3D Systems Corporation (DDD) Q4 2007 Earnings Call Transcript

Kevin McGrath – Investor Relations, Cameron Associates Daniel Wilds – President & CEO Richard Levy - Chief Financial Officer & Vice President of Finance Alan Mitchel - Senior Vice President Business & Legal Affairs & Chief Legal Officer Stephen Turner - Vice President & Chief Technical Officer :

Ted Neville – Private Investor Michael Potter - Monarch Capital Group

Good day ladies and gentlemen and welcome to the SCOLR Pharma 2007 year-end financial results conference call. (Operator Instructions) I would now like to turn the presentation over to our host for today's call, Mr. Kevin McGrath of Cameron Associates. Please proceed.

Thank you and good morning everyone. Before I turn the call over to Dan Wilds, President and CEO of SCOLR Pharma, I need to inform you that information in this conference call contains forward-looking statements that involve risks and uncertainties including activities, events or developments that we expect, believe or anticipate will or may occur in the future. Applicable assumptions, risks and uncertainties are described in detail in our registration statements, reports and other filings with the Securities and Exchange Commission. Such filings are available on our website or at www.sec.gov. You are cautioned that such statements are not guarantees of future performance and that actual results or developments may differ materially from those set forth in the forward-looking statements. The company undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this conference call. I will now turn the call over to Dan Wilds, President and CEO of SCOLR Pharma.

Thanks, Kevin. It's my pleasure to welcome all of you to our year-end conference call. Joining me today are Rick Levy, Vice President and Chief Financial Officer, Alan Mitchel, Senior Vice President of Business and Legal Affairs, and Chief Legal Officer, and Stephen Turner, Vice President and Chief Technical Officer. We are very pleased with our progress we've achieved last year in advancing our portfolio of CDT-based products and furthering our business relationships. An important part of our business strategy is to build our strategic alliances. Before I ask Rick to report on our financial results and Steve to provide an update on our development pipeline, I will review the status of our various alliances and collaborations. Our research collaboration with BioCryst Pharmaceuticals to develop a CDT-based oral formulation of peramivir, a therapeutic being developed by BioCryst for the treatment of seasonal and life-threatening influenza, is proceeding well. As part of the multi-stage collaboration, animal studies have been completed and we are currently evaluating, as a next stage of our collaboration. This represents the first application of our technology to a new chemical entity and if this effort continues to be successful, could serve as an important demonstration of our CDT platform capabilities to improve the oral bioavailability of an injected intravenous small-molecule drug. We announced in early December that we extended our research agreement with an unnamed global consumer products company to co-develop a novel application of our CDT drug delivery technology. We believe this extension is a positive indication of the progress we are making with our co-development partner and we remain optimistic that if successful, a branded consumer product incorporating our technology could be commercialized by 2009. We have been very pleased with the royalty revenues generated from our alliance with Perrigo Company and we continue to be excited about the opportunities to expand this relationship. This alliance currently markets five sustained release nutritional products based on our proprietary CDT oral drug delivery platform, and there are a number of other product candidates under evaluation. In addition, we recently entered into a new non-exclusive license with Nutra, a subsidiary of General Nutrition Corporation, GNC, to manufacture and distribute our CDT-based sustained-release niacin tablets. I will close my discussion this morning with a few words about our most recent agreement with Dr Reddy's Laboratories. The goal of this collaboration is to develop and commercialize an undisclosed oral prescription drug for the cardiopulmonary market, utilizing our CDT technology. We have completed work on the initial prototype formulations of this product candidate and transfer of skill and activities are now in process. We are also continuing to explore several additional development targets suitable for future collaboration. Steve will provide more details about the status of our other development progress later in this call. I will now turn over the call to Rick for a review of our financial results.

