Good afternoon, and welcome to OmniAb, Inc. Second Quarter 2023 Financial Results and Business Update Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Kurt Gustafson, OmniAb, Inc.'s Chief Financial Officer. You may begin.

Thank you, operator, and good afternoon, everyone. Thank you all for joining our second quarter 2023 financial results conference call. There are slides to accompany today's remarks, and they are available in the Investors section of our website at omniab.com. Before we begin, I'd like to remind listeners that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. These forward-looking statements are qualified by the cautionary statements contained in today's press release and our SEC filings. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, August 10, 2023. Except as required by law, OmniAb undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Joining me on the call today is Matt Foehr, OmniAb's President and CEO. During today's call, Matt and I will provide highlights on the company's operations, partner and technology updates and our recent financial results. At the conclusion of the prepared remarks, we'll open the call to questions. And with that, let me turn the call over to Matt.

Thanks, Kurt. Good afternoon, everyone, and thanks for joining our second quarter conference call. I'll start today with an overview of our business here on Slide number 4 of the deck. At the core of OmniAb's business model is our proprietary discovery technology platform that's designed to help partners discover innovative therapeutics quickly and efficiently. In a simple sense, it's a model based on licensing innovative technologies to partners. OmniAb is differentiated in the marketplace by having the most diverse host systems for fully human and bispecific antibody discovery with the industry's only 4-species platform. That includes transgenic mice, rats, chickens, and cow-based technologies. Our partners have an increasing number of antibodies in clinical trials that are from our technology and the versatility of our platform continues to be demonstrated in the number of modalities and formats being employed by our partners, both preclinically and clinically. We offer flexibility to meet our partners' evolving scientific needs as we believe generating large and diverse repertoires of high-quality antibodies increases the likelihood of success in optimizing desired therapeutic characteristics. Our technology and our core capabilities are driven by, what we call, the biological intelligence of our transgenic animals and are further strengthened by our innovative, high-throughput screening and other technologies. There are 74 partners with access to our technology or to OmniAb antibodies with over 300 programs in various stages of research and development. The antibody space is one of the fastest-growing parts of the drug industry with a market size expected to be larger than $250 billion within a couple of years. We believe we're in a great position to capitalize on this opportunity with our unique and expanding technology offerings. We're constantly innovating our technology stack, and this past May, we introduced our newly branded OmniDeep offering, which is a suite of in silico capabilities, including structural modeling, large, multi-species antibody databases, molecular dynamic simulations, artificial intelligence, and machine and deep learning sequence models that are applicable across our technology platforms to further enhance our partners' discovery process. In addition, we plan to introduce our novel heavy-chain-only OmniChicken that we will be branding as OmnidAb in the fourth quarter of this year. And I'll say more detailed information regarding our excitement around that technology until later this year when we launch it. On this next slide, I just want to reiterate that as a company and as a team, we're mission-driven to enable the rapid discovery of innovative pharmaceutical products by pushing the frontiers of drug discovery technologies. We're poised for continued growth, as shown here on Slide number 6 by the new license agreements we signed during the second quarter. In Q2, our team closed 4 new platform license agreements, one with Merck, Inc. and one with Neurocrine Biosciences as well as platform deals with Stanford University and Seattle Children's Hospital. Regarding Merck, this is a new agreement and is with the U.S. Merck & Co., not to be confused with the German Merck KGaA with whom we also have an agreement. We reached a total of 74 active partners at quarter end, up from a partner count of just slightly more than 60 as of a year ago. Our discovery platform continues to garner interest in the industry among a diversified group of leading global pharmaceutical companies, allowing us to leverage our highly scalable business model. Adding partners like Merck Inc., who are global leaders in the industry and who are committed to using the power of leading-edge science to improve lives, bolsters our growing list of partners. We believe this is a testament to our effective and efficient discovery technologies, our in-house expertise for scientific collaboration services, our mindset for developing a deep understanding and also prioritizing the current and future needs of our partners as well as our commitment to continued innovation. Here on Slide number 8, our portfolio of active programs increased to 305 with 29 programs in the clinic under regulatory review or approved for commercialization at the end of Q2. During the second quarter, we added a net total of 4 new programs to our portfolio. Importantly, I want to note that when we report program count, we do so net of attrition, as attrition is expected in the pharmaceutical industry. In this quarter, attrition was seen only in the discovery stage of our partner pipeline. The pie chart on the right-hand side of the slide breaks down our 305 programs by stage of development. The discovery phase consists of 261 programs in addition to 15 programs now in the preclinical stage. In the clinic, at the end of June, our partners had 22 programs in Phase I, 2 programs in Phase II, 1 in Phase III, as well as 1 program currently under regulatory review. There are 3 approved drugs utilizing OmniAb-derived antibodies, and we're recognizing royalty revenue from commercial sales of zimberelimab and sugemalimab in China, both of which are also being pursued in other geographies. We saw some nice progression of programs in the quarter as well, with 3 programs transitioning from the discovery stage to the preclinical stage, with 2 programs moving from the preclinical stage into their first human clinical trials, and with 1 Phase III program moving to a regional filing for approval, shown here on this Slide number 8 pie chart on the right as BLA stage. Our large and growing portfolio features a diversified set of partners utilizing a variety of formats and modalities, as I mentioned earlier. I'd also like to note here that the count of active programs has increased from 270 in the year-ago period, up to 305 programs