May 11, 2009 8:30 am ET
Executives
Stephen Willard - CEO
Siân Crouzet - PFO
Analysts
Matt Kaplan - Ladenburg
Peter Butler - Glenhill Investments
Tom Weissenborn - Credit Suisse
Presentation
Operator
Hello, and welcome to Flamel Technologies' first quarter 2009 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). Please note, this conference is being recorded.
Your host for today's call is Stephen H. Willard, Chief Executive Officer of Flamel Technologies. Mr. Willard, please begin your call.
Stephen Willard
Thank you very much and good morning, ladies and gentlemen. We open as always with the forward-looking statement language, which is set out at the conclusion in today's press release. All statements made on this call are subject to a variety of future events and risk factors, including those set forth in our filings with the SEC, particularly our Form 20-F, which are all publicly available. Please review them and they are directly applicable to every element of this call.
Our first quarter result highlighted the success the company has achieved in leveraging its strengths to build a solid foundation for growth based on innovative technology, a prudent partnership approach that recognizes the advantages that working with leading companies confers on Flamel, the ability of our scientists' to create valuable working relationships with their colleagues in these partner companies and force the stability that Flamel enjoys in terms of financial resources at a time of relative difficulty in the industry.
I would like to briefly review the first quarter highlights and then I will ask Siân to review our financial result. We were, of course, very pleased that Merck Serono exercised its option to license to Medusa technology for one of their already marketed therapeutic protein this past February. We received a EUR5 million upfront payment, that's about $6.5 million, during the quarter [personal] to the contract that we signed at the beginning of the project. As many of you will remember, this program was initiated in December of 2007.
During the time that we have been engaged on this project with Merck Serono, our scientists have forged a strong working relationship with their scientific counterparts. We are very pleased with the results that we have generated on the project, both with respect to the product itself, but also with respect to have it relates to the Medusa platform as a whole. Our expectation is that this program will serve as a strong showcase for the strength of the Medusa platform as it advances and data become public.
During the fourth quarter, we also achieved a milestone with GSK regarding COREG CR, triggering a $4 million payment. This payment was based on the second anniversary of the launch of the product and is not included in our published cash and marketable securities as of the end of Q1.
Our relationship with GSK remains strong and we believe that they have a good understanding of the strengths that Micropump can offer for the delivery of controlled release small molecule drugs. The quality of the work that we have achieved for GSK has benefited us in many ways, not least by increasing our visibility and reputation with other large players in the industry and small players as well for that matter.
I hope that you have all had a chance to read the press release detailing our financial results for the first quarter as went out this morning. Obviously, we are pleased to have increased our revenues, strengthened our cash during the quarter and achieved profitability.
Siân, would you please review the first quarter results.
Siân Crouzet
Thank you, Steve, and good morning, everyone. I'm pleased to discuss quarter one results, which were highlighted as Steve pointed out by growth in revenues and increase in the company's cash reserves, and the profit of $1.2 million during the quarter.
The results continued and, in fact, accelerated certain trends that we have discussed in previous quarters. These trends are increased R&D revenues, cost prioritization, and improved earnings quality.
When we look at our revenues during the quarter, these were affected by the $4 million milestone, which we invoiced to GSK in March. In the year ago period, we had received a EUR0.5 milestone from Merck Serono, which was approximately $750,000 at that time.
Leaving aside these items, what shown important contribution to our financial results, but which can make analysis more difficult with regard to underlying trends, we enjoyed a 53% increase in R&D research revenues year-on-year and in constant currency terms.
We highlight these revenues that they are an important leading indicator to the extent that they reflect the increased interest in our technology platforms. In effect, the price in this line item is one of the things we look at to gauge eventual license fees, milestones, and clinical R&D revenues which we could receive if and when projects progressed further into the clinic.
Our operating cost during the quarter declined somewhat in constant currency terms. A decline that was magnified in dollar terms by the weakness of the dollar versus the euro year-on-year. With respect to the research and development cost, much of it declined due to timing and commitment of certain expenses, which we expect to reverse in future quarters. Our effort to contain non-critical expenditure has led to a decline in SG&A cost year-on-year.
The FAS 123R non-cash charge for the quarter amounted to $1.4 million. Our cash and marketable securities at the end of the quarter was $39.1 million versus $37.1 million at the end of the last quarter of 2008. This increase in cash did not include the $4 million we have invoiced to GSK, but it does includes the payment from Merck Serono for the EUR5 million as an upfront fee following the exercise of that option to the Medusa technology.
The cash and marketable securities position is better effected by negative exchange rate variance during the quarter. As per the exchange rate effect, cash and marketable securities would have increased by $3.6 million in the quarter.
We are pleased with the success of our efforts to build the company with a diversified foundation of multiple projects with multiple partners across different platforms and in different indications. It is for this reason that we are positioned to benefit from milestones, such as the one from GSK and to report a profitable quarter.
As I began by pointing out, these results represent the continuation of several trends that we have pursued over the past two years. We are pleased with the progress we have made thus far, and look forward to further continuation of these trends as events unfold over the coming years.
With that, I would turn it back to Steve.
Stephen Willard
Thank you very much, Siân. It has been a little over two months since we last hosted a conference call, so I will try to be brief in my remarks hoping to leave more time for questions.
As we mentioned, our Q1 cash and marketable securities number did not include the $4 million milestone that we invoiced GSK in March. That will be included in our Q2 balance sheet.
