Good day, ladies and gentlemen, and welcome to the Q3 2018 Aclaris Therapeutics Inc. Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Kamil Ali-Jackson, Chief Legal Officer. You may begin.

Thank you. I'm Kamil Ali-Jackson, Chief Legal Officer for Aclaris. Please note that earlier today, Aclaris issued it's press release announcing third quarter 2018 financial results. For those of who, who've not yet seen it, you will find the release posted in the Investors section of our website at www.aclaristx.com. Joining me for the call today are Dr. Neal Walker, President and Chief Executive Officer; Dr. Stuart Shanler, our Chief Scientific Officer; Frank Ruffo, our Chief Financial Officer; Brett Fair, our Chief Commercial Officer; and David Gordon, our Chief Medical Officer. Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company's future results of operations and financial position, business strategy and plans and objectives for Aclaris' future operations are considered forward-looking statements within the meaning of the federal securities laws. Our forward-looking statements are based upon current expectations and involve risks, changes in circumstances, assumptions and uncertainties that could cause actual results to differ materially from those reflected in such statements. These risks are described in the Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations section of Aclaris' Form 10-K for the year ended December 31, 2017, Aclaris' Form 10-Q for the quarter ended September 30, 2018, to be filed with the SEC today; and other filings Aclaris makes with the SEC from time to time. These documents are available under the SEC filing section of the Investors page of Aclaris' website at www.aclaristx.com. All the information we provide on this conference call is provided as of today, and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. Please be advised that today's call is being recorded and webcast. A link to the webcast is posted in the investors section of our website. I'll now turn the call over to Dr. Neal Walker, President and CEO of Aclaris. Neal?

Thank you, Kamil. Good evening, everyone, and thank you for joining us this evening. I'll start with a brief update on our business highlights and then touch on a few of our clinical development programs. Then I'll hand it off to Stuart Shanler, our Chief Scientific Officer, who will review our Clinical development plans and time lines. Brett Fair, which our Chief Commercial Officer will then address our commercial business, after which Frank Ruffo, our CFO, will review our financial results. Following our prepared remarks, we will open up the line to take your questions. Dr. David Gordon, our Chief Medical Officer, will also be available during the Q&A portion of the call. As previously announced in October, Aclaris entered into a definitive asset purchase agreement with Allergan to acquire worldwide rights to RHOFADE, which is oxymetazoline hydrochloride cream, 1%. As a reminder, RHOFADE is approved in the United States for the topical treatment of persistent facial erythema or redness, associated with rosacea in adults, and can be used in conjunction with many other medications, which are approved to treat the papules and pustules associated with rosacea. Initially launched by Allergan in May 2017, RHOFADE was established as the leading medical treatment option for the erythema rosacea. This is an important unmet need in dermatology and is typical of the indications we prefer to pursue. Late-stage opportunities with no approved therapies or very limited therapeutic options. The National Rosacea Society estimates that approximately 16 million Americans are affected by rosacea. Persistent facial redness is the most common sign of rosacea affecting 68% of rosacea patients according to a survey conducted by the same society. It is important to note that pharmacological agents currently approved by the U.S. FDA with the treatment of papules and pustules of rosacea have little to…

Thanks, Neal, and good evening, everyone. Firstly, leading with our warts program and our clinical development of A-101 45% Topical Solution for the treatment of common warts or verruca vulgaris. In September, we initiated our Phase III program, launching 2 pivotal trials, nicknamed as Neal mentioned, THWART-1 and THWART-2, for the treatment of common warts. These Phase III trials are enrolling as planned and top line data are expected in the second half of 2019. Additionally, we plan to commence an open-label safety extension trial in 2019 as part of the NDA filing. A-101 45% has the potential to be the first FDA-approved prescription treatment for common warts. Moving on to our JAK or Janus kinase inhibitor trials. As a reminder, we are developing both oral and topical dosage forms of our JAK inhibitors in order to address the full clinical spectrum of disease inherent in alopecia areata. And we are conducting 2 topical open-label studies with the primary goal of demonstrating proof of principle for topical treatment in alopecia areata, alopecia totalis and alopecia universalis. We will be providing an update on these 2 topical studies before year-end. If our topical ATI-502 demonstrates any hair growth in patients with the more severe phenotypes of AT and AU, then we will have greater confidence in its ability to treat the less severe phenotype of patchy alopecia areata. Additionally, as previously reported, we are providing patients in our larger dose-ranging studies, AUAT-201 Oral and AA-201 Topical, with the opportunity to continue in long-term open-label extension studies. This program will provide us with unique set of data, allowing us to evaluate induction with the either oral or topical formulation and potential maintenance of effect with long-term topical therapy. We look forward to providing additional updates on these 2 studies in the coming…

