Edesa Biotech, Inc. (EDSA) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stellar Biotechnologies Second Quarter 2016 Corporate Update Conference Call. This conference is being recorded today, Wednesday, May 11, 2016. During today's call all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. [Operator Instructions] I would now like to turn the conference over to Mark McPartland, Vice President of Corporate Development at Stellar Biotechnologies. Please go ahead, sir.

Thank you, operator and good day everyone. We would like to thank you all again for joining us today for Stellar Biotechnologies' second 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 questions from our callers and webcast participants. I would also like to note our press release for the second quarter and six months results and our Form 10-Q quarterly report for the period ending March 31, 2016 were released and filed with the SEC on Monday, afternoon. All the Stellar's current and past reports and filings can be found at the Canadian Securities Administrator's website sedar.com or the U.S. SEC website sec.gov/edger. They can also easily be accessed from our IR section of our website at stellarbiotechnologies.com under the financial and SEC reporting area on the Investor section. Now before we begin, I would like to remind our listeners that today's conference call may include forward-looking statements based on current expectations. Such statements, other than purely historical factual information constitute forward-looking statements. Listeners should not place undue reliance on these forward-looking statements, which are not a guarantee of future performance. There can be no reassurance that forward-looking statements will prove to be accurate as all such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or future events to differ materially from the forward-looking statements. Such risks include but may not be limited to, changes in company's strategy or development plans; the degree of market acceptance for the company's products or for other Company's products in which our products are components, governmental regulations and the ability or failure to comply with governmental regulations; the timing of the Company's or its partners' anticipated results, including in connection with clinical trials; the ability to meet the goals of the Company's joint ventures and strategic partnerships; and other factors referenced in the Company's filings with the U.S. Securities and Exchange Commission and the BC Securities Commission, which are also available on our website. All forward-looking statements are made as of today and are subject to change, except as required by law, the Company assumes no obligation to update such statements. This conference call does not constitute an offer or solicitation of an offer for sale of any securities and any jurisdiction including the United States. Now with that taken of, I would like to turn the call over to Frank Oakes, President and CEO of Stellar Biotechnologies, for our opening remarks.

