Endocyte, Inc's CEO Discusses Second Quarter Results - Earnings Call Transcript

Aug. 2.12 | About: Endocyte, Inc. (ECYT)

Endocyte, Inc (ECTY) Q2 2012 Earnings Conference Call August 2, 2012 4:30 PM ET


Ron Ellis – CEO, President

Mike Sherman – CFO


(Matt McCavaney) – Robert W Baird

Adnan Butt – RBC Capital Markets

Simos Simeonidis – Cowen and Company


Welcome to Endocyte's conference call to discuss the company's second quarter 2012 financial results and business update. At this time, all participants are in a listen-only mode.

Speaking today will be Ron Ellis, President and CEO; and Mike Sherman, Chief Financial Officer. Following comments by Ron and Mike, we will open the lines for questions.

Please be advised that today's call is being recorded and webcast. During the conference call, the company may make predictive statements concerning future events or development such as their expectations for the EU regulatory filing, regulatory approvals, timing of clinical trial execution, clinical trial results and financial outlook.

Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to Endocyte's filings with the Securities and Exchange Commission for a discussion of these risks and uncertainties.

Now let me turn the call over to Ron Ellis.

Ron Ellis

Thanks, everyone, for being on the call this afternoon. We'll have a brief just update on some milestones and then I'll have Mike Sherman go through the financials. As, first off, we announced this morning that we've secured additional supply of DOXIL from Janssen.

We had supply as we announced earlier to cover us for the clinical trial and the enrollment we had and we felt comfortable with that. This provides some more insurance cushion to handle more patients as we bring more sites online and give us just more cushion in terms of the DOXIL supply.

We right now believe we have plenty of supply to cover us through the end of the year and that's when we anticipate that DOXIL should be coming back online, according to announcements from Janssen or J&J.

We also point out that we've been working closely with Janssen on this supply purchase and they've recognized the importance of the PROCEED trial and will work with us to help us make sure we get as much stock that's available.

Second thing is the EU filing update. We continue to have good interactions and frequent interactions with the EU regulators. We have the vintafolide filing, which is EC145, ready to go.

We had some discussion recently with the EU where they have asked us to put all the filings in at one time. We were going to do them sequential but they have requested that they come in all at one time, both the imaging and the therapeutic filing.

And so we'll probably have all of those go in in the fourth quarter. It's not going to delay the review period at all. It's just a request by the EU to see – so that they don't have them come in one time period and one in the other. So we're anticipating the filing will happen this year and we'll have all applications go in at one time.

Ig uses another comment on Merck, we've been very happy with the interactions of Merck so far. There has been a lot of work in preparation for the EU filing as well as potential commercialization in EU.

We've been transitioning the manufacturing responsibilities for – of ertarfolatide or the EC145 to Merck. We're working with them on the new indications that they will be running besides the ovarian and lung study.

And we're appreciating, I guess, the immediate commercial horsepower of Merck as we work through launch plans and start to enhance KOL relationships. And so really – and also they have been spectacular as a partner to work with.

These things often have some tough starts as you go along but they have just been outstanding to work with on all fronts.

Of course, we've also announced that we've named David Meek as our Commercial Head. He's key to the interaction with Merck. We interviewed a number of candidates. We couldn't be happier with landing David. He is kind of the ideal person for this position. He has significant oncology experience.

He's spent the last three or four years in Europe with Novartis and so he'll have great insight into the first launch, which will be in the EU. He's had multiple global marketing and senior leadership sales positions and he was just very – I mean, we're very lucky to get someone of his caliber to come to Endocyte. We look forward to introducing him to – in the future of calls.

The other just update, I guess, is we've already announced, we've added a couple new board members to the board, Pete Meldrum and Marc Kozin. This is consistent with our plan to continue to build the right capabilities on the board as we transition from development into commercial phase of the company and accelerate our pipeline.

So those are the updates and key milestones. I'll let Mike go over the financials and then we'll take questions.

Mike Sherman

Thanks, Ron. This is the first quarter, of course, in which we'll recognize the accounting for the Merck collaboration, so I want to make sure we spend some time covering how that will show up on our financial statement. And more importantly I think you'll see how that collaboration really puts us in a very strong position from a financial standpoint.

