Edesa Biotech Inc (EDSA) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stellar Biotechnologies year-end 2014 results conference call and webcast. This conference is being recorded today, Thursday, November 13, 2014.

During today's call, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Mark McPartland, Vice President of Corporate Development and Communications at Stellar Biotechnologies. Please go ahead, sir.

Thank you, operator and good day, everyone. We'd like to thank everyone for joining us today for Stellar Biotechnologies's year-end 2014 results conference call and webcast.

Joining me on the call today from Stellar Biotechnologies's senior management team are Mr. Frank Oakes, the Company's Founder, President, and CEO; Kathi Niffenegger, our Chief Financial Officer; and Dr. Catherine Brisson, our Chief Operating Officer. Mr. Oakes and Ms. Niffenegger will provide an update on [Stellar Biotechnologies] review of our recent achievements, growth opportunities, and preliminary financial results.

After the formal presentation, we will be available for -- to answer your questions from the callers live and also from the webcast participants.

I would also like to note that in addition to our press release issued this morning, our Form 10-K annual report for the period ending August 31, 2014, will be filed tomorrow and available through the SEC filing system on EDGAR and the Canadian SEDAR filing system, as well. All documents are also available via our website at stellarbiotech.com.

Now before we begin, I would like to remind our listeners that today's conference call may include forward-looking statements based on current expectations. Such statements other than purely historical factual information, including statements related to revenues or profits or the Company's future plans and objectives, our expected sales, cash flows, and capital expenditures constitute forward-looking statements.

Forward-looking statements are based on numerous assumptions and are subject to all of the risk and uncertainties inherent in the Company's business prospects, including risks inherent in the core technology research development programs. There can be no reassurance or assurance that such forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

Accordingly, listeners should not place undue reliance on such statements in general. Except in accordance with applicable securities laws, the Company expressly disclaims any obligation to update any forward-looking statements or forward-looking statements that are incorporated by reference herein.

This conference call does not constitute an offer to sell or a solicitation of an offer to buy any of the Company's securities set out herein in the United States or to or for the benefit account of a US person or person in the United States. Neither TSX Venture Exchange nor its regulation to service providers, as that term is defined in the policy to the TSX Venture Exchange, except responsibility for the adequacy or accuracy of this conference.

Please refer to the documents that we file from time to time in Canada on SEDAR or in the United States on EDGAR, which are also available on our website, for information concerning the factors that could affect the Company.

With this taken care of, I'd like to turn the call over to Frank Oakes, President and CEO of Stellar Biotechnologies, for opening remarks. Frank?

Thank you, Mark. And good day, everyone. Thank you for joining the Stellar Biotechnologies's year-end 2014 corporate update and conference call.

As we close out another very productive year at Stellar, we enter 2015 with strong confidence in our core business and a positive outlook for the Company. Since our last update, we have continued to advance our position as leaders in the sustainable supply and manufacture of Keyhole Limpet Hemocyanin, or KLH.

First, a brief reminder about the key characteristics of our core business. KLH is an important immune-stimulating protein that is widely used as an active pharmaceutical ingredient, or API, in a number of potentially groundbreaking therapeutic vaccines and immunotherapies. KLH is a versatile molecule with a long history of safe and effective use, but the key KLH molecule can only be obtained from a scarce marine animal, the Giant Keyhole Limpet.

It's important to note what makes Stellar unique in this field. We have applied decades of specialized aquaculture and protein manufacturing science to a pharmaceutical industry challenge and have created the only KLH production facility of its kind.

Stellar now has the only demonstrated system with multiple generations of Keyhole Limpets thriving in a land-based culture facility for the specific purpose of producing commercial quantities of KLH. In addition, we've developed considerable intellectual property related to the KLH production and KLH protein molecule. We believe that these achievements position Stellar to be uniquely capable of meeting the anticipated long-term demand for KLH in multiple immunotherapeutic programs now in clinical development for a wide range of important indications, including multiple cancers, inflammatory diseases, Alzheimer's disease, and immune system disorders.

