OmniAb, Inc. (NASDAQ:OABI) Q2 2023 Earnings Call Transcript

OmniAb, Inc. (NASDAQ:OABI) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Good afternoon, and welcome to OmniAb, Inc. Second Quarter 2023 Financial Results and Business Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Kurt Gustafson, OmniAb, Inc.’s Chief Financial Officer. You may begin.

Kurt Gustafson : Thank you, operator, and good afternoon, everyone. Thank you all for joining our second quarter 2023 financial results conference call. There are slides to accompany today’s remarks, and they are available in the Investors section of our website at omniab.com. Before we begin, I’d like to remind listeners that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. These forward-looking statements are qualified by the cautionary statements contained in today’s press release and our SEC filings.

Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, August 10, 2023. Except as required by law, OmniAb undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Joining me on the call today is Matt Foehr, OmniAb’s President and CEO. During today’s call, Matt and I will provide highlights on the company’s operations, partner and technology updates and our recent financial results. At the conclusion of the prepared remarks, we’ll open the call to questions. And with that, let me turn the call over to Matt.

Matthew Foehr : Thanks, Kurt. Good afternoon, everyone, and thanks for joining our second quarter conference call. I’ll start today with an overview of our business here on Slide number 4 of the deck. At the core of OmniAb’s business model is our proprietary discovery technology platform that’s designed to help partners discover innovative therapeutics quickly and efficiently. In a simple sense, it’s a model based on licensing innovative technologies to partners. OmniAb is differentiated in the marketplace by having the most diverse host systems for fully human bispecific — fully human and bispecific antibody discovery with the industry’s only 4-species platform. That includes transgenic mice, rats, chickens and cow-based technologies.

Our partners have an increasing number of antibodies in clinical trials that are from our technology and the versatility of our platform continues to be demonstrated in the number of modalities and formats being employed by our partners, both preclinically and clinically. We offer flexibility to meet our partners’ evolving scientific needs as we believe generating large and diverse repertoires of high-quality antibodies increases the likelihood of success in optimizing desired therapeutic characteristics. Our technology and our core capabilities are driven by, what we call, the biological intelligence of our transgenic animals and are further strengthened by our innovative, high throughput screening and other technologies. There are 74 partners with access to our technology or to OmniAb antibodies with over 300 programs in various stages of research and development.

The antibody space is one of the fastest-growing parts of the drug industry with a market size expected to be larger than $250 billion within a couple of years. We believe we’re in a great position to capitalize on this opportunity with our unique and expanding technology offerings. We’re constantly innovating our technology stack, and this past May, we introduced our newly branded OmniDeep offering, which is a suite of in silico capabilities, including structural modeling, large, multi-species antibody databases, molecular dynamic simulations, artificial intelligence and machine and deep learning sequence models that are applicable across our technology platforms to further enhance our partners’ discovery process. In addition, we plan to introduce our novel heavy-chain-only OmniChicken that we will be branding as OmnidAb in the fourth quarter of this year.

And I’ll say more detailed [Audio Gap] and our excitement around that technology until later this year when we launch it. On this next slide, I just want to reiterate that as a company and as a team, we’re mission-driven to enable the rapid discovery of innovative pharmaceutical products by pushing the frontiers of drug discovery technologies. We’re poised for continued growth, as shown here on Slide number 6 by the new license agreements we signed during the second quarter. In Q2, our team closed 4 new platform license agreements, one with Merck, Inc. and one with Neurocrine Biosciences as well as platform deals with Stanford University and Seattle Children’s Hospital. Regarding Merck, this is a new agreement and is with the U.S. Merck & Co., not to be confused with the German Merck KGaA with whom we also have an agreement.

We reached a total of 74 active partners at quarter end, up from a partner count of just slightly more than 60 as of a year ago. Our discovery platform continues to garner interest in the industry among a diversified group of leading global pharmaceutical companies, allowing us to leverage our highly scalable business model. Adding partners like Merck Inc., who are global leaders in the industry and who are committed to using the power of leading-edge science to improve lives, bolsters our growing list of partners. We believe this is a testament to our effective and efficient discovery technologies to our in-house expertise for scientific collaboration services, our mindset for developing a deep understanding and also prioritizing the current and the future needs of our partners as well as our commitment to continued innovation.

