Yahoo Finance (PFNX) Q2 2019 Earnings Call Transcript
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(NYSEMKT: PFNX)
Q2 2019 Earnings Call
Aug 08, 2019, 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good afternoon, and welcome to the Pfenex second-quarter results and business update. [Operator instructions] Please note that today's event is being recorded. At this time, I would like to turn the conference over to Eef Schimmelpennink, president and CEO. Please proceed.
Eef Schimmelpennink -- President and Chief Executive Officer
Thank you, Chris, and good afternoon, everyone. Welcome to Pfenex's second-quarter 2019 results and business update conference call. Joining me on today's call is Susan Knudson, our chief financial officer. During today's call, I will focus on discussing the status of the three lead programs in our clinical stage portfolio and how they have the potential to turn us into a commercial-stage company in the near future. I will also provide an overview of our strategy to further leverage our proprietary Pfenex Expression Technology platform in order to expand our development pipeline, including a new milestone and royalty partnership that we have established. I believe this additional detail around our strategic expansion will provide greater insight into how we plan to build potential near- and long-term shareholder value beyond our current advanced pipeline products.
I will then turn the call over to Susan to discuss our second-quarter 2019 financial results, after which, we will open up the call for questions. Let me start with our lead program, PF708, a therapeutic equivalent to Forteo that we believe has the potential to provide patients with a valuable alternative treatment option to Forteo, which achieved $1.6 billion in global product sales in 2018. Back in May, the FDA informed us that it had completed its mid-cycle review of our NDA for PF708 and had not identified any issues which require a advisory committee meeting. As such, they are continuing their review process, working toward the PDUFA date of 7 October 2019. Pfenex is also seeking an A therapeutic equivalence designation for PF708, which may permit PF708 to be automatically substituted for Forteo. Earlier in the year, Pfenex has submitted the protocol for the comparative human factor study for FDA feedback.
Recently, the FDA informed Pfenex of its view that it might be premature to comment on the protocol until the details of PF708 labeling are agreed to, which may be near the PF708 PDUFA date of October 7, 2019. Pfenex is engaged in a discussion with the FDA around this position. Depending on the outcome, it may delay the start of the study and submitting the study results to the FDA and potential therapeutic equivalence rating. As I mentioned, this process is separate from the NDA approval, and as such, we do not believe these discussions will impact the timing of the PDUFA date, which, as I mentioned earlier, is set for October 7, 2019. Lastly, we are diligently moving forward with launch-readiness planning for PF708 with our partner Alvogen, which includes, among many other things, producing commercial materials and finalizing overall commercial strategy plans. We believe that all this puts us on track to launch PF708 into the U.S.
market as early as the fourth quarter of 2019, subject to FDA approval, final commercial strategic decisions made by our partner Alvogen and other factors. As I've mentioned on previous calls, the opportunity for PF708 reaches far beyond the U.S. For example, looking to Europe, Forteo achieved $289 million sales in the EU in 2018. As such, we were pleased to announce that during the second quarter, the European Medicines Agency accepted the Marketing Authorization Application for PF708, which was submitted by our partner Alvogen. If EMA approval is received, PF708 will have marketing authorization all 28 member states of the EU.
This will allow Alvogen's European distributor partner, Theramex, a leading global specialty pharmaceutical company dedicated to women's health, to initiate sales of PF708. The advancements of PF708 through these regulatory processes in the U.S. and Europe has moved us closer to potentially triggering the additional $22.5 million in regulatory milestone payments that we are eligible to receive through our U.S. licensing agreement with Alvogen. Upon commercialization, we are eligible to receive 50% gross profit split on U.S.
sales if PF708 is rated as a therapeutic equivalent or an otherwise split up to 40%. While in Europe, we are eligible to receive a gross profit split of up to 60% on product sales, depending on geography and cost of goods sold. Beyond the U.S. and Europe, we have partnerships in place for Middle East and North Africa, as well as China and select Asian countries.
