Orgenesis (ORGS)
Q3 2022 Earnings Conference Call
November 11, 2022 08:00 ET
Company Participants
David Waldman - Investor Relations
Vered Caplan - Chief Executive Officer
Neil Reithinger - Chief Financial Officer
Conference Call Participants
Bruce Jackson - Benchmark Company
Presentation
Operator
Good morning, ladies and gentlemen and welcome to the Orgenesis Third Quarter 2022 Business Update Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. David Waldman, Investor Relations. David, the floor is yours.
David Waldman
Thank you and good morning, everyone and welcome to Orgenesis’ third quarter 2022 business update conference call. On the call with us this morning are Vered Caplan, Chief Executive Officer and Neil Reithinger, Chief Financial Officer. If you have any questions after the call, would like any additional information about the company, please contact Crescendo Communications at 212-671-1020.
This conference call contains forward-looking statements, which are made pursuant to the Safe Harbor provisions of Section 27A of the Securities Act of 1933 as amended in Section 21E of the Securities and Exchange Act of 1934 as amended. These forward-looking statements involve substantial uncertainties and risks and are based upon current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us at the date of this conference call. We caution listeners that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.
Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including, but not limited to the risks and uncertainties discussed under the heading Risk Factors in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2021 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statement for any reason.
Now, I’d like to turn the call over to Orgenesis CEO, Ms. Vered Caplan. Please go ahead, Vered.
Vered Caplan
Thank you, David and thanks to everyone for joining us on our call today. We’ve made significant progress in advancing the rollout of our point-of-care platform, and we are very pleased to report another quarter of solid revenues, $8 million and all progressing in our expansion in the U.S. We have invested much effort in terms of our capital raising activities in order to protect shareholders and preserve our capital structure.
With that background, I am very happy to report that we completed the recent financing of our point-of-care services business who our recently formed point-of-care services subsidiary, Morgenesis LLC. I think it’s important to note that this transaction valued this one subsidiary alone at a pre-money valuation of $125 million, which should represent a significant premium to the market cap of our entire company. For those of you who may have been skeptical of our new business model, we believe this investment for Metalmark Capital, the real private equity firm founded to independently manage the Morgan Stanley Capital Partner Funds is a significant validation of our business model.
They conducted extensive due diligence pirates investment, which I believe has benefited the company. We believe this investment provides the necessary funding to accelerate the rollout of our point-of-care services business while minimizing dilution to existing stockholders given the current state of the public markets. I’d also like to point out that this is a similar strategy to the one we pursued with Masthercell. For those of you who have been involved with Orgenesis for some time, you will recall we bought in a U.S. private equity firm as a strategic investor into our CDMO business. Ultimately, we sold this business for over $300 million to the benefit of all parties involved. We’re pursuing a similar strategy so as private equity investment. The major difference here is that our revenues are already on par with where we were when we sold Masthercell.
We believe that our point-of-care services business will generate substantially more value for the company and that we are providing a unique service for this expanding industry. Our point-of-care platform addresses many of the key challenges facing the industry, including capacity constraints, excessive cost. As a result, we believe our model is uniquely positioned to address industry challenges through a highly innovative decentralized model which lowers cost seems line logistics and expand capacity. Since launching our point-of-care business, the feedback from the industry has been positive. And now with Metalmark support, we believe that we have the lease sources to accelerate this business.
As we have discussed in the past, there are a number of advantages to our point-of-care systems such as short setup times, they have a small footprint, and they lower the cost of production through automated operations, streamlined logistics and parallel processing. In addition, we designed them with a scalable and modular format so we can add capacity as the needs of the hospital or biotech companies expand. [indiscernible] implementation time of new capacity from 18, 24 months as cleanrooms required to approximately 3 to 6 months. We believe our strategy of decentralizing and unitizing the supply of cell and gene therapies based on standardization of the manufacturing environment could ultimately become the solution for this industry, lowering the cost of the therapies to on-site processing and make these therapies more broadly available to patients.
