Athenex Inc (ATNX) 2017 Q2 法說會逐字稿

Good morning. My name is Karen and I will be your conference operator today. At this time I would like to welcome everyone to the Athenex, Inc. second-quarter 2017 earnings call. (Operator Instructions). Mr. Jim Polson with FTI Consulting, you may begin.

Thank you, operator. Good morning and thank you for joining our conference call as we provide an update on Athenex's business as well as a review of financial results of the 2017 fiscal second quarter. The news release detailing the second-quarter results crossed the wire earlier this morning and is available on the Company's website. A replay of this call will also be archived on the Company's website.

During the course of this conference call the Company will make projections or forward-looking statements regarding future events including statements about financial and clinical milestones anticipated in fiscal year 2017.

We encourage you to review the Company's past and future filings with the SEC which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. You can find our SEC filings in the EDGAR database at www.SEC.gov or in the Investor Relations section of our website at www.Athenex.com.

This morning we are joined by Dr. Johnson Lau, Chief Executive Officer; Nick Riehle, Chief Financial Officer; Jeff Yordon, Chief Operations Officer; Dr. Rudolf Kwan, Chief Medical Officer, as well as several other members of the management team who will be available to answer questions after the prepared remarks. With that I will turn the call over to Johnson for introductory comments.

Good morning. While many of you joining us this morning have been following along with our Company for quite some time, I will start with a brief overview of what we do and what makes Athenex unique. We are a global biopharmaceutical Company dedicated to improving the lives of cancer patients by creating more effective, safer and tolerable treatments.

Our main focus is developing clinical product candidates through our Orascovery and Src kinase inhibition research platforms, which are based on our understanding of human absorption biology and novel approaches to inhibiting kinase activity respectively.

We currently have seven candidates in our clinical pipeline. Our lead candidate in our Orascovery program is Oraxol, an oral form of paclitaxel which is currently in a Phase 3 trial for metastatic breast cancer and has entered into a study for treatment of advanced gastric cancer in combination with ramucirumab through a clinical trial collaboration with Eli Lilly and Company.

In the Src kinase platform our main candidate is the KX-01 ointment for actinic keratosis, a precancerous skin lesion, with two Phase 3 trials expected to commence soon. We are pleased with the recent progress right across our proprietary platforms and expect to build upon this momentum as we work to advance our exciting pipeline. Dr. Rudolf Kwan, our Chief Medical Officer, will provide far more detail on our clinical progress later in the call.

We believe that our product candidates, platforms and scientific expertise in the field of biotechnology and oncology provide us with a competitive advantage in the market. Furthermore, we believe we are uniquely positioned because we are internalizing our commercial infrastructure and supply chain through a variety of internal efforts, acquisitions and partnerships which we believe will enable us to capture greater share of the value as well as minimize the supply chain risk for our proprietary oncology product pipeline.

We have built a commercial sales and marketing infrastructure in the United States and intend to continue to further build out this segment. We expect this segment to sell existing in licensed therapeutically related oncology products as a means of helping to fund our commercial infrastructure.

Through acquisitions we own elements of a high potency oncology supply chain which we believe are important to control in order to minimize risk of disruption. We have crafted our business model in order to capture the market opportunities in two of the largest pharmaceutical markets in the world: the United States, which represents the largest pharmaceutical market in the world, and China, which has identified biotechnology as one of its strategic industries of focus.

By utilizing capital efficient public-private partnerships in the United States and China we are in the process of building cGMP manufacturing facilities in both geographies. We have research and product development teams in both countries, which should allow us to leverage our innovation platform resources including development and regulatory expertise to maximize opportunities in both countries.

We intend to serve as a technology bridge between these markets. We also expect to identify new technology opportunities through acquisitions, licensing or partnering in either market and position ourselves as a gateway between these markets. We plan to leverage the experience gained, relationships built and capabilities developed to date to launch our proprietary oncology products currently in clinical trials.

As you know, we successfully completed our initial public offering in June this year. The offering raised net proceeds of roughly $64 million allowing us to strengthen our balance sheet and providing further funding to advance our drug candidates through clinical trials while ramping up our global operations.

As we move forward as a public Company, our strategic priorities remain focused on advancing our clinical oncology candidates, leveraging our global research and development operations to continue developing an oncology focused product pipeline and building a proprietary commercial platform that can achieve and support global sales, marketing and distribution.

We are confident that our unique business model, comprehensive pipeline and upcoming clinical milestones will position us favorably to execute our growth strategy, move the business forward and continue to creating value for our shareholders.

