Xenon Pharmaceuticals Inc (XENE) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to your Xenon Pharmaceuticals Q3 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jodi Regts. Ma'am, you may begin.

Thank you Nova. Good afternoon. Thank you for joining us on our call and webcast to discuss our financial and operating results for the third quarter of 2016. Joining me on today's call are Dr. Simon Pimstone, Xenon's President and Chief Executive Officer, and Ian Mortimer, Xenon's Chief Financial Officer and Chief Operating Officer. Following this introduction, Simon will provide perspective on Xenon's progress and then Ian will review our financial results for the quarter ended September 30, 2016. After that, we will open up the call to your questions.

Please be advised that, during this call, we will make a number of statements that are forward-looking, including statements about the sufficiency of our capital position to execute on our business objectives and our ability to operate in a capital efficient manner, the timing of IND or IND-equivalent submissions with regulatory agencies, the initiation of future clinical trials, potential efficacy, future development plans and commercial potential of our product candidates, the timing of and results from ongoing clinical trials and preclinical development activities, our achievement of certain milestones under our collaboration agreement, the plans of our collaboration partners and their interactions with regulatory agencies, the results of our research and development efforts, and the status and timing of additional product candidates and related development activities. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call. We undertake no obligation to publicly update any forward-looking statement.

Today's press release summarizing our third-quarter 2016 results and the accompanying quarterly report on Form 10-Q will be made available under the Investors section of our website at Xenon-pharma.com, and filed with the SEC and also available on SEDAR.

Now I'd like to turn the call over to Simon.

Thank you, Jodi, and good afternoon everyone, and thank you all for your interest in Xenon and for joining our conference call today.

Throughout 2016, we have executed well on our goals and strategies and achieved significant milestones that have strengthened us as a company and that I believe have created meaningful value for our shareholders. We have advanced our research and development pipeline, supported our partnerships, moved our proprietary programs forward and strengthened our financial position, all while continuing to operate in a capital-efficient manner. We believe we have made great progress in advancing towards important inflection points, which sets the stage for some important milestone opportunities over the next six to 12 months.

Today, we believe we are on the cusp of entering the next important phase of our evolution as a company, driven by the maturation of our development pipeline. In the first half of 2017, we anticipate reaching several milestones that we believe could potentially accelerate the growth trajectory of our company and represent important potential value catalysts for the Company. These major events include the topline data readout from our Phase II XEN801 acne trial, our partner Genentech advancing the Nav1.7 pain program into Phase II, the topline data readout from the Phase IIb trial in postherpetic neuralgia in our partnership with Teva, and filing an IND in our Nav1.6 proprietary program for epilepsy around mid-2017. As we review with you today our successful third-quarter performance and prospects for 2017, I hope to convey to you the confidence and excitement that we have about Xenon's future.

I'll start with a discussion of our lead proprietary product, XEN801. XEN801 is a highly differentiated product for the treatment of moderate to severe acne based on a novel mechanism of action. XEN801 is a selective small molecule inhibitor of stearoyl Co-A desaturase-1, or SCD1, an enzyme involved in lipid synthesis that is expressed in sebaceous glands in the skin.

XEN801 is topically administered in a gel form. It is differentiated from currently marketed products as a result of its dual mechanism of action, firstly by reducing the production of lipids produced by sebaceous glands, and, secondly, by inducing apoptosis, or cell death, of the sebaceous glands, essentially limiting the factory of lipid production in the skin.

The XEN801 Phase II clinical trial, which was planned as a 150 subject study and initiated in February, has recently completed enrollment, randomizing in fact 165 patients with moderate to severe acne. We were very pleased to successfully enroll more subjects as this does boost the statistical power of the study. Just as a reminder, with a 12-week study duration, our previous guidance remains the same, and we expect to report topline results in the first quarter of 2017.

To briefly summarize the Phase II trial design, this is a well powered, randomized, double-blind vehicle controlled parallel group study. The active arm is XEN801 applied as a 1% gel once daily, and the placebo arm is a matching vehicle gel also applied once daily, both dosed for 12 weeks. We are assessing efficacy, safety and pharmacokinetics with the primary efficacy endpoint being the percent change between active and placebo comparing total lesion count, that is both inflammatory and noninflammatory lesions, at the end of dosing compared to baseline.

