Decoy Therapeutics Inc. (DCOY) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2016 Flex Pharma Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks, we will host a question-and-answer session and instructions will follow at that time [Operator Instructions]. It is now my pleasure to hand over the conference over to Elizabeth Woo, SVP, Investor Relations and Corporate Communications. Ma’am you may proceed.

Thank you Brian. Good morning everyone, thank you for joining us to discuss Flex Pharma's fourth quarter and full-year 2016 financial results as well as our recent progress and outlook. Earlier today, we issued a press release announcing business highlights and detailing our fourth quarter and full year 2016 results. You can find these documents on our web site at flex-pharma.com. Today, we will be making certain forward-looking statements about future expectations, plans, events and circumstances, including statements about our strategy, operations and 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-Q and 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 and then open it up for Q&A. And on the call today, I’ll be handing it to Dr. Christoph Westphal, Chairman and CEO of Flex Pharma. He will be followed by Dr. Tom Wessel, Chief Medical Officer; and then Kathie Lindemann, Chief Operating Officer; we also have John McCabe, CFO of Flex Pharma joining for the Q&A. I'll now pass the call to Christoph.

Thanks Elizabeth, thanks to so many of you for joining us this morning. As a team we are excited about accelerating our clinical programs in severe neurological indications such as ALS, MF and Charcot-Marie-Tooth or CMT. For R&D 2016 was a year of learning. Learning how to study this drug in clinical settings, including parallel design patient selection et cetera. Learning about our drug products including its effect size formulation and dose. In three distinct human settings involving muscle cramps, we have seen efficacy consistent effect sizes equal to or larger than a number of marketed neuro drugs. In the exploratory NLC studies with FLX-787, where a neurologist adjudicated in a blinded manner, subject likely to have an NLC based upon a questionnaire administered after the study, the data from first treatment exposure of the 26 adjudicated NLC subjects showed a distinct and clear statistically significant effect in the reduction in cramp frequency when compared to placebo, with a P value of 0.03. In an earlier NLC, study with our extract we demonstrated statistically significant positive efficacy effect in a randomized blinded controlled crossover study with NF50. And then the third setting of course is the human electrically induced cramp model, where we've shown an over 100 subjects efficacy with our mechanism and our drug. And we've also shown a sigmoidal dose-response curve with a P value of less than 0.05 in five subjects. So 2017 for us is a year of execution of our ongoing and upcoming clinical trials including enrollment monitoring et cetera. When we initiate our Phase 2 clinical studies in ALS and CMT FLX-787 will be amongst the most advanced novel clinical compounds in clinical development for these conditions. That then leads us to late 2017 and into 2018, which is a time of results, as we expect multiple studies to conclude across different severe neurological diseases. Now moving on to consumer, for conversely for consumer 2016 was a year of execution and namely getting HOTSHOT developed manufactured launched and in the hands of consumers. Our team successfully launched HOTSHOT mid-year and we are encouraged by the response of HOTSHOT as generated from customers. In consumer, 2017 is a year of building and learning. Building upon our more than 20,000 paying customers including endurance athletes, Olympians and over 200 professional collegiate and high-school teams. Our consumer business is off to a promising start laying the foundation for growth. Continuing on the learning theme for 2017, we are learning now how customers use HOTSHOT potentially for more than just cramping including muscle soreness and recovery. In a recent customer survey, HOTSHOT consumers indicate they experience a reduction in cramps but they also have a reduction in pain and often an improvement of function. Our consumer business provides encouraging evidence that the mechanism of chemical neuro simulation is potentially effective in several neurological indications. 2017 we're also learning where athletes hear about HOTSHOT and what message resonates with them, so we can optimize our marketing efforts and maximize ROI. Finally we are learning enthusiasms for HOTSHOT is highest including geographically and across multiple sports. Lastly 2018 will be a year of results, where when the execution strength that we have shown dovetails with an informed refined and effective marketing strategy to accelerate growth. With over $61 million in cash and investments at year-end Flex is well funded through early 2019 to execute upon our value creating objectives for both our R&D and our consumer businesses. Dr. Dr. Tom Wessel our Chief Medical Officer will now give an update on R&D efforts followed by Kathie Lindemann our COO who will provide a brief update on our HOTSHOT business.