Thank you, Mark, and good day, everyone. Thank you again for joining Stellar's 2016 second fiscal quarter corporate update conference call. Before I get into this morning's update and discussion of the announcement this morning, regarding a newly signed joint venture agreement with Neovacs France, I want to recognize that Stellar came for their solid performance again in this latest fiscal quarter. Although our share price has been under considerable pressure in 2016, along with the entire [SBOT factor] I want to show everyone that the company's fundamentals remain very strong. Stellar delivered another strong quarter with operational results that include increases in sales once again over previous periods, while demonstrating careful management of the resources and projects. Our revenue for the second quarter and the first six months ended March 31, 2016, increased 74% and 103% respectively over the comparable periods in 2015. This revenue growth continues to be driven by a combination of the increase in customers and greater sales volume from existing customers and in particular increased volume under supply agreements with our clinical stage customers with vaccines and development. The increased interest in Stellar KLH is both a direct reflection of the growing pipeline of active immunotherapy that use KLH and the recognition of Stellar’s value proposition, which is our ability to deliver scalable and sustainable supplies of GMP, KLH protein. We believe these are very positive indicators for Stellar’s core KLH business that will drive potential future catalysts and sustained company growth. As a reminder of Stellar’s current position and future potential, Stellar KLH products are already being used as key active pharmaceutical ingredients in multiple clinical stage immunotherapies targeting the treatment of cancers, autoimmune diseases such as lupus and Crohn's disease and even Alzheimer’s disease. But there is also pipeline of other KLH-based immunotherapies underdevelopment including new technologies and expanding indications for existing therapies. These we believe will also need to secure dependable and ample supplies of KLH in Stellar’s ideally positioned to be that supplier. We are working closely with current and perspective customers to ensure long term support of these exciting immunotherapy programs and to ensure access to Stellar KLH. For example this morning Stellar announced the signing of a Joint Venture Agreement with Neovacs of France. The purchase of the joint venture is to produce Neovacs' Kinoid immunotherapy product candidates, including their Interferon Alpha Kinoid at commercial scales as well as potentially manufacturing other KLH-based immunotherapy vaccine products to third party customers worldwide. This is a prime example of the KLH pipeline based immunotherapies translating into new business opportunities and setting the stage for potentially greater market share for Stellar and Stellar’s KLH products. A short word about Neovacs, Neovacs is a long term customer of Stellar's and partner in many projects Nevacs is a leader in the development of active immunotherapies for autoimmune and inflammatory diseases. Neovacs' lead product candidate is Interferon Alpha Kinoid, a conjugated vaccine, which uses Stellar KLH as the active carrier molecule. This product is in a multicenter Phase IIb clinical trial in Europe, Asia and Latin America for the treatment of moderate to severe Lupus and Neovacs recently received FDA authorization to extend the Phase IIb trial into the United States, which is a major step forward. In addition the Interferon Alpha Kinoid development program was recently expanded to include a new indication Dermatomyositis or something similar to that, which is a serious condition that has an orphan drug indication, which will also involve Stellar KLH. Under the terms of the Joint Venture Agreement, Stellar and Neovacs will form a company in France to carry out the business of manufacturing and selling conjugated immunotherapies. The new joint venture company will be owned 70% by Neovacs and 30% by Stellar. This partnership is a natural extension of our strong relationship with Neovacs and it offers strategic advantages for both companies. For Neovacs the joint venture is a key step in their industrial plan, ensuring access to Stellar KLH or building and manufacturing infrastructure that can support their clinical trials and potential future market launches. For Stellar this joint venture is a unique opportunity. We believe that this new alliance will position Stellar to both broaden the market for our KLH business at our expected margins and also potentially benefit from the manufacture and sale of finished immunotherapy products. Due to this joint venture, Stellar and Neovacs can work together to support the success of Neovacs' immunotherapies like their Interferon Alpha Kinoid for Lupus while we lay the groundwork to offer similar support to other companies developing KLH-based immunotherapies. I want to point out that Neovacs has already secured public financing to the amount of €5 million from the General Commission for Investment operated by DPI France with Neovacs plans to use towards establishing the manufacturing facility that will be managed under our joint venture operations. With regard to other initiatives we continue to evaluate the suitability of our potential second site in Baja California, Mexico, which we see as an important opportunity to support the potential for growing demand for our KLH -- Stellar KLH products. This site offers redundancy for operations, which are recognized as a priority for our customers as they advance through clinical trials and anticipate commercialization of their immunotherapies. At our California Headquarters, we have completed significant improvements in expansion of our aquaculture infrastructure and manufacturing capabilities. These improvements and additional work that is in the planning stages, will allow us to scale for more efficiently increase -- to more efficiently increase our KLH production capacity in advance of immunotherapy pipelines that I mentioned earlier. All of these steps are critical to meet the expectations of our customers as they formulate their plans for commercialization of their drugs. Stellar continues to advance as a U.S. public company. As most of you are aware, at our request on April 8, 2016, we voluntarily delisted our shares from the Canadian TSX Venture Exchange because the trading volume for our shares had moved almost entirely to the NASDAQ Capital Market Exchange. After our up-list in November, Stellar made the decision to voluntarily delist from the TSX Venture Exchange to eliminate the cost and resources required to maintain an unnecessary dual listing. In the liquid market for the company’s shares remains on the NASDAQ. The trading of Stellar's shares on NASDAQ provides a centralized exchange, which we believe will help overall liquidity in the market and benefit the company’s long-term growth in capitalization initiatives. As I noted earlier, in the first half of our fiscal year, it has been very encouraging for our core business and our continued progress is a reflection of the increasing market demand for KLH and our ability as the only company capable of supplying a sustainable source of KLH to meet industry demand. Now I would like to turn the call over to Kathi Niffenegger, our CFO who will discuss our financial results in greater detail.

