Dr. Carl Spana - President & CEO Steve Wills - EVP, CFO & COO

John Newman - Canaccord Michael Higgins - Roth Capital Partners

Good morning, ladies and gentlemen, and welcome to the Palatin Technologies Fourth Quarter Fiscal Year 2017 Conference Call. As a reminder, this conference is being recorded. And before we begin our remarks, I would like to remind you that statements made by Palatin are not historical facts and maybe forward-looking statements. These statements based on assumptions that may or may not prove to be accurate and actual results could for materially from those anticipated due to a variety of risks and uncertainties discussed in the company's most recent filings with the Securities and Exchange Commission. Please consider such risks and uncertainties carefully in evaluating these forward-looking statements and Palatin's prospects. Now I would like to introduce you to your host for today, Dr. Carl Spana, President and Chief Executive Officer of Palatin Technologies. Please go ahead, sir. Dr. Carl Spana: Thank you. Good morning and welcome to the Palatin Technologies fourth quarter fiscal year end 2017 call. I am Dr. Carl Spana, CEO and President of Palatin, and with me on the call today, is Steve Wills, Palatin's Executive Vice President, Chief Financial Officer, and Chief Operating Officer. On today's call, we will provide financial and operating updates. I am now going to turn the call over to Steve, who will provide financial update.

