Athenex, Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Greetings, and welcome to Athenex Third Quarter 2018 Earnings Conference Call. At this time, all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Tim McCarthy, with LifeSci Advisors. Please go ahead.

[Tim McCarthy:]

Good morning, and thank you for joining our conference call as we provide an update on Athenex’ business as well as a review of financial results for the third quarter 2018. The news release detailing the third quarter results crossed the wire earlier this morning and is available on the company’s website. A replay of this call will also be archived on the company website. During the course of this conference call, the company will make projections or forward-looking statements regarding future events, including statements about financial and clinical milestones anticipated in fiscal year 2018 and beyond. We encourage you to review the company’s past and future filings with the SEC, which identify specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements. You can find our SEC filings in the EDGAR database at sec.gov or in the Investor Relations section at our website at athenex.com. This morning, we are joined by Dr. Johnson Lau, Chief Executive officer; Mr. Jeff Yordon, Chief Operating Officer; Dr. Rudolf Kwan, Chief Medical Officer; Mr. Randoll Sze, Chief Financial Officer and several other executive who will be available to answer questions after the prepared remarks. With that, I’ll turn the call over to Johnson for introductory comments.

[Johnson Lau:]

Thank you, Tim, and good morning, everyone. So far 2019 [ph] has been a busy year for Athenex and in the third quarter we've continued to make substantial progress in both our commercial business and as well as research and development programs. Beginning with Oraxol, we were very pleased to announce that the DSMB, our Data and Safety Monitoring Board all within our ongoing Phase 3 trial of Oraxol in metastatic breast cancer recommend unanimously that the study continue recruiting patients as planned. We currently expect to announce topline data from this trial in mid 2019. If successful, this study will serve a major validation for our proprietary Orascovery program and we believe it has the potential to be a transformative event for Athenex. Our pipeline of Orascovery products also continues to advance. We identified suitable dosing regimens for both Oratecan and Oradoxel for advancement to Phase 2 studies, based on recent pharmacokinetic data. At the end of October, the FDA also accepted our IND for Eribulin ORA, which is our oral version of the chemotherapy Eribulin. Our plan is to commence clinical trials with this product in 2019. This represents the eighth IND that has been accepted on Athenex products and we are very proud of our team in their excellent, on-time or ahead of time execution. Our commercial business continues to perform well. Revenue for the third quarter was $18.4 million, an increase of 32% as compared to $14 million for the same period last year. This speaks the research has consensus by 1.4 million. Our reported net loss per diluted share was $0.70 in the third quarter. However, if you exclude a noncash item of $24.5 million the net loss was only $0.33 per diluted share, which is actually in a sense below the research consensus up to $0.51 per diluted share. In our Src kinase program together with our partner Almirall, we reported positive clinical data from two pivotal studies of KX2/391 in actinic keratosis earlier in the third quarter. Actinic keratosis is a large and underserved market and based on the data, both we and our partner Almirall believes that that 391 could potentially be a game changer in the treatment of this disease. The economics we have with Almirall are very favorable and we see this product as potentially creating a lot of value for Athenex. We undertook an important strategic initiative to add an immunotherapy platform to Athenex through the establishment of Axis Therapeutics, which is a joint venture with Xiangxue Life Sciences in China. Axis is developing a technology called T-cell receptor affinity enhancing specific T-cell therapy. In a way that is somehow, somewhat similar to CAR-T the concept being to explore is to manipulate the tumor killing properties of a patient's own T-cells in order to recognize the tumors. We believe that our TCR-T technology could offer important advantages over CAR-T in its potential to target solid tumors in a larger population of patients. We have recently reported the first set of very encouraging clinical data generated news in this technology. Dr. Rudolf Kwan, our Chief Medical Officer will provide more details on this. As Athenex moves forward, it is important that we have the right people managing the organization. We were pleased to announce that we promoted Mr. Randoll Sze to Chief Financial Officer in August. We have known Randoll, who is a former investment banker since our IPO. He has already integrated fully into the leadership team across our various business units. Also we welcome Mr. Tim Cook, the former Head of Worldwide Commercial Oncology at Eli Lilly to be our Senior Vice President of Global Oncology. I will now turn the call over to our chief medical officer, Dr. Rudolf Kwan for more detailed overview of our clinical progress during the third quarter. Rudolf?

