Q3 2019 Earnings Call
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Mr. Arthur Przybyl. Please go ahead.
Good morning, everyone welcome to analyze earnings conference call for the third quarter 2019.
My name is art Przybyl, I am a CEO and joining me today, Steven carry our Chief Financial Officer.
Before we begin I want to refer everyone to the forward looking statements language in this mornings press release.
And ask each of you to review it carefully as important context for this conference call.
Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures can be found in our earnings release dated today.
And I reported third quarter 2019 revenues of 51 point Threemillion.
And adjusted non-GAAP EBITDA of 19.8 million.
For nine months ended September 30, 2019.
And I reported revenues of 158 point Sixmillion, 10% increase.
And adjusted non-GAAP EBITDA of 65.8 million, 6% increase.
Our nine month reported revenues and adjusted non-GAAP , EBITDA or both record amounts for and I.
Today, we provided revised 2019 net revenue guidance of 290 to 212 million.
And adjusted non-GAAP EBITDA guidance 84.72.
To 86.8 million a direct result of additional competition and subsequent price erosion on several currently marketed generic products.
Over the last several years, we have from time to time.
Parents generic price erosion from your competitors.
Now as in the past we believe we can overcome these competitive challenges continue to grow and advance our business model.
We remain committed to our core business model fundamentals.
First and foremost year over year growth in revenues and non-GAAP EBITDA.
Since we became a public company in 2013, new grown our annual revenues from 30.1 billion and adjusted non-GAAP EBITDA from seven and a half million to today's numbers.
Annually reported record revenues and adjusted non-GAAP EBITDA since 2013.
We expect to continue to expand diversify and grow our generic revenues by watching additional generic drugs.
Over the coming months.
Certainly we want to think of my some oral solution is third quarter, and recently announced or intend to December launch of the Chilean injection.
Both products that have the potential to be large generic revenue contributors brianna.
We expect to continue to grow our generic and mature brand revenues and EBITDA through accretive acquisitions.
Since 2014, we have acquired 124 generic drugs and 11 mature brands for total consideration of 333 million.
18 different transactions.
In the future, we expect to continue to invest their money these types of transactions.
Our continued advancement of core Tropin Joe.
Remain on track for our supplemental NDA filing in March 2020.
From our paper to practice efforts, we recently Delstar first human volunteer subjects with our finished dosage form core tropin gel drug.
We continue to believe that cold Tropin jealous, a transformational revenue and EBITDA opportunity for Ana.
Core Tropin gel will compete in the monopolistic market.
That approximates 1 billion in that revenues today.
Second strong balance sheet and strong cash flow.
Our current debt net of cash is approximately 130 million.
At that level, we are levered at less than one of them a half times the midpoint of our 2019 adjusted non-GAAP EBITDA guidance.
Our cash flow from operations for the first nine months of 29 PM is 40.8 million.
And our current cash on hand is over $64 million.
Large part of the generic industry turmoil in recent years can be directly attribute it out of whack bloated debt loads on companies balance sheets.
And I remain steadfast in advancing our business model and a financially responsible manner.
By doing so it allows us to invest our money's and transactions that's helped us grow our business, while not exceeding harmful debt levels.
We're well prepared to meet any challenges our business model my space in a short term and have both short and long term opportunities for continued growth.
We have near term generic product launches a quarter open jail transformational opportunity.
The financial firepower to continue to acquire accretive assets.
We are excited about in ice future.
I will now turn the conference call over to our Chief Financial Officer, Steve and Carrie who will provide you with more details on our financial results.
Thank you are good morning to everyone on the line and thank you for joining the call.
Well, a nice third quarter 2019 key financial metrics fell short of both internal and external expectations.
Our financial position and financial performance remains very strong.
In fact, this is the 15th consecutive quarter, the and I has posted year over year topline sales growth.
As we will discuss.
We have a diversified portfolio a strong balance sheet position in extremely solid track record of business development and remain on track to file the most promising drug in the company's history with the FDA.
With this morning's announcement, we are resetting our guidance for 2009.
During the third quarter, we experienced competitive actions against our E. M P franchise.
