Apellis Pharmaceuticals, Inc. (APLS) Earnings Call Transcript & Summary

Okay. Great. Welcome, everybody. I'm Doug Tsao, senior analyst at HCW. We are thrilled to have with us next Apellis, represented by the company's CEO, Cedric Francois; and the CFO, Tim Sullivan. It's been a quiet summer for the company. Sorry, I had to make [ this up ].

So with that, we'll jump right in there. So you recently provided an update on reported cases as well as a recommendation to switch out the 19-gauge needle for the 18-gauge needle. So we know the 19-gauge needle was primarily used, the predominantly used needle at commercial launch and the 18-gauge became more available in the spring. We also know that the 18-gauge was the one that was used in clinical trials when there were none of these retinal vasculitis events. So have you been able to assess how the filter might have triggered vasculitis and sort of come up with a hypothesis, at least how it might have caused or contributed to these events?

Yes. Thank you so much, Doug. So it's wonderful to be here. Thank you for the invitation. And yes, it's been a pretty intense summer for us. The good news, the great news out of the summer, quite frankly, was the efficacy data that we had in the GALE extension study with SYFOVRE, where we saw up to 45% slowdown when you get to month 30 of treatment, which, of course, has a benefit to patient is absolutely extraordinary. The vasculitis cases are extremely rare. And I think this is really important and cannot be overemphasized enough is that the rarity or the, as you say, the rate of these cases is not a problem. The majority of physicians and patients will be very comfortable with that. But in July, when it got announced, the question was, is this the rates? Or is this something that is kind of the top of the iceberg or something much more in the areas, which a couple of years ago happened, right? That is, we know, for effect, not the case, right? So this is a very rare event, and we're going to keep tracking that. It's also important to point out that when events are so rare, more often than not, you do not find what the root causes. So that's important as a preface. But diving now into the needle as a potential contributor, the reason why we did the field alert and make sure -- are making sure now that physicians as much as we can use the 18-gauge needle, instead of the 19-gauge needle is based on 2 elements. The first one is that when we started looking into, as you pointed out, accurately, of course, the differences between the clinical trials and what happens in the real world, one of the things that stood out is that in the clinical trials, we either had the 18-gauge filter needle or we had a vial adapter, both of which use a filter material that is the same, it's like a 3D filter. And that particular filter material has been used for millions of anti-VEGFs to be pulled out as well. In order to meet the demand and the supply and to make sure that there was redundancy, right, we said we're going to include 2 needles into our NDA so that we have a backstop that's just a prudent thing to do, even though I want to point out, we are perfectly fine with the supply for the 18-gauge. We had the 19-gauge needle. And what's important with the 19-gauge needle is that the filter itself, the material is different from what we had in the validator or the 18-gauge needle. So naturally, it was a place for us to look into that because sometimes filter material, it's not hardly mentioned with thousands of injections may get pulled into the liquid and find its way into the eye. And when we did that, this again comes to the first point, we saw these structural variations where in this 19-gauge needle, we have a mesh of nylon. And that mesh can sometimes be double or triple stacked and leave particulates that could come into the fluid that gets injected into the eye. When we then, that's the second aspect, looked at the association of the cases of vasculitis with the use of either of these 2 needles, what was interesting is that the use of the 19-gauge needle was more associated than the 18-gauge needle. How did we do that? In some cases, we may know exactly a needle is very likely to have been used with the 19-gauge or the 18-gauge. But in most cases, it's a distribution. So what we do then is we see how much that we ship to the side of the 2. And if we have a case of vasculitis, we split it between the odds of being one versus the other. And then we found that purely based on that, which is not hypothesis driven, the 19-gauge needle was associated with a case rate of approximately 1 in 5,750 injections, whereas the 18-gauge needle was 1 in 30,000. So quite an important difference that and the structural variations led to the field alert that we issued a few weeks ago.

And what has been the physician response to both the needle switch, but also, I think, an arguably more importantly, the fact the case rate basically stayed the same, right? There was a couple of new cases or maybe one new case. But we're really starting to see that stabilization because I remember when the alert first came out, the e-mails or you saw the same ones from investors. This is the tip of the iceberg. There's going to be some explosion. It's not 10, it's going to be 20, and we're still in the single digits. And given some of the doctors who did pause or slow down use of SYFOVRE, when this came to light, have they started to come back, especially in the wake of your update sort of giving confidence that this is this 1 in 10,000 or rate, maybe potentially lower is what it is?

