ADC Therapeutics SA (NYSE:ADCT) Q4 2022 Earnings Call Transcript

ADC Therapeutics SA (NYSE:ADCT) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Welcome to the ADC Therapeutics Fourth Quarter and Full Year 2022 Financial Results Conference Call. My name is Andrew, and I’ll be your operator for today’s call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Amanda Loshbaugh, Investor Relations Manager. Amanda, you may begin.

Amanda Hamilton: Thank you, operator. This morning, we issued a press release announcing our fourth quarter and full year 2022 financial results and business updates. This release is available on the ADCT website at ir.adctherapeutics.com under the Press Releases section. On today’s call, Ameet Mallik, Chief Executive Officer; Kristen Harrington-Smith, Chief Commercial Officer; Mohamed Zaki, Chief Medical Officer; and Jose Carmona, Chief Financial Officer, will discuss recent business highlights and review our fourth quarter and full year 2022 financial results, before opening the call for questions. Before we begin, I would like to remind listeners that some of the statements made during this conference call will contain forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Examples of forward-looking statements include those related to our future financial and operating results, our ability to achieve our guidance for 2023, and long-term revenue, operating expenses and cash requirement reductions, future revenue growth, prescription volume, product launches and market share for our products, either alone or through our foreign partners, timing and results of ongoing and future development programs and clinical trials for our products, either alone or in combination with our partner products, FDA and foreign regulatory authorities actions and potential regulatory approval for our products either alone or in combination with our strategic partners products, future strategic partnerships and business development efforts and our ability to repay our outstanding debt obligations.

These forward-looking statements are subject to certain risks and uncertainties and actual results could differ materially. They are identified and described in today’s press release, in the accompanying slide presentation on Slide 2 and in the company’s filings with the SEC on Form 20-F and is updated in ADCT’s recent periodic filings on Form 6-K. ADCT is providing this information as of the date of today’s conference call and does not undertake any obligation to update any forward-looking statements, contained in this conference call, as a result of new information, future events, or circumstances after the date hereof, except as required by law or otherwise. The company cautions investors not to place undue reliance on these forward-looking statements.

Today’s presentation also includes non-IFRS financial measures. These non-IFRS measures have limitations as financial measure and should be considered in addition to and not in isolation or as a substitute for, the information prepared in accordance with IFRS. You should refer to the information contained in the company’s fourth quarter and full year earnings release for definitional information and reconciliations of historical non-IFRS measures to the comparable IFRS financial measures. It is now my pleasure to pass the call over to Ameet Mallik. Ameet?

Ameet Mallik: Thanks, Amanda, and thank you all for joining us today. 2022 was a year of evolution for ADC Therapeutics, a year in which we laid the groundwork to help optimize and launch its potential, prioritize our pipeline, strengthen our leadership team and bolster our capital position, all with the intention of elevating the company to the next level. We are now positioned to execute our strategic initiatives in 2023 and unlock the tremendous untapped value of the company. We expect to see this value unfold through our three core pillars of growth: maximizing the Zynlonta opportunity, advancing our PBD-based pipeline and expanding our ADC platform. Beginning with the highlights of the quarter, Zynlonta net sales were $19.8 million in the fourth quarter, a 16.5% increase year-over-year and $74.9 million for the full year.

We are encouraged to see on underlying trends and have a focused plan in place to help to drive future growth. Kristen will take you through these initiatives momentarily. By executing successfully, we expect to drive Zynlonta net sales by a double-digit percentage year-over-year, even when taking into account, the gross to net headwinds and expected approval of bispecifics. We also expect them not to achieve commercial brand profitability this year, and for its sales to begin funding pipeline development by the end of the year. As a reminder, while success in the third line cost setting is hugely important, we believe this patient segment only represents around 20% of the commercial potential for Zynlonta. The larger opportunity lies in combinations in earlier stage settings.

Here we firmly believe that Zynlonta’s strong single agent activity and manageable side effect profile make it an ideal combination partner of choice. We are exploring Zynlonta and combination with rituximab in earlier lines of therapy in the LOTIS 5 and LOTIS 9 studies. We are also excited about combining Zynlonta with bispecifics, which we are investigating in the LOTIS 7 study. If we were able to expand our approved indication and capture earlier lines, we believe combination opportunities for Zynlonta have the potential to deliver peak annual sales of between $500 million and $1 billion in the U.S. with additional opportunity through partnerships ex-U.S. Regarding geographic expansion, we were very pleased to see Zynlonta to receive approval in December from the European Commission and the UK MHRA for the treatment of relapsed or refractory DLBCL.

