Earnings Transcript for AVCT.L - Q4 Fiscal Year 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the Avacta Group plc Final Results Investor Presentation. [Operator Instructions]. Before we begin, I'd like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand over to the management team from Avacta plc, Christina; Tony. Good afternoon.

Christina Coughlin: Thanks, Mark, and thanks to everyone who has dialed in to listen today. My name is Christina Coughlin, and I am the new CEO of Avacta. Let me take just a moment to introduce myself to all of you. I am an oncologist and an immunologist. I trained at the University of Pennsylvania now a number of years ago. The serendipity of my first-year oncology career as a fellow was that Penn recruited a gentleman by the name of Carl June, who is the scientific pioneer behind the CAR-T cell. I spent a number of years working with Carl and training with him in science and practicing pediatric oncology before then leaving for an industry career. So I spent about 10 years in large pharmaceutical companies

Tony Gardiner: Thanks, everybody. Let me just take you through those numbers now, just to bring those up to date. So we're reporting on the year ended December '23 relative to the prior year. And as you can imagine, our income statement looks very different compared to a year ago given the 2 acquisitions, which have now embedded into the Diagnostics division with Launch being acquired back in October '22 and Coris back at the beginning of June last year. So revenue growth is up to £23 million. And that's obviously got a knock-on impact through to our gross profit number for the year. Research costs is probably one of the most important parts in the P&L in terms of spend on the development programs, and we'll talk through the plans on those later. From an SG&A perspective, we've obviously got increased costs there given the additional businesses. But on an underlying basis, excluding the 2 acquisitions, SG&A costs are down at 3.5% year-on-year. We have an operating loss of £28 million, which is slightly lower than last year's figure. And then we have the financing and tax costs where we have the R&D tax credits that we repay in cash every year and there's a net noncash charge of about £1 million from the 2 components of the convertible bond that's been taken through the financing section. So we ended up with a retained loss of £25 million and that turns out as a loss per share of just over 9p per share. If I just break the income statement down a little bit further into our segments. Therapeutics, the income coming through from here is the AffyXell milestone that we had during the year. That takes our percentage ownership of that JV up from 19% through to 25%. Obviously, that's a noncash. Our investment increases from that perspective. And the £13 million research costs compare to just under £9 million the previous year. SG&A costs in Therapeutics are broadly flat year-on-year. So the adjusted EBITDA, and that's our noncash nonrecurring items measurement that we use, to £13 million loss at Therapeutics compared to the £6 million for the previous year, and that is purely the drive on the research costs as we head through the clinical programs. I'll move on to the Diagnostics provision. Obviously, we've grown massively from £4 million revenue to £21 million. And that gives us £9 million of gross profit to contribute towards the group. At our important business, we're striving to make Diagnostics a profitable business. And as you can see, it's gone from a loss of £5 million EBITDA to just over £1 million in that period. We believe that the division will be EBITDA positive in the second half of 2024 and it will be cash generative in 2025. So all the investment that comes into the group goes in to drive essentially the Therapeutics part of the business, with Diagnostics covering itself and starting to contribute cash to the business as we move forwards. I'll move on to the cash flow statement. We started 2023 with £45 million, operating cash outflows of £15 million. The investing activities reflects the payment for our Coris business and there's some CapEx within there. So we finished the year with just under £17 million of cash but the fundraise in March contributed a net £29.4 million to the cash. So at the end of March, we had circa £38 million cash. That cash based on our current runways takes us through probably to the start of 2026, which is what we've indicated previously. From a balance sheet perspective, the noncurrent assets has increased year-on-year because of the Coris goodwill. Cash, we've talked about previously. The other items to just mention there is the -- the convertible bond has 2 elements to it and it's reduced from just under £58 million down to £34 million at the end of the year in terms of how the 2 components of it have been valued. The sixth amortization happened on the 22nd of April this year, so the principal amount of the bond is now reduced from £55 million down to £35.7 million as we sit here today. Thank you very much for that. And I will now hand over to Chris to pick up on the business update.

