Veru Inc.
Q4 2017 Earnings Call Transcript

Published: 5 Jan 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to Veru Inc’s Investors Conference Call. All participants will be in listen-only mode. [Operator Instructions] After this morning’s discussion, there will be an opportunity to ask questions. Please note that this event is being recorded. The statements made on the conference call that 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 Securities 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, Veru Inc’s CEO and President. Please go ahead.

[Mitchell Steiner:]

Thank you, operator, and good morning. This is Dr. Mitchell Steiner, President and CEO of Veru Inc. And joining me are Michele Greco, Executive Vice President of Finance; and Kevin Gilbert, Senior Vice President, Corporate Development and Legal. I’m very proud of our team and our accomplishments to date as we transition to a urology and oncology biopharmaceutical company. Today, we will provide an update on the progress we’re making with our clinical development of our drug pipeline; commercialization of our products, FC2 and PREBOOST; as well as provide financial highlights for the fourth fiscal quarter and year-end fiscal year 2017. It has been a very productive year for Veru building the foundation for growth. Veru is now well-positioned to become a leading urology and oncology biopharmaceutical company. We are initially focused on low-cost, near-term, and high-reward pharmaceuticals, using an expedited regulatory pathway known as 505(b)(2). Our goal is to have several near-term and mid-term products progressing at the same time to have multiple shots to ensure that in the near future we file and commercialize several drugs in urology and oncology, putting our company on a trajectory of solid growth. We’re delivering on this goal. We have advanced Tamsulosin DRS, a new slow release granule formulation for the most popular medicine for symptoms of enlarged prostate, causing difficulty in urination also known as BPH and is currently marketed under the name FLOMAX. As it’s stated in the FDA package insert, FLOMAX capsules should not be crushed, chewed, or open, because it may lead to serious side effects of low blood pressure and dizziness. A slow release granule formulation will allow us to target up to 60% of men in long-term care or nursing homes and 15% of men in the general population over 60 years of age that can – that have difficulty or cannot swallow tablets or capsules. On Augusts 2016, FDA agreed that a single bioequivalent study would be all that is required clinically for the NDA. When we conducted the bioequivalent studies, we discovered that this new granule formulation unlike FLOMAX does not have to be taken with meals, because there appears to be no food requirement with our slow release granules compared to the existing FLOMAX formulation. We plan to put these proprietary granules also into a capsule as Tamsulosin extended release XR capsules. Tamsulosin XR capsules will allow us to target the broader urology and primary care markets, including those men who can actually swallow tablets or capsules. The final bioequivalent study will be conducted and the NDA will be filed in 2018. We also purchased and licensed the proprietary Solifenacin DRG, Delayed Release Granule formulation, which has the same delivery technology platform as our Tamsulosin DRS low release granule formulation. Solifenacin is the active ingredient in VESIcare, a drug for the treatment of overactive bladder, which is urgency, urge incontinence, and frequency in both men and women. By FLOMAX, the FDA package insert states that Solifenacin tablets must be swallowed whole. There is no granule formulation available for men and women who have the common condition of overactive bladder. In November 2017, FDA agreed that a single bioequivalent study would be acceptable for a 505(b)(2) NDA filing. We plan to conduct a bioequivalence study in 2018 and file the NDA in 2019. The overactive bladder market is a multibillion dollar opportunity. The prevalence of overactive bladder is between 16% and 23% in the United States and increases with age. According to a recent study conducted by the Department of Health and Human Resources, 37% of short-term and 70% of long-term nursing home residents did not have complete bladder control. Consequently, the initial target population will be men and women in long-term-care facilities with overactive bladder symptoms who have difficulty or cannot swallow tablets, which will utilize the same sales channel that will be already in place with Tamsulosin DRS. To further ensure we have multiple urology products progressing At the same time, we purchased and licensed another new proprietary formulation, Tadalafil 5 milligrams, Finasteride 5 milligram combination tech [ph] capsules. This proprietary formulation contains the active ingredients of CIALIS, Tadalafil 5 milligrams, which is approved for the treatment with symptoms of BPH and erectile dysfunction, and Proscar which is Finasteride 5 milligrams approved for shrinking in a large prostate to treat BPH. The Tadalafil/Finasteride combination formulation will allow us to offer a family of BPH drugs that have different mechanisms to treat the symptoms and signs of BPH. Where Tamsulosin treats the immediate symptoms of BPH in men with smaller prostate, Tadalafil/Finasteride combination capsule treats the initial symptoms and shrinks the size of the prostate in men who have an enlarged prostate. In November 2017, FDA agreed that a single bioequivalent study would be acceptable to a 505(b)(2) NDA filing for the Tadalafil/Finasteride combination capsules as well. We plan to conduct a bioequivalence study in 2018 and file the NDA in 2019. We are well-positioned to take advantage of the multibillion dollar BPH and overactive bladder opportunities. These four products

