Veru Inc.
Q2 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to The Female Health Company doing business as Veru Healthcare investors conference call. [Operator Instructions] Please note this event is being recorded. The statements made on this conference call are not historical in nature, are forward-looking statements. Such forward-looking statements reflect the company's current assessment of the risks and uncertainties related to our businesses. Our actual results and future developments could differ materially from the results or developments in such forward-looking statements. Factors that may cause actual results or developments to differ materially include such things as the risks related to the development of the company's product portfolio; risks related to the ability of the company to obtain sufficient financing on acceptable terms when needed to fund development and company operations; risks related to competition; government contracting risks; and other risks detailed in the company's press releases, shareholder communications and Security and Exchange Commission filings. For additional information regarding such risks, the company urges you to review its 10-Q and 10-K SEC filings. I would now like to turn the conference over to Dr. Mitchell Steiner, CEO and President. Please go ahead.

[Mitchell Steiner:]

Thank you, operator, and good morning. This is Dr. Mitchell Steiner, the President and CEO of Veru. And joining me are Daniel Haines, CFO; and Kevin Gilbert, SVP, Corporate Development and Legal. Last week marked our sixth month of operations since the merger. I'm very proud of our team and our accomplishments to date. And I'm confident that we will continue to execute at this high level going forward. Today, we will update you on the progress we are making with commercialization of our products and clinical development of our drug pipeline as well as provide financial highlights for the second fiscal quarter. We continue to strengthen our leadership team with the addition of talented executives. We added relevant experience and expertise for the commercialization and development of our 505(b)(2) and traditional pharmaceutical drugs. With our key team and organizational structure now in place, we are better positioned to advance our deep pipeline of pharmaceuticals and to commercialize our products. Although the company was previously completely reliant on a single product in the global public health sector, we have in a short time solidly transformed the company into one that now has a diversified revenue stream with FC2 being sold both in the global public health sector and via prescription in the U.S. as well is moving Veru on its way to becoming a pharmaceutical company with the advancements in the clinical development of multiple 505(b)(2) products. And that will contribute to our revenue soon. As you can see from our financial results included in the press release, the public health sector FC2 business now had 4 straight quarters of lower-than-expected and declining sales. While we are disappointed with these results, we expect the global public health sector to strengthen in the second half of fiscal 2017. And we also expect new revenues from the U.S. prescription FC2 Female Condom business, which we will discuss in more detail in a few minutes. The diversification strategy underway is first to reposition FC2 Female Condom from an over-the-counter OTC product to a prescription product in the U.S. Second, advance the clinical development of low-risk, low-cost and large market drugs using the expedited 505(b)(2) regulatory pathway. And third, advance new drugs for oncology, a premium market opportunity. I'm pleased to report we've made progress on all fronts. I will discuss the 3 new and near-term revenue programs

[Daniel Haines:]

