Edesa Biotech, Inc.
Q4 2016 Earnings Call Transcript

Published: 15 Dec 2016

[Operator:]

Good day and welcome to the Stellar Biotechnologies Fiscal Year 2016 Conference Call. As a reminder, this call is being recorded and webcast over the Internet. You can access the webcast in the Investor Event section of stellarbiotech.com. The replay will be available for the next 30 days at this address as well. Following the presentation, the conference will be open for questions. [Operator Instruction] At this time, I would now like to turn the conference over to Gary Koppenjan, Senior Director of Investor Relations. Please go ahead, sir.

[Gary Koppenjan:]

Thanks, operator, and good morning and afternoon to everyone. I’m joined today by Frank Oakes, our President and CEO; and by Kathi Niffenegger, our Chief Financial Officer. Yesterday, we announced our results for the fiscal year ended September 30, 2016. The press release we issued and the annual report we filed on Form-10K are available on our website. Before we get started, I would like to remind our listeners that today’s conference call include forward-looking statements based on our current expectations. Statements, other than purely historical factual information constitute forward-looking statements. Forward-looking statements are based on numerous assumptions that are subject to risk and uncertainty. Factors that can materially affect actual results can be found on our reports filed with the SEC and in Canada with the British Columbia Securities Commission. We should not place undue reliance on these forward-looking statements, because they involve known and unknown and uncertainty another factors that in some cases beyond our control. No forward-looking statements are the guarantee of future performance. Stellar undertakes no obligation to update any forward-looking statements to confirm these statements to actual results or changes in the Company’s expectations. I would now like to turn over to Frank.

[Frank Oakes:]