[Rudolf Kwan:]

Thank you, Johnson. And now for a review of our clinical development activities. Starting with KX2-391 we announced in July that KX2-391 ointment was effective and safe for actinic keratosis in two Phase 3 clinical studies conducted in the U.S. Both studies met their primary endpoint of 100% clearance of AK lesions at day 57 within the treatment areas and the results were highly statistically significant with a p value of each study less than 0.0001. The clinical results have been consistent between Phase 2 and the two Phase 3 studies highlighting the consistency of this treatment in patients with AK. We believe KX2-391 has the potential to change the paradigm of topical therapy for this disease. Additionally, we announced that we will receive back from Hanmi Pharmaceuticals the right to KX-01 oral formulation for Korea, China, and other Asian territories. This will allow us to explore the potential of KX-01 oral formulation globally. For Oraxol, we reached an important milestone with the announcement that the planned second interim analysis of the ongoing Phase 3 clinical trial in metastatic breast cancer have been conducted and reviewed and that the independent Data Safety Monitoring Board recommended unanimously that the study continue. The DSMB congratulated Athenex on the rapid patient recruitment and the promising results achieved. The Oraxol 001 Phase 3 clinical trial is a randomized controlled clinical trial comparing Oraxol monotherapy against intravenous paclitaxel monotherapy in patients with metastatic breast cancer. As Johnson mentioned we plan to announce topline results in mid 2019. At the European Society for Medical Oncology meeting in October we presented encouraging efficacy and safety data of Oraxol in the treatment of metastatic breast cancer patients who failed previous chemotherapies in a pharmacokinetic and Phase 2 clinical trial conducted in Taiwan. The encouraging PK profile and the positive clinical efficacy and safety data highlights the excellent potential of Oraxol. We are also evaluating Oraxol as the treatment for gastric cancer and have been conducting a Phase 1 study in combination of Ramucirumab in patients that have failed previous chemotherapies. The results from the first cohort announced earlier in the year, we were pleased to see that Oraxol-Ramucirumab was well tolerated with encouraging tumor response. The second cohort which is evaluating higher dose of Oraxol is near completion and we plan to have results in the coming weeks. Our Oratecan and Oradoxel candidates are both well advancing Phase 1 development. We have identified our dosing regimens for Phase 2 which we are planning to initiate in the first half of 2019. Moving on to Eribulin ORA, we announced that FDA has allowed IND application for this candidate which is an oral version of chemotherapy agent Eribulin. The currently available IV drop [ph] is active in paclitaxel resistant tumor and is approved for the treatment of metastatic breast cancer patients who have received at least two prior chemotherapies for late stage disease as well as in liposacroma. We expect that this profile will create a number of synergistic opportunities with the other drug candidates in our Orascovery clinical pipeline. We plan to initiate clinical trial in the first half of 2019. Finally on our immuno-oncology development pipeline, we announced preliminary results of a pilot study in China in which patients will receive our TCR-T therapy showed encouraging positive clinical signals in terms of efficacy and safety. The pilot studies are being conducted by Xiangxue Life Sciences with whom we have partnered to form our joint venture, Axis Therapeutics. This technology will also allow a number of combination treatment potential for our strategies with our current portfolio going forward. We intend to file the first IND in the U.S., then initiate Phase 1 studies with this technology during 2019. With that, I will turn the call over to Jeff for an overview of our operations. Jeff?

