Good day, and thank you for standing by. Welcome to the Aclaris Therapeutics First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Kevin Balthaser. Please go ahead..

Thank you. I am Kevin Balthaser, Chief Financial Officer for Aclaris. Please note that earlier today, we issued a press release highlighting our first quarter 2024 financial results and other business matters.

For those of you who have not yet seen it, you will find the release posted under the Press Releases page of the Investors section of our website at www.aclaristx.com.

In addition, we will be referring to a slide deck entitled ITK Portfolio, which can be found on the Investor Presentations page of the Investors section of our website and furnished as an exhibit to our Form 8-K that we filed with the SEC earlier today.

Joining me today for the call are Neal Walker, our Interim Chief Executive Officer and Joe Monahan, our Chief Scientific Officer; Wally Smith, our Scientific and Business Development Consultant will also be available for the Q&A portion of the call.

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 section of Aclaris' Form 10-K for the year ended December 31, 2023 and other filings Aclaris makes with the SEC from time-to-time. These documents are available under the SEC Filings page of the Investors section of our website at www.aclaristx.com.

All 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 can be accessed under the Events page of the Investors section of our website. I'll now turn the call over to Neal Walker..

Thank you, Kevin. Good afternoon, everyone. Last quarter, we announced that in addition to various cost cutting measures and an overall review of our business strategy, we were also reevaluating the indication selection for ATI-2138, which is our oral small molecule ITK JAK3 inhibitor.

Today, I'm pleased to announce that we have decided to move ATI-2138 forward in a proof-of-concept study in moderate to severe atopic dermatitis. Atopic dermatitis is a Th2 cell driven disease and ITK inhibition blocks T cell differentiation, activation and production of IL-4 and IL-13.

In fact, there is extensive literature on the role that ITK plays in regulating the signaling pathways that are central to the production of various cytokines by both Th2 cells and mast cells. Today, we will provide an overview of ATI-2138 and the data we have generated thus far.

Joe?.

Thank you, Neal. ATI-2138 is a covalent inhibitor that targets T cell kinase ITK as well as JAK3. ITK is a kinase downstream of the T cell receptor and is important for the regulation of T cell function, while JAK3 is required for the signaling of cytokines that utilize the gamma common receptors such as IL-2, IL-4 and IL-15.

ITK through effective targeting of these 2 critical T cell and cytokine associated pathways provides the potential to treat a broad set of autoimmune diseases.

ATI-2138 was generated from our proprietary connect drug discovery platform using structure based drug design, focusing on molecules with high reversible affinity containing electrophiles that target the ATP site cysteine positioned similarly in ITK and JAK3.

As shown in Slide 5, covalency and engagement of Cys442 was demonstrated from the proprietary crystal structure of the ATI-2138 ITK complex. ATI-2138 also binds to and engages Cys909 and JAK3, the only JAK Isoform with this residue in the ATP site.

This cysteine in JAK3 has also been effectively targeted by the drug ritlecitinib, which is Pfizer's recently approved therapy for alopecia areata. ATI-2138 differentiates from both ritlecitinib and reversible JAK inhibitors, thereby demonstrating unique pharmacology and best-in-class potential.

As shown on Slide 6, ATI-2138 has similar high potency for inhibiting both ITK and JAK3 signaling in contrast to ritlecitinib, which is less potent on both pathways and demonstrates JAK3 biased pharmacology. ATI-2138 is selective for JAK3 with no meaningful crossover to other JAK Isoforms.

The restricted expression of JAK3 to hematopoietic cells coupled with the lack of crossover to other JAKs may result in improved safety profile for ATI-2138 relative to broad spectrum reversible JAK inhibitors. Clear differentiation from the covalent inhibitor ritlecitinib is demonstrated in human old blood studies shown on Slide 7.

The panel on the left compares ATI-2138 and ritlecitinib in ITK dependent anti CD3 stimulated interferon gamma production, while the right hand panel compares 2 compounds in JAK3 dependent IL-2 stimulated interferon gamma release.

ATI-2138 is 44.4 times more potent than ritlecitinib in blocking ITK dependent cytokine production and 5.44 more potent in the JAK3 dependent readout. The comparable whole blood potencies of 2138 on ITK and JAK3 translated to similar impact on the respective PD readouts in the human SAD and MAD studies.

In contrast, at the FDA recommended 50-milligram QD dose of ritlecitinib for alopecia areata, Exposures would be expected to inhibit JAK3, but have little impact on the ITK pathway. Now why is ITK an important target? Slide 8 demonstrates the current understanding of the role of ITK in T helper cell differentiation and activation.

