Enanta Pharmaceuticals, Inc. (ENTA) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Jesse, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta Pharmaceuticals Second 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] Thank you. Carol Miceli, Director of Investor Relations, you may begin your conference.

Thank you, Jesse, and thanks for joining us this afternoon. The news release with our financial results for the recent quarter 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, 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-Q 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 and thank you for joining us today. Enanta ended the quarter with approximately $387 million in cash and marketable securities. We continue to make progress in each of our clinical development programs with three clinical milestones expected by the end of the next quarter. I'll begin with our RSV program. In March, we announced that enrollment was complete and the Phase 2a RSV challenge study for EDP-938 and we expect top-line data mid 2019. This randomized double-blind placebo-controlled human challenge study, enrolled healthy adult subjects who were randomized into one of two dosing arms or a placebo arm and dosed for five days. Subjects received a once-daily 600 milligram dose or a single 500 milligram loading dose followed by 300 milligram doses twice daily or placebo. Primary and secondary outcome measures include changes in viral load measurements, changes in baseline symptoms and safety. Following the completion of the Phase 2a study and assuming a positive outcome, the next step would be to initiate our first Phase 2b study, which will be in adult outpatients with RSV infections. Our goal is to initiate this study before the end of calendar 2019. EDP-938 is the only N-inhibitor for RSV in clinical development today and we believe that it 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, our lead FXR agonist. We have two Phase 2 studies ongoing: ARGON-1, our NASH study is a 12-week randomized double-blind placebo-controlled study designed to evaluate the safety, tolerability, pharmacokinetics and efficacy of EDP-305. In March, we announced that enrollment was complete in this study. Treatment is ongoing and we anticipate sharing top-line data by the end of the third quarter of calendar 2019. Enrollment continues in the INTREPID study or Phase 2 study in PBC. Recruitment has been challenging due to multiple clinical trials attempting to access a limited number of available patients for this potential second-line therapy in this orphan indication. We'll provide further updates on PBC enrollment in the coming months. We believe that FXR is one of the most promising mechanisms in development today for NASH. We've made good progress with our follow-on program. We expect to also announce a development candidate later this year. In addition to FXR, we continue our research into other mechanisms as well. Let's turn to our next program, our core inhibitor EDP-514 for HBV. EDP-514 was selected from our lead series of HBV compounds that are characterized by potent antiviral activity. Core inhibitors are a relatively new class of HBV inhibitor that can disrupt the assembly and replication of the virus at multiple steps in the viral life cycle. Most recently at the International Liver Congress in April, new preclinical data on EDP-514 was presented. In vitro, data demonstrated that EDP-514, a novel Class II core inhibitor is a potent inhibitor of HBV replication and prevents the de novo formation of new cccDNA and primary human hepatocytes when given early during an infection. Data also show that EDP-514 is pan-genotypic and that combinations of EDP-514 with either nucleoside reverse transcriptase inhibitors which are the current antiviral therapies for HBV or Class I core inhibitor resulted in additive to synergistic antiviral effects. In vivo, EDP-514 demonstrated excellent efficacy with greater than 4-log viral load reductions in HBV-infected PSC mice. Based on our preclinical data, we believe EDP-514 may have best-in-class potential for the core inhibitor mechanism. A Phase I study of EDP-514 is expected to begin next quarter. The design of this study will evaluate single and multiple doses of drug in healthy volunteers and will incorporate a Phase Ib arm in patients with chronic HBV infection. In addition to EDP-514, we are exploring other anti-HBV approaches as we believe that it will likely be necessary to utilize multiple mechanisms for the treatment of HBV. In summary, Enanta continues to advance its promising and broad pipeline of clinical candidates as well as other compounds in earlier 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. We are working diligently to duplicate this success within our current clinical programs and to bring new therapies to challenging disease areas with high unmet medical need. 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 September 30 fiscal year schedule. Today, we are reporting results for our second fiscal quarter ended March 31, 2019. For the quarter, total revenue was $39.6 million and consisted entirely of royalty revenue. This compares to total revenue of $44 million for the same period in 2018. Royalty revenue in the current quarter was earned on AbbVie's $815 million in global sales of HCV regimens. Royalty revenue was calculated on 50% of MAVIRET sales at a royalty rate of 10% and approximately 30% of VIEKIRA sales at a royalty rate of 10%, after adjustments for certain contractual discounts and rebates, which historically have been approximately 1.5% of AbbVie's reported HCV sales. I will 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. The royalty schedule we started at our lowest royalty rate of 10% in our quarter ending March 31. This means that the quarter ending March 31 royalties being reported today will be at the lowest royalty rate of 10%, and our royalties for the quarter ending December 31 will have the highest royalty rates for 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 March 31, 2019, research and development expenses totaled $34.2 million, compared to $21.5 million for the same period in 2018. 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, including our three Phase 2 clinical trials. General and administrative expense for the quarter was $6.8 million versus $5.7 million for the comparable quarter in 2018. The increase was driven by increases in compensation expense, primarily due to increased headcount. Enanta recorded an income tax benefit of $3.2 million for the three months ended March 31, 2019, compared to income tax expense of $5.4 million for the same period in 2018. Despite reporting pre-tax income, Enanta recorded an income tax benefit during the quarter due to tax deductions from employee stock award-related activity during the quarter. Enanta's effective tax rate for the six months ended March 31, 2019 was approximately 2% compared to approximately 27% for the same period in 2018. This 2% rate differs from the federal statutory rate of 21% due to federal research and development tax credits and tax deductions from employee stock award-related activity. In 2018, Enanta accounted for the enactment of the Tax Cuts and Jobs Act, which resulted in a revaluation adjustment of deferred tax assets during the 2018 year. We expect our effective tax rate for fiscal 2019 to be approximately 10%, which reflects the impact of both R&D credits as well as tax benefits from stock award activity. Net income for the three months ended March 31, 2019 was $4.1 million or $0.20 per diluted common share, compared to net income of $12.6 million or $0.61 per diluted common share for the corresponding period in 2018. Enanta ended the quarter with approximately $387 million in cash and marketable securities, an increase of approximately $62 million to our 2018 fiscal year-end 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 financial details are available in our press release and will be available on our Form 10-Q for the quarter when it is filed. I'd now like to return the call back to the operator, and open up the line for questions. Operator?

