Spero Therapeutics, Inc.

Good afternoon and welcome to the Sparrow Therapeutics third quarter 2022 financial results conference call. At this time, all participants are in listen only mode. Following the company's formal remarks, we will open up the call for questions. Please be advised that this call is being recorded and a replay will be available. You can find information on the replay and further information related to today's announcement on the Sparrow Therapeutics website, www.sparrotherapeutics.com. At this time, I would like to turn the conference call over to Ted Jenkins, Vice President, Investor Relations and Strategic Finance at Sparrow Therapeutics. Mr. Jenkins, please go ahead.

Thank you, Operator, and thank you all for participating in today's conference call. This afternoon, Sparrow Therapeutics released financial results and provided a pipeline update for the third quarter of 2022. A press release is available on the investor page of the Sparrow Therapeutics website. Before we begin, I'd like to remind you that some of the information presented on this conference call contains forward-looking statements based on our current expectations, including statements about the future development and commercialization of SPR 720, SPR 206, and Tebby-Pettim HBR, and the design, initiation, timing, progress, and results of the company's preclinical studies and clinical trials and its research and development programs, management assessment of the results of such preclinical studies and clinical trials, the company's cash forecast and anticipated expenses, and the sufficiency of its cash resources. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Spare Affidavit's filings with the SEC, including in the Risk Factors section of our quarterly report on Form 10-2 for the quarter ended September 30, 2022, filed today. These forward-looking statements speak only as of the date of this conference call, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the company after the date of today's call. Participating in today's call are Dr. Ankit Mahidibia, Chief Executive Officer, Dr. Kamal Hamad, Chief Medical Officer, and Seth Shukla, our Chief Financial Officer. With that, I'd like to turn the call over to Dr. Ankit Mahidibia. Please go ahead, Ankit.

Thank you, Ted, and good afternoon to everyone who's joined us for a discussion of our third quarter financial results and company highlights. The third quarter was an exciting time for Sparrow as we successfully executed our new strategic direction that we set forward in the second quarter when it became clear that Tebby Penham would not receive FDA approval on its first cycle of review. The strategy we laid out was to move forward with SPR 720 as our lead asset and advance Tebby Penham HBR and SPR 206 as our designated partnership directed programs. We made this decision because we felt it would position us for future growth, allow us to maintain good stewardship of our capital, and ensure the medicines that we develop continue to advance towards potential regulatory approval. In addition, our long track record of establishing creative partnerships with leading organizations gave us confidence that we would be able to successfully execute our new strategic approach. Our confidence and our approach were validated this past September when we entered into an exclusive license agreement with GSK for Tebipenem HBR. As delineated in last week's press release, we have now closed this transaction. Sparrow has already received the $9 million associated with GSK's equity investment and will soon receive the $66 million upfront payment and will be eligible for up to $525 million in additional milestone payments as well as low single-digit to low double-digit tiered royalties on net product sales. This collaboration adds even more strength to our balance sheet and shareholder base. In exchange for the upfront payment and potential milestones and royalties, GSK is being granted an exclusive license to develop and commercialize Tebipen and HBR in all territories except Japan and certain other Asian countries, which will be retained by Sparrow's partner, Meiji Seika. Under the agreement, Sparrow is responsible for the execution of an upcoming Phase III study, and GSK is responsible for the execution and cost of additional development and commercialization activities for tebupenem-HBR outside of the Meiji-Seika territory. Given GSK's global reach and history as a leader in infectious diseases, we believe they are the ideal partner to fully unlock tebupenem's value and expeditiously deliver it to medicine patients following regulatory approval. We therefore view the new partnership as our key step towards potentially providing millions of complicated urinary tract infection patients with an at-home oral option that may also reduce hospital resource utilization. It's our hope that Tebby Penham HBR may provide an alternative to the intravenous therapies which currently are often a patient's only option. Extensive clinical and market research data suggests that Such an option would improve clinical care while delivering substantial economic benefits to patients, physicians, and payers alike. We are eager to continue developing tebepenem as the potential first oral carbapenem antibiotic for the development of CUTI and are thrilled to be supported in this endeavor by our world-class partners at GSK. Looking ahead for tebepenem-HBR, we expect to initiate a new Phase III clinical trial in 2023. Prior to entering our agreement with GSK, we aligned with FDA on key components of the trial design at a recent type A meeting. Feedback from this meeting indicated that positive results from this single additional trial together with confirmatory non-clinical evidence of efficacy could be sufficient to support tebipenem HVR's approval for the treatment of complicated urinary tract infections, including pyelonephritis for a limited use indication. This upcoming pivotal trial will build upon the extensive clinical and non-clinical data previously generated with tebupenem HBR, which include the results of our prior Phase III clinical trial, ADAPT-PO. The results of this clinical trial, which were published in the New England Journal of Medicine, demonstrated that oral tebupenem HBR was well-tolerated and not inferior to IV ertapenem in the treatment of adult patients with complicated urinary tract infections or acute pyelonephritis as per the pre-specified statistical protocol. We are currently working to finalize the design of our upcoming trial, which will be the subject of a special protocol assessment request. With review of our newly forged partnership complete, I'd like to now introduce Sparrow's recently appointed chief medical officer, Dr. Kamal Hamid. Kamal joined Sparrow in September, bringing with him an impressive range of experience within the biotech industry, global pharmaceutical companies, and as a practicing physician caring for patients with infectious diseases. He has a long track record in infectious disease drug development, including multiple drug approvals. He's integrated seamlessly into his new role at Sparrow and has displayed the expertise and commitment to our Sparrow values that made him the ideal candidate to serve as our CMO. with the added strength kamal brings to our management team our clinical pipeline and our gsk partnership we've laid the foundation for sustained growth into 2023 and beyond we have cash runway through key milestones for each of our clinical programs and have a deeply talented team in place all of our programs are supported by clinical and non-clinical data that provide clear differentiation over competing approaches and each has demonstrated the potential to deliver clear clinical and economic benefits. With that, I will now turn the call over to Kamal to speak about his decision to join us here at Sparrow and to provide an update on the SPR 720 and SPR 206 programs. I'll hand it over to you, Kamal.

