Stellar Biotechnologies (NASDAQ: SBOT): KLH Supply & Vaccine Manufacturing Ability for Cancer, Alzheimer's, Lupus, Diabetes & More

Preparing the company to meet the demand for keyhole limpet hemocyanin (KLH) as it increases to support multiple drugs in commercial production.

Nick Hodge: Hi, this is Nick Hodge, Founder and President of the Outsider Club. I am talking today with Chairman, President and CEO of a company called Stellar Biotechnologies (NASDAQ: SBOT), Mr. Frank Oakes. Now this is a company I have been involved with in some way or another since late 2012, early 2013, and I have seen them mature over that time.

What they do is they produce a sustainable supply of high quality, keyhole limpet hemocyanin or KLH. Now that's a bit complex so I am going to turn to Frank to let him explain to you exactly what that is and why it's so important in the medical community. Frank, first of all, thanks for joining us and second of all, let's talk a little bit about what KLH is and where it comes from?

Frank Oakes: Thank you, Nick. KLH is a protein. It comes from a live animal. It has been used for decades as a stimulant to induce immune response. It's been used to study immune system function and more recently it is used throughout the field of active immune therapy to induce an immune response to target various diseases, including cancer.

It's a protein and what makes Stellar unique is we produce and sell this protein from what we call "our little bioreactors," which are unique in the industry because they are actually live marine shellfish that produce this protein. It's a very large complex protein. It's never been synthesized, yet it is used throughout the world to induce immune function and to fight disease. As an active pharmaceutical ingredient, it's a high-priced protein. We sell it to pharmaceutical companies developing active immune therapies. The price ranges from $15,000 to as much as $50,000 per gram of this protein.

Nick Hodge: There are a lot of drugs being developed, a lot of immunotherapies that use KLH as a main ingredient and we have seen you guys expand supply and make sure your supply is fully traceable. We saw you go from the TSXV last year to list on the NASDAQ. Going forward here at the end of 2016 and into 2017, what sort of milestones can Stellar Biotechnologies investors look forward to?

Frank Oakes: Nick, I have been involved since the inception of this company back in 1999 and I am as excited now as I have ever been about the opportunities for KLH. We are working with multiple companies. There are as many as 20 different drugs in development and we are preparing now for a rapid growth phase.

We are looking at new supply agreements with companies developing immune therapies. We are preparing for infrastructure expansion to support rapid growth and the demand for the molecule. We are involved in product innovation, including developing assays for functional properties of the KLH vaccines, advancing with our partners through clinical programs and looking forward to numerous company milestones with our partners as they advance their therapies through clinical trials.

Nick Hodge: I think your partners are crucial and one of your big partners is Neovacs. They are developing an immunotherapy for lupus and they have just announced they had added the first US patient to their global phase IIb study. How does this lupus opportunity with Neovacs, using KLH compare to some of the other work in your partners are doing like in cancer, for example?

Frank Oakes: This is a really exciting expansion of the use of KLH. It's inducing immune function to target inflammatory molecules rather than trying to kill cancer cells. It's a significant broadening of the opportunity for KLH and active immune therapies.

Lupus, as you know, is a very complex disease. It's an open market. It's an unmet medical need and there is significant scientific optimism around the theory of using a KLH carrier protein to induce immune function to target the inflammatory molecules that underlie the symptoms of lupus.

Rather than the segmented market for cancer, this is an unmet global need, a single global market opportunity for Stellar and for the KLH molecules. We think it's very significant and it could lead to multiple additional therapies for similar diseases that have underlying molecular targets as the symptom-inducing agents of the disease.

Nick Hodge: That's a lot right there so let's unpack it a little bit. You mentioned KLH comes from a live animal, a sea mollusk. Why is it so important for these clinical trials, for lupus and for other terrible diseases and illnesses? Why is it so important that the supply of KLH comes from someplace that is sustainable and fully traceable?

Frank Oakes: It's a biological molecule and therefore, in the regulatory community, the FDA and European Union and Asian regulatory agencies, the source of the biological molecule is extremely important and the traceability of that molecule back to its original source to ensure it is free of underlying toxic components so that the traceability of the source animal, Stellar is the only company that has the ability to produce that animal in a controlled environment and allow the protein to come from a traceable source.

Nick Hodge: Not only I think these companies and the FDA want the source to be pure and fully traceable, but how about redundancy, right? You have a site in Port Hueneme, California, that I visited on a naval base there, an ex-naval base that is highly secure. As of until I think a year or two ago that was your single site, but now you have also expanded into Mexico. Can you talk about that expansion and why it's important to have a redundant site supply?

Frank Oakes: Certainly, there is significant risk associated with a single source for critical ingredients for any therapy or any medical product. Having the site redundancy is critical and having the ability to rapidly scale is very critical because we expect the demand for KLH to increase by orders of magnitude.

The facility in Mexico is critical to our long-term development plan. It is a site we are currently studying and evaluating the feasibility and the suitability of the site. We will evaluate the suitability of the protein that comes from that site so that as we expand our market, Stellar will have the ability to source product from two locations. We have staged it so that we are only experiencing modest risk of the capital investment by incrementally expanding our site here in Port Hueneme, our primary site, as we develop the suitability profile for our site in Mexico.

