Teligent, Inc.
Q4 2017 Earnings Call Transcript

Published: 17 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Teligent Inc. Fourth Quarter 2017 Results Conference Call. 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 call is being 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 Private Securities Litigation Reform Act of 1995 and involve certain 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. There is no assurance that the company will achieve the sales levels that will make its operation profitable or 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 introduce your host for today’s conference Jason Grenfell-Gardner, President and CEO. You may begin.

[Jason Grenfell-Gardner:]

Thank you, Glenda and good afternoon, ladies and gentlemen. Welcome to the Teligent business update covering the fourth quarter of 2017. 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 our expansion plans. Damian will then provide a more detailed breakout of our financial performance for the fourth quarter. Today we released results for the fourth quarter that exceeded expectations and demonstrated a strong rebound in our business. Sales for the quarter were $16.1 million taking our full year 2017 revenue to $67.3 million. Gross margin also improved by nearly 2200 basis points as we worked through the issues that had impacted the prior quarter. This turnaround in business performance was driven by a broad-based improvement in revenue across the portfolio. It was also aided by new product launches gaining traction from the third quarter and further new launches in the fourth quarter. We finished 2017 with 28 products in the U.S. market and 30 products in Canada. After a bumpy ride in the middle of 2017, we finally saw the pipeline approval engine re-engage with three approvals in the fourth quarter. That's important because as you know, we've been working through review issues related to FDA inspections of some of our raw material suppliers. These have now been cleared and approvals are flowing again. The significant work that we have done over the past year to be prepared for product launches has enabled us to introduce products to the market in an expedited fashion. This also helps in achieving the strong fourth quarter. On our last call we mentioned that our Canadian business has been performing strongly. This continued in the fourth quarter with Canada recognizing its strongest quarter of the year. Our contract manufacturers have partnered closely with us over the past few quarters to ensure that our Canadian team were able to respond to significant fluctuations in demand, derived from competitor supply issues. We believe these trends are likely to continue through the first half of 2018. Putting this all together, product launches, a broader revenue recovery and the strong Canadian business have helped us to achieve an excellent result for this fourth quarter. Turning to the pipeline, we submitted a further two products to the FDA in the fourth quarter, closing the year with 31 ANDAs on file in the United States, representing a total addressable market of $2 billion based on recent IQVIA data. We also ended the year with five submissions un-file with Health Canada. R&D expenses were higher than average in the fourth quarter as a result of milestone payments related to the submission of our first complex generic drug. I will speak further to the shape of the pipeline following Damian’s financial review. Turning to our expansion, we moved into the first half of our expansion in December 2017. This was a milestone moment as we occupied our new laboratory in support spaces in the building. But in addition to that, we've made incredible progress on our sterile filling suite for injectables and the broader project. Today, we believe that we are on track to sell our first injectable product during the second quarter of 2018 and the space looks great. This really is America's newest State-Of-The-Art injectable manufacturing site and we’re keen to move from constructing, installing to manufacturing and selling. With this project on track, we're moving closer to having the greater financial flexibility I described in our last call to be able to utilize the site and the broader business to address the outstanding convertible debt liability. We have initiated a number of conversations on this front and as a result, I can tell you that we have a high degree of confidence that we will be able to manage this liability according to our plan. Finally, I'm excited to welcome our new Chief Financial Officer, Damian Finio of the Teligent team. Damian’s breadth of experience in the generic and branded pharmaceutical markets, as well as our mutual experience of working together through complicated financial situations, makes me excited to the broader team. As part of his early work here, he has managed our 2017 full year audit which included the review that resulted in a revision to our third quarter 2017 financials today. I think this is evidence of our mutual commitment to transparency and completeness. Let me turn the call over to Damian now to provide more details on the results for the quarter. Damian?

