deCODE genetics, Inc. Q2 2008 Earnings Call Transcript

| About: deCODE genetics (DCGN)

deCODE genetics, Inc. (DCGN) Q2 2008 Earnings Call Transcript August 7, 2008 8:00 AM ET

Executives

Joy Bessenger – VP of Strategy and Development, and Head of IR

Kari Stefansson – President and CEO

Lance Thibault – CFO and Treasurer

Analysts

Philippa Gardner – Lehman Brothers

Michael Olson – Thomas Weisel

Chad Messer – Piper Jaffray

Peter Welford – Lehman Brothers

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the deCODE genetics 2008 second quarter financial results conference call. At this time all participants are in a listen-only-mode. Later we will conduct a question-and-answer session.

(Operator instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to your host Joy Bessenger. Please go ahead.

Joy Bessenger

Thank you Linda and good day and welcome to our second quarter earnings conference call. I am Joy Bessenger, Vice President of Strategy and Development and Head of IR and with me today are Dr. Kari Stefansson our President and CEO; and Lance Thibault, our CFO.

Today’s discussion as always will refer to results reported in our release yesterday and which we hope you all had a chance to review. On today’s call Lance will provide a brief review of financial results for the quarter and Kari will then give you an overview of our progress. We then expect to have ample time to take your questions.

Before we start I would like to remind you all that today’s discussion is likely to refer to our vision of the future and any statements contained in this presentation that relates to future plans, events, or performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results and the timing of events to differ materially from those described in these forward-looking statements. These risks and uncertainties include, among others, those relating to our ability to obtain financing and to form collaborative relationships, uncertainty regarding potential future deterioration in the market for certain securities which could result in additional permanent impairment charges, our ability to develop and market diagnostic products, the level of third party reimbursement for our products, and other risks that we have identified in our filings with the SEC. We undertake no obligation to update or alter these forward-looking statements as a result of new information, future events or otherwise. And with that I will turn it over to Lance.

Lance Thibault

Okay, thanks Joy. Good morning and thank you for joining us today in our second quarter financial results conference call. Since last quarter we continue to sharpen our focus moving forward with our 2008 goals, while keeping a watchful eye on how we use our resources in achieving these.

We concluded our clinical pharmacology study for DG041, continued to advance our PDE4 inhibitor program, invested further into the sales and marketing of our five DNA-based diagnostic tests and we continued to concentrate on capturing the commercial potential of our genomics service businesses comprised of our gene-typing contract services, diagnostics, and deCODEme.

For the second quarter our operating loss was $13.5 million and for the first half $33.1 million, which is a substantial improvement over the same over the same period in 2007, in which our operating losses were $22.9 million and $43.4 million respectively. A key contributing factor in these improvements is a strong increase in revenue this year and then with significantly lower R&D spends.

Revenues for the second quarter were $15 million nearly double the $7.6 million in revenues from the same period last year and revenue for the first half of 2008 was $30 million versus $16.2 million in the first half of last year. These gains are largely due to increases in sales in our genomics service business, which includes our contract gene-typing, diagnostics and deCODEme.

At the end of the second quarter we had $15.1 of deferred revenue of which we expect to recognize upwards of $9 million in the coming year.

Our R&D spend during the quarter was $7.9 million just over half the $14.5 million we spent in the second quarter of last year. Our current R&D investment is largely associated with the ongoing development of diagnostic products and deCODEme, continuing gene and target discovery work as well as costs associated with the conclusion of our clinical pharmacology study for DG041, our antiplatelet compound for the treatment of arterial thrombosis and those costs related to the advancement of our PDE4 inhibitor program.

R&D investment in the first half of 2008 was $20.6 million, the decline versus the investment in the first half of 2007, which amounted to $27.2 million. In 2007 our R&D spend reflected the conduct of several clinical trails as well as the significant gene and target discovery work.

While we have already begun the see the financial benefits from the head count reductions and hosted measures we have taken already in the first half of the year, we will have the full impact of these measures beginning here in July and forward into the rest of 2008 and into 2009.

