Teligent, Inc.
Q4 2019 Earnings Call Transcript

Published: 8 Apr 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Teligent Incorporated Fourth Quarter and Full Year 2019 Results Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions].Except for historical facts, the statements in this presentation as well as oral statements or other written statements made or to be made by Teligent Incorporated are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. For example, without limitation, statements about the Company’s anticipated growth and future operations, the current or expected market size for its products, the success of current or future product offerings, and the research and development efforts and the Company’s ability to file for and obtain U.S. Food and Drug Administration approvals for future products are forward-looking statements. Forward-looking statements are merely the Company’s current predictions of future events. The statements are inherently uncertain, and actual results could differ materially from the statements made herein. There is no assurance that the company will achieve the sales levels that will make its operations profitable or that FDA filings and approvals will be completed and obtained as anticipated.For a description of additional risks and uncertainties, please refer to the Company’s filings with the Securities and Exchange Commission, including its latest Annual Report on Form 10-K and its latest quarterly reports on Form 10-Q. The company assumes no obligation to update its forward-looking statements to reflect new information and developments. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Damian Finio, Teligent Incorporated Chief Financial Officer. Thank you. Please go ahead, sir.

[Damian Finio:]

Thank you, Daniel and good morning everyone. I'm Damian Finio the Chief Financial Officer of Teligent. I'm joined on this morning's call by our new President and CEO, Tim Sawyer. Before introducing you to Tim, on behalf of all employees at Teligent, I wanted to take a moment to thank our former President and CEO, Jason Grenfell-Gardner for his vision and significant contributions made to this organization.Now, this morning, I'm excited to introduce you to our new President and CEO, Tim Sawyer. He brings over 26 years of experience in the pharmaceutical industry, having held a variety of senior executive positions in general management, marketing and sales. Prior to joining Teligent, Tim spent 16 years at Barr Laboratories, eventually serving as Executive Vice President, Global Generic Sales and Marketing, where he led a team of nearly 2000 employees in 25 countries. Subsequently, Tim held positions such as Senior Vice President, Corporate Strategic Development at Mylan and President Retail Medicine at 1-800 Doctors Inc. Most recently, Tim served as Chief Executive Officer of Geritrex, a manufacturer and marketer of generic over-the-counter pharmaceuticals.Since Tim joined on February 5th, his leadership style has been consistent and it's no surprise he's had success in this industry. He's a great listener, adept at building relationships quickly, crystal clear with his expectations, and does not hesitate in holding individuals accountable. We are confident in his ability to lead this organization through the next phase of our evolution. And with that introduction, I will hand the mike over to Tim. Tim.

[Tim Sawyer:]

