Avalyn Pharma Inc. (AVLN) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the session of the Morgan Stanley Global Healthcare Conference. We're very excited to have the team from Avalyn, Lyn and Doug here with us. Before we get started, let me just read a quick disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. I'm Judah Frommer, one of the [ Smid ] biotech analysts. And like I said, very excited to have Avalyn. Your -- our first fireside chat post-IPO. Before we dig in, can you give the audience a quick intro to the company, how the team came together for those who may be less familiar?

Sure, happy to. So hi, everybody. I'm Lyn Baranowski and thanks to those of you that I know and looking forward to getting to know those of you that I don't, I'm the CEO. Company was founded in 2017 with Series A. I joined in 2022 as the CEO. We're focused entirely in pulmonary fibrosis. So this is one of the rare deadly diseases that affects unbelievably high number of patients in the U.S. There's massive unmet need. We might get into some of that today. And we're capitalized to deliver some clinical stage catalysts, 3 different assets either in the clinic or moving into the clinic with data readouts from each of the 3 programs in the second half of next year, did an IPO a few months ago with Morgan Stanley's help and just really delighted to be well capitalized and hopefully geared up to make a big difference for these patients that we're trying to serve.

All right. Great. So with that, maybe let me -- let's talk a little bit more about the unmet need in pulmonary fibrosis. There are 3 approved drugs here and a number of programs in development. So where do you expect the opportunity to be when your drugs are potentially coming to market? Can you put some numbers around the unmet need?

Oh, for sure. It's a great question. Thank you. So let me start maybe on the patient side and the clinical side. And then actually, maybe I'll ask Doug to comment on the commercial opportunity here, which really sits in parallel with that. So from an unmet perspective, we're talking about, as I said, a rare deadly disease. Life expectancy with pulmonary fibrosis is about 3 to 5 years. So it's actually worse than most forms of cancer. You can say that again, pulmonary fibrosis survival is worse than most forms of cancer. We do have 3 drugs approved on the market today. But I think what is really unbelievably shocking to understand is how few patients with this deadly disease are benefiting from an oral drugs. So if you took a snapshot of the U.S. market on any given day, it's roughly about 1/3 of patients that are taking any of the oral drugs. Another 1/3 of patients have tried and failed in oral and another 1/3 of patients haven't even bothered trying because these drugs that exist, they only slow the rate of lung function decline that patients have. And unfortunately, as oral [ agents ] they layer on top of that already very difficult disease profile and the symptoms of the disease, they layer on top really difficult symptoms. So we're talking about [ GI ] side effects from the drugs that cause massive levels of discontinuation. Oral pirfenidone causes nausea and vomiting, and nintedanib as an oral drug causes really unrelenting diarrhea. And so over the course of the year, most patients that take an oral cycle off those oral drugs really pretty quickly within a few months usually. And at the end of the year, you'll look at sales data, and it's the case that Ofev, which is the largest drug in this market, is effectively reaching less than 10% of patients in the U.S. because of how difficult it is for patients to tolerate. So it leaves most patients with this incredibly sad disease really unable to take anything for it, and we think we can do something about that, but we'll come to that. But maybe on the commercial side, Doug, can maybe walk you through the market opportunity here?

Yes. So the current market is defined in terms of the dollarized value of branded products is north of $4 billion with Ofev being a leader That's, as Lyn mentioned, less than a 10% market share. Jascayd is the newer entrant that's BI's next-generation product that was approved about a year ago. that price at the range of around $200,000 per annual course of therapy. We [ can ] give you a sense, the brands of Ofev and Esbriet were around $150,000. So looking at the total addressable market, it's north of $42 billion, that assumes every patient is on the lowest brand price of $150,000 I think with the Jascayd launch, and we look at that just as a real quick example, the profile of Jascayd is similar efficacy is the 2 orals being oral pirfenidone and nintedanib with slightly better tolerability, still with diarrhea and other AEs. And that product according to the IMS prescription data is annualizing at about over $2 billion in gross sales. So I didn't really just speaks to the opportunity, in particular on tolerability, if you can improve that, you can really unlock a lot of potential in this field.

Yes. So it's magical from my perspective because this is an opportunity for us to do a lot of good for a lot of patients. Make a huge difference in their disease, and there's a massive amount of commercial value to be unlocked.

Okay. Great. That's great background. And before we jump into your individual candidates, I want to spend a minute just on the device you licensed from PARI and your formulation work that you've done. So can you talk a bit about the inhaler and the know-how that's gone into your candidates and the combination with that device, how does that specifically support differentiation and barriers to entry for you?

