GSK plc (GSK.L) Q1 2009 Earnings Call Transcript

Thomas Watkins - President and CEO Tim Barabe - SVP and CFO Jim Davis - EVP, General Counsel and Secretary David Stump - EVP, R&D

Joe Schwartz - Leerink Swann Geoff Porges - Bernstein Terence Flynn - Lazard Capital Management Liisa Bayko - JMP Securities Jason Kolbert - ThinkEquity

Welcome to the Human Genome Sciences conference call. (Operator Instructions) At this time, it is my pleasure to turn today's call over to Mr. Thomas Watkins, President and Chief Executive Officer of Human Genome Sciences. Please go ahead, sir.

I want to thank all of you for joining us today. The press release that we issued just a short time ago is posted on our website at www.hgsi.com. Before we begin, I would like to point out that we will be making forward-looking statements based on our current intent, belief and expectations. They are subject to certain risks and uncertainties, and I encourage everyone to look at the SEC filings for additional detail. During the call, I'll provide an overview of recent HGS accomplishments. And then Tim Barabe, Senior Vice President and Chief Financial Officer, will discuss a few key highlights from our financial results. For the Q&A session, which will follow, we will be joined by other members of our senior management team. We continue to make substantial progress during the first quarter of 2009. We achieved our first product sales with ABthrax. We achieved the highest revenues for any quarter in our history and we achieved profitability. I have to admit to you that it's a pleasant experience for us, at least for this quarter, to be talking about a net gain in cash instead of discussing our progress in controlling net cash burn. We do take considerable pride in reaching these milestones, and we look forward to a time when we believe that we'll have major products on the market and will be reporting significant revenues and earnings on a regular basis each quarter. To that end, both Albuferon and LymphoStat also continue to make substantial progress toward commercialization during the first quarter. Let's begin with ABthrax. As I said, we achieved our first product sales when we began delivery of ABthrax to the U.S. Strategic National Stockpile for emergency use in the treatment of inhalation anthrax. We believe ABthrax will make an important contribution to our nation's biodefense program. During the first quarter, we delivered a substantial amount, substantially all of the 27,000 doses called for in our contract and will recognize $154 million in revenue as a consequence. The remaining amount of doses will be delivered here in the second quarter and will recognize at least an additional $8 million in revenue during this quarter. We expect to file a Biologics License Application in the second quarter, and we will be receiving $10 million upon FDA licensure of ABthrax. We are also working to secure additional orders for ABthrax. So stay tuned for further news in that area. Moving to Albuferon. In December 2008 and in March 2009, we announced the results of our Phase 3 trials of Albuferon. On Saturday, April 25th, just this past weekend, these results were presented in two late-breaker sessions at the annual meeting of the European Association for the Study of the Liver also known as EASL. The results demonstrate that with half as many injections in two pivotal Phase 3 trials, Albuferon succeeded in meeting its primary endpoint. The data from these studies show that the efficacy of Albuferon was comparable to Pegasys and show a positive safety profile with rates of serious and severe adverse events that were also comparable to Pegasys. We continue to work very closely with Novartis to move Albuferon forward, and we are preparing for pre-BLA meetings to be followed by the filing of global marketing applications in the fall of this year. Assuming licensure by the FDA and other regulatory authorities, we believe Albuferon could become a market-leading treatment for the treatment of chronic hepatitis C. And we plan to launch Albuferon in the second half of 2010. Now let's turn to LymphoStat-B. We are on track to report the results of BLISS-52, our first LymphoStat-B Phase 3 trial in July 2009, and we are on track to report results from BLISS-76, our second LymphoStat-B Phase 3 trial in November 2009. Now, as you know, LymphoStat-B presents a unique opportunity, since patients have not seen a new drug for lupus approved by the FDA in more than 50 years. Assuming successful results in these Phase 3 trials, we and GlaxoSmithKline expect to file global marketing applications for LymphoStat-B in the first half of 2010. Now moving to the GSK clinical pipeline, both darapladib for cardiovascular disease and Syncria for type 2 diabetes have advanced to Phase 3. HGS has substantial financial rights to both of these products. In February of 2009, GSK initiated a Phase 3 program for Syncria. And as a result, we received a $9 million milestone payment during this first quarter. Syncria was created by HGS using our proprietary albumin-fusion technology. It is a long-acting form of GLP-1, a peptide hormone that acts to maintain normal blood sugar levels and control appetite. We licensed Syncria to GSK in 2004. We are entitled to fees and milestone payments that could amount to as much as $183 million, including $33 million received to date. We are also entitled to single-digit royalties on worldwide sales if Syncria is commercialized. Now, let me turn to Tim Barabe for our financial update. Tim?