Thank you, Carl. Good morning everyone. For the fourth quarter and fiscal year ended June 30, 2017, I will cover significant and recent operational highlights. Regarding our Bremelanotide development program for hypoactive sexual desire disorder or HSDD. In February 2017, we closed on an exclusive North American license agreement with AMAG Pharmaceuticals to develop and commercialize Bremelanotide. Pursuant to the terms of the license agreement, we received an upfront payment of $60 million. AMAG is required to pay up to an aggregate amount of $25 million in reimbursement for all reasonable, direct, out-of-pocket expenses incurred by us, following the closing date, in connection with certain continued development and regulatory activities, necessary to file a new drug application or NDA with the Food and Drug Administration or FDA. For accounting purposes, we have determined, that the $60 million upfront payment and the $25 million in reimbursable, direct, out of pocket expenses, represent a combined unit of accounting, totaling $85 million, that should be deferred and recognized as revenue, as we complete our development obligations, related to certain activities necessary to file an NDA with the FDA. We estimate that the $85 million will be recognized over the four quarters ending first quarter of calendar 2018. In addition, AMAG is also required to pay us up to $80 million upon achievement of certain development and regulatory milestones. Up to $300 million upon achievement of certain sales milestones, and AMAG is also obligated to pay us tiered royalties on annual net sales, ranging from high single digits to low double digits. On September 6, 2017, we announced the signing of a collaboration and license agreement with Fosun Pharma for exclusive rights to develop and commercialize Bremelanotide in the territories of Mainland China, Taiwan, Hong Kong and Macau. Under the terms of this agreement, we will receive an upfront payment of $5 million. Fosun is also required to pay us a $7.5 million milestone, based on regulatory approval in China, and up to $92.5 million in sales related milestones. In addition, Fosun is also obligated to pay us tiered royalties on annual net sales, ranging from high single digits to low double digit royalties. All development, regulatory, sales, marketing and commercial activities and associated costs in the licensed territory will be the sole responsibility of Fosun Pharma. We continue to work closely with AMAG on completing the task and activities necessary to file an NDA with the FDA. This filing is targeted for early calendar year of 2018. Moving over to our operational, financial highlights. Regarding the fourth quarter and fiscal year 2017 financial results, Palatin reported a net income of $13.3 million or $0.07 per basic and diluted share for the quarter ended June 30 2017, compared to a net loss of $13.4 million or $0.09 per basic and diluted share for the same period in 2016. The difference between the three months ended June 30, 2017 and 2016 was primarily attributable to the recognition of $33.9 million in contract revenue, pursuant to our license agreement with AMAG. For the year ended June 30, 2017, Palatin reported a net loss of $13.3 million or $0.07 per basic and diluted share compared to a net loss of $51.7 million or $0.33 per basic and diluted share for the year ended June 30, 2016. The decrease in net loss for the year ended June 30, 2017 compared to the net loss for the year ended June 30, 2016, was primarily attributable to the recognition of $44.7 million in contract revenue, pursuant to our license agreement with AMAG. Regarding revenue, as I stated prior, we recognized $33.9 million in contract revenue for the quarter ended June 30, 2017 and $44.7 million in contract revenue for the full year ended June 30, 2017. There was no revenue recorded in the quarter or year ended June 30, 2016. Regarding operational expenses, total operating expenses for the quarter ended June 30, 2017 were $19.6 million compared to $12.7 million for the comparable quarter of 2016. For the year ended June 30, 2017, Palatin incurred $55.3 million of operating expenses compared to $49.3 million for the year ended June 30, 2016. The increase in operating expenses as mainly attributable to the continued progress of Phase-III clinical trials and development of Bremelanotide for HSDD, as well as professional fees incurred related to closing our license agreement with AMAG. Regarding other income expense; total other expense net was $0.5 million for the quarter ended June 30, 2017 compared to $0.6 million for the quarter ended June 30, 2016. For the year ended June 30, 2017, total other expense, net was $2.3 million compared to $2.5 million for the year ended June 30, 2016. Total other expense net for both fiscal years consisted mainly of interest expense related to our venture debt. Regarding income tax expense; income tax expense was $0.5 million for the quarter and year ended June 30, 2017. Yes, we do have income tax expense now, compared to no income tax expense or benefit for the quarter and year ended June 30, 2016. Income tax expense relates to the alternative minimum tax known as AMT expense, based on federal alternative taxable income attributable to the $60 million upfront payment from AMAG. Regarding cash position, Palatin's cash, cash equivalent and investments were $40.5 million and accounts receivable, all from AMAG, were $15.1 million as of June 30, 2017, compared to cash, cash equivalents and investments of $9.4 million and no accounts receivable at June 30, 2016. Current liabilities were $19.9 million, this is net of deferred revenue of $35.1 million, which is just the timing difference on the recognition of the revenue related to our license agreement with AMAG, and this compares with current liabilities of $13.9 million as of June 30, 2016. We believe that our existing capital resources, along with the additional proceeds of $5 million from our license agreement with Fosun Pharma, will be adequate to fund our planned operations to at least calendar year 2018. Carl? Dr. Carl Spana: Thank you, Steve. I see you had some fun with that presentation. I will start our fourth quarter fiscal year end 2017 operational update with Bremelanotide and then cover our pipeline programs. Concerning Bremelanotide, as Steve mentioned, we are working with AMAG Pharmaceuticals, our North American licensing partner, really to complete all the activities that are required to file a new drug application with the FDA. These activities include, various clinical pharmacology studies, certain manufacturing activities and the preparation of the NDA. We anticipate that the Bremelanotide NDA will be filed in the first quarter of calendar 2018. Our development of Bremelanotide outside of the North American market will be done only in the context of a partnership. To this end, we are focusing our business development efforts on a Bremelanotide partnership for the European Union, as well as other regions of the world. As Steve also reported, our business development efforts have resulted in a licensing deal with Fosun Pharma, granting them the exclusive rights to Bremelanotide in China, Taiwan, Hong Kong and Macau. I won't go into the financial details [indiscernible] recovered. Fosun is a leading Chinese pharmaceutical company and we do believe, that they will be an excellent partner for Bremelanotide in the territories that they have. Moving on, Palatin's drug development efforts are focused in two areas; our natriuretic peptide program for cardiovascular diseases, and our melanocortin programs for autoimmune and anti-inflammatory diseases. Regarding our melanocortin obesity and