Protalix BioTherapeutics, Inc. (NYSE:PLX) Q2 2023 Earnings Conference Call August 7, 2023 8:30 AM ET
Company Participants
Charles Padala – IR
Dror Bashan – President and CEO
Eyal Rubin – SVP and CFO
Conference Call Participants
Boobalan Pachaiyappan – H.C. Wainwright
John Vandermosten – Zacks
Unidentified Analyst – Private Investor
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
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 the 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
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 the Fabry disease. And 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 U.S. 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 been 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 carriers started building its 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. And 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. And we also thank Giacomo Chiesi for joining us and providing an overview of the Chiesi’s in-depth and experience 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. And 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. And as a reminder, 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 second quarter of 2024.
We also continue to make process 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 look to build and 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
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 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 regulator 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 a onetime 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 out of the 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
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 strengthening our pipeline and R&D capabilities. I’m proud of the 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question is from Boobalan Pachaiyappan with H.C. Wainwright. Please proceed.
Boobalan Pachaiyappan
Hi, thanks so much Dror for talking our questions. So firstly, with respect to Elfabrio. So we understand Chiesi is responsible for launch activities. But maybe from Protalix’s end, what additional update would you like to provide to a shareholder 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
So thank you for that. I think, as you know, Chiesi is responsible for the commercial — for the 100% of the commercial activities. Chiesi is also a private company. So once we will be able to share more information, we’ll share more information. Right now, the product was just approved. It was launched in the U.S. It is being approved country by country in Europe. This is public information, of course. And as Eyal mentioned and I also briefly mentioned, we are building stock, and I hope that this will continue into a good penetration into the market. So once we will have more data, we will share it through our financials in the different quarters, of course. But I can assure you that we are pleased with Chiesi, very pleased with Chiesi. We think they are very good and committed partner. And we are positive they are doing their best in top priority to bring these products to the patients.
Boobalan Pachaiyappan
Okay, fair enough. With respect to your ongoing PRX-115 gout study, so given you’re enrolling patients — hello, can you hear me?
Dror Bashan
Yes.
Boobalan Pachaiyappan
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 level 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
So I suggest we have to finish the recruitment and to analyze the data. This is why we have — we plan at least to have up to 56 subjects in this clinical strategy. The protocol that we are using, I think it’s public. It’s — 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 for the next stage.
Boobalan Pachaiyappan
Okay, great. And then maybe one final question from me. So with respect to NETs programs, so I’m trying to understand your clinical strategy here because there are multiple NET diseases, NET-related diseases, including rheumatoid arthritis, lupus, psoriasis and so on. So I’m trying to understand, is the key here to demonstrate proof of concept in one particular indication and maybe partner with established players for the clinical development or branch out your — the value of this drug, any color on your clinical strategy?
Dror Bashan
So we have mentioned, I believe, in late June on our investor event that we have, if I may say, refined our pathway forward and our strategy going forward. And we will focus into the genetic and non-genetic rare disease space. This is going forward. We believe we have many years of experience, knowledge, many years of scars and also two outstanding successes, bringing products to the market, going through all the developmental and regulatory hurdles, and getting to the finish line. And this is where we believe we can add value. This is despite the fact ProCellEx, our system, is agnostic. So this is the intent.
Now right now, we are — we will — we planned this, and we hope we will succeed, of course, to put our hands and to bring in and strengthen our pipeline with additional programs within the rare disease space. With regard to a commercial platform or a commercial partner, right now, we don’t have the means, and we are still small and we have to be to stay modest. So we will clearly develop the products until a certain stage, and then we will consider to join forces with a partner. 5 to 10 years down the road, it’s a different ball game. Hopefully, we will do well, and then we can consider maybe to have a phase — this is part of, if I may say, a vision, but not the two, three years plan right now.
Boobalan Pachaiyappan
Okay, alright, thanks so much for your time.
Dror Bashan
Thank you.
Operator
Our next question is from John Vandermosten with Zacks. Please proceed.
John Vandermosten
Thank you and hello Dror, Eyal, how are you guys doing?
Dror Bashan
Good, how are you John.
John Vandermosten
I am doing pretty good. So let me start with a question on any potential future studies for Elfabrio. I think it had been mentioned that there might be a pediatric study and potentially some others. Would Chiesi be completely responsible for those or would Protalix get involved as well? And also, do you know if there are any of these trials — future trials, especially for pediatrics being considered?
Dror Bashan
So again, under the agreement with Chiesi, our responsibility is to 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. As part of it, they do plan a pretty deep long-term medical plan with additional studies. As you mentioned, pediatric study, I think by the FDA requirement, it is written and it’s public as well, pregnant women study, etcetera. So I suggest we wait and we will — once it will be initiated, it will be fully available, I mean, from a data point of view. And also you can approach Chiesi and ask them for more information but overall I believe that within the next 6 to 12 months, we will be in the — not we, Chiesi will be executing a very deep long-term medical plan. Since Protalix developed the product, there are some key senior employees that are consulted with Chiesi or Chiesi is consulting with them, but this is their responsibility.
