Q3 2021 Zymergen Inc Earnings Call
[music].
Okay.
Thank you for standing by and welcome to the St Maarten Derrick with our 'twenty to 'twenty, one I need two results conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question answer session.
Ask a question during that time simply press star one on your telephone.
If you require any further assistance please press star zero.
I'll turn the call over to Mr. Mike Doolin. Please begin.
Alright. Thank you all for joining earlier today <unk> released preliminary financial results for the quarter ended September 32021.
If you haven't received this news release or if you'd like to be added to the Companys distribution list. Please send an email to investors at zymogen Dot com.
Joining me today from Zymogen R. J stoutly, acting Chief Executive Officer, and <unk> Chief Financial Officer.
Before we begin I'd like to remind you that management will make statements. During this call that are forward looking statements within the meaning of the federal securities laws.
These statements involve material risks and uncertainties that could cause actual results or events to materially different differ from those anticipated.
Additional information regarding these risks and uncertainties appears in the section entitled forward looking statements in the press release Zymogen issued today.
For more complete list and description. Please see the risk factors section of the company's latest 10-Q and other filings with the Securities and Exchange Commission, including when filed the Form 10-Q for this quarter.
Except as required by law zymogen disclaims any intention or obligation to update or revise any financial where product pipeline projections or other forward looking statements, whether because of new information future events or otherwise.
This conference call contains time sensitive information that is accurate only as of the live broadcast November 13 2021.
In addition, please note that the third quarter financial results discussed today are preliminary and estimated and are subject to the completion of the finalization of that zymogen financial and accounting closing procedures.
I would like to turn the call over to Jay.
Thanks, Mike and thank you all for joining US. This afternoon on today's call I'll begin with an update on our progress against the objectives. We set in August I'll, then turn the call over to Ina for a more detailed review of our financials, including our preliminary third quarter results and our forecasted cash burn.
In addition to the summary of the work we've done today I'll share a high level overview of our forward looking portfolio. This will provide a general sense of our direction, but it is not intended to provide full details as our work is ongoing.
Spectra complete our strategic plan around year end and we'll be in a position to provide more detailed plans once that work is complete.
In our business update in August we committed to complete a number of key deliverables over the several subsequent quarters, including a full re examination of the company's target markets confirming our past views or altering them. If the data indicate a shift in market focus as appropriate including exploring potential new markets.
Our plan to reduce the company's burn rate to extend our operating runway a.
A deep dive into the process by which we prepare and launch products to be sure. They are market ready and can be easily integrated into our customers' workflows.
Plan to strengthen our commercial team and ensure the reliability and robustness of both our sales pipeline and forecast processes and lastly, our multiyear plan with clear milestones and goals that the company can be held accountable to achieving.
Over the last 90 days, we've made significant progress towards these goals.
Working with top tier consultants, we've done a deep dive on our market opportunities and our portfolio using a standardized process to assess our investments. This included overall market size, our addressable market competitive profiles product development cost cost of goods of the ultimate product cost of customer acquisition time to market margin pro.
<unk> and development risk all the factors you would expect to consider and building an optimized pipeline.
We stopped work on a number of programs and promoted several others. These changes or changes allowed us to implement a reduction in force of approximately 220 positions across a variety of levels and functions. We believe these tough decisions along with a reduction in related overhead spending will lower our burn rate sufficiently to operate.
Two mid 2023 with the cash we have on hand.
We've established a rigorous product development process to move products from concept to launch in a consistent and systematic way, which will ultimately help ensure greater confidence in product success.
We've also restructured our commercial team with a more customer centric orientation integrating the formerly separate marketing function to drive a holistic lead the revenue process.
In addition, we have more clearly defined our sales operations function to increased discipline in how we engage customers.
With our portfolio and cost reduction work largely in place we've kicked off our process to develop a comprehensive strategic plan that maps the business through 2024.
Let me now share some additional details.
Our portfolio review indicated that we were working we were working on at least 30 different programs far too many to adequately resource. It was imperative that we narrow our focus to a smaller number that we believe capitalize on our strengths and provide clear commercial opportunities that.
That resulted in the decision to pause or eliminate several programs, while promoting others to a higher level of investment.
A critical highlight is the cancellation of two programs that were prominent in our public plans highlighting known as Z Y M. One O two and our direct to consumer insect repellent referred to as <unk> 201.
In the case of highly and films, we no longer have conviction in the market opportunity.
To be clear and contrary to many published reports the product worked as designed the underlying technology and science ourselves.
The technical issues that I discussed on our August call cause delays, but were quickly resolved by our teams and were not a factor in our decision to hold the project.
In fact at the time, we canceled the program we have made tens of thousands of square meters of filing.
The issues, we uncovered where commercial we look more closely at the Foldable display market and the emerging data on the market segments that we targeted with highly <unk> and other electronic films indicated a smaller near term opportunity than we initially expected.
As a result, we stopped work on our electronic films programs, but are continuing work on our Z Y M. One O. One film in partnership with Sumitomo we've.
We will also continue to explore and develop biobased poly image and several different form factors, which we expect will add value to potential future products not just in electronics, but other markets as well.
In the case of our insect repellents and other consumer care programs. Our review show that the cost of customer acquisition with a direct to consumer model would've been prohibited for zymogen.
While the product performance was satisfactory it could not be produced and distributed at a price point competitive with the incumbent products.
With this assessment, we have decided to park all our efforts in consumer care.
We have however developed strong IP and technology around bioactive and remain open to potential future partnerships and clean consumer care.
Turning now to the forward looking portfolio, we continue to see success with our work in agriculture, particularly with a flagship program in nitrogen fixation, where we're working with an important partner.
We expect to have data later this year on the performance of our microbes in both corn and wheat field trials across over 50 sites in North America.
We're also accelerating work on two programs in the health care market one for development of key enzymes used in vaccine production and a second in drug discovery.
Our enzyme work is focused on improving both supply and performance for next generation vaccines and our teams deep enzymology experience is enabling us to quickly develop several enzymes for potential use in vaccine manufacturing.
And drug discovery, the size and diversity of our med genomic libraries provide the raw materials to discover molecules that can modulate important oncology and other validated targets.
