Orgenesis Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Orgenesis First Quarter 2021 Business Update Conference Call. It is now my pleasure to turn the floor over to your host, David Waldman of Investor Relations. Sir, the floor is yours.

[David Waldman:]

Thank you. Good morning, everyone, and welcome to the Orgenesis First Quarter 2021 Business Update Conference Call. On the call with us this morning are Vered Caplan, Chief Executive Officer; and Neil Reithinger, Chief Financial Officer. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at [phone]. This conference call contains forward-looking statements, which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. These forward-looking statements involve substantial uncertainties and risks and are based upon current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us as of the date of this conference call. We caution listeners that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.

[Vered Caplan:]

Thank you, David, and thanks to everyone for joining us on our call today. I am pleased to report we achieved 400% growth in revenue for the first quarter of 2021, which reflects the early success of our POCare strategy. I'll talk more about this in a moment. At the same time, we achieved positive operating income and maintained a solid balance sheet with $41.8 million of cash as of March 31, 2021. Let me take a minute to recap on our POCare strategy. As discussed last quarter, following the sale of Masthercell, we have been hard at work implementing our POCare platform, which we believe is a key to unlocking the full potential of the cell and gene therapy industry. Currently, cells are manufactured using centralized production, which is standard across the industry. However, this strategy has resulted in high cost of cell and gene therapy, such as the CAR-T therapy, which can range in the hundreds of thousands of dollars per patient. Our goal is to the dramatically lower these costs through on-site processing of our therapies, which will support payer uptake and make these therapies more broadly available to patients. We believe this is a crucial step that is necessary for cell therapies to become widely available. Towards this end, our business is built around 3 key pillars

[Neil Reithinger:]

Thank you, Vered. Our revenues for the 3 months ended March 31, 2021, were $9.4 million compared to $1.9 million for the 3 months ended March 31, 2020, reflecting an increase in point-of-care development service revenue due to increased activity under our master service agreements with existing and new joint venture partners. Cost of services and other research and development expenses for the 3 months ended March 31, 2021, were $6.1 million compared to $4.9 million for the 3 months ended March 31, 2020, representing an increase of 25%. The increase is mainly attributable to the continued expansion of our pipeline of licensed CGTs, the expansion of our POC, point-of-care, capacity globally, further investments in automated processing units and processes for the development of owned and licensed advanced therapies to enable commercial production and additional work with partners to enable efficient closed processing system technologies addressing POCare needs. Selling, general and administrative expenses for the 3 months ended March 31, 2021, were $3 million compared to $3.5 million for the 3 months ended March 31, 2020, representing a decrease of 16%. The decrease in selling, general and administrative expenses is primarily attributable to a decrease in accounting and legal fees as a result of decreased corporate investment activities in 2021 compared to 2020. In terms of liquidity, we ended the first quarter of 2021 with cash and cash equivalents of approximately $41.8 million and had no long-term debt.

[Operator:]

And the first question is coming from Bruce Jackson.

[Bruce Jackson:]

Bruce Jackson, The Benchmark Company. Congratulations on the strong quarter. At this run rate, it could -- if you were to continue this, you'd hit like $37 million or more for an annual revenue number. I know that with this business, it tends to be lumpy sometimes, for lack of a better term. So maybe you could just give us a rough idea of how the revenue might unfold for the rest of this year.

[Vered Caplan:]

So Bruce, thanks for the question. And so I always say this to shareholders and people, this is a business that should not be judged quarter-by-quarter. It's the -- in cell processing, cell development, cell and gene therapies, I would say, more of a long-run process. But just looking at the work we have ahead of us for the next year, I would say it's going to be pretty consistent in terms of the support we need to give to our cell and gene therapies. I can't, of course, give a forecast on the numbers because we have not made any such forecast public. But I will say that I think for the next year and even more, we have our work kind of cut out for us. And we know what we need to do to support our partners. And these are long-term contracts, usually for a year or 2, sometimes even more. So we're expecting to continue activities and perhaps manage to grow them. But as again, I explained before, we are focusing on our validation centers and really want to make sure our model is validated before expanding to the full capacity we think we can hope to do so in the future. I hope that kind of summarizes the answer.

[Bruce Jackson:]

Oh, yes. It's -- I understand it's difficult to forecast. So just trying to get just a rough idea of what's going on. And speaking of the validation centers, maybe you could tell us how many OMPULs are out there right now and whether or not you have a target for how many OMPULs might be out there, say, by the end of the year.

