Q2 2016 Theratechnologies Inc Earnings Call
Jul 06, 2016 AM EDT
TH.TO - Theratechnologies Inc
Q2 2016 Theratechnologies Inc Earnings Call
Jul 06, 2016 / 12:30PM GMT
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Corporate Participants
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* Denis Boucher
EXOCET Public Relations, Inc. - IR
* Luc Tanguay
Theratechnologies Inc. - President, CEO, and Director
* Philippe Dubuc
Theratechnologies Inc. - SVP and CFO
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Conference Call Participants
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* Doug Loe
Echelon Wealth Partners - Analyst
* Andre Uddin
Mackie Research Capital - 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 for the second quarter of fiscal year 2016. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Wednesday, July 6, at 8:30 AM Eastern Time.
I would now like to turn the call over to Denis Boucher. Mr. Boucher, please go ahead.
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Denis Boucher, EXOCET Public Relations, Inc. - IR [2]
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Thank you very much, and welcome. Mr. Luc Tanguay, President and Chief Executive Officer of Theratechnologies; and Mr. Philippe Dubuc, Senior Vice President and Chief Financial Officer, will be the speakers on today's call. The Q&A period, open exclusively to financial analysts, will follow their presentation.
Before Mr. Tanguay begins his remarks, I've 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 future events or developments.
In preparing these forward-looking statements, several assumptions were made by Theratechnologies, and there are risks that results actually obtained by the Company will differ materially from those statements. As a consequence, the Company cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on them.
Theratechnologies refers current and potential investors to the forward-looking information section of its press release issued this morning, and to its annual information form dated February 24, 2016, and the risk factors section therein, available at www.sedar.com, under Theratechnologies' public filings.
Forward-looking statements represent Theratechnologies' expectations as of July 6, 2016. 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 Mr. Tanguay.
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Luc Tanguay, Theratechnologies Inc. - President, CEO, and Director [3]
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Thank you, Denis. Good morning, everyone, and thank you for being with us today. Much has happened during our last quarter, and it may very well be regarded as yet another important moment for our Company. I'll explain why in a moment. Philippe will then proceed with the detailed financial information for the quarter. After Philippe's presentation and before answering analyst questions, I will make a short closing remark.
So, as I just mentioned, the second quarter was very active on many fronts. And I have every reason to believe that it will have a major impact on our Company's future. As you will recall, we announced on March 18 an agreement with TaiMed Biologics for the commercialization of ibalizumab in the US and Canada. This was truly the right deal at the right time, and let me reiterate why.
First, ibalizumab is really a great product. This compound, as you know, is for the treatment of HIV multi-drug resistant patients. Recently we announced that primarily Phase III result showed that the primary endpoint of the trial, which is to reduce viral load by a level equal to or greater than 0.5 log, was met in 82.5% of patients after seven days of treatment, which exceeded our initial expectations.
I have to say that everybody here was more than excited by those results, and convinced that this product will put Theratechnologies in a new category of players in the HIV field. This is the last clinical trial before submitting the product to the FDA for approval. The 24-week trial will be completed in October of this year. Once completed, data analysis will not take a long time, as it is an open-label study in a limited number of patients.
This means that the ibalizumab biologics license application, or the BLA, should be submitted to the FDA around the end of the year. Having been designated as a breakthrough therapy, it will be reviewed in priority by the FDA. As a consequence, if approved, the product should generate revenues in the short term, as it could be launched in the US as early as mid-2017.
In addition, the deal required minimal upfront payment, and represents minimal risk for our Company. In fact, there will not be any other payment to our partner until the product is approved and commercialized in the US. As we prepare for the launch of ibalizumab, minimal investments will be required. Ibalizumab is very much aligned with our existing infrastructure, and we can pretty much take care of every pre-launch activity without significant additional resources.
This means that as we get ready for the launch of ibalizumab, we will not need to divert financial resources that otherwise would've been directed toward the commercialization and growth of EGRIFTA.
