Good afternoon, and welcome to OmniAb, Inc. Second Quarter 2023 Financial Results and Business Update Conference Call. [Operator Instructions] 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. You may begin.

Thank you, operator, and good afternoon, everyone. Thank you all for joining our second 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'd like to remind listeners that comments made during this call will include forward-looking statements within the meaning of the 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 the live broadcast, today, August 10, 2023. Except as required by law, OmniAb 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, OmniAb's 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. And with that, let me turn the call over to Matt.

Thanks, Kurt. Good afternoon, everyone, and thanks for joining our second quarter conference call. I'll start today with an overview of our business here on Slide number 4 of the deck. At the core of OmniAb's business model is our proprietary discovery technology platform that's designed to help partners discover innovative therapeutics quickly and efficiently. In a simple sense, it's a model based on licensing innovative technologies to partners. OmniAb is differentiated in the marketplace by having the most diverse host systems for fully human bispecific -- fully human and bispecific antibody discovery with the industry's only 4-species platform. That includes transgenic mice, rats, chickens and cow-based technologies. Our partners have an increasing number of antibodies in clinical trials that are from our technology and the versatility of our platform continues to be demonstrated in the number of modalities and formats being employed by our partners, both preclinically and clinically. We offer flexibility to meet our partners' evolving scientific needs as we believe generating large and diverse repertoires of high-quality antibodies increases the likelihood of success in optimizing desired therapeutic characteristics. Our technology and our core capabilities are driven by, what we call, the biological intelligence of our transgenic animals and are further strengthened by our innovative, high throughput screening and other technologies. There are 74 partners with access to our technology or to OmniAb antibodies with over 300 programs in various stages of research and development. The antibody space is one of the fastest-growing parts of the drug industry with a market size expected to be larger than $250 billion within a couple of years. We believe we're in a great position to capitalize on this opportunity with our unique and expanding technology offerings. We're constantly innovating our technology stack, and this past May, we introduced our newly branded…

Thank you, Matt. As a reminder, the financial results reported for the prior year periods are prepared on a carve-out basis, which were derived from Ligand's historical accounting records as if OmniAb were an independent company. As a result, certain comparisons to prior periods aren't reflective of true underlying business changes. This is primarily true for operating expenses, given the differences in corporate structure and the methodologies for reporting. You'll recall that OmniAb derives revenue from several sources, including upfront payments for partners to access our technology stack, payments related to service contracts when we do discovery work for our partners, milestone payments typically related to progress in the clinic and royalties on net sales of our partners' programs. So moving specifically to our second quarter results. Total revenue for the second quarter of 2023 was $6.9 million compared to $7.2 million in the prior year quarter. We saw an increase in license and milestone revenue based on milestones that were hit this quarter, mostly related to progress with batoclimab, specifically the start of additional pivotal studies for 2 new indications. The increase in milestone revenue was offset by a decrease in service revenue, and this decrease is related to a few different things. First, we've completed our portion of the work on certain programs, and these programs have been handed off to the R&D teams at our partners. As a result, we are no longer earning service revenue for these programs, but would still have the opportunity to earn milestones and royalties should these programs advance. Second, the research period for one of our GSK ion channel programs was extended by approximately 1.5 years. The accounting impact of this extension is that the initial $7 million upfront payment that was being amortized over the initial research period had its…

[Operator Instructions] Your first question comes from Puneet Souda from Leerink Partners.

So Matt, maybe first one. Obviously, you talked about some of the headwinds in the market. And as you pointed out, you have -- there's a potential that you could see that. But maybe talk to us a little bit about the flip side of what's happening at the partners and what they are telling you in terms of the projects that they can potentially bring to you because you're providing them value and cost reduction. Maybe talk to us about what -- how do they think about that as they think about discovery stages and getting into Phase I.

