Teligent, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Teligent, Inc. Second Quarter 2018 Results. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. 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 Inc. 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 report on Form 10-Q. The Company assumes no obligation to update its forward-looking statements to reflect new information and developments. I would now like to introduce your host for today's conference, Jason Grenfell-Gardner, President and CEO. Please go ahead.

[Jason Grenfell-Gardner:]

Thank you, Mony, and good afternoon, ladies and gentlemen. Welcome to the Teligent business update covering the second quarter of 2018. I am Jason Grenfell-Gardner, the President and CEO of Teligent, and I'm joined today by Damian Finio, our Chief Financial Officer. Thank you for joining us today. I'll be providing you an update on the core elements of our business and the latest on our expansion plans. Damian will then provide a more detailed breakout of our financial performance for the second quarter. Today, we released results for the second quarter that showed significant growth in our core business. Net revenue for the quarter was strong at $16.8 million despite the adoption of accounting rule 606, which you will recall have the effective reducing net revenue and cost of goods sold as detailed in our press release and financials today. Revenue growth for the quarter was really driven by two key factors

[Damian Finio:]

Thanks, Jason. And good afternoon everyone. I would like to start by walking you through our financial results for the second quarter of 2018. Then provide an update on market guidance for the full year, ending with a quick mention of our near-term priorities. Let's start with the results for the second quarter. Upon adoption of ASC 606 revenue from contracts with customers, revenues for the second quarter were $16.8 million, which includes another strong quarter of revenue from Canada of $4.8 million. Total revenues were ahead of our internal target and reflects 15% growth over the first quarter of 2018. In comparison to the second quarter of 2017, revenues declined 9%. This decline was driven by lower revenues for Lidocaine 5% ointment and 4% topical solution, Zantac, and a $0.9 million decline in contract manufacturing and other partnered product revenues. These declines, however, were partially offset by an increase in all other U.S. Teligent-labeled products and a $1.3 million or 39% increase in revenues generated by our Canadian business versus the second quarter of 2017. Gross profit for the second quarter of 2018 was $5 million or 30% of revenues, which is below our 2018 guidance of 35 % to 40%. As mentioned in today's press release, we recorded a $0.5 million lower cost to market adjustment for inventory on hand at June 30 that sold for a loss in the second quarter. This adjustment alone lowered second quarter gross margin by three basis points. In addition, product and customer mix, gross margin loss on products sold in the quarter and higher freight charges to ship much-needed product on drug shortages in Canada accounted for remaining portion of the gross margin shortfall. SG&A for the second quarter was $6 million, which includes $800,000 of bad debt expense. Although now reserved for from an accounting standpoint, we will continue to actively pursue collecting these past due accounts. Excluding $800,000 of bad debt, the remaining $5.2 million of SG&A represents a 9% increase over the second quarter of 2017. This is due primarily to the year-on-year growth of our employee base and increase of fees associated with ongoing litigation, audit and other consulting needs as we continue to scale up the organization we need in place to both run and support the expanded facility in Buena, New Jersey. R&D investment for the quarter was $4 million, which represents a 22% decline over the same period a year ago. This is due to a decline in development cost as we move from toppable to injectable-focused development, strive to bring more testing in-house to reduce costs and tighter expense management of supplies needed to run the labs. Lastly, we recorded an operating loss in the first quarter of $4.9 million or $3.6 million when the lower of cost or market adjustment and bad debt expense recorded this quarter are taken into consideration. Bridging from our reported operating loss to the net loss reported for the quarter, we posted a foreign exchange loss of $3.2 million. This amount fluctuates quarter-to-quarter based on changes in exchange rates between our three operating currencies, the U.S. dollar, the Canadian dollar and the Euro. In addition, the consolidated statement of operations reflects $12.6 million of interest and other expenses for the period. This figure is after capitalizing $1.5 million as part of the facility expansion. Of the $12.6 million, $10.9 million is non-cash and relates to debt discount and debt financing amortization for the three debt events executed in the quarter, namely the early and partial extinguishment of December 2019 bonds, which is $10.1 million of the $10.9 million of non-cash interest expense. And the issuance of December 2023 bonds and the term loan with Highbridge. Taking both the foreign exchange loss and total interest expense incurred for the period into account, the company's net loss was $20.7 million in the second quarter. Shifting to the balance sheet, I wanted to highlight a few items relating to cash. To stay the course of our intent to continue launching new products and bring the construction of our injectables' facility in Buena, New Jersey to completion, we executed a term loan for $25 million on June 1, of which $15 million of fees was received upon closing. Cash collections from wholesalers continue to be dampened by the impact of customer credits coming due to private invoices. Although I've mentioned this previously, I think it's worth mentioning again, from a cash perspective, launching products in rapid succession has a drag on short-term cash collections. Wholesalers begin shipping our products to customers at our contract price. Customer credits in the form of chargebacks come due when the wholesalers ships the product, even though their payments to Teligent for the product they purchased from us comes due later. In addition, we paid $2.5 million of interest from a convertible bonds this period and another $4.3 million for the general contractor overseeing our manufacturing expansion, which brings the year-to-date total cash outlay for the expansion to $11.2 million. In respect to guidance for the full year, despite the impact of ASP 606, we are maintaining our revenue guidance of $70 million to $78 million, gross margin in the range of 35% to 40%, and an investment of $13 million to $15 million in R&D. However we are lowering our EBITDA guidance for 2018 to a range of negative $3 million to zero or breakeven, due primarily to the unplanned inventory and bad debt reserves of $1.3 million reported this quarter, $1.9 million of foreign exchange loss and lower gross margin performance year-to-date. Moving on from our financial results and guidance, I want to highlight some of our near-term priorities, one of which is continuing to address our capital structure. On our last call in May, we talked about the new convertible bond issuance executed on May 1. We also mentioned that our next step was to leverage the company's assets to secure debt, the proceeds of which would provide the liquidity needed to continue executing our business strategy and to address the remaining $68.7 million of December 2019 convert. On June 1, as I mentioned previously, we closed the deal with Highbridge, where we received $15 million upon closing. Remaining $10 million of the $25 million was received on July 15 after finalizing necessary legal documentation. This facility includes an option to increase the loan amount to $70 million on September 15. The bulk of these proceeds will provide us the necessary liquidity to resolve the majority portion of the remaining December 2019 convert. Jason and I continue to work with other potential lenders to secure financing at a more competitive rate, and we're still on track to address the December 2019 bond before year-end 2018. Lastly, as we have mentioned before, 2018 is a year of transition for Teligent. The margin pressures and one-off reserves recorded year-to-date have collectively driven us to be even more focused on driving profitability in the second half of the year. Teligent's strong track record of developing and launching products continued in the second quarter, and we have taken large strides internally to strengthen the cost discipline across the organization. We have initiated RFPs with several vendors, both large and small and the momentum and the excitement is building across departments where they have been successful in driving down costs and/or improving the quality of goods and services procured from our vendors. Jason and I continue to take a very hands-on approach to reviewing expenses and holding individuals accountable to budgets and time lines. Plans to execute the remaining steps in our ongoing capital restructure, and cost-reduction plans are in full swing. And we have already acted early in the third quarter to adjust for this contract and walk back prices across our U.S. portfolio of products to improve both margins and cash flow. Most importantly, this organization continues to be energized by the opportunities that lie ahead. Now let me turn the call back over to Jason.

