todays open briefing

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Attention ASX Company Announcements Platform
Lodgement of Open Briefing®
Biota Holdings Limited
10/585 Blackburn Road
Notting Hill, VIC 3168
Date of lodgement: 21-Feb-2007
Title: Open Briefing®. Biota. CEO on Half-Year Profit
Record of interview:
corporatefile.com.au
Biota Holdings Limited reported its first ever profit with the announcement
today of net profit of $4.1 million for the first half ended December 2006,
versus a loss of $8.7 million in the previous corresponding period. Sales
revenue rose to $19.0 million from $1.6 million, driven primarily by growth in
Relenza royalties to $12.7 million from $0.7 million in the previous
corresponding period and up from $4.7 million in the second half of the June
2006 financial year. What’s the expected trend in Relenza royalties in the
current second half and going forward?
CEO Peter Cook
We’re assuming our Relenza royalties in the second half will be similar to the
first half. That’s based on the only concrete advice GlaxoSmithKline has given
its shareholders, which is that it would increase annual Relenza production
capacity to 15 million courses. Our analysis of reported sales for the December
quarter implies GSK’s Relenza production is tracking at about that rate.
There have been unconfirmed reports that GSK may double or treble capacity
during calendar 2007, and although we have no knowledge of the potential
timing, we know GSK’s North Carolina facility has been commissioned.
On the marketing front, there have been very encouraging indications for
Relenza in the market. The drug’s role in government pandemic stockpiling is
strengthening with growing concern about the emergence of Tamiflu-resistant
flu strains. There are also concerns about the side effects of Tamiflu,
particularly its effect on the central nervous system, and the package insert for
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the drug has been updated to include a precaution on neuropsychiatric effects
in the US market.
In the UK, a recent Royal Society and Academy of Medical Sciences report
said the government should be moving towards a 50:50 mix of Tamiflu and
Relenza in the national stockpile, which at the moment is 100 percent Tamiflu.
All this makes the environment look very encouraging for Relenza over the
next two to four years.
corporatefile.com.au
You expect the company to deliver a net profit for the full year ending June
2007. What assumptions underlie this forecast and can you provide more
specific guidance regarding the level of profit expected?
CEO Peter Cook
We’re expecting the second half to be profitable. I’d remind you we’re a
research and development company; what we’re doing is experimental and
occasionally the results don’t quite stack up the way we want, so we need to be
a little guarded. For that reason I’m not prepared to quantify our expectations.
corporatefile.com.au
As at the end of December 2006 Biota had receivables of $19.8 million, up
from $5.9 million six months earlier. Of the total, $15.7 million related to
Relenza royalties. How does this reconcile with the $12.7 million Relenza
revenue booked in the first half and what level of cash royalties will Biota
receive before the end of June?
CEO Peter Cook
GSK pays us the Relenza royalties annually in arrears on a year ending April.
So at the end of December we held eight months of receivables, whereas we
reported six months of sales. We’ll receive the cash payment for the royalties
late in June, so we’d typically end the financial year, and start the new financial
year, with high cash reserves.
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Operating cash flow remained negative in the first half, with cash outflow of
$3.9 million, compared with $3.6 million in the previous corresponding period.
You’ve previously indicated you expect underlying operations to be cash flow
positive in the current year. Do you remain on track to achieve this?
CEO Peter Cook
As we’ve just discussed, the first-half cash outflow was a function of the fact
our Relenza royalties are paid annually and are not in sync with our financial
year. Because the cash payment of the royalties will occur in the second half,
we expect to be cash positive for the second half, and for the full year.
corporatefile.com.au
Excluding litigation expenditure, Biota’s total expenses increased to $12.8
million in the first half, up from $9.5 million in the previous corresponding
period. This primarily reflects increases in product development expenses to
$4.7 million from $3.2 million, and in business development expenses to $2.4
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million from $0.4 million. In which specific areas was the spending increase
focused and do you expect further increases in expenses in the current second
half?
