Q2 2023 Orgenesis Inc Earnings Call

Participants

Neil Reithinger

Unidentified Company Representative

Vered Caplan; Chairperson of the Board, CEO & President; Orgenesis Inc.

Bruce David Jackson; Senior Equity Analyst; The Benchmark Company, LLC, Research Division

David K. Waldman; President & CEO; Crescendo Communications, LLC

Presentation

Operator

Greetings. And welcome to the Orgenesis' Second Quarter 2023 Business Update Call. (Operator Instructions) A question and answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, David Waldman, Investor Relations. You may begin.

David K. Waldman

Thank you, and good morning, everyone, and welcome to the Orgenesis' Second Quarter 2023 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 or 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 and Section 21E of the Securities Exchange Act of 1934 as amended.
These forward-looking statements involve substantial uncertainties and risks and are based upon our 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, 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, 2022, and in our other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statements for any reason.
I'd now like to turn the call over to our 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 reported revenue of approximately $7 million in the second quarter of 2023, which reflects the continued activity of our point-of-care strategy. Most recently, we rebranded the point-of-care services business for Orgenesis to Okta mail, which reflects our focus on providing standardized decentralized, cost-effective development and production of advanced cell and gene therapies. The ongoing expansion of our point-of-care strategy has been enabled in part by the recent investments for Metalmark Capital. This capital allows us to increase our capacity and expand our activity as well as the rollout of our point-of-care centers and deployment of our OMPULs in the U.S.
The reason our point-of-care business is resonating well in the industry. And among those familiar with the industry is quite simple. Our point-of-care platform addresses many of the key challenges facing the industry, including capacity constraints and excessive cost. Despite the fact that the autologous cell therapy market is valued at $13 billion and growing, the centralized production approach is not a sustainable business model as illustrated by supply shortages, high prices of products and limited availability of coverage.
And because of our experience in this business for the past 10 years, we recognize the stats in fact, before the rest of the industry. When announcing the industry acknowledged the urgent need to shift production away from a centralized to a decentralized model and towards point-of-care, hospital and health systems can't afford to produce cell and gene therapies in a centralized manner.
This is a fact. And Octomera, our rebranded service activity is the only service provider that can offer solutions today. We are also seeing growing recognition and support for decentralized production of cell and gene therapies amongst the regulators including the FDA, which addressed decentralized manufacturing for the first time in the [BAS] guidance document, consideration for the development of chimeric antigen receptor, the CAR-T cell products, which we believe comes as a response to the industry search for solutions in this space.
In fact, the recent article in Labiotech noted that over 9,900 cell therapy trials are currently recruiting. They go on to point out that even if 5% to 10% are successful, a significant number of cell therapies will be approved in the near future. This is extraordinary, considering the average number of drugs approved over the last 10 years is around 40.
They go on to note that a traditional centralized CDMO model is a capital-intensive approach, essentially a dead end and I quote, "economically, it doesn't work. The cost of centralized manual processes will keep therapies out of reach for patients and peers. " They point out a recent example which was Bluebird's (inaudible) of Zynteglo as gene therapy for rare blood disorders from the German market because it could not agree on a price with the health authorities.
They conclude by saying the centralized approach also doesn't work from a clinical perspective because of the complicated logistics, time lags and failed batches. In context, we are poised to capitalize on this growing underserved market and have shown our process work in a decentralized manner within the field of cell and gene therapy, our processes apply to regenerative medicine and immuno-oncology as well as other genetically modified cells.
We are now expanding to new customers and moving to more advanced clinical stages among existing ones. As a result, we believe our model based on standardization of the production environment is uniquely positioned to address industry challenges to a highly innovative decentralized model, which lower costs, streamlined logistics and expands capacity.
In addition, we designed a scalable modular format so we can add capacity as the needs of the hospital biotech companies expand. This process is exactly the same regardless of where the product is still used. We have a GMP team with significant practical experiences overseeing the centers and OMPULs and working to implement advanced quality management and IT solutions.
We are also be enrolling our new GMP service -- rolling out our new GMP services in the U.S. in the coming quarters. In addition, OMPULs can be deployed and operational and fleet of 6 months with an existing structure or an available outdoor space. And production capacity can be easily scaled via the additional units. OMPULs are fully integrated, all-in-one bio prospecting production units that can be rapidly implemented as a standardized industrial cleaning alternative at the point-of-care, [ample] shorten the implementation time of new capacity from 24 months to 3 to 6 months, the interior can be purpose-built to include GMP-compliant production space with options for quality control labs and warehouse spaces.
