Enzon Pharmaceuticals, Inc (NASDAQ:ENZN) Q2, 2008 Earnings Call August 6, 2008 9:00 AM ET
Craig Tooman - Executive Vice President of Finance and Chief Financial Officer
Jeff Buchalter - Chairman, Chief Executive Officer
Ian Sanderson - Cowen and Company
Matt Renna - Soleil-Neponset
Good morning, ladies and gentlemen. Thank you for holding. Welcome to Enzon Pharmaceuticals' Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. (Operator Instructions). Please be advised that this call is being recorded at the Company's request.
And at this time, I would like to introduce your host for today's call, Mr. Craig Tooman, Executive Vice President of Finance and Chief Financial Officer of Enzon Pharmaceuticals. Please go ahead.
Craig Tooman - Executive Vice President of Finance and Chief Financial Officer
Good morning and thank you for joining us today. I would like to remind you that during the conference call we will be making forward-looking statements that represent the Company's intentions, expectations, or beliefs concerning future events. These forward-looking statements are qualified by important factors set forth in today's press release and the Company's filings with the SEC, which could cause actual results to differ materially from those in such forward-looking statements. Those factors include but are not limited to timing, success, and cost of clinical studies, our ability to obtain regulatory approval of products, market acceptance of, and continuing demand for our products, and the impacts of competitive products and pricing. A more detailed discussion of these and other factors that could affect results is contained in our filings with the SEC, including our annual report on form 10K for the period ended December 31, 2007. Furthermore, our information discussed on today's call is accurate as of today, and we do not intend to update it.
Again, this quarter, all business segments reported strong results. This broad-based revenue increase is a real reflection of some of the longer term planning efforts at Enzon. It is also very gratifying to have extinguished the Company's debt burden due in 2008 in its entirety on July 1. You will recall that we inherited a $400 million debt burden when we first arrived at Enzon in 2005 and strategically financed the Company over the last two years.
As you can see from today's release, Enzon reported a net loss of $1.7 million or $0.04 per diluted share this their quarter compared a net loss of $2 million or $0.04 for the three months ended June, 2007. Our results for this quarter are quite a bit better than expectations. I'll highlight a few reasons for this. As I mentioned, revenues were very solid again this quarter. Sales of the product segment comprised of Oncaspar, DepoCyt, Abelcet and Adagen increased 17% to $29.2 million this quarter compared $25 million for the comparable period in 2007.
Higher revenues this quarter were mostly attributed to sells from our oncology product, Oncaspar. We continued to see additional adoption in the ALL market in both the pediatric and adult settings. Oncaspar is growing nicely both in units and dollars and our sales and marketing team have a nice platform for sustainable growth with this brand. Sales of DepoCyt for lymphomatous meningitis were $2.4 million this quarter, up from $2.1 million for the comparable period in 2007. And sales of Adagen, enzyme replacement therapy used to treat patients with severe combined immune efficiency disease, increased to $7 million this quarter from $6.6 million in the second quarter of 2007. Sales of Abelcet in US and Canada this year were relatively stable at $6.6 million. Given the competitive antifungal market we are encouraged by the early stabilization of Abelcet.
Revenues from the Company's royalty segment decreased 18% this quarter to $15 million as compared to $18.3 million for the same three-month period in 2007. Our royalty revenues continue to perform quite well from the previous year when you factor in the sale of 25% of the royalty interest in PEG-INTRON which occurred in August of 2007. Again, royalties were down 18%, but we sold 25% of the PEG-INTRON royalty. The revenues from the other products from which we received royalties also continued to perform well, and we expect to add royalties from Cynzia by the fourth quarter.
The Company's revenues from the contract manufacturing segment increased to $6.6 million for the three months ended June 30, 2008 as compared to $5.9 million in the corresponding period of the prior year. This increase was due to the timing of shipments to our customers. However, we do continue to see positive results from our ongoing efforts to better utilize our manufacturing operations.
In the first quarter of 2008, Company's cost of goods sold increased to $1704 million from $15.3 million, included in the second quarter of 2008 were amortization costs of $1.9 million, related to a $8 million sales milestone in connection with our 2007 amendment to our Oncaspar license. This payment will not be made until January of 2009. However, since we have determined that it is likely that we will achieve this milestone, we started amortizing this cost.
Going forward, the additional amortization from this agreement will be approximately $125,000 per quarter, through 2014, which is the end of the agreement. Also included in the COGS in 2007 we incurred validation costs of $1.9 million in the second quarter related to certain production batches, associated with the consolidation of our products from the South Plainfield, New Jersey, location to the facility in Indianapolis. Excluding these costs in both years, which are equal in magnitude, the gross margin was relatively unchanged from year to year.
