XBiotech Inc. (XBIT) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the XBiotech quarterly update conference call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce the host for this conference call Mr. Josh Drumm. You may begin, sir.

Thank you, Kevin. Before turning the call over to management, I would like to make the following remarks, during this call forward-looking statement including declarations regarding management’s beliefs and expectations will be made. In some cases you can identify forward-looking statements by terminologies such as may, will, should, would, could, expect, plan contemplate, anticipate, beliefs, estimates, predicts, reject, intend, or continue or the negative of such terms or other comparable terminology although not all forward-looking statements contains these identifying words. Forward-looking are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statement. These risks and uncertainties are subject to the disclosures set forth under risk factors in XBiotech’s SEC filings. Forward-looking statements are not guaranteed to future performance and actual results of operation, financial condition, and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this call. Any forward-looking statements that we make on this call speak only as of the date of this call. XBiotech assumes no obligation to update its forward-looking statements whether as a result of new information, future events or otherwise after the date of this call. At this time it is now my pleasure to turn the call over to John Simard, President and CEO of XBiotech.

Thanks, Josh. Thank you all for joining us this morning for our first quarter 2016 update. I’m going to take you through recent developments, then provide an opportunity for Q&A for audience. At that time, our Medical Director, Mike Stecher, our Senior Vice President, Operations, Kelly Thornburg and our Vice President of R&D, Sushma Shivaswamy, will be available to provide further color to the updates. A highlight in this quarter is of course our recent submission of a marketing authorization application to the European Medicines Agency. The intent of the application is to gain approval to sell Xilonix in the European Union member nations. This application is reviewed favorably it could result in marketing approval by the end of this year 2016. And EMA approval would, however provide the ability to seek marketing authorization in many other countries around the world also. I want to say a little something about our submission to the EMA. In short, our application is probably unlike anything the EMA has seen before. That is Xilonix is unlike any cancer therapy that anyone has seen before. It is a cancer therapy that actually heals while it antagonizes the tumor. People getting treatment with the antibody overall feel better not worse during therapy. To me this is what medicine should be, it makes you feel better while it works to treat your disease. You know this is a really tough concept in cancer medicine where the effectiveness of a drug has for so long been measured by how toxic it is and how sick it makes you feel. In a very real sense therefore our application and our therapy is a breakthrough. Let me expand on that for a moment. Xilonix marketing authorization is being sought for the treatment of persons with colorectal cancer. Colorectal cancer is actually the second leading cause of cancer in the industrialized world. And cancer itself is the second leading cause of death. So the impact of colorectal cancer is huge. The patients we treated were those that have been diagnosed with colorectal cancer, but have also progressed despite treatment. The patients we treated had developed deadly symptoms of the disease, such as pain, fatigue, anorexia, and wasting. The tumors were metastatic or inoperable they had failed all recommended forms of chemotherapy and most other forms of therapy as well. These patients were physically and emotionally exhausted from the treatment-related toxicities. Unfortunately, however, these patients are not a small subset or a rare population with the disease. Half of all colorectal cancer patients end up in this situation. Yet we are aware of no clinical study having being performed to specifically evaluate clinical benefit from therapy in this group of patients. We are not aware of any anti-tumor treatments proven to provide clinical benefit for these patients in this stage of disease. For this group of patients a therapy with significant treatment-related morbidities is not a viable option. It is crucial therefore that Xilonix therapy showed little evidence of any frank toxicity either during infusion of the drug or from the therapy effects itself. This was in fact achieved. Moreover, there was no reported treatment-related suppression of the patients’ natural immune system as a result of therapy. Many of these patients are elderly and their immune system has been compromised from previous cytotoxic therapies. This is a very key issue, since the immunosuppressive effects of cancer in cytotoxic therapy is one of the most substantial and troubling risk factors for further treatment. The lack of side effects and the ability to maintain the immune competence of these patients is of paramount importance to them doing well in their fight against the disease. The Phase III study was designed to demonstrate an improved objective response rate for patients treated with the antibody therapy. As we have stated before, there was a 76% relative improvement in objective response rate for patients receiving antibody. But Xilonix treated patients also had 