Thank you. [Operator Instructions] Your first question comes from Brian Abrahams with RBC Capital Markets. Your line is open.

Hi, there. Thanks very much for taking my questions and congrats on the continued progress. On NASH, on 938, sort of wondering coming out of the EASL conference, what are your latest views on what sorts of ALT declines or improvements on other measures you'd want to see to suggest a competitive profile or even a potential advantage versus some of the later-stage FXRs? And I'm also curious how the follow-on program you mentioned fits in profile-wise. And then I have a follow-up.

Sure. Thanks for the question, Brian. This is Jay. I think you meant EDP-305 not 938 regarding the NASH study.

Yes. Sorry about that.

So, yeah. So, with regards to the ARGON-1 study, as I mentioned and we've reported that enrollment's complete. We're now just working through the last patients in this study and we are due to read out by the end of calendar Q3. We're going to look at a lot of different readouts in that study once it's completed. We -- of course, we'll be looking at ALT which we think is sort of a general parameter. We're looking at the effects that are going on in NASH patients with elevated ALTs. We hope to see a significant reduction there. But we'll also be looking at liver fat. We'll be looking at our biomarkers that we've looked at in the past signs of true target engagement, including FGF19 elevation, C4 reduction. And there will be other sort of exploratory readouts that we've baked into the study as well. So, I think it's really going to be a snapshot. Again, this is a 12-week non-biopsy study so there's only a certain amount of things that you would expect to see in such a study. But directionally, we want to see positive improvements in as I mentioned ALT, fat, C4 FGF19, et cetera and we're going to look at the aggregate of that data in making a decision to proceed. Certainly, some of the FXRs that have come out, they have shown some impact in terms of the readouts that I've mentioned. But, for example, in fat, there are other more direct fat based mechanisms. If you're looking just at liver fat by MRI, PDFF then FXRs are likely to show. And -- but that said, the aggregate balance of touching a whole bunch of different mechanisms, including those that could ultimately lead to improvements in fibrosis, those are the hallmarks of FXR. And what we would like to do is see the expected readouts and then continue the path forward with appropriate doses in a Phase 2b assuming the data are supportive.

