ImmunoPrecise Antibodies Ltd. (NASDAQ:IPA) Q3 2023 Earnings Call Transcript

ImmunoPrecise Antibodies Ltd. (NASDAQ:IPA) Q3 2023 Earnings Call Transcript March 16, 2023

Operator: Good morning, and welcome to IPA’s Earnings Call for the Third Quarter Fiscal Year 2023. I am Regina, and I will be your host for today’s call. Before we begin, I would like to remind everyone that our remarks today may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our statements. We encourage you to review our filings with the Securities and Exchange Commission for a more complete discussion of these risks and uncertainties. IPA undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call and the accompanying presentation slides, non-GAAP financial measures will be used to help investors and analysts understand IPA’s business performance.

IPA believes adjusted EBITDA reflects the business in a manner that allows for a meaningful period-to-period comparisons and analysis of trends in its business. An explanation and reconciliation of non-GAAP to GAAP measures can be found in the text of our management discussion and analysis filed on EDGAR and SEDAR. With that, I will now turn the call over to IPA’s CEO, Dr. Jennifer Bath, to provide an overview of our results for the quarter.

Jennifer Bath: Thank you, Regina. Ladies and gentlemen, welcome to our third quarter earnings call. We are happy to report a very noteworthy quarter for IPA, characterized by strong revenue growth, the expansion of new revenue streams using our AI-driven LENSai complex technology and the establishment of a potentially disruptive and valuable AI-driven research collaboration. Regarding this most recent pioneering collaboration, the partnership aims to tackle some of the world’s most challenging drug targets, specifically those within cells, which have been long considered inaccessible. By combining IPA’s unique discovery technologies with Libera Bio’s intracellular targeting formulations, we believe we are offering our investors an important value proposition.

Furthermore, we are energized by our ongoing efforts to finalize an AI-driven research collaboration on an additional complex oncology program. The partnership is under negotiation with a highly respected multibillion-dollar global leader in the field of oncology therapeutics and also focuses on a particularly challenging class of oncological proteins. As previously indicated, this program is still estimated to close around the end of this month. We are confident that these strategic initiatives will continue to drive growth, innovation and shareholder value, and we look forward to sharing more details on our progress during this call. In relation to our COVID drug product, while we continue to await delivery from our contract development and manufacturing organization, ChemPartner, we have taken decisive action to address the unanticipated delays.

We have put any significant further investment into the program on hold as we are hopeful for a promising and mutually beneficial resolution with the service provider. We are currently engaged in what we hope will be productive discussions to address this matter and we will share more details about this important opportunity both later on this call and going forward when details become available. Regarding our quarterly financials, IPA’s overall project revenue increased by 16.7% compared to the prior year, driven primarily by the growth of the company’s proprietary B-cell Select platform and protein manufacturing services. On a site-by-site basis, this increase reflects overall revenue growth at our Utrecht site of 25.3% year-over-year on a euro basis and at our Victoria site, an increase of 11%.

On a project revenue basis, so excluding the more time variable off-the-shelf product cells and cryopreservation, Victoria and Utrecht have experienced significant revenue growth of 24.6% year-over-year and 48.9% year-over-year, respectively. Brad will share more details about our strong quarter revenue shortly. This quarter, we were also excited to unveil our new website, showcasing our innovative technologies, including those of our recently acquired subsidiary, BioStrand. These modern in silico solutions have generated new revenue streams with the potential for quicker turnaround time, faster revenue recognition and higher profit margins. These recently publicized additions to our offerings underscore the value and potential of this strategic acquisition for our investors.

We have also made strategic changes to the Talem website content to better align with our overall focus on all licensing products and reducing expenditures related to partnerships and collaborations. With a slightly refocused approach, we aim to boost profits in curve expenses while delivering high-quality valuable products to our partners. This new direction for Talem involves a gradual shift away from programs where the subsidiary bears most of the preclinical research costs. Instead, it places greater emphasis on upfront financial arrangements, complemented by downstream revenues. This change is expected to benefit both Talem and our organization as a whole as we move forward in our quest for sustained growth and advancement. Lastly, in our general overview, we are pleased to announce that IPA has partnered with a premier executive search firm specializing in the life sciences industry to identify and secure top talent for the position of a nonexecutive Board Director.