80% reduction in paraneoplastic thrombocytosis and a 60% reduction in systemic inflammation compared to placebo. Patients receiving the antibody were also 53% more likely to have stable disease, compared to placebo. There was also a 26% reduction in the incidence of serious adverse events in patients treated with the antibody. What this means is that the occurrence of any kind of serious health problem, any kind, such as those that would require hospitalization or even result in death, was reduced in patients receiving antibody therapy. This, I believe is unheard of for any anti-tumor therapy and late-stage disease. We are simply not aware of any previous anti-cancer therapy used in advance disease where an effect like this has been seen. We will be working hard to communicate this breakthrough and advance this drug for the large and growing population of patients in need. An anti-cancer agent that works to strangle a tumor while healing and protecting the body from the effects of the disease has been a long time coming. Now we must begin to spread the word to patients and practitioners alike. To this end Mike Stecher, our Medical Director recently presented our Phase III clinical findings before European Parliament’s Commission for Health and Food Safety. He was invited to speak by the prominent patient advocacy group EuropaColon. Mike is here, he can speak to his impressions from this meeting, if there is interest in the Q&A period. But he relayed to us a high-level of enthusiasm by EuropaColon for an approval of our therapy in colorectal cancer. Beyond the European regulatory approval, we are of course conducting another pivotal study with Xilonix, which is part of an FDA fast track program. The primary endpoint of this study is overall survival. In January 2016, we presented information relating to the design and progress of the study to the gastroenterology community at ASCO’s 2016 Gastrointestinal Cancers Symposium. To-date, approximately, 287 out of the total 600 patients had been enrolled, placing us about one month ahead of our initial enrollment projections. There are currently 96 active sites worldwide including the U.S., Belgium, Switzerland, Austria, the Netherlands, Spain and Italy. Australia and the UK are currently undergoing final site approvals and Argentina, Brazil, France and Germany are currently pending approvals. We anticipate completing enrollment as planned by the last quarter of 2016. In addition to developing Xilonix for colorectal cancer, we believe that the antibody therapy could be relevant in a broad range of malignancies and have generated and published data regarding its activity in other tumor types such as non-small cell lung cancer. In December 2015, we announced that we signed a letter of agreement with the National Institute of Canada clinical trials group to develop a Phase II study to assess Xilonix in combination with Tarceva for treatment of non-small cell lung cancer. The projected launch for this clinical trial is expected in the third quarter of 2016. The combination therapy with Tarceva was inspired by our previous Phase I/II clinical results, which highlighted a potential for the antibody therapy to work with EGFR inhibitors in lung cancer. In this earlier study which was conducted at MD Anderson and published in investigational new drugs in March of last year. Patients who received prior treatment with Tarceva appeared to have considerably better outcomes than those that had not received Tarceva. It was based on these findings and the National Cancer Institute of Canada’s interest that we decided to move ahead with a combination therapy in lung cancer. We will provide an update once the study is launched. We have other very important clinical work going on in infectious disease. Our antibody 514G3 targets staph aureus and we are currently using it to treat severe bacteremia infections. Our novel anti-staph antibody was isolated and developed from a healthy human donor with natural antibodies against the bacteria. Three unique mechanisms 514G3 knocks out the bacteria’s principle method of immune evasion, allowing white blood cells to detect and destroy the bacteria. What makes this antibody even more valuable is that the target on the bacterial cell surface is common to both antibiotic susceptible and resistant strains, such as the notorious MRSA, or methicillin-resistant staph aureus. The final patient in the third and final dosing cohort for the dose escalation phase of the study recently cleared the safety window. This dose escalation phase determine the maximum tolerated dose that is currently being used in the Phase II expansion of the study. Patients with these staph infections typically have severe complications extended hospital stays and a 30-day mortality of approximately 20%. That’s our recent finding of the Phase I portion of the study that there was a 50% reduction in serious adverse events is a remarkable and tremendously exciting finding for us. A serious adverse event can result in a prolongation of hospital stay or even death. So reducing the occurrence of serious adverse events is a fundamental indication that risk to life and limb by all causes from the disease is being reduced from therapy. The development of an agent that could be used to help rescue these very sick patients from staph bacteremia would be a significant advance in infectious disease. Currently there are 11 active sites in the U.S. with six additional sites coming on in April, four sites in Korea, a single site in Germany and four sites to be added in Taiwan by the end of Q1 2016. This study is projected to be