Before I get into the accounting, let's be clear on the economics of what transpired in the second quarter. First, soon after the close of the Merck agreement, we received $120 million cash as an upfront payment.

We incurred $2.8 million in research expense during the quarter, which will be the responsibility of Merck, along with another $2 million in expenses that were incurred prior to the signing of the agreement, which are related to Merck's portion of the cost of product that was manufacture for the ongoing clinical trial. So those together will be reimbursed by Merck, a total of $4.8 million.

So between the upfront payment and the reimbursable expenses, we have $124.8 million, which is recognized as revenue and it's spread over the performance period, which we defined as starting at the close of the collaboration at the end of April through the end of 2014, so it's a 32-month period.

We recognized the first two months of that in the second quarter, or $7.8 million and then the remaining $117 million shows up in deferred revenue on the balance sheet split between current and long term and we'll recognize that going forward at $11.7 million per quarter through the end of 2014.

Our R&D expenses for the quarter of $8.8 million were up about $1 million versus last year and up by $1 million to $2 million versus the last couple of quarters. The sequential increase is driven by the resumption of the PROCEED enrollment as well as the startup of the target lung trial.

Last year's second quarter actually had a lot of the startup expenses associated with the PROCEED trial. Netting out the $2.8 million, which is the current period reimbursable expenses, the expense for the quarter of $6 million is actually down from recent quarters and down from last year, which just demonstrates the benefit of the Merck funding.

SG&A expenses were up last year but very similar to our recent expense in the first quarter of this year. I think the other item of note in the P&L is the other expense category which reflected about $1 million expense related to the retirement of the credit facility. That expense included $600,000 prepayment fee and the rest of it was a non-cash charge related to the financing costs that were being amortized over the course of the loan.

To provide a little bit of perspective on the cash position, we ended 2011 with $128 million in cash. We added to that the $120 million Merck upfront payment, offset that somewhat by the debt repayment of $13.6 million, which leaves about $23 million of operating cash burn in the first half of the year to get to the current $211.5 million balance.

That translates to about $20 million cash burn if you net out the year-to-date portion of what Merck will reimburse, so about $10 million per quarter on a net basis.

Reflecting on the spending guidance for the year for the moment, we said our annual expense growth for this year net of the Merck reimbursement would not exceed 12% growth versus last year.

With the first six months, operating expense total of $21.5 million or $18.4 million net of the year-to-date portion of Merck reimbursable expenses, that leaves $12 million to $13 million per quarter in the second half of the year which will accommodate growth in our portion of the PROCEED trial cost plus some early investment in the commercial preparation. That also translates to a year-end cash balance north of at least $190 million.

I've provided the math for the going-forward amortization of the deferred revenue. That's the $11.7 million per quarter. I just want to note that the future R&D to be billed to Merck will add to that amount as will potential recognition of milestones.

The accounting for the future R&D services will work the same way as it did in this quarter. We'll spread that over the 32 month performance period and then recognize in that quarter the revenue, the portion related to the months that had passed since the start of the collaboration.

So in the third quarter, R&D services, for example, will recognize five months worth of that 32 months and the remainder would be spread evenly through 2014.

Bottom line of all of this is that we have over $211 million in cash. We've been spending about $10 million per quarter recently on a net basis, so we have substantial flexibility to make investments in the pipeline and prepare potential commercialization of vintafolide and etarfolatide.

In the meantime, Merck funds the pursuit of multiple new indications fro those products. In short, we're in great financial position.

Key activities ahead of us include the filing of the EMA applications next quarter. Confirmation the that manufacturing of DOXIL has resumed, although much of that risk was mitigated with the new supply we announced today.

We'll start to see the initiation of Merck trials and additional indications and we'll engage even more deeply into the commercial preparations as David Meek has joined us, as Ron mentioned, all that as we're working to get earlier-stage pipeline drugs into the clinic next year.

So with that, let me turn it back to the operator for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of (Matt McCavaney) – Robert W Baird.

(Matt McCavaney) – Robert W Baird

First, I just wanted to get a little bit of update on the meeting that I think you guys were going to hold with the FDA this summer about enrolling – I think it was around 200 FR-positive patients in the PROCEED trial. Can you just give an update on whether you did have that meeting? If you did, what the outcome was or when you're going to have it?

