Stellar Biotechnologies' (SBOT) CEO Frank Oakes on Q3 2016 Results - Earnings Call Transcript

| About: Stellar Biotechnologies (SBOT)

Stellar Biotechnologies Inc. (NASDAQ:SBOT)

Q3 2016 Earnings Conference Call

August 10, 2016 13:30 ET

Executives

Mark McPartland - Vice President, Corporate Development

Frank Oakes - President and Chief Executive Officer

Kathi Niffenegger - Chief Financial Officer

Analysts

Jason McCarthy - Maxim Group

Brian Marckx - Zacks Investment Research

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stellar Biotechnologies Third Fiscal Quarter and Nine Months 2016 Corporate Update Conference Call and webcast. This conference is being recorded today, Wednesday, August 10, 2016.

During today’s call all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] I would now like to turn the conference over to Mark McPartland, Vice President of Corporate Development at Stellar Biotechnologies. Please go ahead, sir.

Mark McPartland

Thank you, operator and good day everyone. We would like to thank you all for joining us today for Stellar Biotechnologies’ third quarter fiscal 2016 corporate update conference call and webcast. Joining me on the call today from Stellar’s team, senior management team are Mr. Frank Oakes, the Company’s President and CEO; Kathi Niffenegger, our Chief Financial Officer; and Mr. Oakes will provide an update of Stellar Biotechnologies operations, and review our recent achievements and growth opportunities while Ms. Niffenegger will review our consolidated financial results. After the formal presentation, we will be available to answer questions from our callers and also our webcast participants.

I would also like to note that our press release for the third quarter and nine months results and our Form 10-Q quarterly report for the period ending June 30, 2016 were released and filed with the SEC on Tuesday. All of Stellar’s current and past reports and filings can be found on the U.S. SEC website at sec.gov/edger and the Canadian Securities Administration website at sedar.com. They can also be easily accessed from the investor section of our website at stellarbiotechnologies.com. I would also note that the webcast replay will be available shortly after the conference call as well as a replay of the teleconference for dialing purposes and can also be found by visiting investor section of Stellar’s website. Before we begin, I want to remind our listeners that today’s call may include forward-looking statements based on current expectations. Statements, other than purely historical factual information constitute forward-looking statements. Listeners should not place undue reliance on these forward-looking statements, which are not a guarantee of future performance.

There can be no reassurance that forward-looking statements will prove to be accurate as they involve risks, uncertainties and other factors that may cause actual results to differ materially from the forward-looking statements. For a discussion of risk and uncertainties related to our business, please read carefully our press releases and company reports filed with the U.S. Securities Exchange Commission and the BC British Columbia Securities Commission. All forward-looking statements are made as of today and are subject to change, except as required by law, the Company assumes no obligation to update such statements. I would now like to turn the call over to Frank Oakes, President and Chief Executive Officer of Stellar for opening remarks. Frank.

Frank Oakes

Thank you, Mark and good day everyone. Thank you for joining Stellar’s third fiscal quarter corporate update conference call. On behalf of the dedicated team of Stellar Biotechnologies, I am really pleased to report another period of strong growth and forward momentum on all fronts. But before I get into recent key achievements in both financing and business development, I want to point out our solid fundamentals and continued revenue growth as evidenced by this latest quarterly report. Once again this quarter Stellar delivered an increase in sales over previous periods with revenue increases for the third quarter and the nine months ended June 30, 2016 of 15% and 78% respectively over comparable periods 2015.

These increases were driven by both greater sales volume and expanded customer base. Importantly, they reflect the positive dynamics that we are seeing ring needed for KLH in the field of immunotherapy broadening recognition by immunotherapy developers for Stellar’s KLH products and expertise and shows ability to convert this market opportunity into sales growth. Several quarters ago, we set a corporate goal to concentrate on expanding our KLH core business. We saw a growing pipeline of immunotherapies that use KLH in clinical development for a wide range of serious diseases with little awareness of the potential of future supply constraints, so we laid out a plan to prepare and position Stellar to be the go to supplier for KLH of these immunotherapy programs.

Since that time we carefully developed and deployed our resources toward expanding infrastructure, growing production capacity and adding new supply agreements in collaborations and initiating discussion with potential new customers and partners. support and believe that we’re now seeing the positive impact of these efforts of sales revenue and we’re excited by the business opportunities that we are seeing going forward. This brings me to Stellar’s announcement is May of a joint venture with our long-term partner Neovacs of France. Neovacs is a leader in the development of active immunotherapies for autoimmune and inflammatory diseases and Stellar’s branded KLH is key carrier protein in Neovacs’ leading Kinoid therapy technologies. Neovacs has product candidates in clinical trials in Europe, Asia and Latin America for the treatment of Lupus and Crohn’s disease and Neovacs’ just received FDA authorization to extend its Lupus trials into the United States. This is an exciting opportunity. In addition, Neovacs is expanding its clinical program to include the inflammatory disease Dermatomyositis.

