Array BioPharma Inc. F3Q 2010 (Qtr End 06/30/2010) Earnings Call Transcript

| About: Array BioPharma (ARRY)

Array BioPharma Inc (NASDAQ:ARRY)

F3Q 2010 (Qtr. End 06/30/2010) Earnings Call

May 4, 2010 9:00 a.m. ET


Tricia Haugeto - IR

Bob Conway - CEO

Mike Carruthers - CFO

Kevin Koch - President and Chief Scientific Officer

David Snitman - COO and VP, Business Development


Howard Liang - Leerink Swann

Ted Tenthoff - Piper Jaffray & Co.

John Sonnier - William Blair

Simos Simeonidis - Rodman & Renshaw

Stephen Willey - Thomas Weisel Partners


Good day, everyone, and welcome to today's Array BioPharma third quarter fiscal 2010 financial results conference; just a reminder that today's call is being recorded. At this time for opening remarks I would like to turn the call over to Ms. Tricia Haugeto. Please go ahead, ma'am.

Tricia Haugeto

Thank you, [Lisa]. Good morning and welcome once again to Array BioPharma's conference call to discuss our financial results for the third quarter of fiscal 2010. You can listen to this conference call on Array's website at In addition a replay of the conference call will be available via telephone for the next seven days and via the internet.

I'd like to introduce Array's Chief Executive Officer, Bob Conway and our Chief Financial Officer, Mike Carruthers, who will lead the call today. I'd also like to introduce Kevin Koch, our President and Chief Scientific Officer and David Snitman, our Chief Operating Officer and Vice President of Business Development, who will be available to answer questions as needed.

But before I hand over the call to Bob, I would like to read the following Safe Harbor statement. The matters we are discussing today include projections or other forward-looking statements about the future results, research and development goals of Array and its collaborators and future financial performance of Array. These statements are estimates based on management's current expectations and involve risks and uncertainties that could cause them to differ materially from actual results.

We refer you to risk factors discussed in our filings with the SEC, including our annual report filed on Form 10-K for the year ended June 30, 2009 and in other filings Array makes with the SEC. These filings identify important risk factors that could cause actual results to differ materially from those in our projections or forward-looking statements. Now I would like to turn it over to Array's CEO, Bob Conway.

Bob Conway

Thanks, Tricia. Thanks for joining the call to discuss Array's third quarter results for the fiscal year ending June 30, 2010. I hope everybody got a chance to review last night's press release. We're pleased to report on our progress this quarter in both our proprietary and partnered programs.

Let me start with our partnered programs by reviewing our two most recent partnerships, our deals with Amgen and Novartis. Combined, these deals provide Array with $105 million of initial payments, over $1 billion in potential milestones, double-digit royalties as well as commercial co-detailing rights.

These two deals demonstrate the end of the spectrum for Array's partnering strategy. In the Amgen deal, we partnered our glucokinase activator ARRY-403 for Type II diabetes. This is a drug that's aimed at a huge market opportunity, primarily in the primary care marketplace. The overriding objective for Array was to license the drug to a partner who would maximize its total value while providing Array with significant near-term economics.

Amgen is leading and paying for the full post-phase one development and commercialization costs of the drug. Array received an initial payment of $60 million, is eligible for over $600 million in potential milestones and a double-digit worldwide royalty. Array does have a co-detailing option on this drug as well.

The Novartis deal for our MEK inhibitor, ARRY-162 for cancer, which has now been renamed MEK-162, is a much more strategic deal for the company. This type of deal is core to our strategy to become a fully integrated commercial stage biopharmaceutical company and is a prototype for future deals which involve markets that can be served by a therapeutic specialty sales force.

In this deal we received an initial payment of $45 million and $422 million in potential milestones. Array plans to co-develop 162 in one or more specific indications and fund a portion of the co-development costs.

The agreement provides Array with double-digit royalties on sales of the drug outside the United States with significantly higher royalty rate for US sales provided Array does not opt out of our co-funding obligation. We also have co-detailing rights in the US which is an essential element of the deal.