Christina Coughlin: Great. Thanks, Tony. So first, I'd like to introduce you to the research and development leadership team at Avacta. You'll see there our Chief Business Officer, who has been with us for several months, and is quite busy, Simon Bennett; our Chief Operating Officer, Karen Harrison; and then 2 of our key scientists who are making I'll call it the magic happen with the pipeline that I'm going to tell you about in the next slide, who are David Jones, our Head of Biology; and Francis Wilson, who is our Head of Chemistry. So if we move to the next slide. As you know, we recently published our first clinical data with AVA6000 at AACR. This, as you know, was our first peptide drug conjugate in the pipeline. What I want to show you here in this slide is how we've leveraged these clinical data and how we're going to shape the pipeline going forward. This is a complex slide, but it's my favorite one in the deck. It's designed to take you through what is the next chapter for Avacta and where the pipeline is heading. I'd like to first start with a couple of key terms here to make sure everyone is on the same page. The tumor microenvironment and the FAP. Let's look at both their meaning and their importance. First, the tumor microenvironment. We often talk about tumor cells as if they are the tumor, but that just isn't true. The analogy that I like to use here is that of a brick wall. A brick wall isn't just constructed with bricks alone. Any could knock that over. It needs the mortar that holds the bricks together. The same is true of a tumor. Think of the tumor cells of the bricks and the fibroblasts and the immune cells, the stroma, as the mortar, they're holding the tumor together. Protein or the protease that pre|CISION technology leverages, also known as FAP, is expressed on the surface of those cells that are in the mortar, the fibroblasts. And so all of these cell types together form the tumor microenvironment, and we will keep using that term, meaning both the stroma and the tumor cells. So over there on the left, the first modality in the pipeline is pre|CISION alone, and that is a peptide that is linked to a toxic warhead. In the first instance, the toxic warhead is doxorubicin and that is known as AVA6000. This is the original pre|CISION drug, and there are others in the pipeline. And as we saw in the AACR data, the pharmacokinetics are somewhat changed between traditional docs in AVA6000. It's probably the right profile for a cytotoxic warhead, but perhaps not for the other types of warheads that we're interested in pre|CISION enabling essentially. As we published, the half-life of AVA6000 is somewhat short. But again, that's the profile that we want for that truly cytotoxic warhead. If we consider the other types of warheads, let me give you 2 examples. Perhaps an immune-signaling warhead or a pathway-targeted warhead. Each of these is going to have sort of a different desired PK profile. And so to achieve this, we've been working on 2 alternative delivery methods or modalities that are both based on the pre|CISION technology. So in the middle there, what you can see is we have a nontargeted biologic. This is the Fc portion of an antibody that is used essentially as a delivery vehicle but really modulates, changes the PK and you can see here, we describe the extension of the PK. The warheads though are released in the exact same way as AVA6000, meaning they are cleaved in the tumor microenvironment by the FAP that is expressed on those fiberblasts or that part of the mortar. This extension of the half-life here is going to be important for some of the warheads in the pipeline. And then third, as you can see all the way over there on the right, we have sort of truly unique Avacta offering in the pipeline, which is an antibody or an Affimer drug conjugate, whereby we take our pre|CISION-enabled warhead and link it up with a tumor targeting either an Affimer or an antibody. And so this becomes a truly tumor-specific mechanism of action with 2 targeting options, both the target of the Affimer or the antibody and then as well the FAP for the pre|CISION release mechanism. And so this is going to allow us then to implement in the clinic really much more potent warheads than our first one in the clinic, which is doxorubicin. And so we haven't disclosed this entire pipeline. But here, you can get a flavor of the research that is ongoing with that team that I introduced previously. We're leveraging the data in the clinic. We have a deep understanding of just how pre|CISION technology is working in patients who are receiving AVA6000 and we're looking forward to an update to the pipeline in the second half of this year along with an update to the AVA6000 data. In the next slide, I'd like to take a look at what are the key advantages of these approaches. So what you can see here on the left are essentially 5 parameters that we think about and we're comparing our 2 modalities, the peptide drug conjugate and Affimer drug conjugate, with a traditional antibody drug conjugate. Just trying to categorize what essentially are those advantages that we would see in the clinic. Now truth be told, the antibody drug conjugate class is a very good drug conjugate class. These have been quite successful in the clinic. We think though that with the pre|CISION technology, we have the ability to build on that success and create, we think, even better options. So if we first take there in red, the peptide drug conjugate and the Affimer drug conjugate, which are somewhat similar to each other, they have a different mechanism of action than the traditional ADC. And so we see extracellular warhead release with very limited systemic exposure. And so that is going to limit some of those toxicities that are the release of the warhead from an ADC in some places such as the lung. We will see rapid internalization of our warhead in both FAP-positive and FAP-negative cells. Now the reason that that is important is if we go to the second parameter, which is that location of warhead activation. Our warhead is released extracellularly and so it optimizes something called the bystander effect. The bystander effect is a key parameter in ADCs in that this is the way that a tumor antigen negative cell can be killed. That warhead being released in the extracellular space now is free to move into either a FAP-positive or a FAP-negative cell. That is going to be critical moving forward, especially as we show you some of our expression data a bit later. The third parameter there, the linker, recall, pre|CISION is a tumor-specific warhead release. And so we implement that as just the peptide in the peptide drug conjugate, but it's the linker between the Affimer or the antibody and the drug conjugate as we implement both the Affimer drug conjugate and a pre|CISION antibody drug conjugate. This is important because it is nonspecific release by traditional antibody drug conjugates that produce these toxicities that are essentially off tumor, so the lung toxicity is probably the best example there. I'm going to consider a parameter of 5 and 6 together, the drug-to-antibody ratio as well as manufacturing because they sort of work together in thinking about the advantages. The first, under a peptide drug conjugate, we have a 1

