Q1 2020 Earnings Call

Patients.

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And gentlemen, thank you for standing by welcome to the Teligent Inc. first quarter 2020 results conference call.

At this time, all participants' lines are in listen only mode.

After the speakers presentation, there will be a question and answer session.

To ask a question during the second you'll need to press star one on your telephone.

Please be advised of today's conference maybe recorded.

Have you require any further assistance please press star zero.

Except for historical facts the statements in this presentation as well as oral statements or other written statements made works to be made by Teligent, Inc.

Forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and involve risks and uncertainties.

For example, without limitation statements about the company's anticipated growth and future operations, the current or expected market size for its products the success of current or future product offerings.

And the research and development efforts and the company's ability to file for and obtain U.S. food and drug administration approvals for future products are forward looking statements.

Forward looking statements are merely the company's current predictions of future events.

Statements are inherently uncertain and actual results could differ materially from the statements made herein.

There is no assurance that the company will achieve the sales levels that will make its operations profitable or the FDIC filings and approvals will be completed and obtained as anticipated.

For a description of additional risks and uncertainties. Please refer to the company's filings with the Securities and Exchange Commission, including its latest annual report on form 10-K, and its latest quarterly report on form 10-Q.

Company assumes no obligation to update its forward looking statements to reflect new information and developments.

I would now like to hand, the conference over to your Speaker today, Mr., Tim Sawyer, President and Chief Executive Officer. Thank you. Please go ahead Sir.

Thank you Daniel.

Good morning, everybody.

Thank you for joining us today, Jim Sawyer, President and CEO intelligent and I'm joined on this morning's call by our Chief Financial Officer Damian video.

I'd like to start by thanking our talented employees around the world and particularly those in your <unk> New Jersey.

As evidenced by what they continue to accomplish on a daily basis, there clearly committed to our organization and extremely capable professionals.

Their desire to win the right way during these unprecedented and challenging times, it's truly an inspiration thanks to each and every one of you.

In alignment with the direction in the state of New Jersey.

Pharmaceutical manufacturing facility were considered essential.

We will remain open as long as permitted and conditions remain safe for our employees in order to continue the supply pharmaceutical products to the patients either.

Teligent has taken a number of preventative measures to help ensure gives me something really while continuing to support safe and stable operations.

We have directed all non production employees to work from home in accordance with state and local guidelines.

Our employees onsite RP Vita daily personal protective equipment, including masks and gloves. Upon their arrivals were facility and we've implemented temperature monitoring services that are newly established single point of entry entries.

We adjusted shipped hours and having implemented social distancing measures.

Hope limiting the number of employees in certain areas and the related distance between employees where feasible.

We've also implemented a bi weekly beep sanitization process and adjusted our production schedule to concentrate on high demand or low stock products to help reduce employee concentrations welcomes any genuine to fulfill customer demand.

[noise] our efforts have paid off as thankfully none of our employees have tested positive for cobot Nike today.

As a consequence of Coca 19, dermatology visits were down in March and April.

Although estimates differ.

Really always come across in my research suggests a decline of at least 50% in comparison to pre killed it 90 levels.

Not surprisingly less visits to the dermatologist translates into less demand for our U.S. portfolio topical pharmaceuticals.

As we mentioned on our last earnings call, we expected an approximate 50% decline in first quarter revenues versus Q4 2019.

Revenues were in fact down 53%.

But as shelter in place guidelines across the country begin to lessen we anticipate demand to begin to build towards pre pandemic levels and in fact, we started to see some really positive signs in may.

Given the level of uncertainty and potential consequences of less stringent guidelines, it's still extremely challenging to predict the pace at the anticipated ramp and whether or not it might be a second wave of decline.

That said based on what we've seen second quarter to date in terms of demand and the aggressive actions we've taken to reduce costs. The David will walk you through momentarily, we anticipate and improved top and bottom line financial performance in the second quarter versus the first quarter.

As I mentioned on our last call. My initial observations on joining teligent was that the strategy with sound.

But the organization needed to focus relentlessly on execution.

