Aclaris Therapeutics, Inc. (ACRS) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the third quarter Aclaris Therapeutics Incorporated earnings conference call. [Operator Instructions] I would now like to introduce your host for today's conference, Ms. Kamil Ali-Jackson. Ma'am, you may begin.

Thank you. I'm Kamil Ali-Jackson, Chief Legal Officer for Aclaris. Please note that earlier today, Aclaris issued its press release announcing third quarter 2016 financial results. For those of you who have not yet seen it, you will find the release posted in the Investors section of our website at www.aclaristx.com. Joining me for the call today are Dr. Neal Walker, President and Chief Executive Officer; Dr. Stuart Shanler, our Chief Scientific Officer; and Frank Ruffo, our Chief Financial Officer. Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company's future results of operations and financial position, business strategy and plans and objectives for Aclaris' future operations are considered forward-looking statements within the meaning of the federal securities laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties that could cause actual results to differ materially from those reflected in such statements. These risks are described in the Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operation sections of Aclaris' quarterly report on Form 10-Q for the quarter ended September 30, 2016, to be filed with the SEC later today, and other filings Aclaris makes with the SEC from time to time. These documents are available under the financial information section of the Investors page of Aclaris' website at www.aclaristx.com. Additional factors may also be set forth in those sections of our annual report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 23, 2016. We encourage all investors to read these reports and our other SEC filings. All the information we provide on this conference call is provided as of today, and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. Please be advised that today's call is being recorded and webcast. A link to the webcast is posted in the Investors section of our website. I'll now turn the call over to Dr. Neal Walker, President and CEO of Aclaris. Neal?

Thank you, Kamil. Hello, everyone, and thanks for joining us today. As we have done in prior calls, I want to provide an update this morning on the progress we have made during the third quarter of 2016 and then discuss the outlook for the remainder of the year. The highlight of the third quarter was our announcement of the positive results for our Phase II trial of A-101 for the treatment of common warts. In the trial, the 45% concentration of A-101 demonstrated clinically relevant and statistically significant improvement in the mean change in the Physician’s Wart Assessment, or PWA score, and also in complete clearance of common warts. This was a significant milestone for Aclaris, as the data validated the clinical value of our proprietary formulation for A-101 and identified the 45% concentration as a go-forward dose in common warts. Now let me take a few minutes to walk through the results from the WART-201 trial in more detail. This study was a randomized, double-blind, vehicle-controlled clinical trial designed to evaluate the safety and dose response of 2 concentrations of A-101 Topical Solution, both the 40% and the 45%, compared with vehicle in patients with common warts. 98 patients were enrolled in the study at 6 investigational centers within the United States. Of the 98 patients enrolled, 90 completed the 8-week treatment period. The primary endpoint was the mean change from baseline in the PWA score, which was a 4 ordinal score judged one week after the last treatment. Patients treated with the 45% concentration demonstrated a statistically significant change in the PWA score versus placebo at numerous time points from week 4 through the end of the study. And at the end of the study, the P value was 0.01. In addition, the proportion of patients treated with the 45% concentration who achieved complete clearance of the target wart one week after the last treatment was 25.8%, which was statistically significant as compared to the placebo group and had a P value of 0.02. Moreover, the proportion of patients treated with the 45% concentration who achieved a PWA score of clear or barely evident or near-clear one week after the last treatment was 41.9%, which is also statistically significant as compared to the placebo group and had a P value of 0.02. From a safety perspective, A-101 was well tolerated and local skin reactions were primarily mild in severity and similar to placebo. The most frequently reported LSR across treatment groups was mild erythema, which was transient. In terms of thinking about the U.S. market opportunity for warts, IMS data reports that at least 2 million patients seek treatment for common warts from their health care provider each year, with approximately 60% visiting their dermatologist and 40% visiting their pediatrician or general practitioner. Given the safety and efficacy profile demonstrated in this trial as well as the ease of use with just once-weekly administration, we have now decided that A-101 45% would best address the unmet need for treatment of common warts as a prescription drug for patients to use at home. The next step is to perform a Phase IIb study that mimics at-home use in which patients will self-administer A-101 45%. Now pivoting to A-101 for the treatment of seborrheic keratosis, or SK. We were pleased to announce results from a 406-patient observational study conducted at 10 U.S.-based dermatology offices last month, which found that patients with asymptomatic SKs are bothered by their highly visible skin lesions and were very interested in seeking treatment to improve their appearance. The results underscore the desire and need for an effective nonscarring treatment option for this highly prevalent condition. To reiterate, SK is a common undertreated skin condition affecting over 83 million Americans, with the majority of SK patients having lesions on their face or neck: 68% on the face; 56% on the neck; and 85% on the trunk. Findings from the study indicated that 61% of patients took action to hide or disguise their SK lesions. 86% indicated they were somewhat or extremely interested in treatment provided in a dermatologist's office. While no SK treatment has been approved by the FDA, invasive treatment options, including cryosurgery, electrodessication, curettage and surgery do currently exist. Results from this prospective observational study were presented the annual Fall Clinical Dermatology Conference in mid-October, and this data will be published in 2017 in its entirety. As a reminder, we anticipate reporting initial results from all 3 of our Phase III trials in the coming weeks. This includes the 2 pivotal Phase III trials, 301 and 302, and the open-label safety Phase III trial 303. Our goal remains to file an NDA in the first quarter of 2017. I will now turn the call over to Dr. Stuart Shanler to give a brief update on the JAK inhibitor program in alopecia areata, vitiligo and androgenetic alopecia. Stu?