Of the TEC kinases, ITK alone is required for the differentiation and activation of Th2 and Th17 cells and ITK knockdown or inhibition results in skewing of T helper cells from the Th2, Th17 phenotypes to the Th1 T reg phenotypes.

ITK inhibitors have the potential as effective oral drugs to treat diseases driven by Th2 and/or TH17 cells, such as atopic dermatitis. ATI-2138 has demonstrated activity in a number of preclinical immune inflammatory disease models.

Oral activity at various doses of ATI-2138 in rat adjuvant induced arthritis is shown on Slide 9, evaluating ankle swelling on the left and histology on the right. Similar strong activity is observed with doses in 5 and 15 milligrams per kilogram BID as well as 30 milligrams per kilogram QD.

Activity was also observed in the adoptive T cell transfer model of colitis in the mouse as shown on Slide 10. ATI-2138 formulated in CHOW protected optimal and distal colon as well as the ileum from inflammation to a greater extent than the anti-IL-12p40 antibody.

Preclinical studies supported the advancement of ATI-2138 into Phase 1 SAD and MAD clinical studies as summarized on Slide 11. The drug was generally well tolerated had favorable PK characteristics and demonstrated dose dependent modulation of ITK and JAK3 pharmacodynamic readouts. Slide 12 shows the PK characteristics of ATI-2138 from the MAD study.

Exposures following the final dose on day 15 of the med study are shown on the left and dose proportionality is shown on the right. Linear PK is observed with ATI-2138 following 2 weeks of dosing, with steady state dose proportionality observed for both Cmax and AUC.

Slide 13 shows the pharmacodynamic results across the 2-week dosing period in the MAD study.

The left panel is measuring the inhibition of ITK dependent IL-2 mRNA following ex vivo stimulation in blood, the middle panel JAK3 dependent interferon gamma production and the right panel interferon gamma production following dual stimulation of the TCR and JAK3 pathways.

ATI-2138 demonstrated dose and time dependent inhibition under all stimulation conditions. 50% to 90% inhibition of the PD readouts was observed with doses from 5 to 40 milligrams BID. Slide 14 shows exposure response analysis from the 3PD readouts and compares the translation from preclinical human whole blood analysis.

These data demonstrate a strong concentration dependent correspondence between EC50s from both the SAD and MAD clinical studies and in vitro human whole blood studies across the 3 stimuli. As expected, similar potency is observed for the ITK pathway, JAK3 and dual stimulation inhibition.

Finally, exposures generated from the 5 milligrams to 40 milligrams BID dosing were sufficient to provide blockade of both pathways. Successful completion of the Phase 1 studies effectively positioned ATI-2138 to advance into Phase 2. The first indication in which ATI-2138 will be evaluated is atopic dermatitis.

The rationale for which is shown on Slide 15. The dual TCR JAK3 specificity of ATI-2138 effectively positions it for treatment of atopic dermatitis.

The important role of ITK and Th2 cell differentiation and activation, coupled with the efficacy observed with the biologics targeting the Th2 cytokines IL-4 and IL-13 supports the potential for ATI-2138 as an oral alternative to these biologics.

Additionally, inhibiting JAK3 should add complementary efficacy through blockade of IL-2 and IL-4 signaling, as evidenced by the efficacy of a number of JAK inhibitors in atopic dermatitis. The design of the atopic dermatitis study is summarized on Slide 16.

This study will be an open label 12 week 15 patient study to examine the safety, PK and early signs of efficacy of ATI-2138 in patients with moderate to severe atopic dermatitis. In addition to the clinical readouts, there will be a heavy emphasis on PD markers of pathways and disease in this study.

Moreover, we plan to demonstrate the importance of ITK inhibition as a differentiating feature of our molecule. In summary, as shown on Slide 17, ATI-2138 is a potential best in class dual inhibitor of ITK and JAK3. Non-clinical potency, activity, ADME and safety studies supported moving the compound into clinical development.

The positive data from the SAD and MAD Phase 1 studies provided clinical support to advance ATI-2138 into a proof-of-concept Phase 2 study in moderate to severe atopic dermatitis. Aclaris is expanding our efforts in the ITK pathway beyond ATI-2138 with discovery efforts focused on next generation ITK inhibitors.

While ITK has been of interest to pharmaceutical companies for over 20 years, it has proven to be a difficult to drug kinase as evidenced by the efforts outlined on Slide 19.

