Enanta Pharmaceuticals, Inc. (ENTA) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Colia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta second quarter financial results conference call. [Operator Instructions] Thank you. I would now like to turn the call over to our host, Carol Miceli. Please go ahead.

Thank you, and good morning everyone, and welcome to Enanta Pharmaceutical's fiscal second quarter financial results conference call. The news release with our financial results was issued this morning at 7:30 and is available on our website at www.enanta.com. You can also listen to the webcast or replay by going to the Investor section of our website. On the call today is Dr. Jay Luly, President and Chief Executive Officer; Paul Mellett, our Chief Financial Officer, and other members of our senior management team. Before we begin with our formal remarks, we want to remind you that we will be making forward-looking statements including plans and expectations with respect to regulatory and commercial developments for our product candidates, milestone payments and financial projections, all of which involves certain assumptions, risks and uncertainties that are beyond our control and could cause our actual results to differ materially from these statements. A description of these risks can be found in our most recent Form 10-K and other periodic reports filed with the SEC. In addition, Enanta does not undertake any obligation to update any forward-looking statements made during this call. I'd now like to turn the call over to Dr. Jay Luly, President and CEO.

Thank you, Carol. Good morning, everyone, and welcome to our fiscal second quarter financial results conference call. In a few minutes, Paul will briefly highlight our financial results for the quarter and provide guidance on our R&D expense, tax expense and royalty assumptions. But first I want to talk to you about why we are excited about our prospects for the futures. We passed our two year anniversary of becoming a publicly traded company. As most of you know, Enanta is a research and development-focused biotechnology company, creating small molecule drugs for viral infections in liver diseases. In a short period of time we've seen our first product progress from discovery through to commercialization by AbbVie, and we've also seen our promising pipeline begin to mature, all while building a highly efficient small company and maintaining an entrepreneurial culture. Earlier in our history, we made a strategic decision to work with pharmaceutical partners in order to participate in the large and growing HCV market, a market that would be difficult for a small biotech to compete in alone. We also made the decision to build world-class chemistry expertise as well as early stage development capabilities. Those decisions paid off last December with our first approved royalty bearing drug paritaprevir. This protease inhibitor is a part of AbbVie's treatment regimens for HCV currently being sold in the U.S., Europe and other territories. This success has given us an unusual biotech profile. We have strong financial resources and substantial non-dilutive cash flow to fund future R&D of our proprietary pipeline, including our NASH program. Those resources also allow us to keep our options open for future business development opportunities. As of the end of our recent quarter, we had approximately $227 million in cash and liquid investments, a strong foundation for us to fuel our progress. Currently, our primary source of cash is tied to the HCV market. So I'd like to provide some context around how we think about that market in relation to Enanta. We believe the global HCV market is large and sustainable, and we expect AbbVie to grow its share of that market in the next 12 months, as it initiates additional reimbursement agreements, as it obtains regulatory approvals in additional major markets such as Japan, and as it extends it's reach to special population such as HIV/HCV co-infected patients and patients with severs renal impairment. Our partner AbbVie has indicated that it expects the VIEKIRA launch in the U.S. to accelerate over the next quarter, as more peer contracts go online. AbbVie management has also reiterated that it expects to exit calendar 2015 at a run rate of worldwide VIEKIRA sales in excess of $3 billion. So how does Enanta benefit from this market? I have spoken about our four waves of HCV opportunity. And I want to review them quickly here and explain how they position Enanta for success in the future. Our first wave is the paritaprevir containing three direct acting antiviral or 3-DAA regimen. We are currently receiving royalties from our partner AbbVie on the worldwide net sales of this regimen in the U.S. and other territories. Our second wave is AbbVie's 2-DAA regimen consisting of paritaprevir and AbbVie's NS5A inhibitor ombitasvir. This regimen is currently on the market for genotype 4 in the EU. It is also now under regulatory review in the U.S. for genotype 4, where it has been granted breakthrough therapy designation and priority review. Additionally, it is under regulatory review in Japan for genotype 1, where it was recently granted priority review. As a reminder, there are approximately 1.5 million to 2 million people in Japan living with HCV. Our third wave of opportunity is our next-gen HCV protease inhibitor ABT-493, also identified in our AbbVie collaboration. The goal of our next-gen program is to offer a pan-genotypic interferon-free and ribavirin-free once daily dosing regimen for HCV patients. ABT-493 has been co-formulated with AbbVie's next generation NS5A inhibitor ABT-530. This combination is an exciting next-gen regimen looking at 12 and 8 week treatment durations. AbbVie recently announced promising phase 2b preliminary results from this combination regimen in 79 non-cirrhotic genotype 1 patients receiving treatment for 12 weeks. These results included both genotype 1a and 1b treatment-naïve and prior null responders to PEG/RBV therapy and demonstrated a sustained virologic response rate at four weeks post treatment of 99%. Our fourth wave of HCV opportunity is our wholly-owned HCV pipeline. Based on growing concerns regarding NS5A resistance-associated variants or RAVs, we believe that high-barrier to resistance mechanisms are going to be increasingly important for the treatment of HCV patients who have failed on recurrent therapies. Our cyclophilin inhibitor and nucleotide polymerase inhibitor classes of compounds offer such high barrier mechanisms and candidate identification continues. Building beyond HCV using our proven expertise in virology and liver diseases, we've turned our focus to new areas of growth for Enanta. Our newest program disclosed in January is a program for non-alcoholic steatohepatits or NASH. As many of you know, NASH is becoming the number one cause of liver disease in western countries as associated with other diseases including type-II diabetes, insulin resistance, obesity, hyperlipidemia and hypertension. Our initial preclinical work in NASH has generated several promising leads with excellent potency and activity against the clinically validated target FXR. In addition to NASH, we are piloting several other programs within our core strength in virology and liver disease and look forward to sharing those programs with you at a later date. We are highly focused and committed to these new programs and have recently hired several key scientists to augment and accelerate our efforts. We are also expanding our operations within our Watertown headquarters to accommodate our planned growth. I'd like to pause here and have Paul Mellett discuss our financials for the quarter and our financial outlook through the remainder of our fiscal year.

