Enanta Pharmaceuticals, Inc. (ENTA) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta Pharmaceuticals' Fourth Quarter Financial Results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Carol Miceli, Director of Investor Relations. You may begin your conference.

Thank you, Kelly, and welcome to Enanta Pharmaceuticals' fiscal fourth quarter and year-end September 30 conference call. The news release with our financial results was issued this afternoon and is available on our website at www.enanta.com. You can also listen to the webcast or the replay by going to the Investors 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'll be making forward-looking statements including plans and expectations with respect to development, regulatory and commercial developments for our licensed product and our product candidates and financial projections, all of which involves certain assumptions, risks and uncertainties that are beyond our control and could cause our actual developments and 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 afternoon, everyone, and thank you for joining us. I'm pleased to able to discuss the progress Enanta has made over the past quarter and during our recent fiscal year. I'd like to begin with a brief overview of our business strategy. Early in our history Enanta utilized a partnering strategy in order to maximize their chances for success in the highly competitive HCV arena. This approach produced the success of an improved combination treatment regimen that included paritaprevir and provided us a nondilutive way to fund our business. Our cash and marketable securities balance is over $200 million. We have royalties on paritaprevir that were running at an annualized rate of approximately $57 million based on the quarter ending September 30. Our second protease inhibitor ABT-493 is being developed as part of a 2-DAA a treatment that AbbVie plans to have approved in the U.S. in 2017. Approvals in major markets would make us eligible for up to $80 million in commercialization milestone payments as well as additional royalties from this product. Given our current cash balance and the prospects for additional revenue streams, we have the resources in hand to fund significant R&D programs for the foreseeable future. We planned to advance two of our wholly-owned programs cyclophilin inhibitor for HCV and an FXR agonist for NASH into the clinic in 2016. We are also advancing other discovery programs in the focused areas of virologic and liver diseases and you'll be hearing more about those programs in the coming months. Now I want to walk you through the key pieces of Enanta's business and point out why we believe the Company is positioned for success in 2016 and beyond. From a financial perspective, our collaboration with AbbVie has provided a solid foundation on which Enanta can grow. In addition to our strong cash balance, we are receiving royalties from AbbVie's net sales of the VIEKIRA PAK, TECHNIVIE and VIEKIRAX, all of which contained paritaprevir. Our royalties on paritaprevir were approximately $34 million in our 2015 fiscal year $14 million of which were earned in our most recent quarter. These sales are still in their first year of launch and we believe there is potential for upside in AbbVie's sales based primarily on introductions of paritaprevir containing regimens into new territories and the anticipated introduction of the new once-daily fixed-dose tablet of VIEKIRA combination recently submitted by AbbVie to the FDA for approval. As VIEKIRA sales continue to ramp up and ABT-493 advances toward commercialization, there is real potential for additional milestone payments and higher royalties to Enanta. Turning now to clinical developments, the last few months have marked important progress for our HCV collaboration compounds including both ABT-493 as well as paritaprevir. Building on the launch of VIEKIRA PAK AbbVie has recently filed a new drug application with the FDA for once-daily fixed-dose formulation of the 3-DAAs in VIEKIRA PAK regimen for the treatment of patients with chronic genotype 1 HCV infection. This new once-daily formulation which is expected to be approved in 2016 would provide a more convenient dosing regimen for patients well in advance of the next generation regimen approval that AbbVie expects in 2017. Let turn