diabetes program, we will not progress this program on our own, we are working to find partners to work with us to bring this program forward. I will provide a little more detail on our pipeline program, starting with our natriuretic peptide. PL-3994 is our lead candidate and it's a selective agonist at the natriuretic peptide A receptor and a compound has been extensively evaluated in preclinical models of heart failure, demonstrating expression of the renin-angiotensin-aldosterone system, cardiac hypertrophy, fibrosis and remodeling. PL-3994 has been evaluated in two Phase-I clinical studies, which have allowed us to establish initial safety, pharmacokinetic and pharmacodyanmic properties and to define dosing range. We will be evaluating the safety and efficacy of PL-3994 in a Phase-2A clinical study that is planned to start by the end of this year. This study will enroll heart failure patients with preserved ejection fraction and we anticipate preliminary data in 2018. We plan to provide further details on this clinical trial, when patient enrollment begins. PL-5028 is an agonist at both the natriuretic peptide C and A receptors, the emerging science conducted by Dr. Adrian Hobbs, a member of Palatin's scientific advisory board, indicates that the NPR-C agonism plays a key role in reducing cardiac fibrosis, which plays a major role in the underlying cardiac dysfunction and heart failure. We believe the dual agonist activity at PL-5028 should allow for superior efficacy in a much broader dosing window compared to other naturally peptide approaches. PL-5028 has demonstrated excellent efficacy and preclinical models of heart failure, and we are planning to begin preclinical activities to support human clinical work [ph] and first in-man studies in 2018. Heart failure is a major health issue. In 2013, there were approximately 5 million patients with heart failure in the U.S. The management of these patients represents a significant cost to the healthcare system. Although there are numerous questions, if the [ph] medication is approved to help the management of heart failure, most patients have progressive disease and a poor five year prognosis. There clearly remains a high unmet medical need for new treatments in heart failure. We believe, our research and development efforts have put us in a leading position to develop direct acting, natriuretic peptide receptor agonist as treatments for heart failure and potentially other disease indications. We have established multiple sets of compound that are selected for each of the three natriuretic peptide receptors or combinations thereof. Our development work is protected by a broad intellectual property program, and as our clinical development programs in this area advance, we will continue to expand our knowhow in intellectual property. Our second area of focus is our melanocortin autoimmune and anti-inflammatory disease program. In this program area, we are initially focusing our development efforts on inflammatory bowel disease and ocular inflammatory indications. The current treatments available for managing patients with inflammatory bowel disease or ocular inflammation, in general, suppress key components or parts of the pro-inflammatory pathways. Use of these agents [ph] results in moderation of symptoms, with few patients having meaningful remission of their disease. Targeting melanocortin pathways as a treatment for inflammatory disease incorporates a novel mechanism action, that we believe has the potential to induce resolution of disease and restore homeostasis of the immune system. Our compound, PL-8177 is a selective agonist of the melanocortin-1 receptor, that has demonstrated efficacy in multiple models of inflammatory diseases, including inflammatory bowel disease, uveitis, and we are excited to be moving the compound into clinical development. PL-8177 has completed all pre-clinical activities needed to support moving into clinical trials, and we anticipate first PL-8177 clinical study will begin enrolling patients by the end of this year. Our second development candidate is PL-8331, it's an agonist of both melanocortin 1 and 5 receptors. We believe there are a number of autoimmune and inflammatory diseases such as ocular inflammation, where the dual agonist activity of PL-8331 may provide superior treatment benefit. We are currently evaluating PL-8331 in multiple preclinical disease models and drug safety studies. [Indiscernible] supports continued development, we plan to start the activities required to file an IND or an investigation or initial new drug application, which should allows us to begin clinical studies in 2018. We believe our research and development efforts have put us in a leading position to develop melanocortin receptor agonist as novel treatments for autoimmune and inflammatory diseases. We have established multiple sets of compounds that are selective for the melanocortin receptors involved in resolving pro-inflammatory pathways. And we have broad intellectual property that protects our development work, and as our clinical development programs in this area advance, we will continue to expand our knowhow and intellectual property in this area. We believe that the potential of targeting the natriuretic and melanocortin peptide systems has potential beyond the indications that we spoke about above. We plan to allocate resources and activities that will expand the potential indications of our compounds and strengthen our intellectual property. As we think about the future of Palatin, I am very excited about the potential of our development programs to lead to new treatments that can significantly impact the lives of our patients. The success we have had in developing Bremelanotide from concept to Phase-III clinical trials and now into multiple commercial partnerships, not only provides the potential for realizing the value of Bremelanotide, but has provided us with the resources to unlock the value in our pipeline programs. Looking forward, we aim to achieve the following objectives; we will be working diligently with AMAG Pharmaceuticals, our Bremelanotide North American commercial partner, to complete the remaining activities required to file a new drug application with the FDA in the first quarter of 2018. This will put us on track for a potential Bremelanotide approval in early 2019. In addition, we will be working with Fosun Pharma to support their development efforts for Bremelanotide for the Chinese market, and we will continue our business development activities with Bremelanotide, looking for partnerships in the EU and other territories. For our natriuretic peptide system programs, it has the following objectives; PL-3994 to begin, as Phase-IIA trial in heart failure patients which preserves ejection fraction. And for PL-5028 to complete -- require preclinical activities to begin clinical studies in 2018. Our melanocortin peptide program has the following objectives; for PL-8177 an IND submission and completion of the Phase-I study. Establishment of an oral formulation, initiation of Phase-II proof of principal studies in 2018 and for PL-8331 to complete the required preclinical activities to begin first in-human studies in 2018. And as previously stated for our melanocortin obesity and diabetes program, we have an active development program, and our goal is to bring in one or more corporate partners to that program as well. As we conclude, the management employees of Palatin are focused on achieving our objectives and building value for our shareholder. As a reminder, you can find additional information on our web site, which is www.palatin.com. We are now going to open the call to questions. Thank you.