[Damian Finio:]

Thanks Jason. And I'm excited to be here. Good afternoon everyone. I joined Teligent about six weeks ago on February 5. But today, I wanted to start by saying, thank you to my predecessor Jennifer Collins. Jen and I worked closely together in the last few weeks to ensure smooth transition, for insight and history with the organization has been extremely helpful and very much appreciated. I’d like to review our financial results in two parts. First, I'll make a few brief comments about our third quarter 2017 Form 10-QA filed earlier today. Then walk through the financial results for the fourth quarter and full year 2017. From there, I will provide you with guidance on our projected financial performance for calendar year 2018. But first, after discussions with the company's audit committee we made the decision to file Form 10-QA today in order to revise and restate our third quarter 2017. In Form 10-QA filed for the third quarter of 2017, we outlined three transactions that required adjustment. Number one, the company agreed to appoint $8 million price concession for the purchase of one of our Canadian products in August 2017. However, that price concession has not been properly recorded as of September 30, 2017. Number two, the company has an outstanding receivable from one of its contract service customers in the amount of $1.7 million. The receivable met the company's criteria as of September 30, 2017 to be fully reserved. However, as a result of the misinterpretation of the legal position, the reserve was not recorded. And lastly; number three, the company entered into an agreement for professional services prior to September 30, 2017 about $0.1 million of this fee earned at September 30, 2017 were not properly accrued at quarter end. The net impact of these three transactions was an approximate $2.6 million increase to the company's operating loss. Moving on to our results for the fourth quarter and full year 2017. As Jason mentioned, revenues for the quarter were $16.1 million bringing our full year 2017 revenue to $67.3 million which is in line with the high end of our last 2017 full year revenue guidance and represents a 1% increase in year on year performance. Breaking down the $67.3 million of full year 2017 revenue $58 million of revenue was generated by Teligent labelled product which represents $9.1 million or 19% increase over 2016. And it's worth highlighting the $3 million increase was generated by incremental revenues in our Canadian business. The remaining $9.3 million of the full year 2017 revenue of $67.3 million was generated by contract manufacturing, partner products and product development fees which represents $8.7 million or 48% decline in 2016. In 2017, two products accounted for more than 10% of full year revenue Lidocaine ointment 5% which realized that $3.6 million decline in revenue year on year and Zantac which realized the $5 million increase year on year revenues. Working our way down the P&L, our gross profit for the quarter of 2017 was $5.9 million bringing our full year 2017 gross profit to $27.4 million which represents a 21% decline in year on year performance. Gross profit of $5.9 million for the quarter and $27.4 million for the full year equates to gross margin of 36% and 41% respectively. The full year figure of 41% down 12 basis points from the prior year, due primarily to price declines particularly with Lidocaine ointment 5%, operational challenges and increased distribution fees on Teligent labelled sales, all of which was discussed during our Q3, 2017 earnings call. SG&A for the fourth quarter of 2017 was $4.9 million, bringing our full year SG&A expenses to $19.9 million. This includes the $1.7 million of bad that expense mentioned in my earlier remarks regarding the amended Form-10A, filed earlier today. Excluding that bad debt provision from both 2016 and 2017 for the sake of comparison, the increase in adjusted 2017 SG&A represents a 24% increase in comparison to the prior year. The increase relates primarily to compensation related expenses associated with the growth of our employee base, as well as consulting fees related various projects across the business geared at strengthening our internal control framework. In terms of our continued investment in R&D, we recorded $5.9 million of expense in the fourth quarter of 2017, bringing our 2017 full year investment in R&D to $19.3 million which is just below 29% of our full year revenue. This brings us to a loss before interest impact of $4.9 million for the quarter and $11.8 million for the full year 2017. Lastly in the fourth quarter 2017 we recorded $2.5 million of interest, $2.3 million of which, which was non-cash interest expense related to the amortization of the discount related to our convertible notes. It's important to highlight that the majority of the interest on our convertible debt is still being capitalized as the proceeds are being used to fund expansion and our Buena, New Jersey manufacturing facility. We also recorded a $1.1 million foreign exchange gain and a $0.2 million in taxes for the quarter 2017. As a result, our net loss for the quarter was $6.1 million and $15.2 million for the full year. The $15.2 million net loss for the year, includes $8.6 million of non-cash interest expense offset partially by $7.7 non-cash gain related to the foreign currency translation of our inter-company loans, our wholly owned subsidiary as well as transaction level adjustments. As stated in previous communications, there is no economic benefit for the company that has this transaction. Full year 2017 EBITDA before product development and research expenses was $19 million compared to $22.3 million for the prior year, representing a 13% decrease. From a cash perspective, net cash provided by operations for the quarter of 2017 was $10.3 million which included $5.9 million disbursements relating to our continued investment and a reduction of accounts receivable, driven by strong cash collections for customers. And net-cash provided for the full year was positive. Net cash using investing activities for the fourth quarter of 2017 was $14.4 million primarily relating to capital expenditures for the expansion of our facility. The expansion project is expected to be completed next quarter with total cost complete of about $60 million. Lastly in terms of guidance for calendar year 2018, the company expect total revenue in the range of $70 million to $78 million, EBITDA $3 million to $6 million, gross margin in the range of 35% to 40%. And we plan to invest $13 million to $15 million in our R&D pipeline. Thank you and at this point, I'd like to turn it back over to Jason.

