Teligent, Inc.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Teligent Third Quarter 2017 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Except for the historical facts, the statements in this presentation as well as in the other statements or other written statements made or to be made by Teligent Inc. are forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995, and involve risk and uncertainties. For example, without limitations, statements about the company's anticipated growth and future operations, the current or expected market size or 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 approval for future products are forward-looking statements. Forward-looking statements are merely the company's current prediction of future events. The statements are inherently uncertain and actual results could differ materially from the statements made herein until the company will achieve the sales levels that will make an operation profitable or that the 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 development. I'd now like to turn the conference over to Jason Grenfell-Gardner. Sir, you may begin.

[Jason Grenfell-Gardner:]

Thank you, Grace, and good afternoon, ladies and gentlemen. Welcome to the Teligent business update covering the third quarter 2017. I am Jason Grenfell-Gardner, the President and CEO of Teligent. And I'm joined today by Jenniffer Collins, our Chief Financial Officer. Thank you for joining us today. I'll be providing you an update on the core elements for our business and our expansion plans. Jennifer will then provide a more detailed breakout of our financial performance for the third quarter. As you’ve seen in our results just released this afternoon, the third quarter was a challenging revenue quarter for Teligent following a strong performance in the first half of the year. Revenue for the quarter was $13.7 million, down 26% from the second quarter of 2017. This was largely driven by volume declines in Lidocaine ointment and Lidocaine topical solution that were down by nearly $3.5 million compared to the second quarter, partially offset by stronger performance in other legacy and newly launched products. While this was not entirely unexpected, given our strong over performance in the first half of the year when we benefited from competitive supply disruptions and market opportunities, certainly the magnitude of these volume impacts was greater than expected. New product launches during the quarter certainly helped to mitigate some of the economic impact of the Lidocaine volume declines. However, new launches due take time to ramp up. In addition, our team faced manufacturing challenges, for instance related to an excipient and high volume product that was being provided to us with particles that have the potential to adulterate our finished goods. The teams spend a significant amount of effort in resolving these challenges which they now have. However, the engineering expenses related to the fixed contributed to lower than anticipated margins in the quarter. These activities combined with lower Lidocaine sales resulted in margins below our expectations. One particular bright spot for the quarter was our operation in Canada, which performed on par with second quarter and accelerated going into the fourth quarter. Our team has done a great job there responding to competitive supply disruptions and working with our supply chain partners to ensure product availability. Despite these achievements it now looks increasingly challenging to hit our previously stated revenue target for the year. Based on today's current environment we now anticipate revenue for the year between $65 million and $67 million and gross margin of 38% to 40%. As you all know, Teligent is not a quarter-to-quarter story, at least not yet, but the strategic elements of the story are continuing to come together. This includes a diversified product mix, a diversified pipeline, a broader customer mix through the addition of different product forms in territories and state-of-the-art manufacturing. And indeed you can see that in looking at our year-to-date numbers which show a significant shift to Teligent's own products with our Teligent label revenue year-to-date at $44.1 million, up 29% over the same period last year and more than making up for nonrecurring private-label business in the prior year of $5 million. To drive the story, we continue to need timely approvals from our strong pipeline of ANDAs and ANDSs. During the quarter we had four approvals. One of our strongest quarters for pipeline approvals, three of which have already launched. During our last call, I mentioned the challenge we faced with specific API suppliers. These have down largely been resolved and we are working through the regulatory aspects of that to progress the filings that were impacted. I had said on the previous call that this would create a speed bump of one to two quarters and that continues to feel about right. There were certainly ANDAs that we had expected to see a potential approval of this quarter that looked more likely to be approved now in the first quarter of 2018. That being said, there are still a few ANDAs that have goal date over the next seven weeks that hold the potential to be approved. Also I'm pleased to announce that we have submitted our first complex drug together with our development partner. This drug targeting a market of between $125 million and $150 million based on recent QuintilesIMS data should also be eligible for expedited review under GDUFA 2. We’ve also applied for 180 day exclusivity under the guidelines of the FDA Reauthorization Act or FDARA, which provides for 180-day exclusivity for first to market generics of off patent drugs. The submission of this application will trigger milestones as part of our development agreement which will be a significant driver of our R&D expense in the fourth quarter. On the expansion front, I’m extremely happy with the progress that our team has made over the past quarter. We anticipate moving into the first part of the building during the fourth quarter. We've also begun the fit out of our sterile injectable manufacturing suite with our isolator being installed last week and our filling line being installed this week, now begins the delicate ballet of moving from our existing space into the new premises and a lot of work has done into the choreography of this move to ensure that it is successful. Having reached this point, I think it's important for us to talk about what comes next in terms of our operating priorities. Our stakeholders, including you our shareholders have been remarkable in your support and patience as we've invested in this business and its manufacturing footprint and in its pipeline. As we look ahead to 2018, you'll see a pronounced shift from investment mode to recognizing the benefits of the investment we’ve made. This is the key premise in our 2018 budgeting process to drive stronger cash flows in the business and to raise the bar on the required ROI for investment and is consistent with the plan that we’ve set out before embarking on this cycle of capital investment. Frankly, I think we all agree it's time to shift gears. In addition to our focus on performance, we will also be working on our capital structure in 2018 to replace some parts of the existing debt structure with longer dated commercial debt tied to our facilities and our working capital. We have a few ways we can do this, but I think the important message is that we will be active in managing our balance sheet exposures during the year. So there's a lot going on and with our facility coming online our pipeline progressing and our ability to drive future growth, I’m excited about where we’re headed next. Let me turn the call over to Jennifer now to provide more details on the results of the quarter.

