Gyre Therapeutics, Inc. (GYRE) Q2 2014 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Q2 2014 Targacept, Inc. Earnings Conference Call. My name is Purita, and I'll be your coordinator for today. [Operator Instructions] I would like to turn the call over to Dr. Stephen Hill, the President and CEO. Thank you.

Thank you, Purita. And good morning to everybody, and thank you for joining us today. And also with me is Alan Musso, our Chief Financial Officer. First, let me inform you that comments made today may include forward-looking statements made under the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to plans, expectations, objectives or future events, financial results or condition including for any of our product candidates, the design, scope or other details of clinical trials, the timing for initiation or completion of, or the reporting of results from clinical trials or for submission or approval of regulatory filings, target indications or commercial opportunities, as well as AstraZeneca's development plans for product candidates licensed from us, our cash runway, revenues or expenses, plans, expectations or any other matter that is not a historical fact. Actual results may differ materially from those expressed or implied by any forward-looking statement as a result of many factors, including those described under the heading, Forward-Looking Statements, in our press release from earlier today or under the heading, Risk Factors, in our most recent Form 10-K or in later filings with the SEC. We caution you not to place undue reliance on any forward-looking statement. Also, any forward-looking statement that is made speaks only as of today and should not be relied upon as representing our views as of any future date. We disclaim any obligation to update any forward-looking statement except as required by applicable law. So with that, it has been clearly a busy few months for us. As I'm sure you've seen, we've received data from our Phase IIb clinical trials in both Alzheimer's disease and in overactive bladder, and have publicly shared the top line results. Let me talk first about our Alzheimer's disease study. As we announced, this trial was designed to test with the TC-1734, our alpha4beta2 NNR modulator was superior to the market leader, donepezil, as a monotherapy over a 12-month period. This trial did not include a placebo arm. And a total of 293 patients with mild to moderate Alzheimer's disease were randomized across 61 sites in Eastern Europe and 3 sites in the U.S. In this study, TC-1734 did not meet the objective of showing superiority to donepezil, on measures of either cognitive function or global function. As in previous studies, the compound was considered generally safe and well tolerated. This is a rigorously designed trial, planned to provide us with a definitive answer as to whether TC-1734 could be a better treatment option in the current standard of care in what has been a very difficult disease area for the development of normal therapeutics. After considering the study results, we decided not to invest further in this program. Let me now turn to the second recent clinical study to read out, TC-5214, as a treatment for overactive bladder. This Phase IIb study was conducted at 119 sites in the U.S. and randomized 768 patients with overactive bladder. The study's coprimary endpoints were change in micturition frequency and change in urinary incontinence episodes per 24 hours from baseline to 12 weeks. Patients on the study received 1 of 3 doses of TC-5214, 0.5 milligrams, 1 milligram or 2 milligrams or placebo twice daily, randomizing the 2 1:1 ratio favoring placebo. In the study, TC-5214 demonstrated mixed results on the coprimary endpoints of the highest dose. We saw a statistically significant reduction in micturition frequency with a p-value of 0.033 and an improvement that did not reach statistical significance on episodes of urinary incontinence with a p-value of 0.379. Additionally, on several secondary endpoints, including the physician rating of global clinical improvements and on patient-reported measures of urgency, statistically significant in dose-dependent improvements were observed during the course of treatment. TC-5214 was considered generally safe and well tolerated. Although, we did observe a 15.1% placebo adjusted rate of constipation and a 5.9% rate of urinary tract infection in the highest dose group. While we continue to analyze the complete data set, we've decided to discontinue development of TC-5214 in overactive bladder, as we're not convinced that TC-5214 would provide a better treatment option than currently approved OAB medications. Looking forward now, let me turn to our ongoing gastroparesis program. Gastroparesis is a chronic and debilitating disorder affecting an estimated 5% to 12% of patients with diabetes. In June, we initiated an exploratory Phase I, II trial of TC-6499 as a treatment for gastroparesis. TC-6499 is a small novel molecule that modulates activity of the alpha3beta4 and other neuronal nicotinic receptors. The alpha3beta4 NNR is located throughout the GI tract, and when modulated, is believed to increase cholinergic tone, which in turn leads to increased motility. This is a cross-over design trial, evaluating 3 doses of TC-6499 in placebo in approximately 20 subjects at several U.S. sites using a sophisticated carbon breath test, as a surrogate measure of gastric motility. We expect to provide guidance on the estimated completion of this trial as we get a little further along in the recruitment cycle. Looking at the bigger picture, we have consistently stated our goal of building a sustainable company over the long term. We've done substantial scenario planning over the last 12 months. And whilst we certainly hoped that we would see a positive outcome at, at least, one of our Phase IIb readouts with the high risk nature of clinical development we knew that, that was not a certainty. Accordingly, we acknowledged and planned for the possibility that none of the study outcomes would go our way. And we also made a deliberate decision not to hedge our portfolio by taking on new programs ahead of those results, but instead to preserve our capital for the further development of those programs if they were to produce results that supported further development. Unfortunately, that did not occur. And we are now moving forward and have the resources needed to embrace new opportunities beyond the NNR Therapeutics with an ongoing commitment to be disciplined in our diligence, decision making and financial management. During 2014, we've been especially active in screening for assets that could be a good fit for Targacept. And whilst the majority of these have been dismissed from consideration, we have identified several but are interesting and warrant further exploration. Targacept has a strong shareholder base, which includes substantial ownership positions held by several, very small and experienced healthcare investors. We've had discussions with a number of them over the course of the last week. We plan to engage with them in evaluating our portfolio options as we seek to determine the best path forward. We will keep you updated on the status of these activities in the coming months. But in the meantime, I want to thank all of you for your continued support. With that, let me turn the call over to Alan for our financial update, and then we'll take questions. Alan?

