Sol-Gel Technologies Ltd. (SLGL) Earnings Call Transcript & Summary

Greetings, and welcome to the Sol-Gel investor conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Alon Seri-Levy, CEO of Sol-Gel. Thank you, sir. You may begin.

Thank you, operator, and hello, everybody, and thank you for joining us on such a short notice. Together with me is our Executive Chairman, Mr. Mori Arkin; our CFO, Mr. Gilad Mamlok; and our VP of Clinical & Regulatory Affairs, Dr. Ofra Levy-Hacham. This morning, we informed about 2 exciting advancements we have made: signing of a strategic partnership with Galderma regarding commercialization of Epsolay and Twyneo in the United States, new pipeline findings and the replications for our future development plans that are in line with our vision to transform into the leading topical dermatology company. But before further discuss these 2 advancements, I kindly ask to pay attention to this cautionary note on forward-looking statements. The cornerstone of our strategic partnership with Galderma is the innovation behind Epsolay and Twyneo and the strong clinical results extended for both assets. We are proud that Galderma has recognized the advantages of Epsolay and Twyneo and their importance for rosacea and acne patients, and delighted that following this partnership, Epsolay and Twyneo will have the potential to become the next key rosacea and acne market brands in the United States. Galderma is the world's largest independent dermatology company. It has been the U.S. and acne and rosacea market leader for many years, achieving nearly $350 million in peak sales for Epiduo in acne, and nearly $200 million in peak sales for Soolantra in rosacea. We therefore identified Galderma as our preferred strategic partner for making Epsolay and Twyneo available to as many rosacea and acne patients as possible in the United States and for maximizing the market potential of these 2 assets for the benefit of Sol-Gel's stakeholders. According to our agreement with Galderma, Sol-Gel will be entitled to receive up to $50 million in upfront and product approval payments, assuming both products are approved by the end of this year. Sol-Gel will also be entitled to mid- to high-teen percentage royalties of net sales and up to an additional $9 million in sales and milestone payments. In addition, Sol-Gel has the option to regain commercialization rights 5 years following first commercialization, which we find very compelling, as Epsolay and Twyneo are patent-protected until 2040 and 2038, respectively, and we are pursuing additional patent applications for both programs. We carefully consider the alternative of [ Twyneo ] and decided that given payer's current approach and investments required to go along that it would be more prudent to collaborate with a top-tier, well-established dermatology company rather than building our own marketing and sales force for only 2 drug products as good as they may be. We may commercialize Epsolay and Twyneo ourselves in 5 years after their markets are well established and after our pipeline candidates mature. In the meantime, the capital we will gain from our partnership with Galderma and our partnership with Perrigo generics will be used to advance our promising pipeline of innovative topical formulations of roflumilast, tapinarof and erlotinib for which we have constructed comprehensive development and intellectual property packages. It is now my pleasure to turn it over to our Executive Chairman, Mori Arkin. Mori, please?

