Earnings Call Transcript - AKBA Q1 2022

Mercedes Carrasco, Director of Corporate Communications

Thank you and welcome to Akebia's first quarter 2022 financial results and business update conference call. Please note that a press release was issued earlier today, Monday, May 9th, detailing our first quarter financial results, and that release is available on the Investors section of our website. For your convenience, a replay of today's call will be available on our website shortly after we conclude. Joining me for today's call, we have John Butler, Chief Executive Officer; and Dave Spellman, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call includes forward-looking statements. Each forward-looking statement on this call is subject to risks and uncertainties that could cause actual results to differ materially from those described in these statements. Additional information describing these risks is included in the financial results press release that we issued on May 9th, as well as in the Risk Factors and Management Discussion and Analysis section of our most recent annual and quarterly reports filed with the SEC. The forward-looking statements on this call speak only as to the original date of this call, and except as required by law, we do not undertake any obligation to update or revise any of these statements. With that, I'd like to introduce our CEO, John Butler.

John Butler, CEO

Thanks, Mercedes, and thank you all for joining us. Our first quarter and the weeks since have been extremely eventful for the Akebia team. Given all the moving pieces, I believe it's important to start with an outline of our strategic focus, as we reshape Akebia to maximize value and deliver on our purpose. As you know, Akebia received a complete response letter, or CRL, for the Company's new drug application for vadadustat, an investigational oral hypoxia-inducible factor prolyl hydroxylase inhibitor for the treatment of anemia due to chronic kidney disease. The CRL came as a surprise, and we're extremely disappointed by the outcome. Regardless, we acted quickly with the goal to both strengthen and secure the Company financially, as well as begin to rechart our near-term and longer-term focus. We've organized our strategic focus into three pillars: first, maximizing Auryxia performance and corporate-wide cost management; second, supporting our global partners through vadadustat review, approval and launch, as well as additional geographic expansion and evaluating options for potential U.S. approval; and third, at the appropriate time, thoughtfully investing in our pipeline by developing internal assets and evaluating other strategic growth opportunities. These efforts are intended to create shareholder value. Let me begin with our first pillar. Most critical for our success is maximizing the value of our commercial product, Auryxia. Our commercial team has done a great job positioning the product to increase revenue and contribution from the brand. Our financial guidance of $165 million to $170 million represents a 17% to 20% annual net revenue growth for the year. We made some important decisions in 2021 that created the opportunity to increase net price to Akebia. Those decisions are beginning to bear fruit now. In addition, we've been very deliberate in our efforts to rationalize costs with a goal to align our spending with our top strategic objectives. We believe this work will enable meaningful value creation in the near term. Again, the goal is to drive Auryxia revenue and identify cash management opportunities with the objective to enable Akebia to manage the Company with existing cash resources and ongoing cash from operations. Our recently announced reduction in force aligns with our go-forward operating model and strategic plan. Several members of our leadership team will also depart the Company over the coming quarters. The planned transition time for each executive is to ensure Akebia is positioned for long-term success. We're very fortunate that we've had a focus on leadership development for a number of years. For example, while Dell Faulkingham, our Chief Commercial Officer, will be leaving the Company at the end of June. He's built an incredibly strong leadership team, and, frankly, an incredibly strong commercial organization, which I'm confident will continue to deliver results for Akebia and our patients. For me, losing anyone is tough, but especially losing these leaders and employees, who are impacted by this necessary change in direction. They have made lasting contributions to Akebia. Each has helped establish a foundation of talent and culture that will enable us to build for the future. For that work, I'm extremely grateful. Moving to our second pillar. Vadadustat is still a key value driver for Akebia. It's approved in Japan and under review in Europe and several other markets. We will continue to support our partners in their efforts to obtain regulatory approval for and sell vadadustat outside the U.S. As you recall, our partner, Otsuka, filed an MAA with the European Medicines Agency for vadadustat in October of last year. Approval in Europe, if obtained, could drive significant non-dilutive growth capital and potentially benefit thousands of patients. As I've always said, we're committed to all people impacted by kidney disease. That commitment drives our efforts to explore a path forward for vadadustat in the U.S. as we continue to believe in its benefit, as a treatment for anemia due to chronic kidney disease. The next step available to us is to request an end review conference with the FDA. We're working on the documentation to support that request and expect to submit it to the FDA this quarter. Now on to our third pillar, we've been working hard to build a pipeline beyond Auryxia and vadadustat. These efforts have become even more important now. In addition to our clinical development pipeline opportunities, we have several promising preclinical stage programs based on internal research that we're currently evaluating. We will take advantage of opportunities to advance our pipeline, as appropriate. Building our pipeline and leveraging our excellent commercial organization is a key component of our strategy. We've maintained several important capabilities that we believe continue to make us an appealing partner moving forward. Furthermore, as we've shared, vadadustat is being studied by the University of Texas Health as a potential therapy to prevent and lessen the severity of acute respiratory distress syndrome, or ARDS, in adult patients, who have been hospitalized due to COVID-19. We expect to read out the data from the investigator-sponsored study later this quarter. We look forward to updating you there as appropriate. With that, let me pass it over to Dave to look more carefully at the numbers.