In both territories, we're working diligently with our partners toward regulatory submissions. To further expand our commercial reach, we are, through our partner Alvogen, also in active business development discussions with companies interested in licensing rights for other territories. With all the activities and opportunities for PF708, we are very excited about the potential milestones and sales royalties that could have a positive impact on our business. Turning to our collaboration with Jazz Pharmaceuticals, through which we are developing two products: PF743, a recombinant crisantaspase, an alternative to Jazz's currently unmarketed Erwinaze; and PF745, a recombinant crisantaspase with half-life extension technology that is aimed to provide an improved version of Erwinaze. As a reminder, under our agreement with Jazz, we are eligible to receive an aggregate total of $224.5 million in development and sales milestone fees, of which $188.5 million is still to be received. We're also eligible to receive tiered royalties and worldwide sales of any products resulting from the collaboration. In their second-quarter update call earlier in the week, Jazz indicated that they have successfully completed the Phase 1 clinical trial for PF743, which goes by JZP-458 in Jazz's pipeline, and are preparing for single-arm pivotable Phase 2/3 study that is expected to begin later this year.
We are pleased with the progress achieved and look forward to following Jazz's continued advancement of the program. Similar to PF743, our main responsibility for PF745 is to develop a product and process that can be tech transferred to a GMP facility and taken to a clinic. We are advancing PF745 development and are encouraged by the progress we are making. After $188.5 million in milestones remaining, $29.5 million are tied to development milestones primarily related to PF745. We believe we could be eligible to achieve certain payments in 2019 up to $29.5 million in development milestone payments available under its agreement with Jazz Pharmaceuticals. We remain enthusiastic about the potential benefit that these programs can bring to patients and look forward to updating you as we progress. Moving to our carrier protein, CRM197, which is the third potential revenue driver in our current pipeline.
We have development and commercial partnerships with both Merck and with Serum Institute of India, or SII, among other partners. Regarding Merck, we're eligible to receive annual fees, milestone payments and tiered royalty payments based on net sales for all products that they develop that use the CRM197 production strengths licensed to them and produced by our Pfenex Expression Technology platform. Currently, Merck is using our CRM197 in 12 Phase 3 studies for its V114, an investigational 15-valence conjugate vaccine for the prevention of pneumococcal disease. Merck stated in their Q2 earnings results that they are very enthusiastic about V114 for which Phase 3 data from their comprehensive development program may become available toward the end of this year. Turning to Serum Institute of India. They have developed a 10-valence pneumococcal conjugate vaccine, Pneumosil, which utilizes our CRM197.
SII has initiated the process of World Health Organization prequalification for Pneumosil in the first quarter of 2019. With this process potentially taking up to 12 months to complete, this could mean a first quarter 2020 approval and launch by SSI. If approved, the commercial market for Pneumosil will include India and the developing worlds, covering 71% IPD-causing serotypes and, among others, targeting the Indian Universal Immunization Programme. A second product being developed by SII, which also includes CRM197 and is subject to the Pfenex Expression Technology license, is a thermostable pentavalent meningococcal conjugate vaccine that is expected to enter in a Phase 3 study. This product is also targeting markets in developing countries.
Pfenex is eligible to receive a tiered royalty payment based upon net sales for both products pursuant to regulatory approval. Now let me share with you my views on our future growth. As we are executing on the growth strategy that we established when I joined the company two years ago, I'm encouraged by the steady advancements of our three lead programs that have the potential to provide both near- and long-term value for our stockholders. Assuming regulatory approval, our business is expected to transition from a clinical-stage development company to a commercial-stage biotech company. Beyond continuing to ensure execution success on these three programs, I'm very focused on developing new opportunities for additional growth.
