Enanta Pharmaceuticals Inc (ENTA) 2015 Q4 法說會逐字稿

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta Pharmaceuticals' fourth-quarter financial results conference call.

(Operator Instructions)

Carol Miceli, Director of Investor Relations, you may begin your conference.

Thank you, Kelly, and welcome to Enanta Pharmaceuticals' fiscal fourth-quarter and year-end September 30 conference call. The news release with our financial results was issued this afternoon and is available on our website at www.enanta.com. You can also listen to the webcast or the replay by going to the investor section of our website.

On the call today is Dr. Jay Luly, President and Chief Executive Officer; Paul Mellett, our Chief Financial Officer; and other members of our senior management team.

Before we begin with our formal remarks, we want to remind you that we will be making forward-looking statements, including plans and expectations with respect to development, regulatory and commercial developments for our license products, and our product candidates and financial projections, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause our actual developments and results to differ materially from these statements. A description of these risks can be found in our most recent Form 10-K and other periodic reports filed with the SEC. In addition, Enanta does not undertake any obligation to update any forward-looking statements made during this call.

I'd now like to turn the call over to Dr. Jay Luly, President and CEO.

Thank you, Carol. Good afternoon, everyone. Thank you for joining us. I'm pleased to be able to discuss the progress Enanta has made over the past quarter and during our recent fiscal year. I'd like to begin with a brief overview of our business strategy.

Early in our history, Enanta utilized a partnering strategy in order to maximize our chances for success in the highly competitive HCV arena. This approach produced the success of an approved combination treatment regimen that included paritaprevir, and provided us a non-dilutive way to fund our Business. Our cash and marketable securities balance is over $200 million. We have royalties on paritaprevir that were running at an annualized rate of approximately $57 million, based on the quarter ending September 30.

Our second protease inhibitor, ABT-493, is being developed as part of a 2-DAA treatment that AbbVie plans to have approved in the US in 2017. Approvals in major markets would make us eligible for up to $80 million in commercialization milestone payments, as well as additional royalties from this product.

Given our current cash balance and the prospects for additional revenue streams, we have the resources in hand to fund significant R&D programs for the foreseeable future. We plan to advance two of our wholly owned programs, a cyclophilin inhibitor for HCV and an FXR agonist for NASH, into the clinic in 2016. We are also advancing other discovery programs in the focus areas of virologic and liver diseases. You'll be hearing more about those programs in the coming months.

Now I want to walk you through the key pieces of Enanta's business and point out why we believe the Company is positioned for success in 2016 and beyond. From a financial perspective, our collaboration with AbbVie has provided a solid foundation on which Enanta can grow. In addition to our strong cash balance, we are receiving royalties from AbbVie's net sales of VIEKIRA PAK, TECHNIVIE, and VIEKIRAX, all of which contain paritaprevir.

Our royalties on paritaprevir were approximately $34 million in our FY15, $14 million of which were earned in our most recent quarter. These sales are still in the first year of launch, and we believe there is potential for upside in AbbVie sales, based primarily on introductions of paritaprevir-containing regimens into new territories and the anticipated introduction of the new once-daily fixed-dose tablet of VIEKIRA combination recently submitted by AbbVie to the FDA for approval. As VIEKIRA sales continue to ramp up and ABT-493 advances toward commercialization, there's real potential for additional milestone payments and higher royalties to Enanta.

Turning now to clinical developments, the last few months have marked important progress for our HCV collaboration compounds, including both ABT-493, as well as paritaprevir. Building on the launch of VIEKIRA PAK, AbbVie recently filed a New Drug Application with the FDA for a once-daily fixed-dosed formulation of the 3 DAAs in VIEKIRA PAK regimen for the treatment of patients with chronic genotype 1 HCV infection. This new once-daily formulation, which is expected to be approved in 2016, would provide a more convenient dosing regimen for patients well in advance of the next-generation regimen approval that AbbVie expects in 2017.

