Earnings Call Transcript - KMDA Q1 2021

Operator, Operator

Greetings. Welcome to the Kamada Ltd. First Quarter 2021 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Bob Yedid. You may begin.

Bob Yedid, Host

Thank you, operator, and thank you everyone for joining today’s call. This is Bob Yedid with LifeSci Advisors. Joining me today from Kamada are Amir London, Chief Executive Officer; and Chaime Orlev, Chief Financial Officer. Earlier this morning, Kamada announced financial results for the 3 months ended March 31, 2021. If you have not received this news release, please go to the Investors page of the company’s website at www.kamada.com. Before we begin, I’d like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Kamada. I encourage you to review the company’s filings with the Securities and Exchange Commission, including without limitation, the company’s Forms 20-F and 6-K, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content on this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, Wednesday, May 12, 2021. Kamada undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With those remarks, it’s my pleasure to turn the call over to Amir London, CEO. Amir?

Amir London, CEO

Thank you, Bob. I also thank our investors and analysts for your interest in Kamada and for participating in today’s call. While the global pandemic continues to create commercial challenges, our sales and financial results for the first quarter of 2021 were in line with our expectations. Chaime will provide all the key details regarding our first quarter financial results shortly. But I’d like to begin by highlighting the recently announced amendment to the Glassia license agreement with Takeda. Upon completion of the transition of Glassia manufacturing to Takeda, which is expected by the end of 2021, we would transfer the Glassia U.S. BLA to Takeda. In exchange for the BLA transfer, we will receive a $2 million payment from Takeda expected by the end of the year. In addition, the term of the final sales-based milestone of $5 million due to Kamada under the license agreement was amended and resulted in a recognition of income in the first quarter. Based on the transition of Glassia manufacturing to Takeda and its continued distribution of the product to the U.S., the transfer of the BLA to Takeda is a sound strategic next step for both sides. Also, in connection with the transition of Glassia manufacturing to Takeda later this year, we are planning to implement a workforce downsizing in the early part of the third quarter, which is expected to result in an annualized reduction in labor costs of approximately 10%. This cost-saving measure aligns our workforce with the lower plant utilization, maintaining a profitable and effective operation that meets market demands. With that, I would like now to turn to our product pipeline and discuss our InnovAATe Phase 3 clinical program for proprietary inhaled AAT for the treatment of alpha-1 antitrypsin deficiency. As a reminder, InnovAATe is a randomized, double-blind, placebo-controlled, pivotal Phase 3 trial performed under an FDA IND and a European CTA designed to assess the efficacy and safety of inhaled AAT in patients with alpha-1 deficiency and moderate lung disease. This program continues to be a high priority for Kamada, and we continue to evaluate strategic opportunities for engaging a commercialization partner for this important product candidate, which is currently estimated at over $1 billion, growing 6% to 8% annually. Moving on, I’d like to discuss the important progress we continue to achieve around the development of our plasma-derived immunoglobulin products as a potential therapy for COVID-19 disease. We were pleased to announce the top-line results of our Phase 1/2 open-label single-arm, multicenter clinical trial of our IgG product in Israel. To briefly summarize the results, 11 of the 12 patients recovered following the receipt of the treatment. Seven patients were discharged from the hospital at or before day five post-treatment, and the remaining four patients were discharged by day nine. Following the infusion of the product, IgG levels in the plasma of all patients increased, and preliminary results demonstrated that the IgG level increase was associated with enhanced utilization activity. In addition, we were encouraged to observe that our IgG product demonstrated a favorable safety profile, and there were no infusion-related reactions or adverse events considered related to the study drug. Under our existing agreement, we continue to supply the product to the Israeli Ministry of Health (MOH) for the treatment of COVID-19 patients in Israel. As a reminder, the initial order from the MOH for the product is sufficient to treat approximately 500 hospitalized patients and is expected to generate approximately $3.4 million in revenue for Kamada. The therapy is available nationwide in Israel, and patients are being treated either as part of the MOH clinical study or on a named patient basis. During the first quarter, we also finalized the ramp-up in manufacturing production of the product by utilizing plasma collected in the U.S. by Kedrion. This scaled manufacturing on our commercial scale production line can accommodate potential demand from additional international markets. We are currently in discussions with several countries regarding the potential supply of IgG product. In general, we believe that even after the global deployment of COVID-19 vaccination, specific populations will continue to need an IgG product, mainly immunocompromised patients, who are expected to continue to be at risk due to their condition. Lastly, we believe that our activity during the COVID-19 pandemic clearly demonstrated our ability to quickly and professionally respond to such emerging situations. Moving onto the formation of Kamada Plasma, our new subsidiary in the U.S., we are extremely excited about the future opportunities provided by our recent acquisition of the plasma collection center in Beaumont, Texas and the establishment of our own collection capabilities. The acquisition represents our entry into the U.S. plasma production market and drives us toward our strategic goal of becoming a fully integrated specialty plasma company. I’m pleased to report today that integration activities are proceeding as planned in this facility. By leveraging our FDA license, we intend to open additional centers in the U.S., through which we intend to significantly expand our hyperimmune plasma collection capacity. This plant expansion is expected to improve our IgG competitive position in various markets. We look forward to sharing additional details with you regarding this potential growth opportunity in the coming quarters. Lastly, we continue to proactively explore new strategic business development opportunities that utilize and expand our core plasma-derived development, manufacturing, and commercialization expertise. As a reminder, we will focus on identifying plasma-derived products that we can acquire or provide manufacturing services for. Our team is fully engaged and we are currently in active discussions that we hope will lead to realizing this opportunity, which will be funded by our strong cash position of nearly $110 million as of March 31, 2021. Our strategy is focused on driving profitable growth for our current commercial activities as well as our plasma-derived product development and manufacturing expertise, and as such, we intend to continue evolving into a vertically integrated specialty plasma-derived company, focusing on the development and acquisition of plasma collection and product distribution capabilities. In summary, we continue to firmly believe in the strength of our business, which consists of multiple lines of activity that can each drive significant long-term growth opportunities for Kamada. With that, I’ll now ask Chaime to review our financial results for the first quarter 2021. Chaime, please.

