Joshua Reed - CFO Todd Brady - CEO, President & Director.

Neil Carnahan - Stifel, Nicolaus & Company Elemer Piros - Cantor Fitzgerald & Co. I-Eh Jen - Laidlaw & Company Corey Davis - Seaport Global Securities.

Good day, and welcome to the Aldeyra Therapeutics Second Quarter 2018 Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Joshua Reed, Chief Financial Officer. Please go ahead..

Good morning, everyone. I'm Joshua Reed, Chief Financial Officer of Aldeyra Therapeutics, and welcome to the Aldeyra Therapeutics conference call to discuss our second quarter 2018 financial results. With me today is Dr. Todd Brady, Chief Executive Officer of Aldeyra Therapeutics.

Before we get started, we would like to remind you that this conference call contains forward-looking statements regarding future events and the future performance of Aldeyra.

Forward-looking statements include statements regarding Aldeyra's possible or assumed future results of operations and expenses, business strategies and plans, research, development, and commercial plans or expectations, trends, market sizing, competitive position, industry environment and potential growth opportunities, among other things.

These statements are based upon the information available to the company today, and Aldeyra assumes no obligation to update these statements as circumstances change. Future events and actual results could differ materially from those projected in the company's forward-looking statements.

Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater detail in the company's press release and the company's filings with the SEC. Now I would like to turn the call over to Dr. Todd Brady, President and Chief Executive Officer of Aldeyra. Dr.

Brady?.

Thanks, Josh, and thank you all for joining the call today. I first want to remind you that this morning, we filed a press release on our financial results for the second quarter of 2018. I encourage you to review the press release, as it contains important information, including a corporate update that will be discussed on this call.

It has been a very productive first half of the year at Aldeyra, and we continue to execute on our strategic plan to develop and expand our deep pipeline of innovative products focused on immune-mediated diseases.

Today we are pleased to announce that we expect to release results from our vehicle-controlled, randomized, double-masked, Phase IIb clinical trial of topical ocular reproxalap in dry eye disease late third quarter or early fourth quarter of this year.

The primary objective of the trial is to establish the drug concentration, number of patients, and end points for Phase III clinical testing. As many of you know, our vehicle has not previously been tested in dry eye disease patients, and thus, the Phase IIb trial is not statistically powered.

However, assuming the activity of reproxalap exceeds that of vehicle in any of a number of clinical signs or symptoms, the Phase IIb results will be used to statistically power Phase III trials, and in that scenario, we will provide more detail on our Phase III plans.

Dry eye disease is a persistently disturbing condition, affecting an estimated 20 million patients in the United States, and physicians and patients generally consider current therapeutic options to be inadequate.

The unmet medical need in dry eye disease is thus considerable, and based on Phase IIa clinical results announced last year, reproxalap could represent a novel approach with broad activity and rapid onset of action that may be distinguished from standard of care.

In addition, today we announced that the results of an investigator-sponsored trial of ADX-1612, formerly known as ganetespib, in conjunction with pemetrexed or cisplatin or carboplatin, will be released at the International Association for the Study of Lung Cancer Conference, which is behind held from September 23 to September 26 of this year.

As we discussed at this year's research day, mesothelioma is a particularly serious cancer with low response rates from 20% to 40% that have not improved in many years, despite modern cancer therapy. Fortunately, mesothelioma is a rare cancer, and meaningful therapeutic advances are generally awarded breakthrough therapy by the FDA.

The results from the investigator-sponsored trial, to be announced in September, are expected to inform the feasibility of advancement of ADX-1612 to pivotal clinical testing.

Also at our research day in June, we described a potential synergy of ADX-1612, an HSP90 inhibitor, in combination with DNA damaging agents, including cisplatin, given that inhibition of HSP90 inhibits DNA repair.

Accordingly, in addition to malignant mesothelioma, ADX-1612 is expected to be tested in combination with DNA damaging agents in patients with ovarian cancer in the Udario trial, a Phase II trial that is expected to begin this year and will be performed in conjunction with leading gynecologic oncology experts in Europe.

By downregulating cell proliferation, ADX-1612 is a potent immune modulating agent, and the end license of ADX-1612 is consistent with our strategy of building a pipeline of product candidates that could treat immunological diseases, including cancer.

