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Avid Bioservices, Inc.

CDMO US

Avid Bioservices, Inc.United States Composite

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Q1 2017 · Earnings Call Transcript

Sep 8, 2016

Executives

Tim Brons - IR, Vida Strategic Partners Steve King - President and Chief Executive Officer Joe Shan - VP, Clinical & Regulatory Affairs Rob Garnick - Head of Regulatory Affairs Jeff Hutchins - VP, Preclinical Research Paul Lytle - Chief Financial Officer

Analysts

Joe Pantginis - Roth Capital Kumar Raja - Noble Financial Thomas Yip - FBR

Operator

Good day, ladies and gentlemen and welcome to the Peregrine Pharmaceuticals' first quarter fiscal year 2017 financial results conference call. At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

I would now like to hand the conference over to Tim Brons of Peregrine's Investor Relations Group. Please go ahead.

Tim Brons

Thank you. Good afternoon and thank you for joining us.

On today's call, we have Steve King, President and Chief Executive Officer, Paul Lytle, Chief Financial Officer, Joe Shan, Vice President of Clinical and Regulatory Affairs, Rob Garnick, Head of Regulatory Affairs and Jeff Hutchins, Vice President of Preclinical Research. Today, our team will be providing an overview of the company's operations and progress, spanning Avid Bioservices' contract manufacturing business, as well as our clinical, pre-clinical and corporate activities.

After our prepared remarks, we will welcome your questions. Before we begin, I would like to caution that comments made during this conference call today, September 8, 2016 will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties.

Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters.

With that, I will turn the call over to Steve King.

Steve King

Thanks, Tim, and thanks to all of you who have dialed in and to all of you who are participating via webcast today. Since the start of the fiscal year back in May, we have steadily advanced our R&D plans, as well as our contract manufacturing growth strategies.

On the R&D front, we recently announced that we had achieved two important milestones. Beginning with the recent announcement that the National Comprehensive Cancer Network or NCCN has awarded grants to three investigators to support bavituximab clinical research.

Our collaboration with the NCCN has been an important part of our strategy for advancing the bavituximab clinical programs in a cost effective way. We earlier provided NCCN with a $2 million grant to support bavituximab related clinical research with no further financial obligations.

And these grant awards represent the outcome of a competitive selection process for the best proposals. These studies will evaluate novel bavituximab combinations in glioblastoma, head and neck cancer and hepatocellular carcinoma including an immunotherapy combination, which is a major focus for advancing the program.

Today we were very pleased to announce that the topline data from our Phase III SUNRISE trial have been accepted for a late-breaking oral presentation at the upcoming European Society of Medical Oncology or ESMO Congress to be held in Copenhagen in early October. ESMO is the premier European oncology meeting attended by thousands of oncologists.

The presentation at ESMO will be a great opportunity to share clinical data from the study in conjunction with initial results from ongoing biomarker analysis, which are already highly encouraging. Biomarker analysis was built into the SUNRISE trial from the beginning, including the collection of thousands of patient samples that can be analyzed once of the trial was unblinded.

The primary goal the biomarker analysis is to identify a biomarker pattern, present in patients that receive the most benefit from a bavituximab containing therapeutic regimen and we look forward to sharing the results of the ongoing analysis with more data expected later in the year. The impact of the effective biomarker identification is already quite evident in oncology drug development with the latest evidence being the PD1, PD-L1 in the development of Keytruda.

These types of biomarker can only be identified through analysis of larger patient populations such as in the SUNRISE trial. The results of identifying effective biomarkers can potentially have a huge impact on clinical development potentially reducing the size of future trials, including making possible biomarker driven clinical designs which could provide even more rapid readouts.

Taken together, these developments are setting the stage for new data throughout the rest of 2016 and in the 2017. Joe, Jeff and Rob will provide more insight as part of their prepared remarks.

On the manufacturing front, it remains an extraordinarily busy time. We have remained on track for initiating and completing manufacturing campaigns keeping us on track to meet our current fiscal year revenue projections.

Our strategy for growing manufacturing revenues remains on track as well. Continuing to generate revenues in our Franklin facility which last year generated over $40 million in revenue, generate revenues from our new Myford facility which is already booked well into next year and has another $40 million in revenue potential and to bring online a new clinical production facility by mid next year which will allow us to continue introducing new clients into our business and to continue bringing in second products from existing clients.

The new facility will add another $30 million in revenue potential and we have already identified a number of projects that can move into the facility as soon as it is completed. Paul will discuss the Avid business in more details as we continue to deliver high quality products for our partners.

