Earnings Call Transcript - PLX Q2 2023

Operator, Operator

Good morning, ladies and gentlemen and welcome to the Protalix BioTherapeutics Conference for Second Quarter 2023 Financial Business Results. As a reminder, this conference is being recorded. I will now turn the conference over to our host, Mr. Chuck Padala with LifeSci Advisors, Investor Relations for Protalix. Thank you, you may begin the conference.

Charles Padala, Investor Relations

Thank you, operator and welcome to the Protalix BioTherapeutics Second Quarter 2023 Financial Results and Business Update Conference Call. With me today are Dror Bashan, President and CEO of Protalix; and Eyal Rubin, Senior Vice President and Chief Financial Officer. A press release announcing the results and the update was issued this morning and is now available on the Protalix website. Please take a moment to read the disclaimer about forward-looking statements in the press release. The earnings release and this teleconference include forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from the statements made. Factors that could cause actual results to differ are described in the disclaimer and in Protalix's filing with the U.S. Securities and Exchange Commission. I will now turn the call over to Mr. Dror Bashan. Dror?

Dror Bashan, President and CEO

Thank you, Chuck. And welcome everyone to our second quarter 2023 financial results and business update. I will begin by reviewing our recent progress and accomplishments and following my remarks Eyal will provide a more detailed review of our financial results. And then we will open the line for questions. I would like to start with the most impactful milestone we achieved this quarter together with our development and commercialization partner Chiesi Global Rare Diseases. We are very much excited that both the European Commission and the U.S. FDA approved Elfabrio for the treatment of adult patients with Fabry disease. Introducing an alternative treatment options for patients that has the potential to improve quality of life is a significant achievement for the patients and the families affected by Fabry disease. Fabry is now the second approved drug from our priority protein expression system, ProCellEx, which further highlights the success of our unique platform. The approval triggers a $20 million milestone payment that we have received from Chiesi in Q2. We are very grateful for the Protalix team as well as our partnership with Chiesi. Chiesi’s continued dedication to this journey has greatly contributed to these achievements. As we discussed during our KOL event in June, Chiesi is poised to realize the full potential of Elfabrio with a global presence and significant expertise within the rare diseases space. They've ramped up commercial activities and they've already launched in the U.S. In addition, in preparation for launches in various countries, they have started building inventory as reflected in our financials on which Eyal will elaborate soon. Fabry disease represents a significant opportunity in a multi-billion dollar market that is in need of an alternative treatment option. We and Chiesi are prepared to deliver. As I just mentioned, Protalix hosted a KOL event in June in New York City. We would like to thank Dr. Ankit Mehta for sharing his perspective on how Elfabrio could address the unmet needs in Fabry disease patients. We also thank Giacomo Chiesi for joining us and providing an overview of Chiesi's in-depth experience in bringing rare disease drugs into the global markets. During our event, we also discussed the future of Protalix and our focus in the rare disease space. We are committed to addressing high unmet needs for patients with limited therapeutic options. We are well equipped with the clinical, regulatory, and technical expertise to move Protalix forward into the next phase of growth. To that end, I will now provide an update on our very early stage programs. First, PRX-115, which is a novel PEGylated uricase in development for the treatment of severe gout. Enrollment in Phase 1 first-in-human clinical trial of PRX-115 is continuing. The trial is a double-blind, placebo-controlled, single ascending dose study designed to evaluate the safety, pharmacokinetics, pharmacogenomics, and immunogenicity of PRX-115 in up to 56 patients. The study is being conducted in New Zealand. To date, 16 patients have been dosed in this trial, and we are looking forward to continued enrollment and dosing of patients. We expect that enrollment will be completed by the end of this year, early next year, and to have final results by the second quarter of 2024. We also continue to make progress on PRX-119, a PEGylated recombinant human DNase I protein designed to elongate DNase's half-life in circulation for treatment of NETs-related diseases. We have conducted preclinical studies to demonstrate the feasibility of PRX-119. We look forward to providing updates on this program and others as we strengthen our growing pipeline. Finally, our strong balance sheet provides us with sufficient cash runway to maintain current operations without the need for near-term capital infusion. I will now turn to Eyal to review our financials. Eyal, please?

