DiaMedica Therapeutics Inc. (NASDAQ:DMAC) Q3 2023 Earnings Call Transcript

DiaMedica Therapeutics Inc. (NASDAQ:DMAC) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the DiaMedica Therapeutics Third Quarter 2023 Conference Call. An audio recording of the webcast will be available shortly after the call today on DiaMedica’s website at www.diamedica.com, in the Investor Relations section. Before the company proceeds with its remarks, please note that the company will be making forward-looking statements on today’s call. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. More information, including factors that could cause actual results to differ from projected results appears in the section entitled Cautionary Statement Note regarding forward-looking statements in the company’s press release issued yesterday and under the heading Risk Factors in DiaMedica’s most recent annual report on Form 10-K and current year quarterly reports on Form 10-Q.

DiaMedica’s SEC filings are available at www.sec.gov and on its website. Please also note that any comments made on today’s call speak only as of today, November 14, 2023, and may no longer be accurate at the time of any replay or transcript reading. DiaMedica disclaims any duty to update its forward-looking statements. Following the prepared remarks, we will open the phone lines for questions. I would now like to introduce your host for today’s call, Mr. Rick Pauls, DiaMedica’s President and Chief Executive Officer. Mr. Pauls, you may begin, sir.

A scientist working in a modern lab, examining small-molecule and protein therapeutics.

Rick Pauls: Thank you, Paul. Hello, everyone, and welcome to our third quarter conference call. I am joined this morning by Scott Kellen, our Chief Financial Officer. Before we begin this morning, I want to take a moment to welcome Dr. Ambar Shah as our Chief Technology Officer. Dr. Shah has over 25 years of experience in advancing biopharmaceuticals from early stage to commercialization, where he has had key contributions to over 50 drugs in multiple successful drug approvals. He was previously the Vice President and Head of Global Vaccines Development at CSL Seqirus, where he was accountable for end-to-end chemistry, manufacturing and control in the development of vaccines. Prior to that position, he was Executive Director, Head of Drug Product Development at Bristol-Myers Squib formerly Celgene.

His prior experience comprised increasingly impactful roles at AstraZeneca, formerly MedImmune, GlaxoSmithKline, formerly Human Genome Sciences, and Pfizer, formerly Wyeth. Ambarish consulted with us for five months before joining us in a permanent role. We are thrilled to have Ambarish as part of our team. Turning to our Phase 2 update. As we’ve discussed, our clinical operations have been working tirelessly to assemble the team, update procedures, and prepare the tools to properly support the physician investigators and the clinical study sites. During this time, we have also been speaking with study sites, key opinion leaders, industry experts, our Scientific Advisory Board and our new Interim Chief Medical Officer, Dr. Jordan Dubow, to ensure that the ReMEDy2 protocol is as clear and executable as possible by study sites, while generating the data required for the FDA and other regulatory bodies.

More than that, we want to give DM199 the greatest possible probability of clinical success. We will focus today on discussing these protocol amendments in addition to issuing our quarterly earnings press release yesterday, we provided a slide deck presenting more detailed information. This information is available on both the DiaMedica website at www.diamedica.com and the SEC website, www.sec.gov. The amendment protocols was submitted to the FDA in early October, and the FDA did not have any comments as of the end of the 30-day review period, which expired on November 3. Given this, we are able to and are moving forward in conducting ReMEDy2 with this amended protocol. In its totality, we believe the amended protocol significantly increases our probability of achieving clinical success and will accelerate site activation.

Furthermore, if we increase the performance improvement of DM199 versus placebo at the interim analysis, we can reduce the total required number of patients for the trial, which is our quickest and most cost-effective path to completing the trial and getting our drug to stroke patients. The most significant change in the protocol centered around the inclusion and exclusion criteria for the trial. Specifically, we modified the baseline National Institute of Health Stroke Scale or NIHSS inclusion score to focus on ischemic strokes of moderate severity. This is defined as patients presenting with a baseline NIHS score of five to 15. We conducted a post hoc review of ReMEDy1 Phase 2 stroke trial focusing on those participants that did not receive mechanical thrombectomy prior to enrollment in our ReMEDy1 trial.

This is a subset of that trial that most closely aligns with the target patient population for the ReMEDy2 trial. In these patients, there was a 15% greater absolute improvement in participants reaching an excellent outcome, defined as a score of zero to one on the modified Rankin Scale, or mRS. This group comprised of 45 participants, 25 active and 21 placebo. These participants were enrolled based upon a baseline NIHSS score of six to 24. Scores above 15 represent moderate to severe and severe strokes. When we look at the results from just a moderate severity strokes in this trial, those in the NIHS scores of six to 15, which includes 34 participants, 19 on DM199 and 15 on placebo, the improvement in excellent outcomes increased to 18%. And if we go one step further and look at just the strokes with the baseline NIHS score of six to 10, the improvement in excellent outcomes is even higher, where we had 35%.

