Progenity, Inc. (NASDAQ:PROG) Q4 2021 Earnings Conference Call March 28, 2022 4:30 PM ET
Company Participants
Chuck Padala – Managing Director of LifeSci Advisors
Adi Mohanty – Chief Executive Officer
Eric d’Esparbes – Chief Financial Officer
Conference Call Participants
Joseph Pantginis – H.C. Wainwright & Co, LLC
Catherine Schulte – Robert W. Baird & Co. Inc.
Operator
Greetings, and welcome to the Progenity Fourth Quarter and Full-Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Chuck Padala, Managing Director with LifeSci Advisors. Thank you, Chuck. You may begin.
Chuck Padala
Thank you, operator. Good afternoon, and welcome to Progenity’s fourth quarter 2021 corporate update and financial results conference call. Joining me on the call are Adi Mohanty, Chief Executive Officer of Progenity; and Eric d’Esparbes, Chief Financial Officer.
Before I turn the call over to Mr. Mohanty, I would like to remind you that today’s call will include forward-looking statements within the meaning of the federal securities laws, including, but not limited to, the types of statements identified as forward-looking statements in our annual report and Form 10-K that we will file later today and our subsequent periodic reports filed with the SEC, which will be available on our website in the Investors section. These forward-looking statements represent our views only as of the date of this call and involve substantial risks and uncertainties, including many that are beyond our control. Please note that the actual results could differ materially from those projected in any forward-looking statements.
For a further description of the risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements as well as risks related to our business, please see Progenity’s periodic reports filed with the SEC.
With that, I will now turn the call over to Adi Mohanty, CEO of Progenity.
Adi Mohanty
Hello, everyone, and thank you for joining us today. My journey here started a couple of days before the last earnings call. I was in the process of learning a lot about the details of Progenity’s various products, people and plans at the time. I have now had time to work with the team to absorb, understand and refine our plans. I came here because I saw a big potential for some of the assets, and I saw the commitment of the company to a significant transformation. I am very happy I made that decision as I see continued commitment to our transformation at all levels of the company, and I see an even greater potential than I first thought for the products we will focus on going forward.
As the company transitions away from the diagnostics business, it allows us to focus all our resources on the potentially game-changing oral platforms that have been progressing within the company over the last few years. I’ll talk more about that later.
In the last few months, we have completed the sale of our Avero lab business as we forecasted in our last call, executed on a process for our other diagnostics assets which we expect to stop developing further by next month and most importantly, reset the organization to be aligned with our oral therapeutics pipeline. All of these actions have allowed us to significantly reduce the cash burn of the company.
On the other side of our transformation, we will initially focus our resources on two main platforms, a platform for targeted localized delivery of drugs to the site of need for GI diseases and a platform that can take IV or injectable drugs and make them available in a pill form to achieve systemic bioavailability. So similar therapeutic profile, but without the needles.
Let me first discuss our company transformation. As promised, we completed the sale of our Avero lab affiliate in December. We continue working towards finding beneficial ways to allow our remaining diagnostic assets to reach eventual commercialization. This can take time, but we will remain open to those options while we stop spending on further developing, allowing us to focus capital allocation towards our oral therapeutics pipeline.
We made good progress with these programs as shown by the data presented at scientific conferences with our KOLs. We continue to strengthen our IP portfolio with further patent issuances announced recently and more expected to come this year. We believe that in the last few months, we have positioned the company for long-term success. This will be a year of execution for the company.
We are now entering a phase where clinical data generation is one of our main priorities. We understand the impact data generation and subsequent clinical data readouts have on patients we serve and the investment community. We are working diligently to ensure our clinical development plans and clinical studies progress smoothly and efficiently. The timing of our anticipated news flow will require some patience as is typical for any biotech company. Although we expect the validation of our platforms and the potential value inflection should be quicker than other biotech product development.
As I cover the progress we have made over the last few months, I will also provide additional guidance on milestones anticipated in 2022. First, our targeted therapeutics platform. Our initial focus with this platform is an ulcerative colitis or UC. Annual global sales for UC drugs are estimated to be about $7 billion globally and the inflammatory bowel disease or IBD space is about $19 billion globally.