This collaboration will ensure a highly customized search process, enabling us to select the best candidate who will contribute significantly to delivering long-term value for our shareholders and further solidifying IPA’s position as a leader in the industry. Now for the much anticipated update on sales and revenue, I will turn the call over to Barry Duplantis.

Barry Duplantis: Thank you, Jennifer. First off, we’re happy to report quarter-over-quarter global revenue was up 7.4% over Q3 fiscal year ’22, while project revenue increased by an impressive 16.7% over last year. Secondly, I’d like to touch on sales orders, contracts that are signed commitments to future work. While sales orders may not perfectly correlate with revenue, they do provide a useful metric for forecasting ongoing revenue over the next 10 months. Sales orders showed a Q3, a substantial increase of 66% over Q2 fiscal year ’23 and 48% over Q1 fiscal year ’23. These figures indicate that as client projects progress, IPA’s revenue is expected to continue to grow. Overall, the upward trend in sales orders indicates a promising outlook for IP’s continued success.

Thirdly, IPA has added nine new clients and serviced a total of 145 clients during Q3. The addition of nine clients this quarter is the highest number of new clients onboarded during a quarter in the past two years, while the 145 ongoing clients has averaged over the same time frame. IPA has seen a 23% increase in the number of antibody discovery programs initiated when comparing the first three quarters of fiscal year ’23 to all of fiscal year ’22. This growth represents a significant accomplishment, especially considering that Q4 is still yet to come. Our continued growth can once again be contributed to IPA’s rabbit B-cell platform and an industry that is cycling back towards the use of wild-type rodents. IPA is established and continues to cement itself as the leader in rabbit monoclonal antibodies.

Rabbit drive monoclonals are often used by our clients as therapeutic companion reagents, integral components of the drug discovery process with highly distinct roles and specifications perfectly suited to our workflows. However, as a standalone strategy they are in concert with IPA’s ability to use multiple strains, immunization strategies and discovery platforms. The use of alternative species such as rabbits and chickens has become a very effective means of ensuring a diverse set of therapeutically relevant sequences. In addition to more phylogenetically distance species, there is a renewed interest from our clients in the use of wild type or non-humanized transgenic animal models for therapeutic discovery. Despite the rise of transgenic models over the past decade, the fact that the wild-type immune systems are still regarded as superior, and that wild-type animals do not carry the royalties and milestone payments charged by third-party transgenic providers has led clients back to the use of the wild-type animal model.

With the integration of BioStrand and silico analysis, IPA’s next-generation humanization services are well positioned to take advantage of the cyclical market trend. In particular, the high throughput immunogenicity screening provided by BioStrand allows IPA to offer more advanced service that meets the evolving needs of our clients. Overall, the combination of IPA’s species agnostic platform, the use of wild-type animal models and the integration of BioStrand’s technology into IPA’s humanization platform represents a powerful strategy for continued growth and success in the industry. Next up, IPA is excited to introduce its latest marketing undertaking, the IPA Collective, a set of science and social gatherings held in strategic locations.

Photo by National Cancer Institute on Unsplash

The first event will take place in San Francisco next week. These events, combined with the recruitment of essential sales team members in Q2 will aid in establishing a firm physical presence in these vital markets. Finally, IPA Europe, Utrecht has added 12 new product entries to IPA’s online store based on the organoid growth factor R-Spondin 1, RSPO1. The addition of RSPO1 to culture medium of stem cells can increase the yield and quality of organoids, making it a valuable component in the production of organoids for the research and therapeutic purposes. Overall, RSPO1 is an important component in the growing organoids market as it can enhance the efficiency and effectiveness of organoid production leading to more accurate disease models and better drug testing plans forms.

