Q2 2012 Thera Technologies Earnings Conference Call
Jul 12, 2012 AM EDT
TH.TO - Theratechnologies Inc
Q2 2012 Thera Technologies Earnings Conference Call
Jul 12, 2012 / 12:30PM GMT
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Corporate Participants
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* Denis Boucher
National Public Relations - Partner
* John Huss
Theratechnologies Inc. - President and CEO
* Luc Tanguay
Theratechnologies Inc. - Senior EVP and CFO
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Conference Call Participants
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* Pooya Hemami
Desjardins Capital Markets - Analyst
* Adnan Butt
RBC Capital Markets - Analyst
* Philippa Flint
Bloom Burton - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen and thank you for standing by. Welcome to Theratechnologies earnings conference call and webcast for the second quarter of 2012. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator instructions) I would now like to remind everyone that this conference call is being recorded today, Thursday, July 12 at 8.30 AM Eastern time. I would now like to turn the conference over to Denis Boucher from National Public Relations. Mr. Boucher, please go ahead.
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Denis Boucher, National Public Relations - Partner [2]
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Thank you, and welcome. Speakers on today's call include John Huss, President and Chief Executive Officer of Theratechnologies; and Luc Tanguay, Senior Executive Vice President and Chief Financial Officer of Theratechnologies. Their presentations will be followed by a Q&A period which will be open exclusively to financial analysts.
Before we start, I have been asked by Theratechnologies to read the following message regarding forward-looking statements. I would like to remind everyone that Theratechnologies' remarks today may contain forward-looking statements about its current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or other forward future events or developments.
Several assumptions were made by Theratechnologies in preparing these forward-looking statements, and there are risks that actual results will differ materially from those contemplated by the forward-looking statements. As a result, the Company cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Theratechnologies refers current and potential investors to the Risk Factors section of its Annual Information Form dated February 27, 2012, available at www.SEDAR.com and at www.SEC.gov under Theratechnologies' public filings.
Forward-looking statements represent Theratechnologies' expectations as of July 12, 2012. Except as may be required by securities laws, Theratechnologies does not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. I would now like to turn the conference over to John Huss.
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John Huss, Theratechnologies Inc. - President and CEO [3]
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Thank you, Denis, and thank you all for joining us today. I will start off the call by providing an overview of our activities since our last call in April, and then I will turn it over to Luc, who will walk you through the second quarter financial results. While we certainly had a tough quarter on the regulatory front, which I will cover in a second, but other aspects of our business plan are unfolding well.
First, prescriptions of EGRIFTA in the US are trending up nicely, with cumulative scripts of over 7300. We are very encouraged by the growth seen in the first half of the year. Second, the positive effects of last year's restructuring on our results and burn rates are starting to show, and we are in a good financial position in terms of cash on hand. Luc will give you the details later. Third, in terms of R&D, we are progressing well with our TH1173 preclinical program.
So let's start with the regulatory situation. As mentioned, our most significant update concerns Europe, where we announced that our partner, Ferrer, has withdrawn the marketing authorization application for tesamorelin. This is the consequence of a meeting with the CHMP during which it indicated that it couldn't conclude on the positive benefit/risk balance. There have been no developments in this regard since our June 22 announcement.
As a result of the withdrawal, we have revised our EGRIFTA guidance and no longer expect to be EBITDA-positive in 2013. We are not providing further guidance at this time. We are now assessing various options for tesamorelin in Europe with our partner Ferrer. It will likely take us two to three months to complete the assessment, and we will advise the market once we know more.
Turning to Latin America -- after conducting an audit of the Montreal-based third-party manufacturing facility that produces EGRIFTA, ANVISA, Brazil's regulatory body, has identified some technical deficiencies that need to be corrected before the site can be approved. An action plan addressing all of ANVISA's recommendation has been finalized and will be sent to ANVISA in the coming days. This development, as previously announced, may delay Brazil's final decision regarding the application.
On a positive note, applications for EGRIFTA in Colombia and Venezuela were filed by Sanofi, our commercial partner in Latin America, at the beginning of June.
If we now go to Canada, we received a notice of noncompliance from Health Canada asking us to elaborate on information previously submitted, as well as posing additional questions. We are currently working with Actelion, our commercial partner in Canada, to respond to the notice within the prescribed period of 90 days. A regulatory decision for Canada is now expected in the first half of 2013.
