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PharmAthene (NYSEMKT:PIP)

Q3 2012 Earnings Call

November 06, 2012 4:30 pm ET

Executives

Stacey Jurchison - Director of Corporate Communications

Eric I. Richman - Chief Executive Officer, President and Director

Arthur Y. Elliott - Acting Chief Scientific Officer

Linda L. Chang - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Nathan Cali - Noble Financial Group, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 PharmAthene Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Stacey Jurchison, Director of Corporate Communications. Please proceed.

Stacey Jurchison

Thank you, Derek, and good afternoon, everyone. Joining me on the call today are Eric Richman, President and Chief Executive Officer; Dr. Arthur Elliott, Acting Chief Scientific Officer; and Linda Chang, Senior Vice President and Chief Financial Officer. Eric will begin today's call with a brief overview of the quarter followed by a discussion of our programs by Dr. Elliot. Linda will then review our third quarter financial results, after which, we'll open up the call to Q&A.

Before we begin, I'd like to point out that during today's call, we will be making projections and other forward-looking statements which are based on our current beliefs and expectations. Please be aware that these statements are subject to certain risks and uncertainties. We encourage you to consult PharmAthene's filings with the SEC for additional detail. With that, I will now turn the call over to Eric to begin.

Eric I. Richman

Thank you, Stacey, and good afternoon, everyone. Thank you for joining us today for PharmAthene's Third Quarter Update Call. During the quarter, we made steady progress toward meeting our business and financial objectives and continued to be well-positioned to meet our near-term goals, which includes to mitigate complete response to the FDA regarding the clinical hold notification for SparVax and moving towards final resolution in the litigation with SIGA, which I will touch on in more detail in a moment.

During the quarter, we also received positive news that the Department of Defense had exercised its option to accelerate funding for our BChE bioscavenger program, which continues to make solid progress. And finally, we have significantly strengthened our financial position, as Linda will address.

Before we discuss our programs, I'd like to take a moment to briefly update you on the status of the SIGA litigation. Following issuance of the final judgment by the Delaware Chancery Court on May 31, SIGA filed an appeal with the Delaware Supreme Court in June. We filed our own motion to cross-appeal in response to this action. At this point, all legal briefs pertaining to the appeal have been submitted and the Delaware Supreme Court has set a date to hear oral arguments on January 10, 2013.

As you know, in its final judgment, the Delaware Court of Chancery ordered PharmAthene 50% of the net profits over a period of 10 years from all sales of SIGA's smallpox antiviral therapeutic, ST-246, and related products, after SIGA receives the first $40 million in net profits.

In its third quarter conference call yesterday, SIGA said again that it anticipates initial deliveries of ST-246 to the government, will commence in the first quarter of 2013. Should the Delaware Supreme Court uphold the Chancery Court's final ruling, PharmAthene could potentially realize significant near-term revenue.

Prior to SIGA's appeal, the Delaware Chancery Court has ruled 4 separate times in favor of PharmAthene. First in 2008, denying SIGA's motion to dismiss, and then in 2010, denying their motion for summary judgment, culminating with the September 2011 judgment favorable to PharmAthene, and finally, in December 2011, denying SIGA's motion for reargument.

We are pleased that we are entering the final stages of this extended legal case. We remain confident in the merits of our case and in the final decision of the Chancery Court. Based on the timing of the Delaware Supreme Court decisions, we expect a ruling from the high court no later than the second quarter of 2013.

Now turning to our SparVax program, removing the clinical hold is the top priority for our company. I'm pleased to say that we have worked expeditiously to address the FDA's request for additional information related to our proposed Phase II clinical trial, and we intend to submit a complete response at the FDA shortly. We are presently in communication with the FDA to ensure that our response is as comprehensive as possible. As such, the actual timing of the submission may be subject to near-term FDA feedback.

The FDA has requested that we provide additional stability data on the product and more information on the stability-indicating assays.

We have been in close contact with the -- with both FDA and BARDA throughout this process.

As I've previously stated, we intend to submit a complete response to the FDA shortly and after their review, we will be in a better position to determine the clinical path for SparVax.

I'd now like to turn the call over to Dr. Arthur Elliott to discuss recent program developments. As we recently announced, Art, who has been a scientific advisor to the company since June of 2011, has assumed the position of Acting Chief Scientific Officer, following the departure of Dr. Tom Fuerst. I am pleased to welcome Art to this position.