[Operator Instructions]. And we will take our first question from John Newman from Canaccord. Please go ahead.

Hey good morning guys. Congrats on all the progress, especially with the pipeline. Just curious if you have had your pre-NDA meeting with the agency, with regard to Bremelanotide? Dr. Carl Spana: John, that's a good question. We actually have had our pre-NDA meeting with the division. It went very well. We feel that we are in a very strong position, that we will have all the components necessary to file a really top notch NDA. So we are quite excited about the meeting and where we are and we are working real hard. Really no surprises in the meeting. It went as we expected and as it should have.

Okay. And with regard to 3994, I know that you have been working on this in the background for some time, and now that you have some additional funding, you are pushing it forward. Just wondering what you can tell us about the Phase-I study at this point, in terms of design and sort of, what you are looking to learn at this point in the clinical development there? Dr. Carl Spana: Sure. So it will be more of a Phase-II study. This study is designed to really look at a natriuretic peptide mechanism in patients that have heart failure with preserved ejection fraction. And a patient with preserved ejection fraction are -- about 50% of heart failure patients have preserved ejection fraction, and there are currently no FDA approved treatments for them. So what we are doing in this study is, we will be actually -- these patients very commonly come in, and they get, which is known as a right heart work-up, so they have a catheter that's put in and the function of the right heart is monitored. So while they are going through that procedure, we will be introducing PL-3994. We will be looking at its effects on pulmonary arterial blood pressure. In particular, pulmonary capillary wedge pressure in particular, and we will also be taking a biopsy of the heart, and the goal of that biopsy is actually to look at the signaling pathways that are activated by PL-3994, making sure that they are functioning in these types of patients. If that's the case, that will be a major step forward for us, that really gives us a key indication that the product of the drug will work in these patients, or there is a chance that it will work in these patients, and we could think about how we go forward and design trials that actually show benefits in a more natural setting. So it's a pretty important study. It will be done in conjunction with two academic centers, and we will talk a little bit more about that, when we announce the start of the study, a little bit later this year.

Okay, great. Thanks.

And we will take our next question from Michael Higgins from Roth Capital Partners.

Good morning guys. Thanks for taking the questions. Congrats on the completion of a very positive year. Hoping to get an update from you on the Bremelanotide's pre-NDA trials. You had some small PK trials that you have been running, and I think you may actually have some coming up as well -- as well, abuse-liability in drug interaction studies. Any update for us on those? Dr. Carl Spana: Sure. I mean, these are -- a lot of these studies are -- they are important to be able to meet regulatory requirements. They are all fully enrolled in almost all of them, I think except for one, to have actually completed the in-patient part, and we are just waiting for study reports. We don't really have much in the way. They are fairly benign. As far as outcome, there is no negative results that we report. As far as we can tell, the drug looks quite clean, as far as its drug interactions. The abuse-liability, from a preclinical standpoint, there are a number of studies that we have done, doesn't appear to be any interaction there. The clinical component is, again, fully enrolled, and we haven't yet received the clinical study results, but my suspicion is that we won't see any effect there either. So really overall, these are -- they are either complete or they are at the tail end of being completed, and they will be incorporated into the NDA, as we get study reports and submit it into the FDA, but there is nothing here that will have a negative impact on the label, which is what we are most concerned about.