Makes sense. And as you think about next steps for 305, what's your latest view on potential partnership strategy there? Has that evolved at all? Coming out of EASL, now that we've seen some corroborative data for the FXR mechanism and what's your latest thinking on that and what the next step could be?

Yeah. Our thinking hasn't really changed on that. We're going to build up a body of Phase 2 results. And we believe that on the other side of Phase 2 data or data sets that that would be the best valued inflection point for us to then team up with another party for the later-stage development, potential partnered combination therapy. So prior to Phase 3, is still our thinking when between now and that time sort of remains to be same. We want to continue to work out our own data sets. We'll be looking obviously externally at other people's data sets and thinking about where combinations might or might not make sense. And then explore that pathway as we go forward.

That's really helpful. Maybe one more question perhaps for Paul. Your R&D expenses have been relatively steady. What's the right way to think about the run rate over the course of the rest of the fiscal year, especially as we look towards your programs advancing further?

Well we've guided Brian to between $135 million and $155 million in R&D spend for the year. So we -- that's the range that we're still looking at for fiscal 2019.

Okay, thanks.

Your next question comes from Yasmeen Rahimi with Roth Capital. Your line is open.

Hi Team. This is Paul O'Brien on for Yasmeen. Thanks for taking my questions. I just wanted to talk about the Phase 2a RSV challenge study. And how do you determine which -- from the data which patient population would be most ideal to go into? And like what types of modeling is performed to understand what the -- what this population will be for the 2b? Thanks.

Sure. So, the human challenge study for RSV as we also reported is completely enrolled and as we are still on track to have data mid this year. We're going to take those results which we expect will show viral load reduction. We should also see again, this is assuming it's a positive study you would expect to see viral load reduction. You'd expect to see, improvement in signs and symptoms and general safety. With that, kind of a challenge study data set in hand, you're really poised to then propel yourself into lots of different sort of patient populations. We've said before, that we were going to do an adult population first prior to going into paeds. We want to really understand the drug as best we can in adults. And then make that transition ultimately to paeds. And then within that arena, you have sort of three adult populations that one might consider. So, if you think about elderly hospitalized patients. You could think about, bone marrow transplant recipients for example. Or you can think about, sort of an outpatient, all-comers adult type of study. And that's where we've actually landed. So, that is going to be the first patient population that we're targeting is an outpatient adult population sort of a point-of-care study. And that will again we're targeting to initiate that by year-end this year.

Okay. Great. And if I can just ask one more question. In that Phase 2a study, I just was wondering how critical is it to administer the loading dose like at the right time and getting that dose correctly?

Yes. Well, we don't know, quite honestly. I mean, that's why we baked it into the study. We don't know if we'll need a loading dose or we won't need a loading dose, but what we did want to do was bake that into the challenge study now rather than wishing we had done that later. And so that's why we sort of stacked it with the two regimens that we did. We've got 600 milligrams QD or we've got a 500 milligram loading dose and then 300 milligrams BID. When you model that out, the loading dose followed by the BID that I just mentioned does give sort of a strong smack right out of the gates at the virus, which is in this indication could well be important. Is 600 milligrams QD sufficient for that early smack of the virus? It may well be. And so -- but we really put that in there just to ask that question. It's not uncommon in respiratory infections to use a loading dose, just to get the drug on board more quickly to get to steady state sooner, et cetera, et cetera. So we'll just wait and see what the -- where the data lead us.