Here on Slide number 8, our portfolio of active programs increased to 305 with 29 programs in the clinic under regulatory review or approved for commercialization at the end of Q2. During the second quarter, we added a net total of 4 new programs to our portfolio. Importantly, I want to note that when we report program count, we do so net of attrition, as attrition is expected in the pharmaceutical industry. In this quarter, attrition was seen only in the discovery stage of our partner pipeline. The pie chart on the right-hand side of the slide breaks down our 305 programs by stage of development. The discovery phase consists of 261 programs in addition to 15 programs now in the preclinical stage. In the clinic, at the end of June, our partners had 22 programs in Phase I, 2 programs in Phase II, 1 in Phase III as well as 1 program currently under regulatory review.

There are 3 approved drugs utilizing OmniAb-derived antibodies, and we’re recognizing royalty revenue from commercial sales of zimberelimab and sugemalimab in China, both of which are also being pursued in other geographies. We saw some nice progression of programs in the quarter as well, with 3 programs transitioning from the discovery stage to the preclinical stage with 2 programs moving from the preclinical stage into their first human clinical trials and with 1 Phase III program moving to a regional filing for approval, shown here on this Slide number 8 pie chart on the right as BLA stage. Our large and growing portfolio features a diversified set of partners utilizing a variety of formats and modalities, as I mentioned earlier. I’d also like to note here that the count of active programs has increased from 270 in the year-ago period, up to 305 programs at the close of the second quarter, noting again that this is net of program attrition.

Despite some of the industry’s challenges, including evolving financing environment and funding constraints, especially for some of the smaller players in our industry, our portfolio continues to expand from a combination of new and existing partners. We don’t feel that it’s entirely unexpected that macro factors can influence the velocity of growth of some of our business metrics. And although we see a slightly lower number of net new program additions compared to last year, OmniAb is in a very solid position for continued growth with an increasing number of both active programs and active partners. Moving now on to Slide number 9. As I mentioned, in the second quarter, 2 new programs entered the clinic with Immunovant who initiated a Phase I clinical trial of IMVT-1402, which is a subcu FcRn inhibitor.

Also, Gloria Pharmaceuticals initiated a Phase I/II study to investigate the safety, tolerability and preliminary efficacy of GLS-012 as a monotherapy in combination with GLS-010 in subjects with advanced solid tumors that have progressed following standard treatment. We’ve now had 3 new programs entered the clinic in the first half of this year, and we expect a potential 1 to 2 more to enter the clinic before year-end. I want to note that when 2023 began, we indicated that we expected 3 to 5 new programs to enter the clinic this year. By the end of June, we’d already reached 3, and we’re now focused on an upward range of 4 to 5 new clinical programs for the year. Our partners made numerous public announcements about their clinical and commercial progress during the second quarter and in recent weeks.

And I’ll highlight a few of them on this slide, Slide number 10, starting with batoclimab. During the second quarter, we earned milestone revenue related to advancement of batoclimab into pivotal studies in 2 additional indications of CIDP and TED. These are additional indications from the Phase III work that was started in generalized myasthenia gravis earlier in the year. In addition, Harbour BioMed announced that China’s NMPA accepted its biologics license application for the treatment of generalized myasthenia gravis. And for the same indication, HanAll announced that they’re progressing towards initiation of a Phase III trial in Japan later this year. As for the next-generation anti-FcRn IMVT-1402, I mentioned that Immunovant initiated a Phase I trial to evaluate safety, tolerability and pharmacodynamics and they’ve communicated that initial data are expected in the second half of this year.

One of our newer partners, Cessation Therapeutics announced that they’ve received authorization to initiate a Phase I clinical trial. CSX-1004 was first discovered via collaboration with Scripps Research Institute and subsequently licensed to Cessation for development. Cessation is developing this compound for the prevention of fentanyl overdose, which is an indication that obviously it has an important and urgent unmet medical need. Aptevo Therapeutics announced data for its bispecific AML drug candidate, APVO436, and that it plans to initiate 2 Phase II clinical trials in AML populations. And lastly, we achieved a research progression milestone for small molecule inhibitors of a genetically validated target relevant to neurological diseases in one of our ion channel collaborations with GSK.

This triggered a $2 million progression payment for OmniAb and Kurt will discuss the accounting for this. We’re particularly excited about this program with GSK as it demonstrates the capabilities of our highly differentiated ion channel and transporters technology platform. Ion channels are key components in a variety of biological processes that involve rapid changes in cells, and they hold therapeutic potential in a broad range of indications, including neurological and metabolic diseases, pain, cancers, infectious diseases and many others. As a result, ion channel drug discovery provides a compelling opportunity, although it’s been a challenging area for the industry to identify drugs to these high-value targets. Our ion channel platform an OmniAb leverages our proprietary expertise in a combination of biological assays, medicinal chemistry and in silico and computational chemistry applications to enable the discovery of ion channels targeting therapeutics in a variety of formats and modalities.