In 2006, he joined the Department of Health and Human Services, and most recently served as a branch chief for BARDA, where he was responsible for the U.S. government's anthrax vaccine portfolio. Prior to that, he led the avian influenza pandemic preparedness program for HHS, a joint industry, inter-agency collaboration, to accelerate the production of stockpiling of pandemic influenza vaccine for the Strategic National Stockpile.

Prior to joining HHS, he spent 16 years with Merck & Co. where he oversaw the manufacturing and registration of all biological products sold by Merck. I'll now turn it over to Art for his remarks.

Arthur Y. Elliott

Thank you, Eric. Hello, everyone. I'm very pleased to have the opportunity to support PharmAthene in its efforts to develop important medical countermeasure solutions. As you know, the greatest potential biological threats identified by the U.S. government are anthrax and smallpox. Accordingly, our government has made the procurement of next-generation recombinant anthrax vaccine an important, national security priority.

Newer anthrax vaccines, which are based on modern recombinant vaccine technology, offer the potential for significant advances, including improved convenience and cost-effectiveness. And also, the flexibility for rapid scale-up in production, which is vitally important in the event of a national emergency.

I believe that PharmAthene's rPA anthrax vaccine has features that should make it a highly desirable candidate for the inclusion in the Strategic National Stockpile. Notably, this vaccine has previously been evaluated in 3 separate Phase I and Phase II clinical trials, involving nearly 800 human subjects and were shown to be well-tolerated and immunogenic.

Last year, PharmAthene completed the technology transfer of its manufacturing process from the U.K. to a U.S.-based manufacturing facility, and completed both pre-cGMP engineering, and GPM -- GMP manufacturing of final drug product at full commercial scale.

In August, prior to dosing any patients, the company was notified by the FDA that its proposed Phase II trial for SparVax was being placed on clinical hold, pending provision of a complete response to the agency.

The FDA's decision to place the proposed trial on clinical hold, relates primarily to questions about the stability-indicating assays and the amount of stability data provided to the FDA. Specifically, the agency has requested additional information about our mouse challenge assay, which has been used to release product for each of the 3 previous SparVax clinical trials.

As I noted, last year, we completed the technology transfer of our manufacturing process to a U.S.-based contract manufacturing organization. The FDA has acknowledged comparability between the U.K.- and the U.S.-generated bulk drug substance, but is requesting more information about this particular assay. In addition, the FDA has asked that we provide additional stability time points for the final drug product manufactured in the U.S. We have generated and completed these data, which will be submitted to the FDA shortly.

Since receiving this modification, we have had numerous interactions with FDA and our partner, BARDA, as we work to develop our full response. Importantly, we believe that the FDA's request for additional information is achievable, and we are confident, in the path forward, in our ability to address these issues.

As Eric stated earlier, we plan to submit our complete response to the FDA shortly. Following their review, and any potential request for further clarification or information, we will have a better idea of the clinical path for SparVax. However, in the meantime, we are moving ahead with all other efforts under the contract, which are not affected by the delay in initiating the Phase II clinical study.

Moving on, progress in our BChE program has been very strong in 2012. Last year, we were awarded a contract from the Department of Defense, valued at $5.7 million for development of a mammalian-cell-culture approach for our recombinant BChE program, a broad-spectrum chemical nerve agent, prophylaxis.

We were very pleased to learn that this quarter, that the DoD had accelerated funds options under our contract.

The mammalian cell culture approach could have significant advantages over the original transgenic approach utilized by Protexia, including a more streamlined and cost-efficient development and production process. We are continuing to work collaboratively with the DoD to execute on this contract, and position the recombinant platform for future funding to initiate Phase I clinical development.

In closing, I would like to say that I have great confidence in PharmAthene's pipeline and look forward to contributing my knowledge and expertise in vaccine development to advance PharmAthene's Biodefense program.

I will now turn the call over to Linda Chang for a review of financial results for the third quarter.

Linda L. Chang

Thank you, Art. We have announced our latest financial results in the press release that was issued at 4:00 p.m. today. If you have not seen that, you can access this information on our website. I will now briefly review some financial highlights from the third quarter, beginning with our cash position.

We ended the quarter with $20 million in cash and cash equivalent and receivables. Net cash used in operations year-to-date is approximately $178,000. At this point, we are optimistic that we will be able to meet or exceed our 2012 annual cash burn goal of $6 million or less, with cash burn defined as the change in our cash and cash equivalents. We are solidly financed through the anticipated outcome of the SIGA litigation and initiation of ST-246 product delivery.

