Xenon Pharmaceuticals Inc. (XENE) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Xenon Pharmaceuticals Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jodi Regts. Ma'am, you may begin.

Thank you, Nova. Good afternoon. Thank you for joining us on our call and webcast to discuss our financial and operating results for the third quarter of 2016. Joining me on today's call are 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 quarter ended September 30, 2016. 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, our achievement of certain milestones under our collaboration agreements, the plans of our collaboration partners and their interactions with regulatory agencies, the results of our 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 third quarter 2016 results and the accompanying Quarterly Report on Form 10-Q will be made available under the Investors Sections of our website at xenon-pharma.com and filed with the SEC and also available on SEDAR. Now I'd like to turn the call over to Simon.

Thank you, Jodi and good afternoon everyone. And thank you all for your interest in Xenon and for joining our conference call today. Throughout 2016, we have executed well on our goals and strategies and achieved significant milestones that have strengthened us as a company and that I believe it created meaningful value for our shareholders. We have advanced our research and development pipeline, supported our partnerships, moved our proprietary programs forward, and strengthened our financial position, all while continuing to operate in a capital efficient manner. We believe we've made great progress in advancing towards important inflection points which sets the stage for some important milestone opportunities over the next six to 12 months. Today, we believe, we are on the cusp of entering the next important phase of evolution as a company driven by the maturation of our development pipeline. In the first half of 2017, we anticipate reaching several milestones that we believe could potentially accelerate the growth trajectory of our company and represent important potential value catalysts for the company. These major events include the top-line data readout from our Phase 2 XEN801 Acne trial, our partner Genentech advancing the NAV1.7 pain program into Phase 2, the top-line data readout from the Phase 2B trial in post-herpetic neuralgia in our partnership with Teva, and filing an IND in our NAV1.6 proprietary program for epilepsy around mid-2017. As we review with you today, our successful third quarter performance and prospects for 2017, I hope to convey to you the confidence and excitement that we have about Xenon's future. I will start with a discussion of our lead proprietary product XEN801. XEN801 is a highly differentiated product for the treatment of moderate to severe acne based on a novel mechanism of action. XEN801 is a selective, small molecule inhibitor of stearyl Co-A desaturase 1 or SCD1, an enzyme involved in lipid synthesis that is expressed in sebaceous glands in the skin. XEN801 is topically administered in a gel form. It is differentiated from currently marketed products as a result of its dual mechanism of action, firstly, by reducing the production of lipids produced by sebaceous glands; and secondly, by inducing apoptosis or cell death of the sebaceous glands essentially limiting the factory of lipid production in the skin. The XEN801 Phase 2 clinical trial which was planned as a 150 subject study and initiated in February has recently completed enrolment randomizing in fact 165 patients with moderate to severe acne. We're very pleased to successfully enroll more subjects as this does boosts the statistical power of the study. Just as a reminder, with a 12-week study duration our previous guidance remains the same and we expect to report top-line results in the first quarter of 2017. To briefly summarize the Phase 2 trial design. This is a well powered randomized double-blind vehicle controlled parallel group study. The active arm is XEN801 applied as a 1% gel once daily and the placebo arm is a matching vehicle gel also applied once daily both dose for 12 weeks. We're assisting efficacy, safety, and pharmacokinetics, with the primary efficacy endpoint being the percent change between active and placebo comparing total lesion count that is both inflammatory and non-inflammatory lesions at the end of dosing compared to baseline. New innovative treatments for acne remain a large underserved market opportunity and we are pleased to see that broad interest in the dermatology market continues. We believe the keen interest in our acne program from both investors and pharmaceutical companies with a dermatology interest is driven by growing awareness of SCD 1 as a novel target with a unique mechanism of action focused on reducing serum production. Our earlier data confirm the ability to effectively get XEN801 to the target in the skin at good levels with extremely low systemic exposure. This truly topical action underscores our belief that XEN801 can demonstrate an attractive safety profile compared with current standard of care retinoid based treatments. We are looking forward to sharing top-line readouts in the first quarter of next year. Continuing the focus on key events coming up in 2017, I will discuss the advancement of our collaborative programs coming out of our partnerships with Genentech and Teva which are focused on the development of novel inhibitors of the sodium channel NAV1.7 for pain. Interest in NAV1.7 as a valuable pain target is extremely high both in the scientific community and the pharmaceutical industry. Recall that people relax in NAV1.7 gene and protein have a condition called congenital indifference to pain or CIP and cannot perceive pain. People who have gain of function mutations in the same gene have a opposite severe form of pain known as erythromelalgia. There is tremendous amount of human genetic data supporting the validation of NAV1.7 as a pain target. Xenon is especially fortunate to have two promising partnerships focused on this exciting highly validated targets. In our strategic alliance with Genentech, we are developing early active, highly selective small molecule inhibitors of NAV1.7 for the treatment of pain. Genentech moved two differentiated inhibitors of NAV1.7 into Phase 1 