In addition, once approved, the product will be targeted -- will target a minimum population of 8,000 to 10,000 patients that are in dire need of life-saving treatment option. At present, the alternative product is called Fuzeon. It sells for CAD3,500 to CAD4,000 a month, but it comes with characteristics that we believe make ibalizumab more attractive.
The first presentation of ibalizumab to reach the market will be a twice-monthly IV injection, whereas Fuzeon requires painful injections twice a day. That, combined to being a first-in-class medication with a new mechanism of action, make us believe that we will be in the position to sell ibalizumab at a premium price compared to Fuzeon. In short, ibalizumab holds great financial potential for Theratechnologies.
The beauty of it is that we could start reaping the benefit in a relatively short time frame. This is a rare occurrence in the pharmaceutical world, where, as we very well know, it can take over a decade before a molecule is commercialized.
Ibalizumab could certainly be described as our Company's second win. This was all made possible from believing in the potential of EGRIFTA and shifting our Company's focus from research to commercialization. Indeed, EGRIFTA is proving to be, quarter after quarter, the tool that we needed to make things happen for Theratechnologies.
The second quarter of 2016 was no exception. Revenues are showing steady growth. Wasn't it for the stronger Canadian dollar, our result will be more impressive than the ones we are reporting today, and that Philippe will present in detail in just a moment.
The surprisingly strong value of the Canadian dollar has two main impacts. The first one is that our growth does not look as good as it is in reality. The second one is the impact on our guidance for the year, which is also affected by another factor. Indeed, in our sales in US dollar experienced a more than respectable double-digit growth in Q2 compared to Q1, and we are now seeing steady but slower growth than we were anticipating.
The lower growth rate for EGRIFTA in the US is a reflection of the longer than anticipated cycle for our increased marketing efforts to have its full impact on EGRIFTA sales. I want to make it clear here that we believe that unit sales will continue to increase. Combined to our pricing policy, we should continue to see double-digit yearly growth in US revenues for EGRIFTA.
In light of this information, we now estimate that sales for the current fiscal year will be in the range of CAD36 million to CAD37 million. As a consequence, our expectations for the adjusted EBITDA in 2016 are now in the region of CAD5 million to CAD6 million. That being said, we think that we need to focus on the fact that Theratechnologies is in a desirable position. We have a great product that, solely based on US sales, could provide double-digit yearly growth for the years to come.
Moreover, this product enables our Company to be cash flow positive and to focus on our long-term growth strategy. We also have the rights to a second product, ibalizumab, which has shown fantastic preliminary Phase III results. If approved, it could completely change the financial picture of the Company. In a nutshell, there is a great potential for Theratechnologies.
And on this note, let me turn to Philippe, who will give you the main financial results for the second quarter of 2016. And I will come back right after.
Philippe?
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Philippe Dubuc, Theratechnologies Inc. - SVP and CFO [4]
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Thank you, Luc. Given what Luc just mentioned regarding variations in the exchange rate, I would like to give you an opportunity to appreciate just how much of an impact this has had on our numbers by giving you some of our results in both US and Canadian dollars.
So, measured in US dollars, revenues grew from $6.3 million in Q1 to close to $7 million in Q2, representing sequential growth of 11%. You may recall that marketing efforts implemented in late 2015 alleviated the usual downward trend that we normally experience in the first quarter. As such, an 11% increase in quarter-over-quarter US revenues is quite satisfying.
When looked at it in Canadian dollars, revenues increased from CAD8.7 million in Q1 to a little over CAD9 million, representing an increase of over 3%. You can see here the impact of the Canadian currency on our results. When compared to the same quarter last year, our revenues increased 22% from $5.7 million to $7 million. In Canadian currency, they went up by 28% from CAD7.1 million to CAD9 million.
In terms of expenses, cost of goods sold was slightly up from the same quarter last year. It amounted to CAD1 million in Q2 2016 compared to CAD900,000 in Q2 2015, which correlates with higher sales volume. On a percentage basis, our cost of sales went down to 11% compared to 13%. This reflects continued manufacturing optimization.
