Syntara Limited (SNT) Earnings Call Transcript & Summary

Good morning, everyone. The clock has now to past 10:30 a.m. So we will get started with today's special investor briefing with Pharmaxis' CEO, Gary Phillips, who will provide details around a company restructure announced this morning by the ASX. Restructure will help accelerate the company's drug development pipeline, but I'll let Gary discuss that in more detail. My name is Alfred. I'm part of the Pharmaxis Investor Relations team. And I will assist with running the briefing. Just a couple of formalities. This call is being recorded. After the presentation, Gary will take questions from attendees. So if you do have any -- Gary, there's a button at the bottom of your screen with a Q&A speech bubble, just tick that and type your questions in, and we will read through them towards the end of the presentation. With [ saving master ] and Dave from company's history, there's plenty of information to dissect. Gary, I won't take up any more of your time. Let me hand over to you.

Thanks, Alfred, and good morning, everybody. Yes, so as you can see because if you've had a chance to read the press release today is quite a big day in the life of Pharmaxis. We're announcing a major company restructure, which includes the sale of the Mannitol business, creating a new clinical development company, Syntara, restructuring the board and taking more than 60% of our core costs out as well. So I'm going to -- these, of course, I'll try and go through my slide deck in around about 20 minutes and cover some of the detail that's here, but very happy to answer questions at the end and acknowledging that there's a bit more to do here yet. So just as a headline, just to give you -- sort of orient you as to the overall structure of what we're doing today. The first thing is that the mannitol respiratory business, which includes Aridol and Bronchitol, those 2 products, it includes all of the assets associated with that, the IP associated with that, the contracts of our distributors and suppliers and everything else is all being sold to a company called Arna Pharma. We're doing that over a period of a few months, and we've estimated the exit cost of doing that being quite minimal. They're less than $1 million. The company that's left without the mannitol Drug Discovery business in the factory is to be renamed Syntara. That company will be around about 20 to 25 people and it will be focused on drug development primarily to treat cancer and will be -- is designed to be a small agile group that can cost effectively take the pipeline that we've developed at Pharmaxis through into the clinic and into patients. As part of that, we've also renewed the Board, long-serving Chair Malcolm McComas is retiring. Neil Graham, another nonexecutive is retiring as well at the same time. So the Board is being downsized and we'll be under new leadership with Dr. Kathleen Metters, previously the Head of Basic Research at America and CEO of Lycera in the U.S. will be taking over as Chair, Kathleen's been with us a few years. So as an experienced and taking over somebody who really understands our business and again, a small board that fits the purpose of the new company. That new company is going to benefit from the restructuring we're announcing today. We've got a Phase II myelofibrosis clinical trial with the protocol already agreed with the FDA, that's due to commence this quarter, so very quickly now. So we're expecting clinical readout from myelofibrosis and other trials we're running by the middle of '25. So within a 2-year time frame. We're going to benefit also from a significant reduction in the cost base. So the core expenses of the company are reduced by over 60%. So Syntara will be having a cost base, which is $14 million per annum lower than Pharmaxis did. And at the same time as exiting the Mannitol business for minimal cost, we set ourselves up to receive product royalties from Arna Pharma from the net profit of those products going forward as well. So I believe this is a really strong win-win agreement for both companies and sets up a strong future for the Mannitol business in the hands of Arna Pharma, who can -- I'll explain the benefits later on. But at the same time, launches this smaller agile drug development company, really focused on hematologic malignancies, sort of blood-related cancers. So well, I guess the question is why now? So the Mannitol business unit has a high cost, the rent of the manufacturing facility we have and the cost of running a GMP facility is high, something like $10 million per annum. In order to cover that, obviously, we require a pretty large sales base. And the business model for this business unit was always predicated on us generating significant sales of Bronchitol in the U.S. Now over the recent years, we have generated one-off initiatives the sale of the orbital device sale of distribution rights, which have lessened the impact of the cost base that the Mannitol business unit has. And we've seen sales grow strongly, particularly in Russia. But the U.S. sales, the launch happened during just as COVID with us, and they really haven't recovered since then, despite us having the product in the hands of a very experienced distributor in Chiesi and then doing a very good job, we believe, in the launch. We haven't seen the kind of sales level that eventuate that really would turn around the unit against the high cost base we have. And then you can see on the chart at the bottom left there, in terms of sales, we've had the Mannitol business unit over the last 3 years. They tend to be a bit lumpy because we sell to distributors, not evenly every month, but sometimes once every -- once or twice a year. So the sales have been around about the $7 million mark. They haven't really grown over the last 3 years. Whilst the EBITDA, we've been making a loss of around $4 million to $5 million each year. So the deal we've done today is with a company called Arna Pharma. They will own and operate the Mannitol business unit from completion this month. As part of the deal, they will complete a technology transfer to a new facility they're building in Sydney with part of the process going to a contract