Xenon Pharmaceuticals Inc. (XENE) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Xenon Pharmaceuticals Incorporated Second Quarter 2017 Earnings 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 call is being recorded. I would like to introduce your host for today's presentation, Ms. Jodi Regts. Ma'am, please begin.

Thanks, Howard. Good afternoon. Thank you for joining us on our call and webcast to discuss our financial and operating results for the second quarter ended June 30, 2017. 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. 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; our expectations regarding the sufficiency of our cash to fund operations into 2019, the timing of IND or IND equivalent submissions with regulatory agencies; the initiation of clinical trials, the potential efficacy, future development plans and commercial potential of our and our collaborators product candidate, the timing as and results from ongoing clinical trials and pre-clinical development activities, our ability to achieve certain milestones in both our proprietary and partner development programs, support 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 second quarter 2017 results and the accompanying Quarterly Report on Form 10-Q will be made available under the Investors section of our website at www.xenon-pharma.com and filed with the SEC and 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 joining us on this webcast. Today, I'll provide an overview of our progress as we drive towards exciting milestones for the remainder of 2017, and into early 2018. Our goal remains squarely on building a robust pipeline of new focused ion channel modulators of highly validated drug targets via our own internal research efforts as well as through in-licensing or acquisition of other product candidates that complement our existing portfolio. Turning first to the proprietary products within our pipeline, we have focused on developing novel epileptic drugs for rare often as well as larger market indications. We believe that epilepsy is a therapeutic area very well suited to Xenon's ion channel small molecule strategy. Ion channel modulators have already proven themselves as effective agents used in the treatment of various forms of epilepsy. These agents have been limited by narrow therapeutic windows because of the lack of target selectivity and we believe we can improve significantly on this target selectivity. XEN1101 is we believe a very promising anti-epileptic drug or AED that is an innovative next-generation Kv7 potassium channel opener. We expanded our epilepsy pipeline through an acquisition of XEN1101 in Q2. The deal terms for this product were very favorable with limited upfront and near-term costs to us and then regulatory and sales based milestones that are more back end loaded with mid-to-high-single-digit royalties owed by us on commercial sales. XEN1101 has been developed as a potential best in class next generation potassium channel modulator as a fast follower to the first generation product Ezogabine which was approved in 2011 for the treatment of adult onset focal partial seizures. Based on significant pre-clinical work conducted to-date, we believe XEN1101 could potentially provide a better safety, tolerability, and PK profile compared to Ezogabine and it represents a completely differentiated alternative to other AEDs currently available on the market. To provide some context, I'd like to give you a bit of background on the human genetic validation of Kv7.2 as a target and the scientific rationale for the clinical development of XEN1101 as an innovative AED. Children that are born with loss of function mutations in this particular channel known as KCNQ2 have a very severe form of child in epilepsy or early infantile encephalopathic epilepsy known as EIEE7. These children typically present with seizures in the first weeks of life which are usually frequent, often refractory, and challenging to treat. In addition to these multiple seizures, many of these children experienced delayed development or intellectual disabilities. We intend to take advantage of the fact that for XEN1101; the early development path has essentially been laid out by the first-in-class Kv7.2 modulator Ezogabine. This is a drug that was developed initially by Valiant and licensed to GSK. Ezogabine received a black box safety label relatively soon after launch when it was noted that some adults who took the drug started developing areas of pigmentation in the skin and the eye. This drug related liability and subsequent FDA warning impacted Ezogabine sales tremendously and GSK indicated earlier this year that it intended to pull Ezogabine from the market this year. Xenon's Kv7.2 modulator XEN1101 is a next generation drug that was developed initially by Valiant to address the pigmentation issues and to often improve potency, selectivity, pharmacokinetics and safety over Ezogabine. XEN1101 differentiates itself from Ezogabine in a number of ways. Firstly, the chemistry is different, so we do not anticipate XEN1101 will dimerize which was the suspected course of the pigmentation observed through Ezogabine since the specific chemical reaction with Ezogabine caused the drug to form a dimer that would bind to melanin. Secondly, XEN1101 is more potent with results showing approximately 10-fold greater potency than Ezogabine when studied in-vitro. Thirdly, XEN1101 is demonstrated improved selectivity with three to four fold selectivity for the neuronal channels KCNQ2 and 3 over other KCNQ2 channels and the molecule has proven to be highly selective over other sodium, potassium, and calcium channels. In pre-clinical studies, XEN1101 has also shown improved efficacy with an ED-50 dose three to four times lower compared with Ezogabine for studies conducted in the same preclinical models. Finally, with an improved PK profile in, in- vivo testing XEN1101 has the potential for once or twice daily dosing versus three times daily with Ezogabine. The key indication for XEN1011 potentially includes adult partial onset focal seizures, this was the largest indication for what Ezogabine was developed. Our animal data strongly supports this indication and the MES mouse model in which XEN1101 has shown significant efficacy has historically been predictive of focal partial onset seizures when studied with other AEDs. Other indications for this product could include the rare form of infantile epilepsy EIEE7 that I described earlier and in addition there are other