John Vandermosten
Great, yeah, thank you for that. Also, I want to understand, I guess, how revenues will flow through from the product and there’s two components there, [indiscernible]. I mean, the milestone, there’s the product revenues and then there’s the royalty revenues. And 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? And then will they build up inventory and then work it down, I mean, what is your sense of how those revenues will flow for the rest of this year and into 2024?
Eyal Rubin
So John, Eyal. Let me try to elaborate. So first, in Elfabrio we have the product, royalties and milestones. We have only two type of revenue stream from Elfabrio. The first one is obviously the royalties in both the U.S. and outside the U.S., which ranges 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, obviously. In terms of what we’ve recorded this quarter and what we anticipate to record in the following quarters, obviously, as Chiesi are getting prepared for launch in the various countries, both in the U.S., which the product was launched and out of the U.S., obviously, they are building up their inventory, and those are the sales that we recorded. The way that it works, 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 lease price, and that’s the revenue basically that we recorded. I want to be even more conservative than this since the agreement which is public state that we’re getting the royalties from the net sales. Obviously, we have a reserve for sRNA and discount in case that they are applied to the price.
In terms of projections for the next year, as a small company, we don’t really provide projections, but I think that the trend at least in the next quarter is going to continue as Chiesi are building up and ramping up their inventory. Again in general in the next two to three years until revenues are going to be stable and growing means that the changes in inventory are going to be at least for us totally transparent. I guess that most of the revenues we’re going to see is going to be changes in inventory and Chiesi’s inventory build. Two to three years from now, I guess that, that will be a different story but the trend is definitely that you’re going to see an increase in revenue towards the end of this year. And obviously, in the beginning or the second quarter and towards the second half of next year as well, they are ramping up their operations.
John Vandermosten
Okay. Great, great. That’s a good answer. And then royalty revenue sometimes take 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 mean, 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
Sure. So as I described, the revenue is almost fully recognized the minute that we sell the inventory to Chiesi, the drug product to Chiesi. And it’s also — there’s no timing difference between the revenue recognition and the cash flow. According to the agreement, which is public, they have 45 days net to pay us, so there is no timing gap there. As I mentioned, since the sRNA and discount if applicable, at this point, at least unknown, I guess that they — as we move forward, we’ll know better. And we’re going to play with the reserves that we 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
Okay. And then last question for me is on gross margin. And how might the gross margin in Elfabrio compared to LOIs, so will they be in a similar range or should we expect a difference?
Eyal Rubin
That’s — we’re talking about a little different ball game. Obviously, I can share with you the gross margin of the product, but looking at the industry, I guess we can assume that you have biological drugs, you’re talking about like anywhere between 85% to 90% gross margin on the product. And I think I can state that this is give or take the case with Elfabrio, — different story but don’t forget that we sold the royalties to Pfizer back then in return to getting a one-off big check that the Pfizer cut. That’s the reason that we sell them at a very small, if any, margin on the sales. In Brazil, a different story also. In Brazil, we do have margins. We don’t complain. But again, we’re not disclosing those margins at this point.
John Vandermosten
Okay, thank you Eyal.
Dror Bashan
Thank you John, appreciate it.
Operator
[Operator Instructions]. Our next question is from Dar Bashes, Private Investor.
Unidentified 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
Thank you for the question. So as I explained, I mean, I’ll do it again. It’s not manufacturing. We have only two streams of revenue on Elfabrio. The first one is royalties means drive the resources to Chiesi, and we’re getting royalties at a percent of the list price. And the second one, obviously is milestones, both commercial and regulatory. When we recorded the revenue, obviously, there’s a finished products that were sold to Chiesi. They will turn around, obviously, and sell it to the market. But at this point, as I mentioned, I guess that, that’s going to be the case in the next two years or so while they are building their inventory. So we’re going to actually record sales of drug product to Chiesi. That’s going to be the revenue we’re going to be recording. And in the future, once the inventory change is going to be minimal, then the real royalties calculation and reconciliation is going to start taking place.
Unidentified Analyst
Great, thank you for that clarification. Appreciate it.
Dror Bashan
Thank you.
Operator
[Operator Instructions]. There are no more questions at this time. I would like to turn the conference back over to management for closing comments.
Dror Bashan
So this is Dror and I’d like to thank everybody for their time. And again, we are very happy with the results and the evolvement of the company. Happy that we have Elfabrio available both — in both continents for the benefit of the patients and their families, and looking forward to speaking with you next time. Thank you very much.
Operator
Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.
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