DiaMedica Therapeutics Inc. (DMAC) Earnings Call Transcript & Summary

Lisa, thank you, and good morning everyone. We hope all of you are well and safe. We're glad to have you with us for this discussion of our business update and the results from 2020's second quarter. Yesterday, following the market's close, we issued a press release that included a business update as well as our financial results for Q2 2020, and we filed our quarterly report on Form 10-Q too. Both documents are available in the Investors and Media section of diamedica.com, our website. With me today are Scott Kellen, our Chief Financial Officer, and Dr. Harry Alcorn, our Chief Medical Officer. Before anything else, I want to touch on a few points about the public offering that closed this Monday. You're probably already aware that Guggenheim Securities took the role of lead book-running manager, Craig-Hallum was a joint book-running manager, and National Holdings served as lead manager. That deal generated $23 million in gross proceeds — an amount that accounts for the underwriters using the overallotment option in full — and the shares were priced at $5 apiece for the public. We've stated repeatedly over the past several months that, in our view, our capital is adequate to get us to the Phase II data for the first 2 cohorts of the REDUX CKD study. Our position was that we wouldn't pursue more capital before having those results. That said, we've also been upfront that a solid justification for departing from that approach would be the chance to bring in well-known biotech funds whose participation would amount to independent validation of DM199. Throughout this past summer, we kept telling our story, along with findings from our ReMEDy stroke study and our CKD plans, to quite a few biotech funds. Not long ago, we received an opportunity to run an offering involving specialist biotech funds, and that opportunity is what prompted this offering. Institutional investors made up the primary buyers in the offering. We'd love to name the new investors for you, but we're not able to until they report their positions. I'm confident our shareholders are going to be pleased with who these new investors are. In addition to those new investors, it was genuinely gratifying to see a number of our existing investors participate in the offering too. We intend to use the offering's net proceeds to keep funding clinical and product development efforts for DM199, and that covers bringing in a third cohort of diabetic kidney disease subjects for our REDUX study as well as launching our upcoming study in acute ischemic stroke. The net proceeds will additionally fund team expansion to support that added workload, along with other working capital needs and general corporate purposes. Now, to give you my updates regarding the REDUX trial that's currently running, I'll walk through where we stand clinically in our DM199 research for CKD. In July 2019, we wrapped up a Phase Ib clinical trial of DM199 that enrolled patients suffering from moderate or severe CK — meaning chronic kidney disease, or CKD — resulting from Type 1 or Type 2 diabetes. That trial was designed to look at how three different amounts of DM199 behave in the body — namely 3 micrograms per kilogram, 5 micrograms per kilogram, and 8 micrograms per kilogram, each administered as a single injection under the skin — while also checking safety, how well it was tolerated, and secondary pharmacodynamic measures. Based on what the trial showed, we concluded that giving up to 5 micrograms per kg to patients with moderate CKD would probably restore KLK1 to the level we regard as normal. That gave us confidence in the dosing approach for the CKD trial we're currently running. Overall pharmacodynamic data looked good, with near-term improvements in estimated glomerular filtration rates, or EGFR, of about 4.6 mLs on average, along with the urinary albumin to creatinine ratio, or UACR. Once we removed participants whose UACR was in the normal range, the mean reduction in UACR reached 23%. These gains occurred at the same time as the hormones nitric oxide and prostaglandins peaked. Our view is that the effects came from the drug, because the largest changes appeared around 24 hours after DM199 was given and diminished from there. Next, we completed a post hoc analysis of endpoints from the ReMEDy stroke study, focusing on a subgroup of patients with impaired kidney function, identified as those having an eGFR under 90 along with elevated blood sugar around 7 millimoles. This group corresponds to individuals with diabetic kidney disease, and it comprised 25 participants: 9 received DM199, while 16 were given placebo. Despite the limited sample size, those on DM199 showed a statistically significant gain in kidney function, as assessed by eGFR, compared with placebo — a mean difference of 12.7 mLs on day 22. When patients stopped taking DM199 and stayed off it for 34 days, the average gain in their eGFR levels was still there — which might point to a lasting effect. Compared with placebo, those who received DM199 additionally experienced lower blood glucose, showing a mean downward trend of 2.2 millimoles. In our view, the product profile of DM199 for people suffering from diabetic kidney disease might cover better kidney function as measured through eGFR as well as albinuria, together with lower glucose and diabetic retinopathy, all while cutting the chance of recurrent strokes. Our belief is that DM199 achieves this by bringing KLK1 levels back into a normal healthy range. Also, when it comes to the regulatory side, there's reason for optimism. The National Kidney Foundation has been working with the U.S. FDA and the European Medicines Agency on a scientific workshop collaboration over the past several years, and based on that, we may get new thresholds for registration studies covering diabetic and chronic kidney disease treatment that are potentially lower. Those thresholds would rest on eGFR together with albinuria. Should these new metrics gain acceptance, the clinical burden could drop substantially. With everything we've observed, we're eager to move ahead with a third cohort in the REDUX Phase II CKD trial, and that cohort is going to center on individuals living with diabetic kidney disease. To sum up, the REDUX Phase II CKD trial is going to have 90 people enrolled, split evenly among 3 cohorts. Participants in the first cohort have IgA nephropathy. The second is made up of African-American patients with CKD and high blood pressure, but no diabetes. Diabetic kidney disease is the focus of the third cohort, which was just added. Everyone in the study will be given DM199 for about 13 weeks, dosed at 2 or 5 micrograms per kg, injected under the skin twice a week. When looking at the entire study, eGFR and albinuria serve as the primary efficacy end points. As for the secondary end points, they focus on measuring the potential of DM199 to produce a beneficial effect on whatever underlying disease is driving each participant's CKD. We mentioned recently that, as of August 5, 2020, the REDUX study's first 2 cohorts were roughly 1/3 enrolled. The measures implemented to combat the COVID-19 pandemic have caused enrollment to lag behind what we expected. In our view, this results from a combination of factors: certain clinical study sites have scaled back or stopped activities while they address the safety of their staff and patients, along with related concerns, and patients themselves are worried about visiting clinical sites.