manufacturing. This will enable us to maintain supplies of Bronchitol and Aridol after the facility is closed in May 2024. This company will be producing the 2 products in a greenfield site, which is going to be producing a lot of different products. This will result in a much lower cost of goods which supports the long-term profitability and will -- means that the supply for Pharmaxis distributors and in patients worldwide is in a much stronger position. At the same time, the Pharmaxis employees will support this tech's transfer, and they will have job opportunities at the new Arna Pharma site in Sydney. So if we go step through the terms of the sale other than that summary, so I've said they'll own and operate the mannitol business unit as of completion in October. So I'm going to deal with those kind of structural issues first, and then I'll go on to the financials. So structurally, they will own and operate the business from the closing in October. The Pharmaxis brand name will continue to be associated with the Mannitol business unit and goes to Arna Pharma. It's a name which appears on the packaging of the 2 products. It's appropriate that the name stays with Bronchitol and Aridol. And then during this transition period to the end of when Pharmaxis gives up its lease on the facility -- its facility in Frenchs Forest in Sydney in May of '24, we will make our employees and the production facility available to support the manufacturing of the Mannitol products under the direction of Arna Pharma. So Arna Pharma will arrange to manufacture and inventory of products to supply the market. So they'll be building up stock during this period in to -- from now until May '24, while simultaneously doing a technology transfer to allow them then to keep a continuous supply to the marketplace. Arna Pharma will also be able to relocate any plant and equipment currently in our Frenchs Forest facility to utilize in its own facility. So we'll really be picking up the factory that we have here and transplanting it into a new facility in -- owned by Arna Pharma, along with many other products that we'll be making there. After the transition period, the distributors and patients will be continued to be supplied with Bronchitol and Aridol. Arna Pharma will produce the bulk mannitol patented powder and capsules at a contract manufacturer. And then there will be -- the primary and secondary packaging and shipping and distribution will all take place from their Sydney multiproduct facility. So that's the structure of what we're doing. The financials behind that is that whilst we'll be responsible until May '24 for the rent of the facility employees, and certain operational costs and closing the Pharmaxis facility here at Frenchs Forest. The sale agreement includes a number of payments from Arna Pharma back to Pharmaxis in relation to those costs incurred over this transition period. Now if we net those 2 things out, Pharmaxis expects its residual net exit costs over this period to be less than $1 million. It's a little bit difficult to put a precise number on it. There's a lot of moving parts here, but we're confident that it's less than $1 million. So after that transition period, Pharmaxis will earn royalties on the operating profits of both the mannitol products, Aridol and Bronchitol, but also all other Arna Pharma products produced at their new Sydney facility for a period of 8 years. So we've turned a situation whereby Pharmaxis was experiencing a loss an EBITDA of negative $4 million to $5 million plus the cost of the lease each year to 1 where from May '24 onwards, the new company will benefit from royalties on net profit that the Arna Pharma make on the products that are being transferred and other products made at the factory. So I think that's a really good outcome for Pharmaxis shareholders, and it gives Arna Pharma also an established product and equipment to do a faster on their new facility getting up and running as well. So for both companies, I think it's genuinely a win-win. So the impact on cash flow, an important slide in understanding the drivers behind what we're doing and how far we've gone in reengineering the business that's left behind. So the sale of the business unit allows the new company to focus its resources and management on the clinical development pipeline. And it removes the need for us to support what will be a noncore business. So clearly, whilst the employees that are currently engaged with the mannitol business unit are -- will be working under the direction of Arna Pharma over the period up until May. There will be lots of job opportunities that are created at the new facility in Sydney, which will be available to those employees. Of the people that remain that will number around about 25. We haven't settled on an exact number yet, but those -- the new company focused on clinical development will be 25. So the net number of employees in the public listed company once the employees from the mannitol business unit depart -- drops from 70 to 25. We'll be moving on from being the leasehold of the Frenchs Forest facility is 7,000 square meters and we'll be moving to a much reduced new lease for the research labs and a small corporate office. We've downsized the corporate and admin requirements. And we've removed direct indirect costs associated with the manufacturing of the 2 pharmaceutical products. It's probably something that's not immediately apparent to people looking at, but the -- keeping a facility running to the standard -- the GMP standard and capable of clearing audits from the FDA and the Europeans and other markets worldwide is a very, very expensive experience, and it attracts a lot of costs. So you end up with all sorts of systems and processes and equipment, which has to be run to a higher standard, then you'd have to run if you're just running a drug development business. So all of that can go. If we exclude the external clinical trial and drug discovery costs in the business, then we cut out -- I'm looking at this as sort of a 2023 pro forma cash expenses, they dropped from $23 million down to $9 million, so a cut of more than 60%. And we strongly believe that there are more corporate and admin savings