JAMES E. RURKA - MICROCIDE PHARMACEUTICALS - (MCDE)
CEO Interview - published 01/08/01

DOCUMENT # LAP287

JAMES E. RURKA, President, and Chief Executive Officer, Microcide Pharmaceuticals, Inc. Before joining Microcide Pharmaceuticals in February 1994, Mr. Rurka gained a wide range of health care operations experience during his 25 years in the US Pharmaceutical and Biotechnology industries. He was most recently President of the Cetus Oncology division of Chiron Corporation (a 95-person, $40 million sales revenue group), with US responsibility for clinical research, business development, project management and marketing/sales functions for the company’s cancer and infectious disease therapeutic products. Prior to joining Cetus Corporation in 1983 as Vice President-Marketing and Business Development, Mr. Rurka held several group marketing and product management positions at Bristol Laboratories and Schering Laboratories. In these positions, he had direct P&L responsibility for antibiotic and cancer therapeutics businesses of approximately $75-100 million. Mr. Rurka holds a Bachelor’s degree in English with a minor in Business from Seton Hall University, where he also attended its Graduate School of Business.

DONALD D. HUFFMAN, Vice President, Finance and Corporate Development, Chief Financial Officer, joined Microcide Pharmaceuticals, Inc. in June 2000. Mr. Huffman was most recently vice president, finance & administration and chief financial officer at Celtrix Pharmaceuticals, Inc. Prior to Celtrix, Mr.Huffman was vice president and chief financial officer of Endosonics Corporation, and he previously served in the same capacity at Qualimatrix, Inc. In addition, Mr. Huffman held senior financial management positions at Furon Company and Alumax Inc. He received an MBA from State University of New York at Buffalo and a BS from Pennsylvania State University.

Sector: Biotechnology

TWST: Would you mind providing our readers with an overview of Microcide Pharmaceuticals?

Mr. Rurka: Microcide has the deepest and broadest discovery and early development capability in the antibiotics space. We’re a company of about 110 employees today, with roughly 90 scientists, all dedicated to discovering new classes of antibiotics and antifungal products, as well as antiviral drugs, from the company’s three major discovery technology platforms. I would characterize Microcide as the most deeply committed discovery organization among the companies that occupy the anti-infective sector. The three major discovery platforms of the company have produced several product candidates that are now emerging from our earlier discovery work, and we can clearly see a product pipeline developing. This pipeline has multiple products, some that are partnered, and some that are completely owned by Microcide. We have a partnered product currently in clinical trials and expect several others to enter the clinical phase in the next two years, including some that we own. For Microcide, 2001 is an important transition year, where we go from largely a discovery operation to a developing, development company managing a robust product pipeline of early clinical development opportunities. This will become more visible as the year goes on, and we believe the investment community will increasingly see the value we’ve created.

TWST: Who are some of your partners?

Mr. Rurka: We have four major pharma partners. Pfizer is our partner in microbial genomics, where we have been engaged in a five-year research collaboration to discover certain genes that are essential for the bacteria to grow. The collaboration was founded on the premise that new classes of antibiotics can be discovered that will inhibit those “essential” genes, and kill the bacteria. Thus far, we and Pfizer have generated over 100 genetic targets for drug discovery. While impressive, this represents only a small portion of Microcide’s total microbial genomics technology platform, which encompasses more than 350 bacterial, fungal and viral gene targets for drug discovery. Our second collaboration, underway since November 1995, is with Daiichi Pharmaceutical Company in Tokyo. Here we are working in a second technology platform area of the company, called efflux pump inhibition, and again, only a small fraction of the total drug discovery capability of this platform is devoted to the collaboration. Within that program, we and Daiichi are developing an efflux pump inhibitor to combine with an existing antibiotic product for the treatment of serious Pseudomonas infections. We expect Phase I clinicals to begin for that work in 2002. The third corporate partnership is with the RW Johnson Pharmaceutical Research Institute, a division of J&J. That collaboration has been underway since October of 1995 and is in the field of cephalosporin antibiotics. We and J&J have advanced a Microcide cephalosporin discovery for hospital infections into Phase I clinicals, and during the year 2001 expect a transition to Phase II clinicals for the lead product. Behind the lead compound, we have a second cephalosporin in a preclinical phase, with the expectation that it will enter Phase I clinical trials in 2001, and now are starting work on cephalosporins for additional indications, including an orally available version. This all adds up to a powerful, multiple product, cephalosporin franchise. The fourth partnership, recently announced, is with Schering-Plough Animal Health Corporation, for the application of our efflux pump inhibitor technology to veterinary infectious disease indications. Now, just a little bit of color on the technologies. The cephalosporin technology platform is chemistry-driven, and highlights the discovery and development capabilities of Microcide’s medicinal chemistry, pharmacology and microbiology groups, which together number approximately 45-50 scientists, a very large and highly skilled capability. Our efflux pump inhibition program has been a biology-centered research effort, which calls for understanding efflux pumps in various microbes, and utilizing that knowledge to screen for small molecules that will inhibit those pumps. However, three of our five efflux projects are now at the stage of being chemistry-driven as well. These include our Pseudomonas collaboration with Daiichi, our own Fungal Efflux project and our recently-announced collaboration with Schering-Plough Animal Health. Microbes use these pumps to reject the antibiotic by pumping the drug out of the cell. By inhibiting these pumps, you dramatically improve the effect of the antibiotic that’s partnered with the pump inhibitor. The analogy that I would use is Augmentin which is a fixed-combination product where an antibiotic is paired up with a compound that has no appreciable antibacterial effect by itself. It’s sole purpose for being there is to knock out a mechanism of resistance that the bacteria has to the antibiotic. So, this efflux pump inhibition program at Microcide that I’ve described is actually a very deep technology platform that Microcide can continue to mine, to produce multiple Microcide-owned products, each a patentable new chemical entity. Currently we’re targeting five such opportunities.

