Yahoo Finance SBOT: 2016 A Solid Year, Both Financially and Operationally
By Brian Marckx, CFA Q4 2016 Financial Results
NASDAQ:SBOT
Stellar (SBOT) reported financial results for their fiscal fourth quarter 2016 ending September 30. While revenue was moderately lower than our estimate, it was up fairly significantly on both a yoy and sequential basis. And despite the “miss” to our topline number, this was more than offset by strong gross margin and lower than modeled operating expenses. The net result was EPS of ($0.13), a penny better than what we were expecting.
Q4 revenue was $276k (vs. $375k estimate), all of which relates to product sales. As a reminder, as a result of the conclusion of services related to a two-year contract, SBOT has not booked any contract services-related revenue since fiscal Q1 2016.
Gross margin was a relatively very healthy 26% in Q4, driven by product margin of 57% - which looks to be an all-time high. We continue to look for both greater stabilization and growth of gross margin with higher KLH production volumes as SBOT supports larger clinical trials and brings on additional contracts and supply agreements.
Operating expenses were $1.4M, up about 29% and 17% from the year-earlier and quarter-earlier periods, respectively, but about 6% lower than what we were anticipating. Stellar recently brought on additional professional personnel in anticipation of increased demand for KLH and eventual production scale-up. While this will have the effect of incrementally pushing up OpEx, this should be at least partially offset by expected near-term revenue growth and expanding gross margins.
Q4 net loss and EPS were $1.3M and ($0.13) vs. our $1.5M and ($0.14) estimates. Cash balance (inc liquid investments), which was bolstered by the $6M (net) equity raise in July, was $11.4M at fiscal year-end. Cash used in operating activities was $1.2M and $4.5M in Q4 and the full year, respectively. Another $107k and $470k was used for capital purchases and contribution to the Neostell JV in Q4 and the full year, respectively. Management is currently guiding for total expenditures to be approximately $6M in fiscal 2017 and expects the cash balance to fund operations for at least the next 12 months.
Looking at the full year, fiscal 2016 was a solid year – from both a financial as well as operational perspective. KLH product sales grew 120% from the prior year to $1.2M, which follows 293% growth to $564k in 2015. For 2016, the major revenue contributors included OBI Pharma which accounted for 41% of product sales, Eurogentec 25% and Neovacs 10%. With additional activity expected from these customers, including Neovacs’ recently initiated phase 2b U.S. study for its IFNa-Kinoid Lupus candidate as well as the potential for additional customer onboarding, we expect 2017 will be another record revenue year for SBOT. We note that Neovacs’ Lupus candidate, which now has fast-track status in both the U.S. and S. Korea, could soon materialize as the first KLH-based commercial product that SBOT supports.
On the operational side, SBOT made additional significant progress in 2016 towards scaling operations in anticipation for increased demand for its KLH as well as to manufacture and sell KLH-based vaccines. Management noted on the Q4 call that their goal is to have the capacity and operational infrastructure in place to be able to support multiple commercial launches of KLH-based therapies and have been putting the pieces in place to be able to do so within an approximate two-year timeframe (i.e. length of time required to prepare based on lifecycle of limpets).
Part of the infrastructure upgrades relate to their existing manufacturing and production facilities in California – the first phase was completed and the second phase, per management’s comments, will begin in the coming months. This includes additional equipment and other activities and assets aimed at increasing production capacity of KLH. The other part of the infrastructure upgrades relates to their Baja California (Mexico) location. Management noted that they have made additional progress related to this facility.
The recent equity raise as well as the appointment of a V.P. of Chemistry, Manufacturing and Controls as well as adding an Executive VP of Corporate Development are also aimed at fortifying and accelerating plans towards increasing capacity and readying for support of commercial product launches, including that through Neostell.
Neostell Will Supply KLH For Neovacs’ Lupus Candidate (if and when approved), Just Granted FDA Fast-Track…
As a reminder, SBOT and Neovacs have had an ongoing relationship through a supply agreement whereby Stellar has supplied KLH for Neovacs' Kinoid vaccine candidates targeting certain autoimmune disorders.
Per the terms of the supply agreement, originally penned in 2008 and recently expanded, Stellar supplies KLH as a carrier molecule for two of Neovacs' Kinoid vaccines under development for the treatment of Lupus and Crohn's disease.
