Enanta Pharmaceuticals, Inc. (ENTA) Q1 2019 Earnings Report, Transcript and Summary

Good day. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta Pharmaceuticals' First 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. I would now like to turn the call over to Carol Miceli. Ma'am, you may begin.

Thank you, Ian, and thanks for joining us this afternoon. The news release with our financial results for the recent quarter was issued 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. But before we begin with our formal remarks, we want to remind you that we'll be making forward-looking statements, which may include our plans and expectations with respect to our product candidates and financial projections, all of which involve certain assumptions and risks beyond our control that could cause our actual developments and results to differ materially from those statements. A description of these risks is in our most recent Form 10-K and other periodic reports filed with the SEC. 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. I'm pleased to provide an update on the Enanta milestones to look forward to in 2019. First, though I want to highlight the disciplined and focused approach we take to the selection of our clinical development candidates. Our scientific approach focuses on mechanisms of action that embodies sound biology and promising clinical potential in our targeted disease areas. For each area, we aim to apply our world-class drug discovery capabilities in order to produce quality candidates that possess potential best-in-class or first-in-class opportunities. This disciplined approach has resulted in Enanta's promising pipeline of internally-owned candidates to treat major unmet needs. We expect our first clinical milestone in 2019 to be readout of Phase 2a data from our RSV challenge study for EDP-938, the only N inhibitor for RSV in development today. In October, we initiated a Phase 2a human challenge study of EDP-938 to evaluate the safety, pharmacokinetics and antiviral activity at multiple doses of EDP-938 orally administered to healthy subjects inoculated with RSV. This randomized, double-blind, placebo-controlled human challenge study will enroll up to 114 healthy adult subjects, who will be randomized into one of two dosing arms or a placebo arm and dosed for five days. Primary and secondary outcome measures include changes in viral load measurements and changes in baseline symptoms. The trial is advancing well, and top line data is expected mid calendar 2019. I'll remind you that we believe that our N inhibitor EDP-938 is differentiated from fusion inhibitors because it directly targets the viral replication process of RSV and has demonstrated a high barrier to resistance in vitro. Moving to EDP-305, we have two ongoing trials in NASH and PBC. As mentioned last quarter, recruitment in PBC with EDP-305 is ongoing, but lagging compared to NASH. And therefore, we expect our second clinical milestone in 2019 to be the announcement of data from our Phase 2a NASH trial known as ARGON-1. Enrollment in this trial is expected to conclude in the first calendar quarter of this year. This trial is a 12 week randomized double-blind, placebo-controlled study, evaluating the safety, tolerability, pharmacokinetics and efficacy of EDP-305 in subjects with NASH. We anticipate sharing data from this trial in the third quarter of calendar 2019. As a sign of our commitment to therapeutic approaches to NASH and in recognition of the potential need for combination therapy in this indication, we have continuing research efforts in non-FXR mechanisms and are also identifying new follow-on FXR agonist leads. We expect to announce a follow-on candidate later this year. Our third clinical milestone in 2019 is expected to be the initiation of a first-in-human study of EDP-514 for HBV. EDP-514 is a core inhibitor, also referred to as a capsid assembly modulator or a core protein allosteric modulator. This is a relatively new class of HBV inhibitor that can disrupt the assembly and replication of the virus at multiple steps in the viral lifecycle. EDP-514 was selected from our lead series of HBV compounds that are characterized by potent antiviral activity. In vitro, they are capable of preventing the establishment of cccDNA, are pan-genotypic, are active against known nucleoside resistant mutants, and are additive to synergistic with nucleoside analogs and other core inhibitors. Members of this class have also demonstrated excellent reduction in HBV titers in a chimeric mouse model with human liver cells. In January, Enanta announced positive preclinical data on EDP-514. This novel core inhibitor displayed potent anti-HBV activity at multiple points in the HBV lifecycle. In addition, EDP-514 demonstrated potent inhibition of HBV replication in vitro, accompanied by a greater than 4-log viral load reduction in a humanized liver mouse model after 12 weeks of dosing. Based on the strong preclinical data, a Phase 1 study of EDP-514 is planned to begin in the second half of 2019. The study will evaluate single and multiple doses of drug in healthy volunteers and will incorporate a Phase 1b arm in patients with chronic HBV infection. Based on our preclinical data, we believe EDP-514 has best-in-class potential for the core inhibitor mechanism. Additional preclinical data from EDP-514 will be presented at the International liver Congress in Vienna in April. In addition to EDP-514, we are exploring other anti-HBV approaches, as we believe it may be necessary to utilize multiple mechanisms for the treatment of HBV. In summary, Enanta has a promising and broad pipeline of candidates in various stages of development. Our science has been validated by our partnered HCV protease inhibitor program, which has resulted in two approved products marketed by AbbVie, including MAVIRET, currently the leading HCV treatment in the world. With a strong balance sheet, no debt and having finished the quarter with approximately $357 million in cash and securities, we have the financial resources to advance our pipeline. I'll stop here and turn the call over to Paul to discuss our financials for the quarter. Paul?