[Michele Greco:]

Thank you, Dr. Steiner. First, let’s review our fourth quarter results. FC2 unit sales totaled $6.9 million compared to $6.7 million from the fourth quarter of 2016. Net revenues for the quarter totaled $3.7 million compared to $3.6 million in the prior year quarter. Gross margin was 49% compared with 52% in the prior year quarter. Operating expenses increased to $4.6 million as compared to $2.2 million in the prior year quarter. The increase in operating expenses was primarily due to $1.5 million of research and development expense for our clinical development programs, which were not present in the prior year and increased cost for additional headcount from the APP accusation and costs associated with the prescription launch of FC2. Overall, there was a net loss for the quarter of $4.7 million, or $0.10 per diluted common share, compared to a net loss of $1.8 million, or $0.06 per diluted common share in the prior year quarter. For the year-ended September 30, 2017, unit sales totaled $26.2 million, which was down 38% from the prior year of 42 million units. Excluding Brazil sales of 11.5 million units, our unit sales were down 13% from the prior year. Net revenues for the year totaled $13.7 million, a decrease of 38% from the prior year. Excluding Brazil net revenues of $6 million, our net revenues were down 15% from the prior year. This year, we’ve seen a decline in public sector volume over the prior years. The recent decline is primarily due to timing of tenders, but also impacted by the U.S. political and geopolitical donor uncertainty that caused declines in our order frequency in the order size from some of our 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. We are optimistic that we will see improving financial results as we work to expand our customer base and our markets. Gross profit decreased 47% to $7 million, for a margin of 51% compared to gross profit of $13.3 million for a margin of 60% in the prior year. The decrease in gross margin percentage is primarily due to higher per unit cost allocation of fixed cost due to the low unit sales. Operating expenses increased 50% from $10.3 million for the prior year to $15.5 million, again driven primarily by R&D expenses, increased costs for additional headcount from the APP acquisition, cost associated with the prescription launch of FC2, and other increased administrative cost. The bottom line result was a net loss for the year of $8.6 million, or $0.25 per diluted common share, compared to net income of $344,000, or $0.01 per diluted common share in the prior year. Also noteworthy regarding our P&L, for the three months and the year ended September 30, 2017, we recorded tax benefit of $127,000 and $2 million, respectively, which represent an effective tax rate of 4.5% and 23%, respectively. Our net operating loss added to our NOLs, which as of September 30, 2017 are $62 million in the UK, $12.1 million and $15.4 million in the U.S. for federal and state, respectively. Our cash tax payments during the year ended September 30, 2017 were $231,000, which is primarily due to taxes in Malaysia, where we operate as a small profit due to international transfer pricing regulations. In addition, in the P&L for the three months and the year ended September 30, 2017, there is a preferred stock dividend of $2 million, which represents the difference in the valuation of the preferred stock granted to be APP shareholders on October 31, 2017, the date of the merger and the actual value which was cannot be recognized until July 28, 2017, when the shares were available for conversion, which is when the shareholders voted to increase the number of authorized common shares. The $2 million does not represent a cash dividend. However, it’s an increase in the net loss when computing earnings per share. Moving onto our balance sheet. As of September 30, 2017, our cash balance of $3.3 million and our accounts receivable balance was $11.4 million. This is broken out on our balance sheet between short-term of $3.6 million and long-term of $7.8 million. As per our cash position and liquidity, our net working capital, which is our short-term assets versus our short-term liabilities, it was $4.8 million as of September 30, 2017, which is down $8.1 million from our prior balance as of September 30, 2016 of $12.9 million. We generated $1 million in cash from operating activities during the year-end September 30, 2017, compared to using $1.7 million in operations in the prior year. We’ve made significant progress on our clinical programs. We’ve advanced portions of each program. Our plans have been and continue to be to advance our clinical programs, at least, through in part, using cash available from our commercial operations. We’re optimistic about the near-term prospects of meaningful FC2 profit and expect the global public sector to return closer to historical volumes and operating profit. Now I’d like to turn the call back to Dr. Steiner.

