Earnings Call Transcript - DMAC Q2 2021

Operator, Operator

Good morning, everyone. Thank you for joining the DiaMedica Therapeutics Second Quarter 2021 Conference Call. An audio recording of this call will be available shortly after we finish today on DiaMedica's website in the Investor Relations section. Before we move on, I want to remind you that we will be making forward-looking statements during this call. These statements carry risks and uncertainties that could lead to actual outcomes differing significantly from what we predict. Additional details regarding the factors that may cause these discrepancies are found in the Cautionary Statement Note Regarding Forward-Looking Statements in our press release issued yesterday, as well as in the Risk Factors section of our most recent annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q. You can access DiaMedica's SEC filings on the SEC's website and our own website. Please be aware that comments made during this call reflect only the situation as of today, August 12, 2021, and may not remain accurate in future replays or transcripts. DiaMedica does not have an obligation to update any 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 CEO. Mr. Pauls, you may proceed.

Rick Pauls, President and CEO

Thank you, operator. Good morning, everyone. And thank you for joining us today. Welcome to our second quarter 2021 earnings and business call update. Yesterday, after the markets closed, we issued a press release with a business update and a summary of our Q2 2021 financial results. At that time, we also filed our quarterly reports on Form 10-Q. Both documents can be found in the Investor Relations section of our website at diamedica.com. I'm joined this morning by our Chief Financial Officer, Scott Kellen; and our Senior Vice President of Clinical Operations, Dr. Harry Alcorn. Since we held a clinical update call at the end of June, we'll keep our prepared remarks today brief before opening the call for your questions. I'll begin by highlighting the positive interim data from our REDUX Phase 2 chronic kidney disease study we announced at the end of June. Our REDUX study was designed as a signal finding study in three different causes of chronic kidney disease. And remember, kidney function in chronic kidney disease patients declines over time. It does not improve on its own, and there are no therapies that restore kidney function today. As a result, current treatments focus on reducing the rate of decline. The primary signal or signals that we are looking for from a REDUX is an absolute decrease in the UACR, a measure of albuminuria, and stable to increasing eGFR, which would suggest to us the potential to maintain or improve kidney function, which would be completely new in the treatment for patients suffering from chronic kidney disease or CKD. In addition, we're also looking for signals that further demonstrate the mechanism of action for DM199. For example, blood pressure reductions in the hypertensive patients along with kidney biomarkers. Such mechanisms may be parts of the improvement in kidney function or provide additional clinical benefit of value to CKD patients. For example, again, reducing blood pressure may reduce the risk for cardiovascular disease, heart attacks, and also strokes. As we reported in June, interim data from REDUX provided what we believe are meaningful signals of stable to improving kidney function and mechanistically blood pressure control. These signals are consistent with both the hypothesized mechanism of action for DM199 and the data from our Phase 1b study in CKD patients and the clinical use of porcine KLK1 in Asia today. The interim results also continue to confirm the excellent safety and tolerability profile of DM199 in the CKD patient population. We were particularly encouraged by the data observed in the IgA nephropathy cohort. In this group, DM199 demonstrated a statistically significant decrease in the urinary albumin to creatinine ratio, or UACR, and stabilizing of the estimated glomerular filtration rate or eGFR. The average decrease in UACR was 33% in patients with moderate to severe albuminuria with a statistically significant p-value of 0.002, which basically tells us that almost all of the participants thus far in this group experienced an improvement in their UACR levels. In addition, the eGFR levels were stable. We believe DM199 may be the first compound to reach the FDA's rare CKD guidelines for conditional approval in IgA nephropathy, a rare cause of CKD, which is a 30% plus reduction in UACR over more than 6-plus months. One additional note for clarity, we received requests from three patients in the IgAN cohort to continue treatment for compassionate use, as these patients' vitals not only improved, but they also felt better with DM199 treatment. It's not often in a study of this size that there's feedback directly from multiple patients on how they feel better or the impact of treatment has improved their quality of life. But hearing this from these patients helps us to make all the challenges of developing a new treatment for patients worthwhile. In total, we saw clinical improvements consistent with the DM199 mechanism of action across all study cohorts, which we believe is a clear signal that DM199 is biologically active, including in the diabetic kidney disease cohorts with hypertension, where patients had a statistically significant decrease in blood pressure. We believe that the combination of these signals, mechanistic validation, and biological activity are building a compelling data set for DM199, if the final REDUX data remains consistent. Then REDUX will achieve our objective and affirm our strategy of pursuing rare causes of chronic kidney disease, with the lead focus remaining with IgA nephropathy. As a reminder, we expect additional data from the study, including kidney function, blood pressure control, and IgAN biomarkers, along with dosing level details to be presented at the American Society of Nephrology Annual Meeting in November of this year. Turning to our lead program in acute ischemic stroke, our near-term focus, our IND application to the FDA for an adaptive Phase 2/3 clinical trial of DM199 was accepted by the FDA earlier this year in mid-May. Initiation of the trial is on track. We still expect the first study sites to be launched and open for enrollment by the end of the summer. It's also important to note that the biological activity and mechanistic signals, including blood pressure reductions in hypertensive patients in the interim data from the REDUX trial gives us even more confidence in the potential for DM199 to improve patient outcomes following a stroke and to reduce the risk of stroke recurrence. Our ReMEDy2 Phase 2/3 trial is a double-blinded, placebo-controlled randomized study of approximately 350 participants. Based on a 90% powering for statistical significance on the primary endpoint of excellent outcomes with the modified Rankin Scale at day 90. After consultations with a number of regulatory and statistical experts, along with vascular neurologists, we are adding the prevention of stroke recurrence as an independent co-primary endpoint for the study. Note, this does not change anything about the design or execution of this study. Importantly, it gives us a second endpoint, which could also serve as the basis for approval of DM199 as a separate indication. Stroke recurrence represents 25% of acute ischemic strokes today. These strokes are more disabling, costly, and fatal. If you recall, in our ReMEDy2 Phase 2 trial, there was a statistically significant reduction in severe stroke recurrence. This was a 13% reduction on an absolute basis or an 86% reduction on a relative basis. To put this into perspective, today approximately 25 strokes are recurrent. So out of 100 stroke patients, you would expect 25 of 100 to have a second stroke. Based upon the reduction rate observed in our ReMEDy Phase 2 trial, that number would drop from 25 of 100 down to 4 of 100. Given the tendency for recurrent strokes to have a more adverse impact on those affected, this is a particularly significant potential benefit of DM199. And I think you can understand why we wish to move stroke recurrence up to an independent co-primary endpoint for the study. We're also preparing to publish a more comprehensive rationale for DM199 in stroke recurrence, which will include plaque stabilization, endothelial and blood pressure improvements. Secondary endpoints for the ReMEDy2 study will include mRS shift, the NIHSS scale, the Barthel Index scores, death, safety, tolerability measures, and biomarkers related to KLK1. The ReMEDy study will target up to 80% of acute ischemic stroke patients who do not have a treatment option today. These are patients who are not eligible or who do not receive tPA or mechanical thrombectomy. We believe ReMEDy2 has the potential to serve as a pivotal study of DM199 in this patient population. We are preparing for up to 75 sites in the U.S. With ReMEDy2, we have a sense of the site activation and enrollment pace. We will provide an update on expected timing for the interim analysis being planned for after approximately 40% of patients have completed the study. We've also filed an application with the FDA for a fast track designation for DM199. This application was submitted in July. As much as we believe it should be granted, I remind you that it's not a certainty that it will be issued.