Thank you, Jay. I would like to remind everyone that Enanta reports on a fiscal year schedule. Our fiscal year ends at September 30, and we are reporting results for our second fiscal quarter ended March 31, 2015. As Jay pointed out we are unusual for a small biotech, one with cash and earnings growth, so after I briefly review our results for the quarter I would like to provide you with additional guidance on how to think about Enanta from a financial perspective for the remainder of the year. Enanta ended the quarter with approximately $227 million in cash and marketable securities as compared to $131.8 million at our September 30, 2014 fiscal yearend. We expect that these resources will be sufficient to meet our anticipated cash requirements for the foreseeable future. Our revenue for our second fiscal quarter ending March 31, 2015, was $57.4 million compared to $2.2 million for the three months ended March 31, 2014. For the six months ended March 31, 2015, revenue was a $134.9 million compared to revenue of $3.1 million for the same period of 2014. The change in revenue year-over-year for the three and six month's periods was primarily related to the timing and amount of milestone and other payments from our AbbVie collaboration. We expect to have a sustainable cash flow in the near term and we'll continue to be dependent on our collaboration with AbbVie. We continue to expect the timing and amount of milestone and other payments to vary significantly from period to period. We are not in a position to make any projection of the amount of royalties on paritaprevir for future periods. However, we thought it would be helpful to give some guidance as to how to directly translate AbbVie's future reported sales of VIEKIRA into estimated royalties for Enanta on a one-step basis. For the quarter-ended March 31, 2015, our paritaprevir royalties represented approximately 3% of AbbVie's reported VIEKIRA regimen sales, and we expect royalties to Enanta on reported VIEKIRA sales in the quarter ending June 30, 2015, would continue to be approximately 3% of such sales. This calculation includes our expectations in the amount of VIEKIRA sales allocated to paritaprevir, the gross to net sales adjustments and the annual royalty tiers under our agreement, which are applied on a calendar year basis. Given that the vast majority of Enanta's revenue in cash is dependent upon AbbVie's commercialization efforts, we offer this guidance to provide our investors a simple way to estimate the royalty flow to Enanta for the quarter ended June 30, 2015. Moving on to our expenses, research and development expense was $5.4 million and $4.7 million for the second fiscal quarters ending March 31, 2015 and 2014, respectively. For the six months ended March 31, 2015, research and development totaled $9.9 million compared to $9 million for the same period in 2014. The increase year-over-year is due primarily to increased preclinical cost associated with our proprietary research programs, which include our internal HCV programs. We expect that our research and development expenses will continue to increase modestly over the remainder of our fiscal 2015 year as we advance our independent HCV programs and continue our preclinical research on our NASH program. For our full fiscal year ending September 30, 2015, we expect to incur approximately $28 million of expenses associated with research and development, which is exclusive of expenses incurred by AbbVie in developing our license product candidates paritaprevir and ABT-493. General and administrative expense was $3.4 million for the quarter ended March 31, 2015, and $2.6 million for the same quarter in 2014. For the six months ended March 31, 2015, G&A expense was $6.2 million compared to $4.6 million for the same period in 2014. The increase in G&A is due primarily to higher stock-based compensation expense as well as additional expenses incurred as a result of our operating as a public company. Net income for the second quarter was $28.8 million or $1.49 per diluted common share as compared to a net loss of $5.2 million or a loss of $0.28 per diluted common share in the second quarter of 2014. For the six months ended March 31, 2015, net income was $70.8 million compared to a net loss of $10.6 million for the same period in 2014. I would like to remind you that during the quarter we recently earned and received a $50 million milestone payment from our partner AbbVie for the commercialization regulatory approval of VIEKIRAX in the EU, and this payment is reflected in our March 31 financial results. And together with the $75 million milestone payment earned in December has increased our balance of cash in short-term and long-term marketable securities. Our income tax expense for the quarter was approximately $20 million, which reflects the $50 million of regulatory approval milestone earned in this quarter. We expect that our effective tax rate for the remainder of fiscal 2015 will reflect the full applicable combined U.S. federal and state statutory tax rates. This represents a tax rate of approximately 40% for the current quarter, and the remainder of our fiscal year. Further financial details will be available when we file our Form 10-Q for this quarter. I'd now like to turn the call back to Jay.

