InMed Pharmaceuticals Inc. (INM) Q3 2019 Earnings Report, Transcript and Summary

Good morning my name is Sylvia and I will be your conference operator today. At this time I would like to welcome everyone to InMed's Third Quarter Fiscal 2019 Financial Results Business Update. [Operator Instructions]. I would like to turn the call over to Josh Blacher, Chief Business Officer. You may now begin.

Thank you, Sylvia. Good day ladies and gentlemen. My name is Josh Blacher, InMed's Chief Business Officer. Welcome to InMed's Third Quarter Fiscal 2019 financial results and business update conference call. Before we began, 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, Jeff Charpentier, our CFO will then review the financial results of operations. Following that we will be available for questions and answer sessions. Joining us to address your questions today will also be Alexandra Mancini, our Senior Vice President of Clinical and Regulatory Affairs. Please be advised that certain statements in the following conference, call recordings, 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 facts 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 documents and recent press releases. InMed does not undertake any obligation to update any forward looking statements made during this call. I would now like to turn the call over to President and CEO, Eric Adams. Eric.

Thanks, Josh, and good day to everyone. We appreciate you joining us today for our quarterly conference call. I'd like to open today's call with an update on our INM-755 program for the treatment of Epidermolysis Bullosa or EB. As you may recall, earlier in the year, we announced the transition of our EB program to a single cannabinoid formulation rather than a two cannabinoid approach. This new single cannabinoid product is referred to as INM-755. Our decision to move forward into clinical development with INM-755 was entirely data driven. In particular, based on our numerous preclinical investigations, we determine that by increasing the concentration of one cannabinoid, we were able to obviate the need for the second cannabinoid when measuring the overall effect that the compounds were having in each preclinical model. In addition, the selected cannabinoid had an important effect in the upregulation of the targeted keratin for impacting the underlying disease in EB simplex, which is the largest subset of EB patients. INM-755 will be developed based on its potential to provide symptomatic benefit for all EB patients and possibly improve skin integrity in a subset of EB simplex patients through this keratin upregulation. Moreover, we believe that pursuing a single agent formulation rather than a combination product will ultimately improve the probability of development and regulatory success in this complex and rare disease. With regard to the targeted symptom relief, we're focused on four main areas, itch, pain, inflammation and chronic wounds. We believe that symptom relief alone would serve as a strong backbone for a successful commercial product. While the symptom relief is important, we're also highly encouraged by the possibility of 755 hoping to reestablish the integrity of the skin. As we discussed in the past, all EB simplex patients suffer from a misregulation of certain keratins which triggers the core anchorage between the dermis and the epidermis, and thereby serves as the underlying cause of the extensive blistering and open wounds. As you know, unlike a number of other competitors in the EB space, we are not a gene therapy company and therefore, our scientific mode of action does not attempt to mend the damaged keratins rather INM-755 targets the upregulation of a compensatory keratin, which we believe has the potential to mitigate the damage caused by one of the misregulated keratins. To that end, we have generated and replicated compelling preclinical data demonstrating that the specific cannabinoid in our INM-755 formulation up regulates this compensatory keratin. So in summary, the aim of INM-755 is not only to treat the symptoms of the disease, but actually we establish a higher degree of integrity in the skin itself. In preparation for our forthcoming Phase 1 trials, InMed is currently coordinating the execution of over 10 additional preclinical studies in toxicology and safety pharmacology. Turning to the human clinical trials, our proposed Phase 1 study will have two parts. In the first cohort of patients, we will evaluate the safety, tolerability and pharmacogenetics of INM-755 cream and healthy volunteers with normal intact skin. The volunteers will have cream applied once daily for 14 days. In the second cohort of healthy volunteers, we will test the local safety and tolerability of applying INM-755 755 cream to small wounds once daily for seven days. Both parts of the Phase 1 study will be conducted with two different drug concentrations. We currently expect that our regulatory application seeking permission to initiate clinical trials will be submitted in the second half of calendar 2019 with the initiation of the Phase 1 study to begin soon as soon as possible thereafter. Before I review our advancements with the biosynthesis program, I first like to address how InMed's program significantly differentiated from our competitors and in our estimation significantly more advanced. There seems to be a new entrance into the biosynthesis space just about every month with several in this last year alone, most if not all of these are utilizing yeast as the host organism for cannabinoid production. Further most if not all, our freshly minted startups that see a big future for themselves in and manufacturing CBD for the recreational and non-healthcare opportunities rather than building a pharmaceutical business based on the science of minor cannabinoids. So how are we different? I'll segment by answering the five primary areas. First the host, early on, we were agnostic as to whether to use yeast or bacteria to produce cannabinoids. Based on early R&D we determined that E. coli may be beneficial in terms of both yield as well as the range of cannabinoids that can be made with this system. Based on recently published results, I would have to estimate that there may be no difference in