[Vered Caplan:]

So we do have our internal targets. But again, this is not public information. Our aim is to have around 30 validation centers. How many OMPULs will be in each center is difficult to say at the moment. Some centers can begin work, by the way, without the OMPULs because they've got smaller systems of ours incorporated into cleanrooms, but others are waiting in line, so those that have not received them. So we're trying to be as efficient as possible and make sure we spread out as quickly as possible. I think we will be able to answer all the supply needs we have this year.

[Operator:]

And the next question is coming from Kelvin Seetoh.

[Kelvin Seetoh:]

So when Orgenesis does well, I know it's a win for your partners and more importantly, the patients that you are serving. So I'm thrilled to be on this journey as a shareholder. So could you talk a little bit more about the overall progress for CD19 and autologous insulin-producing cells in terms of the clinical trials? Are they progressing smoothly according to your time line?

[Vered Caplan:]

Thanks for the question and thanks for the support. So I think we are progressing according to time lines. And for the -- I'll begin with autologous kind of insulin-producing cells because what we did as our strategy, our first strategy is to expand the Koligo product, Kyslecel, because we believe that's a very good base for our program. Once we have that expanded, we can add in additional sales to that because if you may remember, we have an orphan indication for patients that have undergone a complete pancreatectomy. So this product is the first stage. This is already being sold in the U.S., and we are trying to expand the capacity of supplying this product through ompulyzing this product and, in parallel, working on adding in additional cell types, such as our EPI cells and other cell types to make this a more robust product for those patients who, unfortunately, don't have enough vials. So that's I think going according to plan and so our programs in Europe. We have had some difficulties in collecting all the biopsies of the liver cells because of COVID-19, but I think we're now ramping it up and coming back to our initial program. So that's going well as well. On the CD19 product, I think we have some -- we have not announced which, so I can't say, but I will say that I think we have at least 1 major research center in each continent involved in this, and we're very much hoping to see this start getting into the clinical phase. And we're very excited about this of seeing if we can make these cells at a substantial decrease in cost as a validation of our platform, of our strategy.

[Kelvin Seetoh:]

All right. Vered, I just have one more question as well. Given that Kyslecel is one of our commercialized products, could you share with us any developments on automating Kyslecel and expanding to more centers? And also, I would like to find out when will Kyslecel be available to more hospitals across America.

[Vered Caplan:]

So thanks. So we're still working on the automation and ompulization of this product. We actually have a center who's already kind of chosen to be our validation center with this. We will have to do, of course, some comparability testing in order to approve this for use in the U.S. And in parallel, we're working on expanding and trying to get an approval for these products in other regions, such as Europe or Asia, which will take a bit longer because, again, this is a cell therapy utilizing islets. And we have to go through a process. But of course, we have accumulated a lot of data from the U.S. So I'm hoping that if we finish this process by this year, by the end of this year, we will be able to expand. And I'm talking about the automation process, not the legislation in other countries. So I'm hoping if we finish the automation by the end of this year, we will have the ability to expand that capacity.

[Kelvin Seetoh:]

All right. Sounds really exciting. I just got one question because I was visiting your website today, and I noticed that we hired this lady, this is very experienced lady called Osher. I think she is performing the role of a General Counsel and Compliance Officer. So could you share with us more about the focus at Orgenesis and also shed some light on the surrounding factors that prompted you to hire a General Counsel. Is it because of there's more negotiations now, especially in the areas of royalties and working with hospitals, too?

[Vered Caplan:]

Well, actually, Osher is a wonderful lady, and we're very happy to have her on the team. We did this move for making sure we're compliant with all our obligations and so we can have a very close kind of, I would say, control over all our activities with all our partners and also to make sure in terms of different legislation issues that we are following, all the regulations we should in each country and each location. And Osher is doing a great job in kind of compiling all of this into a systematic approach, which will allow us to control our activities with each partner in each region.

[Kelvin Seetoh:]

All right. I just want to end by saying that your team is always doing a great job creating affordable health care accessible to everyone. So once again, thank you, Vered.

[Vered Caplan:]

Thank you. Thanks very much for the questions.

[Operator:]

And the next question is coming from .

[Unidentified Analyst:]

Vered, first off, I would like to congratulate you for such amazing first quarter results. And as your shareholder, I feel very happy to see how Orgenesis is going to impact lives all over the world. And I'm really glad to be able to speak with you today. So I would like to ask, how do you go about choosing which hospitals to place your OMPULs at? And how do you expect the deployment and validation of your OMPULs to be in the coming year or so?

