Matt Haines – Senior Director, IR and Corporate Communications
Michael French – CEO
Stephen Quay – Chief Scientific Officer
Gordon Brandt – President
Bruce York – CFO and Secretary
Yale Jen – Maxim Group
Nastech Pharmaceutical Company Inc. (NSTK) Q2 2008 Earnings Call Transcript August 4, 2008 4:30 PM ET
Good day ladies and gentlemen and welcome to the MDRNA second quarter earnings conference call. My name is Jen and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer-session towards the end of today’s conference. (Operator instructions) I will now turn the presentation over to your host for today’s conference, Mr. Matt Haines, Senior Director of Investor Relations and Corporate Communications; please proceed sir.
Good afternoon. Thank you for joining today's conference call to discuss MDRNA's highlights and financial results for the quarter ended June 30, 2008. With us today are J. Michael French, Chief Executive Officer; Stephen Quay, Chief Scientific Officer; Gordon Brandt, President; and Bruce York, Chief Financial Officer.
At 4.00 pm Eastern Time today, we released financial results for the second quarter ended June 30, 2008. During today's call, the senior management team will discuss those financial results and highlights for the quarter.
Before we begin, I would like to note that comments made during this call may include forward-looking statements regarding future events or the future financial performance of the company. Such statements are predictions only and actual events or results could differ materially from those made in any forward-looking statements due to a number of risks and uncertainties, including assumptions about future events based on current expectations, planned business development efforts, near and long-term objectives, potential new business, strategies or organizational changes, changing markets, future business performance and outlook.
I refer you to our most recent filings with the SEC, including without limitation, Forms 10-K, 10-Q and 8-K which contain all material information about us, including risk factors.
I will now turn the call over to Michael.
Thank you, Matt. Good afternoon everyone and welcome to our first earnings call as MDRNA, a company solely focused on the discovery and preclinical development of RNAi based therapeutics.
There are four key points we will cover today on the call; number one, our ongoing restructuring to meet the needs of a discovery oriented biotechnology company; two, our pipeline of RNAi based therapeutic programs including timelines and near-term milestones; three, the progress we are making on monetizing our intranasal delivery assets; and four, measures we are taking to reduce our spending and conserve our capital. And as always, we will cover our second quarter financials in detail at the end of the call.
MDRNA is committed to realizing the potential of RNAi based therapeutics through the development of a broad-based, state of the art, drug discovery platform built upon industry leading expertise in RNA chemistry and oligonucleotide delivery. To that end, we announced today the further restructuring of the company. As of September 1, the company will no longer have ongoing operations related to intranasal delivery with the exception of those measures necessary to maintain the value of our core intranasal business; that core business being our clinical programs and PTH, insulin, PYY and Carbetocin.
In addition, we will also maintain intellectual property assets necessary to support our current partnership with Amylin for the development of intranasal delivery for exenatide as well as manufacturing QA and QC capability to meet our current obligations to Par Pharmaceuticals for the manufacture of salmon calcitonin and QOL medical for the manufacture of Nascobal.
By September, the company will just have over 50 people of which over 60% will be dedicated to the discovery and pre-clinical development of RNAi-based therapeutics, about 10% dedicated to manufacturing QA and QC related to our intranasal delivery partnering commitments and the remaining 30% of the team supporting primarily the R&D operations as well as the governance requirements of a publicly traded company. Those disciplines include finance, IT, legal, business development and human resources.
We believe the restructuring will leave us with a lean organization dedicated to the discovery and pre-clinical development of RNAi-based therapeutics and committed to our partners. With this team, we can build a robust pipeline in multiple therapeutic areas capitalizing on our expertise in RNAi technologies and delivery systems.
To describe this in more detail, I will now turn the call over to Steve Quay, Chief Scientific Officer and the architect of our RNAi drug discovery platform. Steve will describe our pipeline and projected timeliness and milestones. Steve?
Thank you, Michael. My goal today is threefold; one, to introduce our product pipeline; two, to provide the current status of our RNA-based therapeutic programs; and three, to identify key milestones and advancing these programs to Phase I human clinical trials.
The pipeline we announce today represents the focused efforts over the last five years to develop a broad proprietary platform of RNAi and delivery technologies necessary to solve the four key challenges for any RNA-based therapeutic; maximizing efficacy, reducing off target RNA effects, reducing non-RNA side effects and tissue delivery.