Neovacs' lead candidate, IFNa-Kinoid, completed a phase I/IIa study (n=28) for lupus in 2011. Results showed IFNa-Kinoid was well tolerated and patients experienced a strong immune response with a significantly higher production of binding antibodies compared to TNF Kinoid in humans. A phase IIb study, which had originally expected to include approximately 166 patients and began patient enrollment in September 2015, has been ongoing in Europe, Latin America and Asia. In April 2016 Neovacs received IND approval from FDA to extend the study to the U.S. which also prompted an increase in total enrollment to 178 patients (in 21 countries) and expanded the number of sites from 5 to 15.
On November 7, 2016 Neovacs announced that they enrolled the first patient in the U.S. and also noted that they are seeing strong interest from a large number of U.S. clinical sites. Importantly, earlier this month (12/7) Neovacs announced that FDA granted Fast-Track status to this IFNa-Kinoid Lupus candidate. Fast-Track is granted to candidates that address serious diseases which are not well controlled with existing therapies. Fast-Track, which aims to facilitate faster time to approval, allows for seamless cooperation with FDA as well as priority review. As such, this could speed eventual approval in the U.S. market. Neovacs is still aiming to have full results in summer 2017.
It’s possible that a lupus indication could be even a sooner event in to S. Korea. In mid-April 2016 Neovacs announced S. Korean health authorities approved an IND for their phase IIb lupus study. Importantly S. Korea is the only OECD country in which lupus is considered an orphan disease. As such Neovacs expects to file for orphan designation, granting of which could mean Neovacs may be able to launch IFNa-Kinoid commercially in S. Korea without the need to conduct a phase III study. Neovacs has already started preparing for a potential commercial launch by partnering with Chong Kun Dan Pharmaceuticals, a S. Korean pharmaceutical (immunotherapies) company.
And there are other signs of Neovacs’ confidence in their Lupus candidate as the company has made other recent preparations to scale up production. This includes the November announcements that they acquired interferon alpha manufacturing technology (from Amegabiotech) and signed a production partnership (with 3P Biopharmaceuticals) for the manufacture of interferon alpha. These agreements put in place an important piece for Neovacs to be able to manufacture IFNa-Kinoid in commercial scale.
Stellar/Neovacs also recently expanded the supply agreement to ensure sufficient KLH quantities are available to support these upcoming studies as well as a potential future commercial launch. In addition, the agreements call for Neovacs to pay Stellar for maintaining a dedicated colony of limpets. Neovacs accounted for 10% of SBOT’s total 2016 revenue but with additional clinical activity in 2017 as well as potential preparations towards launch, we think this will increase in the coming year.
And while this and SBOT’s other supply agreements are important for several reasons, including validation of the quality and sustainability of supply of SBOT’s KLH as well as providing some early revenue and offering potential to supply KLH for an eventual approved therapy, this new JV offers the additional upside of participating in KLH-based vaccine sales and manufacturing. The JV will not only produce and commercialize Neovacs’ vaccines (assuming eventually approved), it will also seek to supply and manufacture KLH-based products for third parties.
Details of Neostell S.A.S. include;
- located in Paris, France
- SBOT holds 30% equity interest and will initially contribute €120,000 (~$134k), 50% of which has already been paid with the remainder payable upon "occurrence of certain defined future events" (which is interpreted to mean, 'positive results of Neovacs' IFNa-Kinoid phase II lupus study')
- additional future funding will be on a pro rata basis (i.e. SBOT 30%, Neovacs 70%)
- "If the joint venture does not achieve certain milestones by December 2017, the joint venture will be dissolved, unless (i) the parties mutually agree to pursue the joint venture arrangement, or (ii) either party decides to purchase the equity interests of the other party. Each of the parties is entitled, upon the occurrence of certain defined events, to acquire the interest of the other party" (copied from Q3 10-Q)
- "In connection with the formation of the joint venture and the performance of its goals and projects, the parties and the joint venture agreed to enter into (a) an exclusive supply agreement within a limited field of use for the Company to supply KLH to the joint venture, (b) a supply agreement designating the joint venture as the exclusive manufacturer and supplier of the other party’s vaccines, and (c) services agreements for the provision of various knowledge and expertise by each of the parties to the joint venture. The other party will also license certain of its intellectual property to the joint venture
- "The joint venture has an initial ten-year term, renewable for successive five-year terms. If either party provides notice at least six months prior to the expiration date of an applicable term that it does not wish to continue the joint venture transaction, the other party will have a right to acquire all of such terminating party’s equity interests in the joint venture"
- Per Neovacs’ Jan 21st press release announcing the collaboration, Neostell is expected to hire between 50 and 100 employees
We view this JV as another endorsement for the quality and sustainability of the source of KLH that SBOT provides. It also provides the opportunity for SBOT to participate in the full product cycle from supply, manufacturing and sales – which broadens the scope and breathe of SBOT operations and revenue opportunities. And finally, we think this JV is another step in progress towards exploiting the expected rapid growth of immunotherapies, superiority of KLH as a carrier protein and SBOT’s position as the only company in the world capable of supplying commercial-scale quantities of the high quality KLH protein.
