Good afternoon, and welcome to OmniAb, Incorporated Fourth Quarter and Full Year 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, Incorporated's Chief Financial Officer. You may begin. Thank you.

Thank you, operator, and good afternoon, everyone. As you said, this is Kurt Gustafson, and I want to thank you all for joining our fourth quarter and full year 2023 financial results conference call. There are slides to accompany today's prepared 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, March 20, 2024. 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. With that, let me turn the call over to Matt.

Thanks, Kurt, and good afternoon, everyone, and thanks for joining our fourth quarter and full-year 2023 conference call. As we kick off the call today, I'd like to mention that our clear mission here at OmniAb is to enable the rapid development of innovative therapeutics by pushing the frontiers of drug discovery technologies. We do this within a pure-play licensing business that is partnering-focused and that's designed to be efficient, scalable, highly leverageable, and that we believe is now poised for growth to meet what we see as an enduring and global need in the pharmaceutical industry. Our technology offering addresses the most critical challenges of antibody-based drug discovery. We have a highly differentiated suite of technologies that are proven and increasingly leverageable. Better industry success rates and other factors are driving an acceleration of antibody-based investment by the pharmaceutical industry, and we think we're well-positioned to meet increased demand for cutting-edge, antibody-focused discovery technologies. OmniAb grew significantly in 2023, making substantial progress across key elements of our business. This included expansion of our partnership base and our pipeline of partner programs, advancements of key late-stage programs by some of our partners, and global expansion of our business development team. We now have BDT members in the U.S. and in Asia, based out of Singapore, and in Europe. We're focused on and dedicated to continued innovation and executed extremely well on that in 2023 with two successful new technology launches, including OmniDeep, which is our suite of in silico AI and machine learning technologies and capabilities that are woven throughout our technology stack and that marry extremely well with the biological intelligence of our transgenic animals. In November, we launched OmnidAb, which is our latest example of a novel transgenic animal, and I'll talk more about that shortly. We had…

Thanks, Matt. So, bear with me one final time as I make the statement about our historical financials. These financial results reported for the periods prior to November 1, 2022, 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 corporate structure and the methodologies for reporting. So, moving to Slide 16. This summarizes the financial performance in the fourth quarter of 2023. Total revenue for the fourth quarter was $4.8 million compared to $35.3 million in the prior year quarter. The decrease was primarily due to the recognition of the TECVAYLI milestone of $25 million that was recorded in Q4 2022. Service revenue was lower primarily due to the completion of work on certain ion channel programs and royalty revenue was about the same as it was last year. Turning to operating expense. Our R&D expense for the fourth quarter was $14.8 million compared to $12.9 million in the prior year quarter. The increase was primarily due to higher personnel costs and investments in our new facilities. For G&A, expense was $7.9 million compared to $10.2 million in the prior year quarter. Our G&A expense was down due to the transaction costs associated with the spin-off that were recorded in Q4 of 2022. This was somewhat offset by the higher headcount-related costs as we built up the G&A side of the business over the course of 2023. The net loss for the fourth quarter was $14.1 million or $0.14 per share versus a net income of $6.8 million or $0.07 per share in the prior year period. One additional thing that I want to point out is regarding our tax rate in the fourth quarter.…

Thanks again, Kurt. I want to reiterate that in just over a year after completing our spin-off and becoming an independent company, we've made great strides in our business execution. OmniAb is primed for growth, and our business is now highly scalable and highly leverageable given the team we've assembled and the previous investments that we've made into the business. We focus our organizational energy here on our stakeholders, which we see as our team, our partners and the patients that their programs treat or will treat the communities where we work and of course, and importantly, on our investors. And with that, I will now turn the call back over to the operator to open it up for questions. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Puneet Souda from Leerink Partners. Your line is now open.

Hey guys, thanks for the questions here. So first one, Matt, if I could ask around here in terms of overall expectations, you ended up ahead of that. The number of programs were also ahead just trying to parse out how much of this is simply a function of biotech fundraising and also M&A that we have seen in the first three months this year. And how much of this is due to more business development conversations, could you maybe parse those out? And maybe you're seeing some effect of that already in 2023. So maybe just talk to us about sort of what you saw at the end of 2023? And what's been the conversation on the business development side in the first quarter here as well?