Based on 26 participants, of which 14 were on DM199 and 12 placebo. Let me add the caveat here and recognize that this post hoc analysis includes a small number of patients, but it is key to point out there were no study participants in the nonmechanical thrombectomy subgroup with a baseline score of 15 that achieved an excellent outcome in mRS of zero to one. It is a high clinical bar to take a patient with a baseline NIHSS score above 15, a moderately severe stroke and expect many to get to an mRS score of zero to one. It is important to note the average NIHSS baseline in most KAILIKANG studies, this is the human urinary form of KLK1 in China, range from 8 to 8.5. In contrast, ReMEDy1 was 10.9. By targeting moderate strokes, we anticipate aligning more closely with the KAILIKANG range.

Just to tie things out, we’re also including stroke patients having a baseline NIHS score of five, which represents approximately 20% of all moderate strokes. As mentioned, we saw the highest treatment effect in the NIHS scores of six to 10 and by including NIHS scores of five, we hope to capture more of these patients. Our new range of five to 15 also fully aligns with official NIHSS definition of moderate ischemic strokes. The net effect of the change in the NIHSS inclusion range does reduce the number of potentially eligible patients in the ReMEDy2 trial. However, we believe that by focusing on moderate strokes, we have the highest probability of clinical success and generating the largest possible improvements relative to placebo. The latter being important for both reducing the number of participants we need in the trial and generating greater statistical significance and perhaps equally as important, eventually driving commercial adoption and favorable pricing assumptions after the FDA marketing approval.

The second change we want to discuss is the exclusion of ischemic strokes occurring in the posterior circulation of the brain or PC strokes. These can be problematic strokes for clinical trials. The NIH Stroke Scale predominantly evaluates neurological deficits created by strokes occurring in the anterior or front circulation of the brain. As a result, PC strokes are often underscored by the NIH Stroke Scale. Our Chief Business Officer, Dave Wambeke, was recently on a business development trip in China, where he was able to capture greater perspective on the clinical use of KAILIKANG, the human urinary-derived form of KLK1. In his various discussions, it became clear that PC strokes were excluded from the primary KAILIKANG studies due to issues with the NIH Stroke Scale properly evaluating these patients.

Obviously, this issue has the potential to create uncontrollable variability in a clinical trial, which we prefer not to introduce in ReMEDy2. Here again, this may also reduce the number of eligible patients for the trial, but we expect the impact to be minimal. Only 20% of all strokes originate in the posterior circulation, and approximately 70% of those have an NIHS score less than five, meaning the vast majority of this already small pool of patients would not meet the bottom end of our baseline inclusion criteria. The last change I want to address is the one that has the least potential to affect the overall timing of the trial, but it is more technical. It is our removal of the overwhelming efficacy assessment during the interim analysis.

An interim assessment of efficacy comes with a penalty in the statistical analysis of the overall trial. This penalty is significantly larger than the penalty for re-estimating the sample size. By removing this penalty, we believe we further increased the probability of study success. Additionally, from a practical perspective, our projected future enrollment rates suggest little benefit in conducting an interim analysis. It is key to remember that we will not stop enrolling patients once the 144th patient is recruited. During the period encompassing the enrollment of the 144th patients through their 90-day follow-up and subsequent data analysis of the interim analysis, we anticipate enrollment nearing 240 patients. This 240 number represents the lower threshold of our re-estimated sample size range, should our interim results demonstrate overwhelming efficacy, strong enough to warrant halting the study, we would likely already be at or very near that point.

It is key to point out that we will not stop enrolling patients once the 144th patient is recruited. With a now effective amended protocol that we believe gives us the highest probability of clinical success, our focus is solely on site activation and patient recruitment. Our team is energized and working closely with our global CROs. We have reached out to over 600 sites in 23 countries, and we are conducting extensive feasibility and site selection and narrowing down to what we believe will be the best sites for our trial, with a target still of up to 100 sites globally. Our product is also currently in review by the Canadian and Australian stroke consortiums. The first three sites of our trial are on track to be reactivated in November and December.

