Charles Theuer - President and CEO Patricia Bitar - CFO.

Tom Shrader - Stifel Nicolaus Chad Messer - Needham & Co. Maury Raycroft - Jefferies & Company.

Good day, ladies and gentlemen, and welcome to the TRACON Pharmaceuticals Second Quarter 2017 Earnings Conference Call. At this time, all callers are in a listen-only mode. After the speakers' prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time.

During today's call, we will be making certain forward-looking statements, including statements regarding expected timing of clinical trials and results, regulatory activities, future expenses and cash runway, and our development plans and strategy.

These statements are subject to various risks that are described in our filings made with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2016, and subsequent quarterly reports on Form 10-Q.

You are cautioned not to place undue reliance on these forward-looking statements and we disclaim any obligation to update such statements. Now I would like to turn the call over to Dr. Charles Theuer, President and CEO of TRACON Pharmaceuticals. Dr.

Theuer?.

Good afternoon and thank you for joining us today for TRACON's second quarter 2017 financial results and business update conference call. I will begin with an update on our pipeline and recent activities. Following that, our Chief Financial Officer, Patricia Bitar, will review our financial results for the three and six months ended June 30, 2017.

Finally, we will conclude by taking your questions. Let's begin with our lead product candidate TRC105, which has the non-proprietary name carotuximab. We continued to open sites and enroll angiosarcoma patients in our randomized Phase 3 TAPPAS trial.

The initial TAPPAS sample size of 124 patients is designed to detect an improvement in PFS from four to seven months. However, the trial uses and adapted design that allows for expansion of patient numbers while preserving type 1 error.

This adaptation protects the power to detect a clinically meaningful survival benefit and provides greater flexibility and efficiency than a standard trial with a fixed sample size. Importantly, we expect to conduct an interim analysis in mid-2018. At that time, results will be categorized as belonging to one of four zones based on conditional power.

The zones are labeled as favorable, promising, enrichment, and unfavorable. The sample size and PFS events needed to complete the trial will be left unchanged if the interim result lie in the favorable and unfavorable zones, but will be increased to a total of 200 patients in the promising zone.

This will allow more than 80% power to detect a less robust, but still clinically meaningful improvement in PFS between the two arms. If the interim results lie in the enrichment zone, the trial would enroll an additional 100 patients who have cutaneous disease.

This will result in a total of 135 patients with cutaneous disease which would preserve the power to detect the desired treatment effect in these patients.

We believe that TRC105 has broad potential and TRACON continues to execute on its tier development strategy than includes orphan drug indications, mid-size market indications and large market indications. In addition to the pivotal TAPPAS trial in angiosarcoma, TRC105 continues to advance in Phase 2 studies in two mid-market indications.

First, we have accrued 147 of the 150 patients into the Phase 2 randomized TRAXAR trial that compares treatment with TRC105 and Inlyta to treatment with single agent Inlyta in patients with clear cell, renal cell cancer. A planned futility analysis was canceled by the independent Data Monitoring Committee given the near completion of enrollment.

We expect to report top line PFS data from this trial later this year with the exact timing driven by the number of progression events or death that define progression-free survival. We're actively tracking the total number of events confirmed by central review.

At the present time, we believe the trial will produce fewer than 110 events confirmed by central review, which will decrease the power of the trial to less than the planned 80% to detect the desired improvement in PFS from 4.8 months with Inlyta to 7.2 months with the combination of Inlyta and TRC105.

For example, a decrease in the number of events from 110 to 80 would decrease the power from 80% to 70%. As we discussed at ASCO 2017, we will also asses PFS in patients with predefined levels of two soluble biomarkers that correlate with response in the Phase 1b portion of the trial.

In that Phase 1b study, we observed that patients with a partial response by RECIST following treatment with TRC105 and Inlyta were statistically more likely to have lower baseline levels of osteopontin and higher baseline levels of TGF-beta receptor 3.

Second, we are enrolling the multi-center Phase 2 trial of TRC105 and Nexavar in liver cancer where we expect to report initial response rate data in early 2018. The goal of this trial is to reproduce the response rate of a completed Phase 1/2 trial of TRC105 and Nexavar in patients with liver cancer that was conducted by the NCI.

