XBIT - NASDAQ

Meg Lewis - John Simard - Founder, President & CEO Mike Stecher - Medical Director

Good morning, ladies and gentlemen and welcome to the Q2, 2016 Xbiotech Inc. 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 over to Meg Lewis.

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. Forward-looking statements are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. The risks and uncertainties are subject to the disclosures set forth under risk factors in XBiotech’s SEC filings. Forward-looking statements are not guarantees of future performance and actual results of operation, financial condition, and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this call. Any forward-looking statements that we make on this call speak only as of the date of this call. XBiotech assumes no obligation to update its forward-looking statements whether as a result of new information, future events or otherwise after the date of this call. At this time it is now my pleasure to turn the call over to John Simard, Founder, President and CEO of XBiotech.

Thanks, Meg and thank you all for joining us this morning for our second quarter and 2016 update. I’m going to provide a brief review of recent developments, and then provide an opportunity for Q&A for the audience. At that time, our Medical Director, Mike Stecher and I will be available to answer your questions. I’d like to start with some recent highlights pertaining to our European study. In July, XBiotech presented data from the pivotal European trial for Xilonix at the European Society for Medical Oncology World Congress in Barcelona, Spain. An oral presentation was made there by Dr. Tamas Hickish and there we also met with key opinion leaders to discuss our findings. It was a very interesting meeting sure there may be some questions to follow. More recently, we had an in person meeting with the European regulators in Europe to discuss our marketing authorization application, and the application I can tell you remains on schedule and we are currently devoting a good deal of effort to advancing the process. On other fronts, we continue to move forward with our Global Phase 3 study in colorectal cancer. We call this our XCITE study, which is proceeding under FDA fast track designation. Our enrolment in this study remains on track and we anticipate completing enrolment around years’ end. Recently, data and monitoring committee meeting was held following randomization of 400 subjects. This is a standard process to evaluate the study principally for safety and they found no safety concerns and allow the study to proceed as planned. Another DMC meeting is scheduled to occur after 600 patients have been enrolled. We do have another oncology study in non-small cell lung cancer that has actually been in the planning stage for some time. We are organizing this study with the National Cancer Institute of Canada. The plan is for them to launch a Phase 2 randomized study to access Xilonix in combination with an agent called Tarceva. The combination therapy with Tarceva was inspired by our previous Phase I/II clinical results, which suggested a potential for positive interaction with the anti body and the agent. This is what we call an investigator sponsored study and the launch has been a little more complicated than usual with a lot of discussions regarding the study design, however we are close to getting this launched and we’ll let you know when we get that going. Now regarding some of our other clinical programs for infectious disease, the Phase 2 study for the treatment of staph aureus bacteremia is on track for enrolment completion by the year’s end. We recently expanded the study as planned into Taiwan and Korea, this took us a little longer than anticipated, but it was an important milestone for some of the kind of infections we are hoping to see in this study. In fact, in that region in Asia, we understand that bacteremia is particularly aggressive and that is the kind of disease we are looking for with the therapy. So we will see now if there is a good patient access in the region and let you know in the next call. In the area of Dermatology, enrolment of our Phase 2 pilot study in subjects with Pyoderma Gangrenosum has completed. Pyoderma is a potential orphan indication and is part of our demonstration of the overall therapeutic role for interleukin-1 alpha antagonism in dermatological disease. As you all probably know, we have completed a number of studies in this area and this is developing again what is really an orphan application as part of our regulatory strategy to get us approved in this area. So the plans to pursue our regulatory path relating to Pyoderma Gangrenosum will be under evaluation with respect to the data read out that is coming in the coming weeks. We also have a Phase 2 study in hidradenitis suppurativa [ph] that has completed enrolment. This is an investigative sponsored study that will follow patients out for about another six months and read out we would expect shortly after that. Again, this is a very serious type of skin disorder and is a part of the identification for us and an orphan indication is relevant. Changing gears now from the clinic, our manufacturing expansion is nearing completion. Over the quarter, construction continued largely event free. We anticipate final building completion in receipt of our occupancy permit this month in fact. I am extremely proud of the job done by our team here at Xbiotech who had designed and built what will really be a ground breaking example of the state of the art in biologics manufacturing. We’ll actually be having a ground opening event around the middle of September, and we’ll let you know the details soon. Manufacturing operations and validation will start very soon after our opening events to build the registration package for the new facility, and in the end, I can say that we will end up very close to our budget on the project. We’ve had some activity and business development in the past quarter. We announced the execution of an exclusive licensing agreement with Megapharm Limited to commercialize Xilonix in Israel for the treatment of Advanced Colorectal Cancer. Megapharm is an important oncology player in Israel. They will pursue the regulatory activities now in Israel to facilitate product launch in that region based on the outcome of the EU process. The use of regional expertise to help distribute Xilonix is part of our global distribution strategy. And according to our deal with Megapharm, we’ll pursue a registration for us and purchase drug from Xbiotech at a transfer price that will slide [ph] based on the sales performance of the product. Regarding our team at Xbiotech, we have been in the considerable growth phase and been building our talented group here through all areas of operations in the past year. In June, we appointed Trey Benson as our new Commercial Head. Trey brings more than 16 years of marketing and commercial development experience in the pharmaceutical industry and is coordinating commercial efforts. On a down note, we would like to thank Scott Whitehurst for his achievements during his short tenure with Xbiotech as CFO. Fortunately, health developments with him have made it -- have forced a difficult decision upon him to step down from his position as CFO and he will be retiring. We do wish him well and thank him for being a part of us for the short time. We are now working to find a suitable replacement. Regarding financials from inception through June 30th of this year, the company has accumulated a deficit of about $155 million. During the past quarter, the company had about $13.6 million in operating expenses, which was about $7 million more than our expenses during the second quarter of 2015. Higher expenditures compared to last year are largely due to increased clinical trial costs associated with the global Phase 3 study, which is quite large and the growth in headcounts, which as I mentioned has seen expansion of the workforce in all areas. As of June 30th, the company had cash and cash equivalents of approximately $64.7 million and our cash run rate remains adequate to achieve our major clinical and commercial milestones. With that, I would like to open the call to questions from the audience. So, I will ask the operator if you would please go ahead. Thank you.

