Xenon Pharmaceuticals Inc. (XENE) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2018 Xenon Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jodi Regts. Ma'am, you may begin.

Thanks, Daniel. Good afternoon. Thank you for joining us on our call and webcast to discuss our financial and operating results for our third quarter ended September 30, 2018. Joining me on today's call are Dr. Simon Pimstone, Xenon's Chief Executive Officer; and Ian Mortimer, Xenon's President and Chief Financial 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 cash to fund operations into 2021; the timing of IND or IND equivalent submissions with regulatory agencies; the initiation of future clinical trials; the efficacy of our clinical trial designs and anticipated enrollment; the potential efficacy, safety profile, future development plans, addressable market, regulatory success and commercial potential of our and our collaborators' product candidates; the timing of and results from ongoing clinical trials and preclinical development activities; our ability to achieve certain milestones, in both our proprietary and partner development programs; the plans of our collaboration partners and their interactions with regulatory agencies; the results of our research and development efforts; the status and timing of the potential addition of new programs to our pipeline and related development activities; the timing of our public presentation and potential publication in future clinical data; and the potential to advance XEN496 into a Phase III clinical trial and XEN007 into a Phase II clinical trial. 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 statement. Today's press release summarizing our third quarter results and the accompanying quarterly report on Form 10-Q is 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 welcome to the Xenon call. This past quarter marked a number of achievements. Notably, we presented positive data from our XEN1101 Phase Ib transcranial magnetic stimulation, or TMS, pharmacodynamic study and provided an update on our XEN901 program at our European Congress on epileptology. We announced the pipeline addition of XEN496, which is a potassium channel modulator for the treatment of KCNQ2 epilepsy that we are developing and expect to initiate a Phase III clinical trial in mid-2019. And we significantly strengthened our balance sheet and anticipate having sufficient cash to fund operations into 2021. With our continued progress and growing momentum, we believe we're establishing one of the most compelling neurology pipelines in clinical development, with a number of programs that we expect to be mid- to late-stage clinical development in 2019. On our call today, I'll begin by highlighting the key takeaways regarding the newest addition to our neurology pipeline, XEN496. I'll then provide updates on the rest of our neurology pipeline before turning things over to Ian to provide a financial overview. In early September, we unveiled our plans for a Kv7 potassium channel modulator called XEN496, with the active ingredient ezogabine, otherwise referred to as retigabine. We believe XEN496 represents a perfect fit within our portfolio of ion channel neurology focused therapeutics. And we're excited that XEN496 provides us with the opportunity to move rapidly into late-stage development since we anticipate a Phase III start in approximately mid-2019. We intend to develop XEN496 using a precision medicine approach to treat a rare and severe pediatric epilepsy called KCNQ2 epileptic encephalopathy, also known as EIEE7 or KCNQ2-EE. By way of background, ezogabine is the only FDA-approved antiepileptic drug, or AED, with a mechanism of action that potentiates Kv7-mediated potassium current. It was originally approved by the FDA in June 2011 as an adjunctive treatment for adults with focal seizures with or without secondary generalization. GlaxoSmithKline marketed ezogabine in various jurisdictions as Potiga in the U.S. and Trobalt in Europe, but withdrew the drug from the market worldwide in June 2017 citing commercial reasons. Because of the pigmentation risk, especially the initial concerns about potential visual toxicity related to retinal pigmentation, which to date have not been proven, as well as issues around the three times a day dosing regimen and Cmax-related CNS AEs, ezogabine never gained a large market share in the landscape of other approved AEDs in the adult population. As we dug deeper into ezogabine as it related to XEN1101, a novel Kv7 modulator, currently in early clinical development for the treatment of epilepsy, we found both in our KOL discussions as well as in reported case studies interesting and compelling reports of positive benefit to risk ratios in cases where there was use of ezogabine in children with KCNQ2 epilepsy. We became increasingly interested in the pediatric use of ezogabine and began to build a case for XEN496 to potentially offer a precision medicine approach to treating children with KCNQ2-EE. KCNQ epilepsy is generally very difficult-to-treat infantile encephalopathic epilepsy with seizures and cognitive decline, mostly refractory to current AEDs. In one recently published case report of 11 KCNQ2-EE patients reported by John Millichap in 2016, ezogabine was associated with improvement in seizures and/or reported improvements in development in 3 of the 4 infants treated before 6 months of age and 2 of the 7 treated at an older age. No serious adverse effects were reported in this case series. Another study that included a review of medical records and structured interviews with families of eight children with KCNQ2-EE who had previously been prescribed ezogabine. This was a report by Olson in 2017. Also suggested that ezogabine was effective and tolerable. Sustained improvement in seizure frequency was observed in five of the six patients with at least weekly seizures, along with reported improvements in development or cognition in all three patients. The only adverse event reported was urinary retention in three patients, and overall, ezogabine was well tolerated. Considering