[Jason Grenfell-Gardner:]

Thanks Damian. So, let me talk a little bit more about 2018. As I said in our recent communications, we view 2018 as a year of shifting gears from investment to profitability. First Damian set out our revenue expectations for the year at $70 million to 78 million. We would expect that number generally to be more heavily weighted to the back half of the year with revenue accelerating quarter to quarter. First quarter 2018 may come in slightly before fourth quarter 2017 due to timing of yearend inventory orders that can impact revenue in the first weeks of the New Year. Second, we anticipate that gross margin will continue to improve in this together with a focused spend on R&D. We’ll drive positive EBITDA on 2018. With our move to injectable product development and using the approved drug applications that we already own through the acquisitions we previously made we're able to achieve a high degree of R&D productivity at a lower cost in 2018. This implies a reduction in absolute dollars spent in R&D of approximately $4 to $6 million in 2018 as we target that total R&D investment of between $13 million and $15 million that Damian mentioned. Our first injectable drug that we manufactured the size are ready to go from an R&D perspective and we're looking forward to getting in there and getting them made. Finally, we are laser focused on profitability this year. Over the past two years, we've been able to achieve positive cash flow from operations while we invested heavily in our physical infrastructure. We're now approaching an inflection point and I'm excited about what we're going to achieve in 2018. Before opening up for questions, I would like to extend my personal thanks to our Teligent teams in the U.S., Canada, and Estonia who have been working to make Teligent successful. These folks have endured a lot over the past many months as we've been building facilities and capabilities around them and I am enormously grateful for their dedication and their generosity of spirit and I'm incredibly proud of the work that they do. So, thank you to all of them. With that Glenda, lets open this up the question.

[Operator:]

[Operator Instruction] And our first question comes from the line of Elliot Wilbur from Raymond James. Your line is now open.

[Elliot Wilbur:]

Thanks. Good afternoon. First question for yourself Jason, I guess with respect to 2018 revenue guidance can you just give us maybe a little bit more granularity in terms of what may be embedded in there with respect to new approval activities, either potential number approvals and/or so what you're expecting in terms of incremental revenue?

[Jason Grenfell-Gardner:]

Yes, sure Elliot. Thank you for the question. So, when I think about the 2018 pipeline and the growth that comes from there; first, one of the larger growth opportunities is from the products that we have already launched this quarter and that was from hydrocortisone butyrate lotion. That is a paragraph for first to file drug in which we have 180 days of exclusivity and that drug launched during this quarter. So that's one of the good guy I think in terms of the pipeline. There are a couple of other sort of larger opportunities in there. And I think, we'll see some FDA activity around that in the first half of this year to give you a little bit of shape around goal dates and what that looks like? I mean, if I look right now just to June 30, between now and June 30 I believe we have eight potential action dates. And we feel pretty good about most of those. There's a couple there, where I think the FDA is still working through some of the questions around elemental and purity that could cause some delays, but for the most part, I think we've addressed what the FDA needs. So, we feel pretty good about that in the pipeline.