Partnering our drugs provide resources and capital to advance the drug as well as non-dilutive capital to Array. In addition, once a drug is partnered, either all or a majority of the funding is provided by the partner, reducing our burn. We now have eight partner drugs in clinical development with terrific partners like Novartis, Amgen, AstraZeneca, InterMune, [Rogue] and [Lilly] and three significant discovery collaborations with Celegene, Genentech, [Rogue] and Amgen.

These partnerships have a potential upside of $2.5 billion in milestones and royalties that reach into the double digits.

One great thing of a portfolio of deals like we have is that there is a series of potential milestone payments that Array can receive. In fact, we've built an annuity of milestones that can be a significant source of funding for the company.

As our partner portfolio advances, these milestones become more meaningful. For example, in fiscal 2008 we received almost no milestones. This year we're projecting $10 million in milestones and next fiscal year, 2011, we expect to receive over $20 million. If we're successful in our partner programs, these milestones should continue to build.

We're projecting these huger milestones will significantly reduce our burn beginning next year; and Mike Carruthers will provide further guidance on this in a moment.

One final point I'd like to make before I brief you on the individual programs is about the work we've done valuing both our partnered and proprietary programs and the vast difference we see between the value of the individual programs and our current market capitalization.

Based on our current assumptions, our analysis of the estimated risk adjusted net present value of the potential income from our partnered drugs alone significantly exceed the current market capitalization of the company. This is in addition to what we believe is our most valuable asset, our pipeline of 100% owned Array drugs. Mike will, again, give you more detail on this in a minute.

Then we review now the progress made during the quarter on the programs beginning with our partnered programs. In our Novartis collaboration with MEK-162 we reached the maximum tolerated dose with 162 and our phase one escalating dose trial and advanced 162 into an expansion phase at MTD in biliary track cancer patients in 10 clinical sites in North America.

Our Amgen collaboration Array continued to phase one multiple sending dose clinical trial in patients with Type II diabetes with AMG-151, also known as ARRY-403, a small molecule glucokinase activator. Array also continued a research program which is being funded by Amgen to identify and advance second generation glucokinase activators.

In our AstraZeneca deal with AZD-6244, a MEK inhibitor for cancer, we continue to - AztraZeneca, rather, continued two phase two combination trials, one in non-small cell lung and [K] Ras Mutants and the other in melanoma and B-Raf mutations.

AztraZeneca and Merck are continuing a phase one trial with AZD-6244 and Merck's AKT inhibitor, MK-2206. They also continued over half a dozen single agent trials conducted by MCI in collaboration with AZ.

In the InterMune collaboration, InterMune announced positive top-line results from a planned 12-week interim analysis of the phase two randomized study with Danoprevir, a protease inhibitor in Hepatitis C patients. Danoprevir is also known as RG-7227, that's the [Rouge] number, and InterMune-191, which was co-invented by Array and InterMune.

In our research, beginning with the Genentech one, Array received $3.75 million from Genentech for achieving milestones on two undisclosed programs. In our Celgene research collaboration Celgene announced for the first time progress on three Array partnered research programs during their R&D event on April 8th, c-fms for oncology, TYK2 for inflammation and PDGFR for inflammation.

Celgene reported that all three programs have a possibility of entering clinical development over the next 12 to 24 months. Under the terms of the Array agreement with Celgene, Celgene has the option to select two of the programs and Array would retain the rights to the third.

In our proprietary programs during the quarter we made significant progress advancing our proprietary pipeline. There are four 100% owned Array programs in clinical development today that we want to report on.

ARRY-520, our KSP inhibitor continued a phase one trial which is of ARRY-520 and [model] KSP, our Kinesin Spindle Protein inhibitor, in patients with solid tumors and two phase one, two trials in patients with AML and multiple myeloma.

