VivoSim Labs, Inc. (VIVS) Q4 2019 Earnings Report, Transcript and Summary

Good day, and welcome to Organovo Holdings, Inc. Fiscal Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steve Kunszabo, Investor Relations. Please go ahead.

Good afternoon, and thanks for joining us. I'd like to welcome you to our fiscal fourth quarter 2019 earnings call. On the call with us this afternoon are CEO, Taylor Crouch; and our CFO, Craig Kussman. Today's call will begin with a discussion of our 2019 fiscal fourth quarter results followed by Q&A. Before I turn things over to Taylor, I'd like to caution all participants that our call this afternoon may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. We're also in the process of completing our audit for fiscal 2019. Accordingly, financial statement amounts discussed on our call today are subject to change upon completion of our audit. We expect to file our 10-K and annual report in the first week of June. With that, let me turn things over to Taylor.

Thanks, Steve, and good afternoon, everyone. We've a lot of ground to cover today as we have updated our clinical development goals for our liver therapeutic tissue program across the board. I'm going to jump right into the changes in our timeline for our first IND submission, the new challenges we have to address in the next 12 months, our key accomplishments and how we move forward. In short, we're pushing our key clinical development milestones out by a few quarters. We need to do more work to optimize our manufacturing processes and complete additional preclinical studies that generate consistent scientific data on the sustained functionality and therapeutic benefits of our liver tissue patch. Our goal is to present data-rich analysis to the FDA as to how we harness this leading-edge capability to impact human disease. Our clinical strategy is expected to focus on initiating our Phase I trial in patients with end-stage liver disease. Subject to favorable outcomes in that trial, we intend to explore the benefits of NovoTissues in one or more inborn errors of metabolism disease areas such as Alpha-1-antitrypsin deficiency. We may also study our product as a bridge to transplant. All of these diseases represent high unmet need areas where we believe our liver patches may provide a meaningful benefit to patients. Based on our current planning, our expected pre-IND meeting with the FDA has shifted to calendar 2020, which also delays the start of our IND-enabling studies. Our IND submission and the first -- and the start of first-in-human trials are now both planned for calendar 2021. To achieve these critical objectives, we're devoting substantially all of our considerable effort and resources to our liver therapeutic tissue program. Let's dive into why we revised our plan and extended our preclinical testing window. Over the past several months, we've launched a large group of animal studies to further evaluate the capabilities of our liver tissue product. This project included experiments that implanted our patch into more than 500 rodents to investigate functionality, viability and surgical placement alternatives. While we made important progress and confirmed previously reported scientific data in some areas, we also concluded that additional development work needs to be done to enhance our manufacturing process and improve the duration and effectiveness of our tissues. The primary challenge we're now facing is that the tissue patches in our latest studies have demonstrated a shorter duration and functionality than we saw in our earlier pilot studies. Specifically, the data from our current animal studies in rodents, which is primarily based on interim analyses, suggest that the human protein output of our bioprinted patches dropped significantly to nominal levels after about 1 month compared with up to 3 months in some of our earlier pilot studies. We've also observed a significant reduction in hepatocytes during this time frame. Despite these observations, we continue to see statistically meaningful reduction in toxic globules in our Alpha-1-antitrypsin rodent model all the way out to 90 days. The reduction of these toxic globules, which are a hallmark of the liver pathology in this disease, is consistent with our pilot studies. However, we need to do more work over the coming months to understand why we are seeing conflicting data and to improve the duration and functionality of our tissues. Bioprinted tissue engineering is at the leading edge of innovation in the regenerative medicine space, and all components and processes matter in creating a durable tissue that mimics key aspects of human biology. The challenges we face are not unique in this sector. In fact, they are very common. And we believe we are uniquely equipped to prepare our tissue platform for the rigors ahead. To recap, we're extending our Chemistry Manufacturing and Controls or CMC development and preclinical testing with the aim of holding a pre-IND meeting with the FDA in calendar 2020. Following FDA feedback on our clinical strategy and manufacturing processes, we then plan to conduct our IND-enabling studies with the goal of an IND submission and the start of first-in-human trials in calendar 2021. I also want to highlight some important accomplishments on our platform. To name just a few, we've demonstrated the ability to deliver multiple patches of varying sizes in our animal models. We've taken early steps to scale up our patch sizes to what we target for human implantation and have begun to evaluate surgical techniques in a large animal study at a leading academic institution. We've explored different application methods for our NovoTissues and have had comparable results using both bioadhesives and sutures. We've successfully engrafted our therapeutic tissue onto fibrotic animal livers, an important step in evaluating the patch's versatility as we consider end-stage liver disease indications. Although definitive IND-enabling toxicology studies have not yet been performed, no adverse effects have been detected to date on liver enzymes or histology in well over 500 animals treated with our liver patches. This is quite important. We continue to advance our operational capabilities to prepare our CMC plans. Assuming successful outcomes in our preclinical trials, our goal will be to implement clinical-scale manufacturing and quality processes well in advance of our first-in-human trials. These steps encompass a wide range of internal functions, including documentation, equipment and facilities optimization, process validation and the adoption of stringent manufacturing controls. And finally, we continue to receive and process donated levers through our partnership with the International Institute for the Advancement of medicine, IIAM. You recall that IIAM is one of the world's leading organizations for the procurement of organs used in medical research and the development of therapeutic applications. Our team of scientists at Samsara have collective experience, processing over 3,000 livers throughout their careers. This industry-leading expertise will serve as well as we continue to isolate and bank human cells and tissue to prepare for our first IND. Before I wrap up, let me provide a quick update on the progress of many -- of our many partnerships at leading academic institutions. We continue to collaborate with organizations around the globe that are conducting proof-of-concept studies in 3D bioprinted tissues research areas, including the kidney, retina and vasculature. An excellent recent example of this work involves expanding our relationship with Professor Melissa Little at the Murdoch Childrens Research Institute in Melbourne, Australia. With support from Stem Cells Australia and CSL Behring, we're working together to develop a 3D bioprinted stem cell-based therapeutic tissue for treating end-stage renal disease. We're proud to partner with these cutting-edge researchers and scientists to develop therapeutic gaps in areas of critical unmet need. In closing, we have a robust work plan ahead of us as we extend our preclinical testing window and continue to refine the timeline for our first IND submission. The clear priority in deploying significant financial and operational resources in the short term is to address these challenges and then to get into the clinic in calendar 2021. I look forward to updating you in the months ahead. With that, I'll turn it over to Craig for a more complete financial review.

