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

Appreciate that, Laura. Morning to all of you. Trust everyone is well and staying healthy, and it's my pleasure to welcome each of you to the call covering our business update for the third quarter of 2020. Yesterday, once trading had ended, we put out a press release containing a business update along with a summary of the financial results we recorded for Q3 2020. Alongside that, we submitted our quarterly reports on Form 10-Q. You can locate both of those documents over in the Investors and Media portion of our site, @diamond.com. Sitting with me this morning are our Chief Financial Officer, Scott Kellen, and our Chief Medical Officer, Dr. Harry Alcorn. To begin, I'd like to update everyone on our REDUX trial, which is where we're developing DM199 as a therapy for chronic kidney disease, or CKD. REDUX is an open label, multicenter Phase II study targeting 90 patients with CKD, divided into three cohorts of 30 patients apiece. The initial cohort focuses on nondiabetic, hypertensive African-Americans with Stage II or III CKD and albuminuria — a group at higher CKD risk than Caucasians; we should also note that for African Americans with the APOL1 gene mutation, the chance of developing CKD rises even further. So for that reason, we're looking at the APOL1 gene mutation as an exploratory biomarker inside our study. The second cohort is signing up individuals who have IGA nephropathy. Cohort two focuses on participants dealing with Type II diabetes, hypertension, and albinuria. We launched Cohort three with DKD participants back in August, partly motivated by some exciting results from our remedy Phase II Stroke trial that finished earlier this year. More precisely, this came from a post hoc analysis examining a subset of participants thought to have diabetic kidney disease at the time they enrolled. DKD was defined as an estimated glomerular filtration rate, or eGFR, below 90 mL along with glucose above 7 mmol. Those subjects given DM199 saw a statistically significant mean improvement of 12.7 mL in eGFR compared with placebo across the 22-day treatment period. On top of that, the group receiving DM199 saw a mean reduction of 2 mmol in blood glucose levels. We further observed that the DM199 group showed a retained eGFR benefit amounting to a mean improvement of 8.8 mLs at day 56, which came 34 days off drug; in our view this is a highly intriguing signal pointing toward possible retained eGFR benefit, something that could render DM199 entirely unique within the chronic kidney disease and DKD therapeutics space, with the potential to meaningfully better patients' conditions. The second reason we're looking at participants who have DKD has to do with a potential shift in how regulators in both the US and Europe might view registration studies. Earlier this year, the National Kidney Foundation headed up the publication of a special report. That report grew out of a scientific workshop collaboration that the National Kidney Foundation has been running for the past several years together with the FDA, the EMA and industry. What that report put forward is that regulators should lean on surrogate endpoints — things like early changes in albinuria and/or a slower rate of GFR decline — as the basis for granting conditional approval in CKD clinical trials. Should these new metrics gain acceptance, the clinical load could shrink considerably, cutting down how long it takes to bring a therapy such as DM199 to patients awaiting novel treatments, and it would boost drugmakers' enthusiasm for this area even more. Just a brief note before I go on: those taking part in the REDUX CKD trial will get DM199 for roughly 13 weeks across two dose levels. For the study as a whole, the primary efficacy endpoints are gains in albinuria and eGFR. Among the secondary endpoints is an assessment of whether DM199 might favorably alter the disease's underlying course. Yesterday we told you that by the end of last week—October 30—our total enrollment had reached 49 subjects, compared with 18 as of August 5. Broken down, that's 11 people in Cohort 1, 13 in Cohort 2, and 25 in Cohort 3. We're obviously pleased that the diabetic kidney disease cohort is nearly fully enrolled. This rapid pace reflects a large patient group that meets the criteria for diabetic kidney disease. Our DKD cohort should finish enrolling by year-end, and we anticipate having topline data in the first half of 2021. As for Cohorts one and two, sign-ups there have continued much more slowly than we had projected. Based on what our study sites have told us, people who might qualify are still hesitant about taking part in the trial. A good number of these people are viewed as having compromised immune systems, which elevates the danger from COVID; we think such worries have probably grown given the recent reported surge of COVID infection and infection rates, and in certain instances, rising infection rates have likewise led to a scaling back or halting of activities at a few of our study sites. Although we expect the COVID pandemic will probably keep hurting our capacity to recruit or enroll subjects in Cohort one and two, we are pursuing steps to better the situation; we recently brought on two study sites and are collaborating with existing sites to widen the referral network. Additionally, we continue to evaluate other locations as a way to expand recruitment further. Now, regarding our stroke program, we're very pleased to share that the FDA has agreed to our request for a type B pre-NDA meeting, where we'll review our accumulated clinical and nonclinical data, the clinical study design we're proposing, and several other regulatory matters. Their acceptance came with no stipulations, and they've opted to provide written feedback by early December. We believe we have a strong basis in the nonclinical and clinical data generated to date, and that confidence is of course supported by how widely the efficacy of approved KLK1 products—those derived from human urine and porcine pancreas—has been utilized in Japan, China, and Korea. When we asked for this meeting, we sent the agency a number of questions so they could make clear what would be required prior to moving forward with clinical development of DM199 in acute ischemic stroke, or AIS. Those questions include whether the nonclinical work finished to date is enough, what additional nonclinical work remains, and ultimately whether they agree that the data we have accumulated so far supports moving into a seamless Phase 2, 3 adaptive study. We additionally asked about the timing for pursuing fast track and breakthrough designation. What we want is to conduct a well controlled trial capable of supporting a commercial approval filing. We think the Phase 2, 3 adaptive design we have proposed can get us there. Under an adaptive design, once the interim analysis is finished, DiaMedica will stay blinded to the study results, while the Data Monitoring Committee examines those results to decide if the trial should proceed as planned or if the sample size needs adjusting so that a statistically significant outcome is achieved. We look forward to giving everyone an update once the FDA's feedback arrives in the coming weeks. We continue to feel optimistic about DiaMedica's therapeutic potential for patients suffering from acute ischemic stroke. During the second phase of our remedy trial, looking at the group without mechanical intervention, we saw an absolute rise of 22% — which works out to a 2.5-fold gain — in how many subjects reached an even result versus those on placebo. That measurement relied on an NIHSS rating between zero and one. Don't lose sight of why this matters so much: scoring zero or one for excellent outcome on the NIH scale indicates a person can manage daily life on their own, without assistance for getting dressed, eating, or bathing. For the upcoming Phase 2/3 trial, what we've put forward is to leave out individuals who have large vessel occlusions, along with anyone who received mechanical thrombectomy and TPA beforehand. We think DM199, with its 27-hour window for treatment, could be an effective and safe option for the 80% to 90% of AIS patients who right now can't get TPA and/or mechanical thrombectomy, and whose only other choice is supportive care. As a point of reference, when Clot Buster TPA first won approval, its treatment window was three hours, and it delivered an 11% absolute improvement in excellent outcomes based on an NIH score of 01. Let's move now to the public offering we finished recently. This year on August 10, we closed an underwritten public offering with $23 million in gross proceeds, and net proceeds came in at just over $21 million. The money we raise is going toward the new DKD group we brought into the REDUX study, so we can keep advancing DM199's clinical work in AIS, as well as covering other working capital needs and general company expenses. Another point worth noting is that Guggenheim Securities served as the lead book runner overseeing this offering. We're also glad to report that Darrell < > just kicked off analyst coverage of us. At this point, I'll hand things over to Scott Kellen, who will walk us through the financial results for Q3 2020.

