Aclaris Therapeutics, Inc. Q1 FY2023 Earnings Call

Thank you. I am Robert Doody, Head of Investor Relations for Aclaris. Please note that earlier today, we issued a press release highlighting our first quarter 2023 financial results and other business matters. For those of you who have not yet seen it, you will find the press release posted under the press releases page of the Investors section of our website. In addition, we will be referring to a slide deck entitled Q1 2023 investor conference call, which can be found on the Investor page of our corporate website and furnished as an exhibit to our Form 8-K that we filed with the SEC earlier this morning. Joining me today for the call are Doug Manion, our Chief Executive Officer; Gail Cawkwell, our Chief Medical Officer; Joe Monahan, our Chief Scientific Officer; and Kevin Balthaser, our Chief Financial Officer. 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 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 31st, 2022 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 the Aclaris' website. 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 the 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 investor section of our website. I'll now turn the call over to Doug.

Thanks, Bob. Good morning, everyone. I hope you had a great weekend. It is my distinct honor to be speaking with you today, following not only my first quarter as CEO, but also the first quarter of operations for our new leadership team. For those who may be newer to the Aclaris Therapeutics story, we were originally founded as a specialty pharma company focused on dermatologic conditions. It is a great credit to my predecessors that a few years ago the company made the decision to acquire Confluence Life Sciences based in Saint Louis. The addition of this world-class discovery group focused on the human genome, allowed Aclaris to pivot its focus on research and development efforts towards addressing areas of serious unmet need in immune-inflammatory diseases with oral or tissue-specific agents. As evidenced by a number of recent significant transactions in the INI space, including acquisition announcements from major pharmaceutical companies, there is tremendous opportunity for significant creation of shareholder value in this space, and we find ourselves in the enviable position of having several key clinical-stage assets targeting these potential diseases led by our potential first-in-class MK2 inhibitors, zunsemetinib or ATI-450. If you could direct your attention to slide three in the slide presentation, we can discuss the agenda for our call today. We're very pleased to be speaking with you today to provide an overview of our first-quarter financial results, as well as an update of our timing and plans for the remainder of the year. I'll begin by providing a few opening remarks on the company's performance to date for the year, and then we'll turn the call over to Gail, who will provide updates on all of our progress across the clinical development programs. Following that update, Gail and Joe will provide an overview of the final results from the trial in hidradenitis suppurativa or HS, for which we reported top-line results back in March. Kevin will then provide an overview of our financial results for the period. And finally, I'll provide some closing comments prior to opening up the call to address your questions. Overall, I'm very pleased with the performance of our company through this first quarter of 2023. Our team is making tremendous progress, advancing all of our various clinical development programs, which is a testament to our team as we are a relatively small company in terms of size and overhead. I also remain impressed with their ability to continue to execute global clinical trials in a challenging macro environment that is continually taxed by economic downturns, choked supply chains and global conflicts. Despite all these headwinds, our team is continuing to prosecute these studies and demonstrating creativity and flexibility in the face of hurdles when they arise. And for that, I could not be more proud. During the first quarter this year, we completed and reported the top-line results of our Phase 2a trial of ATI-450 in HS. Although we were disappointed that the efficacy results were not what we had hoped for in this challenging and still relatively misunderstood disease, our team delivered on time a well-executed trial. Importantly, this trial further expanded our experience and understanding of ATI-450. The completion of this study has further demonstrated the foundation for the program from both a safety and pharmacodynamic perspective. Going into our next data readouts in rheumatoid arthritis and psoriatic arthritis. As a reminder, our company already had positive proof-of-concept data in array from a prior Phase 2a trial. Shortly, Gail and Joe will provide more details on the final results of the trial, with a focus on how they inform our continued execution of the rest of the ATI-450 program. With that, I'm now going to turn the call over to Gail to begin the discussion on clinical development progress. Gail?