yield between the two systems, a recent publication by Lou [ph] and others, The Journal Nature cited cannabinoid production levels in yeast that mimic what InMed announced over 1.5 years ago, so there seems to be a trend towards equivalency in yields. However, we remain confident that our E. coli will also be robust and functional in producing a wide range of cannabinoids. Second, experience in our IP position. We've been working over the last four years to optimize the gene sequencing needed to over express to the highest degree possible, the amount of cannabinoid that comes out of bacteria. It has been an arduous process, and has led to the filing of three families of patent applications. This discovery process is a path that in all likelihood, these newer companies will also have to venture down. So we have a significant headstart, we have a strong patent position in bacterial expression, and these new entrants will have to contend with several issued patents that already exist in the yeast space. Third, the chemistry manufacturer and control, InMed has assembled a team of highly experienced executives who have decades of know how in pharmaceutical manufacturing preferring [ph] small and large molecules, fermentation, extraction and purification. We understand the importance of these variables necessary to successfully manufacturer pharmaceutical drugs. Fourth is the process, when you enter the manufacturing scale up phase, E. coli is far superior to yeast in terms of ease of manufacturing and time spent in fermentation clean rooms, both resulting in significant cost reductions. So if your sole intention is to compete on cost using a yeast system, you will have a massive yield advantage which doesn't seem to be the case, at least based on the published data that we've seen. So to my knowledge, InMed is the only company engaged in a scale up of a process towards commercial scale. Finally the R&D, we continue to pursue all avenues to manufacturing low cost pharmaceutical grade cannabinoids. We are constantly screening new approaches to realize yield improvements and to reduce costs beyond what is recognized as a traditional biosynthesis approach. Our aim is to build a sustainable leadership position in cannabinoid manufacturing. While we've been approached by potential suitors and will certainly entertain such conversations we have a fiduciary responsibility to our shareholders to maximize the value of this proprietary technology. We feel this is best accomplished by retaining all rights and ownership until we have a better understanding of how this franchise can be. We've identified three deal comparables to-date in the biosynthesis space that provide an indication of the increasing value of biosynthesis manufacturing. The first deal was inked eight months ago in September, 2018 when OrganiGram invested an aggregate of $10 million into Hyasynth Biologicals in three tranches. Next also in September, 2018, Cronos put $22 million in R&D Capital and Ginkgo Bioworks. Ginkgo can earn up to $100 million in an earn out by the issuance of stock in Cronos based on milestones, by achieving cost targets that never really been accomplished according to publicly disclosed information, and finally [indiscernible] teamed up in March of this year, while the total bio bucks dollar figure of $300 million plus royalties was quite substantial [indiscernible] thus far only collected on the first milestone of $10 million. So if you just look at the chronological top line trend $10 million, then the $122 million, then $300 million, the valuations in this sector are growing at significant rates. Again, InMed's objective is to build a going concern [ph] business, the value of which we hope will dwarf all of these previously in-house deals. We're not focused on a quick sale that would undervalue our significant advancements in this field. What's more, and as I mentioned earlier, we sincerely believe that we are ahead of the competition in reaching commercial scale. So at this point, InMed retains full ownership of its technology with only a very small royalty going to our partner, UBC. But let's take a second and jump to the science. During the quarter as we mentioned in the press release, we completed a number of important milestones and made meaningful advances on several others. I'll just highlight a few. First, we completed the technology transfer from our partners at the University of British Columbia, to the National Research Council Canada, successfully converting precursors into a specific cannabinoid using the appropriate DNA plasmid construct in E. coli. Following tech transfer, we will initiate optimization of fermentation parameters with the purpose of increasing production yield. Second, we initiated downstream process activities involving purification of cannabinoids from the fermented material at a GMP ready contract development and manufacturing operations. Over the next several months, we plan to develop a suitable process to eliminate impurities during the fermentation resulting in highly pure cannabinoids. Finally, we published the first in a series of pending patent applications directed to the company's biosynthesis platform technology for the manufacturing of pharmaceutical grade cannabinoids. This patent addresses the enablement and maximization of cannabinoid production through optimization of the precursor substrate needed to support specific cannabinoid synthesis. This application, as well as two more recently filed U.S. provisional patent applications cover various elements required to enable functional cannabinoid synthase production in an E. coli system. Securing strong IP is paramount to building a successful biotech company. So you can expect to see more of this in the future. Also, in the near term, we expect to complete the fermentation optimization initiative, fermentation scale up to higher quantities and the downstream purification process towards commercial scale. Finally we will continue to pursue various avenues to maximize the yields, and to lower the cost of cannabinoid manufacturing by exploring all available technologies to support our effort. I would now like to turn the call over to our CFO, Jeff Charpentier for a review of our financials. Jeff.