[Jeffrey Yordon:]

Thank you, Rudolf, and good morning everybody. In our commercial business we continue to launch significant new products in both our 503B business, Athenex Pharma Solutions and our specialty injectable business, Athenex Pharmaceutical Division. We added to our 503B portfolio in August with the launch of compounded Vasopressin injection in ready-to-use premix IV bags. Vasopressin is currently on the FDA's Class 1 list of APIs that may be used in compounding under section 503B of the Federal Food, Drug, and Cosmetic Act. The branded product has been marketed by Endo and the current run rate is approximately 450 million annually. It's not completely clear whether the product will continue to be on the FDA's list. Clearly Endo would prefer if there were no competitors and they brought a lawsuit against the FDA to try to force them to remove the product from the list. That lawsuit is currently stayed until December 31, while the FDA considers the issue and finalizes its compounding drug list. In the meantime, we continue to sell the vasopressin product. If it stays on the list, then we think Athenex could potentially take a meaningful portion of the market in 2019 and beyond. If it is removed from the list we will still have had the benefit of being able to market our version in at least Q3 and Q4 of 2018. For Athenex Pharmaceutical Division one of the key products is ondansetron hydrochloride which is an antiemetic drug that is widely used by oncologists. At one point there was a glut of this product on the market and most of the suppliers have exited the market and it has consistently been on the FDA shortage list. We have been able to establish ourselves as the leading supplier of ondansetron and we sell our version at a reasonable price. Other spot shortage products that we sell include sodium bicarbonate, Vancomycin and potassium chloride. Athenex pharma solutions currently markets six products in total with 16 SKUs. Athenex Pharmaceutical Division markets a total of 25 products with 48 SKUs. We are planning on launching two new products before year end with an additional four new SKUs. On the manufacturing front, we are very happy with the progress we have been making on our facility in Dunkirk, New York. The exterior of the plant should be finished by the first half of 2019 and we expect the whole facility to be complete by the end of 2019 and operational by mid 2020. Please go to our website to see a drone generated video for a regular video update on our progress in Dunkirk. Our oral proprietary products specialty injectables and 503B compounded products will all be manufactured in this facility. Dunkirk is being constructed with substantial grant funding through a private-public partnership with the State of New York and we are very, very grateful for their support. We are also happy to report that our API facility or raw material in Chongqing, China is on target. The exterior of the building will be finished by the end of 2018 and the facility is expected to be completed by mid 2019. This facility will give our API subsidiary a great deal more capacity and will result in more sales and a better ability to supply key APIs to Athenex Both the existing commercial business and our manufacturing infrastructure are important strategically as we establish Athenex as a fully integrated global oncology company. We believe that we can create more value for shareholders by using our resources to commercialize products in the major markets. In order to be successful, the commercial and manufacturing elements must be in place well in advance of proprietary product launches. Some of the key accomplishments of the APD and APS divisions this year include the successful branding of the company and the establishment of key relationships in all facets of the oncology clinic and hospital markets in advance of our planned proprietary launches. We've been able to create massive goodwill in the market by supplying key products at reasonable prices such as ondansetron which is the largest shortage oncology product. We have also substantially lowered our distribution costs through centralized wholesaler agreements. Looking at our portfolio of proprietary products, the one that’s most likely closest to market is KX2-391 formerly known as KX-01. On the strength of the positive Phase 3 clinical we announced earlier in the year, we and our partner Almirall believe that KX2-391 has the potential to change the standard of care for actinic keratosis. We are now awaiting the 12-month follow up data from the Phase 3 trial. We have completed the marketing plans for both KX2-391 and Oraxol and are working to have all facets of the business established that will allow a seamless launch of these proprietary products. We have secured all state licenses and completed all GSA agreements. Both of these licensing activities could take up to three years to complete and we have already completed this. We have strong relationships of all 27 comprehensive cancer hospitals including the P&T committee members and have the staffing plan in place to quickly prepare for the first launch. I will now turn the call over to Randoll for an overview of our financials.