CEO Peter Cook
The project development expenses reflect the fact that all our projects are
accelerating. The first half saw the costs associated with the completion of the
Phase I trials of our Human Rhinovirus (HRV) drug as well as expenditure
under our programs with MedImmune and Boehringer Ingelheim(BI).
In the case of business development expenses, the largest single item was $1.8
million in third-party payments to the Commonwealth Scientific and Industrial
Research Organisation (CSIRO) and the Victorian College of Pharmacy, which
are beneficiaries of a portion of our Relenza royalties. There has also been a
slight increase in our overall business development expenses relating to the
setting up of our Australian business development group under Leigh Farrell,
who joined us in April 2006. We’re rebuilding activity here having closed
down our development group in the US in the first half of the previous
financial year.
As we work toward or get deeper into clinical trials, we’d expect our overall
level of expenditure to go up. The expenditure increases can sometimes be
quite lumpy as you insert significant costs to prepare for and set up clinical
trials, while at other times, for example in the interpretation phase of the
studies which essentially uses in-house resources, the increase is more in line
with underlying costs. It’s difficult to provide a clear picture of exactly when
those expenditures will occur.
corporatefile.com.au
In the first half, litigation expenses increased to $3.4 million from $2.2 million,
with Biota’s legal action against GSK in the discovery phase of the court
process. Under the action, Biota is claiming damages for GSK’s failure to use
best endeavours in the development and marketing of Relenza. What’s the
outlook for litigation costs this year?
CEO Peter Cook
We’ve been in the discovery phase for about 18 months and it’s required a
reasonably consistent level of expenditure, involving the receipt of nearly
300,000 documents from GSK, cataloguing them and understanding their
content. Until recently work on the case has been reasonably constant and
predictable but we’re now drawing up our revised statement of claim, which
has to be lodged with the court by the end of March, and beginning preparation
of our witness statements, which have to be lodged by August. We’d expect to
have litigation expenditure in the range of $7.5 million to $8 million this
financial year.
I must stress that the case is being managed on a project-like basis within the
organisation. We’re clear about our revised statement of claim, we’re very
comfortable with what we’ve found in the discovery documents and we’ll
continue to work toward getting GSK into the court on the scheduled date of
April 1, 2008.
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corporatefile.com.au
First-half sales revenue included research and partnering income of $5.9
million, up from $0.1 million, reflecting contributions from the licensing deals
with MedImmune and BI. What were the respective contributions of the two
deals and what are the expected contributions in the current second half?
CEO Peter Cook
Contractually we’re limited as to what we can say, and it would be
inappropriate for me to break out the two programs. Our accounts show an
aggregate of the programs and our level of expenditure in them and given we
commenced the BI deal very late in the half, the results predominantly relate to
the MedImmune program. You could expect a similar level of activity
progressively building in the BI program in the future.
corporatefile.com.au
The BI program, under a research collaboration and licensing agreement you
announced in November, relates to Biota’s nucleoside analogues to treat
hepatitis C (HCV). Can you comment on the work on this project to date?
CEO Peter Cook
The particular compounds under study in the BI program are novel nucleosides
that are well protected in terms of the intellectual property and have a known
mechanism of action during the replication cycle of HCV. They are however,
very early in their development phase, and there’s a lot of work needed before
we could contemplate taking them to human studies.
We’ve enjoyed considerable contact with BI in setting up the administrative,
scientific and intellectual property aspects of the program. With the experience
of three or four licensing deals in the past, we’re very encouraged by the
calibre of the people on the BI side and the efficiency with which they’re
approaching the project.
corporatefile.com.au
You’ve previously indicated Biota could potentially receive a milestone
payment this year if the Respiratory Syncytial Virus (RSV) compounds you’re
developing under the licensing deal with MedImmune enter Phase I study.
What’s the current progress on the project and are the compounds still on track
to go into Phase I before the end of June?
