Orgenesis Inc. (NASDAQ:ORGS) Q4 2022 Earnings Call Transcript

Orgenesis Inc. (NASDAQ:ORGS) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Greetings. Welcome to the Orgenesis 2022 Year End Business Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, David Waldman, Investor Relations. You may begin.

David Waldman: Thank you. Good morning, everyone. And welcome to the Orgenesis year end business update conference call. On the call with us this morning are Vered Caplan, Chief Executive Officer; and Neil Reithinger, Chief Financial Officer. If you have any questions after the call, would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. This conference call contains forward-looking statements, which are made pursuant to the Safe Harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. These forward-looking statements involve substantial uncertainties and risks and are based upon current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us at the date of this conference call.

We caution listeners that forward-looking statements are predictions based on our current expectations about future events. These future — these forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including, but not limited to the risks and uncertainties discussed under the heading Risk Factors in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2022, and in our other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statement for any reason.

I’d now like to turn the call over to Orgenesis CEO, Ms. Vered Caplan. Please go ahead, Vered.

Vered Caplan: Thank you, David, and thanks to everyone for joining us on our call today. We are advancing the rollout of our Orgenesis Mobile Processing Units and Labs, also known as OMPULs, which are fully integrated all in one bioprocessing units that can be rapidly implemented as a standardized industrial clean emautomative at the point-of-care. Our revenue for the fourth quarter of 2022 increased by 98% to $13.6 million compared to the same period last year. In addition, we reduced our operating loss by 91%, which reflects our cost effective and scalable business model. Our revenue has shifted to be more production-based as we advance products from process development to GMP production. As we expand production, we hope to benefit from economies of scale with each point-of-care site servicing several OMPULs. As we have discussed in the past, the key to success in our point-of-care business is standardization.

The process is exactly the same regardless of where the product is produced. We believe our strategy of decentralizing the supply of cell and gene therapies based on standardization of the manufacturing production environment will ultimately become the solution for this industry, enabling lower cost, streamlined logistics, accelerated development and providing a scalable long-term option to overcome the industry-wide capacity constraints. Utilizing our OMPULs based approach, we believe we are uniquely positioned to address the challenges of current centralized productions. OMPULs showed on the implementation time of new capacity from 18 months, 24 months to three months to six months. In terms of expenses, our goal over time is to reduce the cost of therapies to tens of thousands with hundreds of thousands of dollars.

A recent news article in Genetic Engineering & Biotechnology News stated that high production costs are limiting patient access to cell and gene therapies. Additionally, an analysis by the Institute for Clinical and Economic Review suggests the average cost of cell therapy treatment is $1 million. For this very reason, we believe our point-of-care process is a crucial step that it is necessary for cell services to become widely available. As a result, we believe our model is uniquely positioned to address these challenges facing the industry, including capacity constraints and excess of cost. As we see this industry mature, more and more products enter the clinical stage, it becomes clear that this industry must find solutions to reduce costs, both in the development stage, as well as upon market approval.

According to cell and gene, a publisher of industry research through 2022, there were 27 FDA-approved cell and gene therapies. However, there are currently over 1,500 ongoing clinical trials of the cell and gene therapies registered with clinicaltrial.gov. For this very reason, we would like to become an industry standard on which we can integrate new therapies in development. So saving the costly need for each company to develop its own platform, including all the expenses and risks involved. We believe that utilizing an existing flexible platform available at multiple standardized locations, will enable therapeutic development companies to focus their efforts on clinical development. We continue to support our point-of-care centers, which are strategically located around the world and now span North America, Europe, Asia and the Middle East, which serve as hubs for the entire region.

We appreciate the dedicated work of our teams across the globe that diligently work to implement our quality system and implement the GMP practices. We view our human resources as our greatest asset and hope to continue to attract wonderful scientists from every nationality. Our strategy is to qualify the production process and one OMPUL at one point-of-care location and then to add additional OMPULs under the same quality system infrastructure. We have developed this approach based on a decade of experience and process development of such therapies and we are working closely with researchers from leading academic institutes, as well as some biotech companies active in this space. We believe our OMPULs are an important step to quickly expand our capacity and we look forward to expanding both the quantity and location of our system.