Our ultimate goal remains to reach overall profitability within the next 21 months and Avid will be an important driver for achieving that goal in combination with making strategic investments in our R&D while pursuing partnerships to help advance our programs. You can already see these plans playing out as we are on track to grow revenues significantly this year while simultaneously seeing a significant decrease in R&D spending during the quarter, even though we are continuing to advance our programs.

I will now turn the call over to Joe for more details on our clinical development efforts. Joe?

Joe Shan

Thanks Steve. As Steve has stated, we are very excited to have the opportunity for a late-breaking oral presentation on the Phase III SUNRISE trial at the ESMO Congress about a month from now.

Even as the trial continues to wind down, treatment, follow-up and data collection are still ongoing for a number of patients with some continuing to receive bavituximab for over a year. At ESMO, we will be presenting both topline clinical data from the trial as well as initial results from our ongoing biomarker analysis, the results of which have been promising to-date.

Because these data have been accepted for presentation at ESMO, they are under embargo until the actual presentation, but we will provide additional details on the ESMO presentation and our findings as soon as we can. As a reminder, the biomarker program was prospectively built into the SUNRISE protocol and is designed to help us better understand how bavituximab works and which patients may benefit most.

This is a massive effort and though there are still much ongoing sample testing and data analysis, our goal is to share these results as they become available throughout the rest of this year and into 2017. Now turning to our collaboration with the NCCN.

Just a couple of days ago, NCCN announced the oncology research program had awarded grants to three investigators to support clinical trials of bavituximab in combination with other therapeutics. One award is for Phase I trial of sorafenib and bavituximab plus radiation in hepatocellular carcinoma.

This will build on a previously reported investigator sponsored Phase II trial of bavituximab and sorafenib in liver cancer. Another award is for a Phase I/II trial of bavituximab with radiation and temozolomide in newly diagnosed glioblastoma.

This trial is supported by some of our most impressive preclinical data demonstrating long-term survival in a lethal brain cancer model and that surviving rats were immune from tumor rechallenge. The third award is for a Phase II study of pembrolizumab and bavituximab in head and neck cancer.

We are particularly excited about this project as it will be the first clinical trial of bavituximab with a checkpoint inhibitor. In multiple previous preclinical studies, we have observed bavituximab's potential to work synergistically with PD1 inhibitors such as pembrolizumab.

These three studies align with our overall development strategy and will add to our knowledge about bavituximab focused cancer treatment combinations. While we are not directly involved with these studies, we will be watching the progress carefully and look forward to providing an updates on the three NCCN trials in the coming months.

That concludes my comments today. Let me now turn the call over to Rob Garnick, Head of Regulatory Affairs.

Rob?

Rob Garnick

Thanks Joe. I would like to emphasize the strategic importance of the biomarker study which, as Joe said, was built into the SUNRISE trial.

The identification of a positive biomarker or relevant biomarker pattern with clinical efficacy is an important facet of clinical trial design that can be used to inform additional new studies that in turn might be used to select patients who would best benefit from bavituximab therapy. For example the identification of the HER2 biomarker was critical in the development of Herceptin.

And its importance was only critically established based on the results of the Phase II clinical trial. As Steve previously described, the critical role of the PD-L1 biomarker is emerging as a major factor in the selection of patients for the clinical use of Opdivo and Keytruda.

In the case of bavituximab, once a promising biomarker or biomarker pattern is identified, we strategically plan to include these results into potential new clinical trials. I will now turn the call over to Jeff Hutchins, VP of Preclinical Research.

Jeff Hutchins

Thanks, Rob. I would first like to provide an update on our PS exosome program.

As we announced in July, we executed a licensing agreement with UT Southwestern Medical Center for a novel exosome technology designed to detect PS positive exosomes in a patient blood sample. It is our belief that this technology can provide clinicians with detection and monitoring information regarding the presence and the prevalence of cancer.

Preliminary independent studies have demonstrated that the levels of PS positive exosomes present in the blood of cancer patients are higher than levels found in the blood of healthy volunteers. Furthermore, study findings also suggest that there is a correlation between the level of PS positive exosomes detected in the blood of cancer patients and the severity and extent of their disease burden.

Given our in-house expertise in PS targeting, we believe that we are uniquely qualified to advance this technology. We believe there are significant opportunities to use this technology as both a complementary tool in bavituximab's ongoing development as well as more broadly as the basis for a novel cancer detection and monitoring test kit that will be the focus of partnering efforts.

