Kamada Ltd. (KMDA) Q2 2020 Earnings Report, Transcript and Summary

Welcome to the Kamada Limited Second Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will an opportunity to ask questions. [Operator Instructions] I'd now like to turn the conference over to Troy Williams of LifeSci Advisors. Please go ahead.

Thank you, and good morning, everyone. This is Troy Williams of LifeSci Advisors. Thank you all for participating in today's call. Joining me from Kamada are Amir London, Chief Executive Officer; and Chaime Orlev, Chief Financial Officer. Earlier this morning, Kamada announced financial results for the three and six months ended June 30, 2020. If you have not received this news release, please go to the Investors page of the company's website at www.kamada.com. Before we begin, I'd like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Kamada. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, the company's Forms 20-F and 6-K, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 12, 2020. Kamada undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, it is my pleasure to turn the call over to Amir London, CEO. Amir?

Thank you, Troy. My thanks also to our investors and analysts for your interest in Kamada and for participating in today's call. I hope you all are keeping safe and healthy in these challenging times. Let me begin by discussing the significant progress we have achieved in the development of our plasma-derived immunoglobulin product as a potential therapy for COVID-19 disease. Following our announcement in June of being the first company globally with an availability of a COVID-19 IgG product for compassionate-use treatment in Israel, earlier this week we announced initiation of a Phase 1/2 clinical study in Israel. This is an open-label, single-arm multicenter study to assess the safety, pharmacokinetics and pharmacodynamics of our IgG product in 12 hospitalized non-ventilated COVID-19 patients with pneumonia. Our product has also been evaluated for SARS-CoV-2 neutralization activity, and the preliminary results are highly encouraging and suggest potential high neutralization titer. Lastly, we intend to further explore the potential of our IgG product to prevent COVID-19 disease in healthy subjects at risk in a separate study. We are very excited with this meaningful progress, and we believe our product has the potential to be an effective treatment for hospitalized, non-ventilated COVID-19 patients with pneumonia, and we look forward to the results of this trial later this year. As a reminder, this milestone is part of our global collaboration agreement established in April 2020 with Kedrion Biopharma for the development, manufacturing and distribution of our IgG product as a potential treatment for COVID-19 patients. Pursuant to the collaboration between the two companies, Kedrion is responsible for the collection of COVID-19 convalescent plasma from U.S. recovered patients. Kedrion is already collecting the plasma through its plasma business unit, KEDPlasma, at 23 FDA approved centers across the United States. We intend to expand our COVID-19 clinical development program to the U.S. and plan to conduct a pre-IND meeting with the U.S. FDA during the current quarter in order to obtain FDA acceptance for proposed clinical development program. If FDA clearance of the IND is received, Kamada and Kedrion intend to initiate the clinical program in the U.S. in early 2021. Moving on, I'd like to report that we are accelerating our commercial and business development efforts, and we are working to mitigate the effect of the planned transition of GLASSIA manufacturing to Takeda during 2021. I am optimistic that our organic commercial growth, as well as additional business development opportunities funded by our strong cash position will result in resumed revenue and profitability growth beginning in 2023. As a reminder, we anticipate revenues of approximately $65 million from sales of GLASSIA to Takeda this year, and in the range of $25 million to $50 million in 2021 based on Takeda supply needs. In addition, based on the agreement between the companies, upon the initiation of sales of GLASSIA manufactured by Takeda will receive royalty payments from Takeda at the rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually for each of the years from 2022 to 2040. In addition to GLASSIA contribution, we expect Kedrion’s revenue in U.S. market share to continue to grow. As a reminder, Kedrion’s U.S. market share increased from approximately 10% in 2018 to approximately 20% in 2019, and it continues to grow. In addition, we anticipate continued strong contribution from our distributed products in Israel, both existing products, as well as new products, which we will be launching in Israel during the next few years. Going forward, we also expect meaningful growth from our existing proprietary IgG product portfolio, as well as GLASSIA in the international markets outside of the U.S. Moreover, the contract manufacturing agreement we signed in late 2019 for an FDA approved commercial stage specialty hyper-immunoglobulin product which is currently in its technology transfer phase is expected to have significant contribution to our plant utilization and growth starting in the beginning of 2023. In addition to all of that, we believe that our leading development program, the IgG product for COVID-19 and the Inhaled AAT, if approved, have substantial market opportunities. Beyond the significant existing internal potential growth catalyst, we intend to utilize our strong balance sheet to identify additional business development opportunities that leverage our expertise and manufacturing capabilities. We are optimistic about the future of our business, and we are confident that our actions will generate significant shareholder value. Let's now turn to the current status of our InnovAATe Phase 3 clinical program for our proprietary Inhaled AAT for the treatment of Alpha-1 Antitrypsin deficiency. As you will recall, we've been recruiting patients into the Phase 3 trial in Europe through February 2020. However, as we said in our last call in March, due to the effect of the COVID-19 pandemic on healthcare systems, recruitment into the study was temporarily halted. I am pleased to report today that recruitment into the study restarted in June. As a reminder, InnovAATe is a randomized, double-blind, placebo-controlled pivotal Phase 3 trial designed to assess the efficacy and safety of Inhaled AAT in patients with Alpha-1 deficiency and moderate lung disease. Up to 250 patients will be randomized one-to-one to receive either Inhaled AAT at the dose of 80 milligrams once daily or placebo of two years of treatment. The primary endpoint of the InnovAATe trial is lung function measured by FEV1. Secondary endpoints include changes in lung density as measured by CT scan, as well as other parameters of disease severity such as additional pulmonary functions, exacerbation rate, and six-minute walk test. Before I turn the call over to Chaime for his review of the second quarter and the first half of 2020 financial review, I’d like to take this opportunity and mention the recent changes in our Board of Directors, which were also announced this morning. First, I'd like to thank Mr. Leon Recanati for his contribution to Kamada as an Investor, Director and Chairman, and office he held for the last seven years. His continued support and contribution to Kamada and to myself personally was invaluable. I believe that Ms. Lilach Asher Topilsky’s nomination as the Kamada’s Chairperson is indicative of FIMI’s confidence in the company's long-term growth prospects market position, corporate strategy and our solid management team. Over the past several months since last appointment to Kamada Board, she's made significant contribution and I congratulate her on her appointment and I look forward to a continued successful cooperation. At the background, the FIMI Opportunity Funds is the leading private equity investor in Israel and is Kamada’s lead shareholder. Lastly, I'm happy to welcome Prof. Ari Shamiss to Kamada’s Board of Director. Ari’s extensive experience as Senior Executive at leading hospitals in Israel will be important in strengthening our business, including our commercial product as well as our clinical pipeline. Prof. Shamiss is a highly respected healthcare authority in Israel and we look forward to his significant contribution to Kamada. With that, I'll now ask Chaime to review our financial results. Chaime?

