Earnings Call Transcript - DMAC Q3 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the DiaMedica Therapeutics Third Quarter 2020 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 and Media section. Before the company proceeds with its remarks, please note that it will be making forward-looking statements during today's call. These statements are subject to risks and uncertainties that could lead to actual results differing significantly from those anticipated. More information on the risks that could impact actual results can be found in the Cautionary Statement regarding forward-looking statements in the company's press release issued yesterday, as well as in the Risk Factors section of DiaMedica's previously filed annual reports on Form 10-K and subsequent quarterly report on Form 10-Q for the quarter ending September 30, 2020. DiaMedica's SEC filings can be accessed at www.sec.gov and on its website. Please also be aware that any comments made during today’s call are only valid as of today, November 05, 2020, and might not be accurate during any later replay or reading of the transcript. DiaMedica has no obligation to update its forward-looking statements. After the prepared remarks, we will open the lines for questions. I would now like to introduce your host for today’s call, Rick Pauls, DiaMedica's President and Chief Executive Officer. Mr. Pauls, you may begin.

Rick Pauls, President & CEO

Thank you, Laura. Good morning, everyone. We hope you're doing well staying safe and I'd like to welcome you to our third quarter 2020 business update call. We issued a press release with a business update and summary of our financial results for the third quarter 2020 yesterday after the market closed. At that time, we also filed our quarterly reports on Form 10-Q. Both documents can be found in the Investors and Media section of our website @diamond.com. I'm joined this morning by our Chief Financial Officer, Scott Kellen and our Chief Medical Officer, Dr. Harry Alcorn. Let me begin with an update on our REDUX trial in which we are testing DM199 for the treatment of chronic kidney disease or CKD. REDUX is a Phase II multicenter open label investigation targeting 90 participants with CKD enrolled in three cohorts with 30 participants per cohort. Cohort one of the study is focused on nondiabetic, hypertensive African-Americans with Stage II or III CKD and albinuria, a group of which is at greater risk for CKD than Caucasians. We also note that for African Americans who have the APOL1 gene mutation, the risk for developing CKD is even higher. Therefore, in our study, we are testing for the APOL1 gene mutation as an exploratory biomarker. Cohort two is enrolling participants with IGA nephropathy. Cohort two is focused on participants with Type II diabetes with hypertension and albinuria. We initiated Cohort three in DKD participants in August based in part upon some exciting data from our Remedy Phase II Stroke study completed earlier this year. Specifically, in a post hoc analysis of a subset of participants considered to have diabetic kidney disease at enrollment. DKD was defined as having an estimated glomerular filtration rate or eGFR below 90 mL and glucose above 7 mmol. Those subjects treated with DM199 experienced a statistically significant 12.7 mL mean improvements in eGFR versus placebo during the 22-day treatment period. In addition, the DM199 treated group experienced a 2 mmol mean reduction in blood glucose levels. We also noted that the DM199 group demonstrated a retained eGFR benefit of 8.8 mL mean improvement at day 56, which was 34 days off drug. We think this is a very interesting signal for potential retained eGFR benefit, which could make DM199 completely unique in the field of chronic kidney disease and DKD therapeutics with a potential to significantly improve patient conditions. The second reason we are evaluating participants with DKD have to do with the potential new regulatory perspective for registration studies in the US and Europe. Earlier this year, The National Kidney Foundation led in the publishing of a special report based upon a scientific workshop collaboration conducted over the last few years by the National Kidney Foundation with the FDA, the EMA, and industry. The report suggested that regulators use surrogate endpoints such as early changes in albinuria and/or reduction in the rate of GFR decline as a basis for conditional approval in clinical trials for CKD. If these new metrics are allowed, it could greatly reduce the clinical burden, which reduces the time required to get a treatment like DM199 to patients in need of new therapies and further increase the interest of pharmaceutical companies in the space. Before I continue, just a quick reminder participants in the REDUX CKD study will receive DM199 for approximately 13 weeks at two dose levels. The primary efficacy endpoints for the overall study are improvement in albinuria and eGFR. Secondary endpoints include evaluating the potential for DM199 to positively impact the underlying disease. As we reported yesterday at the end of last week as of