Thanks, Rick, and hello everyone. Rick already mentioned that yesterday afternoon we came out with the third quarter's financial results and submitted our 10-Q. Should you not have gotten a chance to review those, you can find both on our site or through the SEC's site. We recorded a net loss of $3.2 million, which works out to $0.19 per share, for the third quarter of 2020. Across the nine months that concluded on September 30, 2020, the net loss totaled $8.1 million, equal to $0.55 per share. This is versus a net loss of $2.4 million, or $0.20 per share, in the third quarter of 2019, along with a net loss of $8.2 million, or $0.68 per share, for the nine months ended September 30, 2019. Breaking that down, research and development expenses increased to $2.2 million for the three months ended September 30, 2020, compared with $1.6 million for the three months ended September 30, 2019. That comes to $0.6 million more, mostly because of expenses tied to the REDUX trial, among them the recent start of the DKV cohort. Turning to the nine months that closed on September 30, 2020: research costs came in at $5.2 million, which is $0.9 million below the $6.1 million recorded during the same nine-month period ending September 30, 2019. For the nine-month stretch, the drop came mainly from about $1.3 million in nonrecurring expenses tied to manufacturing the new batch of DM199 drug substance across the nine months that ended September 2019, along with a year-over-year net reduction in clinical study spending. That clinical study cost reduction, in turn, stemmed from two things: lower spending on the Remedy Stroke Study as it finished and wrapped up in 2020, plus the one-time expense of the phase 1B CKD study, which had its start and finish during the comparable period a year earlier. At the same time, some of that reduction got offset by expenses tied to the REDUX trial, which got underway late in 2019, plus higher costs for manufacturing development and a rise in non-cash share-based compensation. For the quarter that ended September 30, 2020, our G&A expenses came to $1.1 million, compared with $1.0 million for the same quarter in 2019. Over the nine months that ended September 2020, G&A expenses climbed to $3.2 million, which is $0.5 million more than the $2.7 million recorded across the nine months that ended September 2019. Looking at that nine-month comparison, the main drivers behind the increase were greater non-cash, share-based compensation costs as well as higher spending on professional services. Turning to other income: for the three months that ended September 30, 2020, the total came in at $128,000, which was lower than the $225,000 recorded in the same period a year earlier. Over the nine months that ended September 30, 2020, total other income was $359,000, versus $683,000 for the nine months that ended September 30, 2019. The main reason for that nine-month decline was smaller R&D incentives, which reflect reduced remedy stroke study expenses this year, with foreign currency transaction gains recognized this year providing a partial offset. Shifting over to the balance sheet: as of the close of the third quarter of 2020, we had $30.6 million in cash and marketable securities, along with $1.4 million in current liabilities and $29.7 million in working capital. Compared to that, we had $7.9 million in cash and marketable securities, plus $1.3 million in current liabilities, along with $7.5 million in working capital, as of the end of 2019. The improvements in both the company's combined cash and marketable securities and our working capital resulted from our public offerings of common shares in February and August 2020. Rich already discussed the public offering we completed in August; and back in February of this year, we likewise completed a public offering of common shares, which brought in gross proceeds of $8.5 million and net proceeds of $7.7 million. With the capital we have now, we should be able to complete all three cohorts of our REDUX Phase II clinical trial, which includes the DKV cohort that began in August. Beyond that, we can kick off a Phase III trial for acute ischemic stroke and cover the operations we've planned for the coming two years. Our expectation remains that slower enrollment in the REDUX study will move the timing of when expenses hit, rather than adding any meaningful amount to total costs, because as I said, we're running that trial with our own team. Even so, we'll continue assessing how the pandemic affects the REDUX trial by monitoring how far the virus has spread and what measures local officials have put in place to combat it, and we'll keep everyone posted. With that, I'll turn things back to Rick.

