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SBOT: Clinical Trial Progression Remains Key Metric

By Brian Marckx, CFA


Q2 2017 Financial Results

Stellar (NASDAQ:SBOT) reported financial results for their fiscal 2017 second quarter ending March 31st.  Revenue remains relatively insignificant and while also below our estimate, 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.

Q2 revenue was $63k (vs. $328k estimate), including $50k from contract services and $13k from product sales.  But while this is down 81% yoy (from $326k) and 56% sequentially (from $142k) and the lowest top-line number in twelve quarters, it is important to keep this in the context that there will be variability in demand based on snapshots of activity of the clinical trials and other development programs that Stellar supports.  As such, periods of relative weakness in revenue should not be interpreted as being representative of operational progress or future growth potential.  

For example, periods between conclusion of a phase II and commencement of a subsequent phase III study can create lulls in KLH demand and related revenue.  More significant, however, is the progression of the clinical program as it represents potential future revenue growth for SBOT given larger patient enrollment as well as increasing the chance that the drug candidate eventually reaches commercialization.

Both product income and total gross income were in the red in Q1.  While gross margin averaged approximately 11% in 2016, periods of relatively low revenue, such as Q1, mean that direct costs related to aquaculture may not be fully absorbed.  Gross income will go back in the black with more meaningful revenue levels.  

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 $1.1M, compared to our $1.5M estimate – with most of the difference related to lower than modeled R&D expense.  We expect operating expense will incrementally 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.  Over the mid-term, we expect at least a portion of the additional spend to be offset by revenue growth and gross margin expansion.      

Q2 net loss and EPS were $1.1M and ($0.11) vs. our $1.5M and ($0.15) estimates.  Cash balance (including liquid investments) was $8.6M at quarter end, compared to $9.9M at December 31, 2016.  SBOT used $1.3M ($1.1M ex-changes in working capital) of cash for operating activities in the quarter.  
Operational Highlights: Multi-Year Agreement Locks-In SBOT as KLH Supplier for OBI’s Clinical Trials

Relative to recent customer supply agreements…

➢ …in early March 2017 SBOT announced that they entered an exclusive multi-year agreement with Amaran Biotechnology whereby Stellar will supply KLH for Amaran’s partners (i.e. OBI’s) clinical trials.  While this came as little surprise given the prior two-year collaboration agreement between the two relative to optimizing Amaran’s manufacturing processes for the OBI-822 candidate and our expectation that SBOT would remain the KLH supplier to Amaran/OBI, it is nonetheless important as it makes it ‘official’.  The agreement, per Stellar’s press release, commits Amaran to purchase Stellar KLH in amounts necessary to meet its requirements for vaccine production.  As we explain below, we continue to eagerly await updates on OBI’s clinical programs, the most recent public information surrounding which were announced in January 2017.  

As a reminder, 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 either).  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 announcements regarding moving into phase III in China and submitting phase III protocol to U.S. FDA was somewhat surprising given the missed endpoints in phase 2/3.  While the status of OBI’s clinical programs is unclear (given OBI has not provided public updates since January 2017), if and when there is additional forward progress, it should provide more insight into related potential incremental revenue to Stellar given the recently consummated exclusive multi-year KLH-supply agreement with Amaran (for OBI’s studies).  In addition to these breast cancer studies, OBI-822 is also in a phase 2 study for ovarian cancer.   
➢ Neovacs announced in early February 2017 that they will 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 facilitate eventual approval in the U.S. market.  In February 2017 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 later in 2017.      

While we do not think commercialization for Lupus in the U.S. is likely to happen within the next few years, it’s possible that a Lupus indication could be a sooner event in 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.  According to Neovacs’ April 2017 investor presentation (below), they are currently hoping to be able to launch in S. Korea sometime in the year 2020.       

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.  

Neovacs is also developing IFNa-Kinoid for dermatomyositis, which is considered an orphan disease in both the U.S. and in Europe.  The dermatomyositis program commenced in mid-2015.  Neovacs presented an update of its ongoing phase 2a study at the World Conference on Myositis earlier this month.  The phase 2a study (n=30) is evaluating the immunogenicity, tolerance and biological and clinical efficacy of IFNα Kinoid. Results are expected to support design of a pivotal study.  

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.

Neostell (see Appendix for JV details), 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.  
➢ 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.   

Building Capacity to Meet Expected Increase in Demand…

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).  


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