Decoy Therapeutics Inc. (DCOY) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 2016 Flex Pharma Earnings Conference Call. [Operator Instructions] I'd now hand the program over to Elizabeth Woo, Senior Vice President, Investor Relations and Corporate Communications. Ma'am, please proceed.

Thank you, Brian. Thank you all for joining us this morning to discuss Flex Pharma's second quarter 2016 financial results as well as our recent progress and outlook. Earlier today, we issued a press release announcing recent business highlights and detailing our second quarter 2016 results. You can find these documents on our website at flexpharma.com. Today, we will be making certain forward-looking statements about future expectations, plans, events and circumstances, including statements about our strategy, future operations and the development of our consumer and drug product candidates, plans for future potential product candidates and studies and our expectations regarding our capital allocation and cash resources. These statements are based on our current expectations, and you should not place undue reliance on these statements. Actual results may differ materially due to our risks and uncertainties, including those detailed in the risk factors section of our 10-K filed with the SEC and other filings we make with the SEC from time to time. Flex Pharma disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. We'll provide a brief overview then open it up for Q&A. And joining us on the call today is Christoph Westphal, Chairman and CEO of Flex Pharma; Dr. Tom Wessel, Chief Medical Officer; Kathie Lindemann, Chief Operating Officer; and John McCabe, VP of Finance for the Q&A portion of the call. I'll now pass the call to Flex Pharma’s CEO, Christoph Westphal.

Thanks, Elizabeth. Thanks to so many of you for joining us today. Flex has made significant progress in recent months. Several lines of research support the role of Chemical Neuro Stimulation, a process by which a chemical signal via a small molecule acting topically is translated into an electrical signal in the nervous system for the benefit of patients and athletes alike. This novel and important discovery by Nobel Laureate Dr. Rod MacKinnon and Dr. Bruce Bean may be a generally applicable method to treating disorders of cramping and spasms stemming from alpha motor neuron hyperexcitability. With this platform, we’re developing solutions for both patients and consumers. We have demonstrated efficacy in three human settings involving muscle cramps with consistent effect sizes. First in nocturnal leg cramps, statistically significant positive effects on multiple efficacy endpoints in a randomized blinded controlled crossover study in 50 subjects. Second, muscle cramps in athletes, statistically significant benefits in a randomized blinded controlled crossover study by Penn State researchers in 20 subjects. Third, electrically-induced human cramping model, randomized blinded controlled with over 100 subjects over 200 safety and efficacy data points. The clinical and consumer arms of the business continue to progress well. With our single agent TRP ion channel activator, we initiated and completed enrollment ahead of plan in our human efficacy NLC study. We initiated our Phase 2 MS study and expect to start our Phase 2 ALS study in the coming months. Dr. Tom Wessel, our Chief Medical Officer, will expand upon our clinical progress in his comments. In addition, we are pleased with the strong launch of HOTSHOT, the first scientifically proven formula to prevent and treat exercise-associated muscle cramps for athletes. We began selling our sports beverage on our branded website on June 2 and in specialty retailers in Boston, Boulder and LA. We are pleased with Q2 revenues of HOTSHOT which represented sales from pre-launch orders and online purchases from June 2 through June 9. We are receiving positive feedback from customers, including endurance athletes and Olympians. Several professional teams in the NFL and Major League Baseball are ordering and reordering. Kathie Lindemann, our Chief Operating Officer, with extensive consumer beverage background as COO of DAVIDs TEA and SVP at Starbucks, will provide an overview on our HOTSHOT business. Flex is well funded through the middle of 2018, with approximately $75 million in cash and investments at quarter end as we execute on our mission of helping patients and consumers. I will now hand the call to Dr. Tom Wessel.