Thank you, Dan. Let me take a moment and cover our financial highlights for 2007. Our net loss for 2007 decreased 1% to $10.6 million compared to $10.7 million for 2006. This was a result of lower operating expenses, including a reduction in consulting expense and non-cash share-based compensation expense. Our revenues consist of research and development income, licensing revenues and royalty income from our sales of various products incorporating our CDT technology. Total revenues for the year ended December 31, 2007 were $2 million compared to $2.3 million for 2006. Royalty income increased 38% or $321,000 to $1.2 million for 2007 compared to the $856,000 recorded for 2006. This was largely a result of the royalties generated through our alliance with Perrigo. Our drug delivery technology continues to generate positive results in the nutritional products arena. We have successfully introduced a new calcium product through Perrigo and have seen their market-share increase as they expand the sales to several large national retailers. We continue to work closely with Perrigo to increase the sales of our nutritional products. In 2007 we received $600,000 in research and development revenue compared to $1.3 million in 2006. All these payments related to our agreement with Wyeth Consumer Healthcare which was terminated in March of 2007. Licensing revenue for 2007 of $173,000 was attributable to the recognition of previously deferred licensing fee revenue associated with our agreement with Wyeth. Let me now review some of the components of our operating expenses in 2007. Operating expenses for the year were down 10% to $13.3 million for 2007 compared to $14.7 million in 2006 due to the recognition of $800,000 in expense associated with the amendments to our license agreements with Temple University and Archer-Daniels-Midland in 2006. This expense was offset by additional research and development spending, and we experienced further reductions of approximately $1.7 million in our general and administrative expenses. Moving to our research and development activity, R&D expense increased 1% to $7.8 million for 2007 compared to $7.7 million for 2006. This increase is primarily due to approximately $500,000 increase in outside manufacturing, supplies and clinical trial expenses which were offset by a reduction of $800,000 in license expense associated with the amendments to the licensing agreements previously mentioned. In addition, payroll related expenses increased approximately $230,000 as we increased staff to further advance our projects. General and administrative expenses continued to trend down. G&A expenses decreased 27% to $4.6 million for the year ended December 31, 2007 compared to $6.2 million for the same period in 2006. This trend's primarily due to a decrease in non-cash share-based compensation of $910,000 as a result of the timing of stock option grants and a reduction in the fair value of our stock options granted in 2007. There were additional decreases of approximately $410,000 for accounting expenses associated with initial costs of compliance with Sarbanes-Oxley Act of 2002, and the implementation of SFAS 123(R). In addition, payroll related expenses, including bonuses, decreased approximately $40,000 and insurance expense decreased approximately $60,000 due to the lower premiums during the period. Our marketing expenses increased slightly during the year from $813,000 to $936,000 as we participated in scientific and business development exhibits, conferences and symposiums. In addition, commission expense increased as a result of higher royalty income from Perrigo. Turning to other income. Other income consists primarily of interest income associated with our cash and short-term investments. The change in other income for 2007 compared to 2006 is primarily due to the change in accounting related to the fair value of warrants to purchase common stock. As we have discussed before, in 2006 the Financial Accounting Standards Board issued new guidance related to the accounting for warrants that contained registration payment arrangements. As a result, the warrants were transferred from a liability classification to equity and no longer had a profit and loss impact. As of December 31, 2007, we had $11.8 million in cash and cash equivalents as compared to $16.2 million at December 31, 2006. Our cash used for operations continues to range from $700,000 to approximately $1 million a month. The variation in cash outflows are impacted by the level and timing of our clinical trials and development efforts. We believe that we have sufficient cash to support our operations through early 2009. We have $21.1 million available for issuance under our current shelf registration. This amount is after the completion of our equity offering of $4.1 million in December 2007. While we believe that we have sufficient cash to support our efforts through early 2009, we will continue to be opportunistic to seek additional funding from the capital markets over the next year. I will now turn the discussion over to Steve Turner, our Vice President of Research and Development, and Chief Technical Officer.

Thank you, Rick. As Dan has provided an update in his opening remarks on the status of our clinical programs with our research collaborations and licensing partners, I will focus my remarks on our primary programs beginning with the status of our ibuprofen programs. We initiated our first US phase III pivotal trial campaign on our OTC 12-hour CDT-based ibuprofen product prior to the end of 2007. As of today we have completed two of the three product performance pivotal trials to evaluate the safety and efficacy of our CDT-based ibuprofen. Preliminary results are encouraging and consistent with previous clinical trials we have conducted on this formulation. The FDA recently provided guidance to us on a label comprehension study and a consumer use study that will be required for product approval. We are incorporating this guidance into our clinical trial plans and currently expect to complete this trial prior to submission of our new drug application. Our goal is to file an NDA with the FDA in the second half of 2008. We are continuing preparations for submission of our first Abbreviated New Drug Application for a 12-hour CDT-based pseudoephedrine product. Pseudoephedrine is an active ingredient in OTC and prescription products for upper respiratory discomfort. We expect to submit our ANDA for this product to the FDA in the second half of 2008. We believe the primary advantages of our formulation may have over currently marketed pseudoephedrine tablets, relates to the overall efficiency of the formulation. We were able to develop a bioequivalent product while reducing the overall tablet size, gaining important manufacturing margin advantages over commercially available tablets. With the added pressures these products now face behind the counter, we feel that margin and size may play an important role in the selection process from consumers and could give SCOLR an advantage in the competitive store brand and private label marketplace. The work on our initial once-daily CDT-based risperidone and rivastigmine prototype formulations has been completed. Risperidone, marketed under the brand name Risperdal, is administered for the management of schizophrenia, while rivastigmine, marketed under the brand name Exelon, is used for the management of Alzheimer’s disease. We have received the necessary contract manufacturing and clinical trials management proposals and are evaluating the appropriate timing for pilot testing. We are not planning to begin clinical work without securing additional funding. We have had pre-IND conversations with the FDA on our novel Ondansetron once-daily and immediate release Raloxifene formulations in order to clarify the regulatory and clinical requirements for commercialization of these exciting programs. We continue to work with the agency as we seek to clarify the remaining requirements and evaluate our next steps. Based on these meetings, we will assess the additional investment of resources required to support continued internal development or partnership discussions. This concludes our update, and I will now turn the call back over to Dan for some parting comments.