We believe our strategy of decentralizing and harmonizing the supplier for cell and gene therapies will ultimately become the solution for this industry, lowering costs, streamlining logistics and accelerating development of therapies through on-site processing. Through these steps, we are clearly executing all our strategy to make cell and gene therapy products and services more accessible, affordable and available to patients than traditional centralized models of production.
In terms of expenses, our goal over time is to reduce the cost of these therapies to tens of thousands versus hundreds of thousand dollars. On a related note, it is important to point out that some of the growing pains we went through to get where we are today. When we started out our point-of-care strategy over 3 years ago, decentralized production was a topic discussed as a distant option at industry events with various bioreactor companies taking initial steps to provide systems for use in hospital cleanings.
We had already tried this approach and realized that though this was important. This was not the full solution the industry needed. Our first clients were smaller, earlier-stage companies. It couldn't even access production capacity due to supply constraints within the market. For this reason, they were willing to take a risk with us while this was still an early-stage concept and recognize the value proposition we would be able to offer in terms of more rapid lower-cost production if and when successful.
But because many of these smaller companies who are early stage and undercapitalized, we were also willing to provide greater flexibility in payment terms and mutual support and work [reason]. They [were and are] our partners, and we appreciate the support while we were still in the development stages.
This approach has impacted our accounts receivable, but we believe that we have achieved our goals and hopefully, as these companies mature, we hope to continue providing the products in more advanced clinical phase. We have also advanced and matured and have validated our approach across several product types and can now work with companies in this industry sustainable levels.
With the deconsolidation of OMPULs, we believe our decentralized service platform can now function as an independent entity as it continues to expand the reach globally. It has been rebranded as Octomera, with the name Octomera expressing the unique characteristics of the Octopus, its capability to adapt and integrate to a wide range of spaces.
It's decentralized intelligence. Octopus arm's can actually think independently of the central brain. The ability to regenerate the limbs and the ability to reach out in all directions. The [main] part of the names come from the word Chimera, which signifies our ability to genetically modify cells.
Because of the head start, this has given us in the market, we have now proven our model and Octomera is positioned as a clear leader in terms of providing decentralized services. The industry itself is also maturing and cell and gene autologous therapies once considered almost a science fiction are now becoming a viable approach for therapeutic treatment with more and more therapeutic areas targeted.
A good example is the CAR or chimeric antigen receptor approach, which the patient's immune cells are genetically modified, we may target a specific target. CAR was first used only to treat blood cancer, making history by enabling unheard of clinical results in extremely ill patients and have now expanded to multiple modalities, including autoimmune diseases and even cardiac disease.
As the number of therapies goes, and more and more patients acquire these treatments, it has become obvious that the industry must find solutions to reduce costs and enable capacity. And we believe Octomera will play a significant role in providing this solution. Also, once these customers start working with us, as I have discussed in the past, we become central to their entire production process and regulatory approval.
This leads to a long-term collaborative relationship and interdependency. As it progresses to various stages of clinical trials, so do we and ultimately into commercialization together. Our strong process development capabilities, coupled with our going GMP capacity enables us to decentralize the supply of cell and gene therapies in various regions.
By initially developing a robust production process programmed into our proprietary agnostic and flexible [options], the production can be efficiently scaled and transferred to various locations in the network. We have our initial locations, which have operated directly by us, but we have also identified regional partners at which we can work that can support the expansion of the network to meet local demand.
This allows us to reduce regional overhead and expand our reach and providing decentralized services. It is also part of our strategy of providing a standard for the industry and utilizing available resource and integrating innovative technologies into the platform. We have successfully implemented a certified academic program to support additional recruitment and are performing multiple Tech transfer to additional sites for production stage products supplied at existing sites.
We continue to support the growth of our network, which now spans North America, Europe and Asia and the Middle East, compromised with both point-of-care centers, which serve as hub for the entire region. In Europe and Asia and the Middle East, Octomera is already providing production services.
It is still setting up point-of-care centers and strategic hubs in the U.S., implementing procedures in GMP in the international hubs. In order to maintain Octomera's value as an industry leader, it must not rush at the cost of not complying with its (inaudible) quality requirements. There can be no compromise on this issue as this both legal and an ethical beauty. Octomera recently reached an important milestone and its collaborated...
(technical difficulty)

Unidentified Company Representative

Vered Caplan has rejoined. Vered Please proceed.

