Arcturus Therapeutics Holdings Inc. (ARCT) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alcobra Q4 and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll host a question-and-answer session and our instructions will follow at that time. [Operator Instructions] As a reminder to our audience, this conference may be recorded for replay purposes. Now it is my pleasure to hand the conference over to Ms. Debbie Kaye, Investor Relations for Alcobra. Ma'am, the floor is yours.

Good morning and thank you for listening in. Before the market opened this morning, Alcobra announced financial results for the fourth quarter and fiscal year ended December 31, 2016. If you have not yet received this news release or if you would like to be added to the company's distribution list, please contact us at 212-390-8964. Before we begin, let me remind you that this conference call will contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. For example, forward-looking statements include statements regarding our 2017 work span, the expected timing, cost of filing and MDA if filed at all, the proposed development path to approve ADAIR, the sufficiency of our financial resources as for our future plans, the market opportunity for and expected sales and potential benefits of ADAIR, expected cash balance at the end of the first quarter of 2017 and strategic options for our MDX drug candidate. Additionally, while physicians, parents and others that we've approached have indicated an interest in ADAIR, we cannot be sure that interest will be indicative of general market acceptance of ADAIR if approved at all. Such statements are subject to the section titled forward-looking statements included in the press release we issued earlier today. Hosting today's call from Alcobra's Senior Management team are Dr. Yaron Daniely, President and Chief Executive Officer; Dr. Tomer Berkovitz, Chief Operating Officer and Chief Financial Officer and Mr. David Baker, Chief Commercial Officer. It is now my pleasure to turn the call over to Yaron. Yaron, please go ahead.

Thank you, Debbie and good morning, everyone. Today, David and I will discuss our new lead drug candidate, a proprietary abuse-deterrent amphetamine immediate release product that we are calling ADAIR. We'll then hand over the call to Tomer to review Alcobra's Q4 and annual financials and then hold a Q&A session after we conclude our prepared remarks. ADAIR was conceived by a deliberate and thoughtful process, which sought to address a significant unmet need in the market space that's very familiar to the Alcobra team and our network of advisers and collaborators. Abuse of prescription CNS stimulant is a large and growing public health challenge. The ADHD market is currently devoid of any abuse deterrent products. This unmet need prompted Alcobra to design ADAIR as an oral formulation of an immediate release, short-acting dextroamphetamine and included the development and in vitro testing of multiple formulations followed by the selection of the optimal proprietary formulation of ADAIR that's intended to introduce certain barriers limiting this product abuse by snorting or injecting. As you'll hear shortly, snorting and injecting are rather common and dangerous routes of abuse of prescription CNS stimulants. We held a pre-IND meeting with the FDA late last month to present our drug candidate and discuss the development path and requirements to support an NDA filing for ADAIR. We were encouraged to see many FDA attendees across multiple offices and divisions attend the meeting and express their interest and engagement. Most importantly, the meeting results confirmed a roadmap for potentially rapid, straightforward 505(b)(2) development path towards a planned NDA submission for ADAIR in the second half of 2018. As Tomer will mention later, we expect our existing cash balance to fully support all the development costs of ADAIR up to this planned NDA submission milestone. Importantly, giving the defined scope of clinical and nonclinical activities required for such a submission, we believe this development plan represents a significantly different risk profile in developing a novel drug in this space, while also carrying substantial commercial potential. We intend to be the first to introduce a proprietary abuse-deterrent immediate release dextroamphetamine drug to the market and intend to leverage our agility, flexibility and knowhow to utilize such a position for the benefit of patients, physicians and our community. ADAIR is an important development program for Alcobra and the cornerstone of our revamped strategic plan, focused on creating new value opportunities for our shareholders. Not I would like to turn over the call to David Baker, our Chief Commercial Officer who will review highlights of the market need and commercial potential. As some of you know, David previously worked at Shire for 10 years, where he served as Global General Manager for Vyvanse. David also led the original launch of Vyvanse, the launch of the adult indication for Vyvanse and consequently, the global expansion efforts, including successful establishment of a partnership in Japan and launches in Canada and Brazil. Before that, David served as Vice President of Marketing for all of Shire's ADHD product and had been directly involved with the commercialization of five approved ADHD medications. David, the floor is yours.