We believe our differentiated core capabilities can assist partners in their advancement of drug discovery against this target class. We’re continuously expanding our capabilities in this area, and we believe we have one of the most experienced teams of ion channel experts anywhere. We have an extensive bank of custom cell lines, reagents and assays that are designed to accelerate ion channel drug discovery and development, and that’s what attracts partners to this element of our technology and capabilities. As these are higher value and more difficult targets to identify, we structure our collaboration agreements accordingly. These deals provide for exclusivity on various targets, and as a result, have higher milestone payments and higher royalty percentages than we typically get for standard platform access agreements.

We have agreements with GSK for 2 neurology targets that are in discovery phase and another partner is Roche for 3 undisclosed targets that are also in the discovery phase. In total, we’re eligible to receive $1 billion in milestones on these 5 programs alone, along with royalties should program be commercialized. And this last slide for me, which is Slide number 13 in our deck, highlights our key areas of focus going forward. And it describes why we believe we’re well positioned for future growth and can make an enduring impact on our industry and ultimately on global human health. Our business is highly scalable, and we’re focused on increasing partners and expanding programs by continuing to invest in technologies and innovations to power the discovery and development of effective therapeutic candidates.

A focus on stakeholders and building value for stakeholders is at the foundation of what we do. And that focus is guided in collaboration with our Board of Directors and it’s present in every employee here as well. While I mentioned our Board of Directors, I do also want to acknowledge on today’s call that, earlier this week, with heavy hearts, we announced the passing of a beloved Board member here at OmniAb, Sunil Patel. Sunil was an accomplished biotech executive who was a longtime colleague and a co-architect of what we’re building here at OmniAb. And I’ll add that the team here is honoring Sunil’s contribution and legacy as we continue to do our important work, expand our technology and grow our business. And now before I hand the call back over to Kurt, I’ll finish by saying that we look forward to keeping the investment community updated as we execute on our strategy.

And with that, I’ll pass it back over to Kurt now for a discussion of our second quarter financial results. Kurt?

Kurt Gustafson : Thank you, Matt. As a reminder, the financial results reported for the prior year periods are prepared on a carve-out basis, which were derived from Ligand’s historical accounting records as if OmniAb were an independent company. As a result, certain comparisons to prior periods aren’t reflective of true underlying business changes. This is primarily true for operating expenses, given the differences in corporate structure and the methodologies for reporting. You’ll recall that OmniAb derives revenue from several sources, including upfront payments for partners to access our technology stack, payments related to service contracts when we do discovery work for our partners, milestone payments typically related to progress in the clinic and royalties on net sales of our partners’ programs.

So moving specifically to our second quarter results. Total revenue for the second quarter of 2023 was $6.9 million compared to $7.2 million in the prior year quarter. We saw an increase in license and milestone revenue based on milestones that were hit this quarter, mostly related to progress with batoclimab, specifically the start of additional pivotal studies for 2 new indications. The increase in milestone revenue was offset by a decrease in service revenue, and this decrease is related to a few different things. First, we’ve completed our portion of the work on certain programs, and these programs have been handed off to the R&D teams at our partners. As a result, we are no longer earning service revenue for these programs, but would still have the opportunity to earn milestones and royalties should these programs advance.

Second, the research period for one of our GSK ion channel programs was extended by approximately 1.5 years. The accounting impact of this extension is that the initial $7 million upfront payment that was being amortized over the initial research period had its amortization schedule adjusted to reflect the new length of the research period. This resulted in a onetime negative adjustment of $1.7 million this quarter. The full $7 million will all eventually be recognized. It’s just that the recognition of the revenue will be spread over the new longer research period. And third, as it relates to the GSK program that achieved the $2 million research progression milestone, this milestone is recognized as service revenue and will be amortized over the research period of this program.

As this program is a bit more than halfway through its research period, we recognized a bit more than half of this milestone in the current quarter and the rest will be amortized over the remaining research period. The net result of the change in the amortization period and the new milestone recognition created a negative impact of about $500,000 in the quarter relative to what the trend would have been. Turning to operating expense. Our R&D expense for the second quarter was $14.1 million compared to $11.5 million in the prior year quarter. Similar to Q1, the increase was primarily due to higher personnel costs and higher costs associated with our new facilities. G&A expense was $8.7 million compared to $5 million in the prior year quarter, with the increase related to increased headcount and other costs associated with being a newly established public company.