Vered Caplan

Sorry for being disconnected. Octomera recently reached an important milestone in its collaboration with the University of California. Specifically signed a partnership agreement to deploy OMPULs, [QC] data and other healthcare universities within the state of California. They are now setting up the first hub, which we expect will expand over time.
We believe that having UCD university, UC Davis University as a partner is also strong validation and is likely to enhance the sales process with other institutions as Octomera expand it's services across America. This agreement sets out the stages approach which Octomera will install and operate OMPULs, enable the point-of-care platform to produce therapies with hospitals throughout California, empaneling on-site production for clinical trials like cell and gene therapies in development at UC Davis' Health Alpha Stem Cell Clinic as well as marketed products for patients of the hospital.
Orgenesis has also developed additional assets that are positioned to be integrated into a decentralized model. One unique asset has been developed by MiNA Biotech, our wholly owned subsidiary under the support of a prestigious EU grant. We've seen an explosion in the market in terms of new therapies utilizing induced pluripotent stem cells known as iPSCs.
MiNA has developed a unique technology and capabilities to support production of autologous iPSC therapies, including using microfluidic technologies and Artificial Intelligence. This project is advancing rapidly and is already being integrated into areas such as neurological conditions, diabetes and oncology.
We are working in collaboration with several companies to integrate this for decentralized production. We believe that this will further propel and sustain our position as an innovative leader in the market. We also have other innovations in therapeutic technologies that state-of-the-art vectors and delivery technologies that have developed low-cost capital -- and have developed a low-cost, capital-efficient business model to bring these technologies to market.
These technologies target a broader lay of indication for immuno-oncology, antiviral, to metabolic and autoimmune disease, tissue generation and more. We are leveraging government grants and other sources of non-dilutive funding from regional partners in order to advance this.
More broadly, our strategy involves in-licensing technologies from leading research centers, hospitals and biotech companies industrializing them so they can be utilized in a decentralized approach and out-licensing them to development partners, benefiting from co-development related payments. By designing these technologies to be integrated into a decentralized point-of-care model, we believe these therapies and technologies can be advanced through clinical trials at a lower cost than traditional ones by leveraging our network of academic institute and health care systems around the world.
Through this network, we are establishing key strategic partnership and licensing arrangements for several of these assets. And while our partners are responsible for funding development and clinical trials, we get paid for supporting the development efforts.
As these program progress, we expect to increasingly benefit from revenue sharing of [dividends] with our partners as we seek to advance with respective therapy through commercialization. Our subsidiary Koligo therapeutics continues to supply Kyslecel to Medical Institute for total pancreatectomy with islet autotransplant cases. As previously announced, Koligo passed an FDA inspection for the site as a registered tissue production establishment. Following this confirmation of the infrastructure design and production protocols and building on increasing demand, we are now aiming to expand capacity in the U.S. and internationally.
In the EU, Koligo is utilizing the expertise of Orgenesis to enable regional production capacity and leverage [gas] to drive clinical development. We also aim to expand into type 1 diabetes market valued at over $7 billion. So to wrap up, we continue to progress toward our goal of winning life-changing cell and genes therapy treatments to large number of patients that reduce cost under a decentralized strategy.
Following the successful sale of Masthercell, we invested in the technology and methodology required for setting up a decentralized platform. We also invested in building out capacity for providing services in the EU, U.S. and the Middle East, which has generated revenue in the range of $35 million annually over the past 2 years. We have now built up an independent service company, Octomera, that following the investment from Metalmark is now expanding in the U.S. market.
We have developed a pipeline of products into diabetes field with Koligo leading the way with Kyslecel, currently provided and reimbursed at leading entities in the U.S. With the goal of expanding its services under a decentralized approach both to additional regions and additional therapeutic modalities. We have developed a unique capabilities in the iPSC field being integrated into therapeutic modalities.
We have developed and in-licensed multiple technologies integrated into a point-of-care therapeutic target and developed on the partnerships and licenses. We believe that by partnering and bringing in financial support at the subsidiary level, we are optimizing shareholder value. Importantly, we are still in the first inning and building value in the biotech market, either as a service or as a solution or technology provider.
And that value of a solution and technology provider cannot be measured in months or quarter, nor achieved in a year or 2. We believe we have a deep understanding of this industry through our relationship with industry groups, technology provider, a leading research institute we are always one step ahead in understanding what are the industry needs and have developed solutions and services that target such requirements like Masthercell whose value was not obvious to non-industry parties, it may take time for the 2 value activities are fully realized.
Orgenesis is a company that has a goal of implementing amazing scientific achievements of the last decade into an industrial approach, enabling the patients who need these breakthroughs to benefit from them. We believe that tremendous economic value in advancing this capability, both as a service and as a technology provider, and we have spilled no efforts to achieve these goals as quickly as possible in the last 3 years despite extremely challenging economic conditions.
I am proud of our mission and of our team's achievement. We are providing this industry a strong foundation in which to go and believe we will be among the first benefits from these goals. Octomera is the only company with full service capabilities to support cell and gene decentralized production. In this regard, we have positioned Octomera at the forefront of this industry.
There are other companies, some of them quite large that is developing technology for decentralized production, but these are devices, not solutions, which makes Octomera very unique. These companies announcing the shift in the market and need a decentralized service platform on which to integrate through equipment. And ours is the only platform that has already been incorporated into production and clinical.
All that said, our first and foremost considerations have always bring life-saving therapies to market while driving value for our shareholders. Importantly, we've built a scalable reoccurring revenue business model that will support the growth of the industry and the growing capacity requirements of our partners and customers.
We hope to benefit from growth in high margins, recurring revenue streams based on future royalties and long-term agreements contracts for industrializing and supplying these cell and gene therapies. One final note I'd like to welcome Elliot Maltz, who is recently appointed CFO for Orgenesis effective September 1. Elliot brings 16 years of accounting and corporate finance experience working with public and private companies specializing in the biotechnology, medical device and manufacturing industries.
We believe his strategic insight and experience will be invaluable as we enter our next phase of goals. I would like also to personally thank and express our sincere gratitude to Neil Reithinger for his significant contributions following years of dedicated service. We are always appreciative of the support of our shareholders and investors and hope they appreciate the endless efforts we invest in making Orgenesis a best-in-class company.
We look forward to sharing more developments to be announced in the weeks and months ahead. On that note, I'd like now to turn the call over to Neil Reithinger, our Chief Financial Officer.