Our goal over time is to reduce the cost of these therapies to tens of thousands versus hundreds of thousands of dollars. We believe this is a crucial step that is necessary for cell therapies to become widely available. Our global supply network now spans North America, Europe, Asia and the Middle East, compromise of point of care centers, which serve as hubs for the entire region. We now have a full deployed in Europe and the Middle East and set a point of care centers and strategic hub in the U.S.
As previously discussed, we expanded our collaboration with Johns Hopkins to establish a new point of care centers, also known as Maryland Center for Cell Therapy Manufacturing. Construction of the new point-of-care center will be funded in part by a $5 million grant from the state of Maryland. Our process development services are already active on-site. We could not envision a better partner than John Hopkins as one of our first strategic collaboration.
We believe that having them as a partner is strong validation and is likely to enhance the sales process with other institutions as we explained across North America. All that being said, it’s important to note that our business goes beyond point-of-care services. In terms of our therapeutic pipeline, we have developed a low-cost, capital-efficient business model to bring these therapies to market. We now have a dozen distinct therapeutic programs within our pipeline in various stages of development. These therapies span a broad of indications for immunooncology, antiviral, metabolic and autoimmune disease and more. By designing these therapies from the ground up using our point-of-care model, we believe these therapies can be advanced through clinical trials at the lower cost and traditional clinical development by leveraging our network of academic institutions and healthcare systems around the world.
Through this network, we are establishing key strategic partnership and licensing agreement to fund the development of activists. And while our partners are responsible for funding development and clinical time we get paid for performing services. As these programs move into commercialization phase, we would benefit from revenue sharing and royalty agreements with our partners.
In addition, we have a strong track record of securing non-dilutive grant funding to further accelerate the development of these programs. We believe that our ability to secure grant funding makes these therapies even more attractive for potential partners and licenses. We then work with us through all stages of the development life cycle. We can basically provide them a plug-and-play road map, including manufacturing, clinical and regulatory as well as other services. Also, through these partnerships and prudent cash management, we have dramatically reduced our SG&A by 49% and our net loss by 86% for the third quarter of this year over the same period last year. As a result, we achieved nearly breakeven income from operations for the third quarter of 2022.
At the heart of our business model, our goal is to provide life-changing treatments to a large number of patients at reduced cost within the point-of-care setting. We’ve also built a robust therapeutic pipeline, leveraging the government grants and other sources of non-dilutive funding from regional partners and others, while out-licensing therapies to regional distribution partners and benefiting from service-related payments.
We are more than enthusiastic about the outlook of the business as we have built a scalable recurring revenue business model. We believe our model is uniquely positioned to support the growth of the industry and the growing capacity requirements of our partners and customers. I would like to thank all of our loyal shareholders that have stuck with us and believe our best days lie ahead. We look forward to sharing more exciting developments to be announced in the weeks and months ahead.
On that note, I’ll now turn the call over to Neil Reithinger, our Chief Financial Officer.
Neil Reithinger
Thank you, Vered. Our revenues for the 3 months ended September 30, 2022, were $8 million compared to $8.7 million for the 3 months ended September 30, 2021. The decrease was attributable mainly to a decline in POC development services as a result of our having completed the majority of performance obligations under the POC development services contracts in ‘21. During ‘22, we started recognizing revenue from cell processing, which comprised $2.4 million of the revenue for the 3 months ended September 30, 2022. As we moved into the second phase of our rollout, our ability to grow revenue has been limited by capital constraints. As Vered mentioned earlier, we believe the capital infusion by Metalmark will enable us to accelerate the rollout of our point-of-care services.
Cost of revenues development services and research and development for the 3 months ended September 30, 2022 were $4.7 million as compared to $10 million for the 3 months ended September 30, 2021, representing a decrease of 53%. The change is contributing to the decrease during the quarter were attributable to a decrease of $2.7 million in subcontracting, professional consulting service fees and a decrease of $2.1 million on other research and development expenses. SG&A for the 3 months ended September 30, 2022 were $3.1 million compared to $6.1 million for the same period last year, representing a decrease of 49%. The decrease in SG&A in the 3 months ended September 30, 2022, compared to the comparable period last year is primarily attributable to a decline in salaries and related expenses, which was offset by an increase in accounting and legal fees.