clinical development. The compounds are known as GDC-0276 and GDC-0310. Genentech has now indicated that it plans to progress to Phase 2 clinical development within the first half of 2017. While we had previously guided to late 2016 or early 2017, we understand from Genentech that there is ongoing work that needs to be completed prior to finalizing the next stage of clinical planning and prior to committing to an exact start date for the clinical trials. We're excited about this important near-term event not only because we are eligible to receive a milestone payment when the first patient is treated, but because we believe commencement of the Phase 2 development will help to establish a leading position for Genentech within the NAV1.7 pain markets. I should mention that we also see further progress in our pain genetics collaboration with Genentech which is focused on the discovery of novel pain targets in ray human pain disorders. Our third major value driving event anticipated in the first half of 2017 is the data readout from the Phase 2B trial of TV-4570 in post-herpetic neuralgia or PHN. We're collaborating with Teva on developing a topical sodium channel blocker for peripheral application to treat post-herpetic neuralgia. TV-4570 targets NAV1.7 and other sodium channels to treat conditions of chronic pain. We have previously shown this topical product gets into the skin in humans at high concentrations with a NAV1.7 target is expressed in peripheral pain sensing nerve endings. Teva is conducting a randomized double-blind placebo-controlled Phase 2B trial and expects to randomize approximately 330 patients with post-herpetic neuralgia. The primary endpoints is the change from baseline in the numeric rating scale to week four and the secondary endpoints include 30% and 50% responder rates quality-of-life and safety. As per prior guidance top-line results from this ongoing PHN clinical trial are expected in the first half of 2017. In addition to these three major anticipated clinical milestones, we also excited about the progress we're making in our proprietary program to develop a potent and selective inhibitor of the sodium channel NAV1.6 for the treatment of seizure disorders, including ray intractable childhood epilepsies such as Dravet syndrome and SCN8A or NAV1.6 gain of function epilepsy. Sodium channels appear to play a key role in neuro-excitation and neuro-inhibition in the central nervous system. And NAV1.6 is the most highly expressed sodium channel in the hyper dexterity parameter pathways in the brain. So we believe this is a very compelling and differentiated target. Promising results continue to come out of a preclinical program. Last quarter, I summarize some of the preclinical in vivo data we've generated showing that there are a number of different NAV1.6 gain of function mutations that exist in humans that causes severe form of childhood epilepsy. We demonstrated that we can block these different variants with our NAV1.6 inhibitors. In addition, using our NAV1.6 inhibitors, we showed compelling dose dependency in a transgenic SCN8A gain of function mouse model of seizures, where we presented a very significant reduction in the seizure activity in these animals who had gain of function mutations in the NAV1.6 gene. Within this past quarter, we have also generated additional preclinical in vivo data with our selective NAV1.6 inhibitor compounds which supports the potential treatment of adults, partial onset epilepsy, with a potent, selective NAV1.6 inhibitor. These data continue to fuel our great excitement in the NAV1.6 targets and in our NAV1.6 program which remains on track to file an IND around mid-2017. As I noted in the beginning of my comments, we believe that these key near-term milestone events coming to fruition separately and together position us on the cusp of realizing potentially major value infection points for our company. We have a lot to look forward to the coming six to 12 months. To summarize these important near-term capitalists in both our proprietary and partner programs: one, we look forward to completion of the well-powered Phase 2 trial of topical XEN801 in patients with moderate to severe acne with top-line results expected in the first quarter of 2017; two, we anticipate the progression of Genentech's NAV1.7 pain program interface to development in the first half of 2017; three, we expect results in the first half of 2017 from Teva Phase 2B clinical trial or TV-4570 in patients with post-herpetic neuralgia; and lastly, we're progressing towards identifying the development candidate to address severe forms of epilepsy including childhood epilepsy's with our NAV1.6 sodium channel inhibitor program in order to file an IND application around mid-2017. We believe that our business model of leveraging financially well structured partnerships to participate in large market indication such as pain, combined with a focus on rare or orphan neurological indications in our proprietary programs such as severe childhood epilepsy disorders is a major strength. This strategy enables us to pursue multiple, diverse, therapeutic, and commercial opportunities to manage risk and to maximize opportunities for success. And as Ian will describe in his comments with our successful financing in September, combined with our existing cash balance, and the potential for an additional $32.5 million in potential milestone payments over the next 24 months, we believe that we are well-positioned to achieve our near-term goals. Before, I ask Ian to finally review our financial performance for the quarter. I would also like to just take a moment to formally welcome Dawn Svoronos to our Board of Directors. Dawn is a highly accomplished and experienced pharmaceutical industry executive. Impressive career includes more than 23 years with Merck with a focus on commercial operations and marketing. Dawn also has experience at the board level as she is currently Chair of the board for Theratechnologies and was previously on the board of Medivation which recently was acquired in a very successful transaction. We're delighted to have Dawn join our board and believe that her vast knowledge of the commercialization process in life sciences and pharmaceutical companies, she will make a great contribution to the maturation of our company. Ian?