complete by the third quarter of this year. Let me now say a few words about our R&D work. We have what I see is a truly, remarkable and unique discovery program. And at XBiotech, we are all very excited about where it is quickly leading us. For example, we are currently screening for antibody therapeutics for infectious agents that impact the lives of millions of people, both in the United States and around the world. We are quickly narrowing in on a candidate therapeutics antibody to treat influenza, a disease that kills tens of thousands of persons each year around the world. I also expect this year we will have therapeutic antibodies that could potentially treat herpes zoster or shingles, a dreadful and painful virus infection that strikes one in three Americans. And we are closing in on a natural antibody candidate that could be given orally to protect people against C. difficile, one of the most devastating gut infections known affecting half a million in the U.S. annually where 29,000 people will die within 30 days of contracting the disease. To bring new drugs to market, we need to manufacture lots of antibody. We need a flexible, efficient and cost effective manufacturing process to handle this extraordinary pipeline. To this end, there was significant progress in the first quarter with regard to construction of our new manufacturing facility. During the quarter, the build out of the interior administrative and lab spaces continued. Installations of clean rooms also progressed well. Delivery of long lead time utilities and manufacturing equipment were received and this is progressing on schedule. We currently anticipate building construction completion late in the second quarter 2016 or earlier in the third quarter. Validation and commissioning activities for the clean rooms, utility systems and manufacturing equipment will begin in the next few weeks and we will begin engineering and performance qualification batches for Xilonix soon after construction is complete. We expect to file for registration of the new facility in the fourth quarter of 2016. Review of the application and approval will follow standard timelines for EMA and could take approximately nine to 12 months. Our strategy is to support the additional commercial launch of Xilonix from our current manufacturing facility and transition production to the new facility once it is approved. We look forward to working with EMA regulatory authorities as they review the marketing application and to hosting a pre-approval inspection for the manufacturing in the coming months. Our current manufacturing facility has indeed been operating at full capacity, producing clinical trial material for both Xilonix and 514G3. During this period of intense manufacturing activities, we continue to focus on those activities that enhance our operational capacity, efficiency and compliance. To that end, we refined standard operating procedures, implemented changes to clean room practices and added staff members in manufacturing quality and facilities. These ongoing efforts will allow manufacturing operations at XBiotech to respond to the growing demand for products to support our existing programs and our expanding pipeline. Finally, I’ll say a few words on our financials. As of December 31, 2015, the Company had cash and cash equivalents of approximately $91 million. During the year ending 2015, the Company recorded a net loss of approximately $37 million, which included $14 million relating to clinical operations including the now completed Phase III oncology study in Europe. XBiotech remains in a good cash position to continue our current and planned operations. This cash runway allows us to achieve several major inflection points, including potential marketing authorization in Europe, completion of ongoing clinical studies in oncology and infectious disease as well as finalizing construction and equipment purchases for our new manufacturing center. We thus expect the majority of our burn to consist of costs relating to the large U.S. Phase III study to the completion of the manufacturing expansion, as well as the expenses associated with commercialization in Europe. We expect another $13 million in costs relating to the building construction and equipment for our new facilities. In short, our balance sheet remains strong and we continue to carry no debt. We do not at present have cost estimates relating to commercialization in Europe. At present, the Company is in discussions with contract sales groups to provide full service launch program, including marketing, regulatory and sales activities. Our strategy is to refrain from cost commitments until at least our first feedback from regulators regarding marketing authorization as received. We are working to create a plan that enables rapid and efficient rollout of commercial operations around the approval process with as little upfront commitment as possible. In conclusion, let me say that our recent filing for marketing authorization marks a significant milestone for XBiotech as it highlights a decade of perseverance and the relentless pursuit of the development of a true human antibody therapy. Today, XBiotech is generating more and more excitement with this infectious disease platform. The tools we assembled over these years to discover and produce true human antibodies have created what I believe is now the world’s leading development platform for infectious disease therapies. We are all truly excited about the work ahead. I would like you now open up the call to questions from the audience. Operator, please do go ahead. Thank you.