[Jenniffer Collins:]

Thanks, Jason. Good afternoon, everyone and again thank you for joining us today. Jason was giving you an overview of the business sequentially compared to second quarter of 2017. I will now give you some background on our year-over-year results. Our total revenues for the third quarter was $13.7 million, a decrease of 15% compared to the same quarter last year. As we’ve talked about there are two topical products that have lower bioequivalent barriers to entry and had experienced positive price dislocation prior to over the last few years. It is expected these products would face additional competition compared to last year we experienced significant price decline in those two products which were flurandrenolide topical solution and Lidocaine ointment 5%. Revenue from Lidocaine ointment 5% represented 16% of total revenue in the third quarter compared to 34% last year. In addition, the increased competition caused the small reduction in volume as well over last year. The decline, however, was significantly offset by our seven new product launches since September 16, an additional increase in share on one of our products over last year. Product sales from our contract service business were relatively flat $1.9 million this quarter compared to $1.8 million in the same quarter last year. Our contract service revenue from pharmaceutical customers represented 91% of the third quarter contract services compared to 78% last year. Now let me turn to gross margin. Gross margin in the third quarter of '17 was 24% compared to 50% in the same quarter last year. As compared to that quarter last year, margins were affected by the price declines of our two products I just referred to the operational challenges Jason discussed, and increases in distribution fees related to our Teligent label sales in the U.S. In our Canadian product portfolio, we experienced some margin improvement over last year due to the supply disruption that Jason mentioned. SG&A in the third quarter of '17 was $4.1 million compared to $3.7 million in the same quarter last year. SG&A as a percentage of sales for the third quarter of '17 and '16 were 30% and 23%. We’ve invested $4.6 million in the third quarter of 2017 compared to $4 million in the same period last year in R&D. The most significant portion of our R&D cost relates to clinical studies and development work to support our TICO strategy, based on the timing of the milestones and studies, we will start to see significant sequential growth in R&D in the fourth quarter to support those objectives. For the quarter ended September 30, 2017, net cash used in operations was $2.7 million, which included $4.6 million of R&D expenses. The use of cash was related to some partial delays in working capital as we received payments of our accounts receivable of approximately $12 million in October. For the quarter ended September 30, 2017, cash used in investing activities was $10.7 million related to capital expenditures for expansion of our facility in Buena, New Jersey. We expect the final budget for the facility expansion including necessary equipment, utilities and process controls to approximate $55 million. We hope to have this substantially complete by the end of next -- by the end of this year. In the third quarter of '17, we recorded a net loss of $6.3 million compared to a net loss of $2.7 million in the same quarter last year. We’ve included a foreign exchange gain of $1.7 million for the noncash gain related to our foreign currency translation of our intercompany loan to our wholly-owned subsidiaries combined with reconciling items for our foreign exchange from prior quarters. Due to the nature of this transaction, there was no economic benefit to the company to hedge this transaction. For the quarter ended September 30, 2017, net loss included amortization and depreciation of $1.2 million compared to $1 million last year. Our net loss in this quarter also included $2.4 million of noncash interest expenses primarily related to the amortization of our discount related to our convertible note. As always, we are grateful for your participation today. I will now turn the call back to Jason for his closing remarks.

