Maxygen, Inc. Q2 2008 Earnings Conference Call Transcript

Maxygen, Inc. (MAXY)

Q2 2008 Earnings Call Transcript

July 31, 2008 4:30 pm ET

Executives

Michele Boudreau – Director, Investor and Public Relations

Russell Howard – CEO

Larry Briscoe – SVP and CFO

Elliot Goldstein – COO

Analysts

Han Li [ph]

Marshall Urist [ph]

Eric Schmidt [ph]

Ben Ladner [ph]

David Beau [ph]

Presentation

Operator

Good day ladies and gentlemen. I'd now like to turn the presentation to over to your host of today's call, Ms. Michele Boudreau. You may proceed.

Michele Boudreau

Thank you Jasmine. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected in the forward-looking statement. The factors that could cause actual results to differ are discussed in Maxygen 2007 annual report in Form 10-K including under the caption risk factors and then in our reports on Form 10-Q and Form 8-K.

Our discussions during this conference call will also include certain financial measures that were not prepared in accordance with GAAP where reconciliation of each non-GAAP financial measure to the most directly comparable financial measures can be found in Maxygen's current report on Form 8-K filed on July 31, 2008. These reports are available on our website at www.maxygen.com in the Investors SEC Filing section.

I'd now turn the call over to Russell Howard, Maxygen's Chief Executive Officer.

Russell Howard

Good afternoon and thank you for joining us. I'll start today's call by reviewing milestones and the current state of our business and then I'll turn it over to Larry Briscoe, our CFO to discuss the financials. After that, we'll open up the call for Q&A.

The second quarter of 2008 was a productive one. We made continued positive progress on our Phase IIa Maxy-G34 trial, closed an important transaction with Bayer Healthcare, filed and received approval for CTA for MAXY-VII and increased our focus on autoimmune drug opportunities in addition to progressing MAXY-4.

We continue to make excellent progress on our Phase IIa trial of Maxy-G34. During the quarter, we finished enrolling the 45 µg/kg dose and the 60 µg/kg dose and enrolled the first cohort to patients at 100 µg/kg. We have good safety and tolerability and so far have seen no serious adverse events attributable to Maxy-G34 and no immunogenicity. The drug is efficacious at all dose levels, and we expect to share the four [ph] results with you in the first quarter of 2009.

On July the 2, announced that Bayer Health purchased our Factor VII program along with all of our hemophilia assets and certain technology rights for $120 million. This purchase brought us a $90 million initial cash payment and potential to receive up to an additional $30 million upon Bayer's initiation of a Phase II trial of MAXY-VII in hemophilia depending on the certain intellectual property conditions.

A timely filing of our CTA for MAXY-VII in the second quarter of this year contributed to our successful transaction with Bayer. We exceeded the original goal by not only filing but receiving approval for the CTA from the U.K. during the quarter.

The MAXY-VII transaction validates our MolecularBreeding protein and engineering platform. It provides source of non-diluted capital and allows us to explore new business opportunities. One such opportunity is the expansion of our efforts in a promising area of autoimmune disease.

We have a preclinical program of MAXY-4 – it is a biosuperior CTLA4-Ig protein therapeutic. Our current target indication is rheumatoid arthritis, a large commercial market which significant unmet patient need.

MAXY-4 is designed to be a follow on product to Orencia launched by Bristol-Myers Squibb in 2006 for the treatment of RA. DMS is currently exploring new (inaudible) CTLA4-Ig in multiple other diseases and is evaluating a second generation version of (inaudible) in transplant rejection.

At Maxygen, we are watching these trials closely as we also see opportunities for MAXY-4 in multiple other autoimmune indications. In preclinical assays, MAXY-4 leads to being shown to be 70 to 200 fold more potent than Orencia and 5 to 15 fold more potent than belatacept.