Thanks, Damian. Good morning and thanks for that kind introduction. I truly appreciate the time you've spent helping me get up to speed quickly. Thank you. I'm Tim Sawyer, the new President and CEO of Teligent. I'm delighted to be here with you this morning to discuss the Q4 and full year 2019 results for Teligent. It's been five months since Teligent's last call with investors so needless to say, Damian and I have a lot of topics to cover this morning.I'd like to start by thanking the Teligent employees, Board of Directors, and the many stakeholders including shareholders, creditors, customers, and vendors for their warm welcome. Thank you. I look forward to working with you as we drive Teligent's business forward. During my first eight weeks at Teligent I've been very clear with all of these stakeholders about my top three priorities. First, resolving the warning letter issued by the FDA in November of 2019; second, passing the pre-approval inspection of our new injectable manufacturing facility in Buena, New Jersey; and third, managing cash flow. Before walking you through these priorities in more detail I'd also like to highlight that I believe in the company's TICO, topicals, injectables complex and ophthalmic strategy. My plan is grounded on efficiently executing this strategy, not fundamentally changing it. I worked in the pharmaceutical industry for nearly 30 years, I've seen strategies, companies, people and products come and go. But regardless of the ever shifting headwinds this industry has faced for decades, the companies that succeed know how to execute and to execute you need to build an organization hyper focused on delivering an uninterrupted supply of high quality, low cost pharmaceutical products to its customers. My plan is to execute the TICO strategy, not change it.Let's talk about our first priority, resolving the FDA warning letter. There are two phases to the warning letter remediation. Phase one is a physical audit of our facility conducted by a third party auditor. This phase is intended to show that the current processes, procedures, and policies of the company are compliant for pharmaceutical products. This phase has been completed and the report was submitted to the FDA. Phase two is the documentation, audit and review. This ensures that all products on the market that are within expiry are verified as safe, effective, and fit for use. This phase is nearly complete and we expect to file our final response to the agency in the coming days. Although ultimately only the FDA can decide to lift the warning letter, I feel confident in the company's remediation efforts led by our enhanced quality team.Regarding the second priority, passing the pre-approval inspection, we engaged the third party auditor previously mentioned to conduct a mock audit of our prior approval supplement application and the Buena facility, which included the new sterile facility. At the conclusion of the audit we reviewed the findings and our quality and operational teams have worked diligently to address their observations. We believe we are prepared for the FDA inspection. Our original intent was to use our Ranitidine product to trigger this PAI. However, in light of the FDA action on Ranitidine in last week, including requesting the market withdrawal of all Ranitidine products, this is unlikely and we will shift to our next injectable product to trigger the PAI. This product is expected to be filed shortly after the warning letter is submitted in the coming days.Again, although it's ultimately up to the agency to decide, our preference and intent is to work with the FDA to perform a combined inspection in Buena that covers both what's necessary to lift the warning letter and approve our sterile facility for commercial production. Managing cash flows has been and will continue to be a priority under my leadership. The organization was successful in reducing discretionary spending and redeploying the savings to fund more investment in our quality department previously. Cost savings however, are an integral part of a generic company and we will continue to focus on savings that impact our cost of goods to enable Teligent to remain cost competitive in the marketplace.Another area of focus has been on the company's capital structure. As you'll hear from Damian, he has led the team in retiring, issuing, and swapping convertible bonds in addition to executing amendments on our revolving credit facility and term loan with Ares Capital. Efforts to reduce costs will continue and the capital structure will continue to evolve. We also continue to work with our development partner and the FDA to address the second complete response letter received on our complex drug application. And finally, we continue to work with Leerink on the non-core asset divestiture process initiated in October of 2019. We are progressing and we'll provide updates as appropriate. At this point, let me turn the call over to Damian so he can provide more insight to our actual and projected financial performance and a few other important topics. At the conclusion of Damian's remarks, I'll share some final thoughts before opening it up to your questions. Damian.

[Damian Finio:]