Thanks, Christoph. Flex Pharma is developing the leading pharmaceutical agent for nocturnal leg cramps. In May, we announced that we had initiated another NLC study with a single molecule TRP channel activator. This study is a randomized controlled blinded crossover design in over 50 subjects. The single molecule TRP activator is formulated as an orally-disintegrating tablet or ODT. Last week, we reported that enrollment in this study went faster than anticipated and the study was fully enrolled within a couple of months, well ahead of plan. We expect top line results from this study by year end. NLC is age-related and highly prevalent. We estimate NLC affects over 4 million Americans over the age of 65 every night. The rapid enrollment in our NLC study underscores the same substantial unmet need for the millions of people in the US who are suffering from this painful condition and currently have no safe and effective therapeutic options. The current study builds upon our completed Flex-100 study, a randomized controlled crossover study, in which the original extract formulation demonstrated statistically significant positive human efficacy on key endpoints. Results from that study were presented as a late-breaker at the American Academy of Neurology meeting in April 2016, which was selected as one of only 14 abstracts for late-breaking presentations. This study demonstrated statistically significant efficacy results that we believe are clinically meaningful on multiple key endpoints: muscle cramp frequency, cramp-free nights, the physician-rated global impression of change as well as specific sleep disturbance and specific pain measures. So all over highly concordant efficacy results and these positive effects were seen across a broad range of enrolled subjects. Additionally, the product appeared to be safe and well tolerated and no serious adverse events were reported. We are also running an additional smaller dose-ranging NLC study of the single molecule TRP activator. And now as this is ongoing, but the preliminary interim results appear promising, we anticipate providing more details from this added human efficacy study when treatment sequences are more advanced in the fall. We expect the results from this study to inform the optimal dose and design of the Phase 2 clinical trial conducted under the IND, which we expect to begin in the first half of next year in the United States. Moving now from NLC to neurological indications, in June, we initiated a Phase 2 efficacy study in multiple sclerosis patients in Australia. This randomized controlled blinded crossover study is designed to evaluate the safety and efficacy of FLX-787, the company's single molecule chemically-synthesized TRP channel activator in up to 50 patients with MS who suffer from cramps, spasms and spasticity. In addition, in the next few months, we expect to begin enrolling patients in our Phase 2 efficacy study in up to 50 ALS patients in Australia with 787. The study design is similar to the ongoing MS Phase 2 study. In terms of recent sports medicine research, in April, Dr. Larry Kenney and his coworkers, leading academic researchers at Penn State University, presented the positive effect of the company's proprietary formulation on athletic human muscle cramps at the Experimental Biology conference. The proprietary consumer formulation showed a statistically significant benefit in reducing muscle cramps in athletes as compared to vehicle control, as measured by the intensity-duration profile of voluntarily induced muscle cramps. The research at the Noll Laboratory at PSU supported our consumer product and is consistent with our research using an electrically-induced cramp model. In summary, Flex is quickly advancing the clinical development in nocturnal leg cramps and the statistically significant human efficacy data generated in our first NLC study holds great promise as a new treatment for the millions of individuals in the United States who currently have no safe and effective therapeutic options. These recent results encourage us to look beyond exercise-associated cramps and nocturnal leg cramps to spasms and spasticity in MS and other neurological diseases because we believe there are common underlying neurological mechanisms that play related to neuronal hyperexcitability. Our current clinical studies will generate a steady flow of data over the course of the next year. With our ongoing and future clinical development programs, we expect to define the impact of this novel therapeutic approach to control hyperexcitability and prevent muscle cramps and spasms in different clinical settings. I’ll now hand the call to Kathie to discuss the launch of our consumer product.