indications that have scientific rationale for a potassium channel opener including Tinnitus, ALS, and Pain. Our development strategy currently is to develop an XEN1101 for treatment resistant focal or partial onset seizures in adults, a strategy supported by the clinical validation of the target with Ezogabine. XEN1101 has completed GLP safety pharmacology and toxicology studies along with a pre-IND meeting with the FDA. We anticipate that an IND while IND equivalent will be filed followed by initiation of a Phase 1 clinical trial in the fourth quarter of 2017. As part of our Phase 1 plans, we expect to deliver an early pharmacodynamic readouts in the first quarter of 2018 from a transcranial magnetic stimulation or TMS assessment that will be run in parallel with the multiple ascending dose portion of the Phase 1 clinical trial. This TMS PD readout could provide an early indicator of target engagement in the brain. We know that certain other AEDs that have shown an effect in the TMS model have provided seizure control in epilepsy patients. After our TMS study in Q1 2018 we would then expect to initiate Phase 2 development by middle 2018. Also within our epilepsy portfolio we continue to advance XEN901 towards an IND or IND equivalent filing also expected in the fourth quarter of this year. We expected this; later this year in Q4. XEN901 is a potent and selective inhibitor of the sodium channel Nav1.6 for the potential treatment of adult's partial onset epilepsy and rare intractable childhood epilepsy such as a SCN8A otherwise known as Nav1.6 gain-of-function epilepsy as well as Dravet syndrome. Nav1.6 is the most highly expressed sodium channel in the extra tertiary pathways in the central nervous system. As definitive validation of the sodium channel targets, when mutations in this target cause a gain-of-function children present with a very severe form of epilepsy. We have created a mouse model that reproduces this human phenotype with gain-of-function mutations and with XEN901 we have demonstrated that we are able to abrogate the seizure burden in this animal model. We have also generated data looking at the effects of XEN901 across multiple different mutations that occur in humans and we are able to inhibit the Nav1.6 channel across these mutations that we identified. Additionally XEN901 has demonstrated efficacy against seizures in the MES model that supports the treatment of adult partial onset epilepsy. That's we believe Nav1.6 is a very compelling and differentiated targets and we look forward to the XEN901 IND or IND equivalent filing in Q4 this year as it could potentially represent a much needed improved treatment for epilepsy. As an update, GLP toxicology studies are now underway in two species to support our Q4 IND or equivalent filing for XEN901. With our ongoing development of XEN901 and XEN1101, two proprietary and innovative AEDs, we look forward to a very full six to 12 months ahead with a number of development stage catalysts within our epilepsy program. I'll now discuss the work emerging from our collaborative programs in our partnerships with Genentech and Teva which are focused on potential treatments for pain. In our strategic alliance with Genentech, we developed GDC-0310 and early active and highly selective small molecule inhibitor of Nav1.7 for the treatment of pain. As reported previously, Genentech has completed its GDC-0310 Phase 1 clinical trial in healthy volunteers, and as previously reported, there are ongoing pre-clinical studies that Genentech has opted to conduct prior to initiating a Phase 2 clinical trial. These studies are still underway and given this Genentech have provided us with guidance that it now anticipates initiating a Phase 2 clinical trial start in the first quarter of 2018. While the initiation of Phase 2 development has taken longer than we initially expected and guidance is now being updated to include Q1 2018 start as opposed to by end of 2017, we are optimistic that the delay in the Phase 2 trial start will yield an even better regulatory package to support initiation of the Phase 2 clinical trial with GDC-0310. We are also engaged in a second collaboration with Genentech centered on pain genetics with the goal of discovering and validating new therapeutic targets and mechanisms for treating pain. The collaboration leverage is Xenon's Extreme Genetics discovery platform to focus on identifying genetic targets associated with rare phenotypes. We individuals have an inability to perceive pain or we individuals have non-precipitated spontaneous and severe pain. Xenon and Genentech announced the identification of a Novel pain target in 2015 and recently discovered the second pain targets in our collaboration triggering a milestone payment to Xenon in July of this year. We're very pleased with the progress made with Genentech in this collaboration. Moving to our collaboration with Teva, in late June, of course we announced top-line results that indicated the topical form of TV-45070 did not meet its endpoints in a Phase 2b clinical trial in patients with post-herpetic neuralgia or PHN. We in Teva are further analyzing the data and determining the next steps for TV-45070. Final decisions on next steps have not yet been made. We believe that we are very well positioned to achieve our goals and support our expanded neurology pipeline of Novel ion channel modulators based on genetically validated targets. Looking ahead to the remainder of 2017 and into early 2018 we expect a number of potentially key value driving events for Xenon. Firstly, we anticipate filing an IND or equivalent to initiate a Phase 1 first-in-man trial in the fourth quarter of this year for XEN1101, our next generation Kv7 potassium channel opener. Additionally, we expect to receive TMS Pharmacodynamic readout in the first quarter of 2018 for this product. Secondly, we expect to submit an IND or IND equivalent for XEN901 a Novel Nav1.6 inhibitor for the potential treatment of epilepsy also in the fourth quarter of this year. Thirdly, we anticipate that following the completion of ongoing pre-clinical studies Genentech will advance its GDC-0310 program into Phase 2 in the first quarter of 2018. We consistently strive to ensure we had multiple shots on goal and we're excited about the milestone opportunities and key events anticipated in the remainder of this year and into 2018. Before opening the call to your questions, I would like to ask Ian to please review our financial results for the second quarter of 2017. Ian?