As we described at research day, we intend to initiate Phase II clinical testing of ADX-1612 in post-transplant lymphoproliferative disease next year, in parallel with the advancement of ADX-1615, an oral prodrug of ADX-1612.

Today, we are also pleased to announce that as part of our ongoing strategy to partner with large pharmaceutical companies to advance our novel development programs, Aldeyra will collaborate with an undisclosed, large pharmaceutical company on the development of novel therapeutics for the prevention and treatment of ocular inflammation.

The collaboration will focus on mechanisms that are distinct from Aldeyra's RASP inhibitor and HSP90 inhibition programs.

And as we have previously disclosed, we intend to partner with larger companies that have the potential to augment our development and global commercialization potential, and this latest collaboration, in addition to our previously announced systemic immune-mediated disease development relationship with the Johnson & Johnson company, Janssen, represents our latest success in this regard.

At the end of the year or early next year, we expect to announce results of our Alleviate Phase III clinical trial of topical ocular reproxalap in an allergen challenge model of allergic conjunctivitis.

In addition, in preparation for subsequent Phase III testing, we intend to initiate two methods development clinical studies in patients, following environmental exposure to allergen.

Allergic conjunctivitis is estimated to affect 20% or more of the population worldwide, and physician market surveys conducted by Aldeyra suggest that an estimated 24% of patients do not respond to standard of care antihistamines. Thus, the market for a novel therapy in allergic conjunctivitis is substantial.

In addition, there is considerable overlap between allergic conjunctivitis and dry eye disease that is not treated with currently available therapy other than topical corticosteroids, which can lead to considerable ocular toxicity, including glaucoma and cataracts.

Next year, we expect to announce results of our Sulus Phase III clinical trial with topical ocular reproxalap in noninfectious anterior uveitis, a disease that is today treated with topical corticosteroids that, as I had mentioned, could result in sight-threatening ocular side effects.

In July, we announced that the first patient was enrolled in part one of our pivotal reset Phase III clinical trial of dermatologic reproxalap for the treatment of ichthyosis associated with Sjogren-Larsson disease, an orphan disease that has no FDA-approved therapy.

We expect to announce results from part 1 of the reset Phase III trial in Sjogren-Larsson disease next year. Finally, at Research Day this year, we announced the expansion of our pipeline with product candidates for systemic and retinal diseases.

We expect to initiate clinical testing in a variety of diseases, potentially including nonalcoholic steatohepatitis, inflammatory bowel disease, and diabetic macular edema next year. As our pipeline continues to advance towards commercialization, we intend to build an organization with significant commercial operations experience.

To that end, last quarter we added Dave McMullin to head corporate development and strategy, and this quarter we are pleased to announce that Joshua Reed had joined Aldeyra as chief financial officer.

Encompassing more than 20 years of financial operation, strategy, and investment banking experience, including serving as vice president and head of finance for Bristol-Myers Squibb's U.S. operations, a $12 billion business unit, Josh is well positioned to contribute to Aldeyra's growth.

Many of you have witnessed the programs of Aldeyra over the past several years, as we have expanded our drug development efforts across multiple indications and multiple product candidates with a variety of mechanisms of actions. Today, Aldeyra represents a truly diversified, late-stage biotechnology company.

As we prepare for the continued advancement of our pipeline, we look forward, as always, to continuing to update you on our path to commercialization and our mission of providing novel therapeutic options to patients with unmet medical need. Now I'd like to turn the call back over to Josh to discuss the second quarter 2018 financial results.

Josh?.

Thank you, Todd. For the second quarter of 2018, we reported a net loss of approximately $9.1 million compared to a net loss of approximately $5.3 million for the same period last year. Basic and diluted net loss per share was $0.46 for the quarter compared to $0.35 per share last year.

Losses have resulted from the cost of our clinical trials and research and development programs as well as from our general and administrative expenses. R&D expenses were $6.8 million for the second quarter of '18 compared to $3.8 million for the same period in '17.

The increase of $3 million was primarily related to the increase in research and development expenditures, including manufacturing, preclinical and clinical development costs and an increase in personnel costs. General and administrative expenses were $2.4 million for the second quarter compared to $1.5 million for the same period last year.