Our selling, general and administrative expenses for the quarter was $7.1 million compared to $6.8 million for the same period last year, an increase principally associated with genomic service sales and marketing efforts.

SG&A spending for the first half of 2008 amounted to $14.4 million and that compares to $12.3 million in the first half of 2007.

Altogether our net loss for the second quarter of 2008 was $18.4 million or $0.30 per share, which compares to a net loss of $16.2 million for the same period in 2007 or $0.27 per share. In the second quarter of 2008 we recognized a further $1 million unrealized loss in our investments in auction rated securities.

Net loss for first half of this year was $45 million or $0.73 per share versus $38.9 million or $0.64 per share for the same period last year. The increase in net loss year-over-year in spite of significant revenue growth and lower R&D spend is due to the unrealized losses we have recognized in our auction rate securities this year. It was also impacted by the one-time gain recorded in the comparable 2007 periods, which was related to the favorable settlement of the intellectual property litigation.

We ended the first half of this year, June 30, with $49.4 million in cash and investments, comprised of $23.7 million in cash, cash equivalents and current investments, $5.1 million in restricted cash associated with the sale and lease back of our Woodridge property, and $20.6 million in non-current investments in auction rate securities.

We remained focused this year on our core capabilities in human genetics leveraging those assets to respond [ph] commercial opportunities presented by our diagnostics work and deCODEme. At the same time, we aim to advance our clinical stage therapeutic programs through partnerships. We will continue to take steps necessary to sustain operations and have slimmed down elements of the business to most efficiently focus our resources. With this focus and with continued discipline we reiterate our previous guidance for R&D, which may range towards $35 million. However, our net use of cash for the full fiscal year 2008 may range from $60 to $65 million from previous guidance of $45 to $55 million, any major new alliances or treasury activities aside.

And with that I will turn the call over to you Kari.

Kari Stefansson

Thank you, Lance, and thank you all for joining us today.

I would like to begin to focus my discussion on the DNA-based diagnostics tests of late has been receiving lots of attention from the medical community, from the population in general, and from the investment community and we have been seeing significant number of companies being founded around the concept of DNA-based diagnostics of late.

And let us turn to look at what it takes to form a successful DNA-based diagnostics business apart from the money from the investment community. Number one we need content, number two we need technical know-how houses to form the test and then we need marketing and sales operation. So, when it comes to the content for DNA-based diagnostic data we have not been available except for the past two or three years, and if you look at the tidal wave of discoveries, our sequence variants associated with common diseases that is allowed for the development of DNA-based diagnostics, that are still being published over the past two or three years. More than half of it has come from deCODE genetics.

And so what you need basically in the form of content to be able to develop the diagnostics, our sequence variants and the human genome that associates with significant risk to individuals. And actually we have – if I just give you a brief list of diseases that we – where we have isolated such variants that include heart attack, prostate cancer, breast cancer, skin cancer, atrial fibrillation, type 2 diabetes, lung cancer, glaucoma, thyroid [ph] cancer and the list goes on. So, basically an deCODE test not only made these discoveries and has already turned 5 of them into (inaudible) in the marketplace, we have also turned them into a deCODEme with our consumer genome focus, but we have also started to built up into medical property portfolio on the sequence variants that associate with the risk of common diseases that conferred significant enough risk to make them useful diagnostics.

So, we believe and we continue to make discoveries like this and I think it is fair to say that we have been making one such discovery at least every two weeks over the past few months. So, I believe that we are in a position to control the bottleneck into DNA-based diagnostics, which is the generation of the content.

In addition to that the second thing which is then the technical know-how. We have you know tried publicly close to 500,000 people. We have unexplored (inaudible) operation, which is CLIA-registered that performs these tests for us. Then when it comes to the marketing and sales basically when you take our intellectual property portfolio when it comes to DNA-based diagnostic we have already in the company more content then we can manage ourselves. So, we basically look at the marketing of the sales of the DNA-based diagnostics as falling into basically three categories. Number one which is marketing that is attached to our own sales force, which we are focusing relatively narrow number of few indications and I expect we will sharpen that focus more in the near future and I wouldn’t be surprised if that focus would be mostly on subset on cancers. Secondly, it is marketing that is attached to the sales force of others and we have basically been trying to develop that in two ways by forming distribution agreements with other diagnostic companies and the second one is to license out some of intellectual property that we have generated. And the third aspect of the marketing is through deCODEme or the consumer genome service that we have been marketing since November of last year.