Thank you Christoph. The hyperactive alpha-motor neuron is thought to be the final common pathway involved in fasciculations, cramps, spasms and spasticity apparent in many neurological diseases. We believe our approach with FLX-787 a dual TRPA1 and TRPV1 activator may benefit patients afflicted with numerous neurological diseases. As Christoph mentioned earlier 2016 was a year of learning. It is important to remember that Flex is testing a new therapeutic mechanism. Over the past year, we have gained important insights from these exploratory studies that inform our efficacy studies moving forward. Our key learnings over the past year are; firstly, topical neuro stimulation of TRPA1 and TRPV1 channels clearly reduces muscle cramping in humans in multiple randomized controlled trial setting demonstrating an encouraging effect size in the human electrically induced cramp model in randomized controlled trials of validated nocturnal cramp subjects and in athletes. We continue to present our positive human efficacy data from randomized controlled trial was at medical meetings throughout the year. Most recently we presented a poster at ACTRIMS with upcoming presentations at the American Society for Experimental NeuroTherapeutics, The ASCENT meeting and the annual meeting of the American Academy of Neurology or AAN meeting, which is our third presentation in a row. Secondly we have learned that FLX-787 dosed as an orally disintegrating tablet formulation, similar to the one that will be utilized in our upcoming Phase 2 studies is effective in treating human electrically induced cramps and shows a sigmoidal dose-response curve. Thirdly our experience to-date consistent with FDA feedback this taught us that a parallel study is likely to be a superior trial design to a crossover design for this patient population. We believe parallel design study fits better with regulators and is easier to enroll and is easier to interpret. We have a good understanding of the issues related to patient selection, investigator instructions recording of frequency and severity of muscle cramps and we have initial regulatory guidance regarding study endpoints. Fourthly, no SAEs associated with FLX-787 have been reported. To-date FLX-787 is well tolerated and safe. Since 787 has been studied and over 100 human subjects treated for several weeks of therapeutic doses this provides an unusually extensive human safety and efficacy experience for an agent at this stage of development and bodes well for our Phase 2 study. 2017 is a year execution of our ongoing and upcoming clinical trials. In late 2016, we began in rolling MF and ALS patients in two separate exploratory Phase 2 studies in Australia designed to evaluate the safety and efficacy of 787 in-patients who suffer from cramps, spasms and spasticity as a consequence of their disease. Both studies are similar randomized controlled blinded, which will be analyzed after the first parallel portion as well as after crossover and incorporates a 7 to 14 day washout period before the cost over, which may reduce any carry over effect. Our clinical efforts now focus on accelerating the development of FLX-787 in severe neurological diseases of a ALS multiple sclerosis and peripheral neuropathy such as Charcot-Marie-Tooth neuropathy. We are currently in the process of finalizing our IND application and the protocol for the initial U.S. study, which we will submit in a few weeks. The proposed IND opening study will be a randomized, blinded and placebo-controlled Phase 2 parallel design study of FLX-787 formulated ODT in patients with motor neuron disease primarily ALS who suffer from frequent cramping. This study will include a 28 day run-in period during which patients receive a placebo and record their cramps, spasms and spasticity, twice a day. At the end of this run-in period patients will be randomized if they maintain a minimum level of cramping are compliant with medication and the recording mechanism and lack of pronounced placebo response. Unlike our Australian clinical study which was initiated prior to the FDA feedback we received last fall. The U.S. clinical trial with ALS patients will be a parallel design study in which subjects are randomized either FLX-787 or placebo for the 28 day treatment period with no subsequent crossover period. We expect to evaluate changes in cramp frequency as the primary endpoint with a number of secondary endpoints. Shortly after we have an open IND, we plan to start another randomized, blinded and placebo-controlled Phase 2 clinical study in Charcot-Marie-Tooth patients that will be largely identical to the U.S. Phase 2 ALS study. Let me share some background on Charcot-Marie-Tooth. CMT is the most common form of inherited neuromuscular disease affecting an estimated 150,000 people in the United States. It occurs in populations worldwide with the prevalence of about one in 2500 individuals. The primary clinical features of this disease are slowly progressive distal weakness muscle atrophy affecting feet and legs primarily and sensory loss. A majority of CMT patients experience muscle cramps frequently in many muscles which interferes with sleep exercise daily activities and quality of life for many patients. There are no drug products approved by the FDA to treat cramps in patients with CMT. With our clinical development programs, we expected to find impact of this novel therapeutic approach to control neuronal hyperexcitability and prevent muscle cramps and spasms in the severe neurological indications with the intention of expanding to additional clinical settings in the future. Late 2017 through 2018 will yield a number of data readouts as we expect multiple studies to conclude. I will now hand to Kathie for an update on consumer.

