Aldeyra Therapeutics, Inc. (ALDX) Q2 2014 Earnings Report, Transcript and Summary

Greetings. Welcome to the Aldeyra Therapeutics' Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Burke of The Ruth Group. Thank you. Mr. Burke, you may now begin.

Good morning, and welcome to the Aldeyra Therapeutics' Second Quarter 2014 Financial Results Conference Call and Audio Webcast. With me today are Dr. Todd Brady, President and Chief Executive Officer; and Stephen Tulipano, Chief Financial Officer of Aldeyra Therapeutics. Earlier today, Aldeyra issued a press release announcing the company's financial results for the second quarter of 2014. We encourage everyone to read today's press release, which is available on Aldeyra's website at www.aldeyra.com. In addition, this conference call is being webcast to the company's website and will be archived there for future reference. Please note that various statements we make during this call about the company's business, financial position, business strategy and plans and objectives for Aldeyra's future operations are considered forward-looking statements within the meaning of the federal securities laws. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks, changes in circumstance, assumptions and uncertainties associated with the company's business. These risks are described in the Risk Factors, the Management's Discussion and Analysis of Financial Conditions sections, Aldeyra's registration statement for the initial public offering and Aldeyra's quarterly report on Form 10-Q for the quarter ended March 31, 2014, which are on file with the SEC and available on the SEC and Aldeyra's websites. Additional factors may also be set forth in those sections in Aldeyra's quarterly report on Form 10-Q for the quarter ended June 30, 2014, to be filed with the SEC in the third quarter of 2014. We encourage all investors to read these reports and our other SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 4, 2014. Aldeyra undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. With that, I would now like to turn the call over to Dr. Todd Brady. Todd?

Thank you, David, and thank you, all, for joining us this morning for our second quarter conference call and our first conference call as a publicly traded company. As many of you know, Aldeyra was initially funded by Domain Associates, a large healthcare venture capital firm from which I led the funding; and Johnson & Johnson Development Corporation, which I recruited as an investor in Aldeyra. And we closed our IPO on May 7, 2014, raising gross proceeds of $12 million. Our lead product, which is called NS2, is part of a unique, innovative program to trap aldehydes, a naturally occurring class of toxic chemicals. High levels of aldehydes have been shown to mediate certain diseases, including both rare and common diseases, especially inflammatory diseases. NS2 traps aldehydes and facilitates the metabolism or the disposal of those aldehydes. We believe that Aldeyra is the only company focusing on aldehyde trapping as a treatment for disease. The first indications we intend to test with NS2 are rare diseases. We believe that rare diseases are attractive targets for several reasons: Number one, a clinical trial for rare diseases are generally inexpensive compared to other indications because such trials require lower number of patients, allowing the company to test more than one indication at once with multiple potential opportunities for success. Number two, therapy for rare indications can be easier to market since there is generally a smaller number of physicians to treat such diseases. And most importantly, number three, patients with rare diseases often have no approved therapies or no therapies that are both safe and effective, meaning that new technology for rare diseases has the potential to make major impact in patients' lives. Thus, we believe that, assuming sufficient funding, commercializing a drug with high therapeutic potential for a rare disease, it could be feasible for Aldeyra. Sjögren-Larsson Syndrome, or SLS, our lead indication, is a very rare disease, believed to be exclusively caused by aldehydes due to genetic mutations in the enzyme that metabolizes fatty aldehydes. Treatment with NS2 is analogous to enzyme replacement therapy, that is replacing a missing function, which in this case is aldehyde metabolism that these patients are lacking. There are believed to be approximately 1,000 SLS patients in the United States. Symptoms of the disease include thick, scaly skin that is extremely dry and accompanied by severe itchiness. Some patients also manifest retinal disease and neurological disorders, but the primary day-to-day challenge of these patients and their caregivers is the severe skin disease, such that many patients routinely scratch themselves excessively that can lead to bleeding. Currently, there is no FDA-approved treatment for SLS, and there are not therapies for the disease other than creams that are largely ineffective or toxic. The second disease we are testing with NS2 is acute anterior uveitis, which affects approximately 25,000 patients in the United States. Acute anterior uveitis is characterized by high aldehyde levels and ocular inflammation that leads to severe pain and loss of vision. Unfortunately, the disease often recurs in patients and is typically treated with topical steroids. The long-term use of steroids will generally lead to cataracts and glaucoma, the latter of which is increased pressure inside the eye that can cause blindness. In support of testing these indications, NS2 has shown promise in cell, animal and human tissue models of disease and in a Phase I clinical trial of NS2 eyedrops. Specifically, we have demonstrated positive results with NS2 and animal testing, including anti-inflammatory activity in 2 different models of skin inflammation and increased speed of lesion healing and reduction in scarring. Additionally, we've demonstrated reduction in free aldehyde levels in human skin and human eye tissues, subjected to extremely dry conditions, and in cells lacking the same enzyme that is missing in Sjögren-Larsson Syndrome. Finally, Phase I results of NS2 used as an eye drop in healthy volunteers showed that the drops were well tolerated, consistent with many studies in animals that support the safety of NS2. Since becoming a public company, we have executed on our strategy as outlined in our documents filed with the SEC by focusing on building an experienced and knowledgeable leadership team and preparing to test NS2 in clinical trials for Sjögren-Larsson Syndrome and acute anterior uveitis. With the capital raised in our IPO, we believe that we are sufficiently funded to complete these 2 clinical trials. Importantly, we remain on track to file 2 investigational new drug applications by the end of 2014 in order to begin clinical testing in both target indications. As is often the case with rare diseases, both clinical trials are relatively short and small trials. We plan to treat approximately 12 patients for Sjögren-Larsson Syndrome and approximately 45 patients for acute anterior uveitis over a period of approximately 2 months. We continue to expect data from these 2 clinical trials in 2015. Our hiring plan to establish strong leadership and development teams remains on track. We have recently hired Steve Tulipano as our Chief Financial Officer. Steve has deep expertise in financial accounting, specifically in the pharmaceutical space, with experience at notable biotech successes such as Biogen. Steve will be a significant asset to our team as we seek to strengthen our financial positioning and pursue growth opportunities. In addition, we have hired and planned to continue to recruit experienced drug development personnel. Our goal is to execute our clinical trials with a small efficient staff that will minimize our overhead. In summary, we believe that aldehyde trapping is applicable to diseases with significant unmet medical needs, and we have a novel product that, if proven effective and is approved for commercialization, has tremendous potential. We believe that reporting results from our 2 clinical trials in 2015 will be significant milestones. In the interim, however, we will seek to gain orphan status from the FDA for the diseases that we are testing. We will seek to continue to publish preclinical data as it becomes available, and we will continue to look for opportunities to grow our business and strengthen our pipeline of assets in order to create value for the company and its shareholders. Now I'd like to introduce Steve Tulipano, our Chief Financial Officer, to discuss our financial results. Steve?