The research described on this slide have focused on ATP competitive inhibitors and due to poor biochemical efficiency and pharmaceutical properties, they have not advanced in clinical development. More recently, covalent inhibitors of ITK have been described with the Corvus CPI-818 in early clinical development.

Our next generation efforts are focusing on selective inhibition of ITK and eliminating crossover on JAK kinases as shown on Slide 20. Selective targeting of ITK should provide effective modulation of both Th2 and Th17 cell functions with the potential of treating atopic and Th17 driven diseases as summarized on Slide 21.

Human and mouse genetic data, as well as pharmacological inhibition strongly supports a role for ITK in T cell biology and pathophysiology. This coupled with the fact that dysregulated T cells are involved in a number of immune inflammatory diseases validate selective inhibitors of ITK as an approach to treat a broad range of indications..

Thank you, Joe. I'll now turn it over to Kevin to discuss our financial highlights for the quarter..

Thank you, Neal. We continue to maintain a strong balance sheet with a robust cash balance and 0 outstanding debt. We ended the first quarter with cash, cash equivalents and marketable securities of $161 million, which was compared to $182 million at year-end. Our cost containment initiatives are on track and progressing nicely.

Of our total cash expenditures in the first quarter, approximately $14 million was related to nonrecurring payments, including discontinued research and development programs, severance benefits for individuals impacted by the reduction in force announced in December, and payments owed to third parties related to the upfront amount received under the Sun Licensing Agreement.

Activities associated with discontinued programs and the reduction in force are expected to be substantially completed by the second quarter of 2024.

As a result, we expect our cash expenditures on a quarterly basis for the remainder of the year to be significantly reduced when compared with the first quarter without giving effect to any potential business development transactions.

We continue to evaluate business development opportunities across our portfolio of assets to be a source of non dilutive capital in the near-term. With that, I will now turn the call back over to Neal for closing remarks..

Thank you, Kevin. We are pleased to provide you with a portfolio update on our decision to shift to atopic dermatitis as the first proof-of-concept indication for ATI-2138. As a reminder, we are still in the process of reviewing various strategic options moving forward and look forward to providing additional updates in the near-term.

Kyle, we would now like to pull for questions..

[Operator Instructions] And for our first question, it comes from the line of Roger Song from Jeff..

Maybe starting with the biology question, so for the ITK and the JAK3 understanding you're compared to the pan JAK inhibitor has a lot of the advantages. Just curious how do you think about those ITK and JAK3 in terms of their having synergistical additive effects when you inhibit both for those preclinical models.

Just curious if you see any have you compared just JAK3 or ITK alone kind of in the preclinical model? And then I have a follow-up for the clinical question..

Yes. Thank you, Roger. I'll start to Joe and or Wally.

But, yes, that that's one of the attractive things about the molecule and was one of our original hypotheses about it that if we could inhibit JAK3 and then layer on maybe the hyper boost with ITK, particularly in an indication like atopic where ITK really targets the Th2 effect, we ought to see a more robust effect there.

And so we certainly tested that hypothesis out in preclinical models. And actually, I know you didn't ask this, but going forward, in this initial proof-of-concept study, we'll endeavor to tease out that differential effect through looking at various pharmacodynamic markers to just definitively prove out the ITK contribution from that molecule.

And maybe Joe if you want to add anything there?.

The only thing I would add is that we have profiled JAK3 more selective inhibitor ritlecitinib versus ATI-2138 in the adoptive T cell transfer model of colitis. And that equivalent doses and exposures, we did see a boost in anti inflammatory activity with 2138 compared to ritlecitinib..

Compared to JAK3, more selective compound. Maybe that's the ITK component, but curious to see the PD marker in the Phase 2 for sure. And then in terms of the Phase 2a, the planned Phase 2a, you're selecting the 10 milligrams BID as a dose. Understanding you want to be more capital efficient to test the one dose.

Just curious, do you think that dose is the best dose you can tell from a preclinical? And also what the other potential dose, if that dose sees some signal, but what's the other dose potentially you will test in the future clinical trial? And then also for the Phase 2a, any powering for those efficacy? What is the ultimate, kind of efficacy goal for the Phase 2a in order to move forward? Thank you..

Yes. So it is open label. So our main objective is to show the absolute treatment effect. And I think to be fair in this indication, we want to see something north of some of the standard end market JAK inhibitors. I mean, from my perspective, they've set the bar in AD from an efficacy perspective.