[Vered Caplan:]

So thank you, first of all, for your good words, much appreciated. And as for your question, so that's part of the reason we have regional partners because they are really -- they really understand the region where they're working. And so they know which hospitals are the leading centers. I would say, kind of the voices of facility in this space that once our systems are, I would say, validated in this hospital, it really does serve as a kind of a sign of excellence. So you can see this by our activity also in the U.S. with JT and UC Davis. We're really trying to choose the best hospitals that are also research centers because then we can work with existing researchers that have, in many cases, grants but do not allow them to cover actually the expense and -- of making these products by working with an external CDMO. So by going there, we're actually solving more than one problem, right? We're also supplying our therapies, but also helping them with their therapies, which is very important in order to push the sector forward. So we really try to choose in each region, I would say, the leading kind of hospitals in the cell and gene therapy space that want to expand and understand and -- these therapies and also have the clinical teams that can implement these therapies in the clinical setting that is not always trivial. As we go about the validation, as we are able to show that these units, our mobile units as well as our therapies are available at reduced price and as we go through different clinical stages also hospital exemption, no matter what the regulatory framework, once we have those in a more validated fashion, and validation doesn't mean the therapy needs to be approved, it means that we are continuously manufacturing, processing, supplying these therapies through our automated units, at that stage, then we can start expanding. Now not for every hospital do we need to have clinical trials. Not for every hospital do we need to run through full regulatory process. Our goal is to do this through the validation centers and then just expand supply capabilities to the hospitals. So it will be, I hope, a much simpler process in entering and expanding. And as stated in our documents and our filings, we really want to focus on validation for the next year or 2. We want to make sure we kind of optimize our model. We are also in learning stage as we kind of set up this model. And I think once we do that, it will be much easier to just expand in the existing centers as well as open up new centers for us directly and for our regional partners.

[Unidentified Analyst:]

All right. That's a really thoughtful business strategy and it makes a lot of sense. I have another question. So for this quarter, we recorded a slight profit on a group level. So do we expect similar profitability going forward? Or is there a scope for any improvement in your margins?

[Vered Caplan:]

So during this validation process, our model is really based on a cost-plus model. Remember, our goal here is not to squeeze our distributors, our partners as much as possible. Our goal is to actually support them in their regulatory filings and their achievements. So for any work we are doing to support them, we will continue using our cost-plus model. And for work that is coming in from external sources that work with our partners or work done for the hospitals, we -- I think we can slowly build up higher margins. But again, our focus at Orgenesis is not just to make as much money as we can on each therapy. It's to make as many therapies as possible. So we're really focusing on expansion, not on -- because even in the existing hospitals, perhaps we can charge much more. But our goal is to keep a sustainable model so to allow for quick and healthy expansion. We would rather make less money on many more patients than a lot of money on each patient. So I hope to sustain our model. We will continue in our validation model. And hopefully, our margins will improve. But our goal at this point is really the validation. The fact that even in this validation model we can build a sustainable model is what lets us really, I would say, optimize our system, our platforms and our relationship with the hospitals as we advance towards market approval of these products.

[Neil Reithinger:]

And Meghan, also, just to.

[Unidentified Analyst:]

All right.

[Neil Reithinger:]

On top of that for SG&A, just to -- as far as that line item goes, we don't expect material changes in that either. Just like Vered said, we actually expect that to be sustainable as well. So except for any other corporate transactions that caused that to fluctuate from last year, legal and accounting, we expect the same on SG&A. Okay.

[Unidentified Analyst:]

All right. Also, building on what Kelvin asked earlier, apart from Kyslecel, may I ask what other therapies are there that we are likely to ompulize in the pipeline over the next 2 years?

[Vered Caplan:]

So we're working on MSC products, which are orthopedic indications. We're working on kidney disease. We're working on, of course, different wound healing, dermatology products. We're working on antiviral therapies. So we're really trying to ompulize everything we can get our hands on. Some will take longer, some will be quicker. It really depends on how complex the therapy is. But we are focusing -- this is a big focus for us in incorporating automation, incorporating different technologies into the OMPULs. I think for the moment, on clinical side, we're very kind of focused on, of course, the pancreatic projects, on the immuno-oncology and dermatology, orthopedics. This is kind of our main focus at the moment. But in parallel, we're working on many other things that should be incorporated. Now not every time do we need to begin all of the work. Again, many of these therapies build on expertise, built in -- on existing therapies. So as we advance more and more therapies, actually, the amount of work we need to invest in ompulism goes down. So it's not as though we have to begin from scratch every time.

