Q4 2019 Earnings Call
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Thank you for holding ladies and gentleman your line for the Heart Health Conference call at this time Youre still gathering additional participants and well get started momentarily. We thank you for your patience enough that you. Please remain on the line.
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Good morning, and welcome to the conference call covering Harl House financial results and business update for fourth quarter 2019.
On the call joining me today I have heard as Chief Executive Officer, Mike bought excuse me work bomb and Harris, Chief Financial Officer, Andrew Boll.
My name is just and I will be your operator for today's call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session.
By now you should have received a copy of the earnings release. If you have not received a copy. Please go to the Investor Relations page of the company's website at Www Dot Haro Inc. Dot com.
Before we begin today, let me remind you that the company's remarks include forward looking statements within the meaning of the federal Securities laws.
Forward looking statements are subject to numerous risks and uncertainties many of which are beyond our house control, including risks and uncertainties described from time to time in FCC filings, such as the risks and uncertainties related to the company's ability to make kirschling commercially available its compounded formulations and technologies and after FDA approval of certain drug.
Candidates in a timely manner or at all.
For a list and description of those risks and uncertainties. Please see the risk factor section of the company's most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q filed with the Securities and Exchange Commission.
Oral health results may differ materially from those projected our disclaims any intention or obligation to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise. This conference call contains time sensitive information is accurate only as of today March 3rd.
18th 2020 I.
Additionally, higher will refer to non-GAAP financial metrics, specifically adjusted EBITDA Andorra adjusted earnings.
A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's release available on the web site.
With that I would like to turn the call over to Mark bomb to go over some prepared remarks prior to the question and answer session Mark.
Thanks for joining our call today.
Shareholders told us they like our new conference call and shareholder letter format. So we intend to continue to publish an update letter going forward with that said I'll highlight a few items and then open up the Q when a.
First though with the recent Corona virus concerns upheavals in the energy market and to the market repricing old assets.
Professionally as a hero investor myself, there are few things I am thankful for first there were in the pharmaceutical business and there were ophthalmology focused which tends to be fairly recession proof.
To.
Now we have a robust supply chain no supply disruptions and not on the horizon only assurances to customers that our team is there for them.
And third that despite the doom and gloom, which I understand and appreciate our business has been pretty strong what a blessing it is to be profitable cash flow positive and not need to raise capital.
See magically 2019 was a period, where we play all the ground for next leg up for a company and our shareholders or portfolio includes a powerful invaluable group of businesses.
Operationally in Q4, we hit the ball out of the park on gross margins delivering a year ahead of schedule and with new equipment coming online in a few weeks and additional efficiencies. We expect shortly we should secure the gross margin targets, we promised to deliver going forward.
We are a bit behind schedule on revenues because of a one time event in Q4, but as I discuss and our shareholder letter, we're getting caught up quickly and we have numerous ways to meet or exceed our shareholders expectations financially, we're making money and as I said, we have no intention to dilute.
Our shareholders and 2019, our core Imprimis Rx business generated record highs in gross margins and adjusted EBITDA.
Ophthalmology revenue grew 40% for the year with 2019 gross ophthalmology revenue equaling 47.7 million for the year and 12.4 million during the fourth quarter. We expect this growth to continue and 2020 as we sign more supply agreements similar to the way.
Ones, we've agreed to with V C N a.
Hi, or partners and I care services partners, but you'll also see us introduce new products to our portfolio.
Make improvements to our Salesforce and hopefully benefit from several other potentially revenue generating initiatives.
As I alluded to gross margins hit a record 72% in Q4 and eight percentage point improvement from 64% in the fourth quarter of 28 team for the year, we posted 67% compared to 60% for 2018.
I believe our production in manufacturing team is on the right path and have the potential to keep gross margin at 70% or higher going forward, which puts us on a par with other up thalmann pharmaceutical company peers adjusted EBITDA reached a new record high a four.
Point Sixmillion for the year, and we total and we total adjusted EBITDA of 2.1 million in the fourth quarter. Another record high for the company, finishing the year strong.
Last point on the financials that I want to highlight is a big one for us because we generated nearly $1.7 million in cash flow from operations. During the fourth quarter. This is an important milestone for the company. We look forward to build off it into future as revenues continue to grow and we expect.
Generate more cash flow from our operations during 2020.
We have other reasons to be excited about 2020 is well beyond the look out for significant value milestones from our drug development businesses Eaton surface melt Mayfield and rapidly which are discussed in more detail in our shareholder letter.
On top of mind in a very positive way is the progress we've made with our stove pharmaceutical subsidiary, which recently completed several studies at a world renowned ophthalmology focused research laboratory on the killing power of S. T 006 on various.
