Q1 2020 Earnings Call
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Good morning. My name is Lisa is I would be your conference operator today.
At this time I would like to welcome everyone to the Q1 2020 Endo International earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If youd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound cake.
I would now like to turn the call over time as Lori Park Senior Vice President Investor Relations in Corporate Affairs. Please go ahead.
Good morning, and thank you for joining us to discuss our first quarter 2020 financial results. Joining me on today's call, our Blaise Coleman, President and CEO of Endo, Mark Bradley Executive Vice President and CFO.
Pat Barry President Global commercial operations, and dominant Curico, Chief commercial officer of sterile Injectables and generics, we prepared a slide presentation to accompany today's webcast and that presentation as well as other materials are posted online in the investor section at Endo Dotcom.
We'd like to remind you that any forward looking statements made by management are covered under the U.S. Private Securities Litigation Reform Act of 1995, and the applicable Canadian Securities laws and are subject to the changes risks and uncertainties described in today's press release and in our U.S. and Canadian Securities filings.
In addition, during the course of this call we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies.
Investors are encouraged to review Endos current report on form 8-K furnished with the FCC today for Endos reasons for including those non-GAAP financial measures in our earnings release and today's presentation.
The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our earnings press release issued prior to the call unless otherwise noted there and I would now like to turn the call over to Blaze plays.
Thank you Laurie and good morning, everyone.
The ending on slide two.
My remarks today I will start with an update on how we're dealing with cobot 19 as an organization.
And then discuss our first quarter business performance and provide an update on our pipeline and certain financial expectations.
Prior to this I'd like to share on behalf of all of our Endo team members and their families. Our deepest sympathies for those has been affected by the global Cobot 19 pandemic.
We also sincerely thank those who have been working to keep all the safe to the croesus, particularly those healthcare workers on the front lines as co. The 19 fight.
Their commitment and selfless acts are an inspiration to all of us and on behalf of our entire Endo team I see thank you.
Moving to slide three.
Let's take a moment to look at how we're dealing with Coca 19 as an organization.
Guided by our commitment to the safety of our team members and the communities, where we live in work as well as commitment to continue reliably supply the critical medicines needed by health care providers and the patients to care for.
Into has implemented a comprehensive response to cobot 19.
To provide for the safety for our team we've implemented alternative working practices, including mandatory work from home requirements for team members, who are able to perform their jobs from home.
We also transitioned to our salesforce to a virtual engagement model to continue supporting healthcare professionals patient care and access to medicines.
We reinvented how we're working during the last two months and have accelerated our use of technology across all parts of our business.
This new wave working during this extraordinary period will serve as a valuable lesson us going forward and re imagining all we do and how we do it.
For manufacturing supply perspective, with the burden of Cobot 19 on hospitals. The continued supply of our critical care products has never been more important.
I'm pleased that the Endo global supply team kept 100% of our manufacturing sites and related distribution channels operational without significant supply disruption.
As part of our commitment to meet the demand for critical care and medically necessary products. We prioritize those operations. In addition, we've implemented enhance safety measures that each of our manufacturing facilities.
Including modified work schedules, so that fewer colleagues are present at once increased social distancing restricted site access to only essential workers enhanced tweeting protocols.
In addition, we provided additional compensation to certain onset operation team members to show, our gratitude and to support for their commitment to delivering necessary medicines to patients.
In addition to our commitment to maintaining the continuous supply of are critical care products and supportive fight against Cobot 19.
We've also pledged over $5 million in product and monetary support to americares and the Red Cross to help address cobot 19 related needs.
Overall, I'm very proud of our company's response to the challenges presented by Cobot 19.
I couldn't be more appreciative of the response of each and every one of Endos nearly 3200 team members around the globe.
I want to thank each of them for their sense of purpose, an unwavering commitment to doing their part in these challenging times and for reflecting who we truly are as a company.
Moving to slide four in order to provide additional context when the impact of the cobot 19 pandemic to our business. We will start with a review of its first quarter impact our business and our expectations of the ongoing impact.