at the close of the second quarter, noting again that this is net of program attrition. Despite some of the industry's challenges, including evolving financing environment and funding constraints, especially for some of the smaller players in our industry, our portfolio continues to expand from a combination of new and existing partners. We don't feel that it's entirely unexpected that macro factors can influence the velocity of growth of some of our business metrics. And although we see a slightly lower number of net new program additions compared to last year, OmniAb is in a very solid position for continued growth with an increasing number of both active programs and active partners. Moving now on to Slide number 9. As I mentioned, in the second quarter, 2 new programs entered the clinic with Immunovant, who initiated a Phase I clinical trial of IMVT-1402, which is a subcutaneous FcRn inhibitor. Also, Gloria Pharmaceuticals initiated a Phase I/II study to investigate the safety, tolerability, and preliminary efficacy of GLS-012 as a monotherapy in combination with GLS-010 in subjects with advanced solid tumors that have progressed following standard treatment. We've now had 3 new programs enter the clinic in the first half of this year, and we expect a potential 1 to 2 more to enter the clinic before year-end. I want to note that when 2023 began, we indicated that we expected 3 to 5 new programs to enter the clinic this year. By the end of June, we'd already reached 3, and we're now focused on an upward range of 4 to 5 new clinical programs for the year. Our partners made numerous public announcements about their clinical and commercial progress during the second quarter and in recent weeks. And I'll highlight a few of them on this slide, Slide number 10, starting with batoclimab. During the second quarter, we earned milestone revenue related to the advancement of batoclimab into pivotal studies in 2 additional indications of CIDP and TED. These are additional indications from the Phase III work that was started in generalized myasthenia gravis earlier in the year. In addition, Harbour BioMed announced that China's NMPA accepted its biologics license application for the treatment of generalized myasthenia gravis. And for the same indication, HanAll announced that they're progressing towards the initiation of a Phase III trial in Japan later this year. As for the next-generation anti-FcRn IMVT-1402, I mentioned that Immunovant initiated a Phase I trial to evaluate safety, tolerability, and pharmacodynamics and they've communicated that initial data is expected in the second half of this year. One of our newer partners, Cessation Therapeutics announced that they've received authorization to initiate a Phase I clinical trial. CSX-1004 was first discovered via collaboration with Scripps Research Institute and subsequently licensed to Cessation for development. Cessation is developing this compound for the prevention of fentanyl overdose, which is an indication that obviously it has an important and urgent unmet medical need. Aptevo Therapeutics announced data for its bispecific AML drug candidate, APVO436, and that it plans to initiate 2 Phase II clinical trials in AML populations. And lastly, we achieved a research progression milestone for small molecule inhibitors of a genetically validated target relevant to neurological diseases in one of our ion channel collaborations with GSK. This triggered a $2 million progression payment for OmniAb and Kurt will discuss the accounting for this. We're particularly excited about this program with GSK as it demonstrates the capabilities of our highly differentiated ion channel and transporters technology platform. Ion channels are key components in a variety of biological processes that involve rapid changes in cells, and they hold therapeutic potential in a broad range of indications, including neurological and metabolic diseases, pain, cancers, infectious diseases, and many others. As a result, ion channel drug discovery provides a compelling opportunity, although it's been a challenging area for the industry to identify drugs for these high-value targets. Our ion channel platform at OmniAb leverages our proprietary expertise in a combination of biological assays, medicinal chemistry, and in silico and computational chemistry applications to enable the discovery of ion channels targeting therapeutics in a variety of formats and modalities. We believe our differentiated core capabilities can assist partners in their advancement of drug discovery against this target class. We're continuously expanding our capabilities in this area, and we believe we have one of the most experienced teams of ion channel experts anywhere. We have an extensive bank of custom cell lines, reagents, and assays that are designed to accelerate ion channel drug discovery and development, and that's what attracts partners to this element of our technology and capabilities. As these are higher value and more difficult targets to identify, we structure our collaboration agreements accordingly. These deals provide for exclusivity on various targets, and as a result, have higher milestone payments and higher royalty percentages than we typically see for standard platform access agreements. We have agreements with GSK for 2 neurology targets that are in the discovery phase and another partner is Roche for 3 undisclosed targets that are also in the discovery phase. In total, we're eligible to receive $1 billion in milestones on these 5 programs alone, along with royalties should the program be commercialized. And this last slide for me, which is Slide number 13 in our deck, highlights our key areas of focus going forward. And it describes why we believe we're well positioned for future growth and can make an enduring impact on our industry and ultimately on global human health. Our business is highly scalable, and we're focused on increasing partners and expanding programs by continuing to invest in technologies and innovations to power the discovery and development of effective therapeutic candidates. A focus on stakeholders and building value for stakeholders is at the foundation of what we do. And that focus is guided in collaboration with our Board of Directors and is present in every employee here as well. While I mentioned our Board of Directors, I do also want to acknowledge on today's call that, earlier this week, with heavy hearts, we announced the passing of a beloved Board member here at OmniAb, Sunil Patel. Sunil was an accomplished biotech executive who was a longtime colleague and a co-architect of what we're building here at OmniAb. And I'll add that the team here is honoring Sunil's contribution and legacy as we continue to do our important work, expand our technology and grow our business. And now before I hand the call back over to Kurt, I'll finish by saying that we look forward to keeping the investment community updated as we execute on our strategy. And with that, I'll pass it back over to Kurt now for a discussion of our second quarter financial results.

