OvaScience (OVAS) Q4 2016 Results - Earnings Call Transcript

| About: OvaScience, Inc. (OVAS)

OvaScience, Inc. (NASDAQ:OVAS)

Q4 2016 Earnings Conference Call

March 2, 2017 4:30 pm ET

Executives

Jennifer Viera - IR

Michelle Dipp - Executive Chair and Co-Founder

Christophe Couturier - CFO

Analysts

Patrick Walravens - JMP Securities

Derek Archila - Oppenheimer

Operator

Welcome to the OvaScience Reports Fourth Quarter and Year-End 2016 Earnings Results Call. My name is Adrienne and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded.

I'll now turn the call over to Jennifer Viera. Jennifer Viera, you may begin.

Jennifer Viera

Thank you. Good afternoon and thank you for joining us on today's call to discuss OvaScience's financial results for the fourth quarter and year ended December 31, 2016. With me today are Dr. Michelle Dipp, our Co-Founder and Executive Chair, and Christophe Couturier, our Chief Financial Officer.

Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see our press release issued this afternoon and our annual report on Form 10-K for important risk factors that could cause our actual results to differ materially from those projected or suggested in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call as a result of new information or future results or developments.

We will begin first with Michelle who will discuss highlights from the quarter and the year, followed by Christophe who will discuss our financial results. After our remarks, we will open the call for Q&A. Now I'll turn the call over to Michelle. Michelle?

Michelle Dipp

Thank you, Jennifer, and good afternoon everyone. Thank you for joining us on today's call to discuss OvaScience and our progress in the fourth quarter and year-end 2016. We entered 2017 steadfast in our commitment to transform women's fertility. We are confident that our portfolio of treatments has the potential to impact women and couples around the world. While we have recently made changes to our business strategy, I want to emphasize that our vision to create a future in which every woman can have a biological child remains the same.

When we started OvaScience in 2011, our goal was to translate the groundbreaking scientific discovery of egg precursor cells, also known as EggPC cells, into potential new treatments to improve female fertility. EggPC cells, as many of you know, are immature egg cells found in the outer lining of the ovary, which has the potential to mature into new healthy eggs, thereby replenishing a woman's egg reserve.

We identified and acquired our core technology from Harvard Medical School and Massachusetts General Hospital and began work on OvaTure, our next-generation in vitro fertilization or IVF treatment. The goal of OvaTure is to help women produce healthy, young, fertilizable eggs without hormone injections.

We also wanted to develop treatments that could improve upon standard IVF. Some women do not make any or enough eggs to undergo IVF. For these women, we developed OvaPrime, which is designed to replenish egg reserve.

Our third treatment, AUGMENT, was designed to improve egg health and to increase the number of high-quality embryos. By improving both egg and embryo quality, we can improve the likelihood of IVF success.

I will begin by highlighting the progress we have made with OvaTure. Over the last five years, our scientists together with our partner and trust fund have defined a culture process that supports the in vitro maturation of bovine and human EggPC cells into eggs. The ultimate test to determine the maturation of a healthy egg and embryo is successful fertilization.

As we progress, we are focused on a concept recognized in the field as developmental competence. This means that an egg is exhibiting certain characteristics to suggest it may fertilize and develop into an embryo. We used several criteria to indicate developmental competence in both bovine and human models. These criteria can be grouped into three areas; number one, genetic; number two, morphological; and number three, functional.

The first criteria is genetic. Genetically, eggs must undergo the process of chromosomal segregation, whereby the two sets of chromosomes are made. The second criteria is morphological. Morphologically, eggs must undergo an increase in cytoplasmic volume. Eggs must also demonstrate three structural characteristics at different stages of the maturation process, a germinal vesicle, a polar body, and a zona pellucid.

The third criteria is functional. Functionally, eggs must test positive on a brilliant cresyl blue or BCB test. Mature cells do not metabolize BCB. If a cell has stopped growing and it is mature, it will turn blue and it is identified as BCB positive. Another functional test, performed only in bovine eggs, is parthenogenetic activation, which utilizes chemicals to determine whether an egg is mature enough to be fertilized.

We have observed each of these criteria as applicable in bovine and human EggPC cell-derived eggs. As we announced at the J.P. Morgan Healthcare Conference, bovine fertilization studies are ongoing. We are on track to achieve our goal of successfully fertilizing a bovine egg by the end of 2017, completing an embryo transfer by the end of the first half of 2018, and ultimately achieving the birth of a cow by the end of the first half of 2019.

