DiaMedica Therapeutics Inc (DMAC) 2019 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the DiaMedica Therapeutics Second Quarter 2019 Conference Call. An audio recording of the webcast will be available shortly after the call today on DiaMedica's website at www.diamedica.com in the Investors section.

Before the company proceeds with its remarks, please note that the company will be making forward-looking statements on today's call. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. More information, including the factors that could cause our actual results to differ from our projected results appears in the section entitled Cautionary Statement regarding forward-looking statements in the company's press release and under the heading Risk Factors in DiaMedica's most recent annual report on Form 10-K. DiaMedica's SEC filings are available at www.sec.gov and on its website.

Please note that any comments made on today's call speak only as of today, August 14, 2019, and may no longer be accurate at the time of any replay or transcript rereading. DiaMedica disclaims any duty to update its forward-looking statements.

(Operator Instructions)

And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Rick Pauls, DiaMedica's President and CEO. Mr. Pauls, you may begin.

Thank you, Crystal. Good morning, everyone. I'd like to welcome you to our quarterly earnings and business update call. We've had a very good quarter clinically and are happy to have a chance to discuss our progress with you. Yesterday, we issued a press release with a business update and summary of our financial results for the quarter. We also filed our quarterly report on Form 10-Q. Both documents can be found in the Investors section of our website at diamedica.com.

I'm joined today by our Chief Financial Officer, Scott Kellen; and our Chief Medical Officer, Dr. Harry Alcorn.

Let me begin with updating you on Phase II chronic kidney disease or CKD study. On Tuesday, yesterday, we filed our clinical trial protocol with the FDA for our Phase II multi-cohort study in chronic kidney disease caused by rare or significant unmet diseases. This is another important milestone for our company. We spent months working with our scientific advisory board and other advisers and key opinion leaders to ensure the best possible design for this protocol. I would note here that not only were we able to draw upon the data from our recently completed Phase Ib study and the insights from our highly experienced scientific advisory board, we were also able to leverage the vast body of knowledge of KLK1 and the clinical research surrounding the use of porcine KLK1 in Asia, which has been used to treat hundreds of thousands of patients with chronic kidney disease. The FDA has now 60 days to complete the review of the protocol, and we expect the patient enrollment to start in Q4 of 2019.

Before I get into the details of our trial design, I want to spend a minute discussing a potential unique attribute of DM199 for CKD patients. Increasingly, in studying CKD treatments, the scientific community is focusing on the combination of albinuria or the urinary albumin to creatinine ratio also referred to as UACR and the estimated glomerular filtration rate, or eGFR, with the understanding that kidney function and kidney damage are viewed as 2 sides of same coin. To date, kidney function has been primarily measured by eGFR. Albinuria is now drawing much more attention from clinicians after 2 major companion studies were published in the Journal Lancet earlier this year, which support the use of albinuria as a surrogate endpoint for evaluating the progression of kidney disease. And this is consistent with what we've heard from the FDA in their public remarks.

What we believe is potentially unique to DM199 compared to other therapies in development is that DM199 could potentially improve both eGFR and albinuria. We base this belief on clinical data from the porcine KLK1 currently being used today in Asia, which has demonstrated significant improvements in both eGFR and UACR simultaneously. As well as our own Phase Ib data where we saw an early signal in the short-term positive movements in eGFR and UACR. We will be looking at changes in eGFR and UACR in our Phase II trial. And if our hypothesis is correct, we believe DM199 could be a great clinical benefit to patients who are suffering from chronic kidney disease.

In a Phase II study, we'll enroll patients in 2 cohorts. The first is patients with IgA nephropathy and the second is nondiabetic African Americans with CKD and hypertension. Our enrollment target is 30 patients per cohort, and patients will be treated for approximately 13 weeks at a dose level of either 2 or 5 micrograms per kilogram, administered subcutaneously twice per week. The primary endpoints will be eGFR and UACR along with standard safety and tolerability markers.

