Enanta Pharmaceuticals, Inc.
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Good morning. My name is Skinner, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enanta Pharmaceutical's Fiscal Third Quarter Financial Results Conference call. [Operator Instructions] Thank you. I would now like to turn the call over to our host, Ms. Carol Miceli, Director, Investor Relations. Now you may begin the conference.

[Carol Miceli:]

Thank you, Skinner, and welcome to Enanta Pharmaceutical's fiscal third quarter financial results conference call. The news release with our financial results was issued this afternoon and is available on our Web site at www.enanta.com. You can also listen to the webcast or the replay by going to the Investor section of our Web site. On the call today is Dr. Jay Luly, President and Chief Executive Officer; Paul Mellett, our Chief Financial Officer, and other members of our senior management team. Before we begin with our formal remarks, we want to remind you that we will be making forward-looking statements including plans and expectations with respect to development, regulatory and commercial developments for our product candidates, milestone payments and financial projections, all of which involves certain assumptions, risks and uncertainties that are beyond our control and could cause our actual results to differ materially from these statements. A description of these risks can be found in our most recent Form 10-K and other periodic reports filed with the SEC. In addition, Enanta does not undertake any obligation to update any forward-looking statements made during this call. I'd now like to turn the call over to Dr. Jay Luly, President and CEO.

[Jay Luly:]

Thank you, Carol. Good afternoon, everyone, and welcome to our fiscal third quarter financial results conference call. Before I begin with my formal remarks I would like to welcome our new Chief Medical Officer Dr. Natalie Adda to Enanta's executive team. Natalie joined the company in June, brings a wealth of clinical development expertise and experience in virology and liver disease to Enanta. We are very excited to have her on board as we prepare to advance our wholly owned programs in these areas. I would like to begin by demanding everyone of Enanta's profile. For a company of our size, we have unusually strong financial resources and substantial nondilutive cash flow to fund our future R&D of our proprietary pipeline including our HCV and NASH programs and other early stage discovery efforts. As at the end of our recent quarter we had approximately $212 million in cash and liquid investments. Those resources are allowing us to advance our discovery programs in HCV and in other disease areas such as NASH without any near-term need for dilutive equity financing. We are expanding our discovery and development capabilities so that as we advance our discovery programs will be ready to move them directly into clinical development.. And finally our financial resources will also allow us to keep our options open for future business development opportunities. Enanta' financial basis driven from milestone payments received for successful development of paritaprevir plus royalties being earned on AbbVie's net sales of paritaprevir containing regimens including the AbbVie's 3-DAA and 2-DAA HCV regimens now marketed in the U.S., Europe, and other territories. The latest 2-DAA regimen is [indiscernible] which was just approved in the U.S. last month in combination with ribavirin for genotype 4. Later in calendar 2015 we expect a new paritaprevir containing regimen to be approved for genotype1 in Japan. This regimen will use the same 2-DAA combination but without ribavirin. Reimbursement approval in Japan will trigger a $30 million milestone payment to us. This 2-DAA regimen will provide improved economics to Enanta, because 45% of the net sales of these would be allocated to paritaprevir for purposes of calculating in our annually tiered double-digit royalties. Trying to point out that AbbVie is still in the ramp up of its HCV sales worldwide; so we are yet to see the full picture of the potential for paritaprevir containing regimen. June 30 mark the end of only the second quarter of sales in the U.S. and other territories including parts of Europe, and during this ramp up Enanta's royalty has increased 64% quarter-over-quarter. AbbVie recently reported that it