Scott Kellen, CFO

Thank you, Rick. Good morning, everyone. As Rick mentioned, we announced our second quarter financial results and filed our quarterly report on Form 10-Q yesterday afternoon. If you haven't had a chance to review these documents, they are both available on either the DiaMedica or the SEC websites. Our research and development expenses for the quarter increased to $2.2 million. Now this is up from $1.6 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, R&D expenses increased to $4.6 million compared to $2.9 million for the prior year period. The increase for the six-month period was primarily due to a number of factors, including costs incurred for our ReMEDy2 clinical study, increased year-over-year costs related to manufacturing process development and our REDUX Phase 2 CKD study, as well as increased personnel costs associated with additional staff added to support R&D operations. These increases were partially offset by decreased costs incurred for our ReMEDy Phase 2 stroke study, which was completed in the prior year. General and administrative expenses were $1.2 million for the second quarter, up from $1.1 million for the prior year period. For the six months ended June 30, 2021, G&A expenses increased to $2.4 million, up $0.2 million from $2.2 million for the six months ended June 30, 2020. The increase for the six-month comparison was primarily due to increased professional service costs and increased personnel costs to support our expanding clinical programs. Turning to the balance sheet, we had cash, cash equivalents, and marketable securities of $21.3 million. Our current liabilities were $1.4 million, with a resulting working capital amount of $20.2 million as of June 30, 2021. This compared to $27.5 million in cash and securities, $2 million in current liabilities, and $25.9 million in working capital as of the end of December 31, 2020. The decreases in combined cash, cash equivalents, and marketable securities and in working capital are due primarily to the increased clinical study costs associated with preparing for a pivotal ReMEDy2 Phase 2/3 stroke study, costs related to our REDUX Phase 2 CKD study, and increased costs related to manufacturing development. Net cash used in operating activities for the six months ended June 30, 2021, was $6.4 million compared to $3.8 million for the six months ended June 30, 2020. This increase relates primarily to the increase in the net loss, partially offset by non-cash share-based compensation and the effects of changes in operating assets and liabilities. Looking forward, if we continue our operations as currently planned, our cash would get us into the third quarter of 2022. And as I'm sure you expect, we have options to remove deferred spending that doesn't directly contribute to the advancement of the ReMEDy2 pivotal trial to extend this runway closer to the end of 2022 to minimize the additional capital required to get us through the interim analysis for the ReMEDy trial and give us more time to focus on regional partnerships.

