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Targacept, Inc (NASDAQ:TRGT)

Q2 2008 Earnings Call

August 5, 2008 5:00 pm ET

Executive

Donald deBethizy - President and Chief Executive Officer

Alan Musso - Chief Financial Officer

Analyst

Terence Flynn - Lazard

Kim Lee - Pacific Growth Equities

Jon Lecroy - Natixis

Bret Holley - Oppenheimer

Mark McHenry

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2008 Targacept Earnings Conference Call. My name is George, and I'll be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for reply purposes.

Any statements made or responses given during this conference call that are not purely historical in nature, including without limitation regarding the process, timing, or scope of the research and development of any of our product candidates or related regulatory filings or clinical trials; including that timing for completion or reporting our results from AstraZeneca Phase IIb clinical trials of AZD3480; the possible therapeutic benefits of any of our product candidates; any future payments to AstraZeneca or GlaxoSmithKline made to us; or our plans, expectations, future operations financial position, revenues, costs or expenses constitute forward-looking statements made under the provision of the Privates Securities Litigation Reform Act of 1995.

Actual results, performance and experience may differ materially from those expressed or implied by such forward-looking statements as a result of various important factors, including our critical accounting policies and risks and uncertainties described under the heading "Risk Factors" and in our Annual Report on Form 10-K for the year ended December 31, 2007, and in our other filings that we make with the Securities and Exchange Commission.

Such forward-looking statements speak only as of today and should not be relied upon as representing our views as of any date after today. We specifically disclaim any obligation to update any forward-looking statements except as required by applicable law.

And now, I would like to turn the presentation over to your host for today's call, Dr. Donald deBethizy. Please proceed.

Donald deBethizy - President and Chief Executive Officer

Thank you, George.

Good afternoon, ladies and gentlemen, and welcome to Targacept's second quarter 2008 conference call. I'm Don deBethizy, President and Chief Executive Officer, and with me on this call is Alan Musso, Targacept's Chief Financial Officer.

During this call, I will provide an update on Targacept's product development programs and business activities, and then Alan will review our financial results for the second quarter ended June 2008, which we have just released.

Targacept continues to advance its broad pipeline of NNR Therapeutics, which currently includes four structurally and chronologically diverse product candidate in the clinic. We also continue to demonstrate exceptional productivity in preclinical activities designed to meet the objectives of our collaborations with AstraZeneca and our alliance with GlaxoSmithKline while fueling independent pipeline opportunities. We are fortunate to have strategic relationships with two of the world's leading pharmaceutical companies that facilitate our ability to expand and advance our portfolio in a capital efficient manner.

Let me now discuss some of the specifics.

As you know, AstraZeneca’s two separate Phase 2b clinical trials of our lead product candidate, AZD3480, which has been known historically as TC-1734 are nearing their completion. We expect the combined enrollment for these trials will be approximately 925 subjects. The first 12 which is called the Sirocco is designed to evaluate AZD3480 as a treatment for mild to moderate Alzheimer's disease. The second, which is called the HALO trial is designed to evaluate AZD3480 as a treatment for cognitive dysfunction in schizophrenia.

We were pleased to announce today that based on current expectations, we anticipate reporting top line results from the Sirocco trial in September. We were also pleased to announce that the HALO trial is fully enrolled and as previously disclosed, we expect it to be completed during the fourth quarter of 2008. We appreciate the work of our AstraZeneca colleagues in executing these important studies and look forward to reporting the results.

Moving on to TC-5619, this highly-selective alpha7 NNR-targeted product candidate is planned for development for cognitive dysfunction in schizophrenia and potentially one or more other conditions characterized by cognitive impairment. In our completed Phase 1 single rising dose trial, TC-5619 was generally well tolerated at doses up to 600 milligrams, which based on our preclinical work is at least a 100 times greater than doses that we expect to have positive effects on cognition in human and suggest the substantial therapeutic margin. We expect to initiate a multiple rising dose trial of TC-5619 in the third quarter.

Following our completion of Phase 1 clinical development and a planned Phase 2 clinical proof-of-concept trial, AstraZeneca has the right for license TC-5619. If TC-5619 achieves clinical proof-of-concept and AstraZeneca license it, the prenegotiated terms provided for AstraZeneca to pay us $40 million fee for us to be eligible for substantial precommercialization milestones and step double-digit royalty on future product sales and for AstraZeneca to assume and fund all later stage development and commercialization.

And now turning to our depression program, where we have retained a commercial life. We recently initiated a Phase 2b clinical trial of TC-5214, a broad spectrum NNR antagonist as an augmentation therapy in subjects with major depressive disorder. The design of the Phase 2b trial of TC-5214 includes two phases. In the first phase, subjects diagnosed with major depressive disorder, MDD, receives citalopram hydrobromide, a marketed SSRI for eight weeks to determine the extent of therapeutic response.

