AFT Pharmaceuticals Limited (AFT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the AFT Pharmaceuticals' 2021 Half Year Results Analyst Briefing. [Operator Instructions] I would now like to hand the conference over to Hartley Atkinson, CEO. Please go ahead.

Good. Thank you very much, and welcome, everyone, to the presentation of our half year FY 2022 investor presentation. Now the presentation is on the website. So I'll just be going through that, and I'll read out the page numbers as I go. So looking through Page #2, is the standard disclaimer notice. So if you could please take [ event ] to as read. And then looking to Page #3, what we have here is looking at our growth over this time period, we've had on the top figure, 1H 2022. You can see we have $55 million of sales revenues from total operations, which is a 14% increase on the prior year. And looking down at the bottom graphs, we have operating profit on the left, and that shows we've got about 2.3x improvement in our half year operating profit. And then on the bottom right, that's translating through into a 3.5x improvement in net profit before tax. And look, you can see it's very much what we've talked about over the years where we floated, we raised money to invest in R&D, which we did. We made some losses initially, which we forecast. And then we moved from that forward to profit, and we're working on building a profit at the moment. So that's at Page #3. So moving on now to Page #4, extending the foundations for AFT's future growth. As we've said, without belaboring the point, we've had a lot of COVID curveballs and it has been a challenging environment. But what we've been focused on is still delivering our results, which have to be frankly been tempered by COVID, but then also getting well setup for the future as well. So at core Australasian market, we had a number of new product launches in the last half, but actually much more launches going to happen over the next 6 months. And in fact, over the next 18 months, we have around 30 new product launches. The Maxigesic commercialization, which is our first lead R&D product, there will be others, but this is the first lead product. We have continued to commercialize that. We've sustained our market leadership in Australia. We've had good growth, actually about 18% sales growth of Maxigesic in the Australian market. And also, our licenses, we've done a lot of work around increasing our number of licensees and also improving the number of registrations, including you would have seen earlier in the year, we confirmed a landmark licensing deal with Hikma for the United States. The tablets, we're just working through with those. We're selling in more and more countries as time goes on, and we've launched recently in Switzerland, Greece and Lithuania, which all basically is adding country on country. In Asia, we're accelerating our pace there, where we set up an office in Hong Kong with an Asian head, Lorraine Poppleton. And also too, we have started at e-commerce work with Tmall, but we are looking to really accelerate and extend there and watch out for future announcements in that space. And look, R&D portfolio is still very important. And basically, we are starting soon a new study with Pascomer and a new indication. And also we've got ongoing development of different Maxigesic dose forms and a NasoSURF delivery system. So moving on then to Page #5, which is the strategic and operational update title page, and that leads into Page #6. So the title of Page #6 is Australia grows despite lockdowns. We definitely saw some impacts around the East Coast, Eastern States lockdowns. And the growth, to be frank, in Australia was positive, but muted and we see that is picking up though over this next half year as the Eastern States have opened up. And we've certainly seen that with our field force out and we've had to work pretty hard with wholesalers because actually when you're getting reports of stock-outs, which actually is, in some ways, a positive thing because it means that our sales are growing faster than the forecast. So we'll keep on pushing very hard in the Australian market because that is our main market. Our Maxigesic and eyecare ranges have lead growth. And as I've said before, Maxigesic, for example, is growing about 18% in Australia, and we've also seen good growth with our eyecare range. OTC revenue has been dampened. We'll show you a photo later on, which will kind of explain what I'm talking about, but that will come later. Product launches. We've had some launches, but also some delays where we're keener to launch in the second half when things kind of open up and they certainly have opened up in Australia. And literally, we have 30 new product launches planned over the next 18 months, and we see that as being helpful to keep on driving our Australian business. So that's Page #6. And then to flick on to Page #7. New Zealand, we've had some restrictions, obviously, and -- we've got ongoing striking restrictions, but generally probably still less lockdown than the same time period last year. So we certainly have been able to grow the New Zealand business by around about 15% or over 15%. And we're seeing growth in our OTC channel, which has reflected somewhat more normal trading, although still not as open as would benefit sales of our OTC products. We've had good sales with Vitamin C Lipo-Sachets and Maxigesic leading our OTC sales growth. Actually had good growth in the hospital channel with a 23% lift in antibiotic sales, so for infections. And prescription channel, we had also 15% growth there