[Operator Instructions] And your first question comes from the line of Kumar Raja. Your line is open.

Good morning, John. Congratulations on all the progress. I have got questions here. First for the XCITE study, when do you expect the first planned efficacy analysis and what efficacy parameters will you be looking at during this efficacy analysis?

Thanks, Kumar for calling in. Mike will answer that for you.

So it’s typical to know exactly when to expect the first efficacy. We are following the event rate very closely. Right now we’re projecting that it could occur anytime between the very end of the year and Q1 of next year. So, as you know, the efficacy analysis is based on the number of events. As far as the fixed size, we are looking for, is the same as -- what we would have to see at the end of the study. We just have to be very highly significant so that the p-values what drives that. So it would be a difficult bar to reach on the first interim but we are hopeful and so, sometimes between end of the year and then Q1 of next year.

And for European review of Xilonix, what can you guys say about the interaction with the European regulators and also thoughts on why there was a change from expedited review to standard review and also the timing for the publication of the Eurpean data?

So, we’ve had a clarification meeting with the regulators and this is a standard meeting where we are able to ask questions and those very productive, we are able get some more details as to what they are thinking and we are able to give them some insight into our data. As far as the change in status, again this was something that we found to be pretty standard with the novel endpoint that they needed some additional time to review responses. As far as the publication that’s currently under review and we hope to have something to announce soon.

And final question on the combination trial with Tarceva, non-small cell lung cancer. What are your expectations in terms of safety profile there? Obviously, you are combining two drugs there. You said that you guys are seeing some positive interaction in terms of efficacy. What effects are you seeing in terms of safety there?