Currently, our scientists are testing the potency of our MAXY-4 leads versus Orencia in various in vivo models. These experiments designed to serve as additional preclinical proof of concepts which a goal of demonstrating appropriate biological activity in rodents and potentially primates.

Other research programs at Maxygen in the area of autoimmune disease are currently in progress and include exploratory work on protein therapeutics for diseases such as lupus, Crohn’s disease, and multiple sclerosis. These are large markets with significant unmet patient’s need and we see tremendous opportunity to develop new drugs by leveraging our shuffling technology, our scientific expertise in the field, and in some cases, our existing assays and models. In order to be expand up into this rich therapeutic area. We will keep you posted as this early stage program grows closer to the preclinical development phase.

Bayer technology industry is clearly undergoing rapid transformation. In the upcoming months, I would like you to present some unique business opportunities. Now that we have a clear focus on protein drugs and autoimmune disease opportunities plus expertise in product pharmaceuticals and an excellent cash position, we can actively explore in licensing and entail opportunities from the position of strength.

I would now like to turn the call over to Larry who will review the financials for the quarter.

Larry Briscoe

Thanks Russell. Maxygen reported a GAAP net loss of $28.1 million, or $0.76 per share, for the second quarter 2008 as compared to a GAAP net loss of $15.7 million, or $0.43 per share in the second quarter of 2008. The difference is primarily due to a $12.2 million goodwill impairment charge in Q2 2008. That charge was incurred as result of goodwill impairment test that we performed after Maxygen's stock price experienced the significant decline during the second quarter. With this decline, the accruing value of our net assets was less than the market capitalization and as it – such, the entire amount of goodwill remaining on our balance sheet, 12.2 million, was determined to be impaired.

Revenue for second quarter was 1.2 million compared to 2.1 million for the same period in 2007. Our total revenue is composed primarily of grant revenue but also includes a 120,000 related to our BioFuel license agreement with Codexis.

Combined R&D and G&A expenses were 17.6 million during the quarter compared with 19.9 million in the comparable period of 2007. R&D expenses were somewhat lower during the quarter due to cessation of operations in Denmark, partially offset by higher G&A expense due to legal and other fees incurred in connection with the Bayer transaction.

Our cash, cash equivalents and marketable securities as of June 30 totaled $122.4 million compared to $145.8 million at the end of Q4. Note that the Bayer transaction closed July 1 so the 90 million payment from the transaction will be reflected on next quarter’s financial statements.

Maxygen has also updated its operating cash utilization projection as a result of decreased expenditures on MAXY-VII associated with the transfers of our program to Bayer. We now anticipate operating cash utilization for the full year of 2008 to be in a range of 40 to 45 million. Operating cash utilization is defined as net loss adjusted to include capital expenditures and exclude the impact of stock compensation expense, the impairment of goodwill, depreciation, and the 90 million of proceeds received from Bayer.

I will now turn the call back over to Russell for closing comments.

Russell Howard

Thanks Larry. In closing, I’m going to recap the near-to-a-milestones to watch for at Maxygen.

From MAXY-G34, expect a Phase IIa progress update in Q3 and Phase IIb initiation in 2009. For MAXY-4, our goal is to demonstrate preclinical proof-of-concept for one or more of all leads [ph] by the end of 2008.

All operating cash utilization is now projected at $40 to $45 million for the full year. We have $122 million in cash as of June 30, 2008 and received a payment of $90 million on July 1, 2008 from the sale of our Factor VII program to Bayer Healthcare.

As a reminder, we maintained approximately 25% ownership in Codexis and we have no debt. With the Bayer transaction completed and plenty of cash in hand, Maxygen is well positioned to continue advancing our MAXY-G34 and MAXY-4 programs, to continue expansion of our autoimmune capabilities, and also to actively seek in licensing and (inaudible) opportunities.

Thank you for your time this afternoon and we’re happy to take questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Han Li [ph]. You may proceed.