David Spellman, CFO

Thank you, John, and good afternoon, everyone. As John mentioned, we have made several difficult and important decisions this month. With our cost savings plan aligned to our strategic pillars, we believe we can build a Company that can fund its current operating plan with collaboration and product revenues. We are excited to be one of the few biotechs that come up to its lead product for key strategic cash in these challenging times in the biotech and broader equity markets. In addition to the Auryxia revenue guidance, we plan to reduce our operating expenses in each of the next few quarters for the remainder of 2022, as we see the benefits from our headcount reductions and anticipated reduction in contractual commitments. We are working to preserve cash until we're in a position where our cash from operations is contributing important funds to profitability, reinvestment or both, which we will evaluate in future periods. Some of the cost savings we have already implemented include reductions to our vadadustat external marketing costs and the U.S. supply chain build. We are taking steps to reduce our overhead costs across our G&A functions and plan to continue to find ways to streamline our external cost structure in R&D and commercial. Most importantly, our team is showing resilience and resourcefulness, as we undertake these activities. Turning to some important selected financial results for the quarter, starting with revenue. Net product revenue for Auryxia increased 36% to $41.4 million for the first quarter of 2022 compared to $30.4 million for the first quarter of 2021. The Akebia team is very proud of the performance. This is a challenging market, where COVID has increased mortality in the patients we serve. The growth is reflective of a higher net revenue per pill. Collaboration revenue was $20.3 million for the first quarter of 2022 compared to $21.9 million for the first quarter of 2021. The decrease was primarily due to lower collaboration revenue from Otsuka. Turning to expenses. Our total cost of goods sold in the quarter were $31.3 million versus $34.6 million a year ago. Our cost of goods sold consisted of costs associated with the manufacturing of Auryxia and supply of Vafseo to Mitsubishi for commercial sale in Japan. Additionally, $5.3 million was related to excess and obsolescence reserves associated with Auryxia, partially offset by a $0.8 million reduction to the liability for excess purchase commitments and $9 million related to amortization of intangibles. Additionally, we estimate our restructuring charge in connection with our recently announced reduction in force to be approximately $16.5 million, driven by headcount reductions and associated costs. For our bottom line, net loss was $62.4 million for the first quarter of 2022 compared to $69.6 million for the first quarter of 2021. Regarding our capital position, we ended the first quarter with $174.6 million in cash and cash equivalents. We believe that our cash resources should be sufficient to fund our current operating plan through at least the next 12 months. To achieve this cash runway, we will have to continue to reduce our cost base from where it is today. As mentioned earlier, we have not yet achieved all the savings we are targeting, and the team is diligently working to execute our plan. Overall, as we move through the second quarter, we are proud of the progress we have made despite these unexpected circumstances. Auryxia continues to perform well, and we look forward to providing further updates throughout the year. With that, we'll open the line for questions.

Allison Bratzel, Analyst

Hi, good afternoon, and thank you for taking my questions. I have two questions. First, regarding Auryxia, could you clarify the growth drivers for 2022? Is the growth primarily going to come from increased revenue per pill, as you mentioned? It seems like your guidance suggests minimal sequential growth for the rest of the year. Also, can you explain how we should view Auryxia's margins moving forward? I understand there are several non-cash items in COGS, and some of the cost reductions you mentioned won't be realized this year. It would be helpful if you could detail those factors and explain your confidence in making Auryxia a cash flow positive product before the generic version arrives in 2025. My other question is about your cash position. Can you remind us of your cash run rate guidance, particularly what assumptions are included regarding milestone payments for EU approval and the repayment of the term loan? Additionally, are there other factors like the use of the ATM that are not included in that guidance?

John Butler, CEO

Great. Thanks, Ally. Dave, do you want to...