New innovative treatments for acne remain a large underserved market opportunity, and we are pleased to see that broad interest in the dermatology market continues. We believe the keen interest in our acne program from both investors and pharmaceutical companies with a dermatology interest is driven by growing awareness of SCD1 as a novel target with a unique mechanism of action focused on reducing sebum production.

Our earlier data confirmed the ability to effectively get XEN801 to the target in the skin at good levels with extremely low systemic exposure. This truly topical action underscores our belief that XEN801 can demonstrate an attractive safety profile compared with current standard of care retinoid-based treatments. We are looking forward to sharing topline readouts in the first quarter of next year.

Continuing the focus on key events coming up in 2017, I will discuss the advancement of our collaborative programs coming out of our partnerships with Genentech and Teva, which are focused on the development of novel inhibitors of the sodium channel Nav1.7 for pain. Interest in Nav1.7 as a valuable pain target is extremely high, both in the scientific community and the pharmaceutical industry.

Recall that people who lack the Nav1.7 gene and protein have a condition called congenital indifference to pain, or CIP, and cannot perceive pain. People who have gain-of-function mutations in the same gene have the opposite, a severe form of pain known as erythromelalgia. There is tremendous amount of human genetic data supporting the validation of Nav1.7 as a pain target. Xenon is especially fortunate to have two promising partnerships focused on this exciting, highly validated target.

In our strategic alliance with Genentech, we are developing orally active, highly selective small molecule inhibitors of Nav1.7 for the treatment of pain. Genentech moved two differentiated inhibitors of Nav1.7 into Phase I clinical development. The compounds are known as GDC-0276 and GDC-0310.

Genentech has now indicated that it plans to progress to Phase II clinical development within the first half of 2017. While we had previously guided to late 2016 or early 2017, we understand from Genentech that there is ongoing work that needs to be completed prior to finalizing the next stage of clinical planning and prior to committing to an exact start date for the clinical trials. We are excited about this important near-term event, not only because we are eligible to receive a milestone payment when the first patient is treated, but because we believe commencement of the Phase II development will help to establish a leading position for Genentech within the Nav1.7 pain market.

I should mention that we also see further progress in our pain genetics collaboration with Genentech, which is focused on the discovery of novel pain targets in rare human pain disorders.

Our third major value driving event anticipated in the first half of 2017 is the data readout from the Phase IIb trial of TV-45070 in postherpetic neuralgia, or PHN. We are collaborating with Teva on developing a topical sodium channel blocker for peripheral application to treat postherpetic neuralgia.

TV-45070 targets Nav1.7 and other sodium channels to treat conditions of chronic pain. We have previously shown this topical product gets into the skin in humans at high concentrations where the Nav1.7 target is expressed in peripheral pain sensing nerve endings.

Teva is conducting a randomized double-blind, placebo-controlled Phase IIb trial and expects to randomize approximately 330 patients with postherpetic neuralgia. The primary endpoint is the change from baseline in the numeric rating scale to week four, and the secondary endpoints include 30% and 50% responder rates, quality of life, and safety. As per prior guidance, topline results from this ongoing PHN clinical trial are expected in the first half of 2017.

In addition to these three major anticipated clinical milestones, we are also excited about the progress we are making in our proprietary program to develop a potent and selective inhibitor of the sodium channel Nav1.6 for the treatment of seizure disorders, including rare and tractable childhood epilepsies such as Dravet syndrome and SCN8A, or Nav1.6 gain-of-function epilepsy. Sodium channels appear to play a key role in balancing neuroexcitation and neuroinhibition in the central nervous system. And Nav1.6 is the most highly expressed sodium channel in the hyperexcitatory pyramidal pathways in the brain. So, we believe this is a very compelling and differentiated target.

Promising results continue to come out of our preclinical program. Last quarter, I summarized some of the preclinical in vivo data we have generated showing that there are number of different Nav1.6 gain-of-function mutations that exist in humans that causes a severe form of childhood epilepsy. We demonstrated that we can block these different variants with our Nav1.6 inhibitors. In addition, using our Nav1.6 inhibitors, we showed compelling dose dependency in a transgenic SCN8A gain-of-function mouse model of seizures where we presented a very significant reduction in the seizure activity in these animals who had gain of function mutations in their Nav1.6 gene.

Within this past quarter, we have also generated additional preclinical in vivo data with our selective Nav1.6 inhibitor compounds, which supports the potential treatment of adult partial onset epilepsy with a potent selective Nav1.6 inhibitor. These data continue to fuel our great excitement in the Nav1.6 targets and in our Nav1.6 program, which remains on track to file an IND around mid-2017.