Thank you, Stu, and good evening, everyone. I will begin on an update on ESKATA. And then I'll speak to the exciting RHOFADE opportunity. Regarding ESKATA, we currently have over 1,050 accounts and continue to onboard new accounts every week. We launched in the plastic surgery account beginning in July, and recently began launching in the selected many spa account last month. Account adoption is robust, however, the integration process is taking longer than we had originally anticipated. There are both clinical as well as practice integration components when establishing a new treatment paradigm, and each can require multiple touch points in an account before they can optimize productivity with ESKATA. Steps for successful clinical integration include determining who will practice diagnosis, GSK, who will perform the treatment and then scheduling a staff in-service for application training. Additional steps in the clinical integration process include training the staff and how to offer ESKATA to the patients, and setting expectation for treatment experience. Following the initial in-service, certain accounts may require additional training to achieve the best clinical outcomes. Steps for business - successful business integration center on connecting the patients to the product. To that end, we've implemented an onboarding process, which includes providing marketing materials and downloadable assets for a practice website, social media outlets and patient mailings. We've also leveraged our library of DTP marketing materials, and have scheduled office marketing programs to drive patient interest in treatment. We believe our DTC, PR efforts, such as our most recent spot interview will also help drive interest as patients are directed to the find a doctor page on the ESKATA website. Following these efforts, we now have a base of accounts that have successfully integrated the product and begun placing reorders for ESKATA. As such, our current reorder rate…

Thanks, Brett. Good evening, everyone. As I walk through our third quarter 2018 financial results, please reference the financial tables that can be found in today's press release. For further detail, please refer to MD&A section in our quarterly report also filed today. For the quarter ended September 30, 2018, total net revenues were $1.6 million, which consisted of net ESKATA sales of $500,000, and contract research revenues of $1.1 million. For the 9 months ended September 30, 2018, total net revenues were $6.4 million, which consisted of net ESKATA sales of $2 million, contract research revenues of $3.4 million and other revenue of $1 million. Cost of revenues for the quarter and the 9 months ended September 30, 2018, were $1.2 million and $3.3 million, respectively. During the quarter and 9 months ended September 30, 2017, our total net revenue was $700,000, which consisted entirely of contract research revenue with $500,000 in cost of revenues. For our ESKATA product sales to date, our gross-to-net realization was about 93%. Our gross-to-net discount currently includes the cost of distribution and administrative fees necessary to deliver ESKATA into HCPs offices. Our gross profit realized on sales made so far this year was about 86%. Cost of goods sold includes a 4% royalty on net sales of ESKATA. During the first 3 quarters of 2018, our total operating expenses increased to $99.5 million compared to $47.2 million for the same period in 2017. These 9 months periods included $14.5 million and $10 million of cash, noncash, stock-based compensation, respectively. During the third quarter of 2018, our total operating expenses increased to $33.9 million compared to $19 million in the same quarter of 2017, which included $4.5 million and $3.5 million of noncash stock-based compensation, respectively. R&D expenses increased $5 million to $15.9 million…

Thank you, Frank. This year has been busy for us. We are - we feel pretty unique and the fact that we are a cool fit versus our peer group companies. We have 2 commercial products now in the bag once we close the RHOFADE acquisition. We have a Phase III asset in common warts that's due to read out in 2019. We have multiple Phase II studies, both open-label and randomized studies due to readout also in 2019, and an early stage pipeline that will come into focus with our MK2 inhibitor and next-gen ITK JAK3 inhibitors. There will also be coming interview in the mid and back part of 2019. We also have a drug discovery engine that continues to be productive for us. And as you can tell, 2019 will be a very busy catalyst year, and we will look forward to updating you as to our progress. Mark, can you please poll for questions.