Rick Pauls, President and CEO

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

Operator, Operator

Your first question comes from the line of Etzer Darout with Guggenheim Securities. Your line is open.

Etzer Darout, Analyst

Great. Thank you. Thanks for taking the questions. Just - first one for me is just a point of clarification, Rick, for DM199 the fast track, was this for stroke specifically? And I guess, wondered if you had any interactions with regulators on the CKD data since the disclosure at the end of June. And if not, how you're thinking about maybe timing of these interactions, particularly for IgA nephropathy in the hypertensive African-American cohorts? Thanks.

Rick Pauls, President and CEO

Sure. Thanks, Etzer. Yes, so the fast-track designation was specifically for stroke outcomes, for the excellent outcomes. With regards to your second question, we're just continuing to go through the interim results from the REDUX study and looking at potential options moving forward while we complete - get a more complete conclusion of the study. At this point, we still believe that the IgA nephropathy is our lead indication and cause moving forward. While talking to our SAB members specifically, they're also very encouraged with some of the early data in the hypertensive African-Americans. So we're continuing to look at the data, and as we complete the study, it gives us an opportunity to start planning for next steps moving forward for the kidney program.

Operator, Operator

Next question comes from the line of Alex Nowak with Craig-Hallum Capital. Your line is open.

Alex Nowak, Analyst

Great. Good morning, everyone. Rick, maybe to expand off the next steps, can you maybe expand on what those next steps could entail based on the data you're sitting with IgAN, and sitting with African-Americans? Do you think a larger study within those cohorts would be necessary before moving into a pivotal? Or do you think at this stage, a pivotal could certainly be likely?

Rick Pauls, President and CEO

Yeah. It's a great question, Alex. So that's exactly what we're looking at, and we're exploring some different options moving forward and looking at potentially a path forward. We definitely see a path forward for kidney disease, but we have some time here now as we finish up the study to determine what that will be. Specifically, it's going to be looking at a Phase 2b or a Phase 3, but also making sure that our focus right now is on our acute ischemic stroke pivotal trial.

Alex Nowak, Analyst

Okay, that makes sense. And then how many sites do you expect to be live on the stroke pivotal this summer? And then just to Scott's point about regional partnerships, can you maybe expand on that and the conversations you're having for both stroke and kidney?

Rick Pauls, President and CEO

So for the number of sites that we're looking at for the stroke study is right now, we're working with a lab called Labcorp Covance as our CRO. We're looking at up to potentially 20 sites to be initiated by the end of the year for the stroke study.

Scott Kellen, CFO

And Alex, with respect to partnering, as you recall, we were forced to terminate the relationship with Ahon, the Chinese pharmaceutical company, a couple of years ago when they tried to compel us to provide them the manufacturing technology. At the time, we talked about wanting to see the IgAN data results before we went too much farther down that path because of the importance of IgAN as an indication in China. Recall over there, it's 2 million people a year versus 140,000 here in the U.S. And so now we have that data in hand, and we're feeling very good about being able to have those conversations. So I think the best way I can answer your question is to say, yes, that we're open to partnering. It's our preferred source for additional capital, and we don't have anything that we can disclose publicly at this time.

Alex Nowak, Analyst

No, understood. And I appreciate the commentary on the site, sorry. And maybe just one other question just on - you're starting the study. What sort of additional personnel build-up or, I guess, infrastructure build-up does the company need to undertake here before starting the pivotal later this summer?

Rick Pauls, President and CEO

Yeah. Great question, Alex. So right now, we are looking at hiring a couple of new support people for Harry's clinical team. But we're using a CRO, and everything is on track here.

Operator, Operator

Your next question comes from the line of Thomas Flaten with Lake Street Capital. Your line is open.

Thomas Flaten, Analyst

Good morning, guys. Thanks for taking the question. Hey, Rick. I just wanted to clarify on the coprimary endpoint. I know you said it was independent and coprimary, which is kind of an unusual word choice for me. So they are completely independent, meaning that if you succeed on the old primary endpoint regardless of the outcome of the current study, the study could still be successful, right? Is that correct?