So, basically over the past quarter if you look at the issue at hand over the past quarter we have continued to execute on our strategy of product development in diagnostics. We have five diagnostics on the market including in type 2 diabetes, in myocardial infarction, in atrial fibrillation and stroke, prostate cancer, and glaucoma. And we perform these tests in the laboratory that I referred to before the CLIA-registered laboratory (inaudible) 1211. Actually before we made the decision to move forward with a test, we validate these variants we have discovered in several populations, not only in Iceland, not only in people of European origin, but people of other ethnic origins and these validations we have been publishing in peer review journals. And I want to emphasize again that our ability to find genes and replicate them, and launch tests and services is built on in-house competence in genetics that we believe is unprecedented and it provides what we believe is a qualitative advantage over our competition in the field of common diseases where medical needs and market potential are the greatest. We believe we are actually in a position to dominate the content when it comes to DNA-based diagnostics in common diseases in the near future.

In the past few months we have rounded out our internal sales and marketing team as planned. We have now about 35 individuals from the team including a senior reimbursement manger, two reimbursement specialist, a marketing director, and five sales managers. This team has facilitated over 2000 drug physician interactions through June 30, and we expect to achieve 4000 direct interactions in the fourth quarter.

We have expanded our distribution channels and I want to emphasize that these are just – this is just based on the sales force that we have within our company and this does not include what we expect to get out of our distribution alliances that we will be announcing over the next few weeks and months. But through these distribution agreements we have expanded our distribution channels both in the United States and internationally by working with private groups and laboratories through molecular tests. We have also marketed directly too and in some cases began to execute agreements with (inaudible) health programs, employers, private insurers, and others. But we believe a key to early success with our diagnostic test is to leverage – it will come to leveraging our existing resources in marketing and sales by working with other groups that have deep roots in the industry.

As these new relationships deepens, and as we continue to have new partnership we expect that we will be able to significantly increase our one-to-one initiative with physicians by year-end and there we expect to be focusing on the classic pharmaceutical marketing where the (inaudible).

In addition to our work with external billing groups to submit to requests for reimbursement based on standard CPT code it is also moving forward nicely. As we progress in our calls, the last insurers in the United States we are concurrently running demonstration and clinical utility trials without outside parties for use of our launch [ph] diagnostics to strengthen even further the case for reimbursement.

In short, we believe we are taking more than necessary steps in a timely manner to truly become successful as a diagnostic company and we are certainly posing a very large (inaudible) emphasis today on developing a cohesive marketing strategy and to execute on that strategy and to increase our sales.

We anticipate today that the launch of our breast cancer diagnostic test. It is a very interesting test. It is actually a test that identifies 1% women in our society that have triple the average risk of breast cancer. So, we are talking about risk conferred by the sequence variant reaching up to the risk that is conferred by for example, the mutation in the BRCA2 test.

Remember this is a test that picks up risk that is separated apart for most of the familiar risk that is conferred by mutations in BRCA1 and BRCA2 and also conferred by (inaudible) discovered variants.

Our announcements in melanoma and schizophrenia are recent examples of how quickly and swiftly we can lay foundation for future tests using our demanding target discovery platform. We are also pleased with the progress we are making with deCODEme, our personal genomic effort of the consumer genomics effort. We are continuously adding content to the site and providing detailed updates to our customers and nearly every new discovery we announce is immediately coded into deCODEme including breast cancer variants announced early in the second quarter.

I see a lot of findings in the melanoma and basal cell carcinoma. And we will continue to add more content to deCODEme and I want to emphasize that our present applications that we have filed for our discoveries will eventually begin to yield patents, issue patents. And some of them we are actually beginning to see them in the near future being issued.