The primary purpose of the joint venture is to work together to manufacture Neovacs’ Kinoid immunotherapy products. This will eventually also provides us the potential to manufacture and sell other KLH vaccine, vaccines for third party customers including some of Stellar’s existing partners. As announced earlier this month we formed the new company Neostell to carry out the business of this joint venture and we are now putting together the operational teams to map out the next steps for the Neostell program. This is really a unique opportunity for Stellar. Through Neostell, Stellar and Neovacs can work together to ensure the success of Neovacs’ products like their Interferon Alpha Kinoid for Lupus while we lay the groundwork for similar support to other companies developing KLH-based immunotherapies.

In addition, we believe that Stellar can potentially benefit from the deeper involvement in KLH conjugated vaccine manufacturing. The Neostell joint venture is an excellent example of how our core business is driving new business opportunities for sustained growth. We have added to this quarter’s momentum with a successful capital raise. On June 30, Stellar announced pricing of a $6.75 million registered direct offering of common shares with a private placement of unregistered warrants. We completed the transaction with institutional investors in a close on July 6. Our KLH products already being used in multiple clinical stage programs but as I pointed out earlier, we have a pipeline of new immunotherapies and opportunities on tap. This financing will support Stellar’s goal meeting the demand for KLH from current and new customers as they advance from clinical development to commercial launch. Our growth trends are now bolstered by a stronger balance sheet providing a runway from which we can execute on key programs that we believe will position Stellar to be a leading company in the field of active immunotherapy.

I want to take this opportunity to formally welcome two new Stellar team members. In April and May, we expanded our management team with the addition of Dr. Michael Klein as Vice President of Chemistry, Manufacturing and Controls and Diane Mussmacher as Head of our quality assurance group. Mike brings with him 26 years of scientific, regulatory and operational experience in the biopharmaceutical industry with specialization of protein chemistry and Diane brings 26 years of experience in quality control and quality assurance. Mike is now heading up Stellar’s production and product development functions and serving as the lead on all activities related to CNC [ph] for Stellar and KLH products. Mike’s extensive experience in pharmaceutical manufacturing management with novel biological products at all stages of development will be a great asset given Stellar’s expansion plans. We are very pleased to have Mike and Diane joining Stellar’s operational group at this exciting time in the company’s evolution. The Stellar’s team is already hard at work as we move into the fourth quarter and I am confident in this strong foundation that we built and in the opportunities ahead. I look forward to your questions into this call.

And now, I would like to turn the call over to Stellar’s CFO, Kathi Niffenegger who will discuss our financial results in more detail. Kathi.

Kathi Niffenegger

Thank you Frank and good morning everyone. During my review, I will be discussing the condensed financial results for our third fiscal quarter and nine months ended June 30, 2016, with the comparison to the same periods in the prior year unless other noted.

Frank has already noted the increase in our revenues, 15% increase from $157,000 to $181,000 in the third quarter and 78% increase from $558,000 to $996,000 for the nine month period. Our total expenses were $1.37 million and $4.59 million for the third quarter and nine months ended June 30, 2016 compared to $1.03 million and $3.95 million for the same periods in 2015. Our cost of revenues actually decreased for the quarter and decreased relative to revenues for the nine months. As we mentioned in the past, our cost of revenues may vary compared to revenues primarily because we have certain indirect cost that are incurred regardless of our product sales levels. For example cost of aquaculture and manufacturing quality system.

In addition, some employees were temporarily signed to process development for Stellar KLH products thereby lower indirect manufacturing cost and increasing R&D cost in the current period. As a result, our cost of revenues deceased from 285,000 to 179,000 in the third quarter and increased from 772,000 to 924,000 for the nine months period. We have experienced an improved cost of sales percentage at a higher revenue levels. Our research and development expenses were 470,000 for the third quarter and 1.1 million for the nine months ended June 2016 as compared to approximately 130,000 for the third quarter and 830,000 for the nine months for the same period in 2015.

