BioCryst Pharmaceuticals, Inc. (BCRX) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the BioCryst Fourth Quarter 2011 Conference Call. Today's call is being recorded. At this time, for opening remarks and introduction, I will turn the call over to Mr. Robert Bennett. Please go ahead, sir.

Thank you, and good morning, everybody. Welcome to our fourth quarter corporate update and financial results conference call. Today's press release and accompanying slides for this call are available on our website at www.biocryst.com. [Operator Instructions] Joining me on the call today are Jon Stonehouse, our CEO; Dr. Bill Sheridan, our Chief Medical Officer; and Tom Staab, Chief Financial Officer. Before we begin, I'll read a formal statement as shown on Slide 2 regarding risk factors associated with today's call. Today's conference call will contain forward-looking statements, including statements regarding future results, unaudited forward-looking financial information and company performance or achievements. These statements are subject to known and unknown risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from any future results or performance expressed or implied in this presentation. You should not place undue reliance on the forward-looking statements. For additional information, including important risk factors, please refer to our BioCryst documents filed with the SEC, which can be found on our company website. With that, I will turn the call over to Jon.

Thanks, Rob. Good morning, and thanks to everyone for joining us today. At our Investor Day in September 2010, we presented our strategic plan to create sustainable value based on advancing novel BioCryst discovered drug candidate. Today, almost 18 months later, we've made meaningful progress against that plan and we now have the most promising, risk-balanced development pipeline in the company's history. Today, our portfolio includes 2 Phase III assets, peramivir heading into the home stretch of its Phase III influenza program, which is fully funded by the U.S. government and BCX4208, a gout treatment for which we reported positive results from our Phase IIb trial. And 2 highly innovative BioCryst discovered compound, BCX5191 and BCX 4161, that are on track to be ready to file for first-in-human studies during the second half of 2012. Both of our leading preclinical programs have advanced since our -- since the Investor Day and today, Bill Sheridan, our Chief Medical Officer, will summarize promising preclinical results for BCX5191, our nucleoside analog RNA polymerase inhibitor for the treatment of hepatitis C. He will also provide some details regarding the progress with BCX4161, our potent inhibitor of kallikrein for development as an oral prophylactic treatment for hereditary angioedema. Let me recap the important recent progress in our most mature clinical program. Our Phase II BCX4208 gout program advanced significantly during 2011 culminating in the successful outcome of the Phase IIb 24-week analysis and vaccine challenge sub-study we announced last month. BioCryst is currently preparing for meetings to get a regulatory advice in the U.S., E.U. and Japan to take place in the coming months. We are also actively engaging with potential partners to fund Phase III development and commercialization. The gout market is large and with the BCX4208 differentiating characteristics as shown on Slide 4, we believe it can be an attractive treatment option positioned in a large portion of their patients. For example, it may be used safely and effectively in gout patients with kidney stones and in patients on other medications for chronic diseases, such as hypertension or diabetes. Turning to peramivir. We are well prepared to file an NDA if the ongoing Phase III trial is successful. The strategic importance of peramivir is validated by HHS/BARDA's support of up to $235 million to fund development, as well as activities to support an NDA filing. And on top of that, if approved, we believe a U.S. stockpiling order for peramivir could help fund the company's future in a meaningful way. With this in mind, it's important to remember that timing of 2 study completions is dependent upon the prevalence and severity of flu. Flu prevalence thus far in the northern hemisphere has been relatively mild. There has been some pickup recently, but it's still too early to predict this flu season. In contrast, flu has picked up significantly in Japan where our partner Shionogi sells peramivir under the commercial name, RAPIACTA. We will report out RAPIACTA sales performance for this flu season after we receive this information from Shionogi. Lastly for peramivir, we reported in November that the Phase III study to support U.S. filing includes an interim analysis to determine if the study's enrollment target for the primary efficacy population, which is set at 160, should be revised. Recently, it was agreed with HHS/BARDA that the analysis will now be concluded after the first of 2 events, either enrollment reaching 70% of the current target of 160 or the conclusion of the southern hemisphere flu season later in 2012. Additionally, we've agreed to include a futility analysis. The 3 potential outcomes from the analysis are outlined on Slide 5. Under the first 2 scenario, where the efficacy trend is in favor of peramivir, we would continue the study after concurrence from HHS/BARDA, either the current enrollment target or a higher target depending on the trend. If the target sample size required to maintain power exceeds 320, we would stop the trial as futile and evaluate the data in hand. Thus, the statistical penalty for the interim analysis is small: 0.001 and this is a reasonable approach to resizing the study in the events our original assumptions for sizing were low. With that, I will turn it over to our CFO, Tom Staab, who will discuss our fourth quarter and full year 2011 financial results.