The increase of $900,000 is primarily related to an increase in legal and patent-related costs, rent, consulting costs and personnel costs. In the second quarter of '18, total operating expenses were approximately $9.2 million compared to $5.3 million in the prior year.

Cash, cash equivalents and marketable securities were $41.7 million as of the end of the second quarter of 2018..

Operator, we're able to take questions now..

[Operator Instructions]. Our first question comes from Adam Walsh of Stifel..

This is Neil on for Adam.

I know we've talked about this in the past, but can you remind us of what we're looking for in the Phase II dry eye study? And then, do you have any reason to believe that reproxalap might have an improved side-effect profile than the currently approved treatment? And then, just any color on timelines of a possible pivotal launch.

And I have one follow-up..

I'll decline to comment on our timelines for launch. That's a little far in the future..

I meant launch on a Phase III; I'm sorry..

Oh, yes, for sure. So the primary objective of the trial, as I mentioned, is to plan Phase III, which is what Phase II trials are all about anyway. The reason Phase II trials were invented is to plan Phase III, and that's exactly what we're doing here.

The particular parameters that we need to clarify, or that any company needs to clarify in Phase II before advancing to Phase III in dry eye disease is what's your drug, what's your drug dose? Which endpoints are you going to use? The FDA requires a sign and a symptom that is statistically different from vehicle for approval in Phase III, and the dosing frequency and a variety of other parameters that one would need in Phase III.

So, in a way, the bar in Phase II for dry eye is somewhat low, meaning that unless the drug fails to exhibit any trend versus vehicle that's positive, Phase III can be statistically powered. The number of patients that one would need for statistical power in Phase III can be clarified, and the program advances.

I always point out that there are four or five signs and four or five symptoms, so in Phase II, there are many shots on goal to demonstrate a trend versus vehicle. We do not expect statistical significance.

The trial, as I mentioned in my comments, is not statistically powered because it is impossible to statistically power a trial unless you know your vehicle effect. This is the first time vehicle has been tested in these patients. So P values would be unanticipated positive in this case.

In terms of timing for advancement, I think we'll probably comment on that subsequently, after seeing the results. But one could reasonably expect 3 to 6 months in preparation for Phase III, following the Phase IIb results, assuming that everything works out well in the results of Phase IIb..

And then, welcome, Josh. Congratulations on the new position.

Would you mind just giving us some color on how we should be thinking about R&D expense and cash burn over the next few quarters, given the amount of development activity you guys are doing?.

Sure, I'll say it this way. The existing programs are funded into Q1 of 2020. That said, as we continue to see clinical trial results, we'll assess our cash needs relative to the development pathway of our assets..

Our next question comes from Elemer Piros of Cantor Fitzgerald..

Todd, I was wondering if you could give us a little bit of a background on 1612, its history, from whom did you in-license this drug, and if you could elaborate a little bit on the design and the size of the mesothelioma trial that is coming up..

Yes. Elemer, thanks for the question. As I mentioned in my comments, we have an explicit strategy of expanding our pipeline with immune-mediating drugs. ADX-1612 is a perfect example of that. The drug was originally developed as a cancer agent by Synta, now Madrigal, known as ganetespib.

Our interest was initially exclusively for PTLD, which is a disease that I described in my comments earlier. You know, in immunology, there's two ways of generating an excessive immune response. One is hyper-activation of cells, right, which is something that RASP mediates.

Another, though, is too many cells, too many immune cells, and this is something that HSP90 inhibitors are well positioned to address. And in that way, ADX-1612 is sort of representing novel and potentially very important approach in treating immunological disease. As I mentioned, we intend to initiate Phase II testing in PTLD next year.

We have also, I would say, inherited clinical trials in cancer that are ongoing. As we talked about at Research Day this year, cancer is, in a way, an immune-mediated disease. That is, too little immunity, or too much immune regulation or dysregulation can lead to the development of cancer.

Hence, the field of immune oncology, and thus we're excited to evaluate our options as these data read out. Because the data, Elemer, are going to be released at a conference, we are embargoed in terms of the nature of the trial and the results. But I can tell you that the goal of the trial is to inform on the feasibility of pivotal Phase III testing.

And mesothelioma, because the cancer is rare, generally companies will perform an initial trial like the one that will be announced in September, the results of which are used to power and plan a single pivotal trial, again, given the rarity of the cancer.