Our platform technology has matured to a point that we can develop siRNA drug candidates against a variety of human diseases with the hope of beginning to realize the immense potential of this new science and changing clinical medicine. Our pipeline encompasses three key therapeutic areas; metabolic disorders, oncology and inflammation, with specific indications in hypercholesterolemia, bladder cancer, lung cancer, inflammatory bowel disease and rheumatoid arthritis.
Let’s begin with the program in hypercholesterolemia. We’ve chosen Apolipoprotein B or ApoB, which is a novel clinical target for treatment of hypercholesterolemia and thus possibly a major underlying cause for cardiovascular disease. The selection of ApoB may not come as a surprise to many of you familiar with the RNAi field as several companies have chosen this target because, one, ApoB is primarily synthesized in the liver and therefore is more readily targeted by lipid-based delivery systems, and two, the target itself is likely to be extremely effective at lowering cholesterol levels.
Up to 30% of the adult population in the US has elevated cholesterol levels with many who are considered to have severe or extremely high blood cholesterol levels. We have developed an siRNA against ApoB, which is complexed with our proprietary DiLA(2) liposome that can produce greater than 80% knockdown of serum cholesterol over a one week period in a mouse model.
The ED50 or dose that lowers serum cholesterol by more than 50% is less than 0.5 milligrams per kilogram. We believe the knockdown we see at this dose is as good as or better than any reported RNAi-based candidates. For example, a 2007 PNAS paper on Dynamic PolyConjugates of ApoB siRNA require between five and tenfold higher levels of siRNA to achieve the same knockdown as we’ve achieved with our leads.
One additional distinction of our formulation is that we have demonstrated knockdown of ApoB message RNA in the non-liver organ in which it is synthesized, the small intestine. Neither the Dynamic PolyConjugates nor the antisense oligonucleotides currently in late stage clinical development have in fact been shown to produce knockdown of ApoB message in the small intestine.
Recently, it has been shown that atheroscloretic plaques contain more intestinal ApoB than liver ApoB based on the relative serum concentration, implying that the intestinal LDL particles may in fact be more atherogenic. If this is so, the ability to knock down both forms of ApoB could have significant clinical impact.
We are performing lead candidate selection this quarter with the expectation that we will be an IND enabling pre-clinical study in the fourth quarter this year. Because of the duration of those studies, our IND submission is projected for Q3 next year with a first-in-man study in Q4.
In oncology, we are pursuing indications in bladder cancer and lung cancer. Bladder cancer is the fifth most common cancer in the United States and seventh worldwide with 67,000 new cases per year in the US and 120,000 new cases per year in Europe. It is one of the most costly cancers to the healthcare system with the cost-of-care ranging from between $90,000 and $180,000 per patient, and upwards of 13,000 deaths per year.
The current treatment paradigm is transurethral resection with or without intra-bladder chemotherapy. But because of the high recurrence rate after surgery, approximately 60% to 80% and about 30% progression rate to a higher grade tumor, there is a significant unmet medical need to prevent both recurrence and progression. We have selected three gene targets for our formulation; Survivin, PLK-1 and EGFR. All are over-expressed in bladder cancer and have been measured to be up-regulated in voided urine samples from humans with bladder cancer.
We are screening our formulation in the UM-UC human bladder cancer cell lines. Survivin is part of the inhibitor of ApoB doses or IAP-Family. The Survivin protein is highly expressed in most human tumors in fetal fiddle tissue, but it’s completely acid in terminally differentiated cells. This makes Survivin an idle target for cancer therapy as we can target cancer cells while leaving normal cells alone.
A single Survivin gene can give rise to four different alternatively spliced transcripts. An siRNA targeting Survivin in fact targets all four isoforms, and as a testament to our bioinformatics capabilities that we have multiple siRNAs targeting Survivin with IC50 values, that is the concentration that produces 50% knock down of under 0.1 ng/mL, 10 to 50 times more potent than published values for other formulations.
With regard to PLK-1, knock down of this target has been demonstrated to prevent the growth of bladder cancer in a mouse model. In our hands, we’ve been able to produce formulizations with IC50 values again below 0.1 ng/mL.