It is our goal to develop, optimize and validate a functional screening assay capable of detecting PS positive exosomes in a blood sample and to initiate partnering discussions for commercialization of the program in 2017. We are on track to achieve this goal and we look forward to providing further updates.

I would now like to provide an update on Peregrine's preclinical I-O focused internal efforts and our collaboration with Memorial Sloan Kettering Cancer Center. The goal of this work is to evaluate combinations of PS targeting with other checkpoint inhibitors and immune stimulatory agents for the purpose of developing new and increasingly effective anticancer treatments.

These programs are advancing well and to-date, we have seen impressive signs of activity with new combinations of PS targeting and other treatment modalities such as checkpoint blockers, T-cell agonists and radiation. These new combinations are improving overall survival accompanied with increases in cyto-reactive T cells into the tumor tissue.

This exciting new internal work will be presented at the CRI, AACR Immunotherapy Meeting in New York later this month and at ESMO in early October. We expect the first results from our collaboration with the Wolchok Lab investigators to be presented at SITC in November and we will provide more detailed information as that presentation becomes available.

That concludes my comments today. And I will turn the call over to Paul Lytle, Chief Financial Officer, who will discuss the company's financial performance including additional details regarding our Avid Bioservices business.

Paul?

Paul Lytle

Thanks Jeff. Let me shift gears now and give you a brief overview of our financials.

As a backdrop, our goal is to become profitable on an overall basis within the next 21 months and we intend to reach this goal by growing revenue from our contract manufacturing business while also reducing our R&D spending. Let me first talk about our contract manufacturing business.

During fiscal year 2016, our Avid business has experienced substantial revenue growth with a five-year compounded annual growth rate of 39% and year-over-year growth of 66%. However, revenue for the first quarter was lower than expected due to delays in third-party testing labs that put revenue recognition for a number of manufacturing runs from this quarter to the second quarter of fiscal year 2017.

As a result, contract manufacturing revenue for the current quarter was $5.6 million, compared to $9.4 million for the same quarter last year. However, as this revenue shift, we now expect to recognize contract manufacturing revenue in excess of $20 million in the second quarter of fiscal year 2017.

I would also like to reaffirm our full fiscal year 2017 revenue guidance of $50 million to $55 million representing up to 24% and year-over-year growth compared to last fiscal year. And it's important to note that our projected revenue growth is supported by current revenue backlog of $71 million under signed contacts covering services to be completed during the remainder of fiscal year 2017 and into fiscal year 2018.

Now given our corporate goal of reaching profitability in 21 months, it is critical that we continue to grow our contract manufacturing business. For this reason and coupled with the high demand for manufacturing services, we are planning to construct a third manufacturing facility focused on products in clinical development.

We believe the third facility will again significantly increase our manufacturing capacity and all three manufacturing facilities will have the potential to generate in total approximately $110 million in annual revenue. We expect the new facility to be complete and ready for clinical manufacturing activities by mid calendar year 2017.

Shifting gears now to expenses, let me first discuss our research and development strategy. We are focusing our internal drug development efforts on small, cost effective, early stage clinical trials designed to attract potential partners to further advance our products.

We believe this strategy will not only help us achieve profitability sooner, but it could also create significant potential upside for our shareholders. As we execute on this strategy, our R&D expenses decreased 38% this quarter compared to the same prior year quarter.

And if you compare R&D expenses for the current quarter ended July to the last reported quarter ended April, we saw a 47% decrease in R&D expenses. This decrease in R&D was primarily driven by lower cost associated with our Phase III SUNRISE trial combined with a decrease in related payroll and manufacturing costs.

Turning to cost of contract manufacturing. We saw a decrease in manufacturing cost during the first quarter in relation to the similar decrease in revenue.

For G&A expenses, we saw a slight increase in the first quarter as compared to the same prior year quarter as we increased our infrastructure to support the expansion of our contract manufacturing business. A more detailed analysis of our statement of operations is included in our Form 10-Q that was filed today.

This concludes our prepared remarks. We would now like to open the call up for questions.

Shane?

Operator

[Operator Instructions]. Our first question comes from the line of Joe Pantginis of Roth Capital.

Sir, your line is now open.

Joe Pantginis

Hi guys. Good afternoon.

Thanks for taking the question. With regard to your burn rate, how do you look at the burn with regard to R&D programs versus expanding the Avid programs with regard to your burn with regard to expanding your clinical studies?

Thanks.