Since we have launched our point-of-care business, the feedback of the industry has been positive. We are all — also seeing the regulatory agencies address the issue of decentralized production of cell and gene therapies, which we believe comes as a response to the industry search for solutions in this space. The success of our point-of-care strategy has been enabled in part by the recent investments from Metalmark Capital Partners, a premier private equity firm into our point-of-care services subsiding Morgenesis LLC. It is important to reiterate that this transaction with Metalmark valued our Morgenesis subsidiary alone as a premium valuation of over $120 million, which represents a significant premium to the market cap of the entire company.

This capital has allowed us to increase their capacity and advance our go-to-market strategy as we aim to accelerate the deployment of our OMPULs throughout our global point-of-care network, with a goal to expand capacity across a broad range of advanced cell and gene therapies. We recently reached an important step in our collaboration with the University of California, Davis. We specifically signed an MOU with UC Davis to deploy our OMPULs at UC Davis and other healthcare universities within the State of California. We believe that having them as a partner with strong validation is likely to enhance our implementation, as well as with other institutes as we expand our OMPULs strategy across North America. It is important to know that our business goes beyond our point-of-care services.

In terms of our point-of-care therapeutic pipeline, which we believe we developed a low cost, capital efficient business model to bring these therapies to market. In 2022, our subsidiary, Koligo Therapeutics, supplied Kyslecel to five medical institutes supplying total pancreatectomy – islet auto transplant cases. Production from this one site enabled Koligo to achieve positive cash flow from operations in the fourth quarter of the year as a separate business unit. Additionally, Koligo passed an FDA inspection of this site as a registered tissue production establishment in February. Following this confirmation of the infrastructure design and production protocols, and building on increasing demand, we are now pursuing plans for site expansion in the U.S. and internationally.

In the EU, Koligo is utilizing the expertise of Orgenesis to enable regional production capacity and leverage grants to drive clinical development. More broadly, our strategy involves in-licensing therapies from leading research centers, hospitals and biotech companies, and out-licensing such products to pharma and biotech companies in consistent and standardized manners in all locations. We provide these partners with development and supply services while benefiting from service-related payments. At the same time, we are leveraging government grants and other sources of non-dilutive funding from regional partners and others in order to advance such therapy. Using our point-of-care model, we believe these therapies can be advanced in clinical trials at the lower cost of traditional clinical trials by leveraging our network of academic institutes and healthcare systems around the world.

Our partners, our customers have aligned interest with us and have committed to support the validation, development and clinical trials of advanced therapies utilizing our point-of-care platform within the respective markets. As we have discussed in the past, we provide our partners and customers with development and supply services, whether it is for our own products or for out-license therapies, we believe this approach is highly scalable and derisk developments or outside support from our partners. In this way, we believe we can advance our development of point-of-care therapies, which now span immunooncology, antiviral, metabolic, autoimmune disease, tissue generation and more. As an example, we recently reached an important milestone in collaboration with Hospital Infantil Universitario Niño Jesús in Madrid, Spain and Kurve Therapeutics.

Specifically, we announced positive preclinical results in intranasal administration of a stem cell-based oncolytic virus building product that demonstrated over 50% tumor reduction in Murine Glioblastoma model in that. This ability to deliver stem cells to the brain through the blood-brain barrier opens a possibility to a broad array of treatments that could be potentially be less invasively administered. The production of that stem cell-based oncolytic product involved utilizing hospital-based OMPULs. We look forward to expanding our collaboration with Kurve Therapeutics. On one final note, we recognize these are challenging times both since financial markets and for the companies developing the next-generation of therapies. We believe that by offering a more cost-effective drug development pathway for these therapies, especially for companies trying to optimize cash utilization, we can offer new cost-efficient solution that will unlock value not only for Orgenesis, but across the industry.

So to wrap up, we believe the coming year could be transformative for Orgenesis. We believe we are building a sustainable revenue model that will allow us to support our global partners and customers, while the advanced products will required regulatory. We expect to benefit from growth in reoccurring revenue stream based those on services and on future royalties and a long-term contract for investing and supplying these cell and gene therapies. With Metalmark’s support, we look forward to accelerating the rollout of our point-of-care strategy and deployment of our OMPULs. We share a vision of combining breakthrough therapies to market in a cost-effective way that will ultimately benefit patients, and hopefully, save lives. We look forward to sharing more exciting developments to be announced in the weeks and months ahead that we hope will drive value for shareholders for years to come.

On that note, I will now turn the call over to Neil Reithinger, our Chief Financial Officer.