Thank you, Eric. And thank you all for joining the call today. As a Canadian based and regulated company, I remind you that the figures I will present in today's call are expressed in Canadian dollars. Please also note that the complete financial statements and MD&A are now available on our website under the tab investors For the three months ended March 31, 2019 which is the third quarter of our 2019 fiscal year, we recorded a comprehensive net loss of 3.5 million or $0.02 per share. This compares with a comprehensive net loss of about 2.1 million or $0.01 per share for the three months ended March 2018 R&D expenses were 1.6 million for the three months ended March 2019, compared with $555,000 for the three months ended March, 2018. This substantial increase in R&D expenses in 2019 was primarily due to increase spending on research supplies for the purchase of the active pharmaceutical ingredient to be used in the clinical trial for INM-755 and due to higher spending with external contracts. There's for work associated with preclinical studies for INM-755 required for the regulatory application to initiative clinical trials in the second half of calendar 2019. In addition, there was also higher spending for our biosynthesis program and higher R&D personnel compensation as a result of increased R&D staffing. G&A expenses total $989,000 for the three months ended March, 2019, compared with $815,000 for the three months ended March, 2018. The increase during the quarter versus last year was driven by higher G&A personnel compensation as a result of increased G&A staffing to support our overall growth. It's important to note that the comprehensive loss of 3.5 million during the quarter $920,000 was attributable to non-cash expenses, the vast majority of which was attributable to share based payments related to stock options. Shifting now to our balance sheet. At March 31, 2019 our current assets which is primary the sum product of our cash, cash equivalents and short term investments, was 21.1 million, which compares to current assets of 23.4 million at December 31, 2018. This decrease in the last quarter was the byproduct of 2.8 million cash outflow from operating activities, less $200,000 in proceeds from the exercise of stock options during the third quarter of fiscal 2019. At March 31, 2019 our issued an outstanding shares totaled approximately 172 million, a slight uptick from last quarter due to options that were exercised by a former employee and 223 million on a fully diluted basis. Our weighted average shares issued and outstanding during the third quarter which serves as the basis of our EPS calculation was 171 million. Based on the funds available as at March 31, 2019 the company currently estimates that it has cash resources to fund planned operations into 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-755 and further scale up other biosynthesis program amongst other R&D activities. With that I'd now like to turn the call back over to Sylvia for questions and answer session. As a reminder, Alexandra Mancini who heads up our INM-755 development program for EB will also be available for questions.

[Operator Instructions]. Your first question will be from Maxim Jacobs at Edison. Please go ahead.

By the way, those were some great opening remarks. You answered a lot of them just through that but noticed that there seems to be a little bit of an acceleration in terms of the timing for the clinical trial initiation like before it was ended this year and now it's more second half. Have you had any interaction or feedback from regulators for the INM-755 program?

Thank you. This is Alexandra Mancini, I will take that question. The timeline hasn't really changed in what we have been stating. We are always talking about the second half of this year and in terms of have we spoken with any regulators? Well, initially, we had filed a pre-CTA meeting requests with Health Canada, but that was when we were still considering developing a two cannabinoid product. And now that we've made the decision since we made the decision to focus on a single cannabinoid, it's now a very traditional drug development program, and we don't have any need for a pre-CTA meeting. We don't need to seek any regulatory guidance to submit this application and our first clinical trial will be healthy volunteer trial. So it's pretty straightforward.

And then also just continuing on this program, I was just wondering, have you been looking at any additional indications for it? Like beyond what's already been announced, like glaucoma, etc.