Let's turn now to ABT-493, our next-generation pan-genotypic protease inhibitor, which is being developed in combination with ABT-530, AbbVie's next-generation NS5A inhibitor. Data from AbbVie's SURVEYOR studies of this 2-DAA combination demonstrated that after 12 weeks of treatment with doses at or closest to the Phase 3 clinical dose, SVR rates were 100% in genotype 1 HCV patients, 96% in genotype 2, and 93% in genotype 3. Additional late-breaking data from these Phase 2b studies also showed that non-cirrhotic genotype 1 HCV patients treated for only eight weeks with this combination achieved an SVR12 rate of 97%.

Based on this promising data, AbbVie recently initiated its ENDURANCE-1 study, the first of a series of Phase 3 studies of this next-generation combination. ENDURANCE-1 will study 8- and 12-week courses of this combination in non-cirrhotic genotype 1 HCV patients. AbbVie is planning for FDA approval of this combination in 2017.

Upon its commercialization regulatory approval in key markets, Enanta will be entitled to receive up to $80 million in milestone payments, and we'll also benefit from improved royalty economics because 50% of any net sales of this 2-DAA combination will be allocated to the net sales of ABT-493 for purposes of calculating our annually tiered double-digit royalties for that product. This higher net sales allocation to our product will give us increasing royalties, even at a constant level of AbbVie's total net sales, and it should give us the opportunity to achieve higher royalty tiers more quickly.

The success to date of our AbbVie collaboration, as well as the prospects for its future success, have positioned us to advance our wholly owned discovery and pre-clinical programs on our own without the need for additional dilutive financing. This afternoon, we disclosed in our press release our cyclophilin inhibitor candidate for HCV, EDP-494, and that we expect it to enter the clinic in the first calendar quarter of 2016.

Based on growing concerns regarding resistant forms of HCV, we are now focusing special attention on these so-called Resistance-Associated Variants, or RAVs. Given that certain RAVs can be challenging to treat with approved DAAs, we believe that high-barrier-to-resistance mechanisms such as cyclophilin inhibitors are going to be increasingly important for the treatment of RAVs in the growing number of DAA failure patients. Cyclophilin inhibitors may have the highest barrier to resistance of any class because cyclophilin is a human drug target which, unlike the HCV virus itself, is non-mutating.

NUC inhibitors are also known to enjoy a high barrier to resistance, so we plan to combine a cyclophilin inhibitor with a NUC to create a combination with two high-barrier mechanisms. The goal of this type of combination would be not only to have good activity across genotypes, but also to have good activity against important RAVs.

In this program, we have seen uniform activity of EDP-494 against all HCV genotypes tested so far, namely genotypes 1 through 5, and perhaps more importantly, uniform activity against all genotype 1 RAVs tested to date, including RAVs from all the major DAA classes. These classes include NS3 protease, NS5A, NS5B polymerase inhibitors, both NUC and non-NUC.

For example, most HCV regimens on the market today and currently in development contain NS5A inhibitors that have generated NS5A mutations, ultimately leading to treatment failures. We believe that, over time, real-world treatment failures will continue to emerge, even for the next-generation therapies, and that this will create an opportunity for a regimen such as a cyclophilin NUC-driven combination to potentially be an option for these patients.

Beyond HCV, our initial pre-clinical work in Non-Alcoholic Steatohepatitis, or NASH, has generated several promising leads with excellent potency and activity against the clinically validated target, FXR. We are in the process of conducting pre-clinical studies, and are on track to initiate clinical development with an FXR agonist in 2016. In addition to NASH, we continue to pilot several other programs within our core strengths of virology and liver disease, and look forward to sharing more on these growth areas with you in the coming months.

I'd like to pause here and have Paul Mellett discuss our financials for the quarter and our financial outlook for FY16. Paul?

Thank you, Jay.

I'd like to remind everyone that Enanta reports on a fiscal year schedule. Our fiscal year end is September 30, and we are reporting results for our fourth fiscal quarter and year ended September 30, 2015.

Enanta ended the quarter with approximately $209 million in cash and marketable securities, as compared to $132 million at our September 30, 2014, fiscal year end. That $209 million balance does not include our $14.4 million royalty payment for the quarter, which comes in after quarter end, or the $30 million milestone payment we earned for this month's reimbursement approval of AbbVie's VIEKIRAX in Japan. We expect that these resources will be sufficient to meet our anticipated cash requirements for the foreseeable future.