As I noted in the beginning of my comments, we believe that these key near-term milestone events coming to fruition separately and together position us on the cusp of realizing potentially major value inflection points for our company. We have a lot to look forward to in the coming six to 12 months.

To summarize these important near-term catalysts in both our proprietary and partner programs, one, we look forward to completion of the well powered Phase II trial of topical XEN801 in patients with moderate to severe acne with topline results expected in the first quarter of 2017. Two, we anticipate the progression of Genentech's Nav1.7 pain program into Phase II development in the first half of 2017. Three, we expect results in the first half of 2017 from Teva's Phase IIb clinical trial for TV-45070 in patients with postherpetic neuralgia. And lastly, we are progressing towards identifying a development candidate to address severe forms of epilepsy, including childhood epilepsies, with our Nav1.6 sodium channel inhibitor program in order to file an IND application around mid-2017.

We believe that our business model of leveraging financially well structured partnerships to participate in large market indication such as pain, combined with our focus on rarer orphan neurological indications in our proprietary program such as severe childhood epilepsy disorders, is a major strength. This strategy enables us to pursue multiple, diverse therapeutic and commercial opportunities, to manage risk and to maximize opportunities for success. And as Ian will describe in his comments, with our successful financing in September combined with our existing cash balance and the potential for an additional $32.5 million in potential milestone payments over the next 24 months, we believe that we are well-positioned to achieve our near term goals.

Before I ask Ian to finally review our financial performance for the quarter, I would also like to just take a moment to formally welcome Dawn Svoronos to our Board of Directors. Dawn is a highly accomplished and experienced pharmaceutical industry executive. Her impressive career includes more than 23 years with Merck with a focus on commercial operations and marketing. Dawn also has experience at the board level. She is currently Chair of the Board for Theratechnolgies and was previously on the board of Medivation, which recently was acquired in a very successful transaction. We are delighted to have Dawn join our Board and believe that, with her vast knowledge of the commercialization process in life-sciences and pharmaceutical companies, she will make a great contribution to the maturation of our Company.

Ian?

Thanks Simon. For the quarter ended September 30, 2016, we reported total revenue of $0.4 million compared to $4.3 million for the same period in 2015. Revenue for both periods is primarily derived from our collaboration agreements with both Teva and Genentech, and the decrease of $3.9 million is primarily attributable to revenue recognized relating to the upfront payment from the collaborative development and license agreement with Teva, which was fully recognized by December 2015, as well as revenue related to the upfront payment from our March 2014 genetics collaborative agreement with Genentech, which was fully recognized by March 2016. And the remaining decrease was due to less full-time equivalent funding from Genentech as we've shifted resources from supporting our collaborative agreements into our proprietary programs.

R&D expenses for the quarter ended September 30, 2016 were $6 million compared to $3.8 million for the same period in 2015, and this increase of $2.2 million is primarily attributable to an increase in spending in our Nav1.6 sodium channel inhibitor program as well as in our XEN801 program which entered Phase II clinical development in February of this year. And that's partially offset by a decrease in Genentech collaboration expenses.

G&A expenses for the quarter were $1.8 million. This compares to $1.3 million for the same period last year. In the quarter ended September 30, 2015, we had a $1 million recovery, and that was recognized due to a decrease in the fair value of liability classified stock options that were granted to certain directors and consultants, and these options were subsequently reclassified back to equity in September 2015. And the remaining change is due to a one-time acceleration of stock-based compensation expense for certain consultants that occurred in the third quarter of last year.

Other expense for the quarter was $0.4 million compared to other expense of $3 million for the same period in 2015, and this decrease of $2.6 million was primarily attributable to a decrease in unrealized foreign exchange losses arising from the translation of Canadian denominated balances to US dollars as compared to the same period in 2015.

Net loss for the quarter was $7.7 million compared to $3.8 million for the same period in 2015 and the change is primarily attributable to lower revenues, higher G&A expenses, largely due to stock-based compensation recovery, higher R&D expenses, and lower unrealized foreign exchange losses.

As Simon mentioned earlier, on September 13, we completed an underwritten public offering of 3.45 million primary common shares at a price per share of $7.50, which resulted in approximately $25.9 million of gross proceeds to Xenon. As part of the financing, there was also a secondary component where certain of our pre-IPO shareholders sold 1.15 million shares. Therefore, the total deal size was $34.5 million on a gross basis. We were very pleased with the terms of the financing and also met our objective of continuing to broaden our shareholder base as we advance our business to important milestone opportunities over the coming quarters.