Our lead program, PGN-600 is a liquid formulation of tofacitinib delivered in the colon using a proprietary drug delivery system, a capsule approximately the size of a fish oil pill. A version of tofacitinib is approved for UC and commercially available. Many drugs for UC are injected or IV, but tofacitinib is administered orally, and like other drugs that are orally delivered is mostly absorbed in the stomach or the upper GI track, whereas UC is a disease of the lower GI tract.
Currently approved drugs for UC do work, for some patients, for a period of time. However, none of the approved drugs work for all patients and long-term remission remains a significant unmet need. This leaves more than half of UC patients without long-term options and entire need. There could be many reasons why so many patients do not benefit enough from current therapies.
One theory is that we need to get significantly more drug in the tissue at the main side of the disease in the lower GI tract and that cannot be achieved safely by any of the current options. In conjunction with our scientific collaborators, we recently presented compelling evidence supporting the theory at the 17th Congress of the European Crohn’s and Colitis Organization and the 34th edition of the Belgian Week of Gastroenterology in February.
Materials presented included data from patients with moderate to severe UC receiving commercial formulations of tofacitinib. GI tissue biopsies were obtained from these patients and a clear correlation was identified between higher concentrations of drug in the tissue and improved outcomes. We believe our proprietary platform can significantly increase drug levels in disease tissue while reducing systemic exposure.
Our preclinical results show that treatment with PGN-600 leads to at least 25x higher tissue concentrations in colon tissue compared to the equivalent standard oral dose while showing significantly less systemic exposure. This demonstrates the potential for PGN-600 to safely increase drug levels at the site of disease, which could dramatically improve disease management for UC patients.
The key feature of our platform is the precise targeting and localization of drug delivery in the lower GI tract where it is most needed. We have already issued several patents covering the auto location capability of our technology that allows for the precise delivery of drug. Our platform offers the potential to deliver the right amount of drug at the site of need without systemic toxicity limitations, which could ultimately lead to superior clinical outcomes, more rapid induction of remission and reduce safety events for patients with UC.
The same platform can be expanded for use in other diseases of the GI tract. Also, the potential reduction of systemic toxicity could enable combination therapies to further improve patient outcomes. While we continue device development and manufacturing, we are preparing to execute several studies to further the program this year. We completed the first clinical study last year with our device and demonstrated its ability to accurately identify the colon and release a liquid payload in healthy volunteers. This study was funded in part by the Crohn’s & Colitis Foundation. We share their commitment to provide better, longer-lasting therapeutic options for patients with UC and other GI diseases. The foundation continues to fund a portion of this product development.
Following successful completion of the first study in healthy volunteers, we are now conducting a similar study in UC patients and have recently announced the start of patient enrollment. Positive results in this study will further confirm the robustness of our platform, which can then be used to deliver a range of therapeutics to the colon in UC patients and beyond. This will also enable us to move to the next phase of clinical development by initiating a Phase I trial with PGN-600 in the fourth quarter.
As many of you know, developing drugs particularly for serious conditions requires several methodical stages and can be a bit of a test of patients in the early part of development. Our development path may have some advantages because we are using molecules that have well-known safety and efficacy profiles. And once we finish proving that the device functions are desired, the next steps approving the combination should add a higher likelihood of success compared to many other drugs in early development.
Our current time line to start the clinical trials in UC patients have some risks. Because we are approaching the regulatory agencies with a plan that depends on the data we have generated to date, we believe our current data could be sufficient to begin trials for our drug and device combination. However, there is a chance that we will be required to provide data for additional animal studies before we are able to begin these trials. These animal studies are planned for the coming months. But if we need to complete them before initiating the Phase I trial, it could add another quarter or so to our projected start for the Phase I trial, pushing it into early next year.
We feel we have good rationale to begin the trial earlier rather than later, and we will provide updated guidance after we meet with the FDA. We plan to file the request in Q2. We understand the patient’s need for this product and are committed to progressing toward approval as quickly as possible while planning for all the required stages of the drug and device development process.