And finally EGFR, the epidermal growth factor receptor, is cell surface receptor of the EGF family of extracellular protein ligand as a target. Like Survivin and PLK-1, we have developed highly efficient formulations that have demonstrated knockdown of EGFR.
Because cell death or apoptosis not simply MRNA knockdown is a key criteria in our selection process, we will continue to screen all three gene target candidates through pre-clinical studies before settling on one target and therefore our lead candidate. We expect to select our lead candidate in Q4 of this year with the expectation that we will be in IND enabling preclinical study in the first quarter next year. Because of the duration of those studies, we expect to submit our IND in Q4 2009, with a first-to-man study in Q1 2010.
Our effort in lung cancer leverages our pulmonary delivery experience garnered in our influenza development program. Cancer of the lung is a leading cause of death throughout the world with greater than 1 million deaths per year. In the United States, over 160,000 people are expected to die from this disease in 2008.
Lung cancers are classified into two major groups depending on histology; small cell lung cancer and non-small cell lung cancer. Non-small cell lung cancer accounts for up to 85% of total tumors. Despite advances in treatment options, the overall five year survival rate for lung cancer is currently only 15%. Our approach to lung cancer is to provide post surgical resection treatment using RNAi based therapies against Survivin, EGFR or RAS.
RAS oncogene is a signal transduction protein, which has proven elusive [ph] by typical small molecule and antibody based therapeutic approaches and therefore is an excellent candidate for an RNAi based therapeutic.
Our effort to develop a drug candidate against lung cancer permits us to advance our platform on two fronts; one, administration of an RNAi, DI pulmonary route; and two advancement of our peptide conjugate delivery system. It is likely that this formulation will represent the first peptide conjugate we will take into humans based on IC50 values in the influenza program below picomolar or 1,000 times lower than typical seen in vivo. We will complete lead selection in our lung cancer program in Q2 2009, with the expectation that we will be an IND enabling preclinical study in Q3 2009. We’d expect to initiate Phase I trials in 2010.
I would like to point out that Survivin, EGFR, PLK-1 and RAS have all been shown to be expressed in other tumor types and we would hope and expect that RNAi-based therapies developed against these targets for bladder cancer and/or lung cancer may be expanded at some point to include other cancer types.
In inflammation, we are looking at therapeutic indications where knock down of TNF-alpha message RNA is likely to yield a positive clinical response. Two primary diseases; rheumatoid arthritis and Inflammatory Bowel Disease are being taken forward at this time. Together these diseases consume almost $10 billion a year in therapeutics. This program has been disclosed in some detail in the past. For today I simply want to say that we are identifying lead candidates who will be using our DiLA(2) Delivery formulation.
We expect to complete lead selection in Q1 2009 with the possibility that we will take one or the other program forward depending on both the individual therapeutic response as well as the availability of funding to support pre-clinical studies for both programs. Regardless, we would expect to begin IND-Enabling pre-clinical studies for one of the other in Q2 2009, expect to submit an IND and initiate Phase I clinical trials in 2010.
I would like to note that we have a lead candidate in our Influenza program that has demonstrated knockdown against multiple strains of Influenza-A virus including seasonal H3N2 and highly pathogenic H5N1. We completed all work to the point of initiating IND-Enabling pre-clinical studies. For strategic business reasons, we will be seeking a partnership for this program and not advancing it ourselves.
We’ve outlined an aggressive but attainable plan to advance our therapeutic pipeline. Our drug discovery platform capitalizes on tremendous expertise in siRNA construct and lipid and peptide-based delivery systems. We look forward to reporting back to our progress. I’ll now turn the call back to Michael.
Thank you, Steve. I want to take just a moment to discuss our intellectual property estate as it pertains to the program Steve just outlined. We believe that we have a robust patent estate and it is sufficient to permit us freedom to operate to develop Dicer-substrate and meroduplex siRNA constructs in proprietary lipid-based and peptide-based delivery systems and further to protect those drug candidates upon commercialization.
To be clear and specific, the City of Hope has granted us non-exclusive rights under the license patent applications, those patent applications being for Dicer substrate constructs. They have granted us those rights for the treatment of all human diseases, less certain infectious diseases and I want to say that again, we’ve been granted non-exclusive rights, the City of Hope intellectual property for all of human diseases.
