NovaBay Pharmaceuticals, Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Mar 2015

[Operator:]

Welcome to NovaBay conference call. At this time all participants are in a listen-only mode. After our management’s prepared remarks we’ll hold a Q&A session. [Operator Instructions] As a reminder this conference is being recorded March 26, 2015. I would now like to turn the conference over to Jody Cain. Please go ahead ma’am.

[Jody Cain:]

This is Jody Cain with LHA. Thank you for participating in today’s call to discuss NovaBay’s 2014 Fourth Quarter and Full Year Financial Results and Business Progress. Joining me from NovaBay Pharmaceuticals are Dr. Ron Najafi, Chairman and CEO; Tom Paulson, the company’s CFO; and Glenn Moro, Vice President of Sales & Marketing for Avenova. I would like to remind listeners that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risk and uncertainties that could cause actual results to be materially different from any anticipated results. For our list and description of those risks and uncertainties please review NovaBay Pharmaceuticals’ filings with the Securities and Exchange Commission. Furthermore at the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast March 26, 2015. NovaBay Pharmaceutical undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. And now, I’d like to turn the call over to Ron Najafi. Ron?

[Ron Najafi:]

Thank you Jody and my thanks to all of you for joining us. While we are still in early stages of our commercial launch of Avenova, I am please to report that we’re gaining excellent traction in the market. Sales of Avenova doubled in February, compared with January and sales to-date in March are well outpacing February numbers. Equally exciting is that the growth is coming from both first time orders and from reorders, as ophthalmologist and optometrists are incorporating Avenova into their practices. I'm delighted to report that in the three months since introducing our new business strategy we’re making significant progress. As you may recall, our plan is aimed at driving near-term revenue with ultimate goals of reaching profitability. On today’s call, I will discuss recent development Tom Paulson, our CFO will review financial results, Glenn Moro, our Vice President of Sales and Marketing will provide and update on our commercial activities and then I will share some final comments and will take your questions. As announced on January 7 of this year, following a comprehensive review of our assets, competitive positions, markets and market dynamics, we made the decision to focus NovaBay’s business primarily on the eye care market. We implemented a three-part strategy with the first component being the commercialization of Avenova. This is our proprietary prescription based product for the management of blepharitis, and Meibomian gland dysfunction and associated dry eye syndrome. Our decision to make this a business priority has the full support of our highly respected members of our Ophthalmology and Optometric scientific boards. I want to spend a minute to share my enthusiasm for Avenova and why we believe commercializing this product is the best path to near term revenue growth. Approximately 30 million Americans suffer from blepharitis or dry eye syndrome. These are difficult to treat chronic conditions that can cause irritation, inflammation and itchiness of the eye lid. Alternative treatments for managing blepharitis include antibiotics, steroids and OTC detergent-based lid wipes. The soap in these wipes can counteract the eyes’ natural moisturizing mechanism. All of them are for a minimal relief at best and can further irritate tissue that’s already inflamed. Avenova is the only eye care product to contain our pure proprietary hypochlorous acid, which we call NEUTROX and has no bleach impurity or drying soaps. Hypochlorous acid is a naturally occurring substance produced by white blood cell to fight microbial invaders. Laboratory test shows that it has put potent antimicrobial activity yet it is non-toxic to mammalian cells. And it’s easy to use as patients simply wipe their eye lid area twice daily with this soothing product. Patients with blepharitis and dry eye tend to return time and again to their eye care professional to find better ways of managing their condition. This is a frustrating pattern to patients who cannot obtain relief from their symptoms and to clinicians who are unable to offer an effective treatment to for their patients. After years of suffering, patients are now experiencing relief with Avenova and as little as two weeks. This is a significant market opportunity for NovaBay. We estimate annual market for Avenova in managing blepharitis and dry eye syndrome at $500 million in the U.S. alone. And we are already hearing that some ophthalmologists are expanding its use to cataract and LASIK surgery. We expect continued sales momentum with Avenova as we execute on a well conceived commercial strategy to reach ophthalmologists and optometrists throughout the United States. This plan is under the leadership of Glenn Moro, who has 27 years of experience with Alcon, a leader in Ophthalmology. Glenn will provide an update on commercialization later in the call. The second component of our strategy is to introduce additional innovative eye care product that allows us to leverage our sales force. The next product we expect to launch is Avenova in a form of cream or ointment formulation for overnight management of blepharitis. Subject to FDA clearance, we are making progress developing additional products that are synergistic to Avenova. We believe these products will have exceptional additions to our eye care portfolio. We expect to introduce several of these products in the 12 months to 18 months time period. The third and final component of our strategy is to monetize select assets in neurology, dermatology, wound care, and cosmetic and aesthetic dermatology. We see this as a mean of generating cash if flow, adding new revenue stream and allowing our management team to focus on the eye care opportunity, while also reducing our expenses. We have received preliminary interest in auriclosene or NVC-422 our product to reduce encrustation and blockage indwelling urinary catheter, as well as with our dermatology asset. We will make announcement on these activities when appropriate. I want to make it clear that we remain full committed to our current partnerships with our NeutroPhase products, in wound care this includes, China Pioneer Pharma in China, Shin-Poong Pharma in South Korea and Biopharm Group in the Middle East, as well as our recently signed exclusive distribution agreement with Alpha Pharma for Ukraine. The potential in these markets are significant with an estimated 24 million people suffering from diabetic, ulcer and other chronic wound conditions in China alone, and millions more in Middle-Eastern countries and Ukraine. We also have partnership in animal care with Virbac and dermatology with Galderma. As an update on our agreement with China Pioneer, that firm began promoting NeutroPhase through its extensive network in China early this month. We have received orders for 200,000 units of NeutroPhase and are currently shipping this product. China Pioneer is a major support of our product and our company. In addition to being our distributor, China Pioneer has invested in NovaBay including participating in the financing we completed earlier this month at full market cost and we’re delighted by our strong relationship. As a final comment, we recently signed an exclusive agreement with Sarmedic to market Avenova in Israel. We continue working to seek additional agreements with Avenova in other overseas market. At this time I’d like to turn the call over to Tom Paulson, our CFO.

