Good morning, and welcome to the OmniAb Inc.'s First Quarter 2023 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Kurt Gustafson, OmniAb Inc.'s Chief Financial Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you all for joining our first quarter 2023 financial results conference call. There are slides to accompany today's remarks, and they are available in the Investors section of our website at omniab.com. Before we begin, I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. These forward-looking statements are qualified by the cautionary statements contained in today's press release and our SEC filings. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, today, May 11, 2023. Except as required by law, OmniAb takes -- undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Joining me on the call today is Matt Foehr, President and CEO. During today's call, Matt and I will provide highlights on the company's operations, partner and technology updates and our recent financial results. At the conclusion of the prepared remarks, we'll open the call to questions. With that, let me turn the call over to Matt Foehr. Matt?

Thanks, Kurt. Good morning, everyone, and thanks for joining our first quarter 2023 financial results conference call. OmniAb has been an independent publicly traded company for just about six months now. So I'd like to start off this morning by taking a quick moment to welcome our new investors and new analysts who are joining today and to just briefly describe a bit of what we do. OmniAb's business model is focused on licensing our proprietary discovery platform to enable our partners to rapidly discover innovative therapeutics. We generate revenue from upfront payments for access to our technology stack. From collaboration or service revenue when a partner asks us to do work for and with them from milestone payments related to advancement of clinical phases, regulatory or commercial achievement and from royalties on net sales of our partners' products. We believe OmniAb has the most diverse host systems for fully human and bispecific antibody discovery with the Industry's only 4-Species Platform. Our technology stack is driven at its core by the biological intelligence of our engineered transgenic animals paired with our high-throughput screening technologies to enable the discovery of high-quality fully human antibody therapeutic candidates for a wide range of diseases. Our robust base of experience, coupled with our close collaborations with partners gives us critical insight into the industry and creates a positive feedback loop to advance and expand our proprietary platform. We strive to keep our technology offerings at the forefront of our industry. And in a few slides, I'll discuss our branded OmniDeep offering, which leverages in silico capabilities such as structural modeling, artificial intelligence and machine learning across our technology platforms in order to further enable our partners work. OmniDeep is the first of our technology launches this year. As we also plan to launch our…

Thanks, Matt. As a reminder, the financial results reported from the prior year period are prepared on a carve-out basis, which were derived from Ligand's historical accounting records, as if OmniAb were an independent company. This makes certain comparisons difficult, primarily for operating expenses, given the differences in the methodologies for reporting. Now let's walk through a few of the highlights for the quarter. Total revenue for the first quarter of 2023 was $16.9 million compared to $9.6 million in the prior year quarter. The revenue increase was primarily due to the recognition of the remaining $10 million milestone payment for the first commercial sale of TECVAYLI in the EU. I mentioned on our last conference call that we received a $35 million payment from Janssen and that $25 million was recognized as revenue in the fourth quarter for the first commercial sale in the U.S. I also stated that we would likely recognize the remaining $10 million milestone payment later in the year. However, in April, we received information from Janssen that met the criteria for recognizing the EU portion of this milestone revenue in the first quarter. Like last quarter, our service revenue was down slightly as a result of less work being performed for some of our ion channel partners based on stage and status of these exclusively licensed programs. Turning to operating expense. Our R&D expense for the first quarter was $13.8 million compared to $10.8 million in the prior year quarter. The increase was primarily due to higher personnel costs and higher costs associated with our new facilities. G&A expense was $8.2 million compared to $4.1 million in the prior year quarter as we staffed up these functions and incurred other costs associated with being a public company. The net loss for the first quarter…

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from Robyn Karnauskas from Truist Securities. Please go ahead.

Hi. This is Nishant. I'm on for Robyn. Thanks for taking our questions and congrats on all the process. So one question on OmniDeep. I know -- I mean, you just believe that biological intelligence is a better way to produce antibody. But just wondering if you're willing to leverage OmniDeep platform to kind of create novel antibodies just in silico, is that something like a plan for the future?

