Zogenix's (ZGNX) CEO Stephen Farr on Q4 2017 Results - Earnings Call Transcript

Zogenix, Inc. (NASDAQ:ZGNX) Q4 2017 Earnings Conference Call March 6, 2018 4:30 PM ET

Executives

Brian Ritchie - IR, LifeSci Advisors

Stephen Farr - President & CEO

Michael Smith - EVP & CFO

Analysts

Annabel Samimy - Stifel

Difei Yang - Mizuho Securities

Myles Minter - William Blair

David Sherman - LifeSci Capital

Operator

Good day, everyone and welcome to the Zogenix Fourth Quarter and Full Year 2017 Financial Results Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Brian Ritchie, LifeSci Advisors. Please go ahead, sir.

Brian Ritchie

Thank you, operator, and thank you all for joining us this afternoon. With me on today's call are Chief Executive Officer, Dr. Stephen Farr; and Chief Financial Officer, Mike Smith. This afternoon, Zogenix issued a news release announcing financial results and providing a business update for the fourth quarter and full year ended December 31, 2017.

Please note, that certain information discussed on the call today is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements, due to risks and uncertainties associated with the Company's business. These forward-looking statements are qualified by the cautionary statements contained in Zogenix's news releases and SEC filings, included in the annual report on Form 10-K and subsequent filings.

This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, March 6, 2017. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

Now, I'd like to turn the call over to Steve.

Stephen Farr

Thank you, Brian, and good afternoon to everyone who is joining us on today's call. I'm pleased to be speaking to you today following what was a transformative year for Zogenix. As you are aware, much of our operational focus throughout the 2017 year was around the advancement of our late-stage program, ZX008 for the treatment of Dravet syndrome.

In the third quarter of 2017, we announced positive results from study 1, our first global Phase 3 trial evaluating ZX008 as adjunctive treatment procedures in children and young adults with Dravet syndrome. Study 1 met it's primary efficacy endpoint with high significance and was also positive on all pre-specified key secondary efficacy endpoints. On the heels of our robust Study 1 results we successfully completed a $290 million follow-on secondary offering. This allowed us to end 2017 in an extremely operating position with $295 million in cash and multiple key upcoming conference on the horizon in 2018, including results from our second Phase 3 trial and U.S. and E.U. regulatory filings in Dravet syndrome.

Based on results from Study 1, we were recently granted Breakthrough Therapy Designation by the FDA for ZX008 in Dravet syndrome. FDA Breakthrough Therapy Designation is intended to expeditely development and review of medicines for serious or life threatening disease where there is preliminarily clinical evidence that the investigation therapy may offer substantial improvement over existing therapies. We believe the seat operator therapy designation is acknowledgement of the strong efficacy profile for ZX008 and it's potential as a transformative treatment for this serious disease with few treatment options and currently no FDA approved medications.

In the first quarter of 2017, we announced the spout of the efficacy portion of Study 1504, our second planned Phase 3 pivotal trial. And in January of this year, we stated that we have enrolled and randomized this final patient for this study. Study 1504 is a double-blind randomized two-arm trial with approximately 40 patients per treatment group being conducted in United States, Europe and Canada in Dravet syndrome patients to [indiscernible] based background future regiment of anti-epileptic drugs. The primary and key secondary endpoint readouts are the same as in Study 1.

Similarly, successful outcomes for Study 1504, we intend to submit applications for regulatory approval of ZX008 as an adjunctive treatment procedures associated with Dravet syndrome in the United States and Europe in the fourth quarter of this year. Breakthrough Therapy Designation and Fast-Track Designation -- with both of those designations the NDA forced ZX008 in Dravet syndrome is eligible for priority review in the United States and we anticipate submitting complete distractions of the NDA on a rolling basis.

Patients enrolled in our core Dravet syndrome clinical studies are eligible to continue treatment with ZX008 on rollover into our open label extension trial, Study 1503. To-date we have seen very robust participation in the open-label extension program. As of the end of February, over 240 patients have entered the open-label extension trial and greater than 90% of these patients remain in the study today. Off note, over half of these patients have now been in open-label treatment for more than six months and approximately 40 patients have exceeded one year in the study. It's important to note that safety margin continues for all patients in the open-label extension study via periodic echocardiography and former assessment by data-safety margin committee. To-date, no cardiac safety concerns have arisen in the clinical study program and there have been no cases of valvulopathy or pulmonary hypertension.

