ACRS - NASDAQ

Ladies and gentlemen, thank you for standing by. And welcome to the Aclaris Therapeutics Fourth Quarter and Full Year 2019 Earnings and Business Update Call. [Operator Instructions] I'd now like to hand the conference to your speaker today, Kamil Ali-Jackson, Chief Legal Officer. Please go ahead.

Thank you, Victor. I’m Kamil Ali-Jackson, Chief Legal Officer for Aclaris. Please note that earlier today Aclaris issued its press release announcing fourth quarter and full year 2019 results. For those of you who have not yet seen it, you will find the release posted in the Investors section of our website at www.aclaristx.com. Joining me today for the call are Dr. Neal Walker, President and Chief Executive Officer; Frank Ruffo, our Chief Financial Officer; David Gordon, our Chief Medical Officer; and Joe Monahan, our Executive Vice President, Research and Development. Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company’s future results of operations and financial position, business strategy, and plans and objectives for Aclaris’ future operations are considered forward-looking statements within the meaning of the federal securities laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions, and uncertainties that could cause actual results to differ materially from those reflected in such statements. These risks are described in the Risk Factors and management discussion and analysis of financial condition, and results of operations section of Aclaris' Form 10-K for the year ended December 31, 2019 filed earlier today, and other filings Aclaris makes with the SEC from time to time. These documents are available under the SEC filings section of the Investors page of Aclaris' website at www.aclaristx.com. All of the information we provide on this conference call is provided as of today and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. Please be advised that today’s call is being recorded and webcast. A link to the webcast is posted in the Investors section of our website. I'll now turn the call over to Dr. Neal Walker, President and CEO of Aclaris. Neal?

Thank you, Kamil and thank you everyone for joining us on our fourth quarter earnings call this evening. 2019 was a transitional year in which we redefined our strategy and shifted our capital allocation to focus on our immuno-inflammatory pipeline. As a reminder, in 2019 we divested RHOFADE, retired all $30 million of our debt and made the strategic shift from a biopharmaceutical company focused only on dermatology. So we’re now focused on our core competency of developing kinase inhibitors for immuno-inflammatory diseases. The fourth quarter was particularly productive. We reported positive results from the second of two pivotal Phase 3 trials from common warts. As a reminder both our Phase 3 studies in common warts were highly statistically significant across all endpoint and if A-101 45% is approved, it has the potential to be the first FDA approved RX product for 101. Positioned as NRX product, it will be distributed through the traditional retail pharmacy channel with the convenience of at home use. We're actively pursuing strategic alternatives for this asset. Turning now to the pipeline update, we’ve recently completed our first in human single ascending and multiple ascending dose trial with ATI-450 in oral small molecule MK2 inhibitor for the treatment of immuno-inflammatory diseases. As we announced in January, the team continues to execute across our pipeline and started of 2020 with positive preliminary results from our Phase 1 SAD/MAD trial. In the study, we demonstrated potent suppression of TNF IL-1. The goal of the next Phase 2 study will be to demonstrate the PD profile in the well-characterized condition of rheumatoid arthritis, which will provide us with a potential to extrapolate into various other inflammatory conditions that are characterized by high levels to one or more TNF IL-1, IL-8 and IL-6. We also intend to study ATI-450 in a second immuno-inflammatory indications. In addition, we continue to advance our additional novel kinase inhibitors ATI-1777 which is our soft-JAK and ATI-2138 our covalently bound ITK/TXK/JAK3 towards IND submissions. Our renewed R&D efforts is targeting opportunities in the multi-billion dollar immuno-inflammatory market. Given the continued unmet needs broadly in the immunology space, we believe our portfolio and our approach has positioned us well to address the growing opportunity for novel focus mechanisms and oral formulations that have the potential to reshape the immunology landscape. Turning now to our team to accomplish our objectives, we have assembled a world class team focused on the design of innovative, kinase targeted small molecule therapeutics that can be designed for oral or site specific use. Our discovery in early stage drug development team in St. Louis has led by Joe Monahan, Paul Changelian, Jon Jacobsen and Walter Smith who have been leaders in this field for many years. This team is complemented by our later stage development team based in Wayne that have continued to deliver on all of our strategic objectives. We are proud of our team's accomplishments and look forward to delivering on the following catalyst in 2020. For ATI-450, we plan to initiate Phase 2 trial of rheumatoid arthritis in the first half of 2020 for subsequent data readout in the second half of 2020. For ATI-1777 or soft-JAK we plan to submit the IND in mid-2020 and initiate Phase 1/2 trial in the second half of 2020. And finally for ATI-2138, which is our ITK/TXK/JAK3 inhibitor, we plan to submit the IND in late 2020 possibly early 2021. As Frank will review in more detail later in the call, we ended the year with $75 million in cash and investments, and this is sufficient to get us to the third quarter of 2021. I want to reiterate that this guidance gives no affect to any potential business development transactions or financing activities. With that, I’ll handed it off to Dave, our CMO, who’ll update you on our R&D progress. Dave?