Pressmaster/Shutterstock.com

Neil Reithinger: Thank you, Vered. Revenue for the three months ended December 31, 2022 increased by 97.7% to $13.6 million, compared to $6.9 million for the three months ended December 31, 2021. Revenue for the year ended December 31, 2022 increased to $36 million, compared to $35.5 million for 2021. The growth in revenue reflects an increase in cell process development service and hospital services as a result of having signed new process development services agreements with third-party customers, partially offset by a decline in POCare development services now that we have completed the majority of performance obligations under the initial development contracts in 2021. Cost of revenues, development services and research and development for the three months ended December 31, 2022 were $6.1 million and $27.1 million for the three months and 12 months ended December 31, 2022, a decrease of 43% and 26%, respectively, over the same period last year.

In previous years, we made significant investments in research and development services, including in the development of several types of OMPULs, the development of automated processing units and processes, owned and licensed advanced therapies to enable commercial production and additional work that addresses POCare needs. While we continue to invest in these activities, the majority of development work on our OMPULs has been completed, thus allowing us to deploy OMPULs in various worldwide locations. As a result, we saw a significant reduction in development and research and development service expenses, subcontracting, professional and consulting services, lab expenses and other research and development expenses. Selling, general and administrative expenses for the three months ended December 31, 2022, were $6.8 million, compared to $2.7 million for the same period last year.

SG&A for the year ended December 31, 2021 was $15.6 million, as compared to $14.7 million for the year ended December 31, 2020. The increase in selling and general administrative expenses for both the quarter and full year 2022 was primarily attributable to an increase of professional services, accounting and legal fees as a result of additional investment activities in 2022 compared to 2021, offset by a decline in salaries and related expenses. We expect the growth in revenue in 2023, including contracts already in hand will cover R&D and SG&A expenses during 2023. Operating loss for the three months ended December 31, 2022, was $627,000, a decrease of 91%, compared to $6.9 million for the same period last year. Net loss for the three months ended December 31, 2022, was $1.3 million, a decrease of 75%, compared to $5 million for the same period last year.

Operating loss for the year ended December 31, 2022, was $8.6 million, a decrease of 49%, compared to $16.8 million for the same period last year. Net loss for 2022 was $12.2 million, a decrease of 33%, compared to $18.1 million for the same period last year. In terms of liquidity, we ended the year with cash and cash equivalents of approximately $5.3 million and restricted cash of $1.1 million. We subsequently raised gross proceeds of $3.9 million through a registered direct offering and a $5 million three-year convertible note, which we believe provides us additional flexibility to support our near- and long-term capital needs at the parent company level. At the same time, we believe the investment from Metalmark will enable the deployment of our OMPULs to provide life-changing treatment to large numbers of patients in the U.S. and all around the world.

Overall, we remain focused on carefully managing expenses and believe much of our upfront investments are behind us and expect that future growth in revenue will offset our cash burn. Operator, we will now open the call to questions. Thank you.

See also 10 Best Stocks to Buy According to Chris Hohn and 11 Most Undervalued EV Stocks to Buy.

Q&A Session

Operator: Certainly. Your first question for today is coming from Bruce Jackson at Benchmark Company.

Bruce Jackson: Hi. Good morning and thank you for taking my question. I wanted to go into a little bit more detail about the University of California, Davis, Memorandum of Understanding. When — how long do you think it’s going to take to get to a formal agreement?

Vered Caplan: Well, I don’t know, academic institutes, they have their processes. Remember, we already have existing agreements, so we know the team very well and we are pushing ahead as quickly as we can. I feels like I think it’s important for both of us.

Bruce Jackson: Okay. Okay. And then the OMPULs have several different capabilities. I was also curious to know, does the agreement cover a particular type of processing like adoptive therapy or cellular therapy processing or does it also include like gene therapy or some other types of OMPUL capabilities?

Vered Caplan: We — the OMPULs are quite flexible, changing from a cell or genetically modified cell is really just changing the equipment inside. So it’s really not an issue

Bruce Jackson: Okay.

Vered Caplan: in terms of — we don’t have to kind of predefine it, let’s say.

Bruce Jackson: Okay. And then can you help us with just a general sense of scale as suppose — give us a rough idea of how big this could get. Would it potentially go to the entire University of California system at some point?

Vered Caplan: Well, I mean, the idea is to have this expand from not just one location, yes. And I think we will start with one location and take it from there. As we use to do.

Bruce Jackson: Okay.

Vered Caplan: I mean, we want to validate a location, make sure all is working. They certainly need the rest of California. It’s not just one site.