October 30, we have enrolled a total of 49 subjects, up from 18 subjects as of August 5. Breaking this down, we've enrolled 11 subjects in Cohort 1, 13 subjects in Cohort 2 and 25 subjects in Cohort 3. Obviously, we're very happy that enrollment is nearly complete in the diabetic kidney disease cohort. This rapid enrollment is a function of a large patient population that matches the enrollment criteria for diabetic kidney disease. We believe that enrollment for our DKD cohort will complete by the end of the year and topline results will be available in the first half of 2021. In Cohorts one and two, where enrollment has continued at a much slower than expected pace, we know that the feedback we've received from our study sites is that potential subjects are still hesitant to enter the study. Many of these individuals are considered to have compromised immune systems, which makes COVID a greater risk. We believe that these concerns have likely been heightened with the recent surge reported of COVID infection and infection rates, and in some cases, the uptick in infection rates has also resulted in a reduction or suspension of activities at some of our study sites. While we anticipate that the COVID pandemic will likely continue to adversely affect our ability to recruit or enroll subjects in Cohort one and two, we're taking actions to improve the situation. We recently added two study sites and are working with existing sites to expand the referral network. We also continue to evaluate additional sites to further expand recruitments. Turning to our stroke program, we're very pleased to announce that the FDA has accepted our request for a type B pre-NDA meeting to review our cumulative clinical and nonclinical data, our proposed clinical study design and certain other regulatory questions. The FDA did not put any qualifications on their acceptance and has opted to provide written responses to us by early December. We believe that we have a solid foundation with the nonclinical and clinical data that we've generated to date; our belief is supported by the extent of efficacy of approved KLK1 products derived from human urine and porcine pancreas in Japan, China, and Korea. As part of our meeting request, we've asked the agency a number of questions to clarify the requirements for moving forward with the clinical development of DM199 for acute ischemic stroke or AIS. These include, among other things, the adequacy of our nonclinical work performed to date and remaining planned nonclinical work and ultimately whether they agree that our current cumulative data supports moving into an enter a seamless Phase 2, 3 adaptive study. In addition, we asked about the time to apply for fast track and breakthrough designation. Our goal is to conduct a well-controlled study, which can be used to support an application for a commercial approval. We believe that our proposed Phase 2, 3 adaptive study design can accomplish this goal. With adaptive design, upon completion of the interim analysis of the study, DiaMedica will remain blinded to the study results; the Data Monitoring Committee will review the results to determine whether the study should continue as planned or if the sample size should be adjusted to ensure a statistically significant outcome is reached in the study. We look forward to updating everyone after we receive the FDA's feedback in the coming weeks. We remain optimistic about the DiaMedica therapeutic potential for patients suffering from acute ischemic stroke. In our remedy phase II study in the non-mechanical treatment cohort, there was a 22% absolute increase or 2.5 times improvement in the number of patients achieving an excellent outcome compared to placebo. This was based on the NIHSS score of zero to one. Keep in mind the importance of this NIH's score: an excellent outcome of zero or one means that you're able to live independently and don’t need help to dress, eat, or bathe. For our Phase 2/3 study, we've proposed excluding patients with large vessel occlusions and those pretreated with mechanical thrombectomy and TPA. We believe DM199 and its 27-hour treatment window may represent an effective and safe treatment option for the 80% to 90% of AIS patients who are currently ineligible to receive TPA and/or mechanical thrombectomy, for whom the only alternative is supportive care. For perspective, the Clot Buster TPA was initially approved with a three-hour treatment window and an 11% absolute improvement in excellent outcomes based on the NIHSS score of 0-1. Now turning to our recently completed public offering. On August 10 of this year, we completed a public underwritten offering of $23 million gross proceeds, with net proceeds just over $21 million. We intend to use the proceeds for the recently added DKD cohort to our REDUX trial, to continue our clinical development of DM199 in AIS and for other working capital and general corporate purposes. I'd also like to highlight that Guggenheim Securities was the lead book runner managing this offering. We're pleased to share that the analyst coverage was recently initiated by Darrell.