And our E S franchise spaces competition from two newly approved market entrants in the fourth quarter.
These market realities have led us to recalibrate near term expectations.
As such we're guiding to full year revenues of between 209 to 212 million, reflecting fourth quarter revenues of between 50.4 million and 53.4 million.
Full year non-GAAP adjusted EBITDA of between 84.7 million and 86.8 million, reflecting fourth quarter projections of 18.9 to 21 million.
And full year non-GAAP adjusted earnings per diluted share of between $5.06 and $5.23.
These reductions occurred during a period in which we are building momentum behind our late September 2019 ball winch vancomycin oral solution.
This product provides an FDA approved alternative to a market did as largely served by compounding pharmacies.
It is not atypical AB rated generic launch and therefore, we currently anticipate revenues to ramp overtime as we build market awareness and product adoption.
In addition, we look forward to our upcoming December launch upper Tilikum Cosily injection, our first marketed injectable products for use in emergency room setting.
We currently anticipate that these products and other planned generic product launches will be meaningful growth drivers in 2020 and are examples of our increasingly diverse commercial product offerings.
In addition, we have a healthy balance sheet and strong cash flow. It we intend to continue to leverage and supporting business development activities.
During the third quarter of 2019, we generated 21.8 million of cash flow from operations, resulting in our unrestricted cash and cash equivalents of $59.7 million as of September Thirtyth 2019.
This balance is reflective of 40.8 million of year to date cash flow from operations and is net of 21.2 million of cash utilized for business development activities and nearly 5 million its capital expenditures made during the first nine months for the year.
Total net debt as of the balance sheet beat was reduced to 130 million, representing 1.5 times net leverage on both the trailing 12 month basis.
When utilizing the midpoint of our revised full year 2019 guidance.
As previously discussed we remain on track to refinance the upcoming December 1st maturity of our 118.75 million convertible debt in the form of fully committed financing included in our $265 million senior secured credit facility.
In addition, with 75 million dollar revolver portion of this facility remains undrawn and coupled with our existing cash and cash flow from operations provides us with significant flexibility and continuing to pursue further business development transaction.
Turning to key personnel metrics for the quarter ended September thirtyth.
And I posted net revenue of 51.3 million adjusted non-GAAP EBITDA of 19.8 million and adjusted non-GAAP bps of $1.23 cents per diluted share.
At 51.3 million net revenue for the third quarter 2019 was up Ciro point 6 million or 1% versus prior year as the gains in our generic and brand pharmaceutical product categories were tempered by declines in contract manufacturing and royalties.
Net revenue gains were driven by the late September launch of bank of myosin oral solution higher sales volumes of both our brand bank of saying and generic vancomycin tablets.
And higher sales volumes at the attic hand, and Kansas Star.
These gains were tempered by decreased sales of agreement that E M T and dice monopoly atrophy.
Cost of sales in the 10 year period was 15 million or 29% of net revenues as compared to 15.6 million or 31% of net revenues in the prior year period.
The approximate two point year over year improvement in margin is principally due to lower royalty expense, resulting from a royalty buyout completed in the first quarter of 2019.
Selling general and administrative expenses were $14.4 million as compared to 11.8 million in the prior year driven by a full quarter worth of costs related to an eye, Canada, which was purchased in August of 2018.
Increased U.S. space head count and pharmacovigilance cost and continued support of the expansion of our portfolio.
Higher good do for and could do for user fees higher legal fees and increased sales and marketing related costs.
Research and development costs totaled $5 million in the quarter as compared to 4.7 million in the year adult period.
Organic R&D spend it continues to be driven by investment behind Petroken and work related to our underlying generic pipeline.
Third quarter expense includes a 328000 dollar charge related to a milestone paid to a third party development partner upon the FDA approval of the product in development.
Typically a payment of this nature would it be capitalized to intangible assets. However, this current commercial forecast for this particular drug did not support capitalization and therefore, we expensed. The payment has incurred this item has been added back to our adjusted non-GAAP metrics for the quarter.
As art mentioned, we continue to successfully complete piece steps on our path to a March 2020, SP N D. A filing for core Tropin.