The first cohort is focused on subjects diagnosed with CKD caused by previously diagnosed IgA nephropathy. IgA nephropathy is a kidney disease that occurs when pathogenic or mutated IgA circulates to and cannot be processed by the kidneys. The result is a buildup of IgA cells in the patient's kidneys. This buildup forms deposits causing inflammation in the kidney, which impairs the kidney's ability to filter blood. This is considered an autoimmune disease that the pathogenic IgA cells are caused by a faulty response to the patient's immune system.

Approximately 140,000 people in the U.S. suffer from IgA nephropathy making it a rare disease. Currently, there are no approved treatments. DM199 has the potential to treat IgA nephropathy by increasing renal blood flow, reducing inflammation and increasing the production of regulatory cells, or Tregs, potentially addressing the underlying autoimmune problem, creating the pathogenic IgA cells and thereby improving our overall kidney function.

Based on other products currently in development for similar rare forms of kidney diseases, we anticipate that a Phase III trial could potentially require only 200 to 400 subjects with a treatment duration of 9 to 12 months for initial approval.

Our second cohort will focus on nondiabetic African Americans with CKD and hypertension. African Americans with CKD exhibit lower levels of KLK1, reduced renal blood flow, and for the 70% plus of those with hypertension, they are also considered to be salt sensitive, meaning that they are less able to regulate sodium and potassium levels in their bodies. DM199 has the potential to be a successful treatment, given its ability to replenish KLK1 levels and restore the function of the kallikreinkinin system, which may improve renal blood flow and the regulation of sodium and potassium levels.

KLK1 has also been shown to be more effective in salt-sensitive preclinical models. There are currently no approved therapies for treating this patient population. Physicians are limited to managing or treating the symptoms. In this study, we plan to also test for the presence of the APOL1 gene mutation. The exact number of people with APOL1 gene mutation is not known. We've seen estimates suggesting that approximately 15% of African American population has this gene. Tracking this gene is important as the APOL1 gene mutation accounts for a significant increase in the risk of chronic and end-stage kidney disease.

There are approximately 7 million African Americans with CKD in the U.S. and they are 3 to 4x more likely to suffer kidney failure than Caucasian Americans. African Americans with CKD and the APOL1 gene mutation are 2x more likely to progress into end-stage renal disease than African Americans with APO1 gene. The treatment methods duration endpoints are the first -- the same as in the first cohort.

Turning back to our Phase I CKD study. We are pleased to report that we completed the follow-up of the last patients in this trial in July. In the study, we evaluated 32 patients with moderate or severe chronic kidney disease. In order to understand the safety tolerability, pharmacokinetics profile of DM199 in this patient population. Specifically, we want to understand whether the presence or severity of chronic kidney disease affected how DM199 is processed by the body and whether we need to adjust dose levels and/or the frequency for CKD patients in our Phase II study.

In addition to continuing to develop our understanding of the safety and tolerability of DM199, we also predefined a number of secondary pharmacodynamic endpoints. And just a quick reminder for the study, DM199 was administered in a single subcutaneous dose, and we tested 3 dose levels, 3, 5 and 8 micrograms per kilogram.

In June, we released positive interim results based upon data from the first 28 patients. We are very encouraged by these results, which occurred in a Phase Ib single-dose study. And as an aside, we are very much looking forward to dosing patients for 3 consecutive months in the Phase II study. These results demonstrated a PK profile at the 3-microgram per kilogram dose for both moderate and severe CKD patients that was consistent with our prior testing in healthy subjects. This was a significant development for us in that the presence or severity of CKD is not expected to require any dosing adjustments in our Phase II study.

These study results give us confidence that we can set the dose range to normalize KLK1 levels in CKD patients in our upcoming Phase II study. In addition, with the results we also expect to avoid the cost and time of having to complete a full renal study for DM199.

