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Executives

Tony F. Cruz - Chairman of the Board and Chief Executive Officer

Nicole Rusaw-George - Chief Financial Officer

Analysts

Philippa Flint - Bloom Burton & Co., Research Division

Neil Maruoka - Canaccord Genuity, Research Division

Dan Trang - Stonegate Securities Inc., Research Division

Transition Therapeutics (TTHI) Q2 2014 Earnings Call February 12, 2014 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the conference call to discuss Transition Therapeutics second quarter fiscal 2014 financial results. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 12, 2014.

I would like to begin by reviewing the Safe Harbor provisions. Certain statements made during this conference call about the company's future plans and intentions or other future events constitute forward-looking statements for purposes of Canadian securities legislation and the Safe Harbor provisions under the SEC's Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical facts but rather on management's current expectations regarding Transition's future growth, results of operations, performance, future capital and other expenditures, competitive advantages, business prospects and opportunities. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. These risks are described in the company's annual information form and the company's annual report on SEC Form 20-F for the fiscal year ended June 30, 2013, and other SEDAR/SEC filings. Forward-looking statements are made as of the date of this conference call, and Transition assumes no obligation to update or revise them to reflect new events or circumstances.

And I would now like to turn the conference over to, today's call is with Dr. Cruz, Chairman and Chief Executive Officer of Transition. Please go ahead, sir.

Tony F. Cruz

Thank you, Jasmine. I'm Tony Cruz, the Chairman and CEO of Transition. I'd like to welcome you to our conference call announcing the fiscal 2014 second quarter financial results. Nicole Rusaw, Transition's CFO, will begin by providing a summary of the financial results for this quarter. Then I'll follow and provide a summary of our progress over the last little while, over the last 3 months, with a focus particularly on our lead technologies. And then after that, we'll answer any questions. So Nicole, can you?

Nicole Rusaw-George

Sure. Thank you, Tony. I will begin with a brief discussion on our cash position. At December 31, 2013, the company's cash and short-term investments were $36.4 million, a net increase of $8.3 million compared to the June 30, 2013 year-end balance of $28.1 million. The increase in cash and short-term investments is primarily due to the USD 11 million raised from the August private placement, which has been partially offset by the 6 months net cash burn of $3.3 million. Today, the company has approximately $36 million in cash and our projections indicate that our current resources should enable the company to execute its core business plan and meet its projected cash requirements well beyond the next 12 months.

I will now discuss the significant variances in the results of operations for the 3- and 6-month periods ended December 31, 2013, compared to December 31, 2012.

For the 3-month period ended December 31, 2013, the company recorded a net loss of $1.3 million or $0.04 loss per common share, compared to net loss of $2.8 million or $0.10 loss per common share for the comparative period ended December 31, 2012.

During the 6-month period ended December 31, 2013, the company recorded a net loss of $3.6 million or $0.12 loss per common share, compared to net income of $5 million or $0.19 income per common share for the 6-month period ended December 31, 2012.

Revenue was 0 in both the 3-month periods ended December 31, 2013 and 2012. Revenue was 0 in the 6-month period ended December 31, 2013, compared to $10.8 million in the comparative period, which represents the milestone payment received from Elan upon our commencement of the next D5 clinical trial.

R&D expenses decreased 981k from $2.1 million for the 3-month period ended December 31, 2012 to $1.2 million for the 3-month period ended December 31, 2013. For the 6-month period, R&D expenses decreased $2 million to $2.2 million from $4.2 million for the same period in fiscal 2013. The decreases in R&D expenses for both the 3- and 6-month periods are primarily due to decreases in clinical development costs related to diabetes drug candidate TT-401/402, which are now fully funded by Lilly, as well as decrease in amortization resulting from the fiscal 2013 write-off of the TT-301/302 technology, which has been partially offset by an increase in clinical development costs related to '08 candidate TT-601.

G&A expenses increased by 124k from 849k for the 3-month period ended December 31, 2012, to 973k for the 3-month period ended December 31, 2013. For the 6-month period ended, G&A expenses increased 255k to $1.9 million from $1.7 million for the same period in fiscal 2013. The increases in G&A expenses for both the 3- and 6-month periods are primarily due to increases in legal consulting fees and increased business and corporate development activities.