As part of our activities to be the company has purchased an expanded raw materials active pharmaceutical ingredient and finished dose product in its R&D efforts.
All of these cost Oh excuse me all costs related to this activity had been expensed as incurred to the personnel.
However, starting in the third quarter, we began to purchase inventories that we currently expect will be utilized in saleable commercial batches upon FDA approval of our prior approval supplement filing for this product.
Ordinarily materials purchased for commercial sale would be capitalized does inventory.
However, since we are dealing with a novel product they must cleared the supplemental and D.A. regulatory pathway with the FDA.
Dictates that such costs cannot be capitalized and must be expensed when purchase.
In order to shed transparency on the physical build of core Jochen inventory starting with the third quarter. We have broken this activity out on a separate line item on the PML and have disclosed further information in the footnote number 14 to the financial statements.
Total expense for the third quarter was 195000, which has been added back to our non-GAAP metrics.
Most importantly, however from an operational perspective, we're planning for success and we anticipate our our purchase of commercial levels of raw materials, and Apiay will significantly increase in the fourth quarter of 2019 and during the course of 2020.
On a GAAP basis fully diluted diluted earnings per share of 32 cents decreased 10 cents from the year ago period.
Similar to the second quarter of this year the calculation of our GAAP EPS includes the diluted the effect of our convertible debt.
GAAP requires the Dod Guy we did weighted average shares outstanding include the your radical dilution that would occur at share prices above the 69 dollar in 48 cents conversion price on the face of the convertible debt.
The inclusion of these theoretical shares negatively impacted GAAP EPS by less than one center in the quarter.
Our adjusted non-GAAP diluted earnings per share excludes these another impacts and was $1.23 cents per diluted share down six cents or 5% from prior year.
As discussed on the second quarter call from an economic perspective, our shareholders are protected from equity dilution ups to share price of $96.21 due to the hedging program that the company put in place in 2014.
And as such we currently anticipate no equity dilution associated with the December 1st maturity of our convertible notes.
On a year to date basis, we have generated 158.6 million of net revenues.
65.8 million of adjusted non-GAAP , EBITDA and $3.98 of adjusted non-GAAP diluted earnings per share representing year over year gains of 10%, 6% and 6% respectively.
In summary, we acknowledge the revision to near term expectations.
We remain steadfast in our confidence to weather normal course competitive pressures and to continue to leverage our portfolio, our balance sheet and the talent of our 300 plus colleagues.
Continues as long term growth and success of and I.
I will now turn the call back to our President and CEO art principle.
Thank you Steve.
Nicole we will now open the conference call two questions.
At this time, if you would like to ask a question. Please press Star then one on your Touchtone phone you may would try a question at any time by pressing the pound key once again to ask a question. Please press star one on your Touchtone phone.
So first question comes from line of Dana Flanders, what Guggenheim.
Hi, Thank you very much for.
The questions I have three if that's okay.
My first one is just can you maybe help us understand how we should think about a generic gross margins.
You know trending into the back half of this year and into next year.
Given competition on.
Some of your larger products My second one is just on.
The durability of the portfolio when someone your top franchises and I just ask.
Because I believe E.M.T. as it does he product and that's it's all the mine has maybe I barriers and so as we lap lapped the impact of competition.
Some of these products should we think about the risk of further competition is maybe I'm not as as severe.
Then my third question and I and I. Appreciate you haven't given 2020 guidance, but it sounded like you.
Got you had some nice pipeline opportunities to drive growth into next year.
So curious if you could maybe just give us any initial thoughts on.
You know, how we should think about topline growth in.
In the generics business into next year, just given a competition and what you have in the pipeline. Thank you.
So Dana this is our only answer the last one first regarding 2020 guidance on some of our generic products.
I'm I'm going to actually punk on that question.
And.
Not because I want to look because.
I think Steve explaining that a couple of our for key products for us and commerce and oral solution and recurring him.
As much as they represent potentially substantial revenue and margin opportunities are they are ramp.
So unlike a b product it gets approved and you have a current market of 25 million.
Take some price erosion against the current market to see I'm going to capture.
30% of that market, depending upon the level of competitors.