The increase over the prior period was the result of increased cost related to our aquaculture feasibility assessment in Baja California Mexico, increased internal research and process development related to our Stellar KLH products and the completion of contract services under our collaboration agreement resulting in higher costs incurred by internal research. Our administrative expenses were approximately 720,000 for the third quarter and $2.6 million for the nine months ended June 2016 as compared to 618,000 for the quarter and $2.35 million for the previous year. The increase over the prior period resulted from increased corporate expenses, costs related to hiring new employees, increased customer and business development travel and increased investor relations activities.

Our net loss for the third quarter was $1.9 million or 14 for basic share compared to a net income of $463,000 or $0.06 per basic share for the same quarter in the prior year. The net loss for the nine month ended June 2016 was $3.68 million or $0.44 per basic share as compared to a net loss of $1.3 million or $0.16 per basic share for the nine months ended June 2015. The increase in net loss was primarily due to fluctuations in non-cash gain or loss in fair value of warrant liability in the prior year periods partially offset by foreign exchange gains in the nine months ended June 2016. We no longer have warrants with Canadian dollar exercised prices so warrant liability is now zero and the fluctuations in the non-cash fair value changes will no longer affect our current results going forward. Our capital resource position remained strong with working capital of $6.89 million at June 2016 compared to $7.5 million at September 2015.

Cash, cash equivalents and short term investments totaled $6.79 million at June 2016 compared to $8.97 million at September 2015. As Frank mentioned earlier subsequent to the period end, we completed a Registered Direct Offering of common shares and private placement of unregistered warrants for net proceeds of approximately $6 million. That transaction was completed with institutional investors and closed on July 6, 2016. The financing strengthens the company’s balance sheet and we will support growth initiatives and tended to meet anticipated market demand from Stellar KLH products.

We believe our current cash position and short term investments will continue to fund our operating and development program as well as upgrades to our facilities for at least in the next 12 months. However, we may seek additional capital to get our equity raises as needed to accelerate the development of our programs and initiatives in response to market demand or to exploit new opportunities to expand our business. As Mark mentioned earlier, we filed our second quarter Form 10-Q, on Tuesday, August 09, which includes our unaudited condensed interim consolidated financial statements and the related management discussion and analysis.

I would encourage your review for more details on our ongoing operations. I will now turn the call back over to Frank for closing remarks.

Frank Oakes

Thank you, Kathi. I would like to reiterate to all of our listeners and key points of our discussion. We continue to see increasing interest for Stellar KLH and our third quarter and nine months revenue growth can be attributed to higher sales and increased interest in KLH. We have continued our expansion initiatives on multiple operational fronts including our ongoing aquaculture infrastructure improvements in California and in Mexico and the formation of a joint venture manufacturing partnership which we believe are paving the way for strong strategic foundation and future growth for the company. Our strengthened management team will support the advancement of our partners therapy development programs and commercial launches. Our grow plans were bolstered by the enhancement of our balance sheet in July providing a runway from which we can execute on all key programs that we believe will position Stellar to be in the leading position in the field of active immune therapy. We continue to see strong interest from new potential customers and opportunities for growth specifically where we can support the advancement of KLH powered immunotherapies in clinical development. I remain extremely excited by the prospects for Stellar Biotechnologies and want to thank our employees, partners, shareholders, stakeholders for all their support. This concludes our formal comments at this time and we like to open the call for questions.

And operator, if you would like to begin that process?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will go now to Jason McCarthy with Maxim Group

Jason McCarthy

Hi guys, thanks for taking the question. I wanted just little bit from Neovacs for a second and just talk about some of the other partners in particular OBI Pharma and the breast cancer vaccine, I know they had some interesting data from the Phase 2/3 study, they are planning I guess to move to a Phase 3, haven’t heard anything about it. Could you give us an update on you know what OBI is doing and how that could translate you know, if they are going to start the largest study into KLH supply or the volume that you might be supplying to a study like that?

Frank Oakes

Well I can’t speak specifically to any customer’s plans or expectations. But I can say that in the field of oncology in general and in particular in the field of breast cancer that there continues to be strong enthusiasm and the prospects for those therapies in development and I know that is echoed by OBI’s continued forward movement with their breast cancer vaccine. I know they have recently reported data in a public forum and reported that they continue to intend to move that product forward, and there continues to be very strong interest in access to KLH supplies and support of vaccines such as the OBI 822 vaccine in the field of oncology. So generally speaking without speaking specifically to any one customer or partner, we still see strong – a lot of enthusiasm and strong interest in accessing KLH supplies and in particular in securing long-term agreements to assure supply through clinical stage development into commercialization. So we are optimistic about the field and optimistic about those relationships.