[Mitchell Steiner:]

Thank you, Michele. Fiscal year 2017 has been a transformational year for Veru. We have established a foundation to make Veru a leading urology and oncology biopharmaceutical company. We have several near-term and mid-term drug candidates progressing at the same time to have multiple shots to be able to file and launch new drugs in urology and oncology. We aspire to file, at least, one NDA each year for the next five years. This will provide the engine for growth. We will continue to develop and commercialize existing 505(b)(2) products. Currently, we seek new 505(b)(2) products from the outside – from outside the company. We’re excited about VERU-111 as a novel targeted oral therapy for multiple types of cancer and look forward to obtaining a partner at the right time. We will continue to finance clinical development and commercialization in part through PREBOOST and FC2 sales. We will drive shareholder value through low-cost and expedited clinical development for large market opportunities in urology and oncology. We’re committed to becoming a leading urology and oncology biopharmaceutical company. And with that, I’ll now open the call to questions.

[Operator:]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question will come from Yi Chen of H. C. Wainwright. Please go ahead.

[Yi Chen:]

Thank you. Thank you for taking my question. My first question is on the sales cycle of the global public sector customers for FC2. So generous speaking is, is this so that they order every, once every two years, so that if fiscal year 2018 has a higher revenue -- is projected to be have a higher revenue than 2017, then will typically be followed by a lower sales in 2019 – fiscal year 2019?

[Mitchell Steiner:]

Yes, great question. So I’m going to answer it as I see us going forward. And then I’m going to ask Michele, who has been with the company for over five years to discuss historically. So going forward, the expectation is that the Brazilian government will order 50 million units, which is the largest order they have sought ever. So historically – so this is a big order compared to typical in the order of 15 million to 20 million. So this is a big number. With that said, I don’t think, if we get that full order, that would be a year to 18 months to maybe even two years to fill that order even though it’s an annual order. The second one in terms of South Africa, this is again the largest order they’re going to be putting in, and that’s 40 million units over three – a year for three years, it’s 120 million units. Now when I think it all and look at this competition, what – our expectation and we’re confident we’re going to get the bulk of it, and that will go on for three years, but that may go on to four years. And so, at least for the near-term, the next two to four years, the expectation for Veru is that, our biopharmaceutical pipeline will be moving along and hopefully the revenue that we will see from Tamsulosin and Solifenacin and from Tadalafil/Finasteride and VERU-944 and VERU-111 will dwarf what we’re getting revenue wise from FC2. So that’s kind of where we’re heading in the future. Historically, I’ll let Michele tell you kind of how the lumpiness plays out from a cycle standpoint.

[Michele Greco:]

Right. And again as Mitchell said, if you look at us historically, you’ll see some lumpiness. We have four main customers. As I mentioned, it’s been FPA, USAID, or governmental agencies, and they continue to order year-over-year. So there is no up and down with them, it all depends on which countries are asking for donations from them that they place the orders for those countries. Our – the Republic of South Africa and Brazil go through what they call a tender process, a request for proposal, if you will. And sometimes the - there’s a gap between when they put out the new tender process and when the last one closed. And other times like South Africa is working to close that gap, so that when one tender ends, the other tender will start. But in the past, the lumpiness you have seen is, because there’ll be a gap between when a tender ended and the next one comes out and then we’ll have a year where we have no shipments to those two countries and they’re large customers.