ARRY-614 is our p38 Tie-2 inhibitor. We continued dosing patients with MDS in a phase one trial with 614 to determine the safety, maximum tolerated dose, pharmacokinetics and preliminary estimates of efficacy of the compound in this patient population.

ARRY-543 is our ErbB family inhibitor for solid tumors. We continued three 1b combination trials with Xeloda, Taxotere and Gemzar respectively. We reached the maximum tolerated dose of ARRY-543 in each of those trials in the combination trials.

Finally, ARRY-380 is our selective oral HER2 inhibitor for breast cancer. Array continued dose escalation in a phase one trial to evaluate the safety, maximum tolerated dose and pharmacokinetics of 380 in patients with advanced menostatic breast cancer.

Let me now pass it over to Mike Carruthers, our CFO, to drill down on the financials. Mike?

Mike Carruthers

Thank you, Bob. Array's revenue for the third quarter of $18.4 million established a new record level. This revenue result included the full quarter of revenue from the Amgen deals for ARRY-403 as well as nearly $4 million in milestone payments from Genentech.

This strong revenue, combined with reduced R&D spending, pushed our loss per share for the quarter down to $0.30. Both the revenue and the loss per share were significantly positive compared to the consensus estimate.

Our cash burn for the quarter also continued a positive trend with only a net of $15 million used. This left our cash equivalents and marketable securities as of March 31 at $100 million. This balance is before the receipt of the $45 million from the recently announced deal with Novartis for 162.

I would like now to provide an update to guidance for the 2010 fiscal year that ends in June. The main driver for the change in guidance is the conclusion of the Novartis deal. The current consensus estimate for the full fiscal year is for revenue of approximately $48 million and loss per share of $1.61.

With the Novartis deal we believe that the full-year revenue will be about $52 million and the loss per share at $1.58 or better. Our assumption for the revenue recognition for the up front payment from Novartis is between four and five years and this is something that we're still in the process of finalizing.

We haven't previously discussed guidance for fiscal 2011 but with the deals we've concluded over the last few months we think it would be good to give some directional guidance for revenue and loss per share for next year that will begin in July.

We think total revenue for fiscal 2011 will grow to about $75 million. Revenue from the new deals drives much of this improvement but, in addition, we currently expect a significant level of milestones with our collaboration partners to be achieved. If so, it could provide $20 million to $25 million in cash and providing around $10 million in revenue recognition.

With these revenue results combined with projected reduced R&D costs as a result of the Amgen and Novartis deals, we currently estimate our loss per share can be held to about $1 for fiscal 2011 and that our burn with milestones should be less than $60 million.

At this point, I'd like to switch gears and talk about the accumulation of value that has occurred from our partner deals. We've taken a close look at the potential future milestones and royalty [strand] from our most significant collaborations, including those with Novartis, Amgen, AstraZeneca, InterMune, Celgene and Genentech.

We've considered the probabilities and timing of each lead drug in these collaborations making it to market as well as probably sales levels once on the market. We currently estimate that the resulting risk adjusted net present value to Array is north of $400 million for these partnered programs.

When we do the same analysis for our 100% owned pipeline we get a similar level of value such that the current combined estimated net present value of our nearly 20 partnered and wholly owned programs is over $800 million.

These estimates, of course, are subject to a number of risks and uncertainties that are detailed in our public filings and the assumptions we use in the analysis may change or prove not to be accurate over time. However, we believe our current assumptions are reasonable.

We want to bring this analysis to your attention because we intend in the coming months to try and help investors better understand the facts and assumptions that drive this value.

Bob Conway

Thanks, Mike. Let me do one more thing and that's review our milestones for calendar 2010. Remember, we're in a fiscal year ending June 30 but we've always done our milestones on a calendar year basis. We provided these in January 2010.

The first of the programs is ARRY-403. That's the glucokinase activator that we partnered with Amgen. We plan to complete the multiple [ascending] dose trial in Type II diabetes patients and initiate a second generation discovery program. Those are both ongoing.