the encouraging results, both in terms of efficacy and tolerability reported in case studies with the use of ezogabine in KCNQ2 epilepsy, we concluded that the potential benefits of treating children with KCNQ2 epilepsy with ezogabine greatly outweigh the well-understood risks. Having identified a significant unmet medical need for XEN496, we took a number of steps to advance this program. Firstly, we obtained the regulatory rights of reference from GSK authorizing the FDA to reference GSK's nonclinical and clinical data when considering our regulatory submissions. This is especially valuable considering that ezogabine has been tested and used in thousands of patients. Secondly, we consulted with clinical experts and patient efficacy groups prior to submitting a pre-IND briefing package to the FDA, which outlined our proposed pediatric clinical development plans for XEN496. We included key letters of support addressed to the FDA from the KCNQ2 Cure Alliance from key opinion leaders and from parents of these patients. Thirdly, we received a positive response from the FDA indicating that it was acceptable to study XEN496 in infants and children up to four years old and that a single pivotal trial in approximately 20 patients may be considered adequate in order to demonstrate XEN496's efficacy in KCNQ2 epilepsy. Fourth, we also received Orphan Drug Designation from the FDA for XEN496 as a treatment of KCNQ2 epilepsy. Fifth, we established a steering committee made up of key opinion leaders in the pediatric epilepsy field to help guide the clinical development of XEN496. With input from the steering committee on the proposed trial design, dosing and endpoints, the protocol development for the XEN496 Phase III clinical trial is well underway, and we are in the process of clinical trial site selection. Sixth and finally recognizing that ezogabine was initially developed as a hard-coated tablet that is unsuitable for use in children, we are advancing development of a pediatric-specific formulation for XEN496 that may also address the pigmentation liability associated with ezogabine. Therefore, overall, our positive interactions with the FDA, GSK rights of reference, strong relationships in the KCNQ2-EE community and the efforts to develop a proprietary pediatric formulation provide us with what we believe are very important advantages and risk-mitigation measures in our XEN496 program. It is anticipated that the Phase III clinical trial examining XEN496's efficacy as a treatment of KCNQ2 epilepsy will be initiated in approximately mid-2019. We look forward to providing additional details regarding the proposed clinical development of XEN496 over the coming months. Following XEN496 in our pipeline is XEN1101, which is our novel Kv7 potassium channel opener for the treatment of epilepsy and potentially, other neurological disorders. Based on results from the interim Phase I clinical data, we believe XEN1101 has the potential to be a best-in-class Kv7 modulator. Importantly, pharmacokinetic, or PK, data from our Phase I clinical trial confirms the half-life consistent with once daily dosing for XEN1101 versus the three times daily required for ezogabine. This potential dosing advantage viewed together with the low risk of pigmentation leads us to believe we will observe improved overall tolerability of XEN1101 compared with ezogabine. Additionally, in preclinical models and now also in our PMA studies in humans, we have shown evidence that XEN1101 has activity at lower doses compared with historical data for ezogabine from other studies. Therefore, overall, our hypothesis that XEN1101 could have significant improvements over ezogabine has been observed preclinically and now has been supported with promising results in early clinical development, including in a pharmacodynamic, or PE, readouts. We have now completed enrollment in our Phase I clinical trial, which is evaluating the safety, tolerability and PK of both single ascending doses, or SADs, and multiple ascending doses, or MADs, of a powder-in-capsule formulation of XEN1101. In addition to fairly traditional Phase I design, we designed a pilot study using the TMS assay for XEN1101 in order to obtain an early PD readout measuring impact of the active drug on cortical and corticospinal excitability. We have also used the TMS results to help shape our future development plans for XEN1101, including optimizing dose selection for our upcoming Phase II study. Based on the encouraging results from an initial TMS pilot study, which we presented in May at the Eilat meeting, we opted to move ahead with a more robust trial design for our Phase Ib TMS study, which was designed as a double-blind, placebo-controlled, randomized, crossover study in 20-healthy male volunteer subjects. The positive results from this Phase Ib TMS study we presented at the European Congress on Epileptology meeting at the end of August, including data showing that XEN1101 reduced corticospinal excitability has demonstrated by a concentration-dependent elevation in resting motor thresholds, or RMT, the key TMS-EMG measure and shows this RMT effect with XEN1101 was more robust and observed at a significantly lower dose when compared to historical ezogabine data from other studies. XEN1101 has been shown to be generally well tolerated with all the adverse events, or AEs, reported as mild to moderate and reversible. There were no withdrawals, no serious AEs and no deaths. We intend to publish the complete XEN1101 Phase I clinical trial results at the upcoming American Epilepsy Society, or AES, meeting taking place between November 30 to December 4 in New Orleans. The totality of the data generated to date with XEN1101, including the preclinical data sets, the Phase I clinical data, including dosing, PK, safety and tolerability as well as the robust signal in TMS, combined with a well understood mechanism of action and the known development paths of ezogabine gave us the confidence to go from Phase I into a larger randomized, placebo-controlled Phase II study in adult focal seizures. We believe this phase II study