Data from this NCI trial, e-published in Clinical Cancer Research, demonstrated median overall survival of 15.5 months in all patients. Overall response was assessed by RECIST across four dose groups. All observed responses occurred in the two highest dose groups in which 5 of 15 or 33% of patients demonstrated a response.

Both of these data points compare favorably with historical single agent Nexavar pivotal trial data that showed a response rate of 2% to 3% by RECIST and overall survival of 10.7 months or less. As well, we continue to enroll handful patients with GTN at sites in the US and in the EU with the expectation of presenting data in 2018.

In addition, based on the rational provided in a paper published by Dr. Rita Perlingeiro, Professor of Medicine at the University of Minnesota, we have begun discussions with clinical experts to assess development opportunities for TRC105 in acute myeloid leukemia or AML.

Publication, the journal Blood demonstrated endoglin expression on majority of blasts from AML patients and that endoglin expressing blast had superior leukaemogenic activity.

Importantly, her research team showed that TRC105 prevented the engraftment of primary human AML blasts and inhibited progression following disease establishment in mouse models. TRC105 also demonstrated synergy with reduced intensity myeloablative chemotherapy.

AML is a hematologic malignancy with high unmet need that may represent an additional development opportunity for TRC105. Finally, we expect to initiate a Phase 1 trial of TRC105 in combination with Opdivo in patients with non-small cell lung cancer before year-end, the details of which are now posted on clinicaltrials.gov.

Endoglin is expressed on activated myeloid derived suppressor cells, a cell type implicated in tumor resistance to immunotherapy and we have observed encouraging activity of endoglin antibodies in combination with PD 1 inhibitors in preclinical syngeneic mouse tumor models.

We expect these preclinical data will be presented at a scientific conference next year. Turning now to DE-122, the ophthalmic formulation of TRC105, considerable progress has been achieved this year in the product candidate development for wet AMD by our partner Santen.

In July, Santen initiated dosing in the Phase 2 randomized AVANTE study that compares treatment with DE-122 in Lucentis to treatment with single agent Lucentis in patients with wet AMD. Trial initiation triggered a $7 million milestone payment obligation to TRACON and further details of the trial are available on clinicaltrials.gov.

We also expect that Santen will report data from the Phase 1/2 PAVE trial that assess safety and bioactivity of DE-122 in refractory wet AMD patients at the American Academy of Ophthalmology Annual Meeting in November.

We believe there is a substantial opportunity for agents that target essential angiogenic pathways like endoglin to be developed in combination with VEGF inhibitors for wet AMD.

Recent negative data from companies conducting two separate late-stage studies targeting the PDGF pathway in combination with VEGF inhibitors in wet AMD underscore the high unmet need remaining in this indication. We'll turn now to our second product candidate, TRC102.

TRC102 is a novel, small molecule inhibitor of the DNA base excision repair pathway that is intended to reverse resistance to certain chemotherapeutics. Importantly, TRC102 has demonstrated the ability to potentially have the activity of PARP inhibitors in preclinical tumor models.

The NCI presented positive safety, PK and efficacy data from its all comers Phase 1 trial of the combination of TRC102 and Temodar at ASCO earlier this year. Partial responses were observed in patients with ovarian, lung and KRAS-positive colorectal cancer.

Expansion cohorts are currently enrolling in each of these three tumor types at the recommended Phase 2 oral dose of TRC102. Notably, DNA damage was observed in four of five paired colonic biopsies, following treatment with TRC102 and Temodar.

We will continue to assess biomarkers in this study with the goal of identifying a baseline biomarker that predicts activity of the combination. Enrollment in additional NCI-funded trials of TRC102 is also underway. The NCI is sponsoring a Phase 2 trial of TRC102 and Temodar in patients with glioblastoma that has completed the first stage of accrual.

In addition, a dual arm Phase 1/2 trial consisting of a Phase 2 cohort of TRC102 with Alimta in patients with mesothelioma and a Phase 1 cohort of TRC102 with Alimta and Cisplatin in patients with solid tumors is also enrolling. We expect the NCI to present data from all three trials in 2018.