Thank you, Yaron, and good morning, everybody. As Yaron mentioned, we're very excited about the prospects for ADAIR. I would like to expand on some of Yaron's points in order to explain why we think this is a unique opportunity for Alcobra and its shareholders. Stimulant drugs are the mainstay of ADHD pharmacological treatment. They are also unfortunately among the most widely misused and abused medications with nearly two million people abusing prescription stimulants annually in the U.S. alone. In recognition of that, stimulants approved for ADHD contain black box warning language, specifically identifying the high potential for abuse and dependence. What the black box warning notes and what makes the problem CNS stimulant abuse, both unique and challenging, is that the abuse and addiction risk of stimulants are not restricted to those who are prescribed the medications. Quite the contrary, published data reports that stimulants are almost twice as likely to be diverted meaning given away or sold in other medications like opioid, sleep or anxiety medications. It has been reported that between 25% and 60% of teenagers and college students with ADHD have been approached at some point to give away or sell their prescription stimulants. Not surprisingly, friends, classmates and colleagues rank as the leading source for obtaining these drugs in surveys of CNS stimulant abuses. This fact is troubling as physicians realize that even if they think they know and trust their own patient, a prescription for CNS stimulant may often be diverted to people outside their circle of care. IR stimulants are more prone to abuse than extended release stimulants. This is being documented in multiple published studies and in multiple settings. Importantly, the fastest-growing market segment year after year is that same abuse prone immediate release drug class. According to IMS data between 2010 and 2015, the total prescription count for ADHD medications in the U.S. has grown by 37% from 49 million to 67 million prescriptions and 50% of that growth went to immediate-release impediments. In 2015, 24 million prescriptions were filled in the United States for immediate release stimulants, making the public health concern about stimulant abuse far from being a niche problem. Turning to the question of routes of abuse, we found surprisingly high rates of snorting or injecting stimulants in our literature review and surveys. Multiple peer-reviewed published studies report that 40% or more people who misuse or abuse prescription stimulants do so by snorting or injecting these products. These methods of abuse drive a more rapid increase in dopamine levels that drive the subjective of reinforcing effects of these drugs. Consequently, these abuse routes are thought to bring the abuser, one step closer to addiction independence. As we described last week, we have relied on these insights to design ADAIR. ADAIR is formulated so, it cannot be readily crushed or manipulated for intranasal or intravenous abuse. The final formulation of the ADAIR product was identified through the screening of multiple prototypes, optimizing for maximal abuse deterrent effects, while maintaining a release profile that is comparable to the referenced drug in laboratory testing. We have filed patent applications, covering the chosen optimal formulation of ADAIR. Following the formulation development and optimization stages, we have also conducted extensive studies to manipulate the products to prepare for insufflation or snorting. As compared with dextroamphetamine tablets, which are easily grounded small particles, ADAIR consistently maintains viscous, clumpy texture that poses a deterrence for insufflation. Similarly, when ADAIR is extracted or manipulated to prepare it for potential injection, it forms a viscous, cloudy material that is not only visually unappealing, but resistant to syringeability through a range of needle gauges as compared to the commercially available reference drug. This extensive formulation development, optimization and product testing work was presented to the FDA recently as Yaron described a little earlier. The agency confirmed that the 505(b)(2) regulatory pathway, which involves well-defined activities was appropriate for ADAIR. As a result, we expect to submit an NDA in the second half of 2018. For those less familiar with the regulatory language a 505(b)(2) NDA application generally allows some of the safety and efficacy information on the active ingredient to come from previous studies not conducted by the sponsor. This often results in a less expensive and faster development path, compared with the traditional 505(b)(1) development application for new chemical entity. The takeaways from the meeting with the FDA were as follows. The ADAIR development path will include a single bioequivalent study in a small number of healthy adult volunteers, comparing the pharmacokinetics of blood levels of ADAIR to the commercially available reference drug. In addition, a study comparing the blood levels of ADAIR in fasting and fed states again in a small group of healthy adult volunteers will also be performed. We expect both these studies will be completed later this year. It is feasible we plan to perform a human drug liking study in a small group of experienced drug users with the intent to demonstrate reduced lighting of ADAIR when taken intranasally as compared with intranasal administration of crushed, commercially available dextroamphetamine tablet. This potential study may support the regulatory exclusivity for ADAIR once it is launched. As Tomer will explain shortly, all anticipated development activities leading up to NDA submission including the potential drug liking study, should be fully supported by Alcobra's existing cash resources. With a plan to file the NDA for ADAIR in the second half of 2018, we've initiated preliminary activities to better understand ADAIR's commercial opportunity. We're planning to hold an event next month when we will go into greater depth, describing results of these quantitative assessments. I wanted to share some preliminary highlights demonstrating the strong commercial potential for ADAIR. We've conducted several rounds of market research with high prescribing ADHD physicians, which demonstrated a strong and consistent interest in prescribing ADAIR. Physicians were generally aware of the risks of abuse and diversion with stimulants and responded favorably to published data on the extent of the problem. Most physicians also had personal experience with patients who had misused, abused or diverted their stimulants. The physicians were very interested in the ADAIR product concept and they indicated that if ADAIR was available, they would prescribe ADAIR for the majority of their patients who otherwise would receive an IR amphetamine prescription. Market research with managed-care payers representing over 100 million covered lives in the United States suggest acceptability of the product concept without intention to block access. Managed-care tends not to actively manage the largely pediatric ADHD category and our research shows that if we're not overly aggressive with our pricing strategy, managed-care is unlikely to work to minimize access to and reimbursement of ADAIR. We also have conducted preliminary consumer market research with parents of teenagers with ADHD and with young adult patients. In that research, the parents were familiar with abuse and diversion of stimulants. They were extremely favorable in their reaction to the ADAIR product profile and all interviewed parents that they would ask their physician about ADAIR if it weren’t approved product. Even more importantly, these parents indicated that they would be willing to pay a higher insurance co-pay for ADAIR than what they are currently paying for their child's IR amphetamine prescription and among the young adults currently prescribed an IR amphetamine, all were familiar with stimulant abuse and acknowledged they had been asked to divert their prescription stimulants. Our sales projections put ADAIR peak sales at greater than $300 million annually, three to four years post launch. This projection is based on estimates of penetrating less than 10% of the immediate release amphetamine segment alone and an ADAIR price set at the low end of the branded products prices. I look forward to elaborating on these market research results in our modeling during our event next month. Let me now turn over the call to Tomer for a review of the financials.