Let's now turn to our R&D activities. In the second quarter we pursued our preclinical program for our second-generation growth hormone releasing factor peptide, TH1173. I'd like to draw your attention to the study results that were presented by Dr. Grinspoon from Harvard at ENDO 2012 at the end of June. Results from this study show that increasing growth hormone levels with tesamorelin can have positive impacts on abdominal fat in obese patients with reduced growth hormone secretion.
Moreover, data from this model suggests that selectively reducing visceral adipose tissue, without affecting subcutaneous adipose tissue, may improve known cardiovascular risk factors associated with obesity. Keeping in mind that the TH1173 clinical trials in humans should begin in the first quarter of 2013, these findings are therefore very interesting as we work towards narrowing down the indications for future development.
Turning now to EGRIFTA in the US, after a few quarters of slower growth, we have recently seen a clear uptick in market trend. According to IMS, prescriptions in the April to June 2012 selling period were up significantly over the prior quarter. There were 4051 total scripts filled in the second quarter of this year versus 3311 in the first quarter, a 22% increase quarter over quarter. For the first half of 2012, the total number of prescriptions amounted to 7362, almost 3 times as many as were filled in the first half of 2011. Based on these figures, second-quarter sales could be around the CAD10 million mark.
The current run rate is therefore very encouraging, and as we learn more about the use of the drug, our partner, EMD Serono, is able to address the two main concerns we are seeing more effectively. The two concerns are treatment adherence and new patient identification. Retention programs, through AXIS, have been put in place to address the former, and marketing campaigns aimed at consumers have been running for the last six months to address the latter.
In my opinion, the combination of these efforts, linked to the potential seasonality of the drug use, are reasons for the inflection we are seeing. I will now turn the call over to Luc, who will go over our financial results. Luc?
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Luc Tanguay, Theratechnologies Inc. - Senior EVP and CFO [4]
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Thank you, John. Now for an overview of our financial results for the three-month period ended May 31 -- looking at further news, our royalties are up and our sale of goods are down; let me explain. As John just described, prescription trends are positive and royalties are growing accordingly. Royalties received from EMD Serono in Q2 reached CAD726,000 compared to CAD190,000 in Q2 of last year. These continue to be paid quarterly in arrears. Royalties from Q2 are slightly lower than Q1. Why this? While royalty revenues tend to track patient prescriptions, there can be periodic fluctuation due to factors such as pharmacy stocking levels, as seen in the previous quarter.
As for sales of goods, they amounted to CAD856,000 in Q2 compared to CAD2 million in the same period last year. The discrepancy is attributed to the buildup of stock by EMD Serono in 2011 for the product launch. Finally, the amortization amount of the upfront payment from EMD Serono for the current quarter is of CAD1.1 million compared to CAD1.3 million for the same period in 2011. This decrease reflects a change in the service period attributed to the initial payment. And as you know, this is an accounting issue and not reflective of the business trends.
Taking all this into account, reported consolidated revenues amounted to CAD2.7 million for the quarter compared to CAD3.6 million in the same period in 2011. Cost of sales amounted to CAD692,000 compared to CAD2.6 million. Revenue from sales of goods exceeded cost of sales for the first time since EGRIFTA was launched in the first quarter of 2011. All old inventory is now essentially depleted, but we do expect quarter-over-quarter variations in gross margins due to the costs associated with validating additional suppliers.
In the second quarter, we can clearly see the benefit of our December 2011 restructuring. Expenses continue to be significantly lower across the board, as in the previous quarter. R&D expenses decreased by 54% to CAD1.4 million. Selling and market development expenses decreased by 55% to CAD256,000. And finally, G&A decreased by 51% to CAD1.8 million. As a result, we recorded a net loss of CAD1.4 million this quarter compared to CAD5.9 million, which represents a 76% improvement over the comparable period in 2011.
Use of cash from operating activities was CAD4.4 million compared to CAD8 million in the comparable period of 2011. Finally, liquidities at quarter end amounted to CAD24.5 million. The benefit of the restructuring also showed up in the burn rate. As you know, burn rate is not a GAAP measure, but here's how we get to it. Take cash used in operating activities before changes in operating assets and liabilities, and just add the change in deferred revenue. So with a burn rate of CAD2.3 million this quarter, we are on track to end the year with over CAD20 million in cash on hand.
With that, I will now turn the call back over to John for closing remarks.