[Elliot Wilbur:]

Okay. And then with respect to actual performance in the quarter in terms of the sequential rebound in the U.S, topical business, any anything in particular there drive the sequential rebound, any particular products that we’re calling now?

[Jason Grenfell-Gardner:]

No, it's a good question. It was actually a pretty broad rotation around the portfolio. So, you had a couple of the injectable drugs that were in the U.S. that were back dealing with some shortage issues that we picked up a little bit of volume there, drugs like [indiscernible]. Again, those can be transitory. But I think what I liked about the shape of this quarter was that, there was nothing there in terms of a big mover that was you know outsized. There are pluses and minuses across the portfolio more to the plus side. But it was a pretty broad-based movement across the entire product portfolio.

[Elliot Wilbur:]

Thanks. Last question for me just with respect to the injectable facility, can you just walk us through the remaining steps, milestones, timeline before we could actually begin to see revenue realization from that facility?

[Jason Grenfell-Gardner:]

Sure. So, where we are right now is in sort of startup phase. So, when we last spoke in November, we were just installing the line and we had our vendors there selling isolator and the filling line, finishing up the space and so on. Today the sterile injectable suite is largely finished. What we have going on there is qualification of the filling lines by both the other vendors from the outlet in the filling line manufacturers. In concurrence with that, we are doing water validation, right, for the purified water and water for injection systems that really support this system. Now that is usually a 30-day test to run through all of those tests and processes. And we have to do that not only with our sterile systems, but also support our larger topical business. So that's something that we'll be working through now into April, beginning of May. Our goal and our hope are that, we will then be able to fill the first batches before the end of the second quarter. That will allow us to put drug up on stability because we're using post approval change our goal is to be able to submit a prior approval supplement to FDA to trigger an inspection, probably at the beginning of the fourth quarter and then it really depends on the FDA. I think the best estimate to have here is that, we expect that the facility will be generating revenue from the new filling line in early 2019 which is consistent with our plans.

[Elliot Wilbur:]

All right. Thank you.

[Operator:]

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

[Matt Hewitt:]

Gentlemen thank you for taking the questions. Hello a couple. First off regarding the guidance how much of that is the base business or what you've recently launched versus what you anticipate getting approved for maybe here in the first half of the year and getting launched that you could generate some revenue by year end?

[Jason Grenfell-Gardner:]

So, when we think about the guidance, on the low end of the guidance as you know, we try and look at all the things that we already have in hand. And the upper end of the guidance, I think consideration, optionality around things yet to be approved and other potential sources of outside. So that's generally how we constructed the guidance this year, Matt.

[Matt Hewitt:]

That's helpful. Thank you. And then regarding the R&D investment this year how should we be thinking about that from a split perspective? Meaning, how much of that is going to be focused are those dollars focused on new and as versus how much of it is going to be spent on re-launching some of the acquired products over the last few years?

[Jason Grenfell-Gardner:]

That's a really good question. I don't know that I've done the math to split it out that way between old and new. What I will say is that, there's a combination of both new and reactivation products on the injectable side because we've been doing new formulation as well. There are still topical submissions that are expected to happen in 2018 as well. But in terms of old versus new split, I haven't done that math. So, I can do that and revert back you.

[Matt Hewitt:]

That's found to be helpful. Thank you. And then maybe one last one, the two applications that were submitted here in the fourth quarter, were those still on the topical side? Are you starting to submit some applications on the injectable side that you would eventually flip over to your own manufacturing one that's ready?

[Jason Grenfell-Gardner:]

So, I think if I remember what was submitted in the fourth quarter correctly, one of them was for the first complex drug and one of them would have been for one of our topical drugs.