Thanks, Simon. For the quarter ended September 30, 2016, we reported total revenue of $0.4 million compared to $4.3 million for the same period in 2015. Revenue for both periods is primarily derived from our collaboration agreement with both Teva and Genentech. And the decrease of $3.9 million is primarily attributable to revenue recognized relating to the upfront payment from the collaborative development and license agreement with Teva which is fully recognized by December 2015, as well as revenue related to the upfront payment from our March 2014 genetic collaborative agreement with Genentech which is fully recognized by March 2016. And the remaining decrease was due to less full time equivalent funding from Genentech as we shifted resources from supporting our collaborative agreements into our proprietary programs. R&D expenses for the quarter ended September 30, 2016, were $6 million compared to $3.8 million for the same period in 2015. And this increase of $2.2 million is primarily attributable to an increase in spending in our NAV1.6 sodium channel inhibitor program as well as well as on our XEN801 program which entered Phase 2 clinical development in February of this year and that's partially offset by a decrease in Genentech collaboration expenses. G&A expenses for the quarter were $1.8 million. This compares to $1.3 million for the same period last year. In the quarter ended September 30, 2015, we had a $1 million recovery and that was recognized due to a decrease in the fair value of liability classified stock options that were granted to certain directors and consultants and these options were subsequently reclassified back to equity in September 2015. And the remaining change is due to a one-time acceleration of stock-based compensation expense for certain consultants that occurred in the third quarter of last year. Other expense for the quarter was $0.4 million compared to other expense of $3 million for the same period in 2015 and this decrease of $2.6 million was primarily attributable to a decrease in unrealized foreign exchange losses arising from the translation of Canadian denominated balances to U.S. dollars as compared to the same period in 2015. Net loss for the quarter was $7.7 million compared to $3.8 million for the same period in 2015 and the change is primarily attributable to lower revenues, higher G&A expenses, largely due to stock-based compensation recovery, higher R&D expenses, and lower unrealized foreign exchange losses. As Simon mentioned earlier, on September 13, we completed an underwritten public offering of 3.45 million primary common shares at a price per share is $7.50 which resulted in approximately $25.9 million of gross proceeds to Xenon. As part of the financing there is also a secondary component where certain of our pre-IPO shareholders sold 1.15 million shares therefore the total deal size was $34.5 million on a gross basis. We were very pleased with the terms of the financing and also met our objective of continuing to broaden our shareholder base, as we advance our business to important milestone opportunities over the coming quarters. We ended September 30, 2016, with $69.5 million in cash, cash equivalents, and marketable securities which we believe puts us in a strong financial position to execute on a key near-term business objectives. And to summarize Simon's earlier comments, we anticipate multiple milestone opportunities from our internal pipeline and from that of our partners. We believe, we continue to manage our financial resources efficiently to support the advancement of our proprietary product pipeline and the successful execution of our corporate goals. So now operator, we can open the call up for questions.

