Aldeyra Therapeutics, Inc. (ALDX) Q3 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the Aldeyra Therapeutics Third Quarter 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, David Burke, Vice President of The Ruth Group. Thank you, Mr. Burke. You may begin.

Good morning and welcome to Aldeyra Therapeutics’ third 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. Earlier today, Aldeyra issued a press release announcing the company’s financial results for the third 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 through 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 circumstances, assumptions and uncertainties associated with the company’s business. These risks are described in the Risk Factors and Management’s Discussion and Analysis of Financial Condition sections of the Aldeyra’s registration statement for its initial public offering and Aldeyra’s Quarterly Report on Form 10-Q for the quarter ended June 30, 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 of the Aldeyra’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 to be filed with the SEC in the fourth 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, November 10, 2014. Aldeyra undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this 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 third quarter conference call and our second conference call as a publicly traded company. I am pleased to report that since our last quarter’s conference call, we have continued to execute on our strategy with the focus on building an experienced and knowledgeable leadership team and preparing to test our lead compound, NS2, in clinical trials for Sjögren-Larsson Syndrome and acute anterior uveitis, including the filing of two investigational new drug applications by year end. Additionally, we have recently closed on a debt refinancing with Square 1 Bank, which provides us with increased financial flexibility as we move forward in clinical development. I do want to reiterate that we currently have sufficient funding through the completion of our two planned clinical trials, but we believe it is prudent capital management to have additional access to capital, including debt. As such, we are pleased to have entered into our third agreement with Square 1 Bank and believe this speaks volumes to the confidence our lenders have in Aldeyra. As I have mentioned, we remain on track to file two investigational new drug applications for NS2, which we anticipate taking place by the end of this year. These two IND filings are of course part of a process that will enable us to begin clinical testing of NS2 in Sjögren-Larsson Syndrome and uveitis, both of which are rare diseases. And as is often the case with rare diseases, our planned clinical trials are relatively short and small trials. We plan to enroll approximately 12 patients for Sjögren-Larsson Syndrome and approximately 45 patients for acute anterior uveitis and treat patients in both trials over a period of approximately 2 months. We continue to expect data from these two clinical trials in 2015. Our plan to establish a strong leadership and core development team is now complete with our latest strategic hires that provide us with significant biotechnology operations and drug development experience. During the second quarter, we hired Steve Tulipano, our Chief Financial Officer and we hired three individuals to have a wealth of experience in pharmaceutical development, whom we expect will be key, as we continue through clinical trials. Obviously, our team has – collectively, our team has more than five decades of experience at leading biotechnology companies, including Biogen, Genzyme, Vertex Pharmaceuticals, Baxter International, MGI Pharma and Synageva Pharma. As many of you know, our lead product, NS2, is part of a unique innovative program to trap aldehydes, which are a naturally occurring class of toxic chemicals. High aldehydes are associated with certain diseases, both rare and common, especially inflammatory diseases. NS2 traps aldehydes and facilitates the metabolism or disposal or those aldehydes. We believe that Aldeyra is the only company currently focusing on aldehyde trapping as a treatment for disease and we believe we are well-equipped now with a seasoned team of professionals to continue to advance NS2, our lead aldehyde trap. Now, I’d like to take just a few minutes to describe our first indications for NS2. Sjögren-Larsson Syndrome, which we refer to as SLS, is a rare disease, believed to be exclusively caused by high aldehyde levels due to genetic mutations in an enzyme that metabolizes aldehydes. Treatment with NS2 is expected to be analogous to enzyme replacement therapy that is replacing a missing function in this case aldehyde metabolism that these patients are lacking. There believed to be approximately 1,000 SLS patients in the United States. The symptoms of this 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 to the point of bleeding. Currently, there is no FDA approved treatment for SLS and there are no therapies for the disease other than creams that are largely ineffective or toxic. The second disease we plan to test 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 in some cases loss of vision. The disease often recurs in patients and is typically treated with topical steroids. Unfortunately, the long-term use of steroids will generally lead to cataracts and glaucoma, which has increased pressure inside the eye that can cause blindness. In support of testing these two indications, NS2 has shown promise in cell, animal and human tissue models of disease and in a Phase 1 clinical trial of NS2 eye drops. Specifically, we have demonstrated positive results with NS2 in animal testing, including anti-inflammatory activity in two different models of skin inflammation in mice and increased speed of lesion healing and reduction in scarring enhancers. Additionally, we have demonstrated reduction in free aldehyde levels in human tissues subjected to extremely dry conditions and in cells lacking the same enzyme that is missing in SLS. Finally, Phase 1 results of NS2 used as an eye drop in healthy volunteers showed that drops were well-tolerated consistent with our studies in animals that support the safety of NS2. 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 approved for commercialization has enormous potential not only for the diseases that we have discussed today, but also for other diseases, especially those that are related to inflammation. Now, I would like to ask Steve Tulipano, our Chief Financial Officer to discuss our financial results for the third quarter. Steve?

