Good afternoon, and thank you, and welcome to AbCellera's Second Quarter 2023 Business Update Conference Call. My name is Jason, and I will be the facilitator for the audio portion of today's interactive broadcast. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] At this time, I'd like to turn the call over to Tryn Stimart, AbCellera’s Chief Legal and Compliance Officer.

Thank you. Good afternoon, and welcome to AbCellera's second quarter 2023 business update. We are pleased to have you with us today as we discuss the results announced in our press release issued after the market closed today, which you can find on our Investor Relations website. With me on the call today are Dr. Carl Hansen, AbCellera's Chief Executive Officer and President; and Andrew Booth, AbCellera's Chief Financial Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. If you are following along on the phone and wish to access the slide portion of this presentation, you may do so on the Investor Relations section of our website. For those of you who have access to the streaming portion of the webcast, please be aware that there may be a delay in that you will not be able to post questions via the web. This presentation may contain forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements are based on management's current expectations and are subject to certain risks and uncertainties. Please review our SEC filings for certain risk factors that could impact our future performance. Our presentation and SEC filings are available on our Investor Relations website. Note that all dollars referred to during our call today are U.S. dollars. Now I am pleased to turn the call over to Dr. Carl Hansen.

Thanks Tryn. In preparation for today's call, I was reflecting on conversations that we've had with investors over the past few years. In the best of cases, we've had the opportunity to build deep relationships, and a clear understanding of what we're doing as a company as well as trust in our ability to execute. In newer relationships, we often get questions from investors that are related to antibody -- the antibody discovery space and how our company or our platform or strategy differs from competitors. Accordingly, I thought, I would start today by sharing some perspectives on the different markets and business strategies that are associated with antibody therapies. First, antibody discovery is not one thing. It is a collection of hundreds of different steps each contributing to the goal of finding a best-in-class therapy that meets all the needs for a therapeutic program. Some examples of these activities include reagent generation, immunization, screening, sequencing, DNA synthesis, molecular engineering, expression purification, functional testing, affinity maturation, immunogenicity assessment, biophysical characterization, liability assessment and much, much more. It's a long list. The point is that antibody discovery cannot be reduced to a single technology. It can't be built overnight. And it takes many years of investment and hard work to assemble and integrate the people facilities technologies know-how and relationships that are needed to bring drugs efficiently from the idea stage to clinical testing. The better these capabilities the greater the speed the efficiency and the likelihood of success. This is what we've been building over the past decade. When anybody discovery is successful, it results in a small number of antibody sequences. Typically, a development candidate and a few backups that are ready to advance into cell line development and IND-enabling studies, and then into clinical testing. Given the difficulty…

Thanks Carl. First, let me highlight progress made in our key business metrics in the second quarter of 2023. This quarter we started work on five new discovery programs, taking us to a cumulative total of 106 partnered program starts. As a reminder, the number of starts in any given quarter will be irregular. Over the trailing 12 months, we have started work on 18 partner-initiated programs. We signed no new programs under contract in the quarter and ended the second quarter of 2023 with 177 programs under contract with 41 unique partners. As we have stated in the past we continue to do more work and add more value per program. We focus on and emphasize the quality of the programs that we work on rather than their absolute number. As we mentioned on the last call the numbers included in our key business metrics do not include pre-partnered programs from our internal technology development efforts. We see evidence of the differentiation of our engine and the value it creates when it attracts partnerships from the most innovative and best-established drug developers in the industry. Additional evidence that we're creating value is when our programs reach patients through clinical trials and in Q2 2023, we continue to report nine molecules in the clinic. And we view this growing list of molecules in the clinic as specific examples of our near and midterm potential revenue from downstream milestone fees and long-term royalty payments. Turning to revenue, revenue in the quarter was approximately $10 million, almost entirely driven by research fees relating to work on partner-initiated discovery programs. This compares to approximately $13 million in Q2 of 2022. The decrease is primarily due to a shift away from work on higher upfront free programs such as our contract with DARPA on…

[Operator Instructions] Our first question is from Andrea Tan with Goldman Sachs. Your line is now open.

Hi, everyone. Thanks for taking our questions. Carl maybe one for you. First thanks for the thoughts on, how you're differentiated from others in the antibody discovery business. I wanted to ask you though on AI, if there has obviously been a lot of focus here and excitement in the area particularly around, how it can be leveraged to disrupt the drug discovery and development process. Would love to hear your perspectives here on -- on where this technology stands today how you're using it specifically in your platform and your thoughts on where it goes from here? Thanks so much.