Thank you, Matt. As a reminder, the financial results reported for the prior year periods are prepared on a carve-out basis, which were derived from Ligand's historical accounting records as if OmniAb were an independent company. As a result, certain comparisons to prior periods aren't reflective of true underlying business changes. This is primarily true for operating expenses, given the differences in corporate structure and the methodologies for reporting. You'll recall that OmniAb derives revenue from several sources, including upfront payments for partners to access our technology stack, payments related to service contracts when we do discovery work for our partners, milestone payments typically related to progress in the clinic, and royalties on net sales of our partners' programs. So moving specifically to our second quarter results. Total revenue for the second quarter of 2023 was $6.9 million compared to $7.2 million in the prior year quarter. We saw an increase in license and milestone revenue based on milestones that were hit this quarter, mostly related to progress with batoclimab, specifically the start of additional pivotal studies for 2 new indications. The increase in milestone revenue was offset by a decrease in service revenue, and this decrease is related to a few different things. First, we've completed our portion of the work on certain programs, and these programs have been handed off to the R&D teams at our partners. As a result, we are no longer earning service revenue for these programs, but would still have the opportunity to earn milestones and royalties should these programs advance. Second, the research period for one of our GSK ion channel programs was extended by approximately 1.5 years. The accounting impact of this extension is that the initial $7 million upfront payment that was being amortized over the initial research period had its amortization schedule adjusted to reflect the new length of the research period. This resulted in a one-time negative adjustment of $1.7 million this quarter. The full $7 million will all eventually be recognized, it's just that the recognition of the revenue will be spread over the new longer research period. And third, as it relates to the GSK program that achieved the $2 million research progression milestone, this milestone is recognized as service revenue and will be amortized over the research period of this program. As this program is a bit more than halfway through its research period, we recognized a bit more than half of this milestone in the current quarter and the rest will be amortized over the remaining research period. The net result of the change in the amortization period and the new milestone recognition created a negative impact of about $500,000 in the quarter relative to what the trend would have been. Turning to operating expense. Our R&D expense for the second quarter was $14.1 million compared to $11.5 million in the prior year quarter. Similar to Q1, the increase was primarily due to higher personnel costs and higher costs associated with our new facilities. G&A expense was $8.7 million compared to $5 million in the prior year quarter, with the increase related to increased headcount and other costs associated with being a newly established public company. The net loss for the second quarter was $14.7 million or $0.15 per share versus a net loss of $10.3 million or $0.12 per share in the prior year period. Turning to the balance sheet. We ended the second quarter with a total of $103.1 million in cash, cash equivalents, and short-term investments. Our business model is not capital intensive and it's highly scalable. And while we are committed to growing the business and keeping our technology cutting edge, we're also committed to deploying our capital efficiently. We continue to expect that our cash balance at the end of 2023 will be slightly higher than the balance at the end of 2022 and that this cash balance provides sufficient runway to fund our operations for the foreseeable future. Turning to our quarterly results, I'd like to make a few comments on some of the underlying trends that we see. Excluding the milestone revenue recognized specifically for teclistamab, we generally expect total revenue to grow. However, the majority of our revenue in the near to medium term will come from milestone payments, and the exact timing of these milestones can be difficult to predict. As a result, our revenue growth will likely be a bit lumpy on a quarterly basis. As we think about our operating expense going forward, I had indicated last quarter that our Q1 2023 actual results would be a good baseline from which we would grow. The second quarter results were consistent with that expectation, and we anticipate this trend will continue going forward as our operating expenses are now more predictable. We're forecasting that both R&D and G&A will grow slightly in subsequent quarters with the pace of G&A spend being more moderate than that of our R&D spend. And with that, I'd like to open up the call for questions. Operator?