[Randoll Sze:]

Thank you, Jeff. Let me start with the results for the quarter. Revenue for the third quarter were $18.4 million compared to $14 million last year. The increase was primarily a result of an increase in licensing revenue of $5 million together with increases in sales of the company's 503B products and an increase in medical device sales. These were offset by decreases in API sales, contract manufacturing revenue, grant revenue and other product sales. Cost of sales for the third quarter totaled $12 million compared to $8.1 million in the same period in 2017. These were primarily due to the increase of cost of sales of $1.9 million from the recently launched specialty products and $2.0 million from 503B products and API products. R&D expenses for the quarter were $51 million, an increase of $39 million compared to last year. This was primarily due to an increase in licensing fees and clinical expenses. What we would like to highlight here is there was a $29.5 million non-cash license fee related to the purchase of our TCR-T technology in connection with establishment of Axis Therapeutics. Out of these $29.5 million, $24.5 million related to the fair value of the IP R&D and $5 million related to the company's common stock issued to Xiangxue Life Sciences, our partner in China. SG&A expenses were $11.5 million compared to $10.4 million in the same period last year. Net loss for the third quarter was $46.2 million or $0.70 per diluted share compared to net loss of $23.3 million or $0.41 per diluted share last year. For people who have been looking at our earnings or EPS, we would like to provide a more comprehensive picture and reiterate that excluding the non-cash licensing fee of $24.5 million the net loss would have been $21.6 million or $0.33 per diluted share. In July, we closed a privately placed debt and equity financing transaction with Perceptive Advisors for gross proceeds of $100 million. We were very honored to have them as our capital and strategic partner and see as validation of our approach in our product pipeline. As part of the terms of the transaction we entered into a five-year senior secured loan for $50 million of this financing and issued approximately $2.7 million shares common stock for the remaining $50 million. Our cash, cash equivalents and short terms investments were $141 million at the end as of September 30, 2018. Based on our current operating plan we expect that our cash, cash equivalents, short term investments, together with the cash to be generated from our operating activity will enable us to fund our operating expenses and CapEx requirements into the fourth quarter of 2019. For more details on our financial including results for the nine months ended September 30, 2018, please refer to our Form 10-Q filed with the SEC earlier this morning. In terms of revenue guidance, due to the timing of a collaborative payment from a partner, we are currently looking or we currently expect our full year 2018 revenue to be in the lower end of the guidance range of $100 million to $125 million inclusive of licensing fee revenue. Our operational business is on track and we expect to receive this collaborative payment in the first half of next year. With that, I'll return it back to Johnson for some final comments. Johnson?

[Johnson Lau:]

Thank you, Randoll. Thank you to all of your continued support. I would like to thank our team around the globe whose hard work drives the operational and clinical progress. Their execution continues to be strong. Importantly, the company has met all the milestones that we previously set out to achieve. We do not believe that the current market cap will affect the fundamental value of Athenex and our team will continue executing our plan according to schedule. Given all the milestones and new developments in our R&D execution, I would like to mention that we plan to hold an R&D date for the investment community on Monday, December 17. This will take place in New York City from noon to 3 p.m. on that date and we would like to invite all of you to attend. Our goal is to provide investors a deeper dive on our programs and an opportunity to gain additional perspective on the indications and markets we plan to target. We will provide everyone with the full details shortly. With that, we’ll now open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question will be coming from the line of Kennen MacKay with RBC. Please proceed with your question.

[Kennen MacKay:]

Hi, this is Justin on for Kennen. Congratulations on all the success this quarter and thanks for taking our questions. The first one is around enrollment into the Phase 3 MBC Oraxol trial I was wondering if you had an estimation for when that might be complete? And then additionally on that trial you have any anticipation for when median progression free survival could be mature versus the guidance of mid-year 2019 for the primary endpoint? Thank you.

[Johnson Lau:]

Our Chief Medical Officer Dr. Rudolph Kwan will address these questions.

[Rudolph Kwan:]

Justin, thank you for the question. We expect the target enrollment for this study to be completed by the end of 2018 and we - as you said we expect the top line results be in mid of 2019. The progression free survival is a secondary endpoint and so we will expect the result will come in at date of mature. We did not power into the study and I cannot estimate that whether the data will come up with the top line at this time point. But as you know very well survival analysis is different from response rate, so we will continue to monitor and give the guidance as we see the data.

[Kennen MacKay:]

Great, thank you very much.