Han Li

Hi, good afternoon, Russell. Do you have any update on the G34 Phase II – current Phase IIa study? When should we expect the highest dose 100 µg data?

Russell Howard

Everything is on track, why don’t I pass you over to Elliot Goldstein, our COO and CMO, to give you the latest data.

Elliot Goldstein

Yes. Thanks Russell. As Russell announced just a little earlier the first to cohort, the first three patients with a 100 µg/kg were dosed in the quarter, so it’s progressing well. Relevant to put in the (inaudible) as the decisions to expand the dose group, go up in a dose down or make decisions about that are made independently at Maxygen by the DSMB, the Data Safety Monitoring Board, so with the caveat, we’ll see what they’re recommendations are at their next meeting.

But so far, as Russell pointed out, there’ve been no one's word effect – certainly no serious adverse events. The safety profile was roughly similar to the last and we have already seen that in Phase I. So the progress is good and we would expect a fairly uneventful DSMB meeting at the next round. Again, now with an independent group and they evaluate the data and make their determination.

Russell Howard

But then Han, they should be finished the clinical by the end of this year – within this year.

Elliot Goldstein

Yes.

Russell Howard

Well, they'll finish the clinical work this year.

Han Li

Okay. Any update on the G34 legal access – I guess, (inaudible) new pattern?

Russell Howard

No, there's yet, sufficed to say that’s we’re very concerned about the impact that this has on the protection of value for G34. We remained absolutely convinced that our intellectual property will stand and that it was an error at the PTO in the issuance of the Amgen patent and we’re working very hard both with internal and external experts to remove this roadblock from the road ahead.

Han Li

So we should expect some action – legal actions from your side?

Russell Howard

Well, we’re working hard to do our best to get things to move forward.

Han Li

Alright. Thank you very much.

Operator

Your next question comes from the line of Marshall Urist [ph]. You may proceed.

Marshall Urist

Yes. Hey guys. Thanks. Just quickly on the next G34 progress update, given that we’re at the highest dose, what are the potential outcomes there? Could you guys go higher again or would it if at a 100 micrograms could the DSMB just say that’s it and we will get an update that that dosing is done?

Russell Howard

Various options, Marshall. As you know the original Phase IIa plan was to go from 10 up to 100 micrograms per kilogram and you're aware that in the phase I we had excellent safety and efficacy data up to 150 microgram per kilogram. So we could go higher if the DSMB wanted that. It’s basically going to be decision based on all the properties that we have and so I don’t want to get our heads up at this time as to whether we might go higher or say it’s a job well done. We understand the drug sufficiently. Our current plan is to have the clinical work finished this year.

Marshall Urist

So then if the plan is at the trials done, can we get the data sooner than by the end of the year?

Russell Howard

We’re planning to give you updates in the same form which is really quantitative summaries in the forthcoming September through December investor conferences that we regularly attend.

Marshall Urist

Okay.

Russell Howard

It’s very clear that locked-down audits will not be completed until a time in Q1 as I’ll remind you that after the highest dose, and let’s assume for the moment it was 100 micrograms per kilogram, which is the current plan, it was 100 micrograms per kilogram 70 days after that three-week period of that last 6th cycle, we take that woman’s immunogenicity testing samples. So there’s a prolonged delay before that last sample and obviously an additional delay while samples are aggregated and tested at another site. So it, by definition goes into ordered and locked down in Q1. We will give you an update of the results of pre-ordered as soon as we can in Q4 this year.

Marshall Urist

Good. And then another question, can you sort of talk generally about what your options might be around the recent Amgen patent? Would you guys consider asking the PTO to reconsider the patent? Or what are your – can you sort of speak generally about what your options are?

Russell Howard

I’ll only mention one and that is the one that we have previously spoken to publicly and that is we will pursue an interference strategy and obviously that’s an interference strategy post patent issuance of Amgen’s patent and we have other strategies that we’re considering as well.

Marshall Urist

Okay. Thanks guys.