Our revenue for our fourth fiscal quarter ending September 30, 2015, was $14.4 million, compared to $2.6 million for the three months ended September 30, 2014. This increase in revenue over the prior year was due to royalty income earned on AbbVie's net sales of paritaprevir-containing regimens.

For the 12 months ended September 30, 2015, revenue was $161 million, compared to revenue of $48 million for the same period in 2014. The increase in revenue for the 12 months ended September 30, 2015, was due primarily to a total of $125 million in payments earned from AbbVie for the achievement of US and EU commercialization regulatory approvals of VIEKIRA PAKs and VIEKIRAX, respectively.

We expect to have significant royalty cash flow in the near term, which will continue to be dependent on our collaboration with AbbVie. After earning the $30 million milestone payment for Japan, we are not eligible for any further milestone payments from AbbVie until the commercialization of the next-generation HCV regimen, which AbbVie is planning for 2017.

As we did last quarter, we thought it would be helpful to give some guidance as to how to translate AbbVie's future reported sales of TECHNIVIE and other paritaprevir-containing regimens into estimated royalties for Enanta on a one-step basis. For the quarter ended September 30, 2015, our paritaprevir royalties represented approximately 3% of AbbVie's reported VIEKIRA regimen sales, and we expect royalties to Enanta on reported VIEKIRA sales in the quarter ended December 31, 2015, would continue to be approximately 3% of such sales. This calculation includes our expectations to the amount of VIEKIRA sales allocated to paritaprevir, the net sales adjustment per our collaboration agreement with AbbVie, and the annual royalty tiers under our agreement, which is applied on a calendar year basis.

Any of these factors could change in subsequent quarters. For example, if AbbVie sales include a higher percentage of 2-DAA regimen sales, such as those of VIEKIRAX in Japan where 45% of those sales are included in the total paritaprevir sales for purposes of calculating our royalty, then our royalties would increase.

And it's also important to remember that in January we start a new royalty year, which means our royalties on future net sales reset to the first royalty tier of 10%. Given that the vast majority of Enanta's revenue and cash flow is dependent upon AbbVie's commercialization efforts, we offer this guidance to provide our investors a simpler way to estimate the expected royalty flow to Enanta for the quarter ended December 31, 2015.

Moving on to our expenses, research and development expenses were $7 million and $5 million for the fourth fiscal quarters ending September 30, 2015 and 2014, respectively. For the 12 months ended September 30, 2015, research and development totaled $23.2 million, compared to $18.7 million for the same period in 2014.

The increase in the 3- and 12-month periods year over year are due primarily to increased internal and external pre-clinical costs associated with our proprietary research programs. We expect that our research and development expenses will continue to increase in our next year as we advance our cyclophilin inhibitor and NASH programs into the clinic, and we increase our R&D capabilities.

For our full fiscal year ending September 30, 2016, we expect to incur between $40 million and $50 million of expenses associated with our research and development efforts. These expenses do not include expenses for the development of our licensed product candidates, paritaprevir and ABT-493, which is conducted and fully funded by AbbVie.

General and administrative expense was $3.7 million for the quarter ended September 30, 2015, and $2.8 million for the comparable quarter in 2014. For the 12 months ended September 30, 2015, general and administrative expense was $13.5 million compared to $10 million for the same period in 2014. The increase in G&A in the 3- and 12-month periods is due primarily to higher stock-based compensation expense, as well as additional expenses to support our expanding operations.

Net income for the fourth quarter was $5.8 million, as compared to a net loss of $5 million in the fourth quarter of 2014. For the 12 months ended September 30, 2015, net income was $79 million compared to $34 million for the same period in 2014. The increase in net income during the 12-month period in 2015 was primarily due to $125 million in milestone payments and royalty revenues received.

We expect that our effective federal and state tax rate for FY16 will be approximately 37%. Further financial details will be available when we file our Form 10-K for our FY15.

I'd now like to turn the call back to Jay.

Thanks, Paul.

Looking ahead, Enanta has never been in a stronger position. Our pipeline has yielded paritaprevir, now a part of multiple HCV treatment regimens that AbbVie is commercializing worldwide, and ABT-493, which AbbVie plans to commercialize in 2017.