Those subjects who do not respond well based on predefined criteria are randomized into the double blind second phase of the trial and receive either TC-5214 or placebo, together with continued citalopram therapy for an additional eight weeks. It is expected that approximately 560 subjects will participate in the first phase of the trial and approximately 220 subjects will be randomized into the second phase of the trial. The primary endpoint is change from baseline during the second phase of the trial as measured by the Hamilton depression rating scale. The trial also includes a variety of secondary safety and efficacy measures.

TC-5214 is the S+ enantiomer of mecamylamine hydrochloride. The design of the current trial is similar to a previous Phase 2 study that generated encouraging results racemic mecamylamine and incorporates our learning from that trial. Also as you will recall, in our pre-clinical evaluation, TC-5214 exhibited an overall therapeutic profile superior to racemic mecamylamine, a finding consistent with laboratory studies showing TC-5214 to more effectively inhibit the activity of the alpha4beta2 NNR.

We are excited about the potential for TC-5214 to represent a new mechanism of action with application as an augmentation therapy. Based on a preliminary commercial assessment, it is clear that physicians are in need of new treatment options for the estimated 40% of patients that do not respond well to standard SSRI first line medications. The National Institutes of Mental Health estimates that major depressive disorder affects approximately 14.8 million adult in the US alone, making this a substantial societal need and commercial opportunity.

And now let me briefly update you on the GlaxoSmithKline Alliance and our Pain program. In our alliance with GSK, which has progressed well over its first year, TC-6499, our neuropathic pain product candidate remains on track to complete its Phase 1 program by year end. We have also identified promising pre-clinical product candidates for smoking cessation and are working to leverage our 10 tab drug discovery engine and our NNR expertise to design and progress novel new chemical entities in the other therapeutic areas of the alliance. The scope and unique structure of the alliance provides us a path to expand and retain portfolio breadth and diversity and diversify the risk inherent in drug development.

In summary, we have made great progresses thus far in 2008. We remain convinced that NNR Therapeutics represent an area of great opportunity and we continue to build upon our leadership position. We are executing on our goal of delivering five Phase 2 clinical proof-of-concept trial outcomes with four distinct product candidates over the next two years. We have a broad pipeline, productive relationships with AstraZeneca and GlaxoSmithKline and a great team of talented and passionate employees. I have never been more excited about the future for Targacept.

And now, let me turn the call over to Alan Musso, our Chief Financial Officer.

Alan Musso - Chief Financial Officer

Thank you Don. Let me now review with you our financial results for the second quarter of 2008. We ended the second quarter of 2008 in a strong cash positions with approximately 102 million in cash, cash equivalents and short term investments. We continue to focus on the prudent management of our resources as we advance our clinical and pre-clinical programs and work towards anticipated development events, which with successful outcomes would generate significant additional cash proceeds from our strategic relationships.

Turning to our operating results. For the second quarter of 2008, we had a net los of 6.8 million compared to a net loss of 8.3 million for the second quarter of 2007. Our net operating revenues were 5.2 million for the second quarter of 2008 compared to 2.8 million for the second quarter of 2007. The increase is principally due to an additional 1.8 million of milestone and license fees, which reflects the recognition of 1.1 million of deferred license fee revenue from payments received from GlaxoSmithKline and AstraZeneca in the second half of 2007, the achievement of $500,000 milestone event under our agreement with GlaxoSmithKline related to our smoking cessation program and a $200,000 milestone event in the preclinical research collaboration under our agreement with AstraZeneca. The higher net operating revenues are also attributable to an increase of 561,000 in collaboration research and development revenue resulting from our work in the preclinical research collaboration with AstraZeneca.

Our research and development expenses totaled 10.5 million for the second quarter of 2008, compared to $9.1 million for the second quarter of 2007. The higher research and development expenses were principally attributable to an increase of 1.3 million in salary and benefit expenses, occupancy costs and supply and infrastructure costs resulting from an increased number of research and development personnel, as well as an increase of 905,000 in costs for third-party preclinical research and development services.

These increases were partially offset by an aggregate decrease of 520,000 in costs for third-party research and development services related to our clinical-stage product candidates, primarily due to the timing of our clinical trials, plus reduced spending of 291,000 on a product candidate no longer in clinical development.

We anticipate our research and development expenses for the reminder of 2008 will increase as a result of expenses associated with our ongoing Phase 2b clinical trial TC-5214, our ongoing Phase 2 clinical trial of AZD3480 in adults with ADHD. Our planned Phase 1 clinical trials of TC-5619 and TC-6499 and increased activity in our preclinical programs including those in the therapeutic focus areas of our alliance with GlaxoSmithKline.

Administrative expenses were 1.9 million for the second quarter of 2008, compared to 2.6 million for the second quarter of 2007; a decrease in 2008 was primarily attributable to a decrease in stock-based compensation expense, partially offset by greater occupancy costs, salary and benefit expenses and recruitment costs.

Our net interest income was 630,000 for the second quarter of 2008, compared to 808,000 for the second quarter of 2007. The decrease for the 2008 periods was principally attributable to a lower short-term interest rate, which more than offset a higher average cash balance, and increased indebtedness under loan facilities used to finance laboratory equipment, furniture and other capital purchases.