Your first question comes from Puneet Souda from Leerink Partners.

So Matt, maybe to start off, you mentioned some of the challenges in the market. As you noted, there's a possibility of encountering those. Could you discuss the positive aspects of what your partners are experiencing and their feedback regarding the projects they might bring to you, especially since you're adding value and reducing costs? How do they view this as they consider the discovery phases and moving into Phase I?

Yes, this is Matt. I appreciate the question. This quarter, we entered into four new platform license agreements with new partners: Merck and Neurocrine. Merck is a well-known global player in the industry, committed to leading science and leveraging cutting-edge technologies to develop new medicines. Neurocrine has over 30 years of history in innovations that have led to life-changing medicines in neurology and neurological diseases. We also formed new partnerships with Stanford and Seattle Children's, both of which are prominent academic centers focused on translating novel biology into new medicines. The insights from both existing and new partners help us understand the value we bring. Our discussions with partners revolve around their interests and how they believe our technologies can unlock opportunities for them, which can lead to higher success rates and a quicker process for identifying quality antibodies for clinical trials. There's also a growing recognition of our commitment to innovation, which plays an important role. Our innovations benefit from our strong relationships with partners, creating an intelligent feedback loop that informs our tech investments and innovations based on industry trends. Ultimately, it's about speed, opportunity, efficiency, and the quality of the antibodies produced from our platform.

Got it. I was wondering if, in the event that biotech funding situations worsen, there would be an opportunity for you to capture more market share. Additionally, I know you mentioned Gloria and the anti-LAG-3 in the Phase I trial. Could you provide an update on the situation in China? We are all aware of the weakness in the discovery stages in China, so I am curious about your observations there. Any information you can share about the geographical landscape would be appreciated.

