Xenon Pharmaceuticals Inc. (XENE) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Xenon Pharmaceuticals Fiscal Year 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Ms. Jodi Regts, Senior Director of Corporate Affairs. Ms. Regts, you may begin.

Thanks, Andrea. Good afternoon. Thank you for joining us on our call and webcast to discuss our financial and operating results for 2015. Joining me on today's call is Dr. Simon Pimstone, Xenon's President and Chief Executive Officer; and Ian Mortimer, Xenon's Chief Financial Officer and Chief Operating Officer. Following this introduction, Simon will provide perspective on Xenon's progress, and then Ian will review our financial results for the year ended December 31, 2015. After that, we will open up the call to your questions. Please be advised that during this call we will make a number of statements that are forward-looking, including statements about the sufficiency of our capital position to execute on our business objectives and our ability to operate in a capital efficient manner, the timing of IND or IND equivalent submissions with regulatory agencies, the initiation of future clinical trials, potential efficacy, future development plans and commercial potential of our product candidates, the timing of and results from ongoing clinical trials and preclinical development activities, the commercial launch of Glybera in the European Union, our achievement of certain milestones under our collaboration agreements, the plans of our collaboration partners and their interactions with regulatory agencies, the results of research and development efforts, and the status and timing of additional product candidates and related development activities. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control including the risks and uncertainties described from time-to-time in our SEC filings. Our results may differ materially from those projected on today's call. We undertake no obligation to publicly update any forward-looking statements. Today's press release summarizing our 2015 results and the accompanying annual report on Form 10-K will be made available under the Investor Section of our Web site at www.xenon-pharma.com. Now, I'd like to turn the call over to Simon.