Sort of plug that in right away you can't do that with these products.
So these products are growing.
And we'll grow over time, obviously with the petroleum launch and so we're going to I'm going to take the opportunity to beg off on that question and obviously, we'll provide we'll be providing 2020 guidance for our generics in our entire business model.
In a hearing February 4th quarter earnings release.
Additionally, we never obviously anticipate the.
Uh huh.
Any transaction accretive.
There are several out there we are certainly involved in them.
Needless to say.
You know, we don't need jerk, our transactions it has to be the right value for us and obviously the right value for the seller and so we would never put that into our guidance but.
We certainly.
Since we anticipate that you know some of that could be some upcoming transactions there could be included in that guidance as well so.
Stay tuned for 2020.
In regard to.
Stability of our our generic franchise.
Are you sensing products has always been relatively stable the.
The Oh the issue with that product is that there is a declining a unit market and has been a ever since we launched the product but that does he is.
Somewhat insulated from competition in regards to Methazolamide like you know we have a nice.
Exclusive relationship with any pie manufacturer for.
For that product that.
You know, perhaps somewhat limits competition I'm always leery about forecasting competition because if there are we found a generic market overtime to be very efficient if there are.
Opportunities to drive revenues and gross profit to a business model in a product that you know has.
Limited competition.
Frankly, we owe lease yield at that is going to be filled by a companies recognize those opportunities.
And you know file Andas and subsequently large products and I think you've seen that in a couple of products.
This year alone.
No big products Methylphenidate, Asperger career tomorrow, where significant competitive pressure came to the market.
That didn't hurt us we had not launch those products and so maybe we didn't anticipate the amount of competition against what we forecasted for the product, but nevertheless, we were not someone who had to roll back.
<unk> revenue base because of additional competition.
Our generic.
Portfolio pipeline has certainly grown over time and yet we've always experienced competitive pressures I mean I could name products do you like for path and on a pro Crown all that we acquired launched and you know the where they were great upon launch and they've just rolled back over time, we haven't we haven't mentioned them and this is first time that was kind of.
Actually caught in the middle of a quarter with.
Some competitive launches but.
Oh, we don't shy away from it yes, if you look at Imus data. It was a 28 million dollar product that's not dead net revenues for us, but nevertheless, we know that we're going to lose obviously some of those revenues to because of price declines ropers that we have to.
Address right the first refusals.
With the two new product entrance and so you know that's always married off by these additional product launches, such as particularly and Ah vancomycin all solution.
I'm going to let Steve address the left in the first question that you had which was the durability of our gross margins on our on our generic products. Steve would you take that question. Please sure and good morning, Dana and thanks for the questions. Yeah, I think to your question was specifically about.
The gross margin profile of the generic business I don't think we've publicly commented.
On the breakdown of our margins, but I can speak of in the aggregate. So clearly some of the pricing contraction, we'll have a a modest negative effect on the gross margin profile, but I think given the diversity of our portfolio and then the numbers.
Products and with a few of the launches that we've been speaking of we're talking about very modest number somewhere and I.
I don't know Directionally two to three.
Points on the on the margin line, some something in that range.
Okay. Thank you for the color.
Well, thank you Dave Thanks.
Your next question from the line until they get willfully with Raymond James.
Thanks, Good morning art.
Can you just talk a little bit about sort of.
Capital deployment strategy.
Finally, the company has done quite a few transactions over the years and there's a lot of assets that.
Our emerging for sale will remain for sale, but just from your perspective, where do you see the best relative values. If you think about the three different buckets that youve transacted in the past branded assets generic.
Products.
Sure.
Into portfolios or potentially even.
Fracturing or dosage form platforms.
Sure so.
We continue to pursue mature brands Ginger if you look at our mature brands and why do we do that I mean, you know typically you've seen this by those that.
Yeah.
No I think relative Oh.
Relatively a good a reasonable value added multiples.
We've been eight we've been successful as you know many times launching a g.'s against some of those mature brands.
And putting together some programs that you know maybe.
No stabilize the decline to mature brands in terms of market units as they.
As it happens over time.
