Earnings Call Transcript - DYAI Q3 2020

Operator, Operator

Good evening, ladies and gentlemen, and thank you for holding. Welcome to Dyadic International's Third Quarter 2020 Financial Results. My name is Chuck, and I'll be your operator for today. As a reminder, please note that this call is being recorded. At this point, I would like to turn the call over to Ms. Ping Rawson, Dyadic's Chief Financial Officer. Please go ahead.

Ping Rawson, CFO

Thank you, Chuck. Good evening, everyone, and welcome to our third quarter 2020 earnings call. A press release with Dyadic International's third quarter 2020 financial results and the recent company highlights was issued earlier today. The press release on Form 8-K and Dyadic quarterly report on Form 10-Q have been posted to the SEC and Dyadic's website. On today's call, our President and CEO, Mark Emalfarb, will give a review of our business and corporate accomplishments for our third quarter of 2020, including a brief summary of our research and business development efforts. I will follow with a review of our financial results in more detail. We'll then provide you with an opportunity to ask questions. Matthew Jones and Ronen Tchelet will join Mark and me to answer your questions. At this time, I'd like to inform you that certain commentary made in this conference call may be considered forward-looking statements, which involve risks and uncertainties and other factors that could cause Dyadic's actual results, performance, scientific or otherwise, or achievements to be materially different from those expressed or implied by these forward-looking statements. Dyadic expressly disclaims any intent or obligation to update any forward-looking statements, except as required by law. For more information about factors that may cause actual results to be materially different from forward-looking statements, please refer to the press release we issued today as well as risks described in our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the quarter ended September 30, 2020, particularly in the section titled Risk Factors. This information can be found in other filings with the SEC when available. With that, I'd like to turn the call over to Mark. Mark?

Mark Emalfarb, CEO

Thank you, Ping. Welcome, everyone, and thank you for joining our third quarter conference call. I hope that you and your family are safe and healthy and are staying out of harm's way. This has been and continues to be a very exciting year for Dyadic. Q3 has produced results and has gotten us closer to meeting our collective scientific and business objectives. We continued to advance our proprietary C1 gene expression platform into a safe and efficient expression system with improved properties, impressive scientific results. Our business development pipeline continues to grow with additional interest from both new and previously engaged collaborators, which we believe will accelerate the adoption and use of our C1 gene expression platform toward the goal of commercialization. In addition to our COVID-19 initiatives, we signed 6 new and expanded collaborations with human and animal health companies. Additionally, we are expanding our presence in the Asia Pacific region with the signing of a research collaboration agreement with Jiangsu Hengrui Medicine, the largest pharmaceutical company in China by market capitalization and our previously announced nonexclusive research collaboration with WuXi Biologics, a leading global CDMO. The agreement with Jiangsu Hengrui Medicine highlights C1's potential value proposition to address demand for more efficient biomanufacturing processes of biologic drugs and vaccines. In October, Dyadic entered into a nonexclusive technology agreement with Epygen Biotech of India, which after obtaining required funding, expects to produce cGMP clinical trial material at their facility and conduct trials in India using Dyadic's C1 expressed RBD antigen of the SARS-CoV-2 spike protein. This agreement demonstrates how potential collaborators globally can develop and manufacture vaccines and drugs on a regional basis that are affordable, safe, and effective. With respect to our COVID-19 programs, we are currently working with 9 groups, including the Israel Institute for Biological Research, IIBR; the European ZAPI scientists; scientists from Oxford University, among others. We anticipate that up to 10 animal trials will be completed by or shortly after year-end. This is in addition to the Frederick National Laboratory project that we announced in June, which is ongoing and showing encouraging expression data. Importantly, there will be trials with mice, hamsters, and H2 transgenic mice, including challenge studies. We anticipate additional animal data to be generated to evaluate the best path forward for the potential clinical trial in humans. Interim results from a recent additional mice study further support the C1 expressed SARS-CoV-2 RBD. In addition to generating excellent immunogenicity responses with very high titers and neutralizing antibodies against the COVID-19 virus, it also has the potential to stimulate a memory cellular immune response inducing human cells with a SARS-CoV-2 virus. We are in discussions with certain parties and have provided samples to those who have expressed additional interest in evaluating C1 to express SARS-CoV-2 vaccine in antibodies and for potential use for C1 expressed protein for diagnostic applications. As we previously mentioned, we have signed fully funded agreements with all four leading animal health companies as well as a fifth global animal health company to evaluate C1. The results from certain of our animal health programs have been very promising, and therefore, we anticipate in 2021 that one or more of the analog products we are working on will go into animal studies. If successful, it will move towards commercialization. ZAPI has reported that they will continue to work on antigens for both the Schmallenberg, SBV, and Rift Valley Fever, RVFV viruses. ZAPI reported that they will conduct additional challenge studies in animals, which are expected to start before the end of the year with expected readouts in 2021. On the human health side, we signed 4 new and expanded collaborations with global pharmaceutical companies during the quarter. In some of these cases, we have moved beyond the proof-of-concept stage, and our collaborators have identified specific proteins for which they believe our C1 technology could be very beneficial to their commercialization efforts. In addition to entering into 2 fully human health collaborations today with top-tier global pharmaceutical companies, we are in various stages of discussions with other global pharmaceutical companies that we anticipate will lead to additional fully funded research collaborations and/or potential funded research agreements with negotiated license terms. The company continues to make progress in terms of stability and productivity in its glycoengineering and nonglycoengineering of its C1 cell lines to broaden the potential applications of the C1 gene expression platform for its use in developing and manufacturing vaccines, monoclonal antibodies, and other therapeutic proteins. We continue to successfully advance our strategy through fully funded collaborations with leading pharma and biotech companies complemented by our solid cash and investment-grade securities of $30.5 million. Overall, we remain disciplined and opportunistic regarding capital allocation. The at-the-money, ATM, offering we put in place adds to our financial flexibility should we want to accelerate existing programs and pursue additional opportunities that leverage the broad and growing potential applications of C1. However, to date, we have not sold, and we are not obligated to sell, any shares under the ATM agreement, and we have no immediate plans to sell any securities under this agreement to fund our near-term business plan. In closing, I believe that each quarter, we are making solid progress towards further establishing Dyadic's C1 gene expression platform as an alternative to CHO, baculovirus, and other traditional expression technologies currently used in the development and manufacturing of biologic vaccines and drugs for use in animal and human health and to help combat infectious diseases. With that, I will turn the call over to Ping to review the financials.