Operating loss for the 3 months ended September 30, 2022, was $7 million [ph] compared to $7.7 million for the same period last year. Net loss for the 3 months ended September 30, 2022 was $1.4 million, a decrease of 86% compared to $10.1 million for the same period last year. As you can see, we remain focused on carefully managing expenses. At the same time, we believe the investment from Metalmark will enable us to accelerate the rollout of our point-of-care services. We also are able to contain cost per POCare therapies through our international partnering and licensing strategy, coupled with non-dilutive grant funding. In terms of liquidity and current assets, we ended the period with approximately $3 million of cash and cash equivalents. This does not include our most recent funding from Metalmark of approximately $30 million that was received subsequent to the end of the quarter. We look forward to benefiting from this recent investment and advancing our collaboration with them to expand our field care services.
Operator, we will now open the call to questions. Thank you.
Question-and-Answer Session
Operator
Thank you very much. [Operator Instructions] Your first question is coming from Bruce Jackson of the Benchmark Company. Bruce, your line is live.
Bruce Jackson
Hi, good morning. And thank you for taking my questions. So congratulations on the Metalmark transaction and the creation of Orgenesis. I was wondering if you could give us some examples of how you’ve been capital constrained in the past and how the new capital is going to help you grow a little bit faster and get more OMPULs out there?
Vered Caplan
Yes. I think it’s very much CapEx-related. When we set up a new OMPULs set up a new point-of-care site, there is – it’s not a huge investment, but there is an investment there. We need to hire a few more people. And of course, you cannot commit to doing work in a certain region. If you’re not sure, you can – you have the capital to place that equipment and to set up the – so I think in terms of just being a responsible service provider, we have to be careful not to take on context, we cannot too. And now having that capability will allow us to expand, especially with a focus on the U.S. side. Because as you remember, we began our activities in Europe and in Middle East and in Asia, and I think it’s important for us to expand our capacity and just the ability to provide services in the U.S.
Bruce Jackson
And then in the past, you’ve given out the number of OMPULs that have been active, I was just curious if you could share with us how many you have up and running now?
Vered Caplan
So to tell you the truth, I don’t want to say a number because I haven’t...
Bruce Jackson
Okay, that’s fine.
Vered Caplan
And I don’t want to say an incorrect number. But it’s less about – and I think that’s important to understand. So I’m glad you brought up the question. It’s less about how many OMPULs, or how full is the utilization in each OMPULs is kind of done, so I mean the OMPULs can do, let’s say, it can do 10 batches a year, it can make 50 batches or point-of-care center can or point-of-care hub as David likes to call them. They can provide services to one OMPULs or two OMPULs or three OMPULs. So it’s really about making sure that the capacity we have is fully utilized and to make sure that adding additional capacity then sets the stage for additional revenue.
Bruce Jackson
Okay. Got it. And then last question for me. You touched on the therapeutic pipeline. Were there any highlights from the pipeline that you’d like to discuss, any of the projects that made notable progress during the quarter?
Vered Caplan
Well, most of our therapeutics are either preclinical or in different stages of clinical development. And I don’t think there is anything that’s been dramatic in terms of finishing a Phase 1 or finishing a Phase 2 or something like that. But I can say they are progressing very nicely. And I think we will have more benefit from – in terms even – I’m hopeful, even in terms of just payments next year. But I think the team has done a tremendous job in really progressing things and keeping to the timeline and making sure we can also utilize the grant funding because that is, of course, connected to the fact that we are doing the development at the required timeline. So I think things are certainly on cost. And I’m really hoping that in the next year, we will see more and more news coming out on the therapeutics.