Okay. Thanks for clarifying. Thanks.

You’re welcome.

Your next question comes from Eric Joseph with JPMorgan. Your line is open.

Hey, guys. Thanks for taking the questions, and congrats on the progress for the quarter. I just had a couple of questions on 514 for chronic HBV. I guess, I'm just trying to appropriately understand the clinical potential with 514 and whether the expectation is that you would ultimately expect to achieve single-agent activity? Or should we be thinking of this more as an adjunctive therapy to the current nukes? And if in the latter vein, whether you'll be able to assess safety and tolerability in the context of a background nuke analog standard of care in the Phase 1 as designed? Thanks.

Sure. So to answer the very last part of it, first, it won't be in a Phase 1 with a nuke, but what I'll go back and say is, we're thinking about it as a single agent much like others who have programs in this mechanism. The first job is to go into Phase 1 in healthiest doing a set and map, which again we plan to initiate now and our next quarter. We had been going second half and we're putting it into next quarter. And then once we do that, we'll go repeat the 1b effectively in HBV patients to get a sense of viral kinetics in that HBV patient population. This is a very common data set to sort of capture this so the 1b is going to be in nuke suppressed naïve -- nuke suppressed and naïve perhaps patients. So we will get some sense of that in the 1b. Ultimately though is -- the core is really going to be part of a bigger cocktail we ultimately imagine. The question is, is a core and a nuke enough? Currently Assembly and J&J and Roche are in the process of trying to answer these questions and we did get some data that came out of EASL recently that with Assembly's molecule on top of a nuke. And it's not clear that you don't need a more potent core inhibitor than the one that was tested. We'll wait and see what others show from again J&J and Roche. Or that you may need a core inhibitor on top of a nuke for longer than six months. So again that's been unknown at this point. But there is no question that the core is contributing. It's just that HBV, I think so much of the -- not so much people who treat HBV for a living but a lot of The Street I think assumes that HBV might come around quickly like hep C and I just don't think it's going to be -- we're still at an earlier stage of learning to figure out what is the right set of combination ingredients that's really going to pull cure rates up from low single digits. And what's going to pull cure duration then from right now it's never down into reasonable time frames for patients. Will that be a year of treatment? Will it be longer than a year of treatment? Or maybe if we get the right combinations together, can we come down to shorter durations than a year? These are all the old questions that people asked of hep C. And once you sort of got to PEG/Riba and then you added a protease on top of that then you added something else, you can ultimately just dial down and continue to perfect these versions. So we're at an earlier stage now the whole field is. This is an exciting time for patients, but I do believe core is going to be an important mechanism in that ultimate regimen. The only question after that is what other things are you going to need? And that's why we're already internally exploring some other mechanisms that we may well add to the cocktail in the future. So stay tuned on that front.

Your next question comes from Jay Olson with Oppenheimer. Your line is open.

Hey, thanks for taking the question and congrats on the progress. I was wondering if you could please remind us for the Phase 2a human challenge study of EDP-938 and RSV, what is the timing of the onset of therapy with regards to the timing of the inoculation with the virus? Does the therapy begin before inoculation? And also can you tell us the timing of the therapy with respect to the onset of RSV symptoms?

Sure. So it's not given prophylactically, it's given therapeutically. So you – you infect the volunteers and you basically are then starting to track them regularly. They are domiciled, so they're – the subjects are watched very closely and they're monitored for presence of virus continually by PCR. And once you get a detectable load by PCR you usually dose within 12 hours, I believe it is from that time point. So that's the point of dosing.

Okay. Great. That's very helpful. And then can you just remind us is the timing of onset of treatment in the human challenge study the same as timing that you use in the primate study? And maybe as a follow-up, can you just comment on how derisked the human study is by the results of the primate study?