Thank you, Todd and good morning everyone. Let me just take a few moments to review the results in the quarter if I may. In the third quarter, we reported a net loss of $2 million or $0.36 per share based on 5.5 million shares outstanding. This compares to income of $878,000 or $2.76 per share based on 317,000 shares outstanding for the same period in 2013. R&D expenses in the third quarter were $1.2 million versus $666,000 in the same period last year. The period-over-period increase of $530,000 in R&D expenses was primarily related to the increases in our preclinical, clinical and CMC work that we have been doing over the last quarter. G&A expenses were $772,000 compared to $500,000 in the third quarter of 2013. And those increases in G&A are related to increased costs with being a public company. Total operating expenditures for the third quarter of 2014 were $2 million compared to $1.2 million for the same period in 2013. Included in operating expenses for the quarter were $458,000 in non-cash stock-based compensation. As for the 9-month period, R&D increased $1.2 million over the same period in the prior year and this again is due to our ramp in preclinical, clinical and CMC efforts. Similarly, G&A increased $1.2 million over the same period last year largely as a result of being a public company, which includes associated costs such as legal, accounting, audit, insurance, and personnel costs, all of those costs increased over the last year. Total operating expenses for the year-to-date period were $4.9 million compared to $2.4 million in the prior year. There was also $1.6 million in non-cash stock-based compensation included in operating expenses for the 9-month period. And just as a reminder in 2013 and through the first two quarters of 2014, Aldeyra had certain preferred stock instruments. These instruments were accounted for and presented in our financial statements and represent such line items as change in fair value, accretion of preferred stock, allocation of undistributed earnings and deemed dividend. All of these items had a non-cash impact and all of these preferred securities were converted to common shares during our initial public offering back in May 2014. We ended the third quarter with $10.1 million in cash. And that concludes my remarks. I am going to turn it back over to Todd and we will enjoy your questions.

Yes, thank you all for joining us today for the third quarter earnings conference call. We look forward to providing you with status updates in the coming months as we continue to execute on our strategy and reach what we think are important company milestones. And now, I think at this point we will turn the call back over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question today comes from Yale [indiscernible]. Please proceed with your question.

Good morning and thanks for taking the questions.

Hi.

Hi, how are you? Given that the aldehyde trapping, certainly the novel and new approaches and it impacts on the information, but I believe a lot of investors may or may not know some details there. So, could you share some light in terms of how that this connection being made, maybe it’s throughout various factors, why not, and maybe give a little bit more color on that?

Do you mean the relationship of aldehydes to disease and inflammation in particular?

Right, right. Would that be some factors, signal transaction factors that would be impacted by excess aldehyde and maybe the type of relationships?

Yes, it’s a very good question and there have been papers written on this topic. Aldehydes are reactive and in particular with amines and thiols of certain proteins. And in the end what that results in is modification of certain signal transduction factors that you reference. EGFR is a common one that most people have heard of. And as those proteins and receptors are modified, it sets off a signaling cascade that generally results in the activation of certain transcription factors, NF-kappaB being one that is classic for inducing an inflammatory response. So, if you could use a trap to block aldehydes, you would prevent the signal transduction cascade and inflammation prevents the activation of NF-kappaB prevents the release of cytokines and thereby dampen the immune response. On the Sjögren-Larsson side of the equation, this is a disease that relates not so much to inflammation, but the fact that they are lacking a key enzyme that metabolizes aldehydes. And as a result, those aldehydes destroy the moisture barrier in tissue and they have excessively dry skin and their tissue compensates by making more skin and they are covered in plaques and scales. So, I think whether you are talking about Sjögren-Larsson Syndrome or inflammation mechanistically it’s pretty clear that aldehydes are toxic and causal. And I think some of the data we have published and released and disclosed is strongly supportive of that.

