Enanta Pharmaceuticals, Inc. (ENTA) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta Pharmaceuticals' Third Quarter Financial Results 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] I would now like to turn the call over to our host, Ms. Carol Miceli. Ma'am you may begin your conference.

Thank you, Jason, and thanks for joining us this afternoon. The news release with our financial results was issued this afternoon, and is available on 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 Enanta's 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 our product candidates and financial projections, all of which involve 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 and uncertainties is in our most recent Form 10-Q 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, thank you for joining us today. Let me begin by providing updates on our key development programs, and then Paul Mellett will discuss our financial results for the quarter. First so, I want to comment on our increasing royalty revenue from AbbVie related to MAVIRET, currently the best-selling HCV drug in the world. As well as today's announcements, Express Scripts that it has excluded MAVIRET from its HCV formulary for 2019. As a preliminary matter, this announcement only affects the formulary where 2019 has no impact on MAVIRET access in 2018. More importantly AbbVie has advised us that Express Scripts sales represent only a small percentage of MAVIRET sales in the US this year and that AbbVie does not believe there will be any significant change in market access for MAVIRET in the US in 2019 compared to 2018. On AbbVie's recent financial results conference call, management stated that MAVIRET has now achieved a leadership position in the US as well as the strong leadership position in a number of other major markets including Japan, Germany, Spain and Italy among others. Royalties on MAVIRET from the quarter ended June 30 moved into higher royalty rate tiers which increased our royalties to $57 million from $44 million in the prior quarter an increase of 30% quarter-to-quarter. Based on AbbVie's published guidance of $850 million for the quarter-ending September 30, we expect our royalties earned will continue to increase due to the cumulative net sales during the calendar year advancing Enanta into an even higher royalty tier under our agreement with AbbVie. Paul will discuss this in more details in a few minutes. I'd like to turn now to our research and development efforts beginning with our RSV program which recently completed dosing in the phase one trial and has additional near term milestones. EDP-938 is our lead compound being developed for the treatment of RSV or respiratory syncytial virus infection. RV infection is an area of high unmet need particularly for instance less than two years of age and immune-compromised adults. Currently the only approved agents for the treatment of RSV is Ribavirin, which is not recommended for infants and is infrequently used in adult patient population. EDP-938 is a potent non-fusion inhibitor targeting the end protein in RSV and the only inhibitor in clinical development today. EDP-938 works by inhibiting the replication machinery of the virus and as a result has the potential to be more effective at later stages of infection than fusion inhibitors. This is an important factor as patients with RSV would generally not receive medical care immediately after infection. As a result, drugs with mechanisms that target early events of infections such as fusion inhibitors maybe dose too late to treat the infection in real world settings. This afternoon we announced preliminary Phase 1 results that demonstrated that EDP-938 was generally safe and well tolerated and support its progression to Phase 2. We hope to report more of the [indiscernible] data from the Phase 1 study later this year at an appropriate medical conference. As in all clinical trials safety and efficacy are the two keys unknowns in the success or failure of a study. For our RSV program, we believe the Phase 1 trials and important de-risking event for the program from a safety perspective as RSV is one of the few indications where the seven day dosing duration in the MAD portion of the Phase 1 study is comparable in dosing duration to our planned Phase 2a challenge study, and will likely be applicable to Phase 2b and Phase 3 studies as well. In the fourth calendar quarter of this year, our next step in the program would be to begin the Phase 2a human challenge study in healthy adults and occulated with RSV. Moving to NASH and PBC and [indiscernible] continues for our two Phase 2 clinical studies with EDP-305. Our FXR agonist candidate. In NASH our Phase 2 clinical study, named ARGON-1 is a 12-week randomized double-blind placebo controlled study evaluating the safety, tolerability, pharmacokinetic and efficacy of EDP-305 in subjects with NASH. As primary endpoints, this proof of concept study will assess safety and changes and alanine transaminase or ALT levels an important measure of liver injury in NASH. This study will also focus on evaluating multiple secondary endpoints to play a significant role in NASH including imaging and noninvasive markers of fibrosis and steatosis. In PBC, our Phase 2 clinical study named INTREPID is a 12-week randomized double-blind placebo-controlled study evaluating the safety, tolerability, pharmacokinetics, and efficacy of EDP-305 in subjects with PBC with or without an inadequate response to ursodeoxycholic acid, a currently available chronic treatment for PBC. The efficacy of EDP-305 will be assessed by evaluating reductions in levels of alkaline phosphatase or ALP versus placebo. These studies will continue to enroll throughout the remainder of 2018 and into 2019, we anticipate sharing preliminary data in mid-2019. Let's move on to HBC. It's been estimated that 250 million people worldwide are infected with HBV, and there is no effective cure. Our HBV program continues to move ahead and is generating promising inhibitors of the core protein. Core inhibitors sometimes referred to as capsid assembly modulators or core protein allosteric modulators are a new class of HBV inhibitors that can disrupt the assembly and replication of this virus at multiple steps in the viral lifecycle. We believe that it may be necessary to utilize more than one mechanism for the treatment of HBV, and we are now exploring multiple approaches in addition to core inhibition. As we continue to strengthen our patent portfolio, we have advanced multiple new core inhibitors through pre-clinical testing and we hope to announce our first HBV candidate later in calendar 2018. I'm proud of the promising liver and viral disease pipeline that the team at Enanta has built. Our chosen therapeutic areas build on our core expertise in HCV where we have achieved success before and I look forward to more success in the future. I'll stop here and turn the call over to Paul to discuss our financials for the quarter. Paul?