We would like to thank all of our investors (inaudible) for continued support of Athenex through this exciting new stage for our Company. We would also like to thank all of the hard-working employees of our Company who have made all of this possible. We believe with this kind of sustained effort and commitment we are ideally positioned to continue to deliver on our mission to improve the lives of cancer patients by creating more effective, safer and tolerable treatments.

With that I will turn the call over to Dr. Rudolf Kwan, our Chief Medical Officer, for an overview of our proprietary business.

Thanks, Johnson. I will be going through our clinical program in further detail and providing updates on our pipeline candidates. We have two main technology platforms, Orascovery and Src kinase inhibition. Our Orascovery platform is based on a novel oral P-glycoprotein, or PGP, pump inhibitor molecule HM30181A.

The PGP pump is the plasma membrane protein on the cells of the gut which forms a localized drug transport system and [limits] effective oral absorption of widely used cancer chemotherapeutic drugs such as paclitaxel, irinotecan and docetaxel, thus restricting current usage to intravenous or IV administration.

Our lead candidate is Oraxol, which, as Johnson mentioned, is in a Phase 3 trial for metastatic breast cancer as well as Phase 1 for gastric cancer. Time exposure of paclitaxel in the patient's blood at the effective level can be significantly longer with Oraxol as compared to IV taxol.

In addition to the prospect of increased tolerability and better response rates, our oral dosing regimen is also more convenient and may reduce cost compared to IV paclitaxel and eliminates infusion-related reactions caused by IV administration.

I would like to share some updates on milestones we achieved in the Orascovery platform this quarter. We are currently recruiting and enrolling participants for the Phase 3 Oraxol breast cancer study. This quarter we also announced the initial patient dosing in our global Phase 1b clinical trial collaboration with Eli Lilly of Oraxol plus ramucirumab and gastric cancer.

Additionally, our Chinese subsidiary submitted an IND application to the Chinese FDA for Oraxol. The application was accepted by the Chinese FDA for review and we will keep everyone informed as we receive updates from the Chinese FDA.

Looking towards the second half of the year, we anticipate first interim analysis from our Phase 3 Oraxol breast cancer study. Additionally, we are anticipating feedback from the FDA post interim data on the path forward for our Oraxol new drug application.

Now I would like to turn to our other proprietary research platform. Our Src kinase inhibitor platform based on Src kinase, a tyrosine kinase protein involved in regulating cell growth. Defects in Src kinase might be involved in a number of cancers and inhibiting this protein may limit the growth or proliferation of cancerous cell types.

Our key clinical product candidates in this platform are KX-01 ointment for the precancerous lesions of actinic keratosis and KX-02 oral for glioblastoma multiforme or GBM. Thus far clinical studies indicate KX-01 ointment can produce complete responses without major adverse skin reactions. We completed Phase 2 primary data analysis of the KX-01 ointment this quarter.

We are also developing KX-02 oral which is capable of crossing the blood brain barrier. In preclinical studies, KX-02 has clear, tumors highlighting its potential as a novel therapy for GBM. We received allowance of our investigational new drug application from the Chinese FDA for clinical trials of the KX-02 tablet for GBM in May. Looking ahead to the remainder of the year, our KX-01 ointment is currently expected to commence two Phase 3 studies in the US.

I will now turn it over to Jeff Yordon, our Chief Operating Officer, who will provide an overview of our commercial business and operations. Jeff?

Thanks, Rudolf. I'm pleased to be able to provide an overview and recent progress made across our commercial business, which includes our specialty pharmaceuticals business, 503(b) outsourced facilities business, and global API manufacturing businesses.

Our commercial platform plays a major role in differentiating our Company from other clinical stage biotech and biopharmaceutical companies. We believe that the potential for value creation is much higher for companies that can commercialize their own proprietary products rather than using external commercial partners.

Our commercial segment aims to generate revenues to establish and sustain profitable commercial operations prior to the launch of our proprietary products while also integrating global manufacturing and API oncology capabilities. Basically while generating revenue in the near-term through marketing and distributing products on the market in the United States, we are also setting the infrastructure for the development and commercialization of our clinical proprietary products.

Our commercial business has several strategic partnerships including Gland Pharma, Sciecure Pharma, [Amuna], SunGen Pharma, [Nonkwan] and Amphastar. Athenex Pharmaceutical Division, or APD, our specialty pharmaceuticals business, currently markets 11 products in the US with 18 SKUs. APD anticipates launching additional products during the third quarter of 2017 and has 19 products pending FDA approval.

