Atossa Therapeutics, Inc. (ATOS) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Atossa Genetics’ Earnings Conference Call for the Third Quarter Ended September 30, 2016. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Gordon, President of Cor IR. Please go ahead.

Thank you, Amy and thank you for joining today’s conference call to discuss Atossa Genetics’ corporate developments and financial results for the quarter ended September 30, 2016. With us today are Dr. Steven Quay, Chairman, CEO and President; and Mr. Kyle Guse, CFO and General Counsel. On November 14, Atossa released financial results for the quarter ended September 30, 2016. If you have not received Atossa’s earnings release, please visit www.atossagenetics.com. Before we begin, I would like to note that comments made during this call may include forward-looking statements regarding future events or the future financial performance of the company. Such statements are predictions only and actual events or results could differ materially from those made in any forward-looking statements due to a number of risks and uncertainties including assumptions about future events based on current expectations, plans, business development efforts, near and long-term objectives, regulatory actions, potential new business strategies or organizational changes, changing markets, future business performance and outlook. Please see Atossa’s most recent filings with the SEC, including without limitations, Form 10-K, 10-Q, and 8-K. I will now turn the call over to Dr. Quay.

Thank you, Scott and good afternoon. Atossa Genetics Inc. is a clinical stage pharmaceutical company developing novel therapeutics and delivery methods to treat breast cancer and other breast conditions. Our leading program uses our patented intraductal microcatheters, which deliver locally administered pharmaceuticals through the breast ducts. We initiated a Phase 2 clinical study in March 2016 using our microcatheters to deliver fulvestrant as a potential treatment of ductal carcinoma in situ or DCIS and breast cancer. Fulvestrant is commercially available in the U.S. as a monthly intramuscular injection costing about $12,000 per dose. This study is being conducted by Columbia University Medical Center Breast Cancer programs. In June 2016, we commenced a new drug development program with oral endoxifen. Endoxifen is an active metabolite of tamoxifen, an FDA approved drug for breast cancer patients to prevent recurrence as well as new breast cancers. Before I provide an update, Kyle will summarize our third quarter 2016 financial results.

Thank you, Steve. Good afternoon, everyone. Total operating expenses were approximately $1.6 million and $5.4 million for the three months and nine months ended September 30, 2016 respectively, consisting of G&A expenses of approximately $1.5 million and $5 million respectively and R&D expenses of $85,000 and $404,000 respectively. As a result of the sale of the National Reference Laboratory for Breast Health, operating expenses related to the NRLBH are presented separately as discontinued operations for the three months and nine months ended September 30, 2015. Operating expenses from continuing operations for the three months and nine months ended September 30, 2016 decreased approximately $2.2 million and $4.9 million or 57.9% and 47.6% respectively from approximately $3.8 million and $10.3 million for the three months and nine months ended September 30, 2015 respectively, which consisted of G&A expenses of approximately $2.4 million and $7.2 million respectively. R&D expenses of approximately $949,000 and $1.9 million respectively and selling expenses of approximately $499,000 and $1.2 million respectively. The decrease in operating expenses is mainly attributable to the 2015 launch of new devices and services which are not being pursued in 2016 and investing more in R&D programs in the first quarter of ‘15 compared to 2016. Net loss for the nine months ended September 30, 2016 was $3.8 million and cash and cash equivalents were approximately $4.4 million. Cash used in operations ignoring the cash we received from the Besins settlement was approximately $375,000 per month during the quarter. However, we do expect that our cash need will increase as we progress with our programs. That concludes my comments. I would like to turn the call back over to Steve.