[Jason Grenfell-Gardner:]

Thanks, Damian, great progress. July 1 marked a transition point in our business. We moved from that expansion mode that I spoke about on our last call that has colored our past two years in to a high focus on performance and profitability. With the operating leverage that we generate from our product launches, we remain confident in our ability near term to deliver growth, margin expansion, profitability and market disruption. Before opening up for questions, I'd like to extend my personal thanks to our Teligent teams in the U.S., Canada and Estonia who've been working to make Teligent successful. There's been a lot of long nights and weekends, and I'm grateful for their dedication. Thank you to all of them for what they do every day. With that, Mony, let's open up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Elliot Wilbur with Raymond James. Your line is now open.

[Elliot Wilbur:]

Thanks good afternoon. First question yourself, Jason, I guess, with respect to the eight pending GDUFA approvals before year-end. If, in fact, you were to realize all of those, how many of those do you think you could actually launch? And then, within that basket, the orphan product, assuming that is approved this year, is that an asset that you believe the company can fully capitalize on? I'm not sure if that has some sort of specialized distribution characteristics or what exactly is unique about it. But just trying to get a sense of you think as an asset that you're going to optimize the value of.

[Jason Grenfell-Gardner:]

Sure, thanks for the questions Elliot. So, first in terms of the products that have outstanding GDUFA goal dates, I would say seven of the eight of those are within potential to be launched this year. We have the materials and the capability to get them to market. So, it's really just a function of executing through the approval cycle with FDA. In terms of the orphan drug, we thought a lot about the question that you asked. Is this better in our hands, or is it better somewhere else who may have more evolved capabilities related to orphan disease in the specialty pharmacy. But the reality is that building the capability to take this drug directly to this patient group is actually something that we've been able to do over the course of the past few months. We've put in place these sales and marketing and distribution capabilities that we need, and we started to dialogue with that group to be able to ensure that our patients have access to the drugs they need. And we feel confident that together with our specialty pharmacy partner that will facilitate that with us. We're in a good position to offer a pretty great solution to some patients who had a pretty rough time actually. So we're very much looking forward to that.