The net loss for the second quarter was $14.7 million or $0.15 per share versus a net loss of $10.3 million or $0.12 per share in the prior year period. Turning to the balance sheet. We ended the second quarter with a total of $103.1 million in cash, cash equivalents and short-term investments. Our business model is not capital intensive and it’s highly scalable. And while we are committed to growing the business and keeping our technology cutting edge, we’re also committed to deploying our capital efficiently. We continue to expect that our cash balance at the end of 2023 will be slightly higher than the balance at the end of 2022 and that this cash balance provides sufficient runway to fund our operations for the foreseeable future. Turning to our quarterly results, I’d like to make a few comments on some of the underlying trends that we see.

Excluding the milestone revenue recognized specifically for teclistamab, we generally expect total revenue to grow. However, the majority of our revenue in the near- to medium-term will come from milestone payments and the exact timing of these milestones can be difficult to predict. As a result, our revenue growth will likely be a bit lumpy on a quarterly basis. As we think about our operating expense going forward, I had indicated last quarter that our Q1 2023 actual results would be a good baseline from which we would grow. The second quarter results were consistent with that expectation, and we anticipate this trend will continue going forward as our operating expenses are now more predictable. We’re forecasting that both R&D and G&A will grow slightly in subsequent quarters with the pace of G&A spend being more moderate than that of our R&D spend.

And with that, I’d like to open up the call for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Puneet Souda from Leerink Partners.

Puneet Souda : So Matt, maybe first one. Obviously, you talked about some of the headwinds in the market. And as you pointed out, you have — there’s a potential that you could see that. But maybe talk to us a little bit about the flip side of what’s happening at the partners and what they are telling you in terms of the projects that they can potentially bring to you because you’re providing them value and cost reduction. Maybe talk to us about what — how do they think about that as they think about discovery stages and getting into Phase I.

Matthew Foehr : Yes. Puneet, thanks. This is Matt. I appreciate the question. Yes, as we — I mean, one of the things I’ll highlight that, obviously, this quarter, we entered into 4 new platform license agreements with new partners, right? Merck and Neurocrine. Merck, obviously, is a well-known player, global force in the industry that is really committed to leading-edge science and leveraging cutting-edge technologies to develop new medicines. Neurocrine, of course, is a 30-year-plus history in innovations and success of pursuing really what have become life-changing medicines in the neurology and neurological disease space. But also new partnerships with Stanford and Seattle Children’s, both of which are leading academic centers, both of which are focused on translating their novel biology into new medicines.

So sometimes it’s not only the existing partners that tell us a lot about how we’re bringing value to them, but it’s the new partners as well, right? So to your question of how we do that, we obviously get into a lot of deep discussions with our partners of areas they’re interested in and why they see our technologies unlocking opportunities for them. That obviously translates into potential for increased success rates and faster pace in terms of finding quality antibodies to then take into the clinic. And that’s why they’re attracted to do licensing deals with us. I think there’s also a recognition now — a more broad recognition of our continued commitment to innovation, and that is also, I think, an important part as well. And obviously, our innovation is informed by our deep relationships with partners.

So there’s — like what we like to call an intelligent feedback loop, where you get a sense of where the industry is headed, and that informs the sorts of innovations and investments we want to make in our technology. So it’s really, at the end of the day, about speed and opportunity and efficiency and quality of the product, in this case, the antibodies that are coming out of our platform.

Puneet Souda : Got it. And then with that question, I was wondering — what I was trying to get to is that if the biotech funding situations were to get worse, is there an opportunity for you to sort of gain more share in the marketplace? And then let me just follow up with a question on China. I mentioned — I know you mentioned Gloria anti-LAG-3 in the Phase I trial now. Wondering if you could update us on what you’re seeing in China. We are all seeing weakness in the discovery stages in China that’s well known at this point. So wondering what you’re seeing there. Any color you can provide geographically.

Matthew Foehr : Yes. Yes, I’ll take that, Puneet. I’ll take the China part first, and then Kurt maybe can add some color as well. Obviously, we announced this quarter that Gloria entered the clinic in China. So it was nice to see — it’s always nice to see clinical progression out of our pipeline. And we obviously have a couple of drugs that are approved in China that Kurt can probably comment on as well. A lot of that, in terms of the later-stage visible programs out of China, really come out of some very early partnerships with OmniRat that were struck years ago, and those programs progress quickly through the clinic and then — or approaching the clinic, which is really a representation of what you see in our pipeline with some of our assets. But maybe, Kurt, you want to talk a little bit as well?