TWST: Has bacterial resistance to antibiotics come about because they’ve built up a tolerance level to existing antibiotics?

Mr. Rurka: Yes, there are a number of ways that microbes can create resistance, but certainly the largest influence is their exposure to existing antibiotic classes. Recently-approved oxazolidinones are the first new antibiotic class to be marketed in about 25 years; additionally daptomycin, currently in clinical trials, is an example of a new class. Considering the magnitude of the growing resistance problem, this is inadequate progress over the last 25 years. Microbes have had a very long time to become used to existing antibiotics and have evolved resistance mechanisms to virtually all the antibiotic classes that we currently use. This is a major problem worldwide that is getting worse.

TWST: Do you see the products that Microcide currently has in clinical trials right now as representing a new class of antibiotics?

Mr. Rurka: No, they do not constitute a new class, but they do represent an important generational advance on the past members of the cephalosporin class. Our cephalosporin work with J&J, in particular, is a very nice example of how one can discover an improved antibiotic from a very well-established class of antibiotics, cephalosporins, with the new antibiotic having unique activity against organisms with a specific mechanism of resistance. Cephalosporins are the largest class of antibiotics in terms of numbers of products, prescriptions and dollars in the world. What’s unique about Microcide’s cephalosporins is that they were designed to be active against resistant Gram-positive bacteria. All of the cephalosporins that we’ve been able to develop accomplish that very, very well.

TWST: What are some of the most serious forms of bacterial infections?

Mr. Rurka: I think the ones we immediately think of in terms of seriousness would be hospital-acquired infections, or “nosocomial” infections, as they are called. These infections often occur after a surgical procedure or a catheterization or some other invasive process that allows bacteria in the hospital to enter the host. These infections are numerous as well as having high morbidity and mortality associated with them. There are about 40 million hospital admissions each year. Roughly five percent of patients who enter the hospital will acquire an infection there. So that’s 2 million hospital-acquired infections per year, and there are about 80,000 deaths each year associated with these nosocomial infections. Many of these infections today are caused by certain Gram-positive bacteria that are resistant to virtually all antibiotics that we have available, save vancomycin. And, we are beginning to see the development of resistance against even vancomycin, which is often the drug of last resort. Therefore, in the hospital setting, the urgency for discovering new classes of antibiotics effective against these resistant bacteria is very great, indeed. But it’s also possible to see very serious infections outside the hospital in the community setting. Simple middle-ear infections, otitis media in children, are frequently caused by organisms that are resistant to most available oral antibiotics. Consequently, the danger of serious complications in children as a result of what used to be easily-treated respiratory tract infections is becoming a significant concern. The other serious concern in the community setting is the beginning of “leakage” of methicillin-resistant staph strains out of the hospital setting and into the community setting, where physicians are simply not used to looking for them, or selecting antibiotics for the treatment of these strains. So the community setting is also getting to be a very dangerous place.