Thank you, Jay. I'd like to remind everyone that Enanta reports on a fiscal year schedule. Our year-ended September 30 and today we are reporting results for our third fiscal quarter ended June 30, 2018. The three months ended June 30, 2018 revenue was $57.3 million compared to revenue of $7.5 million for the same period in 2017. The increase in revenue in the current quarter was due to an increase in royalties earned on AbbVie's $973 million in global sales of hepatitis C virus regimens including royalties on 50% of the $932 million of MAVIRET sales in the quarter. As Jay mentioned earlier, we expect our royalties earned will continue to increase in the next quarter due to the cumulative sales earned during the calendar year which brings Enanta into higher royalty tiers under our agreement with AbbVie. Based on AbbVie's recent HCV guidance and given that we have entered into higher royalty rate tiers, we now expect that AbbVie realizes its recent projection of approximately $850 million in global HCV sales for the quarter ending September 30, 2018 and substantially all of those sales continue to be MAVIRET. We would expect our royalties on AbbVie's net sales of HCV regimen for that quarter to increase to approximately $67 million. Assuming AbbVie achieves $3.6 billion in total HCV sales in calendar 2018 consistent with their guidance of more than $3.5 billion and substantially all of those sales continue to be MAVIRET, we would expect to earn royalties in the quarter-ending December 31 of approximately $72 million. However, in any event we would not expect our royalties to hit the 20% royalty tear in that period. I will remind you that Enanta is eligible to earn annually tiered double-digit royalties on 50% of AbbVie global net HCV sales of MAVIRET. This means that our average royalty rate for a given royalty year will restart to the lowest rate in our quarter-ending March 31 and will be highest in our quarter ending December 31. Moving on to our expenses for the three months ended June 30, 2018 research and development expenses increased to $28.5 million compared to $15.4 million for the same period in 2017. The increase was primarily due to greater preclinical and clinical cost associated with the progression of our wholly owned R&D programs in NASH, PBC, RSV and HBV. General and administrative expenses for the quarter was $6.1 million versus $5.2 million for the comparable quarter in 2017. Enanta recorded income tax expense of $3.7 million for the three months ended June 30, 2018 compared to an income tax benefit of $4.1 million for the three months ended June 30, 2017. During the three months ended June 30, 2018 income tax expense reflected the significant increase in pretax income during the quarter offset by the impact of excess tax benefits from stock award activity. Enanta's estimated effective annual tax rate for fiscal 2018 of 22.2% includes the impact of the non-cash valuation charge against deferred tax assets to reflect the reduced federal corporate income tax rate as a result of the enactment of the US Tax Cuts and Jobs act. Net incomes for the three months ended June 30, 2018 was $20.3 million, or $0.97 cents per diluted common share compared to a net loss of $8.4 million or $0.44 per diluted common share for the corresponding period in 2017. Enanta ended the quarter with approximately $296 million in cash and marketable securities consistent with our September 30, 2017 fiscal year-end balance of $294 million. We expect that these cash resources are receivables for our royalties earned this quarter and our future royalty cash flow for MAVIRET will be sufficient to meet our anticipated cash requirements for the foreseeable future. Further financial details are available in our press release and will be available in our Form 10-Q for the quarter when filed. I'd now like to turn the call back to the operator and open the lines up for Q&A. Operator?