Thanks, Paul. Having outlined our sources of cash and expectations for our first marketed products paritaprevir, I'd like to wrap up our formal comments by reminding everyone that we have several milestones to look forward to in the remainder of calendar 2015. Within our partnered HCV program with AbbVie, we anticipate that later this year additional phase 2b data will be released and phase 3 trials will begin on the next-generation combination containing protease inhibitor ABT-493. In Japan, we expect AbbVie to gain commercialization regulatory approval for the 2-DAA regimen containing paritaprevir in the second half of calendar 2015. This will trigger a $30 million milestone payment to Enanta. We plan to concentrate our internal HCV efforts on high barrier to resistance mechanisms anticipating growing resistance problems in the future. With our NASH program, we expect to select the candidate by the end of 2015, and initiate clinical studies in 2016. In summary, with commercialize regimens containing paritaprevir moving ahead and a next-generation regimen being developed with ABT-493, we expect to have the financial resources needed to help build and expand the business and fuel our internal HCV pipeline, our new NASH program and our other programs being piloted in the virology and liver disease areas. I'd like to stop now, and open up the call to Q&A. Operator?

[Operator Instructions] Your first question comes from the line of Jessica Fye of JPMorgan.

Just with respect to that guidance around the royalty rate, I think 3% would sort of imply we're still at the 10% royalty on 30% of VIEKIRA sales, and recognizing there are some issues with fiscal year and calendar year. But if AbbVie hits their $3 billion run rate that they've talked about for VIEKIRA, exiting calendar 2015, can you talk about whether you would still be in the royalty range that you've pointed to for the next quarter or whether you would start to move out of that range?

So you are correct. Right now we're in the process of starting with, if you will, and empty net sales bucket with start of the launch, and we're progressing the filling of the bucket of net sales. At some point, as we've stated before, we go from low double-digits or effectively 10% up to higher tiers. And we have not disclosed per the AbbVie agreement, where those royalty tiers breaks are. But it's fair to say that as AbbVie does grow the sales, we will march up into higher tiers. There is a blending that occurs. I'll remind everybody that the low part of that bucket that fills up, gets the lowest tier than the incremental sales on top of that, get the next higher tier and so on, and then you blend it all up. Another thing that's going to go on in addition to growing the sales is we expect over time that there will be an enrichment of combinations that are 2-DAA containing, such that right now, as I think you know we're getting net sales substantially on the 3-DAA regimen where we get our royalty on 30% of those net sales. With time, the 2-DAA regimen containing paritaprevir and ultimately our next-gen program too will push us up into higher percentages too. So it's two factors that overtime will help to improve that number potentially from a straight 3%. It will be a growth in net sales and ultimately stepping into blended higher tiers. And also an enrichment beyond a 3D regimen in terms of those net sales, where our economics are slightly better.

