Neurogen Corporation Q2 2008 Earnings Call Transcript

Neurogen Corporation (NRGN)

Q2 2008 Earnings Call Transcript

August 7, 2008 8:30 am ET

Executives

Allison Scott – Manager, Corporate Development and IR

Steve Davis – President & CEO

Tom Pitler – SVP & Chief Business and Financial Officer

Analysts

Kim Lee – Pacific Growth Equities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter Neurogen Corp. financial results conference call. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Allison Scott, Manager of Corporate Development and Investor Relations. Please proceed.

Allison Scott

Thank you. Our second quarter 2008 financial results news release was issued this morning and is posted in the Investor Relations section of our website, www.neurogen.com. This conference call and webcast will be available for replay after the conclusion of the call. Please see our news release for details on that.

I would like to take just a minute to point your attention to Neurogen's Safe Harbor statement that’s included in the news release. Please note that information in the release and in this conference call may contain forward-looking statements that involve risks and uncertainties. Please reference Neurogen's SEC filings for complete information regarding these risks.

Presenting this morning are Steve Davis, President and CEO, and Tom Pitler, Senior Vice President and Chief Business and Financial Officer. Serge Stankovic, Executive Vice President and Chief Development Officer, and Ken Sprenger, Vice President of Clinical Development and Operations will also available for questions.

The agenda for today's call is as follows. Steve will make some opening comments and then Tom will cover the financials. We will then open the call up for questions. At this time, I'd like to turn the agenda over to Steve.

Steve Davis

Thanks, Allison, and good morning everyone. I’d like to open the call this morning with a brief update on our clinical programs and then I’ll turn the call over to Tom Pitler, our Chief Business and Financial Officer, to go over the financials. In the last six months, we’ve worked to align the company’s operations with a refocused business model centered on our clinical pipeline. We’ve taken significant steps to reduce Neurogen’s cost basis and today are focused on getting the clinical answers.

As you know, we expect later this year to be getting data from our ongoing Phase 2 studies of our dopamine D2 partial agonist, aplindore in Parkinson’s disease and restless legs syndrome. And as you will recall, our belief is that aplindore’s partial agonist profile may restore sufficient dopaminergic activity in the parts of the brain that are deficient without over-stimulating the healthy parts of the brain. And we believe that this over-stimulation is largely responsible for the significant side effects observed with a full dopamine agonist such as Requip and Mirpex.

In February, we announced the start of Phase 2 studies in both indications, in Parkinson’s and RLS, and both of these studies continue to operate on track. The Parkinson’s study is a Phase 2 dose-ranging, double-blind, placebo-controlled, exploratory study of the safety, tolerability, efficacy, and pharmacokinetics of aplindore in patients with early stage Parkinson’s disease. We are doing this study in cohorts where we explore a different titration regimen and dose range in each cohort. We expect to dose up to five cohorts of eight patients each for two weeks of treatment with doses of aplindore administered twice per day.

What will we learn from this study? We expect to learn – first, we will evaluate efficacy in Parkinson’s patients; second, we will develop an informed view of the appropriate dose range and titration schedule for future studies; and third, we will evaluate safety and side effects as we begin learning how well tolerated aplindore is. We expect to report results of this study by year-end.

Before I leave Parkinson’s, I might just add, the side effects seen with the full dopamine agonists are very significant. So, Parkinson’s patients that are on full dopamine agonists report nausea of 24%, daytime fatigue and drowsiness of 24%, dizziness 19%, falling asleep during activities of daily living 17%, hallucinations 15%. So again we think there is a significant unmet need here for a drug that is better tolerated.

We’ll turn now to restless leg syndrome. Here we are conducting a Phase 2 single-blind, placebo-controlled multi-center study designed to determine the efficacy and safety of escalating doses of aplindore administered once per day for at least three nights compared to placebo. The primary endpoint of this study is the number of periodic limb movements or PLMs per hour of sleep for patients receiving aplindore versus those receiving placebo.

We are exploring additional subjective outcomes in sleep measures in several secondary endpoints. We expect up to adult patients with RLS to participate in the study. And from this study too, we expect to evaluate efficacy, explore the dose range and titration options, and begin learning, again, how well tolerated aplindore is. We believe aplindore’s partial agonist profile and its D2 preference, again, may confer reduced side effects relative to the full agonists on the market today. Here too we remain on track and we look forward to reporting results from the RLS study by the end of the year.

Just a brief comment regarding the side effects seen with the dopamine full agonist in RLS. Nausea is reported to be 19%, GI effects 18%, daytime somnolence 17%, and fatigue 16%. So here too there is significant room to improve on the side effects of the full dopamine agonist.