Thanks Neal. We were very pleased to end the year by concluding the Phase 1 program for ATI-450, our small molecule oral MK2 inhibitor that we are developing as a potential treatment for immuno-inflammatory diseases. Preliminary data from study ATI-450-PKPD-101 which was a SAD/MAD study was released in January. So, I won't repeat all of that information, but in summary in healthy volunteers ATI-450 demonstrated marked inhibition of TNF-alpha, IL-1 beta, IL-8and IL-6. It was generally well tolerated at all doses tested in the trial the most common adverse events reported by two or more subjects who received ATI-450 observed during the trial were dizziness, headache, upper respiratory tract infection, constipation, abdominal pain and nausea. ATI-450 demonstrated dose proportional pharmacokinetics with a terminal half-life of 9 to 12 hours in the MAD cohorts. And finally it demonstrated no meaningful food effect or drug-drug interaction with methotrexate. On the basis of these results, we plan to initiate the Phase 2 clinical trial of ATI-450 in subjects with rheumatoid arthritis or RA in the near future. We believe that the top dose studied in the SAD/MAD study, the 50 milligram BID is the appropriate dose for our investigation of the effect of ATI-450 and RA. The most important question in this study is to establish if 450 can reduce and maintain a reduction in inflammation over 12 weeks in patients with RA. We also plan to initiate a Phase 2 proof-of-concept study for ATI-450 in an additional immuno-inflammatory indication. Moving to ATI-1777, our investigational topical soft JAK inhibitor we're progressing towards filing the IND in mid-2020. As a reminder, we are developing ATI-1777 as a potential treatment for moderate to severe atopic dermatitis. We plan to initiate a Phase 1/2 clinical trial in healthy subjects and subjects with the atopic dermatitis in the second half of 2020. Lastly, we are also developing ATI-2138 our investigational oral ITK/TXK/JAK3 inhibitor compound. This inhibitory mechanism interrupts T-cell signaling pathways and lymphocytes and as such ATI-2138 has potential to be a treatment for psoriasis and or inflammatory bowel disease both of which are T-cell mediated or through immune diseases. ATI-2138 targets unique kinases expressed only in immune cells. This specificity may avoid some of the toxicities associated with other T-cells targeted therapies like Cyclospora. We expect to submit an IND for ATI-2138 in the fourth quarter of 2020 or in the first quarter of 2021. I will now pass the microphone to Frank for the financial update.

Thanks David. Good afternoon everyone. As I walk through our fourth quarter and full year 2019 financial results please referenced the financial tables. It can be found in today's press release. For further detail please refer to the MD&A section of our Form 10-K filed today. First just note and a reminder about the current and prior year’s financial statement presentation as a result of our strategic decision during 2019 to refocus our resources on our immuno-inflammatory development programs our historical revenues and expenses from our product sales are summarized in the line item loss from discontinued operations on the face of our P&L statements. Please reference footnote 18 in the Form 10-K for additional details. As of December 31, 2019, we had cash and investments of $75 million and no debt. For the full year of 2019, our R&D expenses were $64.9 million compared to $60.8 million for the full year of 2018. These amounts included non-cash charges of approximately $6 million and $7.9 million in each year respectively. The net increase in expense in 2019 was mainly the result of $5.5 million in milestone and other expenses related to our license agreement with Rigel. In addition in 2019, we incurred $4.1 million increase in preclinical and clinical development expenses related to 450 - ATI-450 that is and a $3.2 million increase in our wart program spending. These were offset by a $7.2 million decrease in spending for our Phase 2 clinical trials ATI-501 and ATI-502 as compared to the prior year. For the full year 2019, our total G&A expenses were $27.2 million compared to $25.6 million for the full year of 2018. These amounts included non-cash charges of approximately $10.9 million and $9.9 million in each year respectively. Personnel and other one-time restructuring charges mainly account for the year-on-year increase. Other income net for the full year consisted of $2.5 million of expense for 2019 as compared to $2.7 million of income for the full year of 2018. This decrease was mainly the result of interest expense and repayment costs incurred on our outstanding debt which was borrowed in October of 2018 and subsequently repaid in October of 2019. Our loss from continuing operations was $113.5 million for the full year of 2019 compared to $82.1 million for the full year of 2018. We recorded a one-time non-cash goodwill impairment charges of $18.5 million which is included in our 2019 loss from continuing operations, no such charge was recorded in the prior year. Our loss from discontinued operations was $47.8 million for the full year of 2019 compared to $50.6 million for the full year of 2018 and just two main items to draw your attention to in the line item loss from discontinued operations. We recognized $13.6 million of net sales of RHOFADE in 2019 through its disposition in October of 2019 and also recognized the onetime non-cash impairment charge of $27.6 million for the breakdown of our intangible assets related to RHOFADE included in the full 2019 results. There was no such charge in the prior year. Now switching to cash flow. For the year ended December 31, 2019 net cash used in operating activities was $96.4 million including $20.4 million in the fourth quarter of 2019. The net cash used in operations during the fourth quarter of 2019 decreased considerably as compared to the average quarterly rate experience since we commercialized in early 2018. This cash burn rate reflects the initial changes in our business following our announcement to exit the commercial product sales business last September and focus our business on our early stage pipeline. Our fourth quarter cash burn from operations continued to include expenses related to our legacy derm development programs and transitional expenses related to our commercial products business that we exited in late 2019. Consistent with our new strategy, we expect that most of our R&D spending going forward will be focused on our current immuno-inflammatory pipeline specifically API-450, ATI-1777 and ATI-2138. Additionally, as a result of our recent restructuring which included a headcount reduction of 60% across the company, we anticipate a significant cash savings relative to the spending rate prior to restructuring in September of 2019. Given these recent changes and the strategy of our business, we currently anticipate that our current capital will provide a cash runway into the third quarter of 2021 without giving effect to any potential business development transactions or financing activities. With that, I'll turn the call back over to Neal for a few closing remarks.