In addition, if the higher court upholds the Chancery Court ruling, we will be entitled to receive approximately $2.5 million in payment from SIGA for a portion of our legal and other expenses plus interest.

Now turning to revenue. For the third quarter of 2012, we recognized $6.7 million in revenue, the majority of which was from the contract for the development of SparVax and the remainder from our bioscavenger program.

Research and development expenses for the third quarter were $5.1 million, up slightly from the year-ago quarter. The increase is primarily due to higher direct expenses under our SparVax program, in combination with decreased costs for our Valortim program and the reduction in nongovernment-funded internal research and development activities.

Overall, general and administrative expenses were $3.3 million in the third quarter of 2012, flat from the year-ago quarter. Our net loss for the quarter ended September 30, 2012, was approximately $200,000 or $0.00 per share, compared to approximately $30,000 or $0.00 per share in the same period of 2011.

Included in the net loss for the quarter, was a $1.2 million gain associated with the realization of a cumulative foreign currency translation adjustment and a $500,000 noncash gain related to the change in the fair value of our derivative instrument.

With a stronger financial foundation, and an operation that is running close to cash neutral, we are confident that our capital will be sufficient to meet our needs well into 2013. And now, I would like to turn the call back to Eric.

Eric I. Richman

Thank you, Linda. As you can see, it has been a very productive quarter with steady progress in our program. We made significant headway in our efforts to respond to the FDA clinical hold on SparVax and believe that we have assembled a comprehensive response that addresses the FDA clinical hold concerns. In addition, we are well into the litigation appeals process with the majority of work now behind us, and we are swiftly approaching resolution in this case, which we anticipate will occur by the second quarter of next year.

We look forward to keeping you updated on these events in the months ahead. Thank you for your continued interest and support. Operator, that concludes my prepared remarks. Could you please open up the call for questions at this time?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Nathan Cali from Noble Financial.

Nathan Cali - Noble Financial Group, Inc., Research Division

Just a couple of quick questions. Since you're on hold for the fourth quarter and then going forward on expectations for contract revenue, do we expect any dip there until you come back off the clinical hold? I know you're still working on some of the other areas with SparVax, how can we look at that?

Eric I. Richman

Nathan, thanks for the question. I'm going to let Linda reply to that, as she keeps track of all the revenue from all of the 8 milestones under this contract for -- on SparVax.

Linda L. Chang

So it is true that originally, we had anticipated that the clinical trial would begin in 2012. Now it is likely that it will be in the 2013 timeframe. However, keeping in mind that this is one of 8 major activities under current contract with the -- with all the other activities remain ongoing and on track, while there might be a slight reduction in revenue in the fourth quarter, we don't anticipate that to be a significant number at this time.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay. And on the appeal decision, what's the likely time frame there?

Eric I. Richman

Well, the -- all -- as I mentioned earlier, all of the briefs for the case have been filed by both sides with the Delaware Supreme Court, and they set a date of January 10, for oral arguments. Those oral arguments will be completed that day and we expect that typically, a final ruling in that case should follow 60 to 90 days past oral arguments. So we're anticipating early April at the latest for a final decision on the appeal.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay. And just a quick refresher. On the BARDA contract for ST-246, SIGA has been receiving several milestone payments throughout the process thus far. Is that part of the net profit split -- how does that factor in, how should we look at that? Because I guess, they're going to be receiving a milestone payment of like $12.2 million in the fourth quarter and then another $8.2 million in the year of 2013. So is that part of the net profit split for PharmAthene?

Eric I. Richman

Yes, I think the way to look at the contract, that -- the award that SIGA received, is the total is about $435 million, there's a portion of it for development of other formulations in the neighborhood of about $50 million. So the remaining amount, $380-or-so million, is for procurement. That will be paid to SIGA for delivery of the product. Now some of that $380-plus million, was delivered to SIGA in the form of an advanced payment or an early milestone, I think 40 -- they have announced, I think it was a little over $40 million, which was prepaid, I believe, as working capital to use for development and finalization of the product for delivery. And then most recently, we heard that a labeling milestone was also hit. But the way we viewed that is it really is an advanced payment, as part of the total procurement dollars, which are eligible for split.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay, great. Just trying to get a sense on timing of when that net profit split of the first $40 million will occur. So that was your reason for the question.

Operator

At this time, I'm showing no further questions. Thank you. Ladies and gentlemen, PharmAthene would like to thank you for joining today's conference. We thank you for your participation, and you may now disconnect. Everyone, have a great day.

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