Thank you, Frank and good morning, everyone. During my review, I'll be discussing the condensed financial results for our second fiscal quarter and six months ended March 31, 2016, with the comparison to the same periods in the prior year unless noted otherwise. Frank already mentioned increase in our revenues, a 74% increase from $188,000 to $326,000 in the second quarter and a 103% increase from $400,000 to $814,000 for the six month period. Cost of revenues also increased, but not as much as revenues primarily because we have certain indirect costs that are incurred regardless of our product sales levels. For example cost of aquaculture and manufacturing quality systems. Cost of revenue increased 12% from $310,000 to $348,000 in the second quarter and increased 53% from $487,000 to $745,000 for the six month periods. We can now see the improved cost of sales percentage at our higher revenue levels. Our total expenses increased, but again not as higher rate as the revenue increases. Total expenses were $1.42 million and $3.22 million for the second quarter and six months ended March of '16, compared to $1.38 million and $2.92 million for the same periods in 2015. Our net loss for the second quarter was $861,000 or $0.10 per basic share, compared to a net loss of $426,000 or $0.05 per basic share for the same quarter in the prior year. The net loss for the six months ended March 2016 was $2.49 million or $0.30 per basic share as compared to a net loss of $1.77 million or $0.22 per basic share for the six months ended March 2015. The increase in the net loss was primarily due to the non-cash gain in fair value of warrant liability in the prior year periods and partially offset by the foreign exchange gains in the second quarter and six months ended March 2016. We no longer have any warrants with Canadian dollar exercise prices. So warrant liability is now zero and fluctuations in the non-cash fair value changes no longer affect our current results. Our capital resources position remains strong with working capital of $8.1 million at March 31, 2016, compared to working capital of $7.5 million as September 30, 2015. Cash and cash equivalents totaled $5.96 million at March 2016, compared to cash and cash equivalents of $3.96 million at September 2015, which represented an increase of $2 million. Our short-term investments totaled approximately $2 million at March 2016 compared to short-term investments of $5 million at September 2015, which represented a decrease of $3 million over the six month period. We believe our current position in cash and short-term investments will continue to fund our operating 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. As Mark mentioned earlier, we filed our second quarter Form 10-Q, on Monday, May 09, which includes our unaudited condensed interim consolidated financial statements and the related management discussion and analysis. I will now turn the call back over to Frank for closing remarks.

Thank you, Kathi. In closing, I would just like to reiterate the key points of our discussion. We continue to see robust and increasing interest for our stellar KLH protein and strengthen our core value proposition. Our revenue growth in the second quarter can be attributed to both an increase in customers and greater sales volume through our supply agreements. Our expansion initiatives on multiple operational fronts including the announcement today of a joint venture manufacturing partnership, the expansion of our manufacturing infrastructure and development of a potential second site. These initiatives establish a strong strategic foundation and strengthen and set the stage for future growth. Our solid financial position is a demonstration of our ability to generate increasing revenues while prudently managing our key resources and preparing the company for the future. We'll continue to seek business opportunities for growth this year, especially where we see opportunities to support the advancement of the KLH powered immunotherapies in clinical development. I am excited by the prospects for Stellar Biotechnologies and want to thank our employees, our partners, shareholders, stakeholders for your support as we continue to progress in 2016. Mark.

This concludes our formal comments at this time. We would like to open up the call for questions and as a reminder, we'll utilize a combination of both the webcast chat box feature for those participating via the web and operator assisted live Q&A for the callers. I'll moderate the view queue and online chat feature for questions and distribution to our team. Operator, you begin the Q&A session.

Thank you. [Operator Instructions]

Operator, I'll take the first question from one of our webcast participants specifically and address back to the team and the question is which has been asked recently as what is going on with the current stock price and its performance and I would turn that to Frank to address?

And that's a great question and while I can't comment specifically on stock price or stock performance, I will say that we recognize our share has been under pressure along with the broad [SBOT factor], which is significantly down from 2015. We don't think this is a reflection at all on Stellar's core strength and future opportunities. I think it's a reflection of multiple factors that are outside of Stellar's control and we think that as long as Stellar continues to deliver on its promise, it's commitments to its customers to support their clinical development and supply products and increasing quantities, our core business remains strong and we expect to see the performance of the company remain strong into the future.