In addition we have filed over 80 applications covering over 100 gene targets and have filed extensively on three-stranded siRNAs constructs as well as our lipid and peptide based delivery systems. In all we believe we have the necessary intellectual property estate to ensure that we can develop and protect a wide range of RNAi-based therapeutics for ourselves and our partners.
I would now like to turn the call over to Gordon who will describe where we are on the sale the intranasal delivery assets as well as our transitional plan through the end of August. Gordon?
Thanks, Michael. Even as we refocus the company’s efforts in the RNAi space, we believe that our intranasal assets including PTH for Osteoporosis, insulin for diabetes, PYY for obesity and Carbetocin for autism have significant value. We are committed to monetizing these assets as quickly as possible under terms that we believe reflect their long term value.
Where are we today? We are continuing to work with Bank of Montreal Capital Markets to identify out licensing opportunities for these programs and other programs. We’ve received a number of enquires about the programs and are pleased with the progress we and BMO are making towards monetizing our nasal assets. Of course such transactions take time and we hope to be able to announce one or more transactions in the near term.
With regard to specific programs, the Phase II glucose tolerance study for our intranasal insulin program was presented at the American Diabetes Association meeting in June. The study demonstrated that intranasal insulin has the rapid action profile which makes it ideal as a mealtime insulin. Specifically the mealtime glucose control following our intranasal insulin was identical to that of a rapidly acting injectable insulin NovoLog.
Importantly the intranasal product had a strategically, significantly lower occurrence of hypoglycemia or low blood sugar during the four hour period post-meal. We believe that this combination of efficacy and safety maybe what it takes to increase the use of mealtime insulin in the type two diabetic populations.
We announced the results of the Phase II trial of PYY for obesity last week and I don’t have any additional data to report. The team will take the next days and weeks to wrap up each program so that each can be partnered and brought back to clinical development in the most expedient manner possible.
Our goal is to “shrink rap” each of these later stage programs so that they can be restarted as seamlessly as possible. This allows programs to be sold or partnered as individual programs or as groups of programs. As Michael mentioned there are contractual obligations such as commercial manufacturing which will continue to be met. There are also regulatory obligations such as FDA required two-year holding period for certain records which will be met.
Bottom-line the goal is to keep the assets in a state of readiness while honoring our commitments in all regulatory requirements. I would like to thank the members of the nasal business team, some of whom have been with the company for more than 20 years, for their contributions. Now, I will turn the call back to Michael.
Thank you, Gordon. I want to reemphasize what Gordon said here. We continue to see value in the PTH insulin, PYY and Carbetocin assets of our intranasal delivery program and therefore have developed and are now implementing a detailed transition plan to ensure that MDRNA retains key assets necessary to fully recognize the value of the intranasal business. We hope to report more to you on the successful realization of that value in the coming months.
As I mentioned in my opening remarks we have restructured the company to ensure that our personnel are aligned with the discovery and pre-clinical development of RNAi-based therapeutics. To ensure that we have sufficient capital to reach key milestones laid out in Steve’s overview of our therapeutic pipeline, I have asked Bruce to initiate cost cutting measures to significantly reduce our spending. I’ll now turn the call over to Bruce to describe our efforts in this regard and report on our second quarter financials. Bruce?
Thanks, Michael. During the second quarter, we continue to implement the corporate restructuring plan announced in February. At July 31, our headcount was 78 employees down from 235 in October 2007 and 155 in January 2008.
Our workforce has three major groups; intranasal, RNAi and GNA support. Our February 2008 reduction in force met the criteria of the Federal WARN act, meaning that we were required to pay full salary and benefits to the 70 employees terminated in February through April 29. Additionally during Q2, we continued to fund the intranasal Phase II studies in insulin and PYY which have now been completed.
Let me now review the results of the second quarter. Revenue for the second quarter was $700,000 compared to $4.9 million for the second quarter of 2007. For the six months, it was $2 million compared to $9.9 million for the same period last year. Revenue this year was primarily related to revenue from feasibility program partners, Nascobal product sales, amortization of deferred revenue from a $2 million payment received in 2005 from QOL Medical and revenue from our government grant.