We expect the COVID-19 pandemic will probably keep hurting our capacity to recruit or enroll subjects, and right now, although we've lately seen screening activity pick up with a handful of participants ready to enroll, we still can't give guidance on enrollment and completion of the study; in July we brought on a 13th study site to help with subject enrollment, and we'll look at adding more sites if conditions call for it. Although results seen so far in the REDUX study point to a safety profile in line with earlier studies, we don't have enough data at this point to assess our comment efficacy. The third cohort in diabetic kidney disease is going to use the existing 13 clinical sites; and after COVID-related pressures let up, we don't expect that adding a third cohort will hurt recruitment in the first 2 cohorts. We're also still optimistic that, given the limited participant contact the REDUX study design requires, sites can move ahead faster, resuming recruitment and screening for the REDUX study once COVID-related pressures ease. Moving to our stroke program, and for those of you who are new listeners, DM199's 24-hour treatment window after an acute ischemic stroke is meant to offer a treatment option to the roughly 90% of stroke patients who qualify for neither mechanical thrombectomy nor tPA. Care for such patients is confined to palliative care, centered on rehab and symptom management. When we examine the ReMEDy data set and look only at those patients who most closely match the population we intend to treat with DM199 — those who didn't undergo mechanical thrombectomy and those who didn't respond to tPA — we observed a positive therapeutic effect among patients given DM199; this group totaled 46 participants, 25 of whom received DM199 and 21 of whom were on placebo. The findings showed that 36% of participants in the DM199 group reached a full or nearly full recovery by day 90. This was measured through an NIHSS score of 0 or 1. Among the placebo group, just 14% of participants reached a full or nearly full recovery; that amounts to a 22% absolute increase and a share of participants achieving a full or nearly full recovery, or also a 157% relative increase. Furthermore, subject deaths fell from 24% in the placebo group to only 12% in the DM199 group, a 12% absolute decrease in subject deaths. Though these results rest on a comparatively small number of subjects, it's worth noting that DM199 results rested on a 24-hour therapeutic window to first dosing. That compares with tPA, today's standard of care, which showed an improvement of approximately 11% in full or nearly full recoveries with an initial treatment window of 3 hours for stroke and first approval. I'd add as well that kallikrein — which is the human version of KLK1, taken out of human urine — got approval in China on the basis of efficacy comparable to what we saw with DM199. By our calculations, more than 0.5 million patients have been treated with kallikrein for acute ischemic stroke. Turning to what's ahead for our stroke program, right now we're putting together a protocol for a proposed Phase III trial of DM199 in stroke treatment. To help with that, we've brought on a global consulting firm to give us an independent assessment of our target's product profile and the clinical end points we've proposed, plus input from payers and neurologists. We also want to make sure we're hitting the economic end point needed to back product deployment and reimbursement for DM199; at present we're completing a meeting request for a type B meeting with the U.S. FDA. We expect to submit that request before long. Should the FDA say yes, the meeting would in all likelihood happen this fall. At this point I'd like to hand things to Scott Kellen to walk us through the Q2 2020 financials.