Royalties to EMD Serono grew to CAD0.7 million in the last quarter from zero in the second quarter of last year, and CAD348,000 in Q1 of this year. R&D expenses for the second quarter of 2016 amounted to CAD2.1 million compared to CAD1.3 million in Q2 of last year. The increase can be explained mostly by a larger investment made in medical education programs to increase sales of EGRIFTA.
In our second quarter, selling and marketing expenses stood at CAD3.3 million compared to CAD2.5 million for the same quarter of last year. Again, those results reflect the intensification of our marketing efforts.
Looking at general and administrative expenses, you will notice they remained stable. They stood at just over CAD1 million, or CAD96,000 more than in the comparable three-month period of last year. I'm happy to report that our operating expenses, including R&D, selling, and general and administrative expenses, reached a stable level.
In light of these numbers I just provided, we generated an adjusted EBITDA of CAD1.4 million for Q2 2016 compared to close to CAD1.9 million for the same period last year. Keep in mind that we now pay royalties to EMD Serono, which for Q2 of this year amounts to CAD0.7 million. Given the impact of the royalty, our EBITDA would have been slightly better than last year's, when no such royalty was payable to EMD Serono.
We ended the quarter with a net loss of CAD498,000 or CAD0.01 per share in comparison to a net profit of CAD818,000 or CAD0.01 per share in Q2 of last year.
I want to highlight that this resulted is impacted by two factors compared to last year: first, the reevaluation of the warrant liability, which had a negative impact of just over CAD1 million. This is a non-cash item, and without this accounting rule we would have generated positive net earnings in Q2 of this year. Fluctuations in the market value of our outstanding warrants will continue to impact our bottom line, in tandem with our stock price performance. Further increases in the market value of our outstanding warrants will continue to cause a non-cash reevaluation expense on our income statement until the warrants are expired or are fully exercised.
Second, we recorded royalties to EMD Serono on sales of EGRIFTA, which we didn't in Q2 of last year. Taken together, those two items have a negative effect of CAD1.7 million on our bottom line compared to last year.
Our operating activities generated positive cash flow of close to CAD1.4 million in the last quarter. We did close the quarter with less liquidity than in the previous quarter, since we made a CAD5.2 million payment against our long-term obligation to Serono; and a CAD1.5 million payment, which includes related expenses, under the terms of the ibalizumab agreement. As a result, we ended the quarter with CAD9.2 million in liquidities compared to CAD15.8 million at the end of the first quarter of this year, which is still a very comfortable position.
On a final note, and as previously mentioned by Luc, we are revising our revenue guidance for 2016 to between CAD36 million and CAD37 million to reflect the impact of the strength of our currency, which has a negative effect of CAD3 million, and with the rest of the adjustment being a result of lower than anticipated sales growth for EGRIFTA.
However, I want to emphasize that the fact that we are anticipating steady revenue growth for EGRIFTA in the coming years. Our marketing efforts should generate sustained unit sales growth, which will be further supported by our pricing policy.
As for adjusted EBITDA, we are now forecasting between CAD5 million and CAD6 million. The effect here is less than on the top line, because we have and will continue to control expenses to ensure solid EBITDA margins, even considering our investment in the launch of ibalizumab.
On this, let me turn the conference back over to Luc.
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Luc Tanguay, Theratechnologies Inc. - President, CEO, and Director [5]
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Thank you, Philippe. In summary, EGRIFTA is providing us a cash flow positive company with steady sales growth, and we are working hard to ensure that we bring this product to its full potential. We need to keep in mind that EGRIFTA is the foundation that made the ibalizumab deal possible, which could turn out to be yet another significant cash flow generating product for our Company.
As we get ready to launch a life-saving treatment option for patients that have multidrug resistant HIV infection, we will not lose our focus on EGRIFTA. Rather, we will ensure that we fully leverage the amazing synergies between both products. Also, despite two large payments made in the last quarter, we ended the quarter with liquidities just under CAD10 million, and with the [reinsurance] that our operating activities are generating good cash flow. That's a nice position to be in.