[Jason Grenfell-Gardner:]

Thanks, Jennifer. Before opening up for questions, I just want to extent my personal thanks to our Teligent teams in the U.S., Canada, and Estonia, as we’ve been working so hard over the past quarter. I get the privilege of seeing the dedication every day in the furtherance of our goals and I'm very proud of the work that they do. So thank you to all of them. With that, Grace, let me open it up for question.

[Operator:]

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

[Matthew Hewitt:]

Good afternoon and thank you for taking the questions.

[Jason Grenfell-Gardner:]

Hey, Matt.

[Matthew Hewitt:]

Hi. First off, let's talk a little bit about the pipeline. So just going to the press release, it looks like you’ve added two new ANDAs given that you’ve gotten the four approvals during the quarter. Regarding the ATI situation that you had talked about last quarter, it sounds like that’s resolved. It seems like that the hold up on several approvals was simply that last box that needed to be checked, the ATI facility inspection. Now it sounds like the things have been pushed a little bit. Was there other information or other details that the FDA require beyond those ATI facilities?

[Jason Grenfell-Gardner:]

Let me -- thanks for the question, Matt. Of course each application has its own questions and issues and concerns, but one of the overarching concerns was certainly related to the compliance of these facilities. And if you think about the process of working through that, what really happens, I mean, first the facility has to clear its compliance issues. Having cleared its compliance issues that then gives rise to potentially reviewing a drug master file or going back and reviewing some of the other elements related to the file. You can end up with sort of a little bumps along the road anywhere, anyway -- anywhere in that process. So, I can think about a specific drug where the outstanding question was really the facility. The facility finally got its establishment inspection report done. We were able to get that back to the FDA, the FDA came back and said oh, now we have an issue with the drug master file, and so you’re in minor complete response letter cycles in order to review that. There have been similar stories with some of these of other products and even with the only question being the facility and the facility compliance that still puts you in a three month cycle for review. So, one of our partners came back into compliance really at the very end of September beginning of October. And so you’re sort of working through that natural regulatory time.

[Matthew Hewitt:]

All right. Thank you for that. As far as -- and Jennifer may be this one is for you, DSOs, they’ve continued to creep up -- I know that there was a couple drugs where the WAC price was cut, obviously late in the quarter, should we expect to see DSOs come down here in the first -- fourth quarter and see the commensurate increase in cash collections?

[Jenniffer Collins:]

Yes, thanks for the question, Matt. When I talked earlier I tried to point out that for October, in cash collections from customers we had received over $12 million. So that was expected that we’d have got that in September, but we actually didn’t received the majority of that until October. So that will have a significant impact on driving those DSOs down towards the end of the year.

[Matthew Hewitt:]

Okay. Thank you. And sorry I must have missed that piece. One last one, then I will hop back into queue. As we look at the fourth quarter and given some of the delays that you’ve seen in the approvals, but the growth that you’re seeing in the products that you have been able to launch, obviously you’ve given us updated guidance, but from the 10 approvals that had expected exiting last quarter, where does that number sit now and how many of those do you think that you could actually get launched yet this quarter? Thank you.