Thanks, Tim. Our last earnings call was in November of 2019 so I would like to spend a few more minutes than usual in order to provide you with a full update on four important topics. Number one, actual and projected financial performance; number two, key highlights of the areas loan amendments announced earlier today; three, liquidity; and finally four, our listing status with NASDAQ. So let's start with the first topic, actual and projected financial performance. Consolidated net revenues for the fourth quarter of 2019 were $16.7 million, bringing full year 2019 revenues to $65.9 million or a 4% short of our last full year guidance. Fourth quarter revenues were dampened by failure to supply fees of $0.8 million, $0.4 million of which were incurred in Canada. And although difficult to quantify, it's reasonable to assume that past supply disruptions coupled with the non-core asset divestiture process initiated on October 1st and the warning letter issued by the FDA in late November 2019 combined to dampen demand for our products. As we work through these challenges efforts to smooth the ongoing process of balancing supply and demand will be further emphasized and with Tim's experience and leadership in this area, I remain confident that we will get there absent any COVID-19 related business interruptions.GROSS margin for the fourth quarter was 12%, a 3100 basis point decline from the 43% realized as of year-to-date September 30, 2019. Unfavorable customer and product mix accounted for 1700 of those 3100 basis points decline in the fourth quarter. Price erosion accounted for another 1000 basis points while incremental inventory reserves accounted for the remaining portion of the quarter-on-quarter decline. Fourth quarter total operating expenses were consistent with previously reported September 30th year-to-date results. Specific to product development and research expenses the incremental expense realized in the fourth quarter was driven by $.9 million non-cash write off of a prepaid asset relating to a delayed tech transfer between two of our injectable contract manufacturers. Specific to selling, general, and administrative expenses, we continue to incur legal fees as we vigorously defend our position in ongoing litigation. However, for a company of our size, legal fees of $1 million in the fourth quarter and $3.7 million for full year 2019 are material.As reported in today's press release, adjusted EBITDA for the fourth quarter was a loss of $4.3 million. That said, consistent with what I described earlier, this loss includes the $0.8 million of failure supply penalties recorded as an offset to revenue, the $0.9 million write off recorded in product development and research expenses, and the continuing legal defense costs. In terms of full year performance, the company posted 65.9 million of revenue, which is consistent with 2018. Despite the less than expected performance in the fourth quarter of 2019, year-on-year gross profit improved by $0.7 million or 3%, while gross margin improved 200 basis points from 34% to 36%.Fourth quarter financial performance led to a shortfall in our goal of forging the path to profitability in 2019 as we posted adjusted EBITDA equivalent to a $0.2 million loss for the full year. We filed for a 10-K extension on Monday, March 30th. The extension provides us with an increment of 15 days. Additional time was needed to execute the loan amendments with Ares and add the resulting and required subsequent event disclosures to Form 10-K. We intend to file by the end of this week, but certainly before the extended deadline of April 14.Lastly, in terms of projected financial performance, we will not be providing 2020 financial guidance on today's call. There are several major variables weighing on our ability to accurately project and deliver our 2020 financial targets. Aside from the impact COVID-19 might have on our manufacturing capability and to our patients demand for our products, Teligent is also operating under a warning letter. As a consequence of that warning letter, our filed topical ANDAs will not be approved and the injectable pre-approval inspection will happen either in parallel or after warning letter resolution. Variables such as COVID-19, a warning letter, pre-approval inspection, complex drug application, and the non-core assets divestiture process are material and not entirely within our control. For all of these reasons, we will not be providing 2020 guidance today. However, we do anticipate reporting an approximate 50% decline in first quarter 2020 revenues. Looking beyond the first quarter of 2020, assuming successful resolution of the material events mentioned, we would expect to see financial performance improvement over the remainder of the calendar year.This leads me to the second of the four topics I'd like to cover. Matters providing key highlights to the loan amendments announced earlier today. Both our actual 2019 financial performance and medium-term projections were reviewed and discussed in detail with our secured creditor Ares Capital. As announced some of those collaborative discussions we executed amendments to both our first lean revolver and secondly in term agreements on April 6, 2020. These amendments served to eliminate the original fourth quarter 2019 financial covenants, while significantly reducing the financial performance required to meet financial covenants going forward. For the four quarters of 2020, the company must record trailing 12 month net revenues of $59 million, $55 million, $54 million, and $57 million respectively.Beginning with the quarter ended March 31, 2021 the company must report trailing 12 month adjusted EBITDA performance in excess of a range beginning with $10 million, increasing to $14.5 million for the last quarter just prior to loan maturity. Also, the calculation of adjusted EBIDTA for the amendment now includes certain add backs including but not limited to legal expenses within certain limitations. In addition, the amendments provide the company with the option to continue picking or deferring cash interest paid on the term loan for an additional year if the company is successful in resolving the warning letter and passing the injectable pre-approval inspection by December 2020. If