But if you look at our mature brand portfolio, you know certainly grown over the years and its I would say, it's not an annuity, but it's certainly a more so often annuities and the cliffs that you can experience sometimes yeah amongst your generic products. So for us mature brands has always represented.
Cash flow and diversification away from risk associated with our generic product portfolio, Okay, and we've always we've taken the same attack in our generic product portfolio like many other generic companies Ace a small percentage of your generic product to drives a large percentage.
For your reference in your portfolio.
And that's just a function step function of competition.
We continue to pursue.
Accretive generic transactions as well.
Yes, I'd be careful with those types of transactions and and.
They have to have a crystal ball approach to or what can happen to some of those products.
You know many of the generic products, we have acquired have been discontinued and we've always sort of pluck. The nuggets out of those acquired product portfolios advanced them to the marketplace and done very very well I mean, yes, regardless of the fact the competition to sit up market, it's been a great product for us.
For three years running and you know and that's the nature of generics you know.
Take your profits a while you can competition is coming and make sure that you have a backstop for with additional product launches.
So we will continue to pursue generic products, we're a believer that the generic industry.
Needs to be rolled up.
There's a lot of walking dead out there.
And there certainly is a number of assets you know that fit our for sale Oh, you know when his blood industries by property.
And we have the cash flow to do it in the firepower to do it and frankly.
We see that we believe that sometimes we are the only strategic bidder.
For some of these assets, but nevertheless.
We have to actually represents good value for us and obviously.
No. Good a good purchase price for the seller. So you know there's there's that that is added into the equation for some of these transactions.
But you know we also see ourselves potentially.
With continued diversification into other finished dosage forms of generics. Besides what we currently have which is all solids and.
Liquids or.
And I think that's important to you know it's important is that our entire generic portfolio is not.
Beholden to a three consortiums that drive 90% market share in the United States for generic pharmaceuticals, and by that I mean, it's important that we diversify each other's dosage forms or perhaps are driven whose contracts or or or revenues was driven through for instance hospital group purchasing organizations.
That represents additional diversification. So all of this comes with that in mind that.
Portfolio diversification is important but watching as many products in any given year is important but it's always finding goes products that are driving revenues and margins for us not just for not launching.
We don't want to be advancing products that you know are below a certain threshold at gross profit for us.
Simple as that.
In terms of looking at you know additional manufacturing capabilities, Canada for us.
He is currently representative of.
Taking some of the workload off of.
Our debt and so would also diversifying risk in terms of compliance et cetera.
Facilities or.
Pristine in terms of B.I.D.A. I status and couple I don't want give anybody wrong impression.
But.
You know certainly adds another element of capacity.
For additional product launches and maybe we can do more product launches in a given year rather than less because we've added additional capacity at the same time.
We are slowly advancing our CDMO business and that again would provide us with additional diversification right now it's very tight.
Our CDMO business is less than.
10% of our overall revenue base.
But we expect that to grow overtime and so you know you've seen us launch.
And I global source, which admittedly is a website you know intended to hopefully drive some virtual companies to take a look at us and see if they'd like to do business with US we make a you know like if we are not the lowest cost manufacturer, we certainly make a quality products on time on time delivery and service et cetera, and so we're excited about.
With that opportunity and that's why we've unveiled that website and the fact that we are.
Advancing that through.
Booths, obviously, it see PHR and so we're just getting started in that arena and again that provides us with.
We'd like to think the beginnings of additional diversification into CDMO businesses and again taking.
Limiting limiting risk to any one particular business platform.
We have at the company.
And so I hope that answers.
The answers your your question, we certainly have we have lots of cash.
And availability of credit.
To apply for additional transactions. This is admittedly been.
A lean year for transactions for the company.
We expect that pace to certainly a pickup in resemble prior years are going forward in future.
Okay. Thanks, and then I'm going ask your question around Protropin, Joe is well upon submission of the application in March and assuming that the FDA does what it supposed to do and you where the recipient of.
Positive.
If you win and approval within the statutory timeline.
How quickly do you think you could actually go to market.
In terms of.
Actual product sales if in fact, you were to receive approval I guess would be in there.