Ron Ellis

The meeting is scheduled for October, so we have not had the meeting. We do know in talking to the EU regulators as well as the FDA, there is a desire by both agencies to see additional patients besides the plus-plus patients put into the trial and look at the patients who are at a lower threshold, the positivity benefit by having the drug.

But we've not had that final meeting with the FDA but we'll have that scheduled again I think in early October.

Mike Sherman

To be clear, it doesn't impact the sort of the protocol or the enrollment -- the enrollment portion of that and it's just a question of the statistical plan that goes behind it.

(Matt McCavaney) – Robert W Baird

And then I just had one other question. I guess J&J on the call they said that they would begin resupplying DOXIL in Q4. Just in your conversations with them, have they given any indication that supply would be enough to use for clinical trials or would it just be a gradual resupply and do you know when they would get full production back?

Mike Sherman

Yes, we've been working with Janssen closely, I mean, in addition to their comments about the Q4 they continue to look for other alternatives to make that happen earlier. So we're confident. Based on our dialogue with them that we won't have any interruption to our enrollment. So based on those discussions I think we're fine.


Your next question comes from the line of Adnan Butt – RBC Capital Markets.

Adnan Butt – RBC Capital Markets

In terms of the available DOXIL supply, are you able to quantify how many patients it's good for or to what period?

Mike Sherman

No, I actually – and even if I did sort of quantify the specific amount, I mean, the impact on number of patients, it's always too many variables to nail that down. But I think as Ron mentioned, we were already in a position where we could get comfortably through the end of the year with enrollment with the supply that we had.

What this does is essentially adds greater flexibility to if enrolment ends up being even more aggressive than we anticipated or if there were a couple of months' delay into next year with the return of new supply, then we would still be in a good position.

I think the most important thing was this notion that Janssen has identified specifically our trial along with one other trial that they have their sights on and are working to make sure that we have all the supply we need.

Adnan Butt – RBC Capital Markets

And are you pretty comfortable with the timing of the supply coming back on between now and the additional and the Janssen (inaudible) coming on could there be additional DOXIL coming in from somewhere else?

Mike Sherman

We're not anticipating or really depending on alternative sources of DOXIL, so I'm comforted in the fact that Janssen and Johnson & Johnson have been very consistent in their feedback, even as the date approaches, for that return of supply. So I can't say more than that's the current expectation and their current expectations. But I think we're pretty confident in that.

Adnan Butt – RBC Capital Markets

In terms of EMA filing, you mentioned three separate applications: vintafolide, etc cetera. What was the thinking behind filing three different applications and will they run in parallel? Could one get reviewed, approved before the other?

Ron Ellis

No, that's what was clarified probably a few weeks ago by the EU. So the three applications, just to be clear, are vintafolide, which is the EC145 therapeutic, the companion diagnostic which is EC20 and then there's folic acid, which we inject a small amount of folic acid prior to imaging just to improve the image quality.

Folic acid as injectable is approved in many countries in the EU but not all. And so they ask us to provide a – they call it quite simple – but third filing for approval of folic acid in all EU countries.

And we were going to sequence those filings as soon as we to them done and they came back and said, no, just when you have them all ready, put them all in at once. And so they'll go in all at once. It won't delay the review or timing period because they wouldn’t start the review until they had everything anyway. So we're just going to finish them all up and send them in altogether.

Adnan Butt – RBC Capital Markets

And then the review cycle for all of them will be the same as well.

Ron Ellis

Yes, exactly the same.

Adnan Butt – RBC Capital Markets

And final question before I jump back in queue. In terms of third discussions with the FDA that are expected in October and any potential additional indications from Merck, do you plan to make those public via press release? How do you plan to communicate those?

Mike Sherman

Our plan is – and I don't believe Merck is intending to communicate. So what we'll do is as those trials initiate and as they go online on clinicaltrial.gov, then we'll be able to start talking about those indications. So that will be the trigger for discussion of new indications.


(Operator Instructions) Your next question comes from the line of Simos Simeonidis – Cowen and Company.

Simos Simeonidis – Cowen and Company

Can you remind us what is the current enrollment target for PROCEED and if you can tell us how far you are in enrollment and when you anticipate to complete enrollment in PROCEED?

Mike Sherman

Yes, so the total trial in terms of enrolling all patients, which is the original design of the trial, even through the primary endpoint is focused ont eh FR plus-plus or those that are 100% positive for the foley receptor, that's approximately 600, 640 patients. So that's the original design.