Chaime Orlev, CFO

Thank you, Amir, and good day everyone. As Amir noted, our business performed as anticipated in the first quarter. As we said would be the case on prior calls, the transition of GLASSIA manufacturing to Takeda and the continued uncertainty in the operating environment created by the ongoing global COVID-19 pandemic resulted in reduced revenues and profitability in the first quarter of 2021, and we expect this to continue throughout the year. In this quarter, total revenues were $24.9 million, compared to $33.3 million for the first quarter of 2020, representing a 25% decrease. Total revenues in the first quarter included the recognition of the accelerated $5 million final sales-based milestone payment from Takeda under the amended GLASSIA license agreement between the companies. During the quarter, we sold approximately $7 million of GLASSIA to Takeda, which are part of our overall expected $25 million in product revenues from the supply to Takeda in 2021. Importantly, upon the initiation of sales of GLASSIA manufactured by Takeda, we will receive royalty payments from Takeda at the rate of 12% on net sales through August 2025, and at the rate of 6% thereafter until 2040, with a minimum of $5 million annually for each of the years, 2022 to 2040. Although the transition of the agreement to its royalty phase will result in a significant reduction of Kamada’s revenue from Takeda based on the current GLASSIA sales in the U.S. and the forecasted future growth, Kamada projects receiving royalties from Takeda in the range of $10 million to $20 million per year through 2040. From a profitability standpoint, gross profits for the first quarter of 2021 were $8.9 million, down from $11.5 million in the first quarter of 2020. Gross margins were 36% in the first quarter of 2021, an increase from 34% gross margins in the first quarter of 2020. The reduction in gross profitability is associated with a decrease in the overall revenues, as well as a one-time inventory write-off of approximately $1.5 million. Moving on, net income was $2.7 million or $0.06 per share on a fully diluted basis in the first quarter of 2021, as compared to net income of $5.2 million or $0.12 per share in the first quarter of 2020. Kamada continues to operate from a position of financial strength. As of March 31, 2021, the Company had cash, cash equivalents, and short-term investments of $109.5 million. As Amir indicated previously, we intend to use these cash resources for the expansion of our plasma collection activity and strategic business development opportunities. That concludes our prepared remarks. We will now open the call for questions. Operator?

Operator, Operator

Our first question is from Anthony Petrone with Jefferies. Please proceed with your question.

Anthony Petrone, Analyst

Thank you, and good morning. Good afternoon. I hope everyone’s doing well. I guess to me or maybe first, just the question on the geopolitical front, just given the events over the past 48 hours, maybe just to address just manufacturing, supply chains, how are you thinking about potential impacts from the events over the last 48 hours or lack thereof? And then we could go into other questions. And of course, hope everyone’s family is doing well.