The use of RSPO1 has contributed significantly to the growth of the organoids market in recent years. With that, I will now turn the quarterly updates over to Dr. Ilse Roodink IPA’s Chief Scientific Officer.

Ilse Roodink: Thank you, Barry, and good morning all. I would first like to update you on our TrkB T-cell engager program. Solid tumors out of expressing TrkB such as breast cancer are also not highly immunogenic, meaning that although immune systems – immune cells are present in the environment of the tumor. They are not attacking the cancer cells. The combination of our proprietary TrkB targeting arm with our unique CD3 targeting arm in a bispecific molecule it’s designed to recruit and activate T-cells and it’s also otherwise referred to as a T-cell engager. This bispecific molecule is designed to induce killing of specific cancer cells and is anticipated to lead to a more effective treatment. Our lead candidate in a TrkBxCD3 bispecific asset portfolio has been proven in the lab to activate T-cells in the presence of target expressing cells while laboratory results also indicated might be a safer therapy than a benchmark therapy currently available to patients.

An extract submitted to the prestigious AACR Annual Meeting this April demonstrates differentiating properties of this potential first and best-in-class lead candidate. I was recently accepted for presentation on the 19th of April, whereby just prior to the event, the extract structural published in the International Peer Reviewed AACR Journal Cancer Research. In our TATX20R program, we reached an important milestone. The TATX20 target is a target is a membrane-bound protein whose activity plays a key role in the survival of solid tumors and resistance to chemotherapy. Inhibition of this activity has been shown to reduce tumor growth and resource susceptibility of cancer cells to chemotherapy in preclinical models. Based on its proven ability to innovate activity in an in vitro assay, we selected an anti-agonistic lead candidate for further characterization.

Identification of an inhibitory monoclonal antibody is quite an achievement as there are only two such monoclonal antibodies known in the public domain for this target. Our candidate is the first fully human anti-agnostic monoclonal antibody emphasizing the uniqueness of our lead candidate. I will now turn back, turn you back over to Dr. Jennifer Bath, our CEO.

Jennifer Bath: Thank you, Ilse. I will now focus on providing a comprehensive overview of our recent operational updates for everyone on the call. Firstly, we’re excited to announce that BioStrand, whose LENSai intelligent technology is now a central theme in our strategies has successfully completed its first commercial project using groundbreaking natural language processing technology or NLP technology to analyze molecular binding interactions for a clinical stage program at a pharmaceutical company. This accomplishment represents BioStrand’s first official revenue generation since joining our team and demonstrates our commitment to driving innovation in the industry. During this project, BioStrand significantly improved its ability to perform in silico structural prediction of multiple isoforms as well as assessed structural homology.

These advancements provided valuable insights into the potential mechanism of action and structural characteristics of the client’s target protein and its interactions with potential drug candidates. BioStrand has also expanded its commercial activities with, in silico immunogenicity screening enabling the identification of potentially dangerous immune responses to partners drug candidates. This successful service offering not only confirmed the value and output of BioStrand’s in silico immunogenicity testing, but also provides a highly scalable rapid turnaround, powerful and high profit service offering that can be integrated into other IPA programs or offered as a standalone service. This newly commercialized service has the potential to add tremendous value to antibody programs by helping researchers select preferable lead candidates, avoid toxicity pitfalls in early stage clinical trials, save time and money during preclinical and clinical development and avoid potentially unnecessary or and fatal adverse events in patients.

Next, our collaboration with BriaCell continues to make significant progress in the first phase of the project, which due to mutually agreed upon additional research steps taken to – undertaken to enhance the quality of the program began one week ago. Our joint efforts to develop an innovative best-in-class therapy are being supported by BioStrand’s LENSai intelligent technology, which is playing a vital role in managing and analyzing the high quality data produced through our antibody generation platforms. This collaboration emphasizes our commitment to driving innovation and creating long-term value for investors. Continuing to focus on the accumulation of meaningful quality data, we turn to our next generation sequencing or NGS platform, where we have integrated cutting edge data mining tools, including our proprietary HYFT technology, with next generation sequencing to enhance computational efficiency across our data mining and repository capabilities.