With ARRY-162, now known as MEK-162 for cancer, we said we'd complete the phase one escalating dose trial and initiate and complete a phase one expansion trial in biliary track cancer patients. Both of those are on track and we also said it would initiate a phase 1d combination trial, which we'll obviously be working with Novartis on that.

ARRY-520, our KSP inhibitor for cancer, we said we'd complete and report the phase one expansion trial in solid tumors and the 1b trial in AML and complete and report the 1b trial in multiple myeloma and also initiate a phase two trial in multiple myeloma. We're on track for those.

ARRY-380 is our selective oral HER2 inhibitor for metastatic breast cancer. We said we would complete and report the phase one escalating dose trial and initiate an expansion trial and initiate and complete a bio-equivalency trial to enable commercial formulation. That's all on track.

With 543, which is our ErbB family inhibitor for solid tumors, we said we'd complete and report three phase 1b combination trials. That's all on track. We've reached maximum tolerated dose with those and we also said we'd initiate a phase two combination trial.

ARRY-614 is our p38 Tie-2 inhibitor for MDS. We said we'd complete and report a phase 1b two trial and we're on track for that.

In addition, we also said we'd file one to two INDs for new proprietary drugs. That's moving programs from discovery into development. Now that we've partnered 162 we have room in our development pipeline and we plan on moving one to two programs this year from discovery into development.

Finally, we said we'd partner one or more proprietary programs and obviously with the Novartis deal done that would complete that milestone. We continue in discussions with a number of different partners on other Array both development and discovery stage assets.

Operator, let me pass it back over to you and see if there're any questions this morning.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Howard Liang - Leerink Swann.

Howard Liang - Leerink Swann

My first question is regarding partnerships. I think you talked about potential additional [fields] in the works. Can you talk about what are the compounds that you think will be most attractive from a partnership perspective?

Bob Conway

Howard, we guided at the beginning of the year that we'd do one or more significant partnerships this year and that's the guidance that we're sticking with. I think there's interest in a number from both major pharm and big cap biotech.

A number of both are development and discovery programs and those discussions are ongoing all the time. It's one of the ways that we continually value the programs that we have here. But we don't have any additional guidance against partnerships this year. We have, as I said, a number of discussions ongoing.

Howard Liang - Leerink Swann

You mentioned the MPV calculations for both the partner programs [also internal] programs. I don't know if you're ready to talk about some of the assumptions that you used for those. [It would be very] helpful.

Bob Conway

Well, Howard, if you look at this - and we're not going to go asset-by-asset - but if you look at just our partnered programs and you take Novartis, Amgen, AstraZeneca and Celgene - and all of those programs we've said have double-digit royalties associated with them.

So if you just assigned a 10% or a 12% blended rate against those in royalties - and some of them are higher than that - and take a risk adjusted view of the potential revenue associated with each one of those programs and then discount it back today and add in the milestones, just that is significantly in excess of the company's market capitalization today.

So there's a disconnect between asset value and market capitalization value that we're trying to understand and do a better job of explaining.

Howard Liang - Leerink Swann

Regarding the MEK program, actually for both AstraZeneca and Novartis, is there an interest in melanoma?

Bob Conway

Let me - Kevin, do you want to comment on that?

Kevin Koch

Sure, Howard. Melanoma continues to be an exciting area. We just published a paper recently on some of the escape mechanisms for the B-Raf inhibitors which go through [erk] activation as well as activation of other pathways. We think that both in a first line setting and perhaps in a rescue setting the MEK inhibitors will have a significant potential in melanoma.


Your next question comes from the line of Ted Tenthoff - Piper Jaffray.

Ted Tenthoff - Piper Jaffray

When it comes to - just a quick housekeeping question - where was the Deerfield debt as of the end of the quarter.

Mike Carruthers

The Deerfield debt is consistent. It's $120 million, which is payable by 2014. Remember the nature of that deal, Ted. It's payable either in cash or stock at a raise option.