Noteworthy Customers / Supply Contracts…
Amaran / OBI Pharma: OBI's lead candidate, OBI-822 (Adagloxad Simolenin), had been in mid-to-late stage clinical testing in the U.S., S. Korea, India, Hong Kong and Taiwan for the treatment of metastatic breast cancer. It was also in a phase 2 physician-initiated clinical trial in Taiwan for the treatment of ovarian cancer (no recent updates have been announced related to the ovarian cancer program). OBI-822 utilizes KLH as a carrier protein for the carbohydrate antigen Globo-H, which is often expressed by cancer cells.
In February 2016 OBI announced that top-line data of the phase 2/3 metastatic breast cancer study did not meet the primary endpoint of progression-free survival. Results were presented in June at ASCO 2016 in Chicago. But, as patients who did show an immune response demonstrated statistically significant progression-free survival versus placebo, coupled with the secondary endpoint of overall survival trending towards statistical significance and no safety issues reported, OBI noted in their February 2016 press release that they expected to forge ahead with a phase 3 study in (Taiwan). While the next step towards that goal would be for OBI to meet with regulators regarding design of a phase 3 study, OBI has yet to publicly announce whether a meeting has been scheduled.
Another potential confounding factor towards moving into later stage trials relates to an investigation into allegations that certain OBI executives illegally sold shares of OBI Pharma prior to the public release of the phase 2/3 results missing the primary endpoint. While the investigation and related outcomes has no bearing or influence on the clinical data or interpretation thereof, it is almost certainly a distraction and could affect the company’s ability or cost of raising additional capital.
What the missed endpoint in phase 2/3 means for Stellar is currently an unknown. While any supply of KLH to OBI for their clinical trials was never going to be an overly significant source of revenue for the company, supplying for a commercialized product could be. And while that is still a possibility, the likelihood became less so with the phase 2/3 study missing the primary endpoint. If and when OBI meets with regulators relative to moving to a phase 3 study, the viability of a pathway forward may become more clear. We note, however, that even in the event OBI does not move directly to phase 3 with their metastatic breast cancer program, that SBOT could still be providing KLH to OBI for earlier stage studies in breast and other cancers.
Stellar recently announced that they have met all the primary objectives of the collaboration with OBI including qualification of GMP-grade Stellar KLH. The formal collaboration agreement, whereby SBOT was responsible for production and delivery of GMP grade KLH for evaluation as a potential carrier protein as well as for method development and process qualification and in return Amaran paid the company for certain expenses and costs, expired on December 31, 2015. However, the expiration has no effect on the duos’ working relationship. If all goes well, SBOT could eventually be supplying KLH for an OBI commercialized product. Next steps will be to optimize manufacturing processes for scale-up of production in the event that OBI moves into phase 3 for metastatic breast cancer. OBI Pharma accounted for approximately 41% of SBOT’s total revenue in 2016.
Neovacs: Neovacs' lead candidate, IFNa-Kinoid, completed a phase I/IIa study (n=28) for lupus in 2011. Results showed IFNa-Kinoid was well tolerated and patients experienced a strong immune response with a significantly higher production of binding antibodies compared to TNF Kinoid in humans. A phase IIb study, which had originally expected to include approximately 166 patients and began patient enrollment in September 2015, has been ongoing in Europe, Latin America and Asia. In April 2016 Neovacs received IND approval from FDA to extend the study to the U.S. which also prompted an increase in total enrollment to 178 patients (in 21 countries) and expanded the number of sites from 5 to 15. On November 7, 2016 Neovacs announced that they enrolled the first patient in the U.S. and also noted that they are seeing strong interest from a large number of U.S. clinical sites. Importantly, earlier this month (12/7) Neovacs announced that FDA granted Fast-Track status to this IFNa-Kinoid Lupus candidate. Fast-Track is granted to candidates that address serious diseases which are not well controlled with existing therapies. Fast-Track, which aims to facilitate faster time to approval, allows for seamless cooperation with FDA as well as priority review. As such, this could speed eventual approval in the U.S. market. Neovacs is still aiming to have full results in summer 2017.