Sure. Yes. a fun question to address. So when we think about inhalers, I always start my thought process with thinking about the patients that we're trying to treat. So there are lots of different kinds of inhalers out there. for these patients. These patients are old, they're sick, they're frail. If I had one with me, they would have very limited breathing capacity, and they have a ton of issues with cough as part of the symptoms of their disease. And so those patients are going to have a hard time with certain types of inhalers. So that's one variable. We have to really think carefully about what patients can actually inhale. Part 2 is want to think about the drugs. And the drugs -- certain drugs require certain volume inhalers. Pirfenidone requires a larger volume of an inhaler to be able to dose the drug adequately. And then finally, when we work on putting a drug an inhaler you really want to think carefully about the particle size that you generate because you really need to be able to reach the correct part of lung and the right tissues. That has to do with the particle size. It has to do with the flow rate. So there's a lot of particle engineering that goes into thinking about how to formulate the drug in the right way, in the right device for the right patient. So you really put all those 3 factors together and with those 3 factors in mind, we chose to develop these 2 lead programs that we have in the handheld nebulizer that you're talking about. It's a handheld nebulizer that we've licensed from a company in Germany called PARI. And what's great about that is that handheld nebulizer itself is patented. And so in order for us to use it, we have to have a license to the device, which we have, and we have exclusivity in the molecules. So that's really important because from a barrier to entry perspective, we now benefit from lots of patents on the drug. Again, a quite nuanced as all this formulation work generates all new patents. We then have patents on the device. And then we have exclusivity in the device that withstand even the expiration of the patents. And then finally, just if you can think about it in your mind for a minute, and I wish I had inhalers in front of me, if you can think about 1 inhalation to the next, they're actually completely different from each other in terms of really that deposition pattern. And so for those reasons, FDA does not have a bioequivalence pathway for an inhaled nebule product. So if a generic company didn't want to compete eventually, they would need to figure out a generic formulation, they would need to get a whole new device because of the exclusivity that we have. And then they would need to replicate the entire clinical package. There is no bioequivalence pathway. So that makes for this kind of moat of barriers even beyond just patents that provide a very nuanced, but very important protection. If you're -- if you're us and you love to specialize in this field, and I do, it allows you to build really durable products, really durable revenue streams over a long-term horizon.

Okay. So maybe double-clicking on that. There are other therapeutics being developed in PF, including reformulations of existing antifibrotic. So if we kind of break it down by mechanism, formulation and device, how would you say your approach is differentiated versus maybe some of the other reformulations that we're seeing?

Yes. I mean I think the -- it's all 3, right? So it's -- you've got to think about the patients and what they can inhale, some of the other companies are doing work in a device that's called, for example, a dry powder inhaler. So dry powder inhalers are a great device. That's an inhaler that's used really routinely in asthma and COPD. It makes a lot of sense in that market because asthma and COPD patients are like me and Doug, like they're really reasonably healthy. The vast majority of that market has an inhalation capacity. So a dry powder inhaler doesn't have any propellant, okay? So in order to dose a dry powder inhaler if I had one, and I don't, you do this. Which I can do because I've got reasonably healthy lungs, they've got mild asthma, but enough to be able to do a big inhalation like that. But for a patient with pulmonary fibrosis, they don't have that inhalation capacity. So our nebulizer doesn't require that. You just breathe normally and we rely on time to dose. So it's about 8 minutes every time you dose. But that's nice for these patients, again, because they're older, they're sicker, they're frail. They don't have the hand-tied coordination required for some of these other inhalers. So there are different solutions from a technology perspective for different segments of this market. I would posit that the segment we're trying to address in this population is going to be the largest segment.

Okay. Great. And maybe just a follow-up on the other question we tend to get that [ age ] you referenced. Maybe just kind of reiterate how sick this patient population is to the point where that time out of their day or maybe multiple inhalation is not necessarily disruptive.

No, that's right. Yes. So again, this is not a patient like me who's trying to get to work. This is largely your grandparents, right? So think about your grandparents, generally, what we hear is someone will wake up in the morning and drink their coffee sitting on the couch watching the Today show. And so actually putting in your mouth an inhaler and breathing in and out normally for 8 minutes while you're watching the Today show, it doesn't seem to be a barrier. Same thing on the other side of the clock. So whether it's [ Jeopardy ] or whether it's -- whatever, a nightly news show, that seems to be really not a barrier. We're not seeing issues with dropouts related to the duration of the inhalation. Again, I think this is not a COPD where they're less symptomatic. This is a very symptomatic deadly disease. So I think these patients are -- they're energized to want to be on therapy because they want to stay healthier longer, and they want to be able to spend more quality time with their families and loved ones, and we want the same thing for them. It's not an issue for us so far.

Great. And maybe just a point of clarification on that license with PARI. Correct me if I'm wrong, but I think AP01, you have the exclusive license for AP02, which is your second candidate, you have an option to license. Maybe just kind of describe that option and where that license could go in the future for 02?