And now let me turn call back over to Don.

Donald deBethizy - President and Chief Executive Officer

Thank you Alan and thanks to everyone again for joining us on today's call. We would be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instruction). Our first question comes from line of Terence Flynn from Lazard. Please proceed.

Terence Flynn

Hi, good afternoon. Thanks for taking my questions and congratulation on all the recent progress. First off, I just wanted on the 3480 Alzheimer's trial, can you remind us if that’s actually powered to detect difference on ADAS-cog versus the Aricept arm?

Donald deBethizy

We haven’t disclosed that. Terence as you know, the trial has five arms to it with three doses of AZD3480, the active competitors Aricept and Placebo and its been powered to be able to differentiate the various arms of the trial, but beyond that we haven’t disclosed anything else.

Terence Flynn

Okay. And then safety is, is that a secondary end point?

Donald deBethizy

Well, as you know in any Phase 2b safety is an important endpoint and it is the secondary endpoint, the principle goal of this trial is the efficacy measures and the dose range finding.

Terence Flynn

Okay. And then just two quick questions for Alan. Can you just remind us if you have any exposure left to auction rate securities and then also I am wondering, if you could give us the number for Inversine sales for the quarter? Thanks a lot guys.

Alan Musso

Yes, Terence, on the auction rate securities, we have actually had all the auction rate securities that we were invested in redeemed at full par value during June and July, so we have no further auction rate security exposer. And in the second quarter our Inversine sells were 199,000.

Operator

Your next question comes from the line of Kim Lee from Pacific Growth Equities. Please proceed.

Kim Lee

Hi, good afternoon. This is Kim Lee. Can you -- I have a couple of questions for Alan. Can you also break down exactly the problems with you reaching grants line and also milestones and licenses? And secondly, I know you guys gave some financial guidance, I think back in February and can you still reiterate that guidance for a total OpEx and that’s it?

Alan Musso

Very good. In terms of the breakdown of the revenues, the milestones and license fees in the quarter were 2.3 million and the revenue, collaboration research revenue was about 2.6 and as I mentioned we had products sales of Inversine 199,000. No grant revenue was recognized in the second quarter. In terms of our financial guidance, we issued financial guidance in February and we haven’t made any adjustments from that. At that time we projected for 2008 that our net operating revenues would be in the range of 16 to 20 million, that our operating expense would be in the range of 60 to 65 million, and that we expected that at year end we have at least 75 million in cash, cash flows and short term investments. And we also made note that those projections did not include the amounts that we may receive from AZ or GSK if we achieve the milestone events for 3480 or 6499.

Kim Lee

Okay, great. So you maintain that guidance from February.

Alan Musso

Correct.

Kim Lee

Great, thanks a lot.

Operator

Your next question comes from the line of Jon Lecroy from Natixis. Please proceed.

Jon Lecroy

Thanks. My question was on the guidance and that was answered. Thank you.

Operator

Our next question comes from the line of Bret Holley from Oppenheimer. Please proceed.

Bret Holley

Hi, good afternoon, it’s actually Maglow in for Bret today. Just a quick question. In terms of the potential variability between clinical sites in the measurement of ADAS-cog, I was just wondering are you attempting to minimize this in any way in order to reduce site variability?

Donald deBethizy

Well, what we do now is that AstraZeneca has selected excellent sites for the study and as far as we know they are doing everything they can to preserve and reduce the variability as much as possible. I am not aware of anything special that they are doing in that regard though.

Bret Holley

Okay, that’s great. Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Mark McHenry. Please proceed.

Mark McHenry

Hi guys. Just a quick question on the 5214 program, have you explored the possibility of taking 5214 and combining it with citalopram for fixed dose combination?

Donald deBethizy

We have not. We certainly explore that possibility at the conclusion of the mecamylamine trial in terms of the possibility of that, but we opt it to move 5214 forward, because of its superior preclinical profile. And we are moving it forward as a single agent, as an augmentation with citalopram in this particular trial.

Mark McHenry

Are there any concerns going forward, if it seems to work on compliance, just having patients take more pills?

Alan Musso

We really don’t think there is going to be a compliance issues. We didn’t have that issue in the mecamylamine trial, they way the trial was designed that was dose escalating and the physician was interacting with the patients every two weeks and the mecamylamine was well tolerated and the majority of the subjects or patients moved up in those. So, we don’t think that’s going to be an issue with 5214. Although the purpose of the trial is to both look at efficacy as well as it’s safety and tolerability.

Mark McHenry

Great. Thanks guys.

Operator

There are no questions at this time. I would like to turn the call back to management for closing remarks.

Donald deBethizy

Well, thank you very much. It’s been an exciting quarter for us and first half of the year and we are looking forward to the second half of the year and the exciting results that we'll be receiving on AZD3480. Again, thank you very much for your time.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Good day.

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