May 9, 2011
Executives
Stephen Willard – CEO Siân Crouzet – Principal Financial Officer
Analysts
Matt Kaplan [Anel] – Ladenburg Thalm
Operator
Please standby, we’re about to begin. Good morning, ladies and gentlemen, and welcome to the Flamel Technologies first quarter conference call.
After prepared remarks, we will be opening the call to a question-and-answer period. As a reminder, this call is being recorded.
At this time it is my pleasure to turn the call over to Mr. Stephen Willard, CEO.
Please go ahead, sir.
Stephen Willard
Thank you very much, Nicole, and good morning, ladies and gentlemen. We open, as always, with the forward-looking statement language, which is set out at the conclusion of 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, as they are directly applicable to every element of this call.
It has been two months since our last conference call, and I would like to give a brief update of our work over the past two months. As we announced last month, we entered into an agreement with a leading specialty pharmaceutical company to develop controlled-release formulations of two molecules using our Trigger Lock technology platform.
While we have an existing agreement with this company, this is a new collaboration and we are pleased with this expansion of our relationship with them. Pursuant to the agreement, we received an upfront payment of $3 million, and we are also eligible for development-based milestones as well as mid-single digit royalties upon commercialization.
We also concluded another agreement recently with a company that markets a control-release, orally administered drug that is given for a certain central nervous system or CNS indication. The agreement covers the development of a Micropump-enabled formulation of the drug that could substantially improve the product.
Flamel received a $500,000 upfront payment and we are eligible to receive mid-single digit royalties upon eventual sales of the product. Last week, Flamel filed suit against Lupin Pharmaceuticals, alleging patent infringement following receipt of a Paragraph 4 letter from Lupin, relating to Coreg CR.
As we have demonstrated in the past, we intend to vigorously defend our intellectual property in Coreg CR. I would also like to speak about a new initiative that we expect will help Flamel capture greater value from our Medusa deliver technology.
We are beginning to enter joint-development agreements with companies which are developing very promising new molecules. We believe the greater ownership and participation in the process will not only provide significantly higher financial returns for Flamel, but it will also give us greater control of the information flowed to investors.
We are currently seeking deals in which our ownership interest will be higher than the typical range of Medusa licensing programs. As these are new modules, there can be no certainty that they will get to market, but we believe that our portfolio of formulations of currently-marketed molecules together with higher value, less certain new molecules, will create increased potential returns while maintaining our core strength.
We recently signed our first such agreement which our partner, a company called Fair Alpha, is scheduled to announce today. This is potentially a first-in-class molecule, and we are very excited at the strong potential of the approach.
We have identified additional opportunities for this enhancement of our business model, and we will keep you informed of developments in the coming quarters. Now I would like to ask Siân Crouzet, our Principal Financial Officer, to review our first quarter results.
Siân?
Siân Crouzet
Thank you, Steve. Good morning everyone.
Our revenues in the first quarter were $6.8 million compared to $8.1 million in 2010. The reduction is primarily due to a decline in Coreg CR sales, which has driven a reduction in both our product sales and realty income.
We have continued to furnish Micropump’s [inaudible] to GSK during the first quarter and are in the process of negotiating a new supply agreement. Our license and research revenues were $3.2 million in the first quarter.
A certain number of our feasibility programs have now advanced to the stage where work is being conducted primarily by our partners. In the coming months we would expect our partners to indicate their assessment of our formulations and their intentions for potential on-going developments.
The turnaround from our partners is difficult to predict, and as such can create variability quarter-to-quarter revenue stream. Cost and expenses during the quarter were $11.7 million compared to 12.1 million in the year-ago period.
SG&A declined by over 10% year on year, as we maintain our commitments as strict costs control. Cost of goods and services sold declined in line with the corresponding revenue stream on the side of Coreg CR, Micropump [inaudible].
Research and development expenses increased to $7.8 million in the first quarter of 2011. This is driven by cost incurred on pre-clinical studies, which we have conducted in a drive to further strengthen intellectual property on both our technology platforms.
Our cash position was $26 million at the end of the first quarter, which does not include the upfront payments of 3.5 million that we are to receive on the recently-signed license agreement. We continue to focus on being self-financing and expect to be cash flow positive in the second quarter.
Stephen Willard
Thank you, Siân. I would like to talk some more about the two license agreements that we have recently concluded, and then move on to the discuss the Lupin litigation.
Regarding the license agreement that we announced last month, this builds upon an existing relationship that we have been working on with a leading specialty pharma company for some time. The development agreement covers two molecules that we will formulate using our Trigger Lock technology.
Trigger Lock is our novel, proprietary and innovative delivery platform which enables the controlled release of narcotics and opioid analgesics, while deterring their abuse. These molecules we are formulating currently enjoy substantial markets, and we believe that these programs can create significant recurring royalties for Flamel shareholders.
We are pleased to be working on these programs, given that the company with whom we are partnered is a leader in this field. This is also an area of the pharmaceutical market that requires substantial regulatory and marketing expertise.
We are certain that the development of these two modules will benefit from our partners expertise in these areas. Regarding the CNS, the central nervous system product agreement, there was considerable competition for this program.
As many of you are aware, the Micropump platform competes in a highly-commoditized space. Our Micropump technology platform has some significant advantages, such as the ability to precisely deliver targeted pharmacokinetics over a long period of time.
We also have additional competitive advantages that we have developed for the Trigger Lock program and liquid adaptations of the Micropump platform. We are focused on monetizing the Micropump platform by entering into deals that fund our business and would serve to create a diversified pipeline of potential future royalty streams for our shareholders.