Thank you, Dr. Steiner. As a reminder to some of the listeners who might not be familiar with the historical operations of The Female Health Company, in late 2014, the company was awarded a tender for Brazil, which resulted in orders of over 40 million units. Most of the revenue from this tender was recognized in fiscal 2015 and into fiscal Q2 of 2016 with no sales since 3/31/16 as Brazil continues to distribute their inventory on hand until their stock level support readying another tender. This as an example, albeit extreme, that illustrates the historical volatility of the FC2 public sector revenue as heavily dependent on the timing of tenders and orders from a few large customers, including Brazil, South Africa, UNFPA and USAID. A number of smaller customers do provide a baseline sales volume, but these few major customers account for considerable variability in our revenues. As Mitch indicated, we have seen a market decline in public sector revenue over the last several quarters. The recent decline is primarily due to timing as in the example I just mentioned with Brazil but also generally speaking of the U.S. political and geopolitical uncertainty that caused declines in our order frequency and an order size from some other customers, such as USAID and UNFPA, who are dependent on charitable donations or government aid, especially those dependent on funding coming directly from the U.S. via any source. That said, we are optimistic that we will see improving financial results in the second half of this fiscal year as political uncertainty continues to settle down. Speaking to our Q2 fiscal results. FC2 unit sales totaled 4.5 million, which is 50% lower than the 9.2 million from Q2 2016. Excluding Brazil sales from Q2 2016 of 2.4 million units, unit sales were down 33%. Net revenue for the quarter totaled $2.4 million, a decrease of 50% from prior year quarter. Gross profit decreased 55% to $1.3 million for a margin of 53% compared with $2.9 million for a margin of 60% in the prior year quarter. Operating expenses increased by 39% from $2.8 million for the prior year quarter to $3.9 million. The increase in operating expenses was primarily due to $1.4 million of investment in research and development of our clinical development programs, which were not present in the prior year. The bottom line result was a net loss for the quarter of $1.8 million or $0.06 per diluted common share compared to breakeven for the prior year within a nominal and a per diluted common share basis. For the results for the 6-month period ended 3/31/17, unit sales totaled 10.9 million, which is down 55% from prior year of 24.5 million units. Excluding Brazil sales of 11.5 million units, our unit sales were down 16% from prior year. Net revenues for the year totaled $5.6 million, a decrease of 57% from prior year. Gross profit decreased 65% to $2.9 million for a margin of 52% compared to gross profit of $8.2 million for a margin of 63% in the comparable prior year period. Operating expenses increased 28% from $5.8 million for the prior year to $7.4 million, again driven primarily by R&D investment. The bottom line result was a net loss for the 6 months of $3.1 million or $0.10 per diluted common share compared to net income of $1.5 million or $0.05 per diluted common share in the prior year. Also to note regarding our P&L, for the 3 and 6 months ended 3/31/17, we recorded tax benefits of $800,000 and $1.3 million, respectively, which represented an effective tax rate in the low 30% range. Our net operating loss added to NOLs, which as of 3/31/17 are $60.9 million in the U.K. and $11.7 million and $11.4 million in the U.S. for federal and state, respectively. Our cash tax payments during the 6 months ended 3/31/17 were $160,000, which is primarily due to taxes in Malaysia, where we operated a small profit due to international transfer pricing regulations. Moving on to our balance sheet. As of March 31, 2017, our cash balance was $1.2 million and our accounts receivable balance was $15.1 million, which is broken out on our balance sheet between short term of $7.3 million and long term of $7.8 million. The long-term balance represents a portion of our receivables due from Brazil. U.S. GAAP requires us to classify receivables between short term and long term based on a variety of technical considerations. However, this is one of the cases where a GAAP conclusion is a fairly good proxy to our realistic expectations of collectability as we do expect the $7.8 million of long-term receivables to be collected sometime in late 2018. While of course, we would prefer to collect the entire Brazil receivables sooner, we are encouraged by recent payments which have tracked very closely to the guidance we've been receiving from our distributor to their communication with the Brazilian government. Regarding the Brazil receivable, we received a payment of $2.3 million in December and a payment of $1 million just a few weeks ago in early April. We had expectations to receive the remaining portion of the short-term receivables totalling $4.1 million over the next few months. Last month, Mitch and I personally visited our distributor in São Paulo and the Ministry of Health in Brasilia. Our visit was encouraging in 2 regards

[Mitchell Steiner:]