Thank you, David. Earlier this morning, we reported our fourth quarter and fiscal year 2016 results. We reported total operating expenses of $6.1 million for the fourth quarter of 2016, compared to $5 million in the fourth quarter of 2015. Our fiscal year operating expenses were $25.2 million in 2016 compared to $19.7 in the previous year. Our total operating expenses include non-cash charges for stock-based compensation of $2.5 million this year and $2.4 million last year. The increase in our total operating expenses was driven by research and development activities mostly related to the measure study. In the fourth quarter of 2016, R&D expenses were $4.4 million compared to $3.3 million in the same quarter last year. On an annual basis, our R&D expenses were $18.4 million in fiscal year 2016 relative to $13.5 million last year. As we've guided previously, the remaining cash-based expense related to the measure study is approximately $3 million and this cost will mostly be paid in the first quarter of 2017. Please note that most of this cash cost is already included in our 2016 P&L and in the accrued expenses on the balance sheet. G&A expenses for the fourth quarter of 2016 were $1.3 million, similar to the fourth quarter of 2015. On an annual basis, G&A expenses were $5.4 million in 2016 relative to $5 million in 2015. We ended the year with $50.2 million in cash bank deposits and marketable securities, in line with our guidance and compared to $54.3 million at the end of the previous quarter and $69.7 million at the end of 2015. Looking ahead, we expect to end the first quarter of 2017 with approximately $45 million in cash bank deposits and marketable securities. Regarding the cost of the ADAIR project, our total investment to date in the project has been less than $1 million over a period of one and a half years. In 2017 and 2018, we expect to invest approximately $13 million in the ADAIR project through NDA submission on top of the fixed cost of running the business. This estimated amount includes $6 million for clinical studies, $5 million for CMC work and around $2 million for other cost, including preclinical studies and regulatory cost. As I mentioned on the call last week, we're now in the process of reexamining our cost structure to ensure it matches the needs of the revised workplan, currently focused primarily on the ADAIR project and other future potential activities. Our goal is to optimize the structure while preserving and enhancing key qualities that we believe are required for the company's future success. We focus on making balanced economic decisions for the benefit of our shareholders. We expect to provide further details on our total expected operating cost for 2017 in our upcoming other investor event next month. Finally, I would like to reiterate that we believe our existing financial resources are sufficient to support the ADAIR program through an NDA submission, which we expect to happen in the second half of 2018 as well as other potential R&D activities in the next couple of years. Before turning the call over to the operator for the Q&A session, I'll hand it over back to Yaron for some final remarks.