We believe we have a powerful methodology to discover and unlock the potential of millions of natural products that are currently considered unreachable using traditional drug discovery techniques, we expect to be in a position to share data on this program in the coming months.
Additionally, we have programs that are in the early concept stage being evaluated for market size product development cost time to market development risk and the other criteria that I described earlier.
In some cases these programs may be funded to move into full development or they might be parked and protected for potential development in the future when resources are available to commit to them.
Lastly, we've reorganized our research group around what we call leads and seeds leaves or the potential drug targets that I, just spoke of and seeds or the early exploratory ideas that if viable will be funded to fuel our future development pipeline.
The key takeaway is that we focused our investments restructured our development and research processes and now have a pipeline of products that we believe capitalized on our capabilities and provide clear commercial opportunities.
As you would expect these portfolio updates have resulted in a number of changes to our organization and leadership structures, which I'd like to take you through now.
A key element to ensuring that we're set up for long term success is to have the best possible leadership.
We're laser focused on ensuring that we have the right team to execute our product development and operation plans efficiently, bringing products to market and positioning zymogen as a stronger company with a compelling operating plant.
As I mentioned in our last call. We've added several key executives who have been instrumental in our recent work in.
In addition, we've made some key changes to our structure that streamline our organization with a clear focus on accelerating product development and commercialization.
Notably, we centralized our strategy business development and portfolio management into a single organization to drive rigor in our product development process combining groups that had previously been spread across the company.
In addition to these changes Jed Deane one of the emergence co founders has decided to move on from the company. After completing the smooth transition of his responsibilities to <unk> <unk>, who joined US in July.
His last day with US was October 31, we're all grateful for Jets vision and his work and advancing the zymogen mission and thank him for his many contributions.
Yes.
Before I turn the call over to Ana I want to reemphasize key point the technology platform Zymogen works as advertised we believe we have the world's largest meta genomics library, a library, which has potential applications in agriculture health care and consumer care.
Begun to explore these capabilities through partnerships in the agriculture space and are excited to pursue further applications.
Our proprietary early discovery and screening capabilities allow us to identify relevant biomarker oculus for a variety of use cases, such as novel therapeutics for challenging targets and agricultural applications.
As an example, just last week a paper was published in nature communications that highlighted the work we performed within logic to improve their synthetic biotic medicine, using our biosensor enabled enzyme engineering.
We've continued to review our technology platform with external experts and scientists and remain confident in the capabilities of our platform with that I'll turn the call now over to Ina for more details on our financials.
Thanks James.
We'll now take you through our preliminary touch quarter results and our forecast with cashman.
Total revenue for the third quarter of 2021 was $4 1 million.
All relating to R&D service agreements and collaboration revenue.
This represents a 27% increase over the same quarter in 2020 and was primarily driven by the timing of the deliverables under fixed fee contracts and additional revenue recognized due to contract milestones.
Revenue was down compared to the prior quarter due to certain milestone payments in Q2, and the normal end of contract season early in Q3.
Total operating expenses for the quarter.
Of 2021 were $99 $3 million.
81% increase from $61 $5 million.
Third quarter 2020.
Operating expenses were driven by increased resources allocated to product development expenses incurred post acquisition of <unk> therapeutics restructuring charges as well as the costs associated with being a public company.
Operating expenses decreased 4% from $103 $5 million in the second quarter of 2021.
The decrease was driven by lower spending on programs as we evaluated our portfolio.
Lots of crude performance bonuses from the first half of them.
This was offset by total restructuring charges of $21 $2 million.
In the third quarter of 2021 total operating expenses, excluding the $21 2 million of restructuring charges was $78 1 million.
R&D expenses for the third quarter of 2021, but that would be $91 million up 18% from prior year, primarily related to work on highly and our insect repellent Zed why am 201.
Prior to our decision to discontinue those products as well as personnel and consumable expenses related to our acquisition of notable therapeutics.
When compared to the prior quarter R&D was down 22% driven by the slowdown in program spending and the bonus accrual reversal.
Sales and marketing expenses for the third quarter of 2021 were $4 $1 million down 9% compared to $4 4 million in the third quarter of 2020 and down 50% compared to the second quarter of this year.
The decrease quarter on quarter resulted from reductions in our marketing and public relations spending and the bonus accrual reversal.
General and administrative expenses for the third quarter of 2021 was $17 9 million compared to $14 4 million in the third quarter of 2020, and $23 7 million in the second quarter of this year.
Compared to the prior year, 24% increase was driven by the cost of being a public company and real estate costs associated with the development of a new company.
The 24% reduction compared to the prior quarter, but was it related to the reversal of the bonus accrual and other adjustments.
Net loss in the third quarter of 2021 was $98 2 million.
Compared to 61 8 million.
Third quarter, 2020, and $108 million in the second quarter of 2021.
The net loss of $98 2 million in the third.
Third quarter of 2021 included $21 $2 million of restructuring charges related to a portfolio review and cost reduction work.
Offsetting this Q3 benefited from the reversal of accrued performance bonuses by approximately $9 $4 million.
We ended the third quarter of 2021 with $496 $2 million in cash and cash equivalents and $10 $8 million in restricted cash.
Looking ahead, we do not expect product revenue in 2021, and expect product revenue to be immaterial in 2022.
Without visibility to near term product revenue one of our top priorities is to closely manage expenses.
In September and October we implemented a workforce reduction and have since narrowed our focus to a smaller number of programs that capitalize on our capabilities and presented to our commercial opportunities.
Additionally, as part of the restructuring we began a reduction in our cost structure with the goal of extending our cash runway.
Third quarter restructuring activities resulted in total pretax charges of $21 $2 million.
These restructuring charges include $4 $2 million related to a workforce reduction in September.
$3 $7 million due to contract terminations and contractual commitments.
Even $2 million of fixed asset impairments and $2 $2 million due to consulting fees related to our restructuring activities.
We expect expenses in Q4 to be roughly flat as our spending reductions will be offset by the lack of the lack of the accrued bonus reversal, which took place in Q3.
We expect to realize the full effect of our restructuring efforts in 2022.
These activities began in the third quarter of 2021, and I expect it to be substantially completed by the end of CEO.