We have established a strong financial foundation with the development and approval milestones. We are building on it with growing royalties from paritaprevir. And we hold the prospect for further milestones and royalties from AbbVie's pan-genotypic once-daily next-generation 2-DAA treatment containing ABT-493.

We are able to fund our wholly owned pipeline, including advancing a cyclophilin inhibitor candidate into the clinic in the first calendar quarter of 2016, as well as a NASH candidate into the clinic, also in 2016. In addition, our financial resources will allow us to keep our options open for future business development opportunities, and also to fund several other ongoing discovery programs within our core areas of virology and liver disease.

I'd like to stop now and open up the call to Q&A. Operator?

(Operator Instructions)

Your first question comes from the line of Geoff Meacham of Barclays.

Hi, guys. This is Carter on for Jeff. First on 494, thank you for the additional color on how you're thinking with the asset. But with that in mind, is there a path on where you might be able to develop this agent on a faster timeline than recent drugs in hep C? And I guess specifically, are there specific variants that you might prioritize in development versus going forward with more of a pan genotypic approach? And then second question. On the NASH program, is there any additional preclinical data we can expect to hear about prior to you moving into the clinic? Thank you.

Sure, thank you. So in terms of a faster path, the initial path will take the molecule into the clinic and do healthy volunteer studies. I mean, obviously, we've got our eye on some of the key RAVs that are out there. Genotype 1 is clearly a large market, but as it turns out the molecule, as far as we've been able to see, has very good activity across all of the genotypes. So that said, we'll prioritize as we get closer to getting to HCV patients. And we'll have more to say on that exact strategy closer to that time.

With regards to NASH, we're pointing to 2016, I think, for being in the clinic. We're definitely on track for that. And I would expect that we'll have more to say about the program before we go into the clinic.

Thank you.

Yes. You're welcome.

Your next question comes from the line of Jessica Fye, JPMorgan.

Hi, guys. Thanks for taking my questions. First, just a question on R&D spend and the pacing of that spend throughout the year in 2016. If there's any kind of color you can give there. And then my second question is just more on timings and the ENDURANCE 1 study [of -- on] clinicaltrial.gov says the expected completion is on January 2017, recognizing there could be some kind of wiggle room about that date. I'm just trying to understand how AbbVie could get that next-gen combo approved in 2017, and whether they have an expectation that priority review will be granted or whether they expect [you] to priority review voucher, kind of how to think about that in terms of meeting that 2017 timeline?

Hi, this is Jay. I'll answer the second question first and then turn the first question over to Paul. The second question as it relates to AbbVie's timing, I really think we probably shouldn't dive too deeply into that on this call. I don't want to get ahead of AbbVie in terms of the things that they have said. So questions about vouchers or priority review or any of those kinds of questions are best directed toward AbbVie.

What I would say is ENDURANCE 1 is the beginning of a comprehensive pan genotypic program in Phase III that AbbVie has started to set into motion and plans to pretty much get out by the end of this year. So it should be a pretty robust program. As you know, you've grown to see AbbVie do in these sorts of Phase III's, but pinning down more discrete timing than what you've just described, I'm afraid that question should be better directed toward AbbVie. Paul do you want to talk about (multiple speakers)?

Sure. On the question about the pace of our quarterly spend from an R&D perspective, I would suggest that it will be weighted towards the second half of the year with a ramp-up with our external spend in our clinical activities in the second half of the year outpacing the first half.

Okay, got it. And maybe just a follow-up on Carter's question. Could we actually see human data for 494 in 2016?

Well, it really depends on when and where and how we expect to put it out, but it's not unreasonable to assume that.

Got it. Thank you.

Your next question comes from the line of Brian Skorney of Baird.

Hi. This Colleen in for Brian. Thanks for taking the questions. So first, how do you think about the resistance data from Merck? How do you think that will impact the market share if this combo gets approved with the requirement for testing at baseline for mutations? And regarding the second-generation combo that AbbVie is developing, are there any potential weak spots in terms of potential resistance? How many mutations do you think we would need to see in order to achieve resistance to that combo?