Thanks, Nishant. Yeah, good question. And I'll first talk a little bit about the branding of OmniDeep, and it's really a nod to the term deep and OmniDeep is really a nod towards deep repertoires, right, that are -- that the biological intelligence of our animals produce, the deep screening and in terms of our screening capabilities with exploration and other proprietary capabilities to deep sequencing and ultimately to deep learning as well. And we'd already been leveraging in silico tools and AI in our downstream work, especially on the screening side and in some of the work around ion channels and transporters really for some time. And I'd be remiss if I didn't note that we have some really fantastic in silico experts on our team who are really impressive and important teammates and have been for a long time. We actually announced a deal a couple of summers ago with [Indiscernible 0:18:48] and talked a bit about it then, and that work expanded considerably over the last 12 or 18 months or so that work was centered around our exploration screening platform. And kind of as you're generally referencing, there are obviously some public and sporadic examples of concordance of predicted structures with actual crystal structures, right? So this is a scientific resource that's available to us and really to everyone else in the drug discovery space. But that I'll say that area of work really is not perfect. There are many, many classes of proteins where it's not so good at all for a variety of reasons. And similarly, designing antibodies based on predicted antibody structure from sequence has a lot of very well-known limitations and the uncertainties are really compounded in that quite a bit when using a predicted but not verified antigen structure, which creates…

Great. Thanks. And in terms of the economics of deals. So as you do more deals for difficult targets using your new advanced technologies, is there variability in terms of economics, like do you negotiate higher economics for these type of deals versus the others, which are like more simpler targets?

Yeah. In general, we've obviously got a core commitment as part of our strategy to continue to innovate around the platform, to really continue to keep it cutting edge, right? And that takes a variety of forms. That's not only workflow enhancement, it's also continued genetic engineering. As I said, we're going to be launching a heavy chain OmniChicken in the fourth quarter. And it's really leveraging the positive feedback loop that we have from our partners and really understanding not only where they are today, but where they are headed. Generally, when it comes to deal structures, maybe I'll let Kurt comment a little bit on kind of the elements of economics of our deals. But it's really an interchange of kind of the work that we're doing that the technology that partners are leveraging and then that kind of is reflected in the structure of the deal. But Kurt, maybe you want to comment there?

Yeah. I mean for the most part, the economics of all of our partnership deals are established and set at the time that we sign those deals. So they're sort of fixed in nature in terms of what milestones and royalties will be. That being said, to the extent that we're performing additional work, we or partners, we would earn additional service revenue for those types of things.

And just the last one. I mean, I know you provided you guidance for a number of new clinical molecules that -- new molecules that will enter clinic in this year. Just wondering, I mean, you are seeing a nice consistent trend of around like 10 new project starts every quarter. Do you plan to like provide guidance for new project starts for the year?

And in terms of guidance for -- the only guidance that we're providing is really just sort of this guidance on the number of clinical starts. And the reason for that is it's sort of a number where we do have some visibility in terms of discussions and insight from partners. As it relates to kind of program starts, it's a really difficult thing for us to project given the way partners start new programs. So I would doubt that we would ever provide guidance on that number. But to the extent where we do have visibility, like I said, on kind of clinical starts, that's where we've tried to provide a little bit more guidance here.

Great, thank you. Thanks for taking our question.

Sure.

Thank you. Your next question comes from Stephen Willey from Stifel. Please go ahead.

Yeah, good morning. Thanks for taking the questions. Maybe just a follow-up on the OmniDeep. Is that technology that a partner with just a broader platform license would have access to? Or is that technology that a partner who comes to you looking for a full end-to-end solution would benefit from, given the way that it's kind of woven into the tech stack?

Yeah. Thanks, Steve. This is Matt. Yeah, it really is woven throughout our tech stack, right? And there are elements of this that we're now branding as OmniDeep that we've been leveraging for years. And so it's been an important part of it. We've expanded it over the last 12 to 18 months. And we are employing these techniques for partners, especially some of our larger partners. So to answer your question, it's part of the benefit, if you will, that partners get when they partner with us, right? They know they're coming to us. They get cutting-edge technology. They get continued innovation and a commitment to continued investment around the platform. And I think that's what drives our partners use of the platform. That's one of the reasons I think they're excited about the things that we do and why our science team is excited about it as well. So hopefully, that gives you a little perspective there.

Okay. And then you talked about launching the heavy chain chicken species in -- I think, the fourth quarter of this year. I guess, how do you think about what the demand for that will look like it. I guess I asked the question. I know that you guys launched OmniTaur, I think, back in 2020, and I think kind of per -- one of the slides you have in the deck, I think 2% of demand looks to be centered around that technology. Would you expect the heavy chain chicken to improve upon, I guess, kind of that 2% OmniTaur demand metrics.