And assuming the results are positive, we would intend to update you in full detail when those data come out on our next [indiscernible]..

And in parallel to the Phase III allergic conjunctivitis trial, you mentioned that you are conducting two clinical method development studies. I was wondering if you could elaborate on those a little bit..

Yes, I thought you would ask that, Elemer. This is an effort of ours to continue to distinguish the novel mechanism of reproxalap in allergic conjunctivitis. Allergic conjunctivitis is really not well served today, and primarily, it is treated with antihistamines.

The challenge with antihistamines is that histamine itself is generally only around for 10 to 15 minutes after allergen exposure. So antihistamines, as a therapeutic class, have a short duration of action. The duration of action is not necessarily durable, simply because histamine itself isn't around very long after exposure to allergen.

Our drug, reproxalap, is different. So there may be effects on histamine, but most of the effects of reproxalap have to do cytokines and proteases and leukotrienes and cell infiltrate, very long-term effectors of the symptoms and signs of ocular allergy.

And so, as we move towards the market, towards NDA filing, our goal is to distinguish the drug mechanistically. One way of doing that is to perform different kinds of clinical trials. Now in ocular allergy, as you know, one way of testing the drug is to put allergen in patients' eyes.

That's called a challenge model, where subjects in a clinical trial enter the trial. Pollen or dander, or whatever the allergen is, is literally instilled into the eye, and then subjects rate ocular itch over time. A drug or vehicle may be administered before that.

The other way of testing patients' response in ocular allergy is to infuse air with allergen, as in an allergen chamber, or to have subjects, during allergy season, rate their allergic symptoms while taking the drug.

These are so-called environmental exposures to allergen, which is the other primary way of testing allergic conjunctivitis in a clinical trial setting.

So this is our intent, and if the drug is active across both kinds of allergen exposure, I can say for certain that this would be one of the most comprehensive NDA packages ever in allergic conjunctivitis. And I think the potential marketing leverage from demonstrating activity in challenge models and environment models would be considerable.

So that’s the basis behind my comments about the methods development studies..

And lastly, if you could also discuss a little bit about maybe the distinction between your collaboration between Janssen and the collaborative research agreement that you just signed with a large pharmaceutical company, what are the areas that are distinct between the two..

Right, so the Janssen relationship is related to systemic autoimmune disease, and it is also related to RASP, which is one of the key mechanisms of action that our pipeline is focused on. It is how reproxalap works. However, the Janssen relationship does not relate to reproxalap specifically, just other RASP inhibitors for systemic autoimmune disease.

So that is the focus of the Janssen relationship. The relationship we disclosed today is focused on vision, or ocular inflammation, okay? And so, a different field, still immune-mediated disease. This is a novel mechanism that is not related to RASP, and it is not related to HSP90 inhibition.

And the intent of the relationship is to inform on the feasibility of moving forward with a new therapeutic class in ocular inflammation, and if those collaborative efforts are positive, you'll be hearing, I'm sure in great detail, about a more formal agreement..

[Operator Instructions]. Our next question comes from I-Eh Jen of Laidlaw and Company..

Number one, and I think [indiscernible] probably is sort of an extension of Elemer's earlier questions, which is the unnamed pharmaceutical collaboration.

How was that sort of distinguished from the reproxalap study you're currently sort of under various studies? Is that still related to the [indiscernible], or that's a total different sort of a targeting?.

It's completely different. It's completely different from reproxalap for RASP or anything else in our pipeline that includes RASP for HSP90 inhibition..

And, okay, also that in terms of allergic conjunctivitis, given the potential duration difference of antihistamine and the reproxalap, do you feel this potentially going forward is successful to be some sort of combination which would take care the symptom relief for—you know, continuously..

Yes, I do think that a combination product one day would be a very logical product line extension. And the duration of antihistamines, as you point out, is limited after allergen exposure. However, antihistamines work very quickly and certainly have been shown to reduce ocular itching in the very, very early phases of allergen exposure.

Reproxalap is a nice complement to that mechanism of action. Reproxalap effects, as I mentioned, more durable effectors of ocular inflammation and ocular itch, and thus lasts significantly longer following exposure to allergens. So the combination of the two would seem to make sense, and you may hear more from us along these lines in the future.

That's a very good point, [indiscernible]..