That concludes the financial review for the second quarter of fiscal 2014. Tony?

Tony F. Cruz

Okay. Thanks, Nicole. So I'll follow, to provide a summary of what progress we've made, and I'd like to first of all talk about our 3 leading technologies, and that is D5 for the treatment of neuropsychiatric symptoms; TT-401 for the treatment of diabetes, which was recently -- which has been taken over by Lilly; and TT-601, which we recently acquired from Lilly, for the treatment of osteoarthritis.

So first, I'll start with D5 and give an update. The biggest change that has occurred now is Perrigo, has -- is now our licensing partner. As you know, Perrigo purchased Elan Pharmaceuticals and as of mid-December, has taken control of development of D5. So the enrollment of the 2 400-patient studies is continuing over 70 to 85 sites in North America and Europe. And just to remind everyone, 1 of these trials is investigating the effects of D5 for the treatment of agitation and aggression in moderate and severe Alzheimer's patients. This 400-patient agitation/aggression trial is a placebo control safety and efficacy study, with primary endpoints being severity of aggression following a 12-week treatment period. This trial is appropriately powered, over 90% powered, to provide conclusive data. D5 has also received Fast Track Designation from the FDA. There is a growing interest in neuropsychiatric symptoms in Alzheimer's, particularly related to agitation/aggression, since it's considered a major medical need and very costly to the healthcare system. It's the primary reason why AD patients are institutionalized.

The second 400-patient trial that's currently ongoing is investigating the effects of D5 on mood changes in Bipolar Disorder patients. This trial is also placebo-controlled. Efficacy trial involving treatment of D5 for up to 48 weeks or a time to the first mood episode. Bipolar is also a very large disease. It's affecting nearly 3.5 million people in the U.S. and Europe.

And lastly, there's a safety and pharmacokinetic Phase IIa trial that's ongoing, looking at the effects of D5 in Down Syndrome and this should be completed by midyear. The Down Syndrome patients are known to have very high levels of myo-inositol, which may play a role in some of their cognitive abilities and functional behaviors. And since D5 is well known in -- from our previous trials, that it reduces myo-inositol levels by 40% to 50%, it's thought that it may have an impact on these outcomes in Down Syndrome patients.

Now in terms of our diabetes program, TT-401, it's a GLP-1 glucagon dual agonist to treat type 2 diabetes and obesity. Lilly exercised their option and licensed TT-401 last summer. Now, it basically is responsible for developing it internally and to commercialize it. Since this deal was finalized, Lilly has taken this technology in-house and began preparation for a Phase II study that's expected to be initiated in early Q2 of 2014. The proof of concept data indicates that TT-401 is a very exciting GLP-1 dual agonist, with the potential to provide superior glucose control and also weight loss for the treatment of type 2 diabetics.

As per our agreement, Transition received a $7 million milestone at the time that Lilly exercised its option. And going forward, Lilly assumes all the costs and is responsible for future clinical development and commercialization. Transition will participate in the Phase II study by committing a onetime payment of $14 million in 3 installments during the 2014 calendar year. In return, Transition will receive up to $240 million in milestone payments, double-digit royalties and potentially low single-digit royalties on future development of related molecules by Lilly.

Finally, Transition, once the TT-401 was licensed into Lilly, we then license worldwide rights to a novel small molecule transcriptional regulator, TT-601 from Lilly, for the treatment of osteoarthritis. This is a selective and potent inhibitor of a novel nuclear receptor target, modulating inflammatory pathways in pain. This molecule is targeted to treat patients who do not respond to NSAIDs or cannot take NSAIDs due to GI issues. We are currently completing some additional preclinical studies and manufacturing sufficient drug product for Phase I studies. We anticipate that TT-601 will enter a Phase I study in the first half of 2014. Following the completion of the Phase I studies, we will follow this with a proof of concept trial. And then at that time, once that data is available, Lilly will have the option to acquire the technology and continue development. If this was to occur, once they review the proof of concept data, then Transition will also receive $6 million in milestone and up to $130 million in milestones after they take it over and a high single-digit royalty.