Thanks, Tomer and thanks again David. Everyone here at Alcobra is very excited about the ADAIR program and believe that the ADAIR opportunity is significant and creates a meaningful near-term cost-efficient value proposition to our shareholders. For the next few months, we expect to complete GMP manufacturing of the required registration drug batches of ADAIR and file the IND for the product with FDA. In the second half of this year, we expect to conduct and report outcomes from the pivotal bioequivalence as well as the relative bioavailability studies for ADAIR. In 2018, we expect to complete the remaining development work for NDA filing and submit the NDA in the second half of the year. As I stated before, ADAIR is the steppingstone in the reorganization of Alcobra's priorities and resources and we look forward to pursuing this program alongside any relevant additional opportunities using our existing resources to increase shareholder value. Along these lines, we continue to have ongoing dialogues with pharmaceutical companies, exploring strategic options for our MDX drug candidate in ADHD and Fragile X syndrome. As we stated previously, we will look to identify the best opportunity for our shareholders to leverage the work already performed on MDX while minimizing any additional investment of Alcobra's existing resources on this particular drug candidate. As these dialogues are going, I'll refrain from providing more detailed about that process for the time being. We will continue to communicate on our progress and plans for further value creation as they evolve. Let me now open up the call for Q&A. Brian please go ahead.

Thank you, Yaron. [Operator instructions] Our first question will come from the line of Annabel Samimy with Stifel. Please proceed.

Hi. Good morning, guys. How are you? I had a couple questions, first little bit broader, as I am trying to understand the market for abuse deterrents stimulants and the actual need for it, so in occupying and creating a [backrest] going back to narcotics, for narcotics it's pretty clear that abuse is a safety issue and for stimulants, it doesn’t seem like there is a safety question when it comes to the abuse as in snorting. So, it means not obvious that there is a need, so can you help us understand the motivations that payers and physicians would have to prescribing abuse-deterrent if there is not a safety question attached to it. And I guess the second question I have is for the -- I guess the abuse-deterrent, establishing abuse-deterrents is just one likability study sufficient and again does it go back to the FDA guidelines for narcotic where you have to establish various levels of abuse to get some kind of label of that fashion, thanks.