Yes. Puneet, thanks. This is Matt. I appreciate the question. Yes, as we -- I mean, one of the things I'll highlight that, obviously, this quarter, we entered into 4 new platform license agreements with new partners, right? Merck and Neurocrine. Merck, obviously, is a well-known player, global force in the industry that is really committed to leading-edge science and leveraging cutting-edge technologies to develop new medicines. Neurocrine, of course, is a 30-year-plus history in innovations and success of pursuing really what have become life-changing medicines in the neurology and neurological disease space. But also new partnerships with Stanford and Seattle Children's, both of which are leading academic centers, both of which are focused on translating their novel biology into new medicines. So sometimes it's not only the existing partners that tell us a lot about how we're bringing value to them, but it's the new partners as well, right? So to your question of how we do that, we obviously get into a lot of deep discussions with our partners of areas they're interested in and why they see our technologies unlocking opportunities for them. That obviously translates into potential for increased success rates and faster pace in terms of finding quality antibodies to then take into the clinic. And that's why they're attracted to do licensing deals with us. I think there's also a recognition now -- a more broad recognition of our continued commitment to innovation, and that is also, I think, an important part as well. And obviously, our innovation is informed by our deep relationships with partners. So there's -- like what we like to call an intelligent feedback loop, where you get a sense of where the industry is headed, and that informs the sorts of innovations and investments we want to make in our technology. So it's really, at the end of the day, about speed and opportunity and efficiency and quality of the product, in this case, the antibodies that are coming out of our platform.

Got it. And then with that question, I was wondering -- what I was trying to get to is that if the biotech funding situations were to get worse, is there an opportunity for you to sort of gain more share in the marketplace? And then let me just follow up with a question on China. I mentioned -- I know you mentioned Gloria anti-LAG-3 in the Phase I trial now. Wondering if you could update us on what you're seeing in China. We are all seeing weakness in the discovery stages in China that's well known at this point. So wondering what you're seeing there. Any color you can provide geographically.

Yes. Yes, I'll take that, Puneet. I'll take the China part first, and then Kurt maybe can add some color as well. Obviously, we announced this quarter that Gloria entered the clinic in China. So it was nice to see -- it's always nice to see clinical progression out of our pipeline. And we obviously have a couple of drugs that are approved in China that Kurt can probably comment on as well. A lot of that, in terms of the later-stage visible programs out of China, really come out of some very early partnerships with OmniRat that were struck years ago, and those programs progress quickly through the clinic and then -- or approaching the clinic, which is really a representation of what you see in our pipeline with some of our assets. But maybe, Kurt, you want to talk a little bit as well?

Yes, Puneet, I mean, I -- we don't have any specific knowledge relative to the sales forecast, if you will, of our partners. I know that one of our partners disclosed earlier this year that there have been supply chain issues in the first half of the year, in part due to challenges with COVID. But they also indicated that they expect that those supply chain issues will be alleviated in the second half of the year. And so they were forecasting sales to pick back up. And we obviously earn a royalty on that. I think the first part of your question, our partnerships are designed really to align sort of the economics that our partners pay with success, right? So I do think in a difficult -- if we're in a difficult funding environment, our model is conducive to have people continue to use it because they're really not paying -- they're not paying for -- or large sums of money until they actually have success, they discovering the drug and actually moving into the clinic. So I do think that there's opportunities there, and we're still continuing to see growth across our key metrics.

Your next question comes from Robyn Karnauskas from Truist Securities.

I'm going to start off with a couple that I [don't know] you'll be able to answer. So can you talk a little bit about how the platform deals with Stanford and those are different than those of the pharmaceutical companies? Like how are they structured if you can give any color? And is your -- are your ion channel programs have -- do they have better economics given the scarcity of like being able to develop small molecules to those -- biologics to those programs? I would think that they have better economics since you're adding a lot more value.