One example of our success is reducing the laborious preprocessing of bulk data from a week to just four hours. Furthermore, we have bolstered our wet lab capabilities by implementing a multi-pronged approach that combines single cell functional screening, single cell sequencing, stage display next generation sequencing, and multi-species, multi-organ next generation sequencing. These efforts have been closely coordinated with our in silico analysis platform. Optimizing the functional output and providing us with integrated meaningful data that highlights our innovative capabilities. BioStrand standalone analysis pipeline for NGS antibody repertoire sequences is another example of our commitment to innovation. The pipeline is functional and capable of analyzing human, mouse, chicken, rabbit, camelid, including lama, rat and shark antibody next generation sequences.

The pipeline’s potential is immense, allowing integration with other bioinformatics pipelines, full IPA controlled flow of data and data processing steps, ease of customization, scalability and optimization of computer intensive steps. This continued focus on leveraging our function first strategy to drive unparalleled innovative solutions further solidifying our position as a leader in the next generation antibody discovery workflow. Lastly, the recent agreement between Talem and Libera Bio showcases our commitment to addressing notoriously difficult intracellular targets and meeting unmet patient needs. This collaboration leverages Libera Bio’s multifunctional polymeric nanocapsule or MPN technology, BioStrand’s LENSai full suite of integrated intelligence technology, and IPA’s wet lab capabilities to develop novel antibodies capable of penetrating the cell membrane and tackling elusive cancer targets.

Last but not least, one more example of a commercializable high demand offering by BioStrand is their SAAS model for SAAS-based data management platform, which has been awarded a first round request for proposal or RFP by an undisclosed large pharma company. The platform allows researchers to store, manage and analyze large amounts of multi-omics data using AI and machine learning. If awarded, this program is expected to help the pharmaceutical company accelerate its drug discovery process and improve its R&D efficiency. Minimally, this third-party validation marks the beginning of a new potential revenue stream of great interest and high conceivable revenues for BioStrand. I will now turn the phone over to Mr. Brad McConn for a closer look at this quarter’s financials.

Brad McConn: Thank you, Jennifer, and good morning, everyone. I’ll provide an overview of our financial results for the third quarter before touching on our balance sheet as of the end of the period. As a reminder, all numbers that I reference are in Canadian dollars unless otherwise noted. IPA recorded total revenue of $5.2 million during the third quarter, a 7.4% increase from $4.8 million during the third quarter of fiscal 2022. As Jennifer and Barry mentioned, the increase was driven by strong growth in our B-cell Select platform at our Victoria site and protein production services in Utrecht. Our project revenue growth was 16.7% year-over-year, continuing our strong performance in our primary revenue drivers. On a year-to-date basis, total revenue has increased 10.9% year-over-year, and project revenue has increased 12.7% year-over-year when adjusting for the effects of currency translations.

Gross profit for the quarter totaled $3 million, an increase of 14.6% compared to the same period last year, while gross profit margin increased to 57% from 54% last year. Moving on to our operating expenses. Research and development costs decreased to $1 million from $2.1 million during the same period last year. Of the $1 million in expense, $0.4 million relates to the PolyTope antibody combination therapy. As Jennifer discussed, we anticipate costs related to this program to reduce significantly moving forward. Other notable expenses include $0.3 million in compensation expense and $0.1 million in depreciation that were allocated to research and development. Sales and marketing expense totaled $0.8 million during the quarter, which is in line with our expense during the same quarter last year.

Sales and marketing include $0.6 million in compensation expense along with $0.2 million in advertising and marketing costs. General and administrative expense was $4.6 million during the period compared to $3.5 million in fiscal 2022. Salaries and benefits increased $0.7 million and management fees, $0.4 million, primarily due to the addition of staff at BioStrand along with some routine pay increases. Professional fees increased $0.3 million, while insurance and share-based payment expense each decreased by $0.1 million year-over-year. And finally, as we’ve seen in previous quarters this fiscal year, amortization of intangible assets increased $0.5 million, which is due to the intangibles recorded for the acquisition of BioStrand. IPA recorded other expense of $15,000 during the third quarter of fiscal 2023 compared to income of $0.7 million during the same period last year.