[Tom Paulson:]

Thanks Ron. And I’d like to add my welcome to those joining us today. I’ll review our financial results starting with the fourth quarter 2014. We reported sales revenue of $385,000 for the quarter consisting of $219,000 in Avenova product sales and the remainder was primarily NeutroPhase sales through our partner Pioneer, at the end of the year when it began to ship the 200,000 units they ordered and anticipation of our their full scale launch of NeutroPhase throughout Mainland China. Given we launched in the later part of the year we expect that the revenue contribution from Avenova to be modest in 2014. While we are building our commercial organization, training our first group of 15 medical direct sales representatives and preparing to execute on additional outreach activities. That said even without the full launch underway sales for Avenova for the fourth quarter of $219,000 were more than double the $90,000 [ph] we recorded for the third quarter. We are also receiving strong pull-through since the launches with both McKesson in the fourth quarter and Cardinal in quarter one. Glenn will add more details on our distributors, but we are very pleased with the steady raise in Avenova sales from pharmacies supplied by McKesson. In fact we’ve seen a six fold increase in pharmacy orders since we began the agreement just four months ago. Gross profit and total sales revenue is $89,000 with gross profit margins up 23%. However Avenova provides us with pharmaceutical like margin levels and we expect gross profit margins to improve handily as sales of Avenova increased overtime, as well as proportional decreases in sales and promotional material cost that are now needed to support our country wide launch. Net loss for the fourth quarter of 2014 was $4.4 million or $0.09 per share on 51.5 million shares outstanding. This compares with the net loss for the fourth quarter of 2013 of $4.1 million or $0.10 per share on 41.2 million shares outstanding. The increase in net loss for 2014 period was due to higher spending on sales and marketing for Avenova launch, offset partially by lower research and development expenses. SG&A expenses were $2.7 million and R&D expenses were $2.4 million. The company expects lower R&D expenses as it shifts into further commercialization of Avenova and other products. Turning to the full year of 2014, we reported sales revenue of $684,000 of which almost half of $329,000 were sales of Avenova. Gross profit on product sales was $198,000. License collaboration distribution and other revenues was $370,000 compared with $3.5 million in 2013. This decrease in 2014 was related to the full amortization of the upfront payments from our agreement with Galderma in 2013, and the end of the full time equivalent funding from the same contract. This was offset partially by increase in sales of NeutroPhase products. Net loss for 2014 was $15.2 million or $0.31 per share, compared with the net loss in 2013 of $16 million or $0.42 per share. R&D expenses in 2014 were $9.5 million and SG&A expenses were $8 million. We reported cash, cash equivalents and short-term investments are $5.4 million as of December 1, 2014, also as we announced earlier this month we completed an equity financing or net proceeds to the company of $4.6 million. With those comments, I’d like to turn the call over the Glenn Moro.