Thank you, Tom. Good morning everyone. On June 2, we launched our cornerstone consumer product, HOTSHOT, the first scientifically proven formula to prevent and treat muscle cramps, on our branded website www.TeamHOTSHOT.com. The product also became available in dozens of specialty retailers in Boston, Boulder and Los Angeles. Hopefully, many of you have purchased and tried HOTSHOT for yourself. The product messaging and name are unique and provocative and our proprietary packaging is distinctive and bold, appealing to our alpha athlete target audience. We have created a truly unique consumer brand based upon the breakthrough scientific insight by Nobel Prize winning neuroscientist and endurance athlete, Dr. Rod MacKinnon. Our sports shot is the first and only consumer product that has demonstrated statistically significant efficacy in mitigating muscle cramps in rigorous double-blinded human studies. The novel mechanism of Chemical Neuro Stimulation is allowing us to define a new category in sports nutrition called neuromuscular performance or NMP. NMP is how the nerve and muscle work together in an optimal way. We have been educating consumers about our product’s benefit in synchronizing communication between the nerve and the muscle, allowing the muscle to function properly, thereby improving neuromuscular performance to stop muscle cramps. This allows HOTSHOT consumers to push harder, train longer and finish stronger. For Q2, we recorded net revenues of over $112,000, comprised of sales from our pre-launch orders and online purchases from June 2 through June 9. This reflects our e-commerce return policy which requires us to defer revenue for the last 21 days of the quarter due to the fact that we do not have adequate history as a new company to estimate refunds. With more weeks under our belt, we are pleased with the strong launch, driven in part by the Wall Street Journal article in mid-July as well as other targeted media. Sales of our 12-pack are higher than anticipated versus our 6-pack, indicating that customers may be taking HOTSHOT more often to prevent, treat and recover from exercise-associated muscle cramps. With these tailwinds, we are seeing stronger than initially expected demand for HOTSHOT in Q3. Our presence in specialty retail locations is important to drive credibility, exposure and word of mouth among the alpha athlete community who frequent these stores. However, sales via our branded website represent the vast majority of our revenue and we expect that e-commerce will continue to represent a large portion of our revenue as we continue to grow the business. Over a half dozen NFL teams and several other professional teams, including Major League Baseball, have purchased cases of HOTSHOT and we are already starting to see reorders. In launching a cult brand, the strategy is to focus on a small highly defined target audience, ultimately converting them to believers and regular users. Establishing a cult brand takes time and patience to drive usage and adoption among target consumers, for us the alpha athlete. After securing the core, we can expand from a cult brand to a lifestyle brand with broader appeal. Companies like Uber, Clif Bar and Red Bull have employed a cult brand approach successfully, showing a hockey stick growth rate once the product reaches the mainstream audience. For our marketing and publicity, we continue to take a strategic approach, [leveraging TR] word of mouth, digital media and public relations activities. In addition, we are actively managing influential social media channels. Our marketing is focused on raising awareness of our scientific breakthrough to drive credibility for our brand. We are leveraging a slate of scientific and athletic spokespeople, including endorsements from endurance athletes, highly respected among their peer group, such as beloved IRONMAN Champion, Craig Crowie Alexander, and all four of our Olympic ambassadors who will be representing the US in Rio, marathoners Shalane Flanagan and Amy Cragg and steeplechase contenders, Colleen Quigley and Evan Jager. A number of other Olympians, marathoners and swimmers have been sampling the product with favorable results and have been actively tweeting about it as well. In mid-July, the Wall Street Journal published the article, “A New Way to Prevent Muscle Cramps”, discussing the breakthrough science behind HOTSHOT. The story ranked one for three days and remained one of the top five most popular articles on wsj.com for one full week. Our digital and social media campaign has successfully resulted in some of the most influential endurance sports publications showcasing the science behind our discovery. HOTSHOT has been featured in several recent publications, such as Wired.com, Men’s Fitness online, LAVA Magazine, the official magazine of IRONMAN, Esquire online and The Daily Burn. This effort has been complemented by targeted press aimed at active lifestyle consumers and the business community. To date, the PR team has placed approximately 300 stories and generated well over 60 million media impressions, primarily reaching HOTSHOT’s core target audience of endurance athletes. Our PR and media efforts have effectively driven visits to our website. Traffic to our branded website have been strong, receiving a healthy bump in July due to the Wall Street Journal and other social media stories. As of today, HOTSHOT has the number one organic SEO listing on Google, excellent progress in just two short months. HOTSHOT’s social media channels continue to see strong growth. Since June 1, our presence on Facebook has grown 20% to over 15,000 followers and garnered over 10 million impressions. For Twitter, we have seen our following grow more than 10% versus last month alone, generating 300,000 impressions. Our Instagram account has increased its following by 50% versus last month and we are continuously exploring new platforms and have been testing Snapchat as a branded vehicle with such programming as an influential takeover by Olympian Colleen Quigley and custom branded filters. We are driving demand and influencer advocacy through education and strategic sampling at key events in select markets. Given our target audience, we are active at endurance competitions such as the Pan Mass Challenge this weekend in Massachusetts, the Leadville 100 Mountain Bike Race in Colorado, IRONMAN events including the Kona Ironman World Championship and the New York City Marathon. We are also presenting at relevant medical and sports conferences, such as the American College of Sports Medicine annual meeting in Boston and the Sports Nutrition Panel at the Colorado University Sports Medicine and Performance Center. In summary, the team has executed an outstanding launch, creating a new category in sports nutrition in a short period of time. Our proposition is strong; our strategy is sharp; and we are delivering on our plan. Our goal is to build a consumer brand with long term sustainable growth. We will be learning a great deal over the next several months and look forward to updating you next quarter on our progress. I will now turn the call back to Elizabeth.

Thank you, Kathie. We’ll now begin the Q&A portion of our call and joining for the Q&A portion is our Head of Finance, John McCabe. Before opening the call to questions, I’d ask participants ask one or two questions and then allow others to ask their questions and then they can rejoin the queue. So Brian, we are ready to take questions.