Thanks, Simon, and good afternoon everyone. I'm going to focus my comments on the key aspects of our second quarter financial results; I’ll focus on current cash position and runway as well as operating expenses. Cash and cash equivalents and marketable securities as of June 30, 2017, were $51.7 million compared to $64.1 million as of December 31, 2016. Based on our current assumptions and this includes fully supporting the planned clinical development of both XEN1101 and XEN901, we anticipate having sufficient cash to fund operations into the first quarter of 2019. And this excludes any revenue generated from existing partnerships or potential new partnering arrangements. As revenue was modest for the quarter, I'll focus my income statement comments on R&D and G&A expenses and other income. Research and development expenses for the quarter were $6.1 million. This compares to $5.1 million for the same period in 2016. The increase of $1 million was primarily attributable to increased spending on our internal pre-clinical and discovery programs, this includes XEN901 and 1101 which as a reminder was acquired in April 2017, and this was partially offset by a decrease in XEN801 expenses and a decrease in collaboration expenses. G&A expenses for the quarter were $1.8 million and this compares to $1.7 million for the same period in 2016. This increase of $0.1 million was primarily attributable to increased costs for business development activities, for salaries and benefits partially offset by the fair value adjustment on liability classified stock options. Other income for the quarter was $0.5 million and this compares to $0.4 million for the same period in 2016. This increase was primarily driven by an increase in unrealized foreign exchange gains arising from the translation of Canadian denominated balances into U.S. dollars. This gives us a net loss for the quarter of $7.4 million compared to $6 million for the same period in 2016. The change is primarily attributable to lower revenue, higher R&D and G&A expenses, partially offset by higher unrealized foreign exchange. For the remainder of 2017 we don't expect our operating expenses to change significantly with the addition of XEN1101. We will be allocating our internal resources from XEN801 to XEN1101 and XEN901 as well as other internal pre-clinical and discovery efforts. And just as a reminder our partner collaboration's are fully funded by Genentech and by Teva. So in summary and to recap Simon's earlier comments, we continue to efficiently and strategically manage our cash and our other resources. And while the past quarter was a challenging one for Xenon, we do look forward to achieving some important milestones in our development programs over the next 12 months. Obviously supported by our cash runway which we believe will extend into the first quarter of 2019. We're building a unique franchise of proprietary neurology products with multiple shots on goal and with partnerships that provide us with additional upside and revenue potential. So now, operator, we'll open the call up for questions.

[Operator Instructions]. Our first question or comment comes from the line of Maury Raycroft from Jefferies. Your line is open.

Hi, thanks for taking my questions. So, good news on the Phase 2 for 0310 starting in 1Q. I'm wondering if you anticipate a standard Phase 2 design for the trial or I guess you can provide any additional context and outlook.

Thanks Maury. Yes, we aren't able to say much about the Phase 2 plans. These are Genentech's obviously proprietary information at this point. I am hopeful that once we get into the phase of development of course we'll be able to talk about the study in much more detail. But we at this point, while we have an understanding of what Genentech wants to do, we are under a confidentiality obligation as part of our agreement with them and just are not able to disclose the nature of the development plans for the compound so, stay tuned but we does not able to say too much at this time.

Got it. And so Ezogabine was supposed to get pulled from the market in June I believe and I just wondering if you had any sort of status update on where the drug is commercially in more patients who have access to the drug.