Thank you, Amir and good day everyone. We continue to be pleased with the momentum in our business, especially in-light of the ongoing operating challenges posted by the COVID-19 pandemic. We demonstrated solid year-over-year top line growth during the first six months of 2020. In the second quarter, total revenues were $33.1 million compared to $35.3 million for the second quarter of 2019. While this represents a decrease of 6% for the first six months of 2020, our total revenues of $66.4 million represented an increase of 7% as compared to the $62.1 billion of total revenues generated in the six months of 2019. It should be noted that in response to challenges in market conditions due to the COVID-19 pandemic, we expedited certain sales at the end of the first quarter of this year, thus shifting them away from the second quarter. Our revenue increase in the first half of 2020 was also driven by 28% year-over-year increase in sale of our distributed products. We expect our distributed products in Israel to continue to be an important driver of our growth prospects. More over longer-term we anticipate that this segment will improve our overall gross margins. The company's business activity and commercial operation were affected by certain COVID-19 pandemic related factors. And the company has taken several actions to ensure its manufacturing plant remains operational with limited disruption to its business continuity, even with the emergency regulation recently reinforced in Israel due to the pandemic. Moreover, to-date we have not seen any meaningful supply shortages in the U.S. market for GLASSIA or KEDRAB and we do not anticipate shortages in the foreseeable future. We also have not seen – more than we expect any significant supply shortages for our distributed product in Israel in the foreseeable future. While the COVID-19 related disruptions had various effects on the company's business activities, commercial operations, revenue and operational expenses, as a result of the actions taken by the company to-date, its overall results of operation for the first six months of 2020 and financial position as of June 30, 2020 were not materially affected. Company expects that its continued actions will allow meeting its annual revenue guidance, however and number of COVID-19 related factors may still have an effect on the company's future financial position and results of operation. With that said, we are reiterating our previously provided full year 2020 revenue guidance of between $132 million and $137 million. Turning to profitability, for the second quarter of 2020 total gross profit was $11.1 million compared to $13.6 million reported in the second quarter of 2019. Proprietary gross margins in the second quarter of 2020 were 43%, down three percentage points as compared to the second quarter of 2019. This decrease is in line with our previous guidance of an annual three percentage point to five percentage point decrease which is attributable to a change in sale product mix and reduced plant utilization. The difference mix is a result of inventory management by our distributors and timing of our product shipments. Similar influence also impacted the distribution segment profitability in this quarter. For the first half of this year, our total gross profit was $22.6 million and gross margins were 34%, this compares to $24.8 million of total gross profit and 40% margins in the first half of 2019. Operating expenses, including research and development, sales and marketing, G&A as well as other expenses totaled $7.1 million in the second quarter of 2020 as compared to $7.2 million in the second quarter of 2019. For the first half of the year, these costs totaled $13.7 million compared to the $13.2 million in the first half of 2019. The COVID-19 related delay in enrollment in the company's pivotal Phase 3 InnovAATe clinical trial resulted in lower than expected increase in research and development expenses. As Amir noted, enrollment in this trial has now resumed and we would expect our operating expenses to increase accordingly over the second half of 2020. Our original guidance for annual research and development expense was for an expected 20% to 25% increase. Given the delay mentioned earlier, we currently expect 15% to 17% increase for full-year 2020 as compared to 2019. Moving on, net income was 3.5 million or $0.08 per share in the second quarter of 2020 as compared to net income of 6.1 million or $0.15 per share in the second quarter of 2019. For the six months of 2020, net income was 8.7 million or $0.20 per share as compared to income of 11.1 million or $0.27 per share in the six months of 2019. During the second quarter and first half of 2020, we continue to generate cash from operating activities and we maintain a strong balance sheet with a total of 104.7 million of cash, cash equivalents and short-term investments as of June 30, 2020, as compared to 73.9 million at December 31, 2019. Part of the increase is related to the $25 million private placement with the FIMI Opportunity Fund closed earlier this year. That concludes our prepared remarks. We will now open the call for questions. Operator?