Sure, I'll address the part about China first, and then Kurt can provide additional insights. This quarter, we were pleased to announce that Gloria has entered the clinic in China, marking a positive step in our clinical progression. We also have several drugs approved in China that Kurt may elaborate on. Many of our later-stage programs from China are the result of early partnerships with OmniRat established years ago, leading to rapid development through the clinic or nearing clinical stages, which reflects the advancements in our pipeline with some of our assets. Kurt, would you like to add more details?

Yes, Puneet. We don’t have specific insights regarding the sales forecast of our partners. One of our partners mentioned earlier this year that they faced supply chain issues in the first half, partly due to COVID-related challenges. However, they also mentioned that they expect these issues to improve in the second half of the year and are forecasting a rebound in sales, from which we earn royalties. Regarding the first part of your question, our partnerships are structured to align the costs our partners incur with their success. In a challenging funding environment, our model allows continued use without large upfront payments until they achieve success in drug discovery and clinical progression. Therefore, I believe there are opportunities for growth, and we continue to see positive momentum across our key metrics.

Your next question comes from Robyn Karnauskas from Truist Securities.

I'm going to start with a couple of questions that may be challenging to address. Could you explain how the platform interacts with Stanford and how that differs from your relationships with pharmaceutical companies? If possible, could you provide some insights into the structure of these arrangements? Additionally, do your ion channel programs offer improved economics considering the challenges associated with developing small molecules compared to biologics? It seems they could have better economics given the significant value being added.

Yes, Robyn, thanks. I'll start with your second question about the ion channel programs. The short answer is yes. These programs are structured to grant exclusivity to the specific target with our partners, allowing them access to technology, capabilities, novel cell lines, and advanced screening technologies. This results in a different and more favorable economic structure. The five programs mentioned in the presentation for ion channel and transporter collaboration, specifically with GSK and Roche, have $1 billion in milestones and royalties, which surpass our typical platform license agreements. We’re excited about these assets, especially highlighting the GSK program today. Now, regarding your first question about the different types of deals, we have recently focused on not only license agreements with leading industry players, such as Merck and Neurocrine, but also with top academic centers. Generally, we maintain confidentiality regarding specific deal structures, but our corporate presentation outlines the typical terms for all agreements, which align with what we have previously disclosed. These deals usually involve multiple components, including upfront payments, milestones, and royalties, with an interplay among these elements. In terms of access to the platform, there are no significant differences between agreements with traditional pharmaceutical companies and academic centers. However, it is uncommon for an academic center to commercialize a drug independently. Typically, these institutions have advanced biology research and aim to translate that into therapeutics, often spinning them out into new companies. Thus, the main difference lies in special provisions that address how the economics are structured when the academic institution decides to out-license the program or establish a company around it. Fundamentally, the deals are quite similar, with specific provisions tailored for the academic context.

That's really helpful. And I guess a follow-up, it's like $1 billion is a lot. So have you been able to negotiate since you've been working with these companies, a little bit more disclosure about what you need to see to get those milestones? And then my last question, sorry for so many. You don't talk a lot about OmniDeep, and I know you believe that nature-based platforms are important, but I'm just wondering if you're willing to leverage OmniDeep platforms to AI/ML-based in silico antibody design. It's a hot topic right now, so I thought I'd ask that question.

On the first part, just financially, the way these deals are structured, they're really structured the same way as our other deals, right? So there are typically clinical stage milestones as they progress through the clinic and royalties. The difference is that the magnitude of the payments are larger and mostly because of a function of the exclusivity on which we have written these deals. On the antibody side, all of the things that people are going after, those are nonexclusive targets. Whereas with the ion channels, these targets are being licensed out on an exclusive basis. And as a result, that's what triggers the larger economics. But there's nothing unusual necessarily about the types of things they fall within that same sort of deal structure of upfront payment and milestones and royalties.