Ping Rawson, CFO

Thank you, Mark. Before I begin my discussion, I'd like to provide you with a few key business and financial highlights. Dyadic's financial position is solid with approximately $30.5 million in cash and investment-grade securities and no debt. Our cash balance of $21.9 million at the end of Q3 remains higher than in prior quarters due to the low interest rates currently available for investments. Our cash burn for the quarter and the first 9 months of 2020 was approximately $1.5 million and $5.6 million, respectively, in line with previous quarters and our expectations. Importantly, our fully funded research collaborations continue to provide an additional source of revenue and partially offset our ongoing R&D expenses. This has allowed us to mitigate our cash burn to a certain extent and maintain a comfortable position to fund our ongoing business activities. Overall, our approach to business development is unchanged, with an emphasis on large and growing addressable markets in human and animal health. I will now discuss our financial results in greater detail. Turning to the income statement. R&D revenue for the quarter was approximately $416,000 compared to $455,000 for the quarter ended September 30, 2019. We reported a decrease in the cost of research and development revenue for the quarter of approximately $267,000, comparing to $385,000 for the quarter ended September 30, 2019. The decrease in revenue and cost of R&D revenue for the quarter reflected a lower level of funding per project from 8 ongoing research collaborations compared to 5 collaborations for the same period a year ago. The increase in provision for contract losses of $112,000 reflected the activities of one biopharmaceutical collaboration research project. R&D expenses for the 3 months ended September 30, 2020, increased to approximately $986,000 compared to $841,000 for the same period a year ago. The increase primarily reflects the expansion of our portfolio, which now includes COVID-19 projects as well as additional internal targeted research activities. There were no research and development expenses related to parties for the quarter ended September 30, 2020, compared to approximately $102,000 for the same period a year ago. The decrease was due to the completion of our Research Service Agreement with BDI in June 2019. G&A expenses for the quarter increased to approximately $1.6 million compared to $1.1 million for the same period a year ago. The increase principally reflected increases in noncash share-based compensation expenses of $236,000, legal and SEC registration expenses of $217,000, accrued incentives of $54,000, insurance premium of $46,000, and miscellaneous increases of $34,000. Our interest income for the quarter was approximately $77,000 compared to $245,000 for the same period a year ago. The decrease was primarily due to the lower interest rate environment on the company's investment-grade securities. The net loss for the third quarter of 2020 was approximately $2.5 million or $0.09 per share compared to $1.7 million or $0.06 per share reported for the same period a year ago. With that, I will turn the call back to the operator to open up for Q&A.