Thank you, Jay. I would like to remind everyone that Enanta reports on a fiscal year schedule. Our year end is September 30th, and today, we are reporting results for our first fiscal quarter ended December 31, 2018. For the three months ended December 31, 2018, total revenue was $69.9 million and consisted entirely of royalty revenue. This compares to total revenue of $38.1 million for the same period in 2017. Royalty revenue in the current quarter was earned on AbbVie's $862 million in global sales of HCV regimens. Royalty revenue was calculated on 50% of MAVIRET sales at a royalty rate of 17% and approximately 30% of VIEKIRA sales at a royalty rate of 10%, after adjustments for certain contractual discounts and rebates, which has been approximately 1.5% on AbbVie's reported HCV sales. I'll remind everyone that our royalties, which are calculated separately for each product on a calendar year basis through a tiered royalty schedule of rising royalty rates, will restart at 10% in our quarter ending March 31. This means that the calendar fourth quarter royalties reported today will have the highest royalty rates in our fiscal year. You can review our royalty tier schedule in our 2018 Form 10-K. Moving onto our expenses. For the three months ended December 31, 2018, research and development expenses totaled $34.9 million, compared to $18 million for the same period in 2017. The increase was primarily due to greater preclinical and clinical costs associated with the progression of our wholly-owned R&D programs in RSV, NASH, PBC and HBV. General and administrative expense for the quarter was $7.2 million versus $5.8 million for the comparable quarter in 2017. Enanta recorded income tax expense of $3.7 million for the three months ended December 31, 2018, compared to an income tax expense of $3.6 million for the same period in 2017. Enanta's effective tax rate for the three months ended December 31, 2018 was approximately 13%, compared to approximately 24% for the same period 2017, primarily due to the US Tax Cuts and Jobs Act enacted in December 2017 and increasing federal research and development credits. Net income for the three months ended December 31, 2018 was $26 million or $1.25 per diluted common share, compared to a net income of $11.7 million or $0.59 per diluted common share for the corresponding period in 2017. Enanta ended the quarter with approximately $357 million in cash and marketable securities, an increase of approximately $32 million to our 2018 fiscal yearend balance of $325 million. We expect that these cash resources, as well as our continuing royalty revenue will be sufficient to meet our anticipated cash requirements for the foreseeable future. Further 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 up the lines for questions. Operator?

[Operator Instructions] Our first question is from the line of Brian Abrahams from RBC Capital Markets.

Hi, guys. Congrats on all the progress and thanks for taking my questions. I guess my primary question is on the NASH 305 program. We're obviously going to be getting some data in short order from the Phase 3 study of the late stage FXR agent. And I'm sort of wondering, how you guys are thinking about potential read-throughs from this REGENERATE data to kind of your development plan and strategy for 305 and then also your partnership strategy as well? And then I have a follow-up on NASH.

Sure. This is Jay. Thanks for the question, Brian. So I think the read-through, we'll have to see what the Phase 3 data from Intercept is. But generally speaking if the data are positive, I think it's a very good and strengthened validation for the mechanism of FXR. All signs at least are the - it should probably mirror their Phase 2 FLINT study since the design is very similar. But we'll just have to wait and see the data. If the data are less than good, then I guess it depends on why that is the case. Is it safety; is it efficacy, what's the read-through? We'll just have to wait and see what that is. But generally speaking, I think most people's minds are that it's likely to be positive. And again, if that's the case, I think it highlights FXR as one of the most promising mechanisms in development today. As it relates to our partnering strategy, again, we've said in the past that NASH is probably one of the indications that we would like to team up with a larger company on. I think that's still probably in the cards for us ultimately, and just from a timing and thought perspective on that, we would probably aim to do it before initiation of Phase 3.

Got it. That's really helpful. And then you've mentioned that there is some next-generation FXRs in the pipeline. Wondering if you could talk a little bit more about sort of what you'd be looking for from those in terms of attributes relative to 305. And then curious what beyond FXR you might be working on for those sorts of indications and whether you believe the mechanisms in late stage development like ASK-1 in the thyroid receptor hormone modulation could potentially be improved on. And I'll hop back in the queue. Thanks.

