InMed Pharmaceuticals Inc. (INM) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to InMed's First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And I would like to turn the conference over to Mr. Josh Blacher, Chief Business Officer. You may now begin, sir.

Thank you, Sylvie, and good day ladies and gentlemen. My name is Josh Blacher, InMed's Chief Business Officer. Welcome to InMed's, first quarter fiscal 2019 financial results and business update conference call. Before we begin, we would like to go over our disclosure statements, followed by a review of the progress on our biosynthesis and R&D programs, which will be led by our President and CEO, Eric Adams. Then we will shift to our CFO, Jeff Charpentier, who will review our financial results of operations. Following that, we will be available for a question-and-answer session. Please be advised that certain statements in the following conference call regarding expectations for InMed's business operations, clinical development, key personnel, contractual partnerships, regulatory approvals, revenue opportunities, and cash runway all constitute forward-looking statements. Such statements are not historical fact, but rather predictions about the future, which inherently involve assumptions, risks, and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. A description of these risks can be found in our latest disclosure document and recent press releases. InMed does not undertake any obligation to update any forward-looking statements made during the call. I would now like to turn the call over to President and CEO, Eric Adams. Eric?

Thanks, Josh, and good day to everyone. Thank you for joining our quarterly conference call. I'd like to open the call by discussing our developments in our INM-750 program for treatment of Epidermolysis Bullosa, or EB, as well as our biosynthesis manufacturing program. Regarding our INM-750 program for the treatment of EB, I'd like to break today's discussion down into a few primary high-level topics. First, I will discuss our developments during the first quarter with regard to the chemistry, manufacturing, and control, or CMC. Next, I will turn to the toxicology and pharmacology portion of the program. And finally, I will review what the next several months holds for the R&D of INM-750. With regard to CMC and more specifically the formulation development for our final drug product, during the quarter we conducted drug permeation studies on several formulations and variations using multiple human skin samples. In these studies with our selected formulation, we demonstrated good drug penetration and adequate drug concentrations in the epidermis, which is the target tissue for INM-750. Concerning our ongoing work on the toxicology and pharmacology front, we completed two types of genotoxicity studies which demonstrated no mutagenicity with the cannabinoid components found in INM-750. In addition, we completed two seven-day dose range finding and pharmacokinetic studies for assessment of systemic toxicity. The lack of any negative results from these studies support the continued development of INM-750. So, so far, we have demonstrated that the cannabinoid components each play important, albeit independent roles for various target effects, including anti-inflammation and keratin up-regulation. In terms of our workflow with regard to INM-750 over the next several months, there are a number of noteworthy projects in our CMC preclinical and clinical development plans. Concerning CMC, we will be working to finalize our selection of a contract manufacturer for our clinical drug product. We will then initiate process development and stability studies for our clinical trial materials. I'd like to mention also our recent hiring of Michael Woudenberg, who serves as our Vice President of CMC. As we advance into clinical trials, this is a very critical role for the company. We couldn't be more pleased to bring Mike onboard. He comes to us with over 20 years of leadership experience in process engineering, formulation development, technology transfer, scale-up, and commercialization of active pharmaceutical ingredients and drug products. In his most recent role at Phyton Biotech, Mike was responsible for the overall management, budgeting, strategic planning for the facility, the manufacturing operations, QA and QC, engineering, R&D, and regulatory activities. He had approximately 50 employees under his supervision at one of the largest global generic producers of paclitaxel and docetaxel, both of which are utilized in the treatment of various types of cancer. He was actively involved in attracting and establishing new business opportunities for other plants-derived compounds via plant cell fermentation, as well as by more traditional pathways such as extraction, purification, and semi-synthetic production of compounds for partner pharmaceutical companies. So we're very pleased that he's joined our management team. Back to INM-750, on are regulatory affairs front, we will continue our preparation of a detailed briefing package for upcoming meetings with the health authorities, including Health Canada and the FDA. We will most likely be conducting our Phase I study or studies in healthy volunteers in Canada under the authority of Health Canada. This process requires submission of a clinical trial application, or a CTA. We will be preparing both the Canadian CTA as well as the U.S. IND in parallel, although the timing of submissions may be staggered. We will seek guidance from the FDA and Health Canada in the first-half of 2019, as previously disclosed, subject to scheduling. Finally, over the next several months, we will be finalizing our selection of a clinical research organization to actually conduct those Phase I studies. In conclusion, we are on track to begin discussions of our clinical development plans with regulatory authorities in the first-half of 2019 and for a CTA or IND filing for INM-750 in the second-half of 2019. This confirms the timelines we established earlier in May of this year. Switching gears now to our biosynthesis program. As you've seen from our news flow, we also had a very busy and productive quarter with our biosynthesis. To recap some of these highlights, in September, we converted our provisional patent to a PCT patent filing for 'Metabolic Engineering of bacterium E. coli for cannabinoid products'. We also announced that the University of British Columbia or UBC, our research partner received a grant from the prestigious Natural Sciences and Engineering Research Council of Canada or NSERC for our collaborative efforts in the biosynthesis of cannabinoids. In October, we had announced entering into a development agreement with the National Research Council of Canada or NRC in Montreal for the bio-fermentation development and scale-up processes for cannabinoid biosynthesis in E. coli. Since then we have initiated our technology transfer from UBC to the NRC. A quick word on the NRC for those who are not familiar with that organization; the NRC is a well-regarded governmental entity that has extensive experience in bio-fermentation for drug manufacturing. We conducted a due diligence on their dedicated state-of-the-art facility in Montreal, and we met with their scientific team. We were highly impressed with their facility as well as the knowledge base as it pertains to the overall development plan for our biosynthesis program. In the near-term, NRC will help InMed define and optimize specific fermentation parameters using a bioreactor system to improve biomass, cannabinoid synthase expression, and functional cannabinoid production. This agreement with the NRC is a significant milestone on our path to biosynthesize cannabinoids on a commercial scale. Beyond InMed's internal needs for a supply of cannabinoids, we believe that our technology will benefit other pharmaceutical companies that are looking for a commercial partnership or licensing of pharmaceutical grade cannabinoids for their specific R&D purposes as well as other non-pharmaceutical companies with the need for high quality cannabinoids for their products intended for other markets. This could provide InMed with incremental revenue opportunities ahead of our clinical development candidates. Finally, during the quarter, we signed a master service agreement with an unnamed contract development and manufacturing organization that will be working on the downstream processing and purification processes for our biosynthesis production platform. So with the biosynthesis program, over the next several months, we will be focusing on first completing the technology transfer and fermentation optimization with the National Research Council; and secondly, the anticipated filing of additional provisional patent applications to further protect the commercial potential for this technology. I'd now like to turn the call over to our CFO, Jeff Charpentier, for a review of our financials. Jeff?