as things returned more to normal, although as we know, not totally to normal. That's Page #7. And flicking on now to Page #8, which is talking about Asia. As you can see on the graph on the left, our revenue, and we did flag this last year, we saw a slight dip, but improving margins last year. But this year, we're seeing sales back in growth mode with a 32% growth in the first half comparison to first half of last year. So we've had good growth in the hospital business. There was some strong growth there. Long term, one of our key things is aimed at extending our reach into China. We appreciate there's always things written about China around risk and things like that. But it is still a large significant market with 1.4 billion people. And what we've started with initially is a Tmall store with a trial offering of only 3 products, but this is what we want to work on really expanding over time. But at the moment, we're still in the trial phase, but we're looking to extend there. So yes, Maxigesic, we did have quite some large stockpiling last year, and we have seen this with international. We can see that some of end markets, they did stockpile it, and then that does tend to weaken sales as they have to clear through the sales. But we're seeing those sales in Singapore starting to clear. So we'd expect that to pick up. What we've done in Singapore as well, as you may have seen, is we did a deal with ASX-listed McPherson's, and they can help us really expand in the medium to long-term OTC distribution in the Singapore market. Slide #9, and this is the international. Revenue overall grew 74% this half year versus last half year. Licensing income for this particular half has been a strong contributor. Again, we did see, when we look carefully, we saw that there was some stockpiling last year and certainly markets like Europe and the Middle East were impacted quite significantly by COVID, which did restrict sales, and therefore, they probably had too much stock that stockpiled. So that has had some impact. But look, we can see sales increasing. And if you look at that, the royalties, for example, have more than doubled. So that's consistent with sales growing and clearing the stockpiles. And that's really what has happened. So that's Page #9. So moving to Page #10. We have the Maxigesic global update map. So what we are seeing here is we're seeing the yellow territories, which is ones where Maxigesic has been launched. We are progressively getting more yellow over time. And in terms of gets, the white territories, where we have not yet licensed. We are working at the moment with some discussions in Brazil. And also, we are filing as well in the Brazilian market regardless of whether we have a licensee, but we do anticipate that we will get one. And then also China is a significant market, being one of the largest in the world. So we are presently working on an agreement with a company in China, and we would hope to be able to make announcements at some stage in the future. Japan, we have had some meetings with the PMDA, the Japanese regulator, to clarify a pathway, and we see that in due course we will get an agreement in Japan, but that has never been straightened yet. But look, it's just really carrying on. Some of these approvals do take a while. We've seen in Africa, for example, that definitely has slowed down on the regulatory front, talking to our licensees, where, for example, some places like Kenya and Nigeria used to be quite quick. With impacts of COVID in Africa, which currently is quite a problem, a lot of the regulators have slowed down. However, the main regulated markets, such as Western Europe and the United States and Canada, things have definitely improved quite significantly. So that's that page. Moving on to Page #11, looking at our rollout across the world. What we've seen is last year we achieved sales or orders in 43 countries. This year we're targeting around 53 countries. We are making progress. It is a rollout. We've had the launches, as I mentioned, of tablets in Switzerland, Greece and Lithuania. And the MIV has been launched in Germany and Austria. Look, it's fair to say with the IV too that last year and even the first part of this year has been a challenging time for any companies launching mainly because of hospitals inundated with COVID in Europe, really, doctors are not open to discussing new pain treatments. So that certainly has slowed down the off-take. But one things clear, we see that will make good progress. And certainly, we're pleased to see that a licensee in Germany achieved a better-than-expected pricing for Maxigesic on the German formularies, which is very important because Europe, every country has this thing where they look at the other countries to see what the pricing is and then that sets the pricing for the whole market. Oral Liquid, registering kids products, as I think I mentioned before, has always been a tough regulatory task, and we're pleased that we achieved our first European registrations in Italy and in Malta. And at the moment, we are doing what's called repeat use procedure in additional countries. So that is an important step as well. So look, that's Page #11. And flicking on to Page #12. What is important as well is research and development because that will also internationally be a future growth engine. And basically, on that top slide, we've tried to show you our progress over time with R&D spend. So the last couple of years, we spent about $9 million, last year $9.4 million, the year before $9.2 million. It's generally recorded as a mixture of expense at