Operator, Operator

And our first question will come from Ahu Demir with NOBLE Capital.

Ahu Demir, Analyst

I was curious if you made any additional research on the RBD antibody for the coronavirus program. And if so, are there any improvements, although you got really good results previously. So I was just curious if there are any updates on that.

Mark Emalfarb, CEO

Yes, there are. So as we mentioned in the call, we not only have seen excellent immunogenicity and neutralization, but we're also seeing T cell response as well in the second mice trial, which supports what the IIBR mice trial did. In addition to that, we have increased the productivity in the last quarter from approximately 1 gram per liter to over 3 grams per liter in 4 days. So we made tremendous progress on that, and we've generated additional strains of C1 RBD that can be used for a variety of different vaccine candidates. And in addition, as we pointed out, we've successfully expressed one or more of the candidates for the Frederick National Laboratory, which, as you know, is part of the Vaccine Research Center and the NIH, Natural Infectious Disease Group, which of course, is related to Dr. Fauci. So I think we made significant advances. We've got data rolling in very shortly on some of the other animal data. As we mentioned, we expect up to 10 animal studies to be conducted on the RBD, C1 RBD, either with nanoparticles, on its own, with additional testing, in mice, and H2 transgenic mice challenge studies, and in hamster studies, and of course, in challenge studies with hamsters. So I see there's a lot going on. We're very excited about the results in terms of efficacy and obviously, the productivity for a long time, even at 1 gram per liter, a record level, and now it's even higher so that we can make billions of doses even quicker and at a lower cost. Hopefully, that answers your question about that. In addition, as we reported, we also have now produced a monoclonal antibody from C1 for SARS-CoV-2, and it's looking very promising in terms of the initial data of neutralization. And that's in conjunction with a biotech firm called IDBiologics, and they licensed that monoclonal antibody gene from Vanderbilt University in James Crowe's lab, who is one of the most renowned scientists in the field. So a lot going on and many others are reaching out to us even today about potentially expressing additional antibodies in C1 for SARS-CoV-2.

Ahu Demir, Analyst

That sounds great. So my second question will be on the external programs. So considering you made many advances in your pipeline and also expanded your partnership portfolio, did it change in terms of how you conduct milestone or royalty payments currently? Did it change, by any means, with your partners? Have you talked to them about increasing those milestones and how you approach them? So I was just curious.

Mark Emalfarb, CEO

Yes. There are really no changes. I mean those are all flexible upfront cash for excess fees, milestones, royalties, fully funded R&D programs, proof-of-concept, potential licensing. As I mentioned, in addition to the deals we already made, including the 2 today that were signed, we're in discussions with others, leading to potentially funded research and even potential licenses for products and platform technology opportunities with several big pharma companies.

Ahu Demir, Analyst

And my last question will be on the glycoengineering. I know you mentioned that you made some progress. I am curious when we might see some data or some presentations on that side.

Mark Emalfarb, CEO

Yes. We continue to make significant progress on the glycoengineering and in the, I would say, merging of the low protease strain with the glycoengineering and then reconstituting the productivity. A lot of the programs we're working on, particularly one we're in negotiations with, is targeting, putting all that together so we can make stable, high-quality, low-cost, glycoengineered monoclonal antibodies and other therapeutic proteins. I'd say that we're on target for what we're doing there, and we are looking to make more deals targeted based on that success.

Operator, Operator

Our next question will come from John Vandermosten with Zacks CRC.