Neil Reithinger

Thank you, Vered. Revenue for the 3 months ended June 30, 2023, was $7 million compared to $7.2 million for the 3 months ended June 30, 2022. We recorded an increase in POC cell processing revenue in the amount of $375,000 as a result of new signed cell processing contracts in the Octomera segment, and an increase in cell process development services revenue in the amount of $5.7 million, offset by a decline in the POC development services revenue of $6.3 million, mainly in the Octomera segment.
Cost of revenues for the 3 months ended June 30, 2023, were $3.2 million as compared to $1.1 million for the 3 months ended June 30, 2022, representing an increase of 204%. The increase was due to increased cost in the Octomera segment, including additional salaries, professional fees, raw materials and depreciation expenses incurred mainly related to higher cost of revenues, of process development and POC cell processing, the revenues of which increase.
Selling, General and Administrative expenses for the 3 months ended June 30, 2023, were $3.3 million compared to $2.8 million for the same period last year representing an increase of 19%. The increase in Selling, General and Administrative expenses in the 3 months ended June 30, '22 compared to the 3 months ended June 30, '21 is primarily attributed to an increase in salaries related to expenses, professional fees and other General and Administrative expenses in the Octomera segment due to the ramp-up activity, offset by a decline in accounting and legal fees.
Operating loss for the 3 months ended June 30, '23 was $3.3 million compared to $4.7 million for the same period last year. Net loss for the 3 months ended June 30, '23 was 3.7%, a decrease of 33% compared to $5.5 million for the same period last year. Comprehensive loss attributed to Orgenesis for 3 months ended June 30 was $3.8 million, which included the translation adjustment due to deconsolidation of Octomera of $384,000 and comprehensive income attributed to noncontrolling interest of $466,000.
We recorded a decrease of 35% in comprehensive loss attributed to Orgenesis Inc. compared to $5.7 million for the same period last year. In terms of liquidity, we ended the quarter with cash, cash equivalents and restricted cash of approximately $1.2 million. This does not reflect the most recent funding from Metalmark into Octomera. 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 POCare services.
It is important to note that while we still have significant influence over Octomera and still on approximately 75% following a deconsolidation, the assets and liabilities of Octomera did not show up on our balance sheet. Finally, we remain focused on carefully managing expenses for our POCare therapies through cost-effective international partnering and licensing strategy and nondilutive grant funding. Operator, we'll now open the call to questions.