I believe our current pipeline represents only a portion of the total opportunity for our proprietary platform technology. In order to execute against this broader potential for our platform, we are focused on growing our portfolio in two distinct ways. First, we are selectively expanding our pipeline with a combination of one or more wholly owned products and new royalty-bearing partnerships around products for which our platform is highly enabling. As an example of the latter, we announced entering into a development evaluation and license agreement with Arcellx, a privately held development-stage company devoted to providing patients with superior immune cell therapies. Their lead programs target cancer with first-in-class adaptive immune cells called ARC-T cells that are readily silenced, activated and reprogrammed by a sparX protein therapeutics.
Through the agreement, Arcellx gains access to the proprietary Pfenex Expression Technology platform to advance multiple proprietary sparX proteins. Under the terms of the agreement, we are eligible to receive development funding in addition to development, regulatory and commercial milestones ranging from $2.6 million up to $18 million for each product incorporating a sparX protein expressed using the Pfenex Expression Technology, as well as royalties on worldwide sales. Pfenex has successfully completed expression screening and process development activities for the first sparX program. Technology transfer of the program to a GMP manufacturing facility is under way. The success of the first program has encouraged both bodies to initiate a second sparX program for the treatment of hematologic malignancies.
This collaboration with Arcellx fits our strategy of leveraging the Pfenex protein product platform to advance our products and those of our collaborators. We believe our success with the first sparX program further validates the visibility of our proprietary protein expression platform and the quality of our development capabilities. We look forward to keeping you updated on our Arcellx collaboration and other new developments that we have started. Our second way of expanding our development pipeline is centered around exploring the opportunities for novel drug protein therapies. Over the more than 15 years that the Pfenex Expression Technology has been active, we have developed many different types of modalities and our experience in showing proof of concept quickly.
Understanding that currently approved drugs target only a small subset of proteins linked to a disease suggests that there is a large drug development opportunity still out there. For many of these targets, the industry is increasingly focused on smaller-sized proteins and engineered scaffolds to achieve biological activity on them. Interestingly, it is especially these types of modalities that Pfenex believes that it's capable of developing. I believe this presents a great opportunity for Pfenex to potentially become a significant player in this new wave of biologics. I do want to emphasize that while embarking on our strategy to further evolve our pipeline, we are continuing to be responsible with our overall cash burn and aim to maintain the burn within reasonable range of our current spend.
In light of this, it is important to realize that we believe our direct spend on PF708 would reduce significantly as we transfer full responsibility of the program to Alvogen upon U.S. approval. The direct spend on PF743 and 745 and CRM197 is already limited. This frees up resources, as well as our team's capacity to create additional value. Additionally, we believe Pfenex can utilize the potential milestones, sales royalty, revenues from our PF708, Jazz and CRM197 programs to reinvest and support our development efforts. As we are focused on implementing this new R&D strategy, we made several strategic additions to our team earlier this year to lead and help guide the process, including the appointments of Dr.
Martin Brenner as Chief Scientific Officer and Dr. Robert Peach to the Pfenex Scientific Advisory Board. Today, we also announced Dr. Lorianne Masuoka as the newest independent director of our board.
We believe Dr. Masuoka's appointment further aligns the board with our new R&D strategy. She brings more than 20 years of experience building and expanding high-value pipelines in the biopharmaceutical industry that have resulted in drug approvals and strategic alliances. During this time, she has successfully created and overseen high-performing teams to lead the clinical development of new medicines.
With such a strong background in managing the R&D programs for several companies, the Pfenex board expects Dr. Masuoka to be a valuable counselor to the company as we look to build out our development pipeline by further leveraging our Pfenex Expression Technology platform. Looking toward the future, we believe that 2019 has the potential to be a transformational year for Pfenex. With several important commercial, clinical and our research milestones on the horizon, we believe the company is on an exciting path and are pleased to have the continued opportunity to share it with all of you. I will now turn the call over to Susan Knudson, our chief financial officer.