[Mitchell Steiner:]

But historically, if you look at the last 5 to 10 years, on average, it’s been about 40 million units a year…

[Michele Greco:]

On average.

[Mitchell Steiner:]

…on average. And so that’s something to keep in mind. The other thing to keep in mind is, this year is a first year that we put a major effort behind the U.S. market. And the U.S. market both from a pricing standpoint and reimbursement standpoint is premium. And so, as I mentioned in the call, we have six channels that we have now shown a proof-of-concept in traction and revenue. So the U.S. market could very easily match or surpass what we’re seeing in the global market. And so, if you’re confident with the right time and being careful with our resources, we will be able to realize that. So, there’s an opportunity here, but – and it will allow us to again bridge into the pharmaceuticals.

[Michele Greco:]

And then, the other thing that I mentioned during the call is that, we’ve been working globally to expand into new markets. We’ve entered relationships with new large distributors globally. We’re exploring new markets globally. So we have a new distributor in South America serving eight countries DKT, [ph]. They’re also going to be looking at working with Mexico and Pakistan. We’re exploring opportunities in Asia and in Latin America. So we’re working on new distributors, new arrangements, and new markets.

[Yi Chen:]

Thank you. Actually, my second question is going to be what kind of the revenue of FC2 in the U.S. can we reasonably expect in 2018, or in other words how soon a sales ramp up can we expect to see in 2018?

[Mitchell Steiner:]

I understand the question. The question is what kind of revenues are we expecting in 2018?

[Yi Chen:]

Right, because you just talked about, you just mentioned that you expect the potential market size of FC2 in the U.S. could be comparable to the….

[Mitchell Steiner:]

Yes, yes.

[Yi Chen:]

Global public sector, right.

[Mitchell Steiner:]

Yes, that’s exactly true. And so what we’re seeing this year is, we looked at six different channels, as I mentioned in the call, and each of those channels are now producing revenue. We launched in the U.S. in April. So here we are now literally eight months later, and so we really need to have about another quarter or two under our belts that we can actually see how we can project that growth and to answer your question specifically. So we’re being very, very careful, because we’re excited. We’re seeing growth in each one of these channels, but we’re going to refrain from making natural guidance statement until we have a little bit more data under our belt, but it is [indiscernible] it is promising.

[Yi Chen:]

Okay, got it. Thank you. My third question is, when targeting the patients in the long-term care facilities, how large are the markets for Solifenacin DRG and to Tadalafil/Finasteride combination capsules, compared to the markets of Tamsulosin DRS?

[Mitchell Steiner:]

Yes. So I can tell you based on some data that I’ve looked at, which is IMS data for Tamsulosin and it’s 2015, so it’s recent enough. In 2015, it was roughly 29 million prescriptions in the U.S. for Tamsulosin, excuse me, for alpha blockers. Tamsulosin comprise 22 million prescriptions a year, okay. One out of 10 men on FLOMAX Tamsulosin, the generics are sitting in the nursing home. And so that number is roughly about 3 million prescriptions a year. If you asked the question, how many men in nursing homes are not swallowing tablets? The answer is 60%, but that’s used the number 50%. So there are 3 million men sitting in nursing homes they can’t take pills and they have BPH. Then the means there is about 3 million men in nursing homes that cannot take pills who would have a diaper or catheter who have to go through surgery. So the numbers about 3 million is what we’re using as 3 million new prescription – 3 million prescriptions a year represents men who cannot swallow or have difficulty in swallowing tablets in a nursing home long-term care settings, that’s a big number. We think, because the other alpha blockers and there’s about three or four of them also are not available by powder or slow granules that will get some of those. So there maybe north of 3 million, so maybe 3.6 million or something like that. Now, Solifenacin, as you know, now you open it up to women. So it’s not just men with BPH. Now you’re dealing with women and now these drugs are very different. As you know, BPH is, because the flow of the urine is restrictive. Solifenacin is taking care of the bladder and the bladders is overacted, meaning keeps wanting to squeeze and it doesn’t act as a storage facility. And so by having a drug like Solifenacin, you can open up the bladder, relax it to be more of a storage. In fact, men with BPH can also take drugs to overactive bladder. So they’re not mutually exclusive, so there could be overlap. With that said, we would imagine that the Solifenacin market will be similar, it’s not larger in nursing homes, because you’re dealing with both men and women.