now to ABT-493, our next generation pan-genotypic protease inhibitor which is being developed in combination with ABT-530 AbbVie's next generation NS5A inhibitor. Data from AbbVie surveyor studies of this 2-DAA combination demonstrated that after 12 weeks of treatment with doses at or closest to the phase 3 clinical dose SVR rates were 100% in genotype 1 HCV patients, 96% in genotype 2, and 93% in genotype 3. Additional late breaking data from these phase 2B studies also showed that non-cirrhotic genotype 1 HCV patients treated for only eight weeks with this combination achieved an SVR12 rate of 97%. Based on his promising data, AbbVie recently initiated its ENDURANCE-1 study, the first of the series of phase 3 studies of this next generation combination. ENDURANCE-1 will study 8 and 12-week courses of this combination and non-cirrhotic genotype 1 HCV patients. AbbVie is planning for FDA approval of this combination in 2017. Upon its commercialization regulatory approval in key markets, Enanta will be entitled to receive up to $80 million in milestone payments and will also benefit from improved royalty economics because 50% of any net sales of this 2-DAA combination will be allocated to the net sales of ABT-493 for purposes of calculating our annually tiered double-digit royalties for that product. This higher net sales allocation to our product will give us increasing royalties even a constant level of AbbVie's total net sales and that should give us the opportunity to achieve higher royalty tiers more quickly. The success to-date of our AbbVie collaboration as well as the prospects for its future success have positioned us to advance our wholly-owned discovery in preclinical programs on our own without the need for additional dilutive financing. This afternoon, we disclosed in our press release our cyclophilin inhibitor candidate for HCV EDP-494 that we expect it to enter the clinic the first calendar quarter of 2016. Based on growing concerns regarding resistant forms of HCV, we are now focusing special attention on these so-called resistance associated variants or RAVs. Given that certain RAVs cab be challenging to treat with approved DAAs, we believe that high barrier to resistance mechanisms such as cyclophilin inhibitors are going to be increasingly important for the treatment of RAVs in the growing number of DAA failure patients. Cyclophilin inhibitors may have the highest barriers resistance of any class because cyclophilin is a human drug target which unlike the HCV virus itself is non-mutating. New inhibitors are also known to enjoy a high barrier to resistance, so we plan combined a cyclophilin inhibitor with a new to create a combination with two high barrier mechanisms. The goal of this type of combination would be not only to have good activity across genotypes, but also have been activity against important [grabs]. In this program, we've seen uniform activity of EDP-494 against all HCV genotypes tested so far namely genotypes 1 through 5 and perhaps more importantly uniform activity against all genotype1 RAVs tested today including RAVs from all the major DAA classes. These classes include NS3 protease, NS5A, NS5B polymerase inhibitors both nuc and non-nuc. For example, most HCV regiments on the market today and currently in development contained NS5A inhibitors that are generated NS5A mutations ultimately leading to treatment failures. We believe that over time real world treatment failures will continue to emerge even for the next generation therapies and this will create an opportunity for a regimen such as the cyclophilin nuc-driven combination to potentially be an option for these patients. Beyond HCV, our initial preclinical work and non-alcoholic steatohepatitis or NASH has generated several promising leads with excellent potency and activity against the clinically validated target FXR. We are in the process of conducting preclinical studies and are on track to initiate clinical development with an FXR agonist 2016. In addition to NASH, we continue to pilot several other programs within our core strengths of virology and liver disease and look forward to sharing more on these areas with you in the coming months. I'd like to pause here and have Paul Mellett to discuss our financials for the quarter and our financial outlook for the 2015 fiscal year. Paul?