The Company's R&D expenses decreased to $14.1 million for the three months ended June 30, 2008. This decrease is primarily the result of startup expenses incurred in 2007, including the purchase of Clinical Drug Supply. This quarter's expenses included $2 million in milestones we achieved related to the L&A platform. We continue to be excited about our ongoing programs in our pipeline which Jeff will update you on shortly. You should continue to expect higher R&D spending in the second half, as we continue our planned investment in the next generation of Oncaspar and Adagen and the pipeline advances.
This quarter, SG&A increased to $18.1 million from $16 million in the comparable period in 2007. This increase was mostly attributed to costs incurred from the proposed spinoff of a biotechnology company. These costs will continue until the transaction is complete, which we expect in the fourth quarter of 2008. The Company also continues to be selective in its selling and marketing investments for our current marketed products.
Consolidation of our manufacturing operations in our Indianapolis, Indiana site is on schedule and has gone smoothly. The Company incurred $900,000 for this quarter compared to $800,000 for the three months ended June 30, 2007. These costs include employee severance for those affected by the consolidation. We anticipate all operations will be transferred from our New Jersey site to the Indianapolis site by the end of this year. As you know, these transitions are fairly complex and our manufacturing team has done an admirable job executing this.
The Company reported other expenses of $2 million as compared net expense of $1.8 million in the same period of last year. The change was mostly due to the reduction in interest expense and investment income, which was impacted by the purchase of $59.9 million of our outstanding debt in the first quarter of 2008. In July, we repaid the remaining 2008 debt balance of $12.5 million, as I mentioned we are very pleased with this strategic accomplishment.
Now turning to our current cash position. Total cash reserves which includes cash, short-term investments, restricted cash, and marketable securities, were $205.9 million as of June 30, 2008. This compared to $258.2 million at the end of last year. The reduction in cash was primarily due to the purchase of $59.9 million of our 2008 convertible notes, as just mentioned. We had $14.6 million remaining in our restricted cash account at the end of June to repay the bond, which was used in July.
Now I would like to provide some updates on a proposed spinoff transaction. As you know on July 30, we filed the Form 10 with the SEC, which provides information regarding the new biotechnology company. Typically it takes the SEC two months or so to complete the review process. In this document, we provided some additional insight as to the taxable nature of the transaction. Confirmation on the capitalization of the new company, composition of the Board of Directors and management as well as the strategy for the new company.
First let me update you on the tax status. This transaction will be taxable. There were several reasons for this decision. First, the Company currently has a reasonably high tax basis in the assets, which it will spin off. Secondly, as a taxable transaction, it provides both companies the flexibility they need to maximize the assets they will manage. Regarding the capitalization as previously stated, we have agreed to fund the company with $150 million in cash. However, we will fund $100 million at the close of the transaction and deliver a promissory note for a subsequent payment of $50 million. And this will provide both companies the capital needed to operate in the short term without relying on the markets for immediate financing. Jeff will update you on the new company's strategy in a minute.
In summary this, quarter was a very strong one for the Company with very good execution on many fronts. Our revenue growth was strong, extinguishing all of our remaining 2008 debt, was also a great milestone for the Company. In addition we continue to advance our proposed spinoff transaction with the filing of our Form 10.
I'll now turn the call over to Jeff to update you on the pipeline and additional details for the new biotechnology company. Jeff?
Jeff Buchalter - Chairman, Chief Executive Officer
Good morning, everyone. Thank you for joining us today. Thank you, Craig. Enzon continues to execute our business plan aimed at driving the business enhancing shareholder value. We continue to deliver strong revenues on our promoted products. As Craig mentioned in July we were successful in eliminating all of the 2008 debt. Finally we're continuing to generate data from our clinical trials as seen in the 2008 Afsco meeting and plan for additional major medical meetings later this year. As Craig mentioned, our Form 10 was filed with the SEC on July 30 providing additional details regarding the new biotech company, Evivrus. Evivrus continues to focus on strategy and oncology innovation.
We'll continue to invest in our technological base and advancing on novel research and development pipeline of projects that are strategically focused with promising pathways to regulatory approval. As indicated in our proposed ticker symbol we are focusing on transforming hope into reality for cancer patients with novel and innovative new cancer therapeutics. Evivrus will be committed to making targeting discipline investment in areas we believe we can make unique contribution and achieve differentiation. We're committed to further evolving the potential of our PEG and L&A technologies and bringing new product developments opportunities forward, both through proprietary and externally sourced programs.