[Glenn Moro:]

Thanks Tom. As Ron discussed we were executed on a well-conceived sales and marketing strategy to promote Avenova to ophthalmologists and optometrists across the U.S. Earlier this year, we hired 20 additional medical representatives, thereby increasing our direct salesforce to 35. Our hiring is benefited from dislocation in the eye care industry, with the several large M&A transactions and we are able to secure reps with more of 10 years of experience in the eye care market and they came at established relationships with optometrists and ophthalmologists. These reps are in the major U.S. metropolitan areas that our extensive market research indicate and have the highest sales potential for Avenova. Key to success for sales will be the frequency of sales calls. So even with the directly relevant past experience, we estimate that it will take approximately eight to ten months for a new rep to reach a breakeven level of sales with upside thereafter. We recently hired a second regional sales manager and our sales organization is [indiscernible] out by four district managers. We are currently are – excuse me – we’re working diligently to improve the product early sales success by replicating tactics that are producing results. We track each sale, each day by market and by sales reps, which allows us to duplicate tactics that work in one market to other markets. As we gain traction, we plan to add reps to our force. When our sales force is fully built out to around 50 reps, we will be able to reach the approximate 20% of the prescribing physicians who produce approximately 80% of the patient volume. Each sales territory will have approximately 200 to 250 eye care specialists, which is a typical territory size for a pharmaceutical rep. About 60% of our current sales are to optometrists and the remaining 40% to ophthalmologists, although we expect that percentage to even out overtime. Avenova is now available to be order through 90% of this 67,000 retail pharmacies through out our nation, while distribution agreements with McKesson Corporation and Cardinal Health. Patients are also able to fill their prescriptions via the Internet from our website at www.avenova.com, as well as the [indiscernible] some optometrists and ophthalmologists who carry Avenova inventory in their offices. As expected, the vast majority of ophthalmologists and optometrists caring Avenova are selling a 30-day supply with $30 to $40. Avenova is a private product and is not reimburse by third party payers. And this price is inline with the patients co-pay on covered prescription for branded pharmaceutical. So though our product is not reimbursed from the patients’ perspective the cash outlay is inline with the reimbursed product. We are gaining awareness of Avenova through our distribution agreement with Vision Source Independent Optometry Network. This is the largest independent optometry network in the U.S., representing 2,800 independent optometrists’ offices. Word of mouth in this position population is among the most powerful tools in gaining acceptance and our marketing collateral features testimonials from highly respected ophthalmologists and optometrists. We placed full-page advertisements in eight of the top trade journals in March. We’re also raising visibility through our presence at 10 industry conference this year such as the American Academy of Ophthalmology, the American Optometric Association and numerous Vision Expo meetings held around in U.S. Additionally, we are holding our own educational and marketing programs. We believe this multi-fascinated approach to sales and marketing is effectively increasing visibility of Avenova within the eye care community. And we are pleased to see early results in the form of increased sales. With those comments, I would like to turn it back to Ron Najafi.

[Ron Najafi:]

Thank you Glenn. We are firmly committed to the success of NovaBay by executing on our strategy. We also continue to dedicate the modest resources to develop our products with our proprietary Aganocide compound. Aganocide is our fast-acting broad spectrum non-antibiotic anti-microbial that’s effective against multi-drug resistant bacteria and has a good safety profile. Pending FDA clearance we’re targeting commercial product launch in the first quarter of 2016. Before, we open the call to your question I want to assure you that we’re fully aware of the challenges of commercializing a product such as Avenova. This makes the early acceptance of our product that much more [indiscernible] and while we are stealing the early adaptor phase of our launch, the feedback we’re receiving from clinicians and patients are like is highly encouraging. Let me summarize, why we are so excited about the prospects for Avenova. We have a product that works and fails an unmet medical need in a large patient population. We have manufacturing in place with ample capacity to fill product orders. We have an expanded sales organization in covering the major markets, where we see the greatest opportunity. We have the support of highly respected key opinion leaders and we have nationwide distribution through our agreements with McKesson and Cardinal to more than 90% of the nation’s retail pharmacy. Also I wanted to let our investors no that we’re now beginning the practice of holding regular quarterly conference calls to keep you updated on our progress and our financial results and to answer your questions. In closing, we’re highly focused on supporting our commercial operations under the leadership of proven sales on marketing bettering, we plan to leverage our sales organization by introducing new product and we’re seeing opportunities to monetize our assets while continuing to support our established partnerships. With that over view, operator let’s open the call up to question.

