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NPS Pharmaceuticals, Inc. (NASDAQ:NPSP)

Q2 2008 Earnings Call Transcript

August 7, 2008 4:30 pm ET

Executives

Susan Mesco – Director, IR and Corporate Communications

Francois Nader – President and CEO

Luke Beshar – SVP and CFO

Analysts

Davis Bu – Goldman Sachs

Adam Walsh – Jefferies & Company

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 NPS Pharmaceuticals earnings conference call. My name is Marsha and I will be your coordinator for today’s call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions) I would now like to turn the call over to Ms. Susan Mesco, Director of Investor Relations and Corporate Communications. Please proceed.

Susan Mesco

Thank you, Marsha. Good afternoon and welcome to our quarterly conference call. Before we start, I would like to remind you that any forward-looking statements fall within the Safe Harbor Provisions of the Private Securities Litigation Reform Act. These statements may involve risks and uncertainties that are described more fully in our filings with the SEC. These filings are available from the SEC or our website. All of our projections and forward-looking statements represent our judgment as of today.

Joining us on today’s call are NPS’ President and Chief Executive Officer, Dr. Francois Nader, and Senior Vice President and Chief Financial Officer, Luke Beshar. It is now my pleasure to turn the call over to our Chief Executive Officer, Dr. Francois Nader. Francois?

Francois Nader

Thank you, Susan. Good afternoon and thank you for joining us today for our second quarter conference call. Since our last call we have made good progress on our corporate priorities. We have advanced the development of our lead compound GATTEX and PTH 1-84 conducted fruitful regulatory meetings and communicated very encouraging results on GATTEX in short bowel syndrome. We have strengthened our partnership, namely our collaboration with Nycomed for GATTEX. We have completed recruitment for key staff positions and we reported improved financial results with reduced operating expenses and strong sales of partnered products.

I would like to give you a brief update on our progress with these priorities before turning the call over to Luke for a review of our second quarter financial results. The results of the Phase 3 study of GATTEX in short bowel syndrome continued to generate significant interest among clinicians and patients. We certainly believe that this will help support the efficient enrollment of our upcoming Phase 3 confirmatory study.

At the DDW conference in May, investigators presented data from the Phase 3 study of GATTEX in short bowel syndrome. Additional data from that study as well as one year data from the Phase 3 extension study are scheduled for a number of oral presentations at upcoming meetings; in September, at ESPEN, and in October, at the ACG Annual Meeting and at the European Gastroenterology Week. In keeping with conference guidelines, I unfortunately cannot review the details of the upcoming presentations, except to say that the additional findings underscore GATTEX potential to become a new standard of care for patients suffering from short bowel syndrome. We will report on the upcoming presentations at that time of the respective meetings.

Our R&D and regulatory teams have made excellent progress in advancing the development programs for GATTEX in short bowel syndrome and NPSP558 in hypoparathyroidism. We recently had a positive pre-NDA meeting with the FDA where we discussed the results of the GATTEX Phase 3 extension study as well as the finding requirements for the most efficient pathway to approval.

FDA confirmed that we will need to complete one confirmatory Phase 3 study prior to filing an NDA. They also gave the company helpful guidance on the study designs and agreed to the primary endpoint. Additionally, FDA offered to provide additional feedback on the protocol in a timely manner. In parallel, we have been working very closely with Nycomed on the design of the confirmatory study that could meet the regulatory and commercial needs of both companies. The joint development effort should ultimately expedite the execution of the study in addition to providing considerable cost savings for NPS.

Our objective is to get GATTEX in SBS to the regulatory finish line as soon as possible with the highest probability of success and while balancing our risk. Having the pieces in place to start the study will take us beyond our third quarter target. However, we believe a short delay will be offset by the assurance that we will be conducting the right study to obtaining the US approval of GATTEX in this indication.

We also had a very productive meeting with Health Canada regarding GATTEX. At our meeting, Health Canada staff indicated that they would review a new drug submission application based on the GATTEX studies completed to date. They also indicated that they would not object to NPS applying for priority review in advance of an NDS. As you know, there are no approved therapy for short bowel syndrome in Canada or in Europe.