: Thanks, Steve. We continue to be excited about the opportunities that our drug delivery technologies have across a broad spectrum of existing drugs, nutritional supplements, and potential new drug candidates. We're looking forward to the completion of our ibuprofen trials, and expect to able to report on the results of these trials during the summer. Our goal is to be able to submit an NDA for Ibuprofen in the second half of 2008 and file an ANDA for our pseudoephedrine formulation in the same timeframe. We also expect to be able to report additional progress on our existing research collaborations and licensing partners, and to establish new alliance and partnership agreements. Thank you for your interest, and we look forward to updating you on our next quarterly call. We will now address your questions. Operators, please proceed.

(Operator Instructions) Our first question will come from the line of Ted Neville, private investor. Please proceed. Ted Neville – Private Investor: Hello, everyone. Dan, you mentioned that we had completed animal studies and that we are evaluating the next steps with BioCryst. I assume the animal studies were encouraging. Is it logical to think that the next steps will be human studies? And if so, when would they start and how long would it take?

Good morning, Ted. You know, we've been working on this collaboration with BioCryst now for quite some time. And, yes, we generally are encouraged by the results we've seen today. The next steps are under consideration with BioCryst, and I really can't divulge more than that at this point in time until they get back to us with feedback as to what they are going to agree to do and not to do. But, again, I'm very optimistic that this program has a very bright future. Ted Neville – Private Investor: Okay, great. Have another question if that's okay?

Sure. Ted Neville – Private Investor: Back in April 2003 BD, before Dan, we announced that SCOLR was preparing to ship glucosamine to us first - first to market European customer. The customer was Springfield Nutraceuticals located in the Netherlands. Whatever happened with this, and are we still pursuing the European market concerning Nutraceuticals?

Yes, let me do a couple of things. One, since I wasn't here during that time frame, that program actually had ended before I arrived. So we'll let Steve address that. And then we can address a little bit more what our thinking is for the international market. Steve. Ted Neville – Private Investor: Okay.

Yeah. Back in 2003 we had actually begun shipping very small quantities to Springfield Nutraceuticals in the Netherlands. And they were hoping to, basically, sell the product both in the Netherlands as well as maybe try to enter into the European markets. It was very low-volume, and never really had an opportunity to grow or expand. I do not believe that we ever got into a second shipment with that particular group. And the primary customer, I think, really from that point forward continues to be Wal-Mart through the Perrigo relationship.

Relative to what our thinking continues to be in the international area for the dietary supplements, we've talked about this in a number of public presentations, Ted, which really relates to the fact that we wanted to get a portfolio of five or six products before we really try to pursue a partnership or liaison in Europe, to be able to market products there that really contain, in the nutraceutical area, our CDT technology. In our discussion this morning we did indicate that we have signed a deal with the Nutra division of GNC. And GNC will have the rights on the extended release niacin product to actually market that product through these very relationships outside the United States. So that will be, potentially, the first of our products that we're aware of now, that are going to go outside the United States through one of our licenses. Then in the meantime we do have some people that are interested in, potentially, licensing these products via a foreign international distribution relationship, and could include manufacturing. We're in continued discussions with various candidates at this point. Ted Neville – Private Investor: Okay, great, thanks a lot.

And your next question will come from the line of Michael Potter, with Monarch Capital Group. Please proceed. Michael Potter - Monarch Capital Group: Hey guys, I'm not sure if you went over this or not, I think you did very quickly. But, what was the monthly cash burn currently?

Our monthly cash burn runs between $700,000 to $1 million dollars a month. That depends upon where we are with our different projects, with the manufacturing of the supplies. Michael Potter - Monarch Capital Group: Okay. And do you think that will hold up through 2008 - that range between 700 and a million?