Thank you, Jon, and good morning, everyone. Today, I would like to summarize the key elements of our fourth quarter and full year 2011 financial results and then move to a discussion of the changes in our cash position and our guidance for 2012. Our guiding principle continues to be focusing our cash resources on advancing our portfolio of development programs while carefully minimizing non-critical and non-project spending. Thereby creating greater stockholder value. We've made significant progress on this principle and end fiscal 2011 with a strong balance sheet. Our financial position at December 31, 2011, provides stability and flexibility as we pursue our 2012 objectives. Our fourth quarter 2011 financial results are summarized on Slide 6. Fourth quarter 2011 revenues were $5.2 million as compared to $16.7 million for the fourth quarter of 2010. This change was primarily due to a $9 million decrease in peramivir collaboration revenue associated with a reduction of peramivir activities in 2010 including the completion of the 303 safety study, as well as other fluctuations in clinical trial activity and related revenue recognition associated with our ongoing peramivir 301 Phase III study. Fourth quarter 2011 R&D expenses were $14.1 million, down from $24.1 million in last year's quarter. Comparing the period, the mix and overall decrease of R&D spend relates to the reduction of various peramivir and forodesine expenses, including the completion of certain clinical trials for those programs in 2010, partially offset by increased investment in our BCX4208 gout and preclinical programs in 2011. Fourth quarter general and administrative costs decreased 27% to $2.2 million from $2.9 million in 2010, primarily due to lower third-party professional expenses and completing the relocation of our headquarters to North Carolina. As mentioned earlier, we successfully controlled non-essential spending and were able to focus our resources on the advancement of our programs. As you compare our results, please be aware that we have reclassified patent-related legal cost to R&D expense whereas these costs were previously classified as general and administrative expense. Consequently, approximately $400,000 and $1.4 million have been reclassified for the fourth quarter and 12 months ended December 31, 2010. We believe this classification more appropriately reflects research and development expenses and total program costs. Moving below the line, we incurred $1.2 million of non-cash interest expense and a mark-to-market loss of $1.1 million on our foreign currency hedge associated with peramivir payable in Japanese yen. Both charges relate to the royalty monetization transaction completed in March 2011, which added approximately $23 million of non-dilutive cash to our balance sheet. Turning now to the full year 2011 on Slide 7. Total revenues were $19.6 million, compared to $62.4 million in 2010 as collaborative revenue decreased by approximately $42 million. This decrease includes a $25.4 million reduction in peramivir collaborative revenue associated with lower activity and related expenses, as well as a $7 million milestone payment from our partner Shionogi and the sale of $8.3 million of peramivir bulk drug to both Shionogi and Green Cross. Unlike 2010, there was no corporate collaborative revenue in 2011, which contributed over $15 million in 2010. R&D expenses in 2011 decreased to $56.9 million from $83.9 million in 2010. Once again, this decrease is largely due to the reduction of activity and completion of certain peramivir and forodesine clinical trials in 2010. In addition, a portion of this decrease is associated with a $8.2 million of expense associated with peramivir bulk drug manufacture for Shionogi and Green Cross, which occurred in 2010. General and administrative expenses decreased slightly to $12.3 million from $12.8 million in 2010 as 2011 cost-saving initiatives offset one-time headquarter relocation cost, which occurred in the fourth quarter of 2010 and continued into 2011. Moving below the line to other income and expenses for the year, we incurred non-cash interest expense totaling $3.8 million. This interest obligation was funded by royalties from sales of RAPIACTA, as well as from an interest reserve account established at the closing of the monetization transaction. In addition, we have incurred aggregate mark-to-market losses on our currency hedge associated with some royalty monetization totaling $4 million at December 31, 2011. The hedge and mark-to-market losses resulted from the continued strength of the yen as compared to the dollar. In regards to RAPIACTA revenue recognition, we have taken a conservative approach to recognizing RAPIACTA royalty revenue and have elected to defer this revenue until we are comfortable, we have an adequate product return history to record future revenue. Now moving to Slide 8. I'd like to discuss our 2011 cash usage and our 2012 financial outlook. We ended 2011 with a strong cash position of $57.7 million as compared to $66.3 million at December 31, 2010. Our operating cash usage excludes proceeds from our royalty monetization, other non-routine cash inflows and cash posted for hedge collateral. Full year 2011 operating cash use of $29.8 million was approximately $5 million below our guidance of $35 million due to careful management of non-program related expense and improved attention to working capital parameters. We are pleased that we were able to keep our 2011 operating cash usage to approximately $2.5 million per month and roughly equal to the approximately $29 million utilized in 2010 despite experiencing a significant reduction in our peramivir-related collaboration revenue. Moving forward, we will continue to adhere to our guiding principle of directing maximum resources to our development programs and controlling non-project spend in 2012. In regards to our outlook for 2012, we are providing operating cash and operating expense guidance. Based upon current trends, assumptions and our operating plan, we expect 2012 net operating cash use to be in the range of $32 million to $38 million. Based upon the midpoint of this range, our year-end cash position provide approximately 20 months of cash runway to achieve our 2012 objectives. Our range and outlook exclude any consideration of cash inflows, including those inflows which could be derived from out-licensing BCX4208. Any inflows in 2012 would offset and decrease our cash utilization range and increase our cash runway. In regards to expenses, we expect total operating expenses to be in the range of $57 million to $69 million in 2012. As evidenced from our actual 2011 results, our annual results are heavily dependent on peramivir-related operating expenses and these expenses are largely a function of the rate of enrollment in the company's ongoing Phase III clinical trial, which in turn is heavily influenced by the prevalence and severity of influenza in those geographies where we are enrolling patients. That concludes my financial review. And I would like to turn the call over to our Chief Medical Officer, Dr. Bill Sheridan. Bill?