Well, let me start with that because I think the rate is really -- you point out exactly the most important fact, which is that rate being very well studied, now a whole lot of moves is remaining stable. And it's also worth pointing out, and I think this is really underappreciated. When you issue a field alert on something that you observe or that you have heard about, typically, you end up with 10x more of that than you're looking for. And I mean that's -- it was remarkable how in July between the alerts and the SRS meeting. Okay, there were a few more, but it was very, very small. It was also, to be frank, in spite of all of the doctors around it, right, it was a great collaboration with the SRS, where SRS and us may disagree, sometimes about, okay, is it vasculitis or not and at the end of the day, but we're like within a few cases, very much in line with each other. And importantly, a testament to the pharmacovigilance being very thorough and exact. So we're very aware of what is happening. It is being reported properly. It is being adjudicated in a very standard way. So the rate being stable for physicians is, I think, the most important fact because going forward, you have to remember when a physician has discussion with the patients, whether it's for an anti-VEGF or for us, they already tell that patient, there's a chance of 1 in 3,000 to 5,000, the e-development infectious endophthalmitis, which can have very bad visual outcomes as well, right? It's a risk that is inherent to the procedure. So that's, I think, where the expectation should be in terms of the long-run prospect, and that will then be balanced with the benefits that you provide, i.e., over 30 months. You may have the opportunity to close to halving the rate at which you're losing retinal disease. So of course, very important. Then going back to the needle story, we -- this is tricky because to be very clear, we do not have causality here. We cannot tell you that this is the cause. Even if after removing the needle, the case rate goes down, that is also not causality, right? There could be other factors that work, but it's something that we view it important to do. And we also didn't want to kind of throw out another panic around the neo being a terrible problem because thousands of injections were done with that needle without an issue as well. So we decided to take a gradual approach as to the impact of the "needle story" to physicians at this point in time. I don't think it matters so much. It's a great subject for discussion. But I think the rate being stable is the most important.

And I guess, that was what I was more focused to question in terms of now being several weeks, right, I guess this 6 weeks or 7 weeks losing track of time since then, and the rate seems to have stabilized, have you seen doctors who maybe did pump the brakes a little bit, start to come back in terms of using SYFOVRE?

So it's a little bit too early to tell. But I think in many ways, the schedule of the retina conferences is helpful to us, right? So at the end of July, we had the SRS meeting, community at large was made aware of this. And you can imagine quite a few conversations in August, where a patient would want to go on treatment and the retina doc says, "Hey, you know what? There's this new thing that came out. It's August, go on holiday. It's not -- this is not a rapidly progressing disease, come back in the fall, and we'll know more." I suspect that there were a lot of conversations like that. And of course, that's something where we hope we'll be able to pick up and regain speed.

With the August update, you did provide some perspectives, right, in terms of additional volume. And obviously, it seemed to be fairly consistent with the weekly average overall of 2Q. Now we know that 2Q wasn't a linear or a flat volume, right? So there seems to have been some impact in terms of the trajectory. That said, I think the resilience was actually very encouraging, certainly from my perspective. And I suspect from your perspective that, that reflects patient demand more than anything. And I'm just curious, what did that tell you with the resilience? What has that told you about the launch?

I think it reflects 2 things. One, which we've always known, but even underestimated it is how important this disease is to patients, how strong the desire is to slow down the progression of this disease and how many of these patients are around. I think that is really something that really stands out there. I think then also the fact that -- and this was a focal point for us at the SRS meeting at the end of July was to be fully transparent to communicate everything that we knew and to build trust with the retina community. So our Chief Medical Officer, Caroline Baumal, who is a retina specialist by training and was part of that community still has been amazing in that regard. So we've been very open, very transparent, collaborative. Going back to the point of the rate is stable, and you can trust us that it is, you can keep restraining. And on the flip side, we have very large practices, right, that have done more than 10,000 injections that have really great experience with this drug. All of these things kind of contribute to the continued momentum.

And I know sort of identifying a cause and whatever it may be, is probably going to be sort of an ongoing process. But given the rarity of the events, as you noted, in all likelihood, we'll never be able to definitively say, "Hey, this was the cause or this is the case because it could be multifactorial." And so is there a common point where they become sort of diminishing returns and you sort of say, like, it is what it is because you don't want to go through like patient selection, "Oh, we don't want to use patients who might have an autoimmune condition." Because then you don't want to scare those -- there are a lot of patients with autoimmune conditions you could pretty much benefit from SYFOVRE even if there is some 1 in 6,000 risk of vasculitis.

I think you're making a very important and excellent point, right, which is that, again, that rate of 1 in 10,000 is very, very rare, right? And you may never establish causality. But as I mentioned, infectious endophthalmitis also has a risk with it that is larger than what we have with these vasculitis cases. It is part of the risk profile. If you want to, there are no drugs that don't have side effects. This is one that's important, but it got the magnitude that it did because of what happened a few years ago. So I think we'll get around to that. And to your point, when you talk about mitigation strategies, you can talk about all of these things in the context of such a rare event are unfortunately not possible and not advisable.

So a competing product was approved recently. And I guess, one -- there are a couple of surprising things in terms of that product's labeling, one that was given a broad label, even though it wasn't tested in a broad population. But at the same time, treatment was limited or recommended to be limited to 12 months, which was surprising. How does that affect the competitive landscape from your perspective?