Yeah. So the primate study was a different sort of a study. That one was run a little bit more in prophylactic mode. And again, what we're trying to do, it's a temptation to veer off and do a lot of other kinds of preclinical studies and exploratory clinical studies et cetera, et cetera. But the punch line is on that primate study, there was a sort of a known protocol and path that had been developed in the African green monkey. And we chose to follow that in large part so that we could compare our data set against those of others. And in one case, a company that used to be called Alios had done a non-human primate study that generated positive data in that model and then had continued on to the human challenge study, which they ran it like we're running it and like others have run it. It's a fairly standardized protocol that people use. But anyway Alios then went on to demonstrate success in their human challenge study. So we felt that again, we showed very robust activity in the non-human primate. We're now going into that next step into the human challenge study. So there's no never any perfect de-risking. That's why you have to ultimately do the experiments, but you are dealing with a primate with similar lung architecture, and you know that the drug needed to get to the site of infection. And in that case we did see a very strong antiviral effect. So going now into the human challenge study, the prequel to that was the Phase 1 where we had demonstrated very good safety over a seven-day period. I'll remind you that, the Phase 2 challenge study is only five days in duration. And that the doses that we're using we demonstrated very high multiples of the EC90 in Phase 1. So high multiple of the EC90 is generally a sought after profiles to go into the viral disease because you want to have a lot of pressure if you will on the virus. So, we were able to deliver that very high multiple of EC90 quite safely in Phase 1 and now have progressed obviously with those types of dosing in our Phase 2 study. So, again, you can never fully de-risk any study, but I think it's -- it was a well-conducted pathway to get to this study. And again I think we're doing it in a way that allows us to sort of compare results with others.

That's great. Thanks for all the details. Appreciate. That's very helpful. Thank you.

Welcome.

Your next question comes from Brian Skorney with Baird.

Hi, this is Jack Allen dialing in for Brian. Thank you so much for taking our questions. We just had one on the recent happenings in the ASK-1 inhibitor space with respect to Gilead's clinical trial data. I think on your last earnings call you had mentioned that you were working on a ASK-1 inhibitor. We were wondering what your thoughts were on Gilead's data and how that might affect your willingness to move forward with your compound? And if you're also monitoring the ATLAS trial that's expected later this year with respect to ASK-1 as a combination in NASH? And if -- and how that would I guess play a role in your decision to move forward with your potential combination of an FXR and an ASK-1 as well? Thank you so much for the question.

Sure. So, we did mention on our last call that we had a -- one of the programs that's not FXR in-house we have multiple of those was an ASK-1 program. We started to have IP coming out. And in fact we had submitted abstracts at the EASL Conference and we showed some very good preclinical data in NASH models using an ASK-1 inhibitor. In fact we had one comparative study versus selonsertib that actually looked very encouraging for our molecule. We also showed data that took apart sort of the kinase selectivity profile of one of our ASK-1 molecules that we showcased versus Gilead's selonsertib and in fact showed that ours had a cleaner kinase profile than theirs. So, that's all backdrop as of April. Of course going into EASL we knew that STELLAR-4 had failed. Quite honestly even though Gilead is certainly a formidable competitor we were hoping for success in that study for obvious reasons in terms of continual validation of the mechanism. And then we were waiting to see what would happen with STELLAR-3 and now we know the answer to that. And that that study was -- also was not possible -- or was not positive. So, I guess the question for us that we have is did Gilead dose high enough? We know that they were capped at 18 milligrams in virtually all of the studies that they've run. They've run numerous Phase 2 and Phase 3 studies. And they always capped out at 18 milligrams except for I think their early Phase 1 study they dosed higher but then they never dosed higher after that. So, we keep asking ourselves whether or not they dosed higher would they have seen a better outcome? And since it appears they weren't able to do that, we won't know that the answer to that question. I think what we need to see is more details on the Phase 3 data thinking about it from the perspective of target engagement and other parameters. But the -- I guess the question for Enanta remains were you to have a cleaner more selective molecule that proved to be safer and allowed you to dose higher would you have a different result? And that's something that we're just going to have to stew on a little bit internally before we make any sort of a final decision. I mean, it appears that Gilead is aiming to go forward in Phase 3 in kidney disease with that. And I think there's probably a -- might be a more compelling argument in that indication based on the biology. But we'll have to sit and think about that a little bit. Regarding the ATLAS study, of course now they're continuing to have combination studies with FXR and ASK1 and other combinations and you can be sure we will have our eye on that data, because we're -- I guess we're the really the only other company that can put together that combination. The question is if we did it with -- potentially we're able to achieve a better profile in our molecules could that be a combination that would be worth pursuing also? We'll wait and see what their data set looks like.