[Operator Instructions] And our first question comes from the line of Louise Chen of Cantor Fitzgerald. Your line is now open.

Hi, thanks for taking my questions. I had few here. So the first question I have was on your JAK program. There seems to be a couple of companies involved in the space and they've been making more noise recently. So, just curious as to what this distinguishes your program from others that are out there on the street? And then secondly, how should we think about spend as we move into 2019? Obviously, you've noted a lot of catalysts as well as 2 commercial products. So just curious how we should think about that? If you can't give numbers, may be qualitative could be helpful as well. And then the last question here is just on ESKATA and RHOFADE, how should we think about the sales progression of those products as things pick up?

Hi, Louise. Thanks. It's Neal. So I'll take the JAK program question and I'll hand off the spin to Frank, and I'll circle back on the ESKATA and RHOFADE question. So related to our JAK program, we maintain and we've been very consistent from the beginning as a way to approach the market in its entirety, given the fact that there's a phenotypic spectrum of severity extending from patchy disease all the way to the most severe phenotype, which is AU and AT. Those who had lost all their hair on the scalpel or on the body. The best way to approach that is to develop both oral and topical programs. We are the only company that is developing both. And I think one of the things that we implemented when David Gordon, our CMO, joined us was an extension aspect to these studies where we can really start to define the treatment paradigm. And that's something that I think we all have to think about within the context of dermatology in general. If you look at any indication, it's characterized by an induction to the treatment. So you try to drive remission but then you have to maintain that remission over time. So we view the landscape that in the following way. If you're treating a severe patient, certainly, you might want to use an oral medication. But then once they get resolution of that disorder, you want to maybe transition in a maintenance fashion to a topical. In contrast, if you have more patchy disease or more limited disease, you want to treat with may be a topical out of the gate. And that's important when you think about the demography here, and the fact this disease tends to skew young. So certainly, we do have competition in the space. And we think that not only our approach differentiates us but also the target molecule. We've always maintained a JAK 1/3 is the key here. And you really want to limit JAK2 because of the tox baggage that occurs with that target. So I think those are the 2 things that I would highlight. Regarding the spend question, as I mentioned, I'll hand this off to Frank. But we are always cognizant of how we allocate the capital, and we have a lot to mind here. We have a lot of very valuable assets within the development pipeline. And I think you can already see, as Frank already guided to in his opening remarks that we actually came in lower than the low end of the range. And so we've been able to manage our spend both on the R&D side and on the commercial side as we see the landscape of all. And may be with that, I'll hand it off to Frank for some further comments.

Thanks, Neal. Yes, so we'll continue to manage that as well as we move forward. Louise, as we think about 2019, of course, we have not guided for 2019 yet. But qualitatively, if you think about the R&D burn, we had entered Q3, and we really got to - Phase III spun up for the wart trial. Not only the wart trial will be in full bore, it will be running full bore in the fourth quarter. The other 2 trials and JAK will be rolling as well. So as we guided and you can do the math and for the full year, we expect those R&D revenues to be in the $20 million range for Q4. And I think that's probably a good number going forward into next year. I know we'll be rolling off some data towards the middle part of the year but also next year, we'll be kind of - some of the work that's early - the preclinical work coming out of our Confluence down at St. Louis, a lot of that will be coming to in the mid-part of the year. So that probably replaced some of the burn that goes away when these trials sort of kind of wrap up in the middle part of next year. So I think - that's on the R&D side. On the sales and marketing side, we'll truly - as we look forward, we're going to manage expenses, and not to like launch of ESKATA and the relaunch, if you will, on RHOFADE. And so we'll be looking at that growth trajectory and looking for all positive signals and continuing to invest there. So I think that would probably be, I would say, I think, the current burn rate at a minimal we'll be looking at next year. And then on the G&A side, I don't think there's many changes there.

Okay, thank you.