[Operator Instructions] Our first question comes from the line of Mike King with JMP Securities.

I wanted to spend a second on NLC, Tom just remind us of are you using similar or identical endpoints for 787 and also maybe talk a little bit about the similarities and differences in the pharmacology versus the mixture?

So 787 is a specific TRPV1 and A1 channel activator and we feel that this has really the optimal balance to trigger a response in those neurons that co-express these two important channels. So what we've done now is to optimize on the compound, on the dose and on the formulation. That's really the thrust of the current work that we're doing in NLC to optimize that. And this is all in preparation so that we can get a running start early in 2017 in our Phase 2b study in the United States.

I'm just curious; I'm looking more for like a PK/PD comparison, and I understand about the selectively, but I just wondered...

As you know, this is a topical neuro stimulation, so interestingly enough with many of these pungent compounds they do not enter into the bloodstream, so there is no systemic exposure and we of course have to carefully gauge the responses that we've observed both in the electrically-induced cramp model, relate those to what we've observed in the nocturnal cramp experiments that we've done and really figure out what is tolerable for patients as well. So it's trying to find that. And it's all driven by pharmacodynamic considerations; PK is really not a concern here.

And Mike you remember and you've addressed I think the key advantage we have, right, we happen to have a situation where we have three different human settings of efficacy already shown at doses, a very unusual situation for a drug. So we actually know it’s an effective dose already in three different human settings.

And then just on the endpoints, Tom?

So these are endpoints that are broadly used in the literature, there's an expansive quinine literature. Obviously, things like muscle cramps frequency over the observation of two weeks or whatever the observation period might be that’s certainly something that comes to mind, cramp-free days, we have found a particularly beneficial effect in terms of just looking at cramp-free nights as an endpoint and that's something that we will be discussing with the regulators here in the United States and elsewhere. You may know that in the UK for instance, there are specific labeling for quinine and we will be talking to the regulators there as well. Other end points, they're sort of clustered around, these key endpoints are physician-related clinical global impression of change. So that's something that often comes up in CNS studies and as you know since this is a sleep medicine application, there are specific questions that we can ask regarding sleep disturbance and pain measures. So luckily, we have a lot of information from these prior studies, so we think that we'll be able to nail it in the Phase 2b study and then move on very quickly to the pivotal studies once we have those results.

Our next question comes from the line of Mara Goldstein with Cantor Fitzgerald.

Just a question maybe [indiscernible] on the MS trial, the Phase 2 trial, is that going to be also a multiple endpoint trial or is there a primary endpoint as it's based on different symptoms of that?

So this is an exploratory study and we have cast our net very broadly because we want to understand what is the impact not just on the short-lived cramps, but also on the more worrisome spasms and the underlying spasticity. As you know for many patients with moderately or far advanced MS, spasticity is a major treatment problem and the drugs that are used in that setting are very sedating. So what we're hoping to see of course is that there is an impact on spasticity and that can be measured with specific scales that our investigators have been trained on such as the Modified Ashworth Scale and the Tardieu Scale which are part of this study. And of course we're looking for patient responses as well that can be easily quantified in the Numerical Rating Scale and so forth. So this is a broad study really, we're getting our feet wet here and understanding how do patients respond, how accurate are investigators in recording this and it's really meant to gear up for larger studies in MS and in other indications where spasticity plays a role.

And so if I could just also ask a follow up then, is the underlying mechanism for spasticity similarly related to the TRP ion channels or is there a thought around that and is that consistent also for ALS and [indiscernible] in ALS patients?

Yes, without going into too much detail on the neurobiology, we think that these circuits are imbalanced in these various neurological disorders, but that neuronal hyperexcitability at the level of the alpha motor neuron is the common theme and for that reason we hope that we will be able to show this in clinical studies. We have many anecdotal reports right know that there are effects observed from individual patients, but of course we are guided by the output from our clinical studies.

And if I could just ask a HOTSHOT question if you don't mind; I appreciate I know it's early days into this very, very concentrated targeted rollout. But in the future calls, will you be able to provide a little bit more granularity in terms of the complexity of what is being ordered whether they're 6-packs or 12-packs, sort of consistency of orders almost like a same-store sales kind of metric?

As to your point, it is early days and we’re evaluating which metrics are most meaningful to track the business. Ultimately we know that revenue is the most important measure, but we are looking at various underlying metrics to determine which ones best correlate to the revenues and the building of a sustainable business. That might be number of visitors that we are able to attract to our website, number of website visitors that purchase, the amount of repeat sales, so there's a number of things that we're looking at for the future.