The 2007 periods included revenue from receipt and recognition of a $2 million payment from QOL related to the June 2007 issuance of a patent for Nascobal nasal spray, which was received and recognized in June 2007 as well as additional revenue from former collaborations with P&G Pharmaceuticals and Novo Nordisk.
Net loss for the second quarter was approximately $14.3 million or $0.48 per share compared to net loss of approximately $12.4 million or $0.50 per share in the second quarter of 2007. Net loss for the six months ended June 30, 2008 was $30.8 million or $1.10 per share compared to $23.9 million or $0.97 per share for the prior year period.
The increases in net loss from the prior year periods were primarily due to lower revenue, $1.9 million in restructuring charges in the first quarter of this year and $2.6 million write-down of inventory recorded in the current quarter which I will discuss in more detail later.
Per share net loss calculations were also impacted by approximately $4.6 million additional shares sold in April 2008. Our 2008 second quarter net loss, including the inventory charge and lower revenue showed improvement over that of the first quarter of 2008 due to our restructuring and cost containment initiatives.
Cost of product revenue in the current quarter increased by $2.7 million compared to the prior year period and by $2.8 million for the six-month period compared to the prior year period. At June 30 2008, the cost basis of our inventory was approximately $2.7 million composed of approximately $100,000 of Nascobal API materials and approximately $2.6 million of calcitonin-salmon API and materials for our nasal calcitonin-salmon product which is pending FDA approval.
As many of you will recall Apotex filed a generic application for its nasal calcitonin-salmon product with a filing date that has priority over our ANDA for our generic product. In May 2008, a federal district court dismissed a lawsuit between Novartis and Apotex due to the parties reaching a settlement in their long-standing litigation. The terms of this settlement were not made public. This however created uncertainty over the launch date of our nasal calcitonin-salmon product and has caused us to reassess the value of our inventory.
At June 30, we considered the carrying amount of this inventory to likely not be recoverable as the material will likely expire before projected usage. Accordingly, we recorded a non-cash impairment charge of approximately $2.6 million to cost of goods sold later to the write-down of inventory during this quarter.
A majority of this was raw materials that have been acquired by us in furtherance of satisfying our supply obligations under our agreement with Par Pharmaceuticals. It is possible that we could receive partial or full reimbursement under the terms of our contractual arrangement with Par should we not be able to use this material in connection with our manufacturing arrangement, but the amount and timing of any such reimbursement are not determinable at this time.
Compared to the prior year periods, R&D expenses for the second quarter decreased by $4.3 million to $8.5 million and decreased $6.2 million to $19.4 million for the six-month period. In 2007 we initiated Phase II Clinical trials to evaluate our PYY nasal spray and our rapid-acting insulin nasal spray and the efficacy and safety study to evaluate our PTH nasal spray for the treatment of osteoporosis and a Phase I study for our Carbetocin nasal spray for patients with autism, causing related increases in R&D expenses.
To conserve cash, we delayed the launch of the PTH clinical trial program in the first quarter of 2008. Our insulin trial completed in Q1 2008 and positive results were announced in June. The PYY clinical trial was completed in July 2008 with results announced last week.
We have decreased spending on all intranasal programs including Carbetocin, our nasal calcitonin-salmon product and other R&D programs as part of our restructuring efforts to control spending and increase focus on RNAi. Increased spending on RNAi preclinical programs partially offset the decreases related to these intranasal programs.
SG&A expenses decreased by $1.3 million to approximately $3.8 million for the second quarter of 2008 compared to the prior year period and decreased $800,000 to $8.6 million in the six months ended June 30, 2008, due primarily to our restructuring and cost containment efforts.
We recorded restructuring charge in the first quarter of this year of approximately $1.9 million comprising of employee severance and related costs of approximately $1.6 million, of which $1 million was paid in the second quarter and $300,000 related to the termination of our PTH clinical trial as previously discussed.
We ended the second quarter of 2008 with approximately $19.7 million in cash, cash equivalents and short-term investments compared to $41.6 million at the end of fiscal 2007 including $2.2 million in restricted cash at each date. We are working to conserve cash by subleasing facilities that will be accessed once our intranasal programs are licensed or sold.
Our further restructuring announced today will result in additional severance cost of approximately $1.9 million, including approximately $300,000 in previously accrued vocation payouts. After this process is complete, we expect to realize personnel cost savings of approximately $1 million in Q4 compared to current costs in addition to incurring lower controllable G&A costs and substantially lower R&D costs as clinical trials spending on intranasal programs would have been concluded in Q3.