[Jason Grenfell-Gardner:]

Sure, Matt. So from that 10 -- I think the language was approximately 10, but from that 10, of course, we’ve seen 4 approvals. We think that there is potential for another couple of approvals throughout the rest of this year. I mean, there are a number of dates, but I think given just some of the things that I’ve seen over the course of the past quarter and the review cycle, I’m a little bit more skittish about those numbers than they were before. Of those 10, I mean, certainly there are 4 there where I see minor complete response letters that really were often related to the site that we talked about earlier or other sort of minor issues. We feel confident of being able to respond to them and that’s why I said, okay, then maybe some of those things become first quarter 2018. So we still see progress. It's just not progress at the rate that we had anticipated earlier this year.

[Matthew Hewitt:]

All right. Fair enough. Thank you.

[Operator:]

Thank you. And our next question comes from Dewey Steadman with Canaccord Genuity. Your line is now open.

[Dewey Steadman:]

Hi. Good afternoon and thanks for taking the questions. I guess, my first one would be on the dermatology market dynamics, the [indiscernible] seems to be degrading quickly with a more crowded market and what -- obviously your strategy is to have a full line of topical products out there, but what tactics in the near-term can you do to offset some of those unexpected degradation of the business?

[Jason Grenfell-Gardner:]

Thanks for the question, Dewey. It's an interesting challenge, right, because if you look at -- and I will come back to the general market, but I want to start with this specifics and let's look at the specifics of the two markets that we were talking about Lidocaine ointment and Lidocaine topical solution, when we launched the Lidocaine ointment back in 2016, I think we launched being the fifth player in that market and then there are now I think seven players in that market.

[Operator:]

Thank you. And our next question comes from Greg Fraser with Deutsche Bank. Your line is now open.

[Greg Fraser:]

Thank you. Its Greg Fraser on for San Francisco thank you it's Craig Fraser on for Greg Gilbert. On the new revenue guidance, how much of the change was related to the pressures on the core products during the quarter versus the delays in launches? Hello?

[Operator:]

[Operator Instructions]

[Jason Grenfell-Gardner:]

So I know Dewey, that we got interrupted there. I don’t understand exactly what happens phone technology, but let me come back and talk about what we were talking about in terms of specific, so some of these market dynamics. So, when we look at certain of these markets, we were because of supply disruptions or competitive dynamics holding positions that were never going to be long-term positions, right? I mean, it would be unrealistic to expect that we would hold 100% share in a genericized market forever. I mean, we always anticipated that our competitors would come back into market for that, new competitors enter markets in the case of -- for example Lidocaine ointment. But I think if you look at the overall market more broadly, we see in terms of our -- looking again, leave me aside these Lidocaine situations which are some exceptional, the rest of our markets have actually been relatively stable from a Teligent perspective. So we've actually found them to be reasonably predictable. It's just when we were going to these markets where there have been significant disruptions that I think sometimes we form opinions that -- our firm expectations that might be challenging to achieve. So I hope that answers your question.

[Operator:]

Thank you. And our next question comes from [indiscernible] with Morgan Stanley. Your line is now open.

[Unidentified Analyst:]

Yes, good afternoon. Could you explain two things. I have been on these conference calls for about three years now and you talk about margins in [indiscernible] and we know the margins are going down, yet you guys have still the scenario of 40% to 50% margins. So that’s one question. My second question is, how much cash do you have on hand and would there be any type of buyback looked at with the stock price now in the [indiscernible] teens that have gone down in a row?

[Jason Grenfell-Gardner:]