In human models, we have met these criteria for developmental competence in a limited number of human eggs. However, before we could fertilize human eggs for research purposes, we must obtain authorization. As we pursue this authorization, we are working to develop a robust and repeatable process for maturing human EggPC cells into eggs, so that we can increase the likelihood of success when we start fertilization studies. We expect to have mature human EggPC cell-derived eggs ready for fertilization studies and to receive the authorization to fertilize them for research purposes by the end of the first half of 2018.

Turning now to OvaPrime, OvaPrime is designed to replenish egg reserve in women who do not produce any or enough eggs for IVF. Diminished ovarian reserve or DOR is a condition in which the ovary loses its normal reproductive potential and does not respond well to hormone stimulation. In contrast, primary ovarian insufficiency or POI is a loss of normal ovarian function before age 40. POI is also referred to as premature ovarian insufficiency.

These conditions represent a significant patient population. According to the CDC, 32% of assisted reproductive technology cycles are performed in women with DOR. And based on data from ESHRE and other sources, we estimate that 1.5% of all women have POI.

By way of background, let me detail the OvaPrime treatment process, which takes about 12 months from informed consent to a pregnancy test. Upon signing informed consent, a woman undergoes baseline screening, including tests for serum blood levels of the hormones AMH, FSH and E2, as well as an ultrasound to image both of her ovaries. A biopsy of the cortex is then obtained, from which her EggPC cells are isolated.

After four to six weeks, the EggPC cells are reintroduced into one of her ovaries and monthly monitoring begins. As a control, the other ovary receives a sham injection. Each month the woman undergoes blood test evaluating AMH, FSH and E2, and she is also monitored via ultrasound. Once approximately five basal follicles are absorbed via ultrasound, she undergoes controlled ovarian hyperstimulation as part of the standard IVF protocol.

After maturation of multiple eggs, egg retrieval takes place and the eggs are fertilized with sperm. The resulting embryos can then be tested genetically via preimplantation genetic diagnosis or PGD. After PGD, the embryo is then transferred back into the woman and she undergoes pregnancy testing.

With this process in mind, I'd like to share our progress with OvaPrime. As you may recall, in December we announced our decision to move the OvaPrime program forward. In Canada, we are currently running a prospective, blinded, randomized and controlled Company-sponsored trial to evaluate the safety of OvaPrime in women with POI and DOR. As a secondary endpoint, the trial will measure changes in the patient's hormone levels and follicular development.

The trial will enroll 70 women with either POI or DOR by the end of the first half of 2017. We have completed an enrollment of 50 patients. We have also completed the first biopsies and reintroductions. We are on track to complete biopsies in all patients by the end of 2017 and reintroductions in all patients by the end of the first half of 2018. We expect to provide an initial data readout from 20 patients by the end of 2017. This readout will include safety data from patients six months after EggPC cells are reintroduced into their ovaries.

Now let's turn to AUGMENT. In December, we announced our decision or revise our commercial and clinical strategy for AUGMENT. We continue to offer AUGMENT to patients at clinics in Canada and Japan, and in fact we are pleased to announce the birth of a first baby in Japan using the AUGMENT treatment. The mother is the patient of Dr. Morimoto of IVF JAPAN group.

Finally, we continue to reassess our clinical trial strategy for AUGMENT, including our planned multi-center study as well as the study being conducted by the IVI Group in Valencia, Spain. Separately, we are planning to meet with the U.S. FDA in the first half of this year to discuss potential entry of AUGMENT into the U.S. market.

I will now turn the call over to Christophe who will review our financial results from the fourth quarter and year-end. Christophe?

Christophe Couturier

Thank you, Michelle, and good afternoon everyone. Before outlining our financial results of the fourth quarter and full-year 2016 detailed earlier today in a press release, I would like to provide more context on the main events impacting 2016.

Much of 2016 was focused on supporting the planned launch of the AUGMENT treatment in key international markets. However, as Michelle mentioned, we closed the year by starting the implementation of a Company-wide restructuring plan that involved slowing our commercial expansion of AUGMENT, increasing our focus on the development of OvaPrime and OvaTure and extending our cash reach. Let's see how these activities were reflected in our financial results.

Revenue for the quarter was $121,000, compared to $157,000 for the same period last year. Revenues for the full year 2016 were $653,000, compared to $277,000 for the full year 2015. The revenue recognized in the full year 2016 relates to 107 AUGMENT treatments, compared to 22 AUGMENT treatments in the full year 2015.