We will then further discuss our first quarter reported financial results.
Starting with the first quarter, we experienced both favorable an unfavorable impacts with the cobot 19.
In terms of unfavorable impacts a high number physician office closures, along with a significant decline in patient visits to doctors offices started in mid March.
This had an unfavorable impact on the performance of our branded specialty product portfolio.
In terms of favorable impact we saw an increase in demand for hospital based critical care stole injectable products utilizing the ongoing treatment of cobot 19 patients.
As well as expect accelerated prescription fulfillment in our generic pharmaceutical segment.
In total we estimate that the cobot 19 impact on our first quarter 2020 reported consolidated revenues of $820 million was an increase of approximately $75 million.
In our branded pharmaceutical segment, there was inventory stocking of XIAFLEX by some customers at the end of the first quarter two the future access concerns. However, this was essentially offset by the overall decline in demand in the last two weeks of the quarter, resulting from a reduction in physician activity and a slowing of pace.
In office visits due to shelter in place orders.
Our sterile injectable segment first quarter revenue growth was aided by approximately $45 million due to higher utilization of days of strict and adrenaline primarily to treat cobot 19 patients.
Our generic pharmaceutical segment first quarter revenues were positively impacted by approximately $30 million as we saw consumers accelerating their prescription fulfillment due to access concerns as well as increased utilization of certain generic medications to treat patients suffering from cobot 19.
Now moving slide five given the uncertainty surrounding duration in severity of the cobot 19 pandemic and its impact on our business. We are unable to reliably estimate its impact in our results for the remainder of 2020 and accordingly, we are withdrawing our 2020 financial guidance.
While growing our guidance, we want to share our current expectations on the ongoing impact of cobot 19 on our business as wells each of our segments.
For our branded pharmaceutical segment, we anticipate a decline in revenue in the second quarter compared to first quarter 2020.
Due to decreased demand for physician administered products.
Including XIAFLEX and Supprelin, la because of office closures and the decline in patients electing to be treated.
While elective procedures are being delayed currently we believe that the underlying demand for both of the XIAFLEX syndications remains strong and we expect to see a gradual increase beginning in the second half of 2020 as physicians and patient activities return towards pre cobot 19 levels.
Additionally, we expect full year revenues full year 2020 revenues to decline compared to full year 2019 revenues.
Looking at sterile Injectables segment.
We anticipate segment revenues to increase in the second quarter of 2020 compared to first quarter 2020, primarily due to increased utilization and channel stocking.
During the second half of 2020, we anticipate a period of Destocking with a subsequent return towards pre cobot 19 purchasing levels.
We expect full year 2000, 2020, sterile injectables revenues to increase compared to full year 2019 revenues.
For the generic Pharmaceuticals segment, we anticipate second quarter 2020 revenues to decline versus first quarter 2020, driven by lower prescription trends following the accelerated prescription fulfillment experienced in the first quarter.
As a result over a modified production schedules to safely maintain operations in response to cobot 19.
We expect the temporary supply decrease for certain lower margin products and potential delays in certain product launches in this segment.
We expect full year 2020, generics segment revenues to decline compared to full year 2019 revenues.
Additionally, we anticipate potential delays in some of our new product regulatory filings plan for 2021st sterile Injectables and generic pharmaceuticals segments.
The PDUFA date for our CCH for the treatment of Cellulite product is July six 2020.
While we are continuing prelaunch commercialization activities as a result of the anticipated impact of Cobot 19 on medical Statics physician office closures and consumer spending.
We are moving our anticipated launch assuming approval to the first quarter 2021.
This tactical shift in launch timing is intended to allow medical statics physicians and patients.
As well as abrupt broader market to return towards our pre cobot 19 environment.
The change in launch timing is based entirely on when we believe the mark will be better positioned to welcome the first injectable therapeutic product to treat sailing.
We grow more excited by the day as we continue to learn about CCH for cellulite and potential.