Our experience with the safety and tolerability of DM199 has been so positive thus far that we have to be careful to not take the safety and tolerability for granted. In this study, consistent with our prior work, DM199 was observed to be safe and well tolerated and no dose-limiting tolerabilities were observed. There were no deaths, no discontinuations due to treatment-related adverse events and no treatment-related to significant adverse events. All the adverse events that were observed were minor and consistent with the standard treatments in the CKD population.

We are also very encouraged by the favorable results with the secondary pharmacodynamics endpoints. Even though this was a single-dose study, we observed significant short-term transient improvements in Nitric Oxide, Prostaglandin, eGFR and also improvements in UACR.

We believe these results are drug-related as they are consistent with the expected mechanism of action and the peak improvement occurred at 24 hours after DM199 administration and then subsequently declined.

As I mentioned earlier, we're in the process of collecting final data and results to date from the last 4 patients have been consistent with the interim results. We intend to provide full results of the study in a peer-reviewed publication and our poster presentation.

This is a good time to mention that we are also very pleased with the U.S. President, along with American Society of Nephrology has placed specific national focus on improving kidney health. Dialysis is not pleasant. It has a significant impact on individual's quality of life and represents the single largest cost for medicare. And oftentimes, the condition that causes individuals kidney disease makes them ineligible for a kidney transplant.

We look forward to continuing the clinical development of DM199 and we sincerely hope that DM199 can be a valuable tool to slow or halt the progression of kidney disease and contribute to the President's goal of achieving a 25% reduction in the number of patients developing end-stage renal disease by 2030.

Let me provide you with a brief update on our Phase II REMEDY trial in acute ischemic stroke. Enrollment continues, and I'm happy to report that the study has past 2/3 mark and on the way to our targeted enrollment of approximately 100 subjects. We have 12 sites active, and we anticipate completion of enrollment in the fourth quarter of this year and expect to provide top line results sometime between late Q4 and Q1 2020.

Next, turning to our update on our licensing with of DM199 for a stroke in China. It's with mixed emotions that report that we've terminated this agreement and taking back the rights to develop and market DM199 for acute ischemic stroke in China.

We've invested a tremendous amount of time in negotiating the agreement back in 2017 and 2018. In the past year, we've also spent a great deal of time in supporting the development of the regulatory submission package for the Chinese regulatory agency. We've made what we believe is excellent progress in our DM199 clinical programs. We've completed a Phase Ib study in CKD, which clearly demonstrated the activity of DM199 in its expected mechanism of action. We're closed to completing our Phase II stroke study and very close to enrolling patients in the Phase II CKD study.

We think this progress has significantly increased the value of DM199. We also encountered difficulties with the regulatory group, requesting proprietary manufacturing information that they were not entitled to under the terms of the agreement. Protecting proprietary manufacturing knowledge has always been one of our primary concerns. Considering this and the fact that we have the capital to get to the results of 3 Phase II clinical trials, including IgA nephropathy, African Americans with CKD and acute ischemic stroke and still have a runway into Q4 2020. We decided that would be in the best interest of DiaMedica's shareholders to take advantage of a window to terminate this license and take that control of China for AIS.

With that, I'll turn the call over to Scott to provide a summary of our financials for the second quarter of 2019.

Thank you, Rick. Good morning, everyone. Yesterday afternoon, as Rick pointed out, we released our second quarter 2019 financial results, and I hope that you've had an opportunity to review that release.

Our net loss for the second quarter of 2019 was $2.5 million or $0.21 per share. Our net loss for the 6 months ended June 30, 2019, was $5.7 million or $0.48 per share. These compare to a net loss of $1.7 million or $0.22 per share for the first -- for the second quarter of 2018 and a net loss of $2.4 million or $0.33 per share for the full first half of 2018.