Foamix bacteria fun Guy and viruses for our team. The results we've received of crystallize the great opportunity, we see in this business and our ability to develop what I like to refer to as a potential category killer drug candidate.
It's not just me, who like Stow, because other folks who I'd say are much smarter than me really like it too and I look forward to discussing stow in more detail on the quarters to come.
Before we jump into the queue and eight.
While I'm truly proud and happy to own interest in all of the businesses. We've started I want to highlight the work we've done building vision allergy, which we intend to launch this year. We've recently agreed to terms with an experience CEO candidate to run vision allergy and he's doing a great job, bringing this unique ophthalmology focused.
Hi, health platform to life, including making progress with one of vision allergies offerings, which is a novel patent pending formulation being developed to treat presbyopia, a massive market opportunity and one that we believe vision allergy will uniquely address more to come up.
About vision allergy finally.
Many promising companies have been beaten down given the recent repricing of just about every publicly traded company having been through a few major cycles over the past quarter century, I know that there are times, one when one looks back and says remember when such and such stock was at such and such price I.
I wish I would've bought it then I'm not making me promises of course, but I Lee I believe hero is one of those companies and I believe Eaton certainly fits into that category as well and we will see without further ado lets jump into the queue in a I'll pause to have our operator poll for questions operator.
Thank you Mark ladies and gentlemen, the floor is not open for questions. If you have a question or comment. This star one on your telephone keypad again, not a star one for any questions. So we do asked if you're using a speaker phone you pick up your handset to provide the best sound quality.
I'll go first to Andrew Dsilva B. Riley FBR.
Hi, Good morning, Thanks for taking my question and yeah. Congrats on on the growth throughout the year I just as it relates to the out of stock commentary that you had related to the I named patient basis products I'm, assuming that's coming out of your fiber three a a facility and I was just.
Curious if products like clarity were impacted there and maybe a little bit of context around what revenue could have looked like for the ophthalmology business had some of those Ah Ah operational issues not taking place.
Yeah. Thanks for the the question Andy and in in short the the impact was specifically to our five oethree a patient specific business. So these are the chronic care formulations and clarity see was impacted as well as other.
Patient specific formulations that we make a in the answer is is frankly, if we wouldn't have had that issue. We would've been you know in the zone that you probably expected us to be in a we view this as a as a onetime event.
It has been the software issues have been corrected.
The growth is come back rapidly, which is critical and we're moving forward and making up Oh in that revenue gap from the fourth quarter.
Okay, and just from a sticky units as customers are you just speaking clarity as an example, I say that there is the issues with them getting their medication when they're expected to how sensitive our day to be able to move over to perhaps.
FDA approved offerings or other compound it offerings that might be in the market, if if they're not able to get a reef, though when needed.
Well, it's a it's a good question and I think you know I don't we haven't studied that we haven't done market research. The only thing I can tell you is that when and I alluded to this into shareholder letter. When we had these issues fixed the response was remarkable and I think.
Thank you know it in other words, we didn't lose folks are people didnt switch over and frankly, they use our formulations because they've very likely failed on those other products. We always ship our products just for what it's worth with additional medication. So.
Oftentimes patients have extra medication and that's what we believe they used in these cases, but we didn't really lose patients. We just weren't able to capture that revenue during the period of the patients are back and I think what's really important because you know as you scale a business you've got to have the systems and process.
He is in place in order to do that when you're dealing with patient specific orders.
This software that we invested in that we deployed in that Didnt go perfectly on the deployment for sure is now delivering and I can tell you that so for those patients, including the ones that were had delayed shipments.
Ability to process their orders efficiently literally in a matter of minutes without human intervention in most cases is tremendous for us as we continue to scale. The business. So we did have that glitch and.
The fourth quarter the patients.
Service is now online we didn't lose folks and were recapturing that revenue and I think most importantly.
These systems the processes and the software that we need to scale are in place going forward.
Great not really good to hear and then.
On the CMS side, just as it relates to one dropless prescribing, maybe let us know where are you are.
As it relates to deploying that and then I was going through your 10-K, I noticed that for certain products you're trying to.
Obtain pass through status your Medicare part B, Oh, I was curious on what kind of a beneficial impact that could have in 2020 or beyond.
Yes, so the the impact from the change in the CMS policy on Dropless has not materialized in an him in a financial way for us. So far volumes haven't changed we continue to have a the same levels of product sales and revenues from that product. So it hasn't been in.
Tactful I think the important factor, though is that over the last five years as you know I've been interface thing with CMS and trying to get some kind of coverage to and to make sure that patience and surgeons have access to these formulations, we've invested heavily in that process.