Thanks, Scott. At this point, we'd like to begin the Q&A portion. Operator, could you go ahead and bring on our first analyst?

I appreciate you taking the time to explain the differences in enrollment for the IGA type diabetic group. Besides adding more sites, what other steps could help boost enrollment in that group if they simply don't want to come in because of the coronavirus?

Harry, could you speak to that, please?

Yes, hello. This is Harry Alcorn speaking. So we're collaborating with the trial locations concerning the way the communication is being delivered from this particular role at the clinical study site to those patients, to determine whether they'd be open to having a nurse visit them in person at home, or what the main worries are, so we can figure out if it's possible to get past what I'd call their hesitations regarding, first, second, screening for our trial. As you're aware, these patients are few in number and they're scattered across the nation, so the sites we've picked are definitely the correct ones, as we observed in the third cohort with DKD. And so in addition to messaging, in addition to not coordinating with their primary care physician, we've brought on the 2 new sites, as we mentioned before, from Rick and Scott. And then we're inquiring of the physicians at the sites what further networking channels they would suggest too.

Harry, it seems like one piece of this isn't really about bringing the patient in for that initial appointment so they can sign up; the real problem is whether they're comfortable letting a nurse into their house. Is that accurate, and a follow-up: could you, or would you want to, shift the actual sign-up process into the home so it all happens right there?

That's something we're able to do already. The ability is there, and what worries patients isn't that first screening visit where they enroll, so to speak. What bothers them is the three months of continued involvement, with nurses stopping by, and those nurses also see other people. Patients get the impression they might catch something from a nurse who's been around someone else with COVID. So from a messaging standpoint, we're working through how to show them that our procedures are designed to bring their risk down as much as possible.

Got it. Considering how quickly people are signing up for the type II diabetes group, might you increase the number — since enrollment is moving so fast, should 30 patients become 60 patients?

At this point, 30 patients is the trial size we have a lot of confidence in, and we're also eager to get the top line data out to the street.

All right. That sounds excellent. Harry, please continue.

We brought additional locations on board as well. For instance, over in Florida, more precisely Orlando, there are doctors who are connected with each other. These are mainly primary care doctors who have these possible patients that, in their view, might be able to be screened. Those individuals are then sent over to our clinical trial locations. That represents another fresh approach we introduced during the previous month.

Then, is there anything new regarding the talks you're conducting about securing a collaborator for stroke, and my assumption is they'll likely prefer to hold off on committing until they've heard back from the FDA, but do you have any fresh information on those partner discussions concerning stroke?

Absolutely, so we have had a number of continuing discussions, some on a worldwide basis and others focused on specific regions such as China and Japan. Right now, we are honestly only a matter of months away from seeing top-line data for CKD, so our preference is truly to hold off and put ourselves in a situation where, once those results are released, we'll be well positioned to evaluate partners for each indication separately or combined.

Then I have a couple of other things to ask. Regarding that FDA meeting, is it confirmed for December 4, or are you waiting for their feedback with comments by December 4? Also, if the agency chooses to grant a breakthrough designation or a fast track designation, at what point should we anticipate hearing about it?

The guidance we have indicates written responses will arrive by December 4. Among the questions we've submitted to them is the timing for filing a breakthrough and fast-track and related designations. So filing would be something we'd consider looking at not long after that.