Thanks, Neal. Our JAK program continues to progress as expected. We have ATI-50001 for oral administration for the treatment of the most severe forms of alopecia areata, that's alopecia totalis and alopecia universalis; and ATI-50002 for topical administration, primarily for the patchy form of alopecia areata. We're pleased to report that the IND application for ATI-50001 has been submitted to the FDA, and we begin -- expect to begin a human pharmacokinetic, pharmacodynamic, that's a PK/PD study, before the end of this year, which is slightly ahead of schedule. For the topical version, the ATI-50002, we are on track to submit an IND application and begin a clinical trial in the first half of 2017, which is consistent with our previous guidance. In addition to progressing our JAK inhibitor program for the treatment of alopecia areata and as we reported on our last call, we have initiated preclinical development of additional JAK inhibitors, which we are developing for topical use both in vitiligo and androgenetic alopecia, which is also known as male or female pattern baldness. The program includes the development of ATI-50003, which is a covalently binding JAK3 specific inhibitor, and the preclinical and formulation work continue to progress as expected. I will now pass the call over to Frank Ruffo, our Chief Financial Officer, who will provide you with an in-depth review of our financial results. Frank?

Thanks, Stu. As of September 30, 2016, we had approximately $84 million in cash and investments, which we believe is sufficient to fund our current operating activities through at least the end of the fourth quarter of 2017 without giving effect to potential new business development transactions or financing activities. Yesterday, we filed an S3 shelf-registration with the SEC that would allow us to offer up to $300 million in mixed securities in the future as we build out our business. Included in the registration is a $75 million ATM offering of our common stock under a sales agreement with Cowen and Company. As Neal previously mentioned, we anticipate reporting our Phase III clinical results in our SK trial in the coming weeks. We currently do not intend to draw down in the near-term under our ATM offering. For the 9 months ended September 30, 2016, total operating expenses were $36.9 million compared to $15.9 million for the 9 months ended September 30, 2015. Note that our operating cash burn for the 9 months ended September 30, 2016, was $26.5 million, as our reported operating expenses for that period included $4.2 million in noncash stock-based compensation and the benefit of an increase of $6.2 million in net working capital. Our average monthly cash usage for operations in the first 9 months of 2016 was approximately $2.9 million. We expect that our cash burn rate will increase as we continue our A-101 programs in SK and the common wart indication and as we continue to invest in our JAK inhibitor program. On a quarter-over-quarter comparative basis, our total operating expenses for the third quarter of 2016 was $10.8 million compared to $10.6 million for the third quarter of 2015, while our operating cash burn for the most recent quarter was $9.9 million. Research and development expenses decreased by $2.2 million in Q3 2016 compared to the prior year. This was primarily attributable to an $8 million upfront payment made to Rigel in the prior year for ATI-50001 and ATI-50002 JAK inhibitor drugs, offset by an increase of $4.2 million in expenses associated with our A-101 programs for SK and common warts and the development of our JAK inhibitor programs. We also experienced a $1.2 million increase in stock-based compensation and personnel-related expenses due to increased headcount. General and administrative expenses for the quarter ended September 30, 2016, increased $2.4 million compared to the same period in 2015. The quarter-over-quarter increase is related to higher expenses of $1.5 million in noncash stock-based compensation and personnel-related expenses due to increased commercial and administrative headcount. Other quarter-over-quarter increases included $300,000 in professional fees related to being a public company and $300,000 increase in marketing research costs. Our net loss attributable to common stockholders included $1 million and $2.4 million for the quarter and 9 months ended September 30, 2015, respectively, in accretive cumulative dividends and issuance costs on our pre-IPO convertible preferred stock. These shares remained outstanding through the closing of our IPO in October of last year when the preferred stock was converted into common. These accretions do not exist for 2016. Accordingly, the net loss attributable to common stockholders was $10.7 million for the third quarter of 2016 compared to $11.7 million for the same quarter last year, and $36.6 million for the first 9 months of 2016 compared to $18.2 million for the first 9 months of 2015. As of September 30, 2016, we had roughly 21.4 million shares of common stock outstanding. Assuming no material issuances of equity, we'd expect our fourth quarter 2016 share count to be similar and our full year 2016 weighted average share count to be about 20.9 million. With that, I'll turn the call back over to Neal for a few closing remarks.