Thanks, Tom, and good afternoon, everyone. You have the numbers for the first quarter in the press release, but I would like to draw your attention to a few highlights. You probably guessed that I would begin with revenues, and you are right. Revenues increased substantially to $177 million in the first quarter of 2009 from $12 million in 2008. And for the first time, our revenues were driven primarily by product sales, $128 million from the delivery of ABthrax to the Stockpile. Our net income for the quarter also increased substantially to $130 million, again due primarily to the ABthrax revenue. Because we previously expensed substantially all of the costs associated with meeting the terms of the contract, most of the revenue fell through to the bottomline. We also reduced our long-term debt during the first quarter by more than 20% by capitalizing on an opportunity to repurchase $106 million of our outstanding convertible notes for 50 million in cash. And net income for the quarter does include a $39 million net gain on this repurchase. I will also note that our cash in investments increased during the first quarter by $24 million to $397 million as of March 31st and continues to be sufficient to take us through the availability of Phase 3 data, the filing of marketing applications and the launch of our late-stage products. With that, I would like to turn the call back over to Tom Watkins for our Q&A session. Tom?

Thanks, Tim. So, in summary, we continue to move aggressively toward commercialization. We have our first product sales from ABthrax. We plan to file global marketing applications for Albuferon in the fall of this year. We are on track for LymphoStat-B Phase 3 results in July and November of this year. And we have a strong cash position. So with that, I will open the call to your questions. Operator, if you would please review the procedures.

(Operator Instructions). And we will take our first question from Joe Schwartz with Leerink Swann. Joe Schwartz - Leerink Swann: Hi, thanks for taking my question. It sounds like you are working diligently to secure additional orders for ABthrax. How comfortable are you that more orders might be seen and what sort of a timeframe should we expect?

Joe, I'm going to ask Jim Davis to handle that question.

Thanks, Joe, for the question. We are working diligently on this, and we are optimistic that we will get additional orders. Unfortunately, at this time, I can't give you any more concrete details of when or how much, but we'll let you know as soon as we do have a definitive contract. Joe Schwartz - Leerink Swann: Great, thanks. And then as far as the remainder of the sales to the Strategic National Stockpile in the U.S. goes, any more guidance on when the remainder might be booked?

We said that we would complete the deliveries this quarter, the second quarter. Joe Schwartz - Leerink Swann: Okay, great. Thanks.

And we'll go next to Geoff Porges with Bernstein. Geoff Porges - Bernstein: Thanks very much for taking the question. Just a couple. First, you mentioned, Tom, the pre-BLA. Could you give us a sense of what's the process of scheduling, when might they happen and would you communicate the outcome of those meetings? And secondly, any plans then to repurchase any more of the debt? Do you think that's feasible given your current cash position?

Geoff, let me answer the second question first, and then I am going to ask David Stump to answer the first question. I would say on the debt, we have no specific plans to do any additional repurchase at this time. We are confident partially because of our good cash position that we have sufficient flexibility to deal with the debt and not have that debt inhibit our ability to move the company forward, and as Tim stated, allow us to complete the work that's ongoing, get the global marketing applications filed and properly launch the product. David, why don't you speak to the question on pre-BLA meetings, please?

Our goal has been to have these meetings both with the FDA here in the U.S. and in Europe in the second quarter. We've requested those meeting dates, don't have them all finally locked in, but I am optimistic we can get those done this quarter for the process, while we've asked for the dates and putting together our briefing books for those meetings. And we will have them ready for any dates we get. So what we would disclose, our plan as we stated is to file applications in the fall. Obviously, if something material came out of those meetings, we will disclose it. But our operating assumption is we are executing our plan with our partner, Novartis.

We'll take our next question from Terence Flynn with Lazard Capital Management. Terence Flynn - Lazard Capital Management: Hi. Just a follow-up. How closely is Novartis working with you on the filings for Albuferon?

I think very closely. We have a joint team deployed to execute this project. Worldwide application filings in the fall are our joint team goal, would like to accomplish that as close to simultaneous as is possible. So, yes, planning date is being analyzed. We have been talking to the scientific community a lot, did that more at EASL. Fine minds asked good questions. So, we are trying to answer those questions with data analysis. In the meantime, we are pulling together document. So, yes, it's a big joint team effort. And from everything there I have seen right there, we're just doing work and thinking along the same fall milestones that we are.

Terence, at this time, I would add to that that whether you're talk about clinical development and regulatory, as David just commented on, or whether you're talking about the work that's going on in the factory, in planning and manufacturing product with Curran Simpson or whether you're talking about commercial preparation with Barry Labinger and his team, Novartis and HGS are working very closely in all aspects of Albuferon work, and it's a very close collaboration and moving forward very positively on all front. Terence Flynn - Lazard Capital Management: Okay. And then a quick follow-up. Do you guys have anything at ASCO this year on the trial program?

Not that's of any clinical importance, no. Terence Flynn - Lazard Capital Management: Okay. Thanks a lot.

And we'll take our next question from Liisa Bayko with JMP Securities. Liisa Bayko - JMP Securities: Hi, guys, just want to clarify, so for the ABthrax revenues next quarter, you said $8 million. I thought we were expecting a total number for the year of $150 million. Can you clarify how much we should expect for the year?

Okay. Lisa, this is Tim. So we booked $154 million in the first quarter, and we are expecting $8 million in the second quarter. So that is our expectation for the year. We will also be filing the BLA in the second quarter, and at some point in time, recognizing $10 million as a result of that. But we shipped substantially all of the ABthrax in the first quarter. Liisa Bayko - JMP Securities: Okay. Although product sales was $127 million, right, $128 million?