has regulatory approvals in 47 markets and several of those have lead times for full reimbursement approvals which have not yet been completed. Additionally, regulatory and marketing approvals are not yet in place insignificant markets such as Japan. We look forward to seeing the ramp up continue and especially the approval in Japan. Next, I would like to discuss our next-generation HCV protease inhibitor ABT-493 which AbbVie is developing in combination with our generation NS5A inhibitor ABT-530. This promising regimen offers a once daily ribavirin free, all oral pangenotypic regimen. Recently AbbVie announced interim Phase 2B SPR 12 results of 100% in genotype one patients receiving the same dose of this regimen that AbbVie intends to use in its planned phase 3 trial, but the details of the phase 2B results are expected to be presented at the AASLD meeting later this year. AbbVie also stated that this next-generation regimen is on track to advance to phase 3 developments later this year, and reiterated its 2017 timeline for commercialization. Upon commercialization, regulatory approval and key markets; Enanta is entitled to receive up to $80 million in milestone payments. We will also benefit from improved economics, because 50% of any net sales of this 2-DAA regimen will be allocated to net sales of ABT-493 for purposes of calculating our annually tiered double-digit royalties on that product. Now I'd like to discuss the focus of our wholly owned HCV pipeline which includes programs in three different mechanisms of action against HCV. Based on growing concerns regarding resistant forms of HCV, we are now focusing special attention on this problem. Given that these so-called resistance associated variants or RAVs can be challenging to treat with approved DAAs, we believe that high barrier to resistance mechanisms are going to be increasingly important for the treatment of HCV patients including those who have failed on current DAA therapies. For that reason may have prioritized cyclophilin and nucleotide inhibitor program. Cyclophilin has an exciting mechanism for HCV inhibition that we have been working on for some time. Cyclophilin inhibitors may have the highest barrier to resistance of any class because cyclophilin has a human target that is non-mutating. Early data with some of our lead cyclophilin inhibitors show good uniform activity across genotypes and little to no degradation in their activity when tested against DAA RAVs was as wild type virus. Nuc inhibitors are also known to enjoy high resistance barrier. So we plan to combine cyclophilin inhibitor with the nuc to create a very high barrier to resistance combination. The goal of this type of combination would be not only to have very good activity across genotypes but more importantly to have good activity against important RAVs. Several HCV regimens on the market contain NS5A inhibitors that are generated NS5A mutations, ultimately leading to treatment failures. We believe that over time real world treatment failure failures will continue to emerge even for the next generation therapies and that will create an opportunity for a regimen such as a cyclophilin nuke driven combination to potentially be an option for these patients. We are actively pursuing such a regimen and hope to progress a proprietary cyclophilin candidate into the clinic in 2016. Turning to NS5A inhibitor EDP 239 abstracts demonstrating promising pharmacokinetic safety and efficacy results in both healthy volunteers and HCV patients have been accepted for presentation back in September and the AASLT meeting in November. We currently view NS5A as a potential add on mechanism if needed in certain populations but for now at NS5A free cyclophilin and a nuke driven combination will be our main focus. Beyond H.C.V. our initial preclinical work and non-alcoholic steatohepatitis or NASH has generated several promising leads with excellent potency and activity against the clinically validated target F X R. We're still on track to initiate clinical studies with an FXR agonist in 2016. In addition to NASH we continue to pilot several other programs within our core strengths of irology and liver disease and look forward to sharing those programs with you at a later date. I like to pause here and have Paul Mellett discuss our financials for the quarter and our financial outlook for the remainder of our fiscal year. Paul?