However, certain activities such as lease restructuring may extend into the first quarter of 2022.
As a result, we believe that we have sufficient cash to fund operations to mid 2023.
Subsequently to the end of the quarter on October 28, we entered into an amendment of our debt agreement with perceptive.
As a bunch of the amendment, we paid $41 million, which included $25 million in principle and $6 million.
Interest and prepayment premiums.
We also modified the final maturity to June 32022, and eliminated the minimum revenue covenants.
With that I would like to turn the call back over to Jay for closing comments Jamie.
Thank you Ina.
I hope, it's clear that over the last 90 days, we've made considerable progress on the commitments. We made in August at the same time, we realized that we have work ahead to accelerate revenue generation, while rebuilding stakeholder confidence despite.
Despite our near term challenges, we remain focused on our strategy of pursuing continuous launches of breakthrough products and I'm proud of the work that our teams are doing across the organization.
We have a clear vision and to partner with nature to make superior products and the superior way our goals will remain ambitious and we're confident in the long term prospects for the company.
The overall Tam for our technology is enormous we have a strong platform to create novel products and the markets are hungry for a new generation of technology that will transform the way materials for manufacturing.
Want to thank you all for your continued support and your patience as we work to strengthen our business and move forward towards a more successful future with that we'll now open it up to questions operator.
If you have a question press star one on your telephone keypad.
The first question is from Derik de Bruin with Bank of America.
Great. Thanks for taking questions I'm, hoping that you can just give us some perspective thats why investors should remain confident in the agriculture programs. After you called it the rest of the pipeline there something different about this market or the customers that you're talking to them that we should be considering.
There's a couple of distinctions one is that it's a what we supply into the agricultural market is a microbe rather than a molecule for the product itself is quite different. So there's no scale up required of manufacturing in particular molecule. The second is that we're working through a partner on distribution.
And field testing so the actual customer interface is held by a very.
Prominent company in this space and so that responsibility is not really being executed by zymogen and I'd say the third factor is that we've already got undergone field trials in a preliminary way.
Those results have been positive to date.
Wonderful and then just one more from me. So you were previously kind of somewhat opposed to going into developing products for health care and now it seems like you're developing enzymes to be used in vaccines can you talk about the strategic rationale here and there maybe more color on the end use of these enzymes.
I don't think the company was resistant to that market really in any way. It was just the fact that the two lead products happen to be in the materials science and consumer care areas. In fact, historically the company actually had some R&D partnerships in the healthcare space, which were successfully executed but were ultimately.
<unk>.
And the programs at least the drug discovery program that I mentioned is something the company has been working on for over a year.
And it really resulted from the realization of the power of the underlying that genomic libraries that we had and our ability to use.
A novel methodology to determine unique drug targets in the natural products space. So I wouldn't say the company in any way was adverse to this market. It's just that we promoted those two programs. Initially we still have many programs in the materials science area in the pipeline.
Alright, I appreciate it thanks.
Your next question is from Tom statements with Cowen and company.
I want to follow up question on kind of how you're approaching the kind of customer base now.
Highlighting.
Why would possibly shoot.
Zymogen and kind of how can you define your value proposition.
Pipeline changes the unchanged households, okay, alright, thank you.
Keith.
I'm sorry that you were a little you were breaking up a little bit could you restate the question again.
Sure.
More online why would why would customers choose slack zymogen now.
I was highlighting.
How are you redefining Johan equal just wanted to go into customers and a lot of the changes with with wireline.
Given the <unk> sales force and all the changes you made.
Can I repeat the question just to make sure we got it right Tom.
Are you asking why would customers choose to work with us and what is our value proposition to them.
Yes, yes.
Yes, well, we each of the products.
That we've talked about go into slightly different markets and the value proposition of each of those are somewhat different.
Clearly, what we're doing in partnership with Sumitomo still.
Still addresses.
The aspect of the film market, but there again, we have a strong partner who is responsible for both the customer contact.
And the manufacturing of the product the.
The value proposition there is that the easy one material has a unique set of capabilities and we believe.
But that program should progress what we're doing in the the enzymes space and the drug discovery space has very different value propositions and drug discovery, we're creating.
<unk>.
Molecules to address particular targets in the case of enzymes, we're going after an existing market, but a relatively new one.
That has requirements for improved performance and improved costs and improve supply. So that of course that market would be the value proposition. So each market is somewhat different.
What happened in hiring was was really a misjudgment.
The rate of growth of the market.
And the degree of differentiation of the segments, we're going after and so I think what we have in the pipeline now is distinctly different from the experience we had with highly.
Fair enough and if I could.
I mean, given that how do you view your kind of revenue.
Into 'twenty two 'twenty three how is that.
Same as it was in Q2 or do you see something more near term.
Well, we havent changed anything on our projections forward projections for the revenue ramp as we complete our strategic plan, we'll probably lay that out a little more bit more clearly.
But what we said and reinforce in her comments is that we don't expect any material revenue in 2022.
Thanks Jess.
Your next question is from Tycho Peterson with Jpmorgan.
Hi, This is Rachel on for Tycho. Thanks for taking the question. So first as a follow up to some of the earlier questions for vaccine enzymes can you just give us some color on your plans for the go to market strategy for that program. So are you planning to partner and do you think they will bring to market on your own.
Yes. This is very likely to be partnered so we are in discussions with potential partners. There. We have nothing to report at this point in time, but the intent is to partner that program.
Great and then on the <unk>.
In fact for a pint you talked about how you have an IP and bioreactors.
Can you talk about have you started to have any conversations with cool consumer companies about potentially licensing or partnering on this.
We've had some inbounds.
In this area and so we're continuing to look at those but to be honest with you in the last 90 days, we've been pretty focused on.
Sort of paring down the pipeline getting focus getting our product development process really stood up executing.
Executing well and focused on the products that we're going to create.
Now that we're pretty much through that initial phase, reducing the cash burn as well, we're going to develop the strategic plan and as part of that work, we should develop a licensing strategy and decide at that point, whether we want to have a more proactive sort of outbound licensing strategy as opposed to merely reacting to inbounds.
Understood and then last question for me can you just give us an update on where the process is that sort of recruiting a permanent CEO.