That's correct. There were also reimbursement for other expenses. Liisa Bayko - JMP Securities: I see. Okay. Fair enough. Thank you very much.

The press release should detail it. The press release mentions $154 million in revenue from ABthrax. Liisa Bayko - JMP Securities: Right, okay. Thank you very much.

(Operator Instructions) We'll take our next question from Jason Kolbert with ThinkEquity. Jason Kolbert - ThinkEquity: Congratulations on a great quarter. Just a couple of questions for you all around the Board. First one is on APB 14-1. In footnote (d) in the press release where you talk about the accounting for convertible debt at 334,269, can you go through the math on that for me?

Okay. Well, let's keep this very high level, Jason. This is Tim. We bought back $106 million in converts for $50 million. So you would think that we would have a $50 million gain. But when we had to restate the bifurcation of the convert, we had to put a certain amount on the balance sheet as a convert, and we took out a certain amount to shareholders' equity. So we had to take a piece of that amount that we would have to write the convert up over time, $16 million roughly, and expense that against the $56 million that we reported as a gain. So the $56 minus the $16 plus gets you to the $39 million net gain. Jason Kolbert - ThinkEquity: Okay, great. Yes, that's very helpful. And on the Albuferon program, can you talk a little bit about what marketing studies or other studies are going to be planned, particularly when you look at developing that in combination with STAT-C therapy?

Yes. Jason, this is Dave. Are you talking about clinical studies --? Jason Kolbert - ThinkEquity: Obviously you need to achieve comfort level with clinicians if they are going to be looking at STAT-C therapies in 2011. So I am asking you, pending filing for Albuferon, what efforts can you do to start generating data now with Albuferon in combination with STAT-C therapy?

Right, okay. Obviously, there are two key parts of the next development steps, but they are very closely tied to what we think the market would want to like a product when we deliver. One is continuing to push on two four-week testing, and we've talked about the Phase 2 trial Novartis is actually implementing now. And we certainly expect results from that sometime next year. Being a genotype 2, 3 study was only six month on treatment phase. For the combination with STAT-C agents, we believe that we need to get out there and start doing Phase 2 combination work with as many of these as is reasonable. From a clinical standpoint, to me what's reasonable is if I have seen enough activity and safety data with that compound to feel that it's reasonable to be combined. And I believe those sponsors who are developing those agents have looked at Albuferon and basically have been waiting for Phase 3 data to be assured that Albuferon is likely to have a presence in the market at the time they come to market. That's led to a number of discussions. We know them. They know us. We all work with the same thought leaders. So, we are actively in a dialog with these folks about how we would actually get those Phase 2 trials going as soon as possible before conceivably either drug reach the market. The rates don't forbid that. Sometimes the hardest part once you get the scientific concept in place is to get all the business interest to line up. I am optimistic we can do that. Maybe I will ask Barry if he has anything to add about that, apparently not. Jason Kolbert - ThinkEquity: That's going to be an exciting time for patients. One last question, it's on manufacturing and development services revenue, reported at 29,116. That's a very big number historically for HGSI. How should we look at that number going forward?

Jason, you'll have to figure in the piece of that that relates to ABthrax, the $26 million that's listed in the press release. So, if you look at the ABthrax revenue of $154 million, $127 million is product sales and $26 million is in that $29 million line. So you'd have to net that out. And then you'd see that the result is beginning to show the fruition of our contract manufacturing of the manufacturing that we're doing for Hospira and others. And hopefully, we expect $30 million to $60 million over the next three years, which is in line with what guidance we provided to you earlier. Jason Kolbert - ThinkEquity: Thank you very much. I just missed that in the press release. That makes perfect sense now. I appreciate it.

(Operator Instructions) We'll take a follow-up question from Liisa Bayko with JMP Securities. Liisa Bayko - JMP Securities: Hi. Just a follow-up to figure out the interest expense. It seemed to be quite a bit higher. Help us think about the run rate of that on a going-forward basis.

Okay. So the interest expense of $15 million includes $6.5 million of non-cash interest expense related to this new accounting rule where you have to bifurcate the convertible debt and you actually have a higher rate of interest on the debt than the 2.75% that we are actually paying. So, you should look at that 15.7 as $6.5 million worth of non-cash imputed interest and then actual interest expense. Does that help? Liisa Bayko - JMP Securities: Yes. So going forward, what rate should we be using as terms of your interest expense?

Probably about $5.5 million a quarter will be non-cash related, because we bought back some debt in the first quarter. Liisa Bayko - JMP Securities: What was the total interest expense?

I would go forward with a number that you have here, maybe just a tiny bit lower. Liisa Bayko - JMP Securities: Okay.

I'd tend to stick with the number that you have in the first quarter. Liisa Bayko - JMP Securities: Thank you.

(Operator Instructions) And with no response, Mr. Watkins, I'd like to turn the call back over to you.

Thank you, operator. I want to thank everybody for your interest in the company and your participation today. Obviously, we feel very good about the quarter. We look forward to continuing progress this year. And everybody have a good evening. Thank you very much.

And thank you. That does conclude today's conference.