Thanks, Rick. Morning, everybody. As Rick said, we put out our financial results for the second quarter of 2020 and filed the 10-Q yesterday once the markets had closed. In case you haven't looked at those documents yet, you can find both of them on the DiaMedica website or the SEC website. For the second quarter of 2020, our net loss came to $2.5 million, or $0.17 per share. For the 6 months ended June 30, 2020, our net loss was $4.9 million, or $0.36 per share. That's against a net loss of $2.5 million, or $0.21 per share, for the second quarter of 2019, and a net loss of $5.7 million, or $0.48 per share, for the 6 months ended June 30, 2019. Our research and development expenses fell to $1.6 million for the 3 months ended June 30, 2020, from $1.9 million for the 3 months ended June 30, 2019 — a drop of $0.3 million. R&D expenses declined to $3 million for the 6 months ended June 30, 2020, versus $4.5 million for the 6 months ended June 30, 2019, a reduction of $1.5 million. The decline in the 6-month comparison largely stemmed from nonrecurring costs of roughly $1.3 million that we incurred for a new production run of the DM199 drug substance during the 6 months ended June 30, 2019, along with a net drop in year-over-year clinical study costs. That drop in clinical study costs came from a combination of lower costs for the ReMEDy stroke study as it winds down this year and the nonrecurring costs of the Phase Ib CKD study, which began and finished in the first half of 2019. Partly offsetting these declines were costs for the REDUX Phase II CKD study, which started late in 2019, plus higher noncash share-based compensation costs. Our general and administrative expenses were $1.1 million for the 3 months ended June 30, 2020, compared with $867,000 for the 3 months ended June 30, 2019. G&A expenses rose to $2.1 million for the 6 months ended June 30, 2020, an increase of $0.4 million from $1.7 million for the 6 months ended June 30, 2019. The rise in the 6-month comparison was mainly attributable to higher noncash share-based compensation costs. Total other income fell to $243,000 for the 3 months ended June 30, 2020, from $280,000 in the prior year period. Total other income declined to $231,000 for the 6 months ended June 30, 2020, versus $458,000 for the 6 months ended June 30, 2019. The drop in the 6-month comparison is mainly tied to lower R&D incentives linked to decreased ReMEDy stroke study costs during the 6 months ended June 30, 2020, partly offset by smaller foreign currency transaction losses. Now on to the balance sheet. We ended the second quarter of 2020 with cash, cash equivalents and marketable securities of $11.8 million, current liabilities of $1.2 million and working capital of $11.2 million. At the close of 2019, that figure stood against $7.9 million held in cash, cash equivalents and marketable securities, alongside $1.3 million of current liabilities and $7.5 million in working capital. Our February 2020 public offering of common shares accounts for the growth in both the company's combined cash, cash equivalents and marketable securities and our working capital. Then, on a pro forma basis, once you account for that public offering, which wrapped up on Monday, our cash, cash equivalents and marketable securities come to $32.9 million; so to repeat what Rick noted, this week we finished a public offering of common shares, bringing in gross proceeds of $23 million, with estimated net proceeds of $21.1 million. With the capital we now have, we should be able to finish all 3 cohorts in our REDUX Phase II clinical study, launch a Phase III study in acute ischemic stroke, and finance our planned operations for the next 2 years. Beyond that, our expectation remains that the delay in the REDUX study will shift when costs are incurred but won't lead to a significant overall rise in costs, since we are running this study internally. That said, we keep evaluating how the pandemic affects our REDUX trial by tracking the spread of the COVID-19 virus and the measures taken to fight the virus, and we will keep providing updates. At this point, let me hand the call back to Rick.

Thanks, Scott. Now we'd like to start the Q&A portion. Lisa, could you go ahead and bring in our first analyst?