Of note, we recorded an unrealized foreign exchange loss of $0.1 million during the quarter, which compared to a gain of $0.5 million during the third quarter of fiscal 2022. All told, IPA recorded a net loss of $4.7 million during the third quarter of fiscal 2023 compared to a net loss of $3.8 million during the same period last year. Adjusted EBITDA for the quarter was negative $2.5 million, which is a $0.1 million gain from a loss of $2.6 million during the same period last year. As previously mentioned, a reconciliation of adjusted EBITDA to net loss can be found in the management discussion and analysis, excuse me, filed today. Moving on to the balance sheet. IPA held cash of $11.4 million as of January 31, 2023, compared to $30 million as of April 30, 2022.

Cash expenditures totaled $3.7 million during the three months ended January 31, 2023, a reduction from $10.6 million in expenditure during Q1 and $5 million during Q2 of fiscal 2023. For the year, the cash used in investing activities includes $1 million in the purchase of equipment and $0.6 million for the first deferred payment for the acquisition of BioStrand. Cash from financing activities includes an outflow of $1 million from lease payments, offset by inflows of $0.7 million from the issuance of shares due to option exercises. And with that, I’ll turn the call back over to Regina for question-and-answer.

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Q&A Session

Operator: Thanks, Brad. Before Jennifer adds any closing remarks, we would like to open the floor to any questions from analysts and investors. Our first question will come from the line of Will McHale with Ingalls & Snyder. Please go ahead.

Will McHale: Hi Jennifer, and team. Good morning. Thanks for giving some information about the other BioStrand deal that you guys are working on. I was wondering if you could also comment on kind of what the pipeline looks like beyond that for future AI drug discovery deals? And also, how you expect the economics of those deals to look over time?

Jennifer Bath: Sure. Hi Will. Thank you for your question. This is Jennifer. So with regard to your first question, an update on the pipeline for the AI drug discovery deals. So sure, happy to answer that, of course. So we expect to finalize the forthcoming AI drug discovery agreement, which involves one of our most prominent pharmaceutical partners, which I mentioned previously, with a complete and definitive contract. So this is the one I was referencing that they anticipate having completed by the end of this month. Additionally, another major pharma company is currently in due diligence and has asked for a site visit by myself and also our VP of Client Relations, Barry Duplantis, so that they may conduct a more thorough assessment.

Furthermore, there are ongoing negotiations with two additional biotech pipeline companies. And it is important to note that the negotiation timelines are primarily determined by the clients’ requirements and approval procedures, but they seem to be moving along at a respectable pace. As far as the economics of the future deals, very good question because we do anticipate those evolving. The primary goal of the early adopter programs was to attract companies to LENSai, while we were still enhancing and adjusting to the complexities of de novo and in silico antibody generation. As you may remember, in exchange for discounted fees and waiving the technology access fee IPA requested early adopters to provide, among other things, the rights to use anonymized data for promotional purposes and the permission to announce the collaboration through press releases.

Initially, we had planned to offer the early adopter option only to four companies. And since we expect to finalize four agreements currently under discussion, and there’s also one additional one that’s already been announced, we are starting to shift away from early adopter conversations. And considering incorporating technology access fees as initial payments along with downstream milestones and royalties, such as are already existing. The pricing for each program will differ based on factors, including things like program complexity, the number of targets and then also other specifics related to the company that IPA is working with at that time. So that’s how we see the gradual evolution, but we see that happening a little bit more in the shorter term here Will as we continue to move through and close these initial deals that are on the table.

Will McHale: Got it. Thanks. That’s helpful. I know the market probably has some interest in your guys’ cash position. I was wondering if you could provide some more detail maybe on just the profitability of kind of the core CRO business? And maybe also comment on the sort of flexible nature of your cost structure.