As part of our strategy to continue to broaden our pipeline in clinical development, Transition's currently performing due diligence on a number of molecules that are of interest to us and that we feel we can move forward. We expect to license at least 1 molecule over the next 3 to 6 months under similar terms.

As of today, and Nicole already mentioned, the company has just over $36 million in cash. Of course, $14 million of this is committed to the development of TT-401, in partnership with Lilly. This leaves the company with $21 million -- $22 million, sorry, to develop TT-601 and additional programs that could be licensed over the next few months. The company's projected burn rate remains around $7 million to $10 million per year. So we are in very good position to meet all our current commitments over the next 12 to 24 months, even if we do bring in another molecule.

So I'll leave it here and, Jasmine, if there's any questions, please let me know.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Philippa Flint from Bloom Burton.

Philippa Flint - Bloom Burton & Co., Research Division

Just a couple of questions. I just missed the royalty you mentioned on the TT-401. Did you say a high single-digit royalty is to be expected on that molecule?

Tony F. Cruz

No, it's a -- sorry, for the TT-601, it's a high single-digit, yes, for TT-601 -- sorry. For TT-401, it's a double-digit royalty.

Philippa Flint - Bloom Burton & Co., Research Division

Okay. Sorry. And then on to the D5 drug. When was the last time you spoke with Perrigo about its development and when would you expect them to announce data on the Alzheimer's trial?

Tony F. Cruz

We have been in discussion with Perrigo since they've taken over the product just to obviously build a relationship, since they now control the D5 molecule and there's a lot of activities going on. They are also, of course, going through the process of learning what is going on with D5 and where it's going and when data is going to be available. When there's further clarity, both from Perrigo and from ourselves, we may announce at that time when data would be announced. I'm hoping to do that over the next few months, but that's really dependent on when Perrigo is -- has that information. So right now, I'm leaving it open because I actually don't know and haven't yet obtained that information from Perrigo. Once I do, I will let everyone know.

Philippa Flint - Bloom Burton & Co., Research Division

Okay. Do you think -- and I thought Elan was saying before by midyear. Has that -- is it just up in the air now because of the integration or you are aware of anything else affecting that study?

Tony F. Cruz

No. I think there's -- it's complicated in the sense that there are multiple variables on the Bipolar trial, as well as the Alzheimer's trial. That trial was a 12-week efficacy study and then it was extended with safety. And so depending how long it was extended will determine the length of the trial. And so there's still, I think, some clarity that has -- some things that have to be cleared up before we know exactly when the trial will be completed. One thing I can tell you, it's ongoing. It's -- enrolling is ongoing and it's being treated like a Phase II -- a large Phase II trial to complete enrollment and get to ensure that we have the proper answers in this drug in a very large trial. So things have not stopped. My understanding is that the group that was working with Elan moved over under Perrigo and they are now developing the drug under Perrigo. So the transition has gone through very well and it's moving forward.

Operator

[Operator Instructions] And the next question comes from the line of Neil Maruoka from Canaccord Genuity.

Neil Maruoka - Canaccord Genuity, Research Division

Just on your partnership with Perrigo, maybe a little bit more color there. That entire team has moved over intact. Is there any changes to that team, and are there any differences in your relationship with Perrigo as opposed to how was it under Elan?

Tony F. Cruz

Well, first of all, the team that was working on this program, my understanding is that in entirety has moved -- stayed on with Perrigo. So in fact, the continuity in terms of these clinical trials, which is really essential, has occurred. So there is continuity. They are there. And they're carrying on these trials. So nothing has changed. Now my relationship with Perrigo, we just really met each other over the last few weeks. But there's a lot of transparency. Our objectives are the same. We want to obviously obtain the maximum value from these clinical trials. There's been a considerable amount of funds spent on them. There's a lot of patients that are currently enrolled. And therefore, we want to see these trials to completion and to be able to, at some point, see if the drug is working in both the Bipolar patient population as well as in agitation/aggression. So that's really both our goals. And now it's really making sure that these trials are supported and, of course, well-designed and continue to be well-designed to achieve the best possible goal. In fact, I've seen a real commitment from Perrigo, as well as, of course, ourselves and particularly the team that's currently working on it to help facilitate get to completion of these trials.