will allow us to get a definitive read on efficacy in this population and will also be dose range finding as it will include multiple active arms. We anticipate that the detailed protocol for the Phase II trial will be released in coordination with the AES meeting where we will be meeting with a number of our KOLs in sites that will be involved in the trial. We expect this trial will be initiated before the end of this year. We look forward to providing the full details on the trial in the next few weeks at AES. Our next product in our pipeline is a potent, highly selective Nav1.6 sodium channel inhibitor called XEN901, being developed for the treatment of epilepsy. Low sodium channel blockers are a mainstay in the treatment of epilepsy utilizing these drugs to their maximal effect in patients who's often limited by side effects. The preclinical profile and selectivity of XEN901 suggested may provide a significant advancement in efficacy, safety and tolerability with the potential to be superior to other sodium channel blockers, allowing more patients to achieve seizure freedom. Therefore, I believe XEN901 could be a very important addition to the AED space. We're nearing completion of a randomized, double-blind, placebo-controlled Phase I clinical trial to evaluate XEN901's safety, tolerability and pharmacokinetics in both SAD and MAD cohorts. Interim results disclosed in May and August of this year demonstrate a favorable pharmacokinetic data profile that showed dose proportionality and supported twice daily or better dosing. The multiple dose levels tested yielded drug exposure above the predicted efficacy range required to achieve the EC70 in the preclinical Maximal Electroshock Seizure model. Based on experience with TMS in the XEN1101 studies, we, along with our collaborators at King's College, are exploring the use of the TMS assay in a small subset of subjects in the ongoing XEN901 Phase I clinical trial. An update on our XEN901 program is also anticipated at the upcoming AES meeting in a few weeks and a Phase II clinical trial evaluating XEN901's efficacy as a treatment for adult focal seizures or for rare pediatric forms of epilepsy is expected to be initiated as soon as feasible thereafter depending on planned discussions with regulatory agencies in the near term. We believe we'll be in a position to give a complete update on the next steps in the development of XEN901 post our upcoming regulatory interactions. We are also developing XEN007, a CNS-acting calcium channel inhibitor that directly modulates the calcium channel nerves Cav2.1. The active ingredient is flunarizine. Flunarizine is approved and used outside of the U.S. for the prevention of chronic migraine as well as vertigo and has also been reported to have clinical benefit in a number of other neurological disorders, including hemiplegic migraine, or HM, alternating hemiplegia and alternating hemiplegia of childhood, and forms of adult and childhood epilepsy. We received Orphan Drug Designation from the FDA for 007 for the treatment of hemiplegic migraine. In addition, we entered into key agreements in order to access regulatory files and manufacturing support to potentially enable the accelerated clinical development of XEN007 directly into our Phase II clinical trial. We are currently evaluating various development strategies for XEN007, including the initiation of physician sponsored clinical trials across different neurological disorders. Lastly, I'd like to touch on our partnership with Genentech before turning things over to Ian. We have an ongoing license agreement in place with Genentech, focused on developing novel, oral selective Nav1.7 inhibitors for the treatment of pain. And as we discussed on previous calls, it was a preclinical finding with respect to a lead compound GDC-0310, and over the past number of quarters, Genentech has been completing additional preclinical work on GDC-0310 to determine next steps in the program. This preclinical work is now complete and Genentech has elected to focus its future Nav1.7 development efforts on backup molecules and not to pursue future development for GDC-0310. While we are disappointed that GDC-0310 is not moving ahead, both Xenon and Genentech continue to believe strongly in the Nav1.7 target, and the program remains a very significant effort at Genentech. The benefit of such a strong collaboration of many years is that their backup molecules already identified. And if these molecules progress through development, we will be eligible for milestones and royalties as outlined in our agreement with Genentech. While Genentech has not provided further detail on timing of this stage, we look forward to updating guidance as this collaboration continues and as backup molecules enter development. In summary, I'm very excited about our immense progress to create what I believe is one of the most exciting neurology pipelines currently in clinical development. Looking ahead in the near term, we anticipate seeing advancements across all of our development programs, including developing a pediatric-specific formulation for our XEN496 product and submitting final proposed clinical protocol in order to initiate a Phase III pivotal trial in approximately mid-2019 in pediatric epilepsy, known as KCNQ2. Disclosing our final 1101 Phase I results at the upcoming AES meeting and initiating a Phase II clinical trial evaluating XEN1101 as a treatment for adult focal seizures before the end of this year. Providing an update on XEN901 at AES before year-end and initiating as soon as feasible thereafter a Phase II clinical program. Evaluating XEN901's efficacy as a treatment of either adult or pediatric forms of epilepsy depending on planned discussions with regulatory agencies in the near term. And evaluating various clinical development strategies for XEN007, including the support and initiation of physician-sponsored clinical trials across different neurological disorders in 2019. Now I'd like to turn this over to Ian to summarize our financial results for the third quarter and to provide some concluding remarks. Ian?