Subsequently, on February 7th, our European partner, Sobi received conditional marketing authorization. We are encouraged that the team has made good progress and expect Sobi to launch in Europe in the second quarter of this year. As I turn to the rest of our pipeline, we are looking forward to multiple value driving catalysts across our portfolio in the next 12 to 18 months. Including preliminary data for ADCT-901 targeting CAAG-1 and ADCT-601 targeting AXL. In an effort to prioritize these programs and to potentially capture the full opportunity for Zynlonta, we made a decision not to pursue further clinical development of Cami on our own, but instead to seek a partnership based on its positive Phase II data. We are strategically advancing the rest of our portfolio programs and Mohammed will provide a more detailed update in a few minutes.

Touching briefly on the financials. At year end, we had a strong balance sheet with $326 million in cash and with the anticipated milestone payments and lower operating expenses, we expect our cash runway to extend into mid-2025. Moving to recent corporate events and as disclosed in regulatory filings, our largest shareholder, Auven Therapeutics, completed a secondary sale of a significant portion of its holdings to meet a debt obligation. The secondary offering of 12 million shares was placed in the of high-quality investors and has allowed us to broaden and strengthen our shareholder base. Following the completion of the transaction, Auven’s holdings has decreased from approximately 28% of outstanding shares in December to roughly 8% after the offering.

And its remaining shares are locked up for 12 months. The high level of interest shown by top tier investors during the process was especially encouraging. Last but certainly not least, I’m thrilled that, we have been able to continue to strengthen our management team with the addition of truly high caliber professionals. I would like to take this opportunity to welcome Kristen Harrington-Smith, our Chief Commercial Officer; Mohamed Zaki, our Chief Medical Officer; and Pepe Carmona, our Chief Financial Officer. We believe these new leaders bring the necessary capabilities to unlock the full value of the company and will be critical in advancing us through the next phase of growth. In the next three to five years, we expect to continue to grow Zynlonta sales, advance the pipeline, broaden our scope of new partnerships and move toward profitability.

With that, I would like to turn the call over to Kristen for a commercial update. Kristen?

Kristen Harrington-Smith: Thanks, Ameet. It is my pleasure to share an update on Zynlonta launch. As Ameet mentioned, we are seeing strong underlying demand trends with have accelerated in the past two quarters. I’m excited by the opportunities we have to build on this momentum, and I want to spend a few minutes outlining how we’ve refined our strategy and initiatives to deliver Zynlonta’s full potential. It all begins with understanding the products, the market, and the various stakeholders. My focus during my first few months has been I’m listening and learning from the team and key thought leaders. Following this steep dive, it’s clear that the key to delivering our growth aspirations for Zynlonta in the near term will be in the quality of our execution and in particular, in doing a few things really well.

We are focusing our cross-functional team on three key imperatives. One, driving awareness of Zynlonta is differentiated profile. Two, educating physicians to optimize the patient benefit. And three, continuing to build advocacy with key thought leaders, focusing on clear patient types. Through executing on these three aspects of our strategy, I believe we will capture the opportunity for growth in the third line, third line plus setting both in the near term and over the longer term, recognizing that this is a marathon and not a sprint. Let me now spend a moment expanding on each of these three elements of our strategy. Starting with driving awareness, Zynlonta has a uniquely differentiated product profile, which we believe positions it to become the standard of care in the third line, third line plus setting.

First, it has strong single agent activity. It’s associated with a rapid time to response with a median of just 41 days. It has a manageable safety profile with no cytokine Release Syndrome and a low incidence of neuropathy. Lastly, it has a relatively patient friendly administration schedule requiring a 30-minute infusion cycle once every three weeks. The second strategic initiative is to educate physicians and nurses on the proper dosing to achieve the best clinical outcome for patients and the manageable safety profile of Zynlonta, what to expect and how to mitigate potential adverse events. We believe Zynlonta’s safety profile is favorable in the third line, third line plus setting, and we need to keep reinforcing this important message.

Lastly, we need to work closely with our thought leaders and for them to educate and share theirs and wants experience with their peers in the community. The third line, third line plus setting landscape is increasingly complex with the availability of new innovative options. Now, more than ever, the community is looking to the thought leaders to help identify the best options for postcard C patients and for those who don’t get to CAR-T. As a reminder, community centers account for roughly 60% of diffuse large B-cell lymphoma patient volume as compared to 40% in the academic centers where Zynlonta is mainly prescribed today. Taking a closer look at the academic versus community setting, we have already established a strong foundation in the academic setting.

Here, around 80% of accounts have experienced with Zynlonta. Our focus will be on driving utilization in the post CAR-T patients. Since approximately 60% of these patients will unfortunately relapse. The bigger opportunity for us is in the community where we have the potential to drive much greater breadth of experience. At the start of 2022, roughly 25% of community accounts had tried Zynlonta, and we grew that to almost 35% by the end of the year. Based on the differentiated profile I discussed earlier. We believe Zynlonta is ideal for the community, specifically for the large proportion of patients more than three quarters who are unable to get to car state due to the complexity, toxicity, or lack of assets. Again, we want to reinforce that the community setting is our greatest opportunity to drive growth.