Bruce Jackson: Okay. And then if I could get in one quick question about Koligo with the sales to the five different customers, I am assuming that those were after you got the FDA manufacturing inspection behind you. And could we expect similar sales per quarter going forward or could it potentially expand off of the base that you established in the first quarter?

Vered Caplan: So just — because of COVID, because of other things, the FDA inspections — of course, the FDA have used your production files and everything, but they did not actually come to the site to do. And for us, it was important, right? We want to validate this. So it’s taking them maybe longer than we thought to make available to come to that site, but they came, they did the audit, which give us — just give us an assurance if we want to duplicate that site, right? We can feel assured that the process, the way we do this, the way we produce this product is acceptable and well audited by the regulator. And we know there’s a need to fill the site, but that’s kind of a point-of-care approach, right? So we are working on one side now to start shipping this to sites that are very far away is not easy and it’s also very expensive.

So what we want to do is now that we validate this location that supply to these centers, we can now build up a network of these so we can supply to additional centers.

Bruce Jackson: Okay. Got it. And then one last question for Neil, when is the K going to be filed?

Neil Reithinger: We do you expect the K to be filed tomorrow, okay, because we always like to make sure it’s at the same or within that same 24-hour period for the earnings release, okay.

Bruce Jackson: Okay. Super. That’s it for me. Thank you.

Vered Caplan: Thank you.

Operator: Your next question for today is coming from William Jordan at TSA Investment.

William Jordan: Yeah. Good morning. First of all, congratulations on the strong quarter. Clearly, you are making tremendous progress. It seems that one of the challenges in the past was the capital to deploy the new OMPULs. Given the significant investment from Metalmark, how do you see that impacting the business going forward?

Vered Caplan: Well, we — first of all, we appreciate that capital very much, because it allows us to stick to our plans, right, and to make sure we can continue to provide for our existing customers and hopefully for new customers. The production capacity we need, that’s very helpful. What I think we can do is now is kind of grow with our customers and go with the industry. And having that capability to expand capacity is very important, because the one thing that our model allows is flexibility. When you look at additional kind of production, right, the moment you — the moment between which you want to increase capacity or if your customer wants until you can actually build out that new capacity is very long. And one of the important things in our approach is allowing that quick response time.

So you don’t have to plan three years ahead that you have that ability to both flexibility to change location, to change capacity and we believe that’s one of the biggest issues of this industry. So that really allows us to kind of, I would say, validate this approach we have.

William Jordan: Great. Thanks. Keep up the good work.

Vered Caplan: Thank you.

Operator: Your next question for today is coming from Steve Waite at Gilder Publishing.

Steve Waite: Hey. Good morning. Good afternoon. Vered, just a question, there seems to be the centralized manufacturers seem to be struggling the center of breakthrough medicines, for example. I mean, these guys have invested a lot of money in these centralized facilities and they don’t really have any customers. I think your decentralized model looks a lot stronger. Can you just comment on perhaps why these centralized models are struggling today and why the decentralized model has a better chance of succeeding?

Vered Caplan: So, first of all, I wish all companies providing capacity in this space, the best of luck. And one thing for sure, there’s plenty of work for everyone does not even need to compete to such a lack of capacity outlook. And we want everyone to succeed whether centralized or decentralized. And I think it’s, again, a timing issue, okay? Because if you look — and when you look at some of the struggles the industry is having, and again, this is my assumption, but I think this is what I am hearing from the industry, right? Traditionally, if you want to build out capacity, you have to plan that quite a long time ahead, right? If you want to work, for instance, with a subcontractor, a service provider, you have to plan that well, well in advance.

And not always are your plans that clear, especially if not, if you are on a clinical stage, you need to make secure — you need to secure space. Now as that space kind of — and what happens is for new capacity being built, it takes a long time until additional kind of companies get to that point where they are planning that much ahead, okay? I hope I am clear. I am explaining well

Steve Waite: Yeah. Okay. Appreciate it.

Vered Caplan: It’s planning logistic issue. The other issue, I think, is that the industry is, these are not exactly the easiest financial time. And I think there’s a big difference between committing to a large facility with a lot of upfront commitments than working with us, right? Where the commitment is stage, it’s very flexible. So it’s much easier, I think, to make a decision, working us with an OMPUL when you know you can have that OMPUL maybe today here and then if you have a change of plans, you can have a solution somewhere else. So it clearly allows our customers that quick flexibility as times change as things change. Again, that is my assumption. But that’s what kind of I feel from coming from the industry.

