Edesa Biotech, Inc. (EDSA) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stellar Biotechnologies First Quarter 2016 Conference Call and Webcast. This conference is being recorded today, Wednesday, February 10, 2016. During today's call all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions] I would now like to turn the conference over to Mr. Mark McPartland, Vice President of Corporate Development at Stellar Biotechnologies. Please go ahead, sir.

Thank you, Operator and good day everyone. We like to thank you all for joining us today for Stellar Biotechnologies' first fiscal quarter 2016 corporate update conference call and webcast. Joining me on the call today from Stellar Biotechnologies' senior management team are Mr. Frank Oakes, the Company's President and CEO; Kathi Niffenegger, our Chief Financial Officer; and Dr. Catherine Brisson, our Chief Operating Officer. Mr. Oakes will provide an update on Stellar's operations, review our recent achievements, growth opportunities and Ms. Niffenegger will review our consolidated financial results. After the formal presentation, we will be available to answer your questions from dial-in callers and as the operator has already indicated from webcast participants as well. I would also like to note that our press release for the quarter and our Form 10-Q quarterly report for the period ending December 31, 2015 was released and filed with the SEC on Monday, afternoon. All documents are available on the SECs website as well as the Investor section of our website at stellarbiotech.com. Now before we begin, I would like to remind our listeners that today's conference call may include forward-looking statement based on current expectations. Such statements, other than purely historical factual information, including statements relating to revenues or profits or the Company's future plans and objectives or expected sales, cash flows, and capital expenditures constitute forward-looking statements. Forward-looking statements are based on numerous assumptions and are subject to all the risks and uncertainties inherent in, among other things, the Company's availability of funds and resources to pursue research and development projects, the successful and timely completion of preclinical or clinical studies by third parties in which the Company's products are utilized, the degree of market acceptance of the Company's products or for other Company's products in which the Company's products are components, the Company's ability to protect its intellectual property, the volatility of the Company's common share price, the effect of competition, the effect of technological changes and general changes in economic or business conditions. There can be no assurance that such forward-looking statements will prove to be accurate as actual results and future events may differ materially from those anticipated in such statements. Accordingly, listeners should not place undue reliance on such statements, except in accordance with applicable securities laws, the Company expressly disclaims any obligation to update any forward-looking statements or forward-looking statements that are incorporated by reference herein. This conference call does not constitute an offer to sell or a solicitation of an offer to buy any of the Company's securities in the United States or to for the benefit or account of a U.S. person or person in the United States. Neither the TSX Venture Exchange nor its regulation service provider, as that term is defined in the policies of the TSX Venture Exchange accepts responsibility for the adequacy or accuracy of this conference. Please refer to the documents that we file from time to time in Canada on SEDAR or in the United States with the SEC, which are also available on our website, for information concerning the factors that could affect the Company. With that taken care of, I would like to turn the call over to Frank Oakes, President and CEO of Stellar Biotechnologies, for opening remarks. Frank, please begin your formal comments.

Thank you, Mark, and good day, everyone. And thank you all for joining us here today for Stellar's first regular quarterly corporate update conference call. I’m pleased to report good momentum heading into 2016, that's what we believe are positive indicators for our core KLH business. Our focus on increasing sales was demonstrated by the 130% increase in revenue for our first fiscal quarter 2016, compared to the same period last year. Revenue growth was driven primarily by an increase in product sales associated with more customers, greater sales volume and in particular increased volume under supply agreements with our clinical stage customers. Our KLH products are primarily being used as a key active pharmaceutical ingredient in multiple clinical-stage immunotherapies targeting metastatic breast cancer, ovarian cancer, Alzheimer's disease, lupus, and Crohn's disease. We are working to expand our commercial and clinical opportunities with new collaborations such as the recently proposed joint venture with our long-term partner Neovacs in France. Stellar KLH is a critical component of Neovacs's Kinoid vaccine candidates; two of which are now in Phase 2 clinical trials for lupus and Crohn's disease, two important inflammatory diseases. In 2015, we expanded our agreement with Neovacs in order to assure an adequate supply of KLH as they advance their clinical trials and prepare for a potential commercial launch. The purpose of this newly proposed joint venture is to produce Neovacs's Kinoid vaccines at commercial scale, as well as potentially manufacture other KLH immunotherapies on behalf of third party customers. Although there can be no assurance of the joint venture, arrangements will be finalized, we believe the advantages of such alliance would include the opportunity to build additional manufacturing infrastructure that could not only support development of Neovacs products and scale, but importantly could potentially be used in the future to supply KLH to other companies looking to transition from clinical to commercial scale. We believe we are building a strategic foundation for future growth. This proposed joint venture is just one example. As previously reported last year, we have also launched initiatives to improve our aquaculture infrastructure and to access the suitability for a potential second site in Baja California, Mexico. Stellar continues to mature as a public company. As you know our shares began trading on the NASDAQ capital market under the symbol SBOT on November 05, 2016. The NASDAQ listing offers a number of advantages including broader visibility to the investment community and potential for increased share liquidity, which we believe will benefit the company's long-term growth in capitalization initiatives. The first quarter has been a great start to the year and our progress is a reflection of the increasing market demand for KLH. I'd now like to turn the call over to Kathi Niffenegger, our CFO, who will discuss our first quarter financial results in greater detail. Kathi?