We recognize adoption as slower as the market is highly fragmented, but we are making steady progress and are encouraged that once physicians are familiar with Zynlonta, they tend to continue to prescribe it. We have an opportunity to increase awareness of Zynlonta’s differentiated profile and the advantages it can bring to patients and physicians. We know from brand impact data that roughly one in three treaters has unaided awareness of Zynlonta, which flags that of other key competitors in the market. We have seen a consistent improvement over the past year, but we can clearly do a lot more. By sharpening our execution, particularly our promotional efforts focusing on Zynlonta’s unique profile. We are confident we can drive much higher levels of awareness so that Zynlonta becomes top of mind with community physicians.

All our focused initiatives are critical to expanding adoption and utilization, and what is really important here is that when healthcare systems tries Zynlonta, they continue to order it. In fact, at the end of 2022, we saw 84% place repeat orders. To close, we are very encouraged by the recent trends in Zynlonta uptake and utilization, and we have fine-tuned our strategy to fully capture the opportunity for this important medicine in the third line, third line plus setting. Now I’ll turn the call over to Mohamed to provide an update on our pipeline. Mohamed?

Mohamed Zaki: Thank you, Kristen. It is my pleasure to share an update on the pipeline. First, I want to discuss the lifecycle management program for Zynlonta. We see potential for the treatment to be a key player in select indication. As you see here, despite current treatment options and emerging therapies, distinct unmet need remains in all lines of therapy. Having spent my entire career in the Hematology and Oncology space, I appreciate what Zynlonta can do for patients. And at this point, I believe we have barely scratched the surface. As Kristen described earlier, Zynlonta has already demonstrated a compelling and uniquely differentiated profile in the third line setting, and our strategy here is to maximize patient utilization.

The larger opportunity, however, lies in earlier lines and in combinations. Zynlonta is the only approved T-19 directed treatment option outside of CAR-T to have demonstrated single Asian activity in the DLBCL and no known overlapping toxicities in combinations currently being studied. We believe Zynlonta has the potential to become the combination agent of choice, and eventually a backbone therapy in all lines of DLBCL. When we think about the second line DLBCL setting, the current treatment includes stem cell transplant, CAR-T, targeted therapies, and, chemo-based regimens. Going forward, we expect to see increasing use of CAR-Ts. But even with this, there will still be unmet medical need and opportunity for those, who are not eligible or cannot access transplant or CAR-T.

Here, we are exploring the combination with rituximab, in our ongoing LOTIS 5 study, for second line plus DLBCL patients not eligible for transplant. This combination could benefit patients, even if they received prior CAR-T or if they are not eligible for CAR-T. The notified safety run-in produced early encouraging efficacy data, and the enrollment of approximately 350 patients is expected to be completed next year. Another potential application for the rituximab combination is in the frontline therapy, where there is a great need among unfit or frail patients, not able to tolerate full doses of R-CHOP. While approximately 85% of patients received R-CHOP and there is an acuity in about 60% of patients, this leaves a significant population that is unable to deliver at R-CHOP and has poor outcome.

Physicians are looking for monthly systemic infusion with better outcomes in this setting. Based on this unmet need and the de-risk profile of Zynlonta, we are conducting the Phase II LOTIS 9 study. This is an open label study in the onset and failed patients with results expected next year. We believe the potential benefit is supported by encouraging data from LOTIS 2. The data showed Zynlonta has a similar overall response in patients over and under 75 years of age, with no notable safety issues in the older patients. In addition, data from safety run-in portion of LOTIS 5 further supports the use of this non-systemic combination and increases the likelihood of success. Beyond the combination with rituximab, we are exploring novel combinations.

We are particularly excited about possibility of combining the — bispecifics with their distinct mechanism of action and toxicity profile. In the LOTIS 7 study, we are evaluating the combination with glofitamab and mosunetuzumab as well as polatuzumab. We expect to have early data from these studies next year. We also have a collaboration with IGM to combine with by specific input amount. Beyond our own clinical studies, we are intelligent to see substantial interest from investigators to explore the long term in different combinations, including by specific in different treatment setting and in other indications. We are closely following those studies to further understand the amount of potential. Investigators are keen to see whether then launch a stronger profile in the challenging DLBCL indication could potentially translate into other areas of CVA-T in disease biology.

Such as CLL Follicular lymphoma, and Mantle cell lymphoma. On my final slide, I would like to discuss our robust pipeline beyond the long, starting with our company sponsor program, ADCT-901 targeting KAAG1 is a novel first-in-class that targets various solid tumors. The Phase 1 dose escalation is proceeding, and we have not yet reached the max tolerated dose. We have decided to amend the protocol to explore different dosing schedule to optimize the potential clinical outcomes for patients and to prepare for regulatory interactions, as part of project aspects. We now expect to share preliminary data in the first half of 2024. Now looking at ADCT-601 targeting AXL, AXL is a validated target over expressed in many solid tumors including sarcoma and non-small cell lung cancer.