Putting the challenges of cobot 19, aside for a moment I want to share. Some good news inhabitants of what I'd be that when I talk about execution.

We received a warning letter from the FDA in late 2019, there are two phases to respond to warning letter, but first of which was completed in early March and then shortly after our last call and about nine weeks. After I joined the company on April 12 to be exact we completed the second and final phase of our response to the.

Yes.

For the warning letter.

And then just two days later on April 14th we filed the prior approval supplement for another injectable pharmaceutical product.

This filing will serve as it back up to our first injectable prior approval supplement filed for rigidity early in fourth quarter of 29 team that at the time, we anticipated would trigger the FDA pre approval inspection.

We both our warning letter response, and second filing of an injectable prior approval supplements admitted to the FDA anxiously anticipating FDA inspection.

Well, good 19 travel restrictions or otherwise permitting.

Got it 19 has created uncertainty in our business in our lives.

And at nearly everything we once new and took for granted.

However, as our world begins to return to our be normal.

The U.S. based pharmaceutical manufacturer with topical and seemed to have injectable manufacturing capacity and a leaner infrastructure I'm confident that teligent will be well positioned for future growth.

I believe that made in America resonates with patients now more than ever.

Before I close I wouldn't say a few words about the strategic review of noncore assets. The company initiated on October 1st 2019 prior to my arrival.

Fully recognized the process was initiated over eight months ago that many stakeholders, including me assumed the process would have concluded by now.

However, it's fair to say that those initial expectations did not factor in the warning letter received in late November 2019, the leadership transition in early February 2020, or a global pandemic that.

But you know that commenced in March the process continues it is a priority of mine and the possibility remains at a transaction maybe executed if there was relevant progress in this area I commit that I will provide you with a more meaningful uptick.

Let me now turn the call Liberty Damian to provide you more detail on both our first quarter financial performance and the actions we've taken and we'll continue to take to lead teligent through these challenging times.

At the conclusion opinions opening remarks, I'll share some final thoughts.

For opening the call up to questions.

And it.

Thank you, Tim and good morning, everybody.

This morning, I will provide details on our first quarter 2020 financial performance the aggressive actions, we've taken to preserve cash by reducing expenses and our NASDAQ listing status, let's start with first quarter financial performance on our last call I mentioned that we anticipated reporting an approximate 50% decline.

Line in first quarter 2020 revenues in line with that projection actual first quarter revenues were down 53% for eight and a half million dollars in comparison to the fourth quarter of 2019.

Of the eight and a half million dollar decline from the prior quarter $2.3 million was attributable to supply challenges in Canada. The remaining 6.2 million dollar decline was driven primarily by weaker demand for our U.S. topical products and price erosion.

As a consequence of the company's intentional strategy to generate cash by selling slow moving product, we recorded an incremental lower cost or market inventory reserve of $1.1 million as well as incremental unrelated inventory reserve point $3 million.

Incremental inventory reserves are reflected in cost of sales.

The combination of these factors resulted in a negative gross margin for the quarter simply put low first quarter revenues were further dampened by incremental inventory reserves, the none of which was not enough to cover the fixed cost of running our manufacturing facility.

But we do foresee an improved top line performance in the second quarter given the recent relaxing of shelter in place guidelines in various states and the underlying assumption that this change will translate into patients returning to the dermatologists.

The reduction first quarter development costs versus the fourth quarter of 2019 was reflective of one off costs incurred last quarter, the $1.8 million a first quarter development costs are inline with our expectations.

Selling general and administrative costs for the quarter were $6.7 million. This is a 1.6 million dollar increase over the fourth quarter of 2019, and a $1.2 million increase over the same quarter in the prior year.

First quarter 2020, selling general and administrative costs include continued incremental legal fees associated with ongoing litigation NASDAQ delisting related items and loan agreement Amendment ultimately executed with Aeris capital in early April.

Lastly, both current and anticipated future financial performance of the company had been negatively impacted by covert 19 as a consequence, the company recorded a noncash intangible asset impairment charge of $8.4 million in the current quarter.