And our expectations are around enrollment of that, so we're such that we would have that enrolled and have PFS data in the first half of 2014. So the expectation is that the 250 patients of that total are the FR plus-plus group and so the question really is with this discussion with the FDA is how many additional, beyond the FR plus-plus group, do we need to enroll or, in other words, at what point can we stop enrolling these lesser positive patients?

Enrolling them today doesn't add risk, of course, to the trial timeline because they are patients we'd have to screen anyway. It also doesn't add regulatory risk because our primary endpoint is still focused on the FR plus-plus.

It really just provides the regulators with some additional data to support the mechanism of action and provides us with some potential upside to the extent that we identify benefit in these lesser positive patient populations that we could include in the label.

Simos Simeonidis – Cowen and Company

So just to make sure I understand you, you plan the 250 plus-plus and potentially up to another 400 plus or not positive.

Mike Sherman

Yes, well, another 400 which would include the – everything less than 100% positive. We had discussed, I think, in our last call there was sort of a middle ground that we were thinking was potential where you'd be able to do the study in 450 or so total patients because you were able to stop enrolling some of these lesser positive groups early.

So that's really the question is at what point can we stop and that will determine is it 400, is it 640? Again, the only – no impact of timing, no impact to the trial design or the statistics of the trial. It's only the analysis that will be performed on the group outside the primary endpoint.

Ron Ellis

So most – just we're powering the study for 250 plus-plus patients and we'll know in October whether we have to include negative patients in the study or not. That'll be a discussed item with the FDA.

And then the total number will depend largely on that discussion with the FDA as well as what percent of the patients that we screen that end up being plus-plus if we have to put in patients who aren't plus-plus, I mean, if it's 40% will have more patients that if let's say plus-plus group is 60% or 70% of the patients.

So there's going to be some variability in the total number of patients we put in depending on those two items.

Simos Simeonidis – Cowen and Company

And the project that you reiterate today for data in the first half of '14, that's based on the 250.

Ron Ellis

250 and assuming that we're running at about a 40% screening rate.

Simos Simeonidis – Cowen and Company

And then finally, you mentioned – Mike mentioned commercial preparation. Would that be for Europe first, for the US and can you give us a little color of what that may entail?

Mike Sherman

Yes, the – it will focus, as you can imagine, on Europe first but the planning we're doing with Merck, it goes beyond that. It's really on a global basis. So but given that our near-term responsibility is going to be to represent the – and commercialize the diagnostic in Europe, we want to make sure that we're ready to do that.

And as we discussed before, it's a bit of a unique situation in that Merck is going to have an organization that's selling the therapeutic, which very much, the diagnostic is very much part of that story.

So there is essentially a poll that's happening on the diagnostic side if the oncologist orders that test for the patient. So really what we need to be in a position to do in Europe is to make sure that the appropriate nuclear imaging facilities have the imaging agent available, they're trained to execute the test and interpret the test. So it's probably not a full-scale commercial effort as you might imagine.

Simos Simeonidis – Cowen and Company

Final question on target, since the initiation of the partnership with Merck, has there been an increased resource allocation there and is it going faster than you were planning gor about the same pace?

Mike Sherman

In general, our trials are on plan relative to the endpoints that – in terms of data that we've identified. It's probably too early to tell the benefit that we might get from Merck's involvement. Although, of course, their engagement and access to key opinion leaders' ability to get visibility to the platform and broader forums is changing very rapidly.

So the opportunity for us to show up at conferences and at various symposia is changing quickly and so we look forward to that. And I think that kind of activity and their relationships at sites will ultimately benefit the enrollment.

Simos Simeonidis – Cowen and Company

But there's no plans to increase enrollment or increase number of sites.

Mike Sherman

Not directly related to the Merck's involvement.

Ron Ellis

I mean, there are sites we're increasing the number of sites in the study. But like Mike said, it's not really related to Merck. It's just a matter of getting the study done quicker. And there's been a lot of interest in the study so when test sites show interest we've been adding them into the study.


(Operator Instructions) And I’m showing no further questions in the queue.

Ron Ellis

Hey, good. Thanks, everyone.

Mike Sherman

Good evening.


Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.

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