Eyal Rubin, CFO

Thank you, Dror, and thank you, everyone, for joining today's call. Let me review our second quarter 2023 financials. We recorded revenues from selling goods of $15.1 million during the three months ended June 30, 2023, an increase of $11.7 million or 344% compared to revenues of $3.4 million for the three months ended June 30, 2022. The increase, as Dror mentioned, resulted primarily from an increase of $11.7 million in sales to Chiesi following the approval by the FDA and the EMA of Elfabrio. We recorded revenues from license and R&D services of $20 million for the three months ended June 30, 2023, an increase of $14.6 million or 270% compared to revenues of $5.4 million for the three months ended June 30, 2022. The increase resulted from the $20 million regulatory milestone coming from Chiesi in connection with the FDA approval of Elfabrio. Revenues from license and R&D services are comprised primarily of revenue recognized in connection with the Chiesi agreements. Cost of goods sold was $6.1 million for the three months ended June 30, 2023, an increase of $2 million or 49% from cost of goods sold of $4.1 million for the three months ended June 30, 2022. The increase in cost of goods sold was primarily the result of the increase in sales of Elfabrio drug substance to Chiesi and royalties payable to the Israel Innovation Authority in connection with the Chiesi agreement. For the three months ended June 30, 2023, the company's total research and development expenses were approximately $4.5 million, comprised of approximately $1.7 million in subcontractor-related expenses, approximately $2 million of salary and related expenses, approximately $0.1 million of materials-related expenses, and approximately $0.7 million of other expenses. For the three months ended June 30, 2022, our total research and development expenses were approximately $7.6 million, comprised of approximately $4.4 million in subcontractor-related expenses, approximately $1.6 million of salary and related expenses, approximately $0.7 million of material-based related expenses, and approximately $0.9 million of other expenses. The total decrease in research and development expenses was $3.1 million or 41% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The decrease in research and development expenses primarily resulted from the completion of our Fabry clinical program and the regulatory process related to the BLA and the MAA review of Elfabrio by the applicable regulatory agencies. Selling, general and administrative expenses were $4 million for the three months ended June 30, 2023, an increase of $1.4 million or 54% compared to $2.6 million for the three months ended June 30, 2022. The increase resulted primarily from an increase of approximately $1.2 million in salary-related expenses due to one-time cash flows. Financial expenses net were $0.8 million for the three months ended June 30, 2023, compared to financial income net of $0.2 million for the three months ended June 30, 2022. The increase resulted primarily from an increase of $0.6 million in cost-related exchange rates as well as an increase in our convertible notes-related expenses of $0.3 million net of a gain recognized due to the conversion of a portion of the 2024 notes of $0.4 million. In the three months ended June 30, 2023, we recorded income taxes of approximately $0.3 million, which were primarily the result of the provision for the current taxes in respect of Section 174 of the U.S. Tax Cuts and Jobs Act of 2017, which went into effect on January 1, 2022. Section 174 eliminated the option to immediately deduct research and development expenses in the year incurred and requires us to capitalize and amortize these expenditures over 15 years for U.S.-based research and developments. In addition, during the three months ended June 30, 2023, we released the valuation allowance related to deferred tax assets of the U.S. jurisdiction that resulted in a net benefit to tax expenses of $3.1 million. Cash and cash equivalents were approximately $48.2 million at June 30, 2023. Net income for the three months ended June 30, 2023, was approximately $19.3 million or $0.29 per share basic and $0.21 per share diluted compared to a net loss of $5.3 million or $0.11 per share basic and diluted for the same period in 2022. I will now turn the call back to you, Dror.

Dror Bashan, President and CEO

Thank you, Eyal. So thank you, everyone, for joining our today's call. On a personal note, I would like to express my gratitude to the entire Protalix team, whose tireless efforts have resulted in this exciting time in the company's evolution. Although our path towards regulatory approval has certainly had its challenges, given the recent regulatory approvals in the EU and the U.S., we have made significant progress in turning around the company. We are now focused on strengthening our pipeline and R&D capabilities. I'm proud of Protalix achievements so far this year, and I'm confident we will continue to drive the company forward for the benefit of the patients and their families. Now I'll turn the call back to the operator and open the line for your questions, please.

Operator, Operator

Thank you. Our first question is from Boobalan Pachaiyappan with H.C. Wainwright. Please proceed.

Boobalan Pachaiyappan, Analyst

Hi, thanks so much Dror for taking our questions. So firstly, with respect to Elfabrio. We understand Chiesi is responsible for launch activities. But maybe from Protalix's end, what additional update would you like to provide to shareholders regarding launch preparation and maybe when can we hear the drug will be launched, or about the pricing information and all that, when can we hear?