Thanks, Eric, and thank you all for joining the call. As a Canadian-based and regulated company, I'll remind you that the figures that I will present in today's call are expressed in Canadian dollars. For the three months ended September 30, 2018, which is the first quarter of our 2019 fiscal year, we recorded a loss of CAD2.8 million or CAD0.02 per share. And this compares with a net loss of CAD1.8 million or CAD0.01 per share for the three months ended September 30, 2017. R&D expenses were 627,000 for the three months ended September 30, 2018 compared with 377,000 for the comparable quarter in 2017. A substantial increase in R&D expenses in 2018 was primarily due to a general increase in spend with external contractors for expenditures related to the advancement of INM-750 for the treatment for EB and for our biosynthesis program, as well as higher R&D personnel compensation as a result of increased staffing. G&A expenses totaled 813,000 for the three months ended September 30, compared with 841,000 for the same three months in 2017. The modest decrease during the quarter versus last year was driven by a substantial decrease in spending on Investor Relations activities that was partially offset by higher personnel compensation as a result of increased staffing. The vast majority of the million dollar increase in a loss for the first quarter 2019 compared to Q1 in fiscal 2018 is attributable to an CAD850,000 increase in share based payments. As our stock price rose during fiscal 2018, the value associated with stock option grants rose in parallel, which has given rise to this increase as those stock option grants are expensed over their typical two-year vesting period. As a reminder, these share based payments are a non-cash expense. Shifting now to our balance sheet, at September 30, 2018, our current assets which is primarily the sum product of our cash, cash equivalence and short-term investments was CAD25.0 million, a modest decrease relative to the current assets of CAD26.7 million at June 2018. This decrease was the byproduct of a CAD1.7 million cash outflow from operating activities during the quarter. At September 30, 2018, our issued and outstanding shares totaled approximately CAD171 million and CAD221 million on a fully diluted basis both of which were unchanged from the last quarter. Based on the funds available at that September 30, 2018, the company currently estimates that it has cash resources until at least the second half of calendar year, 2020, which is consistent with our guidance from last quarter. We anticipate that our current resources will fund a significant increase in R&D spend to continue development of our R&D programs including the preclinical and early clinical program for INM-750 and further scale-up of the biosynthesis program among other R&D activities. With that, I'd now like to turn the call back over to the Operator, Sylvie for a questions-and-answer session. Sylvie?