only one of those items occurs by this time then the company may still elect to pay interest in time during 2021, but only from the time the second condition has been satisfied. Beyond December 2021, a portion of interest on the loans accruing at a rate of 4.25% per annum may continue to be paid in time.Although our preference is to generate the operating cash flow needed to service our debt to avoid the compounding effect of ticking interest, this provision improves the company's ability to maintain the liquidity needed to execute our strategy. In consideration of the relaxed covenants and potential to extend the pick option, the cost of capital increased. The amended interest rate on the first lean revolving credit facility is LIBOR plus 5.5% with a 1.5% LIBOR floor. The new rate is about 100 basis points more than at loan inception in December 2018 or 225 basis points more than the rate just prior to executing the amendment. The difference between the increment at loan inception versus today relates to the 15 month decline in LIBOR. The amended interest rate on the second lean term loan is LIBOR plus 13% also with the 1.5% LIBOR floor. The new rate is about 350 basis points more than at loan inception or 475 basis points more than the rate just prior to executing the amendment. Again, the difference between the increment at loan inception versus today relates to the 15 month decline in LIBOR.Lastly, Ares was granted approximately 5.4 million warrants at the cost of $0.01 per warrant, equivalent to just under 10% of the outstanding shares of the company at December 31, 2019. More detail on these loan amendments will be made available to the public when we file Form 8-K after market closed today. Going forward by resolving the warning letter, passing the pre-approval inspection, and consistently achieving positive financial results, COVID-19 aside, our credit profiles should improve and we will be in a better position to work with Ares Capital, our existing bondholders, and potentially new creditors to address our capital structure and must reduce our cost of capital.Having reviewed the key highlights of the loan amendments let's move to topic three of four, our liquidity. As you heard Tim mentioned in his opening remarks, one of our top priorities is to manage cash flows and I will add, particularly in the second quarter of 2020. Given the impact COVID-19 might have on our business and less than anticipated cash collections from customers as a consequence of the decline in the first quarter of 2020 revenues, available cash balances will decline over the course of this quarter. We issued Series B May 2023 convertible bonds in the fourth quarter of 2019. We used 29.3 million of gross proceeds from those bonds, plus the final $10 million draw from our term loan with Ares to cover fees associated with the capital raise, pay down current liabilities, retire $13.1 million of December 2019 convertible bonds, and provide the company with further liquidity.With the increasing current assets and declining current liabilities associated with this bond issuance and term loan draw, working capital at December 31, 2019 increased to $45 million. This represents a $28.4 million improvement in working capital from what we reported at September 30, 2019. More specifically, we ended the year with 15.5 million of cash on the balance sheet. In order to preserve cash, we will continue to pick or defer cash interest payments on our Series B May 2023 convertible bonds and the term loan with Ares keeping in mind the company now has the potential to extend this option for another year if we are able to resolve the warning letter and pass pre-approval inspection by December 2020.We continue to pay regular interest on our Ares revolving credit facility, as well as our Series A May 2023 convertible bonds. With the loan amendments announced today, Teligent's quarterly 2020 cash interest payable to Ares will increase by about $150,000. This increase relates solely to the estimated 225 basis point increase on the revolving credit facility. And our next semi-annual interest payment to bondholders is $1.6 million and is payable on May 2020. Lastly, we, like many other companies with less than 500 employees are exploring and have applied for COVID-19 relief made available by recently passed State and Federal Legislation in the form of payroll related reimbursements and low cost Small Business Association loans.Now let me switch gears to the last topic, our NASDAQ listing status and potential for a reverse split of our common stock. In June 2019 we received a delisting notice from NASDAQ due to our share price trading below $1 for 30 consecutive trading days. The notice specified that our share price must trade above $1 per share for 10 consecutive trading days prior to December 2, 2019 in order to prevent our common stock from being delisted. On December 2, 2019 we had yet to regain compliance. We requested the second 180 day extension, NASDAQ denied that request and the company chose to file for an appeal. The company was granted a hearing date for the end of January 2020. Subsequent to the appeal hearing, shareholders approved a reverse stock split in the range of any whole number ranging from 5 and 10 to 1 and soon after we were informed by NASDAQ that our appeal was denied.In light of the COVID-19 impact on the markets, NASDAQ set a deadline to regain compliance of June 1, 2020. Although possible, it is not probable that business performance alone, particularly as we navigate through COVID-19 related challenges, will be the catalyst to increase the share price above $1. If our shares are delisted from the NASDAQ, we would be in default of the non-financial covenant required by our senior credit facilities and convertible bonds, and we would need to seek a waiver or seek new capital, thus leaving reverse stock split as the only remaining option to prevent this occurrence. While we believe that the reverse stock split will ultimately increase our share price above $1 for the required 10 consecutive trading days, we can provide no assurances this will be the case. With that, let me now turn the call back over to Tim for his final remarks before we move to the question-and-answer portion of today's call. Tim?