Finally, our collaborators at Case Western recently began dosing patients in a Phase 1 trial of TRC102 in combination with chemotherapy and radiation therapy in patients with lung cancer. Late last year, we in-licensed two oncology assets from Janssen. The first is TRC253, a novel potential best-in-class treatment for prostate cancer.

It is a small molecule competitive inhibitor of wild-type androgen receptor and androgen receptor mutations that confer resistance to Xtandi and other drugs approved to treat prostate cancer. We have moved quickly on TRC253 since in-licensing it in September 2016. TRACON filed the IND in December.

The IND was cleared by the FDA in January and dosing began in May. The primary objectives of the Phase 1/2 study are to assess the safety of TRC253, determine its recommended Phase 2 dose and assess response by PSA levels.

In the Phase 2 portion of the trial, we will incorporate circulating tumor DNA testing in order to allow for biomarker-directed therapy of patients who have progressed following treatment with an androgen receptor inhibitor. We expect to complete dose escalation in this year and complete Phase 2 dosing in next year.

If Janssen opts to reacquire the asset prior to or following completion of the Phase 1/2 trial, TRACON will be entitled to receive a $45 million upfront payment in addition to up to $137.5 million in potential milestones and a low single-digit royalty on any sales.

The Janssen transaction also brought TRC694, a novel small molecule potent inhibitor of NF-kB-inducing kinase or NIK that is intended for the treatment of patients of hematologic malignancies, including myeloma. TRACON owns TRC694 and Janssen retains the right of first negotiation, should we decide to partner the asset.

We continue to perform IND-enabling studies with TRC694 and expect to file an IND in 2018. As you can see, we remain very active on the development front and look forward to a highly productive remainder of 2017 with multiple potential value-enhancing events, including a number of key pipeline-related milestones.

Importantly, we continue to achieve our progress in a cost-effective manner by leveraging the TRACON product development platform that is managing our international Phase 3 TAPPAS trial for TRC105 and angiosarcoma without the significant cost or complexity associated with outsourcing to a global CRO.

We believe the Janssen licensing agreement provided validation of our drug development model and we continue to evaluate additional assets that can leverage our product development platform for the benefit of TRACON and its shareholders.

From a financial perspective, we believe that our current cash resources will fund currently planned operations to mid-2018 and will be sufficient to deliver final data from the randomized Phase 2 TRAXAR renal cell cancer trial, initial response rate data from the multi-center Phase 2 trial of TRC105 in liver cancer, final data from the Phase 1/2 PAVE study in wet AMD, dose escalation data from the Phase 1/2 trial of TRC253 in prostate cancer and support planned manufacturing activities at Lonza for TRC105.

In addition, available financing from our agreement with Aspire provides flexibility to further extend our cash runway. At this time, I will turn the call over to Patricia Bitar, our Chief Financial Officer, who will provide an update on our financials..

Thank you, Charles, and good afternoon everyone. TRACON reported collaboration revenue of $0.6 million and $1.3 million for the three and six months ended June 30, 2017 respectively, compared to $0.8 million and $2 million for the comparable periods of 2016.

The decrease in the six-month 2017 period compared to the 2016 period is primarily attributable to a change in the expected term over which we are amortizing the $10 million upfront payment received in 2014 from Santen. In 2016, we increased the expected term over which we will provide technical and regulatory support to Santen.

Research and development expenses were $4.9 million and $10.5 million for the three and six months ended June 30, 2017 respectively, compared to $6.8 million and $12.3 million for the comparable periods of 2016. These decreases were primarily the result of decreased manufacturing expenses related to TRC105 in both of the 2017 periods.

General and administrative expenses were $2.1 million and $4 million for the three and six months ended June 30, 2017 respectively, essentially flat when compared to $2 million and $4.1 million for the comparable periods of 2016.

Our net loss was $6.6 million and $13.7 million for the three and six months ended June 30, 2017 respectively, compared to $8.3 million and $14.8 million for the comparable periods of 2016.

Turning to the balance sheet, at June 30, 2017, our cash, cash equivalents and short-term investments totaled $32 million compared to $36.7 million and $44.4 million at March 31, 2017 and December 31, 2016, respectively.