Thank you, Tom. Good morning, everyone. As Christoph mentioned in his opening remarks 2016 was the year of execution for the consumer team namely we developed manufactured and launch HOTSHOT to get it into the hands of consumers in early June on our branded website TeamHOTSHOT.com. Based upon the breakthrough scientific insight by Nobel Prize-winning neuroscientist and endurance athlete Dr. Rod MacKinnon, who created a truly unique consumer brand HOTSHOT, our sport shot with the kick. The first and only consumer products scientifically proven to prevent and treat exercise associated muscle cramps. Since the launch our team has achieved great deal establishing a solid foundation for growth as this unique lifestyle brand. Our marketing efforts are focused on raising awareness of our scientific breakthrough and driving credibility of the HOTSHOT brand amongst our core target market, endurance athletes. We leveraged endorsements from highly respected endurance athletes to share their personal authentic experiences with HOTSHOT, these sponsored athletes have become advocates for HOTSHOT because they personally experience benefits from the product. Our sponsored athletes include IRONMAN World Champion Craig Crowie Alexander and Tim Reed. Olympian Marathoners Shalane Flanagan and Amy Cragg, Olympian Steeplechaser Colleen Quigley, Olympian silver medalist in the Steeplechase Evan Jager and two times Pro Championship football player, James Develin. Our PR campaign resulted in some of the most influential endurance athlete publications Triathlete, Runner’s World, and Competitor Magazine, to name a few. Showcasing the science behind our discovery, which effectively increased HOTSHOT brand awareness and trial. In mid-July, Wall Street Journal published the article, a new way to prevent muscle cramps, highlighting the breakthrough science behind HOTSHOT. The story was one of the top five most popular articles on wsj.com for a full week. We amplified our outreach to endurance athletes participating in high endurance are such as triathlons, marathons and long distance cycling by sampling at marquee events such as the Pan-Mass Challenge for cycling, the IRONMAN World Triathlon Championships in Kona, the New York City and Boston Marathon and numerous other running, cycling and tri events. All of which drove awareness and trial. In response to consumer demand, we successfully executed several new initiatives in 2016 as well. We introduced expedited shipping on TeamHOTSHOT.com enabling our customers to get product within a couple of days often just in time for an event or competition. We launched our subscription program for customers who want to receive HOTSHOT on a regular schedule. And we made HOTSHOT available on Amazon.com. In December, we partnered with TriSports.com to make HOTSHOT available to international customers online. All of these initiatives have been very well received by our customers and we expect that they will drive additional growth in 2017. As a result of these efforts, we exceeded our 2016 plan representing a successful launch year. Recording revenues is just over $1 million, with healthy gross margins north of 50% revenue in Q4 was approximately $300,000 reflecting expected seasonality that we highlighted on our third quarter call. We expect Q4 and Q1 to be lower revenue quarters as they are impacted by seasonality. Q2 and Q3 are expected to be higher revenue quarters given the endurance sport training and competition life cycle, which being only a couple of weeks away we already see signs of increased activity and we're excited about the months ahead. 2017 is a year of building and learning. To drive long-term growth, we have a number of key initiatives planned for 2017 which I'll outline just a few of them for you now. We are building upon our e-commerce foundation and last week we launched a complete refresh of our website featuring more modern styling, new content and hands testimonials, improved navigation and greater branding. Since eCom sales represent the mass majority of our revenue at this stage of our maturation, we expect these improvements to drive engagement, customer interaction and conversion to help grow the business. We are broadening our message with greater emphasis on neuromuscular performance or NMP. NMP is how the nerves and muscles work together in an optimal way enabling athletes to avoid muscle cramp so they can push harder, train longer and finish stronger. And we're learning how customers use HOTSHOT potentially for more than just cramping. Responded to recent survey indicates that HOTSHOT users, many HOTSHOT users received benefits beyond cramping including reduced muscle soreness increased ability to exert oneself, reduce muscle fatigue and improve the recovery. We're working with leading academic centers to study these potential benefits. We're also learning where enthusiasm for HOTSHOT is the highest across geographies and sports. In 2017 we are expanding our geographic reach to markets beyond our three launch markets in Boston, Boulder and LA. These new markets include New York, Northern California, Chicago, Texas and Atlanta all of which were chosen for the significant presence of endurance athletes in the level of interest in HOTSHOT. We are building and growing our base of new customers within our core target audience of endurance athletes through digital and print media, events, local market activation and social media outreach. In less than a year, we have a mass over 20,000 unique paying customers and well over 200 professional collegiate and high school teams who have purchased HOTSHOT. This represents a very solid platform for the brand and serves as evidence that our core brand strategy driven by sampling, media and word of mouth by key influencer target group is working to spread the reach of HOTSHOT. We expect that these athletes will in turn spread the word about HOTSHOT and their endorsement will drive future adoption by a broader audience. We believe our consistent positive feedback and testimonials indicate high customer satisfaction with the product. 2018 will be a year of result when the executional excellence we’ve shown dovetails with an informed, refined and effective marketing strategy in a way that further accelerates our growth. In summary, we've created a compelling new brand in a category in sports nutrition and executed a strong launch. Our proposition is strong, our strategy is sharp and we are delivering on our plan. Our goal is to leverage this solid start to create a world-class consumer brand recognized and relied upon by both hyper-competitive athletes and we week-end warriors alike. I’ll now turn the call back to Elizabeth.