And that can take six to nine months, let me start just bringing candidates.
Yes, so we have not started the process yet and that's by choice. So the decision that I made along with the board of directors is that we as priority one wanted to make sure that we right size. The company got our processes fixed cutter. Our development team is really focused on the products the new products in the <unk>.
<unk>.
We write a strategic plan that we all believe in that has credibility and it's defensible and at that point. We believe we could credibly go recruit a world class CEO prior to that I think it would be challenging to sit across the table to try to recruit someone without a plan that you had conviction in and so our intent is to begin working on the Ricky.
Routing process early in 2022.
Great. That's all for me thank you.
Your next question is from Mac Sykes with Goldman Sachs.
Hey, guys. This is Dave on for Matt Thanks for taking the questions.
Really glad to hear about the health care market focus it sounds like the drug development could be a really great fit for you guys could you give us any more details about the work you're doing there.
Not a lot of additional detail at this point in time I mean, we expect.
For the manufacturing distribution side of this and so that.
Both saves money, because we don't have to build a direct sales force as we would've had to do in consumer care as an example.
Or to build things like GMP manufacturing, which we might've had to do in other product areas as well and so we can save some money there which is a large investment in a time delay to market.
So we continue to develop the products largely ourselves sometimes in partnership but much of the manufacturing and distribution will be through partners in the near term.
Great. Thank you.
Your next question is from Jon <unk> with UBS.
Thanks for taking.
Taking my questions I guess, just one on the consumer care programs.
You highlighted that some of the costs were.
On the direct to consumer model can you just maybe elaborate a little bit there on what specific areas you saw there on costs.
As you highlighted.
Sure.
The history of those programs were that the company a few years back was with thinking that it may want to partner those programs in.
Whether it be consumer company in those partnerships didnt reach any conclusion and so the decision was made to go direct to consumer and as we analyze this recently over the last 30 days.
Particularly with only a single product in the portfolio in the near term, which would have been our insect repellent.
The cost of hiring a direct sales force supporting that and building the infrastructure.
Was quite prohibitive. So if you look at the profitability profile over the next three years. There was no chance that that product was going to be profitable and so for that reason, we've pocket and it doesn't mean that we're abandoning the consumer care market. Because we continue to believe that the technology is great applicability there.
And we can create great products in that space. It's a question of us being having a financial footing, where we can either.
Take the products directly to market ourselves and it forward to make that investment or in the alternative we developed a partner that we either licensed the technology to or jointly develop and distribute the products.
Got it and then I guess just another one just a little bit on the cash burn and cash on hand through 2023, I think in the last update there, whereas what's pockets go launching high line in 'twenty, two and maybe having some some revenues of 23 any additional color you can provide on that does that assume any meaningful revenues in 2023.
Or just any way to think about follow on product launches there.
Yes, I think we've been pretty clear on highly that we really canceled that program now and so we should expect no revenue from Eileen coming from the company.
At any point in time now there is theoretically a chance that if the market changed in some dramatic way that the company could reevaluate in the future.
And as I alluded to in my remarks, the underlying.
Material that's used in high lean has potential other applications and so we're exploring those.
The R&D work that went into creating that novel material.
Could have future value.
But at this point I'd say, it's unlikely it's going to be in the films market.
I guess I was more trying to get at when you see the cash burn for 2020 free does that assume product launches and revenue generation in 'twenty three or is there any any revenue.
That model.
Yes, as I mentioned earlier, we haven't talked about 'twenty three yet.
We've really given.
Some clarity around what we expect in 'twenty two as we complete the plan here over the next couple of months, we will get greater visibility on the relative ramp of the products that we now have in the pipeline and solidify our internal forecasts, probably not just 'twenty three but all the way through 'twenty four and we'll decide at that point, what external guidance we give.
Yes.
We still expect product revenue to be immaterial in 2022, including the end of <unk>.
Hi, Thanks for taking my questions.
Our pleasure.
Thank you and if you have a question press star one on your telephone keypad.
Your next question is from Matt Obrien with William Blair.
Hi, This is actually <unk> on for Matt. Thanks for taking our questions I wanted to follow up on some of your commentary around partnering.
And I know you kind of shut down the idea on the previous business update call, but are you considering shifting towards developing more of a horizontal platform I mean, it seems like you're kind of halfway there in terms of licensing licensing out the molecules are products. After they've been created but would it not make more sense to kind of work with customers on the front end instead of trying to partner out after the molecule products have already been created.
Well I mean, the company has had a history.
Doing R&D agreements, where there were some joint development of products and the early revenues that you've seen on our income statement were generated largely from those types of R&D partnerships.
The judgment of the company back a couple years ago and consistent with our judgment now is that the long term term economic value is going to be substantially greater by developing products ourselves and using our proprietary technology rather than relying on third parties to develop those products on our.
Form so.
It's a distinct way of going about this market, but one that we think in the long run will deliver greater value.
Got it that's very helpful. Thank you and then I just wanted to dig in a little bit more on.
<unk> 101 in your decision to keep that program alive.
That decision based just based on your partnership with Sumitomo or is there something unique about that market or that product that gave you.
More comfort in your ability to commercialize it down the line.
There were two factors in at least two factors, let me say that.
Clearly the fact that it was partner was a huge part of it so that so that we didn't have the expense of distributing the product or manufacturing it.
So much of the risk of the program has taken on by Sumitomo in partnership so.
That was a very important factor the second factor is that.
If this material is successful as we hope.
It has very broad applicability across all types of devices and so it has a more general applicability than perhaps highly did and so that's the second distinguishing factor.
Got it thank you.
Okay.
At this time there are no further questions.
Great. Thank you all and we will see you and speak to you in a couple of months.
That does conclude today's conference you may now disconnect.
[music].
[music].
[music].
Thank you for standing by and welcome to the St. Maarten third quarter 2021 financial results conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question answer session.
Ask a question during that time simply press star one on your telephone.
If you require any further assistance please press star zero.
Now I'll turn the call over to Mr. Mike Julie Please begin.
Alright. Thank you all for joining earlier today Zymogen released preliminary financial results for the quarter ended September 32021.