Yes, sir. [Operator Instructions] And your first question comes from Brian Abrahams of RBC Capital Markets.

Hi. Thanks so much for taking my questions. Congrats on the progress with 938. Just wondering, recognizing the specific details are going to be saved for a medical meeting, but wonder if you could maybe talk a little bit more qualitatively about what you saw in Phase 1, if you could provide maybe anymore color in the PK properties whether this looks like a once a day or multiple times a day drug? And sort of how you're thinking about the design of the challenge study coming out of the Phase 1 if this would be a loading dose or not. The duration of that study et cetera. Thanks.

Sure. Thanks for the question Brian this is Jay. So, again we're very pleased with the results from the Phase 1 and we are going for a conference later this year to put out all the nitty gritty of all the detail, but again I would say well tolerated. We think it's got a good PK profile. You heard on some good points and talking about the challenge study, the Phase 2a study it does allow us given the flexibility of how you can set those things up to test a number of different approaches you can look at QT versus PID even look at loading dose, no loading does look at different duration, the treatment, shorter or longer it really does give you a fair amount of flexibility. The only thing is by getting a trial. The more questions there's lots question that you think about asking but the more questions you ask longer it takes and really this is an expedient trial to help us figure out doses. Further de-risk the program and look at the next step which should be going on to Phase 2b patients. So, we want to do that as expeditiously as possible. So, I think our PK certainly offers the possibility of QT [ph] dosing, I think it's likely that we may think about interrogating that versus the ideas so we can answer that question in this study. I think it would be again a shame to have to go, ever go backward on something like that. So, it will allow us in that setting to make sure we cover our bases and maximize our chances of success. You raised a question of loading those, these are all very apt good questions but we'll put out the final details that trial design a little closer to the connection with the trial initiation itself, but that's aimed for again later this year. And again, we like the way that [indiscernible] can really give us quick readouts on not only viral load reductions but also, it allows you to look at signs and symptoms and so forth. So, that'll be going before we know it.

That's really helpful. And then what's the right way to think about I guess along those lines the translatability from preclinical work RSV to potential success in a challenge study and then from a challenge study to a Phase 2, Phase 3 proof of concept type studies?

Sure so, there aren't that many data points in RSV. I guess which is one of the great opportunities that we have in front of us. As you know there are other Ribavirin which we can't really count as a drug that's broadly used in the syndication, not used at all in kids and not that commonly used in adults. So, it's really wide-open space in terms of that. So, some of the transability of those kinds of things remain to be seen. But overall, if you step back viral infections sort of like bacteria and it has a general comment you get really good understandings of how -- what concentrations you need to deliver to effectively target the virus and then you want to pile on multiples of that so that you keep pressure on it and you want to make sure you keep that pressure on the virus throughout the duration of the study. What we've seen at least with some things that have gone in front of us is that some of the models that we've done like the -- we did a non-human primate infection study. There was company that used to called Alias, it's part of J&J they had done a similar study in the primate model and then that in turn then predicted efficacy in the Phase 2 challenge study that they did. So, we've got certainly very comparable efficacy in that non-human primate model and generated a lot of other very strong virology data looking at how we have a very high barrier to resistance with this compound and mechanism combinations. So again, there's never any predictions that you can that you can count on stone at this stage. But I think it says generally as good as these things get when you attack a bug in the lab at a certain concentration you can deliver a good drug levels in a human safely and in this case again over a very short period of time, we're only talking a matter of days. So, I think it all plays out for an encouraging set of next us.