This is the heart of our core business mission, to be the leading supplier of this important immune-stimulating protein, where the product can meet the rigorous regulatory and commercial requirements as a key ingredient in multiple approved immunotherapeutic drugs.

In 2014, we continue to make progress in all of our corporate objectives. Briefly, these involve expanding our core technology through research and development while maintaining a strong balance sheet, pursuing opportunities for commercial growth that leverage our core business, and leveraging our Stellar KLH trademark product into immunotherapeutic solutions.

On the R&D front, in 2014, we completed early preclinical research to evaluate the potential of a KLH-based immunotherapy against Clostridium difficile, or C. diff, using the PS2 antigen we licensed from the University of Guelph. We've found these results of the studies to be very compelling, but it was also clear from the analysis of the data that the pathway to an IND-ready drug will be longer and more involved than we had originally anticipated.

As a result, we do not anticipate the launch of a Phase I clinical trial for C. diff program at this time. We continue to evaluate the potential pathway and plan to continue to explore the development of this asset, but at a pace that allows us to capitalize on recent and exciting expansion opportunities with corporate partners in our key-bid KLH supply business.

With Stellar's development initiatives primarily focused in support of the core KLH business programs for the next year, our CTO, Dr. Herb Chow, is taking advantage of this shift to reduce the demands placed on his shoulders by the C. diff program and to turn his attention to family matters. It was a well-deserved opportunity for him and as a long contributor to Stellar's success, Herb will remain active with the Company through a consulting relationship that will allow him to meet personal priorities while Stellar continues to benefit from his extensive experience.

I'd like to recap for you now our key achievements in collaborations obtained this year. Earlier this week, we announced signing a supply agreement with Araclon Biotech of Spain, which is majority owned by the global healthcare company Grifols.

Araclon is developing a beta-amyloid targeting active immunotherapies for neurodegenerative diseases with a primary focus on diagnosing and treating Alzheimer's with a patented, innovative technology that requires KLH as carrier protein. Under the agreement, Stellar will supply KLH for the ongoing Phase II and Phase III clinical developments of Araclon's Alzheimer's drug. And the companies will collaborate on development of certain manufacturing processes in accordance with the requisite regulatory requirements.

Araclon will manage and fund all of its drug development and regulatory submissions. In addition, we have agreed to first negotiation rights for the exclusive supply of Stellar KLH for the potential future commercialization of Araclon products.

Stellar signed two additional key agreements in 2014. Last month, we executed a supply agreement with Biovest International for the supply of Stellar KLH to be used in Biovest's BiovaxID active immunotherapy for the treatment of follicular non-Hodgkin's lymphoma.

BiovaxID has successfully completed Phase II and Phase III clinical trial development and is currently the subject of a marketing authorization application, or MAA, under review by the European Medical Agency.

Previously, in December 2013, we entered into a collaboration agreement with Amaran Biotech of Taiwan to develop and evaluate methods for a potential manufacturer of OBI Pharma's active immunotherapy against metastatic breast cancer, called OBI-822. OBI-822 combines Globo-H, a carbohydrate antigen frequently expressed by cancer cells, with KLH as the immune-stimulating carrier.

We are adding these new relationships to existing ones, such as our long-term customer, Neovacs of France. Neovacs is in Phase II and Phase IIb clinical trials with two product candidates that use Stellar's KLH as a carrier molecule in its kinoid in immunotherapy, targeting three diseases -- rheumatoid arthritis, Crohn's Disease, and lupus.

Neovacs announced previous results earlier this year and will be confirming the development strategy at next week's American Congress of Rheumatology in Boston.

These new and existing collaborations are excellent examples of Stellar's core business model in action and our progress in 2014. Stellar has the technology to deliver a reliable source of KLH that can be scaled up substantially to meet future commercial demand.

We believe these agreements and collaborations will provide us with multiple commercial pathways for future sales. And we are closely involved in the development of multiple new KLH-facing immunotherapies, with a strong presence in wide-ranging therapeutic areas as these promising new drugs approach market.

With this existing growth in our core business and discussions with potential partners under way, we are prioritizing allocation of resources in 2015 to ensure that the corporate initiatives that offer the greatest opportunity for return on investment continue to be our central focus. We will continue to pursue new research, of course, but our priority in 2015 will be strengthening and expanding our core business.