And our next question comes from the line of Adnan Butt of Guggenheim Securities. Your line is now open.

Hey, thanks for taking the question. Just a couple from me as well. First on the alopecia program. Could you - did you mention, sorry, if I missed it, how many patients enrolled in the extension phase? And then secondarily, you described hair growth and eyebrow growth, could you go into a little bit more detail about that? Or should we expect maybe a more in-depth update later this year? And then finally, on ESKATA, I think in the past, you've mentioned that the doctor experience with ESKATA seems to be progressing? So is there a change in the traditional experience versus the initial phases of the launched that you're seeing? That's it.

So, hi, Adnan. Thanks for the question. So on the alopecia front, I'll start with that, and maybe handoff to David to talk a little bit about the extension piece. So on the open-label front, we did as previously guided, we will be presenting a more in-depth analysis before year-end. But just to give a little bit of color there on the eyebrow study, thus far, we have - we noted a couple of things. One, is that we've absolutely seen hair growth. That was one of the thesis behind doing an open-label study out of the gate, was that we wanted to show a topical approach was viable. In fact, we've already seen antidotally a number of patients using compounded JAK inhibitors TOFA or ruxo out at various derm offices. So I think we're not the only ones to show that the topical approach is viable. So we're pretty convinced with that. Now one of the things that we've seen and noted in the open-label study is that those with less severe disease tend to respond a little bit quicker and more robustly out of the gate. That's something we mentioned on our last call. So if we look at the 5 patients that are continuing on in the eyebrow study, 3 out of the 5 have shown hair growth, with 2 showing quite nice hair growth. And those happen to be the 2 patients with more patchy disease, which is what we will predict based on what we've seen so far. And the other patient who is responding a little bit slower has more severe disease. So this, I think, conforms with how we position this product out of the gate, which is for those with less severe disease, patchy disease or transitioning patients with severe disease to maintenance therapy. So that's a point I'd just like to drive home. If we look at Columbia study, those patients all had quite severe disease, not only defined by the phenotypes but also by the duration. And so I think it's well characterized if you have disease ongoing for 15, 20 or more years that you're qualified as a more recalcitrant patient. And we've seen nice evidence of hair regrowth in 3 out of 7 patients that are continuing on there. And I think one of the value of the extension study that we're conducting is to really define, number one, how long does the treatment take and perhaps the more severe subset? But importantly, once we roll patients off of our oral study onto the topical extension, we'll start to get a view on what that therapeutic regimen looks like and help them defining that. And maybe David, you can add a couple of comments there.

Yes. So the patients in Columbia study, the AA-202, we got 4 patients here in the second 6 months expansion of that study. We've got 3 patients in the Australian eyebrow study. But I think the more relevant studies are the ones that we've just been talking about, patchy study with the 120 patients. We've got around about 20 patients who've gone into the second 6 months of that study. So completed the first 6 months and then the second 6 months. The oral study actually just started towards the end of June of this year. So no one has actually got through the first 6 months of that. But we're just at the stage of signing off on that topical study ready to take the first patient completing that in the first part of next year, so that we can do exactly what you just said, which was to look at the induction maintenance regimen and transfer patients who have received good efficacy hopefully with the oral drug onto the topical drug starts in 2019.

And I think that's going to be a very unique dataset. I think we're the only ones who are going to be able to qualify and quantify those responses over that period of time. And just as - I don't think we mentioned it during our prepared remarks, but we're about 3 quarters enrolled on the oral study. So that's moving along quite nicely. And it's going to be coming shortly after the topical results as we believed at the moment. Relative to ESKATA and the change in the doc experience. If I understand your question correctly, I think we thought we envision this out of the gate was that we would be treating about 2 - we'll be meeting 3 patients about 2x, 3x based on the number of lesions they have and the location on the body. And I think what we're finding is that we're clearing lesions a lot quicker, 1x to 2x. And that's kind of good and bad. I think we're getting a little bit more robust response but sometimes that results in a little bit of brisker reaction that may cause some physicians to just pause until they get retrained in terms of handing it off to their staff. And that's one of the biggest lags. And we mentioned this in our last call, it's just that kind of time period between the initial trial of the product, which can take up to a couple of months and then just putting it into their flywheel, and really start accelerating that. And of course, we have seen that, Brett mentioned our reorder rate getting up towards the 17%. And we feel pretty good about that, obviously, we want to improve that reorder rate. That does take time, and I think we're starting to establish some nice centers of excellence where we can go to these docs and really drive the peer-to-peer message from the docs who've got it right and start just reinforcing that amongst their local community. So we remain optimistic. We just think it's going to take more time.

