Teligent, Inc.
Q4 2018 Earnings Call Transcript

Published: 18 Mar 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Teligent, Incorporated Fourth Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference call maybe 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, Incorporated are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involves risks and uncertainties. For example, without limitations, 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 mainly from the statements made herein. There are 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, Mr. Jason Grenfell-Gardner, President and CEO. Sir, you may begin.

[Jason Grenfell-Gardner:]

Thank you, Chrystal, and good morning, ladies and gentlemen. Welcome to the Teligent business update covering the fourth quarter of 2018. I'm 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 this morning. I will be providing you an update on the core elements of our business and the latest on our injectable plans. Damian will then provide a more detailed breakout of our financial performance for the fourth quarter and our guidance for 2019. Today we released results for the fourth quarter of the year that capped out a year of robust growth, fueled by product launches and our international operations. Sales for the quarter were $16.8 million, while gross margin was 34%, probably in line with the lower end of our full-year guidance. Overall for the year, Teligent recorded growth of nearly 10% in an industry that has been plagued for the past two years with continuing price erosion. There are few players in the generic pharmaceutical sector that can point to year of growth in 2018, and Teligent delivered growth. I'd like to talk about three things today on our call. First, I would like to provide a summary of the transformational work that was done in 2018. Second, I'd like to provide you some perspective on our work in 2019 to bring sterile injectables online and to continue to drive our pipeline. Finally, I would like to give you our sense of what's happening in our segments of the generic pharmaceutical industry and how we plan to position Teligent to respond to these challenges. So first, let's recap the changes we’ve seen at Teligent over the past year. As you know, we commissioned our new factory and during the last quarter of the year we’ve began the process of transferring the manufacturer of our semisolid and liquid topical products into our new bulk drug compounding suites. Now I know that may sound like something a bit odd to mention, but I want to be certain that you understand the profound nature of the shifts that is happening in manufacturing at Teligent. The new bulk drug compounding suites are more automated and better designed to allow us to improve the time and efficiency of our bulk drug compounding. This was critical for us to work through bottlenecks given the rate of drug approvals and launches in our business. We've seen multiple hours removed from batches that should over time improve the operating leverage of the business. We’ve also, however, had to add serialization to our facility as everyone else in our industry. This did not go perfectly. Many across the industry including us, were challenged by service provider failures who struggled to manage the volume of data required to make the serialization systems around the industry work. This led to delays, rework and increased labor touch on finished goods. Although we believe that we’ve largely worked through the initial teething troubles of this implementation, it certainly did lead to inventory shortages in the fourth quarter that gave rise to failure-to-supply penalties. These have continued into the first quarter, but at a much lower rate and our team projects having inventories at normal working levels again by the end of the second quarter of 2019. In our sterile injectables suite we’ve completed the media fills for a number of aseptic sizes to support our aseptic filling capabilities. As I mentioned in our last call, it was important for me that we get this right the first time. And so, during the fourth quarter and into the first quarter, we have added an incremental external experts to help us double and triple check our systems and provide incremental support to our ongoing work. Based on our current understood state of readiness, I believe we are still on track to have the facility inspected by FDA this year and for the first injectable product to be launched by the end of 2019. And that's pretty exciting, particularly given the dynamics that we continue to see in the injectable markets. This brings me to my second point to talk about our R&D pipeline generally and our sterile injectable pipeline in particular. Our R&D pipeline has continued to progress. You all have seen last week's approval of desonide ointment which was received as a first cycle review 10 months from the date of submission. This R&D team finished 2018 in the top 15 of ANDA approvals of all companies in the generic pharmaceutical