Thanks Kathie. So for the Q&A portion we do have our Chief Financial Officer, John McCabe joining us. And now I’ll ask to hand it to the operator for instructions for participants.

Thank you, ma’am. [Operator Instructions] Our first question will come from the line of Mara Goldstein with Cantor Fitzgerald. Please proceed.

Thanks very much for taking the question. I have a question on 787 and also on the consumer. On the parallel design studies where you are going to have the crossover, where those patients has – will and include a criteria the patients who have had previously treated for like cramps or any type of spasticity?

Just to be clear, these are parallel design studies but there’s no portion in the foregoing studies. And the second question of course, many of them have been on medication but I'll let it – I'll leave it up to Tom, these are all some [indiscernible], go ahead.

The main factor of course in determining whether patients eligible or not simply the prior history of cramping regardless of whether they've been on medication or not in the past. But of course they have to be off of any medication specifically for cramps for at least 30 days and if there are other medications for spasticity and so forth because often baclofen and Tizanidine used in these patients. They have to be on a stable dose but nonetheless have the necessary cramp frequency.

Okay, thank you. And then I think specific on the consumer. Two questions one is when you first launch the product while we have discussions around reserving for returns and trying to establish a baseline for what that might be on a go-forward basis and do you think that you reach that. And then secondarily, on sort of the shift from this sort of exclusive if you will, group of athletes to more I guess week-end warrior. Can you sort of layout for us the timeframe and how that rollout will occur and what the changes will be in terms of the volume for that?

Yes, Mara. This is John. So on the returns – we see returns very well, we don't quite have the history yet to avoid the deferral but with as we approach 2018 especially with new revenue recognition guidance. We're likely to be able to estimate returns beginning 2018 and not have to defer but we have to work through that with our audience to make that conclusion.

Okay.

I’m sorry and then I can answer the question about the week-end warriors.

Thank you.

Was John's answer sufficient before I am going.

Yes, thank you very much.

Okay, sure. So in my reference to week-end warriors, we see that is the future penetration we're laser focused right now on the endurance athlete it's a very sizable market multiple millions of endurance athletes and we have really just started to penetrate that market. But we do know that they're very influential in the athletic community and as they become greater advocates and the word of mouth growth, the trickle down effect will absolutely happen. But our focus this year is very solidly on those endurance athletes.

Okay. So there won't be a committed sort of resources to spending out to week-end warrior this year.

Not in 2017.

Okay. All right. Thank you.

Sure.

Thanks, Mara.

Thank you. Our next question will come from the line of Josh Schimmer with Piper Jaffray. Please proceed.

Thank you for taking the questions. First couple for Tom and – just regard to the mechanism of Flex product how do you know it doesn't overlap with baclofen and then combining with bacloville [ph]. If that is the case but the signal of efficacy might be dampened due to overlapping mechanism?

Well, certainly we feel that there's a good rationale for additive therapy. If patients are already on any of these antispasticity drugs but I just want to remind you that like 787 is a topical nerve stimulant there's actually no systemic absorption. So there's not going to be any drug interaction per se, right. You do touch on an important point though we certainly do want to record carefully what other co-medications these patients are on that lends itself to any type of sub-analysis. But we have not seen any differences there so far in terms of responses being separated by preexisting medications.

Also you evaluated some patients who’ve been on baclofen?

There's a lot of many, many patients taking the baclofen or tizanidine for a number of different indications we've never seen any indication that that launched the effect for our agent.