Okay, great. Thanks.

And our next question comes from the line of David Steinberg of Jefferies. Your line is now open.

Okay, thank you. I've got a couple of questions. Back to RHOFADE, the most recent IMS script shows it's in the kind of 1,800 to 1,900-week range without promotion. I think Allergan stopped promoting late last year weekly scripts kind of in this 3,300 range. Curious, how quickly do you think you can get up to the - last month when Allergan seized sales? And what sort of peak sales do you think you can generate from RHOFADE over for what period of time? And then my second question revolves around ESKATA. I know that you just started the DTC program on October 1, so there's not much data, but perhaps, and maybe this is for Brett, any color from the field on how to - are you happy with the DTC program? Are you finding it's pulling any patients in? And any quantification around that would be helpful?

Sure. Thanks, David. So this is Neal. I'll answer the first 2 and hand it off to Brett for some more color. So on the peak year sales, what we've been talking about there is in the neighborhood of $250 million to $300 million on a gross basis and that is consistent with, I think, Allergan's number were actually higher in their hands. And that was consistent with what we thought. We had the product way back when. In terms of the weekly script count, of course, we've seen a decrease in the script count over time as they haven't had the sales force active against that since January. Our objective is once we close the deal, hopefully in the next couple of weeks, we will stabilize the scripts, get the reps detailing back out into the field, and we think that's going to be relatively quick. We have to get our arms around that as we progress through the year. Our goal for the end of the year next year is to exit at the same number as they exited when they had the sales force getting around the 12,000-plus script number in December. So I think we said relatively conservative goal, but that's what we're thinking at the moment. And maybe, Brett, can you give some more color?

Yes. Thanks, Neal. Yes, to Neal's point, we've integrated in, we're selling it with ESKATA. They had 80 reps, we have 50. So I think getting just back to where they left off at the end of this year seems about right. I think it's a good goal for us. In terms of the ESKATA DTC metric, it's very early so it's initiated in October, there's a lag in terms of seeing the impact of doing DTC. But we've seen a big spike in, obviously, in the website traffic results over the course of October, so big spike with the view. And then we've seen a big spike continue to grow in the month of October, that's a good sign. Our PR initiatives are getting traction. We're seeing a significant increase in the media impressions week over week. And we're also monitoring things like postings. But in terms of seeing the results in the account, that's going - there's a lag there. They got a schedule time for appointment, get in, get introduced to the product, get treated, it takes a little bit of time. But what we're seeing in terms of website traffic result and media impressions is good.

And just a quick follow-up. With the sales force now taking in RHOFADE, I guess you run the risk of taking their paddle off the metal with ESKATA. What sort of impact do you think it would have on the ESKATA effort? Or are there a number of doctors who just aren't interested in ESKATA who prescribed RHOFADE and you actually see as a net plus from that point of view?

Yes. So this is Neal, then I'll hand off to Brett. I think it's a net plus because, I think, there's a halo effect when you have 2 products in the bag, and especially a well-recognized brand like RHOFADE that Allergan did within our opinion, a great job of commercializing through the end of 2017. And so I think that will have a positive effect and think about it this way, if you - the general macro environment has a number of docs in the same office, these days it's not like their individual docs and individual offices. So you'll get a tremendous amount of synergy if the rep goes in, and let's say somebody might be a little bit resistant to ESKATA out of the gate, it gives them another reason to go back in the office and call on that physician, selling RHOFADE and then we mentioned ESKATA. So we think it's a net positive. I think we're seeing that across the board. If you look a lot of our peer group companies that have multiple products in the bag, that's really the new model. I think that's the better way to go than one product.