[Elliot Wilbur:]

Okay. And then, with respect to the six approved products pending launch, is it fair to assume that all those would be launched before year-end?

[Jason Grenfell-Gardner:]

That is correct.

[Elliot Wilbur:]

Okay. And could you just talk a little bit – I mean, given you had such a run in term of approvals and significant number of launches, can you just talk about launch dynamics? And how easy and/or difficult it has been to capture share and kind of the rates and maybe switching cost that we've always kind of thought about historically?

[Jason Grenfell-Gardner:]

Sure. I mean I don't think that the general trend of what we've known to be true in generic pharma has changed that much. I mean, yes, we're working in markets that are more highly consolidated. Obviously, we have three large buying groups and that creates its own dynamics. Obviously, within those buying group there can be sub-formularies. But in general, I think that the principles of launch are still relatively the same. I mean it depends on the number of installed competitors that we have, the nature of – the quality of supply, whether there have been recent supply disruptions and our approach to market. And I think that we continue to take a pretty rational approach to launching our products and trying to make sure that we get share and continue to achieve our budgets and our goals. So I don't think that the dynamics have changed that much.

[Elliot Wilbur:]

Okay. And last question, just with respect to the injectable endeavor and facility. What – in terms of just thinking about sort of the final remaining steps to revenue realization. Obviously, going to pre-approval inspection, and assuming there will be a site transfer product that probably ultimately is the first revenue-generating asset, at that facility, but just trying to get a sense of, when that may actually happen? And then when you think you may actually file your first ANDA out of that facility?

[Jason Grenfell-Gardner:]

Sure. So I mean, I think the first part of this is somewhat in our control, right? I mean, we are looking at pre-approval inspection readiness, making sure that we have everything in the state that we wanted. And of course, getting through the final parts of construction, final certificate of occupancy are key part of that. It is sort of up to us to trigger the pre-approval inspection, obviously, based on the stability data of the batches that we've produced. We could probably start that process at the end of this quarter or the beginning of the next quarter based on how we view our progress along our own time lines. But I would say, realistically, we're on track for where we wanted to be, which is revenue coming out of that facility with injectables at the beginning of 2019.

[Elliot Wilbur:]

All right, thank you.

[Jason Grenfell-Gardner:]

All right, thanks Elliot.

[Operator:]

Thank you. And our next question comes from Scott Henry with ROTH Capital. Your line is now open.

[Scott Henry:]

Thank you and good afternoon. I guess, for starters, Q2 sequentially up $2 million in change over Q1. Could you talk about what the incremental drivers were? And I don't know if you're going to call out any products in the 10-Q or if you might want to comment right now? Thank you.

[Jason Grenfell-Gardner:]

Sure. So let me start. I mean, I think as I mentioned at the beginning of this call, Canada continued to perform really pretty well compared to the prior quarter. If you look at Canada revenue, we were about $4.9 million in the second quarter, which was sequentially up from the first quarter and that's really a function of the drug shortage as well as the new physicians that we've had. But we also have these five product launches in the second quarter as well, that was helpful. We'll call out some of that, obviously, within the queue, but, though that was part of the – definitely part of the story too.

[Scott Henry:]

Okay. And is Canada, is that – I know – I believe, it used to be all injectables. Is that no longer the case as we're looking at injectables versus non-injectable?

[Jason Grenfell-Gardner:]

So Canada is all injectable today, but that starts to change actually this quarter. Canada received its first approval for Teligent manufactured topical drug. We anticipate launching that, if not at the end of third quarter, at the beginning of the fourth quarter this year.

[Scott Henry:]

Okay, great. And historically, you – I believe, in your release you've given a cash EPS number. I don't believe it is in the current release. So do you intend to keep giving that kind of non-GAAP guidance? Or are you done with that?

[Damian Finio:]

Scott, this is Damian. The SEC is being much more stringent about non-GAAP metrics, we took one table out of the press release, I think it's the one that you are referring to. So going forward, that's not our plan.

[Scott Henry:]

Okay. And the final question. With regards to gross margins, we are forgetting the noise of the current quarter and obviously, you're bringing the new plan onstream. But when you think out to 2019 and 2020, given a reasonable backdrop for generics, what would be your target gross margin that you would think about, given the mix you would have with a significant injectable exposure?