Thanks, Dan. The third near-term revenue opportunity I wanted to discuss is Tamsulosin DRS for BPH. This is our first 505(b)(2) drug product. But first, a general comment. As promised, we have reallocated financial unit resources to invest in our future as part of the diversification plan. The future growth of Veru will come from its deep pipeline of near- and long-term pharmaceutical products and product candidates. I'm happy to report that we're advancing on all fronts and our pharmaceutical products under development are all progressing well, which includes Tamsulosin DRS for BPH, MSS-722 for male infertility, APP-944 for hot flashes in men with advanced prostate cancer on hormone therapy and APP-111 for metastatic prostate, ovarian and breast cancers. Regarding Tamsulosin DRS, we have recently announced that we achieved successful Stage 1 of a bioequivalence BE clinical trial. Stage 1 was designed to select the optimal formulation of our proprietary Tamsulosin Delaying Release Sachet, DRS product. Tamsulosin DRS is a new, slow release oral powder formulation that addresses the large patient population of men with benign prostatic hyperplasia, who have difficulty swallowing tablets or capsules. With Stage 1 successfully completed on schedule, we will now advance the selected Tamsulosin DRS formulation into the second and final stage of the BE clinical trial. Our results from Stage 1 of the BE trial demonstrated Tamsulosin DRS may have benefits over FLOMAX. Unlike FLOMAX, Tamsulosin DRS is an extended release pattern that does not have to be administered after a meal and may be taken on an empty stomach. These benefits are especially important in the long-term care setting for men, who have difficulty swallowing capsules or tablets and could also improve patient compliance. We remain on track under the 505(b)(2) regulatory pathway. I want to pause here to make sure I'm adequately emphasizing this point. Our product is different from the currently available versions of tamsulosin and that our product formulation could potentially be taken on an empty stomach in contrast to FLOMAX, which has a food requirement and that the label states that FLOMAX should be taken 30 minutes after a meal. And our product appears to have no food requirement, meaning it could be taken without food. Now why is this a big deal? When we decided to pursue this powder formulation, we calculated the potential market by segmenting the population into those who have difficulty swallowing, which we approximated about $200 million of the current market. There's a lot of different ways to estimate the market, but just humour me for a moment with this example of $200 million. We invested in developing this product because we felt we could capture significant portion of that market via the benefits of a slow-release powder formulation. Now if what I just described being that our product lacks a food requirement has meaningful benefits and that it can be taken on an empty stomach, the market we'd be going after wouldn't just be the $200 million of men with difficulty swallowing but rather a portion of the IMS reported $3.4 billion market of all tamsulosin sales, especially if we are able to reformulate it into a capsule. Hence, what seems like a very minor change in our label could be a major change in the value of this product. Besides the excitement that I hope -- that I adequately conveyed in the lack of a food requirement, the milestone of completing a Stage 1 with positive results in by itself is a major milestone for Veru as it progresses our product diversification strategy by getting us one step closer to having another significant commercial product in the market. In Stage 2 of the BE clinical trial, Tamsulosin DRS will be tested in a larger number of subjects versus FLOMAX. And stability data is also being collected on the commercially manufactured drug batches to allow an anticipated late 2017, early 2018 NDA submission, on track for potential approval and launch of Tamsulosin DRS in 2018. This product addresses a substantial market need and is a near-term revenue opportunity. In addition, I'll mention a few items regarding our other clinical programs. For MSS-722 for male infertility, FDA invited us to a public FDA advisory panel meeting about our drug in December of 2016. As prior to this meeting, they have agreed with our development program and gave us a green light on clinical trial design. We're on track to start Phase II clinical trial for this program this year for essentially the first potential oral drug for male infertility. The APP-944 drug to treat hot flashes in men with advanced prostate cancer on hormone therapy, we meet with the FDA this month for what's called a pre-IND meeting, and once we have clarity, we will move forward to file an IND. For APP-111, our novel oral alpha-, beta-tubulin inhibitor, we will start to produce this drug substance so that we can finish the preclinical study required so that we can move into the first Phase I clinical trial, which we expect will be in 2018. And we expect to see data from this open label clinical trial in 2018. In summary, we have made substantial progress in transforming Veru from a single global public health care product company into a global pharmaceutical company with a highly diversified product portfolio. We're focused on the commercialization and development of 505(b)(2) and novel drugs for men's and women's health and oncology. Despite the headwinds facing our FC2 public health sector business, we anticipate adding new revenues from PREBOOST and the U.S. prescription FC2 business. We have advanced our 505(b)(2) pharmaceutical products, notably Tamsulosin DRS, which has the potential to generate substantial revenues in the near term. Our other product candidates are moving along nicely on many fronts. The multiple product candidates in our pharmaceutical pipeline not only address large product -- large patient populations but also utilize potentially lower-cost, lower-risk and expedited approval pathway. We're making excellent progress with our entire drug portfolio, and we believe this is an important step in delivering significant value to our shareholders. We are focused on our ultimate goal of delivering long-term shareholder value. I am more excited than ever about our company's future. And I'm proud of our team for the great progress we've made to date. With that, we'll open the call to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Jordan Kox with AECS [ph] Please go ahead.

[Unidentified Analyst:]

Thank you. Good morning, Dr. Steiner and Daniel. How are you guys?