Operator: That's great, Christina, Tony. Thank you very much indeed for updating investors. Firstly, thank you to everybody for your engagement, both ahead of today's presentation. We received nearly 200 questions, and you also received a number of questions throughout today's presentation. So perhaps in the best interests of time, we'll go through the categories that you've kindly provided to us, Christina and Tony. And as I said, if I don't read out your question exactly, I do hope that we're able to cover your theme of that question in some of the following. So let's start off, if I may, with the first question. There were multiple questions, I guess, around the placing, the bond and the plan for Diagnostics. So I guess I know you've touched on it, but perhaps you could give us a little bit more color around that.

Christina Coughlin: Sure. Thanks, Mark. Let me start with we are at a pivotal time in the history of Avacta, and we hear your concerns. We have achieved proof of concept with our first clinical program, AVA6000, and these data really demonstrate for us proof of mechanism of this pre|CISION platform. This is critical. It's really one of the key reasons that we say that Avacta is at this pivotal point in its history. As you know, I've been on the Board for 2 years and working with the team here as the Head of R&D for a few months, but honestly, this is my first day in this new role as CEO. I'm going to take a bit of time with our Board to assess what is best for both shareholders and patients alike. I can't address all of these questions specifically today, but what I can tell you is that everything is on the table, everything. I'm working directly with the Board and together, we have identified our 4 key strategic priorities for the short term. Let me tell you a little bit about each of these 4. First and foremost is our Therapeutics' pipeline. We are moving AVA6000 quickly in the clinic, and we are working towards those expansion cohorts, which will provide us with disease-specific data, which is important for us to move the program essentially to the next chapter. In addition to that, we're working on multiple fronts in the pipeline of assets, as we talked about in that early slide. What's really exciting about pre|CISION is just the sheer number of ways that we can implement this in the next program. And the team here at Avacta are working hard on those various options. This also brings me to introducing the team. We have hired our Chief Business Officer, Simon Bennett, and let me tell you, he is quite busy. The commercial deals that we've spoken about, these are really unlocked by these clinical data. And so there are multiple conversations ongoing. Progress is being made on multiple fronts in the pipeline. This is key for myself and the Board to keep this moving. The second of the 4 priorities is financing. There's a number of questions here to address, and we will address them. For now, the Board is working towards the plans to fund all of that innovation that I mentioned earlier. This is a key priority for myself and the Board in the short term, and I will reiterate to you, everything is on the table and we are working together with just a short bit of time here to come back to you on some answers to these questions. The third priority is the planning around our Diagnostics division and how this plays out. Here, myself and the Board, we're looking to maximize value for shareholders, customers and our staff alike, and we are working on a plan in this direction and look forward to communicating that to you in the not-too-distant future. And fourth, which I haven't touched on, but you saw in the RNS this morning is the evolution of the Board. There are some critical competencies here that we know are needed and this is ongoing, has been ongoing in parallel with the CEO search. We know that there is Board evolution needed to take Avacta into this next chapter that I told you a little bit about today. So let's turn to the next question. All right.