Thank you. [Operator Instructions]. And our first question comes from the line of Steve Willey of Stifel.

Yes, hi good afternoon. Thanks for taking the questions. I guess so with respect to 801 press releases as we think about what we might be seeing in the first quarter of next year should be expect to see just kind of a generalized statement around either we did or we didn't or do you expect there to be some level of granularity around both primary and secondary inputs.

Hey Steve, it's Ian. We will yes, so will be by our press release. The most detailed analysis will be presented at some point in the future at a medical meeting, but we will provide some level of granularity in the press release. So it will be more than just whether we met both the primary and secondary endpoints we will give some numbers and then we expect to give some numbers in the press release on where we were versus the vehicle from control.

Okay, that's helpful. And then I guess just to respect to some of the new preclinical data that you've generated on NAV1.6 front, I guess adult onset, adult partial onset epilepsy is quite a bit of a larger indications in some of these orphan pediatric seizures that you've previously referenced. So just I know it's still early stage but just wondering if you think that that at some point might now may be change the way that you strategically view the ownership of this asset going forward. Thanks.

It's Simon. Thanks, Steve. Great question. No, I don't think it will change how we view the ownership of the assets we're committed to taking this asset forward. I think it, what it will do is play into what the clinical program looks like and whether or not we'll be, we'll be conducting a adults epilepsy studies in parallel with pediatric studies or whether there is a sequence to it. That work is underway and just defining but it does very excitedly from our standpoint provides great optionality for the product. The in vivo data that we've now generated which we have not communicated publicly, we haven't published but will hope to do so and going forward really does open up different opportunities and I think provides a very sort of compelling story for the mechanism unconscious for the intractable childhood epilepsy's where we rethink 16 is having an important role but probably beyond into other forms, more common forms of epilepsy as well. So we'll obviously determine as we go forward these -- the impact on the clinical studies but it's not going to change ownership of asset. It will just speak to what the clinical plan looks like as we go forward.

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

Hey guys. Thanks for taking the question. Just on the Phase 2 trial for acne and now with your enrollment a complete if you could talk a little more about the what the dropout rate is to-date and how you think the, that will impact the outcome in the way you power the trial?

Yes, thanks, Hugo, Simon here. We haven't talked about the dropout rates publicly what we can say is they low, they're lower than we had modeled into the study so you know how that will impact the power is we'll have, we should have if that dropout rate continues remember we are fully enrolled but that doesn't mean we've completed a number of these subjects are still going through the study. But given the dropout rate is quite substantially below what was modeled we should land up with more completers than was originally modeled. And as I mentioned in my updates we also recruited a larger number or randomized a larger number than was initially modeled as well. So between the larger number randomized and the lower projected dropout rates we should have at least a higher statistical power to determine the effect size that was set. So the initial steps for the study was modeled on a 126 completed subjects, 63 per treatment group, and that was sufficient to provide 80% power to show a 15% treatment difference between the active and placebo with a standard deviation of 30% at a 5% significant level using a two-sided T-test. So with a lower dropout and a higher randomized number that 80% power will increase. So the -- you can look at the impact on stats differently but a simple way to look at it is to, to see the same, to see the effect size that was modeled i.e. 15% difference. Given the larger number of subjects, the study will now have a higher power to allow us to do that probably somewhere between 80% and 90%.

Got it. That's very helpful. And I'm just curious on the skin biopsy that you did in the Phase 1. I mean how does the penetration in the facial skin compared to the back and how consistent is this difference across patients.

Yes, lets that is a very good question. We don't -- we have not mapped it out ourselves so we at Xenon have not done back versus face penetration studies with 801 or with any other compound. There is published literature on this. In general the published literature is consistent that facial absorption is higher than absorption on the back of, skin on the face is more porous. The relative differences in absorption on the face are generally thought to be around two to five fold. We don't know specifically what the difference in absorption is between back and face for this product for 801 using this formulation. So when we quote the likelihood of having greater absorption on facial skin it's based on I'd say pretty significant body of literature but studying other compounds in an array of different formulations. So generally it's a few fold higher, we don't know that specifically for 801.