Nick Hodge: As I understand the story, there are so many immunotherapies in various stages of trials being developed. I think KLH is being used in more than 20 indications now, so it's many shots on goal and really I think it's only going to take one or two actual goals being scored that is a couple of big indication drugs being approved to really make Stellar a fairly sizable company. What are you doing to increase those shots on goal and by that I mean, what are you doing to convert companies who are currently using what I would call "inferior grade KLH" to start using Stellar's high grade, fully traceable KLH?

Frank Oakes: The market for KLH in general is continuing to expand. Companies and research institutions are choosing KLH as the active ingredient for immune therapies. We know of more than 20 indications currently that are being evaluated in clinical development. We are actively working with research groups that are looking at developing new therapies, introducing our pre-clinical grade product, our research grade product to facilitate those companies in their transition from research to medical grade products.

We see the opportunity being significant, so we are working with companies to develop the assays necessary to demonstrate comparability of our protein to facilitate their transition from research grade or competitors' products to Stellar's products.

At the same time, we are working with our partner, the French company, Neovacs, to develop vaccine manufacturing capabilities which will further facilitate the ability of companies to transition from research grade KLH to Stellar's GMP grade KLH for human use and then ultimately to transition to manufacturing vaccines for their finished products.

Nick Hodge: A soup to nuts supply of KLH and potential manufacturing of any immunotherapies that result from testing that is currently going on. To do that you briefly mentioned you have formed a joint venture with your partner Neovacs that's called Neostell. Can you talk about Neostell a little bit and why that adds value to the Stellar story?

Frank Oakes: The joint venture with Neovacs to form Neostell has Stellar positioned as a 30% owner of a vaccine manufacturing company. The initial purpose of that company is to manufacture Neovacs' IFN alpha vaccine for lupus and for other indications and ultimately, it will allow Stellar to offer vaccine manufacturing capability to its other customers and partners that are currently producing vaccines at various contract manufacturing organizations that will ultimately need commercial scale manufacturing capabilities to produce the finished vaccine product.

It allows Stellar to move up the food chain, allows Stellar to sell KLH at its current margins to the manufacturing company and then participate as an owner in the revenue stream from the manufacturer of finished drug products.

Nick Hodge: That's really exciting. Any vaccine that's approved for market is going to need substantial quantities of KLH and in addition to the lupus treatment you mentioned there are several that are advancing fairly quickly. I know there is one being developed for glioblastoma or brain tumors, brain cancer. Are there any other new exciting applications or KLH-based therapies that you have seen at trials or that are new and exciting?

Frank Oakes: Yes, we know of several vaccines that are in pre-clinical development we expect to see enter the clinic over the next 12-18 months. KLH is being used, as I said, in the treatment of inflammatory diseases so there are several opportunities with companies such as Neovacs to expand the indications that their drugs are currently being used for.

For example, Neovacs recently announced that they are looking at the possibility of using a KLH conjugate vaccine in the treatment of Type 1 Diabetes. Neovacs has also announced the expansion of the use of their vaccine dermatomyositis. The use of vaccines currently in clinical trials are expanding the indications.

We have also seen our partner, the Spanish company Araclon announced that it is recruiting into its phase 1 clinical trial for Alzheimer's disease. We know of another European company that recently has announced the initiation of a phase 2 clinical trial for Alzheimer's disease.

We are seeing the expansion and the use of the current vaccines and clinical trials, as well as new trials, new indications entering the clinic and the progress of current vaccines for significant diseases that include major opportunities such as Alzheimer's disease. We see the need to be in a position to rapidly expand the production of KLH and to support the manufacturer of the finished drug product.

Stellar now feels we are positioned with two production sites for the raw material, one in California, one in Mexico, a manufacturing site to finish the finished KLH product in California and now a manufacturing site to produce the finished drug products to support European launches. We think Stellar's positioned well not only to support new drugs entering the clinic but to support those potential commercial launches of multiple drugs that are well advanced in clinical trials already.

Nick Hodge: Frank, I couldn't agree more. Those are some serious applications when you start talking about immunotherapies for Alzheimer's and diabetes. Those are diseases that affect millions and millions of people. It could be a really good market for Stellar to get into and that's one of the reasons why I continue to tell my subscribers to buy the stock.

Here we are in late 2016, probably some tax law selling to take advantage of. The stock has been a little soft lately, but I look for that to really change course in 2017. I appreciate you joining me today and telling my readers a little bit more about the story. Is there anything else you would like to add?

Frank Oakes: I just want to stress that the company is in great financial shape. We attracted an investment last year at $4.00 per share from institutional investors. We have added some energetic, highly talented members to our management team. We see KLH continuing to be a go-to molecule in the field of active immune therapy, one of the fastest-growing segments of the biotech industry. We have just got an incredible focus on preparing the company to meet the demand for KLH as it increases to support multiple drugs in commercial production. It's an exciting time for Stellar. I think it's an exciting time for our investors.

Nick Hodge: I agree. Frank, Chairman, President, CEO of Stellar Biotechnologies, it trades on the NASDAQ under the ticker SBOT, thanks so much for joining us today.

Frank Oakes: Nick, thank you.

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