Amir London, CEO

Thanks, Anthony. We are all well and safe, and we have no concerns regarding supply and the continuation of our operation of the plant. Each one has been in this type of situation for the past 20 years. We didn’t stop our production even for one day as a result of this. We have very strong security and technology around the Iron Dome system, and we are all safe and secure. Thank you very much.

Anthony Petrone, Analyst

Best wishes to everyone. Hopefully, it’s a speedy resolution. So in terms of a few comments referencing the prepared remarks and some of the items in the press release, Amir, maybe a little bit on the outlook for establishing a partnership for the inhaled Alpha-1 Antitrypsin product. Where are the discussions at the moment? And if you look ahead, what sort of partnership should we be thinking about? Will it be a regional commercialization effort, or will it be a single partner that has access to multiple geographies across the world? And then maybe to follow-up on AATD would be just the timings on the next clinical updates that we should be thinking about? And I have a couple more.

Amir London, CEO

Okay. As we mentioned on the call, we are in active discussions with potential partners, and we are evaluating the different opportunities ahead of us. We’re looking at a commercialization partner who will be investing in clinical development, and in return, will have commercial rights for the future commercialization of the product in different territories. In terms of whether it will be one partner for territories or multiple partners, all alternatives are open, and we are evaluating the different options as business partners that are showing interest in such collaboration. In due time, we will update on progress that we will potentially be making.

Anthony Petrone, Analyst

A few follow-ups would be when we look toward the transition of the manufacturing, the BLA transition to Takeda on GLASSIA IV. Is there a way to sort of estimate how much capacity is actually freed up at the plants and subsequently would be available for future CDMO agreements? And then you mentioned also, Amir, leveraging the balance sheet. How should we be thinking about investments allocated toward hyperimmune supply as opposed to potentially in-licensing agreements or even potential acquisitions of hyperimmune globulin products?

Amir London, CEO

Okay. Internal capacity, we developed to slow the effects now a little bit. Basically, you can look at the revenue that is being transferred into royalties. From that, you can kind of calculate the capacity. In general, we are going to have sufficient capacity to take additional CDMO contracts, like the one that we signed at the end of 2019, and we are currently in the tech transfer side of this product. As you may remember, we’ve announced that we signed an agreement for 12 years with the expectation that it’ll contribute between $8 million to $10 million a year to Kamada. Hopefully, we’re close to that $120 million in revenue over the 12 years contract starting 2023. We have the capacity to take additional similar contracts, but also remember that we are growing our catalog in manufacturing, and we own additional Kamada contracts like those with WHO or Canada, where we are supplying the products. The product is on registration in other territories. GLASSIA is growing ex-U.S., and it undergoes registration in some territories, primarily Latin America. So we are growing organically our current products, and this, of course, will fill some of the capacity that will be available after the completion of the transition to Takeda. Adding to that CMO services and additional potential products. All of this does not fully recover all of the verbal capacity, and this is why we are downsizing the plant in terms of number of employees. And as we said, the resolve of downsizing, which is going to happen at the beginning of the third quarter of this year, will result in a 10% cost reduction in terms of our labor cost.

Anthony Petrone, Analyst

And two quick follow-ups there, one on the 10% overall cost reduction – is that just total costs throughout the P&L or is it mostly COGS or operating expenses, or how is it mixed between COGS and operating expenses? And then the last one would be just on a plasma supply in Beaumont, Texas. You mentioned additional plasma collection centers. Should we be expecting this year that you will continue to bolster plasma collection efforts throughout the remainder of the year and into next year? Thanks, again.

Amir London, CEO

Yes. I’m not sure I fully heard the question, but it’s difficult to answer completely. Please ask another question. In terms of the plasma collection capabilities, we have two objectives for this year. One is to expand the capacity of the current center and try to maximize its potential. This is already in the works. In parallel to that, we have initiated the planning of expanding into opening additional centers. We expect to complete the planning of these centers later this year. Once the plan is finalized, we will move into the execution phase of opening additional centers. So the actual opening of additional centers is something planned most likely for next year. In terms of labor costs, we have been busy downsizing or planning to downsize across the entire company, but primarily, of course, on the labor force, which is working directly on production. This is well due to the transition of Glassia to Takeda. We have lower utilization in the plant, and we are aligning the capacity to the needed demand. So the majority of that 10% is related directly to labor costs.