Thank you, Steve. Let me now briefly highlight our financial results for the second quarter of 2014, which we released earlier today. For the second quarter of 2014, we had a net loss before income taxes of $8.1 million compared to $12.4 million for the second quarter of 2013. For the 6 months ended June 30, 2014, we reported a net loss before income taxes of $19.7 million compared to $20.4 million for the corresponding 2013 period. The lower net loss for the 2014 period was due primarily to a decrease in research and development expenses. As of June 30, 2014, cash and investments in marketable securities totaled $122.8 million. As we announced earlier this morning, we're updating our financial guidance to reflect current operating and program spending expectations. This is based on anticipated savings from our announced discontinuation of TC-5214 and TC-1734 development work. A 25% smaller workforce compared to year end 2013, lower patent-related costs and a continued emphasis on managing our expenses. We now expect our operating expenses for the year ending December 31, 2014, to be in the range of $32 million to $36 million. And we expect to have approximately $107 million in cash and investments at year end. We do not anticipate significant operating revenues for the year, and we estimate that in the second half of 2014, cash payments for the closed-out costs of the recently completed clinical trials of TC-1734 in Alzheimer's disease and TC-5214 in overactive bladder will be approximately $6.4 million. And costs for the ongoing gastroparesis trial are estimated to be $2.5 million. These projections do not include any financial impact that we might experience as a result of pipeline diversification or business and corporate development initiatives. And with that, we'll open up the call for your questions.

[Operator Instructions] Your first question comes from Robyn Karnauskas.

A few questions on TC-6499. First off, what gives you confidence that this will be active in gastroparesis. I know there was some early Phase I work done, but I'm wondering if you can expand on that data that suggests it will be an active agent in the disease?

Yes, the data that led us into that study was firstly, the scientific rationale for the role of NNRs and cholinergic modification of GI motility and also a Phase II study, where we looked actually in irritable bowel syndrome. But we did see in a pretty small study, a fairly significant improvement in spontaneous bowel movements. So we know that the compound does have action on bowel motility. But at this point, this is the right study to tell us whether there is an effect on the rate of gastric emptying as opposed to the more broadly impact on the GI tract in general.

So in the increase in bowel motility, has that been seen to correlate with improvement in gastroparesis?

I don't think that's known -- it's not known by me. I don't think...

So there's no -- there wasn't a -- there hasn't been any other, I don't know, not necessarily by you. But you have not seen any other -- correlation between the 2?

No. So again, the basis for the rationale is the belief that cholinergic modulation affects gastric motility and the observation that we have impact on the other parts of the GI tract.