Jason McCarthy

Great. And just one more question about partners or potential partners. And now you do have a partner in Alzheimer’s disease and the reason I mentioned it, I know they are in early stages. They had some interest in data recently. You know Biogen and some of the bigger pharma, bigger biotechs are advancing antibodies for Alzheimer’s disease and have shown some great data and I know KLH based immunotherapies drive or tend to have antibody bias responses like Neovacs has shown great data in Lupus. Can you give us an update on where your partners in Alzheimer’s disease and where they might be heading next? Could you give us some idea?

Frank Oakes

Yes, I will be happy to speak to that. There were some great presentations in Toronto just a few weeks ago at the AAIC conference and the companies like our partner Araclon and that relationship that we publicly announced earlier. They presented data to demonstrate that their vaccine, their KLH conjugate vaccine to beta amyloid target was well tolerated by patients. It was also demonstrated to generate monoclonal or human – or patient specific antibodies against their target, so going down that pathway that you suggested the KLH conjugate vaccines are intended to induce human produced or patients produced antibodies against a specific targets that would be the same targets that would be relevant to monoclonal antibodies for the specific indication. So that vaccine demonstrated good toleration by patients. There was also a vaccine that is a KLH conjugate vaccine by a Slovakian company. There was a presentation at that conference that also demonstrated that the Phase 1 vaccine was well tolerated by patients and was generating antibody specific to their child protein target. So we think that that pathway that has been led by Neovacs in developing conjugate therapies that generate polyclonal antibodies against specific relevant targets that are also demonstrated to be relevant by monoclonal antibodies therapies, we think that pathway bodes well for KLH conjugate therapies because the early clinical stage reports are demonstrating that the vaccines are well tolerated and that they are developing are inducing antibody production against those specific target.

The efficacy of these vaccines and the therapeutic relevance of these vaccines still has to be demonstrated in later stage clinical trials but we are optimistic that there are multiple pathways in diseases like inflammatory disease with Neovacs likely with what are thought to be relevant therapeutic targets for Alzheimer’s such as the beta-amyloid or KLH protein. We think this is all, all bodes well for KLH conjugate therapies and the vaccines seems to be well-tolerated and at least inducing the antibody, the desired antibody response.

Jason McCarthy

Great, thanks Frank. And just one more question on the projected cash burn or the runway that you are going to have with the recent financing. We are also seeing that being – you know operating expenses are being offset by increasing KLH supply or sales. Can you give us a sense that, forgive me I missed it before the cash runway that you see now for the company, where it can get you there?

Frank Oakes

Well we are reporting at least a 12 month cash runway given our current cash burn, our cash position extends well beyond that. It could be forecasted to extend well beyond that of the cash burn will to some degree be influenced by the rate of development or advancement of some of our key customers and the extent to which they may want to see significant increases in KLH supply out over the next 24 to 36 month period. Stellar is in a position where we have to increase production capacities somewhat in advance of the demand increase of the time in which our customers will seem demand increases because of the projection cycle. So we are monitoring the development rate of and advancement of many of our customers, multiple customers and trying to make sure that we are in a position to supply the quantities of product when they need it. And once those supplies are realized, once the demand is realized obviously then the revenues will offset cash burn. So we are projecting at least a 12 month runway with a nice – much nicer runway but also reserving the respect the fact that we may need to make investments in advance of increases and demand if we are to see customers advancing to regional commercial launches in the next 12 to 18 months which could be the case depending on some of the clinical trials that are approaching their clinical endpoints.

Jason McCarthy

Okay, great guys. Thanks for taking the questions.

Frank Oakes

Jason, thank you and great questions.

Mark McPartland

Thanks, Jason. Operator, we are going to take a couple of questions from our webcast participants and then we will transition back to take an additional questions from the teleconference participants. We are coming up on our 30 minutes plus of the conference call, so we will try to narrow the timeframe from there. But the question from our webcast participant is and I will just read the question. Congratulations on another great quarter. Do you see continued opportunities to increase your gross gross margin on KLH as you scale up sales also can you remind us of the price range for your product and have you seen any price resistance from customers as a result?

Kathi Niffenegger

I will go ahead and take that question, Mark. First, related to the cost of sales and the gross margins, I do think and our goals are to continue to improve our margins and a lot of that’s based on the idea that we need a certain level of aquaculture, we need a certain level of quality systems. Our indirect cost if you will even as the revenues grow and I am going to temper that a little following up on what Frank said that as our sales grow, we would like to manufacturing staff, we would like to add QC staff. So there is definitely some room in there to increase margins and that might be – can be staggered over time. And then the other question about our pricing, we have a range depending on the configuration and which we did disclose before but it can easily be in the 30,000 and 40,000 per gram range. And I would not say we are having price resistance, I think we’ve had some consistent sales taking the failed to build good relationships with customers and they are seen how KLH fits in with their programs

Mark McPartland

Do you want to add to that a little?