Then 20 fast track sites to follow in the U.S. We are working with our CRO and Scientific Advisory Board in the selection process. The majority of U.S. sites should be activated in the first half of 2024. We’ll provide more information on the timing of sites at our next conference call. Also, as we discussed in our last earnings call, based upon enrollment rates in recent stroke trials and discussions with multiple CROs, we believe that full enrollment for the interim analysis can be completed in 2024. But ultimately, this will be dependent upon the actual enrollment rates. Before handing it over to Scott, I’d like to emphasize we have received significant interest from key opinion leaders and investigators. DM199 is designed to enhance collateral circulation, a method we consider superior to neuroprotectant and more like other established revascularization treatments like tPA and mechanical thrombectomy.

They are also attracted to DM199’s potential safety profile, particularly its lack of increased bleeding. Additionally, we believe that the revised trial design with a higher potential to demonstrate an improvement in excellent outcomes also contributed to this interest. We believe that we are at a pivotal moment in the treatment of ischemic stroke. Now at over a quarter century since the approval of tPA for stroke, our strategy represents a potential landmark advancement in stroke treatment since then. I’d like to now turn the call to Scott Kellen to review this quarter’s financial results.

Scott Kellen: Thanks, Rick, and good morning, everyone, and thanks for being part of today’s call. Our total cash, cash equivalents and investments were $56.2 million at the end of Q3, up from $33.5 million as of December 31, 2022, this increase was due primarily to the $33.8 million of net proceeds from our June and April private placements conducted earlier this year, partially offset by cash used to fund operating activities during the nine months ended September 30, 2023. Net cash used in operating activities for the nine months ended September 30, 2023, was $14.9 million compared to $8.7 million in the prior year period. The increase in cash usage relates primarily to increased net loss in the current year period over the prior year period and increased amortization of discounts on marketable securities, partially offset by noncash share-based compensation and the effects of changes in operating assets and liabilities in the current year period.

We believe that our current capital will support the clinical development of DM199 and our operations into 2026. Our research and development expenses increased to $3.3 million for the three months ended September 30, 2023, up from $1.6 million for the three months ended September 30, 2022. R&D expenses increased to $9.4 million for the nine months ended September 30, 2023, up from $5.6 million for the nine months ended September 30, 2022. The increase for the nine month comparison was driven primarily by costs incurred for the end-use studies performed to address the recently lifted clinical hold on the company’s ReMEDy2 AIS trial, costs incurred for the Phase II study, determining the DM199 blood concentration levels achieved with the IV dose of DM199 using PVC IV bags and increased manufacturing and process development costs.

Also contributing to the increase were higher personnel costs associated with expanding the clinical team, these increases were partially offset by decreased costs incurred for the Phase 2/3 ReMEDy2 AIS trial as activity was limited prior to the June 2023 lift of the clinical hold. Our general and administrative expenses were $1.9 million for the three months ended September 30, 2023, up from $1.5 million for the three months ended September 30, 2022. G&A expenses were $6 million for the nine months ended September 30, 2023, up from $4.5 million for the nine months ended September 30, 2022. The increase for the nine month comparison was primarily due to increased legal fees incurred in connection with our lawsuit against PRA Netherlands, and increased personnel costs incurred in conjunction with expanding the team.

Higher cost for patent prosecution and noncash share-based compensation also contributed to the increase. Before I turn you over to Rick, let me share that the hearing for the PRA lawsuit is currently still on track for December 7th of this year. PRA recently filed a counterclaim alleging that our enforcement of the April 2023 judgment affirming our ownership of all study records violated Dutch procedural laws. We disagree with their counterclaim, and we don’t currently anticipate that this will change the December 7th hearing date. We very much look forward to presenting our case against PRA. Now let me turn you back over to Rick.

Rick Pauls: Thanks, Scott. With that, we would like to open the call for questions. Operator, if you could please open the lines for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Thomas Flaten of Lake Street Capital. Your line is open.

Thomas Flaten: Good morning. Just a couple of quick questions, Rick. If you think about the total patients as a funnel, so you’re excluding mechanical thrombectomy, tPA, so conservatively called that 20% of patients, then you’re removing about 20% of patients for the posterior circulation. Can you just walk us through how that — how you see that all working, especially if you include the NIHSS score as well?

Rick Pauls: Yes. Thanks, Thomas. So as we see this, that — I mean, bigger picture here is, what’s most important for us is getting to the — we think the greatest clinical effect was this drug. And so we think commercially, the larger delta we see, so improvement of DM199 versus placebo, we think the greater commercial value. And so as we’re initially going to be targeting here, so we anticipate the initial label will be in the moderate to severity stroke patients, which would be in kind of like 35% to 40% of all strokes. And then commercially, though, as we talk to neurologists and commercial people, we think that if a patient has a mild or a moderate to severe or severe stroke that they’ll most likely be getting our treatment.