Our research and development expenses increased to $1.9 million for the 3 months ended June 30, 2019, which was up from $1.1 million for the same period in 2018 or an increase of $0.8 million or $800,000. Our R&D expenses increased to $4.5 million for the 6 months ended June 30, 2019, compared to $1.9 million for the 6 months ended June 30, 2018, again, an increase of $2.6 million. The increase for the 6 months ended June 30, 2019, was due to the costs incurred for a new production of our DM199 drug substance, as well as the cost of our Phase Ib clinical study in CKD patients and increased year-over-year costs for our REMEDY Phase II stroke study in Australia. Increased personnel costs also contributed to the increase.

Our general and administrative expenses were $867,000 for the 3 months ended June 30, 2019. This compared to $780,000 for the second quarter of 2018. G&A expenses for the 6 months ended June 30, 2019, increased to $1.7 million, which was up from $1.3 million for the first half of 2018.

On a year-to-date basis, this increase was primarily due to costs associated with our status as a NASDAQ-listed U.S. public reporting company, which commenced in December of 2018, in addition, increased personnel costs. These increases were partially offset by a reduction in the noncash charges for share-based compensation.

Our total other income increased to $280,000 for the 3 months ended June 30, 2019, up from $131,000 for the prior year period. Now total other income decreased to $458,000 for the 6 months ended June 30, 2019, compared to $789,000 for the 6 months ended June 30, 2018. The year-to-date decrease is primarily related to the initial recognition of the R&D incentive payment from the Australian government, which is paid for qualifying research work performed by our wholly owned subsidiary, DiaMedica Australia, which occurred during the 6 months ended June 30, 2018.

The increase in the current year second quarter other income primarily relates to the impact of increased study costs as compared to the prior year period, which drives an increase in the related R&D incentive recorded in the current period. The year-to-date decrease was partially offset by, and the current year increase was augmented by, increased income from interest earned on marketable securities during 2019.

So as of June 30, 2019, we had cash and cash equivalents of $3 million, marketable securities of $8 million. And I would like to reiterate that despite the elimination of the $4.5 million milestone payment from the Chinese license, we expect that our current cash resources will be sufficient to allow us to complete the first 2 cohorts in the Phase II CKD study as well as the Phase II study in acute ischemic stroke and fund our planned operations into the fourth quarter of 2020.

Now let me turn the call back over to Rick.

Thank you, Scott. Operator, would you please open the lines for questions.

(Operator Instructions) Our first question comes from Alex Nowak from Craig-Hallum Capital Group.

Rick, can you provide a bit more color about the conversations you've been having with Foshan and Aon Pharma here over the past couple of weeks? And was there no other path forward here with Foshan other than to terminate the agreement?

Yes. Thanks, Alex. So yes, so we've had ongoing discussions here. The background on this is that the agreement was signed last fall was to have clearance to start a clinical trial by this summer. It became pretty clear that, that was not going to happen. Through some of the discussions we had over, in particular, the last few weeks, there were requests to extend the agreement and delay the payment and to potentially renegotiate. And as I mentioned on the call here, in light of the progress that we've made here over the last year, in particular, we thought it would be in their best interest to end the agreement and really focus on executing our studies while also continuing other discussions we've had with partners.

Okay. Understood. And are you in talks with any other partners out there, either for stroke or chronic kidney? And can you say if those conversations are within what I'd call the advanced stage, meaning we could potentially see a signed document and an upfront payment here within the next 6 months?

Yes, we've had a number of recent interest, in particular, and a lot of it's been driven by our Phase Ib results both regional and worldwide. But at this point, we're not providing any guidance.

Okay. Got it. And I hear you loud and clear that the Foshan milestone payment, that's not necessary to get to the readout here for Phase II trials. Just to give us some comfort around the cash usage, can you just walk us through the expected expenses here over the next couple of quarters. Is $3 million an overall cash burn per quarter the right number here?