Thank you. [Operator Instructions] The first question is from Raj Denhoy of Jefferies. Please go ahead.

Hi, good morning. I wonder if maybe I could start with some of the reports during the quarter of the compassionate use of a plasma product from you guys in Israel to treat COVID patients. Anything you can offer anecdotally about the use so far in what you're seeing with the product.

Hi Raj, thank you for the question. Thank you for joining the call. There were few treatments of compassionate use, the procedure in Israel is that the approval for compassionate use treatment goes between the medical center and the treating physician and the Minister of Health, for Kamada it is not part of this process. We basically made the product available for the medical centers and they need to apply and get kind of a name patient approval for the treatment. So this is not data that is available to Kamada. The clinical study which was started just recently is sponsored by Kamada. And the data from that study of course will be available and will be shared in due time with the public. As we announced earlier this week, we are encouraged by the neutralization data that we have seen in the different assays that we are performing, and we just need to wait now, not too long before we have the data from the clinical study. Important to mention, the clinical study is for the less severe patients, meaning not the one that got the compassionate use, the compassionate use of given to patients that were severely ill, while the clinical study as we just described is for hospitalized, but not ventilated patients. We believe that that the right population for this type of treatment, we believe that you need to catch those patients. If I can use this term, while they are highly viral, but before their situation worsens significantly in order for the IgG to be effective.

That's helpful. You also mentioned that you're looking at the product as a preventative, a potential preventative to COVID. Is there anything you could offer in terms of what that looks like? Is that a separate trial entirely? Or how do we think about the timing of that?

Yes. So this will be a separate trial. We are now in discussions with the regulators and the KOLs in regards to that study. It's going to be the same product while the dosing might be different. We will be testing different doses in order to rate – to get to the optimal dose for preventive or prophylactic treatment compared to sick patients. Now, there are different approaches to that. You may think about the medical staff. You may think about patients or people that were – that are at high risk and have been exposed to a sick COVID patient, like post-exposure prophylactic. You may think about the elderly population. So there are different opportunities, different populations, which potentially meet this criteria, and we are in advanced discussions with different relevant policies on how to design that study and to what population.