Thanks Frank. We look forward to reporting out on the ATI-450 clinical study work as the year progress getting into an IND for ATI-1777 and also for ATI-2138. So we have a busy catalyst year this year, when we look forward to updating everyone as we make progress. Victor, can you please pool for questions.

[Operator Instructions] And our first participant will be from the line of Louise Chen from Cantor Fitzgerald. You may begin.

This is Sudan Loganathan in for Louise Chen. So I have a few questions here. So first question regarding ATI-1777, so what makes you that unique as a JAK inhibitor going forward as you plan to take that indication into atopic dermatitis. As we know with JAK inhibitors there has been some concern with safety, what different changing factors will ATI-1777 have to emulate those thoughts. And then in terms of MK2 as a novel target what other inflammatory indications are potential targets for that agent and how many - is there plans for going forward with that aspect? Thanks.

This is Neal. Thanks for the questions. So first on 1777, so let’s think it's an important question, we do know that both oral and topical JAKs were quite well in atopic dermatitis a number of companies have shown that most recently Insight has demonstrated that with topical ruxolitinib. So I think the opportunity that we had identified actually a year or so ago actually probably 18 to 24 months ago was looking at how do we differentiate particularly on safety. Knowing that JAK inhibitors work quite well both orally and topically, in fact they do very well on itch, even topically. The one place that one can differentiate is on the safety side. So, we preferentially chose targeting JAK 1/3 because we do have data to support that that is an important factor. And then we also design the molecule to be soft. And by that, we mean that it works on the skin at the side of action. So it site specific and once it hits the plasma, it's rapidly metabolized giving virtually no systemic exposure. So when you think about an indication that has a disrupted skin barrier and disproportionately SKUs young that's really one of the places, one of the key areas where you want to differentiate going forward as this market evolves, which clearly the atopic dermatitis market is evolving quite rapidly. I think the other thing that we decided to do as well is we're targeting moderate to severe patients and we also designed a formulation into an emollient containing spray solution. In an effort to enhance compliance and drive more robust usage of the compound over time, particularly in a condition like this, it tends to wax and wane. So that 1777 on the MK2 front there is I think the exciting thing with the MK2 inhibitors what we've got here is an oral dosage form that targets TNF-alpha, IL-1 beta, IL-6 and IL-8 in a very potent way. And you know when you think about the analogs in this market a lot of the biologics target these things, but we're doing it orally. And so when you look at the kind of host of inflammatory indications that one could target think of anything that's driven by TNF-alpha like rheumatoid arthritis, like psoriasis you know through things that are predominately driven through IL-1 beta like gout, CAPS, pericarditis, hidradenitis. There is just a host of conditions that are evolving that we now know are driven by these cytokine. So, I think that program in particular is quite exciting given the data that we already reported on earlier this year.

And our next question comes from line of Tim Lugo from William Blair. You may begin.