space. And frankly that’s remarkable for an organization of just 200 people. But more than this it has been the pace of review and approval that speaks to the quality of our submission, the mindset of our regulatory team and their responsiveness, and the current environment under GDUFA II. We received 13 approvals during the year 2018 and launched nine drugs. Already in 2019, we’ve received a further two approvals and launched a further four drugs. In our generic orphan drug product, we've had discussions with the FDA through our development partners to clarify the pathway for the analytical work required to support that drug. Incremental testing was conducted throughout the fourth quarter and into the first quarter of 2019 to support the FDA's requests. Based on the work that has been done, our partners anticipate submitting the response of the major CRL by the end of this month of March 2019 and FDA, we believe, will take up to 10 months to review the CRL response. Finally, on our injectable pipeline, we're preparing a number of submission for 2019 based on both our internally developed pipeline as well as our previously acquired products. Now you all know I'm an optimist and I expect things to happen as fast as humanly possible. Chemistry doesn't apparently always work that way, but that being said, I've been blown away by the pace at which our internal development has come up to speed. The rate limiting factors on our injectable pipeline have quickly become the approval of the site and the resources that we can financially allocate to that pipeline. Finally, I want to spend a couple of minutes talking about what we are seeing from the Teligent perspective in the industry and how it has impacted us specifically. Clearly, price erosion has been a common theme over the past couple of years. We've certainly seen that price erosion impacting our business here at Teligent. Indeed, as I look at our results for the year, price took a fairly significant chunk out of our revenues in our topical business, particularly for products that have lower barriers to entry. However, we had three things working in our favor to allow us to continue to show growth. First, we had a dynamic and robust pipeline of drugs that were launched during the year. These drugs contributed significantly to both top line revenue as well as overall margin. Second, we’ve had our nascent U.S. injectable business of four molecules, which although impacted by supply challenges from our CMOs in 2018 on a volume basis, showed a stable pricing environment. Finally, we’ve had a great year in our Canadian business where the team has done a fantastic job growing international revenues by over 50%. As we look ahead, we believe that something has to give in the system. According to the IQVIA data, the generic dermatology market peaked at around $6 billion in total addressable market in 2016. Today based on January data, that same market is about $3.8 billion. For comparison, that’s slightly below the same period in January 2014 when the market was $4 billion. This is the wave of price erosion that we've been living through in our core market. And while we’ve still been able to deliver on revenue growth, margin erosion has impacted underlying profitability across the industry. Conversely, we continue to see market growth in the sterile injectable market. Today, the existing generic addressable market stands at $10.6 billion for injectables based on IQVIA data, up from $7.4 billion in 2014. Clearly not all of generic pharmaceutical markets are the same. So how do we as Teligent respond to these challenges? The pricing dynamics seen in the generic dermatology market have led to some portfolio rationalization across the industry as competitors began to exit less profitable segments of the market. We have ourselves rationalized certain drugs from our portfolio that frankly cease to make sense on an ongoing basis. In fact, we probably should have done that faster as we look at the rates of declines in some highly competitive markets. We've also taken a much tougher look at wholesale acquisition costs in our business model to attempt to manage the travel between gross sales to net sales. Although this may seem arcane, that travel has a significant potential to impact cash flows of the business. Finally, we’ve gotten to a point where we now have capacity to allow us to bring back some contract manufacturing and private-label business, both for topicals as well as for injectables, and we’ve appointed someone to develop and grow that business directly. Although it’s early days, I'm encouraged by what we see as the opportunity landscape for quality manufactured contract product from Teligent. We expected the market for generic pharmaceutical products will continue to be dynamic. Supply, pipeline, quality and the strict control on cost will be critical for our success. Let me turn the call over now to our Chief Financial Officer Damian Finio, to provide his remarks on the quarter and the year.