Yes, Robyn, thanks. I'll answer your second question first on the ion channel programs. And really, the short answer is yes. The way those programs are structured, we are granting exclusivity to the target -- to the specific target with that -- with those partners. They're accessing not only technology and capability, but novel cell lines, novel reagents, novel screening technologies, et cetera. So that then drives really a different and a higher economic structure. The 5 programs that are highlighted in the deck today for ion channel and transporter collaboration, both those are with GSK and with Roche, those 5 programs alone have $1 billion in milestones and royalties that are higher than our standard platform license agreements. So those are assets that we're excited about. Obviously, we highlighted the GSK program today. But the short answer is yes. Now to your first question about the different sorts of deals. We have, in recent quarters, leaned into not only license agreements with leaders in the industry, commercial -- those that are investing a lot in R&D and commercialization like Merck and Neurocrine, but also with academic centers, leading academic centers. And just as a general matter of policy and based on confidentiality, we don't disclose specific deal structures, but we have -- and in our corporate deck, we've outlined typical deal terms for all of our deals. And they fall within boundaries that we previously disclosed. There are multiple parts of the deals, there are upfront payments, there are milestones, there are royalties and there's an interplay between those. But in terms of access to the platform, there really are not major differences between the deals signed with, say, a traditional commercial pharma and the academic centers. But on the business side, obviously, it would be highly unusual for an academic center to commercialize the drug on its own. Obviously, these folks have leading-edge biology. They generally want to translate that into therapeutics that then get spun out into companies. So really, the only difference is we'll have special provisions with -- that specifically deal with how those economics will work when the academic institution chooses to out-license the program or form a company around it. But at a basic sense, they're very similar. There are just some specific provisions that are more applicable to the academic setting.

That's really helpful. And I guess a follow-up, it's like $1 billion is a lot. So have you been able to negotiate since you've been working with these companies, a little bit more disclosure about what you need to see to get those milestones? And then my last question, sorry for so many. You don't talk a lot about OmniDeep, and I know you believe that nature-based [indiscernible], but I'm just wondering if you're willing to leverage OmniDeep platforms to AI/ML-based in silico antibody design. It's a hot topic right now, so I thought I'd ask that question.

On the first part, just financially, the way these deals are structured, they're really structured the same way as our other deals, right? So there are typically clinical stage milestones as they progress through the clinic and royalties. The difference is that the magnitude of the payments are larger and mostly because of a function of the exclusivity on which we have written these deals. On the antibody side, all of the things that people are going after, those are nonexclusive targets. Whereas with the ion channels, these targets are being licensed out on an exclusive basis. And as a result, that's what triggers the larger economics. But there's nothing unusual necessarily about the types of things they fall within that same sort of deal structure of upfront payment and milestones and royalties.

Yes, and I'll be happy to comment on the AI question, Robyn. Obviously, given the visibility and use of AI associated with technologies or industries that are, I'll say, highly visible in a popular sense or counted in a popular sense. This is obviously a question we do get. And OmniDeep, I'll just say, is our suite of in silico tools for therapeutic antibody discovery and optimization that are really woven throughout our various technologies and capabilities. And these tools include the structural modeling and large -- very large multi-species antibody databases, AI and machine learning sequence models and more. And it really -- it allows for optimization of identification of candidates that come out of our technology. Now there's -- to the core of your question, obviously, there's a lot of discussion around AI and its use -- kind of sole AI approaches. And I think the element of that, that might not be as well understood is that there are really some important considerations and limitations of that, and that's why we think there's so much power in not only the biological intelligence of our animals, but also the leveraging our AI capabilities. Now we've been using in silicon and AI tools in our downstream work for a long time actually, especially on the screening side and some of our work around the ion channels and transporters. So we have deep expertise here in our organization that we really kind of rolled out in the concept of OmniDeep in Q2, but these have been woven throughout our organization and technology from the spirit of cutting edge and good science for quite a long time. And in fact, more than a couple of years ago, we actually did a deal with landing AI for a vision portion of AI that we incorporated into our exploration platform successfully that has really been kind of a wild success story around how we leverage our screening. But I'll say on the technical level, there's a lot of limitations to just AI approaches. So really the power of OmniDeep comes from marrying it to, what I'll call, the biological intelligence of our transgenic animals because a carefully engineered transgenic animal system really has many of the tests that are needed to select a winning antibody inherently built into them as natural checkpoints. So you can essentially try and test millions of different sequence possibilities rather than just doing it in a model. And obviously, the biological system can weave those out. Now we do leverage AI and other ways downstream from that with large amounts of data. And I think that's where a lot of that power comes from. So I know I got a little technical there, but hopefully, that makes sense.

Your next question comes from Stephen Willey from Stifel.

I appreciate some of the macro commentary that you provided. I know some of your peers have been kind of talking about that of late. But I guess, have you seen much in the way of any uptick of attrition just on the discovery program front? And would you expect that to be kind of the better surrogate of some of the macro challenges just given some of the reprioritization of R&D spend and, I guess, kind of broader pipeline streaming efforts that we're starting to see across the space?