And historically, we kind of understand the placebo rate.

And then the second or the first question, Joe, do you want to tackle that one?.

Yes. So with regard to the dosing, first of all, we do have the ability to go higher than 10 milligrams BID if we choose to. We identified 10 milligrams BID as our dose in this study based on exposures in the various preclinical disease models that we looked at, coupled with the data in with ritlecitinib in the clinical exposure that they had.

I think with this mechanism, it doesn't seem to be driven by Cmax, it doesn't seem to be driven by Ctrough, it more likely is driven by a Caverage. And at the 10 milligrams BID, we have equivalent potency at Cmax as ritlecitinib does against JAK3, significantly more exposure and potency against ITK as we described.

And at C average, we have higher level of inhibition of both ITK and JAK3 at this 10 milligram BID dose. So based on the preclinical model and based on comparison to ritlecitinib, that's how we chose the dose..

[Operator Instructions] And for your next question, it comes from the line of Thomas Smith from Leerink Partners..

Just on the preclinical data, I appreciate all the models in comparison to ritlecitinib.

I'm just curious if you've generated any data comparing 2138 versus upadacitinib and selective JAK1 inhibition preclinically? And any thoughts on how 2138 is likely to stack up in an indication like atopic dermatitis versus upadacitinib?.

Yes. I think it's, I think the X factor here is the ITK inhibition. And when you look at the literature on ITK inhibition in general, it really skews to inhibiting the Th2 cytokines. So it directly acts on IL-4, IL-5, et cetera. And so we really think that that is going to give the JAK3 side a boost.

Joe, Wally, I'm not aware of direct comparisons between a pure covalent JAK3 versus JAK1 specifically in AD. But I think our hypothesis when you have a dual mechanism that and we've demonstrated synergy, we ought to have an additive effect. So that would be the goal is to outperform upadacitinib..

And just, on the Phase 2a trial design, can you talk about the rationale a little bit, I guess, specifically the choice of an open label design versus maybe a slightly larger placebo controlled design. It sounds like you have some interest in biomarkers identified that you'd like to take a look at here in terms of signal finding.

But I'm just curious in terms of maybe more definitively teasing out the clinical signal here, the choice of the open label trial design..

Well, I think it's a couple of things. One is that it's a lot easier these days in a relatively competitive environment to enroll studies that have just an active arm. And when we're looking for signal finding, I think our goal is speed. And this study was a very cost efficient way to get a lot of answers.

And I think we know what these molecules and different kind of surrogates can do. Like if we just compare if we look at ritlecitinib, upadacitinib, all these other drug categories, I think we have a good understanding of what the absolute responder rate needs to be across these measures.

And so I think that was the balance here trying to get data as quickly as we can. And if it works out the way we hope and expect, we would certainly be interested in progressing in a little bit larger AD study.

But also importantly looking at some of the indications that ritlecitinib has already started to blaze the ground on, looking at vitiligo, looking at alopecia areata. So I think there's a couple of different ways to go post this initial AD study.

But I think just to go back to the original premise of your question, I don't think that we lose too much in not having a placebo group. We enhance the enrollment cadence when we get data quicker, which I think is important for us given where we're at the moment..

And just, along those lines, Neal, with respect to study start, like I understand we're putting together the protocol and the operational preparations are underway.

Do you have an early, I guess, early sense of when we might be able to expect some top-line data from the Phase 2a?.

I don't think we're giving guidance just yet, Tom, but it's going to be, it's definitely going to be within a year of this call. So I'll give you that as a back end marker, but we'll give more color on that once we get the first patient in..

And to your next question, it comes from the line of Corinne Jenkins from Goldman Sachs..

This is Omari on for Corinne. So I had a couple of questions.

One is, are you funded to complete the proof of concept study? And then two, on strategy, where do you see unmet need in atopic dermatitis?.

We're certainly funded to complete the study. This is an exceedingly cost efficient study, which was kind of by design. And so we're trying to generate data very quickly. This is in contrast to what we had originally proposed at the tail end of last year, which was a study in UC, which was a lot more expensive, going to take a lot more time.

So we have a robust balance sheet. And as Kevin alluded to in his comments, that balance sheet is not going to change too appreciably through the end of the year. And so we feel very comfortable. It's a very small amount of burn, while we continue to review various strategic options. And what sorry.

What was the first, the second question?.

Yes.

Where did you see the unmet need in a top third dermatitis? Kind of one of our strategy?.