TWST: What can result from otitis media?

Mr. Rurka: Otitis media can lead to bacterial meningitis in children if not properly treated. That’s a devastating disease, very difficult to treat, a truly life-threatening problem. Physicians who treat pediatric respiratory infections are constantly concerned about making sure that the patient is adequately treated, that the bacterial strains are susceptible to the antibiotics being given. As a result, it’s a natural propensity for physicians to over-prescribe in terms of antibiotic choice. And so, the antibiotic chosen in this situation could end up being one that has a broader spectrum of activity than is absolutely necessary; or is from a newer class that has less resistance associated with it. These more powerful antibiotics end up selecting out resistant strains. Even as they fulfill the physician’s immediate purpose, which is to treat this infection very well, they cause, obviously, greater difficulty for future generations of patients suffering from a similar problem. One hallmark of the antibiotic market, broadly, is that the use, and in some cases overuse, of antibiotics to treat infection causes, over time, the selection of resistant strains which, in turn, require newer classes of antibiotics to treat them. The fundamental principle of Microcide as an organization is to be the source of more new classes of antibiotics, antifungal products and antiviral agents than any other company.

TWST: Do you think it’s necessary to educate people perhaps as to how to use antibiotics so that they don’t overuse them or underuse them?

Mr. Rurka: Yes, there are a number of important public health care issues to address. First of all, patients who receive antibiotic therapy need to take the prescription according to the directions, not simply take a short course of the antibiotic and then put the rest in the medicine cabinet after beginning to feel better. People often like to have them available for the next perceived infection to self-medicate. That’s a very dangerous thing to do. A short course of antibiotic therapy is one very good way of selecting out resistant strains. Also, physicians need to be mindful of using antibiotic therapy judiciously, to not over-prescribe antibiotics or to prescribe a newer class or a more potent class than is absolutely necessary. Other issues on the public health care scene in the hospital setting revolve around epidemiology of infection, being very careful to wash hands between patient contacts and quarantining resistant infections in restricted-access areas of the hospital, to limit their ability to spread. These are all useful, and some would say necessary steps to take, because we do not have a surplus today of effective broad-spectrum antibiotics. So, the work that Microcide is doing is quite important and urgent — that these products emerge in the pipeline that I’ve described to you in time to help solve some of these serious problems.

TWST: Will the cephalosporin class of antibiotics represent the highest area for potential growth for Microcide?

Mr. Rurka: It will in the near term, yes. It represents our most advanced product, the product that has the earliest proof of principle for our approach. In J&J we have a partnership with one of the world’s leading pharmaceutical companies and expect the commercial return from this product to be very large. And so I’d say, yes, in the near term it’s definitely the most important feature on our product landscape. Over the longer term, I think more new products in important new classes will emerge from our other two technologies, which again are efflux pump inhibition and microbial genomics. Those two technology platforms have already yielded compounds in exploratory research that should lead to somewhere between three and eight new products in the pipeline over the next few years. And so the pipeline will become a robust one, largely as a result of these two technologies. The cephalosporin research with J&J, I think, will end up generating multiple products, but it won’t be able to compete in sheer numbers with those other platforms.

TWST: What represents the most significant challenge for Microcide?

Mr. Rurka: As we progress, we are implementing what we call forward integration at Microcide. Our forward integration strategy requires us to strengthen our downstream, late-stage preclinical, clinical and regulatory capability. As our pipeline of products emerges and we find ourselves with four or five products in Phase I and Phase II clinical trials just two years from now, being well armed with the skills necessary to execute on that strategy is probably the biggest challenge. As I said, 2001 is an important transition year for us. We’re evolving the company from an almost strictly discovery organization into a discovery and development organization that has multiple clinical products and a visible product pipeline.

TWST: Would that mean an increase in R&D or a decrease?

Mr. Rurka: I think it’s likely to mean a moderate increase in researchers and the addition of a relatively small number of development staff. So while I’d describe the organization today as 110 people, roughly, in order to execute on our development strategy, we will need to increase that number to perhaps 120 or 125. So it’s going to be a relatively small incremental growth in terms of head count and burn rate of the company, but it will produce an enormous increase in our capacity to build value downstream.

TWST: Do you have an international presence?

Mr. Rurka: No, we do not. We are solely US-based. Our corporate partnerships are worldwide corporate partnerships and for the foreseeable future, we’ll be relying on corporate partners to develop and commercialize our products in Europe and in Asia.