Thanks very much, Jodi, and good afternoon everyone. Thank you all for joining Xenon on our conference call and our webcast today. We're very pleased with our progress in 2015. We executed well on our pipeline partnering and financial management strategies, while continuing to operate in a capital-efficient manner in order to achieve our near-term goals. We believe we are very well-positioned to build on our accomplishments going forward, and anticipate multiple milestone opportunities in 2016. These include data readouts and pipeline progress to fuel the growth and the expansion of our development portfolio. We believe that our business model of leveraging partnerships to participate in large market indications such as pain, combined with our focus on rare or orphan indications in our proprietary programs such as severe childhood epilepsy disorders enables us to pursue multiple diverse therapeutic and commercial opportunities. In this way, we intend to continue to grow and mature our company to expand our pipeline and to bring novel treatments to patients. To review our accomplishments in 2015, I'll start with our proprietary pipeline. We made very good progress with our lead proprietary development program, XEN801, a promising potential treatment for patients with moderate-to-severe acne. At the end of 2015, we completed the Phase 1 study. In February of this year, we achieved a major milestone by initiating the Phase 2 trial. By brief way of background, XEN801 is a novel, topically-administered selective small-molecule inhibitor of the enzyme known as stearoyl-Co-A desaturase-1 or SCD1, an enzyme involved in lipid synthesis that is expressed in sebaceous glands in the skin. We believe that XEN801 can have an impact on acne via two very distinct mechanisms. Firstly, by reducing monounsaturated fatty acids to reduce the production of sebum lipids, these are the lipids produced by sebaceous glands. And secondly, by inducing apoptosis or cell death of the sebaceous glands, thereby reducing their size and number, essentially limiting the factory of lipid production in the skin. We have tested this mechanism in human sebocyte cell lines, and have demonstrated an ability of XEN801 to increase levels of important transcriptional regulators of apoptosis, such as the gene known as Lipocalin, or NGAL. This is the mechanism by which the retinoic acid products have their effect in treating acne. However, XEN801 achieves this endogenously, and not through high-dose retinoids. We believe that these data supported differentiated mechanism of XEN801 compared to other drugs that are either approved or that are in development for acne. Our Phase 1 trial was conducted in 48 healthy volunteers. Doses were either a 14 or 21-day treatment period. A number of different dose volumes of the 1% XEN801 drug product were evaluated, with dosing on the back and the face to determine the maximum tolerated dose. We selected a Phase 2 dose based on favorable tolerability and skin drug concentrations. While maximal plasma concentrations of XEN801 were low, importantly the median skin concentration of XEN801 was above the drug concentration predicted for efficacy for all those volumes evaluated. The Phase 2 trial underway is a randomized double-blind vehicle-controlled parallel group study designed to evaluate the efficacy, safety, tolerability, and systemic exposure of XEN801. We expect to enroll approximately 150 patients with moderate-to-severe acne, and anticipate top-line results in the fourth quarter of this year. We believe that XEN801 is a promising novel treatment for acne, which we anticipate could be better tolerated, and without the serious side effects that often limit the use of currently approved retinoid treatments. Moving on, our program to develop a potent and selective inhibitor of the sodium channel Nav1.6 for the treatment of rare childhood epilepsy disorders such as the orphaned disease, Dravet Syndrome, continues to progress well. In addition to this Dravet Syndrome, which is a channelopathy caused by Nav1.1 loss of function. We are also extremely interested in other cases of pediatric encephalopathy, such as SCN8A epilepsy, which is caused by a gain-of-function mutations in the sodium channel Nav1.6. We have identified potent, selective Nav1.6 inhibitors, and results from early in vivo studies have been very encouraging, where we have seen preclinical efficacy in an animal seizure models. We expect to identify a development candidate in 2016, with a compelling preclinical package in order to file an IND application in the first half of 2017. We believe that the progress we are making with both XEN801 and our Nav1.6 inhibitor programs underscores the value and productivity of our Extreme Genetics, an ion channel drug discovery platform. We are continuing to leverage these capabilities to identify validated drug targets and develop new product candidates in 2016, which could provide opportunities for additional partnering as well as expansion of our proprietary development portfolio. Now I'll discuss our advancing programs in our partnerships with Teva and Genentech. In our pain collaboration with Teva, the development of TV-45070 in neuropathic pain is continuing as planned. TV-45070 targets both targets both Nav1.7 and other sodium channels to treat conditions of chronic pain. Teva is conducting a randomized double-blind placebo-controlled Phase 2b trial in approximately 300 patients with post-herpetic neuralgia. Results from this trial are expected in the second-half of this year. Teva continues to invest broadly in TV-45070, and in addition to the PHN study, has completed a drug-drug interaction clinical study, and a clinical maximal human use study. Both of which were completed with no concerns identified. Teva is also continuing all the necessary non-clinical and CMC [ph] activities to support late-stage clinical development of the TV-45070 product. Our partnership with Genentech, to development orally active selective small-molecule inhibitors of Nav1.7 for the treatment of pain is also progressing well. Genentech is currently conducting two Phase 1 clinical trials, one for the product GDC-0276, and the other for GDC-0310, two differentiated inhibitors of Nav1.7. We expect that pending a full assessment of the results from both Phase 1 trials, Genentech intends to initiate a Phase 2 trial in 2016. As we have noted before, we believe Nav1.7 is an important pain target, and having two Nav1.7 inhibitors in clinical development by our partner underscores the significant potential of this novel class of compounds as a new way to treat pain. And also underscore the productivity of our broad Nav1.7 focused discovery and development partnership with Genentech. We are also proud of the progress we have made in our second collaboration with Genentech, in which we are focused on the discovery of novel pain targets in rare human pain disorders, where individuals have either an inability to perceive pain or where individuals have non-precipitated spontaneous severe pain. In September, last year, we announced that we successfully discovered and identified a novel pain target, thus triggering a milestone payment. Considering the critical medical need for non-opioid-based mechanisms to treat pain, we are excited by the advancements we have made in this pain-genetics collaboration. We believe that we are well-positioned to lead the discovery of additional promising targets and mechanisms that can significantly enhance treatment options for pain. In reviewing 2015, we are thus encouraged by our considerable progress we have achieved last year, and our track record of execution. I'm also proud to report that we continue to attract world-class talents across our teams. Most recently, we hired Dr. Jim Empfield as our Senior Vice President of Drug Discovery. With prior experience at organizations such as Vertex and AstraZeneca, Jim comes to us with a strong track record of identifying and delivering high-quality drug candidates into development. We believe that we have advanced our pipeline in 2015, managed our resources carefully, and maximized our ability to execute broadly and well. Looking ahead, key to our growth as a company is the parallel strategy of advancing both our partnered and our proprietary programs as well as continued cultivation and mining our discovery platform as a source of novel target for development. The remainder of the year, we expect to continue to advance in a numerous important milestone opportunities. We look forward to completion of the 150-patient Phase 2 trial of XEN801 in patients with moderate-to-severe acne, with results expected later in the year. We are on track to identify a development candidate to address severe forms of childhood epilepsy within our Nav1.6 sodium channel inhibitor program followed by filing of an IND application in the first half of 2017. We also expect continued progress towards identifying our next target for drug discovery and development. We anticipate results in the second half of 2016 from Teva's ongoing Phase 2b clinical trial for TV-45070 in patients with post-herpetic neuralgia. We anticipate completion of the GDC-0276 and GDC-0310 Phase 1 clinical trials being conducted by Genentech followed by an assessment of results and progression to Phase 2 this year. We expect to continue to make progress in our pain genetics collaboration with Genentech. And we look forward to providing additional updates as they become available on the commercial launch of Glybera in the EU by our licensee uniQure's commercial partner Chiesi. I believe that Xenon is well positioned to continue to advance, expand, and diversify our pipeline, and look forward to 2016 being a year of significant continued growth and progress. Now, before opening the call up for questions, I would like to ask my colleague, Ian Mortimer to review our financial performance for 2015. Ian?