If you haven't received this news release or if you'd like to be added to the Companys distribution list. Please send an email to investors at zymogen Dot com.
Joining me today from Zymogen R. J stoutly, acting Chief Executive Officer, and <unk> Chief Financial Officer.
Before we begin I'd like to remind you that management will make statements. During this call that are forward looking statements within the meaning of the federal securities laws.
These statements involve material risks and uncertainties that could cause actual results or events to materially different differ from those anticipated.
Additional information regarding these risks and uncertainties appears in the section entitled forward looking statements in the press release Zymogen issued.
For more complete list and description. Please see the risk factors section of the company's latest 10-Q and other filings with the Securities and Exchange Commission, including when filed the Form 10-Q for this quarter.
Except as required by law zymogen disclaims any intention or obligation to update or revise any financial are our product pipeline projections or other forward looking statements, whether because of new information future events or otherwise.
This conference call contains time sensitive information that is accurate only as of the live broadcast November 13 2021.
In addition, please note that the third quarter financial results discussed today are preliminary and estimated and are subject to the completion and finalization of zymogen financial and accounting closing procedures.
I would like to turn the call over to Jay.
Thanks, Mike and thank you all for joining us this afternoon.
On today's call I'll begin with an update on our progress against the objectives, we set in August.
And then turn the call over to Ina for a more detailed review of our financials, including our preliminary third quarter results and our forecasted cash burn.
In addition to the summary of the work we've done to date I'll share a high level overview of our forward looking portfolio. This will provide a general sense of our direction, but it is not intended to provide full details as our work is ongoing we expect to complete our strategic plan around year end and we'll be in a position to provide more detailed plans once that work is.
Great.
In our business update in August we committed to complete a number of key deliverables over the several subsequent quarters, including a full re examination of the company's target markets confirming our past dues are altering them. If the data indicate a shift in market focus as appropriate including exploring potential new markets.
Our plan to reduce the company's burn rate to extend our operating runway a.
A deep dive into the process by which we prepare and launch products to be sure. They are market ready and can be easily integrated into our customers' workflows.
Plan to strengthen our commercial team and ensure the reliability and robustness of both our sales pipeline and forecast processes and.
And lastly, our multiyear plan with clear milestones and goals that the company can be held accountable to achieving.
Over the last 90 days, we've made significant progress towards these goals.
Working with top tier consultants, we've done a deep dive on our market opportunities and our portfolio using a standardized process to assess our investments. This included overall market size, our addressable market competitive profiles product development cost cost of goods of the ultimate product cost of customer acquisition time to market margin.
<unk> and development risk all the factors you would expect to consider and building an optimized pipeline.
We stopped work on a number of programs and promoted several others. These changes helped changes allowed us to implement a reduction in force of approximately 220 positions across a variety of levels and functions. We believe these tough decisions along with a reduction in related overhead spending will lower our burn rate sufficiently to opera.
Right to mid 2023 with the cash we have on hand.
We've established a rigorous product development process to move products from concept to launch in a consistent and systematic way, which will ultimately help ensure greater confidence in product success.
We've also restructured our commercial team with a more customer centric orientation integrating the formerly separate marketing function to drive a holistic lead the revenue process.
In addition, we have more clearly defined our sales operations function to increased discipline in how we engage customers.
With our portfolio and cost reduction work largely in place we've kicked off our process to develop a comprehensive strategic plan that maps the business through 2024.
Let me now share some additional details.
Our portfolio review indicated that we were working we were working on at least 30 different programs far too many to adequately resource. It was imperative that we narrow our focus to a smaller number that we believe capitalize on our strengths and provide clear commercial opportunities that.
And that resulted in the decision to pause or eliminate several programs, while promoting others to a higher level of investment.
A critical highlight is the cancellation of two programs that were prominent in our public plants, highlighting known as <unk> 102, and our direct to consumer insect repellent referred to as <unk> two or water.
In the case of highway and films, we no longer have conviction in the market opportunity.
To be clear and contrary to many published reports the product worked as designed the underlying technology and science ourselves.
The technical issues that I discussed on our August call caused delays, but were quickly resolved by our teams and were not a factor in our decision to hold the project in.
In fact at the time, we canceled the program we have made tens of thousands of square meters of Haile.
The issues, we uncovered where commercial we look more closely at the Foldable display market and the emerging data on the market segment that we targeted with highly <unk> and other electronics films indicated a smaller near term opportunity than we initially expected.
As a result, we stopped work on our electronic films programs, but are continuing work on our <unk> 101 film in partnership with Sumitomo we.
We will also continue to explore and develop biobased poly image and several different form factors, which we expect will add value to potential future products, not just electronics, but other markets as well.
In the case of our insect repellent and other consumer care programs. Our review show that the cost of customer acquisition with a direct to consumer model would have been prohibited for zymogen.
While the product performance was satisfactory it could not be produced and distributed at a price point competitive with the incumbent products.
With this assessment, we have decided to park all our efforts in consumer care.
We have however developed strong IP and technology around bioactive and remain open to potential future partnerships and clean consumer care.
Turning now to the forward looking portfolio, we continue to see success with our work in agriculture, particularly with a flagship program and nitrogen fixation, where we're working with an important partner.
We expect to have data later this year on the performance of our microbes in both corn and wheat field trials across over 50 sites in North America.
We're also accelerating work on two programs in the health care market one for development of key enzymes used in vaccine production and a second in drug discovery.
Our enzyme work is focused on improving both supply and performance for next generation vaccines and our teams deep enzymology experience is enabling us to quickly develop several enzymes for potential use in vaccine manufacturing.
And drug discovery, the size and diversity of our met a genomic libraries provide the raw materials to discover molecules that can modulate important oncology and other validated targets.
We believe we have a powerful methodology to discover and unlock the potential of millions of natural products that are currently considered unreachable using traditional drug discovery techniques, we expect to be in a position to share data on this program in the coming months.
Additionally, we have programs that are in the early concept stage being evaluated for market size product development cost time to market development risk and the other criteria that I described earlier.
In some cases these programs may be funded to move into full development or they might be parked and protected for potential development in the future when resources are available to commit to them.