Operator: That's great, Christina. We're seeing the communications and reports around the AVA6000 and the AACR presentation. Could you just give a bit more color perhaps around how that presentation was received? And really, what the audience has made up of?

Christina Coughlin: Sure. So the AACR presentation, Professor Banerji from the Royal Marsden was our presenting author. He has enrolled actually the most patients onto the trial, has been working with us since day 1. I can tell you, we did put a few pictures out, photos out on Twitter, but Dr. Banerji did not stop speaking to the various people that came to the poster for the full timing of the session, which was over 3 hours. And at many times during the poster session, the audience was more than 5 people deep. There was a QR code in the corner where people could download the poster and many people just gave up trying to get close enough to actually download it. You asked about the audience, which is a good question. There were essentially 3 stakeholder groups that attended. And the conversations with each of them were quite important. The first, the scientists and the oncologists. So these are the mainstay of the attendees at AACR. They were quite excited about the data, asking about the next steps for AVA6000 and several oncologists who came just with ideas for warheads, you know, "We've got this toxic drug and patient populations that we could use them for." There was a lot of interest around FAP-high versus FAP-mid and that choice of warhead and how important it is. The second stakeholder group that I'll mention, were representatives from other pharma and biotech companies. We had made some invitations to those that have been ongoing. And I can tell you, if Simon was here, he would tell you that most of the major players in this space actually stopped by to see the data. And so there were some ongoing conversations and some new conversations there. Like I mentioned, earlier, these kinds of commercial deals are really unlocked by this clinical proof of concept and the proof of mechanism data that we have here. The third group, which were near and dear to my heart, if any of you follow me on Twitter, you know that many of my followers are in this group, they are patient advocates. There were many patient advocates who I know, who actually dropped by and they're asking about next steps for AVA6000. One advocate was from the Metastatic Breast Cancer coalition and just asking about both AVA6000, what's in the future, and then what also might we be doing, what other drugs might we be able to pre|CISION enable. So you're hearing here some of the themes. It was a very exciting day for us for Avacta. It was really one of the first times that we were able to talk about some of these data with these, I'll call them, 3 key stakeholder groups.

Operator: Let's turn to the next question. You've called AVA6000 the pathfinder for the platform. Are you completely confident that it's succeeded in this, i.e., specifically proven pre|CISION is capable of a, targeting a range of tumor types; and b, proven it's suitable for the safe and effective delivery of other more toxic warheads?

Christina Coughlin: Yes, I love that term pathfinder. It is true. This one went into the clinic initially really to show proof of mechanism of the platform. But let me tell you a little bit about this and why we feel so confident in this. There's 2 key data figures that we published in the AACR data that speak directly to this question. In the biopsy data, which I showed today and that's comparing the doxorubicin concentration in the tumor versus the plasma, there's 2 observations that I'm going to highlight again. First, all of the patients, regardless of that FAP category, have approximately a 2-log difference in the doxorubicin concentration. And so we set out in this trial to show just that, that the pre|CISION technology is able to take a toxic warhead and concentrate it in the tumor microenvironment. The second key observation is almost more important, and that is that FAP-high and FAB-mid didn't seem to make much of a difference in that figure. And so that speaks to the first question there, targeting a range of tumor types. There's a number of patients that can be found using such as a FAP immunohistochemistry or a companion diagnostic. There's a number of FAP-positive patients that can be found in a number of different diseases. And so seeing that the pre|CISION technology works regardless of that distinction of FAP high or FAP mid was very important for us. The second figure that speaks to this that I didn't actually put in the deck today, it was the figure that actually shows the logistic regression analysis, so the widening of the therapeutic index. We see a separation between our observation of severe neutropenia and doxorubicin exposure. The key point in that analysis, the widening of the therapeutics index, which simply, we're seeing responses to AVA6000 at exposures that are significantly lower than those with standard-dosed doxorubicin and we're seeing a distinct lack of toxicity of those exposures. So 2 important observations for the pipeline. The distinct reduction in the systemic exposure suggests, a, that we're really concentrating the drug in the tumor microenvironment. It's being released in the TME and also that we may be able to put even more potent warheads in. We're going to want -- as we discussed early on, we're going to want to be able to modulate and really design the PK of each of these. And Mark, I'll give everyone a teaser. In our third R&D Spotlight Series, which has already been filmed, you're going to see the expert, so our clinical pharmacologist who is going to walk through these 2 figures and give an even deeper explanation. Okay. We can move on to the next one.