It’s possible that a lupus indication could be even a sooner event in to S. Korea. In mid-April 2016 Neovacs announced S. Korean health authorities approved an IND for their phase IIb lupus study. Importantly S. Korea is the only OECD country in which lupus is considered an orphan disease. As such Neovacs expects to file for orphan designation, granting of which could mean Neovacs may be able to launch IFNa-Kinoid commercially in S. Korea without the need to conduct a phase III study. Neovacs has already started preparing for a potential commercial launch by partnering with Chong Kun Dan Pharmaceuticals, a S. Korean pharmaceutical (immunotherapies) company.
And there are other signs of Neovacs’ confidence in their Lupus candidate as the company has made other recent preparations to scale up production. This includes the November announcements that they acquired interferon alpha manufacturing technology (from Amegabiotech) and signed a production partnership (with 3P Biopharmaceuticals) for the manufacture of interferon alpha. These agreements put in place an important piece for Neovacs to be able to manufacture IFNa-Kinoid in commercial scale.
Stellar/Neovacs also recently expanded the supply agreement to ensure sufficient KLH quantities are available to support these upcoming studies as well as a potential future commercial launch. In addition, the agreements call for Neovacs to pay Stellar for maintaining a dedicated colony of limpets. Neovacs accounted for 10% of SBOT’s total 2016 revenue but with additional clinical activity in 2017 as well as potential preparations towards launch, we think this will increase in the coming year.
And while this and SBOT’s other supply agreements are important for several reasons, including validation of the quality and sustainability of supply of SBOT’s KLH as well as providing some early revenue and offering potential to supply KLH for an eventual approved therapy, this new JV offers the additional upside of participating in KLH-based vaccine sales and manufacturing. The JV will not only produce and commercialize Neovacs’ vaccines (assuming eventually approved), it will also seek to supply and manufacture KLH-based products for third parties.
Araclon: Per a November 2014 agreement, Stellar will supply Araclon with KLH to support their phase II/III clinical trials for their Alzheimer's candidate. Upon eventual commercialization, Stellar will also have the opportunity to supply KLH for commercial production. In August 2016 Araclon (and partner Grifols) announced positive results from a Phase 1 (n=24) safety study of their ABvac40 (short C-terminla peptide conjugated to KLH with alum) Alzheimer’s candidate which showed no difference in adverse effects between patients treated with ABvac40 (n=18) and those given placebo (n=6). A Phase II study is planned.
AXON Neuroscience: As a reminder, in November 2015 AXON Neuroscience (private) presented positive phase I data on its Alzheimer’s disease active vaccine candidate, AADvac1, at the annual International Trials on Alzheimer’s Disease Conference (CTAD) in November. AADvac1, which utilizes KLH as a carrier protein, is being developed to generate specific antibodies against diseased forms of tau protein. The presentation at CTAD showed AADvac1 to be safe, well tolerated and induced a “robust response in the vast majority of the study participants and the average cognition of patients remained stable over 6 months.” Results were published in December 2016 in Lancet Neurology.
And while AXON’s announcement did not specify where they source their KLH, it appears that it may be from Stellar (we asked on the Q4 2015 conf call but due to confidentiality agreement mgmt. could not confirm) given that revenue from AXON contributed ~$120k in fiscal 2015. A phase II study (titled ADAMANT), designed to confirm phase I results in a larger population, commenced in June 2016. ADAMANT, per clinicaltrials.gov is a 24-month, randomized, placebo-controlled, parallel group, double-blinded, multi-center study to assess the safety and efficacy of AADvac1 in patients with mild Alzheimer’s disease. The primary objective is to confirm the positive Phase I results. While we cannot confirm that SBOT has supplied KLH to AXON in the past (although it appears that was the case) or may do so in this Phase 2 study, AXON could represent another source of supply revenue and, potentially, eventually commercialized-product revenue.
The shares continue to trade well below our target price. See below for access to our updated report on SBOT.
READ THE FULL RESEARCH REPORT HERE
SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR and to view our disclaimer.