Great. And then looking kind of at the market for this, you had mentioned that 5% to 10% of diabetic patients experience this syndrome. How many of these patients actually need drug therapy? And really, how large is this market? What are we looking at here?

Yes, we've done some initial work. It's actually -- because there have been no traditionally, no really very effective treatments to gastroparesis, understanding the epidemiology is not quite as straightforward. I think the easiest thing to say is that if we -- if the drug is effective in that indication, we think there would be a very healthy market for it. I wouldn't want to quantify that in dollar terms, but certainly sufficient to justify a full development program and launching a product if it were indeed effective in that indication.

Right. I mean instead of looking at it from dollar terms, how many patients are we looking at that would really need a drug therapy such as this?

I can't -- I don't have the paperwork in front of me. But I think it's millions rather than tens of thousands. I think the number I remember is 1 million to 2 million. Alan, do you remember?

That's some of the base numbers. It's basically not something that there's been great data on in determining what the total patient population is. Some of the estimates are as high as 6 million. So it's somewhere in the low couple of millions to about 6 million, and those are U.S. numbers.

Okay. And then just looking at the timing of the trial. When do you think we'll have an update as to completion of enrollment of these 18 patients and kind of more color on the path forward in the Phase I, II?

Yes, I think that's challenging at the moment. We always thought this might be a very challenging study to recruit because we're actually careful about getting the right patients in. So we don't have all the centers up and running yet. So I'm loathe to give a guidance on recruiting timelines or something, which is a little bit unpredictable until we have all the sites up and running and we get a sense of how quickly those patients are going to recruit.

And when you say the right patients, what does that mean?

Well, you have to get diabetic patients who are able to tolerate being in this type of study with the duration that's involved. And each patient acts as their own control, so they have to be on placebo and then active drug. So our planning process of looking at this suggested that it may not be the quickest study to recruit in terms of getting patients who are fulfilling inclusion criteria.

Your next question comes from Alan Carr, Needham & Company. Alan Carr - Needham & Company, LLC, Research Division: I guess a quick follow-up to the previous one. We might be able to assume that results from this gastroparesis trial may take into 2015 then, correct?

Well, again, I don't want to give guidelines. But certainly, it's possible that it could run into 2015, yes. Alan Carr - Needham & Company, LLC, Research Division: And then can you comment on your business development strategy here. What -- maybe, you can give us a profile of what sort of compounds you'd like to bring in, in terms of stage of development, indication and maybe the timing that you hope to bring something in.

Yes, I think the real answer to that question, Alan, is we're pretty neutral on therapeutic area. We probably would not want to go into CNS diseases where the etiology is still relative unknown. I think we've explored that pretty thoroughly with our own NNRs. But generally, it's really a question of looking for therapeutic areas, indications and opportunities where the expertise we have in the company, which is pretty broad, can add value to understanding the opportunity. So we're, again, fairly neutral on therapeutic area. Clearly, we would like to find things with meaningful inflection points in the near term. And by that I mean, over the next year or 2. But that's most importantly, we don't feel any rush to bring something in just for the sake of having something to do. So we're going to be very cautious about looking for opportunities. There are a lot of things out there, but as we dig deeper into each of those, many of them don't really fit our criteria for being a big opportunity, both for our investors and to the patients that we hope to treat. So we're open-minded, it doesn't have to be CNS or peripheral nerve, provided we have the expertise to assess the program carefully.

The next question comes from Jon LeCroy from MKM Partners.

When you're looking at assets, are you looking at whole companies in any cases, or is it just kind of things that have been shelved or maybe not moving forward with other companies?

Again, we're very open-minded about that. So for example, one of the opportunities we've been looking at would be the acquisition of a company. But equally, we're prepared to look at in-licensing or even more broad types of investment into risk sharing with other companies. So again, in terms of deal structure, we're very open-minded. But it has to be something with the potential for a meaningful impact on patients and meaningful upside potential for our investors.

Okay. And then in terms of size, assuming you're in-licensing or acquiring a product, how much of your $107 million at the end of the year do you think you have available to pay for an asset?