Yes, Puneet, thanks for the question. And implicit in your question and as you said, we're coming off a period in 2022 and 2023, when the biotech funding generally was down substantially, right? Smaller companies, especially were having a hard time raising money big pharmas as well established. We're taking a close look at their pipelines and focusing their energy on certain assets or therapy areas and really, despite that in 2022 and 2023, we saw really nice growth net of attrition from -- in active partners as well as active programs. In fact, 2022 and 2023 were some of our highest growth years in terms of number of new licenses. In some ways, it can be hard to parse out the various elements of what's driving that growth, right? We were building our business development team through the year last year. We had some nice visibility for the platform really driven by increased investment in innovation and launching new technologies as well as nice headlines from partners who were progressing nicely through the clinic. So, I think all of those things play a role in the growth that we're seeing. It is clear that the industry as a whole appears to be off to a good start this year, especially when you compare it to 2022 and 2023. And we think that really does position our technology quite well, given the level of validation and visibility and momentum that we're building up. So hopefully, that gives you a little more color.

Yes, that's helpful. And could you talk a little bit about in terms of single domain antibodies, you pointed to a couple of areas where they could be potentially applicable, within the context of your prior product launches, maybe just talk to us how would you stack this, the level of interest you're getting here and your expectations for sort of the growth and then the technology.

Yes, Puneet, thanks. In terms of the amount of interest in OmnidAb, I really can't recall another technology that we've added on or launched that has had more interest on day one. In fact, really the moment that we launched it, we were already -- when partners knew it was coming, we were already working on antigen for a number of programs. We now have multiple partners leveraging the technology, some of them with multiple programs. And it really is, I think, a technology launch that was very well timed from a number of perspectives. Obviously, these are all discovery stage at this point. But it was really dialogue we've been having with partners over the last couple of years that informed our conviction around the need for a single domain technology like OmnidAb that can leverage the chicken host, especially when it's paired with our screening and other technologies that are woven throughout our stack. So yes, we feel really good about the work that's already going on, the dialogue and the deliverables that are already being provided to partners who were the earliest users that started at the end of last year. And yes, we're excited about how it positions the business.

Got it. Okay. Super helpful. I'll hop back in the queue.

Your next question comes from the line of Joe Pantginis from H.C. Wainright. Your line is now open.

Hey guys, good afternoon. Thanks for taking the questions. Before my questions, actually, I think it's pretty encouraging at this point, having modeled both ends of the business from the ligand days to really hear the efficiencies that you have in place now and that you don't really need to add employees that much even as your number of programs grow. So that's very nice to hear. So my first question, I guess, first starting high level. So not to sound -- well, you're already doing cutting-edge technologies with regard to antibody discovery. So you did mention it briefly in your prepared comments, but what -- how have you seen the role of AI impacting your technologies? Because obviously, that's not only just the catch rates of the day, but increasingly important with regard to these technological breakthroughs.

Yes. Joe, thanks. This is Matt. And obviously, AI and you've known the business for a while, tracked the business for a while. AI, big data management, deep learning, machine learning, these are all areas that we've been involved in and leaning into for quite a while, really the last few years or more. It comes naturally when you're in the sort of cutting-edge science world that we're in. And it is an area that we've been leaning into much more last year, last May, we launched OmniDeep, which is our suite of in silico AI, machine learning, tools that leverage large multi-species databases. And we launched that in May of last year. But really, many of our partners knew we were in this space long in advance of that. And really what OmniDeep is designed to do is leverage deep learning and really provide the best of our in vivo engineering capabilities and our in silico capability. So we use high-quality input data. We have deep learning models that we presented on at scientific conferences that leverage variational auto encoders to really extend insights that we already get from our screening hits to infer function on other untested areas suggesting new hits and then putting those through in silico developability filters. So we really are using AI and leveraging it here and have been for quite a while. It really does offer our partners a new larger scale discovery workflows with big data, allows us to use optimization tools for existing discovery campaigns and really provides high-quality training data, if you will, for a lot of those capabilities that we've built up over time. So hopefully, that's helpful to you.

