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SBOT: Q1 Light On Revenue But Clinical Trial Progression Suggests Growth Ahead


By Brian Marckx, CFA


Stellar (NASDAQ:SBOT) reported financial results for their fiscal 2017 first quarter ending December 31.  Revenue came in at less than half of our estimate and was at the lowest level since the $126k generated in fiscal Q4 2014 (Sept 2014).  But while revenue has remained tempered, we remind investors that we had and continue to expect relatively limited top-line numbers over the near-term, reflecting expectations that supply agreements with clinical trial customers account for the bulk of sales.  Although we do expect some revenue growth related to progression of customers’ clinical trials to later stages (for example, OBI recently moving into phase III), an eventual supply agreement for a commercialized product (potentially such as Neovacs’ IFNa-Kinoid candidate) would likely significantly steepen the revenue curve.

Q1 revenue was $142k (vs. $308k estimate), all of which relates to product sales.  As a reminder, as a result of the conclusion of services related to a two-year contract, SBOT has not booked any contract services-related revenue since fiscal Q1 2016.

Product and services margin was 45% - which is relatively healthy, particularly as compared to the 36% averaged in fiscal 2016. Gross margin, which along with cost of products/svcs also includes direct costs related to aquaculture, was negative 15%- which is down from positive 11% in fiscal 2016.  As a reminder, similar to revenue, gross margin can be variable q-to-q and is influenced (in part) by the level of sales and coverage of fixed aquaculture costs.

And while revenue missed our number, this was more than offset by operating expenses coming in well below what we were anticipating.  Operating expenses were $1.4M, compared to our $1.8M estimate – with the difference fairly evenly split between R&D and G&A.  We continue to expect operating expenses will increase in fiscal 2017 as compared to the prior year as a result of the recent addition of professional personnel as well as additional activities related to preparations to scale-up production in anticipation of increased demand for the company’s KLH.  We continue to expect at least a portion of the additional spend to be offset by revenue growth and gross margin expansion.

Q1 net loss and EPS were $1.5M and ($0.15) vs. our $1.8M and ($0.18) estimates.  Cash balance (inc liquid investments) was $9.9M at Q1 quarter-end.  Cash used in operating activities was $1.4M in the quarter.  Another $84k was used for capital purchases.  Management expects the cash balance to fund operations for at least the next 12 months.

Operational Highlights: Production Scaling, Mexican Subsidiary, Neovacs Type 1 Diabetes Program, OBI Phase 3 Study

SBOT continues to forge further ahead with building its production, manufacturing and capacity capabilities in anticipation of increasing demand for its KLH.  Management recently noted that their goal is to have the capacity and operational infrastructure in place to be able to support multiple commercial launches of KLH-based therapies and in late (calendar) 2016 began putting the pieces in place to be able to do so within an approximate two-year timeframe.  In December 2016 the company commenced a plan to optimize their protein manufacturing processes in their U.S.-based (California) facility, including evaluating their needs for new equipment – while the current manufacturing system is designed around supporting clinical trials, the optimization plan will be aimed at upgrading this for increased capacity to meet greater demand, such as for a commercialized product.

Most recently their scale-up activities have included the formation of a Mexican subsidiary (BioEstelar, S.A. de C.V.) headquartered in Endenada, Baja California, Mexico.  BioEstelar’s focus will be the (potential, at least as of now) establishment of a second aquaculture facility.  As a reminder, In June 2015 Stellar entered an agreement with Ostiones Guerrero S.A. de C.V., a Baja California based commercial shellfish aquaculture and fishing organization aimed at expanding Stellar's KLH aquaculture operations.  Stellar is leasing undeveloped land from Ostiones and the duo, contingent on findings from a three-year suitability study, will develop marine aquaculture facilities.  This would increase Stellar's KLH production capacity as well as provide production and KLH-sourcing redundancy to the company’s U.S. aquaculture facility.

Stellar noted that they have now begun quality studies of the KLH produced in Mexico.  These studies include confirmation that the Mexico-produced KLH is comparable to that produced in their U.S. facility.  Verification of comparability is critical in order to meet FDA quality guidelines.  And redundancy – having two separate production facilities – is beneficial not only for the additional capacity but also in significantly reducing risk of production delays or stoppages due to unforeseen events.

Capacity, redundancy and ability to quickly scale production are also potentially very significant competitive advantages in our opinion as they reduce vaccine manufacturers’ supply-constraint risk – a risk that can be substantial given that it takes approximately five years for the Giant Keyhole Limpet to fully mature from embryo to a protein-producing adult.  As such, we think additional production and redundancy can be a major selling point for SBOT in not only attracting additional supply agreements but also, potentially, even in helping to further validate the practicality of developing and commercializing KLH-based vaccines (i.e. supply risks will not be a concern).