Thanks, Taylor, and good afternoon, everyone. I'll start by reviewing our key operating and cash flow metrics for the fiscal fourth quarter and will then summarize our liquidity profile at-the-market or ATM financing activity and future capital requirements. I'll wrap up my comments with a quick recap of our income statement trends. We recorded a fiscal fourth quarter net loss of $7 million, a $0.5 million improvement over the net loss we reported in the year-ago quarter. Similarly, our net cash utilization shrunk to $5.1 million versus $5.7 million in the prior year period. The ongoing progress in these bottom line figures is primarily due to a 10% reduction in total expenses related to lower employee costs. At the end of March, we had a cash and cash equivalents balance of $36.5 million, which included net proceeds of $6.3 million from the issuance of 6.1 million shares of common stock in ATM offerings. Consistent with the strategy we've now outlined for several quarters, we'll continue to use our ATM facility opportunistically to extend the cash runway for the business. We forecast a net cash utilization rate between $20 million and $22 million for fiscal year 2020, which is consistent with our burn rate in fiscal 2019 and also considers the increased R&D spend for our liver therapeutic tissue development program. Overall, along with anticipated ATM usage, we believe we have sufficient funds to meet our operating and capital requirements through our forecasted IND submission in calendar 2021. Moving now to our income statement and focusing first on operating expenses. Research and development expenses were $4.4 million, an 11% year-over-year increase, largely resulting from higher lab supply costs related to preclinical work for our NovoTissues development program. Selling, general and administrative expenses were $3.3 million during the fiscal fourth quarter, a 25% year-over-year reduction primarily due to lower employee costs. As we consider our expense trends over the next 12 months, there are 2 important items I'd like to highlight. First, we're planning for a modestly elevated level in R&D spending as we extend our preclinical testing window and capital challenges Taylor outlined related to the duration and functionality of our liver tissues. Second, we expect to more than offset the R&D expense increase with a meaningful reduction in SG&A costs resulting from the continued streamlining of our infrastructure. On the top line, Organovo posted fiscal fourth quarter total revenue of $0.7 million, which declined 38% from the prior year period. Total year-over-year revenue decreased, primarily due to fewer active contracts for liver tissue research services. It's worth reinforcing that in the short term, substantially all of our financial and operating resources are geared toward achieving the revised clinical development milestones for our implantable liver tissue. As a result, we continue to be increasingly selective about bringing on collaborative, revenue-generating agreements. We'll do so in a measured way where the scientific outcomes are complementary to our key goal of entering the clinic in calendar 2021. In consideration of these decisions, we expect that our revenue will continue to fluctuate and will most likely trend down as we allocate fewer resources to revenue-generating projects. In conclusion, we have a very busy 12 months ahead of us to bolster the scientific data for our liver therapeutic tissue program, with the most immediate goal being a successful pre-IND meeting with the FDA in calendar 2020. We're comfortable with our liquidity position for the next 18 months, and we'll continue to carefully manage our operating expenses. I look forward to sharing our progress over the next several quarters. With that, I'll turn things back to the operator for the Q&A portion of this afternoon's call.