Thank you, Alon. As the Executive Chairman of the Board to Sol-Gel, it was extremely important for me to join today to review our new strategic direction and to highlight that this decision has been carefully considered and has the full support of our growth. On this call, I will not only discuss the partnership for our lead branded drugs, Epsolay and Twyneo, but also our vision of Sol-Gel moving forward, as we are now in a position to maximize the development of our assets while capturing a revenue stream from both our generic and branded product partners. Importantly, the structure of today's partnership announced with Galderma, a world leader in dermatology, allows us to deploy our capital to focus on our earlier-stage high-value clinical candidates in our pipeline rather than on commercial expenses. In 5 years' time, I envision that Sol-Gel will be a company with a robust portfolio with 2 established leading products in acne and rosacea with roughly 40% profit margin; and 2, possibly 3, soon-to-be launched products targeting the large markets for psoriasis, atopic dermatitis and hyperkeratotic skin diseases including roflumilast, tapinarof and erlotinib, each of which has promising potential. If we are able to capitalize on this opportunity, we'll be a stronger company whether as a stand-alone company or as an independent division within a larger entity. Although a number of large pharmaceutical companies have moved into biologics, we expect topical therapy to continue to be the backbone of skin therapy for these complex diseases. It is, therefore, our goal to fill the gap that was created by big pharma abandoning topical R&D, and within 5 years become topical innovators and the leading topical dermatology company. If our plan remains on track, we expect to realize significant value for both patients and shareholders. Because these programs -- because the programs that we are focusing on utilize active pharmaceutical ingredients that have already demonstrated efficacy in third-party Phase III trials, we believe that our new programs have the potential for success and in markets that offer high economic potential. To be clear, we believe, these are not traditional risky Phase I assets, but pipeline programs that warrant significantly higher valuations. We are extremely energized and excited by this development. But first, let us explain why we decided to pivot and partner our lead branded products candidate, Epsolay and Twyneo. Because we are always seeking ways to maximize shareholders' value, we carefully evaluated the number of options with respect to our branded products and our early-stage pipeline. We collectively decided that this opportunity with Galderma represented the most attractive path. It permits our branded medications in acne and rosacea to be promoted by the strongest dermatology sales force in the industry with deep prescribing relationship. We believe that Galderma, which is exclusively focused on dermatology, has the best ability to optimize our brand's future growth trajectory and assure successful commercialization. This decision also expedites our path to profitability by conserving marketing expenditure while we benefit from afterward payments and sales royalties. Finally, it gives us the bandwidth to focus on developing other promising pipeline projects like novel formulation of roflumilast and tapinarof in the high-value topical market of psoriasis and atopic dermatitis. We believe that these compounds represents attractive development opportunities, and we have constructed assured intellectual property strategy for each of these programs. Thanks to the enormous efforts Dr. Alon Seri-Levy and Mr. Gilad Mamlok, we have reached an agreement announced today with Galderma that provides us with the best of all worlds. As we previously indicated, the main compounds as we are developing our topical roflumilast SGT-510, topical tapinarof SGT-310 and topical erlotinib SGT-210. We said in our release today that the second -- that in the second half of the decade, we aim to become the leading player in the roflumilast psoriasis market, which is focused by analysts to reach approximately $1 billion in 2028. The atopic dermatitis market similarly represents another $1 billion opportunity. By the end of 2022, we expect to have a head-to-head data against the formulation of 0.3 roflumilast screen that we believe will be a very close approximation of the soon-to-be-launched roflumilast brand. We hope that this comparative study will highlight the unique features of [indiscernible] and expect to initiate Phase II work in roflumilast shortly thereafter, to realize an inflection in value from this program. With respect to our roflumilast trial, we are extremely pleased with the highly encouraging results from a recent preclinical study using a validated psoriasis model that has been used to predict efficacy. So marketed psoriasis drug such as roflumilast, Otezla and several injectable pediatric. What is unique about testing with this model is that drugs are tested on leading human psoriatic skin and therefore, results are expected to mimic the clinical effect in humans. In this experiment, we tested our provider formulation for roflumilast and compare it to a 0.3 formulation of roflumilast, created by Sol-Gel, each dose once daily for 2 weeks. We also employed a positive control of the topical steroid, dexamethasone, given twice daily, while we know -- which we know rapidly counts inflammation as well as a negative vehicle control. In this study, 6 out of 10, or 60% of the animals treated with roflumilast formulation recovered compared to 3 out of 10, or 30% in the animals treated with the roflumilast screen. Make note, this is not a serious findings despite the small number of animals treated, because the study was designed based on the predefined hypothesis that our formulation will be superior to the cream. These results were further supported by histological findings. As a result, we intend to advance our innovative SGT-510 formulation to clinical studies by the middle of next year. Shifting gears, tapinarof is another product that has comparable market potential, and therefore, we are equally excited about this product candidate. Our enthusiasm stems from our expectation to be the only player besides the brand in the U.S. and the rest of the world for a number of years, offering innovative formulation or combinations and increased patient access. In those markets where it would make sense to offer the product also in an unbranded form, we will do so via our partnership with competent players. If our trials are successful, our regulatory strategy to develop our formulation of tapinarof will consist of filing a new drug application or NDA via the 505(b)(1) pathway. We took into consideration that the 505(b)(1) regulatory pathway is more demanding and more costly than the 505(b)(2) regulatory pathway. However, the latter pathway is associated with the Hatch-Waxman 30-month day, which we prefer to avoid. The 505(b)(1) route will enable us early entry into most of the attractive markets in the world as all these markets have a data exclusivity policy, which prohibits a company from entering the market for a period of up to 11 years, unless you have full registration package that was internally developed. It can also provide us with a durable patent protection product that can be marketed alongside other tapinarof formulations as well as monetize to potential partners. We are extremely committed to this project and have already dedicated resources to its advancement. Our first initiative has been to develop a GMP-compliant active pharmaceutical ingredient or API of tapinarof to meet standards by partnering with a reputable API manufacturer, Wavelength Pharmaceuticals, which is well known in the field for its stellar track record FDA GMP compliance. This is an important milestone for us, which will move a major hurdle to clinical trial development. We are now full steam ahead with both clinical projects. In summary, we're extremely galvanized by this turn of events, our stronger-than-ever strategic position. We have struck a deal with a leading global dermatology company to monetize our late-stage products in a way that preserves financial upside for the long term and conserves cash in the near term. This partnership also permits us to focus on scientific efforts on innovative, high-value products that will drive upside for our shareholders. We have also carefully mapped our regulatory and legal strategies, which are core competencies for Sol-Gel alongside our formulation capabilities. Backed by our strong science and innovation, it is our aim to be a leader in the topical dermatology field in the end of this decade -- by the end of this decade. I will now turn the call to Gilad. Gilad?