Susan Knudson -- Chief Financial Officer
Thank you, Eef. Total revenue decreased by $1.4 million or 33% to $2.8 million in the three-month period ended June 30, 2019, compared to $4.2 million in the same period in 2018. The decrease in revenue was primarily due to the completion of revenue amortization for Pfenex-Jazz collaboration agreement, as well as decreasing revenue related to the company's BARDA program. The decrease was partially offset by increased service revenue and sales of Pfenex's CRM or CRM197 product. Our cost of revenue increased by approximately $0.2 million or 21% to $1.1 million in the three-month period ended June 30, 2019, compared to $0.9 million in the same period in 2018.
The increase was primarily due to greater sales of Pfenex's CRM197 product partially offset by decreased activity related to Pfenex's BARDA program. Our research and development expenses decreased by approximately $5.9 million or 55% to $4.8 million in the three-month period ended June 30, 2019, compared to $10.7 million in the same period in 2018. This decrease is primarily due to expenses incurred in the second quarter of 2018 for Pfenex's Phase 3 clinical trial and regulatory activities related to our lead drug product candidate, PF708. Additionally, in the second quarter of 2019, R&D expenses were offset by $1.2 million for certain costs Alvogen agreed to reimburse the company for in connection with quality, manufacturing and supply chain activities for our PF708 collaboration. Selling, general and administrative expenses increased by approximately $1 million or 25% to $4.6 million in the three-month period ended June 30, 2019, compared to $3.6 million in the same period in 2018.
The increases were primarily due to an increase in expenses related to IP legal, consulting and the expansion of business development efforts. Cash and cash equivalents as of June 30, 2019, were $41.6 million. We believe that our existing cash and cash equivalents and cash inflow from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, including all necessary activities leading up to and including potential approval of PF708 in the United States in the fourth quarter of 2019, subject to FDA approval, final commercial strategic decisions made by our partner Alvogen and other factors. Now I'll turn the call back over to Eef for closing remarks.
Eef Schimmelpennink -- President and Chief Executive Officer
Thank you, Susan. As I mentioned, with several notable milestones on the horizon, we believe Pfenex is on a path to transform into a commercial business. We will keep you, our valued shareholders, apprised of future developments as we are able. This will conclude our prepared remarks. I would now like to ask the operator to open the call for questions.
Questions & Answers:
Operator
[Operator instructions] Before we begin the Q&A, I would like to remind you, some of the statements made during the call today are forward-looking statements, including statements with respect to our development and commercialization plans for PF708, PF743 and PF745, CRM197 and our other product candidates; the expected regulatory pathways for our product candidates and our ability to satisfy the filing requirements for specific regulatory pathways; the expected timing and phases of our future clinical trials; the expected timing of our regulatory submissions and any potential future commercial launches; potential partnering opportunities for our product candidates; the potential to receive future payments under our agreements with Jazz, Alvogen, Merck, SII, Arcellx and our other collaboration partners; potential milestones for our product candidates; potential growth opportunities and strategy, including market sizes, our ability to execute on our plans and drive shareholder value; expectations with respect to regulatory developments and therapeutic equivalents; and our future expectations with respect to the sufficiency of our cash and cash equivalents. Actual results could differ materially from those contemplated by our forward-looking statements, and reported results should not be considered as an indication of future performance. Please look at our filings with the SEC for a discussion of the factors that could cause our results to differ materially. Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2019, to be filed with the SEC.
The forward-looking statements on this call are based on information available. Earlier today, Pfenex released financial results for the second quarter of 2019. Pfenex's earnings release and corporate presentation are currently available in the Investor Relations section of our website. Now I would like to begin with the first question, and that is from Andy Hsieh of William Blair. Please proceed.
Andy Hsieh -- William Blair and Company -- Analyst
Hi. Thanks for taking my questions. Just from a market-positioning perspective, I would like to kind of understand your strategy in PF708. So looking across different candidates out there, even in the European market, potentially Teva, this product has undergone two clinical trials, Phase 1 in healthy volunteers and Phase 3 in osteoporosis patients, how do you, from a messaging perspective, convey that to doctors to highlight the potential differentiation versus other generics out there?