Sure. So I think the question about the other mechanisms, I think your research note that came out a few weeks ago highlighted some IP that we filed in the area of ASK-1. So it is the case that we have an interest in ASK-1. It's not the only non-FXR mechanism that we're exploring, but it is one of them. In fact we'll have a few presentations at the upcoming EASL, and two of them relate to a couple of different prototype molecules that we're looking at internally here. And so, there will be some data out on that and a variety of different animal models and a couple of different presentations. So you can stay tuned on that front, when EASL rolls around. I think also with a follow-on FXR, we continue to study the FXR mechanism very, very carefully. As you know, we've looked at a lot of things at the animal model level and then drilling down deeper into cellular models, looking transcriptionally at markers of - potential markers of efficacy and also markers of potential side effects. And so we have a great deal of work that we've done on that, on EDP-305. We've also done that kind of work on follow-on molecules. So we're still working out the finalist candidate. I think we're always trying to optimize potency and safety, and by safety, thinking not just about safety intrinsic to the specific molecule, but also thinking about if there are effects that may or may not be associated with the FXR mechanism, so looking at improving upon those things and dialing out anything we can that doesn't belong there. So we'll be looking very carefully at our Phase 2 dataset when it's available. We'll be looking at the slate of finalist contenders that we have under evaluation in-house. And then, it's our expectation that later this year, we'll make a final call on what we think we'll have, an even improved profile over molecules that we see out there. That's certainly what we're aiming for, but we have to wait for the finalist candidate to lay out those specifics, so stay tuned.

And our next question is from the line of Yasmeen Rahimi from ROTH Capital Partners.

Hi, team. Congrats on the continued strong progress. Two questions, question one is on RSV, question two is a big picture question. Jay, can you kindly walk me through what your expectation is out of the RSV challenge study? Exactly what magnitude of viral load reduction do you want to see that will allow you to say, you know what, this is a go decision to going into a larger Phase 2b study? And then I have a follow up.

Sure. On the viral load front, these healthy subjects who are infected with RSV usually amount a several-log viral titer. And other challenge studies that have been done with agents that have succeeded, you usually do see a multiple-log reduction in a short period of time. So it would be a pretty clear viral load drop generally happening fairly quickly at the onset of drug treatment. So I believe we've powered the study in order to be able to see this type of drop, and we'll also be looking at signs and symptoms on a secondary marker level.

Thank you, Jay. And then you're actively pursuing RSV, NASH and Hep B. So what is to you the priority right now? I mean are you moving all along? And then once we have the Phase 2 data in order to strategize what is best, can you kind of walk me through - and your team structure, so what is the importance, what is among the three, what is the one that is closest to you - to your heart and want to really want to succeed?

I want them all to succeed and they're all close to my heart. We've picked out areas, each of which we think is a really important area with unmet need. There is either no approved drug in these areas or there is no cure, so - or both. So we're passionate about doing it. We're also conscious of, at some point, if all of these things progresses the way we hope, they could become bigger than we are. And that's why at a certain prudent time point, it would make sense for us, for example in NASH, just to start to team up. We've got - as I mentioned, we've got multiple different mechanisms coming through NASH, multiple molecules. The same is true pretty much in all of our areas. But I think we can prosecute this pipeline comfortably through Phase 2s and start making some decisions at that point. I believe that, on the partnering index side of things, NASH is probably at one end and RSV is probably at the other end in terms of partnering. I think for RSV, we're planning to take it forward ourselves. So I guess that declaration probably says something about it. But it's more about what's the best thing for us to try to go alone on versus what's the best thing that we can create a lot of value on and then team up in ways that we can still be successful in some of these very, very large market opportunities, but by doing it in the connection of high-value collaboration. So again, stay tuned on that front. But I think for right now, we're very comfortable prosecuting these assets into the clinic and into phase - and through Phase 2s.

And our next question is from the line of Jay Olson from Oppenheimer.

Hi, congrats on the progress, and thanks for taking my questions. Maybe just to go back for a second to the NASH study, can you talk about what sort of thresholds you may have set in terms of the profile that you want to show for EDP-305 in your Phase 2a study to determine whether or not to proceed to Phase 2b or perhaps to instead focus on one of your follow-on FXR molecules in terms of both safety and tolerability and efficacy?