[Operator:]

[Operator Instructions]

[Ron Najafi:]

While we are waiting for the first question, I want to let you know that we’ll have a major display in the exhibition floor at the American Society for Cataract Refractive Surgery conference in San Diego, next month, April 17 from 19. We are taking the opportunity to showcase Avenova, to thousands of ophthalmologists and optometrists who are expected to be in attended. Okay operator, we’re ready for the first question.

[Operator:]

Our first question is from Yale Jen with Laidlaw. Please go ahead with your question. Yale Jen Good afternoon. And congrats on a very good start. Ron Najafi Thank you Yale. Tom Paulson Thank you. Yale Jen Thanks, my first question is that giving the sales growth you have seen in the last few months and just pretty much close to the end of the quarter. Would you be able to start to make some source of projection for us in terms of both the first quarters’ revenue for Avenova as well as the full year projection, anything of that nature? Glenn Moro You’re right Yale. Right, we are almost through the quarter. I think we had mentioned in the release today and I think that’s as far as we can go so far since we’re still in the early stages, is that what we are seeing in the first quarter so far is well above what we say for both to combined third and fourth quarter of last year. So the momentum is really continuing in the first quarter. But as I said it’s early in the game and too early to predict full year and numbers. Yale Jen Okay, great. That’s fine. And secondly, that I think you guys mentioned earlier the cost of goods for the fourth quarter seems little about higher than the prior quarter and the usage that just coming down. How should we think over al long-term that the cost of goods will be? Tom Paulson Well Yale there are three factors, really one is disproportionally impacted by, as I mentioned, there is a lot of free goods in that number as we supply physicians with product, to get the product – to get the grand the brand out there and get physicians using it. And then, another issue is that, as our sales become more and more dominated by Avenova, which really is traditionally grade pharmaceutical level margins. We’re going to see a much higher up tick. And also as we launch additional products we anticipate them to be in the same high margin category. So, it’s really an aberration if you see this level of a product margin from us. We should see steady growth and actually three’s a fourth factor, so we’re going to be migrating to larger sizes or let’s say two bottle sizes where the margin will be more significant for us. Tom Paulson But, that’s very typical in any launch of a product. Yale Jen Understand. So, should we anticipate at least for the first half of this year 2015, there may be some of these impact there as we move forward, does these margins should be further improved… Tom Paulson Right. Yale Jen Let’s say into second half and goes over? Ron Najafi Oh yes, yes, that’s safe. It will become less and lesser factor. Yale Jen Okay, great. And overall, you guys [indiscernible] give any guidance in terms of your other operating expenditure for this year or let’s say it’s for 2015. Should we anticipate reduced R&D expenditure where as other expenditures will increase too because of the – you changing the focus or emphasis of the operation? Tom Paulson Yes, well I’d say yes, R&D will become less and less of a number, except if it relates to supporting the Avenova product line. We moved on from extensive clinical testing as we’ve done in the past. Our expenses are going to be dominated by sales and marketing expense going forward. Yale Jen Okay, great. And the last question is that, I think Ron mentioned that you will start to build due to [indiscernible] in the process of completing demanding the claim and one formulation of Avenova, so what kind of timeline we may anticipate that to be completed and then may be the FDA, hospitals sort of a clearance on that? Ron Najafi So, as I stated, we are looking at 12 months to 18 months timeframe from today, so I would say first half of 2016 you should expect, pending FDA clearance product on the market from NovaBay. Yes. Yale Jen And what will be the benefits of this versus the eye drop you currently have? Ron Najafi So, it will be again, it’ll be for the same disease stage for blepharitis and the aim is to have a night cream. So patients can benefit from overnight effect of the product onto their eyelashes and eyelids and be able to essentially reduce microorganisms and have clinical benefits for the patients. Yale Jen Thank you very much for the response and congrats on [indiscernible]. Tom Paulson Thank you. Ron Najafi Thank you.