Scott Kellen, CFO

Thank you, Rick and good morning, everyone. As Rick mentioned, we did release the financial results for the third quarter and filed our 10-Q yesterday afternoon; if you haven't had a chance to review these documents, they are both available on either our website or the SEC's website. Our net loss for the third quarter of 2020 was $3.2 million or $0.19 per share. Our net loss for the nine months ended September 30, 2020 was $8.1 million or $0.55 per share. This compares to a net loss of $2.4 million or $0.20 per share for the third quarter of 2019 and a net loss for the nine months ended September 30, 2019 of $8.2 million or $0.68 per share. Now within that, our research and development expenses increased to $2.2 million for the three months ended September 30, 2020, which is up from $1.6 million for the three months ended September 30, 2019. This is an increase of $0.6 million, which is due primarily to the cost incurred in connection with the REDUX trial including the recent launching of the DKD cohort. Now for the nine months ended September 30, 2020 our research expenses decreased to $5.2 million, down $0.9 million from the $6.1 million for the nine months ended September 30, 2019. The decrease for the nine-month period was primarily due to nonrecurring costs of approximately $1.3 million incurred for the new production run of the DM199 drug substance during the nine months ended September 2019 and a net decrease in year-over-year clinical study costs. Now the decrease in the clinical study costs was due to a combination of the decrease in the cost incurred for the Remedy Stroke Study as it completed and wound down here in 2020 and the nonrecurring cost of the Phase 1B CKD study, which started and completed in the prior year period. Now these decreases were partially offset by the cost incurred for the REDUX trial, which initiated late in 2019 and increased manufacturing development costs and increased non-cash share-based compensation costs. Our general and administrative expenses were $1.1 million for the three months ended September 30, 2020, up from $1.0 million for the three months ended September 30, 2019. G&A expenses increased to $3.2 million for the nine months ended September 30, 2020, which is up $0.5 million from the $2.7 million for the nine months ended September 2019. The increase for the nine-month comparison was primarily due to increased non-cash, share-based compensation costs and increased professional service costs. Total other income decreased to $128,000 for the three months ended September 30, 2020, down from $225,000 for the prior year period. Total other income decreased to $359,000 for the nine months ended September 30, 2020, compared to $683,000 for the nine months ended September 30, 2019. The decrease for the nine-month period is primarily related to the reduced R&D incentives associated with decreased Remedy Stroke Study costs during the current year period, which is partially offset by foreign currency transaction gains recognized during the current year. Next turning to the balance sheet, we finished the third quarter of 2020 with cash and marketable securities of $30.6 million, current liabilities of $1.4 million and working capital of $29.7 million. This compares to $7.9 million in cash and marketable securities, $1.3 million in current liabilities and $7.5 million working capital as of the end of 2019. The increases in the company's combined cash and marketable securities and in our working capital were due to our February and August 2020 public offerings of common shares. In August, we completed a public offering, which Rich discussed. Also in February of this year, we completed a public offering of common shares, which raised gross proceeds of $8.5 million and net proceeds of $7.7 million. Our current capital position should allow us to complete all three cohorts of our REDUX Phase II clinical study, which includes the DKD cohort initiated here in August. Additionally, we will be able to initiate our Phase III study in acute ischemic stroke and fund our planned operations for the next two years. We continue to expect the impact of the delay in the REDUX study enrollment to affect the timing of the costs incurred, but not to cause a significant overall increase in costs as we're managing this study internally. However, we'll continue to assess the effect of the pandemic on the REDUX trial by monitoring the spread of the virus and the actions implemented by local authorities to combat the virus and we will continue to provide updates. Now let me turn the call back over to Rick.

Rick Pauls, President & CEO

Thank you, Scott. We would like to open the call for questions. Operator, if you could please introduce the first analyst.

Operator, Operator

Our first question comes from Alex Nowak of Craig Hallum Capital.

Alex Nowak, Analyst

Appreciate all the time on the differences enrolled with IGA type diabetic. Other than opening up more sites, what else can be done to improve enrollment in that group if they're just unwilling to come in given the coronavirus?

Rick Pauls, President & CEO

Harry, can you comment on that please?

Harry Alcorn, Chief Medical Officer

Sure, good morning. Harry Alcorn here. So we're working with the sites in regards to how the messaging is occurring from this position at the clinical trials site to these patients, to see if there is willingness for them to have a nurse physically come to their home or what are the primary concerns to see if we can overcome their, I would say, objections for one or two screening for our study. As you know, these patients are limited and they are pocketed throughout the country, and so the sites that we have selected are clearly the right sites as we've seen in the third cohort with DKD. Along with messaging, along with not working with their primary care physicians, we have added the two new sites as we talked about earlier from Rick and Scott, and then we're asking from the physicians at the sites, what additional streams of networking they would recommend as well.

Alex Nowak, Analyst

And Harry it sounds like part of the issue is not necessarily getting the patient to come in for the first visit to do the enrollment. It's actually the willingness to have a nurse come to the home. Is that fair? And maybe a second question that, is there any interest or ability to move the actual enrollment steps at the home, so everything is done there.

Rick Pauls, President & CEO

We actually can do that now. We have that capability, and it's the concern that the patients have not for that first screen visitor, let's say enrolling in the study. It's the ongoing three months of participation and with the nurses coming in, the nurses are seeing other patients as well. There's a perception there that they may be at risk of receiving treatment from a nurse that may be exposed to somebody else that has COVID. So we're trying to work through that from a messaging perspective and show them that we do have procedures in place to minimize their level of risk.

Alex Nowak, Analyst

Understood. Given the rate of enrollment to the Type II diabetes cohort, would you expand that size just given the very fast-paced enrollments that 30 patients look at 60 patients?

Rick Pauls, President & CEO

Right now it's 30 patients is the study size that we feel very comfortable with; we're also anxious to get top-line data out to the street.

Alex Nowak, Analyst

Okay. That's great. Harry go ahead.

Harry Alcorn, Chief Medical Officer

We also added either sites. So like in the Florida area, specifically in Orlando, we have physicians that have networked with one another. It's specifically primary care physicians that have these potential patients that they do feel that they potentially could screen. They're being referred on to our clinical trial sites. That's also a new strategy that we put in place last month.

