Xenon Pharmaceuticals Inc. (XENE) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Xenon Pharmaceuticals Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Jodi Regts. Please begin.

Thank you. Good afternoon. Thank you for joining us on our call and webcast to discuss our financial and operating results for the second quarter of 2019. 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 give an overview of Xenon's clinical programs, 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 our proprietary development programs; 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 of future clinical data; and the potential to advance XEN496 into a Phase III clinical trial, XEN901 into a Phase II or III clinical trial in 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 statements. Today's press release summarizing our second quarter 2019 results and the accompanying quarterly report on Form 10-Q will be 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. We've now passed the midpoint of the year. And as I reflect on our progress, we remain on track to reach our stated goals for 2019, advancing our robust pipeline of neurology-focused product candidates, including XEN496, XEN1101, XEN901 and XEN007 with multiple products in Phase II or later-stage development by the end of this year. Today, I'll provide an update on each of our clinical stage programs and highlight some of the important milestone events anticipated this year before opening up the call for questions at the end of Ian's financial commentary. Let me begin with XEN496, a Kv7 potassium channel modulator we're developing as a treatment for a rare pediatric neuro developmental disorder called KCNQ2 developmental and epileptic encephalopathy, or KCNQ2-DEE, and is also sometimes referred to as EIEE7. XEN496' active ingredient is ezogabine, which was previously approved by the FDA as a treatment for adult focal epilepsy but was withdrawn from the market for commercial reasons. However, published noncontrolled clinical studies as well as anecdotal parental and physician feedback suggest that ezogabine may be an efficacious and generally well-tolerated therapy for KCNQ2-DEE, with potential to improve development and cognition as well as to reduce seizure burden. We recognize that in order to develop XEN496 for this pediatric population, we would need to take a number of important steps. We obtained orphan drug designation, or ODD, from the FDA for XEN496 as a treatment for KCNQ2-DEE. We submitted a pre-IND briefing package with our proposal to study XEN496 in infants and children with KCNQ2-DEE with appropriate safety monitoring. In response, the FDA supported our proposed safety monitoring plans, including long-term follow-up to monitor potential side effects, and indicated that a single small pivotal trial could be sufficient, provided we see substantial evidence of effectiveness in KCNQ2-DEE. We also needed to address the formulation challenges of ezogabine since the original hard-coated tablet was unsuitable for administration to children. It is difficult to cut the coat of tablet precisely and obtain an accurate dose. In addition, ezogabine may be unstable in solution when compounding, and parents have reported the compounded ezogabine would discolor. Xenon has developed XEN496 with a focus on addressing these challenges. We have made excellent progress over the past few months and now have a final pediatric friendly formulation to advance into clinical testing. The XEN496 final drug product is a granule formulation packaged as single-dose sachets. Parents or caregivers would tear open one sachet and disperse the granules into the chosen semisolid or liquid food carrier. We designed the formulation with the goal of making certain that XEN496 does not have an objectionable taste or mouth feel, is comparable with standard carrier systems including plastics and that XEN496 does not discolor as a granulated form. We believe our formulation has major product advances over the prior ezogabine tablets and, in addition, may provide us with commercial exclusivity well beyond the orphan exclusive 7.5-year term. Standard in vitro testing has shown that XEN496 acts as an immediate release drug like ezogabine with essentially overlapping the solution curves. We have also completed animal in vivo pharmacokinetic or PK studies. And again, XEN496 is performing as expected, with PK similar to what was observed with ezogabine. The testing done to date gives us a high degree of confidence to move this final formulation into clinical development and long-term stability studies, which are now underway. In order to ensure XEN496 is providing adequate drug exposure in humans, we will test this granule formulation in a PK study of healthy adult volunteers, which is expected to be initiated later this quarter. We thereafter intend to file an investigational new drug or IND application in the fourth quarter to support the initiation of a Phase III clinical trial in KCNQ2-DEE. We continue to support initiatives that may help us in our development and may help patients with rare forms of epilepsy, such as KCNQ2-DEE. As noted previously, we are a sponsor of the Behind the Seizure program in the U.S. and Canada to provide no cost testing of children up to 60 months of age with seizures. This access to genetic testing allows for the identification of the cause of seizures and the implementation of specific treatment in many cases. This information helps to build a database of physicians treating these rare disorders. And additionally, patients may be identified for relevant clinical studies. Recently, we were invited to participate in an educational webinar hosted by a patient advocacy group called the KCNQ2 Cure Alliance. We, along with a well-known neurologist in this field, Dr. John Millichap, provided some background on drug development for rare pediatric epilepsies, delivered a status update on XEN496, answered questions submitted by parents in a panel discussion and discussed an upcoming Xenon-sponsored patient survey. Data from this survey, which will gather feedback directly from caregivers of children with KCNQ2-DEE, will be extremely useful and will help inform the clinical trial design for a planned Phase III trial in KCNQ2-DEE. We have also identified other diagnostic companies and academic consortia to expand our reach to identify as many KCNQ2-DEE cases as we can, both for our upcoming clinical trial as well as for future commercial reasons. To date, through our interactions with diagnostic companies, we are aware of approximately 800 genetically diagnosed cases. In addition, a recent