Thank you, Frank, and welcome, everyone, joining us on the call today. During my review, I will be discussing the financial results for our first fiscal quarter ended December 31, 2015 with the comparison to our first fiscal quarter ended December 31, 2014 unless other dates are noted as I discuss them. We generated revenue of $488,000 for the period ended December 31, 2015, which is an increase of 130% compared to $213,000 for the same periods of prior year. The increase in revenue resulted from an increase in the number of customers and increased sales volume, including the sales under supply agreements and custom manufactured products. Our total expenses for the first quarter of fiscal 2016 increased to $1.8 million, as compared to $1.5 million incurred at the same period 2015. Cost of revenues increased to $397,000 for the first quarter in fiscal 2016, as compared to $177,000 for the same period in the prior year, consistent with the increased product sales and contract services revenue. We reclassified aquaculture costs to present them separately from cost of sales and contract services since those operating costs are incurred regardless of sales levels. Therefore, as we disclosed in our footnotes, the comparative December 2014 is presented differently than on the original 10-Q last year. Research and development expenses decreased to $289,000 for the three months ended December 31, 2015 compared to $419,000 for the same period ended December 31, 2014 due to our refocus from internal R&D to manufacturing our Stellar KLH products in response to increased customer advance. General and administrative expenses increased to $1.12 million for the three months ended December 31, 2015 compared to $942,000 for the same period in the prior year. The increase resulted from a combination of increased corporate expenses, including our NASDQ listing fees, compensation increases, increased share based compensation and increased Investor Relations activity, offset by a decreased business development travel during those periods. Our net loss for first fiscal quarter of 2016 was $1.63 million or $0.19 loss per basic share compared to $1.34 million or $0.17 loss per basic share for the same period in fiscal 2015. The increase in net loss was primarily due to fluctuations in noncash gain/loss in fair value of warrant liability. In the past, we've discussed warrant liability and the impact that it has on our financial statements, especially the significant swings in this noncash gain/loss in fair value of warrant liability. The warrant liability was only recorded for warrants denominated in Canadian dollar exercise prices. Since all the warrants with Canadian dollar exercise prices were exercised or had expired by December 31, 2015, the warrant liability is now zero. We will no longer have gain/loss in fair value attributable to outstanding warrants affecting our net results in the future. Our capital resources position remains strong with working capital of $8.97 million as of December 31, 2015 compared to working capital of $7.49 million as of September 30, 2015, our yearend. Cash and cash equivalents totaled $3.89 million at December 31, 2015, compared to cash and cash equivalents of $3.96 million at September 30, 2015, which represented a decrease of approximately $68,000. Short-term investments totaled $5.02 million at December 31, 2015 compared to short-term investments of $5.02 million at September 30, 2015, which represented an increase of approximately $1,600. We reclassified short-term investments to present them separately from cash and cash equivalents, therefore the comparative December 31, 2014 statement of cash flows is presented differently than on the original 10-Q. We believe our current cash position will continue to fund our operations and development programs, as well as upgrade store facilities for at least the next 12 months. However, we may seek additional capital through debt or equity raises as needed to accelerate the development of our programs and initiatives in response to market demand or to explore new opportunities to expand our business. Stellar had positive shareholders' equity of $9.6 million and approximately 8.45 million shares outstanding as of December 31, 2015 compared to shareholders' equity of $8 million and approximately 7.98 million shares outstanding at September 30, 2015 year end. The increase in shareholders' equity was the result of the exercise of warrants during the quarter, offset by the net loss. As Mark mentioned earlier, we filed our first fiscal quarter ended December 31, 2015 Form 10-Q, which includes our unaudited condensed interim consolidated financial statements and the related management discussion and analysis, on Monday, January 08, 2016. All of Stellar Biotechnologies' current and past reports and filings can be found on the Canadian securities administrators' website, SEDAR.com or on the SEC website, SEC.gov/EDGAR. And they can also be easily accessed from our website, ir@stellarbiotechnologies.com, as financial and SEC reports under the investors section. And I will now turn the call back over to Frank for closing remarks.