Steve King

So I think as I said earlier, as we have been trying to find and strike a balance between growing revenues and investment on the R&D side, I think that programs like the NCCN are good examples of how someone can cost effectively run a number of studies in order to gather additional clinical data as we get more and more information from the SUNRISE study, particularly the biomarker analysis and other bits of information that will help guide the program, then I think we will have to look at how we do invest in additional clinical studies, either in conjunction with some of our collaborators or as a standalone company-sponsored clinical study. Our goal right now is to still keep things in balance and to move towards profitability.

We think there is a great upside on the Avid business. If you look, even though revenues were down this quarter because of some delays in shipping out some products, that's really an anomaly.

I think you are going to see that we continue to grow the business throughout this fiscal year. Moving into next fiscal year, we will bring online our new clinical facility.

So clearly that will add more on the revenue side and that helps offset any expenditures we have. Also one of our other major initiatives is to really develop enough of clinical data for bavituximab that we think can bring onboard a partner who can then really help fund the program going forward.

And so we think we can do that, again, very effectively through smaller studies, particularly biomarker driven studies or at least studies in which biomarkers play a major role in helping select patients and [indiscernible] outcomes.

Joe Pantginis

No. That's helpful.

Thank you very much. And I guess, how can you describe over the last few months or so how your interactions with AstraZeneca have been regarding bavituximab.

Steve King

Yes. I think we continue to discuss the pathway forward.

I think what we are trying to do is, again, learn as much as we can from SUNRISE because it's a great opportunity. It's not often you get a set of data this big in which we had already prospectively built in a lot of biomarker and other types of analysis into the study.

And we actually think that the data, even though with the docetaxel study, those results will be actually critical in advancing this in I-O combinations in the future as well. And so I think just gathering data, discussing the data that's available, but more data is literally coming to light on almost daily basis, it seems.

And that's going to continue for the next few months. So I think I would say engaged and at this point we just need to really find the right balance of when we have enough information to clearly define what we want to do going forward.

Joe Pantginis

Okay. Thanks guys.

Steve King

Thanks Joe.

Operator

Thank you. And our next question comes from the line of Kumar Raja of Noble Financial.

Sir, your line is now open.

Kumar Raja

Okay. Great.

Thanks for taking my question. So for the three trials, three awards that have been selected by the NCCN, what was the rationale for selecting those three different cancers as well as the rationale for the combination being selected there?

And how much finding is remaining for further grants by NCCN?

Steve King

Sure. I will start and then I will turn it over to Joe.

So basically the NCCN process, this is a more or less consortium of 27 top medical centers in the U.S. where clinical research is performed.

And so the way it works is, it's a competitive process. Any of the institutions or investigators at the institutions can basically submit their proposals.

The background data is generally based on when it has been published or what has been presented at conferences. And so that becomes some of the background information.

But really, the process itself is about the most interesting combinations, those that will take advantage of the novel I-O mechanism of action of bavituximab and then also trials which have the highest probability of being operationalized and successful in a given amount of time. So I will turn it over to Joe for maybe some more.

Joe Shan

Yes. I think basically as Steve mentioned, this is an independent process.

They follow a process very similar to an NCI grant funding process where they look at obviously what content have been submitted for consideration and rank those in order of importance, not just from a scientific curiosity standpoint, but clinical applicability and medical need standpoint as well. So that's just a general process.

And why those three specifically, I mean that was determined by the expert committee that was assigned for this project.

Steve King

Yes. I think actually I am very excited about the combinations that were chosen because the radiation combination is one that in preclinical studies, as I think was mentioned during the prepared remarks, has always shown a lot of promise.

And so this is great to be able to now see that put into a clinical setting in a couple of different clinical trials. And of course the I-O combinations, as Jeff mentioned during his prepared remarks, is a major focus of ours.

So to see a pembro combination [picked] [ph] as well, I mean, for us I think we are just really excited that these were the three winners out of the - actual winner set of selection process.

Kumar Raja

Okay. Great.

And you talked about profitability and using collaborations to develop the pipeline. So what would be the strategy there for the collaboration?

Would it be like equal partnership or would it be just like Peregrine keeping the U.S. rights and having collaboration for the o-US?

What's the strategy there for those collaborations? So what are you guys thinking there?

Steve King

Sure. I think the collaborations could go on a number of different fronts.

One would be true collaborations like clinical collaborations like we put in place already. It could also be more partnerships, which I think is more what you are talking about, in which we have a development partner.

I think we have flexibility in the overall design. Our goal is to keep significant upside of the program; I feel like we have added a lot of value to the program and now we want to see the benefit that are down the road.