Dror Bashan, President and CEO

Thank you for that. As you know, Chiesi is fully responsible for all commercial activities and is a private company. We will share more information as it becomes available. The product has just been approved and launched in the U.S. and is currently being approved in various European countries. This information is public. As Eyal mentioned, we are building inventory, and we hope this will lead to strong market penetration. Once we have more data, we will provide updates in our financial reports over the coming quarters. I can assure you that we are very pleased with Chiesi as a partner and believe they are wholeheartedly committed to getting these products to patients.

Boobalan Pachaiyappan, Analyst

Okay, fair enough. Regarding your ongoing PRX-115 gout study, are you currently enrolling patients?

Dror Bashan, President and CEO

Yes.

Boobalan Pachaiyappan, Analyst

Okay, alright, sorry, there was a glitch. So with respect to your ongoing PRX-115 gout study, given you're enrolling patients who have elevated uric acid levels, I'm just curious whether you're planning to measure UA levels at the end of treatment, and also what would be an acceptable reduction in uric acid levels to demonstrate the clinical meaningfulness of 115?

Dror Bashan, President and CEO

So I suggest we complete the recruitment and analyze the data. This is why we plan to have up to 56 subjects in this clinical strategy. The protocol that we are using is public; we have all the details of the trials over there. So clearly, it's about reducing the levels, but overall, I suggest we wait and see the final results in order for us to evaluate what we have in hand and how to proceed to the next stage.

Boobalan Pachaiyappan, Analyst

Okay, great. And then one final question from me. Regarding NETs programs, I'm trying to understand your clinical strategy because there are various NET-related diseases, such as rheumatoid arthritis, lupus, psoriasis, and others. Is the goal to prove the concept in a specific indication and possibly collaborate with established companies for clinical development, or to expand the value of this drug? Any insights on your clinical strategy?

Dror Bashan, President and CEO

So we've mentioned, I believe, in late June during our investor event that we have, if I may say, refined our pathway forward and our strategy going forward. We will focus on the genetic and non-genetic rare disease space. We believe we have many years of experience, knowledge, and two outstanding successes bringing products to the market, going through all the developmental and regulatory hurdles, and getting to the finish line. This is where we believe we can add value, despite the fact that ProCellEx, our system, is agnostic. Right now, we planned this, and we hope we will succeed, of course, to strengthen our pipeline with additional programs within the rare disease space. Regarding a commercial platform or a commercial partner, we currently lack the means, and we must remain modest. We will clearly develop the products until a certain stage, and then we will consider joining forces with a partner. Five to ten years down the road, it will be a different ball game. Hopefully, we will do well, and then we can consider perhaps having a partnership; but this is not in our two to three years plan right now.

Boobalan Pachaiyappan, Analyst

Okay, alright, thanks so much for your time.

Dror Bashan, President and CEO

Thank you.

Operator, Operator

Our next question is from John Vandermosten with Zacks. Please proceed.

John Vandermosten, Analyst

Thank you and hello Dror, Eyal, how are you guys doing?

Dror Bashan, President and CEO

Good, how are you John?

John Vandermosten, Analyst

I am doing pretty good. Let me start with a question about any potential future studies for Elfabrio. It has been mentioned that there might be a pediatric study and possibly some others. Will Chiesi be completely responsible for those or will Protalix be involved as well? Also, do you know if there are any future trials, especially for pediatrics, being considered?

Dror Bashan, President and CEO

So again, under the agreement with Chiesi, our responsibility is actually to supply the drug product to Chiesi. The rest is Chiesi's responsibility, including the medical plan and of course, the whole commercialization efforts. They do plan a deep, long-term medical plan with additional studies, including the pediatric study. I think by the FDA requirement, it is written and it's public as well, pregnant women study, etc. Once initiated, the information will be fully available. You can also approach Chiesi for more information, but overall, within the next 6 to 12 months, I believe Chiesi will be executing a very deep long-term medical plan. Since Protalix developed the product, some key senior employees are consulted by Chiesi, but this is their responsibility.

John Vandermosten, Analyst

Great, yeah, thank you for that. Also, I want to understand how revenues will flow through from the product. There are two components there, the milestone, there's the product revenues, and then there's the royalty revenues. You recognized, I think, $11 million so far in product revenues. Should we expect a continued trend like that on the product revenue side as we progress through the year? Will they build up inventory and then work it down? What is your sense of how those revenues will flow for the rest of this year and into 2024?

