XBIT - NASDAQ

Jonathan Kearney - IR John Simard - President and CEO Mike Stecher - Medical Director Dawn McCollough - SVP, Clinical Operations Scott Whitehurst - CFO

Kumar Raja - Noble Life Science Partners Nick Farwell - Arbor Group

Good day ladies and gentlemen, and welcome to the First Quarter 2016 XBiotech Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. Jonathan Kearney. Sir you may begin.

Thank you, Operator. Before turning the call over to management, I would like to make the following remarks, during this call forward-looking statement including declarations regarding management’s beliefs and expectations will be made. In some cases you can identify forward-looking statements by terminologies such as may, will, should, would, could, expect, plan contemplate, anticipate, beliefs, estimates, predicts, reject, intend, or continue or the negative of such terms or other comparable terminology although not all forward-looking statements contains these identifying words. [Technical Difficulty]

Thanks, JK and thank you all for joining us this morning for our first quarter 2016 update. XBiotech has made significant progress during the quarter and I’m looking forward to taking your through these exciting accomplishments. I’ll overview recent research and regulatory developments, then provide an opportunity for Q&A for the audience. At that time our Medical Director, Mike Stecher, our Senior Vice President of Clinical Operations, Dawn McCollough and our Chief Financial Officer, Scott Whitehurst will be available to answer your questions along with myself. I’d like to start with some recent important highlights; first and foremost our lead candidate Xilonix received accelerated review by the European Medicines Agency in April for the treatment of advanced colorectal cancer, and we couldn’t approval as early as fourth quarter this year. I’m also pleased to report that we will be presenting our Phase 3 pivotal trial data at the European Society for Medical Oncology Conference for Gastrointestinal medicine, the ESMOGI on July 1 in Barcelona, and the data for this study should be published around the same time. Xilonix is the first True Human antibody targeting interleukin 1-alpha or IL-1 alpha. For the past six years, we have been undertaking exhaustive clinical analysis of this antibody in clinical trials, and now we are poised for our first drug approval and commercialization in Europe. The ESMOGI conference is an important step for introducing our new candidate therapy and the important new findings to leaders of the European Oncology Community. In the US, our pivotal Phase 3 trial of Xilonix is enrolling on track, and Xilonix everyone mind you has been fast tracked by the FDA for the colorectal cancer indication. At the same time, we continue to advance the rest of our robust pipeline of True Human antibody therapies. We have now been in 10 clinical trials across a range of diseases and medical conditions including nine that involved the clinical use of anti-IL-1 alpha therapy and one therapy using the antibody we call 514G3 for the treatment of all forms of Staphylococcus aureus infections. The 514G3 program just completed its Phase 1 clinical trial and the Phase 2 is underway. In anticipation of the approval and commercialization of Xilonix, we are also intently focused this year on enhancing our manufacturing capacity and quality systems and are on track to open a state-of-the-art facility in Austin in the third quarter of this year. This will allow us to expand our manufacturing capacity to produce nearly 900,000 units of drug per year for sale in the European Union and other markets around the world. Finally we continue to build the XBiotech leadership team with strategic hires. Earlier this month, Scott Whitehurst joined us as Chief Financial Officer. Scott came to us from Amgen where he had deep operational experience in the business. Scott will oversee our financial operations and our Investor Relations outreach. Scott joins me on this call, and I’m delighted to introduce him to you. And just this week Dawn McCollough joined us as Vice President of Clinical operations. Dawn has extensive experience overseeing all phases of global clinical trials in multiple therapeutic areas. She joins us from Biogen, where she led medical research operations and the company’s medical research team. Dawn brings an exceptional level of expertise to our clinical program. As a team, our primary area of focus is on the success of our lead candidate Xilonix. The EMA’s decision to grant Xilonix an accelerated review for the treatment of advanced colorectal cancer is an important milestone for us indeed. As you know, the EMA only grants accelerated review to highly innovative therapies in areas of significant unmet needs. In fact the EMA has taken a high interest in Xilonix, given its unique attributes and has worked very closely with us on the design of our Phase 3 trial. Data continue to emerge from the study and we are looking forward to presenting a complete picture of these findings at the upcoming ESMO conference. I dare say that I believe these findings will not disappoint. Advanced colorectal cancer is indeed an area of tremendous unmet medical needs. The incidence of advanced symptomatic colorectal cancer is growing globally with economic development and aging demographics. The five year survival rate for patients diagnosed with advanced colorectal cancer is under 10%, and one in three patients isn’t diagnosed until their cancer has advanced to stage four. Many patients in this advanced stage of disease have already been through successive rounds of chemotherapy, leaving them so frail that the risk benefit of further therapy does not make sense. Based on the Phase 3 findings, we believe Xilonix therapy would represent a valuable treatment strategy for patients with advanced colorectal cancer. Two quickly recap the results of our recently completed Phase 3 clinical trial in Europe, let me tell you that patients treated with the antibody therapy Xilonix had failed all conventional therapies and had inoperable or metastatic disease. Patients were also required to have multiple debilitating symptoms of disease, each of which correlated with poor prognosis. In this study, among a patient population with advanced disease, Xilonix was able to control tumor related symptoms associated with morbidity and death. In fact we found that a 76% relative improvement in response rate occurred in patients treated with Xilonix as compared to placebo. Furthermore, virtually all secondary measures were significantly improved in the responders to Xilonix compared with placebo, and that included deadly symptoms like paraneoplastic thrombocytosis, systemic inflammation, disease progression and even serious adverse events. Improvements were found in virtually every measure that we looked at for the responder group. As noted earlier, we are very pleased that this pivotal Phase 3 data will be unveiled for the first time during the European Society of Medical Oncology’s World Congress on