[Damian Finio:]

Thank you, Jason, and good morning, everyone. On today's call, I would like to highlight the key components of our fourth quarter and full-year 2018 financial performance and our outlook of Teligent's 2019 projected financial performance. So let's start with the highlights of our fourth quarter financial performance. We posted net revenues of $16.8 million driven by year-on-year growth of 39% and 19% in our Canadian business and U.S portfolio of topical products, respectively. On our earnings call in November, we mentioned that our success in obtaining FDA approvals and launching new products had a significant impact on the workload of our quality department and we were addressing serialization challenges, resulting in shipping delays, which ultimately led to failure-to-supply fees. Although this operational issue was addressed during the first quarter of 2019, we incurred $1.4 million of failure to supply fees in the United States in the fourth quarter. These fees are included in net revenues, lowered our fourth quarter gross profit and EBITDA by $1.4 million and reduced our gross margin from 39% to 34%. We also posted a $1.9 million non-cash impairment charge on intangible assets that were acquired in prior years from AstraZeneca and Alveda. This charge is reported as amortization and selling, general and administrative expenses on the statement of operations, but has no impact on EBITDA. Lastly, we executed a loan agreement with Ares Capital Management on December 13, 2018 using a portion of the proceeds to extinguish our 2021 term loan and beginning just a few days later initiated buyback process of our December 2019 convertible bonds. By year-end, we purchased 53 million of our remaining $68.7 million of December 2019 convertible bonds. These debt related transactions in the fourth quarter had an impact on cash interest paid during the fourth quarter that I wanted to briefly explain. So please note, I'm referring to the $4.2 million of cash interest expense included in the reconciliation of non-GAAP measures from today's earnings release. When we extinguished our 2021 term loan, we paid both the accrued interest and a 2% prepayment penalty. In addition, we paid six months of interest for the first time to our May 2023 bondholders in November and we paid six months of interest to our December 2019 bondholders in mid December. In addition, as I mentioned, we initiated the bond buyback process immediately following the execution of the Ares loan agreement in mid December and therefore we were also required to pay another week or so of accrued interest to those bondholders who sold their bonds back to Teligent. We ended the year with $9.7 million of cash on the balance sheet. Turning to 2018 full-year financial performance. We posted $65.9 million of revenues, a top line year-over-year increase of 9% despite the failure-to-supply fees mentioned previously and in a year when many generic pharmaceutical manufacturers reported revenue declines. Overall, we consider this to be strong top line growth on a consolidated basis and are especially encouraged by the 53% growth in revenues reported by our Canadian business. Turning to our expense base, the cost savings initiatives that began in the second quarter of 2018 continue. However, the progress we’ve made reducing discretionary spending is masked by the year-on-year increase reported in selling, general and administrative expenses. In 2018, selling general and administrative expenses included the $1.9 million impairment charge mentioned previously, a $0.6 million increase in our bad debt reserves as well as $3.1 million of incremental legal and audit related professional fees and staff transition costs. We view the audit and staff transition costs incurred as investments in our internal control framework that will benefit the company going forward. And my last comment regarding 2018. As an accelerated filer, the deadline for our Form 10-K is today. However, in order to allow the time needed to obtain our former external audit firm's consent on the comparative figures included in our 2018 10-K, we will be filing Form 12b-25 with the SEC to formally request an extension. Our intent is to file Form 10-K as soon as possible, but no later than the April 2 extended deadline. Looking ahead to 2019, with the construction of our expanded facility completed and major steps taken with our capital structure, our priorities are to one

[Jason Grenfell-Gardner:]

All right. Thank you, Damian. 2018 was a long year. It's not one that I would want to repeat regularly, but it is one that came with some very satisfying achievements. We weren't perfect. There were definitely some bumps along this road. But what we did deliver was America's newest state-of-the-art manufacturing facility for topical and injectable drugs. We delivered a pipeline that pumped out new drug approvals faster than once a month. We worked through thorny financial challenges and delivered a restructured balance sheet that put us on a firm footing for growth with long-term partners. And we positioned the company in the best growing segments in generic pharmaceuticals, the sterile injectable space, arming it with the best manufacturing technology, the best development and regulatory team, and the drive to see it through. Before opening up for questions, I would like to extend my personal thanks to our Teligent teams in the United States, Canada and Estonia, who have been working to make Teligent successful. I remain grateful and proud of their dedication and generosity of spirit that they have poured into this company every day. Thank you to all of them for what they do. With that, Chrystal, let's open this up to questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Matt Hewitt from Craig-Hallum Capital Group. Your line is open.

[Matt Hewitt:]

Good morning, gentlemen. Thank you for taking our questions.

[Jason Grenfell-Gardner:]

Good morning, Matt.

[Matt Hewitt:]

A couple. First on the failure to supply penalties, are the issues with the serialization on where you’ve been having challenges getting those implemented or is it on the -- in your suppliers and some of your contractors having issues?

[Jason Grenfell-Gardner:]

No, it's really an internal challenge. So -- and it's a combination between what we're doing in manufacturing and then the data services that provide the numbers that feed into serialization and the ability to send them back into the cloud. There are very few data suppliers who support this, and when the system went live they had challenges. So that led to us bulking product, putting a lot of things into WIP and then having to run it through that system on a repeated basis. It was a pretty daunting challenge. Thankfully, we’ve gotten to a point now where it is running relatively smoothly on all lines. It's not perfect yet, but it's certainly much better than it was and we are able now to address inventory in a more timely manner.