As Charles mentioned, the initiation of the AVANTE trial by Santen triggered a $7 million cash milestone payment obligation, which we expect to receive this quarter. As a result, this amount is not included in our reported $32 million cash and cash equivalents balance.

We continue to expect our capital resources to be sufficient to fund our currently planned operations to mid-2018. And with that, I'll turn the call back over to Charles..

Thank you, Patricia. As we noted, the next 12 months will be eventful and full of multiple potentially value-creating milestones.

We anticipate top line Phase 2 TRAXAR trial results in renal cell cancer by year-end, Phase 2 multi-center response data in liver cancer in early 2018 and the key interim analysis to determine the final study size of the pivotal Phase 3 TAPPAS trial TRC105 in angiosarcoma in mid-2018.

We expect Santen to report Phase 1/2 PAVE trial data for DE-122 in AMD at the American Academy of Ophthalmology meeting in November and expect to complete dose escalation for TRC253 this year.

We look forward to providing further updates regarding our upcoming key milestones and remain confident that we have the right strategy in place to deliver on our development and business plans for the benefit of patients and shareholders. With that, we'll be happy to answer your questions..

[Operator Instructions] Our first question comes from the line of Tom Shrader from Stifel. Your line is now open..

Good afternoon..

Hi, Tom..

Thanks for all the background as usual, Charles. It's always -- you always get everything, so I've just a couple of quick questions.

The TRAXAR trial, you are still just saying second half, do -- no closer than that or are you waiting for a meeting, why so broad, it should seem like -- just your thoughts, do you have better resolution than that?.

Yeah, I mean the -- the key on that trial, it's an event-driven trial. So we are tracking the events in real-time, Tom and based on where we think we'll get to in terms of the total number of events, will be kind of basis for reporting the exact data and the timeframe for that.

So right now we clearly think it's second half, meaning quarter four to be more precise and that's just based on looking at the slope of the curve of events as they come in real-time. We're blinded with respect to events per arm, but we do know the total number of events and that will be the basis for triggering the analysis for the top line data..

And do you tell us what the total number is?.

Our goal is 110 events. As I mentioned on the script, I think we're going to be somewhere between 80 and 110, and the difference there is -- at 110, we would have 80% power to see a 2.4 month improvement. Again, likely it will be somewhere between 70% and 80% power at the time of the final analysis..

Okay.

And then just to remind us, for TRC253, what's the earliest you could see the big milestone or the big buy-in?.

So, it can happen at any time up to the delivery of the definitive Phase 1/2 data and we're projecting the Phase 1 portion dose escalation to be completed this year and the Phase 2 portion to be completed in 2018. So, any time up until that point would be when Janssen could opt in and that would trigger the $45 million payment..

Yeah, okay. Perfect, thanks a lot..

Thanks, Tom..

Thank you. Our next question comes from the line of Chad Messer of Needham & Company. Your line is open..

Great, let me add my thanks to the update, keeping track of everything you're doing is high quality challenge..

I appreciate it, Chad..

Yeah, maybe just a clarifying question on TRAXAR. Normally event-driven trials go up until the stated number of events, but you might stop earlier than that. Was that -- is that a change from protocol because the trial is going on too long, how did it come about at that sum -- that is the situation, and if I missed that earlier, I apologize..

No, it's a great question, Chad. I think what we're saying is ideally we'd have 110 events and we'd call the trial at 110th event and do the analysis. Each event in this trial must be confirmed by central review in order to count with respect to the final analysis.

And as we look at the trial, central review doesn't always confirm an investigator's individual decision that the patient has progressive disease. So when we look at the trial, we think that likely the events won't quite get to 110 and how close it gets to that, obviously the closer the better in terms of preserving power.

But I think what we'll do is, look in real-time, see at what point the event seem to be tapering off, if you will, and at that point we would be appropriate to call the trial, knowing that maybe fewer than 110 events.

So, if we get to 110, perfect, then we call the trial, but if we realize we're going to get to a number somewhat shorter than that and we can be pretty confident that the plateau has been reached, then we would call the trial at that number of events and perform the final analysis..

And when you say tapering off, is this a characteristic of RCC patients that has a long tale or something like that?.