And Hugo, it's Ian. Just as a reminder, so we did and we had it in our press release earlier this year in the Phase 1 component of the trial as you referenced we did look at PK back biopsies and so it is relevant to your question on how that translate into the faces as Simon mentioned. But just as a reminder on those back biopsies, we were seeing penetration into the skin level significantly above the IC50.

In fact above the IC90 on average and so we selected our dose from the Phase 1 study to move into Phase 2 based on both topical and systemic tolerability but also based on skin drug concentration. And so we wanted to achieve a level in the skin in the back that was above the predicted IC90 which we did inhibitory concentration where we knocked down 90% of enzyme activity in a human see besides in vitro assay. We did that and we're making an assumption but I think it's a reasonable assumption based on the literature that absorption in the face should be higher and how much higher we don't know.

Thank you. [Operator Instructions]. Our next question comes from the line of Louise Chen of Guggenheim Securities. Your line is open.

Hi this is [indiscernible] on for Louise. Thank you for taking my questions and congratulations on the quarter. Just two questions from us, first can you remind us of the economic terms you have with Teva and Genentech on your partnering products and what the next steps are with each of these companies and the milestones you could receive on those products? And then second question we have is can you give us some more color on the market opportunities for NAV1.6. I know you mentioned the IND filing timeline but beyond that what is your development timeline and what kind of -- what additional color can you give us there? Thank you.

Okay. It's Ian. I will talk through the economics on Teva and Genentech and then Simon can follow-up with the question just on opportunity in NAV1.6. So as Simon had in his prepared remarks said the way we think about it is what milestones we may achieve over the next 24 months as well as kind of the total milestones and royalties on both of those programs. So in the next 24 months we just aggregated those milestones, so we can receive up to $32.5 million in milestone payments from both Teva and Genentech, over the next 24 months and you can think about that as each of those programs individually enter the next stage of development. And then in total kind of quantum the Teva milestones is approximately about $300 million in future milestone payments that are heavily weighted to regulatory milestones, we are filing an approval and then we teens to low 20 royalty on that. We also have an ability to co-promote. So we could co-promote up to 30% in the U.S. On Genentech the total milestones are just north of $600 million and then we have a mid-single-digit to 10% royalty on commercial sales.

Great. So just the next question was around NAV1.6. Look the full development timeline is not absolute deepened down at this point and that's due to the discussion we've just had is, we're mapping out at the moment, the development strategy vis-à-vis some of the childhood epilepsies versus adult epilepsies and of course that's going to have a very significant impact on the commercial opportunity and what the final commercial estimates are. I think when one looks at success of drugs like [indiscernible] product from ESA as well as the UCB products, levetiracetam et cetera including for adult onset epilepsies, we know the market opportunity for adult partial onset usage is high, some of those have been blockbuster drugs already. The childhood epilepsies I think certainly to-date leading the way is the work from both GW Pharma and I think following with Zogenix in the Dravet space. And I think certainly GW have put some thoughts into the childhood epilepsy opportunity for Dravet and clearly it's driving a very sizable market value in that company today. So I think it's hard for us to put specific numbers on at that point only because the final development plan i.e. final indications which will be the first approval indication has not been committed to at this point. I think it's fair to say that we certainly will be looking at conducting human proof-of-concept Phase 2 studies across multiple indications and obviously that too will determine the laser development strategy and ultimately the approval strategy. So we're excited about both the opportunity that is now been proven for adults epilepsy by companies like UCB and ESA but of course we are extremely interested as we've discussed already on the -- in the intractable childhood epilepsies and we see a very significant market opportunity. In terms of real development timelines as I said we guided around mid-2017 for our IND or IND equivalent filing. We expect to spend much of 2017 in the early part of clinical development, so would not expect a Phase 2 start until 2018 but that's as far as we are able to look at this point.

And I'm seeing no questions in the queue at this time. I would like to turn the call back to Jodi. Ma'am, floor is yours.

Thanks everyone for joining us on the call 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 all disconnect. Everyone have a wonderful day.