[Yi Chen:]

Got it. Thank you.

[Mitchell Steiner:]

Thank you.

[Operator:]

The next question will come from Matt Kaplan of Ladenburg. Please go ahead.

[Matt Kaplan:]

Great. Thanks for taking my question. Congrats on the progress during 2017. Just a follow-up on the Tamsulosin DRS. In terms of your strategy focusing on the long-term care facilities, is there an opportunity outside of that, Mitchell, market to go after the overall market as well you contemplated formulating as a tablet or capsule as well?

[Mitchell Steiner:]

Yes. So the answer is because of the fact that this is not appeared to have a food effect. Then that’s pretty exciting, because, as you know, one of the biggest issues outside of just in general with Tamsulosin is, it has to be taken with food. And patients like doctors, we don’t always take our advice and they take the medicine on an empty stomach and they end up getting dizzy and they pass out and that’s a problem. So to be able to have something without a food effects certainly help with the administration compliance and potentially safety. So when we found out that these granules did not appear not to have a food effect and/or food requirement, then we said to ourselves, boy, wouldn’t be great, because if we’re going to be using a powder, the powder really – the slow release granule powder really is focused in nursing homes and long-term care, because that’s where right now the formularies have nothing, which means that, if you come in with a capsule or tablet in nursing homes, look, we’ve got generic Tamsulosin, why do we need another capsule. But with a powder sliding on the formulary, it gets on the formulary. So we’re going to be able to get on every one of these formularies, pharmacies in long-term care, because they don’t have the alternative. And certainly, they don’t want to admit to the fact of giving breaking capsules for patients that are in the nursing homes that potentially could fall and break their hip and things of that nature. So for medical, legally, they’re going to want to have a powder available. So what we found out was that, my gosh, if you have the slow release granules in nursing home setting outside of nursing home in urology and primary care, what the vast majority of those patients are going to be patients that can swallow pills, swallow capsules. So we’re putting the granules back into a capsule. So that we can’t go after the broader urology in primary care markets and because the capsule has the same drug inside the capsule then we’re going to go to FDA and see if we can demonstrate a in vitro dissolution study as a way to bridge into the clinical data. And if not, they want to buy equivalency study, that’s –again, that’s quick and easy to do. But the point is that, you can get into the much broader urology and primary care markets. The real question is, what do we do as a company, initially as a company? Because we don’t want to have a big sales force in that fixed infrastructure. I think that, you can service all the nursing homes and long-term care with 15 people, 15 account managers. But now when you start talking about urology that’s 60 sales people, when you start talking about primary care now you’re at 100, it may make sense in that scenario to partner that with existing sales forces that are already out there. And the fact that Solifenacin is basically using the same technology and through the same channels, we can manage Solifenacin in the nursing home setting and we probably could bundle Solifenacin with Tamsulosin to attract significant partner in urology and in primary care.

[Matt Kaplan:]

All right, that’s helpful. Thank you. And then just shifting gears a little bit in terms of some of your proprietary programs, VERU-111, can you help us understand where that sits in, in terms of for the treatment of prostate cancer, how that plays well?

[Mitchell Steiner:]