to be realized after the separation once we start digging in the weeds and looking at all the small contracts and other things that we've got going that before would have been associated with the GMP facility that we had. And the graph on the right-hand side just tries to illustrate that drop in the cost base that we're seeing. So the new company will be called Syntara. It's a clinical stage drug development company focused on that and delivering first and best-in-class disease-modifying drugs to patients. We're looking to improve quality of life and extend life expectancy. We are prioritizing -- by that, I mean, the cash that we're spending will be prioritized to hematological malignancies or blood-related cancers with a high unmet need and with market opportunities in excess of $1 billion per annum. We are going to retain an integrated drug discovery capability. And with the pipeline, a strong pipeline coming over from the Pharmaxis of preclinical and clinical stage assets in fibrosis and inflammation. And I'll give you a quick look at the pipeline in a moment. As I mentioned at the outset, the Board is going to under new leadership and being downsized. Kathleen Metters, as I mentioned, has been appointed Chair. Simon Green and Hashan De Silva will be non-executive directors, and I will join them as the CEO on the board. This means that the current Chair, Malcolm McComas and Non-Executive Director, Neil Graham will be stepping down. And I'm very thankful to the contribution, the both of them and particularly Malcolm have made over many years to the evolution of Pharmaxis and Malcolm has seen many milestones go under his watch. And both Malcolm and Neil were integral to the decision-making that led to the announcement and the restructuring that we've announced today. As I said, staffing numbers dropping to 20 to 25 with no immediate changes to the existing management. So what does Syntara have? It has -- the foundations are based in the fact that -- Pharmaxis has got itself to a position where it was the global leader in amine oxidase chemistry. We've had 3 nature publications published over the last 2 years on the role of lysyl oxidases in many different diseases. This is an outstanding achievement for a small group to achieve global leadership in this field. and we've now proven beyond doubt, I think, that the lysyl oxidase inhibitors inhibiting that enzyme does affect a strong antifibrotic effect on 2 diseases: myelofibrosis and also scarring, both of which announcements we've made earlier this year. And the safety of those drugs, combined with the efficacy we're seeing was a very strong argument when we reviewed the data with the FDA, and they cleared a protocol for us to progress clinical study in combination with the JAK inhibitor, the current standard of care in myelofibrosis patients, which will start shortly. So the new company starts with a really strong scientific base with a proven technology and a drug that's about to get to the point where it generates data, which is -- would be fundamental to a much increased valuation of the asset going forward. So this is the pipeline. So the lead asset is 5505 pan-LOX inhibitor. As I said, that 1 is about a study, an open-label study in myelofibrosis Phase II with the first patient starting in this quarter we're in now. We'd expect data coming from that study from all 15 patients in the second half of next year, we'd have 6 months data. We will be running those patients on for longer, 12 months to see what happens. But we're expecting strong data in the second half of next year. Certainly, we're enough to start a further discussion with the FDA and with potential partners as well in a market which I think it's very conservatively estimated at $1 billion. The lead asset here, ruxolitinib has sales globally, I think, of around about $3 billion. And there are new entrants in this market coming in all the time and inflating that market figure further. We'll also be exploring another hematological malignancy, myelodysplastic syndrome. It's another blood-related cancer. We've got some very strong data that's just been published in a major communications publication. And we're exploring a potential protocol in that area. Again, that disease is a high unmet need, market opportunity more than $3 billion. Then there's our scar prevention and scar modification program done with Professor Fiona Wood, at the University of WA in Perth. And there, we're looking to start a study in burns patients which we should be recruiting the first patient in this next quarter and then a further study to look at modification of either keloid or hypertrophic scars, where the protocol is still under development. And then finally, our neuro anti-inflammatory drug, which is, again, just about to start recruiting in the next quarter in a double-blind, placebo-controlled study, again, in a large market. So for a new company with a relatively small staff, very focused area, this is a tremendous platform to build on going into the future, a really strong pipeline to go forward with. And the news flow coming even in this next quarter is again strong. We've just announced today the sale of the mannitol business with more than $14 million worth of savings per year and the creation of Syntara, chemical stage drug development company. But we've got 3 studies starting. So the 5505 combination study with a JAK inhibitor starts recruitment shortly. Looking at scar and prevention in a burn study due to start recruitment, the neuroinflammation study starting recruitment. And then an update on our myelofibrosis study, the monotherapy over that we're waiting to hear about acceptance of our poster at the American Society of Hematology, which is due in December of this year. So a strong news flow for the rest of the year. Just leave you on this slide really, I think as we opened this morning, our share price was $0.033, a market cap of $26 million with a pro forma cash balance of $14 million at June '23, gives an enterprise value of only $12 million, which I think looking now at the profile of Syntara, the cash burn going forward and the pipeline it has is conservative. And with that, Alfred, I'll close and very happy to take questions.