Thank you, Gary, and good day to everyone. This is an exciting time for Stellar and our shareholders, and I’m glad you’re able to join us for our year-end review. On our call today, I will discuss the progress we made this year across multiple growth initiatives then I’ll highlight some of the strategic objectives that we have to look forward to 2017. During past calls, I laid down a number of goals for 2016, these included the expanding market opportunities for Stellar and our KLH protein advancing site suitability studies for our second production location and perching our visibility in capital markets and strengthening our balance sheet. And I’m pleased to report that we have accomplished and made substantial progress across all of these strategic objectives. In fiscal 2016, we increased sales of KLH protein by 120%, this marks the third year in a row that we’ve seen growth in product sales is more lease or sale early days in the field of KLH conjugate vaccines. We believe the increase in sales is an important validation of our technology and of our business plan. Through collaboration and supply agreements, our KLH products are now a key ingredient in multiple clinical stage immunotherapies with more clinical opportunities available for future growth. As a reminder Stellar KLH is a high value protein, it's very large and complex, and it has never been synthesized. Yet, it has been used for decades throughout the world to study immune system function due to its long-term safety record and well known effectiveness it’s now being used as a carrier molecule across the field of active immunotherapies. The growth of this field has the potential to fundamentally change how many diseases are treated and in turn has broad long lasting implications on the sourcing and production of the KLH molecule. Our mission is to be the leading manufacturer and supplier of fully traceable, medical grade KLH to the immunotherapy market and to through our Neostell joint venture a leading manufacturer of future KLH conjugate vaccines. The market opportunity for KLH based products continues to grow. Today, KLH is being used in clinical trials for many cancers, lupus, Alzheimer's disease, Crohn's disease, other inflammatory diseases among other indications. In addition, there are preclinical studies now being conducted to address potential uses for cardiovascular disease, infectious disease, addiction and most recently even Type 1 diabetes. As I noted, we are supplying KLH and working closely with multiple companies which are really reaching some very exciting inflection points in their clinical studies. For example OBI Pharma completed Phase 2 clinical trials for their breast cancer vaccine in U.S. and Asia earlier this year. They also announced that they intend to move ahead with additional Phase 3 trials in Taiwan, and we look forward to monitoring their progress and their announcements. The Spanish company EuroQuan [ph] announced that they're recruiting patients into its Phase 2 clinical trial for Alzheimer's disease. Another European country recently announced positive results for their Phase 1 trial for KLH-based Alzheimer's treatment with plans for a Phase 2 clinical trial in the works. Interestingly, these companies working in Alzheimer's disease are aiming at different targets with their immunotherapy, so even within the same indication often there are multiple opportunities for the success with KLH. Finally, a company that we've been talking a lot about this year is our partner via Neovacs a French company, a French biotechnology company that was founded over 20 years ago. They've developed novel therapy for lupus and other inflammatory diseases all using the Stellar KLH carrier protein. Neovacs has announced a number of exciting milestones this year. Most recently, they received fast track status for their lupus therapy here in the U.S. They have a similar status for same drug in the South Korean market as well. Neovacs is currently enrolling patients in a Phase 2B clinical trial. This international study is underway in 21 countries with recruitment more than half of the patients complete. And according to their public statements, Neovacs expects to have preliminary results from this trial in 2017 and could be in a position for a commercial launch in South Korea as early as 2018. During 2016, we also took a strategic step that allows Stellar to expand its revenue streams. We formed a joint venture with Neovacs in France called Neostell, which provides Stellar the exclusive opportunity to sell KLH to the joint venture company. It also allows us to participate as an owner in the revenue stream from the manufacture of finished drug products. We intend to work first with Neovacs Kinoid technology and then ultimately to provide a validated manufacturing facility for other third party vaccine manufacturers. We think this is a great example of how we can leverage our expertise in KLH to help our customers get important therapies in market while creating additional potential revenue streams for the Company with only modest upfront cost. With these activities taking place across multiple implications, we see the need to be in a position to rapidly expand KLH production. Our supply strategy Stellar is around being in a position to support multiple commercial launches, this involves having a necessary infrastructure, production capacity and manufacturing processes available. Keep in mind, that due to the lifecycle of the source animal, we need to be planning on a couple of years ahead of any expected increase in demand. With that in mind, during 2016 we continued our expansion initiatives on multiple fronts. First, we strengthened our balance sheet in order to have working capital in the need to move ahead with our plans. This involved up listing to the NASDAQ and the subsequent completion of an equity financing with institutional investors. As part of our plan, we also completed the first phase of upgrading our primary production and manufacturing site here in California, and we expect to imitate the second phase of expansion in the next few months. This work includes expanding our footprint and putting new structures and equipment in place to allow us to add take capacity as needed. Our capacity is based in part on the number of live animals and our aquaculture system. We currently spot enough animals to produce more than a kilogram of our KLH pharmaceutical intermediate. And over the next few years, we expect to incrementally increase production capacity to meet multi-kilogram demand per year. As we’ve highlighted in previous calls, a key part of our scale of strategy includes identification, establishment and validation of a second production location. The second location will allow us to Stellar scale up a needed and provides us a level of plant redundancy. We recently met with government officials, academic and businesses in Mexico to share vision that aquaculture production of the source animal for KLH will be critical to protecting these species and the reliability of meeting increased KLH demand. We’re excited about this opportunity and have made important progress in the last 18 months. In 2016, we put the source animal in the aquaculture production on site at Baja California and begin testing KLH produce in Mexico among other actions. Because the KLH protein is a biological molecule we're developing proprietary test to demonstrate that the molecule from one production side has the same attribute as KLH proven seven another sites. These capabilities intended to allow us to validate KLH supplies for multiple sites to satisfy multiple regulatory agencies. From a competitive standpoint, these comparability assays as they recalled will also make it easier for customers who may have initiated preclinical or clinical studies using other KLH sources just leads to Stellar’s medical grade Stellar KLH. This represents multiple benefits and opportunities as an area of continued R&D investment. All-in-all, we continue to believe we’re in a strong competitive position. We believe we have significant technology advantage and a multiyear lead over potential market interest. Finally, today I’d like to acknowledge the new members to the Stellar leadership team. Dr. Chuck Olson and Paul Chun officially joined our Board of Directors earlier this month. They're both familiar with Stellar and bring expertise in pharmaceutical development and capital markets management. We also strengthened our management team with the addition earlier this month of Dr. Greg Baxter who stepped down from Stellar's Board of Directors to join our executive team. He will be leading our corporate development activities including our joint venture with Neovacs as well as the expansion of our production and manufacturing capabilities among many other responsibilities. We also recently added Gary Koppenjan to lead our corporate communications. He has extensive experience of investor relations and corporate communications outreach. So, I believe we have assembled a very strong team with the skills and expertise that we will need to execute on our business plan. In closing, while we look back on 2016 as a year of significant progress for Stellar, we are equally excited about the prospects and opportunities and challenges that lie ahead. We are planning to expand our commercial and clinical opportunities through new licensing, supplier and research collaborations. We're preparing for infrastructure expansion to support expected increases in KLH demand. We're continuing to develop innovations and proprietary knowledge around the molecule including new functional assays, and of course we are working closely with our partners as they advance their therapies to clinical trials. Now, I'd like to turn the call over to Kathi Niffenegger our Chief Financial Officer for an update on our financials.