As our ZX008 Phase 3 program in Dravet syndrome nears it's conclusion, we are ramping up our commercial preparations. We currently retain full global commercial rights to ZX008 and our proprietary position is supported by a multi-family global and patent portfolio that has initial patent expiry after 2030. In addition to our patent portfolio, ZX008 would qualify for 7.5 years of market exclusivity in United States and 12 years of market exclusivity in Europe through it's respective open drug designations and pediatric expansions.

In the past year we have established commercial teams that have begun preparation to self-market ZX008 in United States and Europe for Dravet syndrome under the brand name Fintepla. This year we are conducting paid research in both regions aimed to best understanding the perceived value of the drug by payers and healthcare practioners. This research involves conducting numerous in-depth interviews with U.S. public and private insurance, key European stakeholders and policy makers in various countries. In addition to the U.S. and Europe, there is a meaningful unmet need and opportunity for ZX008 in Japan and other Dravet syndrome patient communities in Asia.

With Study 1 results in hand, we have participated in a number of pre-consultation meetings and constructive discussions with the PMDA, the Japanese equivalent of FDA, as well as with the Japan Ministry of Health, Labor and Welfare. We hope to begin Japan related development activities later this year and continue the pursuit of a commercial partner for this region.

I'd now like to provide an update on our second target indication, Lennon-Gastaut syndrome or LGS. Shortly after we announced positive Study 1 results, we initiated a Phase 3 clinical trial in LGS called Study 1601. This Phase 3 multi-center global trial is a double-blind placebo-controlled study to assess the safety, tolerability and efficacy of ZX008 in adult and pediatric patients with LGS when added to a patient's current anti-epileptic therapy. The trial will include the same two-dose levels of ZX008 and placebo that was studied in Study 1 Dravet syndrome trial. The primary endpoint for the trial has changed in number of seizures [ph] that result in drops between baseline and the combined titration and maintenance periods at 0.8 milligram per kilogram per day dose.

As of the end of February, 12 sites in United States were opened to recruit patients into Study 1601. By the end of the first quarter, we expect to have additional U.S. sites active, as well as Ethics Committee submissions to several European countries. We are very excited to be advancing ZX008 in this global Phase 3 trial to potentially help address serious seizure for the LGS patient population which in number is approximately 3x to 4x the current population of patients with Dravet syndrome. We note that 2018 will be a year of enrollment for Study 1601. As such, we do not anticipate topline data from this study before 2019.

Before I turn the call over to Mike, let me remind you of the potentially value enhancing milestones we expect in 2018. First, we anticipate topline data from our second Phase 3 study, Study 1504 late in the second quarter of this year. Following what will hopefully be a successful outcome in Study 1504, we intend to file for regulatory approvals in Dravet syndrome in the United States and Europe in the fourth quarter.

So with that, I will now turn the call over to Mike for his review at the financials. Mike?

Michael Smith

Thank you, Steve. To start, I'd like to first touch on fair corporate finance we anticipate in the last quarter in 2017.

First, shortly after announcing our positive Study 1 Phase 3 top line results the GenX closed on a secondary public offering of common stock early in the fourth quarter of approximately 7.7 million shares at a price of $37.50 per share. The net proceeds from the offering following underwriting discount commissions in offering cost were approximately $271.3 million. In addition, just before the year end, we paid up a legacy relatively costly $20 million rental loans to avoid getting interest cost and fees on money that will have rates above our current risk profile, happy to say that with this loan payoff, Zogenix is now debt-free.

With that, here are our financial results for the three-months ended December 31, 2017. Due to the wind-down of Sumavel DosePro operations, we did not record revenue in the fourth quarter ended December 31, 2017; this compares with total revenue of $11 million recorded in the fourth quarter of the prior year. Research and development expenses for the fourth quarter ended December 31, 2017 totaled $18.1 million, up from $13.4 million in the fourth quarter of the prior year, as we continue to enroll more patients and expand the scope of our Phase 3 studies for ZX008 in both U.S. and Europe and prepare to begin recently initiated global Phase 3 study for ZX008 in LGS.