Yes. It's an option to license the same device for the nintedanib as well as the combos. So it's something that we're working on now in terms of getting that in place for the next steps, but it's already -- the option is already in place. straightforward, I think.

Great. Okay. So now kind of moving into your lead candidate AP01 which is currently in the Phase IIb MIST study. Before we talk about that study, can you talk a bit about the data generated thus far? How is AP01's profile shaping up versus oral pirfenidone.

Sure. Yes. And so maybe I'll start by saying when I took this job and joined the company, I did some market research with doctors and was actually pretty surprised myself to understand how important solving the tolerability barrier is. So it comes -- it became very clear in that market research that if you just can formulate these same drugs in a more tolerated version with equivalent efficacy to the orals, that is a massive opportunity commercially. We certainly think we can do that. We have tolerability data that says that. But our clinical data suggests that we can do that better tolerability, but that we can also improve on efficacy. The reason is that even though we're dropping the dose considerably as compared to the oral version, we actually have better lung exposure. We can measure that in this disease. We can do a bronchoalveolar lavage. We can collect and analyze and inhaled versus an oral and look at epithelia lining fluid through that model. And we think the better exposure that we can measure and see is likely driving what we see in the clinic, which is better efficacy with this approach. If our ongoing this study, which you can talk about generates both better tolerability and better efficacy that's like a game changer in this field from my perspective. But to be clear with you, our base case, our reason to believe is really just around better tolerability though we have built and powered the study for better efficacy as well.

Okay. Great. So -- so ATLAS was open label, but maybe just elaborate a bit more on what you've observed that makes you confident in that lung function benefit. I think there's some HRCT imaging data that was particularly interesting. Yes.

Yes. And it's -- so when I think about the historic data that we have in the program, they're not just 1 data set that point me in the direction that I just suggested, there's multiple. So let me tell you what I mean. In ATLAS, we measured IPF patients over 1 year. We saw stabilization of lung function. We measured 2 different cohorts of patients in an open-label context, a second group with IPF and a third group with the non-idiopathic form of the disease, which is called PPF. And we see the same stabilization of lung function on average in all 3 cohorts over 1 year studied separately. We also rolled patients over into an open-label [ extension ]. Last I checked, we set 23 patients in our open-label extension years later. And they're still stable on average as well in their lung function, which is remarkable. There's a responder bias there, right? So we don't want to pretend there's not. But the fact that we have any patients to study 5, 6 years into the course of the trial is remarkable given what I told you earlier, survival in this disease is 3 to 5 years. And these patients were on average diagnosed 2 years before they came into the study. So if we have them in the study for 5 or 6 years, they're actually diagnosed for 7 to 8 years. And again, they're still stable. They're way outside the survival curve. So really exciting because it speaks to, I think, what we can do for this disease, which is not only gain someone's lung function over a year, but hopefully keep them on therapy, keep them stable over the long term. And then final [indiscernible] you asked about imaging. So we do have imaging data I think this is a really interesting area of our field. We're able to actually take high-rise chest [ CT ] scans. Those are done routinely for diagnosis in the field, and we can look at them the change in the level of [ fibrosis ] in the patient's lung over the study. So we did that in ATLAS, the study you mentioned, and we see a really remarkable fine, which is 70% of patients on the high dose from that ATLAS study were either stable or they actually reversed in their fibrosis in their lungs on imaging, we can see the anatomical change. And we can quantify that, which we have, and it correlates with lung function. So again, something that we're not used to seeing in this field because the lung function is our primary endpoint typically, but we've never really had this correlation exists. And so in this study and in the data set, we do see the correlation between [ FVC ] which is a lung function and QLF, which is the imaging. So really exciting. I think it speaks to, hopefully, the potential for imaging in the future to become a more [indiscernible] point for us. lots of AI and imaging as well, which is cool.

Great. Yes. And then just kind of getting back to -- you touched on about the safety and tolerability profile. Maybe talk a bit about the AE profile and discontinuations in ATLAS this tends to be a concern across some programs in the space. So what do those look like in ATLAS and you mentioned the patients that are still on drug, but relative to other programs.

Yes. So you see the same AEs with the inhaled pirfenidone that you do with the oral, but it's at much lower rates. So nausea, typically, you're going to see 30%, 40% nausea and ours, it's more like 10% thereabouts. And the grades of the AEs are much lower as well. So much more moderate or much more mild, really AEs rather than something more moderate or severe. So a vastly improved tolerability profile, notable, especially the patients in ATLAS, were actually sicker than patients that had been in those oral pivotal studies. So longer since diagnosis lower lung function on enrollment, et cetera. So notable to see that kind of tolerability benefit. And then as I said, the fact that we're able to keep them in an open-label extension really, I think, speaks to the durable profile.

Right. Okay. So maybe moving into the 2b program, MIST, which you announced that you completed enrollment a few months ago. So maybe we just start with the design we'll dive in after that.