Lastly, we've reorganized our research group around what we call leads and seeds leaves or the potential drug targets that I just spoke of and CS are the early exploratory ideas that if viable will be funded to fuel our future development pipeline.
The key takeaway is that we focused our investments restructured our development and research processes and now have a pipeline of products that we believe capitalized on our capabilities and provide clear commercial opportunities.
As you would expect these portfolio updates have resulted in a number of changes to our organization and leadership structures, which I'd like to take you through now.
A key element to ensuring that we're set up for long term success is to have the best possible leadership.
We're laser focused on ensuring that we have the right team to execute our product development and operation plans efficiently, bringing products to market and positioning zymogen as a stronger company with a compelling operating plant.
As I mentioned in our last call. We've added several key executives who have been instrumental in our recent work in.
In addition, we've made some key changes to our structure and streamline our organization with a clear focus on accelerating product development and commercialization.
Notably, we centralized our strategy business development and portfolio management into a single organization to drive rigor in our product development process combining groups that had previously been spread across the company.
In addition to these changes Jed Deane one of the <unk> co founders has decided to move on from the company. After completing the smooth transition of his responsibilities to <unk> <unk>, who joined US in July.
His last day with US was October 31, we're all grateful for Jets vision and his work and advancing the zymogen mission and thank him for his many contributions.
Before I turn the call over to Ana I want to reemphasize key point the technology platform Zymogen works as advertised we believe we have the world's largest meta genomics library, a library, which has potential applications in agriculture health care and consumer care.
<unk> begun to explore these capabilities through partnerships in the agriculture space and are excited to pursue further applications.
Our proprietary early discovery and screening capabilities allow us to identify relevant bio molecules for a variety of use cases, such as novel therapeutics for challenging targets and agricultural applications.
As an example, just last week a paper was published in nature communications that highlighted the work we performed within logic to improve their synthetic biotic medicine, using our biosensor enabled enzyme engineering.
We've continued to review our technology platform with external experts and scientists and we remain confident in the capabilities of our platform with that I'll turn the call now over to Ina for more details on our financials.
Thanks James.
I'll now take you through our preliminary third quarter results and our forecast of cashback.
Total revenue for the third quarter 2021 was $4 1 million.
All relating to R&D service agreements and collaboration revenue.
This represents a 27% increase over the same quarter in 2020 and was primarily driven by the timing of deliverables under fixed fee contracts and additional revenue recognized due to contract milestones.
Revenue was down compared to the prior quarter due to certain milestone payments in Q2, and the normal end of contract phases early in Q3.
Total operating expenses for the quarter.
Of 2021 were $99 3 million.
Ah, 61% increase from $61 5 million in the third.
Third quarter 2020.
Operating expenses were driven by increased resources allocated to product development expenses incurred post acquisition of <unk> therapeutics restructuring charges as well as the costs associated with being a public company.
Operating expenses decreased 4% from $103 5 million in the second quarter of 2021.
The decrease was driven by lower spending on programs as we evaluated our portfolio and the reversal of accrued performance bonuses from the first half as CEO.
This was offset by total restructuring charges of $21 2 million.
In the third quarter of 2021 total operating expenses, excluding the $21 2 million of restructuring charges was $78 1 million.
R&D expenses for the third quarter of 2021 with $99 1 million.
Up 80% from prior year, primarily related to work on highly and our insect repellent.
<unk> <unk> hundred one.
Prior to our decision to discontinue those products as well as personnel and consumables expenses related to our acquisition of <unk> therapeutics.
When compared to the prior quarter R&D was down 22% driven by the slowdown in program spending and the bonus accrual reversal.
Sales and marketing expenses for the third quarter of 2021 were $4 1 million.
Down, 9% compared to $4 4 million in the third quarter of 2020 and down 50% compared to the second quarter of this year.
The decrease quarter on quarter resulted from reductions in our marketing and public relations spending and the bonus accrual reversal.
General and administrative expenses for the third quarter of 2021 was $17 9 million.
<unk> to $14 4 million in the third quarter of 2020, and $23 7 million in the second quarter of this year.
Compared to the prior year, the 24% increase was driven by the cost of being a public company and real estate costs associated with the development of our New company headquarters.
The 24% reduction compared to the prior quarter, but related to the reversal of the bonus accrual and other adjustments.
Net loss in the third quarter of 2021 was $98 2 million.
Compared to 61 8 million in the third.
Third quarter, 2020, and $108 million in the second quarter of 2021.
The net loss of $98 2 million in the third quarter of 2021 included $21 $2 million of restructuring charges related to a portfolio review and cost reduction work.
Offsetting this Q3 benefited from the reversal of accrued performance bonuses by approximately $9 4 million.
We ended the third quarter of 2021 with $496 $2 million in cash and cash equivalents and $10 8 million in restricted cash.
Looking ahead, we do not expect product revenue in 2021, and expect product revenue to be immaterial in 2022.
Without visibility to near term product revenue one of our top priorities is to closely manage expenses.
In September and October we implemented a workforce reduction and have since narrowed our focus to a smaller number of programs that capitalize on our capabilities and presented tier commercial opportunities.
Additionally, as part of the restructuring we began a reduction in our cost structure with the goal of extending our cash runway.
Third quarter restructuring activities resulted in total pre tax charges of $21 $2 million.
These restructuring charges include $4 2 million.
Related to our workforce reduction in September $3, 7 million due to contract terminations and contractual commitments.
$11 $2 million of fixed asset impairments and $2 2 million due to consulting fees related to our restructuring activities.
We expect expenses in Q4 to be roughly flat as our spending reductions will be offset by the lack of the lack of the accrued bonus reversal, which took place in Q3.
We expect to realize the full effect of our restructuring efforts in 2022.
These activities began in the third quarter of 2021, and I expect it to be substantially completed by the end of CEO. However.
However, certain activities such as lease restructuring may extend into the first quarter of 2022.
As a result, we believe that we have sufficient cash to fund operations to mid 2023.
Subsequently to the end of the quarter on October 28, we entered into an amendment of our debt agreement with perceptive.
As a part of the amendment, we paid $41 million.
Which included $35 million in principle and $6 million of accrued interest and prepayment premiums.
We also modified the final maturity to June 13th 2022.