Thanks, Tom, and good morning, everyone. My comments today will focus firstly on the positive BCX4208 gout results announced in January and secondly, on the promising preclinical results for our hepatitis C program, BCX5191, announced in yesterday's press release. I will also update you regarding our progress with BCX4161 for the treatment of hereditary angioedema or HAE. The various studies constituting are robust Phase II proof-of-concept program for BCX4208 as summarized on Slide 9. In Study 203, we enrolled patients who had previously failed to reach the serum uric acid goal of less than 6 milligrams per deciliter after treatment with 300 milligrams of allopurinol once daily. The interim analysis announced in January covered a total of 24-week study drug administration. An archive of the January 9 presentation and webcast provide more detail and these are available on our website under Investor Relation events. This longer duration of blinded study drug administration showed us a favorable clinical and allopurinol of BCX4208 and persistence of benefit in reaching and maintaining this uric acid goal. Given the BCX4208, mild [indiscernible] effect on lymphocyte, we also evaluated the health of the immune system by measuring antibody responses to standard vaccine to qualified patients in a vaccine challenge sub-study. The results of the vaccine challenge sub-study are outlined on Slide 10. Overall, the response rate to tetanus toxoid are shown in the left panel and PPSV vaccine is shown in the right panel with similar in BCX4208 patients, compared to control patients. The response rate seen in the control patients was similar to literature reports. These findings indicate healthy immune function after 16 or 20 weeks of BCX4208 administration after the [indiscernible] change is stabilized. The health of the immune system in patients receiving BCX4208 was also assist by analysis of the pattern of infection. Slide 11 summarizes the rates and the types of infection adverse events presented as rates of 100 patient-months. The rates of infection adverse events in the BCX4208 was similar to the placebo rate. The types of infection seen are those typically observed in patient population and no systemic [ph] infection was observed. Efficacy results through 24 weeks of treatment are summarized on Slide 12. Left chart shows the proportions of patients reaching the serum uric acid goal for BCX4208 both 12 and 24 weeks were similar for each of those studies and compared favorably to placebo. Daily administration of BCX4208 with allopurinol approximately doubled the proportion of patients reaching goal compared to allopurinol alone in this population of allopurinol in inadequate responders. The positive outcomes outlined on Slide 13 establish a favorable safety and promising efficacy profile for BCX4208. The clinical and laboratory efficacy and safety findings of the 24 weeks concern that we have an attractive Phase III ready asset, that is available for partnering. We will provide an update regarding 1-year results for the ongoing Phase IIb study in third quarter this year. With this data in hand, we now have over 900 patient months of drug experience and no clinical adverse events signal. With its safety profile we're comfortable with BCX4208 is ready to advance into a Phase III program. Now turning to BCX4161. We have concerned the potency and oral file availability of BCX4161 in preclinical model and we have established a predicted therapeutic window for BCX4161 in the prevention of angioedema attack. As a reminder, bradychinon, the mediator of HAE attacks is released by the action of activated plasma kallikrein. This plasma kallikrein is a target for BCX4161. Both plasma kallikrein and an other enzyme tissue effect [ph] 7A are inhibited by sub-nanomolar levels of BCX4161 in assays that use the isolated enzymes. So we proceeded to test the impact of these attributes in plasma phase assay systems. The goal of these studies was to evaluate whether there was an adequate therapeutic window where we could effectively inhibit kallikrein production without impacting the pathway of coagulation that is regulated by tissue effect effected 7A [ph] . The results of those studies are shown on Slide 14 and 15. We tested BCX4161 for inhibition of bradykinin release through the action of kallikrein in a staphylococcus orally stimulated normal human plasma assay that had been described in literature. The potential impact on coagulation was evaluated using a very standard assay called prothrombin time. These results are plugged into panel with the concentration of BCX4161 on the X-axis and the potential supression of bradykinin production on the left Y-axis and the ratio of prothrombin time to the normal prothombin time on the right Y-axis. BCX4161, at submicromolar concentrations was able to inhibit bradykinin production in human plasma despite using a method [ph] similar to a staphylococcus [indiscernible]. The propagation prothrombin time required much higher concentration. If we compare the EC50 to bradykinin insupression 0.02 micromolar to the concentration of double the prothrombin time to 5.2 micromolar, we can see that it would take about 200 more times BCX4161 to affect regulation compared to the amount needed to benefit. So with these results, we are comfortable that we are able to find an anticipated therapeutic range and adequate PK safety margins for clinical trial. As BCX4161 is a charged molecular species achieving adequate bioavailability proved a challenge. I'm pleased to report that our formulation research has resulted in acceptable [indiscernible] oral dosing in preclinical models in different species. The example shown on Slide 15 uses the type of formulation that we are now proceeding to test in IND enabled safety studies. In this experiment, we studied single oral doses of BCX4161, at 30, 100 and 300 milligrams per kilogram. Over 24 hours, the plasma concentration served were well in excess of the bradykinin EC50 defined in human plasma assay that we reviewed earlier. Preclinical PK parameters BCX4161 indicated potential for acceptable schedule for dosing at the clinic for example twice daily. We are proceeding with additional IND enabling evaluations and we are on track for our goal of being ready to file first-in-human trials during second half of 2012. Now I will turn to hepatitis C nucleoside and the inhibitor program beginning on Slide 16. The treatment of hepatitis C is rapidly evolving and as I'm sure you're all aware, this is a very exciting field now. With the introduction of protease inhibitors to the market and our