And after issue, our competitive advantage; our advantage over our competitors will begin to emerge because our competitors having been using in their diagnostic services a large number of disease associated variants that we have discovered, and for which we have issued patent applications. So, the landscape is going to begin to change on the basis of intellectual property in this field.

At the end of the second quarter we announced the results of our clinical pharmacological trial for DGO41, our first-in-class antagonist of the EP3 receptor for prostaglandin E2, which examined the impact of DG041 on the top of aspirin and Plavix. I should recall we completed a Phase II clinical trial in several clinical pharmacology studies last year. These studies demonstrate that the DGO41 specifically inhibits platelet aggregation in a highly targeted manner. DG041 was also shown to have the desired effect on a (inaudible) useful for gauging target activation. This effect was achieved in a dose-dependent manner regardless of whether subjects were concurrently receiving aspirin. More importantly, we saw this effect without an increase in bleeding time.

Our most recent trial confirmed the previous findings, the DG041 inhibits platelet aggregation as a standalone drug without increasing bleeding risk. It is further demonstrated that when given with aspirin or clopidogrel DG041 provided additional antiplatelet effect without prolonging bleeding time. The next step with this program is likely to be a large Phase II-b trial, which will begin hopefully with a partner.

We have continued to have worked on our phosphodiesterase platform, which is in the preclinical stage. As many of you know, phosphodiesterase is a well characterized and well accepted pathway in inhibitor that is shown to be efficacious in several diseases. However, these inhibitors cause moderate-to-severe nausea, which are improved quite dramatic in clinical developments.

Our work has given us a platform that has enabled us to demonstrate efficacy in animal models back to such human primates that have (inaudible) this side effect. We are moving forward to several potential partners to the next lines of discussion and we expect that an IND will be filed in this program before year-end.

I believe that our accomplishments in the first half of this year further demonstrates our lead position in genetics and our opportunity to lead in the field of DNA-based diagnostics. This is what sets us apart in the industry and gives us both a key fundamental advantage and a solid foundation for which to create shareholder value. We continue to anticipate we will have at least therapeutic partnership this year. We remain to thoroughly exploring all strategical alternatives open to us in order to ensure that we will be remain a sustainable and viable business and I wish to thank you again for joining us today and we would like to take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from the line of Philippa Gardner from Lehman Brothers. Please go ahead.

Philippa Gardner – Lehman Brothers

Hello there. I have a couple of questions, if I could. Firstly, just looking at your cash burn guidance and your expenses, would it be fair looking at the last couple of quarters for SG&A, those have both been relatively flat. Do you think that's a good benchmark to use going forward? Based on your R&D guidance and your updated cash burn guidance, I'm assuming that –

Kari Stefansson

Philippa, it is difficult to hear what you're saying.

Philippa Gardner – Lehman Brothers

Sorry.

Kari Stefansson

There is a noise on the line when you speak.

Philippa Gardner – Lehman Brothers

Can you hear me now? Is that better?

Kari Stefansson

Yes, this is better.

Philippa Gardner – Lehman Brothers

Okay. It's just regarding your thoughts on SG&A spend basically, and if the $7 million that we've seen in Q1 and Q2, is that going to stay essentially flat over the rest of the year? So just some thoughts on how we should be thinking about SG&A for the remainder of this year.

Lance Thibault

Flat to increasing. I think there is a couple of things going on in there, Philippa. One is the impact of the measures we took in the beginning part of the year, head count and other things that does come through SG&A. And we are beginning to see that impact here in Q3, most materially here beginning in Q3, but then with the buildup in sales and marketing efforts for the diagnostics, in sales force and in advertising and promotion.

Philippa Gardner – Lehman Brothers

Okay. And then just on your cash burn guidance, so we already got through $40 million. So that assumes another $25 million – $20 million to $25 million for the rest of this year. Now, your current cash is just below $24 million. So I'm just wondering what your thoughts are around that, and how you're going to address that.

