Applied DNA Sciences, Inc. (APDN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to the Applied DNA Sciences’ Fiscal First Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sanjay Hurry, Investor Relations officer. Please go ahead.
Sanjay Hurry: Thank you, Gary. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our fiscal first quarter 2021 financial results and business updates. You can access the press release that was issued after market closed today as well as the slide presentation accompanying this call by going to the IR calendar page of our website. Speaking on the call today are Dr. James Hayward, our CEO; Beth Jantzen, our CFO; and Judy Murrah who was recently promoted to COO.
Beth Jantzen: Thank you, Sanjay. Good afternoon, everyone, and thank you for joining us. I will begin this afternoon with a review of our consolidated financial results for the first quarter of fiscal 2021. Dr. James Hayward, our President and CEO will then update you on developments across our COVID-19 diagnostics and surveillance testing business, as well as progress being made in our biotherapeutic and supply chain security segments. Judy Murrah, our newly appointed Chief Operating Officer will join us to offer insight into initiatives being undertaken to support both our near-term and long-term growth plans. We will then open the call to questions from analysts and investors. To begin, and for the benefit of our new investors, the pandemic and resulting shutdown of global supply chains serviced by our tagging and related supply chain business has had an ongoing adverse impact on revenue. Specifically, the shutdown has negatively impacted the textile industry that historically has been our largest contributor to revenue. Over the past several years, this industry has averaged revenue to us of approximately 1 million per quarter. However, early in the pandemic, we shifted our focus to COVID-19 to bring out deep expertise in DNA manufacture and diagnostics to the fight. As a result, we have experienced increased revenue from our diagnostics and biotherapeutic contract research and manufacturing businesses. The increase is specific to sales of our diagnostic assay kit and for safeCircle, our COVID-19 surveillance testing platform. SafeCircle testing is performed under our wholly-owned subsidiary, Applied DNA Clinical Labs that we formed during our September 2020 quarter.
James Hayward: Thank you, Beth and good afternoon everyone. Thank you for joining us on our quarterly investor call. I hope you and your families are keeping well and safe. I will begin my remarks today with a brief progress report against certain inflection points outlined in our fiscal 2020 year-end call that can drive our top line in 2021. I will also provide an update on our strategy to advance the establishment of our LinearDNA manufacturing platform as a disruptive alternative to the use of plasmid DNA But first, let me welcome Judy Murrah to the call. Judy has been an integral part of the management team for the better part of a decade now and her contributions to Applied DNA span both our supply chain security and diagnostics and biotherapeutics businesses. She is the driving force behind the implementation of the digital track and trace infrastructure that underpins our certainty platform, and that ensures authentication in the supply chains we serve.
Judy Murrah: Thank you, Jim and good afternoon, everyone. I'm pleased to be speaking with you today. By way of introduction, and as Jim noted previously, I joined Applied DNA in 2013 with a range of cross functional experiences, which certainly have come in handy in operationalizing our practices, products and services here. Prior to Applied DNA, I held senior leadership positions at Motorola and at Symbol Technologies, prior to its acquisition by Motorola. They spanned functions of sales and marketing, information technology, and operations. Today, my responsibilities lie in working with all of our teams here to drive readiness and responsiveness for our customer’s requirements, priorities, balancing supply, demand and inventory, anticipating where the business is coming from to scale appropriately, and to ensure we have the skilled resources ready. Today, while there's much that I could address, I will focus on two of the top trajectories for the company, as discussed by Jim and Beth. Number one, COVID diagnostics, both for building capacity of our Assay Kit product sales, and in use in ADCL’s internal operations, and in optimizing our services sales with efficiency and certification for ADCL. Second, is scaling the biotherapeutics manufacturing based on our LinearDNA platform. Today, we are operating in a cGMP environment suitable for pharmaceutical excipient, dietary supplements, and cannabis industrial tagging. We have institutionalized a GLP environment for our LinearRx, Biotherapeutics CRO business. And now we are working to add a third regulatory compliance level suitable for CMO contract manufacturing for biotherapeutic customers. Let me offer some operational color and explanations of the industry acronyms for each. Diagnostics first; the core of our product portfolio is the linear Assay Kit in sizes of 100, 500, and 1,000 reactions or tests. We use those interchangeably. With volume based pricing model beginning at $40 per reaction list price. Planning and producing these kits and managing the supply chain must meet demand for both our end users certified laboratory customers and internally by our own Applied DNA clinical lab subsidiary to support surveillance testing. For our largest customer of our kits, we did earn our business by offering superb customer care as a differentiator from other of our competitors. We provided vendor managed inventory services for reagent kits, sample collection