Yes. Maury we believe that they have stopped supplying. There is likely some supply available. There's been quite a bit of press in the last month or so from patients and patient advocacy groups around the availability of the drug and lack thereof looming and concern about obviously stock supply disappearing. So, our understanding is that, they have stopped supplying pharmacies but pharmacies, some pharmacies may still have product supply available. They have sent out as a doctor letter notifying physicians of the removal of the drug and so, the engine we believe is -- has stopped or is withdrawing supply over the recent few months.

So for patients currently on therapy any idea of what their backup plan.

Yes, not really. There anti-epileptic drugs would have to be shifted once stock runs out but we know that for many of these patients, this drug was extremely useful and they'll have to now depend on other anti-epileptic drugs that are approved. And there's nothing specific other than the known drugs that I think will be tried in a stepwise fashion. Many of these patients are patients that were originally on drugs and have very refractory epilepsy which is difficult to treat and the potassium channel mechanism obviously is a well recognized important one and I think this leaves us very well positioned with 1101 to capture, the what we believe is a very significant area of medical need.

Got it. And then for 1101 you mentioned Tinnitus, Pain, and ALS, as other indications potentially and I was just wondering if one of the indications has a higher priority or maybe a better mechanistic perhaps [ph] now.

Yes, no great question. I think if I had to order them I'd probably put sort of Tinnitus and ALS at the top and Pain following. There has been quite a bit of interesting reports of off label use of Ezogabine and patients with Tinnitus as far as I'm aware in a randomized control trial but quite a lot of interesting anecdotal data. We know that potassium channels are expressed in the hair cells and this is been an interesting target. So, we're thinking about this pretty significantly for the 1101 program. ALS as well, I think well I'm we should be offline can provide some of the mechanism based thinking that there is literature supports the role of this channel in neuronal cells and particularly in patients with ALS. Some work that’s being done in pluripotent stem cells that may suggest that potassium channel modulators could be of benefit. So, again I think both in ALS and Tinnitus, the potassium channel mechanism I think is a very interesting one is data around the mechanism in both these indications and I think both obviously huge areas of opportunity in terms of current treatment gaps in areas of need. So while we're not yet ready for prime time to lay out development strategy for those indications and as we updated the focus initially is clearly to follow on what Ezogabine has done, the path has been very well laid out for us. There is going to be work that we will be adding both pre-clinically and hopefully clinically to test this drug based on the Phase 1 -- outcome of the Phase 1 safety PK to test this drug in other indications which we think could be very well suited.

Okay, great. Thank you.

No problem.

Operator, can you still hear?

We can't hear the operator, just wanted if there are any other questions? Operator?

[Operator Instructions]. Our next question or comment comes from the line of Stephen Willey from Stifel. Your line is open.

Hi this is Philomena Kamya in for Stephen Willey, thanks for taking our questions. With respect to XEN901 can we expect similar PK/PB assessments to be disclosed similar to what would be disclosed to the XEN1101 program?

Yes, thanks Philomena, it’s Simon. Thank you for the question. That is under discussion right now. The -- on the surface of course it looks like it’s an obvious thing to do, we need to make sure that we believe the mechanism is well suited for the TMS readout. We believe the mechanism is well suited for 1101 based on the fact that there was similar work done actually with Ezogabine. So I think the validation of the target ensuring this pharmacodynamic readout for the potassium channel mechanism is there. For the sodium channel mechanism obviously given this is a much differentiated drug than other voltage gauged ion channel modulators 901 to be specific very, very selective for NAV1.6, we need to do a little bit more work now and to decide on whether the TMS is appropriate model to test the mechanism. I'm not suggesting in any way that it isn't. We just haven't done that work, we certainly hope that it will be a model that we can apply and if so we probably have that as in and around the Q2 to mid-year timeframe but we don't yet and we haven’t yet made that decision to add the TMS into the Phase 1 program. We will probably have that decision made by the next call, after Q3 call.

Understood. And if I may just may one modeling question, can we expect further decreases in OpEx as a reflection of some of the cost cutting measures that you alluded to the last after the disclosure of the top-line data from TV-45070?

No it's going to be more of a switch of OpEx from obviously earlier in the year and going back into 2016, there was more spending on our 801 program. As I mentioned in my comments I truly think OpEx for this year is going to be more flat and then if you just look at our cash runway into 20, into the first quarter of 2019 that is adjusted there would be an increase in expenses in 2018 and now would be consistent with both the 1101 and 901 at that time being in clinical development.

Understood. Thank you for taking our questions.

Pleasure.

Thank you. [Operator Instructions]. I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to Ms. Jodi Regts for any closing remarks.

Thanks for joining us today. We look forward to providing updates on our progress throughout the year. Operator, we will now end the call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect. Everyone have a wonderful day.