We look forward to receiving our expected FDA approval and are preparing for highly successful launch in first quarter 2021.
Turning to slide six you'll see a snapshot of our segment revenues and our consolidated adjusted EBITDA for the first quarter.
First quarter reported consolidated revenues of $820 million increased 14% versus prior year.
Excluding the impact of Cobot 19 first quarter revenues grew approximately 4% first prior year.
Reported adjusted EBITDA in the quarter of $421 million significantly increased versus prior year due to higher revenues in fear of favorable changes in mix.
Moving to slide seven we continue to see the positive impact of investments in our core growth areas.
In the first quarter, our branded specialty products portfolio and the sterile Injectables segment reported revenues grew double digits.
The branded specialty products portfolio continued its strong performance with year over year revenue growth of 17%.
Our XIAFLEX franchise had another outstanding quarter growth the franchise saw revenue growth of 30% compared to first quarter 2019.
Overall the growth reflects continued underlying demand to continued outstanding due to converge to continued outstanding commercial execution behind XIAFLEX.
The specialty products portfolio first quarter revenue growth was offset by the year over year revenue decline in our established products portfolio.
The decline was primarily due to generic competition and resulted in revenues of our total branded pharmaceutical segment that were comparable to the same period in the prior year.
Our sterile Injectables segment continues to deliver with revenue growth of 25% compared to the first quarter of 2019 or approximately 9% excluding the impact of cobot 19, driven by continued strong growth in days district.
The district revenues were $203 million, a 46% increase compared to the same period in 2019.
Or approximately 20% excluding the impact of pivot 19.
The underlying growth in beta district was due to both price and volume.
Adrenaline revenues were $57 million in the quarter, an increase of 19% compared to the prior year or comparable to the prior year, excluding the impact of show that 19.
Turning to our generic pharmaceutical segment revenues increased by 15% during first quarter or were essentially flat excluding the impact of filled at 19.
The underlying performance in the quarter reflects the impact of certain recent new product launches offset by the impact of competitive events.
During the first quarter, we launched four new products.
First quarter 2020 International pharmaceutical segment revenues of $29 million, where comparable for the same period in the prior year.
Turning to slide eight we shift our focus to our ongoing clinical trials and data generation studies.
As part of our long term strategy investing in our specialty products portfolio and lifecycle management of our XIAFLEX franchise, we initiated XIAFLEX development programs for the treatment of plantar Fibromatosis in adhesive capsulitis.
We believe that both indications represent a large unmet need for patients who are seeking a non surgical approach treatment.
In the case of frozen shoulder or adhesive capsulitis, a thickening and fibrosis of the shoulder capsule results in shoulder emotion restriction and can be painful.
Additionally, plantar Fibromatosis presents as nodules on the plantar fasciitis in fee and the majority of cases patients have pain associated with the condition.
Currently the only option for removal is a potential complication prone surgery.
We remain enthusiastic about both indications and we currently anticipate only modest delays and patient recruitment and site selection for new clinical trials that are result of the impact of cobot 19.
And estimate enrollment to begin for both trials in the second half of 2020.
We're currently running a phase one label expansion PK study on plasma clearance of vasopressin in healthy volunteers, which we believe may further advance our clinical work and help physicians.
Moving to CCH for satellite.
We are excited about the opportunity to enter the us medical aesthetics market with potentially the first FDA approved injectable option to treat say late in the Bucks.
As part of preparing to enter this market, we have a robust data generation plan.
While release, one and release to comprise the largest Sally trial ever conducted.
Our ambition is to continue to provide meaningful real world data for CCH as wells to advance the shared inhibition of the medical aesthetics community to advance the science of slightly.
Our plans include development focused on dosing injection technique and responses in target patient populations as.
As well as Rover studies on durability.
Results that analysis from these studies are key to our publication and presentation strategies.
Moving to slide nine as part of normal course, We act will review and manage our sterile injectables and generics pipeline portfolio to better reflect our core growth opportunities.