[Matt Hewitt:]

Okay. And then shifting over to some of the products, with the injectables, I think some of us have been anticipating maybe a first half launch for some of those reintroduced injectables, sounds like that’s been pushed out a little bit. Is that a function of maybe the timing of the FDA inspection of the facility or has something else come into the fold?

[Jason Grenfell-Gardner:]

We never intended to launch the first injectable products in the first half of this year. So I'm not sure where that misunderstanding comes from. Our goal is to get the facility inspected by the FDA around the first half of this year which would then help us launch product in the back half of this year, but it's going to depend on FDA and our readiness to submit. We think that we are pretty much on our timeline for being able to trigger that inspection in the first half of this year. We will continue to update our readiness assessment on an ongoing basis as we get informed by our own internal audits, but currently that’s our plan.

[Matt Hewitt:]

Okay. And then maybe one more and I will hop back in the queue. Regarding the orphan drug and actually tying this in a little bit to the injectable, so you anticipate revenues from the injectables, I guess, number one, how much have you factored into your guidance for the injectables? And number two, at least from the outside it would appear that the orphan if you resubmit or submit the response to the major CRL in the next week or two, there would be a very high potential for that product to be approved yet this year, but it sounds like you haven't included anything from the orphan drug in your guidance. Maybe help us understand some of the puts and takes there?

[Jason Grenfell-Gardner:]

Let me start with the orphan drug and then I will let Damian touch on guidance. On the orphan drug, we are responding to a major CRL, that’s under GDUFA II and normally has a 10 month review time by FDA. So if we respond at the end of March, it’s normal target action date will be in January 2021 -- or 2020, rather, apologies. So for that reason even though there is a potential for FDA to accelerate that, we think the most appropriate way to forecast that is according to the normal GDUFA standards. Let me let Damian talk about guidance.

[Damian Finio:]

Thanks, Matt. In terms of 2019 guidance, I would say we are including incremental revenues from the launch of injectables in the fourth quarter, but what's really driving 2019 revenues above 2018 actual revenues, the annualization of the launch as Jason mentioned in 2018 as well as continued launches in 2019, I would add it also is a bit of a customer mix story, which is enabling us to improve margins. And I think Jason also mentioned continued diligence in managing our cost base, brings us down to EBITDA guidance that’s well above where we landed in 2018.

[Matt Hewitt:]

Got it. All right. Thank you.

[Jason Grenfell-Gardner:]

Thank you.

[Operator:]

Thank you. And our next question comes from Elliot Wilbur from Raymond James. Your line is open.

[Elliot Wilbur:]

Hey, good morning. First question or first two questions for Jason, specifically with respect to triggering the FDA inspection at the Buena facility what exactly is the triggering event? Is it a filing or is it more of a general GMP inspection?

[Jason Grenfell-Gardner:]

Yes, so we anticipate filing a prior approval supplement to support site transfer of a drug that we already own as the triggering event that would bring the FDA to inspect the facility.

[Elliot Wilbur:]

Okay. And that’s obviously still expected first half event?

[Jason Grenfell-Gardner:]

That’s correct.

[Elliot Wilbur:]

Okay. And then bigger picture question, Jason, I guess given a multitude of industry issues and then some of the company specific challenges that you faced in 2018, I mean, how are you just feeling about the company's execution in terms of launch success been able to essentially capture what we always perceive to be your fair share of the market for in each of these individual new launches. It just seems from the data that has come out to date that maybe that’s been a little bit more challenging than previously expected?

[Jason Grenfell-Gardner:]

It's a really great question. So, I look at our ability to launch products into markets and gain share and I look at some of those markets, we’ve done a really great job of capturing share and in fact I would say that we’ve hit our targets in terms of share and often exceeded them. I don't think that the challenge is in gathering share. I think that the challenge is in making sure that we achieved the appropriate margins. And so as I look at the sort of mix of customers that we are managing, I really believe that we need to prioritize margin over volume and sometimes over revenue. It’s -- I look at 2018, we grew volume significantly. We also grew revenue, but it was the margin erosion that came through pricing challenges in some of these lower barrier to entry products that that really was quite tough. Now as you know as the pipeline has continued to mature and as we look at the approvals we got in 2018, we are seeing more of our portfolio in the higher barrier to entry segments of the dermatology space. That’s probably helpful to us as we think about the margin story over time. But that's -- that margin component of this is something that we are going to spend a significant amount of focus on in 2019. We care much more about margin than we care about percentages of market share.