Alex, this is Scott. No, the burn for the first half of the year, again, includes that the onetime costs really associated with producing the new batch of drug substance. But the costs are going to go. There'll be a bit of a lull between now and when we start enrolling in the Phase II CKD studies. And we don't expect those to take a great deal of time to complete. And then, of course, with Phase II in stroke winding down, we'll see a decline next quarter, an increase in Q4, probably something similar in Q1. And then we should see costs go down from there as we focus on preparing for the Phase III and next steps.

Okay. Got it. And just last question on the cash side, what level of cost overruns, if you want to call it that? Are you assuming here in the -- I know it's a hard question to answer here with the phone, but I'm just trying to get to what level of conservatism are you building into the model for cash usage? And trying to understand what amount of enrollment trial delays are acceptable here in the model to still get through the Phase II trials with some existing cash on hand.

So Alex, you're asking me to confess what the padding is with the Chief Medical Officer in the room?

That's right.

The -- obviously, the -- everything you just mentioned are issues that we are concerned with, and we have to pay attention to. And we're setting levels that are based upon things we've seen with our existing clinical trial work to date. And again, even with that, I'm still comfortable with the position that we have the capital to get through these Phase II readouts.

Okay. Got it. Just wanted to confirm that. That's good to hear. And then just last question for me. Walk us through the process here to start in the Phase II CKD study. You said you met the protocols of the FDA. What else is needed here before you start enrollment? And what is the chance or I guess, the risk that FDA comes back with any questions on the protocol? What sort of delay could we potentially see regarding that? And then if FDA was to issue some sort of fast track designation, would they do so at this time?

Let me see if I can -- this is Harry, by the way. Let me break those questions down for you, Alex. So the submission to the FDA went in yesterday for the protocol for Phase II CKD, respectively. They have 60 days to make comments. We will be reaching out to them probably within the next 2 to 3 weeks to confirm confirmation as to receipt of the protocol and if they have any current or ongoing questions. Obviously, it's a wait and see scenario with the FDA. So we are waiting for them to respond to us.

During that period, we'll be qualifying sites and qualifying a central laboratory to conduct this Phase II CKD study, which will be accomplished by the middle of September to late September, whereby we'll be ready to start enrollment of our study in October as the 60 days will expire on October 11, approximately, at which time we can move forward.

Previously, they did come back with questions on the Phase Ib study. We made sure that we've addressed those in the Phase II. But as you know, with the agency, they can always ask questions at any time, and we stand prepared to answer those questions. And we have the right resources to respond quickly.

Okay. Got it. And then just Rick, last question for me. It's been almost 2 months here since releasing the results from the Phase Ib CKD study. I'm sure you've had a chance to go back to the Scientific Advisory Board a couple of times here as well as talk with larger pharma about the results. What are you hearing from both parties? And what were they pleased to see in the Phase Ib results? And where do they still have more questions?

Yes, great question, Alex. The first point is that from a mechanism perspective, what we're hearing is that, we've got early signals, and that's very important. So up until now, a lot of our story has been about the importance of the use of the crude forms in Asia. And it's been very encouraging that in patients, specifically with kidney disease, we see mechanistic changes in nitric oxide and prostaglandins. And then also we see the early signals for eGFR and UACR, which are really the 2 key endpoints for kidney studies.

The biggest question really is that this was a single study. And hopefully, we can maintain those levels and improve as we start treating patients over several months. And, I'll just add to it. And the other comment we're getting to is that seeing improvements in both eGFR and UACR is quite rare. There are other compounds that are in development, typically, you see an improvement in one or the other. So I think it's very encouraging that we're seeing early signs of that in our protein, but also seeing clear signs in the porcine form and the protein in Asia for CKD.

And our next question comes from Thomas Flaten from Lake Street Capital.

Just -- I wanted to confirm, Rick, did I hear that one of the doses selected for Phase II was 2 micrograms per kilogram?

Yes. We're going to do 2 and 5.

Can you walk us through the rationale for 2, given that the doses in the Phase I were 3, 5 and 8?