We are very pleased to have achieved profitability in the first quarter of this year, because it speaks to the strength of the work that we have done and continue to do with our partners, the commercial success of our platforms and the strong work that our scientists have achieved working together with the partners we have attracted. We are in a strong position where as things stand now events can push us into profitability very easily.
I would also like to point out that our fiscal responsibility has extended for a significant period of time now. In the third quarter of 2007, when we cut back on expenses in response to COREG CR sales, which were far less than projected, we had $40.8 million in cash and marketable securities. Today, six quarters later, our cash is $39.1 million, a decline of only $1.7 million over the six-quarter period. More importantly, during this period, we have made tremendous strides both with our technology and our relationships with new partners.
We have every reason to be confident in this regard. Recently, we have taken steps to streamline our feasibility projects, so as to prioritize our work. This was necessary in order to favor those projects, which we believe have the greatest commercial appeal for potential license agreements and also to open capacity for the agreements that we are currently negotiating.
We have updated our presentation accordingly to reflect that we have one fever vaccine project and one fever therapeutic protein project. Both projects were being conducted with smaller companies that faced funding constraints that were of concern to us.
With respect to vaccines, we still have one active partnership with the Top 20 company and we are currently in discussions with two Top 10 companies for new vaccine programs. These companies have far greater resources to apply to vaccine development. We now know a lot more about the applicability of Medusa with respect to vaccines as a result of the work that we have completed over the past two years.
We are also negotiating a number of feasibility programs both for Medusa as well as Micropump. The negotiations are for the most part well advanced. We expect that there should be a number of updates in this regard over the coming months. With respect to our remaining ongoing studies, we are pleased with the data that our scientists are generation and expect that a number of these studies could lead to license agreements this year.
With respect to many of our feasibility programs, the point at which a company chooses to exercise a license, is entirely at their discretion. As a general matter, we prefer that a company develop more data using our platforms rather than less, as this favors our negotiating position. Fundamentally, the greater the value we are able to create for our partners, the better our position in these negotiations.
Sometimes this is a function of the molecules that we are working on as much as the strength of the platforms themselves. Some molecules required greater functionality that others either because of the nature of the indication, the nature of the molecule itself or some combination of the two. A corollary to my earlier comment is, the greater the problem, the better our position.
This is one reason that we continue to invest in creating greater comparative advantage for both Medusa and Micropump. Some of this investment is being done on the standalone basis and other efforts are being conducted using our partner's funds. As an example of the first approach, we have worked over the past year-and-half on our own to extend the duration of release for the Micropump platform.
Currently, Micropump has many strengths that make it, in my opinion, a best-in-class technology. Its principal strengths are the ability to affect the controlled release with precise pharmacokinetics consistently for all patients using a variety of dosage formulations.
If we succeed in extending the duration of actions significantly beyond the competition, we will create new markets for the platform. Large pharmaceutical companies are always interested in product life extension strategies, particularly if there is a compelling therapeutic rationale. Many molecules are not commercially developed because the molecules have very short half-life.
As an example of the second approach, the one using partner funds, we are working with the Top 10 pharma company to demonstrate the ability of Micropump to be used in over-the-counter liquid formulations, which could be administered to children. This should give us further opportunities to access pediatric and geriatric markets for which we have long believed Micropump was ideally suited. The over-the-counter market is also very attractive to us. In this the time-to-market is reduced compared with prescription drugs.
We are using the same two-pronged approach with respect to Medusa. Several of our ongoing feasibility programs are for new applications of the Medusa platform, by which I mean different modes of application amongst others. We are pleased to be able to leverage the scientific and economic resources of our partners to further develop the Medusa platform.
Our partners gain potentially beneficial terms with respect to the molecules we are working on and we are able to further develop the platform so as to extend our comparative advantage and create more value-added solutions in different therapeutic settings.
We are currently negotiating with two large pharma companies to sign projects that will be based on specific knowledge we built using this approach. We are very pleased with the traction we have achieved using this approach, and that we have been able to accrue this intellectual property with minimal expense. It is a very efficient model.
As we look to the remainder of the year, we are encouraged with the progress we have made with the programs we have in development, with our backlog of projects in discussion and negotiation, as well as of the interest that we have for our internal programs. The potential for all three of these sources of growth to contribute to the strength of the company over the coming year has never been greater.
With that, I would now be pleased to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from Matt Kaplan from Ladenburg. Please go ahead.
Matt Kaplan - Ladenburg
Just following up on some of your prepared remarks, can you talk a little bit about the visibility you have in terms of the transitioning of some of your feasibility studies to commercial agreements, meaning, I guess, you look at the stage of developments and maturation of those feasibility studies, what do you see, I guess, going out in the next six to 12 months in terms of some of those transitioning or, I guess, either transitioning to commercial agreements are falling off and no longer being there?
Stephen Willard
Sure. We wanted by creating the metric system, the metrics that we have in our slides, which are in our corporate presentation, we made a commitment to you, our investors, to give you as much information as we can about as many of the projects as possible. I did mentioned earlier that with two projects we are letting go because we have concerns about the financial viability and we have other things that we expect to be signing fairly shortly that can better utilize the scientists who have been working on those projects.
With regard to how the projects are progressing, there is a metric on page 29 of the slide that shows that we've gone from two projects a year ago in preclinical or beyond to 13. Because we have so many different projects now into preclinical and clinical work, I think I am very optimistic that we have a lot of opportunities for things to convert into the license agreements that we discussed. Although it's hard to have particular certainty with regard to any particular project, but with 13 projects there and with some other projects where we are negotiating, hopefully, directly to go into license agreement, I think there will be a good bit of information coming from Flamel over the next six to nine months.