Eliminated the minimum revenue covenants.
With that I would like to turn the call back over to Jay for closing comments Jamie.
Thank you Ina.
I hope, it's clear that over the last 90 days, we've made considerable progress on the commitments. We made in August at the same time, we realized that we have work ahead to accelerate revenue generation, while rebuilding stakeholder confidence despite.
Despite our near term challenges, we remain focused on our strategy of pursuing continuous launches of breakthrough products and I'm proud of the work that our teams are doing across the organization.
We have a clear vision and to partner with nature to make superior products and the superior way our goals will remain ambitious and we're confident in the long term prospects for the company.
The overall Tam for our technology is enormous we have a strong platform to create novel products and the markets are hungry for a new generation of technology that will transform the way materials remanufactured.
Thank you all for your continued support and your patience as we worked to strengthen our business and move forward toward a more successful future with that we'll now open it up to questions operator.
If you have a question press star one on your telephone keypad.
The first question is from Derik de Bruin with Bank of America.
Great. Thanks for taking questions I'm, hoping that you can just give us some perspective thats why investors should remain confident in the agriculture programs. After we pumped at the rest of the pipeline there something different about this market or the customers that you're talking to him that we shouldn't be considered.
There's a couple of distinctions one is that it's a what.
What we supply into the agricultural market is a microbe rather than a molecule. So the product itself is quite different so there's no scale up required of.
During a particular molecule.
The second is that we're working through a partner on distribution and field testing. So the actual customer interface is held by a very.
Nominate company in this space and so that responsibility is not really being executed by zymogen and I'd say the third factor is that we have already undergone field trials in a preliminary way.
And those results have been positive to date.
Wonderful and then just one more from me. So you were previously kind of somewhat opposed to going into developing products for health care and now it seems like you are developing.
And to be used in vaccines can you talk about the strategic rationale here and there maybe more color on the <unk>.
Use of these enzymes.
I don't think the company was resistant to that market really in any way.
It was just the fact that the two lead products happen to be in the materials science and consumer care areas. In fact, historically the company actually has some R&D partnerships in the healthcare space, which were successfully executed.
But were ultimately completed.
And the programs at least the drug discovery program that I mentioned is something the company has been working on for over a year.
And it really resulted from the realization of the power of the underlying that genomic libraries that we had and our ability to use.
A novel methodology to.
Determine unique drug targets in the.
Natural products space, So I wouldn't say the company in any way was adverse to this market. It's just that we promoted those two programs. Initially we still have many programs in the materials science area in the pipeline.
Alright, I appreciate it thanks.
Your next question is from Tom statements with Cowen <unk> Company.
Just one follow up question on kind of how you're approaching the kind of customer base now.
Highlighting.
Well I would call some issues.
Zymogen and kind of how can you define your value proposition.
Pipeline changed unchanged.
Okay alright, thank you.
I'm sorry that you were a little you were breaking up a little bit could you restate the question again.
Sure.
More online why would why would customers choose zymogen now.
I was highlighting.
How are you redefining your value proposition, when you're talking to customers and how that changes with with high line.
Given the cartridge himself for similar changes you've made.
Can I can repeat the question just to make sure we got it right Tom.
Are you asking why would customers choose to work with us and what is our value proposition to them.
Yes, yes.
Yes, well, we each of the products.
That we've talked about go into slightly different markets and the value proposition of each of those are somewhat different.
Clearly, what we're doing in partnership with Sumitomo still.
Still addresses.
The aspect of the film market, but there again, we have a strong partner who is responsible for both the customer contact.
And the manufacturing of the product.
Proposition there is that the easy one material has a unique set of capabilities and we believe.
But that program should progress.
What we're doing in the the enzymes space in the drug discovery space has very different value propositions and drug discovery, we're creating.
Unique.
<unk> molecules to address particular targets in the case of enzymes, we're going after an existing market, but a relatively new one.
That has requirements for improved performance and improved costs and improved supply. So that of course that market would be the value proposition. So each market is somewhat different.
What happened at Haile was was really a misjudgment.
The rate of growth of the market.
And the degree of differentiation of the segments, we're going after and so I think what we have in the pipeline now is distinctly different from the experience we had with highly.
Fair enough and if I could.
A follow up I mean, yes.
How do you view your kind of revenue ramp into 'twenty two 'twenty three now.
Cause is the same as it was in Q2 or do you see something more near term.
Well, we havent changed anything on our project forward projections for the revenue ramp as we complete our strategic plan, we'll probably lay that out a little.
Bit more clearly.
But what we said and reinforce in her comments is that we don't expect any material revenue in 2022.
Thanks Jess.
Your next question is from Tycho Peterson with Jpmorgan.
Hi, This is Rachel on for Tycho. Thanks for taking the question. So first as a follow up to some of the earlier questions for vaccine enzymes can you just give us some color on your plans for the go to market strategy for that program.
Are you planning a partner they are bringing to market on your own.
Yes. This is very likely to be partnered so we are in discussions with potential partners. There. We have nothing to report at this point in time, but the intent is to partner that program.
Great and then on the.
In fact for a pint you talked about how you have it in bioreactors.
Can you talk about have you started to have any conversations with consumer companies about potentially licensing or partnering on that.
We've had some inbounds in this area and so we're continuing to look at those but to be honest with you in the last 90 days, we've been pretty focused on.
Sort of paring down the pipeline getting focus getting our product development process really stood up.
Executing well and focused on the products that we're going to create.
Now that we're pretty much through that initial phase, reducing the cash burn as well, we're going to develop the strategic plan and as part of that work, we should develop a licensing strategy and decide at that point, whether we want to have a more proactive sort of outbound licensing strategy as opposed to merely reacting to inbounds.
Understood and then last question for me can you just give us an update on where the process is that sort of recruiting a permanent CEO.
Are you seeing that can take six to nine months. So let me start with bringing candidates.
Yes, so we have not started the process yet and that's by choice. So the decision that that I made along with the board of directors is that we as priority one wanted to make sure that we right size. The company got our processes fixed cutter. Our development team is really focused on the products the new products in the pipe.
<unk>.
We write a strategic plan that we all believe in that has credibility and it's defensible and at that point, we believe we could credibly go recruit a world class CEO.