Okay. Let me say something briefly about your first question may be let David speak about this a little bit and address the second question on the development work because that's easier for me. On this question with regard to the discrimination you made in safety outcomes between narcotics opioids and CNA stimulants, I wouldn't make such a harsh distinction. I do believe that there are different safety concerns and magnitude of safety concerns in opiates and CNA stimulants for sure, particularly mortality, but there are multiple safety concerns with stimulant abuse even regular stimulant use. They're all very nicely in a boldly detailed on the black label warnings for these drugs. And the key element there is addiction independence and so although misuse by the oral route of CNS stimulants is unlikely to be associated with significant safety concerns. It may lead and certainly once you start chewing or of course snorting or injecting stimulants, even more likely to lead to issues of dependence and abuse given the reinforcing effects of stimulants and their molecular structure, which has led to their scheduling by DA and FDA and I don't know if David will have something to add on that in a second. With regards to what's required to establish the abuse-deterrent labeling for a CNS stimulant product, this was a major topic of discussion back at the end of January with FDA because one could look to the opioid language on the guidelines to get a sense of the CMC or manufacturing and testing requirements that were adopted there, but it was clear to us through the discussion of the agency that there is a significant acknowledgment that the markets and the issues are not necessarily the same in terms of the abuse routes and the interdependencies between different routes of abuse. So, for example, let me just give you one example where is extended release opioids, which are the only opioids currently approved with the AD labeling need to undergo an extensive list of extraction studies in large volumes and multiple solvents that are essentially testing the ability of an abuser to quote unquote "dose dump” the large ones daily dose of opioids into essentially a single immediate release dose. Of course, in immediate release stimulants, that's not the case. There's no rationale for going through extensive extraction studies in large volumes or adjustable solvents to do does dumping immediate release stimulants and for that matter, immediate release opioids can be abused orally by just popping a pill. So, that's one kind of obvious example, but there are some other examples of a very fruitful and productive discussion that delineate some differences between what would be required for CNA stimulants versus opioids. In terms of our development plan, we will not be required to do or at least based on what FDA has guided us thus far we would not be required to do an intravenous or injection-abuse potential study given the texture and consistency of the manipulated ADAIR product and so we expect that any AD labeling if received for ADAIR for the intravenous routes would be gained based on in vitro studies only. And on the intranasal route, we have proposed to test the tractability or the feasibility of taking this waxy, gluey, clumpy content and smearing it intranasally and comparing it to the powder snortable crushed competitor or reference drug in the market, we believe it's very possible that recreational drug abusers will like the regular stuff and not the waxy product and would -- in this way, would demonstrate significantly reduced liking of the ADAIR product as compared to the crushed reference drug. So, this is something we've actually proposed to do and if it's feasible, we would like to do aside benefit from that is potentially the execution of a simple and short clinical investigation that would reward you with for your market exclusivity and the 505(b)(2) path. Sorry for the lengthy answer, but I was trying to cover a few things. David, anything else on the differentiation in terms of safety on CNA stimulants?

I think just to touch on a couple of points, I think it's important to realize that as compared to the world of opioids, the abuser is completely different. CNA stimulants are not just abused by the patients who are legitimately prescribed the meds but they're also used by nonpatients who acquire them through diversion. And as we showed, diversions are much bigger issue stimulants and both physicians and parents are more concerned about that. They realize that. We talked about routes of abuse. I think it would be -- I don't think it would be appropriate to underestimate the seriousness of injecting or snorting stimulants. I think it's been -- that's been shown in the literature to have serious consequences. And I guess the last difference I would point out is and where there's a big concern is because this largely affects children and teenagers and young adults and I can say from having done market research with parents and physicians in this field for the last 12 years, they all acknowledge the benefit of stimulants because of their efficacy that the fundamental trade-off we're always making in their minds is around the safety and first and foremost, around safety is concerns around abuse of these medications. So, I have no doubt that there is concern or there is a belief that there is a need for something that can address that aspect of -- or that limitation of the stimulants.

Great. Thank you.

Thank you. [Operator instructions] Our next question will come line of Michael Higgins with Roth Capital Partner. Please proceed.

Good morning, guys. Couple questions for you. I guess first off is to preface these, we're all more familiar with abuse deterrent technologies on the extended-release opioids and we're adjusting I think to the abuse deterrent technology for immediate release stimulants. So, my first question will be, is the technology that Capsugel has been developing designed specifically for the stimulants, is it differ, is it similar technology that would be use with the extended release opioids?

Yes, thanks Michael. So, the starting point for developing the ADAIR formulation was a technology that's owned by Capsugel called ABUSOLVE, which has been used in several advanced stage product candidates I think in the opioid space and I'll try and refrain from speaking on their behalf. But I believe that based on that platform technology, we have worked for the better part of the first year of our collaboration to really make the necessary modifications and customizations to optimize a formulation force for immediate release CNS stimulants or outside of the customization that's required to appropriately design a formulation for a particular chemical given stability and compatibility. We are talking also about a shift, which you indicated in the beginning of your question from extended release formulations that sequester or essentially deter the release of the active ingredient by virtue of all kind of polymers and things that make the job harder for the abuser to extract the API versus an immediate release product, which needs to maintain the rapid kinetics of dissolution and drug release both in vitro and eventually in vivo. So, this is -- this required certain efforts and development work that yielded a relatively unique novel distinct formulation of this final product that as I mentioned earlier kind of optimizes all the abuse deterrent barriers that are baked into that formulation while maintaining a release profile that looks comparable to the immediate release available drug. Let me stop here.