Thank you, Jay. I'd like to remind everyone Enanta reports on a fiscal year schedule, our fiscal year ended September 30 and we are reporting results for our fourth fiscal quarter and year ended September 30, 2015. Enanta ended the quarter with approximately $209 million in cash and marketable securities as compared to $132 million at our September 30, 2014 fiscal year-end. That $209 million balance does not include our $14.4 million multi payment for the quarter which comes in after quarter end or the $30 million milestone payment we earned for this month's reimbursement approval of AbbVie's VIEKIRAX in Japan. We expect that these resources will be sufficient to meet our anticipated cash requirements for the foreseeable future. Our revenue for our fourth fiscal quarter ending September 30, 2015 was $14.4 million, compared to $2.6 million for the three months ended September 30, 2014. This increase in revenue over the prior year was due to royalty income earned on AbbVie's net sales of paritaprevir containing regimens. For the 12 months ended September 30, 2015, revenue was $161 million, compared to revenue of $48 million for the same period in 2014. The increase in revenue for the 12 months ended September 30, 2015 was due primarily to a total of a $125 million in payment earned from AbbVie for the achievement of U.S. and EU commercialization regulatory approvals of VIEKIRA PAK and VIEKIRAX respectively. We expect to have significant royalty cash flow in the near-term which will continue to be dependent on our collaboration with AbbVie. After earning the $30 million milestone payment for Japan, we are not eligible for any further milestone payments from AbbVie until the commercialization of the next generation 8 HCV regimen which AbbVie is planning for 2017. As we did last quarter, we thought it would be helpful to give some guidance as to how to translate AbbVie's future reported sales of VIEKIRA, TECHNIVIE and other paritaprevir containing regimens into estimated royalties for Enanta on a one step basis. For the quarter ended September 30, 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 ended December 31, 2015 which continued to be approximately 3% of such sales. This calculation includes our expectations for the amount of VIEKIRA sales allocated to paritaprevir, the net sales adjustment for our collaboration agreement with AbbVie and the annual royalty tiers under our agreement which is applied on a calendar year basis. Any of these factors could change in subsequent quarters. For example, if AbbVie's sales include a higher percentage of 2-DAA regimen sales such as those of VIEKIRAX in Japan where 45% of those sales are included in total paritaprevir sales for purposes of calculating our royalty then our royalties would increase. And it's also important to remember that in January, we start a new royalty year, which means our royalties on future net sales reset to the first royalty tier of 10%. Given that the vast majority of Enanta's revenue and cash flow is dependent upon AbbVie's commercialization efforts, we offer this guidance to invite our investors a simpler way to estimate the expected royalties flow to Enanta for the quarter ended December 31, 2015. Moving onto our expenses, research and development expenses were $7 million and $5 million for the fourth fiscal quarter ending September 30, 2015 and 2014 respectively. For the 12 months ended September 30, 2015 research and development totaled $23.2 million, compared to $18.7 million for the same period in 2014. The increase in the three and 12-month period year-over-year due primarily to increased internal and external preclinical costs associated with our proprietary research programs. We expect that our research and development expenses will continue to decrease in our next year as advance our cyclophilin inhibitor and NASH programs into the clinic and we increase our R&D capabilities. For our full fiscal year ending September 30, 2016, we expect to incur between $40 million and $50 million of expenses associated with our research and development efforts. These expenses do not include expenses for the development of our licensed product candidates paritaprevir and ABT-493 which is conducted and fully funded by AbbVie. General and administrative expense was $3.7 million for the quarter ended September 30, 2015 and $2.8 million for the comparable quarter in 2014. For the 12 months ended September 30, 2015, general and administrative expense was $13.5 million compared to $10 million the same period in 2014. The increase in G&A in the three and 12-month periods is due primarily to higher stock-based compensation expense as well as additional expenses to support our expanding operation. Net income for the fourth quarter was $5.8 million as compared to a net loss of $5 million in the fourth quarter of 2014. For the 12 months ended September 30, 2015, income was $79 million compared to $34 million for the same period in 2014. The increase in net income during the 12-month period in 2015 was primarily due to $125 million in milestone payments and royalty revenues received. We expect that our effective federal and state tax rate for fiscal 2016 will be approximately 37%. Further financial details will be available when we file a form 10-K for our 2015 fiscal year. I'll now like to turn the call back to Jay.