[Jason Grenfell-Gardner:]

Yes, so I think that's a great question. And that's part of the reason why I'm excited about giving through the certificate of occupancy and really giving the existing topical products that are approved launch and also giving the injectables back into the market, the ones that are already on to going through post-approval change. Because if you think about the overhead in our facility, which is already being fully absorbed by our existing business, the incremental operating leverage that we get by driving further utilization and driving these product launches is really significant. And so as I start thinking out to 2019 and 2020, it says to me that we should be exceeding 50% on a gross margin basis. And depending on pricing dynamics, we may be able to do even a little better than that. So that's my goal. But it's really driven by product approvals, leading product launches to drive revenue.

[Scott Henry:]

Okay, great. Thank you for taking the question.

[Jason Grenfell-Gardner:]

Thanks Scott.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Gregg Gilbert with Deutsche Bank. Your line is now open.

[Gregg Gilbert:]

So I want to go back to gross margin. Jason, you talked about getting back to a normalized gross margin soon, I think the guidance is 35% to 40%. Can you talk about some of the pushes and pulls? That's a pretty wide range for less than half year left.

[Damian Finio:]

Yes. You're correct, Gregg. So when we look at margin, the guidance was 35% to 40%. We posted 30% in the second quarter. So within there, Jason mentioned the freight in Canada, I think it's also important to mention that, in Canada, sales were up and volumes were up, but the business wasn't necessarily high margin business. It was necessary product that we had and we ceased the opportunity. But from a margin percentage perspective, lower than what Canada would typically see, the lower cost to market adjustment is three points alone, so that brings you down closer to that 30% from the low end of our range. Going forward, our intent is not to have anymore lower cost-to-market adjustments remove that. The Canadian freight were moved back towards, as we said, more standard shipping terms going forward. I think the volumes will continue in the Canada as well. But we're also having cost-reduction measures, as you know. There's three components to cost of goods, it is direct labor, direct material and overheads. It's going to take a little bit longer, of course to have direct materials work their way through the margin improvement, because in one quarter, you buy, the next quarter, you manufacture, then you sell. But for direct labor, it's a combination of employees and temporary staff. There's also an element of overtime that we can monitor much more closely which we have been. And some of the overhead is subject to this RFPs that I mentioned with vendors. So we'll start to see those a little bit earlier. And also, we have new product launches, as Jason talked about as well. So there's a lot of moving parts in margin, which we expect will help it improve in the second half of the year and get us back within guidance.

[Gregg Gilbert:]

Okay. Jason, you mentioned the competitive generics therapy designation, is that something that applies more broadly to your strategy and your pipeline? Or is it kind of a one-off situation?

[Jason Grenfell-Gardner:]

I mean, for today, it's a one-off situation. And I think you probably will see, as everyone else, [indiscernible] received an approval through CGT today as well. So great for them for obviously very different product but it is a helpful pathway and I think is one that's a little bit underutilized. We found FDA to be incredibly responsive on our applications. And, yes, if there are opportunities to use it further in the future, we will. But at the moment, it's limited.

[Gregg Gilbert:]

Great. And then maybe if you could give us some more color on your sterile injectable programs, what kind of products you're going after? Any time lines you want to commit to on submissions of injectables? Thanks.

[Jason Grenfell-Gardner:]

Sure. So look, our sterile injectable plan is really around liquid formulations. We have the capability to produce drugs that are both terminally sterilized as well as aseptically filled. We can produce drugs both in vials as well as in ampoules. I think what is interesting about the dynamics of U.S. injectable market at the moment, really two things. The first is, there's not a lot of people doing, from our perspective, the heavy lifting of doing the development work in developing drugs, making them, getting them approved and getting them to patients. And so we continue to see rolling drug shortages throughout the U.S. as well as in Canada. And some of those are caused by regulatory issues and some of those are caused by manufacturing challenges. But the reality is that there are continuing significant opportunities there for people to do the work and be reliable supplier. So I think that's the first part. And the second is that we have the opportunity, given our size and given, I think, the flexibility that we've shown in terms of our development programs to see opportunities and turn them around quickly. We have six development teams between the U.S. and Estonia, who are focused on delivering our pipeline, and where there are opportunities that we can turn our hand to, we will do that and I think, we'll be pretty responsive on it. And that's why I said in my prepared remarks, I was surprised that the sort of the speed in the progress that we've made in terms of the development of our new submissions. Many of you know that in our portfolio, we own a number of existing approved NDAs and ANDAs for injectable drugs that we had previously acquired back in 2014. And our game plan has been all along that we will use those to develop our internal skills but also as the sort of beginning part of our pipeline, as we build our internal capabilities for new drug submissions, new generic drug submissions that we would develop ourselves. The team has moved along that time line significantly faster than I had originally expected, and that means that our ability to drive that pipeline and make that transition from topicals to injectables has also accelerated. Now there are some parts for this that we can't really move that are a regulatory, right. We've got to get through pre-approval inspection, there are time lines around stability data and so on. And so we have to work through that stability data and through that pre-approval inspection before that tool is fully available to us. But I am incredibly encouraged by what we will be able to do as we get into 2019. And moving forward, I think, look, top 10 in terms of ANDA approvals in the past 12 months, you apply that same logic to I think what this team is going to develop on the injectable side. There's a lot of opportunity there for us to continue to grow that business.