Great. Appreciate that. Steve, any update for us on the penny warrant conversions and how that has been going?

Sure. The penny warrants are what we call the pre-funded warrants, I mean, that's the size of a penny. In the last four months, June, July, August and September, we have actually experienced approximately $32 million of exercises from the pre-funded warrants, and which we believe all those pre-funded warrants or the vast majority were sold into the marketplace. In the month of September alone, we received $16 million of exercises related to the pre-funded warrants. So as of chatting today, we have approximately $11.5 million pre-funded or penny warrants outstanding and our expectation is that these will be down to zero within the next 30 to 60 days.

Great. Thanks for the update on that. Any update for us on the discussions with European partners for Bremelanotide and what you are looking for in partnership agreements if it's region-wide or country-wide? Thanks.

Sure Michael. As I mentioned and I think most people are aware, we had licensed the North American rights and the Mainland China and a few surrounding territories already. We are in discussions with multiple parties for multiple regions. Some of those discussions are for the rest of the world, under one umbrella. The rest of the world again sans North America and China, and some of those discussions also include European-based companies and some other companies in select territories, i.e. Japan, Latin America is separate, then Europe. So as of right now, we are moving forward with these advanced discussions and similar to what we have done with the partner, with AMAG, as a collaboration partner, and also with Fosun Pharma as a collaboration partner. We are not necessarily -- upfront payments are nice and we want a competitive number. But our A item is finding the right collaboration partner. We think AMAG fits that profile perfectly. We think Fosun Pharma is going to be an excellent collaboration partner in that territory. And as we advance these discussions, we could very well do a rest of the world territory deal or some additional territories, i.e. European and some surrounding countries separately, Latin America separately, some of the other territories separately. But we are very pleased with the amount of activity and enthusiasm we are receiving in the marketplace, and we anticipate that that's going to even increase now, that we have done another deal, i.e. China, with Fosun Pharma.

Great. I appreciate it. Just a follow-up on 3994 follow-up on an earlier question; what biomarker data would you be looking for from your biopsy data? Dr. Carl Spana: Sure. It's a -- [indiscernible] to AMP is the common downstream modulator, looking for other types of things like phosphorylation, protein kinase A activation. So there are a number of downstream biomarkers or intercellular biomarkers that we will be looking for. The main number of genes that we would be looking for as well. [indiscernible] 9 will be another that we are looking at. So we have a whole panel of things that we will look at intercellularly. What we'd also like to see from a physiological standpoint though is, we'd like to see how much of an impact we have on the pulmonary cap wedge pressure, which is -- it can be an important component in these patients that have heart failure.

Thanks. That's helpful. And then one last if I could, I know the Q4 R&D spend is higher than the previous quarters of fiscal 2017. What drove that and might that continue into 2018? Thanks.

It won't continue into 2018, Michael. The way you have to account for this, per generally accepted accounting principles, the cost reimbursement we received from AMAG is actually counted as contract revenue above the line, so that's under the revenue. So we anticipate a significant drop-off in the R&D spend, which is primarily Bremelanotide after the fourth quarter of this year, because as we mentioned, our target is to file the NDA early in calendar 2018, and the R&D spend post, if you will, the fourth quarter of this year, maybe a little bit into the first month or two in calendar 2018, will be primarily, and vast majority primarily on our MCR-1, MCR-1-5, the inflammatory targets and also our heart failure targets.

Makes sense. Appreciate it. Thanks guys.

And this concludes today's question-and-answer session. Dr. Carl Spana, I would like to turn the call back to you for any closing or additional remarks. Dr. Carl Spana: Thank you for the good questions. We appreciate it here at Palatin. As you can hear, we are quite excited about what we have accomplished in the last year, and what we intend to accomplish in the upcoming year. It's a good time to be here. We really have a lot of potential, and as I said, there is a lot of enthusiasm around the employees and our partners, and really, we are just excited to be coming in everyday and look forward to updating you, as we go forward over the next four quarters. So have a great day and we will talk to you next quarter.

And this concludes today's conference. Thank you for your participation and you may now disconnect.