Thanks, Todd, and thank you, all, for joining us today for, as Todd indicated, our first earnings call as a public company. Let me review briefly the results of the quarter. For the second quarter of 2014, we reported a net loss attributable to common of $5.3 million or $1.43 per share based on basic weighted average shares outstanding of approximately 3.7 million. This compares to a loss of $5.47 per share based on approximately 314,000 weighted average shares outstanding for the same period in 2013. Now included in the Q2 2014 loss number is a onetime deemed dividend of $4.1 million. This was the result of a conversion of preferred stock during the quarter. We also had $142,000 of accretion of preferred stock for the quarter. Both of these items are noncash events, and the preferred liabilities have been concluded and net exercised into common stock during Q2. When comparing Q2 2014 to Q2 2013 operationally, the net loss after other income and expense of $1.1 million was favorable to the net loss after other income and expense of $1.6 million in the second quarter of 2013. R&D expenses in the second quarter 2014 were $664,000 versus $325,000 in the same period last year. The period-over-period increase of $339,000 in research and development expenses was primarily related to an increase in Aldeyra's preclinical, clinical and CMC expenditures as well as stock-based compensation. General and administrative expenses were $1 million for the second quarter of 2014 compared with $661,000 in the second quarter of 2013. The increase in general and admin expenses was primarily related to the addition of personnel and other compensation costs and an increase in costs associated with preparing to become a public company. Total operating expenses for the second quarter of 2014 were approximately $1.6 million compared to total operating expenses of approximately $1 million in the second quarter of 2013. Turning to our balance sheet. We ended the second quarter 2014 with cash and cash equivalents of $11.5 million, which reflects proceeds from the initial public offering of May of this year. So that concludes our prepared remarks. We'd like to now open it to questions, if we may. Operator?

[Operator Instructions] Our first question comes from the line of Ram Selvaraju of Aegis Capital.

A couple of things regarding the clinical development program. Could you give us a breakdown, Todd, of the respective costs associated with the Sjögren-Larsson Syndrome and the anterior uveitis programs? Or what's the dollar amount of costs associated with one program versus the other? And then, secondly, could you give us an idea of the timing with which -- or at least the sequence with which you anticipate these 2 studies to report data? And then a question for Steve, if I may. You had mentioned the accretion of the preferred stock in the second quarter. Do you anticipate this to be a recurring item going forward in any way, shape or form? Or can you give us more color on that? And my understanding is that the deemed dividend is a onetime item and will not be recurring. Correct?

That is correct. Both the deemed dividend will not reoccur as well as the accretion of preferred stock will not be a go-forward item. All the preferred shareholders have net exercised, if you will, into common during Q2, so it will only be an issue on a historical basis as we compare year-over-year to 2013 or the first quarter in 2015 to 2014. It won't affect us on a go-forward basis. Did I answer your question?

Yes. The question regarding the clinical development, please.

Yes, Ram, thanks for your question. This is Todd. The timing and costs of each clinical program have not been disclosed specifically. However, what we have said in our filings is that we expect roughly $5 million in clinical costs across both trials. And I think if -- as I've mentioned on this call, if you look at the number of patients in each of these trials, you could probably divide that R&D cost proportionally. I think the other interesting thing about the number of patients in each trial is that you can probably estimate enrollment time based on the size of the trial, and I think that's probably true here. So you could probably draw your own conclusions from those numbers, and my suspicion is that what most people would derive from those patient numbers is probably correct in terms of both cost and timing. And just to reiterate, SLS is a 12-patient trial, uveitis is a 45-patient trial.