[Operator:]

The next question is from the line of Chad Messer with Needham & Company. Please proceed with your questions.

[Chad Messer:]

Great. Good morning and thanks for taking my questions. With regard to the KX2-391, in the past you've discussed the possibility of a rolling NDA submission for this. Just wondering if you've had the opportunity to discuss that possibility with the FDA and if there is any other guidance, additional guidance you can give us on potential timing for an NDA filing?

[Johnson Lau:]

Dr. Kwan will address this question.

[Rudolph Kwan:]

We are currently in variation and discussion of approaching health agencies, both the FDA and EMA. I think we will provide guidance as these discussions mature.

[Chad Messer:]

Okay great. Thanks. And then I'm very interested in learning more about the broad applicability of the Orascovery platform across various chemotherapies. I'm just wondering if you have a plan to publish some of that Oratecan and Oradoxel PK data at some point.

[Rudolph Kwan:]

Yes, let me address this question. We are delighted to see the data of the Phase I PK study of Oratecan and Oradoxel and we're also delighted to see the data in confirming the platform as a very good platform for a number of trusted, the peak glycoprotein protein substrate. I will confirm this to provide additional insights on the R&D Day on December 17, in New York City on the R&D Day and we also plan to submit a number of abstracts to the ESMO meeting next year so that we'll be able to provide a more comprehensive overview with regard to the entire platform starting from Oraxol or Oradoxel to Oral irinotecan to Oradoxel as well to oral eribulin so that the scientific community as well as the investment community will be able to see the potential of this platform in a very comprehensive fashion. I hope I answered your question.

[Chad Messer:]

Yes, thank you and I'm looking forward to your R&D Day. Thanks.

[Rudolph Kwan:]

Thank you.

[Johnson Lau:]

Thank you, Chad.

[Operator:]

Next question is from the line of Yale Jen with Laidlaw. Please proceed with your question.

[Yale Jen:]

Good morning and congrats on the progress and thanks for taking the questions and maybe just a followup on the previous question a little bit in terms of Oratecan and Oradoxel. Although there is more information to come out, but what might be the potential cancer indications going forwards you may be tackle for either one of these drugs?

[Johnson Lau:]

Thank you for your question. Dr. Kwan will be able to provide you more details.

[Rudolph Kwan:]

Right, the interesting thing our portfolio if you see our Oraxol clinical development, if we go after both recognized indications where IV paclitaxel works and also the opportunity to go into new areas like combination with ramucirumab, combination with anti-PD-1 and certainly orphan drug indications like angiosarcoma, and we certainly would take the same approach to what irinotecan and docetaxel. The details of those will be discussed further in the R&D Day. Give you a hint for example, irinotecan definitely works well in colorectal cancer. So this is an obvious indication we will consider and certainly it has been looking at other indications in the literature where the IV formulation was tried to be used as an oral formulation with aflibercept, nevertheless the indication are possible for us to explore, so we'll discuss that further in R&D Day.

[Johnson Lau:]

Yes, also to probably a little bit more insight is the fact that the important part is for any new platform is to have the first product to prove that a platform works and also is effective and safe. And I think that part of our job is to ensure that we are having the most streamlined process in terms of getting additional products to go through the regulatory path after the regulatory authorities are convinced about the whole platform and therefore timing is very important. I am glad to say that we have a lot of experience in our company to time all the programs and the progress according to schedule to ensure that we have the most streamlined process in getting additional products going through the regulatory process right after the first one is approved and that is part of our job and our strings which we will be able to reveal to the investment committee in R&D Day as well as in the next couple years.

[Yale Jen:]

Okay great and thanks Johnson for the detailed answers. And may be just one more question here, that you mentioned that the Chongqing facility is in process of finishing, is this - that’s mainly just for API or that's also related to the API of paclitaxel the raw material that ultimately could be used in Oraxol?

[Johnson Lau:]

Thank you for your question. The government of Chongqing is actually supporting to build two plants, actually the first is the API plant and the second one is a dosage form plant. The one that we just mentioned by our Chief Operating Officer is the API plant which we are scheduled to have everything complete, including the renovation and the first installation of equipment by the middle of next year and that is the API plant. We are also contemplating breaking ground with the dosage form plant in the first half of next year. So everything is in progress.