Frank Oakes

No, I will add to that just with regarding pricing and price resistance. For every vaccines in development cost of goods for the commercial vaccine is always a serious consideration and it leads to the basis for our relationship with Neovacs and the joint venture with Neovacs to form the Neostell Corporation and that’s both an effort to establish a strong manufacturing platform for Neovacs’ vaccine for a commercial launch but also to help manage cost of goods because the cost of KLH or the vaccine manufacturers always a significant component of the cost but generally the cost of the finished product, the finished vaccine product, the manufacturing component of that cost is always the most significant component to cost of good. So in combination with Neovacs we are establishing a platform to provide a KLH supply at a –with a cost structure that assures Stellar its expected margin on the manufacture or on the sale of KLH but also the share on the margin on the manufacture of the finished vaccine product and help Neovacs manage its cost of goods. And we think this is a good model that would apply to multiple companies that are seeking to transition from clinical stage production of vaccines to commercial stage production of a product for commercial launch.

Mark McPartland

Just a question from webcast, it relates also to Neostell or the new joint venture company and specifically how much impact going forward do you believe Neostell have on your resources and is this going to in either way pull your way from your core KLH manufacturing business or how will it potentially drive that business?

Frank Oakes

That’s a good question and it’s a good follow on to the comments that I just made. The Neostell Corporation and the Neostell joint venture was carefully structured to make sure that it does not create a drain or a unnecessary demand on Stellar’s current financial position or core KLH business. The Neostell Corporation has been formed and the development plans are being laid but they’re all being done with very modest and already disclosed capital contributions by Stellar and the increase in demand on Stellar’s resources are structured to take place contingent on Neovacs’ results from a Phase 2 clinical trial which would trigger the ability to support a commercial launch in a regional jurisdiction, so they would be offset – the increase in demand on Stellar’s resources are structured to offset the increased demand by increased revenues. So we think the structure of the deal will not distract Stellar from its core KLH business in support of multiple customers and that the demands on Stellar’s resources are – will be offset by increases in and KLH revenues, KLH sales revenue. So we think the structure of the deal was well thought out, and doesn’t put Stellar’s core business at risk or Stellar’s shareholders at risk.

Mark McPartland

Thank you, Frank. Operator, we would like to turn the call back to additional teleconference participants at this time.

Operator

We will take our next question from Brian Marckx with Zacks Investment Research

Brian Marckx

Hi everybody. Frank, referenced pipeline opportunities in your prepared remarks. Is there anything more that you can talk about that and in particular are some of these late stage development opportunities, and you expect these to make a revenue contribution here in the near future?

Frank Oakes

I can’t speak to any one specifically. There is not already publicly disclosed but I can say that Stellar is in discussions with companies, multiple companies to establish long-term agreements that are structured to assure supply to mid to late stage clinical trials and in particular structured to assure supply to support the commercial launch of vaccine. So lot of the negotiations and discussions we are having are somewhat broader than just KLH supply. They include forward-looking needs for assay development characterization studies and assays that will help support products during the regulatory review to transition from clinical production or clinical stage products to commercial stage products. And we expect to see a number of these I guess day lighted over the next 6 to 12 months. They are significant in nature, they will greatly strengthen Stellar’s core supply business and I think will enhance or will increase the number of indications and the ability for Stellar to talk specifically about the magnitude of potential KLH demand looking out over the 3 to 7 year period.

Brian Marckx

Okay, great. Thanks Frank.

Frank Oakes

Thanks Brian.

Operator

And it appears there are no further questions at this time. Mr. Mark McPartland, I would like to turn the conference back to you for any additional or closing remarks.

Mark McPartland

Sure thank you operator and again thank you everyone. Appreciate your support. I would like actually Frank to provide the closing comments at this time.

Frank Oakes

Mark, thank you and thank you all for participating in this call. I would like to reiterate our thanks to everyone, key stakeholders and shareholders. If you have additional questions, don’t hesitate to call me or contact Mark McPartland directly. And thank you for your continued support and interest in Stellar Biotechnologies and we are looking forward to providing future updates on our progress.

Mark McPartland

That concludes our comments, operator.

Operator

And this concludes today’s call. Thank you for your participation. You may now disconnect.

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