kits, consumables and more in their facilities. We offer process workflow design consultation for their lab, followed by software and automation implementation, with a continuing eye on supply chain health to support their surveillance testing program. Now, anticipating an uptick in kit sales due to demand generation programs we've recently launched and competitive differentiation and variant detection as Jim mentioned, and a continued ramp up in our surveillance business. We're now implementing our own robotics and automation to again, increase our capacity to be production ready to service potential demand. Next, turning to our services business in COVID surveillance testing, safeCircle is the engine that's opening doors for our customers to get back to work and back to school. For our regional customers, we operationally managed supplies and sample collection logistics, we assist customers in setting up their surveillance programs, in a growing number of instances with our partner CLEARED4. Monetarily for us, at a pooling ratio of five individual samples per test reaction and a price of between $60 and $100 per individual samples submitted depending on volume and portfolio services requested. Therefore that makes it $300 to $400 per test reaction. This does generate more per reaction than the linear Assay Kit. However, the Assay Kit also does have a lower complexity in overhead and delivering. So, the combination of these balance our portfolio. For customers outside our region, we easily support sales and implementation remotely. After one or two phone calls consultative nature in helping them set up their surveillance programs and the online platform, they can manage as self service. And we shipped our kits two way via courier. Consequently, we have focused much of our capacity expansion on safeCircle services. Since its launch, we've outfitted a complete laboratory under our Applied DNA clinical lab subsidiary with the equipment for licensing RNA extraction and PCR. We've completed facilities upgrades for cleanliness and safety. And we've hired a team with the certifications and experience needed to grow over 10 times since we began. We're building capacity in anticipation of CLEP-CLIA-certification for which our application to the New York State Department of Health is currently pending. And that will allow multiple avenues of growth from there. On these metrics, our staffing is complete. Some equipment and facilities expansion is ongoing to open some bottlenecks we have and our lab information systems all new are being rolled out as we grow. Near term CLEP-CLIA-certification we complete our service offering with patient specific diagnostic testing on a sample of presumed to be positive as tested under safeCircle pool surveillance. In our relatively low positivity region, while this action represents a small cost savings to bring in-house from an outsourced third party certified lab it does represent a big time savings to our customers. We are on track to request our re-inspection as announced and are pursuing every avenue available under the New York State CLEP program to ensure ADCL’s ability to offer an integrated testing service. Longer-term a CLEP-CLIA certified laboratory would have benefit beyond the pandemic through commercialization of other services as in, for example, our invasive circulating tumor cell based platform beyond that of our up to $1 million two-year award with TYME Technologies. A cancer assay transition to an approved laboratory developed test that is applicable to a host of cancer types would serve as a diagnostic for oncologists to both diagnose and follow the course of therapy for their cancer patients. In parallel with diagnostics, our second initiative I had mentioned is to drive adoption of our PCR based LinearDNA platform. Our toggling from CRO to CMO services, as we now complete small quantity proofs of concepts means investment in capability and capacity, something we must derive from sponsors. Now, just a few acronyms. The industry follows FDA guidance for good laboratory practices or called GLP, and Current Good Manufacturing Practices, called cGMP. It's a living process so to speak. Different levels of product require different levels of stringency. Well the stringency required at the level of therapeutics and vaccines is quite high. For example, we have been living the cGMP process in our cannabis, dietary supplement, and pharmaceutical excipient tagging business for over two years. We adopted cGMP appropriate for the level manufacturing we have performed to produce components of a third parties diagnostic. We have lived GLP within the LinearRx CRO business. Now we have a step function upgrade required as we cross the threshold toward the manufacturer of clinical stage therapeutics, beginning with veterinary trials and moving on from there. The wheels are already in motion. Last May, we contracted a highly respected regulatory consulting firm to help us set our roadmap and we have been executing on it since. We have divided our manufacturing groups in three: diagnostics, therapeutics, and industrial to align appropriate overhead burden and regulatory compliance schemes for each. We've completed some facilities upgrades and have purchased new cGMP compliant equipment in production and in quality. And we'll use the opportunity of the diagnostics facilities built-out to begin to prepare for clinical stage therapeutic manufacturer as well. As noted in communications related to our recent capital raise, this area is one of the primary use of funds, as we in parallel, seek sponsorship for our work. We have a lot happening here. And so today, I'd like to conclude my remarks on those points, and turn it back over to Jim. Actually, I will notify the operator that we're ready for questions.