[Paul Mellett:]

Thank you Jay. I would like remind everyone that Enanta reports on a fiscal year schedule. Our fiscal year ended September 30th and we're recording results for our third fiscal quarter ended June 30, 2015. Enanta ended the quarter with approximately $212 million in cash and marketable securities as compared to $132 million at September 30, 2014 fiscal year end. We expect that these resources will be sufficient to meet our anticipated cash requirements for the foreseeable future. Our third fiscal quarter ending June 30, 2015 was $11.6 million compared to $42.1 million for the three months ended June 30 2014. For the nine months ended June 30 2015 revenue was $146.5 million compared revenue of $45.1 million for the same period of 2014. The change in revenue year over year for the three and nine month periods was primarily related to the timing and amount of milestone and other payments from our AbbVie collaboration. We expect to have significant royalty cash flow in the near term which will continue to be dependent on our collaboration with AbbVie. We continue to expect the timing in amount of milestone and other payments to vary significantly from period to period. As we did last quarter we thought it would be helpful to give some guidance as to how to directly translates AbbVie's future reported sales of VIEKIRA, paritaprevir and other containing regimens into estimated royalties for Enanta on a one step basis. For the quarter ended June 30 2015 our paritaprevir royalties represented approximately 3% of AbbVie's reported VIEKIRA regimen sales and we expect royalties to Enanta on reported VIEKIRA sales in the quarter ending September 30 2015 would continue to be approximately 3% of such sales. This calculation includes our expectations for the amount of VIEKIRA sales allocated to paritaprevir, the net sales adjustment for our collaboration agreement with AbbVie and the annual royalty tiers under our agreement which are applied on a calendar year basis. So to be clear let's walk through an example of the royalty calculation. Under our agreement 30% of net sales of the 3DAA regimen approved for genotype 1 are allocated to paritaprevir. That 30% is the allocated net sales number used to calculate our annually tiered realties which are currently in a low double digits. But total sales allocated to paritaprevir are at the low end of the tiers than 10% of that allocated pieces are royalty. So 10% of 30% gets to 3% which is the shorthand we use for rejecting royalties, we expect to earn in our fourth fiscal quarter. Due to the contractual adjustments and mix of regimen sales this is an approximate number. Given that the vast majority of Enanta's revenue and cash flow is dependent upon AbbVie's commercialization efforts. We offer this guidance to provide our investors a simpler way to estimate the expected royalty flow to an answer for the quarter ended September 30, 2015. Moving on to our expenses. Research and development expense was 6.3 million and 4.6 million for the third fiscal quarters ending June 30, 2015 and 2014, respectively. For the nine months ended June 30, 2015, research and development total 16.1 million, compared to 13.5 million for the same period in 2014. The increases year-over-year due primarily to increased internal and external preclinical costs associated with our proprietary research programs, which include our internal HCV programs. We expected that our research and development expenses will continue to increase modestly over the remainder of our fiscal 2015 year. As we advance our independent HCV programs and continue our preclinical research on our NASH program. For our full fiscal year ending September 30, 2015, we expect to incur approximately 26 million of expenses associated with Research & Development, which is exclusive of expenses incurred by AbbVie in developing our licensed product candidates paritaprevir and ABT-493. General and administrative expense was 3.6 million for the quarter ended June 30, 2015 and 2.6 million for the same quarter in 2014. For the nine months ended June 30, 2015, general and administrative expense was 9.9 million compared to 7.3 million for the same period in 2014. The increase in G&A is due primarily to higher stock-based compensation expense as well as additional expenses to support our expanding operations. Net income for the third quarter was 2.4 million, as compared to a net income of 50.1 million for the third quarter of 2014. For the nine months ended June 30, 2015, net income was 73.2 million, compared to 39.5 million for the same period in 2014. We expect that our effective tax rate for the remainder of fiscal 2015 or reflect the full applicable U.S. federal and statutory tax rates. This represents a tax rate of approximately 40% for the current quarter and the remainder of our fiscal year. Further financial details will be available when we filed our Form 10-Q for the quarter. I’d now like to turn the call back to Jay.

[Jay Luly:]

Thanks Paul. I’d like to wrap up by reminding everyone that we have several milestones to look forward too. Within our partner HCV program AbbVie has guided that the anticipate later this year that additional Phase 2b data will be released Phase 3 trials will begin on the next generation combination containing protease inhibitor ABT-493. In Japan, we expect AbbVie to gain regulatory approval for the 2-DAA regimen containing paritaprevir in the second half of calendar 2015. Fund reimbursement approval in Japan, which we expect in the quarter ending December 31, 2015. We will be entitled to receive a $30 million milestone payment from AbbVie. We also expect to concentrate our internal HCV efforts on high barrier to resistance mechanisms anticipating growing resistance problems in the future. Finally within our NASH program, we expect to initiate clinical studies in 2016. In summary, we see a bright future ahead for Enanta one that is built on a strong financial footing already established with payments we have received for the approval and commercialization of paritaprevir, our prospects for additional and growing royalties from paritaprevir sales and the advancement of our next generation produce inhibitor ABT-493 and our proprietary programs. I’d like to stop now and open the call to Q&A. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of Jessica Fye from JP Morgan.

[Unidentified Analyst:]

This is Ryan on for Jess. I appreciate you guys taking my questions. First can you talk about your expectations for the next gen combo with the 493 and where do you see that fitting in with the evolving HCV market?

[Jay Luly:]

Sure. So our expectations on the next gen combo are actually multifold. First of all, we’re looking at it has been a good addition to be an all overall and G&A typical offering, we’re expecting that, it would be right ribavirin-free as well, once daily dosing, so that we should be able to offer a very good cure in a convenient form and over a reasonable period of duration that we think will be competitive. The cure rate that we've seen to-date have been quite high and the data that has been reported so I mentioned before what we expect to put a lot more data out at AASLD conference. The regimen also has a pretty good activity against some of the known resistance mutations that are out there in the respective mechanisms of protease and NS5A. So there are some places that we’ll explore that clinically as well and that data will be out eventually to. So overall pretty competitive offering we think.

[Unidentified Analyst:]

And if you could remind can you, what kind of reminders what we can expect to see at AASLB in addition to this combo data?

[Jay Luly:]

Well, we haven't yet disclosed all of the abstracts, obviously for the conference there will be a number of them, not only for the nextGen, but obviously for the more mature paritaprevir containing program. But suffice it to say it will be -- it will go well beyond the initial SVR4 and initial SVR12 datasets that have been presented in very top-line forms, so there will be a quite extensive amount of information.