Bruce Jackson
Okay, thank you very much for taking my questions. And congratulations on all the progress.
Vered Caplan
Thank you. Appreciate it.
Operator
Thank you very much. Your next question is coming from Kelvin [indiscernible], Private Investor. Kelvin, your line is live.
Unidentified Analyst
Hey, Vered. Congratulations on the great results. I think this quarter was really impressive in terms of how the costs are being managed. Could you run us through how was it being achieved? Were their head counts being reduced because I see that this turnaround in financial results is really very impressive?
Vered Caplan
So look, we’ve been building a business. It takes time. It takes investment. And I think I’ve mentioned this in other calls as well. You need to land batches before you actually make them. You need to train people, you need to push things ahead. It takes time to find distribution and licensing partners. All of these activities, they acquire capital. And I think what we will have now or what we are seeing now is the benefits from our past investments. Because even if we license therapy, there is still some work to be done on it before we can license it out. And even if we set up a point of cure hub, it takes time until that becomes utilized. But I think we have, at the moment, put in what we needed to establish this level of revenue. And I’m very happy that we now have the Metalmark funds that will allow us to expand and grow the business. That’s– it’s just a matter of, I think, maturity of the business in some ways.
Unidentified Analyst
Got it. I have one follow-up question. So I think it’s really impressive on how we have gotten that investment from Metalmark partners, I think, also validated the business model. So given that we have an infusion of cash, how should we think about the profitability level of issue? Should we expect the business to expand aggressively and there will be some losses in the next few quarters? Or you would want the business to operate on a breakeven level.
Vered Caplan
So I think it’s also a matter of demand and planning for will we have the capital, I think we should go. I think even – this is an industry that is net solutions. And we have a great opportunity to be a trailblazer here to show this can be done to provide solutions. And you see the need in every place on the globe. I mean, wherever you go, you see companies, hospitals need a solution. And if we have the chance to go and expand and provide that solution, and now it’s time to do it, not wait because if we have customers who want our service, we should certainly supply – so it’s really about how fast we can supply demand and how we can go. But of course, I mean, the company doesn’t want to lose money, neither would do we. And unless we have an initial focus of investment, I think we will try to maintain our growth.
Unidentified Analyst
Alright. Got it. Just one last question. I noticed in our revenue breakdown. The cell processing revenue have grown a lot. If I’m not wrong, it’s somewhere above $2 million. So am I right to say that this is a recurring portion of the business?
Vered Caplan
Yes. That is the recurring. And as we spoke in the past, I’m hoping more will shift as eventually we grow. And I also think the fact that we have such strong process development capabilities is actually – because most companies, hospitals are almost anybody who works in this field before you start generating the recurring revenue of the processing, you need that process development. And the fact that we can expand and do possess development and then shift towards is something that I think is very important for our business model that companies or hospitals don’t have to come to us when they have already got a full solution, but we can also provide that support to move from more research to development and then to actual processing.
Unidentified Analyst
Alright. Got it. So I guess three things release stood out for me this quarter. I think, number one, look at the sale processing revenue has grown a lot. So the recurring portion is really great. I think it gives earnings visibility. You have achieved near breakeven. I think that’s fantastic. Third point is that you’ve gotten a huge investment for Metalmark Partners. I think a lot of companies these days are being stop of capital. But in our situation, it seems like we are injected with a lot of capital ready to expand. So I think it makes me even more excited for the journey ahead. Thanks for the great work and looking forward to the next quarter’s results.
Vered Caplan
Thank you very much.
Operator
Thank you very much. There appears to be no further questions in the queue. I’ll now hand back over to management for any closing remarks.
Vered Caplan
I’d like to thank everyone for participating on our third quarter update conference call. We are very excited about the outlook for the business and appreciate the strong support of our shareholders, and we look forward to providing further updates as advance on our therapeutic pipeline, expand our point-of-care platform and deploy OMPULs worldwide. Thank you.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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Orgenesis (ORGS) Q3 2022 Earnings Call Transcript