Operator

(Operator instructions). Your next question comes from the line of Eric Schmidt [ph]. You may proceed.

Eric Schmidt

Good afternoon. I apologize if I missed it, but Larry did you mention what the amortization schedule would be on the milestone? Sorry, the upfront payment as well as the milestone eventually from Bayer?

Larry Briscoe

No. So I think there’s probably two pieces. The $90 million will be recognized relatively promptly. It may get partially spread out into the fourth quarter although I think the current thinking is the predominant amount of it will be in Q3 and we do have the cash so it’s a little bit academic when you recognize the revenue. With respect to the contingent payment, that won’t be recognized until it’s paid because you don’t know what the contingency, whether it will be or not.

Eric Schmidt

And then a question for Russell. In terms of business development strategy, I think I heard you say you’re looking to, potentially, in licensing product candidate. You’ve obviously just out-licensed one and you have a pretty robust albeit maybe somewhat early pipeline behind Maxy-G34. What’s the rationale? What kind of things that you’re looking at? Why does this make sense for Maxygen?

Russell Howard

It makes sense for us to have more book (inaudible) for them to be as mature as possible in the clinical development pipeline. Simply, it’s a way to capture greater opportunity and hedge risk. And as you noted very fairly, our discovery pipeline is early. Maxy-4 is still a pre-clinical candidate and we have G34 out in fronted with our desire to seek a call for partnership as soon as we can, hopefully in 2009. So we have a portfolio of very exciting products that we believe in but it’s never enough products. We need more products and we need greater hedge of risk and greater opportunity. So therefore, given our cash position, our focus in autoimmune disease, we know what we’re good at. We know what we lacking in our company. We can certainly deliver, I think, great protein pharmaceuticals in autoimmune disease. We can also understand opportunities in autoimmune disease whether they are proteins, monoclonals, small molecules, whatever. We know that space. So it is our corporate desire to increase opportunity, decrease risks, and see what we could do to have more shots on goal through any form of strategic partnership.

Eric Schmidt

So you're ambivalent in terms of the type of candidate, small molecule or biologic, but you want to be in autoimmune disease?

Russell Howard

I would never use the word ambivalent for anything we talk about here, Eric. Everything has pros and cons. I'm not trying to be cheeky. Small molecules have pros and cons that we understand, so are the monoclonals, so are the protein pharmaceuticals, and without therapeutic area focus and understanding that area we'll make product-by-product case decisions on the value of something on the outside, the cost to us to bring that in, in terms of equity or cash, the cost to us to take it forward and fully capture their value.

Eric Schmidt

And are you advanced in these discussions? Or is this a relatively a new [ph] issue?

Russell Howard

We're continuously doing this, Eric. We have been doing this ever since we started talking, for example, with Bayer and considering out licensing a product in an area where we decided strategically that we we’re not going to place a therapeutic area of focus that is hematology. So once we made that strategic decision, we will make in parallel the strategic decision where we’ll be focused. Where do we think we are competitive and (inaudible) decision to go forward in autoimmune disease. So we’d had that on our watch list for quite a while.

Eric Schmidt

Okay. And one last thing Russell, could you comment into Santosh’s departure?

Russell Howard

Yes. I'm pleased to. Santosh, first of all, has made a tremendous contribution to Maxygen although he was with us about a short time for 18 months approximately. He came to us with a very strong passion from his background in cardiovascular work for hematology, for hemostasis, and he was particularly excited to join us to take forward the factor VII program and in the time he was with us, he created and built up a team with expertise that we didn’t have at the time, built up that team and in a very short time, turned on a dime and took a program together with all of our other colleagues that had been seen as a factor VII program for acute disease and turned it into a program for treatment of hemophilia.