Rick Pauls, President and CEO

Yes, that's right. So most importantly, adding in stroke recurrence as a coprimary independent endpoint, it's not going to jeopardize the powering of the excellent outcomes in mRS.

Thomas Flaten, Analyst

And then for the publication for Kidney Week. Can you just talk a little bit more about what we can expect to see in that? Will there be data from all the cohorts? How many patients do you think will be included in that data set that are fully completed out of the study?

Rick Pauls, President and CEO

Yeah. So the plan is that we'll have as complete a data set as possible in terms of the number of patients. We'll have further clarity on data by dosing and also looking at the kidney markers, blood pressure, and some of the IgAN biomarkers.

Thomas Flaten, Analyst

Great. And then just one final one. With respect to the IgAN in African-American cohorts, is the goal now to continue towards full enrollment of 30 patients? Or is there an opportunity to cut enrollment and use the data that you already have in hand?

Rick Pauls, President and CEO

Yeah. Great question. So we're currently, as we analyze the data, the fact that we have seen statistically significant improvements with just 11 patients. We are currently exploring the possibility of cutting off the study early, as we look at the data further.

Operator, Operator

Your next question comes from the line of Francois Brisebois with Oppenheimer. Your line is open.

Francois Brisebois, Analyst

Thanks for taking the questions. Okay. So I guess on the IgAN side, we're basically saying here that there might not be a full data readout based on what we've seen already in the interim look. Is that a fair assumption?

Rick Pauls, President and CEO

Yeah. I'd say we're very encouraged already with the interim results. The fact that we did see a greater than 30% reduction. If we look at the FDA's guidelines for rare CKD and specifically for conditional approval, the target is to have a 30%-plus reduction in the albuminuria, the UACR over more than 6-plus months. So I think we're very encouraged. We're already seeing those types of levels already at 3 months, and we anticipate when we go to longer 6-plus months, we think the data will get even better.

Francois Brisebois, Analyst

Okay, great. And on the stroke side, can you just talk about, I guess, what if you hit the prevention of stroke recurrence and not the other endpoint? And has the FDA signed off on any of this stroke recurrence, or is this more of an SAB and it makes sense based on the previous data?

Rick Pauls, President and CEO

Yeah. So this is really following some of the FDA's guidance and specifically from a statistical analysis plan using what's called the Benjamini-Hochberg Procedure. So the premise is that if we first achieve statistical significance with a p-value of less than 0.05 on the mRS excellent outcomes, it's a win. If we also hit statistical significance on the stroke recurrence of 0.05, that's a win on both endpoints. If we miss on the mRS so the p-value is greater than 0.05, but then on the stroke recurrence, the p-value is less than 0.025, there will be alpha splitting, but it would still be a win. What our next steps are, we do plan to talk to the FDA and specifically a Type C meeting to discuss having two independent endpoints with no alpha sharing with the premise that we believe that these are two separate ultimate labels for the product.

Francois Brisebois, Analyst

Okay, that makes a lot of sense. And then just lastly here on the interim look of AIS, I know there's a lot there. There's three different outcomes possible. And you had mentioned before 2022 when you talk about giving more guidance on timing. Is that based off when that would be, or are we not sure if the interim would still be a 2022 event?

Rick Pauls, President and CEO

Yeah. So at this point, we want to, before we have formal guidance, just want to get some clarity on where the initial enrollment is going to come in. So we're still very optimistic. In particular, we feel adding in the stroke recurrence is just one more important reason why we think patients should really consider joining the study. We just want to make sure before we have formal guidance that we have a bit of clarity on how the initial enrollment is coming in.

Francois Brisebois, Analyst

Understood. Okay. But, is it fair to say that the impact of the lingering pandemic might not be as bad for stroke as it is for rare kidney disease?

Rick Pauls, President and CEO

Yes, absolutely. That's definitely the case. I mean, these are patients that have had a stroke. They come into the hospital. They have to make a decision within well within 24 hours of stroke symptoms to decide whether they should join the study. This isn't like a kidney study or an oncology study where the patient has some time and tries to decide whether or not they should join the study. We think importantly for these patients, first and foremost, we think this is going to be a safe treatment option. And if it could, on top of that, potentially improve the stroke outcomes, reduce the risk of stroke recurrence. We think this should be a very compelling rationale for why they should immediately join this study. Thank you, operator. And in closing, let me reiterate how excited we are to be at the threshold for initiating a pivotal trial for stroke. Our optimism for this trial and for patients has been tremendously boosted by clear signals of mechanism and biological activity observed in the recent interim data from our REDUX study. We also look forward to the next steps with the CKD program with our promising therapy for patients. We'd like to thank everyone for joining us this morning. We appreciate your interest and continued support, and this concludes our call.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.