Absolutely. So here’s the exciting part. We know in urology – in prostate cancer and make a blanket statement, it’s a true statement that for advanced prostate cancer, hormone therapies and taxanes have been the most effective therapies period. So that means docetaxel and cabazitaxel have shown overall survival and activity. And then when the hormone therapies fail, then they go to docetaxel and they go to cabazitaxel, okay. And so the problem with docetaxel and cabazitaxel besides the fact that given intravenously, there are other issues related to neutropenia, neurotoxicity, muscle weakness, and so it’s not ideal. And also because of the hormone therapies, oral hormone therapies like abiraterone and enzalutamide, urologists have been pretty much involved with taking care of their patients. They start out with giving them a LUPRON or a drug similar to LUPRON androgen deprivation therapy, so they primarily castrate them. And then when they break through, the primate castration which they all do, then they go on to enzalutamide or abiraterone, it’s a pill urologists gives it. And then when they fail that, now they have to send them to the medical oncologists and in some ways patients get really upset, because that means now they have to go to IV therapy and they have to recognize to get into the end of the disease and then losing the relationship they have with the urologists. Now by having an oral agent, that’s basically a anti-tubulin that we know well – we know from our animal models has activity in prostate, in fact, the fact has activity even in taxane-resistant prostate cancer that this would be ideal, because it will allow the urologist to continue the therapy after they fail in enzalutamide and abiraterone. There was a recent publication from Mario Eisenberger, we’re looking at low-dose, I think, it’s 20 mgs for me to square of cabazitaxel in patients who have failed enzalutamide/abiraterone. And they showed in the subpopulation that those men who failed abiraterone that almost 40%, 42% of these men actually responded to cabazitaxel. So if we had an aging that was oral that had a similar response rate that could be given to men that have failed abiraterone and enzalutamide, that would be a blockbuster. So that’s what we want to see in the prostate cancer setting. So post-ADT, keep ADT androgen deprivation going, enzalutamide and abiraterone failures, because we know if we have abiraterone and you fail it and you add enzalutamide, you don’t get much more bang for your buck, because if you squeeze testosterone way down squeezing it further, it’s not going to help and vice versa. So adding it now a taxane like anti-tubulin that’s oral can make a big difference. It also turns out that in other tumor types, we’ve shown activity in the 28 publications. And so if you can show activity with VERU-111 as an oral anti-tubulin then also said, you’ve gone from just being prostate specific, prostate only to opening up to a whole bunch of tumor types, which will add to the value of the opportunity. So that’s why in the clinical study that we’re going to start in 2018 and we’re in discussions with Johns Hopkins right now to help us with this. And they’re very excited about the opportunity, because having an oral like taxane, they’re having a lot of trouble beyond with IV in patients that just don’t want to sit in chairs anymore, the world has moved that other tumor types like ovarian, breast cancer, endometrial cancer and others pancreatic and so on. So we’re like, because some of the taxanes have such utility across so many tumor types. It really gives us an opportunity to see how broad we can make this product. But we want to start out even in the Phase 1 safety part of the study that show in addition to prostate, PSA responses, we want to be able to show we have activity across other tumor types. And so hopefully, towards the end of this year, we’re going to start seeing those data. And so, this is the biotechie part of the company, but – and has big potential for enterprise value. But we make sure that we’ve got the FC2 program going, so we have money coming in the 505(b)(2), so we have more revenue coming in. And so we’re building a nice floor base and – but VERU-111 is something to really look forward, it’s a really exciting product.

[Matt Kaplan:]

Thanks, Mitchell.

[Operator:]

The next question is from Yi Chen of H.C. Wainwright. Please go ahead.

[Yi Chen:]

Thank you. Just a quick follow-up. Was all the above equivalent study and the additional trials for 944 and 111 in 2018, do you expect the operating expenses in fiscal 2018 to be significantly higher than 2017?

[Mitchell Steiner:]

I expected it to be higher than 2017, because we’re now finally getting to the point that we’re moving the products. Now with that said, bioequivalence study is non-expensive and they’re easy to do and they’re small. So the big expense going to be VERU-944. Veru has a big expense, so you can understand what that means. In VERU-944, we’re expecting about 120 patients, and in our budget, it’s roughly around $4 million. So it’s not huge numbers.

[Yi Chen:]

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. I appreciate everybody joining us on today’s call and I look forward to updating you on our progress in the next investor’s call. Thank you very much.

[Operator:]

The digital replay of the conference will be available beginning approximately noon Eastern time today, January 5th, by dialing 1-877-344-7529 in the U.S. and 1-412-317-0088 internationally. You’ll be prompted to enter the replay access code, which will be 10114690. Please record your name and company when joining. The conference has now concluded. Thank you for attending today’s discussions.