And the Imprimis Rx team as I said in our shareholder letter was able to meet with CMS.
Specifically in the fourth quarter and discussed the opportunity to apply for a pass through.
Status for one specific high volume formulation and based on the outcome of that meeting and the advice of of Ah of folks who we have a lot of respect for we made an application I think importantly, though because if if the application.
And as approved.
You know, it's it's a really big thing for us a very big thing.
But we'll know on that we'll know about that the application has been submitted we'll know what the status is by July 1st So in a matter of a few short months, we'll have a read out on that.
Okay, Great I I could ask a a ton of questions I'll take most the rest of my language or Q2 more quick ones that all bundled together first just as it relates to you maybe the evolving sales strategy a in your letter. He highlighted that you were going to be possibly partnering with other pharmaceutical.
Companies with FDA approved products, maybe a little color on the timing and magnitude of that and then as it just relates to some of the spin out opportunities a stellar envisioned algae for example, I seem to have overlap as it relates just keep the end market opportunity now I was just curious if maybe down.
The road or currently have even thinking about maybe integrating those two companies or other potential spin out into one subsidiary versus multiple I just to make maybe a a broader or larger organization. When do you consolidated thank you very much into.
Good job last year.
Thank you. Thank you Andy the in terms of of or the partnering opportunity or the the the evolution of the Imprimis Rx business model.
We do say in our shareholder letter that we're going to be leveraging the imprimis Rx platform. This year shareholders will see that happen.
We've built a very robust distribution platform sales and marketing platform, we have a lot of customers and we we have a lot of loyal customers. I mean, the fact that we had to software glitch in the fourth quarter and things came back so rapidly I think.
Speaks to the reception that we haven't we walk into our customers offices and what we believe is that there are a lot of companies out there that have taken ophthalmic products through an F.D. approval, but are staring in the face a.
Very significant sales and marketing cost a lot of risk related to commercialization you know they build sales models and that show that they're going to capture.
Four or 567% market share for example in the cataract surgery market.
And the reality is that if I owned one of those products and I was facing those costs and risks and I saw a company like imprimis Rx that could die on me yen immediately to that much market share and a lot more and do it rapidly.
And efficiently and improve my gross to nets.
That's an attractive feature that's an attractive partner and so we've been in discussions with a number of of companies like that who are interested in our platform and as I said in our shareholder letter we intend.
To bring those products and acquire those products or otherwise make them available through our platform that's going to increase it should increase revenues it should increase profits.
And it also should create an evolution of the improvements Rx brand from a compounding specific brand to an ophthalmic pharmaceutical company brand and so we're excited about that and and throughout this year I think you'll see more progress there in terms of the overlap between.
In stone and vision allergy.
No. We haven't said a lot about vision knowledge and I think when we say more you'll see that there really is not any overlap between vision allergy and stone in particular.
And so at this time you know we continue to see these businesses as separate entities. We also think it's really important from a management perspective that the senior executives focus on the specific business. So the fellow that will run so.
Has specific a specific history of success with those types of assets and there really is no overlap between Stow in for example vision allergy, but we'll have to see going forward. It may be the case that some of the investors that are helping us fund these businesses.
See things differently and they want to combine that the business. So we'll see.
Okay, great. Thanks, again, and that's somewhere between 20.
Thank you.
Once again, ladies and gentlemen, it was star one if you have a question we will move next to Brooks Oneil at Lake Street capital.
Oh, good morning, guys I wanted to follow on with Andy Glass question, and just ask you a little bit about the product supply agreements, you've announced recently and how they relate to your whereby you described is evolving strategy from SRX did I get.
It also love to get your sense or whether you think that 72% gross margin number is sort of a baseline that could go up it could go down your strategy Bob's maybe some comments on that would be helpful. Too. Thank you.
Thanks Brooks the a in the cataract surgery market really in the the ophthalmic space, there's been a a trend towards consolidation. So we've seen private equity firms come in and buy up.
Premier practices and geographies around the country, a they're creating clusters within states and frankly, they're creating even larger constellations between states. So the trend is towards consolidation in the ophthalmic space and a if you're a private equity.
From an you're looking at the math and then the case of a cataract surgery for example, where you're getting paid to a fixed fee.
You're looking for a way to provide all of the pharmaceutical products that you need for a particular surgery.
Imprimis Rx is a great potential partner, where a low cost high quality provider of those types of medicines and so we were able to bundle. These formulations to get together to create a farm APAC we call. It a farm a pack for these partners and as we've as the.
Pharma pack has evolved you know we've we've been approached by these these firms that on these these clusters of of practices and so we've published I believe three of the recent agreements that we've signed but there have been more.