Yes. We're at the front end of the atopic market. This is where psoriasis was years ago. We certainly I don't think anybody could claim that we've maxed out efficacy in this space. Obviously, dupilumab is a wildly successful drug.

But in 60% of the patients, we aren't even getting clear or near clear by week 16 and then 50% of those patients get a suboptimal response. And that's on the biologic side. On the JAK inhibitor side, we have much better efficacy. But there's still a lot of headroom in this space and what we're trying to do here is tease out the ITK effect.

We really think this is a strong mechanistic approach to this category and the competitive landscape in AD is as you can see by clinicaltrials.gov is still in its infancy. It's continuing to evolve. A lot of people are starting to look at that space, because we aren't where we're at with psoriasis where we're talking about PASI 100s..

Our next question or comment comes from the line of Julian Harrison from Big TIG..

I got on a few minutes late, so apologies if this has already been covered.

But I'm wondering if you can remind us of the scope of your IP portfolio related to the use of JAK inhibitors for alopecia and how should we be thinking about that opportunity going forward?.

So, yes, we had a long time ago back in 2015, 2016 or so executed transaction with Columbia securing the rights to the method of use IP around utilizing various JAK inhibitors for the treatment of alopecia areata and actually various other types of alopecia. And thus far to date, we have announced 2 royalty deals.

One is with Lilly for the use of baricitinib for alopecia areata and the other is with Sun Pharma who had acquired Concert, which had a deuterated ruxolitinib, and that was also executed late last year. And so those are the two current molecules that we have granted access to utilizing our IP. So we think it's a very valuable estate.

Clearly, we've done 2 deals and we'll constantly be looking at ways to enhance the value of that portfolio..

Our next question or comment comes from the line of Alex Thompson from Stifel..

I guess, if you could just talk a little bit more about how this drug differs from the Pfizer compound.

And then, is there any case for differentiation on the black box warning? Do you guys still expect a black box warning?.

Sure. Thanks, Alex. I mean, I think until you get through an actual NDA approval process and have those dialogues and whenever you're tickling a JAK at this stage, you always have to think about. So in thinking that you'll have a black box.

But I do think a lot of the black box warnings, if you look at all of the different JAK inhibitors out there, they're all slightly different. Rinvoq is different than tofacitinib, et cetera. So I think data will drive some of that.

And maybe, Joe, you can handle the question about, what are the different key differentiating features between our drug and ritlecitinib?.

Yes. The I mean, they're both potent inhibitors that target a similar cysteine residue and they both are potent inhibitors of JAK3. The key differentiation to where we see it is that ritlecitinib has while it does hit kinases, it's significantly more potent on JAK3 than any type kinase including ITK.

And in contrast, ATI-2138 depending on which readout you use is very similar potency with ITK.

And at the clinical exposures and doses that we plan to use and have used and what ritlecitinib is using, I think it's pretty clear that we will have exposures that similarly block ICK and JAK3 significantly, whereas ritlecitinib is more of a JAK3 bias drug with little impact on ICK at the clinical dose and exposure..

And your next question comes from the line of Gavin Clark-Gartner from Evercore ISI..

Apart from the Black Box side of things, I'm just wondering how you believe that providers will view the safety profile relative to the other JAK1s. And specifically, I'm wondering if there are any learnings from the alopecia or even, rheumatoid arthritis space that may give some early hints into how they may view this..

Gavin. It's a good question because, I think on the face, you look at it and say, well, it's a black box. And then, I mean, I could tell you having practiced, oftentimes, it's more of a chore for the physician to explain the laundry list of things that could happen.

However, I would say that in talking to various colleagues over the last couple of years, I really don't think and I think this is reflected in their sales. I really don't think it's been that big of a hindrance once you explain the issues. And at the end of the day, patients want their disease to be better.

And we know that there really hasn't been much tail off at all. In fact, baricitinib has been growing in alopecia areata. You've seen nice growth with RINVOQ and atopic dermatitis. And there's a reason. It provides order of magnitude benefit over biologics for sure.

So I think at the end of the day, when patients want relief and they know they're going to get it very quickly rather than perhaps waiting 16 weeks for a biologic to kind of take get to max effect, that's important..

I'm showing no further questions at this time. I would now like to turn the conference back to Neal Walker for closing remarks..

Well, thanks everybody for joining our call today. We're excited to provide additional updates in the coming months and appreciate your time. Thank you..

This concludes today's conference call. Thank you for participating and you may now disconnect..