GI cancer. It really is the premier event for gastrointestinal cancer and its taking place beginning June 29 in Barcelona. Based on these results that I’m describing in a [crosier] way, you have rapidly achieved critical milestones towards commercialization and towards getting this treatment for the patients who need it. In March we submitted our marketing authorization application to the EMA. The agency subsequently confirmed eligibility of the application, and only several weeks later the agency granted us an accelerated review, meaning a decision on Xilonix approval could commence early as the fourth quarter of this year. So we had very strong progress towards Xilonix commercialization this quarter, and regarding the US pivotal Phase 3 study also in colorectal cancer, enrollment there is proceeding on track. I’d like to briefly mention now the fundamental science that entertains Xilonix. Xilonix is what we call a True Human antibody that was derived from a human being with natural immunity to interleukin-1 alpha. This is quite remarkable since IL-1 alpha can be produced by cells in the body to promote in some cases disease causing inflammation or in other cases the growth in spread of tumors. IL-1 alpha also serves as kind of an alarm signal mediating symptoms associated with advanced cancer such as metabolic changes that can cause muscle loss and weight loss, fatigue and anxiety. In addition to advanced colorectal cancer, we have seen evidence of the activity of this therapeutic antibody in other cancer tumor types and we firmly believe that the anti-IL-1 alpha therapy could be relevant in a broad range of malignancies. We are also rapidly advancing anti-IL-1 alpha therapy in other conditions in which inflammation plays a critical role, including diabetes, cardiovascular disease and in the dermatology space. If you take a look at our pipeline, everything you see here shaded in grey is the result of our work in IL-1 alpha inhibition. It is indeed a pipeline in an antibody. We believe we have the opportunity to improve the standards of care in oncology and a number of other diseases where inflammation plays a crucial role in exacerbation of the disease process. In terms of breadth and depth, XBiotech’s pipeline rivals those of far larger and long established pharmaceutical companies. Not only are we in the clinic in nine indications, we have accelerated review for Xilonix in Europe. Three of our therapeutic programs have received fast track designation from the FDA in colorectal cancer, peripheral vascular disease, and in Staph aureus bacteremia. At the same time, we continue our discovery work to find new antibodies and build our library of potential product candidates to treat serious and life threatening conditions, including infectious diseases like C. difficile or influenza or herpes. Our most exciting work is built upon on a proprietary True Human technology. As you know, all currently approved monoclonal antibodies are engineered, in other words created in a test tube. Our therapeutic antibodies are truly human derived directly from humans with natural immunity to disease and are not modified, change their targeting or activity. Because our antibodies are derived from healthy people, they have the potential to not only be efficacious but to be effective without the serious side effects that are often associated with other therapies including so called fully human antibodies. The True Human technology thus forms the basis for our entire discover program and pipeline, and the possibilities seem endless. We are certainly proud of what we’ve been able to accomplish in a relatively short amount of time. We believe this speaks to the power of the capabilities we have developed over the last decade to identify, isolate and manufacture True Human antibodies, which are demonstrating the potential to improve the lives of millions of people around the world. That brings us to our important clinical work in infectious disease. A rapidly advancing antibody 514G3 targets serious often life threatening forms of Staphylococcus aureus bacteremia, including Methicillin-resistant strains or MRSA. Staph Aureus is the second most common overall cause of healthcare associate infections, and efforts to develop effective vaccines or other therapeutics have repeatedly failed due to the bacteria’s immune engaging mechanism. Our 514G3 antibody was developed from a human donor with natural antibodies that proved to be effective at neutralizing MRSA and non-MRSA forms of staph. 514G3 knocks out the principal immune evasion mechanism of the bacteria and allows white blood cells to detect and destroy is naturally. In the first quarter of this year, we completed the Phase 1 dose escalation study for 514G3 and we saw no dose limiting toxicities. We also had a notable finding that in the small population of patients we look at the incidence of serious adverse event was 50% less in the treatment on as compared to placebo. Now that means that for all causes of serious adverse events, patients had improved. We have now begun to enroll patients in the Phase 2 portion of the study. Patients will be randomized to receive either the highest dose of 514G3, which we had determined in the Phase 1 portion of the study, plus standard of care of antibiotics or placebo plus antibiotics. Efficacy measures include time to clearance of bacteremia. As measured by blood culture, we are looking at duration of fever, length of hospitalization and ultimately mortality associated with the infection. We are excited about advancing in this program as quickly as possible to address an urgent need for safe and effective therapies for these life threatening and dreadful infections. To be able to fully commercialize Xilonix or our 514G3 product ultimately, we are looking forward to the completion of a new manufacturing facility that will be the prototype for all future commercial production operations for XBiotech. And with this new facility, we are nearing completion at our new Austin campus and we anticipate a move-in date towards the end of the third quarter. Once we move in and start producing drug, we expect to file for registration of new facility soon thereafter, as early as the fourth quarter of this year. Review of this registration package for the new facility and approval will follow standard timelines for the EMA, which could take approximately 9 to 12 months. At that point, we can start using product from the facility for sale in the European Union and other markets around the world. I will say a few words now on our financials; from inception through March 31 of this year, the company has accumulated a deficit of about $141 million. During the past quarter, the company had about 10.3 million in operating expenses, which was about 2 million more than our expenses during the first quarter of 2015. Additional expenses during the past quarter were mainly attributed to nearly 3 million of capital expenditures relating to new equipment purchases for our commercial production facility. [Technical Difficulty]