Operator, let's take our first teleconference participant.

Thank you. We'll go first to Jason McCarthy with Maxim Group.

Hi, this is Gabrielle Zhou for Dr. McCarthy.

Hi Gabrielle, how are you?

Good. Hi. So my question is can you talk a little bit about KLH commercial rent look like for the remainder of this year and beyond in terms of grams or kilograms of KLH produced and supplied?

So, in terms of forecast, are you asking for forecast on our current market demand?

Yes.

Okay. Well I can't offer forecasts on market demand since our forecast for demand are based on customer expectations, customer progression and clinical trials. I will say that Stellar expects to continue to see strong growth and demand for KLH. Our KLH protein and gram quantities with forecast and kilogram quantities in the future years, but can’t really offer any specific guidance on what our forecast would look like between now and the end of our fiscal year.

Sure, thank you. I have a follow-up question. So, can you talk a little bit about the progress that the current partner like Neovacs in Lupus and their progress of making use of KLH for their act of immunotherapies?

Again I can’t touch specifically about a customer what a customer's demand would be. I will point to the public announcements that Neovacs has made with regard to issues such as IND in the U.S. and advancing their trial from Asia, Europe and South America into the U.S. So, we see that customers announcing very positive results and anticipates conclusion of a pivotal study late in 2017 and that’s all from their announcements in the public domain.

Okay. Great. Thank you for taking my questions.

Thank you, Gabrielle. Operator we're taking one more question back to the web participants and then we'll redirect back to the calling participants and the question is regarding the Joint Venture with Neovacs kind of an extension of what Gabriel was just asking, in addition to manufacturing Neovacs products, the press release says that the JV can also manufacture other company's products, what is the strategy behind that?

Mark, I'll take that question. Strategically this joint venture is formed to develop manufacturing capabilities to produce Neovacs' Interferon Alpha Kinoid vaccine in support of a commercial launch, but in general, companies developing KLH conjugate vaccines, typically manufacture clinical quantities, clinical trial quantities and contract manufacturing organizations that aren’t necessarily equipped to manufacture those vaccines at commercial scale. So we think the collaboration with Neovacs with this joint venture offers an opportunity to provide customers with a mechanism for seamless transition for clinical trial development to commercial launch of drugs and we think this is a need that’s going to be realized by most customers that are developing KLH conjugate vaccines. So we think it is a great opportunity to support customer development. It's also a good opportunity for Stellar because Stellar will be participating not just in supplying the active pharmaceutical ingredient for those vaccines, but also participating in the manufacture and sale of the finished drug products, which has the potential to increase Stellar’s revenue and commercial opportunity. So we think it’s a great, it presents solution for an industry need as well as an opportunity for Stellar to participate in finished drug products, manufacture and sale.

Operator we’ll take another call participant.

Thank you. We’ll go next to Brian Marckx with Zacks Investment Research.

Hi, everybody and congratulations on the progress. Frank wonder if you could talk about the Neovacs JV little bit more and then specifically in terms of the impetus for moving ahead with the -- with closing the JV at this point while Lupus vaccine is still in Phase II. And then related to that, how much capital do you expect to have to budget for the initial build out and then timing around that build out as well that would be great.

Yes, those are good questions. Some of them get into the mechanics of the joint venture, which I can’t comment on specifically, but the joint venture would involve identifying facility and developing plans to construct and operate the manufacturing facility. The initiation of those activities would be contingent on results from the Neovacs Phase II trial. So the commitment of Stellar’s capital resources is extremely modest until we have a solid indication of the assured increase in demand for Stellar KLH products. So we would expect that KLH sales revenues would be offsetting the capital cost, capital commitments that Stellar would make and the decisions for that commitment would be contingent on success of Neovacs Phase IIb clinical trial. And I would point out Neovacs, the Interferon Alpha Kinoid Product is in a Phase IIb clinical trial in South Korea. Neovacs has already announced a commercial partner in South Korea with a well-established pharmaceutical partner to support the commercial launch and the indication is received orphan drug statuses in South Korea, which would allow initial regional or limited commercialization opportunities for that vaccine with a positive Phase IIb outcome. So the entire joint venture right now is really positioned to support an imminent commercial launch in one jurisdiction with the expectation that revenues would offset capital costs.