There were no such impairment charges recorded in the same quarter of the prior year, we're in the fourth quarter of 2019.

In short the first quarter was a challenge, but we expect improvement in the second quarter.

This uncertain macro environment, we are working diligently to control what we can from a top line perspective, we are encouraged by the positive signs, suggesting patients are beginning to return to the dermatologist and demand for our products is improving.

And we are taking aggressive actions to reduce cost and preserve cash I will highlight four of these actions to give you a sense of how we're managing our business first on May four Tim and I, along with the rest of our executive leadership team, except to the voluntary eight week, 20% reduction in pay.

And other employees, earning more than $100000, an annual salary to take a 15% reduction over that same eight week period.

Second on the same day, we furloughed a portion of our employees in Vienna, as we ramped down topical manufacturing for the short term given adequate inventory levels on hand.

Third we initiated a company wide effort to reduce discretionary spending simplify the organization and focus only on what is critically important.

Fourth we were approved and received covert 19 relief of $3.3 million on May 15, under the small business administrations payroll protection program.

For two more commonly as a p. peel them. We're now operating within the loan forgiveness period and are actively working to balance the employee related actions taken previously with the needs of the business to ensure the majority of the alone will be forgetting.

We are projecting improvements in both top and bottom line financial performance in the second quarter.

Due to the uncertainty surrounding the duration and severity of the covert 19 pandemic and its impact on our business. We are unable to reliably estimate our future financial results and therefore, we are not in a position to provide guidance for the remainder of 2020.

And although we are projecting improved second quarter financial performance.

At 19 May hinder the company's ability to meet financial covenants in the short term.

Switching gears in regard to Teligent NASDAQ listing status in the last earnings call I communicated the deadline to regain compliance was June 1st 2020.

Since then NASDAQ issued file number 2020 das zero to one permitting a longer period of time for companies to regain compliance.

As such our deadline was deferred again, however, we plan to initiate a reverse stock split in the ratio of tend to want to remove the uncertainty that a potential delisting presents to current and future investors. We anticipate the reverse split will be effectuated on May 28 2020.

And in terms of the first quarter form 10-Q, we applied for an extension on Friday may 15th the covert 19 related extension provides us until June 29 to file our first quarter form 10-Q. However, we are planning file next Tuesday for very shortly thereafter, barring no unforeseen events.

In closing, we will continue to generate preserve cash through the sale of slow moving inventory take aggressive actions to reduce costs explore opportunities to divest non core assets and work with debtors to minimize cash interest paid.

By resolving the warning letter passing the pre approval inspection and focusing on cost reduction covert nineteena side, our credit profile should improve and we will be in a better positioned to work with existing debtors can potentially new creditors to address our capital structure, and thus reduced total debt and our cost of capital.

Let me now I'll turn the call back to Tim for final remarks, before we move to the question I answered portion of today's call Tim.

Thank you Damian.

I've now been onboard for about 14 weeks and all though I'd been working for nearly 30 years.

This has been without a doubt one of the most challenging 14 weeks stretches in my career.

As Damian and I highlighted the company continues to navigate through some significant headwinds difficult decisions, we're making to right size all aspects of the business are not without challenge, but are absolutely required to untapped intelligence full potential.

I remain confident I.

I had the management team and employee base needed to achieve our priorities.

We're proud to run at U.S. pharmaceutical manufacturing facility as I said earlier, we believe made in America has more value now than ever we look forward to the FDA inspection and launching Injectables. Soon thereafter, lastly, and most importantly, we hope that you and your families are safe and goodwill with.

That I.

Ill now ask Daniel to open the call up two questions.

As a reminder to ask a question you'll need to press star one on your telephone.

Withdraw your question press the pound key please standby well, we compile the Q and a roster.

And our first question comes from Matt Hewitt with Craig Hallum Capital Group.

Line is now open.

Good morning, and thank you for taking the questions.

Maybe a couple numbers to start off and then I've got some big bigger picture items that I'd like to go over but first deem it could we get an update on the cash balances of ended the quarter.