I am also pleased to report that we have launched an investigator initiated retrospective study to review what occurs in SBS patients after they have discontinuing GATTEX therapy. The study called patient outcomes after stopping teduglutide, or POST, will assess the clinical status and parental nutrition needs at four points in time over a 12-month period after the patients got off GATTEX. The first preliminary data from this study will be available in early 2009.

With respect to our second lead development program, NPSP558 for hypoparathyroidism, we remain on track to initiate the study before the end of the year, and we have been very encouraged by the strong interest in this indication from key opinion leaders as well as patient advocacy groups. We have also placed a strong effort behind the broadening the industry experience of our team.

We have attracted high quality candidates for a number of key positions. For instance, we were very pleased to have Dr. Bo Joelsson recently join our team as Head of Clinical Research. Bo brings a unique, successful record of developing major GI products.

Last, but certainly not least, we are very pleased with the improvement of our financial performance with reduced operating expenses and strong sales of our partnered products. Luke will now review the financial results in more detail, after which we will open the call to your questions. Luke?

Luke Beshar

Thanks, Francois. And good afternoon, everybody. Today NPS reported second quarter net income of $1.2 million or $0.03 a share, which is a considerable improvement from our net loss of $14.8 million or $0.32 a share for the second quarter of 2007.

I’d like to walk through our second quarter financial highlights starting with revenues, which increased to $27 million compared to $13.1 million last year. The growth in revenue was due to the following key drivers. $9.5 million in licensing fees recognized in the second quarter of 2008 under last year’s agreement with Nycomed for GATTEX; a 38% increase in royalty revenue from Amgen where second quarter Sensipar royalties coming in at $14.9 million versus $10.8 million in the second quarter of last year; a three-fold increase in royalty revenue from Nycomed with Preotact royalties of $2.2 million as compared to approximately $700,000 for the second quarter 2007; and $400,000 of royalties from sales of REGPARA in Japan. REGPARA was introduced earlier this year by our partner Kirin and we continue to be very encouraged by the long-term potential for this product.

Turning to expenses. Research and development expenses declined by $8.7 million coming in at $3.8 million for the quarter versus $12.5 million last year, due to the implementation of a new business strategy, the corresponding reprioritization of our pipeline, and our cost reduction and cost containment initiatives.

General and administrative expenses were $3.3 million for the second quarter of 2008 compared to $5.4 million last year. The reduction in G&A was largely driven by $1.5 million credit for prior legal fees, which were determined to be reimbursable from insurance carrier for the consolidated shareholders securities class action suit and derivative action. The remaining decline was attributable to cost containment measures initiated last year.

Interest expense increased to $14.7 million during the second quarter from $5.0 million last year, primarily due to interest expense on the Class B notes, the 5.75% convertible notes, and the notes associated with DRI Capital’s purchase of our Preotact royalties, all of which were originated in the second half of last year. Also contributing to the change was an increase in the effective interest rate on our Class A notes due to a higher sales forecast for Sensipar. These increases in interest were partially offset by a reduction in interest expense on our 3% convertible notes that were substantially repaid last year and a reduction in interest expense on our Salt Lake City building, which we sold.

On June 30, 2008, we held auction rate securities in our portfolio with an estimated value of $25.8 million, which reflects an other than temporary charge of $456,000 recognized during the second quarter of 2008. All of our auction rate securities continue to pay interest.

Finally, our cash and investments remain strong, totaling approximately $138.3 million as of the end of the second quarter compared to $161.7 million at the end of last year. As to guidance, we are happy to reiterate our cash burn guidance of $45 million to $55 million for the full year.

So, to quickly summarize the second quarter, we continue to see strong revenue growth from our partner programs underscoring the value of this portfolio. Our P&L benefited from our restructuring and cost containment initiatives as evidenced by strong declines in operating expenses and we remain diligent in our efforts to aggressively to manage our cash burn and are currently tracking in line with our full year guidance.

With that, I’ll turn the call over to the operator to begin our question-and-answer session. Operator, could you please open the mike?

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of May-Kin Ho from Goldman Sachs. Please proceed.

Davis Bu – Goldman Sachs

Hi, this is Davis Bu for May-Kin Ho. Unfortunately she had to step out. I have a couple of questions. First on GATTEX, so when you say short delay from your prior 3Q guidance, so is it safe to assume then 4Q is what you’re guiding to now?