John Vandermosten, Analyst

And congratulations on the 2 new agreements. I wanted to ask about those agreements and how specifically they're defined in terms of what proteins can be made under the agreement and if there's any restrictions on, I guess, what indications that they can pursue. How does that work when you're doing those contracts for them or those agreements with them?

Mark Emalfarb, CEO

Yes. First of all, I just want to highlight, we made 6 new agreements and several new agreements for COVID, just 6 in the animal health and human health. Those 2 were just the last 2 that we signed today. So to clarify that, we've got a lot of momentum going and are actually in discussions with additional ones that could possibly come in even before this call. So hopefully, between now and the end of the year, we'll see some more deals. And specific to answer your questions, I think I'll let Matt, who I think is on the call, answer that. Matt, do you want to chime in?

Matthew Jones, Executive

Yes, sure. Thank you, Mark. Welcome to everybody on the call, and I hope you're all safe and well. So John, part of the answer is that, of course, we are very conscious that the programs that we are involved with are mostly around enabling. Of course, COVID is a big topic for everybody right now. We are not different or immune to that. But there are many other conversations going on, and Mark's mentioned several new agreements, which may or may not be related to the pandemic type work. Actually, we are very conscious that C1 as a platform has many attributes for human and animal health. So we are pushing on all fronts. I think that the nature of the contracts remains confidential always. But what we can say is that the challenge of health care today is more and more real. And as we look at the effects of this pandemic and potentially future pandemics, the cost of health care is something which we can't get around. So we are enabling companies who have had projects perhaps falter or stand still or go on the shelf with more classical cell lines who have turned to C1. Those conversations are encouraging. We're also encouraging the diversity of what C1 can produce in terms of types of molecules. And we've given public presentations. Indeed, our website has an updated presentation you can look at that talks to a wide range of molecules, not just the vaccines or mAbs. And I think that's great.

Mark Emalfarb, CEO

And I think I can add a little bit, John. I really think that this pandemic has highlighted the inefficiencies in the existing cell lines. I think it's speeding up, let's say, the thought pattern, potential adoption, and use by the pharmaceutical industry, governments to come in and recognize there's a big gap that needs to be filled. We're helping make sure they understand how wide and deep their gap is and how C1 can fill that gap on many different fronts. We can deal with not only animal and human health but in the pandemic. We've developed C1, where we've been rapidly programming very quickly, high levels of stable cell lines for production, quick purification. All that's come about through the sort of work in the last several years of knocking out proteases, glycoengineering, learning how to do better fermentations. I mean, it's all coming together. This investment in the R&D dollars and the investment in the dollars coming in from big pharma. And as I think I mentioned in the last call, it isn't just the money. It's the analytics they're doing. It's the molecules they're giving us. They're giving us sort of a roadmap on how to get rid of the problematic proteases across general classes. And we're learning from that. And as we now have a protease knockout, we basically have a whole cell that's devoid of proteases. And if it's one-on-one, if some protease pops up, we know how to knock it out and eliminate it much quicker to get the result we need of high stability, high productivity, high quality, and low cost. I think everything is starting to come together. As we've mentioned, it's all about the science, and the science is coming together. Now we're putting it together.

John Vandermosten, Analyst

And also kind of along the same lines on Jiangsu Hengrui, what might they be focused on? Are they going to be more focused on approved products or ones in development with the relationship you have with them? Will they be focused on biosimilars? I'm just wondering what are they going to do with the C1 line and how are they going to leverage it? Do you have a sense for that?

Mark Emalfarb, CEO

Yes. I can give you a general sense because it's confidential, okay? But in general, I think it's more about new molecules rather than existing ones, but it might be a molecule that's in a class that someone else may have that drug out there, which could be a multibillion-dollar drug. They want to find a lower way to produce biologics, plain and simple. They want to dominate and reduce the cost of manufacturing because the Chinese government is putting huge pressure on these companies to lower their costs. As Matt pointed out, the social unrest in our country and across the world, access to health care is becoming an inalienable right. There's no way you're going to deliver on that unless you have a better host.

John Vandermosten, Analyst

Yes. And then Epygen Biotech of India, I guess that would be kind of similar as well to just take drugs that are already approved or biologics that are already approved and have them be produced in a cheaper way for the domestic market in India? Is that the thought on that move?