I appreciate the question about AI, Robyn. Given the growing visibility and application of AI in popular technologies and industries, it's a topic we often address. OmniDeep is our suite of in silico tools designed for finding and optimizing therapeutic antibodies, integrated throughout our various technologies and capabilities. These tools include structural modeling, extensive databases of multi-species antibodies, AI, and machine learning sequence models, which facilitate the optimization and identification of candidates emerging from our technology. Regarding your core question, while there is considerable discussion about AI and its stand-alone applications, it's essential to recognize the significant considerations and limitations involved. Therefore, we believe there is immense value in combining the biological intelligence of our transgenic animals with our AI capabilities. We've been utilizing in silico and AI tools in our downstream activities for quite some time, particularly in screening and with our efforts related to ion channels and transporters. Our organization has developed substantial expertise here, which we publicized with the launch of OmniDeep in Q2, although these practices have been part of our commitment to innovative science for many years. In fact, a few years ago, we partnered with Landing AI to integrate AI's visual capabilities into our exploration platform, leading to considerable success in enhancing our screening processes. However, it’s important to note that there are inherent limitations to using AI alone. The true strength of OmniDeep lies in its combination with the biological intelligence of our transgenic animals, which possess many essential tests for selecting effective antibodies as natural checkpoints. This allows for the testing of millions of sequence possibilities rather than relying solely on models. Of course, we still utilize AI and large datasets downstream, which contributes significantly to our results. I hope that clarifies things.

Your next question comes from Stephen Willey from Stifel.

I appreciate some of the macro commentary that you provided. I know some of your peers have been talking about that of late. But I guess, have you seen much in the way of any uptick of attrition just on the discovery program front? And would you expect that to be kind of the better surrogate of some of the macro challenges just given some of the reprioritization of R&D spend and, I guess, broader pipeline trimming efforts that we're starting to see across the space?

Yes, that's a great question, Steve. I wouldn't say there’s anything specific concerning attrition. As we know, attrition is a natural part of the pharmaceutical industry, where many projects do not succeed, so it's expected. In the last quarter, we only observed attrition in the discovery phase and specifically in discovery stage assets. Looking back to the fourth quarter of last year, we did experience some attrition at the clinical stage; two partners had exited certain therapeutic areas. Those assets may still have potential in other contexts but are no longer included in our program count. I mention this as an example. It’s hard to determine if this is a macro trend or just larger partners making decisions based on specific cases. So, I find it challenging to answer your question directly, but we continually monitor these metrics and maintain ongoing discussions with our partners. I hope this provides some additional insight.

Okay. And I guess the work that's ongoing in the ion channel space, I know that these, again, are being kind of out-licensed on a target exclusive basis. But I guess, for those targets that have already been claimed by either GSK or Roche, and I understand that all of these are difficult to drug. But I guess, how would you kind of characterize these targets that they've selected in the hierarchy of things that are difficult to do within the ion channel space itself? And how much more kind of green space in the target universe do you think that you have over the next kind of 1, 3, 5 years?

Yes. Great question, Steve. There are significant confidentiality considerations with our partners that we always respect. The relationship with GSK focuses on specific targets for neurological disorders. This agreement was initially made a couple of years ago and has progressed well, as evidenced by the milestone we announced this quarter. Generally, when pursuing ion channels and transporters, these are seen as high-value targets. I believe GSK has an ambitious innovation agenda in this area, aiming to positively affect the health of 2.5 billion people by the end of 2030. That's an aggressive and ambitious goal, and we're excited to collaborate with them. Our programs leverage distinct capabilities, including cell lines, reagents, high-throughput screening, and multiple modalities, which we think will help us attract more partnerships like this in the future.

Your next question comes from Matt Hewitt from Craig-Hallum.

This is Jack on for Matt. Obviously, you've recently just launched OmniDeep, and I was just kind of curious what the initial reception has been for your customers?

Yes. Thanks, Jack. I'll say, very positive. We launched it at the PEGS Conference in Boston in May. And I'll say that the feedback in the room was a big area, a big presentation, very well attended, and the feedback from partners who were sitting in the room was almost immediate. And it continues to be an area of focus in terms of not only new programs but potentially taking different approaches to increase the potential success rate of some existing programs with partners. Our research and innovation team and our BD team continue to partner on that as we talk with partners about it. So the feedback has been quite positive.

Your next question comes from Chad Wiatrowski from TD Cowen.

Matt, Kurt, it's Chad on for Steven Mah. Yes, congrats on the GSK milestone. Could you give us some more detail as to what differentiates your tech stack from peers who also claim at these historically difficult targets such as ion channels or an opportunity that they're pursuing as well?