Francois Nader

Davis, this is Francois. And we are not guiding to the fourth quarter. What we are suggesting that the delay will be short. And the reason of the delay is it could benefit us, is it will give us additional assurances as to the fact that we will be indeed conducting the study that will lead us to an approval, and at the same time, securing the input collaboration of Nycomed, which would provide us with very significant financial advantages. So it’s very difficult, as you can imagine, to predict FDA timelines. And I wish I could give you a more firm answer, but we are very pleased by the offer to review the protocol in a very timely manner.

Davis Bu – Goldman Sachs

Thanks. That makes sense. And then also on GATTEX, can you review briefly where your collaboration with Nycomed stands, and in particular, whether they might be responsible for any – or pick up any of the R&D expenses?

Francois Nader

Yes. As I said earlier, Davis, we are collaborating with Nycomed literally on a daily basis. They are very interested in the protocol. Our ongoing work will tend to meet really two objectives; one, provide Nycomed with the necessary elements for not only a regulatory – a successful regulatory filing in Europe, but also, as you know, the constraints of reimbursement in Europe. So we’re working with them on ensuring that the protocol will also provide with the necessary elements for a good reimbursement in Europe. And at the same time, for us the advantage would be the financial contribution of Nycomed to the total cost of the study, which is certainly not negligible. It’s very much work in progress, but we are very, very pleased with the way things are going.

Luke Beshar

Yes. And this is Luke. We are optimistic we’ll reach a final agreement with Nycomed for a joint study.

Davis Bu – Goldman Sachs

And there is no particular clock running here that they can make a decision at any time?

Francois Nader

The clock is very much driven by a sense of urgency that you sense on our part and on Nycomed’s part. So we are certainly not delaying any decision. At this stage, the gauging factor is the FDA feedback on the protocol. And we hope that this will be done very shortly, so we can initiate the study as soon as practically possible.

Davis Bu – Goldman Sachs

Great, thank you. And last question, on the retrospective study, can you give us a little bit more color on the thought process here? Is it that some patients may actually have extended response or – I know some patients actually came off of TPM, but I was just wondering if you could give us a little bit more insight into why the study – this retrospective study is being done?

Francois Nader

Yes. Actually that’s a very good question. The rationale for the study was a question that we ask ourselves and actually the investigators ask us and ask themselves as to what happened to these patients after they have been on therapy for a year and some of them for six months. Based on our preclinical data and our proof of concept, it seems that the effect of teduglutide tends to disappear within -- depending on whether it’s an animal model or human in days or weeks. However, the exposure to the teduglutide was relatively short. So it is of scientific interest to us to determine now looking at these patients retrospectively as to after they have been off teduglutide for a period of time, what happens to their standard of care. Did they go back to the initial levels of parental nutrition, for example, or did they say at the levels where they left the study or the study was stopped? So from this perspective, I think it will give us a very good insight as to the duration of the effect possible to the teduglutide. The other aspect, which is very, very important, is the fact that this study will be conducted by four or five of our investigators and it will be a global study. We will be looking at most of the size and as many patients as we can put our hands on. So from this perspective also, it will be a very interesting data. Last but not least, we have four patients, as you recall, who are weaned off parental nutrition. And it will be interesting to track these patients over time as well. So all this to say that we are very, very excited with the study. It’s an investigator initiative study. But nevertheless we expect that we will start getting some preliminary results early next year.

Davis Bu – Goldman Sachs

Great, thank you.

Francois Nader

Sure.

Operator

And your next question comes from the line of Adam Walsh from Jefferies & Company. Please proceed.

Adam Walsh – Jefferies & Company

Hi, guys, thanks.

Francois Nader

Hi, Adam.

Adam Walsh – Jefferies & Company

How are you doing? My first one is, can you talk a little bit about the design of the pivotal GATTEX trial, and compare and contrast that to the prior trial that you did? Thanks.

