Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Aclaris Therapeutics Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Kamil Ali-Jackson. Please go ahead..

Thank you. I'm Kamil Ali-Jackson, Chief Legal Officer for Aclaris. Please note that earlier today Aclaris issued its press release announcing third quarter 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. Dr. David Gordon, our Chief Medical Officer; and Executive Vice President, Research and Development, Dr. Joseph Monahan.

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's discussion and Analysis of Financial Condition and Results of Operations sections of Aclaris' Form 10-K for the year ended December 31, 2018, and Form 10-Q for the quarter ended September 30, 2019, filed 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 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 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 third quarter earnings call today. The third quarter has been a busy and productive quarter.

On our last quarterly earnings call in August, we announced a strategic review of both our commercial as well as our research and development portfolio of assets to determine how to optimally deploy capital to maximize shareholder return.

In September, we announced the plan to refocus our resources on our immuno-inflammatory development programs and that we would actively seek commercialization partners for our commercial products and legacy dermatology business.

As part of the strategic review, we reduced our workforce by over 50% across all areas of the organization and eliminated certain development programs.

As of today, we have divested RHOFADE to EPI Health, retired $30 million in debt, extended our cash runway and are actively looking to partner other assets and programs, including A-101 45% Topical Solution for common warts, ESKATA and ATI-501, 502 for alopecia.

As a reminder, both our Phase III studies in common warts were highly statistically significant across all endpoints. And if A-101 45% is approved, it would be the first FDA approved Rx product for common warts, a highly prevalent indication affecting both children and adults.

Positioned as an Rx product, it will be distributed through the traditional retail pharmacy channel with the convenience of at-home use.

As we look forward to 2020, we believe we are now sufficiently capitalized to execute on our renewed R&D effort, targeting opportunities in the multibillion-dollar immunology market, led by 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.

The basis of our R&D effort is our proprietary KINect discovery platform, which is specialized for targeting kinases and confers a competitive advantage in speed, quality and versatility.

As a reminder, KINect is an integrated system that uses structure-based drug design, a proprietary library of kinase inhibitor fragments and layers of validated translatable testing funnels built from decades of kinase drug discovery success.

We are confident in the versatility and effectiveness of our approach as demonstrated by the success our group is already realized in the design of substrate selective MK2 inhibitors, tissue targeted, reversible and irreversible kinase inhibitors as well as irreversible ITK drug candidates.

ATI-450 or MK 2 inhibitor and first internally developed novel compound to enter the clinic is making good progress in the Phase I SAD/MAD study initiated this year.

Assuming success in Phase I, the goal of the next study will be to demonstrate the pharmacodynamic profile in well characterized conditions such as rheumatoid arthritis, which also provides us with the potential to extrapolate into various other inflammatory conditions that are characterized by high levels of TNF alpha, IL-1 beta, IL-6 and IL-8.

In the coming months, we will also be identifying a second inflammatory indication that we will be pursuing with ATI-450. In addition, we have other breakthrough kinase inhibitors in our soft-JAK and covalently bound ITK/JAK3 in pre-IND advancement.

Given the continued unmet needs broadly in the immunology space, we believe the opportunity exists for novel focus mechanisms in oral formulations that have the potential to reshape the immunology landscape.

A key feature of our current drug candidates is their positioning to parallel or potentially exceed the efficacy of established high-value injectable drugs, including anti-TNF-alpha, anti IL-1 beta and anti IL-17 biologics as well as mitigating the rising safety concern with oral systemic JAK inhibitors.

As Frank will review in more detail later in the call, we ended the third quarter with $91 million, and this is sufficient to get us to the third quarter of 2021. I want to reiterate that this guidance gives no effect to any additional potential new business development transactions or financing activities.

And so we anticipate that the cash out date should only improve as we execute on our business development plans. As a reminder the catalyst we expect to deliver in 2020 in our current budget are as follows. For ATI-450, Phase I data SAD/MAD by year-end or early Q1.

And then initiate, if successful, initiating a Phase II trial in rheumatoid arthritis in the first half of 2020, with a subsequent data readout in the second half of 2020; moving to the soft-JAK inhibitor, which is ATI-1777, we plan to submit an IND in the first half of 2020; and initiate a Phase I/II trial in atopic dermatitis in the second half of 2020; and then finally, our third candidate ATI-2138 is an ITK/JAK3 covalently bound tender, and that will have an IND submitted in late 2020, early 2021 With that, I will hand it off to David Gordon, our CMO, who will update you on our R&D progress.

Dave?.

Thanks, Neal, and good afternoon, everyone. We've had a busy and successful quarter from the R&D perspective. Last month, we announced results from our successful Phase III clinical development program for A-101 45% Topical Solution for the potential treatment of common warts or verruca vulgaris.

I would refer you to the data included in that announcement, but in summary, both Phase III studies known as THWART-1 and THWART-2, met the primary endpoint and all secondary efficacy endpoints with high statistical significance. Mild to moderate application slight adverse events made up the vast majority of all adverse events.