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Hi guys, thanks for taking my question. I was just wondering, what steps are remaining to get INM-750 into clinical trials?

Yes, I'll take that one, thanks, Max. Number of steps that we'll be going through over the course of the next several months to prepare for clinical trials on a CMC standpoint, so the chemistry and manufacturing and control component, we need to identify who is going to manufacture the clinical trial materials and that's an ongoing effort now. They're going to have to manufacture that to our standards and there'll be all the quality testing that's wrapped around that. From a preclinical requirement in terms of the different types of studies we need to look at, we have five additional in vivo studies to look at the toxicity of using this topical cream. They're all planned, they're all scheduled, some of them are actually ongoing, and we have eight additional in-vivo safety pharmacology, toxicology studies, where we will be looking at the systemic toxicity. So even while this is a topical cream, what we do is we dose very heavily systemically just to test for any toxicology. Even though we doubt that we'll ever achieve those levels internally, we still need to test for those. From a clinical standpoint, we're in the process of selecting our clinical research organization to conduct the study or studies in Phase 1. We are developing the protocols or the draft protocols and data collection tools in terms of things like case report forms. And of course, we're going to have to get ethical approval from the sites where we're going to be conducting those. And as I mentioned earlier, from a regulatory standpoint, we're on track to meet with Health Canada as well as the USFDA in the first half of 2019 to discuss all the stuff that we've outlined above. So we'll go in with the hard data analysis as well as a draft for what we think the next steps need to be and that will then all dovetail into us conducting our first clinical trials in the second half of 2019.

Great. Thank you so much for all that info. I just have one more question. I mean, you talked about -- a little bit about the mechanisms of the two components of INM-750, I was wondering if you could give any additional insight on just kind of what the mechanism exactly would be for each component?

Yes, well, it's a really interesting class of compounds and if you look at the class of cannabinoids in general, while they're structurally related and can be derived from a certain set of precursors, they actually have very different activities in the human body and that's kind of what InMed is all about, is trying to evaluate what those individual contributions are towards treating diseases and then finding the right ones to treat specific diseases. So in the two components that we're using in INM-750, you know, we want to really achieve a suite of effects that can benefit the patient, number one, from a symptomatic standpoint that includes things like accelerating the wound healing, reducing pain, reducing itch, reducing inflammation, and also providing some degree of antibacterial coverage. So that's from a symptoms standpoint. On the potential to treat the underlying disease, we want to upregulate a keratin that may be able to compensate for the malformed keratin that is kind of at the root of EB Simplex. It turns out that some cannabinoids do several of these things. So there may be some overlap, but there are areas where one cannabinoid will do one important component whereas another one will do a different one and the best example is one cannabinoid upregulates the keratins whereas the other one doesn't have much of an effect there. So we're targeting to bring together the two that we believe can provide the best suite of activity, not only from a symptom standpoint, but also from the disease treatment standpoint.

Great. That was very helpful. Thanks for taking my question.

Sure.

Thank you. Next question will be from Rahul Sarakesar at Paradigm Capital. Please go ahead.

Good afternoon gentleman, thank you very much for taking my question. Oh, I guess, it's still morning on the West Coast. So my first question really is around the biosynthesis project, so Eric, you referred to a master services agreement with a group for downstream processing. My understanding was that you already had developed all the downstream processing for the [indiscernible] provide a little more color on the necessity for this project?

Oh, sure. Well, everything that we've done to date has been at the university laboratory and as you go through to manufacturing pharmaceutical grade active ingredients, you need to have all of this scaled up to large-scale and you need to have everything validated and you need to prepare your drug master file, which becomes an integral part of your application to commercialize these products. So while we understand what those processes are they still have to be conducted at large-scale using full-scale equipment and processes that have been validated. So really that's the nature of this second agreement for the downstream processing. I think we have a very strong idea as to what needs to happen, but until you do it at a large-scale and validate everything, you can't seek commercial approval for those. So that's really the nature of that relationship.

Okay. So I'm a little bit confused because I was given to understand that the NRC project was really about scale-up and that is distinguished from downstream processing where you're essentially still engineering the bottom end of the process of E.coli making the cannabinoids. So maybe could you distinguish between the two?

Oh, certainly, sorry, yes, yes.