Neil Maruoka - Canaccord Genuity, Research Division

Okay. That's great. And just on future indications or products that you might be looking at in licensing. Can you talk about any particular indications that are of interest to you or maybe even characteristics of indications that would make it a suitable in-licensing candidate?

Tony F. Cruz

No. We're looking -- first of all, we're quite open to indications. There's maybe only a couple of areas that we probably wouldn't take. One of the key criteria is that it has to be a drug that has potential or at least a high degree of certainty that it could show positive data in a proof of concept study. So for example, if we can't design a proof of concept study that is large enough to show good data, so that our partner could take it or we could move forward with that data, we wouldn't take it. So that's really one of the key criteria. Or it could be a drug, for example, that could move straight into a Phase II. We are also looking at those types of molecules that have good human data to support going into Phase II. So at the moment, which drug is going to be next? There's a number of them that we're currently looking at and some are more ahead of the other in terms of due diligence, in other words, more advanced with a few of them, particularly a couple of them. I do feel like we're in a position, in terms of capacity, to bring in 1 more, we can afford it. We can move it quickly since TT-601 is ready to move into the clinic, we're now ready to bring in another one to get ready to move into the clinic sometime in the second or third quarter -- sorry, third or fourth quarter this year. So really, we're well-positioned to bring in another molecule. What that molecule is going to be, probably we'll make that decision over the next couple of weeks.

Neil Maruoka - Canaccord Genuity, Research Division

Can you provide any examples of indications that you would find particularly attractive?

Tony F. Cruz

No. Right now we're debating between of a couple of them, so I'd rather just leave it at the moment until we announce it at some point, if we can get into a situation where we can bring that molecule in. First, we have to be certain that we can get the molecule and then we would announce it.

Operator

[Operator Instructions] And we have a question coming from the line of Dan Trang from Stonegate Securities.

Dan Trang - Stonegate Securities Inc., Research Division

Kind of wondering when you're going to expect royalties for TT-601 and TT-401? Don't know if you provided that date or any of that timeframe earlier in the call.

Tony F. Cruz

No. It's much too early to really determine -- once you're in the Phase III, then you would be in a better position to determine when that product. At this point, we're just ready -- Lilly is going to initiate a Phase II trial in diabetes patient population some time in the second quarter. So it's a bit too early to say when we're going to get royalties. It's really dependent on whether this Phase II trial will be successful and meet the criteria that it could become -- has the potential to become a product, such that it can move into a Phase III. So it's still a little bit early to determine when exactly it's going to be on the market.

Dan Trang - Stonegate Securities Inc., Research Division

Okay. Are there any other indications for D5 that you're possibly exploring aside from what you've already mentioned?

Tony F. Cruz

Well, the other indication that worked was initiated besides Bipolar and agitation/aggression and Alzheimer's, which are 2 large trials that are obviously conclusive and much closer. The other one is in Down Syndrome, where they've, I think that trial will be completed near term but it's still -- it's a pharmacokinetic trial and safety trial in Down Syndrome patients. The reason they had to do that is that it's known that Down Syndrome patients have very high levels of myo-inositol transporters, which can transport our drug. So they have to make sure that the concentration or the dose of the drug, which dose of the drug could go into that patient population, so they've done that trial. Once they have that, the idea is that you could be in the position to move into a larger Phase IIb type trial where you could look for neuropsychiatric symptoms or cognition in that patient population. But at this point, there's no commitment to do that. We'll look at the Phase IIa data and then evaluate whether we would want to do that or not, or Perrigo would want to do that. But right now, there's no commitment to move any other indication forward.

Operator

Dr. Cruz, there are no further questions over the phone lines at this time. I will now turn the call back to you, to continue with your presentation or any closing remarks.

Tony F. Cruz

Okay. Well, thank you, everyone, for attending the call and if there are any further questions, please let myself or Nicole know and we'll get back to you. Thanks very much, everyone.

Operator

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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