Yes, we have sufficient capital, in our opinion, to get us through our planned activities through early 2009. And again, as Dan has mentioned in the past, we have the ability, through the different clinical trials and supplies and manufacturing costs, to adjust the timing of those expenses, as far as when the activities can start and stop. And that's the reason for the fluctuation between the $700,000 and about a million that we spend. Michael Potter - Monarch Capital Group: Okay. And the Risperidone - that the company will not plan initial clinical studies without additional funding. Does that mean a partner? Or does that mean after a capital raise?

Well, it could go either way on this one. We continue to have people, Michael, who are interested in some of these products. And those discussions continue. And what we've done is taken it to the point where the next step on that would be to move it into contract manufacturing for pilot human studies. So we'll either hold the product until such time that we do another financing raise, or access capital through a partnership or what have you. Then we can move that one forward. Or we'll move it forward through our partnership with one of the many people we continue to talk to. Michael Potter - Monarch Capital Group: Okay. Alright, thanks.

And our next question will come from the line of (Greg Miller, with Janus Associates). Please proceed.

Good morning Dan and team. A question regarding the unnamed global consumer products company - it seems like it's taking quite a bit longer than anybody anticipated originally. Could you comment about what specifically they're doing? We don't seem like we have a lot of details on what's been dragging on there. Are they changing their manufacturing process? What's going on?

: Let me take this. I'll take a first stab at that and then maybe let Steve talk a bit about it. Basically, we've been intentionally vague on this simply from the standpoint of the competitive nature of this collaborator. And we have moved – done a number of formulations, transferred formulations to this group. They've done some preliminary testing on those formulations and what they call their consumer product initial testing and have come back to us with some suggestions on that. We did announce that we have extended that relationship, or let's put it this way, they've extended it with us. There are sufficiently encouraged by what they've seen to continue to work with us on this. So we're currently, right now, actually defining the next steps of what we're going to do over the course of the next few months on this. I think we're still, kind of, in the time frame that we discussed some time ago, that we thought that this could be moved into manufacturing in the late 2008, sometime in 2009. This would be an improvement in this collaborator's manufacturing process and allow them to make some claims in terms of the label of the products that these would be included in. Steve, I didn't know if you have another comment about the status of this.

Yeah, I mean basically the whole concept of the program is really stepping out of the box. And they were looking for ways to differentiate their product line with other companies in this particular space. And they came to us, among many companies, to basically provide them with a solution. We have been providing them various prototypes that are really meant to establish what they can do with the concept, and how far we can take it. But at some point it has to go up their internal chain of command before they incorporate the line, as far as the product itself. And once it hits the counter, or once it hits the marketplace, we'll be able to actually talk about it in quite a bit more detail. But until that point, it really just needs to remain secret because they would lose their competitive edge in this particular marketplace. And then, of course, if they lose their competitive edge then we wouldn't necessarily recoup the same economics that we could potentially.

Do we feel like we have a strong advocate at the company? We all know that personnel changes at large companies all the time and sometimes that can take promising programs along with them, out the door. Do we have a strong advocate there? Do we know?

Yeah, well actually I'm all good to take the point on that again. But the person that we've been actually been interfacing with is our advocate, and he's the one that's actually being maintaining the forward momentum internally over at the other group. I think a testament to the recent extension of the collaboration as we continue to evaluate and develop potential programs for them is an indicator to the level of interest. There's always going to be a risk that they may have a change of focus, but right now this particular individual is in charge of the particular segment within this product line. So unless he leaves the organization it continues to charge forward.

He's a very senior member of the technical staff within the organization, and he's been our point person, our liaison person, all along. And he's the one who actually approached us on this on behalf of the corporation, the group that we're dealing with.

Thank you. Next question, if I may, relates to raising cash. The stock is really low here. I would hope that you're looking for other alternatives other than taking down a shelf - money, at these low-low prices.

Well one of the things that we wanted to do when we effected the financing in the November-December time frame, was to make sure that we have enough capital that we can get into comfortably, into 2009. There's always, obviously, other alternatives, Greg, in terms of bringing capital in. If we're successful in some of the business development avenues that we've been pursuing. And we're hopeful that we can put off having to actually raise additional capital, through exercising and moving forward with the shelf, and until the market is supportive of doing that.

Okay, thank you.

(Operator Instructions) I would like to turn the call back over to Dan Wilds, for closing remarks:

Alright. Well, we thank you again for joining us today, and we certainly look forward to updating you on our next quarterly conference call. In the future, if you'd like to get updates on us I encourage you to take a look at our website. We try to keep it up to date with our presentations, and obviously you can access our SEC filings and also our press releases on it at SCOLR.com. So, we're looking forward to continuing to keep you updated, and we're very optimistic for the future of our company. Thank you.