Thank you, Kathi. I would like to reiterate the key points of our presentation. First, our ability to carefully manage resources has been demonstrated this quarter by our continued strong financial position. We've seen strong revenue growth in the first quarter driven by higher KLH sales and our business development efforts, which have brought in new customers. Our continued maturation as a public company is evidenced by our uplist to the NASDAQ, a passage that we think offers long-term benefits for broader outrage and improved liquidity. Our expansion initiatives on multiple operational fronts, including aquaculture infrastructure, potential second site development and a potential manufacturing joint venture have all demonstrated great progress for the company. We will continue to seek opportunities for growth this year, especially where we can support the advancement of KLH-powered immunotherapies and clinical development. I'm excited about the prospects for Stellar Biotechnologies and want to thank our employees, partners, shareholders for your support as we continue to progress in 2016.

This concludes our formal comments, Operator. At this time I'd like to open up the call for questions. You're welcome to start Q&A portion of the call, keep it in mind we will utilize a combination of both the webcast, chat box. For those webcast participants as well as operator assisted live Q&A from the call participants. I'll moderate the view queue online and the chat feature for question distribution to our team. Operator?

[Operator Instructions] And we will take our first question from Jason McCarthy.

Hi Mark, Frank, Kathi. Congratulations. It sounds like you're discontinuing to expand KLH sales. Glad to see that. I was wondering if you could talk a minute or two about your partner OBI Pharma, because they have a critical catalyst coming up with using your KLH and the breast cancer vaccine, maybe at the end of this month, maybe in March. They're going to unblind a pivotal trial and maybe you could discuss where that study is and if that data is positive, what does that mean for Stellar in terms of increasing KLH supply? Because if there is a commercial vaccine that could become available, they could seriously impact the vertical trajectory of your sales of KLH even - as soon as this year.

Thank you, Jason. Great question. OBI Parma is a very visible Taiwanese public company. It's important to the whole field of immunotherapy, because they are advancing a Phase 3 breast cancer trial that does utilize KLH as the important carrier protein. So KLH is an essential component of that vaccine and that vaccine is one of the most advanced in clinical trials. So we are watching OBI Pharma very, very carefully and have a lot of optimism about their product. Stellar does have a publicly announced relationship with Amaran Biotechnologies in Taiwan, which is a company that has announced that they are developing manufacturing capabilities to make the OBI-822 vaccine at commercial scale. So Stellar is strongly aligned with Amaran Biotechnologies and that association with the OBI-822 vaccine. So as you pointed out, it's an important inflection point not just for Stellar, which it is very important, but also for the broad industry, because it would be a sentinel product if it is demonstrates clinical efficacy and supports a commercial launch into Asian jurisdiction. So it's something that's important to us. It's important to the industry and we're watching that vaccine and those companies very closely and have a great relationship through our collaboration and agreements with Amaran Biotechnology's position to be in the mix, in commercial production of that vaccine.

Okay, great. Thanks. And just one more question and that has to do with Neovacs and the joint venture to be third-party manufacturer of KLH base therapeutics. Is there a window for Stellar to move your own proprietary KLH immunotherapy into that third-party structure where maybe it might not need a partner for this KLH immunotherapy or maybe you have some other internal projects that you could now move into that third party venture, and see them progress into the clinic and maybe even beyond that?

Yes. I can respond to that in two ways. One, the venture with Neovacs is important, because there is currently a gap, a clear industry need for a company or facilities that can manufacture these KLH conjugate vaccines at commercial scale. And to facilitate that transition not just for Neovacs, but for multiple companies, the transition from clinical stage manufacturing to commercial scale manufacturing under GMP. And having that in place definitely does offer the opportunity for Stellar to accelerate development of its own therapeutic products that use KLH as the active carrier, because it would give us not just Stellar, but other companies, a clear pathway to transition from preclinical studies to clinical trials using the same carrier protein, same manufacturing facilities and then ultimately transition of commercial scale. So it would open that opportunity for Stellar and its therapeutic products, as you pointed out, which is very important for our company and our stakeholders but also offer the opportunity for Stellar to provide KLH and manufacturing capabilities to companies that are seeking a clear path way from clinical stage development to commercialization of products. So we think that opportunity offers - that joint venture offers those opportunities for Stellar and other companies and will facilitate Neovacs rapid transition to commercial scale production, if they see good clinical results in one of their Phase 2 trials.