So, yes definitely we're thinking of other indications, the preclinical data we have today is very exciting and we think there will be quite a few opportunities that would be worth exploring and other indications. Having said that, it's premature to state what those indications would be. We have some more homework to do, and the next month to up to a year or so we'll be spending time doing work in in-vivo animal models, to look at the different indications that are of interest to us. We will also be looking at other elements of making that choice such as the extent of unmet medical need and current therapies in those areas. So, there's a lot of work ahead, but it's very exciting time what we've seen pre-clinically, we do think there is a lot of opportunity here and they would not necessarily be orphan indications either.

And then just one last question. What's your best guess for when you will achieve commercial scale for biosynthesis?

Yes, it's just a little premature I think to project what we're going to be doing or when that's going to be ready for commercialization. What we're going to be spending the rest of this year doing is optimizing the fermentation conditions which we call the upstream process and that's through that exercise, we're going to learn a great deal more about the potential amounts of cannabinoids that you can get out of the E. coli system to start with. And then as I mentioned earlier, you have a downstream purification processes, and each individual process leads to a loss of a certain portion of the cannabinoid from your initial fermentation. That's just how those processes work. So we're currently working with our CDMOs, about maximize the amount that we get out of fermentation as well as minimize the downstream loss. And until you actually conduct these steps, using the processes that you would at commercial scale, use a proper GMP controls, as well as the equipment that you would use for large commercial batches. It's really difficult to predict what your overall final yield will be as well as the cost structure. So these are ongoing activities, and we will know a lot more by the end of calendar 2019 and we hope to be able to give better guidance at that time.

Your next question will be from Jerry Isaacson at Roth Capital. Please go ahead.

So the first thing I'd like to talk about the 755 program. It's nice to see the progress being made on moving to Phase 1. Wonder if you can talk a little bit about what Phase 2 might look like. And also, you know, what might be some other indications that would be enabled by the Phase 1 trial that's going to be completed?

We'll start with the Phase 2 trial question. So the healthy volunteer study will be focused, that's our first study, that will be focused on both intact skin and also small open wounds, which is what Eric has already described. So when we get the information from that study we will take it forward to design. The first study in EB patients and in EB patients, it's important to be able to treat for longer than, you know, 14 days or 7 days. So our current toxicology program that we are designing, it will allow us to treat up to 28 days in that first EB study. That means that that study will be viewed as a Phase 1/2 study from the get go. We'll be looking at traditional safety and local tolerability endpoints, a traditional Phase 1 thing but we will also be looking at preliminary efficacy to the extent we can in a small population. And then your question about the -- your second question was about leading off into other indications from our Phase 1 healthy volunteer study. And yes, so we're looking at intact and wounded skin so that would give us the primary safety data and PK data from a topical application on intact scan. We would be able to therefore go forward into other indications, other dermatologic indications for keeping the same route of administration and the same concentrations that we have tested in the Phase 1 study as long as we stick to those parameters, we would be able to go into other indications. We wouldn't have to repeat a Phase 1. Does that answer your question?

Yes, thanks. I appreciate that. So you know, another thing I'm thinking about here looking at 755 program is of course, there's a lot of different types of cannabinoid, especially CBD products available over the counter. And I wonder if you can compare, you know, the idea of going and finding a topical CBD as opposed to what's going on with 755.

Well, we certainly we screened a lot of cannabinoids before we've made our decision, as to which one to choose. And I think the best way to say it is we did not choose CBD. We see benefits in what we have chosen that go beyond what CBD could provide. So we did not choose it.

Okay. That makes sense. I want to switch over and ask a question about the biosynthesis if I can. So, Eric, one of the things that you mentioned was that, you know, it's unclear, right now, whether you store bacteria is going to be a better vehicle for making these cannabinoids and maybe they might end up being the same. But I wonder if we could just dig down into the science a little bit. And if you could compare and contrast, you know, E. coli versus yeast, prokaryotic versus eukaryotic system and what from a theoretical or scientific point of view, what might be some of the differences or advantages of E. coli?

Unfortunately, I wouldn't be the appropriate person to really address that. I think Eric Sue [ph] who's heading up the biosynthesis program at this point would be the right guy to talk to. I just wouldn't be comfortable delving down into the science, especially with a group of PhDs listening in on the call. So what we'll do is we'll make sure that Eric is available on the next call. And, you know, maybe you can dig a little bit deeper with you guys and explain it on a much more scientific basis.

That's fine. And that makes sense. Maybe though, we can -- maybe you can talk a little bit more about that you made a statement that it looks like yeast and E. coli could be equivalent. What's the basis for that statement at this point?