Thanks, Simon. I'll start by providing an overview of our cash position and cash runway guidance, and then I'll provide a few highlights of the financial statements. In September, we significantly strengthened our balance sheet through the successful completion of an underwritten public offering of 4.5 million common shares at the public offering price of $14 per common share, providing us with proceeds of $59.2 million net of underwriting discounts and commissions, but before offering expenses. I'm pleased to report that this offering also resulted in the addition of new institutional shareholders to continue to support our strategic goals. Cash and cash equivalents and marketable securities as of September 30, 2018 were $127.1 million and this compares to $43.7 million as of December 31, 2017. Based on our current assumptions, and this includes fully supporting the planned clinical development of the XEN496, XEN1101, XEN901 and XEN007, we anticipate having sufficient cash to fund operations into 2021. And this excludes any revenue generated from either existing partnerships or potential new partnering arrangements. I won't spend any time going over the details of R&D and G&A expenses as they are included in both the press release and our 10-Q filing. However, I'll mention a onetime transaction that occurred during the quarter. Under other operating expenses in our income statement is the onetime $6 million payment to Valeant or Bausch Health. This payment was a buyout of all future milestones and royalties owed to Valeant with respect to our XEN1101 program. With this transaction, we now have a nominal future economics owed on our proprietary clinical pipeline of 4 assets. And this gives us tremendous flexibility as we develop these programs. So in summary, with the support of a strong balance sheet and foundation of leading expertise in ion channel drug development, we believe we have built one of the most exciting and innovative neurology pipelines currently in clinical development in the industry. We have built a balanced portfolio of assets that include both, new chemical entities, or NCEs, as well as drugs previously approved to address high unmet medical needs where we believe these products are well suited. We are particularly excited by the potential to leverage the unique mechanisms of action of the products we have in development and where appropriate, utilize a precision medicine approach to address extremely rare and difficult-to-treat pediatric epilepsies. We look forward to continuing to provide you updates on our progress. Operator, we can now open the call up for questions.