Okay, that's helpful. And then, finally, a question regarding stock-based compensation in the quarter and how you would anticipate that evolving over the course of subsequent quarters. Could you just give me the figure for noncash stock-based compensation in the quarter, then how you expect that to change going forward?

So stock-based compensation for the quarter was about $1.1 million. It'll be less than that going forward. I'm not prepared to say what it will be.

[Operator Instructions] We have a follow-up question from the line of Ram Selvaraju from Aegis.

Just wanted to ask whether you have any plans, Todd, to conduct clinical development initiatives with NS2 outside of the United States at this time. And if so, what those might look like and when we might expect to see data from those initiatives, if at all?

Yes, Ram, that's a great question. We haven't disclosed any outside U.S. plans at the moment. It is true that many companies in the orphan disease space or the rare disease space run trials outside the U.S. Certainly, that's something that any rare disease company is likely exploring. But at this time, we're not prepared to disclose anything along those lines. I will say that, and this relates to your prior question, Ram, one of the interesting and I think beneficial aspects of Sjögren-Larsson Syndrome is these patients that have no FDA-approved therapy and very few options at all, aside from unapproved therapies. And I think that the demand for a therapeutic option in this disease is significant. And I think that, that demand is present, not only in the United States but also across the world because the disease occurs globally.

Ram, if I may, can I go back to your previous question to me on stock-based compensation so I may clarify?

Sure.

So the expense for the 6-month period was $1.1 million. The expense for the quarter was about $750,000. And it's likely to be less than that going forward.

Our next question is from the line of Brad Shoup of Falcon Fund.

Could you walk through -- well, 2 things, I guess, on the trials or the programs, you got 2 that you're going to file an IND for and pursue first. And then there's discoid lupus and ocular rosacea, which were -- are also kind of on the drawing board for future trials. And just maybe between now and the end of the year, give us any color on what you have to do before -- what you have to do to get the IND filed for the 2 -- for SLS and uveitis. And then what, if anything, is going on in the background for discoid lupus and ocular rosacea between now and year end?

Brad, thanks for the question. This is Todd. I think that the -- well, in the initial disclosures we had around the S-1 filings, we discussed discoid lupus and ocular rosacea as extensions of our current strategies in SLS and acute anterior uveitis. We have a dermatologic formulation, a cream, if you will. We also have an eye drop, the latter of which has completed a Phase I testing. So it makes sense then to test these same formulations of NS2 in other diseases where aldehydes are prevalent and elevated. I think that, at least, to us, suggests the broad therapeutic potential of aldehyde trapping in NS2 specifically, and there are probably many other diseases besides from SLS and uveitis and discoid lupus and ocular rosacea that we could test or a partner could test because of the applicability of the technology. We have, in subsequent filings, not discussed discoid lupus and ocular rosacea, and that's because we're focusing on the 2 indications that we have discussed and disclosed recently, that is SLS and anterior uveitis. Because we could use the same formulations of NS2 for these other diseases, I think the transition to testing other indications, assuming sufficient funding, would be viewed by most people in the drug development industry to be fairly easy. I think that -- I hope that answers your question, Brad. Now going back to the timeline to IND filing, as you heard on the call, we're reiterating 2014 filing for both INDs in SLS and uveitis. And given that it's August, the answer is we shouldn't have much to do if we're going to stick to those time lines that we intend to. So we have -- as you know, we've been in humans with Phase I for the eye drop. And I think in terms of safety, tolerability, the classic FDA kind of issues, I think most observers in the drug development industry would see that we have a relatively straightforward path.

Okay. What about looking forward to '15 -- I mean, I know that these 2 programs are going to -- the objective is to take the capital you have and get these 2 programs through Phase II. But the other one was -- the other program was an oral formulation. And if you're looking at making progress on any of these other areas besides the 2 Phase II trials, which one would be taken out first? Or is there stuff going on with the oral formulation this year?

Yes, we -- as you point out, Brad, in our initial S-1 filing, we did disclose an oral program. However, we continue to focus really on the dermatologic and the eye drop for the 2 diseases we discussed today. I think that pending additional financing, oral development in terms of the Phase I trial, in addition to some of the other diseases that you've mentioned, would certainly be on the table. The -- you always bring up good points, Brad. I think the oral is particularly interesting for obvious reasons. We've talked about this in some of our other filings, but the oral itself could apply to many diseases where there's systemic -- systemically high aldehydes, that is throughout the body. And my suspicion, as we discussed previously, is that, that would apply to many diseases where you have effects throughout the whole body that may relate to high aldehydes.

Right. Including possibly SLS, right?

Correct.

At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to Dr. Todd Brady for concluding comments.

Well, thank you, all, for joining us today for our quarterly conference call. We look forward to providing you with updates in coming months as we continue to execute on our strategy.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.