And then, I guess, just quickly on the NASH program. I think, you said, that we would hear about a candidate being selected by around yearend. Is there any other data that we're going to hear coming out of this program in the next 12 to 18 months?

In the 12 to 18 months timeframe, I would imagine the answer is yes. We're working in a very spirited manner to refine that candidate right now. And again, I think we're on track to doing that later this year. So exactly how and when and where that data will trickle out in the conferences or scientific meetings, or what have you, we don't quite have that visibility, but I would imagine over that time and horizon, the answer would be yes.

Your next question comes from the line of Howard Liang of Leerink Partners.

This is Rich Goss calling in for Howard. Do you have a sense as to when you might select your nuc and cyclophilin inhibitor candidates and what you might expect to advance first?

We're still trying to identify one of those by this year as well. We're marching ahead, exactly which would come first. Likely one will come before the other. It's really hard to say until you're done. We've made some good progress on cyclophilin certainly. It's an interesting class, as you know, for the host targeted approach that we've incorporated into our high barrier strategy. But with regards to the exact timing, again we will know it when we've got it. I think we're getting pretty close, which ones is first I'm not sure yet.

And then just in terms of the cyclophilin inhibitor, I realize it's still early days, but where would you anticipate that fitting in, in terms of combinations with other DAAs?

Well, one of the things that we're seeing, and I think a lot of us were over at the European liver meeting recently, EASL, in Vienna, one of the striking observations I think from that meeting is some of the challenges that certain regimens are having with some of these resistance mutations, the RAVs, particularly popping up against certain DAAs and NS5As in particular. So I think Merck saw some data where they had some challenges with certain NS5A mutants that were out there. I think Gilead and their retreatment work, retreatments of Harvoni failures, similarly saw some challenges with regards to some of these sort of [ph] FED mutations that were popping up. And so I think it was, we've always known that they are out there and that that potential is there, but I think now we're starting to see real world challenges and consequences of there having been RAVs developed to the first-generation products over time. And so what we're doing is, we've always been interested in high barrier mechanisms, as I think you know, but I think it really points to an increasingly important role that a really high barrier resistance combination could provide. To some extent we're trying to cover that base with our next-generation protease inhibitor program with AbbVie where we've got a next-gen, next-gen combo. Obviously, we're going to be taking that combination in and looking at its power against some of these difficult resistance problems. But one thing I am pretty sure of is that world can't have enough horsepower in that category, and so we're particularly intrigued with the possibility of a cyclophilin nuc combo, where you have a high barrier of the nuc and you have the high barrier of a cyclophilin, and we don't have any -- may not need any additional DAAs in that mix. So that would allow us to really target, not only against easy to treat patients, if we aim for the hardest to treat, we ought to be able to get the easiest to treat. But I think a really interesting opportunity over time maybe in mopping up some serious resistance problems that have fallen through the cracks in the real world of treating HCV patients.

Your next question comes from the line of Matt Dhane of Tieton Capital.

You folks guided research and development expense for $28 million for the full year. I was hoping you could discuss the staffing increase cadence, and then how should we be thinking about the R&D run rate at yearend? So I guess, just getting a sense of future R&D expense?

As I stated earlier on the call, we do expect to run around $28 million for the full year. We are adding certain skill sets as required as we grow the company and we move into new programs. We also expect our G&A to increase a bit too over those similar timeframe. For fiscal 2016, I expect the R&D expense to continue to grow. It won't be a multiple of 4x or 5x, but it will continue to ramp up in a consistent pattern that we've gone through over the past few years, as we increased our spending, primarily our external spend on our internal programs. When we get into preclinical work, and particularly when you get into clinical phase 1 study, things along those lines, the price tag goes up significantly, so we expect it to ramp up probably consistent on the trend you've seen over the past few years with us.

There are no further audio questions. I would now like to turn the call back over to Carol. Please, go ahead. End of Q&A

Thank you. Thank you, everyone, for joining us today. Please feel free to give us a call or email, if you have any further questions. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.