Our Phase I clinical trial with PGN-600 will evaluate both blood and colonic tissue levels of tofacitinib. Given the data presented in February, if the clinical data generated in our Phase I trial resembled the preclinical PGN-600 data we have generated, we believe the likelihood of improving remission rates in subsequent studies in UC patients is high.
We believe we have reduced development risks for PGN-600 because of the well-known therapeutic profile of the drug in standard oral formulations and the ability to utilize existing data on this formulation in our regulatory submissions.
Soon after the Phase I trial is completed, we will initiate a disease interventional study where we may clearly learn about the benefits our solution can bring to UC patients. Each development stage that we successfully achieved is expected to increase the value of the current program as well as the value of the entire platform, thus enabling us to better assess and discuss partnerships and future commercialization discussions. It will also guide our plans for future product expansion of our targeted therapeutics platform.
We will present additional data at Digestive Disease Week, DDW in San Diego this May. We will be presenting in conjunction with our scientific collaborators, further evidence for the need for local targeted delivery of therapeutics to the colon. DDW is the largest international gathering of physicians, researchers and academics in the GI field.
Next, I’ll cover our systemic biotherapeutics platform. The goal of this platform is to facilitate oral administration of drugs that would otherwise require injection or IV. Our systemic therapeutics delivery solution is a needle-free oral capsule that can deliver liquid formulations of large molecules like proteins, peptides and nucleic acids into systemic circulation. We believe this platform can help improve patient compliance, lower IV infusion costs, help expand the market for drugs across a range of chronic use indications and help biotherapeutics, such as monoclonals become more competitive with small molecule substitutes.
We have the potential to target and treat a wide range of pathologies with this platform. During the fourth quarter, we continued to make progress with device design and manufacturing and implementing improvements that will increase device performance, reliability and manufacturability. We also advanced our understanding of animal models that are critical for completing preclinical work and expected translation of these models to humans.
In our systemic biotherapeutics platform, we are currently working with two lead candidates, PGN-OB1, a variant of adalimumab, which is a monoclonal antibody and PGN-OB2, a high concentration formulation of the peptide liraglutide, a GLP-1 receptor agonist.
We believe that an average bioavailability of around 10% to 15% of IV with repeat dosing will prove satisfactory for a large number of biomolecules and this would make them viable alternatives to the current needle-based options. We have multiple collaborators for this technology who have validated our assumptions.
We have mentioned that Ionis is one of these collaborators and we are eager to share the names of our other collaborators. However, due to contractual restrictions, we are not permitted to do so at this time. It is quite encouraging that so many pharma companies see the potential of our technology and either want to get involved with us or are already collaborating with us. Our goal and focus with this program is to improve patient outcomes.
While we believe that a drug achieving 10% to 15% bioavailability through oral delivery would be considered potentially viable as a commercial product, we have already demonstrated in animal models that we can achieve up to 67% bioavailability for monoclonal antibody. We anticipate generating additional animal data in the coming months and expect to share these results through a combination of publication and KOL presentations at key upcoming conferences.
As with our other platform here to we are initially using drugs with established safety and efficacy profiles, which should have several advantages in the regulatory pathways and development plans. We expect to run clinical studies to demonstrate the function of our systemic platform later this year. These additional data could be sufficient to progress our collaboration discussions in the next stages as well as allow us to be ready for human clinical trials next year.
For now, we plan to take one systemic therapeutic program forward to these later stages, which will show the broad applicability of the platform for use with many other existing and in development therapeutics. In addition to our targeted and systemic therapeutics platforms, we do intend to continue developing our other platform technologies for the future. In 2021, we demonstrated in the clinical study the ability of our Recoverable Sampling System or RSS, our third platform technology to connect and preserve a microbial sample. The results of the study will also be presented at DDW in May.
We believe the ability to collect, preserve, recover and analyze analytes from specific regions of the intestine has numerous potential applications for diagnostics and for drug discovery and development. In the near-term, we will focus on the targeted therapeutics and systemic therapeutics platform initially with one program for each. As we execute and advance these programs, we will be able to add significant new programs to our pipeline, either organically or with partners to summarize.