Great. And then just one more quick one. If you can just remind us if the breast cancer immunotherapy that uses KLH as the carrier is approved, if it does go commercial, if Amaran is going to commit to making that a commercial scale, how much KLH in the ballpark, what a commercial venture consume per year to make a breast cancer immunotherapy? Thank you.

Well, clearly we can’t speculate on the forecasts or on the demands of a customer would express. But we are certain that the multiples on – the multiples and demand transitioning from clinical trials to commercial scale are significant. Since the clinical trials typically, as you know, only address a small percentage of the patient and that are recruited into an indication such as breast cancer. And the OBI-822 vaccine that is currently under clinical evaluation for breast cancer is also under evaluation for ovarian cancer and targets a cell surface carbohydrate, is also expressed on six or seven other cancers. So the field is much broader than just breast cancer alone. And the potential increasing KLH demand over a 5 to 7 year period can be expressed in double-digit multiples beyond what would be required to support any individual clinical trial. So I hope that’s helpful but again, we can't speculate specifically on the demand that would be required by any specific customer for any specific indication because we don’t have that data clearly in front of us.

Great. Thanks guys so much. Congratulation on your first reported quarter as well.

Operator, next question I'm going to take from the webcast participants. I will read the question out loud, as I mentioned earlier, and then direct to the appropriate member of our team. And the first question is, what does the sales pipeline look like going forward? This is a little bit tied into what Dr. McCarthy just asked but do you believe you will add more new customers, which of course, I think Frank, would you like to take that question?

Yes, sure. I mentioned just a moment ago. We can't speculate on future events such as pace, success of customers clinical programs. But there are really two important indicators as to why we are confident in our core KLH business, and it's potential for going forward. First, as you've seen, our sales growth reflects increasing demand for KLH, as well as a growing recognition that Stellar is a leading KLH supplier. As we’ve seen increase sales from existing customers and continue to add new customers to our sales list. Also, if you look at the pipeline of companies with KLH based immunotherapies in clinical trials, you’ll find dozens that are all moving to the clinical development phase for a significant indications like the OBI-822 for metastatic breast cancer, Alzheimer's disease, ovarian cancer, lupus and more. And we are happy to say that we participate in immunotherapies for all of those indications. They will all need to have a reliable, scalable source of KLH and those that are not already using Stellar KLH presently, represent an untapped market potential for future sales. So we are very optimistic about the potential to increase products in our pipeline, as well as increase sales to existing products that are approaching the transition from clinical stage to commercial stage manufacturing.

Thanks Frank. That's very thorough. I think what we will do operator is take the next question from one of our call participants.

And the next question will come from Brian Marckx with Zacks Investment Research.

Frank, I was wondering if you could talk about, kind of, a very near term, in terms of product sales. And whether you think that the Q1, 456,000ish number is something that you think you’ve build from or if you think there may be some variability from that. So potentially up or down, in the next three quarters through the end of this fiscal year.

Again, we really can't speculate on future events. But it’s a good question and requires great consideration. We are optimistic about the 2016 fiscal year because we do support customers that have variability in their demand and control really the timing of orders placement and filling of orders that have to integrate well into their manufacturing cycles. But we think Stellar is positioned well and over the balance of 2016, we think we are going to see good growth in revenues. But again, that's speculating on events that are out of our control but we retain a high level of optimism that the first quarter reflects what we can continue to see over a long period of time. As products move to clinical stage development, and begin to repositioned for later stage clinical trials that include a far larger patient sets, and ultimately the - of commercial launches. So we have a high level of optimism. We are not going to speculate on quarter-to-quarter results because they are out of Stellar’s control.

Okay, fair enough. In terms of the JV with Neovacs, do you have an estimated timeframe for one you think it may close, if it closes and is conformation of the JV contingent on Neovacs's Phase 2 lupus study coming out with positive results.

The joint venture definitely is structured so that all the infrastructure and in terms of agreements that formalize the alliance between the companies will be in place to be able to take advantage of the environment, if Neovacs sees a good indication or good result from their Phase 2 study and that’s really the purpose of the JV is to position both companies to move quickly if they see that event. And as you may have seen in some of the press releases, the public information surrounding Neovacs, and it’s development program, Neovacs has established a relationship with a strong South Korean pharmaceutical company that will be a marketing partner and that company - the vaccine has been approved for a fast-track based on an orphan drug indication in South Korea. So Neovacs anticipates that the transition from clinical stage to a commercial launch in that jurisdiction could be quite quick. Therefore it’s important to have the manufacturing capabilities in place and well-designed ahead of time. So, we are working with Neovacs to position the companies to accomplish that, but all these programs are contingent on clinical results that are yet to be demonstrated. So there is a relationship and timing between Neovacs clinical results and the actual physical launch of the joint venture.