Well again, there's different ways of structuring deals. And I think cash is, perhaps, the most important asset that we have at the moment in addition to the folks that we have and the expertise that they have. But that cash is very valuable in terms of applying it to running development program. So my preference would be to construct deals, which minimized the use of cash for acquisition and maximized the use of that cash for actually running development programs. So clearly, in addition to the cash, we have the potential [indiscernible] equity for acquisitions. But again, I would rather see the bulk of that cash invested into meaningful asset development.

Okay. And then I guess, 2 more. It's just one on kind of the availability of products out there to acquire and what's the competition like? And we hear a lot from the larger companies that it's difficult for them to find assets that are interesting?

Yes. It's difficult, but it's not impossible. And we've looked at probably hundreds over the last 12 months or so, and the vast majority of those we've not felt were justifiable to take forward. But the challenge is to find the 1 or 2 that are meaningful. And out of the searching that we've done, we believe there are a handful of programs that could be very meaningful for us, and we continue to pursue those. But we'll be -- I think the main thing -- and I just want to keep reiterating this is that we're not looking for something for the sake of doing something. We're looking and we'll continue to look until we find something meaningful. And notwithstanding the IPO markets, $100 million plus is a significant amount of cash to be able to apply to moving something important forward. So we believe that if we continue to look carefully, we'll be able to find something that is appropriate match for that cash.

Okay. And then last one, I don't know if you already mentioned this, but what sort of phase of assets are you looking at?

Well, again, we're open minded about that. It ranges from entry in demand through to Phase III ready program. So we've looked at different programs in all of those areas. And again, it's less important whether it's Phase I, Phase II or Phase III. And it's more important that with the cash on hand, we'll be able to move an asset to a likelihood of a positive outcome with a meaningful inflection point within a 2- to 3-year time period.

Your next question comes from Bob Hazlett from Ladenburg. Robert Cummins Hazlett - Ladenburg Thalmann & Co. Inc., Research Division: I want to continue on a little bit more in the same vein. Maybe you've touched on this, but if you could elaborate a little bit more, I'd greatly appreciate it. As you consider additional business development, what characteristics do you consider your areas of expertise. I'd imagine CNS is one of them moving forward. But where do you consider your sweet spot in terms of therapeutic area from an internal standpoint as you're evaluating additional assets? And then secondly, are there any areas that you specifically have ruled out, potentially oncology or other areas where you just don't feel maybe at this point, you have the expertise to be able to move something forward with the robustness that you might need to, given the bidding for these assets that's out there?

Yes, I think there's different components to that question. So when it comes to bidding against other people, and obviously, we're not going to overpay for something. But in terms of therapeutic area, that's really less of an issue about the corporate history. And as you know, Targacept has been primarily focused on CNS. But the individuals within the company come from very varied background. So once we've had a corporate focus on nervous system, the individual people within the company have much broader expertise. I mean my own expertise covers pretty much every therapeutic area. Steve Toler, who runs our preclinical, has covered a whole range of different therapeutic areas, including in -- the time of Pfizer in the past. David Hosford is more focused on the neurological stuff. But again, within the company, we have some pretty good generalists. And on that basis, I would, at this point, for the sake of your thinking about it, I wouldn't exclude any particular therapeutic area. With the exception of we're probably not going to -- as a small company with limited resources, we're probably not going to invest in expensive CNS-related diseases where the etiology is simply unknown. And you can pick a target and just do everything right, but have the wrong target. So I think we would need to seek out therapeutic areas and indications where the science is a little bit better understood than it has been to some of those diseases that we've explored in the past. Robert Cummins Hazlett - Ladenburg Thalmann & Co. Inc., Research Division: Thank you for that. And I guess just, again, not to put a too fine a point on it, but are you ruling out particular areas like oncology, or is it...

No, we would not. We're not a priority excluding any particular therapeutic area.

[Operator Instructions] And you have no further questions.

In which case, thank you, Purita. Thank you, Alan, and thank you to all Targacept's employees over this challenging period over the last couple of months. And I thank you to all of you in the audience and to our investors. And we will continue to be diligent and careful about husbanding our resources. And we'll keep you informed as that process progresses. So thank you and enjoy the rest of the week.