This is Lachlan on for Tim. Thanks for taking the questions. First of all I was just wondering if you could give an update on the partnership for BD discussions for legacy portfolio. How that's going and maybe if there's anything we can expect to see in the near-term or the timelines they look like. And secondly also related to ATI-450 I was just wondering how you're thinking about this other inflammatory indication and what are you looking at to prioritize the various indications. And do you have any sense of when we could expect to know what that will be and when that trial might start?

Sure, thanks. So this is Neal again and maybe I'll hand it off to Joe or Dave, but on the BD process. So we don't comment on the specifics of BD we are actively in active discussions not only on the legacy derm business and across our legacy derm business, but also across our core portfolio. I think - we've been able to generate quite a bit of interest across the company. So we remain excited about the prospects and all that the relative to the timing and other specifics we can't really comment on that at this time. On ATI-450, regarding the other inflammatory indications I think one of the things that we're trying to be very thoughtful of is looking at things that are a mechanistic match and also looking to kind of diversify what we're targeting since we can target a number of different cytokines with this molecule. RA is predominantly TNF alpha, but also IL-1 beta driven. So we're kind of looking more heavily at IL-1 beta driven diseases. And then just trying to be thoughtful about enrollment times, what we target basically - what we want to show is that we're proving out the mechanism with this oral dosage form. And I think in terms of when we're going to go live with that, it will be shortly. We'll be updating everyone shortly on that and providing some more specifics and maybe Dave any other thoughts on the indication.

Yes I mean, we've got some clear ideas along these lines. I mean, we’ve obviously got the key study started and RA versus - a large indication and we're talking about that second indication as being and maybe driven by one of the other sites of cancer shouldn't be as predominant in RA. But also it makes sense to do something which is maybe at the rear end of the disease as well so maybe takes you some more orphan like disease and then that takes into consideration that feasibility as you plan these studies. So we are marching towards making decisions and initiating that program, but making good decisions about indications, which are developable and are feasible as top of mind. So that we can deliver an efficient program.

[Operator Instructions] Our next question comes from the line of Thomas Smith from SVB Leerink. You may begin.

Just a couple of questions on the Phase 1 data for ATI-450, I'm just wondering within the multiple ascending dose portion of the Phase 1 trial, there any early evidence of tachyphylaxis and obviously it's been an issue with the class historically. Can you just remind us, how quickly tachyphylaxis became an issue in the clinical programs for the other p38 inhibitors?

Yes, so if you look at probably the best place to look for that evidence is in rheumatoid arthritis with the p38 inhibitors and the effect is seen very consistently across all of p38 inhibitors in that disease. What you see is a really nice anti-inflammatory effect that’s demonstrated by a reduction in CRP to about two weeks. And then that CRP comes back towards baseline its probably around about halfway back to baseline by four weeks, and then it's all the way back to baseline essentially by eight weeks. So really you have to go beyond two weeks and before you have a chance to start seeing tachyphylaxis. So the intention of the SAD/MAD was not to get into that investigation, it was to show inhibition in that early stage show that the kinetics look good, and show that the safety would look good. And the next study that we're about to initiate is to investigate exactly that question, can we discharge the risk of tachyphylaxis. Just a reminder about the data that we have so far, what gives us confidence, a confidence in that is some of the preclinical models and maybe one of the more significant of that - is mouse study where we compared the p38 to ATI-450 and the ability to inhibit release of TNF. And we showed that ATI-450 was not associated, but any tachyphylaxis over four weeks, whereas the p38 inhibitors were - supported at some preclinical data to support that this has a chance of being real. And we're going to that study really excited about the potential of discharging that risk.

Right, okay thanks. And one other question just on ATI-1777 I guess just wondering how you're thinking about opportunities outside of atopic derm - potentially something like vitiligo?

This is Neal. Thanks for the question. I think right now we're focused on atopic derm and certainly we think that the proof is there in that indication. And we designed in this particular formulation it's kind of a very targeted approach to AD. Certainly one could consider vitiligo. I think we’re constantly looking at how to allocate capital across the portfolio and I think doing a study in vitiligo out of the gate at the moment. It’s probably not in the immediate plans because remember we're you know ATI-2138 which is an oral that we think is going to be a very valuable place to invest. And so we're just being mindful of where we allocate our capital. So that could be something in the future, but I think for now we're going to focus on AD.

Thank you. And I'm not showing any further questions at this time. I like to turn the call back over to Dr. Neal Walker, CEO for any closing remarks.

Thank you everybody for joining us here this evening. And we look forward to further reporting on our progress throughout the year. Thank you.