Cost of revenue for the quarter excluding restructuring cost was $1.4 million, compared to $1.2 million for the same period in 2015. Cost of revenue for the full year 2016 excluding restructuring cost was $5.4 million, compared to $2.2 million for the full-year 2015. This increase was driven by the overall increase in infrastructure, operational activities and commercial volume in 2016 compared to 2015.

Research and development expense for the quarter excluding restructuring cost was $4.7 million, which is consistent with R&D cost for the same period in 2015. R&D costs for the full year 2016 excluding restructuring cost were $21.6 million, compared to $18.4 million for the full-year 2015. This year-over-year increase resulted mainly from a $3.9 million increase in employee compensation, driven by the hiring of additional R&D personnel in preparation for our first Company-sponsored clinical trial. We expect R&D expense to increase as a percentage of our overall cost as we continue to focus our efforts on advancing our OvaPrime and OvaTure treatments, including the continuation of the Company-sponsored clinical trial commenced in 2016.

Selling, general and administrative expense for the quarter excluding restructuring cost was $10.9 million, as compared to $14.6 million for the same period in 2015. SG&A expense for the full-year 2016 excluding restructuring cost was $49.2 million, compared to $51.6 million in the full-year 2015. This decrease was primarily driven by decreased stock-based compensation expense resulting from executive leadership changes in 2016, and decreased cost related to international expansion preparation including the establishment of international legal entities and infrastructures in 2015. We expect SG&A expense to decrease as we implement our corporate restructuring plan, including the approximate 30% reduction in our workforce that was announced in December.

Net loss for the quarter was $22.6 million or $0.64 per share, as compared to net loss of $20.6 million or $0.76 per share for the same period in 2015. Net loss for the full-year 2016 was $82.3 million or $2.56 per share, compared to a net loss of $73.2 million or $2.70 per share for the full-year 2015. The net loss for the quarter and year ended December 31, 2016 includes restructuring cost of $5.4 million.

Our cash burn for 2016, net of proceeds of $53.9 million from a follow-on offering completed in the second quarter, was $66.2 million compared to $57.9 million in 2015. Our cash burn for the fourth quarter of 2016 was $16.6 million, which was materially consistent with cash burn in each quarter of 2016.

As of December 31, 2016, we had cash, cash equivalents and short-term investments of $114.4 million. This cash balance will be used to support our corporate strategy, including our ongoing clinical trials of OvaPrime, the continued development of our OvaTure treatment, and the availability of AUGMENT to patients in our current markets.

We continue to expect that our operating cash burn will be $45 million to $50 million in 2017. In addition, we expect one-time cash expenditures of approximately $5.7 million to $6.5 million over 2017 and 2018 resulting from the corporate restructuring. We continue to anticipate that we will have sufficient funds without additional financing to support our operating plans into the first quarter of 2019.

Before I close, I would like to acknowledge our progress towards building a robust patent portfolio. In 2016, seven new patents related to our treatments were issued in a number of countries, including one in the U.S. that relates to antibody compositions and methods for isolating EggPC cells, a step common to all of our treatments. It is due to expire in 2035. Others are related to AUGMENT compositions, on methods of performing AUGMENT, and are not due to expire until 2032.

In addition, in 2017, nearly 50 new applications covering more than 130 countries have been filed. With these filings, we have significantly extended our IP geographic coverage. At this point, the entire patent estate that we own or otherwise control consist of 58 issued patents in 44 countries and more than 150 applications pending in more than 130 countries.

Thank you for your attention. I will now turn the call back over to Jennifer.

Jennifer Viera

Thank you, Christophe. We will now begin the Q&A session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Mike King from JMP Securities. Please go ahead.

Patrick Walravens

This is Patrick for Michael King. I have a quick question on OvaPrime. Can you remind me what is your Canadian development plan for OvaPrime and what is the enrollment status right now and when will you expect to have full data available, and what will be your next step? Thank you.

Michelle Dipp

Just to remind you, we have started a prospective, blinded, randomized, controlled trial for OvaPrime in Canada, and that is for 70 patients. We have currently enrolled 50 of the 70 patients. We expect to complete enrollment of all 70 patients in the ongoing Canadian study by the end of the first half of this year, and we expect to complete the biopsies in all 70 patients by year-end. And also by year-end, we expect to provide initial data from 20 OvaPrime patients, and that data is safety data as well as the six-month post-EggPC reintroduction data. Does that answer your question?

Patrick Walravens

Sure. And I'm just wondering what will be the next step after you have safety data?