Thank you, Kyle. As a Phase 2 clinical stage pharmaceutical company, Atossa is now exclusively focused on our pharmaceutical programs for the development of novel therapeutics and delivery methods for the treatment of breast cancer and other breast conditions. Our key objectives are to advance our pharmaceutical candidates through Phase 2 trials and then evaluate further development independently or through partners and to advance one or more of our preclinical programs into the clinical trial stage. We accomplished much in the third quarter of 2016 that enables Atossa to proceed with our exciting drug development programs with a stronger foundation, including raising additional capital, regaining compliance with NASDAQ listing and exciting progress with our microcather fulvestrant study and oral endoxifen programs. Together with our settlement with Besins Healthcare and our recent capital raise of approximately $2.8 million, Atossa ended the quarter with over $4 million in capital which we are committing towards the development of our two drug programs. We also affected a 1-for-15 reverse stock split in August and regained NASDAQ listing compliance. These are excellent developments for Atossa in providing us the capability to exclusively focus on our drug development programs. We have two exciting Phase 2 programs in the breast cancer space. One that is in the clinical study and another that we are preparing for a Phase 2 trial. Our intraductal fulvestrant program is in the neoadjuvant setting, meaning the drug is administered before surgery. And the other program, which we call oral endoxifen for patients refractory to tamoxifen is in the adjuvant setting, meaning it would be administered after surgery. In June 2016, we announced our oral endoxifen drug development program intended for breast cancer patients who are refractory to tamoxifen. Endoxifen is an active metabolite of tamoxifen, which is an FDA approved drug for breast cancer patients both to prevent recurrence as well as new breast cancers. We are very pleased to report that our intraductal fulvestrant microcatheter study was recently accepted for presentation at the San Antonio Breast Cancer Symposium being held December 6-10 2016. This prestigious symposium is designed to provide state-of-the-art information on the experimental biology, etiology, prevention diagnosis and therapy of breast cancer and pre-malignant breast disease to an international audience of academic and private physicians and researchers. The study has been accepted in the “ongoing clinical trials” category, which features studies that have not been completed and which does not permit the presentation of study results. As we discussed in our last quarterly call, our Phase 2 trial of fulvestrant by intraductal installation utilizes Atossa’s patented microcatheter device in estrogen receptor positive women with DCIS or invasive breast cancer slated for mastectomy or lumpectomy which opened for enrollment in March 2016. Atossa’s microcatheters were invented by Dr. Susan Love, a world-renowned breast surgeon and were acquired by Atossa from Hologic. This study will assess the safety and tolerability of fulvestrant when administered directly into breast milk ducts of these patients and is being conducted by Dr. Sheldon Feldman, current President of the American College of Breast Surgeons and Chief of Breast Surgery at Columbia-Presbyterian Hospital in New York City. Providing drug directly into the ducts targeting the site of the localized cancerous lesions could reduce the need for systemic anticancer drugs and potentially reduce or eliminate the systemic side effects of the drugs and the associated morbidity in such patients and ultimately improve drug regimen compliance. The primary endpoint of the clinical trial is to assess the safety and tolerability of intraductal administration of fulvestrant in women with DCIS or Stage 1 or 2 invasive cancer prior to surgery. The secondary objective of the study is to determine if there are changes in the expression of Ki67 as well as estrogen and progesterone receptors between a pre-fulvestrant biopsy and post-fulvestrant surgical specimen. This will help us assess the degree to which the drug is permeating the breast tissue. Mammography before and after drug administration in both groups, will be performed to determine the effect of fulvestrant on breast density of the participants. You may recall Atossa owns an issued patent and several pending applications directed to the treatment of breast conditions including cancer by the intraductal administration of fulvestrant and other pharmaceuticals. In order to understand our main clinical program, it’s important to understand the current uses and market for this FDA approved intramuscularly injected drug and how it will compare to our introductally administered product. Going to again frame the potential market opportunity that’s successful developing our lead candidate conveys. According to the prescribing information, fulvestrant is administered monthly as an injection of two shots typically given into the buttocks. In 2012, a published study documented that the single dose cost of intramuscular fulvestrant was approximately $12,000. Annual sales of fulvestrant are approximately $700 million worldwide and it is an important contributor to Astra Zeneca’s oncology product revenue. So the first potential market for intraductal therapy is to take advantage of the huge difference in the amount of drug that gets into the tissue with the intramuscular injection versus the intraductal route. One analysis suggests that the drug levels in tissue might be over 20,000 times higher when administered intraductally. It is simply impossible to get this kind of tissue level when a drug is administered with the traditional intramuscular route. This high local dose provides the potential to test a one-in-done intraductal treatment modality instead of the monthly injections and to potentially obtain better tissue levels that are possible with IM administration. Doing so would save the healthcare system a lot of money and at the same time potentially improve the safety and efficacy of the drug by delivering it directly to the breast. Even if it turned out the intraductal administration needs to be performed every six months, there is still a huge potential to obtain efficacy with much lower costs. Again crucial Atossa owns the issued patent for the intraductal use of fulvestrant, as well as many other pharmaceuticals. The second potential for use of our patented microcatheters is in the neoadjuvant setting, meaning that a drug would be delivered before the primary treatment of surgery. High drug concentrations at the site of tumor and lack of systemic exposure and subsequent toxicity could represent real treatment advances. The current neoadjuvant schedules can run for three months before surgery and the ability to shorten that by one month or even two months could have immense value to the patient and the healthcare system. As I have mentioned previously with respect to the regulatory path forward, we expect that our program could qualify for a designation under what is called 505(b)(2) status, allowing us to file with clinical data only and without having to perform additional significant clinical or preclinical studies. So the path to market is both faster and less expensive than the standard NDA program. For oral endoxifen being developed for breast cancer patients who are refract to tamoxifen thereby getting little or no benefit from taking tamoxifen, the initial drug supply is under development for manufacturer and we expect favorable developments which we will report as they occur. Our current plan is that we will conduct a small Phase 1 study and then proceed to a Phase 2 trial in 2017. We remain encouraged by our continued progress on both of these programs and as we pursue strategic initiatives that include completion of the oral endoxifen drug development efforts to support an IND filing to the FDA or quarterly filing if we develop outside the U.S. which is anticipated to occur in 2017. I wish to thank our valued shareholders for their continued commitment and support. We are pleased with the achievements we have accomplished in the third quarter and are excited to proceed in advancing our goals of developing and commercializing treatments for breast cancer, DCIS and other breast diseases. This concludes our prepared remarks. I will now turn the call back to the operator for any additional questions.