Okay. And then what’s the primary endpoint are you consider ultimately as a registration endpoint for Phase 3?

Well, of course the preliminary feedback that we have from the FDA is that cramp frequency is an acceptable endpoint. Obviously we're collecting very important data right now to really understand what some of these endpoints actually mean in clinical practice and which ones are sensitive to this type of intervention. But I think my anticipation is that we're going to be sticking with cramp frequency and obviously these other endpoints especially if we had an effect on spasticity, might actually kick on greater importance in the future.

And then a quick question for Linde, I guess you're referenced [indiscernible] for athletes is an important marketing tool I guess little incongruent with your comment that they are also hyper-competitive or such who would not want to share whatever athletic edge they might have on peers of competitors maybe you can kind of explain how those two…

I will take the beginning of that, its hilarious one of our largest investors is an endurance athlete and swears by the product and in fact doesn't like to tell other people about it for that reason. Having said that, we have seen very strong evidence of word of mouth and I’ll let Kathie.

So, fascinating thing Josh about these endurance athletes in particular is that they are really competing most often against their own personal best. And they actually are very, very active in sharing things that are working for them. And Crowie for instance who is the World Champion IRONMAN, he is one of the most incredible advocates in out helping other Triathlete’s learn about whether its training techniques, products that he uses, equipment et cetera. So this particular audience is really actually open to sharing. And like to help others, it's quite an engaged community and they have active social communities where they do share those information. We are finding the opposite on the professional team side. They are very secretive. Because they feel like it’s a secret weapon and they don't really want to tell other teams. But when it comes to these endurance athletes they actually are highly engaged with each other and helping each other perform at their personal best.

And Josh, it would be - it is a shame you are not at the Flex Hour today because one of those championship pro-athletes is going to be here talking about it. So they do share.

Thank you.

Thank you [Operator Instructions] Our next question will come the line of Matthew Andrews with Jefferies. Please proceed.

Hey good morning, thanks for the chance to ask a question. Tom one for me, I appreciate going forward to parallel design will be what you used in the two Phase 2’s here in the U.S. but for the ongoing studies in Australia the crossover design, what gives you confidence that the signal that you’ll get from those studies will actually be cleaner than what was seen in the leg cramp study, so that investors we can get a sense about the products true profile, thanks.

Yes thanks for the question here. First of all, we can of course analyze the first crossover period in these studies in these exploratory studies and that's a very important piece of information of us. We do not know what the extent of any carryover effects might be in these populations. We are of course a little bit sensitized because of our past experience in nocturnal leg cramps, but I do want to remind you we have a 7 to 14 day washout period in these studies. So that might actually help us sort of get back to baseline, so there is a chance that these might be fully valid crossover studies…

And I think most particularly that these are diagnosed patients under the constant care of a physician, right versus a nocturnal leg cramp that is not really a very well defined conditions that’s been followed and diagnosed. So in this case we know that these are very valid ALS, MF patients who have the inclusion criteria that we have identified in our…

Yeah, these patients selection method that Elizabeth is alluding to here, they are very important going forward and we feel that we have a much greater degree of clinical certainty as we look to the various neurological sub-populations that we will truly have patients that are reliable in recording their cramps, spasms and in some populations of course there is spasticity.

Matt, if I could just, it's a great question I want to point out one thing in what I talked about in the introduction is the nocturnal leg cramp study that we reported out. I know you all – you're probably just you all are just digesting it but we actually went with a neurologist and did the post-hoc diagnosis in a blinded manner. When you look at the 26 subjects who are confirmed nocturnal leg cramp subjects in that study, it hits statistical significance for an effect of the drug. So it really highlights that we have an active agent, you just need to have the right patients. And of course we are very certain in ALS, MF and CMT that these patients actually have the disease. That's why we’re really focused on those severe indications.

Got it, okay, great thank you.

Thank you, there are no further questions. So I now it’s my pleasure to hand the conference back over to De. Christoph Westphal, Chief Executive Officer for any closing comments or remarks. Sir?

Great, thanks so much. We are excited to continue to finding the positive impact of Chemical Neuro Stimulation the process by which a chemical signal acting topically is translated into an electrical signal in the nervous system for the benefit of both patients and of course for athletes as well. This novel and important discovery, by Nobel Laureate Dr. Rod MacKinnon and by professor 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 gratified to be providing hope already today to patients and customers alike that suffer from debilitating and painful cramps and spasms. Thanks so much to all of you for joining us this morning.

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