Thank you, Doug, and good morning, everybody. I also want to take a moment to commend the Aclaris team on their execution of the hidradenitis suppurativa trial, but also on the tremendous work they've done in recent weeks to fully analyze all of the results from the study, thus enabling us to provide you with today's overview. Directing you to slide four, the summary of our development pipeline. Let's start with our Phase 1 stage clinical asset ATI-2138 and ITK/JAK3 inhibitor. Building on the successes of the ATI-2138 single ascending dose study, the multiple ascending dose study in healthy volunteers continues to progress well. We are very much on track to have pharmacokinetics, pharmacodynamics, and safety results in the second half of this year. As we previously announced, our first clinical trial of ATI-2138 in a patient population is planned to be a Phase 2a proof-of-concept study in ulcerative colitis. The planning is well underway so that we can be in a position to initiate quickly upon completion of the ongoing multiple ascending dose study. Later this year, we will provide you with more details on the ulcerative colitis study after we have the Phase 1 results and have fully finalized the design of this proof-of-concept study. Moving on to ATI-2231, our next-generation MK2 inhibitor, we're moving closer with our prospective academic partners to get into the ultimate objective of setting ATI-2231 in metastatic breast cancer and in pancreatic cancer. Now shifting to slide six. For ATI-1777, our topical JAK1/3 inhibitor, which was designed for skin efficacy and minimize systemic exposure, we are conducting a Phase 2b study in atopic dermatitis as a follow-up to our successful Phase 2a study. The objectives of the trial are to further evaluate the efficacy and safety of ATI-1777 and validate the limited systemic exposure seen in the Phase 2a study. We are also studying several dose strains, including the 2% twice-daily dose studied in the Phase 2a trial and several lower-dose strains as well as assessing once and twice daily applications so that we know which formulation regimen will be best for progressing into Phase 3 development. We also expanded our study population in the study to include children down to age 12, given the importance of this disease in children. The primary endpoint of the trial is the percentage change from baseline in the Eczema Area and Severity Index or EASI score at week four. The target enrollment is 240 patients. We've been very encouraged by the success seen recently with other topical therapies in a broader array of patients and the meaningful medical need in some milder patients. As such, we recently extended the protocol to include not just moderate and severe atopic dermatitis, but some mild patients as well. And we want to assure we can enroll adequate mild patients to meaningfully evaluate them. This protocol modification is also important because as some of you may have seen reported from other companies conducting trials in atopic dermatitis, enrollment this past winter season has encountered some challenges, particularly driven by the mild winter in many locations, particularly in the southern and eastern portions of the US. Since the dryness associated with cold winter weather and heating can exacerbate atopic dermatitis. In the first few weeks of this protocol amendment, which just went into effect we have already seen a meaningful increase in screening. We are updating our guidance in terms of timing of top-line results to move from our prior guidance of midyear to the second half of this year, and we will tighten up that guidance as we continue to learn more about the impact of the amended protocol. Moving to slide seven. As a reminder, in our Phase 2a trial, ATI-1777 achieved statistically significant results in the primary efficacy endpoint at week four, and positive trends were observed in secondary endpoints, including improvements of itch, percent of modified EASI-50 responders, IGA responder analysis, and reduction of body surface area impacted by the disease. Shifting to slide eight. Importantly, ATI-1777 was observed to have a favorable safety and tolerability profile and because of the soft topical approach, very low plasma levels of ATI-1777 were seen following the topical application with the average concentrations in patients never greater than 5% of the IC50 of JAK1/3, and only three patients had concentrations greater than 1/10 of the IC50. Now moving onto ATI-450. We'll begin with a more comprehensive overview of the HS trial now that we have the full data set. As you all know from the top-line results that we reported in March, ATI-450 did not fit either our primary or secondary efficacy endpoints in HS. As shown on slide 10, we randomized 95 patients into the study with 47 on placebo and 48 on ATI-450. Overall, with 32 patients on the placebo arm completing the study and 26 on active treatment. As previously noted, the study did not demonstrate efficacy for ATI-450 in the treatment of HS. We saw a modest effect, which was overshadowed by an unusually large placebo effect. I do want to spend the majority of our time today on the elements from this trial that can be applied to our understanding of ATI-450 overall. These elements primarily fall into two buckets, safety and pharmacodynamics. I will discuss the safety elements in detail and then Joe will discuss the pharmacodynamics. Slide 11 shows the steady demographics and baseline characteristics. We are quite proud that we enrolled a trial that was very representative of real-world HS patient populations with more inclusion of historically underrepresented people.