If we received approval after a four month PDUFA date, we would launch on one day after the approval we would launch the next day.
Okay, we'll be ready to launch so what Steve talks about.
The.
Inventory the fact that we're starting to build inventories you're going to see over the course of.
Our next year and beginning in the fourth quarter, beginning third quarter, but in fourth quarter substantial inventory builds which will be associated with stockpiling of we'll call. It the gross raw material pituitary stockpiling active pharmaceutical ingredient.
And are beginning to us actually have finished dosage form inventory on hand ready to sell on on a on the day of approval or the day after a fruit.
Okay, and as part of the application review process Ari.
You anticipating.
Actual inspections of both the.
And the finish.
For.
Plant I guess, we always discussed his previous okay. Yes, yes, we are we make the assumption that as part of the supplemental review.
That both are a.
<unk> and finished dosage form a drug manufacturers will be up will be inspected.
Okay, and just one last question and.
Recent announcement around the petroleum opportunity that you've characterized that around market size around 360000.
But given that the product has done the market for very long time, I have no idea sort of what.
Price points for that asset could be.
Yes, sure I assume you want to say a whole lot, but just.
Given that I would assume it would be a premium product to a what's currently being used.
I think if its injectable a lighter came but just any color you could share maybe outside of just the volume commentary around that product would be helpful. Thanks.
I agree with you we see the launch of the product as premium product understanding.
[noise] understanding in effect of product launches like.
Many of them have to go through P.T. committees.
You know hospital, setting a but understanding that.
This is a drug that can be two two of these vials can be placed on.
Take of argument every crash card out there Rob.
After about a we've talked about a number of a 100000 crash Cox two per kras cart.
But yes, we would we would.
We will weigh all of that as we are pricing the product, but since we would be the only one on the market. Yes, we would view this as.
Premium pricing within the confines of.
Wanting just to not be have any effect on the decision in associated with.
We purchasing this for crash carts.
With that decision going through PMT committees.
And the final question will come from the line of brain impulse with Cantor Fitzgerald.
Hi, Thanks for taking my question and so you talked about launching courtright put on day, one post approval, but correct me if I'm wrong here given that it's an San Diego Yeah. It's obviously not going to be Substitutable EXL to can you just help us think about you go to market strategy on.
Day, one to get.
Describe is writing you'll product and then any comments you may.
Be willing to give around potential for your competitive to bringing in auto injector of the contracting product. Thank you.
Sure.
Let's answer the let's answer the first question the premature to.
And I speak to our go to market strategies.
I'll give you some macro thoughts that I've always express.
And yes, the product you're right the product is not.
We will potentially has worked well have more than the same label indications as the competitive product.
So first and foremost we will give us at some point in time made a much more detailed deeper dive into our go to market strategy for control.
I can tell you that part of that go to market strategy will begin in earnest well in advance of the.
The anticipated ASCII approval for the product and I will continue to reiterate.
From my perspective that a product like this specialty pharmacy distributed driven product.
Through a small group of prescribing physicians.
And obviously the payers that are supporting this we remain firmly in the camp that market share units.
And revenues.
Well be driven.
First and foremost as most drug products are driven today.
That are not monopolistic the economics world today.
And we continue to believe that.
So.
So you know there will be more to come on a go to market strategy with quarter open.
And the second part of your question Brandon upside was was up.
Any any thoughts on the competitor.
Welcome to bring in told you auto injector I'm, sorry, so look the auto injector.
I suspect that you know they could potentially launching auto injector.
Okay, and then I think there I think our competitor is talking about that.
I guess you have to ask yourself.
How much in auto injector delivery system.
We'll drive.
Or maintain market share.
For a drug that selling through I believe over $50000 survival.
In the face of or what potentially could be a 30% to 50% discount to that price.
And I'll, let you answer that question.
And again I think it falls back on economics rules today.
Great. Thank you.
You're welcome.
We have no further audio question.
Okay, and then I'd like to thank everybody for attending and ice third quarter earnings conference call today have a great afternoon Bye bye.
Thank you this concludes and <unk> third quarter 2019 earnings call. You May now disconnect. Your lines at this time and have a wonderful day.