Obviously, the deal terms for both of these Micropump agreements are quite different from the ones that we are negotiating for the Medusa platform; both with respect to the amount of the upfront payments, and also with respect to milestone schedules and royalty rates. Generally speaking, we believe that the competitive positioning for Medusa is far greater than that from Micropump.
Medusa has many advantages over competitive delivery systems including the ability to provide stable levels of therapeutic agents over long periods of time with fewer side effects. Other advantages of Medusa include enhanced salability, anti-aggregation properties, and the ability to combined multiple therapeutic agents in a single injection.
We believe that one of Flamel’s many strengths is the presence of its two distinct platforms, and we will continue to aggressively pursue partnerships with both platforms. I would also like to make a few limited comments regarding last Wednesday’s announcement that we have filed suit against Lupin.
When GSK applied for approval of Coreg CR, they were required to submit a list of all applicable patents that pertained to Coreg CR. That list is maintained in the database that the FDA keeps, and which is known as the Orange Book.
One of the patents listed in the Orange Book is the original Micropump patent that GSK licensed from us for the formulation of Coreg CR. We at Flamel refer to it as the Micropump 1 patent, as it is the basic patent that covers the foundational elements of the Micropump technology.
There have been many improvements since then, and these are covered under various patents that have been filed more recently. Specifically with respect to Coreg CR, there is another patent pending, which covers what we refer to as Micropump II.
When Lupin filed their ANDA application, they alleged to the FDA that all of the patents covering Coreg CR, both GSK’s and ours, are either invalid, irrelevant, or unenforceable. It is typical in these kinds of situations to make the broadest possible arguments to be certain that nothing is excluded.
We have been informed by our council that Lupin’s formulation may directly infringe our intellectual property. Coreg CR has a very precise pharmacokinetic curve that is difficult to replicate without the use of our technology.
In filing our suit, we will be requesting the judge to enjoin the FDA from acting on the Lupin ANDA until such time as the case is decided or 30 months, whichever comes first, as is provided under U.S. law.
I should also note that we are continuing our discussions with GSK regarding a new supply agreement for Coreg CR. During these discussions, we continue to supply product for GSK on an uninterrupted basis, without prejudice to either party in the current negotiations.
I would now be pleased to take your questions.
Operator
(Operator Instructions). Our first question comes from Matt Kaplan with Ladenburg Thalm.
Matt Kaplan [Anel] – Ladenburg Thalm
Hi. This is Anel calling in for Matt.
Can you hear me?
Stephen Willard
Yes, I can. Thank you.
Matt Kaplan [Anel] – Ladenburg Thalm
Okay, great. I was wondering if you could tell me how many feasibility studies you have currently ongoing?
Stephen Willard
That number is consistently updated with – on our corporate website. I’m getting the exact number; it’s 27 right now.
Matt Kaplan [Anel] – Ladenburg Thalm
Twenty-seven.
Stephen Willard
And that’s a combination not only of feasibility agreements, but also license agreements. The three molecules that we referred to as signed in the last two months were license agreements.
But the answer to your question is 27.
Matt Kaplan [Anel] – Ladenburg Thalm
Okay, great. And can you give me an update on the Coreg CR supply agreement negotiations with regards to the potential timing for an announcement?
Stephen Willard
When dealing with partners we have to be sure that we’ve come to full agreement. I am pleased that they continue to request us to manufacture increasing amounts of Coreg CR microparticles, so I expect that we will have increasing revenues from manufacturing activities as we negotiate.
We are having productive conversations but I can’t make any predictions until we get the whole thing finished up.
Matt Kaplan [Anel] – Ladenburg Thalm
Okay, great. And you didn’t really talk about this as much on the call, but I wanted to know if you can update me on the Merck Serono program and the potential timing for the Phase 1 data?
Stephen Willard
The Merck Serono program is going very well. Rafael Jorda and the team are meeting today in our offices in Pessac.
Things seem to be going quite well with the program. But in terms of the timing of Merck Serono’s announcement of clinical results, that will be up to Merck Serono.
Matt Kaplan [Anel] – Ladenburg Thalm
Okay, great. And just one quick question.
Can you tell me what the stock-based compensation for the quarter was?
Stephen Willard
I beg your pardon, I couldn’t hear you clearly.
Matt Kaplan [Anel] – Ladenburg Thalm
Sorry. Can you give me the stock-based compensation number for this quarter?
Stephen Willard
The stock-based?
Matt Kaplan [Anel] – Ladenburg Thalm
Yes, the stock-based compensation.
Stephen Willard
Okay, yes. So Siân Crouzet will handle that.
Siân Crouzet
It’s half a million dollars.
Stephen Willard
So the answer to your question is $500,000.
Matt Kaplan [Anel] – Ladenburg Thalm
Okay, great. Thank you.
Stephen Willard
Thank you, and thank you Siân.
Operator
(Operator Instructions). At this time it appears we have no further questions in queue, but I’d like to give the audience another reminder.
(Operator Instructions). There appears to be no further questions at this time so I’d like to turn the call back over to our speakers for any additional or closing remarks.
Stephen Willard
Thank you, Nicole. As always, we greatly appreciate your interest in Flamel Technologies.
We are excited by the strength of our company and the possibilities that we are working on and we look forward to communicating with you again soon. Thank you once again for your interest in Flamel Technologies.
Operator
Thank you, everyone. And with that, we will conclude today’s conference.
Thank you all for your participation. You may now disconnect.