While there are no guarantees of success the projects we choose to commercialize are those we believe will create meaningful value for us going forward.
In that context, you can see that our R&D pipeline is increasingly reflective our sterile injectables growth strategy.
We believe our sterile injectables opportunities have a higher level of differentiation and a more durable revenue profile.
We are pursuing opportunities that we believe.
Can help to meet the evolving needs of our customers potentially improve patient care.
Almost 60% of R&D pipeline is in differentiated sterile injectable products and for 2020, we estimate 50% or more of our new product regulatory filings will be for sterile injectable products.
This is supplemented by strategic relationships with third party partners, such as never car, which will potentially provide five differentiated five of five be to hospital in critical care based products.
We anticipate launching the first of a car product in late 2020.
Now, let me turn the call over to Mark to further discuss the Companys financial results Mark.
Thank you Blaze and good morning, everyone Im pleased to have the opportunity to speak with you. This morning, and I hope that you and your families are healthy.
On Slide 10, you will see a snapshot of the first quarter GAAP and non-GAAP financial results. Please covered company and segment revenues earlier, So I will not review that again.
On a GAAP basis income from continuing operations was $158 million or 68 cents per share on a diluted basis in the first quarter of 2020 compared to a loss from continuing operations of $13 million or six cents per share on a diluted basis in the first quarter of 2019.
This increase was primarily attributable to strong operating performance coupled with a discrete tax benefit arising from the cares Act that was recorded for GAAP purposes in the first quarter 2020.
On an adjusted basis adjusted income from continuing operations was $220 million were 95 cents per share on a diluted basis in the first quarter 2020 compared to adjusted income from continuing operations of $139 million were 60 cents per share on a diluted basis in the first quarter 2019.
This increase was primarily due to higher revenue and a favorable change in product mix in the first quarter of 2020 compared to the first quarter of 2019.
Advancing to slide 11, unrestricted cash flow part of debt payments was $86 million in the first quarter 2020 compared to negative $142 million in the first quarter 2019.
This increase was primarily due to higher revenues and favorable product mix.
We ended first quarter 2020, with approximately $1.5 billion.
In unrestricted cash and a net debt to adjusted EBITDA ratio of 4.7 times.
Moving to slide 12, as Blake mentioned previously we're not providing full year 2020 guidance. However, given that our consolidated and segment financial results for the first quarter may not be indicative of future period results. We do want to provide some direction to help you think about second quarter 2020 results.
First we expect total revenues to decline in low 20% range in the second quarter compared to the first quarter 2020.
This decline primarily reflects an expected decline in branded pharmaceuticals revenue in the low to mid 60% range compared to the first quarter driven by a reduction in physician administered products included in the specialty products portfolio, resulting from office closures and a decline in patients electing to be treated.
We also expected decline in our generic pharmaceutical segment in the low 20% range compared to the first quarter driven by lower prescription trends following the accelerated first quarter prescription fulfillment.
In addition, we expect the decline in our international site pharmaceutical segment in the low 40% range compared to the first quarter, primarily driven by competitive event.
Product Discontinuations and an unfavorable impact of foreign exchange rate.
We expect these declines were partially partially offset by an increase in our sterile injectable segment in the low to mid single digit percentage range compared to the first quarter driven by continued increases in demand for our critical care products.
Secondly, we expect just adjusted gross margin to be approximately 60% of revenues for the second quarter 2020, our adjusted gross margin expectation, primarily reflects a shift in sales mix, including a reduction in the branded specialty products portfolio.
Additionally, we expect adjusted operating expenses to be approximately 25% of revenues for the second quarter of 2020. This reflects the continued investments in our core areas of growth and a reduction in certain other expenses.
Finally for the full year, we expect to make approximately $260 million and payment.
Into the mesh qualified settlement fund and for mesh legal expenses and to incur approximately $80 million, an opioid related legal expenses and previously announced opioid settlements.