Thank you very much, Ankit, for the kind introduction. The core drivers behind my decision to join Sparrow were the clear strength of its pipeline, the integrity and expertise of the management team, as well as the guiding principles behind Spiro's drug development strategy, which I view as the ideal approach for the antibiotic field. This approach focuses on developing medicines that, first and foremost, address the unmet medical needs of patients, while simultaneously providing clear benefits to the healthcare system more broadly. By successfully executing on this approach, I believe we can develop anti-infectives that are positioned for rapid and widespread uptake following regulatory approval. Since Ankit walked you through how we believe tebipenem HBR meets these criteria, I'll focus on SPR720 and SPR206. I'll start with SPR720, our novel oral candidate being developed as a first-line treatment for non-tuberculous microbacterial pulmonary disease, or NTMPD for short, which is an orphan disease. NTMPD is an area of high unmet medical need as there are currently no FDA-approved options for first-line treatment. SPR720 is the stable prodrug that's rapidly converted to the active moiety SPR719. In vitro studies have demonstrated SPR719's potent activity against a broad spectrum of NTM species, which is a result of its ability to inhibit ATPase located on the gyrase B subunit of the tetramatic gyrase A2B2 protein. This mechanism of action is importantly distinct from that of fluoroquinolones, thus avoiding cross-resistance with fluoroquinolones and other marketed antibiotics, which has been corroborated with in vitro surveillance data from recent NTM clinical isolates. It's important to note that SPR719 is highly concentrated in macrophages, a site where NTM survive and replicate. In vivo, data supporting SPR720's development come mainly from a murine chronic infection model, where it displayed pulmonary activity against the most prevalent slowly growing and the most prevalent rapidly growing NTM species. and an approximately 100 subject phase one first in human study supporting its safety and pulverability at exposures above predicted therapeutic levels. These data fuel my optimism for the program. Note they are just one component of SPR's strong value proposition. A second key component is the clinical development strategy that we are pursuing. This strategy aims to maximize SPR720's therapeutic and commercial potential by addressing patients with NTMPD who are early in their disease journey in the treatment-naive or treatment-inexperienced stages. The off-label therapy is currently available for these patients, have poor risk-benefit profiles, and are frequently unable to prevent the progression to late-stage refractory disease even when administered continuously for one to two years. In some instances, because physicians view the risk-benefit profiles of the antibiotic combinations currently employed as poor, they choose to delay for macrotherapy and instead initially only suggest steps to improve bronchial hygiene. Unfortunately, this approach does not prevent disease progression. Patients who progress to refractory disease will often suffer irreversible lung damage, leading to debilitating symptoms that may prevent them from performing routine daily activities. Our recent virtual R&D event featured an NTMPD patient testimonial and expert perspective from a key opinion leader describing both the devastating effects of these symptoms as well as the stark limitations of currently available therapies. I'd highly encourage all of those who are interested to view the replay of our event on the Sparrow website. Despite the permanent lung damage that comes with progression to refractory NTMPD, most other agents in development only seek to treat the disease at this late stage. We, however, are taking a different approach. Our goal is to develop SPR720 to intervene before patients progress to refractory disease so that we can help prevent irreversible lung damage from the infection. We believe that this will allow SPR720 to elicit more meaningful improvement in clinical outcomes and quality of life. In addition, Focusing on treatment-naive and treatment-inexperienced patients provides a larger addressable patient population for SPR720, as 75% of NTMPD patients fall within these classifications. As referenced in today's press release, we have initiated the SPR Phase IIa clinical trial designed to achieve early and robust proof of concept for this investigational medicine. Top-line data are expected in the first half of 2024, and we no longer plan to announce interim data. Given that the trial will be relatively focused with a planned enrollment of 35 patients, we believe announcing data from all patients at once will allow us to make a disclosure that's more impactful from both a scientific and value creation perspective, given our newly extended cash runway due to the GSK agreement. The trial design remains unchanged from what was discussed on Sparrow's last earnings call. The study will compare two doses of oral SPR720 monotherapy, 500 and 1,000 milligrams, versus placebo in treatment-naive or treatment-inexperienced patients. The primary endpoint is slow change of weekly sputum bacterial burden from day one to day 56. Specifically, we hope to observe a negative slope with SPR 720 treatment that's significantly better than that observed with placebo. This methodology for assessing monotherapy activity of an antimicrobial bacterial agent is both well-established and validated. having previously been employed in the evaluation of drugs approved for mycobacterium tuberculosis. Demonstrating SPR720's ability to drive an early microbiological response as a standalone agent versus placebo would be a potential key catalyst for the program. It would clearly differentiate SPR720 from other therapies, as there are currently no existing agents that have accomplished this feat. It would also provide clear proof of concept for SPR720's long-term development as a component of combination regimens for NTM-PD. I'll next discuss what I find most exciting about SPR206, our Phase II ready IV polymyxin antibiotic candidate being developed to treat multidrug-resistant gram-negative bacterial infections within the hospital setting. For background, the development of treatments for gram-negative bacterial infections is an area of research that has been relatively stagnant, with a number of novel therapies gaining approval for these infections sharply decreasing over the past 40 years. A major reason for this has been the field's inability to generate agents that can maintain antimicrobial activity while also penetrating the negatively charged outer membrane of gram-negative bacteria. This lack of innovation has left patients with extensively drug-resistant gram-negative infections with suboptimal therapeutic options that consist of combination regimens, including older polymyxins such as colistin, which is one of the most widely used polymyxins today. Unfortunately, colistin and other polymyxins are associated with remarkable methyl toxicity creating a need for next-generation agents that can take their place in combination regimens. In addition, a prior colistin bronchoalveolar lavage BAL clinical study showed that colistin was unable to penetrate patients' lungs, with levels being undetectable as a conclusion for the study. This highlights another key limitation of the agent, as about half of the patients infected with multidrug-resistant gram-negative pathogens suffer from lung infections, i.e. pneumonia. Given its mechanism of action, we believe that SPR206 can overcome the resistance in gram-negative bacteria to other classes of antibiotics, as well as the limitations of currently available polymyxins. This belief is supported by preclinical data demonstrating that SPR206, given its potent intrinsic activity and ability to permeabilize gram-negative bacterial membranes, when combined with beta-lactames and carbapenems, is very effective in the profound killing of several extensively drug-resistant gram-negative pathogens, including carbapenem-resistant Acinetobacter baumannii, which have a mortality rate of 40 to 50%. Further, clinical data show that SPR206 can achieve exposures above predicted therapeutic levels, including concentrations in the lungs sufficient for killing these pathogens. In clinical studies to date, SPR206 has been well-tolerated, and there has been no evidence of nephrotoxicity at multiple daily doses, with exposures above therapeutic levels. When taken together, we believe these clinical and preclinical data clearly highlight SPR206 as a potentially best-in-class polymyxin. This best-in-class potential has helped SPR206 gain the support of partners, including Pfizer, who recently made a $5 million payment for our previously announced ex-US, ex-Asia license agreement. Thanks to the support from Pfizer and other partners, SPR206 is fully funded by external non-dilutive sources through Phase II development. The upcoming Phase II study is designed to enroll patients with multidrug-resistant pathogens and is expected to begin in the fourth quarter of 2023. I'm pleased to announce that the U.S. Patent and Trademark Office has issued a composition of matter patent with formulations thereof and methods of use in treating bacterial infections with SPR206. The patent is assigned to Sparrow and has a lifespan extending into at least June 2039. This completes my pipeline review. I'll now turn the call over to our Chief Financial Officer, Seth Shukla to review our financial results. Seth? Thank you, Kamal.