Steve Waite: Thank you.

Vered Caplan: Thanks for the question.

Operator: Your next question for today is coming from James Watson , a Private Investor.

Unidentified Analyst: Hi, everyone. I want to check with the account receivables, because if we take it as a percentage of the total revenues, it has gone up quite a bit. Just wonder, would the collection be prominent, if we do collect all these account receivables, would we be paying down some debt?

Vered Caplan: Neil, do you want to answer?

Neil Reithinger: Sure. We — when we collect receivables, potentially, yes, we pay debt — some debt. But moreover, it’s — as you heard from our inflection point we are at with our loss for the quarter, it’s $627,000. We are at that point where we want to keep feeding our growth and scalability. So we will be very selective about how we are going to use that outside of working capital, to use and to pay down debt, that will obviously be dependent on other potential capital raising initiatives that are needed to do that when loans come due, potentially if they could be extended. So we want to be very careful about the deployment of capital based on now becoming — given the inflection point we are at, knowing that we want to make sure we continue to scale with this next phase of our evolution, okay?

So — and we always — and we are — as far as from an AR standpoint itself, I mean, obviously, it’s a very — it’s a balance sheet account that all companies monitor very careful based on the economic environment, same thing with us. A lot of our clients are very — customers are very progressive and growing as well. So there every company likewise is affected by the market conditions. But we keep — obviously monitor that very closely, especially too, with regards to revenue and revenue recognition. So we believe we will be successful in our AR collection efforts and there are some balances that may extend the on and we work with those customers. But, so far, everything is within a time period that we think we are going to collect. But we are — back to — we will be very careful about the deployment of that to make sure we scale back operations for growth, okay.

Unidentified Analyst: Excellent. Thank you. And just a follow-up question, so I think all of us who are running businesses, we all understand that the economy has changed a lot and this word of self-sustainability, I think, is very important. So I also understand that Orgenesis is a growth company. So what’s the current thinking model right now, would — for the next few quarters, do we hope to operate on a breakeven level or some months we are still okay having some losses because we are still in a growth phase?

Vered Caplan: So, I think, on the services side, I mean, we are still going, right? I mean we were committed to use that capital. We got focus that idea. We want to maintain growth and that’s kind of part of our business plan. And as for the other side of the business, well, we really try to leverage as much as possible on grants and partnerships. We do have some commitments, but we are trying to keep them balanced as much as we can, because obviously, this is not the easiest time to collect capital.

Unidentified Analyst: Got it. Got it. And also I think this is going to be a very difficult question, but I am not sure if, because Orgenesis right now is really a disruptive business, providing new technologies and we do not know what the possible profit margin that this company could produce, let’s say, three years, four year, five years later when this is at a steady state, but perhaps, no longer a growth phase. Is there any range of margins — profit margins you think it’s possible for Orgenesis to achieve?

Vered Caplan: Look, we try to base our revenue on at least 50% gross profit, that’s what we guided to at least and around 20%, 25% EBITDA on our services. When you deal with out-licensing of therapy, well, that is a completely different model, right? I mean, you are just waiting for the upside. So that’s our goal. We have — as you can see from my finance — our financials, we try to maintain that. That’s kind of been our focus.

Unidentified Analyst: Got it. Got it. Yeah. Can I just squeeze in one last question, because I thought that fourth quarter was a very nice ramp-up in revenue, but we — if we do a year-to-year comparison, it’s sort of flattish, but for the coming next few quarters, where are we seeing ourselves in terms of the demand for OMPULs or even the services that we are providing?

Vered Caplan: I don’t think — I mean we are looking and we are expanding regionally, right? So we are putting a big focus this year on expanding capacity in the U.S. And so I hope — we are also expanding in a few other regions, but specifically in the U.S., we put a focus and I hope that will allow us to grow. That’s the goal despite. That’s why we are putting so much effort into this.

Unidentified Analyst: Got it. Thank you so much.

Vered Caplan: Thank you.

Operator: We have reached the end of the question-and-answer session and I will now turn the call over to management for closing remarks.

Vered Caplan: Thank you. I’d like to thank everyone for participating on our year end business update conference call. We are excited about the outlook for the business and appreciate the strong support of our shareholders. We look forward to providing further updates as we advance our therapeutic pipeline, expand our point-of-care platform and deploy our OMPULs worldwide. Thank you.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.