For our targeted therapeutics platform in UC, we are conducting a device function study in UC patients in early Q2 of this year. We hope to have FDA feedback by Q3 on our planned Phase I study for the combination device and drug study. And if approved, we will begin the Phase I study in Q4. We plan to complete a larger animal safety study by year-end and begin a disease intervention Phase Ib/IIa early next year. We will provide updates as we complete discussions with the FDA.
For our systemic therapeutics platform, we will continue generating preclinical data with our drugs and those of our pharma partners with the goal to move into clinical trials toward the end of this year. We believe the transformation is helping the company build towards having the best and broadest platform for oral delivery of biotherapeutics. We will be highly focused on progressing our lead programs that address serious unmet needs for patients as well as disrupt large markets like the $19 billion IBD market, the $13 billion GLP-1 market and the substantially larger biologics market that is currently dependent on needles.
With that, I’ll now turn the call over to Eric for a discussion of our financial results and capital market activities.
Eric d’Esparbes
Thanks, Adi, and good afternoon, everyone. As Adi mentioned earlier, we made great progress towards transforming our company into a therapeutics company with a goal of leading the frontier of orally available therapeutic solutions. Along the way, the changes we have made focused our capital allocation decisions and significantly reduced cash burn profile. After the sale of our Avero affiliate in December, we have now achieved our original target of reducing annualized cash burn by more than $145 million and extending our cash runway to support our clinical development programs.
As we complete the company’s transformation, we focus on our operations as a development-stage biotherapeutics company, which also changes the way we look at our financial picture. Consequently, we are shifting our near-term focus away from revenue generation from discontinued operations to concentrate on cash use and optimizing capital allocation to our pipeline with the goal of generating value through the achievement of key development milestones and clinical data generation.
Operating expenses excluding stock-based compensation expenses were $18.2 million in the fourth quarter of 2021, representing a $6.8 million favorable variance in the fourth quarter compared to our previous guidance, demonstrating that we achieved a spend reduction associated with the elimination of our lab operations during Q4.
G&A expenses in the fourth quarter were $11.8 million, including $1.7 million in stock-based compensation expense, representing a $2 million favorable variance from our last guidance. R&D expenses in the fourth quarter were $8.5 million, including $0.7 million in stock-based compensation expense, a $1.6 million favorable variance compared to our Q4 guidance, and we expect to maintain our stage-gated data-driven approach to new capital commitments. Our R&D expenses associated with remaining molecular testing assets are expected to be largely eliminated by the end of the first quarter 2022.
So for this year, we expect to invest approximately $25 million in R&D activities excluding stock-based compensation expenses, with a final spend profile driven by the timing of our targeted therapeutics and systemic therapeutics programs clinical work, which is subject to regulatory and patient enrollment processes. Of that amount, we expect to invest approximately $8 million during the first quarter of 2022 and achieve a slightly lower spend level range of $5 million to $7 million during the following quarters after a molecular testing programs activities are completely eliminated.
With regards to G&A expenses, we expect to spend approximately $35 million in 2022, excluding stock-based compensation expenses, with approximately $10 million to be incurred in the first quarter. As a result, our total operating cash burn is expected to be approximately $60 million in 2022, which is in line with our previously stated guidance of achieving an average monthly cash burn of between $5 million and $6 million.
During the fourth quarter, we raised $20 million in gross proceeds through a registered direct offering. $46 million in gross proceeds through warrants exercises, $5 million in gross proceeds through our ATM program and had a cash balance of $88 million as of December 31, 2021. The capital raised in the second half of 2021 puts us in a strong liquidity position in 2022, and combined with the substantial completion of our company’s transformation leading to a reduced cash burn, allows us to have runway well into 2023.
With that, I will now turn the call over back to Adi.
Adi Mohanty
Thanks, Eric. We are excited about our transformation into a biotherapeutics company. We believe the milestones we discuss today can materially enhance value and our pipeline addresses vast markets that have the potential to transform patient care.
With that, operator, we are now ready for questions.
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Joe Pantginis with H.C. Wainwright. Please proceed with your question.