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John Huss, Theratechnologies Inc. - President and CEO [5]
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Thank you, Luc. So to recap, while we did have a tough quarter on the regulatory front, other aspects of the business plan are improving very well. In the US, prescriptions for EGRIFTA are turning up. We are seeing the positive effects of restructuring as reflecting the substantial reduction in quarterly loss and greatly reduced burn rate. We are progressing extremely well with our TH1173 preclinical program and we currently have CAD 24.5 million in the bank, aiming to end the year with over CAD20 million remaining.
So with that, I thank you for joining the call today and I will now take questions from financial analysts.
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Questions and Answers
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Operator [1]
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(Operator instructions) Pooya Hemami, Desjardins Capital Markets.
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Pooya Hemami, Desjardins Capital Markets - Analyst [2]
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Thank you for taking my questions, John and Luc. Just first of all, previously you had mentioned that when you get the sales numbers from EMD Serono, that there was maybe a 25% to 30% difference between what they are reporting and what is predicted by IMS Health. This was based on the data as of 4Q 2011. Now you have more recent data. Can you give us some update in terms of how much of a difference there is between the true sales and what is IMS tracking?
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John Huss, Theratechnologies Inc. - President and CEO [3]
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Yes. Good morning, Pooya. For the first quarter, the difference was about 10%. So as you remember, in the last quarter of last year, as of the fourth quarter that we reported in our first quarter, the difference was back over 20% and has been reduced now to 10% in the first quarter. So this is the first quarter sales of 2012. Obviously, we haven't received the EMD Serono second-quarter numbers yet.
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Pooya Hemami, Desjardins Capital Markets - Analyst [4]
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Okay, so do you expect going forward it will stay closer to 10%? Or do you think it's going to narrow down closer to zero? Or you think it might go back up?
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John Huss, Theratechnologies Inc. - President and CEO [5]
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Well, I think, as Luc mentioned, we may be seeing some periodic variations in the numbers from EMD Serono based on pharmacy stocking. What we saw in December of last year is we did see a little increase in the EMD Serono sales based on the stocking before a holiday season. So I think this is the kind of stuff we can continue seeing. As a rule of thumb, I'd say I would think that we should be between 10%, 20% going forward.
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Pooya Hemami, Desjardins Capital Markets - Analyst [6]
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Okay, now are you going to be able to provide any sales guidance for calendar year 2012 for EGRIFTA? I believe last year at this time you had mentioned CAD25 million to CAD35 million for calendar year 2011. Do you have any gross sales guidance for calendar year 2012?
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Luc Tanguay, Theratechnologies Inc. - Senior EVP and CFO [7]
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No. As we mentioned, Pooya, at this time we don't make any guidance, neither for this year nor for the future.
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Pooya Hemami, Desjardins Capital Markets - Analyst [8]
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Okay, and I guess going also on the royalty rate, maybe you can just give a bit more detail in terms of how there was a sequential reduction in royalties versus the first quarter, even though, according to the IMS data, there was a fair increase, maybe 15 or so percent, between the total prescriptions of those periods. Between, let's say, fourth-quarter calendar year 2011 and first-quarter calendar year 2012. I know Luc mentioned something about stocking, but can you just give us more details as to what can account for a 10% reduction in royalty, whereas total scripts are up 15%?
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John Huss, Theratechnologies Inc. - President and CEO [9]
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Yes. Well, actually, that -- you answered the question yourself. The answer is the stocking. So because the sales in the fourth quarter included some stocking before the holiday season, which is coming, by the way, right? So this is nothing unusual, and you see this in all companies and with all products. Pharmacies will tend to stock before a holiday season, so that is nothing uncommon.
That explains why the royalties were slightly higher in the fourth quarter of last year, which we booked in the first quarter of this year, and royalties went down slightly. But if you look at the first half of the year versus the first half of last year, obviously there's a major increase. And if you look at the increase in trend in prescriptions in the second quarter, so from April to June 2012, from IMS -- that's where I said you can expect sales to be very close to the CAD10 million mark, which obviously will translate, when we get the data from EMD Serono, in an increase in royalty.
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Pooya Hemami, Desjardins Capital Markets - Analyst [10]
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Okay, and I guess one final question before I go back in the queue. You had given some updates on terms of Europe and Brazil, but do you have any timelines as to when you expect decisions for other territories covered by Sanofi, such as Israel, Argentina and Mexico? Because those were filed about a year ago, or maybe in the past nine months. Do you have any expectation as to when you might hear some decisions from those areas?
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John Huss, Theratechnologies Inc. - President and CEO [11]
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So all Latin American countries, Pooya, including Mexico and Argentina, we expect around the beginning of next year. In Israel we are currently in discussion, so that could be -- it could be any time, actually, between the last quarter and early next year.