Going beyond that from the human challenge study and the 2a going into patients that's where now you enter especially rarely chartered waters except for fusion inhibitors and some of the fusion inhibitors are out there looking at those kinds of studies. Gilead certainly has one, J&J has one and some other small companies, so I think that they're looking at that translation step but only with that mechanism and as we pointed out I think there could be some real advantages of the approach we're taking by having a direct tasking antiviral going after the N-protein and we can target already infected cells as opposed to having to be there very early in the stage of infection with something that blocks the fusion step. So, I think that's a potential advantage of our approach as well. But we'll get all that organized enough writing with those trials going.

Great. One more, quick one from me and I'll hop back in the queue just I guess following up on your commentary on the Express Scripts formulary update. How common is this sort of formulary management in the Hep C space now? Would it be fair to say that I guess what we saw this morning was maybe more of an outlier and we're still seeing most of the plans I guess by placing the Hep C drugs or having all the Hep C drugs at parity in the formulary? Thanks.

Yes, well I'll only address that question very generally because this quite honestly is AbbVie's domain and something they are very skilled at or expert in terms of negotiating all these peer contracts but sort of which is the season this is when people are ramping up negotiations for the 2019 year and you're going to see this toing and froing with all the pairs. Right, every year is a new year and Express Scripts made the decision, we know it did but probably it's worth also remembering that when you think about this area of Hep C, it's not really sort of the traditional market that either it used to be or certainly that it is going forward and as much as the majority of patients, probably two-thirds of them are in public payer accounts not private. And so, you have this big chunk of HCV, the majority of HCV patients being in public account. So, we're certainly participating very well this year in private payer accounts for AbbVie's success and contracting in 2018 and they're very confident based on their comments that they expect to see similar participation in calendar 2019 as they see in 2018 when you look across the class. So, just a few points the private are a smaller part of the HCV market, Express Scripts is only a fraction of that. Gilead was already sharing in part of Express Scripts anyway so it's not that AbbVie had it all even this year. So, the net effect, I think when you distill it all down is that it appears to be a relatively small change one that could easily be compensated for in this toing and froing of other contract negotiations that are going on for 2019. And also remember that we're talking about the US which is a large market but when you look at HCV sales, AbbVie's HCV sales year-to-date 40% of it came from the US and 60% of it came from outside the US. So, we're talking about whatever these effects are even on this very thing with Express Scripts it only pertains to a small piece of a small piece, the smaller part of the market that we are seeing overall. And again, you still have lot of other names out there besides Express Scripts. You got CBS, UnitedHealth, Anthem, Cigna, Prime, Humana. There's a bunch of these folks out there. Again, all these contracts, are all get negotiated. So, I would say stay tuned to that but AbbVie doesn't seem very concerned about 2019 over 2018.

Thank you so much Jay.

You're welcome.

Your next question comes from Yasmeen Rahimi of Roth Capital Partners.

Hi team congrats on the continued progress. A number of my questions you answered Jay very nicely. So quickly on RSV, one follow-up and then couple more on other topics. What -- how higher the dose did you go into in your Phase 1 study?

We kind of spread out all the doses, we haven't put any of the doses out. I guess we'll do that in an orderly way laying out all the different doses and things we packed in connection and so we can put it in the context with our antiviral activity in PK. But it was at a normal sort of does ranging study nothing extraordinary. We looked over a wide variety of ranges. So, anyway we'll put out more information on that when we when we put the data.