Okay, great, thanks, and congrats on the development so far..

Our next question comes from Corey Davis of Seaport..

I apologize if you covered this already, but are there certain signs and/or certain symptoms that are more important than others, both in the eyes of the FDA and ones where reproxalap would be more likely to work? And secondly, do you think you could ever get a claim for a faster onset of action that something could [indiscernible] the study that's about to read out in a couple weeks?.

Yes, those are superb questions. The onset of action is particularly important.

One major challenge with RESTASIS and Xiidra, which are the only two products that are approved for dry eye disease today, is that both of those take a while to work, particularly RESTASIS, which takes months in some cases to demonstrate any efficacy, by which time the patients have forgotten what they felt like before.

So it's a very difficult treatment paradigm when a product requires weeks or months to work, especially, as Neil pointed out, where there are side effect. RESTASIS is known for its stinging; Xiidra is known for taste disturbance, which is sort of persistently annoying in many patients.

To undergo such side effects and then wait for weeks for symptomatic improvement is challenging, as you can imagine, from the patient perspective. I think the point that Neil was making is that we could have safety advantages. I do not think reproxalap has ever exhibited taste disturbance.

There is stinging, as there is with any topical ocular medication, but there certainly is room to demonstrate safety advantages, and even more importantly, tolerability advantages in this market.

In terms of which signs and symptoms the FDA wants to see, they've sort of declared that they are agnostic as to what improves symptomatically and what improves in terms of a physician-rated sign. I do think that most companies have focused on staining as a sign. The symptom scores have been all over the place.

Most of the symptom scores, Corey, measure the same thing, or are just different versions of measuring the same thing. Some companies have used an overall symptom score, sort of a how-do-you-feel question with regard to your eyes. Other companies have focused on the dryness subset of scores.

So I think there's a lot of flexibility on the symptomatic scores, and many different scores have been validated, and I think the FDA has declared that there are several options from which to choose in that department.

It's hard to predict, based on the Phase IIa, where our drug might distinguish versus vehicle, because there was no vehicle in Phase IIa. I can tell you the effect sizes of the 0.1% reproxalap, which is being tested in Phase IIb, along with the 0.25% concentration.

The effect sizes were particularly large with the symptoms, and pretty much all the symptoms scores that we use. And clinical utility medicine, as you know, an effect size of 0.5 or larger is generally considered clinically relevant. That is noticeable to the patient effect size, and some of our effect sizes in the symptom scores exceeded 1.

So these would be large to very large effect sizes that you would not anticipate a vehicle could generate. On the signs, tear volume was particularly powerful. We had a good signal with staining. But again, it's difficult to know which of those or how those will distinguish from vehicle.

The other thing I would note is this trial in Phase IIa was relatively short, 28 days of treatment. Almost all dry eye trials, including our Phase IIb trial, are three months of treatment, and over that period of time, one would expect vehicle to separate from drug on a number of different signs and symptoms.

Now, one alternative that we've discussed before and we're excited about, given the breadth of activity we saw in Phase IIa, is that reproxalap is active amongst a number of signs and a number of different symptoms. If that’s the case, then one could approach the regulatory process with a responder analysis.

And by that I mean a responder is someone who improves on any sign by a certain amount, or any symptom by a certain amount, and the responders can be compared across groups. In many ways, that's attractive in dry eye disease because it has many different etiologies. There are many different kinds of dry eye disease, probably.

There are probably many different causes. And so, with that background, it's difficult to assume that any one patient's dry eye is the same as any other patient's dry eye, and picking a sign and a symptom may not be relevant to the entire clinical trial population.

So a responder analysis that could assess multiple signs or multiple symptoms may be more statistically powerful, and I think a lot more clinically relevant..

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Todd Brady for any closing remarks..

Well thank you all for the questions, and thank you, operator. I'd just like to close by saying that we look forward to speaking with many of you shortly about the results of our Phase IIb clinical trial in dry eye disease with topical ocular reproxalap and the results of the MESO-2 trial with ADX-1612 and malignant mesothelioma.

And I hope you can tell that these are exciting times at Aldeyra, as we continue to progress towards commercialization with a unique and diversified pipeline that supports our corporate mission of providing novel therapies to patients with unmet medical need. Thank you all for joining us this morning, and we're happy to close the call at this point..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..