We ended September 30, 2016 with $69.5 million in cash, cash equivalents and marketable securities, which we believe puts us in a strong financial position to execute on our key near-term business objectives.

And to summarize Simon's earlier comments, we anticipate multiple milestone opportunities from our internal pipeline and from that of our partners. We believe we continue to manage our financial resources efficiently to support the advancement of our proprietary product pipeline and the successful execution of our corporate goals.

So, now, operator, we can open the call up for questions.

(Operator Instructions). Steve Willey, Stifel.

Thanks for taking the questions. I guess, so, with respect to the 801 press release as we think about what we might be seeing in the first quarter of next year, should we expect to see just kind of a generalized statement around either we did or we didn't, or do you expect there to be some level of granularity around both primary and secondary endpoints?

It's Ian. We will, yes. So it will be via press release. The most detailed analysis will be presented at some point in the future in a medical meeting, but we will provide some level of granularity in the press release. So, it will be more than just whether we met both the primary and secondary endpoints. We will give some numbers, and we expect to give some numbers in the press release on where we were versus the vehicle control.

Okay, that's helpful. And then I guess with respect to some of the new preclinical data that you've generated on the Nav1.6 front, I guess adult partial onset -- adult onset -- adult partial onset epilepsy is quite a bit of a larger indication than some of these orphan pediatric seizures that you've previously referenced. So just I know it's still early stage, but just wondering if you think that that, at some point, might now maybe change the way that you strategically view the ownership of this asset going forward. Thanks.

It's Simon. Thanks Steve. Great question. No, I don't think it will change how we view the ownership of the asset. We are committed to taking this asset forward. I think what it will do is play into what the clinical program looks like, and whether or not we will be conducting adult epilepsy studies in parallel with pediatric studies, or whether there is a sequence to it. That work is underway and just defining, but it does, very excitedly, from our standpoint, provide great optionality for the product. The in vivo data that we have now generated, which we have not communicated publicly, we haven't published but will hope to do so going forward, really does open up different opportunities and I think provides a very sort of compelling story for the mechanism, and not just for the intractable childhood epilepsies where we think 1.6 is having an important role, but probably beyond into other forms, more common forms, of epilepsy as well. So we will obviously determine, as we go forward, the impact on the clinical studies, but it's not going to change ownership of asset. It will just speak to what the clinical plan looks like as we go forward.

Understood. Thanks for taking the questions.

(Operator Instructions). Hugo Ong, Jefferies.

Thanks for taking the question. Just on the Phase II trial for acne, and now with your enrollment complete, if you could talk more about what the dropout rate is to date and how you think that will impact the outcome and the way you power the trial.

Thanks Hugo. It's Simon here. We haven't talked about the dropout rates publicly. What we can say is they are low; they are lower than we had modeled into the study. So how that will impact the power is we should have, if that dropout rate continues -- remember we have fully enrolled but that doesn't mean we've completed. A number of these subjects are still going through the study. But given the dropout rates is quite substantially below what was modeled, we should end up with more completers than was originally modeled.

And as I mentioned in my updates, we also created a larger number, or randomized a larger number, than was initially modeled as well. So between the larger number randomized and the lower projected dropout rate, we should have at least a higher statistical power to determine the effect size that was set.

So the initial steps for the study was modeled on 126 completed subjects, 63 per treatment group. And that was sufficient to provide 80% power to show a 15% treatment difference between active and placebo with a standard deviation of 30% at a 5% significant level using a two-sided T-test. So with a lower dropout and a higher randomized number, that 80% power will increase. So you know, you can look at the impact on stats differently, but a simple way to look at it is to see the same -- to see the effect size that was modeled, i.e. a 15% difference, given the larger number of subjects, the study will now have a higher power to allow us to do that, probably somewhere between 80% and 90%.

Got it. That's very helpful. And I'm just curious on the skin biopsies that you did in the Phase I. How does the penetration in the facial skin compared to the back, and how consistent is this difference across patients?

That is a very good question. We don't -- we have not mapped it out ourselves, so we at Xenon have not done back versus face penetration studies with 801 or with any other compound. There is published literature on this.