Joseph Pantginis
Hey, guys. Good afternoon. Thanks for taking the question. Wanted to get a sense, maybe, let’s go backward in what you were describing Eric first, with regard to OpEx, thanks for the guidance. And just curious, with regard to the FTEs at the company, are you currently rightsize? Do you need to do any repurposing for your new strategic efforts going away from molecular testing, et cetera?
Adi Mohanty
Hi, Joe. This is Adi. Yes, we’re pretty close to rightsize. So we’ve done a lot of that. I think in the – in our call, we talked about aligning the company. So we need now just tweaks on some skill sets, but we’re pretty close to rightsize.
Joseph Pantginis
That’s great. And then, so thanks for that. And then just curious, hopefully get a little more color on the UC program. Maybe any more specific information on the animal studies that still need to be conducted? And what kind of specific questions or answers you’re looking to provide the FDA ahead of the start of the clinical program?
Adi Mohanty
Okay. So you’re referring to us filing. In Q2, we are looking to file with the FDA a request to discuss our upcoming Phase I trial. And in that, we have a data package that includes animal tox studies. It includes references to existing tofacitinib data. As you know, that Xeljanz is a form of tofacitinib. So there’s a lot of existing data. All that package put together, we think, is quite a compelling package. In fact, this morning, we had a big meeting with some significant GI thought leaders, KOLs that are the who’s who of GI space. They all thought our plan made sense. However, sometimes the FDA wants a more conservative approach because they might say, you know what, do a few extra days of animal studies for this tox package.
So that’s the kind of small stuff we’re talking about, the difference might be. We think the package could be strong enough, and that’s why we’re going forward. We’ve talked to people about it. But we just wanted to flag the fact that it is possible when we go meet with the FDA, they might require a little more. And so those a little more are planned. That will happen, but then we’ll have to tweak our forecasted time lines, as I mentioned, by maybe a quarter, and we’ll let you know when we finish talking about.
Joseph Pantginis
Sure. Always helps to work hand-in-hand with the agency, and it just sounds like you’ll just be dotting some eyes there. I appreciate the color.
Operator
Thank you. Our next question comes from Catherine Schulte with Baird. Please proceed with your question.
Catherine Schulte
Hey guys, thanks for the updates today. I guess, first, any comments on how the three OBDS partnerships are progressing? Any feedback you’ve gotten from those partners? And then what are the next steps for hearing more details around those?
Adi Mohanty
Hi, Catherine. Thanks for the question. So I call them collaborations. I think what I mentioned was, we’re really happy that people were interested in what we had. It shows that they think there’s potential here. These are early collaborations where we’re able to work with them, their molecules, they were able to work with us. But they’ve been pretty – how should I say, restrictive on us being able to share more. We’ve made some progress. We’re continuing to make that progress.
So later this year, we’ll be at a stage where we will have enough information for both sides to decide whether or not we can announce what the next stages are and give more details. That’s what we mean by progressing these partnerships at the point where we can share all that with everybody. We’re happy that they’ve all stayed on with us. We’ve been working with them in some cases for over a year, and they continue to work with us. So that says that we’re making good progress together. We’re just not there yet. We hope this year, we will be there. And later this year, we’ll be able to share a lot more.
Catherine Schulte
Okay. Great. And then any details on the process for finding a potential partner for Preecludia? What kind of feedback has been garnered from those conversations thus far? And how should we think about timing of a potential outcome for that asset?
Adi Mohanty
Yes. So we have a couple of assets. I think I mentioned, right, a couple of our diagnostics assets that we have been working on a managed process with some external advisers and trying to figure out the best path forward for these assets. These are kind of more difficult to predict. In the case of the Preecludia test, the data has been looking good so far. However, some more work needs to be done. In order to commercialize the PE test, we would have to run a, for example, a clinical utility study, which can take more than a year.
And since we moved away from commercial diagnostics, it didn’t make sense for us to continue to spend on that effort. And so we’ve been looking at ways that somebody could partner or work out ways that we could take this forward. That process has not yet resulted in anything that we could share. But hopefully, it will result in something. And as soon as it does, we’ll report back. And we also have a single molecule detection test. So we’re working on multiple fronts. It’s progressing, hasn’t come to a place where we have anything to share yet as soon as we can.