[Gregg Gilbert:]

Thanks.

[Jason Grenfell-Gardner:]

Thank you.

[Operator:]

Thank you. And our next question comes from Matt Hewitt with Craig-Hallum Capital Group. Your line is now open.

[Matt Hewitt:]

Thanks for taking the questions. And I apologize if you have to rehash anything. I'm kind of jumping between calls here. But first off, as you look out – and I think you touched on this a little bit, Jason, but as you look out maybe five years from now, what does your revenue mix look like at that point, given the acquired portfolios of injectables and those that you plan to submit and maybe how those kind of progress with the FDA? When you look out five years, do you think you could be at a 50/50 mix of that point? Or are you still going to be a little more weighted towards topicals depending upon how the FDA responds?

[Jason Grenfell-Gardner:]

Look, based on our internal plan – and five years is a long time, Matt, obviously, so this isn't guidance, but it's more just sort of the shape of the business based on opportunity set that we see out there. We look at an opportunity where we say, there is probably a mix that's two-thirds injectables and one-third topical. Injectables will we believe, continue to offer significantly a larger opportunity set. And remember that this works together with the manufacturing capabilities that we've installed in and the utilities that we've installed to be able to drive that opportunity set. So with the development teams that we have, the ability to drive submissions and generate significant, I guess, haft in terms of the portfolio, the opportunity set is larger overall in injectables than in topicals. And that's what really drives that balance longer term.

[Matt Hewitt:]

Okay, thank you. And then – and I apologize if I missed this, but your prior revenue guidance in the – historically the way that you've provided is, the lower end represents kind of the base business chugging along, upper end would represent several approvals. Given the strong performance you've had here in the first half of the year, what are you – are you still thinking that's the real guidance range? Or should we now be thinking a little bit more towards the upper end, given the number of approvals and launches you've had so far?

[Jason Grenfell-Gardner:]

That's a great question. So first, remember that the guidance that we give at the beginning of the year, the $70 million to $78 million in revenue guidance was based on the previous accounting treatment under 605, right. So if you translate that into 606, you have to make an assumption about what you think wholesaler fees are going to be throughout the rest of the year to really get to an understanding of what the base level of guidance is. As we've said, so far this year, and we actually disclosed this in our press release today, a wholesaler fees so far this year have been about $1.1 million in terms of fees for service. Our original forecast for that – for the full year was larger than that. So we'd originally forecasted, that was about $10 million for the full year, and obviously, there were some puts and takes in that depending on channels and how you plan to go to market. So if you try the like-for-like 605 to 606, you almost end up in a $60 million to $68 million in revenue base guidance compared to $70 million to $78 million base under 605. What we're saying today is essentially almost an increase in our guidance was, even under 606, with the ambiguity around how wholesaler fees will play out for the rest of the year, we're still going to be able to get to – within that $70 million to $78 million range. Now the biggest wildcard in all of this is going to be the approval of the – potential approval of the orphan drug in September. If that gets approved and depending on the launch cycle and how that ramps up, that could have a significant impact on that, which will drive you even further to the upper end of that range. But there is a lot of ambiguity there to work through. Today, I think what Damian and I are saying is, irrespective of the accounting treatment and how you slice it, we're dedicated to get you within that $70 million to $78 million range. And with the products that we have approved that we already have ready to launch and the things that we expect out of FDA between now and the end of the year. And we feel pretty good we'll get there.

[Matt Hewitt:]

Okay, great. And thank you for that color.

[Jason Grenfell-Gardner:]

Thank you.

[Operator:]

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Jason for closing remarks.

[Jason Grenfell-Gardner:]

Okay. Thank you, Mony. We look forward to speaking with many of you at upcoming conferences in the fall. And wish you the very best for the remainder of the summer. Have a great evening. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.