Michelle Dipp

Sure. I mean the next step, so at the end of this year you'll see us present data in 20 patients, and so the next step would be to present data in all 70 patients. But that data is a mix of not only safety but any data that we have following the introduction of cells into the ovaries. So we will be monitoring both the hormones and the follicular development using the ultrasound.

Patrick Walravens

Makes sense. Thank you.

Operator

Our next question comes from Derek Archila from Oppenheimer. Please go ahead.

Derek Archila

So just on AUGMENT, I mean can you just give us a bit more color on the upcoming meeting with the FDA and what potential requirements for U.S. commercialization could be explored? And just to follow up on that one, this meeting, is that the gating factor to reinitiate the Company-sponsored egg allocation study or are there some other ones that we should kind of think about?

And then on the OvaTure, can you just give us a sense of how translatable the data from the bovine model to humans is in IVF, and how derisking need to be that data?

And then one for Christophe, as we think about the cash burn in 2017, I think you said it's going to be around $45 million to $50 million. How should we think about the progression through the year? I assume, as you guys bring in new patients into the OvaPrime study, maybe the burn is kind of back-half loaded. Thank you.

Michelle Dipp

Okay, Derek, I'm going to try to remember all of your questions. So first off, starting with the question around the FDA, it's our policy not to comment on our interactions, our regulatory interactions. So, I'm sorry I don't have much to say there.

What I can tell you is – you are asking, is the FDA meeting linked to the reassessment of the clinical strategy? And the answer is, not necessarily. So we do continue to reassess our clinical trials in Canada. So we did have IRB approval for our multi-center, randomized, blinded, controlled trial in Canada and we have not started that study. But the IVI study of course is still ongoing. But as soon as we have an update for you on our clinical strategy, we'll be happy to provide that.

The next question around OvaTure, this is a really great question. So, what does the bovine OvaTure mean and how important is that? So just to remind you, we are currently undergoing the fertilization studies, and this is the first time OvaTure has been done in a large animal. So, we do think that this is a very significant milestone for the Company. So it's the first time that these cow egg precursor cells had successfully grown into eggs.

So the fertilization of a healthy cow egg and the demonstration of a healthy embryo and then ultimately a healthy cow, we think that's a very big milestone for the Company. And we have chosen the cow because it is the most closely related to the human in terms of cycle, et cetera. So we do think that it is a very good model in terms of a large animal model and as close to human as it gets.

And then I think the next question was for Christophe.

Christophe Couturier

Yes. So thanks for the question. In terms of cash burn, we do not plan significant differences between each quarter. Your question was related to the OvaPrime study. You have heard that we have already enrolled 50 patients. So we have started to treat those patients. So we expect our cost to be relatively similar from quarter to quarter over 2017.

Derek Archila

Great. Thanks guys.

Operator

[Operator Instructions] Our next question comes from Kennen MacKay from Credit Suisse. Please go ahead.

Unidentified Analyst

This is [indiscernible] on for Kennen. Just had a quick question on OvaPrime and just thinking more long term beyond the safety data we'll be seeing by year-end this year, what type of efficacy data we might see later on? And also just if you could help us contextualize what the efficacy bar might be versus what we'd be seeing today with standard of care?

Michelle Dipp

So it's a good question. I mean let me just take you back, I mean so I'll probably be repeating what I just said in terms of efficacy. So the types of efficacy readouts that we are looking for are changes in hormone levels, so changes in AMH, FSH and E2, and then also changes on the ultrasound, we are looking for follicular development.

But in terms of standard of care, remember these patients don't have any options at this point in time. These are patients for whom IVF is inappropriate because they either don't make any eggs at all and therefore can't go through IVF, the eggs that they make are immature, or they make for example one egg. So right now these patients are typically using donor egg or they are choosing adoption.

So in terms of standard of care, I'm very pleased that it's a completely new option for those patients. And hopefully I answered the question in terms of what we're looking for, for efficacy readout. So we are hoping that we can take women who don't make any eggs or enough eggs for IVF and give them the chance to make enough eggs to then be able to do IVF. Thanks for the question.

Unidentified Analyst

Okay, great. Thank you.

Operator

And I will now turn the call back over to Jennifer Viera for final comments.

Jennifer Viera

Thank you so much and thank you everyone for joining us today. We look forward to providing additional updates on future calls. And of course if you have any other questions, please feel free to reach out to us here at OvaScience. Thanks so much and have a good evening. Bye-bye.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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