Sure. Thanks for the question, Jay. This is Jay. So I think the way we're thinking about it, is 305 and the ARGON-1 study exhibits good safety and solid target engagement, by that I mean, looking primary endpoint which is ALT or secondary endpoints, we have several of those lined up and also the surrogate markers that we've got some of which we know and have looked at and understood before. So if the safety is good and we have solid target engagement one or more of our doses, I think looking at the aggregate totality of that data, we're going to progress to the Phase 2b study. Let's see the longer study, remember our current study is only a 12 week study. Will embarked upon a longer term study as others have in Phase 2b biopsy proven NASH biopsy endpoint. So those would be the main drivers and we'll look at the package in its totality.

Okay. Great. Thank you, sorry, continue.

Obviously, we're looking at our follow-ons as well. They're just sort of independent decisions; we've got 305 independent decisions. We've got 305 progressing ahead. We've got follow-ons. We think there are plenty of ways to use more than one of these either by progressing one as a single agent further and peeling-off another one into combinations and/or partnering them in different directions. I mean there's lots of optionality when you have more than one. We're just trying to build depth and FXR overall.

Okay. Thank you. That's super helpful. Maybe just as follow-on. I didn't see any mention in the press release of the INTREPID study for PBC. Could you please give us any update on enrollment of that trial and when you might expect to see data?

Yes. It won't be this year. I think we said the last quarter in my prepared remarks. We mentioned that again the enrollment in PBC is just lagging NASH. NASH is moving along PBC is slower. So I don't expect to see data this year. I'd point you to the next year for that. I will remind you since the topic is out by, our main focus is always been in NASH PBC as a convenient add on because we're doing FXR and FXR have shown some efficacy in PBC, so it makes a lot of sense for us to do that study. That said from a value creation standpoint, we view NASH as we are the most of the overall market opportunity is. And in fact with PBC, it's your - PBC therapeutics in general are looking at second line therapies there's already a new drug on the market. You have plenty of people vying for what's left of that market. And you have the potential for generic fibrate intrusion or maybe even domination. So these are characteristics of a market that at least in our minds is a little bit tricky. So note that NASH is a 100% worked out. It's still early days, but we view the NASH opportunity to be the larger one. We'll continue to update you on progress with regards to INTREPID. But as I mentioned in my remarks, the recruitment is lagging and I think for probably a lot of the reasons I mentioned.

And our next question is from the line of Liisa Bayko from JMP Securities.

Hi. Thanks for taking my question. I just wanted to kind of build-off of Brian's earlier question on regenerate. And as we look at Ocaliva and there could be looking good to be looking at two different ways of showing efficacy both in NASH and fibrosis. How important do you think for a compound for an FXR the ability to reduce NASH as to its commercial profile. I know you can get approval either way, but how important is that NASH component? That's my first question. And then second to that I know you've been trying to kind of differentiate on the LDL factor. How important do you think that's going to be to your story as it relates to Ocaliva? Thanks.

I don't know in terms of the two end points. I mean I happen to think fibrosis is a really important one, but there's a couple of ways to win. So I wouldn't not consider both ways as they're doing so. And with regards to the ultimate profile I guess we have to wait and see what their data and adoption assuming that they do get approved how big of a fact is the lipid factor come into play for Ocaliva. I mean you read a lot of things each way, some people think it's a really important thing. Other people say that these patients are from the majority of them are on steps in anyway and so this thing can be modulate it's not, not such a big deal after all. I mean all things being equal if you had an agent that did not increase LDL. I do think that would be an advantage. How much of an advantage? We have to wait and see how much of an impediment it is for uptake with Ocaliva and marketplace in NASH, so time will tell. We're just trying to chip away at anything that we can to create the best profile we can. At the end of the day, we want a very solid FXR that will be an important component in what is likely to be a combination regimen overall. So we're just looking to create a very solid FXR that has some legs to give us a ticket to the show so to speak on the combination front down the line.

Okay. That's helpful. Thanks. And then if I may just have a question on RSV. Could you maybe talk about the next steps after this - the ongoing - the challenge study readout what would be the next steps for your program? Thanks.

Sure. You're welcome, Liisa. So from a timing perspective, as we've mentioned we've sort of moved up the timing for which we expect to have top line data. It's now mid-year, so mid calendar 2019. And then assuming positive data our plan is to start Phase 2b before the end of the year and likely that would be in hospitalized adults. So I think that when we out the plan for going into 2020.

And our next question is from the line of Eric Joseph from J.P. Morgan.