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Ed Arce with H.C. Wainwright.

Thanks for taking my questions. I guess, I'll start, Taylor, with a sort of the crux of this call and why you're pushing back the timelines around the drops in the human protein that you've seen recently in some of those rodent model tests that you've done recently down to nominal levels at just 1 month instead of the 3 months previously. I'm wondering if you could share with us any more detail as to why do you think that's happening and how do you propose to get a handle on improving that back to where it was or perhaps better. And then, I guess, related to that, how does that tie into the manufacturing processes that you are seeking to improve?

Thanks, Ed, and this is Taylor. And clearly, you have a put your finger on the area that we're most closely focusing on at the moment. Just to start with a quick definition, when we refer to viability, we're talking about the ability to characterize the percent of living cells in our product. That's not something that's easily done, if at all, in living animal models. And so we need to come up with proxies for viability, which can be protein outputs, other measures or functional clues as to viability. And all of that requires some state-of-the-art development of measurement, techniques and validation in animals. So part of our work is just focus on -- focusing on getting better at measuring and standardizing around those measurements. That being said, we understand that when we put our human cell-derived patches under the service of rodent livers, this is a very unnatural environment for those patches. They are not receiving typical human growth factor signals or other cues that typically would lead the patches to respond in the ways we would expect to see once we reach humans. And so animal models are never a great translational model for what we're trying to do. And fortunately, the FDA understands that. That said, we certainly are concerned that some of our patches we see exhibiting viability and functionality out to 90 days or beyond, as we reported in the past in our pilot studies, but more recently, many of our patches are losing a significant degree of viability within 1 month of implantation. We believe that the process of manufacturing our patches can improve the starting viability and that the higher the viability we start with, perhaps the better the outcomes in terms of initial and enduring impact in our animals will be. And so what we're going to do is focus on the key steps of our manufacturing process that begin with isolating and nurturing and cryopreserving cells, taking those cells and incorporating them into bioinks and bioprinting, and then ultimately, the care and feeding of those patches up to release into animals. And fortunately, Organovo has a 10-year history leading the field in manufacturing and characterizing and manipulating tissues, and we believe that we will be able to look at each of these steps, tweak some of our processes and collectively result in higher starting viability, which we think should serve us well in our animals. Just as importantly, those processes that we'll be characterizing expanding upon and building upon will create a much stronger data-rich CMC package for submitting to the FDA at our pre-IND meeting. And if we think about -- our primary goal is to get to the best outcomes from our IND filing and to use our pre-IND dress rehearsal, if you will, prudently, ideally going in with the most data that we can bring and the most rigor built around our platform to lead to the best outcomes. And it was really the combination of creating this better dataset, helping to ideally reduce variability, improve marginally or significantly viability and then see that whether that translates to a longer effect in animals. All of this, we believe, will stand us in much better shape once we go into the FDA, albeit unfortunately with the delays that we've mentioned in our timeline.

Okay. Then maybe I'll just shift gears a little bit to sort of the target that you mentioned in your prepared remarks. Looking to ultimately enter your first trial in patients with end-stage liver disease, I was just curious about that choice, because it does seem to me that it could be, in some ways, analogous to the basket approach that you've described previously, given that there could be many ideologies behind the end-stage disease. And so perhaps you could discuss how you came to that decision and how it will help inform your choice from there into one or more inborn errors of metabolism?