Well, it sounds like the first question was about Merck's market share?

Yes.

Yes. It really depends on what the label turns out to be. Quite honestly, I think people are wondering about duration and [Reg FR] independence and how the label will read with regards to potential RAV testing or not. And I think market share, among other things, is going to be directly correlated to how all of that shakes out in their label. I guess we'll know more in a couple of months.

With regards to our next-generation regimen, this was truly a next-generation regimen that when we, and I'm speaking for the ABT-493 part right now. When we got ABT-450 first into the clinic, we moved onto the next-generation program several years ago and undertook a, sort of a painstaking look at all of the various different genotypes, as well as within genotypes looking at the host of different mutations. And so, certainly in the laboratory and so far in the clinic, it's played out very well. In fact, some of the data at the AASLD meeting recently that I quoted, some of the top-line numbers on just a minute ago, those are actually numbers that come from basically an intent-to-treat analysis. So the full story is actually maybe even a little bit more encouraging than that, because in the naive patients that were studied for genotypes 1, 2 and 3, there was no virologic failure at the doses at or closest to the doses that are going to be used in Phase III.

There was no virologic failure in the naive subjects. And there was only one virologic failure in the experienced patients that were in either genotypes 1, 2 or 3, and that was actually one patient in a genotype 3 null responder situation. They were a null responder to [peg RIVA]. And that was the only virologic failure seen at the doses that are relevant for Phase III studies. And additionally the eight-week data that was shown at 97%, one of the patients had to discontinue the study because they had an aggressive cancer that developed, and the patient later died from the cancer. And so without that patient the eight-week data would have been 100%. So overall the package was very strong, even in the presence of some preexisting RAVs in the study. So, so far so good. We feel pretty good about the nex-gen combination. We look forward to putting out more data, a lot more data next year.

Great. Thank you.

Your next question comes from the line of Lisa Bayko of JMP Securities.

Hi. Thanks for taking the question. Just wondered if you had any update on if and when you might be able to provide us with some of the cutoffs for the different thresholds of royalty, which should be very helpful for modeling purposes. Thanks.

Yes. I'm sorry to say that at this point we cannot give more color. We'll attempt to be able to do that in the future. But as of now we are unable. So just to remind people, the lowest royalty tier is 10%, the highest tier is 20%. There are three tiers in between. And as sales mount in the buckets, so to speak, we have the opportunity to climb to increasingly high tiers.

What we're guiding to now, especially since we're substantially still in 3-DAA mode, is that 30% of the sales from the regimen will be allocated to paritaprevir. And then, again, the first royalty tier is 10%, and at some point obviously, that gets blended and then you migrate up. So again, for right now what we're saying for the next quarters, it's going to be more or less in that 3% range. And again, I encourage people to model some scenarios and then at some point, I hope that as things progress it will become clear, either because we've been given clearance to give more detail on that or because people will be able to sort of start to back into some of the numbers. But that's where we stand right now.

Okay. Thanks.

You're welcome.

(Operator Instructions)

Your next question comes from the line of Bill Dezellem of Tieton Capital Management.

I had two questions. First of all, just following up on that last question. So from as you see it today, it is possible that there will be some royalty above the 10%? You'll move into that next tier next quarter? Not that you're counting on it or want us to model that, but it is within the range of possibilities, did we hear that right?

Yes. I don't want to get into a situation on guiding that we will or we won't begin another royalty tier, per se. So I -- unfortunately, I can't go there. When we are able to say it, again we will. And I think people will over time be able to start to glean some of this. But in terms of which quarter and how that will manifest, we'll give more on that at a future point.

Thank you. And then shifting to taxes. Tax rate was much higher this quarter than it was last quarter. Would you share with us the dynamics behind that, please?

Well, I'll speak about the total year. Due to a change in Mass [portment] we were able to reduce our State tax rate. So we did the planning on a 40% effective rate, combining federal and State, and it's down to 37% aggregate for the year.

Thank you.

There are no further questions at this time. I turn the call back over to the presenters.

Well, thank you everybody. We'll be in the office this evening. If you have any further questions, feel free to give us a call. Thank you.

This concludes today's conference call. You may now disconnect.