Thanks, Andrea. I appreciate the question. Certainly, there's a lot of buzz out there, and we have a lot of conversations with investors who are trying to understand what is real in the AI space and what is not. First, one perspective is that what has happened recently is that there have been some big breakthroughs in AI associated with technologies that everyone can see and understand, most obviously Chat GPT. I think the naive assumption then is that AI has reached a tipping point where it can solve any problem. And people are racing to find where is AI going to make the biggest difference in other sectors, including antibody discovery. So I've actually had people come to me and ask what does Chat GPT mean for your business? The short answer is it means nothing for antibody discovery. The conclusion is that in order -- if you have huge data sets and you have the ability to quickly refine models. We have examples now in alpha fold and Chat GPT that AI can create some big lift and some surprising power in doing prediction. In the antibody space, there's been a lot of talk about generative AI. And there's a couple of dimensions of this that I think people should think about more carefully. So the first is how you set up the problem. And very often, the problem is set up as I've got a target, and I'm going to use a machine learning algorithm in order to try to design an antibody that binds on a specific part of the structure. So if you set it up that way, the first thing that you're doing is you're making an assumption that you know where you want to bind on a target to get a good drug.…

All right. Thanks so much.

Our next question is from Antonia Borovina with Bloom Burton. Your line is now open.

Good afternoon and thanks for taking my question. So my first one is regarding the acquisition of EQRx, which is one of your co-development partners. So just wondering is there a path forward for those programs that you were co-developing with them? And are any of the EQRx programs included in the six co-development programs that you started to-date?

Great question. Carl here. I'll take that one. So we have started three co-development programs with EQRx. Those programs our understanding is they will not be developed by revolution, but those programs the way that that deal is structured AbCellera has a 50% ownership or an option to have a 50% ownership in each of these. Those are programs that are exciting and we're currently talking to EQRx about what will be the fate of those programs that they'll be spun out into a different company or they'll be returned to us. Either way we would either maintain our option or our percent ownership or we would have full control of those programs moving forward. And so either way I think that there's a path forward. And I don't expect that the transaction that's happening is likely to slow down the development of those. All of this is very new of course and we are talking to the EQRx team to see what is the best path to those.

Okay. Great. And I just have one additional question and it's regarding your CD3 panel. So you've generated some pretty compelling data in mouse models, but just wondering if you could provide a rough time frame for when we could see additional data including in nonhuman primates. And also do you believe these studies are necessary to sign a blue-chip partnership?

Okay. I'm happy to take that one. So with respect to the TCE programs as you said, we've done terrific work and have laid, I think, a very impressive foundation in the science for the platform that is focused on being able to generate next-generation TCEs. So that includes what is now, we believe, the largest and best characterized and, in our view, the highest quality panel of anti-CD3 antibodies as well as the OrthoMab platform to combine those and the functional assays to quickly bring them together with tumor-associated antigen binders to make therapeutics. On the basis of that work, as mentioned before, we have initiated five TCE programs on a variety of different tumor-associated antigens. Two of those were announced previously and presented. That was the MAGE-A4 work and the PSMA work. At the same time, we have been engaging with a variety of players. I would say probably certainly a large portion if not the majority of the blue-chip companies that are actively interested in the space. The feedback has been first that this space remains a very high interest. So that's a very positive signal and that the science and the caliber of the platform that has been developed is world-class. I've had at least a couple of conversations where it was characterized as the best it has been seen in the industry. So those are conversations that are going well. In order to bring that to a deal that would be of the value that we expect and intend to get on this platform, I think it probably will require more work -- and the work I don't think is in generating primate data, but rather improving that the diversity of CD3 and the quality of the science at the back end can be used to generate assets to have the profile that appears to be superior to what is being developed using other technologies. So that work is underway. That's associated with our TCE programs. And we are intending to present that at one or more major scientific conferences in the next few months, hopefully, this year.

Okay. Thanks a lot.

Our next question is from Steven Mah with Cowen. Your line is now open.

Thanks for taking the questions. I appreciate you're not giving guidance for 2022 and that milestones were 0 in the quarter. But how should we think about milestones this year. I'm asking because one of your peers indicated that their milestone expectations are being pushed back. Can you give us a sense of what you're seeing in terms of milestones, PEMCO being pushed back at Aclara and I appreciate you guys don't have a ton of color either with your partner program.