Kari Stefansson

I think that we are working actively on that. It looks like it is opening up a post-market for the ARS' that we are exploring. So I think that although the cash looks low for the moment, I think that we have potential to increase that substantially in the near future.

Philippa Gardner – Lehman Brothers

Okay. And then my last question or questions around the same theme is on licensing deals. Can you maybe – based on where we are this year versus last year – you were talking about licensing deals last year and we're obviously in August now and we still haven't seen any. Are you more confident now than you were last year in terms of getting a deal? And what can you say to us to give us more confidence of a successful outcome here?

Kari Stefansson

I am not sure, Philippa, that I can do very much to give you confidence, but I can tell you that I am more confident than I was last year that we will sign a deal before the end of this year, than I was at the same time last year. That's all I can say.

Philippa Gardner – Lehman Brothers

Is that because you're talking to more potential partners or you've got further through the sort of interview stages as well?

Kari Stefansson

Yes, it's because we have gotten further through discussions with a couple of partners on the same program, so we have people who are bidding on a program.

Philippa Gardner – Lehman Brothers

And if you don't get a deal this year, what does that mean for the company?

Kari Stefansson

Philippa, I – it's – I don't know what exactly it would mean for the company that we would not get a deal this year, but I feel pretty confident that we will.

Philippa Gardner – Lehman Brothers

Okay, all right, thank you.

Operator

– question will come from the line of Ian Somaiya from Thomas Weisel. Please go ahead.

Kari Stefansson

Can you speak up louder please?

Michael Olson – Thomas Weisel Partners

Yes, hello, this is actually Michael –

Kari Stefansson

No, I was asking the moderator to speak a bit louder because I didn't hear what you said.

Operator

I apologize. We have our next question from Ian Somaiya from Thomas Weisel. Please go ahead.

Kari Stefansson

Thank you.

Michael Olson – Thomas Weisel

This is actually Michael Olson for Ian Somaiya, thanks for taking my question. I was just wondering if maybe you could provide a breakdown of revenues from your genomic service business, particularly between the diagnostics, deCODEme, and contract genotyping.

Kari Stefansson

We are not providing any data on that at this point in time.

Michael Olson – Thomas Weisel

Okay. Do you think maybe you could provide a little more color on individual diagnostics tests and maybe how the market is receiving those, and maybe some feedback that you've gotten? Was one test more liked than others or any color around that, I'd appreciate it. Thanks.

Kari Stefansson

I – the tests are in general – you see, the tests are in general receiving better and better reception. In the beginning there was a considerable pushback based on the assumption the risk assessed by these tests were trivial, all right, that so many more genes needed to be discovered in these diseases before the tests would become meaningful.

However, when people have started to look at this, and it basically sounds as follows. All of the tests that we have on the market today pick up a relative risk, that is greater, than the relative risk of suffering a heart attack if you have – are in the top quintile of cholesterol. So we are talking in terms of risks that the medical community is used to dealing with and that the health care system is used to dealing with, and that is becoming more and more accepted.

Also, this argument that you shouldn't develop a genetic test until you have discovered all of the genes that affect the risk of a disease sounded like a reasonable argument in the beginning. But people are beginning to see that that would have been equivalent to saying we should not use measurement of cholesterol to assess the risk of heart attack because it only touches a small amount of the total risk.

So, we had a bit of an educational challenge in the beginning. We seem to be getting over that threshold, and basically these tests are being embraced by physicians, and we are very pleased with that. The challenge that we have ahead of us now and that we seem to be able to tackling reasonably well is the one on the reimbursement, because number one task [ph], the physicians have to agree that the test is useful. And when it comes to all of these tests, they seem to be accepting that.

The next thing is that – how can we help them to ensure the patient – or to give them, the patients, a level of comfort that this will be reimbursed and they will not be left with a very large bill; and we seem to be making very good progress there.

When it comes to this test and which one of these tests is receiving – getting the best reception, the prostate cancer test is receiving a very good reception in the urology community and the – probably because there is an sort of an example to follow in the case of the BRAC-1 and the BRAC-2 tests. And I expect that when we launch the breast cancer test that is going to be the one that is going to be received very nicely and I have high hopes for that also.