[Unidentified Analyst:]

Thank you, Vered, I just want to say that you are really doing a noble cause here, and you really have my full support. Thank you so much.

[Vered Caplan:]

Thank you for these kind words. Very much appreciated.

[Operator:]

And the next question is a follow-up from Bruce Jackson.

[Bruce Jackson:]

So yesterday, you put out a press release about the IDE for the Icellator2. And I just wanted to clarify, is this like a new version of the Icellator that you're working with? And what are the improvements that you've made to it?

[Vered Caplan:]

So yes, it is. There are improvements in usability and efficiency and safety. In all aspects, it's just a better product. It's a closed system for making SVF. And this is the first time it's been approved for intravenous use for COVID patients. So I think that's a big step, just taking into account that the -- to go through this IDE, the team has had to face a lot of scrutiny from the regulatory authorities. So I'm personally very proud of the work on this. And I think this opens up also a window to additional therapies that can be deployed by this system. We also have some other clinical trials ongoing and in preparation for the cells provided by the system. So I think it's a great milestone for us.

[Bruce Jackson:]

Okay. Great. And then last question is on the metabolically optimized T cell program. Any update on that?

[Vered Caplan:]

So in parallel to CD19, and we are working very hard on this and setting up sites that can treat patients with this, that can be involved in a clinical trial to validate the system. The -- we're still working with agencies, with regulatory agencies, which indications would be optimal and where we want to start our work there, though we are hoping we will be approved at least in the clinical stage for multiple indications. So yes, we're working on that. And I think, hopefully, it will follow quickly after the CAR-T product.

[Operator:]

And we also have a follow-up coming from Kelvin Seetoh.

[Kelvin Seetoh:]

All right. Neil, this is Kelvin here. So I'm just looking at the cost of services and other research and development expenses for this quarter compared with the previous year, the same quarter, quarter 1. So I did notice that our professional fees and consulting fees have actually gone up from $400,000 to about $2 million whereas our other research and development expenses have fell from $2.8 million to about $800,000. So could you speak about the nature of such expenses? Are both typically are reoccurring? Or some of it could be like a one-off, especially for the other research and development expenses because it kind of dropped by quite a bit.

[Neil Reithinger:]

Well, there's a combination of costs associated with all those expenses, right? Could be -- there's personnel, there's labor. So some -- in some quarters, that will go up, some quarters that will go down. You have development in clinical, you have license. In royalties, there's various regulatory fees, there's consumables in there. So yes. From quarter-to-quarter, those may vary depending on the types of development services and tech transfer we do to support our partners, okay? So the correlation between those won't necessarily be linear. It will vary because the need that they have for our support varies, okay? So whether you -- the difference here for this year is that, obviously, we're -- as we're generating more and more revenue, our -- the need for what we do to support those services increases and so on and the variability will increase as well, okay?

[Kelvin Seetoh:]

Okay. All right. Just one more to squeeze in. In terms of the revenue that we are earning from our partners for providing the tech transfer, in terms of credit days, do we extend credit days to them? And if so, could you share with us, is it 30 days, 45 days or 60 days?

[Neil Reithinger:]

Yes. We do extend credit. And most of the situations we extend credit, it's 150 days.

[Kelvin Seetoh:]

Okay. Is there any reason why it's so long because in terms of cash flow, maybe cash flow could be negative for quite some time because we have not -- if they don't pay within like 60 days or so, then we have to draw on our current cash in order to fund our operations.

[Neil Reithinger:]

That is true. If they don't, just like any.

[Vered Caplan:]

So I.

[Neil Reithinger:]

Go ahead, Vered.

[Vered Caplan:]

No. Go ahead. Go ahead, Neil. Go ahead.

[Neil Reithinger:]

Yes. That is true just like any customer that we have to monitor that carefully, whether it be a 30-day or a 60- or a 90-day customer. This has been traditionally our approach even since last year in terms of when we are generating revenue and which has proven out to be and so far in our trends has been those receivables being collectible. So our sales we had last year, 150 days into the period were collected. We collected receivables in this period that were from the previous periods on that 150 days. So we so far see the same trend going into second quarter and third quarter on those receivables, all right? But that's the way the MSA and way the relationships are structured, especially, too, as they develop as their partners in the sort of pioneering effort they have, okay? That may change in the future. We expect that potentially to change. But at this point, we don't see any sort of -- there certainly is cash flow risk on that with any company with any length of time they extend the receivables, but we haven't seen that thus far, okay? Sorry, Vered, do you want to continue on that?