Sure. Thanks for that question. And indeed, we still view this basket approach concept as an opportunity for our platform. Our intention to enter the human trials in end-stage liver disease, first of all, recognizing that this first trial is a safety trail reflects the fact that we need to convince the FDA of the risk balance of subjecting patients to this experimental surgical implantation approach, trading off that risk with what we would hope to see is a very beneficial upside in this area of high-unmet need. The fact that end-stage liver disease are patients that are on the transplant list have gotten to that list through a broad range of ideologies, including some of the target inborn error of that metabolism disease areas, such as Alpha-1-antitrypsin, should allow us to get some exposure to those patients right off the bat in our Phase I trial. And form the -- based on the results from that safety trial and any early indications of efficacy, then we can branch earlier into pursuing some of the specific diseases that land patients on this list and/or to continue to work in this critical patient area, providing a form of bridge to transplant, which would be addressing a huge unmet need that's kind of tailor-made for our functional patch strategy. So clearly, a basket that we can build off of in that first trial.

Okay. Great. Just perhaps one quick last one, if I may, before I jump in the queue. And this is probably best suited for Craig. You had mentioned the first week of June as your target for filing the 10-K. Is that -- just given that this is sort of an off quarter, is that sort of in line with normal guidelines on timing? Or is there any sort of delay or issue with preparing the audited financials?

No, that's consistent with when we filed it in the past and corresponds to the timing of our long-standing scheduled Audit Committee meeting at the end of this month.

So ideally, what the only thing has changed is we thought it would be prudent to bring out this information of changed timelines and get that out to the market appropriately on time. The rest of our financial filings will follow their normal schedule.

Our next question comes from Matthew Cross with JonesTrading.

Sorry to hear about these new obstacles. I wanted to obviously address kind of the biggest issue here, which was just regarding tissue durability and kind of what's changed. So honing on things a little bit here, was this a result of additional work of transplanting in new preclinical settings as well or just kind of greater sample sizes in the same settings? I guess, I'm effectively trying to assess whether these were concerns regarding a highly reproducible level of viability that just had an insufficient duration or if this was really kind of inconsistent viability in terms of, as you said, hepatocyte counts and protein output as you tested in a larger number of animals. I guess, how often are you seeing closer to a month in terms of viability versus the 90 days when you're looking at all of the samples now that you have, like you said, over 500?

Sure, Matt. Very good questions. The -- we have looked at similar models to those that we explored in our pilots, and we've also looked at some very different animal models. What we see in these statistically powered studies is a general observation that at least for the current batch of experiments, the durability seems to be shorter than the cases that we identified in our pilot studies. This could be a result of just better statistics. It could be a result of every time you start a new animal study, you're dealing with slight biological changes. And of course, we also expect that our manufacturing process continues to evolve, and perhaps there are things that we inadvertently tweaked in the wrong direction that we can identify and bring back in course. In the end, our goal is just to show the maximum duration possible in these animal models and to show it in a reproducible and rigorous way and then discuss with the FDA, the comment I made earlier on, which is no one really knows how long a human tissue construct should last in animals. We could argue before we ever implanted in animals that 7 days might have been a home run. The fact that we saw evidence out to 90 days -- and by the way, we still see functional evidence of globule clearing in the PiZ Alpha-1-antitrypsin model also out to 90 days. That was extremely exciting. We just want to hone down the variability in our animal models, tighten up and optimize as we can the package -- the CMC package and the starting viability. And then I think we've got a very tight package and message to go into the FDA with. And all of that made it seem prudent to delay our pre-IND meeting a couple of quarters just to strengthen and flush out our database.

Okay. Got it. That's very helpful extra detail and it makes sense. Next one I had was just on whether you could provide any detail on the renal work you alluded to in your release and discussion here. I guess, what additional work has been done here so far? And then what was the impetus for revisiting that, as I know that had been more of a pipeline focus alongside the liver in the past? And just related to that, could you provide a little bit more detail on how this work in other organ applications, renal and otherwise, may impact you all from a cost perspective, if at all?

Sure. So for starters, we've been in a longer-term collaboration with Melissa Little in Australia who is really recognized as one of the world leaders in stem cell-based kidney organoid development. And we're pleased to have progressed or expanded that the relationship recently, and we'll be talking about that a little bit more in the future. The goal is to combine her stem cell-based technology with our deep platform understanding. Many of the exact same kinds of capabilities that we are fleshing out in our lead program in liver to see if we can jointly develop solutions that would be applicable to end-stage renal disease, which would open up a very important additional front in the pipeline. That's an aspirational goal. And so for the next 6 to 12 months, our primary focus will be almost entirely on our liver development program, as we've highlighted. And a lot of the preliminary work on the kidney will be taking place through our collaborators without tapping into significant sources or funds from the company.

This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation and you may now disconnect.