Selling, general and administrative expenses for the fourth quarter in 2017 totaled $7.8 million, compared to $7.5 million for the fourth quarter in 2016. Net loss from continuing operations for the fourth quarter in 2017 was $39.8 million compared with $23.6 million in the fourth quarter of the prior year. We reported a total net loss for the fourth quarter ended December 31, 2017 of $39.7 million, or $1.17 per share, compared to a net loss of $23.5 million, or $0.95 per share in the fourth quarter a year-ago.

Now for the years ended December 31, 2017, and December 31, 2016; total revenue for the 12 months ended December 31 2017 was $9.8 million comprised entirely of contract manufacturing revenue related to those. This compared with total revenue of $28.9 million for the 12 months ended December 31, 2016. The decrease was due to a reduction of the number of Sumavel DosePro units delivered to Endo International. R&D expenses for the full year 2017, totaled $57.4 million, up from $41.8 million in the full year 2016, and again, this reflects the continued enrollment and expansion of our Phase 3 clinical trial for ZX008 in Dravet syndrome and in LGS.

SG&A expenses for the 12 months in 2017 totaled $25.9 million compared with $27 million for the 12 months ended December 31, 2016 and net loss from continuing operations for 12 months ended December 31, 2017 was $126 million, compared to $68.7 million for the 12 months ended in the prior year. We reported a total net loss for the year ended December 31, 2017, $126.8 million or $4.55 per share compared with a net loss of $69.7 million or $2.81 per share for the year in 2016.

Cash and cash equivalents at December 31, 2017, totaled $293.5 million as compared to $91.6 million at the start of the year. As Steve noted earlier, we are extremely pleased with our significant accomplishments in 2017 and are looking forward to an equally exciting 2018. With Breakthrough Therapy Designation granted, our global Phase 3 LGS study kicked off in the top line data readout from our second Dravet Phase 3 Study 1504 and regulatory approval submissions I Dravet syndrome in the U.S. and Europe, we have a year in front of us with many value driving milestones. We are pleased to be in the strong and financial position to be able to drive the organization towards the realization of these milestones.

I will now turn over the call to the operator to begin the Q&A session. Operator, would you please provide the instructions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Annabel Samimy from Stifel. Your line is open.

Annabel Samimy

So can you just remind us given that this is -- the 1504 is also on a background of stiripentol and maybe a slightly different patient population or severity. Can you remind us in the open-label Belgian study, how many of those European patients had already been on the background of stiripentol? And does that give you a good enough indication of how they might behave in this study? And a second question regarding LGS, how many studies do you need for LGS? Can you file in SNDA on just one successful Phase 3 study? Thanks.

Stephen Farr

I appreciate your compliments about our successful year last year and we like you looking forward to everything ahead of us in 2018. I'll take the last question first, I'll lock that one off quickly. Yes, we just need one study for LGS in order to submit that supplemental NDA and we got that confirmation from the FDA as well it's from the European authorities as well. So one study required is the global trial as you know. With respect to Study 1504, and the inclusion of stiripentol and whether or not these patients will behave differently, you alluded to the fact that whether any patients in the open-label study or go any Belgian [ph], the answer to that is yes, they were. Out of the 19 patients currently on therapy, 4 of those are taking a combination of stiripentol and ZX008 and all of them are responding in the same way as patients who are not taking stiripentol.

So we don't see any rational to see that the patients in Study 1504 will behave differently or different patient population compared to those in Study 1. In fact, we set up for the same powering assumptions in Study 1504 as we set aside for Study 1.

Annabel Samimy

And can you just remind us if we're going to see any interim data coming out of this 1503 Study, sometime this year?

Stephen Farr

We hope so, yes. Obviously, we will be doing a formal analysis of that ongoing open-label trial for the NDA submission, it will be part integrated summary of safety. So once we have that we will try and move that towards an academic presentation and later in the year.

Operator

And we'll go next to Jason Butler from JMP Securities. Your line is open.

Unidentified Analyst

It's Roy [ph] in for Jason. You've pretty much have answered it with the powering -- the first question was the powering comments. I just wanted to hear if you expect in difference in baseline seizure rates in the 1504 Study versus what you saw in Study 1?

Stephen Farr

We were not anticipating that just on the basis that we have the same inclusion-exclusion criteria for Study 1504 with respect to seizure type and frequency as we have in place for Study 1, so we're not expecting it to be different.