Thanks, Gail. Good morning, everyone. Let me start by saying that at the outset, we believe mechanistically ATI-450 had a chance of demonstrating efficacy in the HS study. However, we believe it is likely that the disease is perhaps driven more locally in the skin than through systemic pathways. I would now like to share what we have learned from the HS study pharmacokinetic and pharmacodynamic analysis. Briefly, the PK for ATI-450 behaved as expected with a modest accumulation across the first week of dosing and peak and trough drug levels similar to those observed in the Phase 1 MAD study and the Phase 2a RA study. For PD, we took two approaches to understand ATI-450 pharmacodynamics in HS patient blood, as shown on slide 18. First, we conducted an analysis of cytokines in ex vivo stimulated patient blood on a small sample subset of five patients from two sites. We compared samples from both placebo and ATI-450 treated HS patients with healthy donor controls analyzed in parallel. We looked at four pro-inflammatory cytokines, TNF alpha, IL-1 beta, IL-6, and IL-8 after the first dose and then again at the end of the study. If you direct your attention to slide 19, you can see we provide side-by-side comparisons across three of the ATI-450 studies completed to date. The seven-day MAD study in volunteers, the 12-week RA Phase 2a study, and the 12-week HS study. ATI-450 inhibited all four cytokines analyzed, while the data shown focuses on inhibition of TNF alpha and IL-1 beta. On day one, near complete inhibition of these two proinflammatory cytokines is observed across all three studies, suggesting that their production in healthy subjects, RA patients, and HS patients is similarly dependent on the MK2 pathway and sensitive to ATI-450. Also important to note here is that ATI-450 potently inhibits the cytokines at the end of each dosing period, either seven days or 12 weeks, consistent with the lack of pathway reprogramming and tachyphylaxis across all of these studies and continued dependence of inflammatory cytokine production on MK2. Our second analysis consisted of evaluating the impact of ATI-450 on endogenous plasma cytokines in HS patients. We carried out this analysis on all 95 patients at time points where it was confirmed that subjects were dosed along with healthy donor controls, evaluating samples at day one pre-dose and then again at trough. If you turn your attention to slide 20, you can see that endogenous plasma pro-inflammatory cytokines and CRP at baseline were lower in the HS Phase 2a study compared with the RA Phase 2a study, which appears consistent with a lower level of systemic inflammation in these HS patients. The next slide provides comparisons between the RA and HS Phase 2 studies, analyzing the impact of ATI-450 on endogenous plasma levels of TNF alpha, IL-6, IL-8, and MIP-1 beta. While pre-dose levels of cytokines were lower in HS patients compared to RA patients in the Phase 2a studies, a similar persistent decrease in cytokine levels near to or below healthy donor levels was observed in both studies.

Thank you, Gail, and good morning, everyone. Our financial highlights are projected on slide 25. Let us begin with our cash position. We ended Q1 with cash, cash equivalents, and marketable securities of $204 million, which compared to $230 million at year-end. Additionally, near the end of Q1 we sold 3.4 million shares under our ATM facility for aggregate net proceeds of $26.7 million. This transaction closed in April after the close of the first quarter, so those funds will be recognized as part of our second-quarter results. With the addition of those funds, we believe that our current cash, cash equivalents, and marketable securities will continue to be sufficient to fund our operations through the end of 2025. We do like to note that our cash runway projection does not contemplate the costs associated with conducting a Phase 3 development program for ATI-450. Regarding our financial performance for the quarter, our net loss was $28.2 million for the first quarter of 2023 compared to $18.8 million during the first quarter of 2022. This difference is primarily driven by the advancement of our ongoing clinical programs. Total revenue for the quarter was $2.5 million compared to $1.5 million in the prior year's quarter. This increase was driven by higher licensing revenue, primarily from royalties earned on out-licensed intellectual property during the first quarter of 2023. R&D expenses were $22.6 million for the first quarter of this year compared to $14.3 million in the first quarter of 2022. As previously mentioned, this increase has been driven by the advancements of ATI-450, ATI-1777, and ATI-2138. General and administrative expenses were $8.8 million during Q1 of 2023 versus $6.1 million during the same period in 2022. This increase was primarily driven due to increased compensation expenses related to increased headcount to support our growing development initiatives.

Thanks to you, Gail, Joe, and Kevin, for those comprehensive overviews. Before we shift the call to addressing your questions, I'd like to make a few final comments. I'm very pleased with the quality and execution of our entire team here at Aclaris. We're blessed to have a world-class large pharma quality research engine that is very atypical for a biotech company of our size. The conference team continues to deliver unique and novel potential medicines against targets addressing significant unmet medical needs. The fruits of that labor include ATI-450, ATI-1777, ATI-2138 along with ATI-2231 with more to come. We're very optimistic about the broad potential of ATI-450 and very eager to complete and report on the current clinical trials. We took a shot at a very difficult disease in HS knowing that we already had positive RA data in hand. We're now laser-focused on the completion and timely reporting of the results of our ongoing trials in RA and psoriatic arthritis, the planning for Phase 3 studies for those indications and the continued exploration of the MK2 mechanism in other INI indications. Importantly, we continue to execute on these programs in a fiscally prudent and conservative manner. It is also gratifying to see that several top-tier investors have either taken or increased their positions in our stock recently. These are very exciting times for Aclaris, and the next several quarters are no exception. We have a lot of work in front of us, but we have the right team in place to execute, and we look forward to apprising you of our progress as we continue forward. Operator, we now would like to open the line for questions.