Yes. I mean, a great question, Steve. I'd say, really nothing specific there on the attrition front. As we noted, obviously, I'll just say at the outset, attrition is a natural part of the pharmaceutical industry, as we all know, many things fail, and that's -- the fact that there is attrition is obviously expected. This last quarter, we only saw attrition in the discovery phase and just in discovery stage assets. Looking back a little bit in the fourth quarter of last year, we saw first program attrition at the clinical stage, 2 partners had exited certain therapeutic areas or specific therapeutic areas, those assets themselves may have potential in other hands, but are not included in our program count anymore. I bring that up as an example. It's difficult to say. Is that a macro thing? Is that just larger partners focusing in those specific instances? It's very difficult to say. So I think it's hard to answer your question specifically, but these are all metrics that we always monitor all the time, and obviously, keep having deep dialogue with our partners. So hopefully, that gives you a little more color.

Okay. And I guess the work that's ongoing in the ion channel space, I know that these, again, are being kind of out-licensed on a target exclusive basis. But I guess, for those targets that have already been claimed by either GSK or Roche, and I understand that all of these are difficult to drug. But I guess, how would you kind of characterize these targets that they've selected in the hierarchy of things that are difficult to do within the ion channel space itself? And how much more kind of green space in the target universe do you think that you have over the next kind of 1, 3, 5 years?

Yes. Great question, Steve. The description -- obviously, there's a substantial amount of confidentiality considerations and other things with partners that we always respect of course. But the GSK relationship is around specific targets for neurological disorders. And at the discovery phase, it was an agreement that was originally struck a couple of years ago, so it's progressed well. Obviously, we announced the milestone in this quarter. And I'll just say when folks are pursuing ion channels and transporters, these are generally considered high-value targets, right? And I'll just comment generally. I think GSK has a really ambitious innovation agenda in this area. They stated publicly a goal to positively impact the health of 2.5 billion people by the end of 2030. So that's a really aggressive goal and an ambitious one, and we're excited to be collaborating with them. I think these are our programs where we've got distinct capabilities and cell lines and reagents and other things as well as high-throughput screening as well as the ability to leverage multiple modalities, which I think are the kinds of things that can attract more of these sorts of partnerships potentially in the future.

Your next question comes from Matt Hewitt from Craig-Hallum.

This is Jack on for Matt. Obviously, you've recently just launched OmniDeep, and I was just kind of curious what the initial reception has been for your customers?

Yes. Thanks, Jack. I'll say, very positive. We launched it at the PEGS Conference in Boston in May. And I'll say that the feedback in the room is a big area, a big presentation, very well attended, and the feedback from partners who were sitting in the room was almost immediate. And it continues to be an area of focus in terms of not only new programs, but potentially taking different approaches to increase the potential success rate of some existing programs with partners and our -- obviously, our research and innovation team and our BD team continues to partner on that as we talk with partners about it. So the feedback has been quite positive.

Your next question comes from Chad Wiatrowski from TD Cowen.

Matt, Kurt, it's Chad on for Steven Mah. Yes, congrats on the GSK milestone. Could you give us some more detail as to what differentiates your tech stack from peers who also claim at these historically difficult targets such as ion channels or an opportunity that they're pursuing as well?

Yes, sure. Happy to talk more about it. I think one of the -- a few things differentiate our technology, right? At the core is the foundation of the multi-species approach that we can present. But beyond that, we highlighted a little bit about our commitment to continually expanding our capabilities around the ion channel space. We have a long history here that really date back decades in terms of building high-throughput screening that can be applicable to a variety of modalities, I think that is extremely important in this space where -- and especially in the industry overall, where the lines between different approaches and modalities are becoming creatively blurred intentionally. And I think we are really at a spot where we can leverage that different than others. We've also built up an extensive bank of custom cell lines that are specifically designed to facilitate the discovery in these areas -- in some of these specific areas. That's something that's been built up over many years. And when you marry that with our other discovery and repertoire generation and screening technologies, it really does, I think, position us in a pretty unique fashion. And I think that's why folks like GSK and Roche are attractive to us for these sorts of partnerships.