And I would build on that, too. If Neal said, we're going to take a strategic approach next year with the Centers of Excellence for ESKATA. I think we have a real opportunity to get pretty tight and specific around those accounts, and get them established. And as Neal said, this is a pretty significant overlap in the Allergan call points for RHOFADE and our call points for ESKATA. You get a real nice halo benefit in those accounts in derms. So we'll definitely be taking full advantage of that.

[Operator Instructions] Our next question comes from the line of Tim Lugo of William Blair. Your line is now open.

Thanks for the question. For the eyebrow topical study, I thought on the last quarter, you mentioned 6 out of 10 patients had some preliminarily regrowth. Now it sounds like 5 are continuing on the trial, but there's evidence of regrowth in only 2 patients. What's kind of the differential there quarter-over-quarter? And I think you also cited in past quarters that microblading may be had some issues with patient recruitment in Australia? Or is there's some sort of relapse occurring? I guess, can you go into that?

Yes. We've had - so we've had some patients terminate the study. And 3 of those - there are 5 early terminations, 3 of those were because they just got tired of coming back for monthly visits for just kind of normal logistical reasons. 2 actually terminated early just because of nonresponse. So that's just what we've seen over time and that's not totally unusual in a longer-term study like this.

And is this making you - I mean, how are you extrapolating this for your current randomized Phase II? Is this - have you - is this making you concerned? Or is this - I guess, what signals should this be suggesting?

So as I mentioned earlier in the call, we believe that growing hair in a severe phenotype patient is a very good sign and a good read through to what we would expect to see in the patchy study. We've clearly in the eyebrow study, as I mentioned, seen quite nice regrowth in 2 of the eyebrow patients that had less severe disease, patchy disease versus slower regrowth in a patient with more severe disease. So 3 out of the 5 patients in the eyebrow study who are continuing on have responded with positive hairy regrowth. So I feel like that's proved out with topical thesis. And so the read through from my perspective is that we should be pretty confident about what we may see in the patchy study and that is strictly related to less severe disease and the fact that we can grow more robustly and quicker in that patient population in those with no hair on their scalp. So from my perspective, we aggregated the data from the open-label study makes us feel confident about what we may see in that study. So we look forward to reporting those results in 2019.

Okay. Understood. And for these patchy patients, where they patchy for a significant period of time entering the study? Or I heard from some physicians that it's kind of waxing and waning disorder for the patchy patients?

That's a good question, Tim, so that's the other variable. It's not only the kind of phenotypic spectrum whether you have 15% hair loss or 50%. But it's also duration of disease. And that's just another factor in kind of the number of variables, whether somebody might respond or not. And those are all things that we're defining over time. But I think it's just intuitive that if somebody has disease for, let's say, 2 years versus 20, they're more likely to be a responder. And I think if you look at, not only our data set, but the data set of some of the competitors out there that everybody is kind of chosen to go with patients who have less severe disease as measured by duration. So 7 or 10 years or less.

Okay. Understood. And switching over to the RHOFADE relaunch. Will Q1 be the first quarter you book revenues? And can you talk about the channel and maybe how much product is in channel? Would it require some restocking? Or maybe you got the inventory you need to work through?

I'll hand that off to Frank.

Yes. So Tim, we'll recognize revenues in Q4, depending on when we close on the RHOFADE transaction. So we'll have a full quarter in Q1 and as it relates to the channel, at this time, I don't believe based on our due diligence they have any more in the channel that's typical out there for at least in the wholesale channel. So not necessarily they don't have increased product in the channel at this time. So providing when we close, we were kind of take another look at that and we'll adjust accordingly, but we don't expect anything different than typical channel inventories.

Okay. And will you be recognizing revenue based on inventory? Based on shipment to distributors or based on end subscriber volumes?

It will be based on shipments to distributors unless they are applicable to discounts and allowances.

Alright, thank you. Thanks for all the questions.

And I'm not showing any further questions at this time. I would now like to turn the call back to Neal Walker, President and CEO for closing remarks.

Thank you for joining us on the call today everybody and we look forward to updating you on number of our catalysts in 2019. Have a good night.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.