polymerase in to the clinic, the focus is now on developing all our short course combination arrangements with the goal of much better tolerability and superior efficacy compared to today's standards of care. Simultaneously, regulators such as the FDA have shortened the development pathway making development a direct-acting antiviral for hepatitis C very attractive. Turning to Slide 17. Recently several investigations of nucleoside and nucleotide and NS5B have shown compelling biological in early clinical trial. These compounds work by being converted to the active triphosphate forms in the liver. Binding to the active side of the NS5B polymerase and terminating the elongation of the viral RNA chain. That action prevents viral replication. For optimal efficacy, [indiscernible] the nucleoside or nucleotide must demonstrate high potency and pan-genotypic activity. It should be rapidly converted to the active triphosphate form of a drug in the liver, have excellent oral bioavailability and PK triphosphate level. For optimal safety it should show high specificity for the viral target and need only low doses. We believe that the experimental data covered in today's call supports the potential for BCX5191 to be a best-in-class drug. So what is BCX5191? BCX5191 is a novel proprietary adenine nucleoside analog and [indiscernible] inhibitor discovered by scientists at [indiscernible] using our deep expertise in purine chemistry and structure-guided drug design. BCX5191 has an stringent criteria for advancing to IND-enabling studies as follows. [indiscernible] against the isolated NS5B enzyme, activity in the replicon assay, excellent oral bioavailability, conversion to high levels of the active triphosphate both in tissue culture and in the liver, a favorable PK profile supporting once daily dosing specific for the viral enzyme and no evidence of toxicity in standard in vitro screen at high concentration. Slide 19 gives the headline results from a head-to-head comparative frequently experiment of BCX5191 against the most advance nucleoside inhibitor currently in clinical development, GS-7977. In this experiment, we synthesized GS-7977 and doses of rats with either BCX5191 or GS-7977 at the same oral dose. We were in present samples of an analog. The triphosphate of BCX5191 showed that 20 times higher Cmax and about 30x greater exposure over 24 hours compared with the GS-7977 triphosphate in this experiment. Let's go back to our list of criteria for a potential best-in-class drug. Slide 20 details the duplicate values the enzyme in addition to BCX5191 compared to published values for GS-7977, the crompina [ph] type 1 through 4. BCX5191 displays sub-micromolar potencies in a published study, GS-7977 generally showed micromolar potency. Slide 21 shows the antiviral activity of BCX5191 in the replicon assay against genotypes 1a and 1b. The cancer cell line that is the parent line for the replicon assay is not very efficient as converting BCX5191 to the triphosphate form. No move is observed on the other hand are much more efficient achieving more than 50x of triphosphate level and 5x the triphosphate initial half-life observed in replicon cells. The sub-micromolar to low micromolar EC50 in the replicon assays BCX5191 is collocated to be an underestimate of the cells because of low effective drug triphosphate exposure in the replicon cells. The preclinical bioavailability results of BCX5191 summarized on Slide 22 are excellent. BCX5191 is easily absorbed across the G.I. track after dosing with drug dissolving plain water with bioavailability ranging from 71% to 100% across pre-clinical phases. Drug levels in the liver are about 2 to 4x higher than in the plasma indicating active transport of BCX5191 into liver cells. With the drug levels are highly correlate with the present drug levels. BCX5191 is efficiently converted to the active triphosphate in the liver. As shown on Slide 23, we saw high concentrations of BCX5191 triphosphate in the liver with these levels exceeding the levels of drug in the plasma by about 5 to 48. As BCX5191 is an added in nucleoside, we also originated fee levels as a check on safety and we're concerned of these levels remained normal. Slide 24 addresses the specificity. In this assay, we are measuring the action of human RNA polymerase and just to orient you in the panel. The bars from left to right indicate what happens when there is low substrate you get no signal. The second bar is the enzyme with substrate but no inhibitor. The bar on the far right is the enzyme with a no inhibitor and substrate added and these inhibitors are outside and so you get no signal. In contrast, the BCX5191 triphosphate across the dose range between 300 and 330 micromolar we had absolutely no inefficient of the human RNA polymerase II. Slide 25 summarizes the cellular and mitochondrial toxicity screen demonstrating no toxic effects in vitro at concentrations up to 100 micromolar or in one case, 1,000 micromolar across a range of different human cell lines and normal human lymphocytes. Let's take another look at the head-to-head comparisons to GS-7977 shown on Slide 26. The BCX5191 triphosphate levels the higher than the genotype 1b IC50 to the full 24 hours after dosing, whereas in the case of GS-7977, this is attributable to 4 hours. This result indicates that BCX5191 has the potential for a low clinical dose. Importantly, given the biologic results seen with other side inhibitors such as GS-7977 in early clinical trial, the superior drug triphosphate levels that we have seen with BXC5191 may translate into clinical efficacy that is in places good and possibly better than the drug currently in the clinic. Slide 27 recaps our current knowledge of how BCX5191 stacks up. It's highly potent, has excellent bioavailability and is converted to the active form very efficiently in the liver, achieving drug triphosphate concentration that are much higher than for GS-7977 at the same dose level. We are working hard to complete additional nonclinical experiments, including GOP preclinical safety studies, additional comparative pharmacology studies and in vitro evaluations of BCX5191 in combination with other hepatitis C drugs such as ribavirin. We are on track to achieve our goal of beginning first-in-human studies before the end of 2012. We are very pleased with our progress on both of our preclinical programs. Consistent with industry-best practices, we are working on multiple early stage [ph] compounds to ensure we have additional optimized candidates for both the HAE and hepatitis programs. Now, I will hand the call back over to Jon.