Now let me update you on the programs that will comprise the Evivrus pipeline as well as our life cycle program for Oncaspar. Our clinical pipeline continues to advance across all of the programs. Our level of excitement has not diminished since our last update. In fact we remain very encouraged with the progress and results from this exciting, albeit early stage pipeline. The Recombinant Human Mannose- Binding Lectin or RHMBO program continues to our patients in two trials, one for the prevention of severe infections in MBO deficient individuals with multiple myeloma undergoing high dose chemotherapy and one for MBO deficient individual undergoing a liver transplant.
At this time, 40 patients have been enrolled in the multi-myeloma trial. We expect to complete enrollment in the study by the end of the year. To better understand the clinical benefit of RHMBO replacement therapy, we are collecting data from a contemporary match control group of patients with multiple myeloma treated at the same cancer center. Each patient in the clinical trial had four patients that were matched for factors most predicted for overall complications and in particular for infectious complications after high-dose chemotherapy.
We observed that fewer patients in the clinical trial were hospitalized compared to the match controls. These preliminary results are encouraging and suggested MBO deficient patients treated with Recombinant Human MBL had similar or fewer infection complicates than the control group with normal MBO levels. Two poster presentations summarizing clinical data from the multiple myeloma study and the match control group will be presented at the fall ICCAT meeting in Washington.
Our liver transplant study continues to enroll slowly and to date treatment has been well tolerated by all patients. As you will recall, enrollment in this trial is a function of organ donor availability and successful transplant. In order to increase enrollment we've opened four additional sites. We still expect to complete enrollment of the study in the second half of 2009.
Turning to the improved version of Oncaspar, this program offers many advantages, including securing the continued supply of Oncaspar as well as extending our development and marketing rights globally. We continue to move forward with transferring the enhanced manufacturing process for the raw material Alasparet to our contract manufacturer. We recently opened a pivotal study, developed by the Children's Oncology Group and Enzyme, to evaluate the next generation Oncaspar in patients with higher risk acute [lymphocytic] leukemia or ALL.
We have also recently received a positive opinion from the European committee for orphaned medicinal products for the improved version of Oncaspar. This committee is responsible for reviewing applications and recommending drug designation to the EMEA. Orphan drug designation creates favorable conditions for the development of the drugs including market exclusivity for up to 10 years following approval and benefits including reduced regulatory submission fees. When we receive a formal approval for the European orphan decision we will communicate that publicly. As previously stated the life cycle programs for Oncaspar and Adagen will continue over the next three years.
Moving on now to the PEG-SN38 program. In the first study, PEG-SN38 is administered once every three weeks at the maximum tolerated dose of PEG-SN38 alone with completed accrual of patients. At this time, five patients have continued on PEG-SN38 [administered] for longer than four months, including patients previously treated with Camptosar. As previous we mention in contrast to Camptosar, where Gi toxicity is the most limiting factor, [febrol neutropenia] was the dose limiting side effect of PEG-SN38 in this Q3 weeks schedule.
As many of you know, neutropenia can be addressed clinically by administering a Granulocyte Colony-Stimulating Factor or GCSF to patient. This allows us flexibility to now escalate the dose of PEG-SN38 even higher to prevent the occurrence of very low white blood cells. We amended the protocol to enable the evaluation of higher doses of PEG-SN38 in patients receiving GCSF after administration of PEG-SN38. This protocol amendment has now been approved by the various FRB's and additional dose escalation is proceeding in the trial.
In the second study, PEG-SN38 is administered weekly for three weeks every four weeks. We've completed enrollment in the fourth dose cohort and are enrolling patients in the fifth dose cohort. So far we've treated 15 patients on the weekly schedule. The weekly schedule has been well tolerated. Several patient receiving multiple cycles of PEG-SN38 and three patients receiving treatment for longer than three month including a patient continuing treatment over nine months. In this study, we have not seen a dose-limiting toxicity which is very encouraging since the dose actually exceeds that of the other trial. The results of this study will be presented at the October EORTC Meeting in Geneva.
Now let me update you on RNA targeting agents. As you know we have two ongoing Phase I studies evaluating the HIF-1 alpha antagonist using a weekly and daily schedule. Between the two studies, 34 patients have been treated including patients with renal cell cancer, colorectal cancer, (inaudible) cancer and a variety of other tumor types. We are seeing stable diseases, stable disease in a number of patients with little or no toxicity. In our weekly study, we've treated 18 patients and continue to dose escalate and treatment has been well tolerated at the higher doses. Three patients have been on treatment for more than 100 days, and one patient received therapy for more than 400 days with no cumulative toxicity, seen in any of the patients.
To results of this study will be presented at the EORTC Meeting in October. In the second study with the daily schedule, we're enrolling at the fifth dose level and currently have treated 16 patients. In this study, one patient received treatment for more than 180 days. Again, the drug was very well tolerated at the higher doses.