[Vered Caplan:]

Yes. And also, I want to add that many of our regional partners, they get -- they generate their support from grants, from the clinicians, from the hospitals. And they have -- they need the time to generate the revenue. So when all done, this is a new model, a new business, and we do not want to put too much pressure on them. So we want to give them a chance to actually pass it from the work we're supplying to them. And in many cases, land facilitates, they'll take 90 days or even more, 120, just to see the expenses and then pay back cash and stuff like that. So we want to be sensitive to that.

[Operator:]

And the next question is coming from .

[Unidentified Analyst:]

Vered, congratulations, fantastic quarter, and you deserve -- you've put a lot of time and effort into this. And I will say in the time that I've known you, everything you've said has always come true pretty much on time and exactly what you say. So again, congratulations. Two questions. One, can you discuss your activities or your backlog, if you will, with OMPULs in the United States? I don't know if you ever discussed that.

[Vered Caplan:]

Well, I don't think we've discussed that, but I'm happy to discuss it now.

[Unidentified Analyst:]

Sure.

[Vered Caplan:]

Certainly, the hospitals we are working with are waiting for the OMPULs. Again, we have to kind of bring them overseas. So they have to sample. And I think they're very excited about the prospect of incorporating them. And of course, we're working on the ompulization of the Kyslecel project, which will go into additional centers. So that's kind of the focus of our activity. It's not that we intend to spread 100 of these over the U.S. in the next few months. We really want to focus on the centers we're working with. We -- I don't think we've announced all the centers, just the 2 major ones. But again, our goal is to have validation centers and to make sure these OMPULs are well located. And I personally think it's better to expand more OMPULs in 1 site before expanding to additional sites. It's just in terms of overhead and achieving our goals, I think that's better. So that will be our focus.

[Unidentified Analyst:]

Got it. Okay. And you -- correct me if I'm wrong, but I believe in the last call, you guys said that you do have a share buyback in place. And if you do, have you made any purchases or plan to make any purchases under the plan?

[Neil Reithinger:]

We do have a share buyback in place, and we are continuing to make purchases because the threshold floor on that is roughly $4.50. You'll see in the -- each filing, you'll see a disclosure that relates to how much we purchase each quarter. So far, in this first quarter, there was a 1 purchase. We've had a couple of purchases. Whenever you see that level, that will take place. So whenever you see the stock activity in that area, most likely that plan kicks into place, okay? So you can track that from last year's level and then, of course, each quarterly as it occurs, okay?

[Unidentified Analyst:]

Great. And just a final question. Are you seeing any more -- I mean given these results, I would hope that you would have more potential analysts following. Are you seeing any further interest in terms of -- and I realize you don't need cash, and so that's always an issue. But are you seeing any more interest from analysts at this point?

[Neil Reithinger:]

Always.

[Vered Caplan:]

We have -- yes. Go ahead. Go ahead.

[Neil Reithinger:]

It's percolating. Yes, we're seeing that. We've had discussions with different institutions that are looking and asking more questions, which I think is probably an inflection point for us in terms of the exposure level we can get with those institutions in understanding our business, yes. Can I -- as far as analyst coverage, no, I mean there's -- I don't think there's anything meaningful that has occurred there we can say that we can point to because we have certain analysts that are covering the stock. But as far as a larger base of investor and an institutional investment, we're starting to see that percolate. I don't know that's coming at a, like I said, meaningful level yet. But hopefully, that is a trend that will continue, okay? You might agree that that's going to be an important next step to have us resonate within the investment community, okay?

[Unidentified Analyst:]

No. I think given that you're cash flow positive, I think that's a tremendous inflection point. And I think that the fact that you're not burning any more cash, I think absolutely should be a catalyst for people to get involved. In any case, congratulations and keep up the great work.

[Neil Reithinger:]

Thank you.

[Vered Caplan:]

Thank you.

[Operator:]

There were no other questions from the lines at this time. I'd now like to hand the call back to the Orgenesis management team for any closing remarks.

[Vered Caplan:]

So I'd like to thank everyone for participating in our first quarter 2021 business update conference call. We're very excited about the outlook for the business and appreciate the strong support of our shareholders. We look forward to providing further updates in our progress in the weeks and months ahead. Thank you. Thank you, everyone.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.