[Matt Hewitt:]

Okay, great. Thank you for the update.

[Jason Grenfell-Gardner:]

Thanks Matt.

[Operator:]

Thank you. And our next question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is now open.

[Gregg Gilbert:]

Thanks. Good afternoon. Have a few. The first one is, Jason you talked about some options to the author convert situation, can you go into a little more detail about the kinds of things that you're considering?

[Jason Grenfell-Gardner:]

Sure. Thanks for the question Gregg. Look I think, it's interesting dealing with this perception around the convert because if I look at what our balance sheet looks like we're very mindful of the obligation that we have out in December 2019. But I look at the bounty that we have in the facilities that we have, the only debt in us on our corporate structure at the moment is essentially this. This can convert. And so how do you stop unbundling that? I think the first is, we have some opportunities around taking some leverage against the business and securing that with our facilities, right. So, whether we do that is a term loan or something as a mortgage. I think if you go all the way down the road you could theoretically do this the sale leaseback transaction which perhaps is not my favorite way to do that. But there are a lot of different levers that we can pull to unlock capital from that facility. I think the second part here is that, at the moment we don't have in place anything around our receivables or any of our working capital. Their ability is there to put in place a revolver NAVL that will allow us to use some of that value. And I think there is third opportunities that are there depending on what the convert looks like? There are some opportunities to work with some of our convertible is directly as well. I think one of the things that perhaps because of just the opacity of the market, equity holders don't mitigate to see what the valuation is of the debt out there? And you can kind of conceptually think that this debt would be trading pretty, pretty low. But you know in fact our debt today trades at $0.90 on the $1. So, I think that the folks who hold this debt have a pretty good sense that, we are going to be able to work through this with the efforts and the levers that we have.

[Gregg Gilbert:]

Okay. Thanks for that. Here we are pretty late in Q1, are you willing to share any sort of color on how the quarter is going, especially after you just reported what you've characterized as a pretty strong quarter in 4Q, any sort of tone or specifics you can share about the almost completed first quarter?

[Jason Grenfell-Gardner:]

Sure. I mean I think I'd try and do that a little bit while giving a sense of the shape of a quarters across the year. The year has actually gone up a pretty good start. I think again as we said, we expect candidates to continue to perform strongly at least through the first half of this year based on the commitments that we see around the existing product portfolio. In addition to that, we did launch Hydrocortisone Butyrate Lotion in the first quarter as well. So that is pretty good for us. So, the quarter is going well.

[Gregg Gilbert:]

Great. And then lastly the bigger picture question about your injectables capabilities, can you give us a sense for what kinds of products you can get out into the market in the next couple of years versus those that you can get out longer term, based on technologies and capabilities you already have? Thanks.

[Jason Grenfell-Gardner:]

Yeah. Sure. So, the filling line that we have is, there actually really need it. It has the ability to produce vials from 2 ml up to 50 ml. In fact, if we wanted to, we could probably produce them up to 100 ml. We can do them both aesthetically filled, as well terminally sterilized. That gives us a lot of scope to work across the portfolio of potential product forms. The second thing that this line can do is that it has the ability to manufacture ampules as well. We all recon ampoules are an older technology. But there are still cases in users where they are medically necessary and there are the appropriate delivery technologies for the drug that question. So, with that, we can do a pretty broad range of product, again primarily focused on liquid fill. The idea of the first filling line is that, this gives us the ability to drive pipeline and drive our R&D capabilities and drive smaller volume products through the facility, but it also gives us the opportunity to bridge a couple of years to a larger capacity filling line in terms of the number of units we'd like to put through. So, we start with between four million and eight million of units of capacity depending on size and shifts in line one with the idea of eventually moving to around 40 million in capacity when we get to line two, but that's a little bit further down the road. Right now, we want to build the initial capacity in the system and get this rolling.

[Gregg Gilbert:]

Thanks a lot.