[Mitchell Steiner:]

Doing great.

[Unidentified Analyst:]

Good. Can you walk through a little bit about how this - the process of a woman walking into a clinic and needing an FC2 product and how it would get into her hands please?

[Mitchell Steiner:]

Sure. So the idea here is take advantage of a call to action, which is the whole issue of an epidemic of sexually transmitted diseases. There's been a recent call by CDC as recent last week about the syphilis epidemic. And so the idea is a woman would come in -- and this is the approach that we're taking now, particularly for some of the clinics is she will come in with the concern that she has an STD. She will then undergo testing. If she has an STD, then what has happened in the past was she was just told, well, take some male condoms and go tell your partners that they have to use the male condom, which we know they don't use it. And so the way she empowers herself is to have a condom to give to males. And so that was typically done. The concept now is, if she comes in and she does have an STD, she'll get a prescription for an antibiotic, and while she gets that same prescription for an antibiotic, they would tag on that a prescription for FC2, a 12-unit pack. If the woman does not have an STD, then what typically is done is she is counselled because clearly she was worried and that's why she came in. And so when she's counselled, at that time, the idea of preventing an STD, particularly with something like the FC2, she would get a prescription at that point. And so if there's any interaction that the woman has with the physician around an STD, it would include an FC2. The other thing that's also happening, particularly with Planned Parenthood and those groups is that, in addition to offering oral contraception, which is also offered basically for free with no co-pay, they also are concerned about STDs. So that's why STDs are important because now you have the situation where a woman can be on birth control pills, but she's worried about Zika, HPV or some of the more common STDs, and in that case, it's not an either-or, it's an add-on to even birth control pills. So the message that we're going out there now is the sexually transmitted disease message. And there seems to be quite a lot of reception for that. And the frustration, because this has been available for prescription for many years, why all of a sudden do we think it's going to work now? And the reason for that is it wasn't really available. I mean, Dr. Fisch and myself, one of the first things we did is wrote a prescription for FC2 when we were doing our due diligence on the company. And we just couldn't get it filled. The pharmacy didn't even know it existed and wasn't even in the system. So all of the basic things that need to be done for prescription, you need to do that with a coordinated effort, and that's what we did. And so now the retail pharmacies will have it and would be able to get it. We've done partnerships with national network distributors and they have it, and so it's really - we're treating this like a prescription drug. And as of April, I can tell you that now it's out there and people are able to get it. And I was at the recent American College of Obstetrics and Gynecology Meeting this past weekend, which is going on in San Diego. And we have a booth, and it's amazing how open people are to having this alternative.

[Unidentified Analyst:]

Is it going to be an inventory build in this quarter to get the product available? Or is it something that's just going to be a quick order flow?

[Mitchell Steiner:]

It's actually both. And so there will be an inventory build in the sense that we have channels that need to be filled with our product, which is a good thing, so it's available. So that's part of it. But as you know, a lot of these national distributors are incredibly efficient. They will not stuff their channels. They will take just enough to keep things moving. And so we're going to be able to tell from the new orders and from the additional data how successful we are.

[Unidentified Analyst:]

Okay, great. Thank you.

[Mitchell Steiner:]

Thank you.

[Operator:]

Our next question comes from John Casello, a Private Investor. Please go ahead.

[John Casello:]

Yes. I was just curious about the Tamsulosin Stage 2 trial and if in fact the trial is already happening or if you anticipate a start date on that.

[Mitchell Steiner:]

Yes. So we're anticipating a start date soon on that. There are a couple things out of our control, for example, getting in the queue for the clinical site that actually runs the study, and they have to screen patients to get themselves a real clinical trial. So it does take a little time. And also once you pick your formulation, like we did in Stage 1, which we're a little bit surprised because we didn't really expect to see such a dramatic food requirement difference that gives us advantages. But put that aside, well, you have to scale it up so that you can now have enough drug released to put into the study. So some of that's going on right now. I think as you can imagine, John, I am pushing them as hard as I can because all we want to do is try to replicate what we saw in the Stage 1 and in more robust additional patients. So we know a lot more now than we did before and more confident now than we were before, although I was confident before but even more so now. So it's just -- it won't change our target because the target all along has been get this thing out so that we can launch it in 2018. So all that's still in place.