Athenex Pharma Solutions, or APS, our 503(b) outsourced facility currently markets three products with 10 SKUs. APS anticipates launching additional products during the third quarter of 2017 and has several other products in development. Our supplier relationships also allow us to respond when market shortages develop as we have done recently in the case of sodium bicarbonate.

As you may have seen, we received FDA clearance to address the major US shortage of sodium bicarbonate providing an opportunity for our Company to help supply US market demand for this important product. This FDA clearance allows Athenex Pharmaceutical Division to import sodium bicarbonate 8.4% injection through February 2018 or for the duration of the shortage whichever extends longer.

Nick, our CFO will provide an overview as it relates to the revenue contributions and expectations for our commercial business in his financial commentary. To help support our broader growth strategy we are focused globally on expanding commercial operations in both Europe and China.

In order to exercise better control over the manufacturing process of our clinical trials and API sources, we are strengthening our supply chain by developing large-scale cGMP manufacturing plants in both the US and China. We have strong private/public partnerships notably with the state of New York in building our manufacturing facility in Dunkirk New York close to Buffalo, as well as with the Banan district government for our planned facility in Chongqing China.

Our planned facility in Dunkirk New York, for which we are planning to break ground later this year, represents an important collaboration with the state of New York and will provide a state-of-the-art facility for our business.

We recently obtained property tax incentives and approximately $9.1 million in sales tax incentives related to the development of the Dunkirk facility in addition to the $200 million New York State will contribute to the design, construction and outfitting of the state-of-the-art manufacturing facility.

While our focus as a Company first and foremost remains on developing novel oncology focused therapies in our clinical program, our commercial platform represents an important piece of our business to both generate near-term revenue to help fund our clinical programs and build the capabilities to commercialize our proprietary products when appropriate.

Now I will turn the call over to Nick for a review of our financials.

Thanks, Jeff. Before we walk through the second-quarter financial performance, I want to provide an update for the use of proceeds from our initial public offering. We closed our offering of 6.9 million shares of common stock at a public offering price of $11 per share. This included 900,000 shares issued upon the exercise by the underwriters of the full amount of their over allotments.

The transaction closed on June 19 raising net proceeds of $64 million. The successful completion of our IPO allows us to maintain a strong financial position. Much of the proceeds are being used to help fund our Phase 3 trial of Oraxol for treatment of metastatic breast cancer as well as additional clinical development in our Orascovery platform.

Funds are also being used for the Phase 3 trial for KX-01 ointment for treatment of actinic keratosis and additional clinical development for our Src kinase inhibitor program. Finally, a portion of the funds will be used for working capital, capital expenditures and general corporate purposes.

Now moving on to the second-quarter financial results, revenues for the second quarter were $4.6 million compared to $5.2 million in the second quarter of 2016. The decrease primarily reflects a $1.7 million decrease in API as well as a $0.3 million decrease in both medical devices and contract manufacturing and a $0.2 million decrease in grant revenues. These were partially offset by a $0.9 million decrease -- excuse me offset by [$1.0 million] of revenue from our injectable specialty drug business which commenced sales late in the first quarter.

R&D expenses for the quarter were $17.6 million, an increase of $8.6 million a year ago. The increase was primarily due to increased drug licensing expense associated with Oraxol Phase 3 trial and the anticipated launch of our Phase 3 trial for KX-01 ointment. The increase in R&D expense was somewhat offset by a $1.6 million decrease in stock-based compensation and a $0.6 million decrease in costs associated with preclinical studies.

Selling, general and administrative expenses were $13.6 million in the quarter compared to $4.6 million in the second quarter of last year. The increase was mainly due to headcount costs associated with the commercial platform as well as an increase in share-based compensation expense to $6.2 million reflecting grants made at the IPO.

Cash, cash equivalents and short-term investments were $85 million as of June 30, an increase from $42 million at year-end 2016 and $37 million a year ago. This increase reflects $64 million in net proceeds from the IPO as well as the sale of $30 million of convertible debt prior to the IPO.

I will now provide some details on the financial performance for the first six months ending June 30. Revenue for the period was $9.2 million compared to $9.8 million in the first half of 2016. The decrease primarily reflects a $2.7 million decrease in API. This was partially offset by $1.9 million in initial revenues from our specialty drug business which commenced operations during the period and $0.5 million in licensing fees from our oncology innovation platform.

We will discuss 2017 full-year revenue expectations in just a moment. Cash used in operations for the six months was $49 million compared to $20 million a year ago, primarily reflecting licensing fees paid in the first quarter along with expenses associated with the launch of our specialty pharmaceutical business.