Yeah. Thanks, Steve. I'll say for OmniTaur, we actually are seeing an increase in starts there, and that percentage is going up. Obviously, when you have over 300 programs it can be -- the percentages are going to shift around the edges, but OmniTaur is an area of growing and increased interest, and we have had new starts there. On the heavy chain antibody side, that's an area of growing interest in the industry, domain antibodies, heavy chain antibodies, nanobodies, [indiscernible], that sort of thing. So we do see a demand there. In fact, we do have partners who are already inquiring and lining up for use and access to the heavy-chain chicken when it becomes available in December. We'll probably talk more about where we see it fitting into the overall landscape at the time we launch it. But hopefully, that gives you a little bit of color.

Okay. And then maybe just lastly, you can kind of speak to the average royalty rate on the royalty-bearing assets across the portfolio right now. Where you think that metric can kind of realistically expand to over the next three to five years? And then maybe what are the key levers that allow for that expansion to occur? Thanks.

Yeah, Steve. So I guess the way that I would sort of frame that question is there are two products that are approved right now where we're receiving royalty and that is a flat 3% royalty. In terms of royalty rates that for the entire portfolio, we haven't given a specific number, but it's generally in the low to mid-single digits. And I would expect, based on kind of as we get out into the future that, that 3% number would go up based on sort of deals that we've signed. That being said, it's going to be a function of sort of what individual deals are that kind of move forward. But in general, I would expect that number to [indiscernible 0:28:49] Operator, can we go to the next question?

Of course. Your next question comes from Joe Pantginis from H.C. Wainwright. Please go ahead.

Hey, guys. Good morning. Thanks. So I guess I'm going to approach OmniDeep from a marketing standpoint. So whether you get inbounds or whether you're out there marketing your overall platform, how would you say OmniDeep differentiates from other in silico approaches?

Yeah. Thanks, Joe. Really, it starts at our core, I'll say, which is our foundation of biological intelligence in the deep repertoires, the proprietary multi-species antibody databases that we possess that have been built up by doing many, many, many programs over many, many years and then pairing that with cutting-edge technology. As I said, this is an area that's been woven throughout our tech stack in pieces for years. But we've leaned into it more over the last 12 to 18 months, really leveraged some of the expertise that we've had internally that had been built up over time in some of the organizations that were acquired that formed the foundation of OmniAb. But really, what differentiates it is pairing some of these tools and capabilities with our transgenic animal systems and the biological intelligence and capabilities. Again, the term Deep is a nod to deep repertoires, the deep screening capabilities that we have deep sequencing as well as deep learning elements that we've invested in. And as we launch this next week at PEGS, as I said, Bob Chen, who heads our systems engineering will be presenting at the PEGS meeting in Boston, also with some case studies around targets where this sort of work has really been able to be highlighted, things like NKp46 and other areas where I think partners will realize and some partners are already benefiting from these capabilities, kind of the power that this creates within our business model.

No, that's helpful. Thank you. And then I guess two little questions, housekeeping expenses for both of you, I guess, are there any changes to the terms or everything sort of status quo with the CStone announcement? And number two, regard to OmniDeep, for example, any key infrastructure investments that need to come from that at this point?

Yeah. I can comment on CStone. Yeah, Joe, you're referring to CStone announced earlier in the week, they regained development commercialization rights to sugemalimab outside of Greater China. And yes, no change at all to the economics to us. Obviously, assets do change hands from time-to-time. We've seen that at times, and there's no change there. Maybe I'll let Kurt comment on expenses.

Yeah. No additional expenses related to OmniDeep or any of these other programs relative to -- we're still sticking with the guidance that we have. So no major change to that.

Fantastic. Thanks for the color guys.

Yeah, thanks Joe.

Thank you. Your next question comes from Puneet Souda from SVB Securities. Please go ahead.

Yeah. Hi, Matt, Kurt. Thanks for taking the question. So first one on maybe a broader one, just given what we're hearing in the marketplace and in terms of small biotechs emerging biotech funding constraints. What are you seeing within the business development pipeline? Maybe can you give us a high-level view there? And then also within the 260 discovery programs that you have, are you hearing anything in terms of cancellations or potential for that sort of in the next two quarters?