[John Casello:]

Okay. Thank you.

[Mitchell Steiner:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Terry Frank with TF Trading and Company [ph] Please go ahead.

[Unidentified Analyst:]

Good morning, Mitch. How are you?

[Mitchell Steiner:]

Hey, Terry. How are you doing?

[Unidentified Analyst:]

I am doing well. I was under the impression that the Brazilian reception of your visit down was that they've not only - because obviously the big orders we need to keep working on, continuing these big orders. And I was under the impression that Brazil was a pleasing response in terms of they were going to pay their past bills and that new orders will be coming and that South Africa was sort of the same response as Brazil. And then as you were sort of marching towards China through some, particularly going into Asia, Cambodia, et cetera. Could you just sort of...

[Mitchell Steiner:]

Yes. I’d be happy to...

[Unidentified Analyst:]

Sort of what's going on with the big orders, yes?

[Mitchell Steiner:]

Yes. So one of our strategies, of course, is to figure out how to take advantage of the global public health market because that is the base by which we will be able to continue to develop our company towards a pharmaceutical company. So we are putting a lot of emphasis on doing a couple of interesting things. One thing we're doing is investing in business development outside the U.S. and so that we can get new orders. So what I can tell you is the following. One is yes, we have gotten new orders, a new order from an area that The Female Health Company has never gotten before, and that's now Asia. And so we're excited that now we have an opportunity to see new orders come from Asia. Second, yes, when we went to Brazil and I met with the British Minister of Health, along with Dan, we had a very good meeting. They're very enthusiastic. She, interestingly, has used FC1 and FC2 in her previous life when she was doing public health good in Brazil and particularly against STDs in the Amazon and that kind of stuff. So she did say to me that Brazil plans to be back in the game. And they plan to put in a 20 million unit order. The only difference now, Terry, is that whereas the FC2 and The Female Health Company were the only ones out there, with Cupid and some of these other ones, there is competition. But they are going to be looking at quality. So the comment I got from them is, yes, we are planning to order 20 million units this year and we plan -- and that would be a start because we believe that this is an important product that needs to be in Brazil every year. And also in Brazil, some of the individual municipals like, for example, São Paulo, as we announced this year, had said they're putting in a 1.2 million unit tender and we got the tender. So hopefully, they'll put their order in. But it turns out, there's about 5,570 individual municipals in Brazil that each can order as well. And so yes, we're working Brazil and we had an excellent visit. And particularly, we were reassured, and that's why Dan said this, that they are going to pay. They've already started paying and they're already starting plans for the future. The second important point is that I just got word in South Africa from our people from the ground, Denise has been - Denise van Dijk is our President. And she and Michele Greco had just recently returned from a trip from South Africa. And South Africa is publicly saying now that they have a tender. And that tender is going to be for 40 million units a year for 3 years, that's 120 million units. So absolutely, we're going to position ourselves the best as we can to get that. And I plan to take a separate trip to South Africa to make sure that we get as much of that tender as possible. Our job is to keep our factories moving and making product both for U.S. FC2 as well as, of course, the public sector. So yes, we had wins. But I do think that, that's our core business. FC2 prescription business will be what we use to make up for the ups and downs from having just a few customers. And then as we move forward with tamsulosin next year and following the pharmaceutical products. So for 6 months at it, a lot has happened and I think we're moving along as best as we can, given what we've got.

[Unidentified Analyst:]

That’s good news. I appreciate it. Thank you.

[Mitchell Steiner:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Mitchell Steiner for any closing remarks.

[Mitchell Steiner:]

Thank you, operator. I really would like to appreciate and thank everybody for joining us on today's call. I look forward to updating you on our progress at our next earnings call, which will be held in August. But we're very, very excited about our future and we appreciate your support. Thank you for being on our call.

[Operator:]

The digital replay of the conference will be available beginning Tuesday, May 9 by dialling 1 [phone] in the U.S. and 1 [phone] internationally. You'll be prompted to enter the replay access code, which will be 10106205. Please record your name and company when joining. This conference has now concluded. Thank you for attending today's presentation.