[Elliot Wilbur:]

Okay. And question -- couple of questions for Damian as well and perhaps yourself Jason. Could you just help us think about -- I mean, obviously counting on some element of revenue stream from the injectable business, probably will be perceived to be somewhat more risky obviously generate revenue from approved products or to be launched products that are already approved, but maybe just help us think about the progression of pipeline events over the course of 2019. Essentially what -- how many potential incremental approvals and or launches there are?

[Jason Grenfell-Gardner:]

Well, I can start with that. So there are I think 22 ANDAs currently pending at FDA. We anticipate continuing the pace of filings throughout this year that will keep that pipeline full. One of the interesting communication challenges that we will have during the year is making sure that we give you the good mix between ANDAs on file as well as responses to -- complete response letters or filing of supplements to the existing ANDAs and NDAs that we own as we manage that site transfer process into the facility to support injectables. So we will be giving you updates throughout the year on the shape of that. And it really start accelerating in the second half of this year once the sterile injectable facility is fully online. The team is obviously making exhibit batches and supporting batches at the moment to be able to support those submissions. We obviously need to generate stability data concurrent with that, but it's a pretty cool pipeline of opportunities that help to support the growth. When we think about what does that mean in terms of the financial projections for the year, obviously the biggest components of this as Damian mentioned in his remarks are related to the annualization of the products that were launched in 2018 as well as the approvals that we expect to get throughout the year. I don’t know if Damian if you would like to add any further commentary to that.

[Damian Finio:]

Yes, I would add. So, Elliot, the way I look at the revenue forecast for 2019, let's talk about U.S first and then Canada. In U.S., as Jason said, launch annualization of last year's products plus new launches, but I would say it's more heavily weighted towards the annualization of last year's launches rather than on this year's new launches. I mentioned customer mix, I would say that also includes expanding our customer base and then Jason also had mentioned contract manufacturing and private-label opportunities. So it's a combination of those three things that drive the U.S revenue forecast for 2019. In Canada, we mentioned some serialization challenges with our contract manufacturers, but once we get past that, which is right around the corner, we expect there to be continued drug shortage opportunities that the team in Canada can take advantage of as well as an expanded customer call list. So I think it's a combination of those three things for the U.S and those two things for Canada rather than relying on injectables that drives our 2019 revenue guidance.

[Elliot Wilbur:]

Okay. And just two quick financial ones for yourself, Damian. Gross to net or net to gross this period improve to around 50% and I know that number has been improving over the course of 2018. Is this sort of the new normal or is there an opportunity to further improve this level and maybe enhance operating cash flow generation somewhat more?

[Damian Finio:]

Yes. In the second quarter and third quarter of 2018, we took some actions to both reduce WACC as well as to increase contract price where possible and improving the customer list. So both of those things helped in that regard in 2018. In 2019, we do think there are continued opportunities to do the same with a different group of products. So I think we'd expect that to maintain or continue the progress we made last year.

[Elliot Wilbur:]

Okay. Last one, any color you could provide on operating cash flow expectations for 2019? Thanks.

[Damian Finio:]

Yes, absolutely. So as I mentioned, we ended the year at $9.7 million of cash in the bank, with $10 million remaining on our revolving loan with Ares. When I look at cash forecast for 2019, we no longer are paying the general contractor, so construction has been completed. That’s been our biggest cash burn over the past two years. Our next interest on the bonds is not payable until May. Now we also have an opportunity, I mentioned on the last call with Ares to pick interest or defer interest on the loan. Our goal would be to pay interest rather than forgo paying interest and have a big compound that is principle on the debt, but we have that option if needed in order to help us with cash flow in launching products. I think the last thing I would say, I mentioned that the first quarter revenues are expected to be about 20% lower than Q4, so of course the follow on from that is a shortage in cash collections in early part of the second quarter that we will need to manage through. But I think, all in all, the pluses outweigh the minuses in cash flow projections.

[Operator:]

Thank you. And I’m showing no further questions from our phone lines. I would now like to turn the conference back over to Jason Grenfell-Gardner for any closing remarks.

[Jason Grenfell-Gardner:]

Okay. Thank you, Chrystal, and thank you all for joining us today. I look forward to seeing some of you at the ROTH Conference this week in California and at other conferences throughout this spring. Thank you for joining us. Thank you for your support to Teligent and have a great morning.

[Operator:]

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