Operator, Operator

And our next question is from Keay Nakae with Chardan Capital Markets. Please proceed with your question.

Keay Nakae, Analyst

Thanks. Can you give us an update on the status of enrollment in the inhaled clinical trials?

Amir London, CEO

Yes. Thanks. We did not provide exact numbers, but what I can definitely say is that, as you know, we initiated the study at the end of 2019 with the sites that were open kept open throughout the entire COVID situation in Europe, particularly the site in the Netherlands. Additional sites are ready to be opened, and now as the COVID situation improves across Europe and the U.S., we will be looking into opening additional sites. So that’s part of our plan, and concurrently, we are working on the business development side of the program and looking to engage a commercial partner.

Keay Nakae, Analyst

Okay. With respect to the hyperimmune plasma for COVID that you’re selling in Israel, can you tell us how much of that $3.4 million revenue was recognized in Q1?

Amir London, CEO

A significant portion of the $3.4 million has been sold already in Q1. The remaining is being supplied to the Ministry this quarter. By the end of this quarter, the entire $3.4 million will be recognized. The treatment has enrolled well over 100 patients in the Israeli study sponsored and supervised by the Israeli Ministry of Health. In general, the COVID situation itself has been improving significantly, as you may know, with the nationwide vaccination program. Current recruitment into the study has slowed because there aren’t many new patients being diagnosed. We are in discussion with other governments regarding the supply agreement. As mentioned during the call, we have scaled up production, and we have sufficient plasma and sufficient production capacity to supply greater quantities of the product to other governments and other ministries of health.

Keay Nakae, Analyst

Okay. For the rabies hyperimmune, last year was obviously impacted by lockdown situations. What are you seeing there as the outlook for that product as things begin to open up globally?

Amir London, CEO

As we mentioned in previous calls, in June 2020, actual market sales of the anti-rabies immunoglobulin were lower than the original expectation due to the lockdown, as people did not spend much time outdoors or in nature. As a result, the inventory levels with Kedrion carried beginning of the year were high, and this affected our 2021 sales to Kedrion, as they needed to consume the high inventory at the beginning of the year. As the U.S. begins to open up and people spend more time outside, especially now for the summer, we expect this high inventory to be consumed and that our sales rate to Kedrion will catch up again, as it was prior to the pandemic. As you may remember, we had over 20% market share in 2019, which was kind of the first full year of us selling our product with Kedrion in the U.S. market. We expect this market share to continue growing. We believe that it can reach up to 45% to 60% of the overall market, which is over $150 million. Starting late 2021 into 2022, we expect this market to continue growing, and overall sales of the product to Kedrion and Kedrion’s in-market sales are expected to expand significantly.

Keay Nakae, Analyst

Okay. And then just a final question about the plasma centers. I assume that most of the product will be used internally, but how much intermediates do you see being collected that you would sell to other parties?

Amir London, CEO

For the foreseeable future, for the next few years, as you indicated, it’s going to be for internal use. We would like to be independent or close to independent in terms of high premium plasma collection capabilities. This will lower our cost of goods and give us a competitive advantage when we compete primarily in countries, as this is based on tenders where price is the main driver for product selection. We see our ability to collect plasma internally as a significant competitive advantage in our evolution toward becoming a fully vertical specialty plasma company.

Keay Nakae, Analyst

Okay. That’s all I have. Thanks.

Operator, Operator

And it looks like we have reached the end of our question-and-answer session. I will now turn the call over to Amir London for closing remarks.

Amir London, CEO

Thank you very much. So in closing, we remain confident in the strength of the fundamentals of our business and look forward to multiple organic commercial growth catalysts, as well as further leveraging our FDA-approved plasma-derived technology platform to quickly respond to emerging pandemic situations. We will leverage our core expertise in the development, manufacturing, and commercialization of plasma-derived therapeutics to become a vertically integrated company by extending our plasma collection capabilities. This evolution has already started with the acquisition of the Texas-based plasma collection center. Moreover, our team remains focused on pursuing compelling business development opportunities by utilizing our solid balance sheet. Thank you for joining us today for the call, and we look forward to providing you with further updates on our progress for the year. We hope you all stay healthy and safe. Thank you very much.

Operator, Operator

And this concludes today’s conference, and you may disconnect your line at this time. Thank you for your participation.