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Pooya Hemami, Desjardins Capital Markets - Analyst [12]
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Okay, thank you. I'll jump back in the queue.
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John Huss, Theratechnologies Inc. - President and CEO [13]
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Okay, great. Thanks, Pooya.
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Operator [14]
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(Operator instructions) Adnan Butt with RBC Capital Markets.
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Adnan Butt, RBC Capital Markets - Analyst [15]
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Good morning and thanks for taking my question. John, can you give us what actual sales were in the fourth quarter and first quarter for EGRIFTA?
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John Huss, Theratechnologies Inc. - President and CEO [16]
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What, actual sales from EMD Serono?
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Adnan Butt, RBC Capital Markets - Analyst [17]
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Yes.
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John Huss, Theratechnologies Inc. - President and CEO [18]
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Or from IMS grossed up to sales?
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Adnan Butt, RBC Capital Markets - Analyst [19]
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Well, if you can disclose what EMD Serono had, that would be helpful.
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John Huss, Theratechnologies Inc. - President and CEO [20]
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Adnan, we don't publish the actual numbers because we also don't publish the royalties we've received from EMD Serono.
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Adnan Butt, RBC Capital Markets - Analyst [21]
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Okay, so in terms of following up for the CAD10 million expected number that you could have in the second quarter, based upon IMS prescription trends, is that a gross number, or is that adjusted for discounts? And is that a net number?
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John Huss, Theratechnologies Inc. - President and CEO [22]
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No, it's a gross number. So what we did is we took the 4500 scripts that we saw in the second quarter, grossed them up at $2000 a script, and then grossed it up. So we should be very close to CAD10 million. And as I said, that's -- if you look at the 10% to 20% difference there is between IMS and EMD Serono, that's how we think we will end up, around CAD10 million.
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Adnan Butt, RBC Capital Markets - Analyst [23]
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Okay, can you say something more about patient trends? How many have used or are using it, based upon data that you get internally? And what compliance you (multiple speakers)?
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John Huss, Theratechnologies Inc. - President and CEO [24]
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Yes. We have over 3500 patients on drug now. We're getting a bit more data on patient adherence, and I mentioned some of the issues that we're seeing. We are losing about 50% of the patients after a year, reasons for which no -- EMD Serono is now putting -- developing programs to increase compliance and adherence. And so that's what we have, so we are at about 3500 patients on drug today.
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Adnan Butt, RBC Capital Markets - Analyst [25]
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Okay, and following up on the next regulatory event, you said that the next events would be approvals outside the US, and the first ones you expect in the first half or first quarter of 2013?
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John Huss, Theratechnologies Inc. - President and CEO [26]
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Well, at this point, it depends. Now, I think the next approval we get should be Brazil. And depending on if they reschedule an appointment and an audit here, to visit the site here in Montreal, the Draxis site, I don't want to pin it down to a quarter. And it could be the first quarter but it also could be the second quarter. For now, until we get more information from -- let's live with the first half. And as soon as we have an answer, once they've seen the action plan put together by Draxis, we will be able to give you more information.
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Adnan Butt, RBC Capital Markets - Analyst [27]
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And how soon after receiving approval do you expect orders?
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John Huss, Theratechnologies Inc. - President and CEO [28]
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In Brazil specifically, or in any country?
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Adnan Butt, RBC Capital Markets - Analyst [29]
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And also in other territories.
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John Huss, Theratechnologies Inc. - President and CEO [30]
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Oh, in other territories.
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Adnan Butt, RBC Capital Markets - Analyst [31]
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Including Brazil.
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John Huss, Theratechnologies Inc. - President and CEO [32]
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Yes, Latin American countries, we should get approvals starting, or at least decisions starting in the first half of next year. Then they have to -- Sanofi will have to go for reimbursement. And depending on the country, that can take anywhere from six months to up to the two years, depending on what kind of reimbursement they go for. And we are in discussions right now with Sanofi to evaluate the best reimbursement strategy.
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Operator [33]
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(Operator instructions) Philippa Flint with Bloom Burton.
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Philippa Flint, Bloom Burton - Analyst [34]
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Thank you for taking my questions, and good morning. In your last conference call you had talked about the buildup of raw material in your inventory for pending regulatory approvals. Given the regulatory issues, and you now have, according to your financials, over CAD10 million in raw inventory, can you talk about how long -- what kind of shelf life that has, and if any of it is at risk given the delays that you are now experiencing in approvals?