Operator: That's great. A number of questions around time lines, time frames, that kind of stuff. Can you comment on the next steps for AVA6000 in the clinic? And is the program still on track?

Christina Coughlin: Yes. So let me reiterate. AVA6000 is slated to both complete the Phase I dose escalation in that every 2-weeks regimen and also to start the expansion cohorts in the second half of this year. Those are one of those key catalysts that I mentioned. Along with that, we will be also updating the AVA6000 clinical data in the second half of this year. And as well, going back to my favorite slide in the deck, we're going to be updating on the pipeline and giving all of our audience here a little bit of a deeper dive into what we've been working on in the labs and some of the exciting things to come.

Operator: That's great. Slightly longer question, so forgive me. Given the initial data from the AVA6000 trial, which shows a significant reduction in the maximum concentration and exposure to doxorubicin compared to standard doses, what additional PK parameters should be studied to better understand the therapeutic window and to optimize dosing for enhanced effectiveness without increasing toxicity?

Christina Coughlin: So the PK profile of the released doxorubicin from AVA6000, this is an area of intense study right now. As you saw, we did put a little bit of data out at AACR this year. We're comparing the profiles, even as I speak, of the every-3 weeks and the every 2-weeks of dosing in addition to some other key parameters. We talked about the Cmax and the AUC, the half-life, some of the key parameters at AACR. But also, just as important is going to be the tissue distribution. This is going to be speaking directly to that reduction in toxicity, but also the elimination kinetics. I can tell you that we are seeing some very interesting differences, I would say, between standard-dosed doxorubicin and then what we see in the various PK parameters. We are very much looking forward to updating in the second half of 2024 regarding these further analyses. These will be part of the clinical update. And we're looking forward to showing essentially some of the modeling that has gone into and will go into and factor into the choice of both the dose and the regimen. This is important. It's a critically important question because our deep understanding of how AVA6000 is working in the clinic really is feeding right back into the labs at Avacta and really feeds into that initial slide describing the evolution of the pipeline. And so we now know that we have ways in the labs now to modulate the PK. And we have ways of essentially modulating both the tumor PK as well as the serum PK. And this will all be part of the pipeline update where we'll be able to show you some of the work that's been ongoing, and that's in the pre|CISION Plus modality as well as the pre|CISION ADC or Affimer DC. These are underscored really highlighting using clinical data that we have to feed right back into the pipeline.

Operator: Second, with the AVA6000, what are the potential mechanisms of resistance to AVA6000 in the FAP-positive tumors? And what studies would be crucial to understand and overcome these resistance mechanisms?

Christina Coughlin: And so let me talk about -- we think that there may be or we can imagine that there may be 2 categories of resistance mechanisms. The first is really something that we've been trying to understand as a field of oncology, not Avacta but oncologists in general, is resistance mechanisms to cytotoxic therapies. And so pre|CISION alone isn't going to be able to change those resistance mechanisms. It's one of the reasons as an oncologist that when a patient has developed progressive disease with a given cytotoxic, we generally tend, in most cases, to move on to a different drug because there isn't cross-resistance there. So understanding in the clinical trial if our patients are developing some of those standard mechanisms of resistance. The second one that we can imagine is perhaps a loss of FAP. We don't think that that is going to happen, however, for a couple of different reasons. Number one is just some data that we've generated in animal models and looking at this. The second is FAP, which we've only really touched on some of the deep understanding that Avacta has in terms of this protein FAP, FAP has been noted in a number of different publications to be a negative prognostic marker. And along with that, what we see is that FAP is almost gained in the setting of tumor resistance to cytotoxics and whatnot. It appears to be higher in those settings of unmet need, which is what essentially underscores that concept of a negative prognostic indicator. It is something that we are looking to positively study in the clinical trial going forward with now our initial biopsy data. The investigators are interested in perhaps even obtaining serial biopsies, that are gold in terms of someone like me who loves this concept of translational medicine, it's how I started my career, are these biopsies that can be obtained even in perhaps the setting of resistance to try and understand some of these mechanisms.