Question and Answer Session

Operator

(Operator Instructions)
And our first question this morning is coming from Bruce Jackson from The Benchmark Company.

Bruce David Jackson

With regard to the University of California agreement, it looks like you expanded during the quarter. So the first site was at UC Davis, and I just wanted to check and make sure I heard this correctly that there were 2 other sites that you were now working with. And then do you have a rough idea of how many sites in total you could expand to?

Vered Caplan

So we have other site but not in California, okay? And that's -- at the moment, we'll just focus on one site in California because we -- it's better to validate that site and then expand. I think in general, we were talking about 5, but again, let me just explain again that when you talk about a site, okay, a site can serve multiple hospitals, okay, multiple it can manage multiple OMPULs or multiple indications. So one hub can host 1 OMPUL, 10 OMPULs depending on how much. So it's really about regional reach, you want these service to get to the location a few hours away, right? So don't think of a site as just one OMPUL to a hospital. Let's confirm this misconception.

Bruce David Jackson

Okay. So the sites can have different capabilities and they're not directly comparable is what you're getting at?

Vered Caplan

Yes. Yes, they can -- each site can increase capacity. I mean, for instance, our [greek] site have several OMPULs targeting different indications, okay? I'm just giving a example. But it's not one site the hospital, it doesn't work that way. One site can offer anything in the vicinity of a couple of hours away.

Bruce David Jackson

Okay. And then with Koligo, on a past call, you discussed that you might be able to take some of that capability to international markets. Is that still the -- is that -- are you thinking about that?

Vered Caplan

Yes. Yes. But we'd like to have that funding supported. We do have that. Kyslecel is actually included in Belgium grant at the moment. So we hope to utilize that to expand the European -- to the European market.

Bruce David Jackson

Okay. And then just last question about the cell process development services, it's been ramping. While the other -- the POCare business has been kind of been peeling off. And actually, it's been kind of -- I guess the question here is with the mix between those 2 businesses, should we expect that the cell process development services are going to continue to ramp?

Vered Caplan

So let me explain this, okay. So that's why -- and I've explained this. I think I've mentioned this in another call, it's very difficult to, I'd say, kind of partition this revenue and our business by quarters. And we used to have the same issues with Masthercell? Because what happens is, I mean, for the past quarter, when you have a new customer, you basically focus a lot on PD. Now you finished, let's say, some -- a certain phase or a certain production phase. And now you're waiting for an existing customer for the next one. So it really actually reflects the fact that we've moved to a few several new customers more than anything else, okay? And it's just a timing issue in terms of this quarter happened to be this, next quarter, maybe something else.
So -- but yes, in general, in concept, we want to maintain a strong process development capability. Why? Because that each time builds up the pipeline for new production capacities, but they're very interconnected. And even the line of what is actual production and what is considered post development is not that clear cut.
You may be producing batches, but for development reasons or other reasons. So it really reflects the fact in this last quarter of bringing in new customers that initially need post development.

Operator

(Operator Instructions) And there are no further questions in queue at this time. I would now like to turn the floor back to management for closing remarks.

Vered Caplan

I'd like to thank everyone for participating on our Second Quarter 2023 Business Update Conference Call. We are excited about the outlook for the business and appreciate the support of our shareholders. We look forward to providing the updates as we advance our therapeutic targeting technology pipeline, expanding our point-of-care platform and deploying our onto worldwide. Thank you very much.

Operator

Thank you. 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.