Relative to recent customer supply agreements, Neovacs announced last week that they expect to pursue a Type I diabetes program for their IFNa-Kinoid compound.  This is in addition to the ongoing Lupus program (currently in phase IIb) for which SBOT has been supplying KLH.  Neovacs made the decision to pursue Type I diabetes following positive results of a mouse model indicating high immunogenicity of IFNa-Kinoid.  Similar to Lupus, Type I diabetes is an autoimmune disease characterized by the overexpression of IFNa.  Neovacs expects to have additional preclinical proof-of-concept data in Type I diabetes this summer and hopes to commence clinical studies for that indication next year.

Assuming this program continues to successfully move forward, we would expect SBOT would be supplying KLH for these Type I diabetes studies as well.  U.S. prevalence of Type I diabetes is estimated at approximately 2M people, slightly more than the ~1.5M Americans believed to have Lupus.  So while it is much too early to make any assumptions regarding the potential additional demand for KLH that a commercialized Type I diabetes immunotherapy may generate, it is worth recognizing that the patient population and potential future opportunity for SBOT is sizeable.

And, as a reminder, Neovacs has also made significant recent progress in their Lupus program.  In 2011 IFNa-Kinoid completed a phase I/IIa study (n=28) for Lupus.  Results showed IFNa-Kinoid was well tolerated and patients experienced a strong immune response with a significantly higher production of binding antibodies compared to TNF Kinoid in humans.  A phase IIb study, which had originally expected to include approximately 166 patients and began patient enrollment in September 2015, has been ongoing in Europe, Latin America and Asia.  In April 2016 Neovacs received IND approval from FDA to extend the study to the U.S. which also prompted an increase in total enrollment to 178 patients (in 21 countries) and expanded the number of sites from 5 to 15.

On November 7, 2016 Neovacs announced that they enrolled the first patient in the U.S. and also noted that they are seeing strong interest from a large number of U.S. clinical sites.  Importantly, in December 2016 Neovacs announced that FDA granted Fast-Track status to this IFNa-Kinoid Lupus candidate.  Fast-Track is granted to candidates that address serious diseases which are not well controlled with existing therapies.  Fast-Track, which aims to facilitate faster time to approval, allows for seamless cooperation with FDA as well as priority review.  As such, this could speed eventual approval in the U.S. market.  Last week (2/3/17) the study’s Independent Data and Safety Monitoring Board issued a favorable safety-related opinion, allowing the study to continue.  Neovacs is aiming to have full results in summer 2017.

It’s possible that a Lupus indication could be even a sooner event in to S. Korea.  In mid-April 2016 Neovacs announced S. Korean health authorities approved an IND for their phase IIb lupus study.  Importantly S. Korea is the only OECD country in which lupus is considered an orphan disease.  As such Neovacs expects to file for orphan designation, granting of which could mean Neovacs may be able to launch IFNa-Kinoid commercially in S. Korea without the need to conduct a phase III study.  Neovacs has already started preparing for a potential commercial launch by partnering with Chong Kun Dan Pharmaceuticals, a S. Korean pharmaceutical (immunotherapies) company.

And there are other signs of Neovacs’ confidence in their Lupus candidate as the company has made other recent preparations to scale up production.  This includes the November 2016 announcements that they acquired interferon alpha manufacturing technology (from Amegabiotech) and signed a production partnership (with 3P Biopharmaceuticals) for the manufacture of interferon alpha.  These agreements put in place an important piece for Neovacs to be able to manufacture IFNa-Kinoid in commercial scale.

Stellar/Neovacs also recently expanded the supply agreement to ensure sufficient KLH quantities are available to support these upcoming studies as well as a potential future commercial launch. In addition, the agreements call for Neovacs to pay Stellar for maintaining a dedicated colony of limpets. Neovacs accounted for 10% of SBOT’s total 2016 revenue but with additional clinical activity in 2017 as well as potential preparations towards launch, we think this will increase in the coming year.

Neostell, the JV formed between Stellar and Neovacs will produce and commercialize Neovacs’ vaccines, assuming eventually approved.  Neostall will also seek to supply and manufacture KLH-based products for third parties.