Yes. Steve, it's Andrew here. So thanks for asking the question. Yes, as you know, we don't provide the short-term guidance on in the business, including on the milestones. I think it's very difficult for us to predict, and we don't have that kind of visibility, as you alluded to. And that has been consistent in the past where upon the achievement usually of the start of a Phase I or submission of an IND, we as well are just notified without a lot of advanced warning. So -- but we don't have any reason to believe why we would be on a different trajectory than we have said in the past with the same kind of frequency we've seen in the past

Okay. That's helpful color. Next question. With regards to the new partner adds and reprogram starts, are you seeing any slowing there? If I'm doing my math right, you had new program starts in the second quarter. Can you provide us any color? Is that what you expected? And then also of these five new starts can you give us some color as to what type of partners behind those new program starts? Are they emerging biotechs established biotechs or pharma or all across the board?

Yes. So, five is -- we have reported five previously. It's probably roughly a run rate that you saw in the previous year. And as we mentioned over the last 12 months we've had about 18. So it's roughly in line with that and what we would expect. In terms of the makeup of the partners behind them, it's a mix of partners we've signed with multi-target deals who are calling their program and then it normally takes some time before we actually register those programs as a start. And then contracts that we've signed maybe more recently and so more recent deals in the past two of the more recent deals we've signed of course one was with AbbVie in the latter half of last year and then with RQ Bio earlier this year. So, it's roughly a similar mix as it has been in the past. I don't think we've noticed any particular shift one way or the other between different customer types.

And then, if I could sneak one last one in real quick. Berkeley Lights litigation, I know the USPTO denied Berkeley Lights, rehearing request on your patents. Does that mean, it's put to bed, or can they still appeal?

This is Carl, here. So I believe there has been an appeal. But at this point, we have successfully defended the patents. So we have a validation that the patents are in place and valid and we are looking to move forward with the litigation. Beyond that, I would pass it off to Tryn on our legal counsel.

Thank you.

Our next question is with Stephen Willey with Stifel. Your line is now open

Yes. Good afternoon. Thanks for taking the questions I guess maybe just a follow-up on the last question. And I know that you guys have kind of prioritized some of the more wholly-owned pre-partnered programs. You're doing more work. You're adding more value to each program. But I guess, when I just look at the last six months or so there's I think three incremental programs under contract as was said before, five incremental partnered program starts and then one incremental discovery partner over the last couple of quarters. So I guess, when we think about the base business in terms of how the partner programs look over the last six months, how should we think about extrapolating that out to the next six or 12? Thanks.

Sure, Carl, Steve here. Sure, Steve. Carl, here. So, great question. So first of all, it's been some time ago I think it was 18 months ago or more where we signaled and have been consistently signaling that in the partnership business, we are really emphasizing perceived value and quality over quantity of deals. The reason for that of course is that, our business is in working on programs that actually make it through the gauntlet and become drugs. And so it matters for us how many of the winners we work on not how many total programs we work on over time. The other thing is that in the business development, we have been looking to build relationships with companies and find opportunities where our technology can really move the needle and where we can do more work. So on both of those fronts, we have been very selective about who we work with and we have been turning away opportunities where we don't think that the investment of time or capital is warranted as compared to other allocations of that time and capital, which would be on building the platform, advancing technology or advancing pre-partnered programs. So that has been the way we're running the business. Now that said, we just had a recent review of the pipeline. I can say that the quality and also even the quantity of deals that are moving forward is as good if not better than I've ever seen. It always takes time to close these but we feel really good about where we are. The other thing that I think is happening and I've been asked this before and I feel like we're starting to see a trend is that there is a macroeconomic factor in play here. And so I…

Okay. Great. That’s very helpful color. Thanks.

Our next question is from Malcolm Hoffman with BMO. Your line is now open.

Hey, guys. Malcolm on for Evan Seigerman. So I wanted to ask I know you said you are focusing on the quality of partners rather than the number. I was just curious to see if you can maybe quantify the number of interactions you're having with potential partners that you ultimately don't agree to pursue. Are there significantly more potential partners reaching out that you don't agree to move forward with, or are most interactions likely to proceed to a partnership?

Yeah. I don't think I'd be able to provide numbers in terms of the funnel. But the reality is that we filter out far more opportunities that we seriously engage in and there's quite a stringent filter at the very beginning. As a concrete example and related to the question on the TCE platform before we have had multiple opportunities to create partnerships around access to the CD3 panel and to the biospecifics. And in numerous cases we've walked away from those, because we believe that by taking it further we can generate more value from that platform than where we are today. And that's a decision that reflects our commitment to make sure we're doing things that drive long-term value and not just trying to do deals to put up numbers in the quarter. That's the way we're going to run the business.