In general, the published literature is consistent that facial absorption is higher than absorption on the back; skin on the face is more porous. The relative differences in absorption on the face are generally thought to be around two- to five-fold. We don't know specifically what the difference in absorption is between back and face for this product, for 801, using this formulation. So when we quote the likelihood of having greater absorption on facial skin, it's based on I'd say a pretty significant body of literature studying other compounds in an array of different formulations. So, generally, it's a few fold higher. We don't know that specifically for 801.

It's Ian. Just as a reminder, we did and we had it in a press release earlier this year. In the Phase I component of the trial as you referenced, we did look at PK back biopsies, and so it is relevant to your question on how that translates into the face as Simon mentioned. But just as a reminder on those back biopsies, we were seeing penetration into the skin at levels significantly above the IC50.

In fact above the IC90 on average. So we selected our dose from the Phase I study to move into Phase II based on both topical and systemic tolerability, but also based on skin drug concentration. And so we wanted to achieve a level in the skin in the back that was above the predicted IC90, which we did inhibitory concentration where we knocked down 90% of enzyme activity in a human sebocyte in vitro assay. We did that and we're making an assumption, but I think it's a reasonable assumption, based on the literature, that absorption in the face should be higher. Now how much higher, we don't know.

Got it. Okay, great. Thanks for taking my question.

(Operator Instructions). Louise Chen, Guggenheim Securities.

This is Zenah Hasan on for Louise. Thank you for taking the questions and congratulations on the quarter. Just two questions from us.

First, can you remind us of the economic terms you have with Teva and Genentech on your partnered products? and what the next steps are with each of these companies and the milestones you could receive on those products?

And then the second question we have is can you give us some more color on the market opportunity for Nav1.6? I know you mentioned the IND filing timeline, but beyond that, what is your development timeline and what kind of -- what additional color can you give us there? Thank you.

It's Ian. I'll talk through the economics on Teva and Genentech, and then Simon can follow up with the question just on opportunity in Nav1.6. So, as Simon had in his prepared remarks, the way we think about it is what milestones we may achieve over the next 24 months as well as kind of the total milestones and royalties on both of those programs. So, in the next 24 months, we've just aggregated is milestones, so we can receive up to $32.5 million in milestone payments from both Teva and Genentech over the next 24 months. And you can think about that as each of those programs individually enter the next stage of development.

And then in total kind of quantum, the Teva milestones, it's approximately about $300 million in future milestone payments that are heavily weighted to regulatory milestones or filing an approval. And then we have a teens to low 20% royalty on that. We also have an ability to co-promote, so we could co-promote up to 30% in the US.

On Genentech, the total milestones are just north of $600 million, and then we have a mid-single-digit to 10% royalty on commercial sales.

Great. So just the next question was around Nav1.6. The full development timeline is not absolutely pinned down at this point, and that's due to the discussion we've just had is we are mapping out at the moment the development strategy vis-a-vis some of the childhood epilepsies versus adult epilepsies. And of course, that's going to have a very significant impact on the commercial opportunity and what the final commercial estimates are.

I think, when one looks at success of drugs like FYCOMPA, the perampanel product from Eisai, as well as the UCB products, levetiracetam, etc., including for adult onset epilepsies, we know the market opportunity for adult onset -- adult partial onset seizures is high. Some of those have been blockbuster drugs already.

The childhood epilepsies I think certainly to date are leading the way as the work from both GW Pharma and I think following with Zogenix in the Dravet space, and I think certainly GW have put some thought into the childhood epilepsy opportunity for Dravet, and clearly is driving a very sizable market value in that company today.

So, I think it's hard for us to put specific numbers on at this point only because the final development plan, i.e. final indications, which will be the first approval indication, has not been committed to at this point. I think it's fair to say that we certainly will be looking at conducting human proof of concept Phase II studies across multiple indications, and obviously that too will determine the later development strategy and ultimately the approval strategy.

So, we are excited about both the opportunity that has now been proven for adult epilepsy by companies like UCB and Eisai, but of course we are extremely interested, as we've discussed already, on the intractable childhood epilepsies, and we see a very significant market opportunity.

In terms of real development timelines, as I said, we've guided around mid-2017 for our IND or IND-equivalent filing. We expect to spend much of 2017 in the early part of clinical development, so would not expect a Phase II start until 2018. And that's as far as we are able to look at this point.

Thank you.

Sir, I am seeing no questions in the queue at this time. I'd like to turn the call back to Jodi. Ma'am, the floor is yours.

Thanks, everyone, for joining us on the call today. We look forward to keeping you informed of our progress throughout the year. Operator, we will now end the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.