I will now turn the call back over to Michael.
Thank you, Bruce. Besides advancing our pipeline cost containment and conserving capital are our two major objectives through the remainder of the year. I am confident that we will trim back the operations to achieve a significant reduction compared to past spending.
To summarize, over the past several years, our multidisciplinary team has developed a target two clinic discovery engine that optimizes leading edge RNAi technology and novel delivery platforms. This engine enables us to apply RNAi technology and delivery to the development of safe and effective RNAi-based therapeutics for a wide range of therapeutic indications. We have discussed our pipeline here, but clearly believe that we have a unique capability that lends itself to therapeutic focus collaborations and are currently seeking such collaborations with pharmaceutical partners.
In closing, I would like to echo Gordon’s thanks and give special thanks to Gordon, Tim and Rick and the leadership of Intranasal business to all the past MDRNA employees and present who have given so much of themselves to the advancement of medicines for patients in need. We appreciate all the sacrifices they’ve made for the company.
This concludes our formal comments, we will now open today’s call to your questions.
(Operator instructions) And our first question comes from Yale Jen with Maxim Group.
Yale Jen – Maxim Group
Hey, good afternoon, and it’s a very good presentation you guys have.
Thank you, Yale. How are you?
Yale Jen – Maxim Group
I'm fine, thanks. Just several quick questions. The first one is that in terms of the current cash, do you have any guidance in terms of how you anticipate this to be – how long the runway would be and how would that tie up to the potential sort of partner prospect and given that these things sometimes look difficult to project, but nevertheless we do have some sort of scenario in our analysis on that?
Yes, we’re not giving any particular guidance on the cash at this point. I mean we are – it maybe that we require additional capital by the end of the year to continue to advance the pipeline as we described it today. But, of course, we’re looking at several options to secure additional capital including the sale of intranasal assets and as Gordon described, I mean that’s advancing fairly well as we look at it, form [ph] partnerships and collaborations as well as additional financing opportunities. I would say that at this point our priority is to non-dilutive measures. We’re looking at lots of options, but we feel very strongly that we’ve got enough to make it to key milestones in our programs and key value inflection points.
Yale Jen – Maxim Group
Great and just another follow-up on the partnership side that, what’s the general thoughts you have in terms of how do you divide that up; whether that’s based on the indication or based on the type of targets and what is out there?
I can just tell you my experience here. I believe what Pharma is interested is, they’re interested in broad therapeutic platforms. There is probably an individual case out there of a particular product being developed as an RNAi-based therapeutic and a particular specific need of Pharma and those may align, but in general or moreover, I think Pharma is interested in broad collaborations across therapeutic areas and I believe we have the Discovery Engine and pre-clinical capability to enter that kind of collaboration with Pharma.
Yale Jen – Maxim Group
So, there was for instance a number programs you mentioned in today's call that could be potentially being sort of exclusive to one or few partners or you would look into only to one partner who could be actually equivalent to a number of partners.
I think you have to look at this as each of these individual programs in a particular therapeutic area are the basis upon which a broader therapeutic collaboration could be built, so I don’t see this necessarily – this pipeline so to speak going to one partner. I think that this creates the basis upon which we can partner multiple therapeutic programs with multiple partners.
Yale Jen – Maxim Group
Okay, great. Thanks a lot.
(Operator instructions) As there are no more questions in the queue, I will turn the call back to management for any closing remarks.
Thank you, Jen. I’d like to thank everyone for your questions. This is an exciting time for our company. I am thrilled personally to be leading this outstanding and dedicated team as we become a leader in the research and development of RNAi-base therapeutics. We believe we have all the capabilities and expertise necessary to build a valuable enterprise.
I realize that many of you may have additional questions though, please feel free contact me or Matt Haines and we will address your questions as quickly as possible. I also invite you to view our newly launched web site at www.mdrnainc.com at your convenience. I appreciate you all hanging in there on what has been an untypically long earnings call, but we wanted to make sure you had all of the information we had. Thank you again for joining us today.
Ladies and gentlemen, we do thank you for your participation in today’s conference call. This concludes the presentation and you may now disconnect. Have a good day.