[Operator Instructions] Our first question comes from Stephen Willey with Stifel. Your line is now open.

Yes, good afternoon, guys. Thanks for taking the question. And congratulations on the progress. Maybe for Simon, just wondering if you can maybe speak to some of the inputs that are driving the decision-making process here behind the initial pursuit of Phase II 901 development in either adult or pediatric patients? Maybe if you can just kind of speak to some of the things that need to happen there in order to solidify decision as to which patient population you choose to proceed first?

Yes, thanks, Steve. Ultimately, I think we would like to test this drug in both adult indications as well as pediatrics. Obvious, pediatric indication being patients with mutations in the SCN8A gene, gain-of-function mutations in the channel that 901 blocks. The critical question for the FDA, which we hope can be resolved in the near term over the coming months, is, can this be more of a parallel activity or do we need to run a traditional step down. As you know, Steve, with previously approved AEDs, drugs have got approved and then were step down into adolescents and pediatrics in some cases, but not typically until the drug is achieved safety in a large number of adults with the disease. This is a slightly different issue, which we are looking to tackle, which is having a drug that's exquisitely well suited and in fact developed for precision medicine approach where kids who have mutations in this target, we think, would potentially preferentially benefit from a drug that directly modulates the pathology of the epilepsy. And so really the discussions coming up with the FDA will be around what the requirements would need to be to allow us to enter into the pediatric population. Of course, in our favor to date is the fact that -- and we've disclosed this and presented this, we've shown very good tolerability preclinically, both at the non-GLP and in the GLP setting. And we've disclosed publicly also before based on interim data presented at previous meetings that tolerability in adults in the Phase I volunteer study looks extremely good as well. And so really, we need to get clarity as to what else the FDA would want to see before we could expect to take 901 into a pediatric setting. Our goal, of course, is to do it in a way that we believe is safe, but to do it in a way that we think we can test the drug in this clinical setting, particularly the pediatric setting as soon as we believe we've concluded the necessary safety steps. And I think that's really the issue at hand. We intend to test the drug in adults. We haven't landed on an indication. Of course, sodium channel blockers are used first-line in focal epilepsy today. That maybe an indication. We'll -- I think, we'll come out with the final plans, I think, with FDA interactions having been held. So at least we know what the steps are to test the drug in the pediatric setting. Ian, did you want to add anything?

The only thing I would add is maybe just a little bit on timing. So we're -- we expect to have some feedback from regulators over the next couple of months. So it will be early in 2019 that, I think, we'll guide in terms of our timing for the different programs in pediatric and adults. Obviously, on the adult side, we can probably initiate a study more quickly once the Phase I is wrapped up, which will happen in the near term. On the pediatric side, we've done some work on the juvenile talks to start preparing for that, but more formal juvenile talks work would happen in the first half of 2019. So any pediatric development could probably start in the second half of 2019.

Got it. And with respect to a Phase II program in adult patients. Again, like you said Simon, this is a sodium channel blocker and these drugs are primarily used in frontline therapy. Would you be able to pursue a frontline patient population within the setting of Phase II development?

Yes, we don't know that, Steve. This is, obviously, discussions that are currently underway as to what a Phase II would look like if it were in focal epilepsy. As you know, most of these studies are add-on adjunctive. And I think, we would go into the initial thinking that, that would be the requirement at least in the initial Phase II. And there are some pros and cons in terms of that. I think it's a little bit too premature at this point to guide us to what that trial may look like. I think focal epilepsy would clearly make sense. I think the first IVa is probably going to be a smaller trial, more of a proof-of-concept IIa rather than a multi-dose ranging IIb study with larger numbers to support a pivotal program, just given the novelty of the approach. And of course, we'd have to think through with respect to the protocol the whole notion of whether patients have been on a sodium channel blocker or not. If they are on the sodium channel blocker, what does that mean? If they have failed a sodium channel blocker, what does that mean? And these discussions are currently underway amongst the group with our KOL panel.