And then the second question more transitioning to NASH, did I hear correctly that you're continuing enrollment in 2019 does that mean that you potentially your income data read out could come in later than initially guided from Mid-2019?

No, I mean we've been saying all along now that the enrollment would be all of this year and into early 19 and even today we point to mid-19 for preliminary data. So, I don't think there's been any real change there. Yes, we've got lots of sites up and running in the US sort of here in the first half that's going to continue to grow in the second half also in the second half we've got Europe layering in on top of that. So, I think we're pretty much saying the same thing that we've been saying.

And then in that regards given that the NASH enrollment is getting quite competitive. Can you comment a little bit more as you go into the site and investigators realize that you are the developer of MAVIRET? How does that sort of impact their decision on being part of the trial like if you could, I can only assume that individuals would be far more in favor knowing that at your track record of success.

It's funny how you say that, because we certainly have incorporated that into some of our communications with sites to keep part and quite honestly not for any lack of my efforts, but I think it's widely appreciated in that community that MAVIRET is an AbbVie drug, which it is. But many of these investigators are thrilled and very interested to understand that actually we were significant part of bringing MAVIRET forward with AbbVie and that glecaprevir came from Enanta et cetera. So, when you start using works like glecaprevir and MAVIRET suddenly everybody then understands who you are. And I think as they understand that it speaks to the sort of the quality of the work that we've done. I think MAVIRET gets a lot of respect in that community as being a very fine offering and has only a 2DAA and no new can and everything else just speaks to the quality of the of the protease and the NS5A that are in that mechanism. So, none of that certainly hurts when individuals find out that association.

Thank you and if I may ask one last question. Can you hold on as you're selecting your next HBV candidate what attributes are you looking for because from my recollection three, six, seven had really broad coverage high potency. So what out there you looking for as you are picking the winning candidate?

It's again it's the so-called break-off. It's going on, there are so many properties that you are optimizing at any given time. Virology is something that we look at exquisitely carefully. We're also optimizing DMPK and Safety and manufacturing and it's just a whole bunch of different components that are going into the overall mix. And so, it's not any single parameter at the end of the day that one focuses on in this instance and can you come up with something, I'll say it a different way. If we found a molecule that objectively looked better on two or three different criteria and everything else stayed the same and we found that a few months after we would have otherwise picked a molecule like three, six, seven we would kick ourselves and so we're just patiently taking that little extra time to be sure. We've picked our absolute best molecules that's what it is. I wouldn't single out anything, because as you point out the profile on the prototype molecule we showed [indiscernible] very very strong. So, we're hoping we can do even better than that but we'll see and we'll know soon enough because again we're hoping to pick that finalist and get going later this year.

Thank you, Jay.

You're welcome.

Your next question comes from Jay Olson of Oppenheimer.

Well, hi. Thanks for taking the questions. I had a couple of them maybe just to start with a financial question. I think you mentioned at the beginning of the call that MAVIRET currently has a low market share at Express Scripts and I was wondering could you share with us what that market share is and if there is a significant decline in HCV royalties next year because of the Express Scripts exclusion or for any other reason? Is there a scenario where you would consider going to the capital markets to finance your R&D programs and then I had a follow-up question on EDP-305?

Yes, I don't think AbbVie shared Express Scripts this year is well -- and then again I'll let what AbbVie see whatever their share is but I was more I think trying to point that Express Scripts participation in the overall HCV market is just a small fraction of Abbvie's overall sales. It's just because of the way, straight away you've two-thirds of the patients are not in private accounts anyway and then when you have private accounts and they are chopped up in all different kinds of ways and you're competing in this case with Gilead as you know they are with us, it's just that when you distill it down to any one thing that one thing isn't substantially important to the whole. Especially when all these pieces that are fractions of fractions. You know deal with 40% of AbbVie's sales not the other 60%. So, I think that's the main point we were trying to make. I think that with regards to the capital markets, I mean again we've got a very strong cash position today. We've never had better cash flow. We've never had higher royalties or royalties have as we've said moved up in tiers and it AbbVie targets their guidance for the remainder of the year which they announced a couple of weeks ago, we expect very strong sales to continue. I think they've indicated us that they expect again substantially similar share participation next here is this year. So, I can't foresee any reason with our current plan and with the pipeline we have today and the way things are moving that we would need to approach the capital markets for the foreseeable future.