Mark Emalfarb, CEO

Well, the initial thought with Epygen is to produce potentially 500 million doses of a low-cost vaccine that the Indian population can actually afford. If they want to eradicate their pandemic, they've got to get it to everybody or a significant part of the population. We believe we have the best solution. People think that Pfizer came out and Sputnik's out, they are all coming out. We know all these guys will beat us to the punch, but they are not going to beat us on cost and the quantities that can be made. We believe ultimately, C1 is going to fill the void easily, whether it's prime and boost or lower-income countries or the boost to some of these vaccines. If this thing sticks around, as some people predict on a seasonal basis, we'll have the lowest level of water. We're going to be much lower cost to produce the vaccine. We believe the type of vaccine we have had tremendous benefits compared to what people are doing with the full spike protein. We don't know if people grasped the difference of what we're doing versus what others are doing, but from warp speed, all those vaccines are full spike, and we're not the full spike.

John Vandermosten, Analyst

Yes. Thanks for the extra detail on the RBD advantages. Last one for me is just on the Frederick Lab's next step, what's required before going into humans there? What are the milestones you've got to meet before you're there?

Mark Emalfarb, CEO

Well, I'm not sure we need to make any more milestones because we think we've expressed one or more of the candidates successfully. We're going to, as I mentioned, very soon, believe by the end of the month, potentially provide them with purified protein for them to evaluate and analyze. From that point on, it's up to them. We're giving them what they need, providing it performs as they expect or want. Based on their criteria, we're turning it over to them. So we're pretty much done. Can we improve it? Yes. In terms of productivity, it's productive enough to make a vaccine at commercially feasible levels, but we can always make it more productive. The question is whether they want to do that and what they're going to do with it. But our part is almost done.

John Vandermosten, Analyst

I guess they had to file an IND or something like that, I guess, right? And that's how we think moving forward.

Mark Emalfarb, CEO

Well, they probably have to do first animal studies, and then an IND.

Operator, Operator

Our next question will come from Lee Alper with Hammock Investors.

Lee Alper, Analyst

Got a couple. One, any update on Sanofi and what's holding that up?

Mark Emalfarb, CEO

Yes. I think the update on Sanofi is that they are still looking for where is the best place, and if they can find a molecule, will they see the fit? They're busy with COVID like anyone else. They have lots of opportunities. They have other expression cell lines that they can use, the things that are easy and have low cost of goods in the past and presently. It may not be their focus. They're just trying to find the right molecule to use C1 to advance into new potential animal studies in preclinical trials. They don't have a molecule ready to do that.

Lee Alper, Analyst

Okay. And along the same lines, has anyone walked away from you on the projects that they're working with?

Mark Emalfarb, CEO

I'll give you an example. We did have a couple of years ago, one company that walked away, big pharma, and we're in discussions now they're back. Sanofi, of course, walked away on the flu vaccine years ago, and it wasn't because of the science, but for other reasons they may have had. Not every one of these companies will move forward. But in most cases, it has nothing to do with the science, the programs, or success. It's timing and finding the right molecule to fit their needs.

Lee Alper, Analyst

All right. And can you give us a little color on the patent exploration rights in 2029? What do you lose? And what do you keep?

Mark Emalfarb, CEO

We don't lose anything. In 2029, DuPont can then, other than for itself, potentially out-license C1, whatever they have in their possession. If they haven't evolved C1, they could be like the Motorola 20-pound brick, and we have the iPhone 12. I'm not quite sure how competitive they're going to be. We don't lose anything and we've just gained a competitor. The reality is, in some ways, if they were here now, that would make life easier. They could be in the clinic with their own candidate and product because the market is so huge, and the opportunities are wide and diverse. I think in some ways, you could argue that it would be beneficial if they actually had rights and were using them. They have rights for themselves, but they're not in the drug business and they can't sublicense it until December 31, 2029.

Lee Alper, Analyst

Right. So in 2030, you'll still be able to do the medical side of it?

Mark Emalfarb, CEO

Yes. By the way, our noncompete on the industrial side ends on January 1 this year.