We believe that THWART-1 and THWART-2 will support an NDA under A-101 45% has potential to be the first FDA-approved prescription medicine for the treatment of common warts. I'd like to thank investigators and the patients who participated in this trial.

I'm proud of our team that worked so hard to deliver the first successful Phase III program for a prescription treatment of common warts. Moving to our immuno-inflammatory pipeline, ATI-450 is our investigational MK2 inhibitor, a small molecule oral drug that targets TNF, IL-6 and IL-8 pathways.

In the first half of 2019, we successfully filed the IND for this drug and the Phase I program is well underway. Through data from the single and multiple ascending dose study or SAD/MAD are expected by the end of first quarter 2020.

The next step after the SAD/MAD study will be to initiate a Phase II trial for ATI-450 in subjects with rheumatoid arthritis in the first half of 2020. Since inhibition of MK2 is expected to target TNF, IL-1, IL-6 and IL-8, we are also considering a number of additional inflammatory indications, which we will update you on in the coming months.

Our second immuno-inflammatory pipeline candidate is ATI-1777, our topical soft-JAK 1/3 inhibitor, which we are developing as a potential treatment for moderate to severe atopic dermatitis.

In the context of 1777 soft refers to its metabolism characteristics, which means that if any drug passes systemically, it will be quickly metabolized to non-active forms. A number of studies have demonstrated that the JAK class of drugs deliver efficacy in atopic dermatitis with both oral and topical formulations.

Aclaris have previously reported that a topical solution of our JAK 1/3 inhibitor, ATI-502 delivered a good response rate and a small open-label study of patients with moderate to severe atopic dermatitis.

We believe that the JAK inhibitor class will have utility in atopic dermatitis, but we are very aware of the safety concerns related to systemic exposure of JAK inhibitor drugs. The approach we have taken with ATI-1777 may provide a good balance of local efficacy, while reducing systemic exposure.

We are on track to enter Phase I/II in patients with moderate to severe atopic dermatitis in the second half of 2020. The third immuno-inflammatory pipeline candidate, are I'll briefly mentioned as ATI-2138. It's a small molecule, oral ITK/JAK3 inhibitor, which has potential as an oral small molecule to treat T cell-mediated diseases.

This will progress to an IND in Q4 2020 or Q1 2021. Finally, we previously announced that we had made a strategic decision to focus our R&D spend on our immuno-inflammatory portfolio.

As such, we are currently seeking partners to further develop ATI-501 and ATI-502, our investigational oral and topical JAK 1/3 inhibitors, both of which were being developed for alopecia indications. Before I close, I'd like to encourage you to review the R&D Day slides that are posted on our website.

This was a meeting held at the end of September, where we showcased our immuno-inflammatory team and our pipeline. With that, I'll pass it over to Frank..

Thanks, David. Good afternoon, everyone. As I walk through our third quarter financial results, please reference the financial tables that can be found in today's press release. For further detail, please refer to the MD&A section in our Form 10-Q that was filed today.

First, just to note about the current quarter's and the prior year's financial statement presentation, as a result of our strategic review and the decision 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 statement.

Please reference footnote 15 of our financial statements in our Form 10-Q for the details of what is included in these line items, including the operating results for our marketed products and related balance sheet items. As of September 30, 2019, we had cash and investments of $91.4 million and had 41.4 million shares of common stock outstanding.

For the nine months ended September 30, 2019, net cash used in operating activities was $76.1 million. Earlier this year, we have given cash runway guidance that our capital was sufficient to fund our operations until the fourth quarter of 2020.

We now anticipate that our current capital, including both the upfront proceeds from the sale of RHOFADE and the full repayment of the loan facility with Oxford in October of 2019, will extend our cash runway into the third quarter of 2021, without giving effect to any additional potential new business development transactions or financing activities.

Now switching to our continuing operating expenses, for the third quarter of 2019, our total R&D expenses were $16.2 million compared to $15.2 million for the third quarter of last year. These amounts include noncash stock-based compensation expense of approximately $1.4 million in each period.

The increases were mainly the result of a $4 million milestone payment made to Rigel for the achievement of specified development milestone as well as a preclinical development activities associated with recent initiated Phase I clinical trial for ATI-450.

These increases were partially offset by decreases in spending for our various Phase II clinical trials for our JAK inhibitor programs and Phase III wart programs, as these projects were at or near completion at the end of the third quarter this year.

For the third quarter of 2019, our total G&A expenses were $6.7 million, which included noncash stock-based compensation expense of approximately $2.6 million. This compared to $6.1 million for the third quarter of last year, which included $2.3 million of noncash stock-based compensation.

Other income net for the third quarter of 2019 decreased by about $1 million as compared to the third quarter of last year, due to interest expense incurred on our outstanding debt, which was borrowed in October 2018 and subsequently repaid in October 2019.

Our loss from continuing operations was $23.1 million for the third quarter of 2019 compared to $20.6 million for the third quarter of 2018. Our loss from discontinued operations was $32.2 million for the third quarter of 2019 compared to $12.1 million for the third quarter of last year.