And so, excellent execution and production of CTA with not just in the time that we'd originally planned of filing their approval. So he worked very hard to do something wonderful and through that time we all realized strategically that it was best for us to partner that program. And so, given that we have partnered a key asset that he was very excited to take forward, given that he is very passionate about hematology among other areas, and you’ll note that we have out licensed hemostasis in effect with approximately 30 targets after Bayer in this field, he now is looking at other opportunities to go forward and to work with his passion and interest in hemostasis.

He has actually come at the time when we can manage this very well at Maxygen because we've had considerable depth in our executive team and you’ll note that Santosh’s departure, although he will be much missed for his contributions, allows us to then pass the mantle of responsibility for CMO back to Elliot Goldstein who has throughout this time been COO. Elliot, as you remember, began the Phase I program of our G34 and then passed that over to Santosh for the IIa and passed over the factor VII work to Santosh. So, Elliott, with all of his experience through Phase 0, through Phase IV, working in large pharma companies, has now assumed the responsibility for our G34 asset and the other clinical programs going forward.

Eric Schmidt

Great. Thanks for your answers.

Operator

Your next question comes from the line of Ben Ladner [ph]. You may proceed.

Ben Ladner

Hi there. I'm Ben Ladner [ph] from (inaudible) on behalf of Mike King as well.

Russell Howard

Hello.

Ben Ladner

To clarify, if there's any more clarity you could provide regarding the patent issue? I know you did mention you’re going to invoke an interference. Is there anything else you can update as regarding that issue?

Russell Howard

No. There’s no other information. Suffice to say, we are upset by the issuance and we are spending time, money, and a lot of brain power at figuring out how to remove it.

Ben Ladner

Okay. Thank you so much.

Operator

Your next question comes from May Kin Ho [ph]. You may proceed.

David Beau

Hi. Actually this is a David Beau [ph] for May-Kin Ho. I apologize that she is busy right now. Just a couple of questions. First, to follow up on some previous questions on the immunology and the in-license, do I understand you correctly then that kind of a strategy is to in-license a more advanced compound but at the same time regardless of how those go, to continue to advance your MAXY-4 candidates?

Russell Howard

Okay. Thank you. Let me make something very clear for everyone because the question has come up now with two questions. It is not our strategy specifically and alone to in-license a compound in autoimmune disease. Our strategy is to consider the range of options which include in-licensing, merger, and acquisition as the way in which we can increase our autoimmune profile, increase the opportunity, decrease the risks. So please don’t get focused on in-licensing as the target of Maxygen. I repeat – it’s one of several strategies to enhance our portfolio.

Next, to the other part of your question, it's a very good point that while we look to increase the size and the opportunity of our portfolio by any one of a range of mechanisms in a corporate sense, we are very aggressively continuing our MAXY-4 Program. We're very committed to it. It's a very exciting program and we think we can beat the existing BMS product of Orencia and the follow on from that the, beletacept, with our MAXY-4 Program. So we're investing in our program. We’re also investing in Discovery Programs at Maxygen at the Research Discovery Phase in other autoimmune targets. So that work continues and it will continue and we'll, I think, be able to have some very exciting partnering opportunities with the assets that derive from internal discovery much less the things that we would obtain from the outside.

David Beau

Thanks. And onto G34. Any updates on partnering discussions with G34 and in terms of any internal goals on when you'd like to see that partnered up?

Russell Howard

No. Our corporate goal remains the same as we've described before and that is we would hope to partner the program prior to entry into a phase to be as we recognize that not only is that expensive but it will take a breadth of expertise and some marketing and commercial decisions that we really want the partner to commit to in Phase IIb and beyond. So we retain our focus on partnering. We hope to do that as soon as possible, certainly before Phase IIb and otherwise I can't give you an update at this time but it's active and ongoing.

David Beau

Okay. Great. And the last question. Thinking about your Bayer collaboration or your Bayer agreement, so as I understand it you carved out a couple of areas (inaudible), got a couple targets for yourself including immunology but also a couple of other areas. I was wondering – just want to get your thoughts on why you carved out those other areas and how does that – or longer term plans?