That's helpful. And maybe just a couple more. So, Kedrion is your partner you mentioned obviously in the United States collecting plasma for you here. What has been the status of their collection efforts? How successful they had been in actually collecting convalescent plasma? There's been some reports of it being somewhat more difficult perhaps to get supplies. So how is Kedrion fairing?

So there's a good progress in the collection. Kedrion has a large network of plasma collection centers in the U.S. They've put most of those centers – they are included in the collection efforts. This plasma, U.S. plasma will be supplied to Kamada in order for us to initiate also our U.S. clinical program. So the platform we are currently using for the Israeli study is plasma that was collected from convalescent patients in Israel. We moved very fast already in March in terms of walking here with in Israel with the local authorities on defining the path forward collecting, working with the Israeli national blood bank on the collection. And this allowed us, if you may remember in June, to be the first company globally to announce availability of a plasma-derived COVID IgG, and also to be the first globally to initiate a clinical study. So we are very happy with the progress we've been making, and we believe that it's very high potential for a successful treatment for COVID-19 patients.

That's helpful. Maybe just one last one on the quarter. The last couple of quarters now we've seen your distributed product sales being quite strong; crested $10 million this quarter. I think, Chaime, you mentioned it's going to be a continued contributor at a higher rate here. So maybe just some background in terms of what's driving that higher revenue from distributed products over the short-term. I realized there's other things coming longer-term, but I'm more curious about which what's been pushing it recently.

Yes. So over the last few years, we have been expanding our portfolio of distributed product for Israel, and we've been signing quite a lot of new agreement for the Israeli market with different international partners. So some of it is new products that have been registered over the last two years and have been launched into the Israeli market, some of it is an increase in the plasma-derived products, our legacy products like IVIG that we've been selling in Israel for many years. There was additional stocking of IVIG products in Israel by the hospitals because of the pandemic. So this also had some contribution to our second quarter sales. And looking into the future, like you said, we have signed some highly promising encouraging additional agreements, like the one that was signed late last year with Alvotech, and this will be a significant driver to our growth in terms of the biosimilar portfolio. So we are very happy with the progress we're making with the distributed product in Israel, and we are very encouraged by the rate it's growing, also looking into the future 2021 and beyond.

But for the second half of the year, we shouldn't assume it stays above $10 million. There was a little bit of perhaps a higher selling – higher sales this quarter. So maybe it falls back a little bit in the second half, do you think?

Correct. I think you need to stick to what we just said, it’s a reiterating of our fully year projection and we are on track to meet it. We've been telling investors and analysts and over the years, don't judge us by quarter-by-quarter, but look at our annual projection and annual performance. We've been very good in the last few years, giving an annual projection and meeting it and the same applies for this year 2020.

Great. That's helpful. Thank you.

The next question is from Keay Nakae of Chardan. Please go ahead.

Hi. Yes. Thanks for the IgG hyper-immune. What are you measuring for efficacy endpoints in the Phase 1/2 in Israel?

So currently – hi, Keay, how are you? So currently, it's a Phase 1/2 study, of course, we are measuring safety and we are looking also at the PK and PD, pharmacokinetics and pharmacodynamics data. But also being an open-label study, basically we will have data on each and every patient, and we'll be also looking at number of hospital days and when the patient has been hopefully recovered and released from the hospital. But the official endpoints of course are safety and pharma – PK and PD.

So just trying to extend that to the prophylactic use, do you have a sense from the regulatory authorities, what you would need to demonstrate in order for it to be used prophylactically?

Not yet, I can't. Like I answered the previous question, prophylactic or the post-exposure prophylactic is definitely an area or a direction that we are interested in. This is part of the discussion that we are having internally and with the KOLs and with the treating physicians. And we initiated also with authorities in order to have a clear path forward, what will be required in terms of the path forward, the clinical, the medical, the regulatory path forward for potentially approval – future approval of prophylactic treatment. This PK data, things like that and all of this is in discussions.

Are you getting a sense that if you have no safety issues and you can demonstrate some level of antibodies within some I guess relatively short period of time, this protection isn't that long lasting would that be sufficient in your view at least today to have something approved for prophylactic use?