Thank you, Frank. 2016 has been a pivotal year for Aclaris as we continue to generate clinical data on our lead development candidates, build out our team and advance our pipeline. We have built a solid foundation, targeting multiple cash pay and white space dermatological diseases with high unmet need. In parallel, we are continuing our precommercial activities with 18 ad boards conducted to date, increased industry conference presence, including poster and podium presentations of our SK observational study results at the recent Fall Clinical Dermatology Conference. We look forward to providing the top line results from our Phase III SK trials in the coming weeks. Thank you for being on today's call. I have also asked Brett Fair, our Senior Vice President of Commercial Operations, to join us for the Q&A. Amanda, can you please poll for questions?

[Operator Instructions] And our first question comes from the line of Louise Chen from Guggenheim.

I had a few here. So first question I had is for the A-101 SK study. Just curious, what size lesions you treated in the Phase II studies? And what are you looking at in the Phase III studies here? And then secondly, on the A-101 for warts, I'm curious what you expect for peak sales or how we should think about peak sales for the product and pricing. And then lastly, here on the ATI-50001 and ATI-50002, could you talk about the market opportunity for these products, and then also how we should think about the pivotal trials here in terms of size, design, cost, anything that you're willing to share? I know it's very early, but just kind of curious what you could tell us there.

Sure. Thank you, Louise. So this is Neal. On the SK study front, the size of the lesions that were studied in the trunk and extremity study were 7 millimeters to 15 millimeters in diameter and 1 millimeter to about 2 millimeters in thickness. On the face study, it rolled down to about 5 millimeters on the lower bound. And so in the combined Phase III studies, the sizes were from 5 millimeters mimicking the face up to 15 millimeters at the top end and the thicknesses were the same. The next question in terms of the A-101 for warts, I'll hand that over to Brett Fair, our SVP of Commercial Operations, to make a few comments on that.

Great. Thanks, Neal. Louise, how are you? So in terms of the common wart opportunity, if you look at the pricing comps for the drugs that are proved for external genital warts, you're looking at pricing starting around $600 for a prescription. We really like this opportunity because the common warts is the majority of the market and the warts -- the drugs that are approved for external genital warts, they are not that efficacious in treating it. So that leaves you about over 2 million patients searching for a solution, for this product. So we're really enthusiastic about it. I think it's got good pricing potential and good market potential.

As it relates to the -- this is Neal again. As it relates to the alopecia question -- alopecia areata question, so the market opportunity there, we think, is quite substantial, north of $500 million in the U.S. when we think about overall market size and try to combine the -- those with the severe phenotype and those with maybe the milder phenotypes, the patchy disease. We are developing both an oral and topical because we think the market needs to be addressed by both, whether you want to target those with more severe disease or you want to induce a quicker remission. And then some of these patients can be quite chronic, so you want to have something that you can use over a long period of time. In terms of the Phase III pivotal designs, a touch early to comment on that, but I think in general, these studies need to run about 6 months to make sure that you see a fulsome effect. And we'll, of course, have to be generating long-term data in these patients since it will be used chronically.