Other Noteworthy Customers / Supply Contracts: OBI Moving Forward to Phase III

-Amaran / OBI Pharma:  OBI's lead candidate, OBI-822 (Adagloxad Simolenin), had been in mid-to-late stage clinical testing in the U.S., S. Korea, India, Hong Kong and Taiwan for the treatment of metastatic breast cancer.  It was also in a phase II physician-initiated clinical trial in Taiwan for the treatment of ovarian cancer (no recent updates have been announced related to the ovarian cancer program).  OBI-822 utilizes KLH as a carrier protein for the carbohydrate antigen Globo-H, which is often expressed by cancer cells.

In February 2016 OBI announced that top-line data of the phase 2/3 metastatic breast cancer study did not meet the primary endpoint of progression-free survival.  Results were presented in June at ASCO 2016 in Chicago.  But, as patients who did show an immune response demonstrated statistically significant progression-free survival versus placebo, coupled with the secondary endpoint of overall survival trending towards statistical significance and no safety issues reported, OBI noted in their February 2016 press release that they expected to forge ahead with a phase III study.  Then in a January 20, 2017 press release OBI announced that they met with the FDA for its end-of-phase II meeting and “based on the discussion with the FDA, OBI Pharma plans to prepare its phase III protocol”.  Just days later (January 24) OBI announced that they received approval from the China FDA to conduct a phase III clinical trial of OBI-822 which OBI notes can be used in a future BLA application.

These recent announcement regarding moving into phase III in China and submitting phase III protocol to U.S. FDA is somewhat surprising given the missed endpoints in phase 2/3.  What this means for Stellar in terms of potentially supplying KLH is still unknown, although it may present another revenue opportunity for the company.  While SBOT has been somewhat quiet on the topic, they do list OBI as a customer (for three of their clinical trials inc these breast cancer studies) in their recent investor presentation – which we think potentially indicates an ongoing supply relationship.  But we also note that while any supply of KLH to OBI for their clinical trials was probably never going to be an overly significant source of revenue for the company, supplying for a commercialized product could be.  So, eventual success in phase III could offer an even more significant (potential) revenue opportunity.  We hope to learn more in the future about SBOT’s current KLH-supply relationship with OBI and what their move into phase III may mean in terms of revenue.

As a reminder the formal collaboration agreement, whereby SBOT was responsible for production and delivery of GMP grade KLH for evaluation as a potential carrier protein as well as for method development and process qualification expired on December 31, 2015.  However, the expiration has no specific effect on the duos’ working relationship (i.e. the expiration does not preclude them from a continued relationship).  OBI Pharma accounted for approximately 41% of SBOT’s total revenue in 2016.

-Araclon:  Per a November 2014 agreement, Stellar will supply Araclon with KLH to support their phase II/III clinical trials for their Alzheimer's candidate.  Upon eventual commercialization, Stellar will also have the opportunity to supply KLH for commercial production.  In August 2016 Araclon (and partner Grifols) announced positive results from a Phase 1 (n=24) safety study of their ABvac40 (short C-terminla peptide conjugated to KLH with alum) Alzheimer’s candidate which showed no difference in adverse effects between patients treated with ABvac40 (n=18) and those given placebo (n=6).  A Phase II study is planned.

-AXON Neuroscience:  As a reminder, in November 2015 AXON Neuroscience (private) presented positive phase I data on its Alzheimer’s disease active vaccine candidate, AADvac1, at the annual International Trials on Alzheimer’s Disease Conference (CTAD) in November.  AADvac1, which utilizes KLH as a carrier protein, is being developed to generate specific antibodies against diseased forms of tau protein.  The presentation at CTAD showed AADvac1 to be safe, well tolerated and induced a “robust response in the vast majority of the study participants and the average cognition of patients remained stable over 6 months.”  Results were published in December 2016 in Lancet Neurology.

And while AXON’s announcement did not specify where they source their KLH, it appears that it may be from Stellar (we asked on the Q4 2015 conf call but due to confidentiality agreement mgmt. could not confirm) given that revenue from AXON contributed ~$120k in fiscal 2015.  A phase II study (titled ADAMANT), designed to confirm phase I results in a larger population, commenced in June 2016.  ADAMANT, per is a 24-month, randomized, placebo-controlled, parallel group, double-blinded, multi-center study to assess the safety and efficacy of AADvac1 in patients with mild

Alzheimer’s disease. The primary objective is to confirm the positive Phase I results.  While we cannot confirm that SBOT has supplied KLH to AXON in the past (although it appears that was the case) or may do so in this Phase 2 study, AXON could represent another source of supply revenue and, potentially, eventually commercialized-product revenue.



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