Good morning, Matt, Yes, absolutely cash at the end to the quarter was $11 million will have the balance sheet and the 10-Q that file next week.

Reduction of about four and a half million dollars from year end.

Consequence, I would say, we had pretty decent cash collections in the first quarter, because we had a pretty decent fourth quarter 2019 in terms of revenue I'd say that cast decline was more driven by incremental expenses that I mentioned in my opening remarks.

Okay, and I guess, along those lines the incremental expenses, obviously, you and most companies in the country and then the world in fact have taken steps to ensure the safety and health of their employees and it sounds like you've taken similar steps.

Okay.

Help us to maybe not specifics but.

What do the what are those costs and and how should we be thinking about those I mean, you added it sounds like an extra shift or are extending shifts to create some of that separation for employees, but there's a cost to that how should we be thinking about that as we look at Q2 Q2 here and maybe the rest of the year.

Yeah, maybe if I could start and Tim I'll talk about the cost and then maybe handed over to you to talk a little bit of more about process in terms of Paul honestly math, there is not significant costs with the changes that we made we do we are doing things like temperature checks and there's a cost of that we've also done things such as the.

Sanitization of the facility.

Every two weeks plus additional cleaning on a daily basis et cetera. So in terms of the cost of covert 19 from that perspective, it hasn't been significant what we spend incremental cost down in the first quarter were primarily around professional fees as I mentioned legal fees and other other fees associated with the NASDAQ delisting as well.

The non core asset process with which continues as Tim mentioned in his opening remarks as well. So I would say the cost of covert 19 from more of an S. DNA perspective has been medical but the process changes have been significant.

Okay Yeah.

Matt We've really tried to say the safety of our employees is critical to US obviously their safety means that we can produce products for our paid for our patients. So.

We've taken multiple steps like sort of outlined some of them, but when you talk about the shifts we didnt add just to be clear we did not add a shift we just staggered for example, one shift would come in they used to cross paths. Just as one example used to cross paths, one would be coming into the other what's going out and that would create person to person cards.

Weve staggered timing so that you know the one that leaves leaves and then the new one comes in and we've also created a single single way Sig away process flow through the building. So that you come in through Windoor. It everybody must come in through that door and everybody leads through a different door. So that there is no commingling there as well so.

Those are cost caustic that they're just.

Operational.

Logistical things that we're going to protect the.

Understood. Okay. That's helpful. Thank you as we look at you talked about an improved financial performance for Q2.

I'm, assuming gross margin will improve as well how should we be thinking about that ramping back to.

Maybe a more normalized level, whether it's 40, 50% whatever it do we get halfway back maybe in Q2 without getting specific but what kind of improvements should we anticipate.

So Matt I'll start and again, Tim if you want to jump and afterwards that would be great.

As I mentioned, we expect topline and bottom line improvement in the second quarter and of course, we're already into the into the second quarter as we speak. So we have a good signings to customer demand for our products and the topline. So we feel comfortable there in terms of margin as I mentioned, there were some onetime sales in order to gen.

Free cash flow in the first quarter I think they'll always be some of that math, it's in our position right now, it's it's better to move inventory and get the cash rather than have inventory sit on the shelf. So I think it'll continue to be short sales such as that at a discount, but I would say that with some of the changes Tim has made about Howard.

Pricing our products, especially in response to ropers right of first refusal I think you'll see improvement in margin and will also take out on from a Cogs perspective. Some of these inventory reserves. So I had mentioned.

We took lower of cost or market adjustments on inventory on the shelf because of some of the pricing of sales that went out the door in the first quarter. So we may still have some of that in the second quarter, but I don't expect it to be as much. So I would see gross margins certainly improving back to being positive last year. This time I think we posted probably.

Mid Thirtys in terms of gross margin a little bit north of that for 2019, I don't see is quite returning back to those levels, Matt and the second quarter, but I do think we could approach trend towards back in that direction I think starting in the second quarter, but improvement in the third in a bit improvement in the fourth.