Sure. Well, recently there was a publication in Nature that came out that caused quite a bit of hubbub of people using yeast to produce cannabinoids and if you read that paper closely, it talks about the yields that they're able to achieve in that system. And it was widely cited as you know, proof of concept kind of across the board that yeast is viable from a yield standpoint. I was just pointing out that the yields that they cited in that publication is basically the same yield that we cited a 1.5 ago and in our own publication. So there's probably a convergence to some degree in terms of what the yields are likely to be in the two systems. But what I also pointed out is that from a cost standpoint, the yield would have to be massively higher for yeast in order to have the same kind of cost basis of what a E. coli system could do, simply based on the amount of fermentation time that it takes. One of the single most expensive aspects of fermenting these are manufacturing cannabinoids using biosynthesis is how much time you spend in the clean room fermenting the product. It's incredibly expensive to actually begin the clean room and E. coli is twice as fast as yeast so you're going to have a massive yield advantage with yeast in order to compete.

Okay, that makes sense. Eric, I wonder if you could also just talk a little bit more about, you know, dig into some more of the details of the patent that you recently published in and give me an idea. Do you think that you -- are you pretty confident that you will be owning the hopefully the potential for E. coli synthesis of cannabinoids?

Yes, I mean that, you know, patents are, you know, you can always find a way around them, I guess, what we try to do when we design our patents is to capture as much of a space as possible, so that at the end of the day, if you want to use E. coli in an efficient manner to manufacturer to cannabinoids you're going to have a hard time doing it without accessing our patent. You know, basically, what we've done is we filed three different families of patents at this point with more to come and one of them is actually PCP, the other two provisionals. But basically the way that you sequence the gene and a few other things that lead to efficient cannabinoid production in E. coli that's really what we're trying to capture from an IP perspective and we think we've done so effectively.

So I just had a question for Jeff, as well. You started to talk -- you mentioned a little bit about R&D expenses and how -- what we might be looking at going forward. And I know you're not offering any specific guidance, but I wonder if you could just speak to potential increase in R&D expenses as these clinical trials and other you know, before the biosynthesis work ramps up?

Just in terms of our guidance, I guess we're at this stage before we're just comfortable giving the very sort of top line guidance in terms of our the cash we had at the end of the quarter of 21 million plus sort of in that ballpark that's going to be fund our operations with what I would just call a significant increase in R&D spend being the primary, but that'll fund our operations into the second half of calendar 2020.

[Operator Instructions]. At this time, I would like to turn the call back to Mr. Blacher.

Thanks so much, Sylvia. There were a couple of questions that came in via email from some of our analysts and investors who couldn't be on the call. But I would like to address them at this point. There were two in particular, the first one asked at what point will the unnamed partner be publicly revealed? From a timeline perspective, can you give us an idea of when we can expect this to happen? We believe that this question refers to master service agreement we signed with a GMP contract, development and manufacturing organization as CDMO that will be working on the downstream processing and purification for our biosynthesis process. It's a contractual obligation they wished on their behalf, for reasons that we are not privy to. However, rest assured the CDMO is very well established GMP manufacturing entity which we have had a long term relationship, and they are exceptionally well qualified in credentials. Furthermore, it's important to note that we have maintained all of the rights to this and all of the economics remain squarely with InMed. The second written question was, at what point does InMed plan to take purchase orders and generate revenues based on where things stand today? So there again, it's really way too early to make any determination quite yet. As we've discussed our key milestones in the biosynthesis program is having in-depth clarity of the manufacturing yields and costs by the end of the year. Once we have a better understanding of this we will be able to provide further guidance for the next steps for the program as well as business opportunities. Operator, are there any more questions in the queue?

No, sir. So at this time, I would like to turn the call back over to Mr. Adams.

Great. Well, thank you very much, everyone. We really appreciate you taking time to listen in today to our quarterly update. I think we're on a really good track right now. It's really come down to execution which is going really well. We've got an amazing team in place and we're always going to hit hurdles, but having the right team in place, it's amazing how quickly we can find ways around to continue on our path. So we think we have a really bright future and going into the second half of this year and into next year, when we will actually turn the quarter from being a preclinical company to a clinical phase company, as well as making some advancements with our other indications, which we haven't really talked today about but we'll give additional guidance at later calls. But I think company is really well positioned, and we're kind of firing on all pistons right now. So, again, thank you very much for taking the time and we look forward to speaking with everyone again in three months.

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