[Jeffrey Yordon:]

The implications that they use a great deal of their capacity currently for our clinical studies. This is going to free up a lot of capacity to generate sales and they have a large portfolio of products that they're now going to be able to actively sell. So we're really excited about this. Okay, let me also add a little bit more color here is that, remember that we have a very strong R&D pipeline. We already have eight different active INDs in clinical studies. We are contemplating more to come and therefore to have the API supply in such a non-disruptive fashion, is actually very, very important. I also would like to thank the Chongqing Government because they are providing more than the support that is the public domain to support us to continue building what we need to do to ensure a successful operation in China and coupled together with what we are achieving in the Western New York together. So to that we are very grateful to both governments and we'll continue executing and building the facilities to ensure that we capture the maximum value for our stakeholders.

[Yale Jen:]

Okay great and that’s very, very comprehensive. I appreciate that. Again congrats and look forward to see the R&D days.

[Johnson Lau:]

Thank you, Yale.

[Operator:]

Thank you. [Operator Instructions] The next question is from the line of Matt Kaplan with Ladenburg Thalmann. Please proceed with your question.

[Matt Kaplan:]

Hey guys. I apologize for the background noise. Just wanted to first off congratulate you on the progress during the quarter, but I guess as now you're getting close to completing the Oraxol Phase 3 involvement and getting closure to the read out of the data, I wanted to get a sense in terms of if we could dig in a little bit more to the design of that study and what you’re expecting and thinking about in terms of the primary endpoint objective response rate and how it could differentiate from paclitaxel if you could give us some more color on that that will be great? Thank you.

[Johnson Lau:]

Thank you, Matt. Dr. Kwan will address your question.

[Rudolph Kwan:]

Matt, the study was designed to differentiate Oraxol from the label of those of IV paclitaxel in a monotherapy setting in terms of both efficacy and safety. So going in, we know oral paclitaxel will not meet infusion with convenience and will not meet the IV steroid and nor the IV and histamine associated with each infusion. So the safety and convenience comparison is obviously an important part. And as we keep on reiterating the improve PK profile with oral administration, we are looking forward to translate into further safety and efficacy differentiation in the safety area, mainly in the area of neuropathy. We continued to track that with extreme interest, how the data set is evolving. In terms of efficacy, that T-PK profile is projected to generate a better efficacy and that in the monotherapy comparison study that is designed using independent radiological read of x-ray response based on reset criteria are confirmed the overall response a relatively acceptable end point by the FDA as the main differentiating factor. And as discussed earlier on with another question, we do build in progression free survival and overall survival although they are secondary endpoints in the study. So our study is designed to show all that. And I think the interim look by the DSMB of this include both facility and data criteria that say that we are on track through January promising an effective data based on our predefined criteria. I think I would sufficiently to leave that at that and I will be able to elaborate a bit more at the R&D Day.

[Johnson Lau:]

And Matt also let me emphasized again that we want to ensure that people understand that our primary objective is to demonstrate superiority in efficacy, let me emphasize again efficacy, followed by having a very good safety profile in terms of our major reduction in the incidence of neuropathy. The convenience factor is actually only third online, I mean convenience is actually not the most critical path here. It is the efficacy being number one followed by safety and then followed by the convenience. Thank you, Matt.

[Matt Kaplan:]

Okay, thanks for that color. That’s very helpful.

[Johnson Lau:]

Thank you, Matt.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Johnson Lau for closing remarks.

[Johnson Lau:]

Thank you to all of you for joining our earnings call today. We look forward to another quarter of good execution from our company and our team. We also look forward to seeing all of you on December 17, in New York City for our R&D Day from noon to 3 PM and we will be delighted to share more with regard to R&D programs in more perspectives during that meeting. Thank you again for your time. Bye-bye.

[Operator:]

This concludes today's conference. You may disconnect you lines at this time. Thank you for your participation.