No, I think it's a standard consideration across all clinical trials, independent of these act indication that, you know, at some point you'll start seeing the events took off at a point where it's rare and rarer and at that point, if you can realize whether you have one event or two events more, you're really not changing the power to detect your effect size and at that point it's appropriate to do the analysis.

.

All right. I guess we can just hope we have as much power as we can..

Yeah, I think --.

So on DE-122….

Chad, maybe just on that point on TRAXAR, I mean I think it's important, this is not a huge difference in power, whether it's 70% or 80% or somewhere in between, we're not making a big -- we're not having a huge effect on power on this study by having say for example 80 events versus 110, and I think that's an important point to consider.

Yeah, on DE-122, please?.

Actually maybe just on TRAXAR, remind us, I think you said it in the call that there is a specific change that you're looking at.

Can you just take us back through the rationale of what you were powering to?.

Sure. So, initially we were trying to go from a control arm expected PFS of 4.8 months, which was what Sydenham [ph] reported in their pivotal Phase 3 study and trying to prolong that to 7.2 months which is a 2.4 month treatment effect and the trial was designed with 80% power to detect that treatment effect.

And if, for instance, instead of a 110 events, we only would have 80 events in the trial, then the power to detect that treatment effect would go from 80% to 70%..

All right, but the rationale for the 7.2, is that based on your clinical data or what you thought was clinically meaningful or how did you come up with that? Yeah. We thought that was clinically meaningful, it was an improvement of 50% from the baseline expectation of PFS of 4.8 months. So we thought that was clinically meaningful.

I mean, the Phase 1b data, to be clear the PFS was much longer, our Phase 1b PFS was overall 11 months. So we clearly had a nice effect in the Phase 1b study. But the Phase 2 study is really powered based on seeing a 50% improvement in PFS, which we thought was quite meaningful. Okay.

So maybe fair to call it a conservative assumption based on the limited data you had going in.

All right, so on 122 you said we can see safety and bio-activity, maybe just walk us through a little more detail, what we should expect to see at -- towards year-end in November from that Phase 1 study?.

Yeah, I appreciate that. So the safety data, I think speaks for ourselves. The bio-activity data, you would really think about three different potential assesses.

One is visual acuity, I think the most important bio-activity assessment is through the OCT or optical coherence tomography, which really gives you a really nice picture of the anatomy of the eye and it allows you to appreciate the macular edema in patients and whether that's affected for instance by treatment with DE-122 and/or treatment with the DE-122 as well as the VEGF inhibitor therapy that the patient has been receiving as a chronic therapy.

Ideally what we'd like to see is that DE-122 followed by the standard VEGF inhibitor therapy these patients are on would have an effect on macular edema and ideally even on visual acuity.

You have to understand, these are tough patients, these are patients who are refractory, they were on a VEGF inhibitor who were not getting the classic three lines visual improvement. They are on the VEGF inhibitor because frankly that's all you can offer a patient with this disease in order to kind of maintain the status quo.

So on the backbone of a basic VEGF inhibitor that's not giving the patient great benefit, we can see effects when you add DE-122 dosing and then follow that with the standard VEGF inhibitor, that in our view would be very meaningful data whether it were to potentially cause improvements of visual acuity or potentially cause improvements in macular edema.

Those are the bio-activity indices that would be important as part of that trial..

All right, thanks. That's quite a bit to look forward to even between now and year-end..

I appreciate it, Chad. Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Maury Raycroft of Jefferies. Your line is now open..

Hi, good afternoon. Thanks for taking my questions..

Hi, Maury..

Hi, I had a question for -- about RCC. And so you mentioned in the press release that there were some trends with the biomarkers that were reported at ASCO. I was just wondering if you could remind what the biomarkers are and maybe a little bit about the kinetics of how the biomarkers work.

I guess after they change after first dose or does it take several cycles of treatment? And then for the data that we're going to see in the second half of the year, if you're going to have any biopsies from those patients?.

Sure, Maury. So first on the biomarkers, with respect to biomarkers, there are several biomarkers that changed with respect to treatment with TRC105, either you give a single agent or given with the VEGF inhibitor. And when you see changes, they happen quite quickly, within two weeks of therapy.