But in general, all of these tests seem to be receiving very nice – getting very nice reception from the specialty discipline where they apply.

Michael Olson – Thomas Weisel

Great, thank you very much.

Operator

One moment please. Our next question will come from the line of Chad Messer from Piper Jaffray. Please go ahead.

Chad Messer – Piper Jaffray

Hi, guys, good morning. I actually had a question about the contracted genotyping that you were doing. Last quarter you talked about a backlog of around $42 million, and then you expected to recognize $30 to $32 of that this year. Is that still – does that still hold, and how should we think about this business going forward into 2009? Are you going to continue to sort of pursue it at the same level? And if you could also comment on your margins for contract genotyping?

Lance Thibault

First, Chad, I think that the numbers that you referred to are like total company. I'm not quite sure, but I have to go back and check. I think you got total company numbers backlog which are – the genotyping services, our grants, all our service revenues of the whole company.

Those figures will point you towards the Q which should be out later this week, next week, but I think that that backlog, if you will, currently amounts to something like $45 million or $46 million of which we see $25 million or $27 million playing out through the rest of this year, and upwards of $40 million in the next 12 months. Again, though, that is all of our services, including the genotyping service business.

Kari Stefansson

Yes, but – yes. So that's nothing to tell whether the sales of diagnostics (inaudible).

Lance Thibault

No.

Kari Stefansson

For me that is just the service business.

Lance Thibault

That's right.

Kari Stefansson

When it comes to the genotyping, we are not – in our view of the future, genotyping services is not playing a big role. So we are being somewhat opportunistic when it comes to genotyping services, using that to generate cash for us to fund other things. And the margin on that is reasonably good, although I am not in a position to give you exact numbers on that at this point in time.

Chad Messer – Piper Jaffray

Okay, thank you.

Operator

Thank you. (Operator instructions) We have a follow-up question from the line of Philippa Gardner from Lehman Brothers. Please go ahead.

Peter Welford – Lehman Brothers

Hello, it's actually Peter Welford here. I have a question on the genotyping and the deCODE business. I wonder if you could talk about the – your marketing to doctors and whether that is for deCODEme or whether it's for the specific tests for specific diseases. And so more particularly that are the certain doctors you're finding who are willing to take this onboard and are using and represent most of your sales, or is the growth coming from additional doctors taking up your diagnostics?

Kari Stefansson

This is actually – this is actually a good question, and actually this question calls probably for a more complicated answer than you expected because there are – the number of doctors that are ordering these tests is increasing. We have been increasing our sales force, we have been increasing our ability to make contact with a larger number of doctors than we had, so the number is increasing.

There is a very healthy proportion of the tests that are being ordered [ph] by doctors in so-called preventive health care clinics. They seem to be more focused on it. And actually a fairly large percentage of our sales of deCODEme is coming from physicians rather than directly through the Internet from direct consumer marketing.

The – and where I see complexity in the future is sort of in the balance between the genetic profiling like you got with deCODEme and individual genetic tests. And that complexity is already beginning sort of to cause us to spend some time on speculating on strategy, when do you expect the line between the sales of deCODEme and the individual tests to cross. Because I think it is inevitable that if you look three to five years into the future, a very large percentage of the population will have a genetic profile of themselves, of the type that is being marketed by us and others.

Peter Welford – Lehman Brothers

Okay, that's great. Thank you very much.

Operator

And there are no further questions at this time. Please continue.

Kari Stefansson

So if there are no more questions, I would thank you, all of you, for joining us on this summer day. We're grateful for the attention that you've given us, and we look forward to seeing you in three months. Thank you.

Operator

And ladies and gentlemen, this conference will be available for replay after 10 a.m. Eastern Time until August 14, 2008, at midnight. You may access the AT&T replay system at anytime by dialing 1-800-475-6701, and entering the access code 955922. International participants may dial 320-365-3844, access code 955922. Once again, those numbers are 1-800-475-6701 and 320-365-3844; access code 955922.

That does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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