Russell Howard

So the areas that we carved out for exclusive use of molecular breeding or DNA shuffling technology relates precisely to the therapeutic area focus and competitiveness that we've described in this call. When we transferred the factor VII asset to Bayer, we negotiated that they have exclusivity initially for 39 targets within hemostasis being blood coagulation factors and all of the cascades that you're aware of in the textbooks of hemostasis. So that's their field, those 30 molecules that really cover that space of hemostasis. At the same time, Maxygen identified and mutually agreed 30 individual targets in autoimmune disease and immunomodulation that are specific for Maxygen to use the gene shuffling technology. So that’s specificity and exclusivity is exactly in line with our MAXY-4 Program and the other things that we're doing in Discovery, all of which are focused in autoimmune disease and immunomodulation, and our intent in terms of any form of strategic partnership in-licensing, merger, acquisition whatever, to be in this field were we think we're most competitive. It's all lined up.

David Beau

Great. Thank you.

Russell Howard

Thank you.

Operator

You have a follow-up question from Han Li. You may proceed.

Han Li

Yes. Thank you for taking my follow-up. Basically a housekeeping item. How much goodwill on the balance sheet? You carried a balance of $12 million in the past three years. Now, this quarter you dropped to zero, can you tell us what happened there?

Larry Briscoe

Well, you could ask the question differently as to whether I think the accounting rules make any sense, but basically the way the rules work, once you – if you’re net assets are greater than your market cap then you have the challenge of proving that the goodwill is not impaired which is pretty challenging to do. So, we're – when we had the decline in stock price, it put us in a position where we really didn’t have a whole lot choices about concluding it was impaired, whether we believed it or not. That’s just where the rules work.

Han Li

So if you – Maxy [ph] value appreciate then we should see that line to reappear?

Larry Briscoe

No. You never get to put it back. It’s a one-way street.

Han Li

Okay. This is just some accounting –?

Laryy Briscoe

Okay, this is just some – the accounting rules which is, you probably know – accounting's just become much more rule-based and this is just one of the rules we have to deal with. Now, technically we have to do some valuation work and so forth but I think that I’d be shocked if it came out any different that our initial estimate which is – that we should just write the whole thing to zero.

The other thing is frankly from a sense essentially the non-cash charge, you identify it separately. I’m not sure how much it really matters.

Han Li

Okay. But what’s the accounting part on the liability or shareholders’ equity?

Larry Briscoe

Yes. Sure. It comes out equity because it goes through the income statement so it increases the net loss on an accounting basis, but on a cash flow basis obviously, it has no impact whatsoever.

Han Li

Okay. So it’s reflecting the second quarter or –?

Larry Briscoe

Yes.

Han Li

Okay. I know –

Larry Briscoe

If there's something –

Han Li

I think you say you’ve been to recognize the $90 million in the two quarters so that could have positive earnings that you may in next two quarters or the third quarter.

Larry Briscoe

Yes, because were going to recognize $90 million from the sale which will be a combination of the license in the sale and asset but there’s really no offset in costs so that'll have a pretty big impact, and you’ll see – if you see in the press release that goodwill impairment is a separate line item and the whole $12.2 million is reflected in Q2.

Han Li

Okay. And also quickly, any update on the Codexis? I know XY [ph] was filed and any update from Codexis?

Larry Briscoe

No. I think the next update from Codexis will be from Codexis and we all trust that they can grow their business and that eventually we will obtain a liquidity event.

Han Li

Okay. Thank you very much.

Operator

At this time I’m sure you have no further questions. I’d like to turn it back to management for closing remarks.

Russell Howard

Well, thank you everyone. This is very challenging time. I wouldn’t use the word exciting but a very challenging time for biotechnology with great our cash position, our focus in autoimmune disease, knowledge of our technology, and our expertise, I think we will turn this to a time of opportunity for Maxygen. Thank you.

Operator

Thank you for attending in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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