[Operator:]

Thank you. [Operator Instruction] And our next question comes from the line of Dewey Steadman from Canaccord. Your line is open.

[Dewey Steadman:]

Hi guys. Good afternoon and thanks for taking the questions. I guess first of all in relate and how it relates to the convert, how core the international business to the company? And then it how much of a growth driver is that business going forward?

[Jason Grenfell-Gardner:]

Yeah thanks Dewey. It's a good question. So, the Canadian business you remember we bought the Canadian business back in 2015. And 2016 was a sort of a flat year, 2017 though the business grew really quite well. And any driver for that was continued market supply disruptions in Canada. And our team together with our contract manufacturing partners were amazing. I mean the ability to respond to some of these things has been incredibly impressive. The idea though about the Canadian asset was not to just continue it in its current state, but it was to achieve greater operating leverage by plugging it into the manufacturing side that we have in New Jersey. That the 2019 endeavor obviously, but we believe that future growth in Canada will likely be driven by that. So, I wouldn't say it’s the core growth driver of our business, but it's certainly something that helps us achieve greater operating leverage and improve margins overtime.

[Dewey Steadman:]

Okay. And then with the tax reform win intelligence becomes a full year of taxpayer. What's the current assumption on a long-term tax rate?

[Damian Finio:]

So, Dewey this is Damian, well. So, right now as you know we're down about 5% effective tax rate. We have the Estonia operations which we used to supply Canada as you are aware. Going forward we need to take a closer look at the Tax Reform Act and think about whether that structure still makes sense going forward. But I am comfortable that we're setting out a pretty good effective tax rate right now. You can’t go below zero. So, we're at about 5 down, we'll see if changing that structure would yield better results with the changes in the tax law.

[Dewey Steadman:]

Okay. And then my final question just for Damian again congratulations on joining Teligent team and with the 3Q restatement will we see a material weakness on the stand today and if so what remediation steps we need take to resolve that.

[Damian Finio:]

So, Dewey, so we haven't filed the 10K yet and we will shortly. Obviously, there was a material witness in the 10-Q from the third quarter. I would suspect we will have another material weakness just to focus on these three transactions that I mentioned. What's good about them in a way is that, they're not systemic and they're not SAP related. And really all three of them have almost the same flavor in that, but it was a miscommunication. It was a distinct and separate transaction. Someone in the business knew but needed to communicate the fact they knew them to the finance function to approve for them properly. So, although that is a weakness, it's a weakness that I think we can address quickly and pretty easily without cost. So, it's a matter of cross-functional and cross regional communications and making those tighter, particularly at the end of the quarter.

[Dewey Steadman:]

Great. And I'd like to add one more and just wanted to end on a positive note. In terms of the lumpy complex product that Jason you talked about previously. Is there any additional color that you can give us or even just give us color on when you're going to give us color on the product? There's a lot of customer interested in it?

[Jason Grenfell-Gardner:]

And we're pretty excited about it too. FE is now going through the review process, as I mentioned I think on the November call, we filed under [indiscernible] for particular matters which would allow us some opportunity to achieve a more iterative review with FDA that is ongoing. FDA is conducting audits of manufacturing about equivalent size. So is one of the things Dewey, I think as we get closer perhaps to Q1 call here in a few weeks, we'll have a bit more information and we can share that with you.

[Dewey Steadman:]

Sounds great, looking forward to that.

[Jason Grenfell-Gardner:]

All right. Thank you very much.

[Operator:]

Thank you. And that concludes our question and answer session for today. I'd like to turn the call back over to Jason Grenfell-Gardner for closing remarks.

[Jason Grenfell-Gardner:]

Okay. Thank you, Glenda. Thank you all for joining us today and for your continued support and interest Teligent. We will be at the Oppenheimer Conference next week in New York. So, looking forward to seeing some of you there and thank you for your continued support, have a great evening.

[Operator:]

Ladies and gentlemen thank you for your participation in today's conference. This concludes the programming you may now disconnect. Everyone, have a great day.