epidemiological study from Europe reported a KCNQ2-DEE birth rate of approximately 1 in 17,000, not far off Dravet Syndrome, which has been reported as approximately 1 in 12,000 to 1 in 15,000 births. Based on this information, we believe that KCNQ2-DEE may be more common than initially thought. We expect to put more diagnostic partnerships in place to support our planned Phase III trial and beyond. We believe given our precision approach as well as our planned administration in the very young, XEN496 in its new pediatric formulation offers children with KCNQ2-DEE a promising chance of seizure control as well as a chance at disease modification, something not yet observed with any AED. Next up in our pipeline is XEN1101, a differentiated next-generation Kv7 potassium channel modulator being developed for the treatment of epilepsy and potentially other neurological disorders. Site selection and patient enrollment for our XEN1101 Phase IIb clinical trial are currently underway in the United States, Canada and Europe. The trial is designed as a randomized, double-blind, placebo-controlled multicenter study to evaluate the clinical efficacy, safety and tolerability of XEN1101 administered as adjunctive treatment in adult patients with focal epilepsy. Approximately 300 patients will be randomized in a blinded manner to 1 of 3 active treatment groups or placebo in a 2:1 to 1:2 fashion using doses of XEN1101 of 25, 20 and 10 milligrams plus a placebo arm. The primary endpoint in this trial is the median percent change in monthly focal seizure frequency from baseline compared to treatment period of active versus placebo. To date, feedback from sites is promising. There is strong interest in the XEN1101 study as investigators support this Kv7 mechanism of action in epilepsy. And XEN1101 would represent an only drug in class if approved. Furthermore, there is not a significant burden of competing trials at the moment. Long-term 6- and 9-month toxicology studies are underway and are expected to support the planned 12-month open-label extension for patients enrolled in the Phase IIb clinical trial. Depending on the rates of enrollment, top line results are anticipated in the second half of 2020. Turning to the third product in our pipeline, XEN901, a potent, highly selective Nav1.6 sodium channel inhibitor being developed for the treatment of epilepsy. We have completed a randomized double-blind, placebo-controlled Phase I clinical trial to evaluate XEN901's safety, tolerability and PK in both single-ascending and multiple-ascending dose cohorts of healthy adult subjects and included a pilot TMS arm. As with XEN1101, the observed changes in TMS-EMG and TMS-EEG parameters suggest activity of XEN901 in the target CNS tissue. We received important feedback from the FDA regarding the requirements to support advancing XEN901 directly into a pediatric clinical trial, examining its efficacy in pediatric patients with SCN8A epileptic encephalopathy, otherwise known as SCN8A-EE. Similar to XEN496, we recognize the need to create a pediatric friendly formulation of XEN901, and we recently completed development of a granule formulation with compelling in vitro and in vivo characteristics. We are also in the process of completing juvenile toxicology studies to support pediatric development activities. Again, mirroring the path of XEN496, we intend to run a PK study in healthy adult volunteers with the new XEN901 pediatric formulation beginning in the third quarter of this year, followed by an IND submission to start a proposed clinical trial in SCN8A-EE patients thereafter. We look forward to keeping you updated on our progress over the coming quarters. The fourth clinical stage product in our neurology pipeline is XEN007, with the active ingredient flunarizine. XEN007 is a CNS-acting calcium channel modulator that modulates Cav2.1 and T-type calcium channels. Other reported mechanisms include dopamine, histamine and serotonin inhibition. Available in certain countries outside of the United States, flunarizine has been reported to have clinical benefit in treating migraine and other neurological disorders, including hemiplegic migraine or HM, alternating hemiplegia of childhood or AHC, vertigo, and as an adjunctive treatment in certain epilepsies, including childhood absence epilepsy or CAE. The FDA granted us a rare pediatric disease designation for the treatment of AHC with XEN007 and previously granted orphan drug designation for XEN007 as a treatment of both AHC and HM. In addition, we entered into key licensing and manufacturing agreements to support the advanced clinical development of XEN007. Various development strategies for XEN007 are under consideration, given the well-understood efficacy and safety profile of flunarizine, we continue to have discussions with a number of physicians who have expressed an interest in running investigator-sponsored clinical trials. In the near term, we anticipate the initiation of a Phase II investigator-led open-label clinical trial examining the potential clinical efficacy, safety and tolerability of XEN007 as an adjunctive treatment of childhood absence epilepsy. Flunarizine has demonstrated efficacy in preclinical absence seizure models, which produce seizures characteristics that are consistent with human absence seizures. Both as a monotherapy and as a combination therapy, flunarizine significantly reduced the number and duration of spike wave discharges on EEG when compared to standard of care medicines, including valproic acid or ethosuximide alone in these preclinical models. With a mechanism of action that is differentiated from other calcium channel blockers, coupled with a vast amount of safety and clinical data generated with flunarizine, we believe XEN007 may potentially offer a better alternative for treating CAE than other antiepileptic drugs currently available. We look forward to providing more details when this Phase II study is up and running. My status update today reflects our excitement with the continued advancement of the clinical stage therapeutic products within our neurology-focused pipeline, including our progress advancing XEN1101 in our large adult focal epilepsy Phase II trial. We also look forward to conducting the important PK studies that I mentioned so that we can test our new pediatric formulations prior to initiating clinical trials in rare pediatric disorders such as KCNQ2 or SCN8A encephalopathic epilepsies. Now I'd like to turn the call over to Ian, who will briefly recap our financial position and will provide some summary commentary before opening up the call to your questions. Ian?