Yes. So we're doing a large global Phase IIb study now called MIST, really designed as the first pivotal. And it's a 52-week study. We needed to do dose rating to satisfy the agency. So we're looking at 2 doses versus placebo over the 52 weeks. And it is quite traditionally designed very similar to nerandomilast in terms of the end points I think the primary difference versus nerandomilast is the newly approved agent from BI is that we're allowing patients to come into that study on background therapy. Otherwise, very similar. Important to say that we're studying here PPF. So PPF is a non-idiopathic form of the disease, it's called progressive pulmonary fibrosis. And we've learned to study it [indiscernible] in the clinic. And what I mean by that, and thanks to our friends and colleagues at Boehringer Ingelheim. PPF by nature is more heterogeneous in terms of its rate of downward decline in lung function typically. So BI learned to [indiscernible] for that by establishing a set of inclusion criteria in the PPF studies. So what that means is when we enroll someone in one in our PPF studies, we look at their historic rate of lung function decline. And we want to pick patients who are declining historically analogous to how IPF patients decline. As long as we do that, you really see that the data between IPF and PPF in these studies is superimposable. So we're doing that. We're using those same criteria that they did with nerandomilast and with nintedanib to pick the right patients to study in this PPF trial.

Okay. And then kind of the natural follow-up to that tends to be oral pirfenidone is not approved in PPS. So just because connecting your trial design to confidence that prevention will show benefit in PPF.

Oh, sure. So we do have clinical data in PPF. I mentioned earlier, 1-year data on drug in an open label as well as long-term data over years. But important to say its percentage is an interesting situation because for those of you that have a few breakers like me, you might remember, pirfenidone was actually originally developed by InterMune and sold to Roche. So when Roche bought the molecule, they just didn't do any life cycle management. I think they didn't have a ton of time left on the patent. And so they didn't study it in PPF. But Three academic centers did look at oral pirfenidone in PPF. And hopefully, when I say they're academic studies, you know what that means to. So you know that means that they were designed unusually. And so often had primary endpoints that are not the ones that we an industry would use. So an example of this, there's 1 study done that was used home [ spirometry ], home lung function as a primary end point. well, home [ spirometry ] doesn't work. So study failed on the primary. But in that paper as well as other 2, all 3 academic labs did collect the office-based FVC, which is what we would have as a primary end point. And in all 3 cases, you see that the drug treatment arm does is affected pretty dramatically when you dose someone with oral pirfenidone compared to placebo. So strong efficacy data from that situation as well. And then finally, I'll say we noticed something in our imaging work. We talked about imaging, where it appears pirfenidone, when we look at the images, we see pirfenidone playing a particularly strong role in a part of the fibrotic pathway, that's called Ground Glass. That's the earliest part of fibrosis, where active inflammation is becoming fine fibrosis. And pirfenidone, from a nonclinical perspective appears to be both an antifibrotic and an anti-inflammatory. So interestingly, it's playing a strong role in this part of the pathway that is really relevant to PPF. So patients with PPF come to the disease because many of them have either some serious environmental exposure or to them have an underlying autoimmune disease. So I mean, this is a hypothesis now, but I think what's going on there is you've got someone with RA, for example, where the RA drugs that they're on systemically are probably not adequately covering the disease in the lung. So they start to develop an expression of the disease in the lung that manifests into what's called RA-ILD. So RA derived interstitial lung disease. You start to see the antigen being expressed. You see a lot of inflammation. And that inflammation in about [ 3% ] of those RA-ILD patients becomes fibrosis. So a really interesting finding because pirfenidone may well play a really strong role in PPF, maybe even over and above what it does in IPF because of the role of inflammation in the PPF lung, which is a little bit different from IPF.

Okay. That's great background. And then you mentioned allowing for background treatment in MIST. So just maybe just remind us which background treatments would be allowed. And does that introduce any risk to the study in your mind?

Sure. So in MIST, which is our inhaled preventative Phase IIb study, we're allowing patients to come in on background nintedanib, oral nerandomilast or background oral [ nerandomilast ]. And no, we don't think it introduces any risk actually. So this is maybe inside baseball, but I'm happy to get into it in the audience. If you look at the nerandomilast data, it appears that patients who are coming into these studies now who are on background are actually sicker than patients not on background. So in that nerandomilast data set, you'll see the placebo rates of decline when patients are on background is actually more profound, larger than the non background, and the drug really works equally across the population. So said differently, we actually think that allowing patients to come into the studies on background is actually enriching the studies for lung function decline because these are now the older, sicker patients that need more therapies. So we do have a cap on background that's 50% cap on oral nintedanib and oral nerandomilast. But I don't think that's a barrier either. In the nerandomilast program, they had 42% of patients on background.