CEO Peter Cook
Before we take a compound into the clinic, it has to undergo a “stage gate
review,” which looks at the accumulated data built up during the pre-clinical
studies. The RSV stage gate review is still on track to occur before the end of
the year. This will be a major review point, so it would be inappropriate to
anticipate what the review group will conclude.
corporatefile.com.au
In August Biota received the first instalment of US$2.4 million of a US
National Institutes of Health award of up to US$8.5 million for the
development of the FLUNET long-acting neuraminidase inhibitors. How did
this impact reported revenue and earnings in the first half, what’s the progress
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in developing the FLUNET compounds and what’s the expected contribution
of the program to full year revenue and earnings?
CEO Peter Cook
Under AIFRS, such grants are recorded as deferred income and taken up as
revenue as the work’s completed. In the first half the project was not
particularly active as we received the grant only in August. Reflecting that,
revenue was just over $100,000. We’ve geared up for the project now and
expect it to be a lot more active in the second half.
The FLUNET compounds are dimeric Relenza-like materials, and the funding
we received from the NIH is to get the compounds through all pre-clinical
studies. This is very much early stage drug development, where basic
scientific information relating to the materials is generated. It’s not a stage
where there are visible or easily recognisable project milestones to be
delivered. Hopefully we’ll be laying the foundations for future clinical
success.
corporatefile.com.au
When do you anticipate announcing the results of the recently completed Phase
Ib trial your human rhinovirus (HRV) drug BTA798? What will be the next
steps in the compound’s development if the trial is successful?
CEO Peter Cook
We expect to release full Phase I results by the end of March. The next step in
the development of the drug will be a challenge study, which is an unusual
Phase II trial.
Normally in a Phase II trial the drug is tested on people who are actually sick,
the Phase I trials having established the safety profile and basic
pharmacokinetics of the drug in healthy people. In a challenge study we give
healthy adults the disease and see how effective the drug is in terminating the
viral infection. Because human rhinovirus (HRV) in otherwise healthy adults
is a reasonably minor, self limiting disease, they can be artificially infected
without putting them at serious risk. This means it’s a relatively inexpensive
and reasonably fast study to demonstrate clinical efficacy.
We’ll still have to take the drug through Phase II studies in real patients, with
larger numbers of people from different age and ethnic groups and different
pre-existing diseases. We’ve always indicated we’ll get to that point before
we’d consider licensing the drug.
corporatefile.com.au
As at the end of December 2006, Biota had no debt and cash in hand of $41.9
million, down from $46.2 million six months earlier. With the prospect of
positive cash flow going forward, would you see the need to retain this level of
cash on the balance sheet? When might you consider returning cash to
shareholders in the form of a dividend?
CEO Peter Cook
As you’re aware, Relenza royalties are the single largest contributor to our
revenue and cash, but they’re received only once a year, in arrears. The cash
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received at the end of one year therefore sustains our operations over the
coming year, so the cash isn’t as abundant as the balance sheet makes it seem.
When you consider the cash requirements of the business, you have to bear two
things in mind. First, the operating cash requirements of the business are
growing, which we’ve discussed in some detail earlier. The second issue is
that we need to carry a high level of cash reserves during the period we’re in
litigation with GSK so our financial security can’t become an issue with the
court or create any doubt about our ability to see the case through.
On the matter of dividends, the point I’d make is that the nature of our work
requires reasonably long time lines. We’ve demonstrated we can deliver value
over time, for example Relenza, MedImmune, BI – all long-term!
Shareholders are investing in a company with long-term promise in its product
pipeline. Therefore, I’d think those shareholders would be happy to see our
resources used to maximise the long-term value of our portfolio.
corporatefile.com.au
Thank you Peter.
For more information about Biota, visit www.biota.com.au or call CEO Peter
Cook on +61 3 9915 3720 or CFO Damian Lismore on +61 3 9915 3721.
For previous Open Briefings by Biota, or to receive future Open Briefings by
e-mail, visit www.corporatefile.com.au
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