Our next question comes from the line of Joe Pantginis with Roth Capital Partners.

Also on HOTSHOT, it's nice to see the early success of the e-commerce section. I just wanted to focus on your three geographical markets. I believe you mentioned that you're in dozens of stores in those three areas. Do you look to keep those number of stores stable right now? Are you looking to expand for the rest of the year and then ultimately when do you think you might expand into additional markets?

We intend to keep focused on these three very influential markets for the endurance athlete and while we are looking to expand slightly into other specialty retail stores, it's not a major target. We do know that they add credibility and actually help us to reach our target consumer, but our online business is anticipated to be the major growth vehicle for us.

[Operator Instructions] Our next question comes from the line of Josh Schimmer with Piper Jaffray.

Tom, a couple for you and then one for Kathie. [indiscernible] can you share where you think there is a relevant opportunity as well as patent protection and also give us a sense of when you might be able to share some of your thinking there and will you be using the same products or introducing the TRP activators for new indications? And then what is the gating step for filing the IND for 787? And then Kathie, since much of the revenue is coming from e-commerce, can you discuss the logistics, distribution, shipping and how those factors may impact merchants over the long term?

On 787, we think that there will be broad applicability to conditions where cramping and spasms and spasticity are prominent. And obviously we've now focused on MS and ALS, but we think that there are many other targets that could be quite interesting that will help us in our regulatory strategy. Our belief is that once we've addressed cramping and spasms and spasticity in distinct neurological disorders is that we may be able to achieve overarching broader label for the treatment and prevention of cramps and spasms and spasticity. Obviously this will entail a dialogue with regulators both here and elsewhere, but we're very optimistic and many clinicians have actually approached us with terrific ideas. I'll give you one example, in renal hemodialysis on many occasions do have cramping and this obviously is a big problem acutely addressed in that setting where we basically have a captive clinical population that we can [indiscernible]. So that’s just one example of many. And I’m going to give the second question to Kathie.

Josh, you might want to mute you phone, it sounds like you’re in a train station, maybe buying some HOTSHOTs there.

Josh, your question about our distribution, we have partnered with Amazon to do all of our fulfillment, which actually gives us significant capacity and is working quite well and they certainly are able to negotiate the best rate possible for the shipping of our product and our product is shipping free of charge to customers unless they choose expedited shipping and we have recently added that as a feature because we do have some people who find that they need it quite urgently if they have an upcoming event. So I don't know if that answers your question specifically?

I was also asking about the margin impact of the shipping costs?

Okay, so we are looking with all the costs in our business of maintaining gross margins north of 50%, which is actually quite healthy in the CPG world.

We have follow-up questions from the line of Mike King with JMP Securities.

I wanted to focus on HOTSHOT too. I heard the commentary about the accounting for returns, do you have any sense of how long or what kind of a track record you need to build in order for you to start reporting sales on a more conventional basis?

There's no bright line, but the SEC literature suggests two years of history, but it's also dependent on volume and pattern. So we're going to assess that in the future as we build more history. But generally, SEC – suggest two years of history.

So on that front then, John, do you – I guess the question is it's kind of a chicken and egg problem, when do you start giving guidance or when do you start providing us with metrics, I mean, quantitative metrics in terms of whatever boxes shift or revenues and such matters like that?

So I think there's a couple points as I know as Kathie mentioned, we're starting to look at metrics and what's meaningful to report. I’ll also point out that the deferred revenue on the balance sheet gives you an indication of what has been deferred in each quarter, so that will give you a little bit of a guidepost as to what's on the balance sheet related to shipments.

Have you given any thought to when you might start thinking about guidance or is that off the table for now?

I think it’s early days, so we are hesitant to give guidance as we're really learning about...

I wasn't asking for it now, Elizabeth, I'm just saying it’s down the road.

Let me see how things go.

Great, thank you for taking the follow up.

And I think that’s our last question and so now we’ll turn the call back to Christoph for closing comments.

Thanks so much, Elizabeth. During the first half of the year, we exceeded our expectations on a number of timelines and milestones we established for ourselves at the beginning of this year. We will continue our work defining the positive impact of Chemical Neuro Stimulation on reducing muscle cramps and spasms in several important settings as we create a leading neuromuscular company, built on our strong foundation of both excellent people and great clients. Thanks all of you for joining us this morning.

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