Thank you, Mori. At the end of May of this year, we had $42.1 million in cash investments. We estimate that our cash resources will enable funding with operational and capital expenditure requirements into the first quarter of 2023, assuming FDA approval of both Twyneo and Epsolay in 2021. This estimates excludes any sales milestone or royalty payments that we may receive [indiscernible]. We will now turn it over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Elliot Wilbur with Raymond James.

Congratulations on the deal with Galderma and the progress on your pipeline. I guess, my first question is with respect to the Galderma licensing agreement. Obviously, it's the company to partner with in the dermatology space. Clearly, the leader in the category but they also have a lot of products. So can you just give us some sense of how the licensing agreement incorporates or embeds various performance obligations in terms of sales and marketing spend or minimum level of details? And how are Twyneo and Epsolay going to be positioned against some of Galderma's existing products, mainly Epiduo Forte, AKLIEF and different -- just curious as to how they're going to make room for these attractive assets within a fairly large derm portfolio?

Let me answer it. We'll start the answer and then Gilad will follow. What we have to remember that right now Galderma does not have so many products because both Epiduo and Soolantra, the 2 leading products, paid bills for the last years are now genericized. It makes no sense to develop -- to market it. So our 2 products came very sharp in the area where they are lacking the new -- [indiscernible] cannot become an alternative to Epiduo, it is not perceived so in the market. So the 2 products that we are offering are the products that they need. They need a replacement for Soolantra, which was up to $200 million, and they got Epsolay. And they needed the replacement for Epiduo and they got Twyneo. So we still -- and that's why they were eager to have it, and we're excited about the opportunity. So because of this complementarity, we feel very confident that they will pursue this business because they can do it relatively easily because of the contacts and the lack of a competitive product in the very same category. So that's what made this deal so valuable for both parties. For the specific numbers regarding sales minimum, we do not disclose the numbers, but certainly, we took care of that also.

Okay. And then I had a follow-up as well, unless Alon was going to add additional commentary there?

Yes, Gilad, please.

Could you repeat just the question -- the follow-up question?

Sure. Well, let me ask a follow-up question then, just moving beyond the promotion and just looking at the rights to get back the products in 5 years seems to be obviously quite an attractive option. Any financial payment associated with those rights in order to reacquire?

No, there is no financial commitment. We can get it back after 5 years. We are going to get it back. There is no cost to it.

Okay. And then just one last question here and I'll get back in the queue. So on roflumilast, you mentioned the regulatory pathway here and went into a lot of detail about kind of why you chose to -- or how you're proceeding and using the 505(b)(1) pathway. Just wondering the (b)(1) pathway versus the (b)(2), how much longer do you think that will take in terms of the development pathway? And then just curious, obviously, the (b)(1) may circumvent some IP that's out there, but there's still the possibility of commencing litigation against the Sol-Gel formulation once the product is approved and commercialized. So I'm just wondering kind of how you were thinking about that alternative versus pursuing the 505(b)(2), which forces litigation at kind of much earlier point under Hatch-Waxman?

Let me put things in order. The 505(b)(1) strategy is for tapinarof. And in the case of roflumilast, we are going to use the 505(b)(2) route. Only we will refer to the oral product of roflumilast. So that also in this case, we will avoid the [indiscernible] of litigation. So 505(b)(1) is tapinarof. Now you asked several good questions. We have already started the development of tapinarof, and it is our expectation to reach the market not later than 5 years from the launch of the brand. This means that if I take, for example, United States, where practically, if you have a new chemical entity, a pediatric exclusivity, and the 30 months day that starts about 3 months after you have submitted because you have to write to them and they have to write -- see you back. Plus the appeal, plus the appeal on appeal, it is rarely less than 10 years that one can maintain exclusivity when a company has a new chemical entity as tapinarof is. So by resorting to a route that will require only 5 years from the launch of the brand, we are going to have 5 years of exclusivity in the United States market. Now if we assume that the market is between $0.5 billion and $1 billion by 2028, roughly similar to roflumilast, we are talking about huge potential for ourselves, both as a brand and also as an unbranded product. We started discussions with companies and everyone is very excited about this possibility. So the value is at least 5 years of exclusivity in the United States, 6 or maybe more in Europe because there we have the 11 years of data exclusivity, if you will. So we're talking about a huge benefit that will translate to hundreds of millions of dollars. The cost will be higher. But in our models, again, which are based on the forecast of the analysts, if they are right, we will reach breakeven very, very soon -- very, very soon after launch, maybe 2 years or something. And now your question about patents, we study every patent of derma brand and every patent of acute is very, very thoroughly. We have several legal advisers, and we are confident that our product will not infringe in any shape or form the patents of each of these 2 companies. Let's now talk about tapinarof. Yes, they can sue us but we are not afraid from sham suits because they are not connected -- don't come together with 30 months day. Any suit would be -- any litigation would be a sham litigation. We are not afraid of sham litigation. We are worried about litigations that require -- that come with 3, 4, 5 years of stay. So we are confident. We know the patents. We know the applications. We know the comments from the patent office. We are very confident and so is our legal consultants that we are not going to infringe any patents.