Eef Schimmelpennink -- President and Chief Executive Officer
Thank you, Andy. Great question. As you can imagine, we are deeply involved with Alvogen to lay out our commercial strategy, and I prefer not to go into too much detail on that on this call. Clearly, as you state, our product, to the extent that we can judge and see, is differentiated from potential other competitors, like you say, in the fact that it has undergone a much more rigorous clinical program over 180 patients in our Phase 3 trial, all aims to show that there's no additional immunogenicity related to our product.
And we know that that's something that is of concern to the FDA, and that's exactly why we executed that trial. So I can imagine that being the only product that potentially has that data available and shown in the clinic that it's -- as even the fact that as Forteo, indeed, can provide an advantage in the mind of payers and physicians. How exactly we will communicate that again is something I would prefer not to go in too much detail on at this moment.
Andy Hsieh -- William Blair and Company -- Analyst
Yes. No, I totally respect that. And in terms of the human factor study that you disclosed, I believe, during the last quarter, how is that progressing?
Eef Schimmelpennink -- President and Chief Executive Officer
Yes. No, a great question. As mentioned previously and also on this call, as you know, we have already performed four separate human factor studies that, in total, have well over 100 patients and caregivers have been exposed or have used open device for Forteo, and we believe that that data set very clearly shows that our device is safe and effective in its use. And that, together with the rest of our NDA package, we believe, can support a therapeutic equivalence evaluation.
However, FDA has put industry guidance, draft guidance, I should say, out in which they suggest that a comparative human factor study for any product or any of the device that is seeking A rating might be required. And what we announced in our Q1 earnings call is that we, therefore, have chosen and are in communication with the FDA to perform such a study. It's important to note that these studies go really fast. It's really exposing or having a group of patients perform the different steps on the two devices.
So it's a one-day exercise for each of those subjects. We actually provide the FDA with our protocol for such study in April. And recently, and very close to the deadline for the FDA to come back with their comments or approval for the study, we entered into a discussion in which the FDA suggested that perhaps it might be difficult for them to provide final comments because the final item of the label might change. We have a different view on that, and we are currently engaged with the FDA in that discussion.
So that's ongoing. If it's -- I feel that if it were to delay the start of the study, it wouldn't be too long. But we will keep everybody updated as we can.
Andy Hsieh -- William Blair and Company -- Analyst
OK. And just to make sure that I heard it correctly, so you said it's reasonable to believe that $29.5 million milestone payments would be received this year from Jazz. Is that correct?
Eef Schimmelpennink -- President and Chief Executive Officer
No. What I stated, and that's also in our earnings release, is that we have, indeed, a $29.5 million development milestones that we are still eligible to receive. What we stated is that we feel that we might be entitled or could be earning part of that milestone in 2019.
Andy Hsieh -- William Blair and Company -- Analyst
Part of, OK. Got it. Got it. OK.
Great. And just for the Arcellx collaboration, is it correct to kind of assume that each program you are -- or actually, Arcellx is bringing forth one strain from the platform?
Eef Schimmelpennink -- President and Chief Executive Officer
Correct. So how the Arcellx technology works is that each sparX protein specifically targets or binds to a certain antigen on a tumor cell or other tissue. So every disease requires a specific sparX protein. As I've mentioned, we've completed the development of the first one, and we are now in development of the second one that's targeting a different disease.
Andy Hsieh -- William Blair and Company -- Analyst
Great. OK, sounds good. Thanks for answering my question.
Operator
[Operator instructions] The next question comes from Jason Butler of JMP Securities. Please proceed.
Roy Buchanan
It's Roy in for Jason. I guess on the human factor study again for PF708, is there any point or any possible value in running it at risk? And seeing what the FDA says later or would they just reject such a thing, is that a possible idea?