But at the same time, share the risks because we have shared all the risk up to this point ourselves. So someone who could actually help drive the funding forward, because recognize that is not just going to be one more study that should be run when it comes to late stage clinical development, but should be multiple studies and our goal would be to find a partner who is going to run those not just on a ex-U.S.

basis, but also on worldwide basis and again to help us advance the program to commercialization.

Kumar Raja

Okay. And a final question on the biomarker analysis.

What are you seeing so far and what can we expect to see at being presented at ESMO?

Steve King

Yes. So right now all the data is embargoed per the acceptance for the oral presentation.

So really nothing details at this point. Some of the other factors are of course that for novel things, intellectual property considerations that we may want to obtain in the mean time before presentation are important.

So really at this point, we are not going to give any more details other than I think it will be a nice rounded set of information available at the ESMO presentation. And of course we will PRM as well.

Kumar Raja

Okay. Great.

Thanks for taking my questions.

Steve King

Yes. Thanks Kumar.

Operator

Thank you. And our next question comes from line of Thomas Yip of FBR.

Sire, your line is now open.

Thomas Yip

Hi everyone. Good afternoon and thank you for taking my questions.

Good to hear that Avid is doing well and you guys have continued with the clinical progress with bavituximab. First question regarding Avid.

Can you remind us how will the new facility be reflected in the P&L?

Paul Lytle

In terms of the new facility, what we mentioned last fiscal year, is that we recognized $44 million in revenue and we stated that all came from our original Franklin facility. And then in March this year, we commissioned our new Myford facility which built for late stage Phase III clinical and commercial production and we are currently going through the motions of multiple process validation runs and those runs right now are built into our financial projections of the $50 million to $55 million with our goal of turning those process validation runs which is kind of the final step before submitting something to the FDA under preapproval inspection in terms of producing commercial quantities for those clients.

So this year is really of building here in terms of building those process validation runs for our clients and then we are hopeful that those will turn into commercial supply needs in future fiscal years.

Thomas Yip

Okay. So the cost of that new facility, I guess, it will be both under cost of contract manufacturing?

Paul Lytle

Correct. Yes.

It's built into that, so the cost of goods the facility overhead, including personnel and everything else.

Thomas Yip

Okay. Can you also just give us some more details about the testing backlog of that third-party testing lab and specifically what are the exact reasons and how likely it could happen in the future?

Steve King

Yes. Sure.

Well, we think it's an anomaly and so we don't expect this to be ongoing issue. The issue is basically, just the testing labs are so busy, there was sort of like a backlog of the line to get into the queue to actually get the testing completed.

Of course, we can't release all the testing results and we can't ship them until they are released. So that's the reason that it hit the bottom line this quarter.

So we think this is an anomaly. It's nothing to do with testing results, per se, for the lots.

It's really just getting them in the line to get the testing done and that's the reason we are projecting the second quarter to be such a big quarter, because now that backlog seems to have worked itself out and we reported into our planning to give ourselves a little bit more time. And so we think it's, again, hopefully some thing that's behind us.

Of course, we can't control all the third-party laboratories but we are certainly working directly with them as well to ensure that we are able to maintain a high priority for them because we do generate a significant amount of business for a lot of our vendors.

Thomas Yip

Okay. Yes.

That's good to hear. I guess I will switch gears wondering about NCCN trials.

So from this point on, what additional information or resources are required from your end?

Steve King

See, so basically that's one of the beauties of working with NCCN, as they actually run the clinical studies themselves. So they take care of all the database management, all the site visits, start up, all that stuff is handled through the consortium.

And so for us, it's really at this point, it's just more being supportive of their efforts. One of the things I think that we would potentially want to help out on, will be some of the biomarker type testing, particularly as we learn more from the SUNRISE study building those into some of the clinical trials as they make sense.

So they can collect samples that can be tested and then we can add that to our database in conjunction with the rest of our biomarker testing plans. Other than that, our only other obligation is to provide, of course, bavituximab for the clinical trials.

And as we have discussed before, we have a stockpile of that. So that's not really an issue at this point.

Thomas Yip

Okay. That sounds good.

Congrats again on the progress and looking forward to learn more about Avid's progress in the future.

Steve King

All right. Yes.

Thanks Thomas.

Paul Lytle

Thanks Thomas.

Operator

Thank you. And I am showing no further question at this time.

I would like to hand the call back over to Mr. Steve King for any closing remarks.

Steve King

I want to thank all of you again for participating in today's phone call. As always, I want to thank our stockholders for their continued support and I would like to especially thank our patients, their families and the investigators that are participating in our bavituximab clinical trials.

With that, we will conclude the call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.

You may all disconnect. Everyone have a great day.

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