Thanks Paul. Looking ahead Enanta has never been in a stronger position. Our pipeline has yielded paritaprevir now a part of multiple HCV treatment regimens that AbbVie is commercializing worldwide and ABT-493 which AbbVie plans to commercialize in 2017. We've established a strong financial foundation with the development and approval milestones. We are building on it with growing royalties from paritaprevir and we hold the prospect for further milestones and royalties from AbbVie's pan-genotypic once-daily next generation 2-DAA treatment containing ABT-493. We are able to find our wholly-owned pipeline including advancing a cyclophilin inhibitor candidate into the clinic in the first calendar quarter of 2016 as well as a NASH candidate into the clinic also in 2016. In addition, our financial resources will allow us to keep our options open for future business development opportunities and also to fund several other ongoing discovery programs in our core areas of virology and liver disease. 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 Geoff Meacham of Barclays. Your line is open.

Hey guys this is Curt Ronn for Geoff. First on 494, thank you for the additional color on how you're thinking with the [ASH] said, but with that in mind, is there a path on where you might be able to develop this agent on a faster timeline than recent drugs [indiscernible]. I guess specifically, are there specific variants that you might [advertise] in development versus going forward with like more of a, I guess, pan-genotypic approach? And then second question on the NASH program. Is there any additional preclinical data we can expect to hear about prior to you move into the clinic? Thank you.

Sure. Thank you. So in terms of faster path, I mean the initial path will take the molecule into the clinic and do healthy volunteer studies. I mean obviously, we have got our eye on you know some of the key routes that are out there. Genotype 1 is clearly a large market, but as it turns out the molecule as far as we've been able to see has very good activity across all the genotypes. So with that said, we'll prioritize as we get closer to -- getting to HCV patients and we'll have more to say on that exact strategy closer to that time. With regards to NASH, more pointing to 2016, I think for being in the clinic, we're definitely on track for that and I would expect it will have more to say about the program before we go into the clinic.

Thank you.

Your next question comes from the line of Jessica Fye, J.P. Morgan. Your line is open.

Hey guys. Thanks for taking my questions. First, let me just question on R&D spend and piecing of that spend throughout the year-end 2016, if there is any kind of color you can give there. And then my second question is just more on timings on the ENDURANCE 1 study upon clinical trials, is the expected completion is on January 2017, recognizing there could be some kind of [indiscernible] about the date. I'm just trying to understand how AbbVie could that next gen approved in 2017 and whether they have an execution of priority or you will be granted or whether they expect you to priority review [vouchers] kind of how to think about that in terms of meeting that 2017 timeline?

Well, hey this is Jay. I'll answer the second question first and turn that first question over to Paul. The second question as it relates to AbbVie's timing, I really think we probably shouldn't dive too deeply into that on this call. I don't want to get ahead of AbbVie and [indiscernible] that they have said, so questions about vouchers or priority review or any of those kinds questions are best directed toward AbbVie. What I would say is, ENDURANCE 1 is the beginning of a comprehensive pan-genotypic program in phase 3 that AbbVie has started to set into motion and plans to pretty much get up by the end of this year or so. It should be a pretty robust program as you have grown to see AbbVie do in these sorts of these phase 3s, but penning down more discrete timing than what you have just described. I'm afraid that question should be better directed toward AbbVie. And Paul, you want to talk about [indiscernible].

On the a question about the pace of our quarterly spend from R&D perspective, I would suggest that it will be weighted towards the second half of the year with the ramp up with our external spend in our clinical activities in the second half of the year outpacing the first half.

Okay, got it. And may be just a follow-up on Curt's question, could we actually see human data for 494 in 2016?

Well, it really depends on when and where and how we expect to put it out, but it's not unreasonable this soon now.

Got it. Thank you.

Yes.

Your next question comes from the line of Brian Skorney of Baird. Your line is open.

Hey this is [Colin] in for Brian. Thanks for taking the questions. So first, how do you think about the resistance data from Merck? How you think that will impact the market share if this combo gets approved with the requirement for testing at baseline for mutations? And regarding the second generation combo that AbbVie is developing, are there any potential weak spots in terms of potential resistance? How many mutations do you think we’d need to see in order to achieve resistance to that combo?

Well, it sounds like the first question was about Merck's market share.

Yes.