Excellent. Thank you, very much, Gary. We have had quite a few questions come in, so I will start working through them. [Operator Instructions] Gary, the first question comes from Dennis. In FY '23 results segmented information for the mannitol business shared expenses of $10.9 million. Slide just mannitol cash cost of about $13 million. Can you please explain the difference?

Gary, can I jump in there?

Yes, sure, David.

It's David. The difference is rent can go into the EBITDA calculation and as Gary explained less than $0.5 million.

Thanks, David.

Thanks, Dave. Next question comes from Lawrence. Gary, does the inventory strategy between now and the site closure. What is the product life span and likely impact on cash flow/profit from mannitol?

Well, the cash flow from mannitol will no longer concern us as of closing at the end of -- in October. The -- there will be a period between now and when the facility closes when the stock will be built up to enable the period when the tech transfer takes place. So there is no situation where the market is not supplied. But again, I think the important thing to focus on here is if you net all that out and look at the extra cost of producing the inventory, et cetera, the net residual cost to Pharmaxis in exiting this is less than $1 million. So whilst there are increased costs involved in the business and whatever, I think all you need to concern yourself with is just what's the actual cost of the -- to Syntara going forward and the assets of that is less than $1 million.

Thanks, Gary. Similar question from Chris as a follow-up. Can you provide any guidance around the royalty stream from the mannitol business?

Well, I can't as yet because the -- yes, I've got ideas, but I think it would be premature to start talking about them now. I mean, it really depends. The royalties are expressed as a percentage of the net profit from the Arna Pharma facility of those products. And that, in turn, relies on how many other products that they have going through that facility and therefore, what the cost of goods at the mannitol will be. Their business model, I think, is a strong one and put these products into a profitable position very quickly, and that's why they were interested in taking it on and why they're interested in the investment they have to make to do the tech transfer, which is a challenging process and an expensive 1 to go through. So I've got every confidence that the -- looking forward, whereas in the past, the company has experienced several years of loss. We will move that into a profit situation because we're taking a percentage of net profit. Now how big that will be? We will see. It's too early to start really projecting that. In any way a great degree of confidence.

Thanks, Gary. Will Arna Pharma take over the global business of mannitol or only the Australian sales?

They will take over everything.

Thank you. A question from Michael. Can you please explain in more detail the expected cash burn on development and how this will be met?

So the business closed with $14 million pro forma at the end of June. We've just announced that we're taking a further $14 million of cash expenses out of the business. The -- we're looking at our clinical development plan now for the new company and formulating what the cash requirements will be going forward. So that, again, will be something that we'll update the market on as we firm up the plan for the new company. We've really been focused at the moment on getting this deal and that over the line and removing that cost base to allow us to move forward with confidence.