Unidentified Analyst

So the seizure rates aren't variable sufficiently between patients that makes that kind of a meaningless to their consistency in the baseline seizure rates I guess?

Stephen Farr

Obviously, it's an ongoing trail so we don't have numbers associated with seizure frequency and study.

Unidentified Analyst

And regarding the extension trial patients in the Study 1, 1503 Study; can you tell us why they have dropped out? Do they tend to drop out relatively early? Thanks.

Stephen Farr

I can't really give you any information on when they drop out but the reasons -- remember that our [indiscernible] trials, so we've had just a few patients who have decided to withdraw. It's a variety of reasons, the biggest one being the patients that we've drawn consent and these are studies which are quite on-risk with respect to time required. So I not so like and really say we don't have any more information on that.

Operator

And we'll go next to Difei Yang from Mizuho Securities. Your line is open.

Difei Yang

Steve, would you help us to quantify the opportunities in Japan? Are you expecting a competent prevalence over on that side of the world?

Stephen Farr

I'll ask Mike to address that question for you, Difei.

Michael Smith

We believe that the instant in that geography is somewhat similar, so Japan being one-third of the population of the United States, there will be a comparable calculation off of our U.S. numbers that should get you the level of population different or as approved in Japan. But there is so a situation where we believe that the majority of patients are still on control that are still like in the U.S. and Europe, just very substantial on that need. There are key opinion leaders that there is a community there that is focused on both, Dravet and LGS indications and there is key simulators that are involved in the global sense with respect to the treatment community.

Difei Yang

Just a quick follow-up on Study 2; is there any updates you could give us on Study 2?

Stephen Farr

With Study 2 you mean the second half of Study 1502, is that correct?

Difei Yang

Yes.

Stephen Farr

That study is still ongoing, so we don't have a definitive time when that study will actually complete the enrollment.

Difei Yang

Steve, I think some time ago you talked about there is a potential you might stop the Study 2; do you see that might happen?

Stephen Farr

Yes, I think that what we obviously want to do is get past Study 1504 and it seems that's successful than obviously we would have both -- we'd have two trials throughout NDA, so I think the timing for that decision would be after results.

Operator

And next we have Ben [ph] from Leerink. Your line is open.

Unidentified Analyst

I wanted to ask about your dosing in the Lennon-Gastaut Phase 3 Study. How different is the biology between Dravet and Lennon-Gastaut? And I guess, what gives you the confidence that the dose you use in Dravet would also work in this indication?

Stephen Farr

We go back to the open-label trial that was conducted in Belgium, the same site is the open-label study in Dravet where the doses that we're using in the Phase 3 trial were representative in the doses that were efficacious enough to global label study. So we have direct clinical evidence albeit in a relatively small patient population of 13 subjects, the doses that we are using in our pivotal trial are efficacious.

Unidentified Analyst

And I guess, I wanted to ask also about your Breakthrough Therapy Designation, the potential for increased dialogue with the FDA; does that -- I know those are for Dravet but does that anyway change your timelines -- your expected timelines for Lennon-Gastaut?

Stephen Farr

No, it's completely independent. So the Breakthrough Therapy Designation is for the drug in Dravet syndrome; so our interactions with FDA will be focused in on Dravet syndrome, not LGS.

Unidentified Analyst

Understood. Just one final question, can you provide any color on cash burn this year?

Michael Smith

What we have said is that we've got nearly $300 million we have according to our plan over two years of cash but we're not guiding as of yet in terms of cash burn on an annual basis.

Operator

[Operator Instructions] Next, we'll go to Tim Lugo [ph] from William Blair.

Myles Minter

Hi, Myles Minter on for Tim Lugo [ph] at William Blair. Just a question regarding your LGS 6891 trial; are you actually looking later on any enrollment to get patients in that have previously taken CBD to canvass [ph]? And if so, do we have any indication about potential drug-drug interactions or protocol amendments that you would need to submit in order to do that?

Stephen Farr

We're obviously interested in understanding rather not this is a plausible drug-drug interaction between CBD and ZX008, that will be helpful, not for LGS but for the Dravet syndrome as well, particularly as we get closer to commercialization understanding how these drugs interact and whether or not and is a drug-drug interaction will be important for guiding physicians on selecting the right dose. So we are going ahead with running a Phase 1 trial to look for that drug-drug interaction and that will be helpful we believe in moving forward allowing CBD patients into the LGS program. But as of today, because we don't understand that drug interaction, we have excluded CBD from the LGS trial. But as time goes on, we may be able to amend the protocol to allow those patients in.