Yes. So ahead of starting the Phase Ib, we identified a range of normal KLK1 in healthy, in non-diabetic, non-kidney patients. And that range really from 1 to 5 nanograms per ml. And so in the Phase Ib, we completed both the 3 and the 5 micrograms were in that range, whereas the 8% was a little bit above that. We believe there's an inverted U curve with this protein. And so by selecting 2 and 5, those are 2 doses that are clearly in the range. So the 2 is just a little bit below the 3 we had in the study.

And then just -- and just a follow-up on the Aon agreement. So can you add some color to the ongoing relationship with Fosun, in particular, given their ownership stake in the company? Like how are those -- how is the relationship post the termination?

It's good. I mean, this has been an ongoing discussion, both with Herman Capital being on our Board. But also, I mean, a relationship with Aon is good. I mean we're going to continue talking to them. There's still interest down the road and potentially partnering this for stroke. And so we're going to continue the relationship. So it -- I don't think there's any damage created here.

So -- and I can't imagine that it was the $4.5 million that was that -- I'm trying to wrap my head around that being a wrinkle for them given the financial backing that they have. Was it more on your side around the proprietary manufacturing things they wanted to bring over? I just -- it's -- I'm having trouble wrapping my head around the fact that this would be a financial consideration for them, given that I think they can certainly afford that.

Yes. There's a series of aspects that we took into account. A very important one, as I mentioned earlier, was the request for proprietary manufacturing information that was not part of the original agreement. And so from our perspective, our #1 priority is protecting that. And that was basically a nonstarter for us. And so that was an important aspect from the regulatory team that we just -- we're not going to proceed. And so that was a key aspect. There were requests to extend the timing of payments. And we just thought, in light of the progress we've made that we would terminate the agreement and focus on executing on these studies. And in particular, as we talked to about earlier, we have the capital required to complete these 3 Phase II clinical trials.

And our next question comes from Kyle Bauser from Dougherty & Company.

Just following up on the Aon agreement again here. Since they were running quarter back on getting that trial approved with the Chinese FDA. What happens now? Is that application still in review?

I guess they did meet with the Chinese FDA last week. And we've got a series of comments. We are part of that -- what we are on the call for that. And so we have the feedback of what's required. And so what we intend our clinical path in China with or without a partner, will be part of MRCT, so a multi international study where we would include China as a -- we'd include sites in China. So no matter what direction if we choose to select another Chinese partner or just do this with a worldwide partner for Phase III, we have some clear direction here on that pathway.

And Kyle, this is Scott. If I might add, in their last communication, they indicated that they were going to finish developing responses to the questions that were raised at the meeting to try and make the package as complete as possible at this stage. So again, it seems to reiterate Rick's earlier point that they continue to have interest in the drug and would like to get back involved at some point in the future.

Okay. That's helpful. And regarding the remedy Phase II stroke trial, you said you're close to 70 patients in of the 100, which should be completed in Q1 at the latest. Since this is a fairly large trial, can you remind me if you anticipate doing any sort of interim analysis or data readout here?

No, it's double blinded, placebo controlled. So we have not had to look at the data, and we're going to wait until the study is complete before we unblind it.

Okay. And following up on that, I assume all patients in both the control and the treatment arms are receiving tPA, but what is the proportion that you think will receive mechanical thrombectomy? And do you think the percentages will be the same in both arms?

This is Harry. I can't give you specific numbers today as it relates to mechanical versus the tPA, but they're fairly close.

And I'll add as well that the protocol design is that if a patient comes into the clinic and they get tPA. And after a certain number of hours afterwards if tPA is not effective, then they'll get DM199. But if tPA is effective, they will be excluded from the study.

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Rick Pauls for any closing remarks.

Well, thank you, everyone, for joining us this morning. We appreciate the continued support of our shareholders and analysts and also our employees who have worked hard and have been instrumental in moving DM199 forward. We look forward to speaking to you again soon and updating you on our progress. With that, this concludes our call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.