Thank you, Simon. For the year ended December 31, 2015, Xenon reported total revenue of $15.6 million compared to $28.4 million for the same period in 2014. Revenue in both periods was primarily derived from Xenon's collaboration agreement with Teva and Genentech. The decrease of $12.8 million was primarily attributable to a $7.9 million milestone payment recognized from Genentech in 2014 and revenue recognized relating to the upfront payment from the December 2011 collaborative development in license agreement with Genentech, which was fully recognized by December 2014. The remaining decrease was due to less full time equivalent funding from Genentech and Teva, and the change in foreign exchange rate between the U.S. and Canadian dollar. As previously announced, the first patient treated with Glybera as a commercially available gene therapy was announced by uniQure in November 2015 and enabled by its commercialization partner in the EU, Chiesi. Glybera is the first product whose active ingredient was derived from our platform to receive commercial approval, and is currently the only gene therapy product to receive approval in Europe. Glybera is specifically indicated for the treatment of a subset of adult patients diagnosed with the orphan lipid disorder Lipoprotein Lipase Deficiency, or LPLD, confirmed by genetic testing and suffering from severe or multiple pancreatitis attack despite dietary fat restriction. While we are eligible to receive royalties from the sales of Glybera under our license agreement with uniQure, we do not expect this royalty revenue to be significant in the near-term. Research and development expenses for the year ended December 31, 2015 were $15.2 million compared to $11.8 million for the same period in 2014. The increase of $3.4 million was primarily attributable to an increase in spending on our XEN801 program in preparation for clinical development which began in September 2015, and our spending on our Nav1.6 sodium channel inhibitor program. G&A expenses for the year ended December 31, 2015, were $9.8 million compared to $5.5 million in 2014. During 2015, $1.7 million non-cash expense was recognized due the change in fair value of our liability classified stock options granted to directors and certain consultants in Q1 and the subsequent change in fair value until the options were reclassified back to equity in September 2015. The remaining increase was primarily attributable to additional expenses incurred as a public company and the acceleration of stock-based compensation for certain consultants. Other expenses for the year ended December 31, 2015 were $6.4 million compared to other income of $1.9 million for the same period in 2014. The change was primarily attributable to unrealized foreign exchange losses arising from the translation of Canadian denominated cash and cash equivalents to U.S. dollar, as a result of the functional change to U.S. dollars from Canadian dollars that we made in January 1, 2015. Net loss for the year ended December 31, 2015 was $15.8 million, compared to net income of 13 million for the same period in 2014. The change was primarily attributable to lower revenue, higher operating expenses, and unrealized foreign exchange losses recorded in the year ended, December 31, 2015. Cash, cash equivalents, and marketable securities as of December 31, 2015, were $58.7 million. We continue to manage our financial resources efficiently to support the advancement of our proprietary product pipeline. We anticipate multiple milestone opportunities from our internal pipeline, and from that of our partners in 2016. And we're looking forward to a successful and productive 2016. With those prepared remarks concluded, we'll now open the call up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of John Newman with Canaccord. Your line is open.

Hi, guys, thanks for taking my question. The first question I had was, I wondered if you could talk a bit about the endpoints that you'd be looking at in the Phase 2 acne study that's currently ongoing. And also, I wondered if we might expect a little bit more detail from Genentech this year regarding the indications that they're looking at for the Nav1.7 blockers. Thanks.