David Spellman, CFO

Yes, I would be happy to address your first question regarding the Auryxia revenue growth. As you mentioned, our guidance is currently limited due to a few factors. Firstly, we are very proud of our achievement over the last six months in realizing a higher net price per pill, but it is still early in the year, and with some contractual changes, we want to ensure that the product continues to perform well. We look forward to providing further updates throughout the year and are pleased with our progress so far. The second reason for our cautious approach is that, although the large dialysis providers have indicated a decrease in excess mortality among their patients, they are still facing challenges from Omicron affecting patient attendance for sessions and staffing issues. We want to be careful regarding any potential changes in phosphate binders in the market. Regarding your second question about expense guidance, our expense projections consider several factors. We plan to service our term loan with Pharmakon, which is part of our strategy. We are also exiting several external cost drivers and winding down certain research and development activities, including the three times weekly studies, later this year. We believe these actions will support the Company. Additionally, it’s important to note that ongoing work to assist our partners with approvals outside the U.S. involves funding contributions from them, which is why we mention collaboration and product revenue. You also inquired about the cost of goods and its drivers. We plan to continue amortizing the intangible asset for Auryxia at about $9 million per quarter. The remainder of the cost of goods is shared between Auryxia and vadadustat. We supply our partner, Mitsubishi, with the drug product for their market, and we must recognize the revenue from collaboration, which also affects cost of goods. Lastly, regarding our cash position, we do plan to fully service our term loan, and there is no assumption in our cash guidance regarding the use of the ATM. This reflects our current operating plan, and we have significant cash savings to pursue. To summarize, the reductions we've implemented will take effect over the coming quarters as we phase out certain expenses. Regarding milestones in the EU, our operating plan anticipates minimal contributions from those, as any milestone payments received in Europe are subject to a 50% clawback to offset some excess R&D costs incurred by Otsuka, thus the net revenue impact is relatively minor. Did we capture everything you needed, Ally? You provided quite a list of questions.

John Butler, CEO

Great. Thanks for the detailed questions. I’ll let you move on to the next analyst.

Mara Goldstein, Analyst

I wanted to ask a couple of things. First, do you have any updates regarding your discussions with partners for vadadustat outside the U.S.? Secondly, regarding the request for the FDA meeting, could you walk us through the timeline for your request and when you expect to have the meeting? Lastly, I wanted to inquire about the write-up for obsolete inventory and whether there will be any additional charges for obsolescence reserves.

John Butler, CEO

So I'll take the first two, David, and then, I'll throw it to you. So your first question, Mara, was on an update on conversations with our partners regarding OUS. And obviously, we're in constant discussion with our partners. And I don't think anything has changed in our focus OUS. We're obviously quite active in the European review at this point in time. Europe is quite independent in the way they look at reviewing products themselves, I think evidenced by the fact that in the same class roxadustat received the CRL in the U.S. and has been approved in Europe for both dialysis and non-dialysis patients. So I think we are all kind of full steam ahead there, as well as the other markets that Mitsubishi is filing and seeking approval for vadadustat in. So that's all good. The FDA meeting, so as we said, we're putting the documentation together. We expect to request that meeting with that documentation by the end of the quarter. And within submitting that request within 90 days, we expect FDA to grant us a meeting within 30 days. But obviously, we'll update as appropriate as we know more.

David Spellman, CFO

And then, yes, Mara, on the excess and obsolete inventory, we believe that this is a onetime charge within this quarter. You'll note that the excess purchase commitment was actually a slight reversal this quarter. We believe that, that one we've got a good forecast on right now.

Mara Goldstein, Analyst

Okay. I hope you don't mind, but I wanted to ask another question regarding the pipeline. How should we consider advancing an earlier-stage pipeline at this point, given that you have a lot of pressing issues?

John Butler, CEO

Yes. So as you said, we have pricing issues right now. So we are extremely focused as an organization in identifying the cost savings. As Dave said, we haven't identified everything, but I'm incredibly pleased with the work that the team has done to identify clear cost savings. It allows us to feel confident in saying we expect to be able to operate the Company on our current cash and cash from operations. And that being said, we do want and expect to be able to invest in the pipeline. Now the nice thing is when you think about our earlier pipeline, our preclinical assets, those have very modest investments initially to keep them moving forward. And while we're doing very little there today, we'll be very thoughtful, as we see the product progress in identifying cost savings at continuing to move those forward and add value. So right now, we really want to completely understand, where we are, understand the trajectory of Auryxia for maintaining the trajectory of the last six months, which is what we certainly hope and expect, and then make wise decisions about how to move forward with some of our pipeline programs. And again, this is something we'll talk more to you about once we've established the first part of that pillar really identifying those savings and driving Auryxia. We do want to talk more about those. But we think we want to earn the right to do that by hitting that first pillar as hard as we can in the short-term.