Eef Schimmelpennink -- President and Chief Executive Officer
No. It's definitely something that is under consideration. I think the time line between the FDA getting back to us on the active discussion that we have makes it much more likely that we will find an opportunity to actually align the two. So I think that, again, we can do that study with full insight from the FDA without losing too much time.
Roy Buchanan
OK. Great. And then the Jazz partnership is making a really good progress. Can you remind us of the IP around PF743? And what's the target product profile for PF745, the extended half-life form? Is the goal just to extend the dosing, have less frequent dosing? Or is there a life-cycle management strategy or something else?
Eef Schimmelpennink -- President and Chief Executive Officer
Yes. So first, on the IP, so the IP, as you can imagine, will be a combination of our platform IP, and we have a group of over 20 different patents that cover our platform, and definitely, quite a few of them are covering our PF743. And that goes out to 2033. I would leave it up to -- prefer to leave it up to Jazz to provide any commentary on how they feel that that could protect PF743. To your question on 745, between the two companies, we have, thus, limited ourselves to indicating that it's a half-life extended version of Erwinaze.
And with that, you can imagine that it's, indeed, focused on less frequent dosing. Whether or not Jazz chooses to use that as pure life-cycle management and switch product cycle or feels that there's a market opportunity for both is something for Jazz to comment on.
Roy Buchanan
OK. Great. And then on the Arcellx collaboration, congratulations on that. Wondering if you could speak to the specific aspects of your expression technology that made it an ideal fit for Arcellx.
Are they solely using your technology in their programs? Or they have some programs using E. coli, for example? And do you guys have a target number for the proteins as part of the agreement? Or is that pretty much open-ended?
Eef Schimmelpennink -- President and Chief Executive Officer
Thank you. So our platform, as we've shown over the last 10 or 15 years is especially strong in expressing more difficult to reduce or refold proteins, and the Jazz enzyme is one example of that. I think the Arcellx sparX protein is another one. And that's why Arcellx has chosen to work with us on that.
As far as I know, we are the partner of choice for them. I think the fact that we are very quickly and are successfully showing that we can effectively produce these proteins for them is proven or is showing that they made the right choice in working with us. So again, it's a difficult-to-express protein, and that's what our platform is especially capable of expressing.
Roy Buchanan
OK. Great. And then last question, if you kind of try to give us some direction here, but I wonder if you can give us maybe a little more on what to expect for R&D expenses. There was a pretty big gap between 1Q and 2Q, and you guys are going to spend more on proprietary programs going forward.
Just any more sense you can give us on what to expect over the next 12, 24 months. Thanks.
Susan Knudson -- Chief Financial Officer
No, Thanks, Roy. This is Susan. And while we haven't given forward-looking guidance, what we do continue to message is that we've historically had a burn of around $10 million a quarter. We still expect that generally to continue, particularly as we take 708 through its -- continuing through its regulatory process and leading up to approval.
And then, as Eef stated in the script, as we evolve into new programs and our development efforts, that we also aim to keep our burn generally within line. So I think, overall, that's a way to say that we expect still a fairly steady burn rate around that $10 million or so a quarter, plus or minus a reasonable amount.
Roy Buchanan
Perfect. Thank you. Congrats on the progress.
Susan Knudson -- Chief Financial Officer
Thank you.
Operator
At this time, there are no further questions in the queue. I would like to turn the conference back over to Eef Schimmelpennink for any closing remarks.
Eef Schimmelpennink -- President and Chief Executive Officer
Thank you, Chris, and thanks again to the Pfenex team for their continued great work and to all of our investors for their continued support. We look forward to seeing all of you at various conferences upcoming this fall. Thank you for joining us, and have a great rest of the day.
Operator
[Operator signoff]
Duration: 37 minutes
Call participants:
Eef Schimmelpennink -- President and Chief Executive Officer
Susan Knudson -- Chief Financial Officer
Andy Hsieh -- William Blair and Company -- Analyst
Roy Buchanan
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