Let me now turn the call back over to Lori to manage our question and answer period Laurie.
Thank you Mark in the interest of time, if you could limit your initial questions to allow us to get in as many as possible. We would appreciate it after we complete the question and answer period blades will have some final comment.
Operator, and we have the first question.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from David Amsellem with Piper at Sandler.
Thanks, just wanted to drill down on the.
Stocking and then potential destocking of that you.
Expect to see on Vasostrict, then and Adrenalin I guess the question here is.
How short you that we will see Destocking later in the year given that we're seeing in significant parts of the country covert cases actually.
Increase and there's a lot of rhetoric around additional ways later this year.
Do you think that commentary could be overly conservative regarding destocking and maybe talk about what you're seeing thus far in the second quarter regarding ordering patterns for the two products. Thanks.
Yes, Hey, David Thank you very much for the question I'm going to have dominate jump on that but just real quickly as we talked about upfront.
We saw some really.
Significant changes in purchasing levels in Q1 that carried into Q2 around our sterile injectables business, but let me, let Dominic talk a little bit more around the dynamics, we have seen in that we're currently seeing.
Yeah, Good morning, David.
In terms available stricter than we've seen some pretty significant increase in shipments in late March.
And into the first couple of weeks of April.
Those shipments.
We're at times anywhere between five to 10 times the.
The or the normal weekly.
Or run rate and.
We're seeing some significant.
Reduction and pull through.
Starting mid mid Martin Im sorry, mid mid April were seeing some from significant phone pull through so there was a ramp that triggered the the stocking both in hospitals and distributors, but we're seeing a fall in that pull through today.
Yes, so just add to that as up as Dominic said, then our expectations are that just given the level of inventory that went out the door.
Just even in the for several weeks of April.
That we would expect to see Destocking start to occur beginning in the third quarter and obviously, we haven't provided guidance for the second half of the year and Theres. Many uncertainties here, including ultimately what that utilization of sterile injectable products looks like in the second half of year and how that Destocking plays out.
With the next question please.
Your next question comes from the liner Randall Stanicky with RBC capital markets.
Hi, Good morning, this is asset yields Randall.
Please can you talk a little bit more about where the potential delayed launches coming from echelon falling Blake.
I think as one of down only company.
Finally grants and so in light of this annual but John guidance as it because of certain sleep doctors that maybe more variable to add there. Some other peers are more out of assented conservatism I know that yes, R&D place in India firms that start share by by segment. So.
Are these facilities all up and running.
Then secondly, how should we be thinking about the college playing out.
Buckets being short dated or worse impact at the growth profile for next year. Thank you.
Sorry can you just repeat the second part of your question. We Didnt, we didn't catch yes sure. Yes of course, just wondering if these filings rates are going to be kind of short dated our wealth.
Impact the graph profile for next year, obviously sterile injectables assumption important segment. So I'm just wanting to know how that plays out.
Yes, so thanks for that question.
So let me let me comment on the filings end to end, the and the up and the potential delays on the new product launches because they are related to the to the seeing factor, which is as I talked about in my previous comments, our number one priority through all this has been the safety of our team members around the globe of our manufacturing facilities and our global manufacturing team has done an.
Outstanding job on that front and as part of those measures we have put in place staggered shifts to really.
Significantly reduce the number of.
The probability of obviously the transmission of Cobot 19.
With how we have our workflows happening at our manufacturing facilities as part of that those changes, we do have lower capacity at our facilities and the different levels of capacity ranges anywhere from 50% to 80%, they're all operationalizing in their off their operational and they're all prioritizing our higher value products in our critical care products that said some of.
The trade offs are going to be around R&D capacity that we normally have we shifted over to commercial capacity and so that impacts both in some cases.
Filings, but then also in terms of new product launches as well. So that's what's happening on that front again, how thats going to play out that's part of our uncertainties. We're obviously working as quickly as we can.
In India current environment to increase capacity, where we can but thats going to be something will play out through the rest of this quarter in into third quarter on your second question around.