[Kathi Niffenegger:]

Thank you, Frank. I'm pleased to report that fiscal year 2016 marked continued progress across a number of key financial areas. First, we continued to build on the revenue growth we reported in the first three quarters of the year. As Frank noted, we achieved 120% increase in products sales in fiscal 2016 over the prior year. We also diligently managed our resources and working capital with the priority on manufacturing our Stellar KLH protein and the related development processes. And thirdly, we strengthened our balance sheet with the 6.75 million equity financing that we completed in the fourth quarter. Together, these actions provide us with a good foundation to advance our future infrastructure and corporate development projects. Turning now to our financial results for the fiscal year ended September 2016. Total revenues increased by 0.51 million to 1.27 million for fiscal 2016, compared to 0.76 million for the prior year. Within revenues, product sales increased by 0.68 million to 1.24 million, compared to 0.56 million for the prior year. This was primarily driven by higher volumes and a broader customer base. The increase in product sales was partially offset by a 0.16 million reduction in contract services revenue due to the successful completion in December 2015 of services related to a two year collaboration agreement. Our total expenses increased by 1.08 million to 6.18 million for fiscal 2016, compared to 5.1 million for the prior year. Looking at our spinning categories, cost of sales and contract services were up by 0.24 million to 0.82 million for fiscal 2016, compared to 0.58 million for the prior year primarily due to increased sales volume. Research and development expenses increased by 0.7 million to 1.73 million for fiscal 2016, compared to 1.03 million for the prior year primarily due to increased research and development in aquaculture in the U.S. and Mexico, process development related to production and manufacturing and product development. We had a modest increase in general and administrative expenses which moved up to 3.32 million for fiscal 2016, compared to 3.22 million for the prior year. This was primarily due to increase corporate and compensation expenses and expanded business development and investor relations activities now that we're NASDAQ listed company. The total loss from operations increased by 0.57 million to 4.91 million for fiscal 2016, compared to 4.34 million to the prior year. Moving down to P&L statement, other income decreased by 1.64 million to an overall loss of 1.11 million for fiscal 2016, compared to an overall gain of 1.53 million for the prior year, primarily due to an non-cash change in fair value of warrant liability. Just to review, this accounting treatment does not have a cash flow impact with the fair value calculation to a negative as they were this fiscal year or positive as they were in fiscal 2015. For fiscal 2016, we reported a net loss of 5.03 million or $0.57 per basic share compared to a net loss of 2.84 million or $0.36 per basic share for fiscal 2015. In summary, we demonstrate a strong growth and product sales. We invested more in research and developments and manufacturing processes, and improved our cash position to support our growth initiatives. At the end of fiscal year 2016, we had 11.48 million in working capital. Cash and cash equivalence and short-term investments were 11.41 million of that amount. These totals now incorporate to net proceeds of the equity financing we completed in the fourth quarter. We believe our current working capital is sufficient to meet our present requirements including all contractual obligations and anticipated capital and operating expenditures for at least the next 12 months. For fiscal 2017, we estimate that expenditures will be approximately 6 million. We have the ability -- the flexibility to adjust the expenditures based on a number of factors including the size and timing of capital expenditures, staffing levels, inventory levels and the status of the customer clinical trials. As a reminder, we have a growth oriented business strategy and in response to market demand or to explore new opportunities to expand our business. We could also seek additional capital through debt or equity raises as needed to accelerate the development of our programs and initiatives. That concludes my prepared comments. For more detail presentation of our financial results, please refer to our year end press release and our annual report filed this week on Form-10K. I’ll now turn the call over the Gary.

[Gary Koppenjan:]

Thanks, Kathi. This concludes our prepared comments. And we would like to open the call up for questions at this time. Operator?

[Operator:]

Thank you, sir. [Operator Instruction] We will take our first question from Jason McCarthy with Maxim Group.

[Jason McCarthy:]

Just in terms of KLH supply. Can you remind us, how much KLH do you need to run a Phase 2 study or a Phase 3 study? I’m just trying to get a sense of OBI is going to move into the Phase 3, they talked about it, their Phase 2 data was good. Having said publicly, how many patients still enrolled. But, could you give us a sense of how much for a breast cancer study KLH could be consumed by a company like OBI?