Thanks for giving us those enrollment numbers. They really helped. During the first few weeks of August, what kind of trend has enrollment shown relative to the prior several months? And since we keep hearing about centers reopening, we're noticing that enrollments are slowing across the whole of health care. Is that deceleration truly about patients not wanting to try something new right now simply because of COVID, or is it instead that patients still just aren't returning to the clinic yet?

Yes. Thank you, Alex. Yes. I mean, it's encouraging that we're seeing screening volumes rise. The difficulty is plainly tied to patients' reluctance to visit the clinic. If we go back to earlier this year, we changed our protocol so that patients would need to make only the initial visit. That way the screening could be performed at their home or office by a nurse, they come in to the clinic for the first dose, and then everything else — actually, all the dosing, the vitals — can be handled at the patient's home or office; but plainly, there are some concerns about even making one visit, and we're observing that more among the African-American group than among the IgA, so it's something we're working on. I think we've identified the patients, it's just a matter of them reaching their comfort level where they'll come to the clinics for that — literally, for that first dose. And after that, everything else can be handled at their home or office.

All right, that makes sense. And I get that IgA counts as an uncommon condition among African-American groups, which represent a fairly sizable population, yet they still want to take part. So is the next constraint, then, the African-American cohort requiring that individuals not have diabetes? I'm simply asking what danger comes with broadening that group so that African-Americans with diabetes could join.

No, finding participants isn't something that worries us, whether for the first 2 cohorts, which have been signing up since early this year, or for the third one involving diabetic kidney disease. Harry has collaborated quite closely with the 13 sites. At a lot of those locations, he already had prior connections, and efforts have focused on locating suitable patients. As a result, the individuals at those clinics are already located. Honestly, all that remains is making each patient feel at ease enough to visit the clinic.

Got it, that makes sense. Now regarding the third cohort in the kidney study, are you aiming to show that DM199 is capable of enhancing kidney function, or lowering blood glucose, or possibly both? This ties back to the earlier use case of DM199 for bringing down blood glucose. Also, would you anticipate that this third cohort enrolls faster compared to the other 2?

Yeah. When it comes to the reasoning behind diabetic kidney disease, after we examined the ReMEDy stroke data and conducted a post hoc subgroup analysis, focusing only on those individuals who were diabetic and had chronic kidney disease, we observed a 12.7 mL change in eGFR compared to placebo that reached statistical significance, and it really stood out to us. We also examined early indicators of retained benefit 34 days afterward. So with the addition of this third cohort, over the longer term, I genuinely envision DM199 being applied to chronic kidney diseases in patients who will — who have diabetic or chronic kidney disease, improving both eGFR and albinuria while simultaneously reducing glucose in those diabetic patients, and also improving retinopathy — diabetic retinopathy, in particular. In Japan, porcine KLK1 is known to carry a label and sees widespread use through directly cleaving VEGF in the eye, and beyond that, when we examine our drug's profile, it can also assist in addressing some complications, such as helping to lower the occurrence of recurring strokes. So when we view it as a profile, for a drug that I simply describe as protein replacement therapy, it possesses a wonderful profile. This simply provides us with additional options, so once the REDUX study finishes, we can review the data. We can determine where — which cohort will show the great — the most compelling clinical effect, while also factoring in, from a regulatory standpoint, the pathway, so we might either pursue going rare, or alternatively we can — near term, or alternatively we could, in a more near-term fashion, consider going toward diabetic kidney disease, but recognizing — it would be extremely helpful for us to recognize that over the longer term, a genuine opportunity could exist here for treating the larger diabetic kidney — chronic kidney disease patient population.

All right. That's very useful, thank you. If I may, I have 2 additional questions about stroke. The FDA meeting on stroke appears to have slipped by just a couple of months compared with what was originally expected. What's behind that delay? Or is it simply that analyzing all the data takes time, assembling a package for submission to the FDA, all while COVID and a work-from-home setup are in play?

Yes. No, that's a great question. Our package is very nearly ready to submit. What we want to do prior to sending it in, though, is this: we brought in a global consulting firm that is genuinely assisting us with the product profile, gathering input from payers and from neurologists, so that we truly have — we completely grasp the profile before that submission, allowing any further questions to be folded in. So yes, it's moving back a little from what we first expected, but the timelines for when we believe we can launch the ideally the Phase II trial aren't changing.