Antonio Arce, Analyst

I have a few questions. Firstly, regarding the second pillar of your restructuring plan, could you provide more details about the potential with vadadustat in Europe, assuming it gets approved? What different scenarios could you explore, particularly the opportunity for non-dilutive capital? Secondly, I'm curious about the Vifor agreement and what discussions are taking place concerning future scenarios. Are there any exit costs we should be aware of if that’s the direction you decide to take? Lastly, it’s clear that you’ve discussed the additional cost reductions needed this year beyond what has already been mentioned. However, I assume there are some committed contractual expenses you have, especially since you had previously anticipated launching vadadustat around this time. Could you elaborate on that and whether there’s any possibility to restructure, eliminate, or reduce those costs?

John Butler, CEO

Thank you, Ed. There are many aspects to consider. Starting with Europe, it presents a significant market opportunity, nearly the size of the U.S. market. Roxadustat has received approval for both dialysis and non-dialysis, leading to high expectations. It's important to note that most countries require a pricing approval process, which delays access to the broader market. We will approach this on a country-by-country basis after launching in the initial few countries with free pricing. However, the potential for growth in Europe is considerable. Otsuka is clearly committed to the product, and the European team is enthusiastic and actively engaged. Our team is collaborating with our partners to navigate the regulatory process. Regarding non-dilutive capital, we have milestones available to us, as well as a solid royalty agreement that could yield up to 30% royalties in Europe over time. Although it may take a while for those revenues to materialize, they represent substantial potential capital. As Dave mentioned earlier, we have included a minimal amount from this in our current expectations, as we aim to establish a stable foundation independently. We believe there is significant opportunity in this area. Regarding Vifor, they have been an excellent partner throughout this process, supporting us despite their surprise at the CRL. They have been instrumental in helping us compile the necessary documentation for our next steps. They share our belief in the product’s benefits and see a path forward with the FDA. We have been collaborating closely, and there have been no discussions about exiting. They have been a highly cooperative partner, and if we achieve success with the FDA, I will credit them for their support.

David Spellman, CFO

So Ed, I mentioned some of this in the prepared remarks, but if you look at our key cost areas, a lot of the external sales and marketing expenses related to vadadustat are already behind us. We designed the contracts to allow for a quick exit if needed. From a supply chain perspective, we need to collaborate with our partners to ensure we can support markets outside the U.S. while also reducing near-term commitments for the U.S. market. Additionally, clinical studies, such as the TIW studies, will naturally wind down, and we need to determine the future of the pediatric studies as we are currently under a partial clinical hold.

Rohit Bhasin, Analyst

This is Rohit on for Serge. Are you able to just provide some additional details on how you're currently supporting your international partners? And in terms of the new earlier stage pipeline assets, do you expect to stay in the kidney disease space or explore additional indications?

John Butler, CEO

Thanks, Rohit. We are assisting our partners in various ways, particularly on the regulatory front where our clinical team is collaborating closely with them. A significant focus is on CMC and supply, as they have mentioned managing a global supply chain. As we consider our launch in Europe, we are mindful of that supply chain and aspects such as quality and inspection readiness. Essentially, we are providing support across nearly every area to help prepare our partners for launch. Regarding the pipeline, our research organization has developed expertise in hypoxia-inducible factor and HIF biology. While we aim to leverage this knowledge in the kidney disease space, we also recognize the potential beyond vadadustat in anemia and chronic kidney disease. There are additional applications to explore, such as our ARDS study involving vadadustat, which is currently being conducted with hospitalized COVID-19 patients. However, this study is focused on ARDS as a condition resulting from infection, not just COVID-19. We need to evaluate the data to determine our next steps, but we believe that biologically, hypoxia plays a significant role in this disease. This opens avenues for development beyond strictly kidney-related issues, as these patients face significant unmet needs and would require acute care. There are other areas where outside collaborators have shared ideas that leverage HIF biology, which we find promising, although it's still early to discuss them in detail. We are excited about the opportunities we've encountered and the limited progress we've made so far. While kidney disease remains essential to us, we are open to exploring adjacent areas where we believe we can positively impact patients.

Operator, Operator

Your next question comes from the line of indiscernible.

John Butler, CEO

Thanks, operator. As I said, we were surprised and disappointed to receive a CRL for vadadustat, and we plan to evaluate and determine potential next steps for the product in the U.S. But I'm very proud of the way our organization has quickly pivoted our focus to driving Auryxia and changing our cost structure. And our goal is to be able to manage the Company with existing cash resources and ongoing cash from operations. We believe this is the best way for us to be able to continue to deliver on our purpose to better the lives of patients, as well as deliver value for shareholders. And I look forward to keeping you all updated on our progress. Thanks for joining this afternoon.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect. Goodbye.