These initiatives include working closely with each customer to meet their unique KLH needs, expanding the regulatory support package for our KLH product line and continuing to upgrade manufacturing processes to meet current and future customers' demand.

I would like to also point out another key area of progress. With Stellar's continued maturity as a public company, tomorrow, we will five our 2014 year-end annual report on Form 10-K with the Securities and Exchange Commission for the period ending August 31, 2014. This is a part of our transition to a US domestic issuer, a step in graduating to a higher tiered market exchange for our common shares.

As noted in the release this morning, our financial position remains strong, with approximately $13.4 million in cash and equivalents as of August 31, 2014. With careful management of these resources, we look forward to reporting more positive results to you for next year.

Now I would like to turn the call over to Kathi Niffenegger, our CFO, who will discuss our financial results in greater detail. Kathi?

Thank you, Frank, and thank you, everyone, for joining us on the call today. I will be discussing our fiscal year-end August 31, 2014, financial information. And we have been reporting with the SEC as a foreign private issuer for several years, and as Frank mentioned, we are now reporting as a domestic issuer.

Along with that, our financial statements used to be presented under international financial reporting standards, and this year, they are shown under US GAAP. And we have recast the prior years to US GAAP as well for comparative purposes.

At August 31, our cash, cash equivalents, and short-term investments were $13.9 million compared to $7.9 million at August 2013. In September 2013, we successfully closed a $12 million private placement. We received $7 million gross proceeds from that placement during this 2014 fiscal year, with $5 million of the placement subscribed and received prior to the fiscal 2013 year.

We also received $4.3 million gross proceeds from the exercise of warrants and options. And as Frank described, we believe the current cash will be sufficient to meet estimated working capital requirements and fund planned program development through at least 2015.

As of August 31, 2014, we had a positive shareholders' equity of $7.7 million and approximately 78.3 million shares outstanding compared to negative shareholders' equity of $2.2 million and approximately 57.9 million shares outstanding at the prior year end.

Our revenues for the fiscal 2014 year were approximately $372,000 compared to $545,000 for the fiscal 2013. We actually had wrapped up our NSS grant during fiscal 2013 and had to close out of that in the first quarter of 2014. Those revenues decreased from approximately $38,000 -- pardon me -- from $409,000 in 2013 to $$38,000 in 2014.

But our product sales revenue increased from $76,000 in the prior year to $144,000 in fiscal 2014. And we had greater sales volume for that. And our contract services revenue also increased from $60,000 in the prior year to $192,004 for fiscal 2014 and that increase was due to services under collaboration agreement.

Our research and development expenses in fiscal 2014 were $2.5 million compared to $2 million in fiscal 2013. And increase in R&D expenses was largely due to preclinical research related to C. diff immunotherapy coupled with a decrease in other internal research and development as operations shifted from process development to manufacturing in 2014.

And typically, as was the case in 2014, our R&D activities involve internal programs and external collaborations with other biopharmaceutical companies. Our internal research included new innovations in aquaculture systems and infrastructure and early preclinical testing of potential KLH space technologies.

Our external collaborations involve both development and evaluation projects with a number of biopharma for the use of Stellar KLH in those companies' programs. And as Frank described, this work culminated in successful execution of new definitive supply agreements for Stellar KLH, which we believe will require growing operational attention and resources in the upcoming years.

Stellar's other operating expenses totaled $3.6 million in fiscal 2014 compared to $2.4 million in the prior year. And that $1.2 million increase was primarily attributable to a planned higher level of activity related to our strategic initiatives in corporate and business development, the addition of key personnel, and share-based compensation related to the vesting of stock options.

Our net loss for fiscal 2014 was $8.4 million or $0.11 per share compared to a net loss of $14.5 million or $0.28 per share for fiscal 2013. And the fluctuation in our net loss is significantly impacted by the fluctuations in fair value of warrant liability. And we anticipate as long as we have outstanding warrants that are denominated in Canadian exercise prices, we will need to record a warrant liability and that will fluctuate each year, based on fluctuations in share prices and calculations of fair value using the Black Scholes evaluation method.