Thanks, Simon. Good afternoon, everyone. The specific details within our financial statements are covered in today's press release and our 10-Q filing. So I'll focus on providing an overview of our cash position, cash runway guidance, and then I'll conclude with a review of our upcoming milestones. Cash and cash equivalents and marketable securities as of June 30, 2019, were $101.8 million. This compares to $119.3 million as of December 31, 2018. As of June 30, 2019, we had approximately 25.8 million common shares outstanding and approximately 1 million Series 1 preferred shares outstanding. And these are convertible into common shares on a one-for-one basis at the option of a holder, subject to certain limitations. So based on our current assumptions, and this includes fully supporting the planned clinical development of XEN496, XEN1101, XEN901 and XEN007 as outlined today, we anticipate having sufficient cash to fund operations into 2021. And this excludes any revenue generating from existing partnerships or potential new partnering arrangements. And as outlined by Simon today, we look forward to a number of important anticipated milestone events, including testing our new pediatric formulations of XEN496 and XEN901 in adult PK studies, followed by IND submissions to initiate pediatric clinical trials in KCNQ2 and SCN8A epilepsies. We believe these PK studies will provide important derisking data, increasing our confidence as we look to move these programs directly into late-stage clinical development. We look forward to advancing our ongoing XEN1101 Phase IIb clinical trial in adult focal epilepsy and supporting the initiation of an investigator-led Phase II open-label trial of XEN007 as a treatment for CAE in the near term. Although we didn't spend time on our discovery research efforts on today's call, we've also made excellent progress on dual inhibitors of both Nav1.6 and Nav1.2. This is another key sodium channel involved in neuroexcitation, and we're now ready to move a molecule forward into GLP tox studies. We've also made good progress in a number of our other programs within our discovery portfolio. So before we turn to your questions, I would like to recognize the dedication and determination of our team here at Xenon, who are committed to developing new innovative therapeutics for patients in need. As you know, 2019 is a year of critical execution across the entire pipeline, and we've made good progress across the portfolio in the first half of the year. And we look forward to keeping you updated on progress over the coming months. Operator, we can now open the call up for questions.

[Operator Instructions]. Our first question comes from Paul Matteis of Stifel.

This is Alex on for Paul. Just a couple of questions. So first one, just a quick question on the 007 trial. Just kind of a little bit more color on what you're expecting to see would be really helpful.