CapEx for the first six months was $33.4 million compared to $0.5 million in the previous year driven for the most part by manufacturing projects associated with the launch of our 503(b) business.

R&D expenses for the period were $44 million, an increase from $15.4 million a year ago. The increase was primarily due to increased drug licensing costs with Hanmi, Gland and Amphastar and costs related to the clinical development of our pipeline. The increase was offset by a decrease in R&D related to compensation of $1.6 million and a decrease in preclinical study costs of $0.8 million.

Selling, general and administrative expenses were $23.4 million in the six months compared to $14.5 million in the year ago period. This increase was mainly due to employee and executive compensation associated with the ramp up of our commercial business and stock grants made at the time of the IPO.

In addition to some of the aforementioned key catalysts and expectations for the back half of 2017, our commercial platform allows us to provide some transparency to our top-line expectations for the full year.

We expect our full-year revenues generated from all segments of the business to be in the range of $30 million to $34 million, which is inclusive of the opportunity created by the sodium bicarbonate shortage here in the US. While such shortages are typically relatively short-term in duration, this opportunity will be a significant contributor of our 2017 revenues and margins.

With that, I will now turn it back to Johnson for some final comments.

Before we open the call for questions, I would like to conclude our prepared remarks with a few summary thoughts on why we are uniquely positioned to succeed in the market.

Our Company boasts a wide range of assets across two research platforms in the commercial segment, meaning that we are not dependent on one binary event to create value for our stakeholders. The diversity of our products makes our Company inherently less risky than many of our biotech peers and should allow us to capture broader market opportunities.

Our commercial platform should help fund our clinical program while potentially allowing us to capture higher rate of return on our proprietary products when and if approved. Additionally, we have many near- and medium-term catalysts across our product portfolio that provide opportunities to create value for our Company and shareholders.

And finally, we boast a seasoned management team bringing a depth of experience across the clinical and commercial platforms of our business, which I'm confident can successfully execute against our long-term growth strategy. At this time we would like to open the call for questions.

(Operator Instructions). Jack Hu, Deutsche Bank.

Thank you. I actually have two questions this morning. The first one is with your ongoing Phase 3 study in breast cancer. So, how was the dosing determined for this study and also where are we in terms of patient enrollment and what are the criteria for interim analysis if you can remind us?

My second question is for our CFO. What are the guidance for cash burn in 2017 and 2018 respectively, if you could give us more color? Thank you.

This is Rudolf Kwan, Chief Medical Officer. Thank you for the question. The dosing for the Phase 3 metastatic breast cancer is based on PK projection we obtain ourselves. So the dosing is 205 milligrams per meter squared per day three days a week each week oral dosing. The enrollment of the study is proceeding well and we are on track to have an interim analysis of the 90 patients this year.

Okay, this is Nick Riehle the CFO. And our cash runway is expected to run out at least to March 2018.

Thank you.

Iris Wang, Credit Suisse.

Thank you for taking my question. The first one, can you please remind us what is the [episode] design for your clinical study Phase 3 for the breast cancer for the Oraxol? And also I want to ask the question from Jack, so what is your current patient enrollment? I understand that the first interim result is based on 90 patients, but what about the total number of patients already enrolled?

The second question is about the KX-02. So, I understand you already got the IND approval from the US. So what about the patient's enrollment for the drug? So, the last question is also about the cash (inaudible) ratio. The CFO just mentioned the cash should be able to support your operation by the end of 2018 and what kind of assumption underlying this guidance?

Its Rudolf Kwan again. The first question regarding the metastatic breast cancer, the study is a superiority design of oral, our Oraxol, versus IV Taxol very much along the same design of the pivotal [Abraxane] study in the registration metastatic breast cancer study design.

The enrollment of the study is in excess of 100 patients as we speak, perhaps around 120 patients enrolled as I speak. The second question is on KX-02. The KX-02 Phase 1 study is ongoing and we are continuing to dose escalate.

Okay, Nick Riehle here. I'm not sure where regarding your source or the timing of the cash running out to 2018, but our expectations are to the March or beyond for 2018.

Okay, thank you for the clarification.

Thank you. That concludes our question-and-answer session for today. I'd like to turn the floor back over to Dr. Lau for any closing comments.

Thank you for your time this morning and interest in Athenex. We are off to a strong start in our first quarter as a public Company. We will continue to focus on advancing our clinical pipeline of oncology focused therapies while developing distributor relationships and commercialization experience through our commercial platform. And we look forward to updating you around all of the exciting clinical and commercial milestones in the coming months. Thank you very much for your attention.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.