Okay, great. That’s very helpful. And so given the information of the function of the inflammatory process has been potentially a factor for a lot of diseases. Do you anticipate, let’s say, if NS2 work on certain inflammation diseases, it might have a greater impact or potential for other type of inflammatory diseases as well?

Yes. I mean, I think that’s a great point and a lot of folks will focus on Sjögren-Larsson Syndrome, but in the end, this aldehyde trapping approach we think could represent a new anti-inflammatory therapeutic mechanism. And if that’s the case, there are hundreds of diseases that would apply. For those of us that have worked in inflammation for a long time, the Holy Grail is a safe anti-inflammatory. And I think the data we have generated to date that I have described even in today’s call are certainly a step in that direction. So, to some degree in the future, if we see any effect in, for instance, acute anterior uveitis, we will face an embarrassment of riches in that there are lots of potential directions we can go and we maybe limited to some extent only by time and capital, but there are many different diseases that we can test as a platform technology would suggest.

Last question is that you mentioned a study to IND this year and you anticipated data to be available in 2015, I understand it really depends on the timing of it, but do you have any more color possibly in terms of the – more specifically narrow down the timing potential for those data releases?

Well, we haven’t disclosed that. I think the only guidance we can give you specifically to that question is to refer to the size of the clinical trials that I have even talked about in today’s call. Obviously, Sjögren-Larsson Syndrome has two major advantages. One is the trial is smaller and two is there is no therapy that’s FDA approved for this disease. So, you can assume that there is a very high degree of patient motivation in this indication. And I think those two things plus the fact that there are few SLS key opinion leaders bodes well for completion of that trial in a timely manner.

Okay, great. Thanks a lot. I appreciate it and look forward to more developments.

Yes, thank you, Yale.

Thank you. [Operator Instructions] Our next question today is coming from RK Ramakanth from H.C. Wainwright. Please proceed with your question.

Good morning, Todd. Good morning, Stephen. Hope you guys are doing great.

Thank you.

Regarding NS2 IND, just want to understand what’s the status of your preclinical data package? Is it all together at this point that you could file for an IND or what is the status? Because, I just want to make sure how much of that data is published or if there is anything that still needs to get done before you can file an IND?

Yes. Specifically, we haven’t disclosed answers to those questions. However, RK, I can speak generally as to drug development. We have disclosed that we are going to file these two INDs or we expect to file these two INDs by year end. And as you know, the IND process is extensive. In general, it involves communication with the FDA. It involves the compilation of many preclinical and non-clinical reports and activities and a large part of the IND process in general is assimilating all this information in a package that you are going to send to the FDA. Generally, if a company notes that there is going to be an imminent IND filing, I think it would be safe to assume that the studies are done that the communications with the FDA have been favorable and that everything is on track. Otherwise, the filing would not be imminent, but I am trying to answer your question in a general sense, RK, and I hope that will give you some comfort.

Thanks. Also, could you tell us, at least on ballpark values, what could be potentially the cost of these studies considering that these studies are for a shorter period and also you don’t really need a huge patient population to conduct these studies?

Right. So, this is Steve, RK. Thank you. So, what we have disclosed is that we expect our cash to go through the end of 2015 and cover both of these trials. So, we have got $10.1 million in cash. So, I think you can safely assume that the cost of those two trials will be less than that.

Okay, thank you. That’s all I have.

Thanks, RK. Just one additional comment to what Steve said in general, small trials cost less. And in general, topically treated patients, whether it be an ophthalmic topical or a dermatologic topical, those trials cost less and I am speaking generally just because the treatment period is not as long. So, we are fortunate at Aldeyra in that we have a platform that enables us to test rare diseases, but also diseases that can be treated topically, both Sjögren-Larsson Syndrome and acute anterior uveitis are diseases that occur on the surface of our body. And that’s why we are going after them topically which enables us to affect relatively short and small clinical trials.

Thank you. Our next question today is a follow-up from Yale [indiscernible]. Please proceed with your question.

Thanks for taking the follow-up questions. Just quickly the first one is that I don’t know whether you guys have revealed what type of endpoints of each study might be or should we anticipate that when you actually get the IND approved before we will know that? And I have another follow-up on that.