TWST: Would you be at liberty to discuss the rate of revenue growth over the next year?

Mr. Huffman (CFO): We don’t have any approved products, so revenue growth in the near term will not be from product sales. Our revenues have been generated by payments from our partners. Those payments are in the form of upfront payments, milestones, or payments for research related to the program that we do for the partner. In the past few years, revenues have been around $10 million and our expenses have been about $18-$20 million. So that’s meant a burn rate of about $10 million a year. Going forward, we expect royalties from the first products that we described, the cephalosporins, in the 2004/2005 time frame and acceleration of revenue growth from that point. We plan to maintain a strategy of some partnerships and also advancing programs on our own. Therefore, I would expect moderate revenue growth from partnerships as we continue to place more emphasis on our own programs.

TWST: Do partners get some of your technology?

Mr. Rurka: Yes, and they also help create new technology. But more broadly, they also create, even in the best of such relationships, a small-company reliance on the pace of development of the big partner, as well as the development and marketing priorities of the partner. And, of course, what investors in small companies like Microcide want to see is a portfolio of products whose value is largely retained by the company going forward, because that’s the way they’ll get a huge breakout in valuation. And so, again, it’s a balancing act of the security and validation that comes from a large pharma partner against the imperative to keep more of your products for a longer period of time in order to build more value for your own shareholders. That’s the balance we’re trying to strike at Microcide. Mr. Huffman: While partners necessarily get some of our technology, we have been able to leverage the intellectual capital generated by the collaborations into our own programs, as mentioned earlier. In the next few years the candidates Jim mentioned will be moving into the clinical trial phases. Ultimately, we may want to partner some of these, but at a later stage and normally under much more lucrative conditions. At that point, given the number of candidates and products that we expect to come out of the pipeline, I think you’ll start to see revenues grow pretty nicely.

TWST: So you’d like to nurture those products, if you will, until they’re ready to emerge?

Mr. Rurka: Yes. That’s right. If you’re able to take on the risk yourself, to take the products through preclinical development and then demonstrate safety and efficacy in man, you’ve created an enormous leverage point for yourself. This will normally improve the deal that you will ultimately strike with the pharma company for final development and commercialization globally. Mr. Huffman: When you look at the size of the antibiotic market, it’s huge — worldwide, $30 billion. The cephalosporin product that we’re talking about could easily be a half-billion-dollar product in the US and we’ll have multiple opportunities in markets of that size. I would say even the smallest market that we’re looking at now is $100 million. When the revenues start, even if they’re a stream of royalty payments, they can accelerate rather quickly.

TWST: Before we conclude the interview, would either one of you want to comment on the current stock price?

Mr. Rurka: I think the current stock price reflects a number of features both organic to the company as well as reflecting externals. The current stock price of the company is just north of $5 a share. I think it reflects a great deal of uncertainty in the market today and the relative weakness of the sector within which our company is listed. I also believe it reflects a relatively young product pipeline. Until now it has been very difficult for people to see it clearly, because the most advanced of our products have been within corporate partnerships, and the news flow associated with the development status of those compounds has been, of necessity, pretty thin. Going forward we expect, as our products enter clinical trials, that their movement from Phase I to Phase II and then Phase II to Phase III will give Microcide multiple opportunities to demonstrate forward momentum. The number of such products will soon be quite a bit larger, and that will produce a general understanding that Microcide is no longer a discovery stage company, but a development stage company, which warrants a much higher valuation than we’ve been given up until now. I expect that picture to begin to emerge in the next few months as Microcide aggressively tells its story, describes its product pipeline in greater detail, and shows the steady progress of products pushing through the pipeline into clinical trials. Mr. Huffman: Another perspective on stock price would be to look at our market cap. At these levels, just one of the products, take the cephalosporin product for example, would more than justify today’s market cap. I believe that our programs and our work have been under the level of radar, so to speak, and there will be more visibility going forward.

TWST: Thank you. (JF)

JAMES E. RURKA
 President, CEO & Director
DOnald D. HUFFMAN
 CFO
 Microcide Pharmaceuticals, Inc.
 850 Maude Avenue
 Mountain View, CA 94043
 (650) 428-1550
 (650) 428-3550 - FAX
 www.microcide.com

Each Executive Officer who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company. This Interview with James E. Rurka, President, CEO & Director, Microcide Pharmaceuticals, Inc., is accompanied by an Ivestors Brief containing corporate information.

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