We believe and this is very preliminary, what I'm just saying, this is not I'm putting a disclaimer, now this has not been fully discussed and definitely approved or agreed with the regulators, but potentially having the ability to compare the PK data, the antibodies level of a prophylactic IgG to an active vaccine that will be approved, this could be a potential one way to look at the product. So definitely, when you're looking at healthy individuals it has to do – sometimes it has to do – it has to be some type of PK data because you're not treating sick patients. So this is one of the ways to look at it. Alternatively, that could be a very long study that you are treating patients and then you see who gets sick and who doesn't get sick compared to some type of control group, this is another option. But again, it will depend on how the regulators would like to see such a path and the potential future of the approval.

Okay. That's helpful. Maybe switching to the operations side and the gross margin, how much lower should we expect that the gross margins will trend down to?

So we gave – Chaime do you want to help me here? We gave the projection on…

We've given a projection that three to five percentage points drop in gross margins in the proprietary sector as compared to last year and we still stand behind that guidance.

And last year it was 46%.

Right. So I guess what I'm asking is that for this year or what happens as we kind of roll into the first half of next year?

So we think it's a little bit too early now to give an answer to that. We are expecting feedback from the Takeda later this year in preparation for 2021 for what's going to be their demand. We mentioned it’s going to be between $25 million to $50 million in sales and it depends on when the tech-trans of GLASSIA to Takeda will be completed and when they expect to have the FDA approval, of course will have an impact on our 2021 projection, also a potential impact of the COVID-19 IgG, so there are few items, a few things that need to be cleared between now and end of this year before we can give an educated projection for next year.

Okay. And then just finally for the rabies product, just in terms of the overall market for the rabies product are we seeing any growth there constrained by outdoor activity related to COVID?

So our sales this year, our sales are to Kedrion and they sell it in the U.S. market. So in terms of the in-market sales, we believe that during the COVID outbreak, there have been maybe two or three months of potential slow down of sales due to them, like you said less outdoor activities, but things are ramping up again, now when life in most of the U.S. is returning to normal.

Okay. All right. That's all I have. Thank you.

The next question is from Gadi Hassan[ph] a Private Investor. Please go ahead.

Hi, Amir. And I have a question about the trial that you've just started and I believe you will have data as you enrolling up people and you will know in a few weeks, what is the result. If the result will be despite – do you expect that we can see that you can start the compassionate treatment to get – to do it with payment like you try to sell this treatment, also you don't have any yet an agreement to sell it as the FDA approval or something like that. If you can sell it as a compassionate treatment by payment, before you haven’t begin the phase, whatever you was intended to do next year to start with FDA And, I don't know if it would be, again you have to repeat the Phase 1/2 or you have – maybe you take this result and continue to Phase 2/3 in United States.

Thank you. Thank you, Gadi[ph]. I will first answer the later part of question in regards to the U.S. path forward. So as we said, we are going to hold a pre-IND meeting with FDA in this quarter. So all those issues will be raised and we will discuss as part of that process, and then we'll have better clarity and we will announce what the plan forward in terms of the needed studies. In terms of your question regarding paid compassionate treatment, it's a little bit too early right now to give you an answer for that. It's an option, but we will need to wait for the data and to have the discussions with the relevant authorities before we can provide any feedback about it.

Okay. Thank you very much.

This concludes the question-and-answer session. I would like to turn the call back over to Amir London for any closing remarks.

Thank you very much. In summary, we are pleased with how our business performed in the first half of 2020 especially as the global COVID-19 pandemic persisted. We have an extremely strong balance sheet and the fundamentals of our business are solid. Our IgG product development program for the treatment of COVID-19 continues to advance very fast. In addition, we continue to drive strategic growth from our core business, including GLASSIA, KEDRAB and our distributed products in Israel. We anticipate that our business development activities will have a meaningful role in our future growth and are also very excited about the potential of our InnovAATe pivotal Phase 3 trial for our unique Inhaled AAT program and are encouraged that the enrollment has now been resumed. We remain highly confident in Kamada’s long-term outlook for success. Thank you for joining us in today's call. And we look forward to providing you with further updates on our progress in the coming months. We ask all of you stay healthy and safe. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.