As of September 30, 2022, Sparrow hedged approximately $50.4 million in cash, cash equivalents, and marketable securities. This does not include the $75 million in total gross proceeds from the upfront payment and equity investment being made by GSK in connection with the exclusive license agreement for Tevipenem HBR. Given that the GSK transaction is now closed, these expected payments have been invoiced, the $9 million in equity investment has been received, and the remaining $66 million upfront payment is expected to be delivered in November. Based on our current projections, We believe our existing cash, cash equivalents and marketable securities, together with the other non-dilutive funding commitments and the anticipated proceeds from the GSK license agreement, equity investment and milestones, will be sufficient to fund our planned operating expenses and capital expenditures beyond 2024. This anticipated runway is expected to take us through clinical milestones including final top-line Phase II data for SBR 720, the initiation of a Phase III clinical trial of Chebipenem HBR, and the initiation of a Phase II clinical trial for SBR 206. Turning now to our remaining financial results, total revenues for the third quarter of 2022 were $2 million. compared with revenues of $3.1 million in the third quarter of 2021. The revenue decrease was primarily due to a $1.5 million decrease in funding under our DOD agreement relating to SBR 206, a $0.2 million decrease in qualified expenses under the BARDA contract for Tevipenem HBR, partially offset by an increase of $0.2 million under the NIAID agreement relating to SPR 206, and recognition of $1.1 million in collaboration revenue relating to the Pfizer agreement. Research and development expenses for the third quarter of 2022 were $7.4 million, compared with $14.4 million of research and development expenses for the same period in 2021. This year-over-year decrease was primarily due to a $4.5 million reduction in direct costs associated with program activity for Terri Penham HBR, a $1.2 million decrease due to reduced clinical activity during the period for SPR 206, and a decrease in personnel-related costs of $2.7 million related to a reduction in research and development headcount due to the May 2022 strategic restructuring. partially offset by $1.3 million of increased costs due to increased clinical and preclinical activity for SPR 720. General and administrative expenses for the third quarter of 2022 of $6.6 million were lower than the $11.2 million reported in the same period in 2021, primarily as a result of a decrease in personnel-related costs arising from a reduction in headcount in commercial, general, and administrative functions due to our strategic restructuring, and a decrease in professional and consultant fees of $2.6 million. Sparrow reported a net loss for the third quarter ended September 30, 2022, of $11.7 million, or 33 cents per common share, compared to a net loss of $22.5 million, or $0.70 per common share, reported for the same period in 2021. For further details on our financials, please refer to our 10Q file with the SEC today. We will now open up the call for questions. Operator?