Okay. Well, let me answer this one first. Thanks. I think that the endpoints have been disclosed in our filings for a Sjögren-Larsson Syndrome, because this is a skin disease, I characterize by what the technical term as ichthyosis. There are ways of rating ichthyosis. We have reported that there will be an ichthyosis rating scale or a visual scale for rating the skin. We have reported that this is a placebo-controlled and blinded trial. So, you can imagine how that might be done. That’s the primary endpoint. Generally with orphan diseases however, especially rare, ultra-rare diseases like Sjögren-Larsson Syndrome, the key opinion leaders and their discussions with the FDA and to some extent that patients and their caregivers and their discussions with the FDA are very important in terms of approval and in my mind often represent, if not the key endpoint, certainly a key endpoint. On the uveitis trial, as I have alluded to in this call, our goal primarily is to demonstrate an anti-inflammatory effect of NS2. So, you can imagine that we are looking at a large number of endpoints having to do with inflammation, which in general relates to swelling and redness and pain at cell counts etcetera, all of which in uveitis, anterior uveitis are readily evaluable because the physician can note them without too much difficulty. So, that’s sort of our, I would say, list of endpoints for uveitis. And again, our goal is to affect one or more of those endpoints so that we can help demonstrate the anti-inflammatory potential of NS2.

Would there be any biomarker you might look into as well?

Well, this question was asked on the last earnings call. In SLS, with ultra-rare orphan diseases in general, companies will often look at biomarkers before they will look at clinical effects. And the reason for that with diseases where you lack a single enzyme and you are simply replacing that enzymatic function, it’s easy to measure that bio-chemically either your drug is doing what the enzyme is supposed to do or it’s not. And obviously in our case that relates to aldehydes or aldehyde levels or the effective aldehyde levels. And I think that’s a reasonable assumption to make for any orphan company that they are looking at biomarkers in ultra-orphan diseases. Now, in uveitis, I am not convinced and I don’t think most anterior ocular inflammation experts are convinced that there really are any biomarkers per se simply, because in a very short period of time, you are going to know whether the drug is working or not. And so trying to identify a biomarker that correlates with effect will be very difficult, because the effect either happens or it doesn’t in a very short period of time.

Great, that’s very helpful. Just the follow-up I had initially was that you mentioned the drug was mainly currently used topically, but going forward, do you anticipate maybe other [indiscernible] of the aldehyde trapping compounds could be used more systemically or in other means of delivery or that’s mainly with topical drugs to start with?

Yes. So, it’s an excellent question. We are starting topically for the reasons that I have mentioned which are namely that these diseases that we are testing actually manifest themselves on the exterior of our bodies. And it makes sense to deliver drug topically, because that’s where the disease is. However, we have disclosed in our initial S-1 filings, the existence of NS2 oral and certainly we intend to develop NS2 and other traps orally or by other means systemically, because as you know and I think where you are going is in inflammatory disease, many of these diseases are systemic processes that while they may manifest themselves in one part of the body, the origin of the disease is systemic all throughout the body. And so systemic aldehyde trapping may be very important one day. So, we are in full agreement with you, Yale, that this is an important next step after we have demonstrated efficacy topically.

Okay, great. Thanks a lot. I appreciate it and best of luck.

Thank you.

Thank you. Our next question today is a follow-up from RK Ramakanth from H.C. Wainwright. Please proceed with your question.

Hey, Todd. Probably, you might have been asked this question before I am not sure, but considering that NS2 is going to be applied topically to SLS patients or the rest of their lives once it gets approved, what’s the accumulated impact of NS2 and has anything been published to that end?

Well, so we haven’t disclosed any data like that to-date. It is true you are correct, that for Sjögren-Larsson Syndrome because these patients are missing an enzyme, they will have to replace that enzyme consistently for the rest of their lives, that’s absolutely right, much like any other loss of function for an enzyme. And the question really relates to how long can you treat these patients without seeing toxicity or any adverse effects due to the drug? The answer is of course we don’t know. And I think in these cases generally, I am not speaking about Aldeyra specifically, but generally in these cases, the FDA will require long-term follow-up just to make sure that there is no long-term toxicity. But I can tell you – I will reiterate RK what we have said in our filings and what we alluded to today, we think this is a very safe drug. We expect the safety of this drug at least during the clinical trials we are performing to be acceptable, which is consistent with our Phase 1 data in humans and consistent with the many, many animals that we have tested over the past 5 years.

Thank you.

Yes.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Burke for any closing or further comments.

Again, thank you all for joining us today and we look forward to speaking with you on our next quarterly call.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.