Thanks for your questions Mark. I appreciate them. So first let's talk about where we see target margins over time. And if you look at the broad evolution of Teligent's margins, let's say, since 2013, 2014 when we started achieving stronger operating efficiency in our business, you can see that we've had quarter-on-quarter margin expansion except for the last two quarters. As we look at those last two quarters, they have been pretty exceptional, right? I mean, in the case of the second quarter you started to see some price contraction related to Zantac and some related Lidocaine as well, and in this last quarter you saw a pretty significant volume contraction. And remember that when you compare this back to 2016, in 2016 we also had this book of about $5 million of private label business that was all relatively high margin business. So now to think about, okay, how does that margin profile change over the coming quarters, I think what happens is you pick up that engine of operating efficiency again in operating leverage. That comes from the fact that -- in the market 21 ANDAs today, 21 dermatology products today on the market, you've got more than 30 of them sitting at FDA and as you start processing that and putting them to your facility you will naturally achieve greater margin expansion getting you back to where you need to get to or in fact I can look at where we are in Q4 already and start to see that some of those one-offs that were affecting Q3 definitely are having the same impact in Q4 and I think that makes a lot of sense. In terms of your second question regarding the stock price and buybacks and so on, I would say this, we have -- we're at the end of a cycle now [indiscernible]. My goal is to see that we start making those assets work for all of us in 2018. I’m mindful that looking at our working capital position that we need to continue to fund our working capital as we grow the business. So I'm not sure that while I think I probably shared your view on the share price, I'm not sure that given the -- where the balance sheet is today, we’d be best placed to be looking at a share buyback. That being said, these are discussions that we always have on an ongoing basis with our Board of Directors and we will always keep that in mind. Thank you for your questions.

[Unidentified Analyst:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Greg Fraser with Deutsche Bank. Your line is now open.

[Greg Fraser:]

Thank you. This is Greg Fraser on for Greg Gilbert. On the new revenue guidance, how much of the change was related to the pressures on the core products during the quarter versus the delays in the new launches? I’m just trying to get a sense for what -- your expectations were for the products that of which approval have been delayed?

[Jason Grenfell-Gardner:]

That was a great question, Greg. It's really almost entirely driven by pipeline delays. I mean, there were expectations that we had of products that we believed were right for approval that we have been pre-staging materials and inventory for that then you come up with another, so the question another cycle of review. That's the biggest impact to us in terms of the forecast.

[Greg Fraser:]

I’m not sure if I missed this, but did you say what injectable sales were?

[Jason Grenfell-Gardner:]

Injectable sales for the quarter?

[Jenniffer Collins:]

Injectable from -- total injectable sales for the quarter were 35% of revenue.

[Greg Fraser:]

Okay. And on the milestones you called out in R&D, how much will those be?

[Jason Grenfell-Gardner:]

I don’t have the exact number in front of me. I might be able to hold in front of me. I think that's -- it's about $1.6 million, I think, in total milestones in the fourth quarter.

[Greg Fraser:]

Okay. Thank you.

[Operator:]

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

[Elliot Wilbur:]

Hey, thanks. Good afternoon. I was distracted listening to the share music on the other conference call. So I may missed this in your opening comments. Beyond injectables, Jennifer, did you had any specific commentary around Zantac performance in the quarter? And if that wasn't mentioned, if you could maybe give us a little bit of insight of what’s happening with that product currently?

[Jenniffer Collins:]

Yes. I think, Jason, had talked about that earlier in his formal remarks that we continue to see that contractions on that market in the third quarter for volume. So it was definitely consistent with where we -- where it was planned to be, but it was, I think, towards the end of the quarter. We’re just not seeing the pickup, we’ve seen a little bit of pick up in the middle of the quarter and then it never came to fruition through that beyond the quarter. So we are not seeing that market come back to the total adjustable market that it was prior to the shortage when we were talking about that in the second quarter. We’ve expected that to continue for the rest of this year in the guidance that we provided.

[Elliot Wilbur:]

Okay. And with respect to -- in the last couple of quarters you’ve sort of highlighted price erosions [indiscernible] for the portfolio outside of one or two key products. I don’t know you have that number this quarter, but -- if you could comment on that?

[Jenniffer Collins:]

Sur. Most of the decline quarter-over-quarter this quarter was driven by the volumes that Jason described earlier, particularly Lidocaine topical solution and Lidocaine ointment. We saw a little bit of price decline for the Lidocaine ointment product at an overall basis. It was I think a couple of percentage points.

[Elliot Wilbur:]

Okay. So in terms of the price impact in the quarter relatively consistent with what we’ve saw last period, which I think was 1.5 [multiple speakers].

[Jenniffer Collins:]

Yes, I think it was 1.6 last quarter. I think it was a medium percentage point higher this quarter, Elliot.