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then 2. We'll pause for a moment as callers join the queue. Our first question is from Gavin Clark-Gartner from Evercore ISI. Please go ahead.

Hey, good afternoon. I was just hoping with all the recent political updates, if you could frame where the Pasteur Act stands, since this could potentially be relevant to SPR 206.

Thanks. Thanks, Gavin, for the question. You're right that the Pasteur Act, which just as a brief review, would provide a very large nine-figure subscription payment to drug developers that develop medicines and meet certain criteria such as those that potentially SPR 206 could meet could be a nice addition to the value proposition for 206. You know, right now the bill has made bipartisan progress. It has bipartisan sponsorship and it's in a form where it could be appended to some of the larger vehicles for legislation. You know, certainly with the midterms coming, It, you know, where the prospects for the bill, I think, will depend on ultimately who's in control of the House now that the Senate is locked in on the Democratic side. So we'll see in the coming days, though, in terms of from a content perspective, Pasteur is in a good position to be attended to something to potentially pass.

Mr. Clark-Gardner, did you have a follow-up question?

No, that was it. I appreciate the color. Actually, no, while I'm here. Maybe you could just give us a little more color around the rationale to knock term analysis for SPR 720.

Yeah, Gavin, sure. So, a couple of points there. First, we decided to focus on top-line data because for a couple of reasons. First is that the study is relatively focused, so it lends itself to the second reason, which is that we wanted to make sure that the data we do deliver is fulsome and clear about what 720 can do for patients. There's even been very recent examples in the marketplace where interim data can sometimes paint the murky picture for a program and a study that's in progress. And the final reason is that with our newly extended cash runway after our partnership with GSK, we do have the runway and the opportunity to allow the study to get to a more robust point. And then finally, operationally, there's some efficiencies in being able to push forward into top-line data rather than focusing on an interim result.

Got it. Thanks.