Well, one of the things we are -- and I am particularly proud of is the robustness of the data package that we have created, right? So we have more than 24,000 injections, more than 1,500 patients across the clinical trials, 2 years of dosing, every 2-month visualization and analysis. And when you look at DERBY and OAKS at 2 years, this incredible homogeny, right, between DERBY and OAKS for both the monthly as well as the every-other-month dosing. Also on the flip side for safety, right, you could see there's the cases of vasculitis, while they're extremely rare. And we have, in the meantime, more than -- we estimate more than 100,000 injections. So a huge volume on which you actually know what you're getting into. And I think that is something that is really important to combine that with a rate that brings you down to approximately close to halving the rate of your retinal cellulose. I think that is important to have the complete picture, understand it, to understand the pathology monthly every other month and our competing products. We wish them good luck, of course, but they only have so far approximately 300 subjects that have been treated with a few thousand injections. There's a long road ahead, and we're going to see what happens.

You recently announced a cost restructuring program that included refocusing of R&D efforts, including stopping programs with systemic pegcetacoplan as well as APL-1030 and 2060. How should we think about the R&D vision for the company going forward, right? You clearly have -- want to maintain yourself as sort of the leaders with the C3 mechanism, if you will. And so how do you continue that? Is that something that you view most likely through gene editing and those types of programs?

Yes. We look -- the most important thing that we did was really to focus in on the aspects of our R&D program. So we think the highest value can be derived. We probably were or we definitely were more flexible in terms of trying many, many things. So there was more R than there was D in some ways. That is something that we decided to change. So we have a very focused research program now on high-value targets, on high-value programs that we think will, in the next couple of years, generate significant upside for the company. In development, for example, for EMPAVELI, we really homed in on continuing to build the franchise in PNH and to double down on what we are doing in C3 glomerulopathy and IC-MPGN, which we think are very large opportunities, but to kind of start thinking really among those 2 diseases and not what could be beyond. And then, of course, our early program with siRNA, which is now in the dose escalation phase that we're very excited about as well. So look, to be frank, 2 weeks ago, was one of the worst weeks of my professional life because saying goodbye to so many people was really hard, and they were amazing contributors to the company, but we had to do what we did. It refocused us. It extended, of course, our runway, and it allows us to double down on SYFOVRE, which is an extraordinary drug for patients and to continue to be there for EMPAVELI as well.

I guess when we think about your balance sheet and sort of capital needs, if we get SYFOVRE sort of starts to recover or get back to the trajectory that it was at, at the beginning of the year, which I don't think is a heroic assumption. How does that position you? And what is that necessarily do in terms of your capital needs?

Yes. So obviously, the first step in terms of what we had under our control in terms of maintaining our cash runway was to take that decisive action for the restructuring. The one thing we can't really do right now is project our growth because, obviously, you saw in August, the first 3 weeks, which we gave the vial count on was not too dissimilar to the average for Q2. We made that point. The next 2 weeks in August, you wouldn't expect meteoric growth in the end of August, right? So at the end of the day, what we need really is September, probably October when we get our permanent J-Code activated to really think about what that trajectory, that growth rate would look like going forward. And I think we can give some guidance on our earnings in terms of cash runway at that point.

And Tim, that's a good point in terms of timing. I mean, does October with the J-Code as well as just the passage of time if we assume the vasculitis event where it stays where it is in this neighborhood? Would that be the point where you would start to expect that you would want to sort of put pedal to the metal in terms of getting your messaging and really focus on driving volume again?

As far as I'm concerned, we aren't pedaling.

But I guess, do you think that that's the point where some accounts that maybe have held back for different reasons when they get the J-Code will sort of lubricate so to speak?

My hope and sense is that there's like a little bit of a moment of let's see how big and problematic this is. I think once that is done, then you're going to end up in the next phase where I think the unmet need in this disease and the desire for patients to be treated, as you mentioned, right, that does not go away. It's still there. And I think, again, the balance with the efficacy data, I mean, most physicians don't know yet how good it can be, right? If you stay on treatment long enough. That's incredibly positive news for patients. It's a message of hope and when put against the context of these very, very rare events provides kind of a proper balance that can be discussed between physicians and patients.

And I think one point to clarify for people with the restructuring, the commercial effort behind EMPAVELI really is not being affected. And so we shouldn't think about any impact on that opportunity over the long term.

Really, neither of the commercial products were -- none of the customer in the front-facing commercialization is none, but very few of the cuts were in the front-facing commercial effort for SYFOVRE or EMPAVELI.

Okay. I think we're out of time. One final question I would throw out. When do you expect to sort of again come back to investors as well as the retina community with another update in terms of cases and the ongoing investigation?

Yes. So for us, it's -- the most important is, of course, the physician community, making sure that they continue to prescribe. That's what we'll ultimately make investors happy as well, of course. And so we're kind of figuring out what is a cadence that makes sense to them. I think the update that we did 2 weeks ago was very well received. We have Retina Society in the middle of October. We have AAO in the beginning of November. So in the near future, there will be other opportunities associated with or in the neighborhood of these conferences.

Okay. Great. So with that, I think we'll wrap up. Thank you so much.