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Luc Tanguay, Theratechnologies Inc. - Senior EVP and CFO [35]
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Hi, Philippa, it's Luc. Shelf life for raw materials is five years. And when you formulate the -- when you add another three or so, there's no issue for now with the raw material.
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Philippa Flint, Bloom Burton - Analyst [36]
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Okay, great, thank you. And then just building on the question that Adnan just asked on timing of orders versus relative to approvals, you said it could take six months or longer. Would it be fair to say that you wouldn't expect sales, then, in Brazil or other countries, until the back -- well into the end of 2013?
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John Huss, Theratechnologies Inc. - President and CEO [37]
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That's correct, Philippa. Yes, absolutely.
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Philippa Flint, Bloom Burton - Analyst [38]
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Okay, great, thanks very much.
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Operator [39]
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(Operator instructions) Pooya Hemami, Desjardins Capital Markets.
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Pooya Hemami, Desjardins Capital Markets - Analyst [40]
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Yes, thank you again. Can you give us a bit of some details in terms of, with the delays in Europe, what could be your strategy for getting approvals in that turn, or maybe talk about the decentralized procedure, if that's an option? And how would that work exactly?
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John Huss, Theratechnologies Inc. - President and CEO [41]
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Yes, that's what we're seeing right now with that, Pooya. We need to know if there isn't a possibility to go back. So there are two things -- either we derive new data and go back with new data, and that could be centralized, also, by the way, so that would open both alternatives, centralized or decentralized. The fallback position is actually to go back to the EMA, once they have posted their comments on the website, which should be before the end of this month -- go back and see with them. Who, during the oral hearing we had, who voted in favor of the drug and who voted against the drug? And then try to see if there is a basket of countries who would be interested in the drug, and then go and see one country to make sure that he approves the drug, and then go for a basket through the mutual recognition.
So we're looking right now to see if that's possible. We're looking at, if we do go back, what kind of data would they want to see, post-approval. If we would have to come up with further studies. But right now it's too early to speculate, and I think we are really at the very beginning of looking at alternatives before making a call. And as we mentioned during the call, give us another 2, 3 months to set this out with -- and map it out with Ferrer, and we will come back to you as for alternatives and timing.
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Pooya Hemami, Desjardins Capital Markets - Analyst [42]
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And is Ferrer still working on other territories covered by the agreement, such as Russia and some parts of Asia? Or should we see any type of movement on that front, or it is going to be pretty much focused on getting the European situation resolved?
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John Huss, Theratechnologies Inc. - President and CEO [43]
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Yes, so they've actually -- they have initiated work in other territories, too. But, again, the interesting part for us and the main part of our contract with them as Europe, and I want to make sure we have a solution for Europe before we start even thinking about launching anywhere else.
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Pooya Hemami, Desjardins Capital Markets - Analyst [44]
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Okay. And finally, on the financial front, I believe in the press release it says that you're guiding to have at least CAD20 million by the end of this year. But your burn rate, looking just at the cash flows, was about CAD4.4 million this quarter. So if you use the same burn rate next quarter, you would be at CAD20 million right then. So maybe you can just go over with us the assumptions you are using as to what get you -- what would lower your burn rates, your cash flow burn rate, so that you would arrive at CAD20 million by the end of the year?
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Luc Tanguay, Theratechnologies Inc. - Senior EVP and CFO [45]
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Yes. Pooya, that is why in my speech I talked about two kinds of burn rate there. The CAD4.4 million include working capital element. So if you take out those elements, the operating burn rate was CAD2.3 million. So it's definitely possible that in the next two quarters we have not the same kind of fluctuation in the working capital. And using CAD2.3 million per month as operating burn rate is a very reasonable, so CAD2.3 million multiplied by 2 is CAD 5 million. We are at CAD25 million today, so in the --
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Pooya Hemami, Desjardins Capital Markets - Analyst [46]
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So basically you expect the working capital to be relatively flat?
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Luc Tanguay, Theratechnologies Inc. - Senior EVP and CFO [47]
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Yes, exactly.
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Operator [48]
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Mr. Boucher, we have no further calls at this time, sir. I'll turn the call back to you.
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Denis Boucher, National Public Relations - Partner [49]
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Well, wonderful. Thank you very much for participating in this morning's conference call. Have a very good day. Bye-bye.
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Operator [50]
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Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation. And we all ask that you please disconnect your lines. Have a great day, everyone.
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