What we really focused on with respect to these two biomarkers is the approach to try to find a baseline biomarker that would predict response. And that would be the Holy Grail with respect to renal cell cancer.

Currently, therapies are used in this disease without really interrogation of the tumor, I think potentially with the exception of some of the PD1 therapies, but the VEGF inhibitors, for instance, are used in renal cell, that really -- any idea if it's going to work patient X or patient Y.

So our goal with respect to our biomarker program with TRC105 in renal cell is, find a baseline biomarker that would predict response in a patient. And in the Phase 1b study, we found two that did correlate with response, so one was osteopontin, one was TGF-beta receptor 3.

You know, on particular incident of TGF-beta receptor 3, that was a very strong statistical correlation between that -- expression of that receptor in plasma and response, and biologically it's interesting, TGF-beta receptor 3 is a receptor that kind of maintains a reservoir of the TGF-beta ligament, it influences the endoglin pathway.

So biologically it made sense that that could correlate with response and again the statistical association was quite strong.

So we're interested to see if that biomarker baseline values will correlate with PFS, the endpoint in the TRAXAR trial, and if we can make that association, that could be the base -- for using a baseline soluble biomarker as a way to enroll responsive patients for instance in the pivotal Phase 3 study.

So that's an exciting prospect that we will develop with respect to the spec to the TRAXAR data as we move forward..

Got it. .

And so… [Multiple speakers].

Well, so I was wondering for the NCI TRC102 trial, just how big the expansion cohorts are going to be for the three different groups and then any idea on that timeline to read out for that trial?.

Yeah, so the Phase 1 trial, now really a Phase 1/2 trial, Temodar plus TRC102, there are nearly 15 patients in each of the three tumor types where they saw partial response; ovarian cancer, colorectal cancer and lung cancer.

And I do expect to see data in that -- for that study typically they've been presenting those data at ASCO, so my expectation would be that they will present data at ASCO '18 with respect to that cohort of data.

And I think importantly in that study too, they are looking carefully at biomarkers and I do think in TRC102, I think the ability to identify a baseline biomarker that predicts response will make that a very valuable program and that's really the emphasis at this time..

Got it.

And then last question was just on the Non-small Cell Lung Cancer trial where you're combining TRC105 with Opdivo, maybe if you can just provide a little bit more context about some prior data and Non-small Cell Lung Cancer and then what your expectations are?.

Yeah, I think it's an exciting potential prospect. I mean our current theme has been combining TRC105 with VEGF inhibitors, biologically that makes sense and (inaudible) escape or resistance to VEGF inhibitor therapies, and that really depends on the endoglin expression on the endothelial cells or directly on the tumors in the case of angiosarcoma.

Our observation that endoglin expressed on myeloid derived suppressor cells, they have led us to investigate the potential to combine this therapy with PD1 inhibitors.

And within the indication of a PD1 inhibitors are approved, lung cancer seems like a nice path in the sense that Opdivo in second-line lung cancer is an effective therapy but the response rate is limited in the 10% to 15% range.

So if we can do a Phase 1 trial with a dose expansion cohort, which is what's planned with the TRC105 plus Opdivo trial, we can look in that expansion cohort and see if we have a more robust response rate, then you'd expect with Opdivo as a single agent.

Importantly, in that trial we will also be performing biopsies with the expectation of identifying where there is certain characteristics of the tumor will predict response to TRC105 and Opdivo.

Specifically, if there are myeloid derived suppressor cells in that biopsy and that correlates with response, that would be a huge breakthrough for a potential new path for TRC105, not building upon just VEGF inhibitors, potentially building upon the PD1 franchises of multiple companies.

So it's an important initial trial, it's substantiated in terms of very encouraging preclinical data that will be presented next year and another nice path for TRC105..

Great. Thank you..

Thanks, Maury..

Thank you. I'm showing no further questions at this time. Please proceed with any further remarks..

I appreciate the questions. Thank you very much for your time and interest. Have a nice day and we look forward to updating you again in next quarter..

Ladies and gentlemen, thank you for participating in today's conference call. This does conclude the program and you may all disconnect. Everyone, have a great day..