Around expiry and how we see that playing out it's unclear in terms of exact timeline on that.
So not much more we can probably say on that question I'm going to next question. Please.
Your next question comes on line of Gary Nachman with BMO capital markets.
Hi, good morning, guys.
To address this I've been jumping around a difficult.
With the DCH Lawrence.
Our staff to walk you have next year, how much expenses are actually equipment that Chris that with that.
And then let other changes we will quickly do in terms of your cost structure to potentially mariners and situational headwinds from coated 19.
And then.
Within given the closing mix.
Yes, we think about gross margins trending.
The second quarter, we will give us some directional guidance that would be helpful. Thanks.
Okay. So you've got three questions one around the expense shift on CCH cellulite.
And what that can mean I just want to start by saying, we've never talked about our investment for CCH say late from a commercial standpoint in 2020 so.
We're not going to size that but we are going to say, obviously with that delay we would see a change and one way to think about it is we wouldn't really start recruiting for our the salesforce to the back half of the to the later part of the years, that's a way to think about the the spend push there in terms of our cost structure and the gross margin.
Question I'll turn over to Mark to maybe just comment on what we're doing in terms of.
How we're thinking about cost management in October 19 World, Yes, sure. Thanks for the question. So I think as you've seen we've we've kind of guided to second quarter only.
And our operating expenses as a percent of revenue of 25%.
We would as as usual.
Take a disciplined approach to capital allocation and we would always look to optimize our cost structure, while still investing in those core areas of growth. So nothing really has changed and with with coded we would continue to.
Employee that same discipline with respect to gross margin percentages.
We have guided to.
Second quarter, we are not able to provide anything beyond that.
We think that the the gross margin that we have guided to is really driven by.
Product mix and of course like I said before we would do everything we could to optimize our cost structure and gross margin profile going forward.
Great. Thanks, Mark for the next question. Please okay. Thank you.
Gary.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes online Amy if a deal with SVB lingering.
Hi, Good morning. This is essential to on Trust me. Thanks for taking my question right.
Maybe first question.
We're seeing some states start to open up just just curious how quickly do think products lifelike saprolite could come back as this occurs when it in the immediate with NPL lag just yet just sort of your thoughts there.
Sure why don't I would let Pat talked about that obviously as we as we think about the second half one of our key uncertainties is around that very question, we'll let Pat provide some comments on what we're seeing and our thoughts around that yes, I mean anecdotally others. The desire to open up as soon as is prudent and we're obviously having lots of community.
Patients with our customers again, and that's that's also guiding how we're approaching on a go forward and as we said, we're we're going to continue to see that downward pressure in Q2 and as offices reopened in the second half we would.
Co travel with that and we do feel like go we'll see we'll begin to see that recovery in the second half.
Building momentum into Q4, some of that's out of our control, obviously and so we're going to be prepared to to meet our customers, though when and where they're ready to meet us and so we as was mentioned in the call Weve put in some technology, let enablers that allow us to engage at a high level regardless of what the.
The environment is.
And so again, we're guiding to recovery beginning in the second half.
Right.
Operating that maybe if I could just at a good I just had a follow up late sure candidates.
Just what is sort of your visibility into adequate supply for I guess, your sterile injectables, particularly bezel stricken adrenaline into sort of second half 2020.
Yep.
I'm, sorry, just a second half of 2020.
Yes, so just spike in say the second half of the year like you mentioned sort of supply of potential I just had.
No absolutely no. So let's talk about supply from it so around all of our key products, particularly vasopressin adrenalin all of our key sterile injectable products with a very robust business continuity protocols have been in place for long time.
So we have those products well stocked in terms of API and finished products and we also have multi sourcing around how we source those products. So.
Between what's out in the channel right now the dominant talked about in terms of what we have on hand, both in terms of finished goods and CPI.
We are extremely confident in terms of our supply.
Annuity supply around both those products.
Okay. Thank you.
Okay is there any other questions operator.
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