Sonoma Pharmaceuticals, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Jun 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Oculus Innovative Sciences Fiscal Fourth Quarter 2016 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Dan McFadden. You may begin.

[Dan McFadden:]

Thank you, Latoya. Good afternoon and thank you for joining us. With me on the call today are CEO, Jim Schutz; and our CFO, COO, Bob Miller. We will open the call with Bob Miller’s review of our financial results for the quarter and fiscal year followed by Jim’s update on the business strategy moving forward. This afternoon, Oculus issued a press release detailing fiscal fourth quarter 2016 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is oculusis.com or you can call Investor Relations at 425-753-2105 and we will be happy to assist you. Before we begin, I remind listeners that this conference call contains forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words as expect, to expand, would and anticipate among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risk inherent in the development and commercialization of potential products, the risk that potential clinical studies or trials will not proceed as anticipated or may not be successful, or sufficient to meet regulatory standards, or receive the regulatory clearance or approvals. The company’s future capital needs and its ability to obtain addition funding and other risks detailed from time-to-time in the company’s filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q and annual report on Form 10-K. Identified product applications and/or uses are intended to highlight potential applications for the investment community and does not infer that the company is marketing for these indications. The company does not provide any assurances that such applications will receive regulatory approvals. Oculus disclaims any obligation to update these forward-looking statements. So with that, I will now turn the call over to our CFO, Bob Miller.

[Bob Miller:]

Thank you, Dan. I will first discuss the financial presentation of our businesses; secondly, our key strategies to achieve strong revenue growth for fiscal year 2017; third, a review of the financial results for our derm strategy and our overall financial results for the fiscal year and fourth quarter ending March 31, 2016; and lastly, we will provide some revenue guidance for first quarter ending June 2016. First of all, we have provided the detailed financial presentation of our businesses compared to last year separating product revenues, which are shown on the last page of the press release into two categories

[Jim Schutz:]

Thank you, Bob. We promised shareholders in late 2014 that we would execute on the strategy with four key steps that we continue to believe will transform the company. For my portion of today’s call, I will cover each of those four key strategic initiatives and then breakdown one, what we promised two, how we are doing to get that promise and three, take a brief look at the future. So first, we promised shareholders that we were going to pick U.S. dermatology as our core market, with our own direct sales force using our Microcyn technology as the cornerstone, building a pipeline of unique affordable and branded products. So how are we going in that first step, as Bob said, we now have 20-plus salespeople, selling seven prescription products and our U.S. derm sales revenue grew more than 120% in the last 12 months. So what’s the future of our U.S. dermatology efforts, we would eventually want to like to get to that 35 sales reps range covering 3,000 to 5,000 dermatologists in the United States and adding one to two new reps in new territories each quarter to get to that 35. Our sales team is enthusiastically looking for to our first product for the esthetic dermatology space. As you may remember, we just received an approval for Lasersyn a product for post lasers, chemical fields and derm operations. Something we believe will be great play in the aesthetic dermatology space. We forecasted our U.S. derm revenue is going to grow more than 50% over the next 12 months. So step two in our strategic plan is that we promised shareholders that all of our non-core markets, you may remember non-core markets are Latin America, Europe, Asia, animal health and our own advanced wound care businesses. We promised all those non-core markets will be breakeven by now and throwing off cash so we can grow our core market U.S. dermatology faster. So how have we done on that step two promise, we are pleased to report that all of our non-core businesses Latin America, Europe, Asia animal healthcare and our advanced wound care businesses were all breakeven as of June 30, 2016. So what’s the future for our non-core businesses, the team continues to work diligently on taking our terrific U.S. line of products and monetizing them around the world. We sell in more than 42 countries and in particular, we are starting to show growth in our international dermatology product sales in Asia and the Middle East. We look forward to Latin America and Europe picking up steam in our derm partnering efforts soon. Step three in our strategic plan is that we promised shareholders that we would diversify into non-microcyn based technologies via license or acquisition to become a multi-technology dermatology company. So how have we done on that step three promise, as you may remember, we in licensed Ceramax from a well known European formulator with an FDA claim for atopic dermatitis. We finalized the license, achieved an FDA approval and launched Ceramax in April. Our sales team believes Ceramax could become our top seller in the next six months. We also acquired U.S. marketing license to Mondoxyne and NDA indicated for severe acne. Mondoxyne has become our best seller by dollars and is supported by robust clinical trials. So what’s the future for our step three, which was to diversify into non-microcyn based technologies. We recently finalized a license for our third product from a German pharma company as the descaler for atopic dermatitis and eventually psoriasis. We hope to file with the FDA this summer and are planning our sales launch within about six months. We also licensed two more interesting European products for our pipeline and we will provide more information in the future. Stay tuned for more products here, more new products here. Our approach with these innovator companies, especially outside the United States has become a real plus. We can now tell these innovator companies, we have 20 plus U.S. sales people, and our territory footprint is growing every quarter. What do you have that we can put in the bag and sell here in the United States? Finally, we promised shareholders in our fourth and final step in our strategic plan is that we would identify orphan drugs or low-cost NDAs to develop for our growing sales team to sell in the future. So how are we doing in that fourth and final step? We filed an interesting orphan indication with the FDA earlier this spring and hope to have news we can share with you on that orphan designation for rashes associated with – excuse me for rashes associated with certain chemotherapy agents. And again we will keep you posted on news as it becomes available. We are also enrolling patients in North Carolina for a proof-of-concept trial for the use of an interesting new hypochlorous acid-based topical formulation from our own R&D for moderate acne. Again, we will keep you posted on clinical results shortly. In summary, we will continue to grow in four ways. One, we will grow by selling more of our current 7 products, and remember please that we are selling Alevicyn and Ceramax product lines for atopic dermatitis, Mondoxyne for sever acne and Celacyn for scar management. The second where you want to continue to grow is by adding additional products to our sales bag. And as Bob mentioned, our target is one new product per quarter, including SebDerm for seborrheic dermatitis, the skin descaler product that we licensed from this German pharma company, and Lasercyn for post-laser chemical peels and dermabrasion procedures. The third way we will grow is by adding new sales reps in new territories. And finally, our fourth way we are going to grow is by gentle price increases. Thus far, using these four growth tools, we have grown our U.S. derm business, as Bob said, at an average quarterly growth rate of 62% for the last four quarters. Going forward, we will use the same four growth tools to keep our U.S. derm business growing at more than our forecasted 50% over the next 12 months. So, Bob covered our numbers and provided guidance for the quarter ending June 30, 2016. I covered each of our four strategic steps that we were working on to transform this company, and then for each broke down what we promised how we are doing against that promise and then a brief look at the future. So with that, operator, please open the call for Q&A.