Those changes in fair value have no impact on the cash flows. And so for Stellar, it's good to look at our statement of cash flows to be able to exclude those non-cash gains and losses and see our cash flows from operations.

As mentioned earlier, we will file our fiscal year 2014 Form 10-K with the consolidated financial statements and related management's discussion and analysis tomorrow, Friday, November 14, 2014. And all our current and past filings can be found on the Canadian securities administrators website, sedar.com, or the US SEC website, sec.gov/edgar.

And you will be able to see both our previous annual financial statements and MD&A filed on SEDAR. And then those same were on a Form 6-K in the United States. Now you will see our Form 10-K filed on both.

So I will turn to call back over to Frank now for closing remarks. Thank you. Frank?

Thank you, Kathi. I would like to quickly reiterate key points from Kathi's presentation. While we achieved modest growth in 2014 in both product sales and contract income, we believe that we have set the stage for strong growth and continued leadership in KLH sustainable manufacture.

As our pharmaceutical partners advance their immunotherapy programs, we believe we are building a robust KLH business across diverse disease areas that will generate long-term revenue potential as our customers' products approach commercialization. And these will provide us with a presence in multiple immunotherapy programs targeting cancers, immune disorders, Alzheimer's disease, inflammatory diseases -- all potentially blockbuster therapeutic areas.

I am excited about these prospects for Stellar Biotechnologies and want to thank all of our employees, partners, shareholders, stakeholders for your part in the success in 2014.

Operator, this concludes our formal comments. At this time, we would like to open the call for questions and answers.

(Operator Instructions)

Dan Trang, Stonegate Securities.

Frank, you mentioned some manufacturing efficiencies. I was wondering if you could provide a little bit more color behind that. And once you've implemented some of those efficiencies, what does that translate into regarding margins?

Well, we have made significant advancement, both in development of aquaculture technology to increase our core KLH production capacity using the same facility design and systems that are currently in place. We've also improved manufacturing efficiencies in the production and purification of the KLH molecule.

And I think all of these ultimately will translate into better margins for Stellar and also our ability to help our customers manage their cost of goods. And I think these are important steps to support companies as they make the transition from clinical trial stage demand to commercial demand, where manufacturing efficiencies are essential to manage cost of goods and help customers maintain their margins within the insurance reimbursement environment.

So I think these are significant advancements, both for Stellar and for Stellar's customers.

Okay. And you mentioned part of your strategic initiative is expanding the regulatory package -- am I correct in that statement?

Yes, you are absolutely correct in that statement. Stellar --

I was wondering if you could provide a little bit of color behind that -- I'm sorry to interrupt --

Yes, I just jumped to the answer. Stellar's regulatory support package is an important part of what we offer our customers. The KLH molecule is supported by extensive characterization and regulatory documentation to allow customers either to directly reference Stellar's drug master files by number or to use Stellar's CMC section in their own regulatory filings, their own regulatory dossiers, to allow -- to streamline the process our customers have to go through to get approval for INDs and ultimately for commercial sale of their drug.

Okay. Thank you.

Operator, I'll take a question from the webcast portion at this time. So coming from the web chat feature, for those participating -- callers participating through the webcast, the first question is what are the Company's plans to move to the NASDAQ or the NYSE? And do you want me to answer that or --?

Yes, Mark, can you answer that question?

So while we cannot comment on our current status regarding a dual listing of the Company on a higher tiered US exchange, we believe that it is still a realistic objective in the near future. And it will be timed accordingly with all the factors that coincide with -- fully qualifying for that exchange.

So at the present moment, we don't fully qualify for the transition to dual as a company on a higher tiered exchange. But as a secondary question to that, another question that had come in was if you were to list on a higher US exchange, what is the process? Or the process of converting shares?

And the answer to that question is all those details will be given regarding the Company's plans from the dual listing standpoint and publicly disclosed in a timely manner any specific details regarding the shares and how that transition takes place. So all the information regarding -- and questions that have come in -- regarding the Company's plan to move to higher exchange, that is still one of our primary corporate objectives, albeit that will be timed accordingly with our qualifications.