Appreciate it. Thanks guys.

Our next question is from Puneet Souda with SVB. Your line is now open.

Hi. You have Michael on for Puneet. Thanks for taking my question. I was wondering if you could give a bit more detail about the macro headwind. We're particularly interested in any color you can provide in China. I'm not sure if you have much, interactions there, but I'm curious, if you have any thoughts on the sentiment there?

Yeah. Hey thanks. No. We don't have any partnerships at the moment that are in China. And so we don't see any negative headwind from that. I don't know if that sufficiently answers your question.

Yeah. No. No that makes sense, you gave some exposure. And then, a quick question regarding the new facility you're building out with the Canadian government, so you mentioned that as part of that build out you'll be taking some pre-partnered programs to Phase 1, I'm just curious if taking out -- doing clinical development all the way to Phase I if that's something that's going to be purely for pre-partners or if that's going to be extended out to like co-development or your partnered program.

Yeah. Great question. So the funding that we have with this overall project that Carl had mentioned in his prepared remarks, involves taking a certain number of programs from target all the way through to the clinic and including a Phase 1. But our GMP manufacturing facility is not exclusively going to be used for just those pre-partnered programs. It may also be available and we would expect it to be used for co-development programs and even in some cases for partner-initiated or partnerships straight partnership deals.

Got it. Thank you very much.

Our next question is from Gaurav Goparaju with Berenberg. Your line is now open.

Hi guys. How's it going? Just two questions for me. Broadly speaking, how should we think about your current capacity or bandwidth for pre-partnered program starts in discovery in addition to partnered program starts prior to the facility expansion?

Hello, Gaurav. Carl here. Sorry, I'm not sure, I quite understood the question. Could you maybe rephrase?

So ultimately -- basically I just -- just capacity constraints. Is that something you're thinking about when strategically considering getting into a new program start? Just trying to think if you actually have the physical bandwidth to let's say you have 12 active program starts for example, as you do right now?

Yeah. Sure. So first like at any given time we may have anywhere from a dozen to 25 active programs in flight at various stages. So we certainly have that capacity in place. And in fact, we have never been in a position where we've entered a partnership or closed a deal or had a partner call a program where we were capacity limited and weren't able to execute on that. So we scale up. We pull levers to make sure that capacity is available to always be able to execute. Now, at any given size, and we've built a lot of efficiency and a lot of capabilities over the last couple of years, there is some overall capacity of work and resources that can be allocated. And what we're doing is making sure that we're bringing that to bear on the most valuable ideas that are out there as well as on the platform development. So there's an opportunity to throttle up and down on partner-initiated and pre-partnered programs depending on how we see the mix at a given time.

Yes, Gaurav, if I could just add to that we continue to also see in our R&D expenses about one-third of the R&D expenditures are on program execution for our partners and about two-third still on platform development including the work on pre-partnered programs. And as you've noted over the number of years, we can have -- continue to invest and execute on our plan to build out the capacity and build out the scale of the company. I mean, over the last few years, we've grown from about 150 employees to now over 600 employees, recruiting top talent in the CMC and GMP to complete that vertical integration right through to be able to produce drug product and building out all of this lab space and lab and office space. So it's a significant investment and we pride ourselves on the execution there bringing us to executing on dozens of different programs over that period of time. And all of that while increasing our available liquidity and capital that we have is I think really speaks to the strong execution. And as Carl mentioned we have never been in a position where a partner has called the program and we have not been able to initiate that program with some speed.

Got it. That was helpful. And then a quick follow-up. Are there any updates on development regarding the third-generation COVID-19 antibody at Eli Lilly that you guys have mentioned in the past? Is that work being put on ice, or should we expect updates from this program in the near future?

Great question. We haven't talked about that for a while. We are still actively engaged with Lilly. I believe we have molecules in hand that would be an effective solution and at least by my understanding are toe-to-toe if not superior to other ones that I've seen out in the space. The big question right now is about the path in clinical development. And right now there's no uncertainty on that. So if it happens, we're ready to step up. I believe that's also true of our partners at Lilly and we view it right now as upside on the business.

Great. Thanks guys.

[Operator Instructions] There are no more questions. So I'll pass the call back over to the management team for closing remarks.

Thanks everyone for joining us today. We remain excited about AbCellera's future and are excited about the progress that's being made and we look forward to speaking with you on future calls.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.