I’ll turn just for a moment to adipiplon, our GABA alpha-3 partial agonist. As you know, we recently reported that we suspended our insomnia comparator study with adipiplon due to reports of a higher than anticipated rate of next day effects early on in the study. As I mentioned at that time, we are currently limited our resource commitments while we gather and evaluate data generated with the bilayer tablets used in the trial. I estimated in July that this would take approximately two to three months, and we’re still on track to be in a position to finish the analysis in that time frame.

As I noted before, once we know whether we can move forward, we will evaluate whether we should. As soon as we have additional data to report there, we will. So I think everyone on the call knows we are also planning to explore low-dose adipiplon in anxiety where we have seen in pre-clinical animal models a 100- fold separation between anxiety-relieving effects and sedation. At this point, we continue to plan and prepare for this study, but we will await our final analysis of the insomnia data before we begin the anxiety study.

And finally, in addition to our internal programs, Merck plans to commence a Phase 2 proof-of-concept study in cough from our VR1 collaboration by the end of this year. As we’ve noted previously, this study is subject to Merck first completing certain work to confirm previous findings.

At this point, we’ll turn to the financials. But before I turn the presentation over to Tom Pitler for a more detailed review of our financial results, I’d like to offer just a few general comments regarding the GAAP required accounting treatment of matters relating to our April financing or more specifically I’d like to distinguish between the accounting treatment of these matters, which was appropriate, correct, and required by GAAP versus any contractual obligation or cash payment or receipt.

So, two points regarding the warrants. First, while GAAP required that we recognize the warrants issued in the financing as a court liability for accounting purposes. No monies were paid or will be paid relating to this liability. The obligation giving rise to treatment as a liability was satisfied on July 25 with our shareholders’ approval of the authorization of shares underlying to warrants.

Second, while we recognized a gain during the quarter relating to the ascribed value of the warrants, this gain too was a non-cash matter and will not result in any monies being paid to Neurogen. Finally, with respect to the preferred stock, we’ve recognized certain deemed dividends related to the period of time prior to the conversion of the preferred shares of common, and the keyword there is deemed.

I just want to be clear here too. While this was the required accounting treatment, no monies were paid or will be paid to the preferred holders for any dividend. The obligation to pay any dividends on the preferred was satisfied and extinguished with our shareholders’ approval of the exchange to common shares from preferred.

So with that, I will now turn the mike over to Tom. Tom?

Tom Pitler

Thank you. To put the quarter in context, as Steve noted, during the second quarter we’ve recognized several non-recurring items, which I’ll discuss more fully in a moment. These matters relate to our previous announced restructuring and the company’s April 2008 private equity financing. So I’ll be referring this morning to both GAAP results and non-GAAP results excluding the impact of these non-recurring items.

On a GAAP basis, including non-recurring matters, Neurogen recognized a net loss for the second quarter of 2008 of $6.4 million on 42.1 – on 42 million weighted average shares outstanding. Because for this quarter at June 30, 2008, per GAAP, we classified preferred stock, which has since converted to common shared as mezzanine equity. We’ve also presented a net loss attributable to common shareholders.

This line item, which is required by GAAP, is the sum of our net loss of $6.4 million and $5.4 million of deemed. That is non-cash preferred dividend resulting in a net loss attributable to common shareholders of $11.8 million or $0.28 per share. Excluding those non-recurring matters, our net loss on a non-GAAP basis for the quarter totaled $8.5 million or $0.20 per share. These result compared to a net loss during the second quarter of 2007 of $13.6 million or $0.33 per share on 41.8 million weighted average shares outstanding.

Neurogen's total cash and marketable securities as of June 30, 2008 totaled $42.8 million. Research and development expenses for the same quarter of 2008 increased to $8 million from $6.4 million in the second quarter of 2007. As noted in our release, this decrease was due primarily to the decreases in non-cash compensation from stock option expense and decreases in salaries and benefits and lower spending in Neurogen’s clinical and preclinical drug development programs.

General and administrative expenses for the second quarter of 2008 decreased to $0.8 million compared to $3.5 million for the same period of 2007. The decrease is due mainly to decreases in non-cash compensation from stock option expense and decrease in salaries, benefit, and legal staff expense. Adding three of the research portion of our collaboration with Merck last August, we had no operating revenue for the second quarter of 2008 compared to $5.5 million for the second quarter of 2007. As we previously described, this collaboration is now focused on the development of candidates previously discovered in the company’s joint research program.

As I mentioned, there are a number of non-recurring items that are accounted for in our second quarter financial results. Number one, in connection with reduction in force announced in February and April, Neurogen recognized restructuring charges of $2.6 million in the second quarter of 2008 and $5.1 million for the six-month period ending June 30, 2008. Number two, Neurogen took a non-cash assessment impairment charge of $7.2 million related to the value of the company’s facilities previously used for research activities but that are no longer used.