Thank you.

Yes, sorry. So we look at this as kind of three different components to manufacturing. The first one is the genetic modification of the E.coli. That work has been conducted with our partners at UBC, University of British Columbia and that work will be ongoing as we learn the genetic sequencing needed to make a whole variety of different cannabinoids. We've made several today. We're going to continue to investigate how to structure the gene to make several more. So that's the first part. The second part then is you take the E.coli, and you put it into a fermentation tank. And there is a whole set of parameters that need that need to be optimized in order to optimize your yield. So, things like how long is it in the tank, what temperature, how much oxygen you put through the tank, how frequently you stir it, these kinds of things. So what's what we call the upstream components of manufacturing is the actual fermentation in the tank of the E. coli. Once that's complete, you need to take that broth, if I can use that term, and you need to separate out your drugs from everything else that's in the broth, that's the downstream component. And so that's what this additional partner is focusing on, is now the separation of the cannabinoids out of the broth. So they're already manufactured, there's no more cannabinoid assembly going on, you just have to now separate it out and purify it into a pure cannabinoid.

Great. That's very helpful. Thank you for clarifying that.

Sure.

And then I guess my one last question is probably more for Jeff, is I guess one thing that did sort of stand out in the financial statements was the escalation in the share-based payments almost tripling between last year and this year. Are you able to provide a little more color? And that'll be my last question. Thanks.

Yes, so what's getting expense are -- relates to stock option grants. And then it gets expensed over time. So, the vast majority of options being expensed in this quarter were granted in fiscal 2018. During fiscal 2018, we had a significant move upwards in our stock price. And as options were granted and effectively priced during fiscal 2018, the values associated with those stock grants were higher than they were in prior periods when our stock price was at a much reduced level. So it's not an increase in the number of options granted, it's really an increase in using the Black-Scholes option pricing model, the value associated with those option grants. So, as those option grants that arose during fiscal 2018 are now being expensed over the subsequent, sort of, two-year period, that's really what's driving that increase in the option expense. And as I mentioned in my earlier comments, that's virtually all of year or quarter-over-quarter loss from fiscal 2017 to this current quarter is as a result of the increase in that share-based payment number.

Great, that's very helpful. Thank you, Jeff. And that's all for me. Thank you.

Thank you.

Thank you. Next question will be from Esther Rajavelu at Oppenheimer. Please go ahead.

Hi, there. Thank you for taking my question, I have two. Wanted to understand the IND processes for Health Canada versus the FDA, how different are they? And would you need to be doing things differently with each organization?

Yes. So I'm not a regulatory expert, but I can say that the processes are very similar, they're not identical. That a lot of the information that will go into the package for one will go into the package for the other. Luckily, we have an expert on staff who's done multiple IND as well as CTA filings, and so she's spearheading that. And so there's a lot of overlap, but they're not identical. Does that help answer your question, that's best I can right now.

Yes. No, that's helpful. And then can you, taking a step back maybe, can you talk a little bit about the broader cannabinoid space and kind of the strategic considerations as you're heading into 2019?

Sure. We've been very transparent about what we think our game plan needs to be. It's, at this point, kind of two components. One is to scale up the biosynthesis process so that we can provide cannabinoids for our own research and our own products going forward. And there may be additional benefits in that program, including licensing agreements with other pharmaceutical companies that need access to various cannabinoids that they can't otherwise get. And the secondly, it's our drug development pipeline. And of course INM-750 is the lead there, that'll be the first into humans. And then we have backup Canada just behind those. From a licensing standpoint with other pharmaceutical groups, from a strategic standpoint, again the making available individual cannabinoids is kind of one potential licensing model. And the other one then is licensing out our individual drug development programs. I don't think we're at that stage yet. I think for EB, which is something that if we choose to, we could self-commercialize, it wouldn't be a large commercial effort, it will be a very focused one, but we would probably want to second Phase 2 data before we could properly value that asset and get the maximum return. For things like glaucoma and pain, which are the next ones in the pipeline, we might entertain something even earlier than that, more of a development partnership to move those assets along. So, does that answer your question?

Yes, that's helpful. Thank you.

Okay.

That's all I have.

Thank you.

Thank you. At this time, Ladies and gentlemen, I would like to turn the call back over to Mr. Blacher. Please go ahead.

Thank you everybody so much for joining. If you have any additional questions or comments, please feel free to reach directly back to me. And have a great day.

Thank you, sir. Ladies and gentlemen, this does indeed concludes the conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.