Thanks, John. It's Simon. Thanks for joining the call and for the question. So in terms of the endpoints for the acne trial, just to give you a brief overview, patients will apply the active ingredient or placebo topically to their face for 12 weeks. There will be a four-week follow-up. The primary efficacy endpoint, John, is the percent change in total lesion counts. This is the inflammatory and non-inflammatory lesion counts, comparing baseline to week-12. Secondary endpoints include the percent change in inflammatory and non-inflammatory lesions at different time points throughout the 12-week study, as well as a number of investigators' global assessment measures. And as mentioned earlier, we anticipate top line results towards the end of 2016, in the fourth quarter. With respect to the second question on Genentech, we do expect that in the latter part of the year Genentech certainly will look to communicate around their plans for the Phase 2 program. We will obviously update as we are able to, and as I think I've mentioned to you before, early in January, this was the first time at least Genentech gave us the ability to communicate around their intent to move the program into Phase 2. They're a very conservative company in how they guide, and so we felt this was a very good -- a good message. And so we feel quite confident that as the year progresses we will be able to communicate more than we have been able to. Genentech is obviously working hard in developing those plans around indication, around timelines, and we expect that we will be able to communicate that, John. And the timeline, we don't have precisely on when that will be, but certainly expect that that will be this year, before the study begins.

Great, thank you.

Okay.

Thank you. [Operator Instructions] Our next question comes from the line of Hugo Ong with Jefferies. Your line is open.

Hey, guys. Thanks for taking my questions. Just looking ahead for acne, are you guys likely to start a Phase 2b trial before moving into Phase 3? And if you are, maybe if you could tell us what that trial might look like?

Yes, Hugo, thank you. It's Simon. Thanks for joining as well. It's an assumption, I think, for now. And I say an assumption because we haven't had the regulatory interaction on this, that a Phase 2b is likely to be required, primarily because I think the agency is going to require some dose range finding prior to a pivotal trial. If you follow Dermira, they have done something quite similar and currently actually in the Phase 2b trial with their ACC inhibitor. In terms of the -- so we don't know that definitively that we'll require one, but I think we will assume for now that we will -- clearly, we'll have interactions with the agency to discuss that point. I think in terms of what the study will look like, very similar to what -- we expect very similar to what this Phase 2 study looks like, Hugo. The FDA guidance for acne studies is actually extremely clear. We are following that guidance in the Phase 2 trial. So I think what you might expect is a very similar study design in terms of endpoints, in terms of duration of dosing. Clearly, what will differ is the size of the study, number of patients recruited, and number of doses selected. So I don't see a significant deviation from the existing study design including the endpoints in the Phase 2b trial.

Okay, got it. And on your Nav1.6 program, just conceptually like how do you feel inhibiting Nav1.6 compares to other approaches towards Dravet Syndrome, such as cannabinoids?

Yes. I can't really speak to the cannabinoids in the sense of how we will believe the Cannabidiol as a drug is working. We believe Nav1.6 given it's expression in the neuroexcitatory pathways in the brain as a predominant sodium channel in those neuroexcitatory pathways, given Nav1.6 gain a function in humans results in epilepsy, given that Nav1.6 loss of function when introduced into a Dravet mouse correct epilepsy, we believe that Nav1.6 is very, very good, both animal and human genetic validation as a target. So we understand the mechanism. We understand where this target is expressed. We understand its role in neuroexcitation, and we understand from data we've generated and others that the target when altered can have a major impact on seizure phenotypes. We think this is a profound evidence of validation for this target and for a Nav1.6 inhibitor for the treatment of epilepsies. Now, how extensive that applies to within the world of intractable childhood epilepsy, of course, we don't know today, but we don't think there will be numerous opportunities to develop the product across different indications within the intractable childhood epilepsies. Dravet is an interesting opportunity. We've talked a bit that historically. We still believe that. And as we have just outlined briefly in this update, what we're getting particularly interested in now as well are these children who have severe childhood epilepsy that's actually caused by gain of function in this channel, as another potential development opportunity and commercial opportunity for the product. So I would say we believe this is a very, very well-understood target relative to, I think, the mode of action of the Cannabidiol, for example. And I think the genetic validation of this target in both animals and humans is profound.

Got it. Great. Thanks for taking my question.

Pleasure.

Thank you. And I am seeing no further questions at this time. I would now like to turn the call back over to Jodi for any closing remarks.

Thanks everyone for joining us today. We look forward to keeping you informed of our progress throughout the year. Operator, we will now end the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.