[Frank Oakes:]

Yes, Jason thanks for being on the call, and thanks for the great question that comes up often. And of course that it is highly variable as you pointed out because of the size of the clinical trial, the number of patients, the jurisdiction that the trial will be practiced is highly variable. But in general terms, the process typically goes form quantities in 10 gram quantities for early preclinical and Phase 1 clinical trials then transitions to potential 100 gram quantities for Phase 2 clinical trials, if they're global trials across multiple jurisdictions such as the Neovacs lupus trial which would be in 21 countries. And cancer indications the patient population is typically lower than inflammatory disease or some of the larger indications, so the trial quantities would be smaller, but typically the transition is from 10s of grams to 100s of grams and then for a full global launch for a therapy could easily be in kilogram quantities. And KLH is used in these therapies typically in those quantities KLH is used within the vaccine itself is used in the KLH component of a vaccine is typically in sub milligram quantities so that 100 grams or kilograms of KLH could effectively treat a pretty broad population in the clinical setting but most indications forecast multi-kilogram quantities for full commercial launch.

[Jason McCarthy:]

Okay great, and just a follow-up and this is more on the clinical side. You know given the solid demand failure for Lilly, a beta target in monoclonal, you know as EuroQuan [ph] discussed you know any hesitation going forward into Phase 2 because they do have an A beta vaccine or immunotherapy with KLH. They discussed like what their trial size would be, they're going to need more patients or are they rethinking their strategy on Alzheimer's because it is such a block buster indication?

[Frank Oakes:]

Yes. And again thanks for asking that. It's important to follow the indications. We can't speak specifically to any particular customers forecast or what our customers' plans are, but in general I would say that one thing to stress is the failure of the monoclonal antibodies was that product was not a KLH-based conjugate vaccine, it was a monoclonal antibody and the consensus we recently talked to customers at an Alzheimer's Conference in San Diego. And there didn't seem to be a decreased enthusiasm for the beta-amyloid target. The consensus was that the choice of antibody may not have been specifically directed to a neutralizing antibody that would show a clinical effect, but the industry is learning and it learns from a product failure just as much as it learns from a product success. So, we don't see a dampening of enthusiasm around monoclonal targets, and keep in mind an advantage of an active immunotherapy such as a KLH conjugate vaccine is it induces a polyclonal response against multiple antibody targets as opposed to the specifically directed monoclonal antibody approach. So, we think that this is certainly an area where the industry is learning rapidly based on both successes and failures of products and preclinical and clinical development. And we’re excited about Alzheimer’s, because we support, we work with our customers and aware of companies developing multiple targets. Other targets that they are adjacent to the beta-amyloid. And there continue to be great enthusiasm about inducing a polyclonal therapeutic beneficial effect using a conjugate vaccine as the clinical approach as appose to monoclonal approach. So, it’s a great question, it’s an area where that the scientific community is still hasn’t lot to learn, but learning rapidly from these drugs from drug development and the both as I said both positive and negative results from clinical trials will direct the development of the industry, and we think that there is a great opportunity there, because it is such a big indication and there are multiple clinical strategies to oppose that disease.

[Jason McCarthy:]

Great. Thanks Frank for taking the question.

[Gary Koppenjan:]

Operator, we’re going to take a question from our webcast participants and then we'll transition back to callers on the phone. The first question, can you talk about what Neovacs fast track designation for lupus treatment will have on KLH supply?

[Frank Oakes:]

Okay. Thank you. And again, we can’t speak specifically to any customers clinical trials. You can look at Neovacs’ announcements, press releases in the public domain. But I will say that their announcement of being awarded fast-track designation by the FDA is significant because it provides for accelerated priority review of clinical data and accelerated processing of license application to market to drug. So, it’s a very positive sign, it’s a positive sign of the enthusiasm around the science of the drug, and it also a positive sign of related to the unmet medical needs. So, we see this status anything that can accelerate regulatory approval is positive for us, although it’s too early to say on this what direct effect it might have on the rate of the acceleration of KLH demand that will completely depend on the outcome of clinical trials that are being conducted by our partners and the results of which will be announced in the not too distant future.

[Gary Koppenjan:]

We’ll take one more question from the webcast. Do you have enough capacity at the California facility to support a commercial drug launch, if so, what is the strategic important of investing in Mexico now?