Okay, great. In terms of upfront capital cost, assuming that Stellar has 30% of the JV and Neovacs 70% based on what's in the public domain. Have you thought about in terms of what would initial capital cost be for Stellar?

Yes, we have. Obviously, we have thought in great detail about that. Those are numbers that we really can't disclose at this time that will become appeared and be made public as the definitive agreements are negotiated and finalized. But we do think that in general we've considered the potential capital cost, upfront cost extremely modest long term capital cost well within Stellar’s capability to manage and the joint venture again as has been disclosed would be - Stellar would be in a minority position and have a minority responsibility for contribution of capital. And the companies collectively think that they are opportunities to bring non-dilutive capital resources to the table to help support that venture. So, there is a lot of strategic planning going on associated with the roll-out of that venture and those details will become public as agreements are finalized.

All right, great. Thanks a lot.

Yes, thank you for the questions, great topics.

Operator, I’m going to take the next couple questions from our webcast participants and then as we're growing close to our expected in time of the call, we will be probably end at that point but the first question is and we talked a little bit about already is to just give a little bit more - the question is can you give us an update on the expansion in Mexico and may be just a little bit more regarding the timeline in details.

Mark, I will speak to that directly the project in Mexico it is - any feasibility of valuation phase that the deal structure was negotiated so that we have a three year window to evaluate the site to collect data on protein comparability, protein production, live animal or limpid survival in growth rates to confirm not only that the site is suitable for the aquaculture production, the source animal for a KLH protein but the protein itself will be comparable and suitable for use and therapeutic vaccines. So it's in a very, very important evaluation stage and we are actively involved in building the initial infrastructure and testing the suitability of the site and those results will become available to us over the next 18 months and decisions will be made on the go forward or the go, no go roughly a year from now 12 to 16 months from now. And the progress is good. We are very optimistic about the long term potential. The side have a high degree of optimism about the suitability but clearly because we are making a pharmaceutical product, we need to have solid data to show our customers and regulatory agencies. In terms of the debenture, we are - as I said directly involved in suitability evaluation and will keep our shareholders posted as we move forward on that with a lot of optimism about the potential to support rapid growth in two jurisdictions in California Coast for their primary site which is ideal and their potential secondary site which mitigates the risk of production interruption in one feasible site. So we think long-term to support to our shareholders but want to emphasize that we are being very, very careful and diligent in this and making sure that we are developing a site that is going to be suitable for pharmaceutical protein production.

Very good. Okay, so our next question, this will be our last question and I’m going to take again from the webcast participants and then we will conclude our remarks. But what key inflexion point is Stellar expecting in the near term and from your partners or potential partners, what should we be keeping an eye out for in 2016?

Well one key area that keeps us very busy is working with companies and institutions that are interested in using Stellar KLH as an API in their immunotherapy programs and we continue to be approached by research institutions and companies that are expanding the use of KLH or have desire to expand the use of KLH and the indications which truly not being used. So that gives us a lot of optimism about the future potential for the KLH protein used broadly in the field of active immunotherapy. And these include both potential new customers but also expanded interest from existing customers who want to secure a long-term supply. In 2016, we will be working hard to convert those discussions and enquiries into additional product sales and potentially into long-term supply commitments that will transition from clinical stage to commercial stage production. Another area that we get excited about is the considerable intellectual property that we are amassing. We have an active initiative underway that is intended to transform assets into new KLH products and services. For example, we recently presented and what we believe is a significant achievement in the development of new KLH filtration methods in our manufacturing process. The purpose of which is to provide Stellar customers with industry leading products. These are just two examples that point to what we believe will be very - a very busy and successful 2016 for the company.

Very well. Operator, this concludes our questions and our webcast participant questions. I would like to turn the call back to you Frank again just for your closing comments.

Well Mark once again, we would like to thank all of the stakeholders and key shareholders who have participated on today's conference call. If you have any additional questions, feel free to contact either Mark McPartland or myself and we look forward to our next quarterly call. And thank you for your continued support and interest in Stellar Biotechnologies, and we look forward to providing timely future updates on our progress.

And that concludes today's conference. We appreciate your participation.