Thank you, Bill. Looking ahead the next 18 months should be even more exciting and here's why. First, we expect substantial progress in the development of all these assets during 2012. Second, we firmly believe each one has the potential to contribute significantly to shareholder value in the near and mid-term. As an example, hereditary angioedema represents a multi-$100 million market opportunity where an oral compound such as BCX4161 would be a game changer for patients and for BioCryst. As this is an orphan drug indication with a short and clearly defined clinical pathway, successful development could lead to approval in a much shorter time frame than most development programs. This is a compound that BioCryst intends to commercialize ourselves and retain the full value. Best of all, this is just one of many assets we have at BioCryst to create sustainable value. Lastly, we are confident that we have the capability to move additional highly innovative preclinical compounds towards IND filing beyond 2012. This world-class research is the fundamental driver in establishing BioCryst as an enduring successful company addressing unmet medical needs. This concludes our formal remarks. We'll now open it up to your questions.

[Operator Instructions] Our first question comes from Charles Duncan of JMP Securities.

This is Gena Wang on behalf of Charles Duncan. I think my question is mostly around BCX5191, and it seems very impressive of preclinical data. I'm wondering if you can help us understand a little bit more. I'd like to hear your thoughts on nucleotides versus nucleosides, for example, bioavailability, toxicity and how the BCX5191 can differentiate from other candidates?

Thanks for the question. This is Bill. So I will refer you to an excellent review published by Michael Sofia in the Journal of Medicinal Chemistry that came out in the last couple of weeks online. And in that review, the reasons for the development of nucleotides and prodrugs are detailed. And the fundamental thing here is that all of these drugs work by getting converted to the triphosphate form of the nucleotide in the cell. So if you get -- have a nucleoside, which is the base plus the sugar, and that gets into the cell and the kinase that's in the cell make the triphosphate and inhibits the virus, then you don't need to resort to a nucleotide or a prodrug. So the only reason that nucleotide was synthesized in the first place is because for those particular chemical molecules that was the sugar and the base, in other words, the nucleosides, the enzymes in the cell didn't make the first step, which is the monophosphate. So they have to make the monophosphate. The problem then that they faced was that the monophosphate is highly charged with 3 negative charges and it had no oral bioavailability. So to circumvent that, they had to make a prodrug of the monophosphate of the nucleoside; in other words, the prodrug of the nucleotide. I know this is technically complicated, but that's basically the story and that review lays it out in a very nice way. So at the end of the day, what you want is a drug that gets into the cell and makes high levels of the triphosphate and that had high potency. And the data that we shared today, we believe, is very compelling that we have potential best-in-class asset.

I might add to Bill's comment that this is a great example of our clever drug discovery folks and their ability to get nucleoside to get the phosphate added and to get it into the cell to get triphosphate related. So a great example of how we were able to figure things out when others weren't.

So my second question is, could you help us understand a little bit more regarding the differences in hepatocyte and replicon assays?

Certainly. Thanks for the question. So the HuH-7 cell line is the parent cell line for the replicon assay, and the replicon assay has been very helpful as the screening test to look at activity against sub-genomic forms of the hepatitis C virus. And the reason that this is helpful is because animal models have been very difficult to establish. The HuH-7 cell line is derived from a liver cancer. It's immortalized and it has multiple genetic abnormalities. So in order to understand the results of your assay, you need to understand how well is that abnormal cell line making the drug triphosphate. And as we detailed today, for our drug, that abnormal cell line is not very efficient compared to normal human liver cells. So you have to adjust for that when you interpret the results of the EC 50 value. So the IC 50 values that we have on the enzymes indicate that we have a highly potent molecule. The replicon cell assay results indicates that we have activity against the virus and the liver triphosphate result indicates that we are getting excellent bioavailability and conversion for the active drug in the liver, so you need to line all of those things up. So the difference between the replicon cell and the normal human liver cells are very profound.

So that's very helpful. My last question is we'd like to hear your view on emerging clinical paradigm going forward, so giving many other candidates already like more advanced than you. So would like to hear your thoughts on that.

Sure, and I'll make a couple remarks and then hand over to Jon. From a medical perspective, this is an incredibly exciting time because very, very few patients with hepatitis C who have even been diagnosed with hepatitis C have ever had treatment because the standard of care treatment has been too toxic and too long the duration with quite problematic side effects. So the pegylated interferon-ribavirin combination therapy has a real issue, and even with the addition of protease inhibitors and the bump in efficacy for protease inhibitors, nevertheless the side effect profile dissuades most patients from even attempting therapy. So the future is looking very bright, and there's some excellent reviews published on this topic. And if we can move to an all-oral direct acting antiviral combination regimen with much better safety profile and for a shorter course, suddenly, everything is different. And so suddenly, the people who have never had therapy who have been diagnosed can get treated and cured, and suddenly, you can start asking public health questions about, well, shouldn't we really detect all of the other people with hepatitis C because in the long run, the problem here is the development of cirrhosis and liver failure and liver cancer. And hepatitis C is the number one reason for liver transplant patients, so this is a serious problem. So medically, it's very exciting, and the proof of concept studies that have been published at the scientific meetings for the NS5B active side inhibitors are absolutely unequivocal. So clearly, they have [indiscernible] activity. This class of drugs address genotype I, which has been very difficult to cure with the standard of care, and the future is looking bright. So the class effect here is unequivocal.

And I think from a commercial perspective, anybody who's going to play in this space, and it's a big space as Bill referred to, is going to need a nuke. And so having a nuke that's very potent that may be used at very low doses perhaps have a better safety and tolerability profile perhaps because of its potency, a better risk profile against resistant strains of the virus and who knows, maybe even monotherapy. I mean all of those things are the potential here and from a commercial perspective could make this extremely attractive.

Our next question comes from Steve Byrne of Bank of America.