Yes. Alex, it's Simon. We're going to provide, I think, a lot more color in the very near term. We expect we'll have a separate release once the study kicks off, as noted in this update, we expect that to happen very soon. So I think what we'd like to do is provide a lot more detail in the coming weeks. I think we're certainly looking to update on what we see as the medical needs, the opportunity in CAE. It's a very interesting orphan childhood epilepsy, similar to other epilepsies, 30-plus percent remain refractory and, of course, tolerability concerns with existing drugs. And this will be an open-label trial, and we'll certainly go through more around the study design and endpoints on a subsequent call or at least in a subsequent release in the near term.

Great. That's helpful. And then one more on 1101. I know you've guided before that depending on how enrollment's progressing, you'd expect readout in 2020. Just wondering if that's still going as planned or if you could provide a little bit more information there.

Yes. No. Absolutely, guidance remains, top line, second half of 2020, we're still on track. So the study is where it is at this stage, a few months in, a number of sites, at the number of being opened, patients are being screened, prescreened. The number of patients have been randomized. But -- so all is on track at this point. So we would -- we -- I'd just come back actually from Europe, met with -- we have probably about 18 or 19 sites across Europe. And there's a very, very significant amount of excitement for this study. As I mentioned in the updates, one of the good news elements which is obviously out of our control is the competing landscape. And so there's actually very limited burden of studies in focal epilepsy at the moment, which we're fortunate to be launching a trial into that. And of course, because this is the only drug of its mechanism, certainly lots of interest. The feedback, I would say pretty much universal from the investigators I talked to, was an improved ezogabine would be a very, very interesting product for focal epilepsy, again, a significant feedback on people's experience with ezogabine in focal epilepsy, in many patients, drug worked extremely well, was limited by its PK, its pigmentation. They feel that this mechanism is a very well-validated mechanism and has shown very good promise with the prior drug. So look, we're not obviously updating recruitment numbers on a weekly, monthly, quarterly basis. We are where we expect to be, and we look like we will be on track for top line, as we said, back half of 2020 at this point.

And our next question comes from Maury Raycroft of Jefferies.

This is Swapnil on for Maury. So first question I have is on 496. So you are like planning the adult PK study in Q3 '19. So like moving from there into pediatric population, like how do we think about that? Like do you go like therapeutic doses and then titrate it up? Or like how well is the physiology between pediatric and adult correlation?

Thank you for your question. The correlation is good, and that's been shown with ezogabine in a previous drug product form. When it was on the market, there was some off-label use of ezogabine tablets which were compounded in children. And in fact, they are published on the PK and showed that sort of dose-for-dose exposures in the children were similar to dose-for-dose in adults. So there doesn't appear to be any significant difference between children, infants and adults with respect to the ADME properties of this active ingredient. We've now shown our in vitro and in vivo PK in animals. The performance of the new formulation looks pretty much identical with what the previous ezogabine tablets were reported on, which is also very important. So we do predict good absorption and ADME properties of the drug similar to previous ezogabine with this new formulation. That all being said, even though we've got sort of a target exposure range based on previous literature for the drug, we will, as you point out, run that dose titration model. The final design hasn't been completely settled. We've got still a few months to finalize this, and this is active discussion, obviously, knowing the PK in the healthy volunteer study is going to be important. But we do expect we'll start at a low milligram per kilogram dose with dose titration every few days, up to a maximum tolerated dose or a target dose of in and around 20 milligrams per kilogram, which was again the experience that was published in children who took ezogabine. So I think that really covers your question. What exactly that dose titration schedule for 496 looks like at this point, we haven't finalized. But as I said, we'll be dose-titrated starting at a low daily milligram per kilogram dose for a few days.

Okay. Yes, cool. And one more question on 1101. So you're running the 6- to 9-month tox studies that are underway. So is there any plans for data disclosures from these studies?

We haven't made plans at this point. So probably not. But clearly, the tox studies will have to support the open-label extension. We expect that we'll have patients who would be looking to move into the open-label extension this year in 2019. And so the tox studies clearly would have to support that. So we don't expect at this point to be publishing or presenting on the tox findings. But certainly, the market would be updated as to the ability for those tox studies to support the open-label extension, and that would be sufficient for our clinical program.

[Operator Instructions]. Our next question comes from Antonia Borovina from Bloom Burton.

Antonia on the line for Dave. My first question is related to XEN007. Just wondering your choice to pursue childhood absence epilepsy over hemiplegic migraine and AHC. Just wondering if that is primarily because you believe the mechanistic rationale is strongest in this indication. Or is it more due to commercial indication?