So the study hasn’t started yet, but our anticipation would be that there will be no change in the safety profile of the drug combining it with Tarceva. There is no reason to believe that combination with EGFR inhibitor would cause any change in the adverse event profile of Xilonix. We are quite hopeful though that it might improve the safety profile of Tarceva though as you know skin toxicity is a major issue with EGFR inhibitors. And as we mentioned on the call today and several times before, we’ve seen some pretty good results in dermatology, reduction in psoriatic, skin lesions and acne. So, we would hope that potentially we could see an improvement in the safety profile of Tarceva along with an improved efficacy combination.

Okay. Great. Thanks for taking my questions.

Yes. Thanks again for calling in this morning.

[Operator Instructions] Your next question comes from the line of Tom Costas, Private Investor. Your line is open.

Hello, yes. My name is Tom Costas. I’m private investor. I had read an article about the European Society of Medical Oncology questioning your Phase 3 study and I was wondering is there anything more to say about their opinion and how you plan to address that?

Well, people are welcome to their opinions. We didn’t see anything credible or illuminating in the review by -- that was put out by the ESMO individual. One of the things I should note is he failed to mention his affiliations with competitor drug products. He is the spokesperson for Regorafenib. And at the Regorafenib launch, he admitted that statement. And Regorafenib is really the target for us in the marketplace and will be the loser should we get approved. So there is special interest in that individual and we didn’t see any new insight or analysis there. So there wasn’t really too much that we saw to address.

But do you anticipate his opinion has any effect on the medical community in Europe adopting your drug, should it be approved?

I can’t really comment on that. I don’t know that one individual’s opinion could influence an entire medical community but I will leave that up for you to ponder. I really couldn’t speak to that.

All right. Well, thank you very much.

Thank you.

Your next question comes from the line of Manish Pal [ph] from MHP Capital. Your line is open.

Thank you. Good morning. I just have two quick questions. One is can you talk about the time of the disposition for European disposition? Is that Q4 still because in the press release it says Q4 and then your 10-Q says anticipated by probably Q4? So is Q4 still looking like a good date for you guys for Europe?

Yes, it is. Yes, it is.

Okay. Great.

Yes. I’m sorry. The language isn’t definitive but that is the lower expectation.

Okay. And with regard to the endpoint, I know when you did the trial the endpoint was already discussed with the European Union. Now they are asking for more time, which is why they changed the disposition of the trial -- of the expedited process. Was there a change with regard to that, or was that something that just they just changed their mind?

No, there is no change of the mind. It’s interesting the way that organization is set up is you go to a body for a scientific advice in study design. And we spent a considerable amount of time with them in that process. But when you move to the registration part of it, it’s a completely different group and even though there is some communication between them, the new group has to learn, relearn the study design and the data and why it was done and how it was done all over again. So it’s not like this group was familiar with it.

Okay. That helps a lot. And then just really quickly, I know you are not in partnership this quarter. Can you talk about your pipeline of other partnership opportunities given your robust pipeline of drug candidates? Thank you.

Yes. Sure, we have a number of discussions ongoing. Part of our core strategic concept here in this company was to put our own legs under us, right. And that goes with our manufacturing, our ability to take drugs to market through our internal process from bench to market. So when we look for partnerships we look for those that really suit us not for things that are short term band-aids or ways to get us to the end, it’s really things are strategic fit. So, we are engaged in that and we do have a number of interesting discussions going on that does support our strategy.

Okay. Thank you.

Thank you.

Ladies and gentlemen, there are no questions at this time. I now like to turn the conference back over to John Simard.

Thank you again all of you for spending some time with us this morning. I hope that was of some help and I do look forward to our next opportunity to update you and hopefully some of you can come to our new facility opening here next month. Have a nice day and until we meet again.