[Tim Sawyer:]

Thanks, Damian. I can confirm my first two months here at Teligent have been exciting. As Damian and I highlighted, the company has some headwinds. However, the untapped potential of this company is evident and I'm thrilled to be here and confident that I have the management team and employee base needed to execute efficiently to achieve our objectives. We hope that you and your families are safe and in good health. Our teams here at Teligent, particularly those onsite working in Buena, inspire me every day. Their dedication, commitment, and loyalty to both this company and our customers and patients is admirable. During this pandemic, we have taken many extra steps to protect our employees and I'm glad to report that no Teligent employee has tested positive for COVID-19.Manufacturing in Buena and distribution from our third party logistics provider has been thankfully uninterrupted. We are recognized as an essential business in each municipality and country where we are located, and as such we are operating as normal. We continue to closely monitor our supply chain to ensure we have the materials necessary to produce our products. To-date, we have not experienced any significant delays in production thanks to the commitment of our operators. We're proud to have a U.S. manufacturing facility for our products. We look forward to utilizing its expanded capacity upon approval from the FDA. With that, I will now ask Daniel to open up the call to questions. Thank you.

[Operator:]

[Operator Instructions]. Our first question comes from Matt Hewitt with Craig-Hallum Capital Group. Your line is now open.

[Matt Hewitt:]

Good morning. Tim welcome, nice to hear from you this morning. I've got a few questions. Maybe the first that you could start with is what attracted you to this opportunity, where do you see that the near-term low hanging fruit, and how quickly do you think you can capitalize on that?

[Tim Sawyer:]

Thanks. So I think a couple of things first, what attracted me to the opportunity? Obviously, you heard a bunch about headwinds and things today, but what attracted me to the opportunity specifically is the product portfolio and the injectables transition that the company had that was undergoing at the time that I joined. I think injectables are a critical component to the medical treatment protocol. I think that they are an area where there is lots of opportunity, particularly as you've seen in the marketplace with drug shortages if you track that area. So I think that was very, very interesting to me and I think that the ability of this company to launch into that market is really exciting. So that's the first part. The second part, what do I see as low hanging fruit? I think the first thing that we did and are doing is improving our product supply. So one of the things that this company was burdened with previously was they were unable to be a reliable supplier for customers. And customers demanded that in this marketplace, not being an intermittent supplier and that causes lumps in your sales, lumps in your earnings. And so we've undertaken a comprehensive plan to overhaul our supply chain and our processes for how we work and forecast and predict our business going forward. So that's the first thing, is to become a reliable supplier for our customers. And that will pay off in dividends when our customers see us as such and are able to rely on us day in and day out when we become their first year call when they're looking for new products. So I think that's a very low hanging fruit for us. And I think I might have forgotten what the third part of your question was.

[Matt Hewitt:]

No, that's perfect. Thank you. You touched on one of the things, so as you look at getting the injectables facility up and approved by the FDA, one of the opportunities with the first drug that was submitted was that it was a drug that had a history of shortages, whatever. As you look at shifting to a second submission to garner or to trigger the inspection is that your plan with that second submission is defined an opportunity where it's a drug that is either is currently on shortage or has a history of being at shortage, or maybe even there's an opportunity within something within the corona virus treatments where there's a need and a demand that would trigger the FDA to maybe come in sooner rather than later?

[Tim Sawyer:]

Yeah, so good question. So what we're looking at, the second product obviously will be filed here shortly. It doesn't have a shortage currently. However, as a part of ANDA and it's a pre-approval supplement, as I mentioned, what's good -- what will happen is there's a statutory timeline that the FDA has to come in and inspect for because they have to respond to the agent -- to the supplement within a certain number of months. So, number one, this product allows us to push a faster track on that. Number two, we are always, and what you mentioned is important, we are always looking for opportunities to accelerate the timeline. And if there are COVID-19 related ways to do that, we will pursue them vigorously to work with the agency to get to accelerate that approval for the facility.

[Matt Hewitt:]

Okay and then -- and I don't know if you know the answer to this, but I'd thought I'd ask it anyway, given the situation with the country right now are there -- are you hearing anecdotally any issues with the FDA conducting inspections, I know that they're considered obviously an essential business and they're still going to work but is that slowing down the inspection process in any way that you have heard?

[Tim Sawyer:]

They have made a couple of announcements at the agency about delaying inspections of certain -- particular types. We believe that, quite frankly, we believe that with what's going on with this pandemic, the fact that we are a U.S. manufacturing facility located in New Jersey as we talked about on the call that we would want to -- that there is an incentive for them to approve domestic manufacturing capacity. And so we believe that they will want to do that with us and we'll give them every reason to approve us. So we're going to move forward quickly. But we think that there's an incentive for them to do that.

[Matt Hewitt:]

Understood, and you actually just touched on another question I had maybe just elaborate a little bit further, given what's happened regarding the corona virus COVID-19 and what appears to be at least the initial stages of a desire to bring more manufacturing back into the country versus China, India, what not. How does that sets you up, let's assume we get through the headwinds over the next year, get through these inspections and what not, how does that sets you up going forward given your domestic capacity?

[Tim Sawyer:]

I think it sets us up well. Obviously, we are right in the wheelhouse there being a domestic manufacturer. I think it sets us up for the potential for success and while we don't know exactly what we can -- it's also hard to predict exactly what the FDA or what quite frankly, the government will do but we feel good about being a domestic manufacturer and we feel good about the opportunities if that's going to present for us in the future.

[Matt Hewitt:]

Okay, that's great. Thank you very much.

[Tim Sawyer:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Tim Sawyer, President and CEO, for any closing remarks.

[Tim Sawyer:]

Alright. Thank you all for your time and attention this morning. That concludes our call. Have a great day.

[Operator:]

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.