No, it certainly does, Matt. I appreciate that color. And I guess my next question or my last question really applies to both the growth and the number of partners that you've been seeing as well as attrition rates. So I guess is there sort of a steady state because you have long-term data, not only from the spin out, but even from the times at Ligand and from the initial start of OmniAb, any steady-state rates that you're sort of seeing with regard to partner growth. Obviously, we have the charts about number of partners growing, but how that links to the visibility of your BD discussions about how many are mature and the attrition rates, does that sort of over time? Or do you see a lot of volatility. And of course, I'm using the analogy from back in the day of Captisol, where it's really changing from quarter-to-quarter.

Yes, Joe. Look, I mean, we always -- as you pointed out, we report our numbers net of attrition for active partners, active programs and active clinical and approved products. Largely because we find that gives the best clarity on where the business stands and where it's headed. Attrition, of course, is very natural, very expected in pharmaceutical discovery and development, it can be different stage to stage. And as we're building up our experience with programs and our portfolio, there are some interesting insights, but it is, I think, still early in some ways. I mean, one I will point out is that while time in different phases can vary program to program, based on therapy area and the work that's needed based on a variety of factors investment profile from the partner and how many things are done in parallel versus sequentially and things like that. You can have at least a difference in phase to phase. But I'll point out our preclinical section, which is the orange slice in our pie charts in the slides we have a very high hurdle for what we put into preclinical. These are programs that are in pre-IND studies. We've actually not had any attrition in preclinical. Now it can be a different time frame to time frame in terms of how long something is in preclinical because if it's in a cancer indication, it may move into the clinic more quickly than if it's in a CNS indication or if it's in a metabolic indication or inflammation. So we do see variability in time in the various stages, but differences stage to stage in terms of attrition rates, discovery versus preclinical versus clinical.

Got it. Very helpful color. Thank you, Matt.,

Your next question comes from the line of Stephen Willey from Stifel. Your line is now open. I'm sorry, -- Your next question comes from the line of Chad Wiatrowski from TD Cowen.

Hey guys, how’s it going. On the sales rep what's the size of the sales force? And can you give that geographic mix? I know you mentioned U.S., Singapore and EU and do all the sales reps focus on the entire suite of transgenic animals, including the newly launched products?

Chad, yes, this is Matt. Thanks for that. Yes. So we've built our business development team of really experienced folks who are deep scientific foundation as well as business foundation also. So we have a team of BD professionals here in the U.S. We have West Coast presence and East Coast presence and then also coverage of the middle of the U.S. Then we've got a BD professional based in the U.K. that covers Europe. We also have alliance team members that are based in Europe as well who support and are involved with our business development efforts. And then our Asia presence is based in Singapore, but covers all of Asia. So that's our makeup of our BDP.

Got it. Thanks. And then on Sugemalimab like does the approval in China of the additional indication or a potential U.S. approval give you any type of milestone? Or are these legacy type large upfront milestones largely cycled through the business after the Teclistamab one this year.

Yes. So specifically, for Sugemalimab, the approval milestones have sort of been hit already. So really the only thing left on that program is to receive royalties. So, we're generating small, but kind of steady royalty revenues from China on that to the extent that there were -- the drug was approved in additional territories we would hope that, that would translate into additional sales that would translate into additional royalties for us, but there's sort of no other onetime payments that would come to us for milestones for that program.

That’s helpful. Thanks for the questions, guys.

Your next question comes from the line of Stephen Willey from Stifel. Your line is now open.

Yes. Hopefully, you guys can hear me now. I apologize for that.

We can hear you, Steve.

Perfect. So I know over the 6 programs to enter the clinic this past year, I think 5 of those were -- or 5 of those included downstream participation on the royalty front, right? I think only the Roche asset was a legacy fully paid license. I guess, of the active programs in various stages of discovery and development now, what proportion of those include downstream participation on the royalty? And have you kind of worked through a lot of those fully paid licensing transactions.