Alex Nowak, Analyst

And then any update on conversations you're having with finding a partner at stroke? My guess is they probably are going to want to wait to hear from FDA before signing anything, but just any update on the partner conversations around stroke?

Rick Pauls, President & CEO

Yes, so we've been having some ongoing conversations both global and also specifically for regions in China and Japan. At this point here we're literally months away here now, I'd say from top-line results for CKD, and so we really want to wait and be in a position so that when that data comes out, we can be in a great position to look at partners for both indications individually or together.

Alex Nowak, Analyst

And then just two more questions, on the FDA meeting just to confirm the FDA meeting on December 4 or you're expecting to hear back with comments by December 4? And if the agency does decide to issue a break designation or fast track designation when would we expect to hear that?

Rick Pauls, President & CEO

So the guidance is that we'll get written responses by December 4, and part of those questions that we have for them are timing on submitting a breakthrough and fast-track related designations. So that would then be something we would look at filing shortly thereafter.

Alex Nowak, Analyst

Okay. Understood. And then on your prepared remarks you mentioned the Phase 2 increased stroke study design, but did I hear you say that you'll seek the label that excludes tPA as well plus mechanical thrombectomy? And if so, I am just curious why the TPA exclusion just because it looks when you did include TPA and DM199 in your Phase II, as the data actually was pretty good, maybe do better.

Rick Pauls, President & CEO

So ultimately, we think DM199 would be effective with our TPA. For the registration studies, what we feel now is having a very clean experimental study that will exclude TPA along with the mechanical thrombectomy and also those patients with large vessel occlusion. So if something is in the initial label, we plan to exclude TPA, but we could look at adding that at a later date. As we mentioned in the prepared remarks, ultimately, 80 to 90% of patients are not receiving TPA or mechanical thrombectomy, so we went out with a very focused targeted trial design.

Alex Nowak, Analyst

Okay. I appreciate the update. Thank you.

Operator, Operator

Our next question is from the analyst at Guggenheim.

Unidentified Analyst, Analyst

Some of the issues are for IGA nephropathy and hypertensive African-America not site-specific and more around patient risk or maybe lack of diagnosis due to COVID. Are you seeing similar enrollment across other IGA nephropathy trials? And maybe what you’ve been able to kind of take away from those and then I have a follow-up question?

Harry Alcorn, Chief Medical Officer

Yeah, sure, good question. The sites that we have for the IGA nephropathy cohort are sites that also have done other protocols. In our conversations with them, it is across the board. They're having the same issues for all their protocols, all their studies. Specifically in these niche populations, it's been very difficult.

Unidentified Analyst, Analyst

Overall, I guess given the KLK1 rationale for DM199 and I guess how much we've been through, do you see positive DKD study to IGA nephropathy and African-American hypertensive? So how much more confident do you get in that mechanism from the DKD trial given that has been a readout first in sort of the overall hypothesis here for the low KLK1 levels?

Rick Pauls, President & CEO

Yeah, I think it will be strong. We feel that DM199, KLK1 will be effective fleet for all forms of chronic kidney disease. The rationale for the study design with the three cohorts now gives us an opportunity to look at the different groups and determine where do we see, ideally, the greatest clinical effect. Our plan then is taking the clinical data in the context of the clinical path for each of the causes to then very quickly decide on which of the three cohorts will move forward into late-stage clinical studies.

Unidentified Analyst, Analyst

Great Thanks and congrats on the progress.

Operator, Operator

Our next question is from Thomas Flaten of Lake Street Capital.

Thomas Flaten, Analyst

Just a couple and just to follow-up on the earlier question about FDA, so just to confirm have you met with FDA or is that still to be a completed item?

Rick Pauls, President & CEO

So we sent in the formal request with questions to the FDA here going back a number of weeks ago and they responded with accepting the meeting request and asked for us to send them the questions and then they would provide a formal response in writing to us by early December.

Thomas Flaten, Analyst

And so is there an expectation that there will be a formal meeting following that or is the written response a surrogate for actually meeting with them?

Rick Pauls, President & CEO

That's right, and if there are any follow-ups, then we'll look at a discussion based on that.

Thomas Flaten, Analyst

And then can you just remind us what discussions, if any, have you had with FDA around April 1 as a biomarker?

Rick Pauls, President & CEO

We have not had a discussion yet about April 1. It's something that we want to have some data in hand, and so ideally first part of next year sometime we'll be in a position to talk to the FDA with actually some data in hand. So we want to get the data first.

Operator, Operator

And we have no further questions at this time.

Rick Pauls, President & CEO

Thank you, everybody. We appreciate your time and hope everybody stays well and safe, and we look forward to keeping you updated with our progress.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.