That's helpful. Yeah you mentioned that [indiscernible] 80% release within 30 minutes in your solution lines compare very favorably, essentially overlapping, which is very helpful to hear. Another way of asking the previous caller's question, I think is what percent of the stimulant abuse is done by snorting, injecting versus swallowing multiple pills and how does that differ from the abuse of opioids?

That's a very good question. So, on the first part its size easy and it was on our slides and there is extensive literature on that. So, in a normative, college student or young adult adolescent population, about 55% of reported abuse is done via the oral route, 40% is done via the snorting or intranasal route and just a few percentages on other kinds of other routes like maybe smoking or even a few injections. When you talk about the adults that actually seek treatments in treatment centers and normally are reporting multiple drug abuse issues and multiple routes of abuse, of course more of them abuse amphetamines and CNA stimulants through the oral route, but the numbers for the snorting remains about constant at 40%. So, across ages and across addiction severity or dependence and even in a normative population we're talking about a very, very large amounts of folks that are abusing their CNS stimulants, while it's not theirs by and large, abusing CNS stimulants through the intranasal or snorting routes. And the second part of your question was with regards to opioids?

Right. How it compares and differs to injecting and snorting percent of opioids.

Yes, so we're going to study that more and report again a lot of published literature, opioids appear to be in our survey of the literature to be much more widely abused to the oral route and then there's kind of a big leap to the injection route and based on what we have seen in literature surveys as well as review publications, the routes, the frequencies of snorting or intranasal abuse of opioids is low, kind of in the teens in terms of frequency.

Okay. Then lastly in terms of the conduct in the design of the liking studies, do they differ between IR stimulants and the ER opioid studies?

Yes, they are in particular with regards to what you need to compare it to. So, given that we appear to be ahead of other clinical investigations and that in our space, we will of course not be -- not have to compare it to existing drugs, but to essentially the commercial generic immediate release dextroamphetamine. And then the second is it's very clear how you would prepare your groups, your manipulated drugs. So, you would crush the immediate release dextroamphetamine that's a tablet form that's available now and of course our drug cannot be crushed. So, what you would do is you would essentially process it. So, you'll take it out of the shell. It will give that gluey mess. You can try and cut it to smaller chunks and provide it to the abuser. So, the difference, they're not differences. The adaptations would be with regard to the comparison groups and the preparation of the drug candidate for testing. With regard to the endpoints, we anticipate things to be very, very similar. These are normally the most common denominator measured by visual analog scales or vast scales that measure different things like the likability and how desirable would it be to do this again and how quickly did you feel this coming, creating the reinforcing effect or the euphoric effect and things like that.

Speaking to -- just the last hopefully brief question, in the ER opioid liking studies, they bring in known abusers and there is such a difference in the impact of one dose of an opioid of the patient's naïve or experience. Is there a difference also with stimulants and do you need to -- is it as important to have patients that are known abusers of stimulants into the study?

Yes, so as far as we understand, these studies are conducted using recreational drug users and the first phase of this study is a phase where you test the ability of the recreational drug user to actually tell the difference between a drug and a placebo or something like that. So, you validate the ability of that drug user to tell the difference to score the available abusable drugs sufficiently high and then they enter into a phase where they can compare. And again, here it's not about two things that will look very similarly and you need to really be in touch with your limbic system to tear them apart. These things one of them is finally crushed snortable powder and the other looks like candle wax, but we hope to be able to get to this early next year and conduct these studies after FDA is able to review these protocols and approve them.

Great. Thanks guys.

Thank you. There are no further questions. So now at this time, I would like to hand the conference back over to Dr. Yaron Daniely, Chief Executive Officer for closing comments. Sir?

Thanks Ryan. So, I want to thank all of you for participating in this morning's call. We look forward to providing future updates on this exciting and rapidly progressive program as well as any additional strategic developments. We hope to see you in person next month at our investor event where we can more extensively describe the ADAIR opportunity, provide you with some clinical perspectives from key opinion leaders and share additional updates on Alcobra's R&D efforts. For today, that's it. Have a great day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.