Catherine Schulte
All right. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from Mayank Mamtani with B. Riley Securities. Please proceed with your question.
Unidentified Analyst
Hi. Good afternoon, team. This is [indiscernible] on for Mayank. Just a couple of questions from us around the UC program as well. Could you provide a bit more color on the proposed sort of Phase I/II study design? And some of the dose-ranging work that’s applicable in both the single and multiple dose segments that kind of can give you some safety information around some of the JAK associated liabilities that we’ve seen? And then also how you’re thinking about how targeted delivery could push on efficacy? And any sort of thoughts on durable remission and what sort of biomarkers you’re looking to generate?
Adi Mohanty
Well, Mike, there was a lot of questions in one question. Okay. I’ll do my best to cover what you asked. So you asked for a lot of different pieces there. I can tell you that some of that we don’t have fully answered yet because we have internal proposals. And until we validate that with the FDA, it would be premature for me to sort of tell you and tell everybody that that’s what it is. We do know certain things that the publications we referenced show that we don’t get enough drug to the tissue. So tofacitinib in its current typical dose is about 10 mg twice a day. And that does not get enough drug in the tissue in the lower GI, which is where the disease is.
People have tried to go to 20 and 30, but even at 10 mg, they start worrying about not just what’s in the GI tract, but what’s in the serum. So in the blood, and going higher doses increases what’s in the blood, and that’s a toxicity issue. So that’s where the safety concerns come. You cannot push that that far if you look it up, you’ll see where physicians have tried to get to 30 mg because that might get a better response in the GI tract, but then it ends up with substantial significant safety issues and it’s way outside of current approved label.
So we know that from multiple ways that more drugs could be good. We’ve done endoscopic studies that show more drug could be good, but we need to be able to get that in the lower GI tract without getting more drug in the serum or in the entire system. And the data we have shown so far, our platform, first of all, accurately detects on its own, the right part of the colon and then releases the drug and the combination of the location as well as our formulation is such that drug coats the entire lower part of the colon. It’s about 25x more at the site and substantially less in the entire body. That allows us to do certain calculations that say that maybe at less than half the current dose, we could get a lot more drug in the location that is needed.
This is where I’m being careful by giving you exact numbers. We have them worked out. But until we have a conversation or make a publication, I want to be careful. But in general, that’s the idea that nobody else can do is get it to the right location, coat the entire lower colon at a lower dose than currently is being prescribed, be able to get a lot more drug, which then leads to the faster induction, the better outcomes, and that’s what we’ve been talking about. I went off and explained a bunch of things I hope I covered your question.
Unidentified Analyst
No, absolutely. That was very helpful and makes a lot of sense as you kind of get towards that FDA meeting. Maybe then one more, thinking about it at a more higher level here. As you think about how the treatment might fit in the current treatment paradigm today. And do you have any thoughts on some of the data released by Arena and Pfizer recently and sort of where you see a targeted approach fitting in the treatment paradigm over time?
Adi Mohanty
Yes. So ours is targeted and topical. And so think about it as a topical that is safer because it’s not going in the rest of your body. At this point, tofacitinib or the version of tofacitinib, which is Xeljanz, is sort of a third-line therapy. If we are able to show some of what I just talked about, which is the faster rate of induction lower doses, better safety. That could move up to a number – second line or even potentially a first-line biologics. So it will always be using – you’ve got the anti-TNF first line. But right after that, all the biologics, which is the close to $7 billion that I talked about currently, $7 billion, fall into first line, second line, third line. So we believe we can get all the way up to first line. However, that depends on the data. We need to start showing that data. At which point, it is a multibillion-dollar opportunity. But more significantly, it’s a real option for patients who have not had anything substantial in probably 20 years even though there’s all these approved drugs.
Unidentified Analyst
Great. Thanks a lot for taking our questions and congratulations on the quarter. Very helpful.
Operator
Thank you. There are no further questions at this time. I’d like to turn the floor back over to management for any closing comments.
Adi Mohanty
I want to thank everyone for joining us today. We’re eager to make progress with our pipeline using the best oral therapeutics platform technologies. We look forward to coming back and talking to everyone. Thank you.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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