[Frank Oakes:]

Yes, that’s a strong question and I do want to stress that Stellar has 20 plus years of operating experience at our California site. We have tremendous confidence and our ability to meet the requirements for any drug launch from that facility without the requirement that we would have multiple production size. But clearly, the opportunity in Mexico is strategic. It is way to assure site redundancy across different political, geographic, economic and environmental condition. So, long-term the redundancy that alleviates dependents on a single site production is good for Stellar, it’s good for Stellar’s customers you give them assurance. There are also advantages and attractive operating costs and development costs that could factor into long-term decisions on where to emphasize expansion. But again to stress the point that we do have the ability to meet the requirements of our customers from the California site that's important to stress, but set redundancy is also a critical strategic initiative. So, we think it's logical for the Company to beginning the ability to produce with strength from multiple areas. It gives us the exclusivity for a particular strategic geographic region. So all-in-all I think that the advantages outweigh the risks and justify the very modest cost that takes is taking Stellar to really demonstrate and validate that site in anticipation of future use.

[Gary Koppenjan:]

Great. Operator, we'll transition back to the callers on the phone now.

[Operator:]

Thank you, sir. We'll go next to Brian Marckx with Zacks Investment Research.

[Brian Marckx:]

Frank, I'm trying to get a little bit of a sense on in terms of the KLH supply to Neovacs for their Phase 2 U.S. FDA study. Is it a simple as looking at the Phase 1 study, which I think was roughly 30 patients and then this Phase 2 is roughly a 180 so say six times? Is it as simple as just doing that kind of math and saying that there would be six times as much supply for the Phase 2 study relative to the Phase 1 study or is that simplifying it too much?

[Frank Oakes:]

Well in terms of the KLH actually consumed in the study, used in the vaccine that is used to treat patients in the study I think that math works just fine because the dose regimes as we understand it are the same. Therefore, the number of milligram of KLH required per patient would be the same. But keep in mind the companies go through a development process as they proceed through clinical trials, which includes a manufacturing process development to assure scalability of manufacturing processes, validation of manufacturing facilities and a lot of associated development cost or development activities that also consume significant quantities of KLH. So, typically it would not be unusual to find that far more KLH was used in the development process transitioning from Phase 1 to a Phase 2 or Phase 3 trials. Far more KLH might be used in development process than actually ultimately ends up being injected into patients. So, the math holds true I think if you're just simply calculating dose volume, but that will cost factor into it and that's why Stellar typically works with customers in long term supply and collaboration agreements. So, that Stellar can make these development processes much more efficient and that's an area where we continue to bring value to our customer base and helping them manage those development costs as well as the efficient use of KLH.

[Brian Marckx:]

Okay, that's helpful, I appreciate that. So, is it fair to assume that you expect to ship and book more revenue related to Neovacs in 2017 versus 2016 or that may not be the case because of the validation and everything that you just went through?

[Frank Oakes:]

I can’t really speak to, would not be comfortable speaking to forecasting what our sales in 2017 might look like to any particular customer, but I will say that we remain optimistic about the trends in general towards increasing demand from each customer as they go through their own unique development and clinical trial strategies.

[Brian Marckx:]

Okay. And just one more, if I could, Eurogentec is listed in the 10-K as a relatively significant revenue contributor. Can you talk about Eurogentec and your relationship with them?

[Frank Oakes:]

Yes, I can. Our relationship with Eurogentec is very good one. We know that company for a very long time and maintain a very good relationship with that company. They are great contract manufacture, and I would encourage any of our listeners here today that our and the immunotherapy development process who look to Eurogentec as a great partner and ally as a contract manufacturing and research organization, extremely professional organization, great processes, great team. So, I would say our relationship with them is very good. And we expect that it will continue to be good over many years.

[Operator:]

And we have no additional questions. I’d like to turn the call back to management for any additional or closing comments.

[Frank Oakes:]

Now, I want to thank everyone for the time today. I’ve been involved with Stellar since the inception of the Company back in 1999. I have to say I mean it's excited now as I have ever been about the Company’s opportunities and the opportunities for the KLH molecule. It’s a unique molecule. It never sees us to amaze me, interest me, and it continues to draw attention from the medical community and drug developers as a key active ingredient and immunotherapy. So, it’s an exciting field and exciting time. As I mentioned earlier, we work with multiple companies which are reaching to some very exciting inflection points in the clinical studies, and we continue to be encouraged by the KLH base work that is in preclinical development and currently entering trials. For the coming year, we’re moving ahead with our plan upgrades to our infrastructure to allow us to incrementally increase our production capacity. They have demand. We’ll also plan to expand our commercial and clinical opportunities and licensing supply and research collaborations. And of course, we continue to support our customers and partners under our existing supply agreements and are closely monitoring a progress of their clinical studies. These are priorities for the year, and we look forward to sharing our progress with you over the course the year. And we hope you all have a very Stellar day.

[Operator:]

And that does conclude our call today. Thank you for your participation.