And our next question comes from the line of Tim Lugo from William Blair.

Can you -- I guess, maybe a question for Neal or Stu. Can you talk about how the scoring and assessment is going to be done in the Phase IIb home administration wart study and for -- are those going to be self-assessments? Or will you just have a less frequent physician assessment?

Yes, it's a good question. So we will be bringing them in weekly and the physician will be assessing it. So what we want to do in this next study is just have the patients administer the product. In fact, we'll probably have them administer it on occasion in front of the dermatologist just to control a little bit for that, but at the end of the day, the dermatologist will adjudicate whether it's clear or not.

Okay. That makes sense. And I guess, given the wart study earlier in the quarter or couple of weeks ago and given the 40% formulation efficacy in that study, is there any read-through to the SK trial, maybe in terms of efficacy and/or safety?

I think on the safety question, we continue to see that across the board, between 40% and 45%, that the active is very well tolerated. That wasn't surprising. And if we look back at our preclinical work, that was very consistent. In terms of any read-through on efficacy, we look at -- the 40% has the right risk-benefit profile to be treating an aesthetic condition. The 45%, you need to drive that a little higher in warts. It's a dermal disease versus SK, which is more of a superficial or epidermal disease. So you need a little bit more punch to drive efficacy in a wart, and it's also viral. And so I think it makes sense in terms of the results that we saw where 40% continued to show some trend in wart, but you needed that extra push to get across the finish line with a higher concentration.

That makes sense. And maybe jumping back to the Phase IIb self-assessment study, do you expect those warts to be relatively similar in terms of pretreated and how recalcitrant they were in the 201 study? I think in 201, it was -- you did have some heavily pretreated warts.

Yes, it was a relatively even split between those that were pretreated and those that were treatment naive. And so we'd like to mimic that. I mean, that's real world, right. So we won't exclude -- create any onerous inclusion-exclusion criteria there. I think the important thing to think about is that we're going to start going down into a younger population. This first study was all adults, 18 and over. Getting down into a 12-year-old age group will make it a heck of a lot easier to enroll and help the study move along a little quicker.

[Operator Instructions] And the next question comes from the line of Liav Abraham from Citi.

Just a quick question on the time line for the headline data of your A-101 study in SKs. Is that in line with your prior expectations? I think in the past you said you would have data by the middle of the quarter, which is November -- in the middle of November. Now you're saying over the next few weeks, you expect to have data. So just wanted to confirm that this is in line with prior expectations. And then secondly, on the commercial front, if you can just provide some kind of color as to the progress you are making in preparing for the launch of A-101 in SK lesions.

Sure. Thank you, Liav. Yes, so to your first question on time line, very -- it's consistent. It's exactly when we are thinking about the top line data, that has not changed. And in terms of your second question about market prep, we've spent a lot of time over the course of this year working on all fronts, building out the team. We have -- all the strategic thinkers are currently in-house. We have VP of -- SVP of Commercial, which is Brett, and I'll have him comment in a second. We have a VP of Sales, that was on-boarded in the second quarter of this year. We have VP of Marketing -- Director of Marketing. We have a team of 7 now that's working on this project. And I'll turn it over to Brett just to provide you a little bit more detail.

Thanks, Neal. Liav, so as Neal said, we're well ahead here in terms of we have the right team in place. So all our infrastructure readiness activities, we're ahead on all of those. We have a clear view on each of them and we're like several [indiscernible] ahead. The key thing for us is really driving disease state awareness right now. So we have a lot of activities and initiatives that are in flight to do just that. And they've been initiated throughout this year, and we'll continue to increase that in 2017 [indiscernible] for a successful launch. In terms of the sales force build, we have a clear view on the rev profile that we're looking for. And with our experience in dermatology, it puts us in a great place to identify and attract the right talent [indiscernible] who they are. There's a lot of interest in our company right now. We're getting -- our commercial team is -- we're inbounding a lot of people who are expressing interest to join this team as we look to build. So we feel like we're in a really good place.

Okay. Ladies and gentlemen, this does conclude the Q&A portion of today's call. Thank you all for participating in today's conference. And this does conclude the program. You may now disconnect.