[Operator:]

Our next question is from Ed Woo with Ascendiant Capital. Ed Woo Yes, thank you for taking my question and also congratulations on a good start for Avenova. My question is I just wanted to clarify, you said that the typical ramp up for sales, new sales people was eight to ten months. Is that more of a steady progression or do you really kind of see hockey stick approach to what sales begin to ramp up for new sales people. Ron Najafi Glenn, would you take this one. Glenn Moro Sure. This is really steady progression as the reps build their territories. Now if you think about the reps we have out there, the majority of them, its virgin territory. So none of the doctors have ever seen this product. So we usually get substantial build with them and that’s why we say eight to ten months it will take them about ten months to create the kind of velocity in volume on the product, where there will be breakeven point. Does that answer your question? Ed Woo Yes, it does and you mentioned that your eventual goal is 40 reps to 50 reps. Glenn Moro At some point, we want to be at 50 reps and as you know, we’re doing a [faced in] process. We’re adding in reps, we’re making adjustments in what we do, we are adding more reps. So I feel that at some point, we will be at 50 reps and that will give us access to 80% – 20% of the doctors who will do 80% of the volume. So again, that will be sort of a [faced in] process. Ed Woo Alright, that sounds good. And last question I have, is just on the – you talked a lot about the opportunities in the U.S. being $500 million opportunity, but what about international opportunities. Ron Najafi So I’ll answer that question, right now our entire focus is United States. The activity that is being undertaken in, for example, in Europe we’re filing regulatory approval through CE Mark approval. We’re expecting something there within the next six months or so to get regulatory approval. And then of course, we’re discussing with potential partners in Europe. As you can see from some of our international activities we’re very active outside of the U.S. and by no means we’re underestimating, the potential market outside of the U.S., but we are obviously active in China, NeutroPhase was launched and we are expecting to start marketing Avenova in some fashion in China and we need some regulatory guidance there from China FDA. And rest of the world again in Israel for example, there is regulatory approval that are needed. So we typically we like to partner and then have our partner go for regulatory approval, except in Europe, where we’ve actually taken the lead. Ed Woo Great, well, thank you and good luck. Ron Najafi Thank you. Tom Paulson Thanks, Ed. Glenn Moro Thank you.

[Operator:]

[Operator Instructions] Our next question is from Bill Mahon with WK Mahon. Bill Mahon Hello. Tom Paulson Yes, Hi Bill, how you doing? Bill Mahon Okay, Tom, how about yourself? Tom Paulson Yes good. Bill Mahon I have relatively easy question. Are the reps referred to them as reps, are they working solely for you? Glenn Moro Yes, they are. Bill Mahon For some other products? Tom Paulson No, no. I’ll answer that Ron. Glenn Moro Go ahead. Ron Najafi They are working only for us, they are NovaBay reps and at this point they are only carrying NovaBay, particularly Avenova. Bill Mahon Good. And then, the other question is how do you pay them? Glenn Moro [Indiscernible] much like a pharmaceutical arrangement where they have a base salary and then they have an opportunity to make a bonus and as they reach certain goals their bonus gets higher. Bill Mahon Okay. So, there is good incentive in that one. Glenn Moro Not yet. Bill Mahon But they are not, in other words it’s not a draw, it’s an actual salary. Glenn Moro It’s a salary, yes. Bill Mahon Yes, as opposed to a draw, you know what I’m talking about? Glenn Moro Yes, they are compensated like your average pharmaceutical rep. Bill Mahon Okay, alright, thank you. Glenn Moro Thank you. Bill Mahon Hey Tom, I’ve got some more questions, but I don’t want to take up a lot of time on the call. So if you don’t mind, I’ll give you call tomorrow. Tom Paulson So, please do. Bill Mahon Okay, that’s well. Nice Tom, Tom Paulson No problem, thanks, Bill. Bill Mahon Again good quarter, by the way. Bye. Ron Najafi Thank you, thank you.

[Operator:]

Our next question is from Yale Jen with Laidlaw. Please go ahead with your question. Yale Jen Thanks operator for the taking follow-up question. Just a quick one that, Glenn you mentioned that the rep will move or enter stabilize at up top 250s. So is that mean that the earlier state of the timeline in terms of mid year could be further expanded or that timeline is still hold? Glenn Moro Yes, it’s quite possible that it could be expanded. We’re examining that right now, and what we want to do is we want to make sure that as we expand we’re able to optimize every record we put in field. So that’s our question we’re wrestling with now and there’s a possibility we may extend that back to when we get to the 50. Yale Jen Okay, great, thanks a lot, I just wanted create like that. Thank you. Glenn Moro Thank you.

[Operator:]

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

[Ron Najafi:]

Thank you again for joining us and for your interest in NovaBay. We’re excited about our progress and the momentum that’s building for Avenova. We look forward to keeping you updated on our progress. Have a wonderful day. Thank you.

[Operator:]

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please, disconnect your line.