Prior to that I think it would be challenging to sit across the table to try to recruit someone without a plan that you had conviction in and so our intent is to begin working on the recruiting process early in 2022.
Great. That's all for me thank you.
Okay.
Yes.
Your next question is from Matt <unk> with Goldman Sachs.
Hey, guys. This is Dave on for Matt Thanks for taking the questions.
Glad to hear about the health care market focus it sounds like the drug developments.
A really great fit for you guys could you give us any more details about the work you're doing there.
Not a lot of additional detail at this point in time I mean, we expect.
To do that as I mentioned in the script over the next couple of months as we sort of increase the validation level of what we're doing and begin to engage third parties in discussions about about the work what I can tell you is that the preliminary work we've done internally looks really solid and so we're very excited about about the program.
<unk> and <unk>.
Ask you to stay tuned for more information to come.
Got it and.
With the strategic review.
<unk>.
Affected how you think about potential partnerships.
And maybe are you any more inclined now to to work with project with partners on projects instead of taking 100% product risk.
Yes, I think it has influenced us.
To some extent in the way it has is that previously.
The company was focused not only on creating the product, but also manufacturing and distributing it and in many cases not in every case.
And I think both because of cost constraints and.
Reasons of time to market, we decided to pull that part of the strategy in and really focus on creating the products and doing more partnering both for the manufacturing distribution side of this and so that.
Both saves money, because we don't have to build a direct sales force as we would've had to do in consumer care as an example.
Or to build things like GMP manufacturing, which we might have had to do in other product areas as well and so we can save the money there, which is a large investment in a time delay to market.
So we continue to develop the products largely ourselves sometimes in partnership but much of the manufacturing and distribution will be through partners in the near term.
Great. Thank you.
The next question is from Jon <unk> with UBS.
Thanks for.
Taking my questions I guess, just one on the consumer care programs.
You highlighted that some of the costs were.
On the direct to consumer model can you just maybe elaborate a little bit there on what specific areas you saw there on costs.
You highlighted.
Sure.
The history of those programs were that the company a few years back with <unk>, we're thinking that it may want to partner those programs.
With a big consumer company in those partnerships didnt reach any conclusion and so.
The decision was made to go direct to consumer and as we analyze this recently over the last 30 days.
Particularly with only a single product in the portfolio in the near term, which would have been our insect repellent.
The cost of hiring a direct sales force supporting that and building the infrastructure.
<unk> was quite prohibitive. So if you look at the profitability profile over the next three years.
No chance that that product was going to be profitable and so for that reason, we've parked it and it doesn't mean that we're abandoning the consumer care market.
We continue to believe that the technology is great applicability there.
And we can create great products in that space. It's a question of us being.
Our financial footing, where we can either take the products directly to market ourselves and it forward to make that investment or in the alternative.
<unk> developed a partner that we either licensed the technology to or jointly develop and distribute the products.
Got it and then I guess just another one just a little bit on the cash burn and cash on hand through 2023, I think in the last update there, whereas what's pockets go launching high line in 'twenty, two and maybe having some some revenues in 'twenty three.
Additional color you can provide on on that does that assume any meaningful revenues in 2023 or just any way to think about follow on product launches there.
Yes, I think we've been pretty clear on highlighting that we've really canceled that program now and so we should expect no revenue from Eileen coming from the company.
At any point in time now there is theoretically a chance that it has the market changed in some dramatic way that the company could reevaluate in the future.
And as I alluded to in my remarks, the underlying.
Material that's used in high lean has potential other applications and so we're exploring those.
The R&D work that went into creating that novel material.
Could have future value, but.
And at this point I'd say, it's unlikely it's going to be in the films market.
I guess I was more trying to get at when you see the cash burn for 2023 does that assume product launches and revenue generation in 2003 or is there any any revenue.
That model.
Yes, as I mentioned earlier, we haven't talked about 'twenty three yet.
Really given.
Some clarity around what we expect from 'twenty two as we complete the plan here over the next couple of months, we will get greater visibility on the relative ramp of the products that we now have in the pipeline and.
And solidify our internal forecasts, probably not just 'twenty three but all the way through 'twenty four and we'll decide at that point, what external guidance we give.
Let me start and expect product revenue to be immaterial in 2022, including the end of <unk>.
Hi, Thanks for taking my questions.
Pleasure.
Again, if you have a question press star one on your telephone keypad.
Your next question is from Matt Obrien with William Blair.
Hi, This is actually Max on for Matt. Thanks for taking our questions I wanted to follow up on some of your commentary around partnering and I know you kind of shut down the idea on the previous business update call, but are you considering shifting towards developing more of a horizontal platform I mean, it seems like you're kind of halfway there in terms of licensing licensing out the molecules of products after they've been created.
But would it not make more sense to kind of work with customers on the front end instead of trying to partner out after the molecule products have already been created.
Well I mean, the company has had a history of.
R&D agreements, where there was some joint development of products and the early revenues that you've seen on our income statement were generated largely from those types of R&D partnerships.
The judgment of the company back a couple years ago and consistent with our judgment now is that the long term term economic value was going to be substantially greater by developing products ourselves and using our proprietary technology rather than relying on third parties to develop those products on <unk>.
Our platform so.
It's a distinct way of going about this market, but one that we think in the long run will deliver greater value.
Got it that's very helpful. Thank you and then just.
Wanted to dig in a little bit more on <unk>.
<unk> 101 in your decision to keep that program alive, I mean was that decision based.
Just on your partnership with Sumitomo or is there something unique about that market or that product that gave you more comfort in your ability to commercialize it down the line.
There were two factors.
Two factors when we say that clearly the fact that it was partner was a huge part of it so that so that we didn't have the expense of distributing the product or manufacturing it.
So much of the risk of the program has taken on by Sumitomo in partnership so.
That was a very important factor the second factor is that.
If this material as successful as we hope.
It has very broad applicability across all types of devices and so it has a more general applicability than perhaps highly did and so thats the second distinguishing factor.
Got it thank you.
Okay.
At this time there are no further questions.
Great. Thank you all and we will see you and speak to you in a couple of months.
That does conclude today's conference you may now disconnect.