Thomas Flaten: Got it. And then to get to the 144 patient enrollment by year-end, how many sites do you need to have actively enrolling at your pacing to get to that number?

Rick Pauls: Yes. So right now, we’re looking at — and we’re talking about up to 100 sites, really focusing on those first 75. So what we’re looking at right now is about 40 in the U.S., potentially 10 in Australia, 10 in Canada, and then the remaining in Europe and other parts of the world. So as we — looking at the enrollment rate, that’s the first assumption. And then the second assumption is the patient enrollment by site by month. So right now, what we’re using is an enrollment rate target of 0.25. So having one patient per site every four months. And so, this is based upon some of the analysis of some historical stroke trials. We’ve recently gone back and did an analysis of the last 20 or so stroke trials for acute ischemic stroke.

Many of those were mechanical thrombectomy that had a smaller treatment window and targeting a smaller patient population. And on average, there was an enrollment rate of 0.5, so about twice in terms of the rate that we’re targeting. But there’s still a lot of variables here that we just don’t know. So even with these changes that we’ve made, we’re still using the assumption of the 0.25 enrollment rate. And getting into the new year, as we start to get some traction here, and we start getting the first sites up, we’ll have better clarity of where that actual enrollment rate comes in at.

Thomas Flaten: Got it. And then one final one, if I might. Any reason that we shouldn’t see the interim analysis readout in the second quarter of 2025, if everything goes to plan?

Rick Pauls: Right now, that’s the plan. And again, there’s lots of variables, but I’m hoping here — I’m hoping that this enrollment rate is conservative. In the past, we had some challenges with COVID. Also part of these protocol changes, there are some aspects in there that were — that weren’t quite clear. So with our new Interim Chief Medical Officer, in particular, helping us with just revising and just making the trial protocol more clear. And I think that’s going to help with recruitment.

Thomas Flaten: Excellent. Appreciate taking the questions. Thank you.

Rick Pauls: Thanks, Thomas.

Operator: Our next question comes from Alex Nowak from Craig-Hallum. Your line is open.

Alexander Nowak: All right. Great. Good morning, everyone. So the prior protocol made DM199 available only when mechanical thrombectomy wasn’t given. Now it’s based more on the anterior circulation. But is the goal still the same to reduce the mechanical thrombectomy patients. Is that correct?

Rick Pauls: So the plan still is to be excluding patients that were previously treated with mechanical thrombectomy and to exclude those patients that have a large vessel occlusion. And we believe that’s about 20% of the strokes today that have a large vessel occlusion.

Alexander Nowak: And then the anterior circulation is being added on top of that?

Scott Kellen: Yes. Alex, this is Scott. The — as we were laying out in the remarks, the NIHS score doesn’t evaluate the posterior circulation strokes very well. And so, the potential for getting misscored patients into the trial, scored low or high, creates variability that we just don’t want to introduce. And keep in mind that, of those 20% that are PCS strokes, 70% generally present within an NIHSS score of four or less. So the effect on the addressable patient population for ReMEDy2 is very minimal.

Alexander Nowak: Okay. Got it. And then the assessment of the anterior versus posterior circulation, how quickly can that be performed in the centers? Is that just a real-time assessment? And then how many in ReMEDy2 were anterior?

Rick Pauls: Yes, it’s something that’s — it’s a quick review by neurologists. We don’t have the data in front of us from a ReMEDy1, but we can double check on that.

Alexander Nowak: Okay. Understood. And then I just want to confirm, so what will be reported now during the interim analysis? I understand you don’t want to get hit with the penalty. But I just want to be clear on what we’re going to see when that interim analysis hits.

Rick Pauls: Sure. So with interim analysis if we’re seeing a lack of efficacy, the study will be terminated for lack of efficacy. Otherwise, there’ll be a resampling size between 240 and 728 patients. So the only thing that’s changed here is that we remove the option for stopping for overwhelming efficacy. And…

Alexander Nowak: Got it. So there won’t be any unblinding of the data, we won’t necessarily see excellent outcomes in the interim piece. We’ll just either know it’s either going to be stopped for lack of efficacy or study size needs to be modified.

Rick Pauls: Yes. That’s right. And basically, what drove this change here as we went through our forecasting and realizing that even if we achieve overwhelming efficacy at the interim analysis, during that five month period from when patient 144 is dosed and the interim analysis is conducted, we should be pretty close to that 240 patient anyways, in particular with now expanding with our trial side of the U.S., so we felt that there’s no sense of taking that statistical penalty if effectively we’re going to be there anyways at that point in time.

Alexander Nowak: Yes, makes total sense. And then all these recommendations to the study change, did they come internal? Did they come by KOLs out in the field? Or were they from the CRO?