Eyal Rubin, CFO

So John, Eyal. Let me try to elaborate. First, in Elfabrio, we have product, royalties, and milestones. We have only two types of revenue streams from Elfabrio. The first one is royalties in both the U.S. and outside the U.S., which range 15% to 35% outside the U.S. and 15% to 40% of the lease royalties for sales conducted in the U.S. On top of it, we have milestones, regulatory and commercial milestones. In terms of what we've recorded this quarter and what we anticipate to record in the following quarters, obviously, as Chiesi gets prepared for launch in the various countries, both in the U.S. and outside, they are building up their inventory, and those are the sales that we recorded. We basically sell them the drug product based on the lowest royalty tier at least at present until we pick up and go to the next level, meaning 15% of the sale price, and that's the revenue we've recorded. I want to be more conservative than this since the agreement states that we are getting royalties from the net sales. Obviously, we have a reserve for discounts if they are applied to the price. In terms of projections for the next year, as a small company, we don't provide projections, but I think that the trend at least in the next quarter is going to continue as Chiesi builds their inventory. Again, in general, in the next two to three years until revenues stabilize and grow, the changes in inventory are transparent. Most of the revenues we're going to see will be changes in inventory and Chiesi's inventory buildup. Two to three years from now, that will be a different story, but the trend is definitely that you'll see an increase in revenue towards the end of this year and in the beginning or second half of next year as well as they ramp up their operations.

John Vandermosten, Analyst

Okay. Great, great. That's a good answer. And then royalty revenue sometimes takes a while to flow through. Perhaps Chiesi would have sales in the third quarter of 2023, but the royalties won't be recognized until later. Can you give us a sense of the timing of how that might be and also the cash flows? I'm not sure if the revenue recognition and the cash flows will happen at the same time for this; can you help us understand how that flow will go for Elfabrio?

Eyal Rubin, CFO

Sure. As I described, the revenue is almost fully recognized the minute we sell the inventory to Chiesi, the drug product. There is no timing difference between the revenue recognition and the cash flow. According to the agreement, they have 45 days net to pay us, so there is no timing gap there. As I mentioned, since the discounts and if applicable are unknown, I guess that as we move forward, we'll know better. We will adjust the reserves recorded, but most of the revenues are recorded in our books in a timely manner, and the same goes for the cash flows.

John Vandermosten, Analyst

Okay, and then last question for me is on gross margin. How might the gross margin in Elfabrio compare to LOIs? Will they be in a similar range or should we expect a difference?

Eyal Rubin, CFO

We are discussing a different situation here. I can provide information on the gross margin of the product, but in the industry of biological drugs, the gross margin typically ranges from 85% to 90%. I believe this is approximately the case for Elfabrio as well. However, it's important to remember that we sold the royalties to Pfizer for a substantial one-time cash payment, which is why we have a very small or no margin on those sales. In Brazil, the situation is different; we do have margins and we are satisfied with them, but we are not disclosing those margins at this time.

John Vandermosten, Analyst

Okay, thank you, Eyal.

Dror Bashan, President and CEO

Thank you, John, appreciate it.

Operator, Operator

Our next question is from Dar Bashes, Private Investor.

Unidentified Analyst, Analyst

Good morning. Just a point of clarification, if I may, on the revenue from Elfabrio, the $11 million, was that primarily manufacturing revenue, or was there royalty revenue included in that? Thank you.

Eyal Rubin, CFO

Thank you for the question. So as I explained, I'll do it again. It's not manufacturing. We have only two streams of revenue on Elfabrio. The first one is royalties that drive the resources to Chiesi, and we're getting royalties at a percent of the list price. The second one is milestones, both commercial and regulatory. When we recorded the revenue, obviously, there were finished products sold to Chiesi. They will turn around and sell it to the market. But at this point, I guess that's going to be the case in the next two years while they are building their inventory. We will record sales of drug product to Chiesi. That's going to be the revenue recorded, and in the future, once the inventory change is minimal, then the real royalties calculation and reconciliation will start taking place.

Unidentified Analyst, Analyst

Great, thank you for that clarification. Appreciate it.

Dror Bashan, President and CEO

Thank you.

Operator, Operator

There are no more questions at this time. I would like to turn the conference back over to management for closing comments.

Dror Bashan, President and CEO

This is Dror, and I'd like to thank everybody for their time. We are very happy with the results and the evolution of the company. We're pleased that we have Elfabrio available in both continents for the benefit of the patients and their families, and look forward to speaking with you next time. Thank you very much.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.