Yes. So Steve, this is Kurt. I'd take you back to kind of what we talked about on our Research and Technology Day kind of back in November of last year. So only about just a handful of our programs involved something where there was a prepaid license or a grandfathered license, if you will, where we don't have economics. So we said 2% of the entire portfolio. That number still is I don't think we'll update that number every quarter, but it still holds as of today. So the vast majority of our programs have downstream economics. Obviously, every program is different, but -- there are very few that have this sort of structure that was a prepaid license.

Yes. And I'll just add a little color there, too, Steve, that all of the -- the 2%, which as we do new deals, that number is getting lower on across the portfolio. Those were deals that we inherited, if you will, not ones we would do today generally.

Understood. I had forgotten you guys, shared that back in November. And then, Kurt, you're kind of referencing of expecting substantially lower cash use in 25% year-over-year relative to 24%. I think you kind of talked about that maybe a little bit on the milestone front. But -- are there any other drivers there that you guys are thinking about when you think about that 2025 cash use number, is there some kind of royalty component to that as there in ion channel partnership component to that. Would just be kind of curious as to whether or not that's just all milestones.

Yes. I think that's the vast majority. I think I sort of talked about the shape of our revenue and sort of in the near-to-medium term, we think that the vast majority of revenue growth is going to come from milestones. As you start looking further out, say, 3, 4, 5 years out, I think royalties will start to be a bigger part of the revenue growth story. But yes, in terms of the way we're looking at this, and essentially, Steve, we just -- we lay out all of the partner programs and we just sort of estimate what the time lines are. And when we get to kind of 2025, there's just a lot more catalysts in terms of events that we think could potentially happen. We don't know for sure whether they happen, but as I kind of talked about, we take a probabilitized approach when we look at those and -- but the more events, the more possibilities for additional inflows from milestones. But yes, I mean, going back to your basic question, there's nothing sort of -- nothing else out there. This is really -- the short term is going to be driven by milestone payments.

Okay. I appreciate it. And maybe just lastly Matt, you had made a comment, I think, about there being an opportunity for the ion channel and transport of partnerships with Roche and GSK to become more visible to investors, I guess, maybe over the next year or so. Is there anything more that you can just add there with respect to just kind of progress that's being made or, I guess, anything that you can say, I'm sure Roche and GSK are driving the communication part of this, but...

Yes. And we've highlighted before that we've got 5 ion channel programs that are active discovery programs with GSK and Roche. Sort of milestones for those 5 programs added up or over $1 billion. They're in the -- generally in the neurodegenerative area, and other areas where ion channels are critical, we do have really a rich heritage there in ion channel discovery and screening they're all discovery stage. So I want to stress that. But we are excited about the work that's going on and excited about the progress that we expect to make on those programs this year.

Understood. Thanks for taking the questions.

Your next question comes from the line of Matt Hewitt from Craig-Hallum. Your line is now open.

This is Jack on for Matt. We just have one question. It seems like there's a noted pickup in activity at the end of fiscal 2023. Has that momentum carried through Q1? Or how is the quarter looking so far?

Yes, Jack, thanks. We'll obviously update on our metrics for Q1 when we report formally. And obviously, we get -- we obviously interact with partners every day all the time. And are always working on deals from a business development perspective, but we also get reports from partners at various points during the quarter, off near the end of the quarter. So we'll report those numbers when we report likely in the May time frame for Q1.

Okay, thank you.

Your next question comes from the line of Robyn Karnauskas from Truist. Your line is now open.

Hi, this is Alex [ph] on for Robyn. The progress has been really -- how is it going -- yes, the progress has been really, really great. We're excited to see, we're wondering now that the pipeline is more mature, there are more molecules in the clinic, various stages, will anything change with how you approach new partnerships and the deals that you're considering with new partners? Let us now if the strategy will change at all now that you're potentially at a different stage than you were before?