Rick Pauls: So really good question. It came really a combination. I mean, first off, Dave Wambeke, our Chief Business Officer was in China for a week in August. And speaking to the company that’s currently marketing the KAILIKANG, the urine form of KLK1, speaking to several other pharmaceutical firms and related. And based upon that, he got some pretty clear feedback on some of these changes we’ve made, like this posterior strokes, we’d be better targeting the moderates patients. So really leveraging the feedback really in China in terms of what patients that we believe will be better responders, and then also having Jordan Dubow, our Interim Chief Medical Officer joining, taking another close looking at the protocol, getting some additional feedback here from the initial sites that we reached out to.

So after coming up of clinical hold, we reached out to numerous sites, and there was a number of feedback to the protocol that we could be done just to simplify it and reducing some of the steps that were perceived as complicated. And the point here right now, it’s very important here that we make this protocol as simple as possible for the sites so that they don’t looking at this protocol and feel that it was over complicated. So although this is taking a small delay here, I’d call it, but really very minor in terms of the big picture. So we see this as — if we can increase the efficacy of the interim analysis by a few percentage than the previous protocol, that could really make the difference in not having to go to a larger total sample size.

So ultimately, we feel this should reduce the total number of patients and time and the cost for the trial.

Alexander Nowak: All right. That makes sense. Appreciate the update. Thank you.

Rick Pauls: Thanks, Alex.

Operator: We have a question from Francois Brisebois of Oppenheimer. Your line is open.

Francois Brisebois: Hi. Thanks for taking the questions. So just a couple here. In terms of the moderate severity, can you help us understand — I guess, you talked about the prevalence, but mechanistically is there a rationale for this to make more sense here? And how do we get to feel comfortable that this won’t — having patients that are only moderately severe, is it easy to gauge who’s moderate? And how do we feel comfortable that, that won’t make enrollment quite a bit higher — harder? Thank you.

Rick Pauls: Yes. So thanks, Frank. So the premise here is if you take a stroke patient that’s come in and — so first off, it’s very clear. So the severity is scored by the NIHSS. So if the score is five to 15, that is a clear moderate severity stroke patients. And so when we take a step back and we look at this, if the patient has a moderate to severe, so above 15, the likelihood of that patient getting to a full recovery and excellent outcome is not very high. And so as we take a step back and we look at this, and as I mentioned on the prepared remarks from our Phase 2 trial, we didn’t have a single patient on DM199 who came in with a baseline above 15 that got to an excellent outcome. So I think what this does is just biases the opportunity here for higher effect.

And as we’re looking at our Phase 2 data further, it’s really in those patients that are — frankly, that were in the six to the 10, that we saw the greatest impact in getting to a full recovery compared to placebo. So we think these changes will ultimately show a greater effect. And then furthermore, when we take a looking at the clinical use of the KAILIKANG in China, most of those trials are targeting a less severe, so targeting more of a moderate severity strokes scale.

Francois Brisebois: Okay. Thanks. And then lastly, can you help us understand the potential outcomes of this lawsuit that’s coming up here? Thank you.

Scott Kellen: Sure, Frank. Hopefully, the outcome is that we get access to our data. We get access to the study site. We’re able to finally audit that study and confirm what the actual results were. I mean, first and foremost, we really, really would like to get a final study report that’s accurate and fileable. Beyond that, we’re going to ask — we’re asking for damages, that last proof-of-concept study that we believe was messed up, would cost $6 million or $7 million to reperform today. So we’re asking for that. We’re asking for the — some damages related to a license that an opportunity that DiaMedica had at the time that was basically undermined by the error reporting from PRA. And we’re taking a chance on lost value of the company as well.

So all in, we’re asking for as much as $75 million in damages and we’ll see how much we can get through the court’s process, again, provided that they reaffirmed their judgment from April that the DiaMedica is the owner and that PRA has reached the agreement. Does that answer your question, Frank?

Francois Brisebois: Yes, all set. Thank you.

Rick Pauls: Thanks, Frank.

Operator: And I’m seeing no further questions. I’ll turn the call back over to our host.

Rick Pauls: All right. Thanks, Paul. So the requirements that we discussed today in the inclusion criteria and are intended to enhance ReMEDy2’s probability of success on the primary endpoint, which also has the potential to reduce the total number of participants required to be enrolled in ReMEDy2 trial without significantly impacting the estimate — estimated enrollment rates. We’d like to thank everyone for joining us this morning and for your continued support. We are thrilled to be reengaged with clinical study sites and hope to be enrolling participants soon. This concludes our call.

Operator: The meeting has now concluded. Thank you for joining, and have a pleasant day.