[Operator:]

Thank you. [Operator Instructions] The first question is from Laura Engel of Stonegate Capital. Your line is open.

[Laura Engel:]

Thank you. Appreciate all the detail. Love the U.S. sales ramp that’s looking great. I had just a few questions. So, tell us a little bit about the sales team as far as the numbers you have added, the performance you expected versus what you have gotten? And then, how they are penetrating these new markets with what’s currently in their bag for sale versus what the expectations were?

[Jim Schutz:]

So, we initially started out with about 10 and as – we have been adding, periodically on average one or two a quarter and we are now up to 20. We have done an analysis of rate of return on our salespeople, which we do every quarter and for the quarter ending March, we were in a position to cover all of their cost, their direct cost. And so we feel like we have done a good job of covering that big expense item and we will continue to grow it to get that business to breakeven and then continue to grow that business to get to breakeven. Now, did you want a little more detail on the salespeople? Most of the salespeople are people that we initially hired. A couple of people that were not, that familiar with derm. And we fairly quickly replaced them with people that are familiar with derm and have a book of business and we – even though we have to pay them a little more we found that, that is far better approach and they go up to ramp. The sales ramp is generally in the 6 to 9-month period for a salesperson. It’s pretty quick in dermatology. That’s a little more color. Anymore specific questions?

[Laura Engel:]

Yes, no, no, no, that’s great. Just trying to get a feel for how that’s breaking up. And then related to the Latin American numbers as far as do you expect any additional issues with Sanfer and the warehouse closings? And going forward, how should – how should we and how are you kind of thinking about the Latin American segment?

[Jim Schutz:]

Well, we are very bullish on our partner. In fact, their Sanfer Laboratories, we have told them that this is public information. It is very interested in going public down in Mexico. And they are a 400, 500 and actually they maybe bigger than that now, because they acquired another company, a good company. They are our powerhouse. Now, when they acquired More Pharma, which was our partner, they acquired a number of warehouses, which they closed down in the quarter in March. And as a result of that, they didn’t need as much in the way of units, so they cut back on what they purchased. They have told us that, that’s over. They have given us reasonably good forecast for the rest of the year in local currency. Obviously, there is an impact of peso on our revenue growth down there, even though we are in a pretty square position overall from the peso perspective. So, we would expect it to see a return to normal, if you will and then over the years see unit growth in Mexico.

[Laura Engel:]

Okay. And then I am also interested and I didn’t hear you mentioned any update from the animal healthcare business?

[Jim Schutz:]

Well, we used to happen to have an animal healthcare guru on the line with us. Dan, you want to jump in?

[Dan McFadden:]

Sure, this is Dan. On the animal wellness, guru or czars as Jim refers to, we are very happy, we have if you have read previous press releases we partnered our U.S. and North American animal health care with Manna Pro out of St. Louis, great private company doing very well. And even though we don’t breakout our financials separately for the animal health, they are doing a great job, have placed us in a national farm and ranch chain with over 1,500 locations with 9 of our SKUs. So, it’s all looking great. We are seeing the numbers grow quarter-over-quarter. At the same time, we are now expanding our footprint into Europe. We just returned from Interzoo and then, in the U.S. we have Superzoo coming up in August. Also we are now starting to focus on the ethical market going after the North American veterinarians. So, number of opportunities there and we think they are all really robust opportunities.

[Laura Engel:]

Great. Well, I appreciate the information. I will hop back in the queue and let some others have a shot at it. Thank you and again great information and impressive sales.

[Dan McFadden:]

Thank you.

[Jim Schutz:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] I am not showing any further questions in the queue. I would like to turn the call back over for any closing remarks.

[Jim Schutz:]

Hey, thank you very much for joining us. We look forward to talking to you again in the earnings call in August for the quarter ending June 30, 2016. Thanks very much.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect.