Alimera Sciences, Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Greetings and welcome to the Alimera Sciences' Second Quarter 2017 Update Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jacob Goldberger. Thank you. You may begin.

[Jacob Goldberger:]

Thank you, Audrey, and thank you all for joining us today for the Alimera Sciences' Second Quarter 2017 Financial Results Conference Call. With me on the call today are Dan Myers, Chief Executive Officer; and Rick Eiswirth, President and Chief Financial Officer. Yesterday, the company issued a press release announcing second quarter 2017 results. Today's call is being webcast and a recording will be posted in the company's website. Following remarks by management, we will open up the call up to your questions. During the course of this call, management may make certain forward-looking statements regarding future events and the company's future expected performance. These forward-looking statements reflect Alimera's current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties. These risks are described in the Risk Factors in the Management's Discussion and Analysis sections of Alimera's annual report on Form 10-K for the fiscal year ended December 31, 2016, and quarterly report on Form 10-Q for the quarter ended March 31, 2017, which are on file with the Securities and Exchange Commission and available on the SEC's website. Additional factors may also be set forth in those sections of Alimera's quarterly report on Form 10-Q for the quarter ended June 30, 2017, to be filed with the SEC in the third quarter of 2017. You will see in Alimera's press release that the company is offering non-GAAP financial measures. Alimera does so because it believes that such non-GAAP financial information can enhance an overall understanding of the company's financial performance when considered together with GAAP figures and is used both by management and by Alimera's lender to measure performance. Adjusted EBITDA and adjusted operating expenses exclude certain noncash items. These non-GAAP metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for GAAP net loss and operating expenses and may not be comparable to similarly titled measures reported by other companies. Non-GAAP financial measures should only be read in conjunction with financial information reported under GAAP when understanding Alimera's operating performance. For a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure, see the table located in Alimera's earnings release from yesterday. In addition, any unaudited or pro forma financial information is preliminary and does not report to project financial positions or operating results of the company. Actual results may differ materially. For the benefit of those of you who may be listening to the replay of this call, this call was held and recorded on Thursday, August 3, at approximately 9 AM Eastern Time. Since then, Alimera may have made additional announcements related to the topics discussed herein. Please reference Alimera's most recent press releases and current filings with the SEC. The forward-looking statements contained in this presentation are expressly qualified by the cautionary statement contained or referred to in this presentation. Alimera cautions investors not to rely too heavily on the forward-looking statements it makes or that are made on its behalf. These forward-looking statements speak only as of the date of this presentation. The company undertakes no obligation and specifically declines any obligation to publicly update or revise any such forward-looking statements, whether because of new information, future events or otherwise, except as required by applicable law. Now I'd like to turn the call over to Dan Myers, CEO of Alimera.

[Dan Myers:]

Thank you, Jacob. And thank you everyone for joining our call. I'd like to begin with some highlights of our recently-completed second quarter and then some additional developments in the past month. In the second quarter of 2017, we achieved positive adjusted EBITDA for the first time in the history of the company. A significant milestone in our path to anticipated positive operating cash flow. Global end-user unit demand for ILUVIEN increased by 6% compared to the second quarter of 2016 and we posted a revenue gain of 8% versus second quarter a year ago. We continue to develop and grow end-user demand with doctors utilizing more ILUVIEN. We expanded the availability of ILUVIEN into Italy in June with the launch by our partner SIFI. Further in the month of July, we made two announcements which should drive future growth of ILUVIEN. First, we completed the transaction with pSivida following allowing us to pursue posterior uveitis as an additional indication for ILUVIEN in Europe, the Middle East and Africa. Second, we continued to release additional data on ILUVIEN in the treatment of diabetic macular edema for several real world clinical data sets. As we discussed on our first quarter call, a significant milestone and priority for Alimera in 2017 is to deliver positive cash flow from operations. We believe the achievement of positive adjusted EBITDA is the precursor to positive operating cash flow due to the lag time in collecting our receivables. We are very excited to announce that we achieved positive adjusted EBITDA of approximately $500,000 in the second quarter of 2017. For some perspective, this compares to $ 4.4 million negative adjusted EBITDA in the second quarter of 2016. We achieved adjusted positive EBITDA due to increases in revenues from the sales of ILUVIEN and establishing an appropriate level of operating expenses late in the fourth quarter of 2016 and the first quarter of 2017. As I noted above, global end-user demand increased approximately 6% in comparison to the second quarter of 2016. This was driven by an increase in the US of 9% in the second quarter of 2017, offset by flat end-user demand in our international segment. The international segment demand, primarily in Germany, the UK and Portugal, was suppressed in the second quarter of 2017 due to a stock out in Germany as a result of increasing demand in the first quarter of this year. The growth in end-user demand indicates that physicians are making the unique long-term continuous micro dosing delivery of ILUVIEN, a more consistent part of their treatment regimen. We are changing the paradigm because ILUVIEN is the only drug with continuous micro dosing that enables the physician to treat DME consistently every day. We expect end-user demand to continue to grow on a global basis as we further penetrate our existing markets and launch into new ones. We are very excited to have added the launch of ILUVIEN in Italy this year through our partner SIFI. Our partners in the Middle East and Spain continue to seek approval and/or reimbursement for ILUVIEN. We expect to generate increasing revenues from our distributors in the second half of this year. The expansion of our license with pSivida following the end of the second quarter provides a significant near-term opportunity to expand the label for ILUVIEN, potentially providing to the patients with posterior uveitis. Posterior uveitis is a chronic noninfectious inflammatory disease affecting the posterior segment of the eye. It produces swelling often in the retina, affects people of all ages and can lead to severe vision loss and blindness. PSivida has conducted two well-controlled Phase III clinical trials where continuous micro dosing of fluocinolone acetonide demonstrated a significant reduction of occurrence of posterior uveitis. We believe this data provides adequate support for the approval for this indication, and we're therefore excited about the opportunity that this indication represents. We anticipate filing a variation to our ILUVIEN product label in the 17 countries in Europe in which we are approved to treat DME adding posterior uveitis in the first quarter of 2018. We expect we would receive approval by the end of 2018. If approved, this would allow us to begin marketing ILUVIEN for posterior uveitis in Europe in 2019. Although the population of posterior uveitis patients is approximately 20% of the population of those patients suffering from DME, we believe that posterior uveitis indication represents a great opportunity for expansion in use of ILUVIEN in both DME and uveitis. Posterior uveitis is perceived to be a more severe disease than diabetic macular edema with fewer treatment options and a different risk-benefit equation for both physicians and patients. We believe patients will adopt ILUVIEN more quickly in uveitis than DME because of a greater tolerability for the side effects associated with steroids in the treatment of this disease. This provides an alternative path for the physicians to gain more comfort with a long-term corticosteroid in the eye. We believe this will lead to greater use of ILUVIEN, which should result in expanded use of ILUVIEN for DME at a later point in time. We look forward to keeping you apprised of our progress regarding our filing for posterior uveitis as we work towards that milestone in early 2018. We are pleased with the recent publications of more real world evidence for the treatment of DME patients. Just last week the two year analysis of Medisoft audit data of 305 patients and 345 eyes in 14 U.K. retina centers was published. This patient population has received an average of 7.4 intravitreal injections prior to the dosing of ILUVIEN. The results from this audit were very good. An important measure of efficacy is the number of patients who achieved a level of vision required to drive a car which is 20/40. In this audit, the percentage of patients more than doubled in the two year period from 18.1% to 39.6%. Additionally, the data showed 86.7% of patients maintained or gained visual acuity after receiving ILUVIEN through 24 months of follow-up. These visual acuity outcomes are comparable to the ILUVIEN Phase III clinical trial results at 24 months. One of the comments we often hear from US physicians is a request to see real world evidence from the United States in addition to Europe. We are very pleased to now have data for US usage of ILUVIEN that shows comparable results to the European data. On June 30, the first results of our user study were presented at the Club Retinal meeting. The user study which stands for US Retrospective chart review in patients receiving ILUVIEN encompasses130 patients and 160 eyes at four practices using ILUVIEN today. The patients in the user study were treated with alternatives prior to introducing ILUVIEN. The treatment burden on these patients was substantially reduced after their ILUVIEN injection. Prior to the introduction to ILUVIEN in these patients, patients were being treated on an average of once every three months for their DME, which is consistent with other published data on treatment frequency. Following the injection of ILUVIEN, consistent visual acuity and reduction in edema were maintained while the frequency of treatments decreased in the overall study population to once every 14 months. We believe this demonstrates the value of continuous micro dosing in treating the disease consistently every day. And importantly, this reduced treatment burden, positive impact on vision and reduction in edema recurred regardless of the patients' baseline visual acuity. I will be presenting this data at Ophthalmology Innovation Summit at ASRS next week, and there will be an additional presentations on user data at the main ASR meeting next week, the Retina Society meeting in September and the American Academy of Ophthalmology in November. As well, our sales representatives and our medical science liaisons will begin presenting it in their interactions with physicians. We believe this real-world data underscores the value of ILUVIEN in the treatment of diabetic macular edema and the value that continuous micro dosing brings to the management of this persistent disease. We believe data like this which continues to be consistent with other data sets in other markets separates ILUVIEN from the other treatment alternatives and will drive revenue growth. With that I'd like to head it off to our President, Rick Eiswirth, to go over more detail on our financials.

[Rick Eiswirth:]

Thank you, Dan. On a GAAP basis, we recognized approximately $ 10.4 million in revenue in the second quarter of 2017 compared to approximately $9.6 million in the second quarter of 2016. This represents an 8% increase in revenue. In the United States, we recognized approximately $8.1 million in the second quarter of 2017, which represented a 13% increase over approximately $ 7.2 million in the second quarter of 2016 while end-user demand grew 9%. As we previously stated, there can be a difference in end-user demand and revenue growth due to purchasing patterns of our 2 distributors in the US. In our international segment, revenue remained mostly flat at approximately $2.3 million in the second quarters of 2017 and 2016, which was consistent with end-user demand. As Dan mentioned end-user demand and therefore sales revenue was suppressed in the second quarter due to an out-of-stock situation in Germany in April, as a result of increasing demand in the first quarter of this year. To drive revenue growth in the remainder 2017, we are relying on our growth in our existing markets coupled with the expansion of the availability of ILUVIEN international. Gross margin remained consistent at 93% in the second quarter of 2017 compared to 94% in the second quarter of 2016. We are pleased with the management of our operating expenses. Operating expenses for the second quarter of 2017 including depreciation and amortization, totaled approximately $ 11 million compared to approximately $ 15.5 million in the second quarter of 2016, representing a decrease of $ 4.5 million or 29%. Our GAAP operating net loss for the second quarter of 2017 improved to approximately $ 2.8 million compared to approximately $ 6.9 million for the second quarter 2016, a decrease of $4.1 million or 59%. On our last call, we discussed that we are focused on Alimera achieving financial independence this year, which requires revenue and gross margin exceeding our operating expenses, excluding any noncash items. Therefore, we believe that the non-GAAP measures of adjusted EBITDA and adjusted operating expenses are relevant measures of our operating performance. We believe the achievement of positive adjusted EBITDA is the precursor of future positive cash flow due to the lag time in collecting receivables. As Dan mentioned, adjusted EBITDA for the 3 months ended June 30, 2017, improved to a positive $ 500,000, compared to a loss of approximately $ 4.4 million for the same period last year. This was due to an increase in global revenue and lower operating expenses as previously discussed. Our adjusted operating expenses for the period, net of noncash items were just $ 9.1 million compared to $ 13.4 million in the prior year's period, a decrease of 32%. Please see yesterday's press release for a reconciliation of these items. Maintaining our operating performance while we grow the top line is management's top priority. In the long term, we expect that we will operate a slightly positive to break even adjusted EBITDA, reinvesting cash generated through increases in sales revenues to grow the top line even further. Although we are very pleased with the achievement of positive adjusted EBITDA in Q2, our business remains subject to seasonality. For example, in the second half of the year, we participate in several major conferences that take place around the world. The bulk of these costs will be incurred in quarter three consistent with prior years and may make the achievement of breakeven challenging in the current quarter. However, long term, we remain confident that we will manage the business as slightly positive to break even adjusted EBITDA beyond Q3. As Dan mentioned earlier, the acquisition of rights to pSivida's technology for uveitis in Europe, the Middle East and Africa, was a significant transaction from Alimera adding an asset to our portfolio, allowing us to reach additional patients in the next two years. We believe this transaction was nondilutive and accretive for the foreseeable future. We used an asset that was fully reserved on our books that if collectible would have not been realized until many years in the future. As of June 30, 2017, we had maintained a receivable from pSivida of approximately $ 25 million, which represented their 20% share of the cumulative cash commercialization losses from ILUVIEN. In this transaction, we forgave $ 10 million of this receivable and agreed to forgive an additional $ 5 million no later than January 2019. The remaining $ 10 million will be used to offset future royalties payable to pSivida on global sales of ILUVIEN. We also agreed to convert the 20% cash profit sharing arrangement to a straight royalty on global net revenue of ILUVIEN. We will begin paying a 2% royalty in the current third quarter of 2017. We believe this change is accretive to our income statement for the next 18 months. For the first quarter of 2017, we paid approximately $ 200,000 and profit share own to pSivida on $ 7.5 million of net cash receipts in the first quarter, which equated to a royalty of approximately 2.6% on net revenue compared to the 2% established going forward, which is accretive of over approximate next 18 months based upon our current revenue run rate. The royalty rate will increase to 6% in approximately 18 months and we will pay an additional 2% royalty on global net revenues and other related consideration in excess of $ 75 million in any year. Even if we increase royalty rates, we believe the change from the profit share arrangements to the royalty is neutral to positive for our expenses at annual revenues from ILUVIEN at $ 65 million or more. At the time of the royalty rate increase, Alimera will be able to offset a portion of the royalty to recover the remaining $ 10 million of the commercialization receivable. I will now turn the call back over to Dan for closing comments.

[Dan Myers:]

Operator, this time we'll open up for Q&A.

[Operator:]

Ladies and gentlemen, at this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Francois Brisebois with Laidlaw & Company. Please take your question.

[Francois Brisebois:]

Thanks for taking the question and congrats on the quarter, just wanted to touch on a couple of things here. With the adjusted EBITDA positive, any thoughts on potential label expansion in terms of - you've mentioned in the past, retinal vein occlusion or non-proliferative diabetic retinopathy is the goal here to really get to cash flow positive before we initiate anything on that?

[Dan Myers:]

I think you're exactly, right. We have said earlier that as we get to the end of the year we want to start thinking about how we would approach expanding the label in the US and I think this does set us up well to start having some discussions and dialog. As I've said in the past, we believe in discussions with the FDA that we could pursue either of those indications, retinal vein occlusion or non-proliferative diabetic retinopathy with 1 child in the US and we continue to believe that. And so, yes, we will begin to start thinking about that with the anticipation of starting those trials in the first half of 2018.

[Francois Brisebois:]

Okay. And then in terms of the out-of-stock situation in Germany and there is high demand, how can we look in terms of the run rate for ex-US, obviously pretty flat here from the first quarter, but should this - is this in the past now at Germany and should this kind of pick up and then we got Italy coming in. How should we think about that for the rest of the year?

[Rick Eiswirth:]

So we suffered that out-of-stock situation right at the beginning - end of and March, right at the beginning of April, I guess, and we probably lost based on our estimate somewhere between $ 400,000 and $ 500,000 worth of sales in Germany over the course of that month. It did impact a little bit in early May and in June, but we think we recovered and expect that growth to continue going forward.

[Dan Myers:]

Franc, I'll just add to that too that we have adjusted our production schedule such that we don't anticipate having any more inventory problems going forward. That was kind of a perfect storm. And so I think we've looked at that from a manufacturing standpoint, we should be in the clear on any inventory issues going forward.

[Francois Brisebois:]

Great. And then just last one here, in terms of sales and marketing is this - this was pretty consistent looking at first quarter, second quarter pretty much the same. Is this something that should ramp up a little bit or are those plans that happen to get the profitability and lower the OpEx is the run rate that we saw in the first half, should we be seeing similar in the second half?

[Rick Eiswirth:]

Yes, I think that's correct. I mean, look, the reality is anytime you put cost constraints in place, Franc, it does have an impact on the top line. I think strategically, we will continue to reinvest. As I said in my comments earlier, the cash that we generate from sales being excess of those expenses back on the business and hope to continue improve that ramp, but I would look at the trajectory in the second half of the year pretty consistent what you saw in the first half.

[Francois Brisebois:]

Okay, great. Thanks a lot. That's it from me.

[Operator:]

Thank you. Our next question comes from the line of Boris Peaker with Cowen & Company. Please take your question.

[Boris Peaker:]

Good morning and congratulations on the progress you guys are making.

[Rick Eiswirth:]

Thank you.

[Boris Peaker:]

So my first question is just, maybe on uveitis, how much investment in uveitis do you expect to make in 2018 and 2019 and how is that going to impact your kind of a trajectory to cash flow breakeven?

[Rick Eiswirth:]

Boris, it shouldn't have too much of an impact. We estimate that it's going to cost us $ 200,000 to $ 300,000 to get the filings done and pursue that approval, which should really cover the expenses in 2017 and 2018. Honestly, at this point time we haven't looked at what the total additional costs would be from a commercialization standpoint in 2019. We would expect in late 2018 to start working on some reimbursement ahead of schedule. But again not a material impact on the profitability. We think we'll certainly be able to fund that out of the revenue growth in DME.

[Dan Myers:]

Keep in mind Boris that one of the values of this deal for both and pSivida was this is an expanded indication versus a new filing. So the time and cost are much more efficient than if you were starting sort of with the new indication.

[Boris Peaker:]

Got you and in terms of physician training getting uveitis traction, do you think it will be some kind of significant undertaking or is this also just kind of incremental effort?

[Dan Myers:]

No, I think it will fit very nicely and tuck in to what we're already doing. The reality is because fluocinolone acetonide has already been proven efficacious in uveitis in RETISERT and physicians know that steroids work in uveitis; steroids are used systemically to treat uveitis; they use with OZURDEX. So I think the transition to a steroid be very seamless for them and these patients a lot of time are treated chronically need something long term, so ILUVIEN should certainly work there and be something that we consider. The other piece of this is, we know that there is usage of ILUVIEN out there for uveitis at this point in time in some of the countries in Europe. There are cohorts being developed that we should be able to carry forward where doctors are using on name patient basis, and for the most part you're approaching the exact same doctors. The uveitis specialists are retina specialists; they're subset of the retina specialists overall that are treating DME, so already talking to all of them.

[Boris Peaker:]

Got you and lastly, I just want to understand the shortage in Europe. So the out-of-stock condition sounds like it occurred in the beginning of the quarter and then was rectified in - later in the quarter. So just want to clarify is there going to be any spillover from shortage in 2Q implying bolus in 3Q or we are back to kind of flat, and we shouldn't see bolus in 3Q for now?

[Rick Eiswirth:]

Yes, I'll will give you a little bit more texture around that. In the first quarter, our end-user demand in Germany grew about 56% over what it did in the first quarter of 2016. So we were expecting growth that grew a little bit faster pace than expected and we found ourselves out of stock in early April. We resolved that situation at stock back in place right at the end of April or maybe the first week of May. So we had a significant downturn there. Probably a little bit of frustration with some of the doctors in the first two weeks of May or so that we have been out of stock and hampers as I said probably $ 400,000 to $ 500,000 impact. The challenge when that occurs is, these are physicians that have already chosen to adopt a steroid, put a steroid in the eye and they are most likely going to OZURDEX - to inject an OZURDEX and ILUVIEN. So it has taken that patient out of the market for, let's say, roughly three months anywhere from two to four months depending on it. So where we sit today is the time we should see those patients coming back in. We're certainly trying to get back to those doctors and hope that would see a bolus, but I don't know that we've seen that phenomenon in the past as people come back from vacation stuff. So I'm not going to rely on that for the growth in the quarter. I think we need to rely on just our typical organic growth that we had seen in the first quarter, I mean, late last year continuing through and that would potentially be upside if that bolus comes back to us.

[Boris Peaker:]

Great. Well, thank you very much for taking my questions.

[Rick Eiswirth:]

Sure.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Yi Chen with HC Wainwright. Please take your question.

[Yi Chen:]

Thank you for taking my questions. My first question is, given that the global end-user unit demand in first quarter is 32% and now it's 6% in second quarter, do you actually observe any slowdown in user demand or is it just an observation of seasonality?

[Dan Myers:]

I think we have to consider the growth in demand will be a little bit lower as we move forward because of the containments, we made our cost structure. As I said, we'll certainly reinvest that to drive the top line and we can reinvest that in adding some sales people back, et cetera and like that . I do think the 6% was artificially understated because of the problem in Germany. If we hadn't had the problem in Germany, we would have certainly been in double digits, both globally and in Europe.

[Rick Eiswirth:]

And Yi, I might add to Dan - I might add that if you look at Q2 '16 for those who go back and remember that call, we did have 1 order on the last day from our distributor in Q2 of '16 that probably gave us a little bit of a bump in those sales in second quarter. So the delta might be slightly understated on the true growth due to kind of timing of orders in second quarter of 2016 last year.

[Yi Chen:]

Got it. Thank you. At this point, could you give us any color on your projected gross - revenue gross in the second half of 2017?

[Rick Eiswirth:]

I mean, we expect that revenues will continue at the trajectory they did overall in the first half of the year compared to the prior year.

[Yi Chen:]

Alright, thank you.

[Operator:]

Thank you. There are no further questions. That does conclude our question-and-answer session. I will now turn it back to you, CEO, Dan Myers, for closing comments.

[Dan Myers:]

Thank you. So as you've heard, we delivered positive adjusted EBITDA results in Q2. This is an important milestone for Alimera to achieve through prudent cost management combined with revenue growth. We believe this growth reflects the adoption of a ILUVIEN in the treatment of DME and the growing relevance of being able to treat the disease consistently every day. As described, we completed a nondilutive transaction to secure the rise to the uveitis indication for ILUVIEN in Europe, the Middle East and Africa and we expect the addition of this indication to our ILUVIEN label in our international segment will further extend the utility of continuous micro dosing that ILUVIEN offers to clinicians and their patients. We look forward to our third quarter conference call where we will expect to discuss the continued success of ILUVIEN and Alimera Sciences. Thank you.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.