Yeah. Thanks, Puneet. So first, I'll just comment on your last question. All the numbers we report are net of attrition, right? So whenever we report our numbers, they're net of attrition. And of course, you do see attrition at any time, that's a natural part of the pharmaceutical business, of course. But your question on the macro environment, obviously, we are students of the industry as well and have been for some time, and we do have I'll say, a really interesting vantage point on the industry given our 70 different partners, over 300 programs. But in answering your question, I think I'll first point historically, and note that we've been able to grow our number of partners and number of active programs on an annual basis through a variety of macro funding cycles in the industry in those times when raising capital for smaller partners was relatively easy or in times like now where it's viewed as more complex. And I'll speak for our business more specifically and say that the diversity of our partner base with a mix of global big pharmas with biotechs, with start-ups who have interesting biology. But that diversity brings a lot of power to the business, and I think positions us well to create long-term value for our stakeholders as cycles come and go. Our deeper relationships with partners also informs our innovation. That obviously creates what we call the positive feedback loop and really -- I'll say, informs our conviction around continued innovations for our platform. And also, I'll say -- I say this to our team a lot internally as well that when you see cycles in the broader landscape, generally, that these are the times when true innovation and true differentiation, but innovation wins, if you will, and partners come to us to help them discover new drugs to get scientific solutions, that's why they come to us is for that innovation. So could some of the things that are seen in the macro landscape, if sustained, influence some of our metrics at some point? Sure. I think it would be odd to say that it absolutely could not. But that said, we do think that our innovation will win out, and we really like how we are positioned because of that. Our business development team remains extremely busy. The vast majority of our deal, dialogue and deals have come from inbound interest or scientist migration that continues to be true. And we are leaning into, I'll say, more conferences. We used to do about a half a dozen or so conferences a year. We're increasing that by about 3x over the next 12 months. So that's hopefully a little bit of color there for you.

Yeah. No, that's great. On the business model, the way you're offering is, can you talk to us a little bit on sort of how cost-effective it is versus the traditional model where the work is being done under sort of one roof in some of your competitors. Can you talk about what sort of leverage do you have if the market was to get tougher how can that offering resonate potentially more with your customers? Thank you.

Yeah, it's a great question, Puneet, because our business is highly scalable in terms of the way we've structured it. So our -- the deals that we have when partners come to us, depending on the type of species they use, and we'll use OmniRat as an example, in that case, in many cases, we do very little work for the partner. We ship them the rats. They have the capabilities to do the inoculations, do the screening themselves. And we really just kind of get quarterly reports on the work that they've done. So in terms of OmniRat, that business is almost theoretically infinitely scalable without us adding additional costs. When it comes to OmniChicken, we actually have to go do some of that work ourselves on the front end because we're the only ones that house the chickens. But we sort of pride ourselves in having this flexibility or flexible business model, right, where partners can come and pay us to go do all of the work, right? So we can do screening and optimization for them, and we'll earn extra service revenue for that. But to the extent that the partner has those capabilities and wants to do that work themselves, that's fine, too, and they take over the work and do that. So our business model tends to be much more scalable than others just in terms of the way that we operate with our partners and the fact that in many, many cases, our partners are doing the majority of the work themselves.

Got it. Okay. Great. Thanks, guys.

Thanks, Puneet.

Thank you. Your next question comes from Steven Mah from TD. Please go ahead.

Great. Thanks for the questions. And congrats on the quarter. And maybe just a follow up on Puneet's question on when you're doing like a transgenic animal license like -- like it seems like to me, maybe you can confirm on the Scripps licensing deal, that's an OmniRat license where Scripps is maintaining the colony and doing the work for themselves. Is that right?

Yeah. Without going into deeper specifics around, I'll say, the workflows for certain partners, right, on a specific basis. Maybe I'll just describe it generally -- we -- one of the things we have started to focus on over the last year or so is continuing to advance partnerships with leading academic institutions. And Scripps is an example of that. We've got a great network of academics, not only through kind of the history that we've built up of genetic engineering first, but also through our board and others and Scripps is an example of an organization that has a history of innovation and interesting biology. So they want access or taken access to our animals. And then from there, one of the benefits of these sorts of deals, and we have -- we've done these with other academic institutions as well is that these are ones that also have a history of licensing and/or seating and spinning out innovative companies. And in this instance, with the Scripps Institute, the assets that came out of our technology there, are now in development at Cessation Therapeutics, Cessation developing novel immunobiologics to prevent a fentanyl overdose and to treat fentanyl addiction using really, what is a completely new approach is really by sequestering fentanyl before it's able to enter the brain to offer more durable protection for overdose. So kind of an interesting new area of science but this is an instance where it's a partnership through a leading academic center who had some interesting novel biology that now then led to assets being moved forward at a company.