Myles Minter

And just switching gear back onto Dravet; from the Study 1 in the European and the Australian centers you enrolled on, was there any patients in those cold waters were on stiripentol and filed? And if they did file, how do you go about back [indiscernible] does because there is an interaction there with 30% increase in bioavailability. I'm just wondering how if patients file -- how I'm fluid, I guess you can back penetrate [ph] with this drug?

Michael Smith

If I'm off the mark with this response then please let me know because I didn't quite understand the question. I think you're getting at a fact that with any patients who have regarded stiripentol failures in our Study 1 results, is that what you're getting at?

Myles Minter

Yes.

Michael Smith

We haven't provided that information, that's obviously a very interesting post-talk analysis that we will be doing at some point but and also reporting that data but you don't have that information today.

Myles Minter

That question related to the need to have a -- whether or not there was a need to have a lower dose for finflorimate [ph] with these patients that they have been on stiripentol prior?

Michael Smith

Right. Therefore, if patients have been on stiripentol prior to Study 1 enrollment, they would have washed stiripentol, so there was no requirement to adjust the dose for those patients if they were in the study.

Operator

And next we'll go to David Sherman from LifeSci Capital. Your line is open.

David Sherman

I was just wondering if you could go over plans for commercial buildout if you guys are ultimately successful and get approved?

Stephen Farr

Mike, you want to take that one?

Michael Smith

Sure. Can you repeat the question David, I'm not sure I understood what you're asking.

David Sherman

I just wanted to understand you guys plans for hiring salesforce and just sort of plans for commercial building.

Michael Smith

In the U.S. we are planning on self-marketing in the product and we see it as a high touch, high patient interaction and try relatively high level of engagement with the patient community and scientific thought leaders and we would be able to do that with a reasonable sized sales force, some -- one that would be typically smaller than a cancer sales force for instance and more on the lines of the standard orphan drug; and I remember there is 5,000 to 8,000 potentially available patients that are diagnosed and will be relatively on control in these patient population that could be eligible for finfloramate [ph]. And that will likely involve also our REMS program which would be applicable for the U.S. and Europe and top of the other geographies. We are making plans to be able to market in Europe as well, and we will not -- we've said that we will not do any direct commercialization in other areas such as Asia. So in an area that has very sizeable or reasonably sized patient community like Japan, we would seek to have a partner.

Operator

And next, we have a follow-up from Difei Yang from Mizuho. Your line is open.

Difei Yang

Now that we have seen Study 1 results with fairly safe side-effect profile; let's assume if 1504 carries out what we have seen earlier, are you still affecting [ph] on REMS program?

Stephen Farr

Yes, we are. Obviously, we are collecting cardiovascular safety data as we go through not just in our core trials but also in our open-label expansion studies as well. We've conducted over 1,500 echocardiograms in approximately 300 patients to-date and really seen nothing but despite that I think the FDA and other agents people feel more comfortable with a REMS program associated with the drug and hopefully, we will see nothing as we move forward even in the commercial REM and potentially relaxation of that REMS has been moved forward but we do expect that to be a REMS program once this product has been approved.

Operator

And we have no further questions at this time. I'd like to turn it back to Dr. Stephen Farr for any closing remarks.

Stephen Farr

Thank you, operator and thanks for everyone on the call today. Our development program continues to move forward as planned and we are very excited about our prospects. So just to recap we have great Study 1 results and we've also recently been granted Breakthrough Therapy Designation by the FDA; so we now of course look forward to the availability of top line data from Study 1504, which will occur late in the second quarter of this year. And following that, we are very much looking forward to submitting our applications from FDA approval in the United States and Europe in fourth quarter.

And also, I'm very pleased to -- recently started the Phase 3 probe in LGS and as I mentioned earlier, we see this year as a year where we will be enrolling that trial. And grace [ph] also that we have a strong balance sheet that was fairly strengthened in the fourth quarter of last year; so we very much look forward to keeping everyone updated on our progress throughout 2018. Thanks, again, for joining us today and enjoy the rest of your day.

Operator

And that concludes our call for today. Thank you for your participation. You may now disconnect.