Operator, can you queue for more questions?

(Operator Instructions)

[Len Dansek], Private Investor.

Thanks for taking my question. Do you have any forecast for the next quarter or year on revenue earnings for the KLH market and Stellar's expected percent of it?

Hi, Len. Thanks for the question. This is Mark McPartland. While the Company does not give any form of forecast or guidance related to our future revenue projections as it relates to any specific customer or agreements that we sign, we don't publicly disclose that, as it's not our policy to give guidance.

All right. Thank you. I've got one follow-up question, if you can take it?

Sure.

How does the cost of your production model compare to borrowing Keyhole Limpets from the sea for KLH donations, such as Biovest employees?

Our core costs are fixed around an aquaculture operation and we expect to see our costs decrease over time compared to the increasing costs associated with paying scuba divers to capture limpets one at a time out of the ocean -- from a decreasing resource. So we think our cost model is manageable over time, where dependence on the wild resource -- history has demonstrated that costs increase over time as opposed to being manageable and maintained or decreasing over time with increased capacity.

Great. Thank you.

Operator, I'm going to take another question that's come in via the web chat feature. And the question is, after the congratulatory congratulations that were given, the question is when a drug surpasses all of its hurdles involving the KLH hurdles involving the regulatory -- I assume that's what he means -- regulatory KLH and comes to market, what is Stellar's capabilities in supplying the traceable product? Possibly several [farrow] companies in the coming years? Meaning, what's our ability to scale.

Yes, Mark, I can speak to that. That is Stellar's core business model. We can increase our core KLH production capacity by increasing the number of Keyhole Limpets that we have in production.

And we have the ability with facilities in place to increase capacity to multiple kilogram quantities. We are currently in discussion with companies that have audited our facilities to confirm the capability of Stellar providing multiple kilogram quantities for drugs like Alzheimer's disease drugs or rheumatoid arthritis drugs with companies that need assurance of Stellar's ability to scale.

And through customer audits, we have maintained that confidence in the minds of our customers that we can actually produce the quantities that would be required to support a frontline drug for a major indication like arthritis.

Operator, you can queue for questions one more time.

(Operator Instructions)

Operator, so we have some additional questions that have come in. And we are about the end of our time specifically for the call. But this question is, how many drugs are nearing the market in -- or how many KLH these drugs are nearing the market in the pipeline? And can you elaborate on that?

Yes, I can speak to that, Mark. We can't disclose proprietary information about any of our customers' drugs, but it is in public domain that Celldex's drug for glioblastoma is approaching the end of a Phase III clinical trial, so that's a publicly traded company with a KLH conjugate vaccine drug.

That's an important milestone. That trial will unblind, I believe, late this year or early 2015. OBI Pharma, Taiwan, their OBI-822 drug is nearing the end of a Phase III trial. They expect to see preliminary Phase III results in 2015. That's another important drug would be a game changer.

As publicly announced, the Biovest ID drug has completed Phase III clinical trials. It's currently the only drug that is being evaluated for commercial approval -- that's in the European Union. That would be the first to market for a KLH conjugate vaccine, so that's an important drug.

There are a number of other drugs that are in late Phase II trials with exciting results. So we see the opportunity over the next 18 to 24 months for three drugs to be commercially approved or evaluated for commercial approval, with three or four important drugs following close behind those.

Operator, I think that comes close to the end of our time for our call. So if there's any further questions, feel free to contact myself at Stellar. You can do that via email or you can call the office directly and they can provide you my contact details. It's also on our corporate website. But with that said, Frank, why don't you give closing comments.

I just want to thank everybody for joining us on this conference call and reiterate our enthusiasm for the program, for the market opportunity, and make the statement that we have seen significant progress, both with Stellar's advancements as well as our customers' advancements. And we think this is a promising opportunity with great upside in the future.

Thank you. Ladies and gentlemen, this concludes the Stellar Biotechnologies corporate update conference call. Thank you for your participation. You may now disconnect.