Okay. Yeah, I appreciate the color. And if possible, can you give us a sense for the economic structures of like a transgenic animal licensing deal where I mentioned where they maintain the colony themselves and do the work themselves versus like a full platform deal like the one you signed with Neurocrine in the second quarter?

Yeah. In terms of the way the deals are structured, the partnership economics are all built the same, right? So we don't -- to the upfront, we don't sort of say, hey, if we're going to do a lot of work for you, then that's going to come at a higher royalty rate or higher royalty rate. The idea is that the economics in terms of the upfront and milestone payments and royalties, they're really established upfront. And they're independent of whether or not we tend to do or whether we're going to do a lot of work for the partner on a program or not. Because in some cases, you'll have a partner where they might be set up to do an OmniRat program where they do all of that work themselves. And then the next program they decide to go do is with OmniChicken, whereas we're maybe doing a big chunk of that work. The economics in terms of milestones and royalties will be the same, although in the case of the OmniChicken program, that's where we would earn additional service revenue as we do work. So the basic structure of the deal is sort of the same for all programs that a partner would go do, the difference would be to the extent that we're doing additional work is the additional collaboration revenue that we would earn.

Okay. That's really helpful color. And last one for me on OmniDeep. Is this something that can be monetized as like a software, as a service to others or to, for example, partners that are just doing the transgenic animal license route?

I think the answer to that is it elements of it potentially could, but you could say that about a lot of elements of our technology stack, right? We've got proprietary pieces of our technology that one could use the portable word around from a number of perspectives. But generally, that's not been how we do it, right? We have built up technology offering of a variety of proprietary tools, of which this contains a number as well. But our view would be no, that this would be for partners who signed licenses with us, and we leverage it for them to facilitate their programs moving forward more quickly and efficiently.

Hey, got it. Perfect. Thanks for the questions.

Yep. Thanks, Steve.

Thank you. [Operator Instructions] Your next question comes from Matt Hewitt from Craig-Hallum Capital Group. Please go ahead.

Good morning. Thank you for taking questions. And I apologize if I ask one that was already asked a kind of bounce in routing calls. But first up, thank you for providing the update on the number of active programs, some nice growth there despite some of the questions about funding and whatnot. I'm curious, what is the number of partners that you currently have? Is -- do you have that number that you can break out?

Yeah, Matt, we're reporting at the end of Q1, 70 partners who are leveraging OmniAb Technologies and Assets.

That's great. Thank you. And then congratulations on the pending launch of OmniDeep. But I'm curious, given your strong cash balance and the current environment that is putting some pressure on some of the smaller companies, would you contemplate or is M&A something that you would consider to kind of add to your tool set? Or is your preference to continue to build those out internally? Thank you.

Yeah, Matt, thanks. Great question. And obviously, we built what became the foundation of OmniAb through doing six acquisitions in less than six years, right, of technologies that fit very well with one another, that are complementary to one another, proud of the fact that we've kept many of the founders of those companies on Board as key members of our science team. And so M&A really is something that is in our DNA, right? Those 6 acquisitions all of which have brought us elements of our technology stack that have been important. We're always cautious never to promise deals, right? But we've been quite successful, I think, in tacking on technologies and teams out of the private sector, right? So these are private companies who have technologies that are validated or in the early stages of validation. So like I said, we're always cautious number to promise deals, but I certainly wouldn't rule it out that is something we do think about and are thinking about and are always assessing. That said, we are also excited about our internal investments in technology like OmniDeep, like the heavy chain OmniChicken that we'll launch in Q4. That investment in our technology is built into our plan, right? It's something we'll continue to do, and we can keep leveraging that positive feedback loop that we have from deeper relationships with partners that really inform our conviction around innovation. So a long way to say, yeah, we certainly are always looking at interesting things to bolt on, whether those come out of companies, whether they come out of universities or other academic areas where we think we could add on new technologies or capabilities that will drive growth in partnerships and programs. So hopefully, that answers your question.

Absolutely. Great, thank you very much.

Thank you.

Thank you. There are no further questions at this time. You may proceed.

Great. Thank you, operator. I'd like to thank everyone for participating on this morning's call and for your questions and engagement. We look forward to keeping you updated on our progress and speaking with you next quarter. I just want to mention also that we'll be out on the road meeting with investors in addition to attending the EF Hutton conference today here in New York. We'll also be attending the B. Riley conference in the L.A. area, the Benchmark Virtual Conference as well as the Craig-Hallum Capital Conference that's coming up in Minneapolis. So thanks again, all, and have a great day.