Francois Nader

Sure, Adam, no problem. Actually I can give you an interim view because the final design will have – is in the process of being verified by the FDA and will be definite and final once we have the formal feedback from the agency. But I can say that in a nutshell, we will have a study that will have the same primary endpoint. And more likely than not, we’ll have the binary endpoint, which is much more easier to manage than the extended one. It will be a confirmatory study, which means that we will also collect additional secondary endpoints. In certain situations, somehow similar to the endpoints we collected during the first study and the extension study. But it will be simpler. And what I mean by that is, there are a number of endpoints where we have enough data and we don’t need to repeat that. So, these will not be repeated. So from its design, it will be a simpler study. Our significant preference will be to have a study that will have one dose, the low dose, 0.05 milligram from kilo per day, and we compare this active group with placebo. So this is a study design that I can share with you at this stage. However, once we have the feedback from FDA and we initiate the study, we are planning to fully disclose the study design and we’ll have an opportunity to discuss it further at that point.

Adam Walsh – Jefferies & Company

Thanks. And then can you remind me, is one of the aspects that you are negotiating with the agency a Special Protocol Assessment for the trial?

Francois Nader

Well, there are couple of options there, one of them being the SPA indeed, where as per PDUFA, the FDA will be – will have to get back to sponsor within 45 days with a letter and their feedback. So this is one router. The other former route would be to submit the protocol to the IND and ask in writing for the FDA comment. We are in the process of assessing which one of those would be the most timely and would provide us with the most timely response from the agency.

Adam Walsh – Jefferies & Company

Great. And then can you quickly comment on the potential trial design for the NPSP558 trial in hypoparathyroidism? What are you thinking there?

Francois Nader

Yes. Our thought process at this stage would be to combine those ranging and a Phase 3 study. So what you will see in the design, and again we’ll communicate the design at the initiation of the study, we’ll be looking at multiple doses probably in an ascending format starting with lower dose and going upwards to higher doses. And the patients, from a design perspective, will be enrolled in the study, will be optimized, will be stabilized, and the dose of NPSP558 will increase. So this is one option. The other option would be to compare two or three different doses. Again, I don’t want us to be locked into one design since we are really in the process of finalizing our option. But we’ll certainly create the opportunity to have a further discussion once we initiate the study.

Adam Walsh – Jefferies & Company

Great. And just final, if I could. You guys did a heck of a job controlling expenses this quarter on the operating expense lines. I’m just curious, will this be a baseline going forward for G&A expense? And then R&D expense, when do you predict that will begin to ramp up again? And would we expect that to go to prior levels seen in--?

Francois Nader

Adam, I will ask Luke to answer this question.

Luke Beshar

Yes. The second quarter was a bit low because our clinical activities were a little bit lower than normal. I don’t think you’ll see – I don’t want to say ever, but certainly not in the foreseeable future, you'll see our spending revert back to the way it was last year. I think we got the right mentality and the right business model. So I think we permanently restructure our burn rate going forward. We feel real good about our ability to fall within the range of $45 million to $55 million. But I would still expect in the second half, depending on the exact timing and the conclusion of the FDA discussions that Francois eluded to a few minutes ago, that obviously we’ll then immediately following that commence the clinical trial that will increase the burn. But net-net, we feel good about full year $45 million to $55 million. And you could just annualize the six-month numbers. You can get a sense where we’re trending.

Adam Walsh – Jefferies & Company

Thanks very much guys.

Luke Beshar

You’re welcome.

Francois Nader

You’re welcome, Adam.

Luke Beshar

Thank you, Adam.

Operator

And there are no further questions. At this time, this concludes the Q&A for today’s call, and I would now like to turn the call back over to Dr. Francois Nader. Please proceed, sir.

Francois Nader

Thank you. And I believe that our presentation today outlined the progress we made in advancing our corporate priorities. We are, as we discussed this earlier, in the process of finalizing the next Phase 3 studies of GATTEX and NPSP558. We have mobilized the right team and the right resources to execute our clinical program in a timely and cost-effective fashion. And we have, as you heard that from Luke, significantly improved our balance sheet. I’m looking forward to providing you with an update on those activities later this year. And meanwhile, thank you for your time today, and have a great evening.

Luke Beshar

Bye-bye now.

Operator

This concludes the presentation for today. Thank you for your participation in the conference and you may now disconnect. Good day.

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