At this time, we will begin the question-and-answer session. [Operator Instructions] Your first question is from Pooya Hemami at Edison Research.

Yes. Good afternoon. Thank you for taking my question. I am wondering on the fulvestrant study, do you still expect to report some interim data this year?

Pooya, thanks for being on the call. Thanks for your question. As we indicated in the call, we will be presenting this study at the San Antonio Breast Conference and you should hear an update at that point in time.

Okay. So will there be any sort of interim study results presented because I think you were saying at the conference there will be no data specifically that was going to be presented?

Yes. Typically, in this particular category, data is not permitted to be presented. I think the study is ongoing and as we have indicated in our ClinicalTrials.gov filing, the drug – we intend this study to be completed by September 2017.

Okay, perfect. And for the endoxifen program do you still anticipate starting a Phase 1 or I guess human studies next year?

Yes. We expect the Phase 1 to be conducted during the first half of 2017. As we get closer we will refine that timing.

Okay. And can you give us a little bit of guidance in terms of what do you see the approval pathway for endoxifen and also for fulvestrant do you think they will both be 505(b)(2) class?

Yes, we believe they both will be 505(b)(2). With respect to fulvestrant it falls under the category of a new run of administration for an existing drug. We would expect endoxifen falls under the category of an active metabolite of an approved drug. So that’s the legal standing for the regulatory pathway. And the nice feature of both of those is they require a single Phase 3 trial as opposed to two trials and there is benefit gained from the preclinical and other clinical work of the parent molecule.

Okay, perfect. And also for the cash runway would you be able to specify whether you expect it into the second quarter or the first quarter of 2017?

Yes. I am going to let Kyle answer that question. Thanks very much.

Can you repeat that question Pooya, please.

Sorry, so the cash runway is – do you expect it will go into the Q2 2017 or Q1 2017?

Yes, we don’t have a forecast at this time for how long our cash flow will extend and you can see that we had a little over $4 million at the end of September and our cash used in operations during the quarter was about $375,000 a month during that quarter. So based on that math we would take as well on to 2017 the fact of the matter is though that we do expect cash burn rate to increase as we commence additional studies particularly with endoxifen.

Okay. So is it safe to say that for the fulvestrant study the burn rate should be stable but it’s going to increase because of the endoxifen study?

That’s probably a fair way to look at it.

Okay. Well, thank you very much for the color.

Thank you, Pooya.

[Operator Instructions] There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Quay for closing remarks.

Well, again I want to thank you for your attention and support of Atossa Genetics and I appreciate you being on the call today. Thank you very much. Good-bye.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.