Yes. Alex, I mean we are extremely, I'll say, mission focused, right, on really enabling rapid development of cutting-edge drugs for our partners by being focused on licensing drug discovery technologies. We expect -- and that is our plan. We are highly committed to that plan. It's something that I think our partners really value -- and we are at a stage now with the growth in the number of partnerships that we've built up, that the deep relationships that we have with our partners really inform our conviction and focus around technology investments. So we feel great about our mission, great about the momentum we're building up with partners and we're going to stick with that strategy. That is the right strategy for this business. We hear it all the time from partners, especially some of our newer partners, and I'll point out new big pharma partners who we added last year who were attracted to our technology because of our clear-minded focus on technology development and meeting their needs not only now, but in the future. And so yes, we feel great about the business that we're building and our ability to execute on it.

Sounds great. And another one, if I could. We're really excited to hear about all the interest in the OmnidAb program and then the new scaffolding tech that goes into that. What is the feedback from the partnerships on any other stones left unturned? What type of tech might there investors could see in the future? Is there like another stage that you're working on? Or anything that you can allude to about challenges that still need to be addressed?

Yes. Look, it's an area that I get very excited about, as everyone here will tell you. And we've got a pretty exciting investment plan in new technologies that's built into our plan. We're becoming more and more efficient in terms of rolling out new technologies. That's largely because of investments that we've made in facilities and workflows and things over recent years. I'll just say, generally, I'm excited about our work around the novel scaffolds area, which is that kind of lower left-hand area of our technology continuum. Also more abilities and work around big data management and things like that, that I think will benefit programs and accelerate programs and also some more scalability initiatives around screening and other things. It gets pretty technical pretty fast, but we'll be talking more about those things at the major antibody discovery conferences through the year like PEGS and AETC. But we're excited about our internal innovation plan.

Yes. That sounds great. And yes, I think we're all excited about the 2024 and beyond. Thanks so much.

Thank you.

Your next question comes from the line of Conor McNamara from RBC Capital Markets. Your line is now open.

Hey guys, thanks for taking the questions, appreciate it. Just for you, I appreciate that color you gave on how you probability adjust the program progression throughout the year. If you just think about 2023 and where you were a year ago, like how did this year stack up versus where you what your model would have said. Are you -- was it -- did financing have any impact on where you hit versus what you kind of were expecting on the profitability for this year?

When we look at the short term, we tend to sort of -- when I talk about the probabilistic approach, that's sort of maybe for future years, in -- for the current year, as we kind of set the guidance, for example, for 2024, we tend to not look at them on a probabilitized basis. We actually sort of decide based on our conversations with partners is it in or out. And so it's a little bit different in the short term because we have a little bit more visibility. For example, we'll have a partner that's out there making a public statement saying we expect to start a Phase 3 study or a Phase 2 study in Q3 of this year. So I mean, that makes us sort of say, well, we're going to slot that in as kind of happening. So I think things were largely as expected. There were 1 or 2 programs that partners said we’re going to hit in 2023 that got pushed to say the next quarter or something like that, but for the most part, I think things were kind of on point.

Okay, thanks. And then just from a competitive standpoint, if you were to look at the number of total programs that are either entering the clinic or discovery programs, do you guys have any clarity as to how many of those programs you guys are winning? And has that market share -- how has that evolved over the last several years?

Yes, Conor, there's not a lot of, I'll say, fulsome data on discovery programs or discovery campaigns out there. The one clear thing is that the greenfield here in terms of antibody-based discovery, and I say that broadly because there's all kinds of interesting and exciting things that are going on in new modalities that are antibody based, but are -- sometimes people refer to them as kind of Frankenstein molecules. We're really excited about that in terms of where our technology sits, but there's not really a lot of good data that you can point to on exact market share around discovery campaigns. I will say the greenfield here is very large and growing. So I'll balance it with that. And that's largely driven by a number of factors that are pretty well documented at this point that are attracting more and more sponsors to antibody-based modalities, whether that be the better clinical success rates as compared to small molecules or things like dynamics within the IRA or other things that have driven more investment towards antibodies. But hard to give you an exact market answer there.

Thanks [Indiscernible] I appreciate it.

Thanks, Conor.

There are no further questions at this time. Please continue.

Great. I want to thank everyone for joining our call today. We look forward to keeping you updated on our progress and speaking with you when we give an update for next quarter, we'll obviously be at various conferences that we'll be attending this spring. So we look forward to seeing investors then. In the meantime, we appreciate your interest in OmniAb, and thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.