Our strategy of building a solid company on the strength of our lead product is working, and we can look forward to the additional contribution of ibalizumab in a relatively short time frame.
Finally, we were surprised to learn last month that the government of Quebec has decided not to add EGRIFTA to its list of reimbursed medications. We have submitted a request for a reconsideration of this decision within the prescribed timeline. And we are pleased to say that we received yesterday the decision that the government has agreed to reevaluate its decision.
So on that note, we will now take questions from financial analysts. Thank you.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Doug Loe, Echelon Wealth Partners.
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Doug Loe, Echelon Wealth Partners - Analyst [2]
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Thanks for the update on the quarter, and for the ibalizumab update specifically. But our attention shifts very quickly to EGRIFTA, so just wanted to focus on that, if I may. Just want to try and understand what specific headwinds you might be encountering that compelled you to revise your guidance down to -- essentially we're expecting flat growth in the second half. Just wondered if you are still encountering issues with prescribing physicians not seeing lipodystrophy as a medical market meriting therapy. Or if there was any pushback on the price point that you are encountering, or any reduction in the overall HIV lipodystrophy incidence, just based on next-generation protease inhibitor drugs not engendering symptoms as dramatically as first-generation drugs did.
We've talked about all those things before, but just want to parse the possible elements that are impacting sales in a more specific way, and how you are addressing those. So, it's a broad question, but that's the first thing.
And then second of all, just wonder if you could provide an update on the rest-of-world approval activity. I know you have obviously the approval in Canada and Mexico. Just wondering if you have an update on other rest-of-world markets you could be exploring. And perhaps Europe could be a specific focus in your answer to that question. And I'll leave it there, thanks.
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Luc Tanguay, Theratechnologies Inc. - President, CEO, and Director [3]
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Okay, thank you, Doug, and thanks to be on the call. I think as far as the guidance is concerned, the reason why we reduced our guidance and compared to what we had before is simple, in a way. When we launched our marketing efforts at the end of last year, we were thinking that at some point in time we will have a kind of a peak in sales; and then have what we have normally: steady growth after that.
What we haven't seen yet is that peak. And what we're seeing -- I want to be clear with that -- we are seeing steady growth in our sales, but we haven't seen yet that peak. And so we have decided, instead of trying to estimate the timing for that peak to come, base on our forecast on only what we are seeing, I mean the steady growth. If you compare last quarter to this quarter's, over 10% growth in our sale, which is not bad. We think that we are still going to have growth in our units sold. And we wanted to base that on what we are seeing in fact, and not try to estimate when we are going to see the result of that peak.
What we think, in fact, is a little bit what I explained in my speech, is that it's taking a little bit more time in the cycle. From the time we do marketing, we speak to the physician, we speak to the patient; for them to get to the office of the physician, to get the prescription, to get to the pharmacy, and so on. So it's taking -- this cycle is longer than what we have anticipated, and we just have decided to readjust according to that.
To address that, in fact, again it is simple. I think we don't want to stop our effort. We have seen -- even if the growth compared to last quarter is not -- or for the rest of the year, is not what everybody was anticipating. If you compare Q2 of this year to Q2 last year, where we were still in full operation at that time, we are seeing more than 20% increase in our sales quarter, Q2 of this year compared to Q2 of last year.
And we think that all the marketing and what we're doing in terms of speaker program and so on, worth continuing those investments. So we want to continue to push on EGRIFTA to see this growth. And as I mentioned and Philippe mentioned as well, unit sales, combined to pricing policy, should be able to generate us a product that will have a double-digit growth in the coming years, year after year. That's what we want to have.
For the rest of the world, I haven't talked about that this morning because there is very little to say about it. It is still working on some country on the regulatory plan; for example, Europe. We think we are having people this week in Europe working with patient groups or working with [constant] over there to get prepared for the possible resubmission that we could do at the end of the year.