Thank you so much for the question.

You're welcome.

[Operator Instructions] Your next question comes from Patrick Trucchio with Berenberg Capital Markets. Your line is open.

Thanks. Good afternoon. Just a few follow-ups on NASH. First, how should we think about the follow-on FXR agonist to be announced later this year? In what ways will it be differentiated from EDP-305 or the other FXRs in development for NASH? And is it possible this follow-on candidate could eventually become your lead FXR antagonist for NASH?

Well so starting with the last question anything is possible. I guess number one we need to harvest a finalist and we have certainly some very, very strong contenders that we're choosing among right now. And again our aim was to try to come up with things that are as good as we can find out there. And that would include EDP-305 our current lead. What we've done we set out years ago, since we didn't license this stuff in from anywhere we sort of built the program from scratch, we've been working on multiple different classes of FXRs for years. And 305 is a member of one class. We certainly have some contenders that are in other classes that we're looking at. We are looking at -- it's all the usual things: potency safety, efficacy, combinability, manufacturing, properties all kinds of other kinds of parameters that we're looking at in these potential candidates. And it's too early to say today what that final profile will look like, but we're hoping to again iterate with a profile that could be potentially even better. And we'll have to -- well, again, we'll just have to wait and see what that finalist molecule looks like. But we're very excited about the sort of the runner-ups that we have right now and it's just a question of making final selections and then we'll, again, aim to do that later in the year. And we'll have a lot more information about it at that time including timelines that we're envisioning.

And then, can you discuss the ASK-1 and its role in the pathogenesis of NASH? And do you think an ASK-1 inhibitor would perhaps be more appropriate in earlier fibrosis-stage patients? Or is it more the case where if you have a more potent ASK-1 inhibitor it could be an effective mechanism also in later fibrosis-stage patients as well?

Yeah. I would be just really speculating on those fine points. I mean, I think the homerun although, it was an uber-aggressive one, but it was one worth taking. And Gilead's to be commended for running STELLAR-4, because these patients are now really hurting, they come pre-diagnosed and there's clearly a need to treat them. I think most people are going to be swinging for F2s and F3s in terms of profile, but whether -- I think at the end of the day, single mechanisms are probably in NASH going to be suboptimal versus what you can do with multiple mechanisms. And again, every successful drug in a lot of these phases for every mechanism gets sorted out by having a drug that really works and demonstrates the power of that mechanism clinically. Certainly, pre-clinically there's a lot of data around ASK-1, but if you don't make that translation, you'd have a bunch of preclinical data. So, I think, again, we've been focused on creating with ASK-1, like all of our other programs, very selective highly potent molecules that we can hopefully dose hard. And I think, unfortunately, right now, based on STELLAR-3 and STELLAR-4 failures, there's still just a few questions with ASK-1 that we need to answer ourselves before we press hard ahead.

That’s really helpful. Thank you.

You are welcome.

There are no further questions. I'll turn the call back to Carol Miceli for any closing remarks.

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

This concludes today's conference call. You may now disconnect.