We are now moving our next LNA target toward clinical development. Survivin is heavily overexpressed in many cancers. We're evaluating the importance of this target in the preclinical setting to better understand its mechanism of the action or whether this problem is what something we wanted to advance. The combination of our now robust preclinical data and the confidence that LNA knocks down the target in a clinical setting from the hip-1 alpha program supports moving our Survivin, LNA program toward an I&D at the beginning of the year adding another novel and innovative drug to our pipeline.
We continue to progress with advancing our peg-linker program and expect to present additional results this year. I believe this technology given the advances we're making and delivering novel new molecular entities such as [olga-nucleotydes] will reevaluate the this technology platform for a broader range of pharmaceuticals. There is more work to be done but we are making good progress in this area.
In conclusion, we had a solid quarter in terms of top-line revenues, operationally and advancing our R&D programs. We're delivering the results we promised in a well-executed plant. Enzon continued to drive initiatives to expand our current business in advance the pipeline for the benefit of patients, as well as all of our shareholders.
With that operator, we'll now open and take questions.
(Operator Instructions). Your first question comes from Ian Sanderson of Cowen and Company. Please go ahead, sir.
Good morning, and thank for taking the question. And forgive me if this is delineated in the Form 10. But on the improved formulation of Oncaspar, will the development responsibility for that rest with Enzon or with Evivrus? And the second question is on Oncaspar performance for the quarter, you mentioned that prescription -- or the volume was up I believe it was –
13% and so presumably price accounts for the rest. But can you talk a little bit about what we should expect for pricing going forward?
Let me say first of all, yes, the residual R&D for Oncaspar and Andagen will stay with the remaining company of Enzon, the responsibility obviously to support the currently marketed brands. And you're correct in that. And second of all in terms of the price increase, we've had pretty good price increases in the last year on both Oncaspar Andagen. That really is to put money back into the required R&D funding. So again, you're right that we've taken those price increases two years in a row at over 20%.
And have you done similar price increases for Abalcet or is the market too competitive?
It's too competitive for any pricing.0:18
Thank you (Operator Instructions). Next question is from Matt Renna of Soleil-Neponset. Please go ahead.
Good morning guys congrats on very nice quarter. Thank for taking the questions.
I just want to elaborate on the last question with regards to pricing on Oncaspar. Obviously you guys have done a nice job of growing volumes in the face of pretty healthy price increases. Going forward do you see really any more significant pricing flexibility on that asset?
Let me handle that, Matt. As I've always indicated, there was some elasticity in the product, and I think the rationale for the price is because of the increase cost of developing the subsequent product. This is on the strategy that we are using as a primary strategy with other recognizing the increased costs associated with developing now a new recombinant form.
Great. And then Craig, after capitalizing the new company, your cash balance will be relatively low, and this obviously implies that you're pretty comfortable with the initial cash flow of the underlying business. Can you maybe provide some color on that dynamic?
Yes, what I like about that split in the $150 million capitalization and retaining 50 for ourselves in the short term, again, allows us not to have to rely on the marketplace. And as (inaudible) enzyme moves forward, they should be in a cash-generating -- earnings-generating situation. So over time we think that will take care of itself.
Great. And then the last question I have is could you maybe comment on the market to purchase royalties today. Specifically on -- on PEG-INTRON if you were to think about selling a part or the rest of that 75%. Are you in a better position today than you were last summer? Just given the trajectory of the product and is that something that you're considering to -- to retire the 2013 debt?
To be very honest, Matt, we have not explored since the refinancing what that situation would be like. Certainly parties have contacted us, but we really did that, as you know, as a refinancing. And nothing more. So we really haven't looked more deeply at that at all at this juncture.
Great. Thanks for tanking question and congrats again on a quarter.
Thank you. (Operator Instructions). Okay, we do have a follow up question from Mr. Ian Sanderson. Please go ahead.
Can I just ask a question about the NOL balance? And my assumption is that is all being transferred to that asset being transferred over to Evivrus, is that correct?
Enzon will retain approximately $80 million or so in NOLs.
Okay. So you will not be hit spread as a tax -- as an earnings-generating entity, will you recognize that asset right away, and then book taxes, is that how we should model this?
We have not stated yet, Ian. And we'll probably hold our options there. Obviously, Evivrus will be generating NOLs over time, so that was part of the rationale for maintaining it.
Thank you, Ian.
Thank you. (Operator Instructions). Thank you. All right, gentlemen. It appears there are no further questions at this time. Please continue.
Thank you, operator. Thank you, everyone for joining us on the call. A good quarter. We look forward to updating you on our progress. Thank you. Have a good day.
Ladies and gentlemen, this concludes the conference for today. We thank you for your interest, and have a great day.
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