[Operator Instructions] Our first question comes from Rahul Jasuja with Noble Life Sciences.

Hi, good morning, everybody, and congratulations on the progress of the colorectal cancer program at the EMA. So, John and team, just a few questions on the EMA process here. Let me start by asking some questions regarding the EMA endpoints. I think there is a dearth of understanding amongst the majority of investors, the relevance of lean muscle mass and quality of life as these novel endpoints. You’ve discussed in the past that these are better clinical surrogates for overall survival than some of the other endpoints. Could you add some color on that front for us, John?

Yes, Mike will talk to that.

Yes, so the endpoints were designed with the EMA Scientific Advice Group and we met with them twice in London. And they were based on guidance documents they had produced stating that reversal of symptoms as an antineoplastic mechanism of action are suitable endpoints in Phase III studies. And so what we were looking at are symptoms that would predict shortened overall survival. So things like, increases in pain, anorexia, fatigue and loss of muscle mass all known to be adverse prognosticators in advanced disease. And so by reversing this process, by treating the overall malignant phenotype, we believe that this is going to translate into a survival benefit. But as far as the end points are concerned, they were considered to be a clinical benefit on their own by the EMA Scientific Advice Group. So this procedure we went through we received written advice on the endpoints and the trial design and this is suitable for approval as a marker of clinical benefit on its own, but we do expect that it would translate to the overall survival benefit.

Okay, great. And then central to this, and again also novel here, is the role of IL-1 alpha and not IL-1 beta, which most of us are used to. Is there any upcoming medical conference or publication that’s upcoming that discusses the role of IL-1 alpha and in particular, this clinical trial: a medical conference, a publication that all this will be put together at? Is there anything upcoming?

We’ve submitted these results to ASCO/ESMO and where we expect to that hear within the next few weeks about acceptance and we are also preparing a manuscript for submission.

Okay, okay, good. And then, the other question.

[Indiscernible]

I think, we should add that it isn’t so novel to use creative surrogates or clinical benefit endpoints in oncology, a very successful outcome recently was achieved with insight in an oncology indication, where they looked at spleen – reduction in spleen size because this spleen is characteristically enlarged in that malignancy and the reduction on spleen size was expected to provide clinical benefit relief to the patient of the discomfort of that ailment and predict also a survival benefit in that disease. We know that insight has done very well, both with the regulators and in the marketplace after. So there’s definitely other examples of people finding new ways to demonstrate anti-cancer effects in late-stage disease.

Sure, sure, point well taken. So on that front also I wanted to ask you, given the novelty of these endpoints, the patients that were in this study, so these are symptomatic metastatic colorectal cancer patients, so they’ve served – sorry they’ve gone through multiple therapies and they’ve failed. Is that right?

That’s correct, there were a refractory to standard therapies. They had – they were ECOG 1 and ECOG 2, we weren’t able to enroll ECOG 0 because those patients are asymptomatic. So a population that is typically enrolled into Phase III advance cancer study ECOG 0, we did not enroll, we had patients over the age of 70, patients with weight loss, patients with symptoms at baseline, these were all requirements to have the symptoms and all of these symptoms at baseline in fact predicted a sicker population as well. So we believe that this was a population that was more frail than a typically Phase III colorectal cancer group.

Okay. And then moving on to my next category, I have two questions left. The next one really is if we could have a little bit more granularity regarding the steps with the EMA from now towards a decision-making and timelines. Could you add some information on that?

Well, I mean there’s different components there is the chemistry and manufacturing controls, the production side and then there is the drug side. What are you thinking about there, Rahul?

Well, just getting a timeline as to what are the interactions between EMA and you guys as the decision-making goes through. What will be publicly disclosed and when on this process?

This is Kelly Thornburg. The process with EMA, I mean they have a standard timelines that they operate on, it’s a 210-day timeline, review timeline that includes from submission, their acceptance of these submissions to a decision on approval. And we would expect to have interactions with them during a pre-approval inspection which is yet to be schedule. And then, at day-120 we should get some questions we’ll have some time to respond to those. And then, we’ll have another couple of check endpoints later in the process. But I don’t think we necessarily will make public announcements about those things along the way although – that remains to be seen, but I don’t think there’s too much for us to report on any of those things.