The Phase 1 study to optimize the combination with gemcitabine and to explore single activity is progressing. and IHC assay for possible biomarker approach is being finalized. Preliminary data from the Phase 1 dose escalation and expansion study are expected in the first half of 2024. ADCT-212 is in Next-generation PBD-based ADC targeting PSMA, validated target over-expressed in the majority of Metastatic Castration Resistant Prostate Cancers. We expect to initiate the Phase 1 study in the first half of 2024. Now for our programs in collaboration, ADCT-602, target CD22 MD Anderson cancer center presented some encouraging signs of activity from the Phase 1 study at ASH in a small number of acute lymphoblastic leukemia patients. The Phase 1 dose expansion study is expected to complete in the first half of 2024.

And finally, ADCT-701 targeting DLK1, a collaboration with NCI in neuroendocrine malignancies. We expect the Phase 1 study to be initiated in the second half of the year. I am really excited about the robust pipeline we have developed with multiple catalysts over the next 12 to 18 months. This is one of the reasons I came to the company. I look forward to reporting on the evolving news flow from our pipeline over the coming month. With that, I will turn the call over to Pepe to give a financial update. Pepe?

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Q&A Session

Pepe Carmona : Thank you, Mohamed. Starting with our balance sheet, as of 31st of December, we had cash and cash equivalent of $326 million, representing a $55 million reduction from our position at the end of the third quarter. Subsequent to the year-end, we receive a $50 million milestone from Sobi given European approval of Zynlonta, and we also expect to receive a $75 million milestone from HealthCare Royalty Partners on first commercial sales in Europe expected in the second quarter of the year. As Ameet noted, based on our business plan, the milestone payment I mentioned and further productivity initiatives underway, we expect that our cash runway now extend into mid-2025. Turning to the P&L, Zynlonta net sales were $19.8 million in the fourth quarter, up 16.5% versus Q4 2021.

While full year net sales more than doubled to $74.9 million with the first full year of sales compared to $34 million in a partial year in 2021. License revenues amounted to $50 million in the fourth quarter, which reflected the milestone from Sobi. For the full year, license revenue of $135 million also included $85 million in app from payments from our partners Sobi, Mitsubishi Tanabe. Cost of product sales amounted to $0.5 million in the fourth quarter and $4.6 million for the full year. In addition to a full year of commercial activity, this expense line reflected impairment charges for products, intermediates, and antibodies that did not meet the company’s specifications. Importantly, these specifications issues did not and are not expected to impact our ability to supply commercial products.

Our largest expense line, of course, continues to be r and b , where as you heard today, we’re committed to invest behind Zynlonta and our promising early stage pipeline programs. R&D expenses was $48.7 million in the fourth quarter and $187.9 million for the full year sales and marketing expenses was $16.2 million in the fourth quarter and $69.1 million for the full year. This reflected a full year professional expenses relating to the commercial line Zynlonta partially offset by lower share-based compensation in the fourth quarter. G&A expense was $15.1 million in the fourth quarter and $72 million for the full year. This reflected higher professional fees and cost associated with the C-suite transition, partially offset by a lower share base compensation in the fourth quarter.

Moving to the bottom of the P&L, on an adjusted basis, we reported a net loss of $7.9 million for the fourth quarter, a $0.10 per deleted share. For the full year, our adjusted net loss was $81.7 million or $1.05 per diluted share. Now turning to our guidance. Based on the market dynamics and the growth initiatives which Kristen highlighted, we expected to grow ZYNLONTA net product sales by double-digit percentage points year-over-year. This takes into account significant gross-to-net headwinds compared with 2022. Specifically, we expect a negative gross to net impact of approximately two to three percentage points from our GPO contracting, together with a negative impact of mid-to high single-digit percentage point to reflect the new Medicare Part B wastage policy regarding discarded unit that was implemented at the beginning of 2023.

In terms of total operating expenses, we expect a decrease in 2023 and 2024 as compared to 2022, reflecting prioritization and productivity efforts across all expense categories. Finally, moving to the upcoming catalysts. We have a number of different value-driving catalysts over the next 12 to 18 months and well within our cash runway. Starting with ZYNLONTA this year. In addition to double-digit growth, we also expect to achieve a commercial brand profitability, meaning we will more than offset the total cost of commercialization, medical affairs and all related costs so that ZYNLONTA, by the end of the year, starts to pay for the development of new indications and the pipeline. Following European approval of ZYNLONTA, we expect our partners Sobi, launch in the second quarter of this year.