Operator: Our first question comes from Yi Chen with H.C. Wainwright. Please go ahead.
Yi Chen: Hi, thank you for taking my questions. Congratulations on a solid quarter. My first question is, based on the current trend you've observed on the shipping of the COVID-19 diagnostic kit, do you think the company is able to deliver solid or robust sequential growth in the current quarter over the of last year?
James Hayward: We certainly have the capability, the manufacturing wherewithal, and equipment and people necessary to do it. We also have remarkable array for someone at our stage of development of blue chip customers. So, I think we do have the capability and the opportunity to ship significant LinearDNA constructs that represent long-term opportunities with these blue chip players. And, you know, I expect that they will be successful since most have in their early cellular and animal trials. And I expect that they will continue to evolve toward requiring larger CMO like quantities under cGMP.
Yi Chen: Yeah. So, before starting the clinical trial for the veterinary COVID-19 vaccine aimed at cats, what additional work needs to be done to prepare the company for the initiation of the clinical trial?
James Hayward: Sure. Well, we have already manufactured all of the material necessary for Phase 1 ne trial. So, we are in a strong enough position from a regulatory position and from a manufacturing position. And we have already manufactured all the material necessary. Of course, we're planning two cat trials. The cat trial – second cat trial will require an additional quantity. And we may have mild changes in formulation by the time we reach that second trial, but we're actually in pretty good shape already to be able to manufacture those products.
Yi Chen: Got it. My last question is, is Takis biotech still committed to advancing the human COVID-19 vaccine? And do you believe when this – when your LinearDNA based human vaccine, COVID-19 vaccine reached a market there could be , you know, a meaningful market left and considering that multiple new vaccines could enter the market this year besides the Pfizer, BioNTech, and the Moderna vaccines?
James Hayward: Yes. You know, at this stage, it's difficult to see into the future out six months, a year from now. Certainly, it's hoped that much of the world in 12 months will have achieved herd immunity, but it's unclear what kinds of boosters may be required for the variants that become well-established across the world in that time. And so, I could see a global need for a third booster in many of those therapies. And I can see an opportunity growing by that time, because we will have the cat trial behind us and hopefully its commercialization. And we'll begin to gather data in those animal models that will help us eventually with FDA. So, I think we are far from, you know missing the opportunity in COVID-19, but more than that, I think we are paving the path for a variety of vaccine like approaches. And for the use of LinearDNA and the other therapeutic platforms we're investigating right now, that include, for example, CAR-T, cancer vaccine, and the production of AAV using LinearDNA, and a far simpler way to manufacture AAV’s to achieve an effective gene therapy.
Yi Chen: Got it. Thank you.
James Hayward: Welcome. Thank you.
Operator: The next question is from Jonathan Aschoff with ROTH Capital Partners. Please go ahead.
Jonathan Aschoff: Thanks a lot, and congrats on that revenue line . When could more substantial cannabis tagging revenue come online? You know, perhaps with the help of TruTrace, and how do you evaluate the specific market potential of tagging itself for cannabis?
James Hayward: Right. Well, our association with our partner has brought us already global opportunities that we're in the midst of a dialogue with. So, I think those opportunities will begin to require materials in the course of our current fiscal year. I think the market is large. I think that the new administration in the U.S. may open those opportunities wider and faster, deeper. And it's an industry that will move so quickly, it will need help tracking the origins and our certainty platform is poised and really ready for our work in cannabis.
Jonathan Aschoff: Okay, thank you. I'm assuming that the market will tolerate electroporation, you know, for Feline vaccines and for CAR-T for sure. But will you definitely only proceed with a human COVID vaccine if it can be given without electroporation?
James Hayward: Well, our colleagues at Takis actually are using an electroporation device that is already well distributed in hospitals, human hospitals throughout Europe. And they are advancing ahead with a plasmid based version of our vaccine using electroporation. So, I don't rule out electroporation as a potential delivery path. However, that said, I think there have been great advances made in the science of lipid nanoparticles relevant to all forms of nucleic acid relevant to multiple delivery vehicles, whether it's intramuscular, whether it's inhalation, intranasal for nebulized into the lung. So, we are studying both paths, both electroporation and the use of lipid nanoparticles.