Got it. And then just with respect to the 901 update at AES. Will that update include the subset of TMS data that you're generating?

We hope so. That is a work that's being completed. We hope that the analysis will be completed over the next few weeks. We have a call with our investigator actually in the next few days just to see where that's at. But we expect that we should at least have some preliminary data on TMS for 901 as well.

Our next question comes from Maury Raycroft with Jefferies. Your line is now open.

Good afternoon and congrats on the progress. First question is on the new 496 formulation. Just wondering, if you'll have to demonstrate comparability for that before starting the Phase III in mid-2019?

Yes, that's a good question, Maury. We don't know the answer to that in terms of will we have to do a bioequivalent study in humans. I think what we'll have to show at minimum is that the new formulation essentially performs similar to the prior form in both in vitro and in vivo models. And so looking at in vitro markers, like dissolution, kinetics and then looking at PK across species, I think, that will be important to show the new formulation behaves similarly to what's been reported previously. We -- based on that, if we do show very similar performance, our hope is, and we will not have to do a human bio-e study. If clearly the performance is different, we will need to do a bio-e study, we'll want to do a bio-e study. But that's clearly going to be a discussion point for the FDA. Our going in approach would be to do what we can to ensure similarity in both in vitro and in vivo models. And based on that, I think we can assume likely similar performance in humans for sure. If the performance is different across species or in vitro, then a bio-e in adult volunteers will likely be required. The current time line estimates around mid-2019 does not assume a bioequivalent study is being done. So if one were needed to be done, that would add a few months to the time line.

Okay. Okay. Great. And then for 007, are you leaning more toward running the Phase II on your own or with the physician sponsors? Or are you planning on both?

I think the initial thinking, Maury, at this point; again, we plan on giving a pretty comprehensive update on the program in the New Year for a variety of reasons. But the initial thinking is to run a few investigator-led studies across a number of different indications. I mean, one of the interesting challenges with this drug, it has been used quite extensively in a variety of neurological disorders with actually good effect. And so one of the challenges, I think, we have is where to focus development and why it taken us the last 6 to 12 months has really been as we work through this, both from a commercial side and a protection strategy as well as doability what are the right indications. And so our current leaning just strategically at a high level is to test the drug across more than one indication next year. These will almost certainly be investigator-led settings outside of the U.S. And based on that data advance the development plan through an IND to follow, which could potentially be a Phase II/III program. I think the investigator-led approach for us next year may also allow us depending on the ultimate final design, but we may see that there will be some open-label opportunities, and we can start to see some data with this drug, in fact, in 2019 potentially. We do plan in the New Year to have a more fulsome disclosure on the program plans. We are just waiting on some discussions that are currently underway at different levels.

Got it. That's helpful. And I do have a follow-up on that one just based on potential strategy to an IP, but I'm guessing that could potentially become in early '19 as well?

Yes, I think so. I mean, look at a high level, Maury, the composition of matter, obviously, is not what's going to protect this and there are multiple other ways. And I'm speaking very generically to provide protection to a molecule like this in terms of both orphan strategies, but also in enhancing intellectual property. And we're certainly aggressively pursuing enhancement of IP in addition to potential reliance on an orphan-exclusivity strategy. We'd like to have both to cover the product if possible.

Got it. Okay. And last quick question just on the AES conference. One reaping comment on whether we should expect when data cutting the AES abstract? And when that cutoff would be? And will we see more mature data at the conference?

Yes, you'll see -- so the abstracts for AES were submitted in the summer months. And so I would consider them more kind of placeholder abstract. So you'll definitely see additional data. So we have submitted 6 abstracts to AES. So you'll see 6 posters there, but you will see data that's in addition to what's in the abstract.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Jodi Regts for any closing remarks.

Thanks for joining us today. Operator, we will now end the call.