Yes. It really depends on what the label turns out to be. Quite honestly I think people are wondering about duration and Ribavirin dependence and you know how the label will read with regards to potential RAV testing or not. And I think market share among other things going to directly correlated to how all of that shakes out and I guess we'll know more in a couple of months. With regards to our next generation regimen, this was truly a next generation regimen. I'm speaking for the ABT-493 part right now. When we got ABT-450 first into the clinic, we moved on to the next generation program several years ago and undertook sort of a painstaking look at all the various different genotypes as well as within genotypes looking at a host of different mutations. And so certainly in the laboratory and so far in the clinic, it's played out very well, In fact, some of the data at the AASLD meeting recently that I quoted some of the top-line numbers on just a minute ago. Those are actually numbers that come from basically in intent to treat analysis. So the full story is actually maybe even a little bit more encouraging than that because in the naïve patients that were studied for genotypes 1, 2 and 3, there was no virologic failure at the doses at or closest to the doses that are going to be used in phase 3. There was no virologic failure in the naïve subjects and there was only one virologic failure in the experienced patients that were in either genotypes 1, 2 or 3. And that was actually one patient in a genotype 3 null responder situation. They were in null responder to peg-riba and that was the only virologic failure seen at the doses that are relevant for phase 3 studies. And additionally the eight-week data that was shown at 97%, one of the patients had to discontinue this study because they had an aggressive cancer that developed in the patient later died from the cancer, and so without that patient the eight-week data would have been 100%. So overall the package was very strong even in the presence of some pre-existing RAVs in the study. So you know so far so good, we feel pretty good about the next-gen combination, we look forward to putting out a lot more data next year.

Okay. Thank you.

Your next question comes from the line of Liisa Bayko of JMP Securities. Your line is open.

Hey, thanks for taking the question. Just wondered if you had any update on if and when you might be able to provide us with some of the cut-offs for the different thresholds of royalty which would be very helpful for modeling purposes? Thanks.

Yes. I'm sorry to say that, at this point we cannot give more color. We'll attempt to be able to do that in the future, but as of now we're unable so just to remind people, the lowest royalty tier is 10%, the highest tier is 20%, there are three tiers in between and as sales mount in the bucket so to speak, we have the opportunity to climb to increasingly high tiers. What we're guiding to now especially since we're substantially still in 3-DAA mode is that 30% of the sales from the regimen will be allocated to paritaprevir and then again the first royalty tier is 10%. At some point obviously that gets blended and then you migrate up, so again for right now what we're saying for the next quarter, it's going to be more or less in that 3% range. And again I encourage people to model some scenarios and then at some point I hope that as things progress, it will become clear either because we’ve been given clearance to give more detail on that or because people will be able to sort of start to back into some of the numbers, but that's where we stand right now

Okay. Thanks.

You're welcome.

[Operator Instructions]. Your next question comes from line of Bill Dezellem of Titan Capital Management. Your line is open.

I had to questions. First of all, just following up on that last question, so from as you see it today, it is possible that there will be some royalty above the 10%, your move into that next year, next quarter, not that you're counting on it or want us to model that, but where it is within the range of possibilities, did we do that right?

Yes. I don't want to get into situation on guiding that we will or we won't be in another royalty tier per se, so unfortunately I can't go there. When we are able to say it and again we will and I think people will over time be able to start to clean some of this, but in terms of which quarter and how that will manifest, we'll give more on that at a future point.

Thank you. And then shifting to taxes, tax rate was much higher this quarter than it was last quarter. Would you share with us the dynamics behind that please?

We'll I speak about the total year. Due to a change in [indiscernible], we were able to reduce our state tax rate. So we did the planning on a 40% effective rate combining federal state, it is down to 37% of aggregates with the year.

Thank you.

And there are no further questions at this time. I'd like to turn the call back over to the presenters.

Well, thank you everybody. We'll be in the office this evening, if you have any further questions, feel free to give us a call. Thank you.

And this concludes today's conference call. You may now disconnect.