Hello. Hi, guys. Thanks for taking the questions. Just a couple of NASH following up on Liisa's question actually. I'm just wondering whether you have a sense of I guess the difference in rates of pruritus or LDL rise that would be perceived as a compelling - received as a compelling difference to a caliber. Let me go look at the ARGON-1 data? And also in your assessment of either of these SAE's in ARGON-1, how does the trial accounts for the use of statins I guess do you anticipate a meaningful level of background statin use or you stratifying that as one of the criteria of the trial? Thanks

Yes. So just kind of going back to the prior question, we're going to look at the data as a whole. And so safety - broader safety parameters we'll be looking at lipids and pruritus, obviously are going to be looking to target engagement. And so I think in the aggregate, we'll have a good picture of what the balance in any trade-offs that need to be made are in that overall profile, but until we get the data set, it's going to be hard to know exactly how to emphasize it. With regards to statin use, we allow patients who been stable on statins for three months to be included. So that would be the backdrop of it, but no new use of statins during our trial also no new use of statins is allowed. So everything would be already baked into the background of the patient's history.

And our next question is one line of Patrick Trucchio from Berenberg Capital Markets.

Thanks. Good afternoon. I've a follow up on NASH program, and then just a second question on MAVYRET. Just first on the NASH program. Assuming all goes well in ARGON-1, the Phase 2b study you noted would be of longer duration. When should we anticipate that study to start and do you have an idea of how long if study it should be. And finally, what fibrosis stage do you think makes the most sense for enrollment in the Phase 2b?

Yes. So we're probably looking at F2, F3 non-cirrhotics and that study, I think the duration would be pretty typical of what some of the other studies have been. But a minimum of 48 weeks with follow-up up to longer period by 72 weeks and designs. So I'm sorry, was there one other part of your question?

And just one. When would you expect the study to start?

Yes. So we'll be getting the data in Q3. So it might not be by the end of the year. It really depends on when exactly in Q3 we've got everything worked up as to whether it's late in the year or early next year. So I'd be in a generally timeframe.

Got it. And then just on the - in terms of the stability of the HCV franchise, specifically as this relates to the injection opioid epidemic in the US. This has been in the news for a few years, but it's actually been going on since the early 2000s and it's accelerating. And so what I'm wondering is how should we think about the impact over the near and long term on volumes in that business? And should we expect some of these folks who were infected perhaps decades ago to now be eligible for treatment or with the fibrosis staging not be advance enough by now to enable coverage and the extent - to the extent that the HCV franchise may be flat in the US for the foreseeable future, the potential for that, what extent do you believe this opioid epidemic may be contributing?

That's a really good question. I mean people are studying that more carefully now. I think there is certainly in the last handful of years, there's been increased attention given to that overall topic, not only for Hep C, but also for other kinds of diseases. But the numbers that I've been seeing are there are tens of thousands of new infections in the US last year and the year before. So I think some number of 30,000 to 40,000. So when you think about treatments in the US, treatment volumes have been in that 140,000 to 170,000 in the US. That's a - it's a very significant component. So the real question is how much does that continue to grow? Does it level off? Does it decline? I think for right now people have only seen growth. So it's something that we're just going to have to see. But I think no matter how you slice it, infection by directly-related to the opioid drug crisis is going to lengthen the tail on this market. And at least the good news is now we have treatments that can cure these. It wasn't so long ago that genotype 3 was still a big problem and for whatever reason, I remember reading there was a disproportionately larger amount to genotype 3 an IV drug infection cases. And - but now we have a drug for that. And so it's just - it's a question of time and money and public health policy and trying to get this opioid crisis under control. It's a complex problem, but we'll be there with a good drug to help treat people.

Our next question comes from Ed Arce from H.C. Wainwright.

Hey, good afternoon guys. This is actually Tomas asking a question for Ed. Just a quick question about the follow on FXR leap or NASH. Should we expect to see some preclinical data or some kind of animal data or into the conference or will it simply kick off with our clinical trial?

On the top with relation to the follow on, there will not be data at EASL. We'll have some data, preclinical data on EDP-305 there in one of the presentations but no - so the follow on effects are molecule. Once we have it and declare it, we'll put data out, obviously at that time or subsequent to that. So it really just depends on when this year we actually make the official nomination. But yes we're surveying among a number of very interesting contenders. And again we hope to have the final one later this year. We'll keep you keep you posted regularly.

And at this time, I'm showing that we have no further audio questions. I'm going to turn the call back over to Carol Miceli.

Thank you, everyone for joining us today. If you have any further questions feel free to give us a call in the office. Thank you.

Ladies and gentlemen, this does conclude today's conference call. We thank you greatly for your participation. You may now disconnect.