Okay. So then is it correct to assume that the 210-day clock has started ticking and that’s when you would make a public reporting, once the 210 days are done, then?

Yes and that’s 210 days without any clock stops there will be clock stops at a couple of points along the way while we respond to their inquiries, but that’s the general timeline. And certainly at the end of it there will be an announcement for sure.

Okay, very good. And then my final question is, so, John, you talked about – a bit about commercialization, and so on. Obviously, there doesn’t seem to be a big pharma plan in your strategy, it seems. I ask this question on my behalf as well as a lot of other folks who are probably wondering why not take a big pharma approach. Any final thoughts on that? And thanks for the time.

Thanks Rahul for the questions. Well, there’s – we have nothing against the big pharma approach. But you know what we – the fundamental strategy is to build value and as long as we can continue to add value to this asset and this drug, we’re doing it. I think an example of a strategy that would be similar would be with Enbrel, you know Enbrel was brought to the market independently and they got to about $50 million. If I remember correctly revenue stream with Enbrel, so they did all the heavy lifting, and they got it to the market, started selling it, but just there and at that point it was sold for over $16 billion, that operation. So there’s definitely value if you can carry a molecule to the market. There’s value in that and a lot of options that it gives you at that time. So we’re in no hurry at this point to hand it over and our plan is just to launch it and carry on with our programs.

Thanks. That’s all I had.

[Operator Instructions] We will move for our next question. Our next question comes from Nick Farwell with Arbor Group.

On the trade-off between licensing Xilonix, as opposed to developing and/or hiring an outside sales organization?

I’m sorry, the question, what the trade-offs.

Yes. In your mind, given the number of other initiatives, clinicals that you currently have underway, what is the trade-off in terms of extending your cash runway in considering licensing Xilonix as opposed to another – to a large pharma or someone else to market it into the EMA, versus hiring out or developing your own salesforce?

Well there’s a few things there. But there’s the trade-offs are all hypothetical, right? The idea of partnering and selling off the part of the upside is to get extensive market penetration, presumably that you couldn’t achieve on your own. So you trade-off some of that future value for a bigger market penetration hopefully and more robust launch and greater revenues overall. But we’re not sure at anytime that that can be achieved. Perhaps also with a good launch with a contract organization, we can come pretty close to what one of our big pharma colleagues might be able to achieve. So you can never be too sure how much you’re leaving on the table or not but what you can be sure of if you maintain ownership is that you will be able to develop that asset and be free to do whatever kind of trade or partnership at a later date. It leaves a lot of options on the table for us. So there’s no hurry. And it all comes down to what kind of terms you have at the present time. And I guess what it – we haven’t seen a deal proposal to us yet with Xilonix that made sense in the context of our ability to carry the ball on our own. So part of the strategy in this company was to maintain the ability to take it to market, hence our manufacturing program. We haven’t been in the position where we needed to offload the drug at any point, we’ve been able to finance it, we’re able to manufacture it; so we’re not in a position to do deals unless they are in the best interest for us. So we’re, as I said, still moving ahead with this plan.

So another way to – I’m sorry, but another way to ask that question is to what degree would – how do you sustain your current clinical opportunities that you have in at least infectious diseases, Staphylococcus? You mentioned non-small cell lung cancer and I think there were one or two others. I’m sorry, I don’t recall them off the top of my head. If at the same time – and be able to get final approval for manufacturing and, at the same time, take Xilonix to the market – I realize you won’t do it yourself, a contract manufacturing, but those are major endeavors. And given the cash position you have right now, there is some kind of balance that I’m sure you’ve considered. I’m just curious if you can give us some perspective on that.

Well, we do have cash to take us through an approval. If and when we get an approval, that will avail a lot of new financing opportunities for us so that’s where we’re heading.

Okay. Thank you.

Thanks. Thanks for the questions.

And I’m not showing any further questions at this time. I’d like to turn the call back over to our host.

Well, thank you all for listening today. I hope we’ve been able to give you a little more color on XBiotech. And thank you for operator for hosting the call for us. And we look forward to our next discussion later in the year.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.