Operator: A couple of questions here. Amongst the 15 FAP-high patients, was there a correlation between the response and exposure or lack thereof to previous therapies that may have triggered tumor resistance?

Christina Coughlin: So we haven't disclosed the breakdown in the prior therapies among the groups. But what I can tell you is that the median number of prior therapies is 3. And that ranges from 0 to 7. There are only a couple of patients there that have 0, which indicates that they did not have prior therapy. So the vast majority of the patients that have been enrolled in the trial would be considered to be resistant to at least one and, in many instances, multiple prior lines of therapy. And as you can see from the AACR data, there was only one patient who had received prior doxorubicin. And we think that the susceptibility to the warhead is a critical piece to consider here. So if we compare again the 15 patients with the FAP-high disease indications versus the patients with the FAP-mid, we also see a big difference in terms of just their predicted sensitivity to that warhead to doxorubicin where soft tissue sarcoma and salivary gland cancer would be 2 indications that would be predicted, and this is based on the literature, not Avacta, but would be predicted to have sensitivity, whereas one might think in the GI cancers, such as colorectal cancer or pancreatic cancer, that we might not expect dramatic responses to the anthracycline mechanism of action. All of these will feed in, and we will be looking forward to updating these data as we get deeper into the second half of this year.

Operator: Great. And I guess a lot of questions around pipeline and Avacta recently spoke about bringing more toxic warheads to the pipeline and the internal work which has been undertaken to expand the pipeline. Is the choice between progressing with this more toxic warhead or AVA3996? If so, when will this decision be communicated and the rationale explained?

Christina Coughlin: So this is correct. Back to my favorite slide, based on the data that we've seen in the clinic, and that includes both the PK, the efficacy, the safety, we have been working on the pipeline very hard internally here. We described there are multiple formats that we can leverage the Pre|CISION technology, not just the pre|CISION drug conjugates, but also pre|CISION Plus, which is going to allow us to take -- We mentioned sort of immune mediated or targeted therapies as warheads, so not just a cytotoxic. We also have the pre|CISION ADC format, the Affimer drug conjugate format. And so we are quite excited about how the pipeline is coming together. And we haven't disclosed the details yet, but what I do commit to you is that in the second half of 2024, we will be disclosing the pipeline. We think it's pretty exciting with a couple of really novel programs coming forward. And with that disclosure, we will also be describing time to the clinic and where we are with each of those programs. So good question, and we very much look forward to that particular update in the second half of 2024.

Operator: Well, Christina, that's the final question. So firstly, thank you to everybody for your questions that you submitted. And as I said at the outset, while we may have not read out your exact question, we hope that we've covered a number of those themes that seem to be coming, recurring throughout the Q&A. Christina, Tony, I'm shortly going to redirect investors on today's call to give you their feedback, which I know will be particularly important to you both. But before doing so, I wondered if I could just ask you for a couple of closing comments and then I'll send investors for their feedback.

Christina Coughlin: Sure. I would like to first thank everyone for taking the time out of your day to come today and to listen. I hope we've conveyed -- although it's day one on the job, I am very excited. We, our entire team here at Avacta, are very excited about our next chapter. The data that we presented at AACR, we believe are truly groundbreaking and have the potential to change the way that we treat cancer. We're very much looking forward to those 3 updates that we will be giving in the second half of 2024. We remain on track in the clinic, and we remain on track with our pipeline updates. And so we look forward to communicating very shortly.

Operator: Christina, Tony, thank you once again for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Avacta Group plc, we'd like to thank you for attending today's presentation and wish you all a very pleasant afternoon.