No, I think there's a number of factors. The others still represent interesting indications, and in fact, we've just had a significant investigator meeting on AHC with regards to 007. Antonia, it was really certainly a good mechanistic support with -- both preclinically as well as clinically. Secondly, it's a sizable orphan population. Thirdly, epilepsy is obviously a strong focus for us. So there's leverage off of some of the work we are currently doing in terms of internal expertise. And then lastly, it was just in terms of the ability to get the study we wanted to do set up, up and running, we could move quickly, swiftly. And we've got a top investigator who was very interested in running an investigator-led study. So it was sort of an alignment of all of these factors, good-sized patient population, doable study, feasible, endpoints well understood, of course, coupled with good mechanistic support for the calcium channel mechanism in this condition, both at the preclinical level and at the clinical level, which led us to at least kick off the program. That's not to say that 007 won't advance in other areas over time. Of course, we continue to explore those. Those are obviously more complex clinical studies, and this was just easy to get up and running.

Okay. And then for XEN496, just a couple of questions. Firstly, is there any potential to get IP for your new formulation? And also, how quickly does the blue color appear in patients in a clinical setting?

Right. So I'll answer those questions. The -- absolutely, we believe that this new granule formulation will lend itself to novel intellectual property. So that would give us extensive commercial exclusivity well beyond the kind of current orphan, 7.5-year orphan term which we expect to get. So yes, we actually think this is a very high likelihood of issuance and expect we will get a novel IP. So that's point number one. In terms of the blue color, there's really 2 elements of this. One is the blue color of the actual pharmaceutic active ingredient, ezogabine, used to occur quickly with ezogabine. In other words, the old tablets when these were compounded, parents would often tell us that they would see the tablets turning blue, from a white color to a blue or purple discoloration. And in fact, we've done these experiments. When you put the old ezogabine in solution and expose it to oxygen, it turns purple. In terms of the color discoloration in humans, ezogabine generally took a couple of years before pigmentation resulted. And so the first -- in fact, as you probably are aware, the drug was approved off of its pivotal program of about 1,500 patients with no pigmentation concern at approval, the first cases where once patients have been on the drug for two or more years. So the actual pigmentation in humans takes a couple of years, but pigmentation was noted it could be with the active ingredient. With the new 496 formulation, what we can at least say is that there's no discoloration of the drug products in solution versus how ezogabine performed. So it's a very significant difference. Whether this lands up pigmenting ultimately, time will tell. But I think we've lowered the risk of pigmentation considerably, number one. Number two, for the indication we're chasing, this is a purely cosmetic issue, the risk of pigmentation, we do not believe is a commercial liability. There has been no cases, none, in the literature reported of visual toxicity with ezogabine. Even when the pigmentation did occur, the vision is preserved, no cases of any toxicology other than the pigmentation itself in terms of the risk of pigmentation causing a liability. So for this particular pediatric severe indication, even if 496 were to pigment, and I've given you reasons why we believe the likelihood is lower, I think the risk is -- from a commercial standpoint, is negligible, if any.

And I just have one final question on 496. You mentioned potential approval if you see a substantial improvement in seizures. So just wondering like what your target is.

We haven't said that yet. It's a good question. I mean that's going to really, at the end of the day, has to get a sort of FDA buy-in. But I think where your question is going, which is exactly the right one, and we're spending quite a bit of time on this now as you can imagine, is if -- because of the rarity of the disorder, if really our ability to run a trial will be limited to one, let's call it a small study for now in terms of just numbers of patients, probably a few dozen patients, we're going to have to be able to convince ourselves as well as the regulators of the drug's activity in a small sample size. We have to come up with some kind of effect, an effect size that we believe and the FDA and KOLs will believe is a meaningful effect in these kids. Now when you look at general focal epilepsy studies, that number is often around 15% to 20%. The difference between placebo and active in a general epilepsy, let's call it focal epilepsy trial is often plus or minus 20% placebo, 35% to 40% active. Now with pediatric, more severe epilepsies, that delta can change and should. So I think suffice it to say that 15% to 20% is likely not going to be enough. We don't know that. But I don't think you'll necessarily going to need a 60% or 70% difference from placebo. So it's probably somewhere in between what's usually observed and what has now become expected in more serious epilepsies, which is probably around 30%, 40% delta, somewhere in that range, Antonia, but I don't have a fixed number for you today.

And at this time, I'm showing no further questions in the queue. I like to turn the call back to Jodi Regts.

Thanks, everyone, for joining us today. We look forward to keeping you updated on our progress. Operator, we will now end the call.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.