In the other country, like Mexico and Canada, as I just mentioned, we are working on the reimbursement part. We are pleased with the fact that Quebec will reconsider this decision. We will see what will come out of that.
But as I mentioned at the beginning of the year, revenue from other territory will be very little this year. We expect to have an impact probably more next year, once in fact we have reimbursement in those territory.
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Doug Loe, Echelon Wealth Partners - Analyst [4]
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That's great. Thank you for that update.
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Operator [5]
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(Operator Instructions). Andre Uddin, Mackie Research Capital.
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Andre Uddin, Mackie Research Capital - Analyst [6]
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I just actually had a couple questions here, if you could just go through. I know Doug had touched on this. But could you also talk a little bit about EGRIFTA, what your plans are for Japan and China, if you are going to look to license the product out there? And also if you could just discuss a little bit about what your plans are there, as well as if you can give an update on South America as well.
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Luc Tanguay, Theratechnologies Inc. - President, CEO, and Director [7]
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Okay. In fact we have plans for other territory, but doesn't include China and Japan as we speak. It doesn't mean that in the future we won't to look at it, but we have other territory that we are working on at this point. We want to complete maybe some in Europe that are not covered with our AOP partnership. So that's our plan for that territory.
In South America, the -- as you know, we have been approved now with the 1 milligram in Mexico. We focus on that territory on our reimbursement. That's the next step, as you know; maybe no. In Mexico, public reimbursement is more than important; it's 99% of the patient that are covered by public plans. So we really need to have a decent market in that territory to have reimbursement by the government. So we are working on that.
In the other territory, it's -- not much happened in the last quarter, Andre.
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Andre Uddin, Mackie Research Capital - Analyst [8]
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Okay. And just in terms of ibali's lab Phase III results, are you -- have you confirmed a medical conference now? I know you were looking at IDWeek before to possibly present. Is that being confirmed? Is that -- where (multiple speakers)?
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Luc Tanguay, Theratechnologies Inc. - President, CEO, and Director [9]
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I'll ask Philippe maybe to --.
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Philippe Dubuc, Theratechnologies Inc. - SVP and CFO [10]
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Well, obviously IDWeek is the most important conference coming up. There's two important ones: one is IDWeek, and one is CROI. I believe we have submitted an abstract for IDWeek. We haven't heard back yet. But I believe the limit for late breakers is in July at some point, so we won't hear probably for the next month or so. But we are pretty confident that we will be accepted for that. And IDWeek is in October, and CROI is in February.
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Andre Uddin, Mackie Research Capital - Analyst [11]
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Okay. And just in terms of your new guidance that you provided, would you say you are being overly conservative? And does your new guidance include any rest-of-the-world sales? And I'll leave it at that. Thanks.
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Luc Tanguay, Theratechnologies Inc. - President, CEO, and Director [12]
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I think the guidance for the rest of the year is pretty much in line and based on what we have seen in the first quarter. So, yes, I think we are conservative on that side. As I mentioned, Andre, what we have taken out of our guidance is the fact that we were expecting a kind of a peak, and after that a stable growth. So now we base our guidance only on the stable growth. And if the peak happens, that's going to be a nice to have.
But since it's very difficult to estimate the timing of that peak, we prefer now to base our forecast on what we see week after week, the growth that we see normally in our patient base.
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Andre Uddin, Mackie Research Capital - Analyst [13]
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Okay. That's fair. Okay, thanks. Thanks, guys.
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Operator [14]
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There are no further questions at this time.
I turn the call back over to Mr. Boucher.
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Denis Boucher, EXOCET Public Relations, Inc. - IR [15]
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Thank you very much. As there are no additional questions, we will conclude today's conference call. On behalf of everyone here at Theratechnologies, we would like to thank you for dialing in today, and we wish you a very good day. Thank you.
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Operator [16]
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This concludes today's conference call. You may now disconnect.
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