Thanks, Gary. There's just 1 more on the royalties. A question for Ram. How is it calculated? Is there a net profit or top line sales?

Based on net profit. And it's high single-digit royalties on the sales of the mannitol products and mid-single digits on the net profit of sales of the other products coming out of the Arna Pharma facility.

Thanks, Gary. A question from Lawrence. The MDS trial you mentioned, does that need to go through a full Phase I? Or can we go straight to Phase II recruitment?

It will go into a -- likely into a Phase Ic so it would be going straight into patients with a dose escalation followed by an expansion, which would be Phase II. We'd expect to see both safety and efficacy from the Phase Ic study.

Thank you, Gary. We have gotten through a lot of the questions already now. So if anyone does have any more, please pop them into your Q&A box. Question from Kai. I noticed you didn't talk much about 6302. Any update?

Yes. So the update we have a range of pan-LOX inhibitors in our pipeline. And we're looking at putting 1 of them into a study that we're going to be recruiting shortly with patients who have burn injuries. So it will be used after surgery to prevent the bad scarring that occurs with these patients. That drug is likely to be given orally because these patients have large surface areas and more than 5% of the body area that they've suffered a burn on. So it's appropriate to use a topical drug like 6302 in that area, and it's an area of really high unmet need. We're still working with Professor Wood and our team on the next topical study. And as I mentioned in the presentation, it's likely to be either in keloid or hypertrophic scars. I've had a series of very interesting discussions with plastic surgeons and dermatologists worldwide in the last few months about where they see the unmet need in scarring and what we do. And it's quite interesting to see that the treatment practices do vary from country to country. So we're just trying to make sure we really understand the market and the commercial opportunity by talking also to dermatology companies before we start that next study with the topical agent.

Thanks, Gary. A question from Robert. Do you foresee a need to raise capital at Syntara? And if so, when?

So as I said, that will be something that we look at in the next couple of months because we are -- despite cash balance coming into this, we're just at the moment, getting our heads around how much cost more we can take out. The amount we're taking that already a significant and therefore, what the cash needs of the company are going forward. Clearly, we would like to accelerate the clinical programs we've got. We have a very strong pipeline. So we will be looking at what our cash needs are over in the next little period.

Question from Richard. Does this result in any alteration in the arrangements you have with BTC Health, your Australian distributor for Bronchitol and mannitol?

No, the contracts that we have with our distributors will transition through to Arna Pharma.

Fantastic. Just 1 last question, Gary, from Kai. Have you had any interest in acquisitions for either 5505 or 6302 from the industry?

Yes. So I talk to potential interested partners a number of times a year. The last catch-up point would have been Bio in the U.S. back in June. And there's clearly -- I mean the -- if you look at the myelofibrosis area, JAK inhibitors as a standard of care, basically get the results they do by being [ myelosuppressants ], they damp down the cells and they cause -- they can cause improvements in symptoms, reductions in spleen size. There's a desperate need here for something which isn't minor suppressive that doesn't cause more cytopenias that is well tolerated and does lead to disease modification. And I think our mechanism of action stands out as being a very attractive 1 for -- certainly the clinicians I've spoken to and the companies that are watching us as we go forward. The next study where we put it in combination with the JAK inhibitor is really a key 1 in terms of highlighting the value that it has going forward. And the exits in this area for drugs that have got to Phase IIb data. So 1 beyond the 1 that we're currently engaged in. These exits are in the order of USD 1.5 billion, they've been snapped up more than -- 3 of them in the last couple of years. So the commercial price there for getting this right is huge for us and for our shareholders. And that's the fundamental point of Syntara. It's a bad identifying where those opportunities are and then really focusing on them and not being distracted by anything else at all and being as cost effective as we can in employing our resources to get to those end points as quickly as we can.

Fantastic. Thank you very much, Gary. We will wrap it up there. If there are any further questions, please feel free to e-mail them through. Gary and David do have their contact details on the final slide of the presentation, which you'll be able to access online on the Pharmaxis website. Recording of this webcast will also be made available shortly on the Pharmaxis website. Gary, on behalf of the investors attendance, and the shareholders who couldn't make it. Thank you very much for your time today.

Thank you.