Okay. If I could one more on OBI Pharma, have you had conversations with OBI since their February unwinding of their Phase II data and any discussions in terms of what the agreement, how the agreement may change or may stay the same depending on what their plans are with moving forward into a Phase III program?

Yes again I can’t comment on customer's plans or needs outside of what is already in the public domain, but I will say that, that OBI has been and continues to be a very good customer of Stellar’s and that every indication that we have is that OBI has a lot of confidence in their drug platform and continues to support clinical trials outside of the limited jurisdiction? The regional trial that was conducted in Taiwan, we know that they’re announced but that they didn’t meet the clinical endpoint on that trial. But every indication for us is they’re continuing with a lot of optimism in their platform.

Okay. Great. Thanks Frank.

Okay, operator, we're going to turn back to the webcast participants and work towards wrapping up the call with a couple questions that come in where we've eclipsed our 30-minute time allocation. But the first question from one of the call participants is can you talk about the potential catalysts or key inflection points that we can expect to see from Stellar for the remainder of 2016 and what specifically do we need to keep our eyes focused on?

Well, I think that for Stellar our full intent is to drive our core value proposition with negotiations that we hope to conclude that would represent expanded all answers with existing customers and new customers with KLH in going into clinical trials for new indications. So broadening business platform, the core business supporting key customers, we can’t speculate on future events of course, but we do have a lot of exciting programs on the radar screen. And we as I said, we’ll continue to focus on our core business with the core being up to production of KLH manufacturing capabilities should produce a full -- fully purified KLH to support multiple immunotherapy programs. And with the joint venture in France, the progress towards development of manufacturing capabilities for finished drug products and of course we're looking forward to starting new collaborations, new work with customers and joint venture partners and expanding Stellar's core business.

Operator, we’ll take one more, one last call from our webcast and then wrap as I mentioned and the question relates to our expansion plans need in Mexico albeit we've given some good detail on Mexico itself, but the question that is what makes the Mexico project or any second sites so important for current demand and potential heavy future demand?

Well, the Mexico site or a second site in general we think is essential to assuring long-term stability and security of supply that KLH protein for our customers and the vulnerability of a single site-base company is a high concern for all of our customers is always articulated as a risk factor. And so as companies begin to have discussions with major pharmaceutical companies for partnering, the commercial launch of their vaccines, one of the issues that always addressed is site security, the security of the source for the key active pharmaceutical ingredient that Stellar makes. So a second site whether its Baja California or in some other regional or political jurisdiction, a second site is essential to Stellar’s ability to right long term contracts to support what could be game-changing drugs like therapeutic cure for Lupus or so some alternative major therapeutic indications. So the second site is essential. We think the Baja California site is ideal for a number of reasons, but I want to point out to all our listeners that Stellar’s financial commitment to that site remains extremely modest and that we are doing the appropriate site suitability studies and protein characterization studies that would allow us to use that site as an alternative source for the production of the KLH protein. And full capitalization of that development remains contingent on the success of one or more therapies and seeing one or more therapies advance to commercialization. So all of these activities really are contingent on the success of our customers and partners and are being staged strategically because we know there is a three-to-five year lead time required for a project like the Baha California site to be brought into commercial development. So we know that is important for Stellar to be positioned to move quickly, but it is also important for Stellar not to expand its resources unnecessarily on our second site full commercialization of a second site until it’s clear that we will have revenues to offset the capital cost.

Thanks Frank. And operator, there is no further questions. So we're going to turn now -- I will turn it back to you for closing comments.

I just want to thank everybody, all of our listeners once again, the key stakeholders and shareholders who have participated in today's conference call. If you have any additional questions, please feel free to contact either me or Mark McPartland. Thank you for your continued support and interest in Stellar Biotechnologies and we’re looking forward to providing future updates on our progress. Operator?