Bill, I wanted to drill a little more into the 5191. When you showed a greater conversion to the triphosphate form, is any of that effect just due to a molecular weight difference from your molecule versus the GS-7977?

Thanks for the question, Steve. So as I indicated, we dosed the animals on a milligram to kilogram basis. The molecular weight of the GS-7977 is about twice that of 5191. So even if you take that into account, we would have 10x more triphosphate in the liver and 15x more exposure. So it's in the same range, basically.

Okay. So then when you look at the IC 50 and you're in the sub-micromolar range, you're dealing with the triphosphate form there in both cases, right?

Yes, you have to use the triphosphate in the enzyme assay because that's the only thing that will work in that assay.

Okay. And so what is it about the enzyme blocker in your case that makes it more effective at a lower dose? Is it, in your view, a stronger selectivity or just binding affinity to the enzyme?

So I think that it could be a variety of things. I think that this is an adenine nucleoside analog that's pretty unique. One paper I read recently talked about the possibility that adenine nucleosides would have less a chance of getting excised from the elongating RNA strand by pyrophosphate because of characteristics of adenine nucleosides that are different. So we can't say why the IC 50 values might be lower. I would caution, just for full disclosure, the values that we've shown here on Slide 20, the 7977 triphosphate is from a published experiment. So this got quite the same head-to-head quality as the rat liver experiment. But on the other hand, the important point here is that we have a potent compound that gets into the liver and gets converted to the active triphosphate at very high levels very efficiently, and that's what counts at the end of the day.

And Bill, wouldn't you agree that given our history of structure-guided drug design at BioCryst, Babu and his team have been very effective at tight binding highly selective molecules and...

Right. That could be effective, too.

So how many other targets that we're working on down there in Birmingham, Jon?

Stay tuned, stay tuned. And my comments at the end of our prepared remarks, we've got this discovery engine. In 2008 and '09 when small biotech companies were shut down the research to keep the cash, we did make a conscious decision to keep that thing going, and now you'll start to see some of the fruit of their hard work and we're just getting started.

And then just one quick financial one for you, Tom. When Shionogi has some sales of -- and you generate some royalties from that assay in the first quarter, will that flow through your income statement? Or because you've already monetized this forward, will that not flow through the income statement?

Well, Steve, first, thanks for asking a financial question. It's nice to feel the question on a call. But in answer to your question, given the early launch of RAPIACTA, we have made a conscious decision not to recognize the royalty revenue associated with that. It doesn't have anything to do necessarily with the monetization. We expect in the future, once we get a little more history under our belt and we get at least 2 flu seasons under our belt, that we should have history and we'll start recognizing that revenue. But I would not expect to see that in the first quarter because we'll just be getting that information and digesting that, and we're going to be reporting that revenue on a quarter lag. But you will start seeing that revenue probably may be the tail end of 2012.

Our next question comes from Rahul Jasuja of Noble Financial.

I have a couple of questions on the HCV program, and then I'll ask a couple on the gout program. Most of my PK questions sort of have been nicely addressed by the previous analyst, but just a couple more here. You talked about the nucleoside versus the nucleotide difference. We talked about the adenosine versus the uracil for the sugar difference. The other question I have and it may not be an apt question, but let me just sort of see if I can peek deeper into the structure here. Bill, is there another or further differentiation in the class of the chemical structure besides the nucleoside versus nucleotide and besides the adenosine versus the uracil that is unique to your compound versus others?

So we haven't disclosed the structure yet, but I think the question is an excellent one and maybe I could answer indirectly this way. In the review that I mentioned, in the discussion and in the body of the paper, one class of compound that it talked about, we're just changing the hydroxyl to a fluorine on one of the positions in the substitution of one of the bases, change the resistance profile against the virus, right. That was the only change in the molecule. So I think that you have -- each molecule is unique and we have a unique and protected proprietary molecule here with excellent characteristics, and we have to step through the rest of the preclinical pharmacology program and safety program before we get it into the clinic. We are very much looking forward to getting it into the clinic because we think it has great characteristics.

Great. This fluorination is routinely done with a lot of other small molecule drugs. Is this particular to your IP?

You shouldn't take my remarks as indicating anything to do with our IP.

Okay. All right. The other question I have is, I'd sort of asked you to sort of look ahead. Given the dynamic changes in the [indiscernible] hepatitis C space, assuming you're going to do a Phase I study as a single agent looking at safety, beyond that about 1 year, 1.5 years, 2 years from now, what do you envision is going to be the appropriate combination Phase II study? And the reason I ask this is because having the right combination study could make a difference of months and that could make a difference in this very active race for the best combination.

So I think that we -- others are paving the way as you well know, and we will learn from their experiences. And in consultation with experts in the field and with regulated, we will design the most efficient program. So I think we'll be in a great position to be fast forward [ph] .

And then one of the observations that I've looked at is, 7299, the Gilead old pharmaceutical [ph] product -- drug, we've seen Phase III data, I believe, in genotypes II and III, or some Phase III for genotype II and III. The genotype Ia and Ib data may not be as robust as the II and III. Looking at this data set, do you think that your approach will be first target the tougher to treat genotype Ia and then Ib to differentiate further from Gilead's product?

I think the clinicians in the field will want to have drugs that have high potency against genotype Ia and Ib obviously tested in that group because as you said, that's where part of the medical need lies.

Okay. And then let me move on to the gout space and ask a couple of questions there, more in the general sense. And maybe, I guess, this is probably for Jon. So Jon, one of the issues that's been in discussion is where we're going to see some sort of partnership validation in the gout space. What is your thinking and how would you like us to assess the potential for a big pharma partnership given where RD is today and given where you're going in the second half of this year? What's the interest?