Lee Alper, Analyst

Okay. And one of your favorite lines is you have many shots on goal, but you seem to be stuck in a red zone. What's it going to take to get us over there on a $1 deal?

Mark Emalfarb, CEO

Well, I don't think we're stuck in a red zone. I think we've moved from the 20-yard line to the 10-yard line. We're working on, for example, with the receptor binding domain, the data is coming in, as I mentioned, we have up to 10 animal studies. The efficacy and performance are coming in. We already know the productivity is there. We're working towards trying to get one or more of these vaccine candidates into humans. I think once it gets into humans in a Phase I clinical trial, the gates will start opening up almost like a floodgate, where we'll have more and more opportunity. I believe we're going to get there in 2021. Hopefully, we'll start in Q1 in 2021.

Operator, Operator

Our next question will come from Robert Smith with Center for Performance Investing.

Robert Smith, Analyst

So Mark, you just said it, aha. You mentioned the first quarter. Is there a possibility of entering human clinical trials sometime in the first quarter?

Mark Emalfarb, CEO

Yes, it's a possibility of doing that. It's actually an objective of ours that we're trying to meet. But we're aiming to meet it, first and foremost, with one of our collaborator's funding rather than our own, if possible. We all want to save our money and use it for everything we can do. If we can get someone else to help us fund that or completely fund it, that would be even better.

Robert Smith, Analyst

Would you say that the understanding of C1 is growing in the community?

Mark Emalfarb, CEO

Yes. If you remember, there was an article a few months ago that said the pandemic changes everything for C1. I absolutely believe we have gotten more attention, and we see the potential adoption in the use of C1 as the proof of principle that we have demonstrated with ZAPI, with SBV antigen, being 300 times more effective than baculovirus for cattle results. They were safe, effective, and the challenge studies were good. We now see the RVFV, the Rift Valley Fever virus, showing stable results, while baculovirus couldn't make it at all. Our own results with the receptor binding domain have shown high levels of productivity now reported at around 3 grams per liter in 4 days. More and more animal data is showing increasing safety and efficacy. I think the pandemic has changed everything for C1; more people are recognizing C1 as an affordable way to mass produce biologics, whether for a pandemic or traditional biologic drugs and vaccines. I hope people are resonating with that opportunity.

Robert Smith, Analyst

Yes. I see many comments about production and distribution, but I don't see the mention of what you have there, as far as the multiples of what could be gained. So that's a puzzle to me.

Mark Emalfarb, CEO

Let me tell you the difference in what we can gain. You've got, I think it was Pfizer who just said they're going to make 1.3 billion doses in 2021. That's an entire year. They have enough for two shots, which is around 650,000 patients worldwide, and we need 16 billion shots potentially. If we wanted to make 1.3 billion doses, I believe if we had the means financially, we could do it in a month, not a year. That shows you the difference at a lower cost with potentially safe vaccine that may or may not be as effective. But we believe we're positioned to make it happen.

Robert Smith, Analyst

No, I fully understand that, but why doesn't Pfizer?

Mark Emalfarb, CEO

Well, Pfizer took an approach through mRNA or DNA. A lot of these pharma guys take what they have and just use it. Then they get stuck. You start a clinical trial, and you don't go back. Why don't they do it? I don't know, ask the CEO of Pfizer. Someone should be asking that question to all the CEOs.

Operator, Operator

I am showing no further questions at this time, and we'll now turn the call back to Mr. Emalfarb for any closing remarks. Please go ahead.

Mark Emalfarb, CEO

Okay. Thank you, Chuck. 2020 continues to be a very exciting year for Dyadic. As we've just discussed, the pandemic has positively increased C1's visibility globally. The promising scientific data has enabled us to move closer to meeting our collective scientific and business objectives and strengthens our resolve to find a way to move a C1 expressed vaccine antibody or other therapeutic protein into clinical trials. I'd like to thank all of our employees, directors, and vendors for their tireless focus and dedication during these challenging times. I'd also like to thank our shareholders for your patience as we continue to work together to bring health care to a global population. We've made very strong progress so far this year, and we look forward to ending the year even better positioned than we are today. Thank you for your time today, and stay safe.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.