Number three, in April of 2008, Neurogen closed a private placement offering of exchangeable preferred stock in warrants. On June 25, 2008, following approval of the company’s stockholders, preferred shares issued a financing converted to common shares, and the company’s stockholders approved the authorization of additional shares underlying preferred stock in warrants. Since the shareholder approval occurred after the end of the quarter, GAAP required that at June 30, 2008, the preferred stock we shown as a mezzanine and the warrants we shown as a liability on our balance sheet.

Number four, in connection with the securities issued in the April financing in accordance with required GAAP treatment of these instruments prior to stockholder approval, in the second quarter we’ve recognized a non-cash charge of approximately $5.4 million related to preferred stock and a non-cash gain of approximately $12 million related to the warrant. The $5.4 million non-cash charge reflected the sum of three items. One, preferred dividends that would have been payable had the exchange from preferred to common shares not been approved. Number two, accretion of the preferred stock to redemption value.

And number three, the amortization of discount associated with the preferred stock. Pursuant to GAAP, these items are deemed. That is, they were non-cash preferred dividends and were added to net loss, resulting in a net loss attributable to common shareholders of $11.8 million for the three-month ending June 30, 2008. A $12 million non-cash gain for the second quarter related to its decrease, a liability associated to the described value of the warrants as a result of the decrease in the company’s stock with date of issuance on April 7, 2008 to June 30, 2008. Upon shareholder approval of this authorization of common shares underlying the warrants on July 25, 2008, this deemed liability was satisfied.

In the first half of 2008, we burned $28 million. As you’re all aware, we have instituted cost containment measures, and for the full year we expect to burn in the mid $20 million. We projected net loss of the year on a non-GAAP basis of $45 million to $50 million, which translates to a loss of $0.85 to $0.95 per share on 53.3 million weighted average shares outstanding.

That concludes my prepared remarks on the financials. I’ll turn it back over to Steve Davis.

Steve Davis

Thanks, Tom. At this point, we’ll be pleased to answer your question. So I’ll turn the call back to our moderator to begin the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from the line of Kim Lee with Pacific Growth Equities. Please proceed.

Kim Lee – Pacific Growth Equities

Good morning.

Steve Davis

Good morning, Kim.

Kim Lee – Pacific Growth Equities

Two questions. First, can you repeat your guidance for this year? And the second, can you give us an update on – additional update on NGD-8243? Thanks.

Steve Davis

I’m sorry, Kim, I couldn’t quite hear the second part of the question.

Kim Lee – Pacific Growth Equities

Can you give us an update on NGD-8243?

Steve Davis

Sure. So, in terms of the guidance for the full year on a non-GAAP basis, we are expecting a loss in the $45 million to $50 million range, which translates to $0.85 to $0.95 per share on 53.3 million weighted shares outstanding.

Kim Lee – Pacific Growth Equities

Okay.

Steve Davis

And again, considering the atypical and non-recurring accounting matters, we feel like the non-GAAP guidance is probably most appropriate here and it’s actually more reflective of the real economic transactions and cash burn. And for the burn, again just to be clear, we’re expecting a burn rate in the mid $40 million range for the full year. We burned $28 million in the first six months. So obviously that means we’re looking at burning something quite a bit less in the second half of the year than we burned in the first half. With respect to our VR1 compound with Merck, I don’t really have anything else to report other than Merck is – I’ll just remind you what we know so far and what we’ve said previously, and that is, Merck has examined this compound in two different indications, cough and pain. They saw effects in both indications. They also saw a side effect that I wouldn’t characterize specifically as a safety concern, but it would be potentially a commercial issue at doses higher than the effects that they saw evidence of efficacy in pain and in cough. The window, however, between the side effect and the efficacy they saw in pain was tighter than they would have liked. But they saw the effects in cough at lower doses than they saw in pain, and therefore a wider window. So, Merck’s plan in this program is to take that compound forward in cough where they think they have a sufficient window. There was one gating item there and that is they need to go back and just confirm the levels at which they see this side effect. And they are doing that now. And once they’ve done that, if they confirm and get the same results they did before, our understanding is and what they told us is they will move forward with Phase 2 cough study. They are bringing a different compound forward for pain. It has a slightly different profile than the first compound. And Merck believes that that will give them a wider window for pain and they are hoping to get that compound into the clinic by the end of this year. So that’s really all we know. And as soon as Merck has completed this confirmatory work and then determined whether they have a green light to go forward as planned, of course, we’ll report that.

Kim Lee – Pacific Growth Equities

Great. Thanks for the update.

Steve Davis

You bet, Kim.

Operator

(Operator instructions) There are no additional questions at this time. I would now like to hand the call back over to Steve for closing remark.

Steve Davis

Okay. Thank you. I’d like to thank all of you for joining us this morning. We look forward to keeping you updated as we move forward in our clinical portfolio and again expect to have results over the next few months in both Parkinson’s disease and restless leg syndrome. Thank you.

Operator

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

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