Jonathan Aschoff: Okay. So, I'm assuming the decision comes down to how far does getting the lipid nanoparticle chemistry up to speed? How far does that set you back time wise? And that would be sort of the decision, the gating factor right? Between deciding which way to give it?
James Hayward: Yes, but remember, the regulatory agencies have already encountered head on the , and approved those drugs. So, I think the lid is off for RNA based therapies and for lipid nanoparticle based formulations and delivery systems. You're right. It requires certain refinement as payloads change, but, you know, we have at this company a deep history in lipid nanoparticles like liposomes, and the transition to the more solid based LNPs is not all that difficult.
Jonathan Aschoff: Okay. I was wondering a comment you guys made during this call, what makes an mRNA more easier to generate off of a linear template?
James Hayward: It's not just that it is easier. You know what, typically, with plasmids they have to be linearized before they're used for IVT, in vitro transcription. Of course, our PCR produced DNA is already linear. But PCR produced DNA has no history of exposure to bacteria. No risk of other sources of DNA, the bacterial chromosomal DNA or worse, the plasmid based genes for anti-microbial resistance for more opportunities for homologous based insertion, because you got more than you bargained for from the plasma. So, I think it will make it enormously safer. And we can provide those DNAs in extraordinarily pure linear format, and eliminate what I think is a partial risk that comes from our plasmid based templates of the allergic and anaphylactic response that can come from the endotoxin associated with bacteria, small amounts of lipid membranes from bacteria that people can be allergic to. I think it just makes eminent sense.
Jonathan Aschoff: Okay. Thank you very much, James.
James Hayward: You're welcome.
Operator: The next question is from Jon Salmanson with Hubble Wealth Management. Please go ahead.
Jon Salmanson: Yes. Congratulations on the quarter and congratulations to Judy. I might ask this question using the wrong terminology, and I apologize ahead of time. But I guess this is directed at Jim, we are approved on our EUA we have the authorized test, what's it going to take for assay to become the standard basically in the U.S. for genomic surveillance? That's part one. And then part two, is there a timeline or when can we expect a LinearDNA contract at the contract manufacturing or the CMO level?
James Hayward: Okay, sure. So the first question is, the promulgation of our linear COVID-19 diagnostic kit as a dominant means for genomic surveillance. Jon, I think we stand a very good chance at that and we are already seeing the distribution of our kits in genomic surveillance efforts in California, in Texas, in Arkansas, and in Kansas, and of course, here in New York, as we achieve success, as we did in our announcement today, and I must say that happened in the very first use of our diagnostic kit by a certified laboratory, after they developed their own lab developed tests, the very first use revealed three variants of concern in their positives that they have identified from a large throughput diagnostic operation. As that kind of news spreads across the U.S., I think we'll have a great opportunity to recruit more and more diagnostic labs that have genuine concerns about the epidemiology of the variants. Now, as our clients who typically enter into our workflow through a CRO based relationship meet success in their in vitro testing. They move of course, to very simple animal models, typically xenographic mice. Now, that's really at the cusp of requiring GLP product, or cGMP product. And so that transition to CMO really begins even when a customer moves at the CRO stage from selves in a dish to an animal model, an early animal model. As that animal model matures, the need for cGMP does as well. And of course, once you reach early clinical trials in humans, those requirements are for strict cGMP at the highest level. I can see that happening. Even now, the signs of it beginning are crystal clear. It's why the rays we just did is so important to us, and it's why we are investing in our cGMP wherewithal and retaining the best compliance and regulatory advice we can find.
Jon Salmanson: Thank you.
James Hayward: You’re welcome.
Operator: This concludes our call. I would like to turn the conference back over to Dr. Hayward for any closing remarks.
James Hayward: Okay. Thank you, Gary. Thank you. In conclusion, fiscal 2021 is about business execution. And to that end, we have started the year really in tremendous form. Fiscal 2021 is also about laying the foundation for opportunity and growth beyond our COVID-19 diagnostics and testing business. The value of LinearDNA has never been more evident in this COVID and post-COVID world and I believe we are uniquely positioned to benefit from its adoption across both biologic and non-biologic worlds. Well, thank you all for your participation this afternoon. And we'll speak to you again in three months time. Stay well.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