And was $48.7 million for the nine months ended September 30, 2019, compared to $35.6 million for the nine months ended September 30, 2018. And just few main items to draw your attention to and the line item loss from discontinued operations.

We recognized $5 million in net sales of RHOFADE for the third quarter of 2019, and $13.4 million for the nine months ended September 30, 2019.

We also recognized a onetime noncash impairment charge of $27.6 million for the write-down of our intangible asset related to RHOFADE, included in both the third quarter and nine months ended September 30, 2019.

As a result of our new strategic direction, which resulted in the reclassification of expenses related to our commercial products into discontinued operations, our prior full year 2019 estimated operating expense guidance no longer represents an accurate estimate of our anticipated operating expenses, and we do not believe that updated full year guidance for 2019 would be meaningful.

But as we exit 2019, we expect to incur some additional employee and vendor wind-down costs related to our discontinued operations as well as some costs to complete our various clinical trials for A-101, 45% and the alopecia Phase II trials.

But as we move into 2020, based on our current plan, we anticipate our cash burn from continuing operations to decrease significantly from the quarterly burn rate experienced during 2018 and the first three quarters of this year.

Based on these assumptions, we estimate that our current capital will be sufficient to fund our operations into the third quarter of 2021 without giving effect to any additional potential new business development transactions or financing activities. I'll now turn the call back over to Neal for a few closing remarks..

Thank you, Frank. So we've obviously had a lot of change over the third quarter, but the team continues to execute on the R&D side, we produced two clinically meaningful and highly statistically significant pivotal Phase III studies in common warts.

We continue to manage our expenses, and we pivoted now from a dermatology focused company to one focused on immuno-inflammatory diseases, where we believe we have a strong competitive advantage vis-à-vis, our team down in St. Louis.

And we will be investing in three programs as we stated today, and we'll be looking forward to reporting on the results of our SAD/MAD work in the coming months. With that, I'll hand it off to Josh to please pull for questions..

[Operator Instructions] Our first question comes from Louise Chen with Cantor. You may proceed with your question..

Hi, thanks for taking my questions here. I had a few.

So my first question is what are you most excited about in your immuno-inflammatory pipeline? What product or products are most differentiated and have blockbuster potential in your view? And then in terms of the assets that you have left to commercialize, what is out there and what kind of economics or valuation do you think are ideal for these? And then in terms of your immuno-inflammatory pipeline, outside the US, are you going to develop this yourself? Or is this something that you could partner? And if so, who is an ideal partner for these types of assets? Thank you..

Hey, Louise, it's Neal. Thanks for the question. So I'll take it in kind of reverse order. So on the ex-US side, I think given the breadths of indications that we would have to look at with the 3 assets that we mentioned, targeting anti-TNF, anti-IL-1 beta, having a soft-JAK topical and then also going after the T cell receptor.

I think we would be looking at larger pharmaceutical companies to partner with ex-US, and that wouldn't be something we would pursue ourselves. We would absolutely look to partner these sorts of rights on a country-by-country basis.

Relative to the valuation question on some of the assets that we're cycling on from a BD perspective, we don't comment on that specifically. Obviously, we think they're valuable assets, and we are now in a formal process on that. So we'll be looking forward to updating everybody on our progress on that front.

And then in terms of your first question, what are we most excited about, I think, it isn't often that you get an asset like the MK2 inhibitor that comes along where you have an oral that can mimic, can potentially mimic the effects at one season in biologic therapy with anti-TNF and anti-IL-1 beta.

And being an oral, I think that's always been something that a lot of companies have looked at. So although we're looking at a couple of indications out of the gate, I think, if we see the results, we think we're going to see, it will be broadly applicable.

So I think that asset is kind of a pipeline and a product and has the largest potential for a blockbuster status down the road. Obviously, we've got a long way to go. We just are finishing the SAD/MAD work, but I think the team is broadly very excited about the potential for that product..

Okay, thank you..

Thank you. [Operator Instructions] Our next question comes from Pasha Sarraf with SVB Leerink. You may proceed with your question..

This is Dylan Dupuis sitting in for Pasha.

One question when it comes to the wind down, how much more of a wind down should you be looking at? And considering in terms of how to model near term operating expenses? And what does the timing look like for completing this wind down?.

So this is Frank. Thanks for the question. I think when you talk about wind down, I mean, a lot of that is behind us in Q3. And we're wrapping up a couple of trials just in the fourth quarter.

So burn would be a little bit – it'll obviously be less than where we're headed – where what we spent in the first three quarters of this year and then far less as we head into next year.

So I think for the most part around the personnel costs and some of the severance-related items, they'll wind up in the – will wind down by the end of the first quarter. And so we'll have a little bit of that, not a whole lot. And then next year, as I mentioned in our remarks, we're going to have a significantly lower burn rate on a quarterly basis..

Great, thank you very much..

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

Thanks, Josh. Appreciate everybody joining the call this evening, and we'll look forward to updating you on our SAD/MAD results in the coming months. Thank you..

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..