Yes, I’m happy to discuss this further. Several factors set our technology apart. At the core, we utilize a multi-species approach. Additionally, we are committed to continuously enhancing our capabilities in the ion channel domain. Our experience in high-throughput screening spans decades, allowing us to apply it across various modalities. This is crucial in an industry where the boundaries between different approaches are increasingly blending. We are positioned to leverage this distinction more effectively than others. Furthermore, we have developed a comprehensive collection of custom cell lines designed to aid in specific discovery areas, built up over many years. When combined with our other discovery, repertoire generation, and screening technologies, it really distinguishes us in the market. This is likely why companies like GSK and Roche find our partnerships appealing.

Really helpful. And I appreciate the improved downstream economics regarding ion channels, but there's sort of precedent that exclusivity of targets has led to some significant upfront payments. So is there an opportunity here to drive some upside in the near-term?

All deals turn into negotiations. We always aim to leverage our successes for higher payments. Historically, the main difference between this and the antibody business lies in exclusivity. Additionally, as Matt mentioned, we have significant expertise in ion channel programs. Typically, these programs involve licensing a target on an exclusive basis, while we continue to conduct all the necessary work. A substantial part of our service revenue comes from the ion channel sector, with many partners pre-paying for that service. For instance, the recent GSK program included a $7 million upfront payment, which will be amortized throughout the research period. This allows us to generate comparatively larger economics than in the antibody business, primarily due to the exclusivity factor.

Your next question comes from Yuan Zhi from B. Riley.

This is Brandon Carney on for Yuan. You talked some about the trends you've been seeing in the discovery stage. Can you comment on the clinical stage regarding delays or cancellations of clinical trials? Can you comment on what you've observed so far related to the projects you're tracking the biologics to build them?

Yes. This is Matt. I'll comment, and Kurt will have some comments here. When we started the year, we said we expected 3 to 5 new clinical entrants this year. At the end of Q2, we were actually already at 3. And today, we're focused now on a higher area there of 4 to 5 this year. And so we're seeing nice clinical progression or graduation into the clinical stage. We are pleased this quarter to see some assets move out of discovery into preclinical, which means that they're then preparing to enter the clinic. So we are seeing nice progression in the portfolio. I don't know if Kurt, anything you'd want to add to that?

We haven't encountered much clinical attrition; what we've observed is primarily due to partners leaving certain therapeutic areas rather than failures in studies. As Matt mentioned, attrition is a normal part of this business, and it will occur. However, our experience in the clinical realm has been quite strong compared to industry standards.

That's helpful. And one last one from us. Have you noticed any shifted interest in biologics development due to the Inflation Reduction Act?

I would like to comment that our business primarily focuses on the antibody sector, which is likely a more favorable area for drug development due to the advantages introduced by the Inflation Reduction Act. However, if we had both a small molecule offering and an antibody offering, it's uncertain whether more people would transition to the antibody side. It's difficult to determine. We are confident in our strong platform and continue to attract new partners, as demonstrated by the four new deals we secured this quarter. Matt, do you have anything to add?

Yes. I would add that due to the higher success rates of antibody-based medicines compared to small molecules, there has been a shift in the industry from a scientific and technical standpoint. This is something we are aware of. The Inflation Reduction Act will allow Medicare to negotiate prices for a limited number of high-cost drugs starting in 2026, with certain exceptions for negotiations. However, biologic medicines benefit from a longer market exclusivity period, which may increase interest in the industry and further the shift towards biologic medicines that was already underway before the Act. While the science and success rates of antibody-based medicines were already driving that shift, this legislation could help to accelerate it.

There are no further questions at this time. I will turn the call back over to the CEO, Matt Foehr.

Great. Thank you. I'd like to thank everyone for participating in today's call and for your questions. We look forward to keeping you updated on our progress and speaking with you next quarter and at various investment conferences we'll be attending in the coming weeks and in the fall. We'll be at the Stifel Conference coming up. We'll also be at H.C. Wainwright, Cantor as well as the Craig-Hallum Capital Conferences in New York in the fall. So in the meantime, we appreciate your interest in OmniAb, and thanks again. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.