Ted Tenthoff - Piper Jaffray

So the interest doesn't accrue to the underlying debt then.

Mike Carruthers

No, we're paying the interest on a quarterly basis.

Ted Tenthoff - Piper Jaffray

When it comes to data flow this year, I know abstracts haven't - I don't think they've been accepted yet for ASCO but we've got a couple different candidates. Now that you're partnered with Novartis will you be reporting the 162 data there do you think?

Bob Conway

Abstracts have been accepted by ASCO but companies are not allowed to talk about it yet. That's a later period I think until they're published. With 162 we're having our first meeting with Novartis either late this week or early next week around that program and we'll have to obviously work through with our partner what we do or don't publish not only on the phase one program but going forward.


Your next question comes from the line of John Sonnier - William Blair.

John Sonnier - William Blair

Bob, you talked about the Novartis deal as a proxy on how to think about future deals and it's fairly evident that there is an evolution toward greater ownership as you guys progress here. So talk a little bit about how that goes. I mean, do you get to the point where you want to maintain rights to entire geographies as you become more integrated?

I'd be curious, if David's on the line, as to kind of what the appetite is in domestic big pharma. It seems like there continues to be a rationalization of early stage discovery research there.

Bob Conway

I think I said a prototype rather than a proxy but either. No, it's the evolution of the company, the advancement of the business model. We want to retain in future deals as much US economics as we can say over the next four or five years. We're also looking at the programs and any of them make sense for us to keep much later but our goal has always been to be a commercial stage biopharmaceutical company.

We think the Novartis deal - it's a great partner in Novartis. We're delighted with attracting that level of partner around this drug and that's our pathway to get into commercialization. David, you talked about the appetite in big pharma.

David Snitman

Yes, well, as Bob has mentioned, we are always in discussions with other companies and looking to do the right deal at the right time for the right value. I think pharma is still very cautious about what they're bringing into their pipeline.

I think what you see, the consolidation of companies. What we're seeing is the out-licensing of a number of products from pharma so the products that they want to in-license, I think, are at a higher level of potential value to them.

We're also exploring geographical deals. As you said, that would be a next logical step for us and we'll see if that makes sense in the future.

Bob Conway

One of the consistent themes that we've talked about publically, John, is scarcity value. We think in the coming years in 2011, 2012, 2013, with the drugs going off of patent and pharma continuing to cut their research capabilities and also there aren't new biotech companies being minted or fewer new biotech companies.

There are new companies, like Array, who are inventing new drugs. We think there's going to be tremendous scarcity value and I think you're seeing that already with some of the value of deals that are getting done, not only from Array but also from other companies like us that are inventing and developing new drugs.


(Operator Instructions) Your next question comes from the line of Simos Simeonidis - Rodman & Renshaw.

Simos Simeonidis - Rodman & Renshaw

A quick question on 162; have you discussed with Novartis and can you share with us the interest in other indications they want to - what other solid tumors they want to go into. Secondly, when would you have to decide whether to co-develop one of these programs?

Mike Carruthers

I'll take the first question, Simos. I think that this is a very competitive area at the moment. We don't really want to discuss the combination studies and single agent studies that we plan on taking MEK-162 into. However, I think that Novartis has a history of having an aggressive development strategy and we want to be the first in this area.

I think the academic and clinical community would argue that the MEK inhibitors will be a drug. So we want to be first and we believe we are best at the moment, which is why Novartis licensed the compound/

Bob Conway

Yes, and we were delighted, as I said, with Novartis as a partner because we wanted a heavyweight pharma company to put the resources necessary to take advantage of the full range of opportunities with MEK and we think Novartis will clearly do that.

On your second question, we're going to be - I'm going to refer you to our press release and our 8-K on that because that's what we've agreed with Novartis that we would say publically. So that's what I’m going to give you.

Simos Simeonidis - Rodman & Renshaw

A quick question on 403; have you talked at all about when you Amgen is going to put it in a phase two setting?