Really helpful. And I appreciate the improved downstream economics regarding ion channels, but there's sort of precedent that exclusivity of targets has led to some significant upfront payments. So is there an opportunity here to drive some upside in the near-term?

All deals are become a negotiation, right? And so I think to the extent that we show success that we always try to leverage that for higher payments. I think as we look historically, a lot of this -- the difference between this and the antibody business has been more just on the exclusivity. The other thing that I would point out on the ion channel side and Matt talked a little bit about the expertise that we have. And so for the most part, with these ion channel programs, there's a license that for a target on an exclusive basis, but then we are continuing to do all of that work. And so a big portion of the service revenue that we generate comes from the ion channel side of the business. In many cases, the partners are pre-paying for that and sort of gave the example today on the specific GSK program where they paid $7 million upfront that was being amortized over the research period. So we are able to generate relative to the antibody side of that business, call it, outsized economics just on a relative basis. But a lot of that is just this function of that it's on an exclusive basis.

[Operator Instructions] Your next question comes from Yuan Zhi from B. Riley.

This is Brandon Carney on for Yuan. You talked some about the trends you've been seeing in the discovery stage. Can you comment on the clinical stage regarding delays or cancellations of clinical trials? Can you comment on what you've observed so far related to the projects you're tracking the biologics to build them?

Yes. This is Matt. I'll comment and Kurt have some comments here. When we started the year, we said we expected 3 to 5 new clinical entrants this year. At the end of Q2, we were actually already at 3. And today, we're focused now on a higher area there of 4 to 5 this year. And so we're seeing nice clinical progression or graduation into the clinical stage. We are pleased this quarter to see some assets move out of discovery into preclinical, which means that they're then preparing to enter the clinic. So we are seeing nice progression in the portfolio. I don't know, if, Kurt, anything you'd want to add to that?

We have not actually seen a lot of clinical attrition in terms of the clinical attrition that we have seen, it's really not -- it's been a function of partners exiting therapeutic areas as opposed to sort of any failure of a study or something like that. As Matt said, attrition is part of this business, and it will happen. But our experience thus far on the clinical side has actually been pretty darn good relative to industry averages.

That's helpful. And one last one from us. Have you noticed any shifted interest in biologics development due to the Inflation Reduction Act?

I mean, I'll just make a comment. I mean, our business is mostly on the antibody business -- on the antibody side. So it is probably a more attractive place to develop drugs just given the benefits that have been afforded by the Inflation Reduction Act. But given that we -- if we had a small molecule offering and an antibody's offering, would we see more people moving over the antibody? I don't know. It's tough to say. We believe that we've got a great platform, and we're continuing to attract new players as evidenced by the 4 new deals that we signed this quarter. So Matt, I don't know if you have?

Yes. I think -- I mean, I'd add that because of the higher success rates of antibody-based medicine as compared to small molecules, from a scientific and technical perspective, there've been an evolving shift in the industry because of those higher success rates. So that's something obviously we see and hear and know. Now, the IRA, obviously, the legislation will allow Medicare to negotiate drug prices with manufacturers for a select number of high-cost drugs starting, I believe, in 2026, and there are exceptions to how all those negotiations can happen and that sort of thing. But there are, I'll say, a longer tail that's afforded to biologics medicines, which is something that may accelerate the interest in the industry and a shift towards biologic medicines that we saw happening already in advance of IRA. So I think if anything, it can help accelerate the interest there. But I think the science and the probability of success in medical benefit in terms of the specificity that antibody-based medicines provide and predictability for development was already starting that shift. So if anything, it just may accelerate it.

There are no further questions at this time. I will turn the call back over to the CEO, Matt Foehr.

Great. Thank you. I'd like to thank everyone for participating in today's call and for your questions. We look forward to keeping you updated on our progress and speaking with you next quarter and at various investment conferences we'll be attending in the coming weeks and in the fall. We'll be at the Stifel Conference coming up. We'll also be at H.C. Wainwright, Cantor as well as the Craig-Hallum Capital Conferences in New York in the fall. So in the meantime, we appreciate your interest in OmniAb, and thanks again. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.