Thank you. Our first question comes from Louise Chen with Cantor. Your line is now open.

Hi. Congratulations on all the progress this quarter, and thanks for taking my question. So I wanted to ask you first about the read-through from HS to your RA study and a lot of people are anticipating results from that at the end of this year. And I'm wondering how you think about that elevated CK level, if you might see that in the RA study? And then the second question I wanted to ask you was on the atopic dermatitis enrollment. And did any of that have to do with more drugs being available really just the winter season? And if you move into milder patients, how well do you think the drug will do in milder patients or what kind of efficacy have you seen in that patient population? And the last question is just on UC, how did you come to choose this as your first indication? And how quickly can you get to proof-of-concept since this market is rapidly evolving? Thank you.

Thanks, Louise, it's Doug here. Regarding the read-through from HS to RA, not focusing on CPK, we see nothing but positives. We have significantly more confidence in the safety profile of the drug, and there are really no red flags. I have developed dozens of drugs, and it's a real privilege to have one looking as promising as this one. Of course, we still need to complete the program, but so far, it's shaping up to have an extremely attractive, competitive safety profile. The drug operates systemically exactly as we expected in HS and as it did in the RA Phase 2a. We're very optimistic about what this means for the RA study results expected in the fourth quarter of this year. As for CPK, Gail elaborated well on our findings in the study. We just need to remember that CPK elevations are clinically irrelevant. Most practitioners wouldn't even monitor these levels routinely, as they fluctuate based on exercise and overall activity. The true concern would arise if there were associated symptoms like muscle weakness or pain, neither of which we observed, or if it seemed related to cardiac issues; however, our CK fractionation analysis on many patients showed no CK-MB elevations. Therefore, we don't believe there's a CPK issue. Additionally, the data safety monitoring board overseeing the RA study hasn't raised any concerns about the study's progress, so we believe we are in a good position. Moving on to the atopic dermatitis enrollment question, we've been monitoring the space, and many other companies have faced similar challenges. It's somewhat ironic for those in the western U.S. because we experienced a very snowy winter. However, in the regions where we are conducting the AD Phase 2b study, primarily in the Northeast and Southeast, the winter was mild, leading to slower enrollment for us and others. We believe that expanding the enrollment criteria to include mild cases will enhance recruitment, and we are confident in the timelines we shared today. We currently lack data for the mild patient group, since the Phase 2a study focused on moderate to severe atopic dermatitis. We believe the drug will perform effectively in mild patients and look forward to the results in the second half of this year. Lastly, regarding ulcerative colitis, the deal between Merck and Prometheus was significant, and they have intriguing data in UC. However, my experience tells me that one should never give up, as there are others exploring the same territory. We think that mechanistically, ATI 238 appears very promising for the indications we’re pursuing in UC and other T-cell diseases. We'll observe how the market changes. Notably, with the Prometheus and Arena deals involving Pfizer, a number of companies are investing in IBD, and we feel confident we will be competitive in that area.

Yeah, good morning, everyone. You alluded to this a little bit on the prepared remarks, but could you further contextualize how the CK elevations compare relative to other oral therapies that are approved and in development for similar indications, including like the JAKs, TYK2s, and TNF alphas? And then have you sought or received any feedback from KOLs regarding what's tolerable there? And then I have a follow-up.

Yeah, so let me start. First, nice to hear your voice, Corinne. So and Gail is going to elaborate in terms of the impact of CPK of other mechanisms in the INI space. But the CPK issue, for lack of a better word, in our clinical trials has been a bit of a nothingburger for investigators. So dermatologists and rheumatologists understand that asymptomatic CPK elevations are really nothing to worry about. Some have even asked us why it is that we're measuring them, but it's kind of standard procedure to do so. We've seen zero concerns from clinicians that this is a clinically significant finding. Gail, do you want to elaborate about the CPK elevations with other mechanisms?

Certainly. It's important to note that while this may not be explicitly mentioned in the label as a safety concern, existing literature, especially regarding TNF and JAK inhibitors in conditions like rheumatoid arthritis, juvenile arthritis, inflammatory bowel disease, and skin diseases, indicates that the observed increases in CK levels can be seen as a sign of muscle regeneration and enhanced muscle mass and function as inflammation decreases. There is also some basic scientific research supporting the idea that differentiation plays a significant role in this process. This pattern aligns with our expectations and our observations so far, with no indications of any pathological issues arising.