The next question is from Louise Chen with Counter. Please go ahead.

Hi, congratulations on all the progress this quarter and thanks for taking my questions. So first question I had for you is if you could give more color on that $525 million in sales and commercial milestones and how those will get triggered or what will trigger them and when. And then secondly, I wanted to ask you about OPEX in fourth quarter and 2023. Should we use the third quarter as a run rate or is there something else that we should think about as nuance there? And then last question is you've got a lot going on. It's going to be very busy end of the year and then busy 2023. So I'm just curious if we were going to frame it, what are the key catalysts and events that you'll be looking out for over, let's say, the next 12 to 18 months? Thank you.

Yeah, thanks, Louise, for the great questions. I'll answer number three first in terms of the overall calendar. And then the other two questions you asked, I will hand to Saab. You know, you're right that it's going to be a very eventful 23 and 24. You should expect us going program by program. Number one, as we mentioned, we're going to be going through the special protocol assessment process with TABICENUM and starting that phase three trial. which will trigger milestones within the GSK agreement. Secondly, for SPR-206, you'll look for us to do the work to advance 206 into the clinic again in a Phase II study. And then number three for 720, we've gone through where the trial currently is. We'll be actively enrolling patients there, looking to the first half of 24 for a clinical readout. So in other words, each of our programs will be, you know, in the clinic during that period of time, and we'll be looking for several important readouts as well as milestones from our collaborations. For the other two questions, I'll hand it over to you, Seth.

Great. So thanks for the questions, Luis. For milestones, we've laid out some detail for the development and commercial milestones when we announced the transaction, but in rough terms, roughly 150 million of those milestones are associated with the Phase 3 development program. We haven't disclosed exactly when those payments come in, but the expectation is that they will come in in time to actually fund the activities for the program. So if you look at the next few quarters as we engage in running that trial again, that funding will come in through that period at certain points in time. That's the $150 million in development milestones. We've also disclosed $150 million in first-patient, first-sale associated milestones. Now, this is a U.S. and also an ex-U.S. program, so part of that is ex-U.S., but if you were to assume that the majority of that amount comes in on the first patient, first sale in the U.S., you wouldn't be wrong. So that's the majority or entirety of the $150 million of that first patient commercial milestone. And then after that, as laid out in our PR, there are milestones associated with degrees of revenues. So the first time the product sales hit a couple of hundred million dollars, Sparrow gets a milestone. The first time they hit $300 million, Sparrow gets a milestone. In the initial sections of that ramp, these sales milestones continue to be allocated to Sparrow At higher levels of sales, we transition more into the royalties, which as Ankit described earlier, increase from low single digits at the lower end of sales to low double digits on the higher end. Let me pause there and first confirm, did that answer your question before I move to your run rate question?

Yes, it does. Thank you very much.

For the run rate, Louise, for 4Q, a 3Q number but slightly higher is probably the appropriate measure for what you should model in. We will be investing a little bit in, obviously, the start of our SPA activities and preparing for the phase three Chubby Penham trial when we start that next year. But in the interim, if we're progressing 720 and 206, just as we did in this quarter, those bond rates will be actually pretty similar to what we experienced in this quarter. So if you applied a slight markup but assumed that it would be much more reflective of this quarter as opposed to Q2, for example, that would probably be the appropriate route to go.

Okay. And you mean for R&D or SG&A also? For both. Okay. Thank you.

Once again, if you have a question, please press star then 1. The next question is from Richard Barrow with Cohen. Please go ahead.

Good afternoon, guys. Thanks for taking the question. I wanted to ask about the final phase three that was agreed upon following the Type A meeting and the minutes. Can you guys talk about the major differences between the upcoming study and your prior study, specifically, you know, how any patients, I think, with Fecialis will be handled, whether you have the full p-value of 0.05 for this study, and if you'll be using the same sites. Thanks.

Yeah, thanks, Ritu. I'll hand this question over to Kamal.

Yeah, thank you for the question. So we're still in discussions about the final, the design of the final Phase C. Of course, we had the Type A meeting with FDA, and that provided clarity on how to approach the next Phase C study, but we are currently in discussions with our partner, GSK, and the final protocol design will be disclosed after we've reached agreement with GSK.

Got it. But that's, the trial is still on track to start in 2023, is that correct?

It is correct.

Great. Thanks so much.

This concludes the question and answer session. I'd now like to turn the conference back over to Dr. Mahadeva for any closing remarks.

Thank you, Operator, and thanks to everyone that listened today. We look forward to our pipeline's continued advancement, and I wish everyone a nice evening.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.