So I think since we got the 24-week data and the vaccine challenge data, that there was a remaining question outstanding around safety, and Bill said it in his prepared comments that we now have a body of evidence. We've got more data than anybody in this space, by the way, that's looking at combination therapy with allopurinol that gives us tremendous confidence that we have efficacy-safety balance to allow us to go into Phase III. And so you couple that with the differentiating factors, and we thought very hard about this. We got input from potential partners about how you're going to get the payers to reimburse this drug. So we knew that there were competitors, and so things like drug-drug interactions, a huge part of the population, doctors don't want to change somebody on a beta blocker that they've controlled them for years and kidney stones, again, 20% to 40% of the population. Last thing you want to do is increase the amount of uric acid that's going through the kidneys when somebody's got a propensity for stones. Those are big differentiators and so -- and then I think the last piece is we're looking for a license. We're not looking to sell the company off of our gout program. We have way too much value beyond our gout program, so we're looking for someone who has got the resources, the capability to get this through Phase III and into the market, and then also sees the space and the opportunity on the upside because it's been -- it's a disease that's been poorly managed for years that can really make this a big high-value asset. And so we're willing to structure a license agreement more back-end loaded and I've said that multiple times as well. So that's really, I think, the difference between us and other people in this space.

Our next question comes from the line of Katherine Xu of William Blair.

I have a few questions. First on the 51 -- 5191 program, just curious, so this is -- can you comment on the patent position so far and then your patent strategy on this and your views on the patent space of nukes for hepatitis C. And another question is, have you looked at the competitized update -- uptake versus 7977?

So I'll start with the patent, and then I'll turn it over to Bill. I mean this is a fairly recently discovered molecule, and given the number of players in this space, we did a thorough analysis of the intellectual property in this space and feel that we have a solid intellectual property position with 5191. So there are no issues. We wouldn't be invested in toxs [ph] if we felt that there was a risk there, so that's really all I want to say about the IP. Bill, do you want to...

Sure. In the data we disclosed today, we have an indirect answer to your question which is -- actually, it's also the best answer to the question, which is when you administer the drug orally to rats, measure the triphosphate levels in the liver, and pretty much by definition what you're measuring is the drug triphosphate level in hepatocytes because that is the vast majority of the weight of the liver. So as shown on Slide 26, the levels for the GS-7977 triphosphate in the liver are much lower than was achieved at the same milligram to kilogram dose compared to the level for 5191 triphosphate. So in vitro, I'm not sure how much I would -- how much weight I would put on in vitro data compared to in vivo data.

Okay. And just curious, why did the other people went for nucleotide and the prodrug strategy and then you guys can actually develop a stable nucleoside?

Well, I think if you're very interested in this area, I would definitely recommend reading Michael Sofia's review. And so not all nucleosides are soluble, not all nucleosides are stable, not all nucleosides cross the plasma membrane of cells and get taken up into the cells, not all nucleosides are efficient substrate for the kinase enzymes that add -- especially the first phosphate. That's a big hurdle. It's creating the nucleotide, which by definition is the nucleoside monophosphate. So in order to succeed with a nucleoside, you have to have a soluble, stable, permeable and efficiently phosphorylated nucleoside, and that's what we have. So unless you have all of those things, you have to have some other strategy. So you could take your nucleoside, which is the sugar plus the base, and if it doesn't get phosphorylated to the monophosphate very efficiently, you have to make the monophosphate then you've struck another problem, because adding a phosphate group with pretty negative charges means it will be very soluble, but it will have almost no permeability and almost no oral bioavailability. So then you have to solve that problem by making a prodrug to neutralize the charge, and there are a variety of prodrug approaches that can do that and people have exceeded at doing these things. And GS-7977, in terms of medicinal chemistry, technical success is a great example of that.

So for 5191 it is -- you're saying that there is no prodrug molecule [ph] on it, or there is some kind of structure other than the nucleoside that you have on there like a tail or some sort, I think, that is conferring with these properties?

So to be crystal clear, it is just the nucleoside, if you like, but it's a great nucleoside. So it's soluble, it's highly permeable, has excellent oral bioavailability, gets transported inside the cell and is incredibly efficiently phosphorylated. It doesn't have any problem being converted to the nucleotide, the monophosphate and doesn't have -- and we've measured those, we didn't show them today, and doesn't have any problem getting converted to the triphosphate form which then inhibits the virus. So we didn't need to resort to any of those other maneuvers.

I have another question on 4208. Can you just comment in general how you think -- I mean you commented on the kidney stones and all that. But can you just put it into numbers how much the market you could capture let's say in the field -- in the world 5 years from now when, let's say, the uricosuric agents are on there on the market combining with allopurinol/ULORIC and then for you also, they are combining with allopurinol? And how are you going to position against those newer agents? Then more detail with numbers, the better, if it's possible.