Yes. So with the two cytokines that you mentioned, with IL-17, there was a subset of patients where IL-17 was measurable and was elevated. And in those patients, ATI-450 resulted in a reduction in the level of IL-17. With IL-12, IL-12 was elevated in HS patients and endogenous and ATI-450 did result in a reduction in IL-12 as well. So in both those cytokines there was a reduction in the measurable levels of those by ATI-450.

Hey, guys. Good morning. Thanks for taking the questions. I guess, first on the HS study and the CNS adverse events, dizziness, headache, and tremor. Do you have a sense for the etiology of those signals? And can you clarify if there were any discontinuations due to the CNS events?

Yes. Hey, Tom, Doug here. So in animal studies, at least, we do not believe our drug crosses the blood-brain barrier. So it is a little bit of an enigma to us if there'd be any such symptoms. But I'll let Gail speak on that.

I'd like to start by mentioning that the signals of headaches and dizziness we have observed are consistent throughout our program. We noticed these in our Phase 1 unit studies, where patients are monitored very closely for several days or even a few weeks. In those instances, these symptoms are typically not unusual and tend to be transient. In most cases, there hasn't been a clear reason for why patients may experience these feelings. As Doug mentioned, we have no evidence that ATI-450 penetrates the central nervous system. Additionally, factors that could lead to headaches and dizziness, like fluctuations in blood pressure, have not been observed in any of our studies, including those with intensive monitoring in Phase 1 settings. The positive aspect is that when patients are informed that these symptoms might occur and are likely to resolve, we have found that they are willing to continue with the treatment.

Thank you, Gail, and good morning, everyone. Our financial highlights are projected on slide 25. Let us begin with our cash position. We ended Q1 with cash, cash equivalents, and marketable securities of $204 million, which compared to $230 million at year-end. Additionally, near the end of Q1 we sold 3.4 million shares under our ATM facility for aggregate net proceeds of $26.7 million. This transaction closed in April after the close of the first quarter, so those funds will be recognized as part of our second-quarter results. With the addition of those funds, we believe that our current cash, cash equivalents, and marketable securities will continue to be sufficient to fund our operations through the end of 2025. We do like to note that our cash runway projection does not contemplate the costs associated with conducting a Phase 3 development program for ATI-450. Regarding our financial performance for the quarter, our net loss was $28.2 million for the first quarter of 2023 compared to $18.8 million during the first quarter of 2022. This difference is primarily driven by the advancement of our ongoing clinical programs. Total revenue for the quarter was $2.5 million compared to $1.5 million in the prior year's quarter. This increase was driven by higher licensing revenue, primarily from royalties earned on out-licensed intellectual property during the first quarter of 2023. R&D expenses were $22.6 million for the first quarter of this year compared to $14.3 million in the first quarter of 2022. As previously mentioned, this increase has been driven by the advancements of ATI-450, ATI-1777, and ATI-2138. General and administrative expenses were $8.8 million during Q1 of 2023 versus $6.1 million during the same period in 2022. This increase was primarily driven due to increased compensation expenses related to increased headcount to support our growing development initiatives.

Thanks to you, Gail, Joe, and Kevin, for those comprehensive overviews. Before we shift the call to addressing your questions, I'd like to make a few final comments. I'm very pleased with the quality and execution of our entire team here at Aclaris. We're blessed to have a world-class large pharma quality research engine that is very atypical for a biotech company of our size. The conference team continues to deliver unique and novel potential medicines against targets addressing significant unmet medical needs. The fruits of that labor include ATI-450, ATI-1777, ATI-2138 along with ATI-2231 with more to come. We're very optimistic about the broad potential of ATI-450 and very eager to complete and report on the current clinical trials. We took a shot at a very difficult disease in HS knowing that we already had positive RA data in hand. We're now laser-focused on the completion and timely reporting of the results of our ongoing trials in RA and psoriatic arthritis, the planning for Phase 3 studies for those indications and the continued exploration of the MK2 mechanism in other INI indications. Importantly, we continue to execute on these programs in a fiscally prudent and conservative manner. It is also gratifying to see that several top-tier investors have either taken or increased their positions in our stock recently. These are very exciting times for Aclaris, and the next several quarters are no exception. We have a lot of work in front of us, but we have the right team in place to execute, and we look forward to apprising you of our progress as we continue forward. Operator, we now would like to open the line for questions.