[Elliot Wilbur:]

Okay. Okay. And then with respect to the …

[Jenniffer Collins:]

Clearly driven by the volume.

[Elliot Wilbur:]

Okay. Thanks. And then, Jason, with respect to the complex ANDA that you filed, assuming that that will -- we won't get much visibility on that, while it sits at FDA, but is there anything more you can say in terms of if anything maybe just identify in the particular dosage form?

[Jason Grenfell-Gardner:]

Sure, Elliot. I mean, it is an oral product. So it's not in our usual universe, but it's something where we like the complexity of the -- what was required in order to work on the API complexity of the actual manufacturing and finishing there. So we’ve actually been working on this project I think for almost 3 years. So getting it to filing, I think is amazing. It is a -- as I said in my early remarks that is a first generic of an off patent product and this is again one of those products where I think we’ve seen some pretty significant price dislocation over the past two years. So the benefit that I believe that Teligent is going to be able to bring with this product is pretty significant. And we are in GDUFA 2, we are part of an active rolling review, not an iterative review. I think once we get acceptance for filing from this, we will probably start to talk a little bit more because the eventual sales channel piece of this will be an important part of the story.

[Elliot Wilbur:]

Okay. Thanks. Just last question with respect to the injectable facility, can you just talk about important milestone events that are going to happen over the course of 2018 and what the current timeline to revenue realization looks like at this point for that endeavor [multiple speakers]?

[Jason Grenfell-Gardner:]

Yes, absolutely. Yes. So, I mean, we start all of our system testing in the month of December. We will do water system testing and validation starting in February and the goal is to reduce the first lapse [ph] to support preapproval inspection in the second quarter and our goal would be to have product available in the market by the fourth quarter of 2018.

[Operator:]

Thank you. And we have a follow-up question with Matt Hewitt with Craig-Hallum. Your line is now open.

[Matthew Hewitt:]

Maybe just to tick on to that last question, as you look out to next year, obviously early on in the process you will have a few of your products that you will be able to shift manufacturing into your facility. Will there be some opportunities to maybe absorb some of the overhead via some contract manufacturing, have you had any of those types of discussions and any color along those lines will be greatly appreciated. Thank you.

[Jason Grenfell-Gardner:]

That’s a great question, Matt. And it's one that we kind of arm wrestle about, because there was one part where we, particularly on the sterile injectable side, where we will have capacity that comes online, but fairly dead -- I think we will fill that capacity fairly quickly with Teligent label products based on the AstraZeneca portfolio and the Valeant portfolios that we acquired back in 2014. We've been working on some site transfers of those two contract manufacturers, but frankly being able to just do that stuff in-house is going to be significantly faster and the team has already prepared the first seven products that will be going into the facility for that. Well, I think there could be some opportunity is on the derma side of the business. We do still have some contract manufacturing revenues that come out of the dermatology side of what we do with the semisolid piece. We get approached regularly for doing more that, but in the context of this expansion, it feels like in a degree of incremental complexity that would potentially put the rest of the project at risk, and so we sort to stayed away from that. As you get into 2018, I think the -- that the window opens up again to consider some of those opportunities. So we will probably looking more of that. And I guess, one final sort of comment on that in terms of contract manufacturing, as we look at our contract manufacturing revenues over the course of 2017, we’ve seen that they've been be pretty significantly lower compared to 2016. Some of that is we know because there were one-off private-label opportunities, some of that is because there have been competitive pressures on some of our contract customers [indiscernible] particularly on the brand side. So that's been a little bit of fluctuation that’s found its way into the model to contract manufacturing too. So there's probably more to do, but for now I think we're just focused on getting into the building and making it work.

[Matthew Hewitt:]

Got it. Thank you.

[Operator:]

Thank you. I’m not showing any further questions at this time. I’d now like to turn the call back to Jason Grenfell-Gardner sir, for any further remarks.

[Jason Grenfell-Gardner:]

Okay. Thanks, Grace. Thank you all for joining us on today's call and thank you for your continued support and interest in Teligent. Have a great evening.

[Operator:]

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