Hello, I think we are back live now. We seem to have some electrical activity in the area and we’re having trouble with our phone line. But we’ll just resume from where we left off.

Nevertheless as of March 31, the company had cash and cash equivalent of approximately $78.2 million. We are squarely on budget for the quarter and our cash runway remains adequate to achieve the major clinical and commercial milestones that we have been discussing. From a patent portfolio perspective, we are in a strong position with approximately 50 patents granted or allowed and more than a 100 pending applications worldwide. Our strategic approach is to cover products of multiple layers of patent protection through overlapping patent families and aggressive continuation division of strategy. Most of these patent families will not expire before 2029. To sum up, we continue to make significant progress. Xilonix extensive pipeline and our new manufacturing facility are all advancing on schedule and we are expanding our leadership team to help drive this success. We’ve got some important milestones ahead, unveiling our Phase 3 at ESMOGI, receiving approval by the fourth quarter in Europe this year, completing our Phase 2 trial and staff inceptions, and discovering new candidates for breakthrough therapies in infectious disease. All are on the horizon and we are very proud of the progress we’re making and look forward to bringing our True Human antibody therapies as soon as possible to the patients who need them. In closing, I’d like to remind you of our over-riding vision, which is to become a leading developer of novel breakthrough therapies, creating an entirely new class of medicines that treat diseases with the safety profile of natural immunity. Treating patients the way we would like to be treated as patients. We are doing this by applying our True Human approach to create a broad portfolio of therapeutic antibodies that have been derived from healthy people. In the near term, we will continue to rapidly advance our lead candidate Xilonix as well as product candidates targeting a range of inflammatory and infectious diseases. We are preparing for our first approval and we are putting the infrastructure in place from our leadership team to a new state-of-the-art manufacturing facility to succeed. In the long term, we will leverage the expertise of our current and expanding leadership team to aggressively expand our product portfolio of True Human antibodies. It’s an exciting time and we truly appreciate your interest and support. I would now like to open the call to questions from the audience. Operator, please go ahead. Thank you.

[Operator Instructions] And our first question comes from the line of Kumar Raja of Noble Life Science Partners. Your line is open. Please go ahead.

So for Xilonix what are the next steps in the EMA review process before the [CHMB] grants their opinion, and also what’s going on in terms of preparation for a launch and are you guys planning in Europe on your own or are you guys looking for any collaborations and partnerships there and anything you can provide on that?