The thing I, just said is caveated with that covert 19 uncertainty that I mentioned in why we were prepared to give full year guidance on this morning's call.

The only thing I'd add to that Matt is that that one of the things that we as a company.

Invest it hadn't invested in and have done is weve increased our inventory levels. So that we can be that supplier of choice for our customers right. We want to improve our positioning so that we don't have out of stocks that we are steady steady supplier to our customers that there are we don't end up with.

Failure to supply penalties and so so weve.

Invested in that and I think that that that creates some challenges in some advantages, but I feel good about being able to satisfy all of our customers' needs and demands and that should help us approved and the margin side as we go forward.

Okay, Okay yeah.

Got it and I guess regarding the failure to supply penalties that that was a a hit in the fourth quarter sounds like you had some incremental here in Q1, but we're seeing some improvement where did those sit in.

You know are you passed that point now with some of the changes you've implemented or maybe another quarter or two to work through some of those issues.

Yeah, we have had stellar supply in the first quarter and then the second question first quarters, that's about a half a million dollars second quarter.

May be about that same rain, but I would say there's been a shift insiders supply fees. So recorded last year was primarily in the U.S.. What we're seeing this year, it's primarily Canada.

But as I mentioned part of our improvement in the second quarter top line.

Supply challenges being addressed in Canada. So we I would say, Matt, it's probably fair to say another quarter or too theres supply penalties again, the majority most likely in Canada, but again I think we hope to have those behind us as supply normalizes, both in the U.S and Canada going forward.

Okay, and then just a point of clarification.

In the press release, you mentioned last contract volume that's related to Corona virus not competitive pressures correct.

Sorry can you say that again.

I Didnt quite understand you said again, yeah. So in the in the press release, you comment that part of the impact on revenues in the first quarter was related to lost contract volume and I'd. Just just for clarification was that related to corona virus or were there competitive pressures.

Good question competitive pressures that was not corona virus related.

Okay and that's what then also being reflected in some of the pricing.

That you saw in the first quarter as well.

Correct, Okay, and then I guess last one from me and then I'll hop back into the queue regarding the the orphan drug any status update on that and where that currently sits thank you.

Thanks, Matt. So so we are we're [laughter].

Obviously, our complex product is.

Very important to us and we.

Our in constant dialogue with both our development partner as well as the FDA to understand what's needed to address their concerns.

As soon as we have clarity the FDA really has slowed way down in terms of there on that for at least with US on this specific product they've slowed way down in their responses and so we're really waiting for them and to provide us with an update and we've we expect quite frankly, we expected update.

Just just due to have occurred already and it hasn't so as soon as we have clear information, we'll share that with with you all but I don't have an update right now its trends in terms of.

Alright, thank you.

Thank you.

Thank you.

A reminder, ladies and gentlemen that Star then one to ask a question.

Our next question comes from Gregg Gilbert with Suntrust. Your line is now open.

Thanks, Good morning, gentlemen.

Tim I think thought we'd start with maybe a more macro industry question. I know you have a lot of company specific things.

To address but as it relates to kind of the pricing environment the larger players as wells.

Described by the distributors the generic pricing environment, some pretty stable for a while it whatever the erosion rate is obviously not flat, but the rate of erosion, it's been pretty stable.

But I've heard from some smaller companies that maybe things are picking up in terms of competitive intensity is smaller companies with a lead approvals to a category or.

Acting a little more competitively.

Are you seeing that and in the category. If you plan or would you say, you're you're an agreement with the broader commentary that the pricing environment sort of is what it is and has been for several quarters.

Good question, Greg I would tell you that in the categories that we participated we're definitely seeing.

Some of that competitive competitive pressure, we're seeing we're seeing some declines.

And we're responding to those as such.

We see we want to continue to service our customers and satisfy their needs, but we are seeing those competitive pressures in the marketplace.

Intensively sure.

As it relates to your longer term injectable strategy, you're getting your facility on track and and cleaned up is she priority number one, but where do you see yourself fitting in in terms the types of products that teligent would be going after in the next few years.