Okay. Thank you. That's helpful and then just on EDP-305. Since you Phase 2 data in NASH would presumably become available sometime after Intercept's Phase 3 regenerate study reads out. What if anything should we read across from EDP-305 and NASH?

Well, you can probablise that across multiple different scenarios. The Intercepts data could be fantastic, it could be okay or it could be poor. If it's fantastic, I think it's good for the mechanism FXR, to this day FXR has shown one of the most sort of strongest most balanced portfolios when you look at different aspects of NASH including fibrosis. So, what's good for Intercept I think is good for other FXR's. If you pick the other goal post and it's not as good there could be because you know they didn't have spoken to one or as safe a one that they could press hard on. So, I don't think it -- I think every molecule is a little bit different. If you step back a little bit further from that, I make a higher level comment, I'll say right now is that FXR proves to be a good mechanism, which we think it is longer-term they're going to be multiple FXR's out there. I think it would be naive to assume there's only going to be one and in that case, I don't want to suggest that they'll become commodities because there are differences in each of these molecules, but I expect in combination therapy going ahead in NASH if FXR proves to be a valuable mechanism there will be multiple of them out there. Much as there a way that was with protease inhibitors and NS5A when it came to HEP C. At the end of the day, that's okay and we just want to maximize our chances of having a solid FXR as it's a player so that we have a ticket into that market and it's one that we find to be interesting obviously we continue to work on follow on FXR's and other mechanisms and so forth and we'll be continuing to build into that. But it's a longer-term game, it's not going to get sorted out by anybody's Phase 3 data next year. I think we'll get some encouraging signs, but it's going to be maybe the end of the beginning at that point.

Okay. Great. Thank you. That's very helpful thanks for taking my question.

You're welcome.

Your next question comes from Liisa Bayko of JMP Securities.

Hi this is Anton [ph] for Liisa, thanks for taking the question and congrats on the progress. Most of mine have been answered, but just a couple short ones. I was wondering if you could comment on what percentage of AbbVie HCV sales are comprised of MAVIRET now and when do you expect that to be completely MAVIRET if at all in the future?

Well, I think this quarter to quarter let me think of the numbers. It was 919, overall and it was 850 MAVIRET, so that makes 69 for VIEKIRA related activities. This most recent quarter it was 973 and I think 932 of that was MAVIRET. So, VIEKIRA right now was sort of 41. So MAVIRET continues to grow as we expected and VIEKIRA over time has continued to produce over time and again that was sort of the plan. So, I would expect over time that's a trend that you may continue to see. So, there's no question that the lion's share of this now and likely going forward is MAVIRET which very much simplifies the equation so to speak.

Right. And then just one more on spend. R&D was up about 30% quarter-over-quarter and with the increased activity towards the back half of the year, I was wondering how should we think about R&D increases moving through the end of this year and into next?

Well, we'll give new guidance for our new fiscal year. But we've been generally tracking to plan, again as we roll into a new year we'll have undoubtedly even more growth in our R&D line which is a good thing it's because of the pipeline progressions will have a you know three Phase 2's going not two. You know with any luck we'll be advancing other molecules and other programs. So, I would expect it to steadily increase but we're not ready to give our sort of fiscal 2019 guidance on that quite yet. But generally with regards to 18, I think we're cracking sort of right on plan.

Great. Thanks for taking the questions.

You're welcome.

And there are no further questions in queue at this time. I'll now turn the call back over to Carol Miceli.

Okay. Thank you everyone for joining us today. If you have any additional questions feel free to give us a call in the office. Thanks again.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.