[Unidentified Analyst:]

Okay thanks its helpful. And I guess one more question if I may. As you guys think about your developing pipeline with your with the HCV assess and the NASH drug. How do you think about prioritizing those development pipelines? Thanks.

[Jay Luly:]

Well right now, we're prioritizing them effectively, equally I think they're not too far off in terms of the stage, but they're at the stage where we're expecting that we could have an HCV molecules as well as a NASH molecule in the clinic next year we’ll certainly do everything in our power to move those as quickly and as carefully as we can. But right now we're pushing them both with equal intensity.

[Operator:]

And our next question comes from the line of Bill Dezellem from Titan Capital Management.

[Bill Dezellem:]

Thank you. First of all, can we circle back to the royalty tiers please and I know you don't want to talk a lot about them, but are each of the tiers of equal size?

[Jay Luly:]

I'll go back to the beginning part of your question, which is we can't. So I think we don't want to talk a lot about them, we're prevented from talking a lot about them because they are reeducated deal terms. So again all we can really say is what the royalty ranges is a tiered setup so there are five tiers and they range from the low-end, the low double-digits 10% and the highest tier is a 20%, so you can sort of imagine numbers that would tuck-in into three other tiers and between those goalposts. So that's really what we're allowed to say, we can't really disclose greater specificity than that at this time.

[Bill Dezellem:]

Okay. I don't think I asked my question very well my apologies. I was thinking not in terms of the royalty percentage, but the dollar tiers, dollar levels at which those percentages came into play, are those roughly equal dollar increments?

[Jay Luly:]

Yes, those numbers were also redacted. So we're unable to really comment on that and I think eventually as our numbers grow in the ramp continues to occur. There will be more indirect insight into that from watching how our royalties build overtime but we can't really get into specifics around what those breakpoints in sales look like that trigger the next year.

[Bill Dezellem:]

Thank you. And let me now try question and maybe is more answerable. You’ve mentioned that R&D will directionally be drifting upwards in the coming quarters. Would you say that the same would apply to G&A or would you anticipated that would you, would be holding more constant?

[Paul Mellett:]

This is Paul Mellett. I think the G&A will drift up, but nowhere near the expected drift up of the R&D spending. The R&D spending as we advance our progress, particularly as we get into external stand can ramp up fairly significantly in short order, the G&A will be much more stable.

[Bill Dezellem:]

Thank you and finally I think you mentioned this earlier, but I missed it. Why the tax rate was lower than you’re expected norm in the quarter?

[Paul Mellett:]

We had the benefit of certain R&D credits that we took this quarter. However for the full year, we expect to be at the roughly the 40% rate.

[Operator:]

And our next question comes from [indiscernible] from AIGH Investment Partners.

[Unidentified Analyst:]

A question on timing in Japan, at the other call indicated they’re looking for a full quarter of Japan sales this year potentially even more than a full quarter, which mean approval tomorrow I guess or some point really soon. It looks like you’re looking for a little bit of a later timeframe. Can you help clarify that?

[Jay Luly:]

Our milestones actually triggered by commercialization approval. And so that may not be exactly at the same time as the drug is approved. Again weeks one way or the other could shift things and to one quarter or another, but the ultimate timing of the actual payment main lag just a bit from the actual event of the approval.

[Unidentified Analyst:]

I would just say that AbbVie said talk about having a full quarter plus of sales. So I assume that everything they need for commercial launch in place Q4, calendar Q4, but I guess matter of weeks is on a big deal one way the other just and if you can help to clarify that at some point…

[Jay Luly:]

We’re nearly talking about our payments that result from that trigger. So there is a little bit of a difference between the two events but we think, it’s going to be on the, what we should be very close to being in that time, that’s likely timing. And it all depend on when the actual timing of the approval is.

[Unidentified Analyst:]

Okay. One follow-up question on next generation if I can. And that is ideas it will be we will seeing data in other genotypes as well in addition to genotype 1 from AbbVie?

[Jay Luly:]

Yes, I don’t think we’ve disclosed that publicly. So but to wait a little bit further down the line for more information on exactly what’s going to be here [indiscernible].

[Operator:]

At this point, we have no further questions. I’d like to turn the call back to Carol Miceli.

[Carol Miceli:]

Okay. Thank you everyone for joining us. We’ll be in the office, if you have any additional questions. Thank you.

[Operator:]

This does conclude the conference call for today. You may now disconnect. Thank you.