Versus aspirationally longer than that but you know what sort of phase one of Teligent doesn't injectables player.

Look like.

The phase one from from my perspective Phase phase one or the the company has the number of products that they acquired overtime.

Obviously long prior to the being here. So phase one includes that those those baskets of products as well as a few others.

However, fit feet, you no longer longer term and our and our construction at our facility that we put together.

There is really built.

Right now and and outfitted for.

Some of the lower volume type products.

So we have space that's being constructed.

In order to enable us to make the higher volume products, but we havent necessarily so did that all out yet so we're going to focus on some of the more near shore lower volume products.

So.

Got it and lastly, youve.

Commented a couple of times this quarter and last about.

The made in the U.S. angle. So I was curious what do you think that means in a tangible sense is it an M&A sort of attractiveness comment is today.

As an independent company, we think we can get more business with government entities, where even non government entities can you maybe just frame you know the the advantages you think you have the U.S. centric player. Thanks a lot.

Sure. Thank you.

So so a couple of things one.

I think that we've seen.

In the marketplace that theres been some government contracting that's been focused towards us development U.S. manufacturing.

So we think that that's a positive sign that so could have an economic impact in terms of sales to cover the next piece so that could be one area that it assists us.

Actually you hit on all the areas to be honest with you it could be a foothold from an M&A perspective, if somebody wanted to come into the United States and and participate in the marketplace foreign entity that Hadnt had had it was desirous of doing that would be possible.

And we think over time that it may resonate with our customers.

If it yes, we do a good job in ensuring that our supply is right. So that they can feel like they have clear uninterrupted supply from their partners from their local partners.

And I would just add in addition to the value Greg that we see with made in America I would categorize our injectable strategy is focused on previously approved products generally low at lower in volume, but higher in value. That's I was to you know I think sort of summarize where we're headed the products that are previously proved again were bought.

In an acquisition Teligent made prior to 10 minutes arrival.

Thanks, gentlemen, good luck.

Thank you.

Thank you and our next question as a follow up from Matt Hewitt with Craig Hallum Capital Group. Your line is now.

Right. Thanks, just a couple more would it be possible getting upbeat on your current pipeline maybe number of applications pending at the FDA I realize it's contingent upon getting the warning letter robow, but where does that pipelines.

Today.

So Matt we still have 16 Teligent label top land Da's on file with the FDA that are awaiting approval.

There wasn't when we when we originally did our budget, we didnt have reliance.

For the most part on new launches to drive growth. This year. Obviously this was all pre code at 19, given the warning letter we haven't seen an approval I want to say since it was about third week of October.

So we still have products on file we hope with the resolution of the warning letter.

And then with further filings of prior approval supplements for Injectables, we should start to see that approval flow pickup again at the back end the year, but there has been really no movement.

Worth mentioning I would say you know in the past couple of months because of the warning letter.

Understood and then I guess the last one from me with the with the injectable facility coming online hopefully soon but coming online and looking at the current environment with krona virus and not just from a vaccine the treatment standpoint, but even some of the other drugs that are.

In high demand because of the virus does that create an opportunity from a strategic standpoint, where you could be going to the FDA or have you gone to the up gains that listen we've got the state of the art facilities sitting here ready to go let US help we can help you and if you have.

Those discussions what has been the response.

Thanks. So so we have not had those discussions yet we are we the first thing we wanted to make sure that we did internally was get our our house in order, which we've now completed including submitting to the agency. So so that.

That is.

Certainly an opportunity for us in the future to go to them.

And tried to leverage the things that we just talked about perhaps being the made me, let's say and the types of products that we're we're coming out with its its an opportunity for us as we go forward.

To affect the timing the timing of our are both the <unk>. So that we can at least that facility as well as perhaps product approvals. So we'll work towards that.

Alright, thank you.

Thank you I'm not showing any further questions at this time.

I would now like to turn the call back over to Tim swear for any closing remarks.

Alright, Thank you and thank you all storage for your time this morning.

I Hope you have a great Memorial day weekend and will be untouched.

Bye.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

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