Mike you want to talk about the next step?

Sure. So the EMA timelines are all published on their website. We basically submitted our package. It’s been validated and now they are reviewing it. And while that’s happening they are scheduling audits both of as a sponsor and of the investigative site, and they will be submitting back to us a list of questions and then we will have -- then the clock will stop and we’ll have an amount of time to answer those questions, and then once they’ve received those questions, they will take all the information and render their final opinion. So basically, we’re in the midst of that process right now.

And the second question was regarding commercialization. We are working with a contract sales organization that has a full service capabilities to help us with our regulatory pricing and product launch activities that we are currently planning with them in Europe, so that’s all underway and on schedule.

In terms of pharma partners are you looking pharma partners or that’s something --.

No, we plan to launch this product together with our sales organization that we are working with directly. It doesn’t include partnerships in non-EU jurisdictions, but in the EU proper we have a plan for direct launch Kumar.

And in terms of Xilonix development in other cancers and also the potential for combination trials, anything going on in that direction there?

Yes, there is. Mike you want to talk a little bit about the non-small cell?

Yeah, we’ve mentioned on past calls, we’re collaborating right now with the NCIC. We’re developing a protocol to use Xilonix in combination with Tarceva, which is an EGFR inhibitor and this is based on some data that we had published last year showing that patient that had failed EGFR inhibitors prior to receiving Xilonix did much better than those who had not. So they had longer survival, they had better increases in lean body mass and in symptoms and bigger reductions in IL-6. So, it really showed us that there was a population there and that seem to benefit maybe a synergy using the two drugs together. And this is based on EGFR inhibition up regulation Class-1 MHC, but also with the inflammation in the tumor micro environment there is immunosuppressive effect. So checkpoint inhibition, so we think that by blocking this inflammation, we may allow immune surveillance to be more effective against these tumor cells that are already prying for disruption. So that study is going to start in the second half of this year.

Okay, great. And for the (inaudible) Conference what all data and analysis can we expect there?

Well we’re going to be giving the full analysis of all the primary endpoints and secondary and some other very interesting findings that we’ve had in terms of survival.

[Operator Instructions] Our next question comes from the line of Nick Farwell of Arbor Group. Your line is open. Please go ahead.

I would appreciate if you could provide us a clinical timeline for 514?

Yeah, I’ll direct that question to Dawn, who is only with us a short time, but she’s got the bull by the horns and she can give a little more color on that.

Thank you very much and good morning to you as well. I’m very pleased to be on board with such an exciting organization. So Phase 1 as you’ve heard we’ve reported out that there’s no (inaudible) related toxicities and basically we’re also reporting out less than 15% AEs than the placebo group. That allowed us to proceed to Phase 2. We’re on time and on trend line for enrollment of the Phase 2 work. We’ll be starting Phase 3, I would say third quarter to fourth quarter of this year.

Dawn, so in terms of third or fourth quarter, meaning you’ll provide final data or read out some time we’ll say September, October, if that’s the appropriate time line. And then what is the time line for Phase 3 and when you’ll have final data?

We haven’t planned that study. The powering of that study ultimately is driven by the details of the ongoing program. So, that’s something that has to be determined yet.

And John, can you provide us some guidance, some cash flow guidance or cash burn; however you want to describe it for the balance of the year, especially in the second and third quarter, given the ramp up in manufacturing?

Well, we are on budget that we’ve discussed in the past. Our cash run rate will take us through 2017 and through these major milestones. So all is according to plan, indeed you’re right Nick the expenses that we’re incurring with the completion in the new facilities, it is causing an accelerated burn, but we anticipated that that’s the exposure we had to take to be ready for commercialization here at the end of this year.

So the general being on budget through ’17 includes, presumably in August includes your direct marketing effort in Europe presumably started up we hope at the end of this year or early ’17?

That’s correct. And you know one of the fabulous upsides of using an organization like we are in the launch of the product is that it defers a lot of the capital and organizational cost to that organization and we pay more as an ongoing cost. So they recur their capital outlays overtime through a margin that they charge us for the operation. So it’s a great way to differ cost for us and get us revenue without breaking the bank.

[Operator Instructions] And I’m showing no further questions at this time. I would now like to turn the call over Mr. John Simard for closing remarks.

Thank you all for attending this morning. We appreciate that and we look forward to giving you some more good news in the near future. Stay tune for our ESMOGI in the publication of this data. Thanks again and all the best.