Well, we wanted to show when we publish those agreements is that these are not in significant numbers. You know one partner alone was 2.5% of the U.S.
Market. Another one was 2.5% and so when you start adding this up and you start thinking about the potential revenue impact and profitability. When you have a nice 72% margin, which I think was the same gross margin that that bausch and lomb.
Put put up a in the most recent quarters. So these are really good margins, we have a really good pharma pack a and these partners that are consolidating these businesses really like this and once again it ties in with this strategy of bringing in additional F.D. approved products because when you have that.
Kind of market share and you have the ability to distribute products in all 50 states, which is what we have you're much more than a compounding company, you're not PHARMAQ pharmaceutical company, a with a pretty good reach in a national platform and so that's what we're going to leverage we think it's a really valuable platform, it's really high.
Hard to recreate it'd be very expensive and it would take a long long time, and we're going to leverage that not only for our shareholders, but we're going to leverage it for these partners going forward.
That's awesome sounds tremendous.
I just want to check in and make sure that the transition of ended the park assets <unk> and product has gone smoothly. The in your opinion is that largely behind it would just moved forward premier.
Well and by the way I forgot your other question about margins to 72% margin is what I thought we could hit it's what I expected I think our teams done a great job.
And there may be some variability a few percentage points here or there, but I actually think we can do better over time.
And you know there is room for improvement believe me, but I'm really proud of the work. The team has done and I think that margins in this range is.
Or what you should expect going forward. So we did hit that number ahead of ahead of time I'm sorry, you you're you're a your other question about park is is is really simple I mean, the park business you were moving forward. A we said that we were going to recapture half of that revenue and we do.
Good.
You know where there we did it the team did it and we're excited about that I think whats important is.
And we said this in the letter as well that business is growing pretty nice and there is this you know growth happening with that that business that we're excited about actually.
And so not only did we recapture what we said we would recapture I think you'll see even.
A trend towards growth in that that segment of the business over the coming quarters.
Right I.
I wanted to ask Andrew just a little detail question about the numbers I see in the quarterly numbers and other income 1.74 million I see up above that in the commentary that you recorded a gain.
2.2 million or from the increase in fair value of eating common shares.
Honestly I'm, just trying to calculate something that might represent and operating EPS number Andrew can you help me or maybe.
Help me understand the difference between the 2.2 million.
Other spend and the 1.67 or that you recorded in the income statement.
Are the big differences interest expense.
Right Okay.
So the operating E. P. S was like what was it like three they have sensed or something.
Operating income for the quarter was 918000.
And then we had our interest expense.
That was netted against the investment gain.
From London and equity losses from Melton surface.
Yep Okay.
Okay last question for me and I appreciate all the information.
If I was reading at least part of the letter quickly and accurately you seem pretty enthusiastic about what's going on at Bell, maybe you could just.
Elaborate a little bit about your excitement there and appreciate all the color thank very much.
Thanks, Thanks Brooks.
The truth is Oh, you know I just.
I'm really excited about eating is well I think eaton is going to surprise people in a in a really great way.
And you know the rest of the businesses surface as I said in the letter you've got phase two data you've got great public company comps a company just raise north of $100 million is a comp recently at a at a pretty good price, we own 30% of that business in a beautiful royalty.
Oh and melt is another one you know the gregs doing a fabulous job. The the the business is progressing will have an I.M.D. filed we're gonna get into the clinic. This year and once again, you've got a really nice public company comp or if you look at Pacira for example.
They have one product effectively one main technology and they started with one indication and they've moved on from indication to indication and when we look at the potential opportunities for conscious sedation and analgesics with you know these multi patented formulations that melt is developing.
We see a tremendous opportunity and Greg the CEO just at a marketing study a in the past a three months or so and the the data from the physicians the prescribers the users was overwhelming patients.
Not only want this but the physicians into facilities, one access to a formulation like the melt and so a you know owning 44% of that business in a really nice royalty is a good thing for taros shareholders, but you're going to see good things with the other subsidiaries is.
Well I think Stow is probably has the has the potential would be the most valuable business, we've built and more will come on that so there are a lot of ways to win.
With our our company and we're looking forward to talking more about them over the coming here.
Great Mark thank very much congratulations on all the <unk>.
Thank you Brooks.
Thanks Rex.
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Well no other questions holding for the conference I'll turn it back to Mr., Mark bomb CEO of Haro, how for any closing remarks.
Thanks again for attending our call today and I Hope this new format continues to provide shareholders you'd better insight into our progress and the outlook for the future of our business and businesses. If you have any investor related questions. Please do not hesitate to contact our Investor Relations Associates John patent his.
Correct number 8587 know for 45 87, this will conclude or call. Thank you.
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