Mike Carruthers

Simos, I think that we don't have a complete clarity on that. I'd say that the molecules moving forward at a rapid pace really depends on the handoff and the population of interest. It could be the end of this year. It could be the beginning of next year but we anticipate that will be within the next year or so.

Bob Conway

Yes, the handoff has gone really well. We're finishing multiple ascending dose trials for the drug and other smaller trials that we need to get done and Amgen is working diligently on moving forward with the phase two but we don't have any public clarity yet on exactly when that trial was initiated.

Simos Simeonidis - Rodman & Renshaw

Final question for Mike; could you give us a rough idea on the milestones what we could see from the Novartis and Amgen deals in the next 12 to 18 months?

Mike Carruthers

Well, as we have said, the combined potential that we would expect is $20 million to $25 million and there's a strong piece from those two collaborations, although that's not 100% of it.


(Operator Instructions) Your next question comes from the line of Stephen Willey - Thomas Weisel Partners.

Stephen Willey - Thomas Weisel Partners

I'm not sure if you disclosed it yet or talked about it but could you maybe just mention or discuss the percentage of the milestone payments related to the Novartis and the Amgen deal that are pre-commercialization relative to post-commercialization?

Bob Conway

I don't think we're going to rely back on the public filings we have on both - sorry, Stephen - on both of those deals. We haven't characterized that so we don't have any more to say on that.

Stephen Willey - Thomas Weisel Partners

Then just thinking out maybe beyond ASCO and kind of some of these road maps here for data catalysts; do you think it's likely that we may see 403 data at ADA and then 380 data, again, year-end at the breast cancer conference?

Bob Conway

Well, I think we'll probably see additional data this year out of 380 for sure and we're looking forward to doing the complete data set on the initial trial we've done and we're doing an expansion phase as well. On 403 we'll have to work that out with Amgen. We don't have any guidance on that today.

Stephen Willey - Thomas Weisel Partners

Maybe just ore of a bigger picture strategic question here; as you kind of look across the partnership landscape, maybe you can just comment how you balance your selection of partners between what the bottom line looks like with respect to economics and maybe where you think your compound fits in from a visibility standpoint and competitive standpoint within the portfolio.

Bob Conway

Well, let me, as I think began my prepared remarks today, that we view our partnering deals in kind of two buckets. Amgen would be the one bucket where they were going to basically take over the program and do the full development, full commercialization. We were trying to maximize the near-term economics as well as the total value of the drug.

In the Novartis deal we wanted to be involved in both co-development as well as co-detailing. Those are the two different types and the difference between those two is primary care versus specialty therapeutic sales forces kind of in our cancer and inflammation areas. That's how we're deciding as to which of the types of deals that we're really pushing on.

Basically, what we want to have is terrific partners that see the same value in the drug that we do. I don't think you can do much better than somebody like Novartis in cancer today or Amgen in the diabetes drug or any of our other partners, [Rogue], for example. So we're delighted with our partner selection and those are the quality of companies we want to work with going forward.


Everyone, at this time there are no further questions. We'll turn the conference back over to our speakers for any additional or closing remarks.

Bob Conway

Thanks very much, [Lisa]. Let me just close on how much I appreciate everybody being on the call today. I'd also really like to thank our 330 employees for their dedication, creativity and hard work.

As you can imagine, the two partnering deals that we just did, the amount of effort that goes into that from our scientific and administrative staff here, from the business development folks as well as the senior scientific team is enormous.

When these folks come in and take a look at the programs that we're working on they turn over everything because if you're going to put down $40 million to $60 million up front and then have a multiyear commitment that could go our to 15 or 20 years, you want to make sure that the program is one that you want to in-license.

A lot of questions, a lot of work on the part of our teams and I really appreciate all the hard work that they put into that and everything else they do every day here at Array. I also want to thank our partners and shareholders for the continued confidence and support and we look forward to updating you in about 90 days and hope to see a lot of you at ASCO this year. Thanks very much, operator, and thanks for being on the call.


Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.

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