Yes. So let me -- we had a slide in previous presentations that are probably on our website, but we took the NHANES data and the growth rate. The NHANES data currently complements the U.S., which was 8.3 and the growth rate of roughly 4% and projected that out to 2015 from the time we'll have the Phase III data. And if you look at the number of people that get diagnosed, that don't get diagnosed and those that are diagnosed that get treated and not treated, and you'll see it's a very poorly managed disease from that perspective. And then you go down to those that actually get put on the allopurinol and don't get to goal. It's about 2.5 million people. So that's if you don't change the behaviors of physicians and get more people diagnosed and get more people treated. So that's kind of the base low-hanging fruit, and I would say that's where we would compete with lesinurad. And so that is by itself is a huge population and a lot of potential. And if you look at the current price of ULORIC at around $5 a day, financially, you can do the math on that. That's big, that's really big. So that's the base. I've laid out for you the differentiating characteristics, I think, on another one that -- and we've done our own market research, primary market research and another thing that resonates really well for decades that has not been a new mechanism of action in this space. And we are bringing forward a PNP inhibitor that shows synergy with allopurinol, and the concept being low doses of both drugs gives you better efficacy with fewer side effects. And in fact, that resonates very well with physicians in terms of the differentiator. They're looking for new mechanisms of treatment because the stuff they're seeing so far is just a new twist on an old mechanism, and it's not super appealing. So we think the combination of all those things and then driving more people, and this is why we need a partner that can -- that has demonstrated they can build markets, driving more people to get to see their doctor and get treated could double that population. So it's big, really big.

Right. So if we take the 2.5 million people, probably that's a little bit more than 1/2 of them are not adequately controlled by allopurinol alone and then let's say we take the 1.3 or so million people that are sort of candidates for combo therapy. And so is your marketing message sort of going towards the kidney stones? How do you guys know those patients, I mean, versus picking the patients as your candidate versus [indiscernible] let's say ULORIC or allopurinol? How do you differentiate -- how do you know those patients that are suitable for your combo?

So let me just make one clarification. The 2.5 million is the population that doesn't get the goal on allopurinol, so that's the market, right. We're going the second line after you haven't been able to get controls on the standards, the 300 milligram dose of allopurinol, that's what we're going after, and that's 2.5 million people projected out in 2015. So think about it on this concomitant disorders for a moment. If there are problems with drugs that inhibit transporters, right, that's the basis of their mechanism, right, if they inhibit transporters, and they interfere with the metabolism and transporting of other drugs, and these people -- you see it in the published literature, you see it in our study, 1/2 of them are antihypertensive. 40% of them are on statin, 1/4 of them on type 2 diabetes medication. These guys are on polypharmacy, right. The last thing a doc wants to do is put them on a drug that interferes with a medication that they've been on chronically, that they got to adjust the dose. They're just not going to want to do it, and so that's a huge advantage for us. And then on this kidney stone piece, what's interesting there is 20% of the population's actually had an attack, right, so there's clinical evidence of kidney stones. Another 20% is what's called silent stones where you haven't had an attack but when you do imaging, you see a stone. And that, from a marketers perspective, that's wonderful because you go to the doc, you're not going to do a scan on everybody. So you don't know who is in this 20% or not, so why not use a drug that doesn't have a problem with flooding the kidneys with uric acid to lower uric acid.

I have a very simple perspective on the answer to your question. So allopurinol is very good for some patients as a single agent, and if they're doing well on that and the uric acid is controlled, they should stay on that drug. On the other hand, if they haven't achieved the goal and they're not getting effective therapy, they need something added. So I think all of those patients will be candidates for BCX4208.

[Operator Instructions] Our next question comes from Christian Glennie of Edison Investment.

I have a follow-up question on the gout program. Is the Phase III -- start Phase III wholly dependent on finding that partner? Or is this a situation which you could sort of start the Phase III ball rolling initially yourselves given that it's still slightly, what others are doing, although slightly, that they're almost to the point of doing -- completing it themselves?

I think the risk is once you've made the commitment to start a Phase III, you got to have the commitment and that means the resources to do it. And our view has been I'd rather get that in the hands of a capable and resourceful partner before I start it. If we're in the final stages of a negotiation and it makes sense to get some stuff rolling, that's something we'll judge at that point in time. But I think in general, the principle is we want a partner on board to get the Phase III rolling.

Okay. And then just because I slightly missed it, at the end you talked about a program you've commercialized -- developed and commercialized yourselves. Was that 4161?

Yes. This one fits perfectly for a company like BioCryst, right, because as I said in my comments, it's an orphan disease. It's a small number of physicians that treat it, and so it allows us to put up a very small commercial infrastructure that is affordable, and it's a highly profitable disease area as well because there's such a high unmet medical need. And to have a game changer like an oral for preventing attacks could just be a major breakthrough. And so we want to keep that value because it's straightforward and something that we can manage.

And then finally just on the hep C program, I mean sort of and it's still fairly early stages. But any idea about, I guess, an eventual development and commercialization in terms of getting partners on board, a point at which that might be a certain point for you. I mean obviously, in terms of the valuation point, I mean how far would you like to take it?

Yes, so that's an interesting question. So our intention is to partner, right, because it's a highly competitive space and speed matters here. So our intention is definitely to partner, but the open question is when. And I think the way we'll answer that is based on value and speed. And we'll see what the interest level is, we'll see what the potential value is and we'll decide whether or not we'll take it another step or partner at that time. But just based on the current trend that we're seeing with yields right now, it seems that people are going further and further back towards preclinical. And our intention is to partner, so we'll see what the value and speed opportunity is for us, and we'll make a decision from there.

I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Jon Stonehouse for any closing remarks.

Thank you. So as I said in my prepared comments, the next 18 months should be even more exciting than the last 18 months. And the employees at BioCryst, at least in my 5 years, have never been more energized and dedicated to moving these molecules forward. So we look forward to updating you on our progress over the coming months, and thank you for your interest in BioCryst. Have a good day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.