R&D and capitalized. So that's just done under the relevant accounting standard. This year, we have increased R&D a bit, and we've done and spent about $5.2 million so far, and we're foreseeing in the full year we spend somewhere between $11 million to $12 million in R&D spend, and we see probably going forward, it will be a similar kind of number. So basically, Maxigesic dose forms, we've got a number of studies underway. We're just finalizing our big cold and flu study for Maxigesic Cold & Flu. That will be finalized this financial year. Pascomer is our dermatology drug. You can see the picture on the right of the girl with growth on her face. Yes, this actually is kind of a mild case, maybe going towards moderate. So on 0 to 5 rating scale, this would be about 2. So you can just imagine that as it gets towards 5, it's very disfiguring. And this is one of the reasons just to point out to people that AFT exists. We want to provide products to real live patients that it actually helps them. And this is a very worthwhile project because it can treat these horrible skin conditions. So basically, we've licensed Pascomer to North America with a company called Timber. And in Europe, we've licensed to another European company based out of Hamburg, called Desitin. And presently, we have completed enrollment in our Phase II/Phase III pivotal study, which has been a challenge. It's not been a walk in the park. It's 17 sites around the world, anywhere from Christchurch to Brisbane to Taiwan, with about 6 sites in the United States, including Mayo Clinic, and then a number of sites across Europe, including Navarre and Madrid in Spain and then sites in Eastern Europe going through to Serbia, Czech Republic, et cetera. So that has been a challenge with the pandemic, but we managed to complete our study enrollment, and we'd be looking to analyze the data and have data mid-2022, which obviously will be very interesting. We'll be waiting with bated breath to see what the study results are. NasoSURF, we are commencing soon our first clinical study, our proof-of-concept clinical study with our NasoSURF, that's the device on the top right. You can see it's like a nifty little kind of device that delivers drug intranasally, so instead of having an injection, you can use the system. And then we also have other products under development. We have our medicinal cannabis program, which is well underway. Crystawash Extend as a long-acting hand sanitizer that protects you for 24 hours, Crystaderm as well. And we've got a number of other projects actually. So we are ramping up R&D, and we'll be able to tell you more about that in the future. So that's Page #12. And then the title Page #13, financial performance, it is time for me to hand over to our expert on numbers, our CFO, Malcolm Tubby.

Thanks, Hartley. Yes. So Slide 14, revenue of $55.5 million, which Hartley has taken us through in detail, an increase of 14%, benefiting from -- the gross profit, in particular, benefits from the license income. So that rise is at a higher rate of 31% because it's 100% margin, the license income. So gross profit up to 26.7% and that represents 48% margin. We do show the margin without the license income down, the smaller table at the bottom of the page. And you can see we've increased the gross profit margin on product sales and royalty to 43.2%. But we've been able to put some price increases in, and we're starting to see the benefit of those. Operating expenses increased to 21.2, and that increased 1.7 percentage points of revenue, up to 38.2, and that reflects the investment into the R&D that Hartley took us through. We have invested some more into sales and marketing behind our Australasian brands. And we have increased a bit of personnel in the corporate costs to assist us with that future growth. So that leaves us with an operating profit of $5.5 million. Net finance expense, we've been to the point where with this, and we've been able to switch $5 million from the working capital facility into a business finance scheme loan, and that generated some additional savings for us in our interest cost, which is very beneficial for us. So that gives us a net profit after tax of $4.2 million, up 2.5x on the same time last year. So if we move on to Slide #15. It just highlights here from the balance sheet. We are maintaining our elevated inventory levels at around the $34 million mark. That's around about 6 months’ worth of stock, and we will continue to do that until we see things settling down. Freight, we are seeing a little tiny movement of improvement in the freight area, particularly costing seems to be, have reached its peak at this stage, touch wood. So -- but it's going to still be quite a journey before we get back to full normality. So we think it's -- we're sure it's the right decision to hold this inventory and be able to supply the market. Cash improves from the money generated from the operating profits. So then equally, net debt reduces to $32.5 million. And we're targeting to bring that down to the sort of $25 million to maybe $30 million range. Total assets stay around the same, just over $100 million, and the equity improves $4 million, which is from the P&L. So we're up to $41 million of equity now. Turning to Slide 16. Cash flow highlights. So $6.8 million generated from the operating activities, $2.8 million investing. That's predominantly the R&D that we capitalized. And then the financing activities are interest. So the net increase in cash is $2.7 million. The first presentation we put out this morning at $4.7 million. We have issued a new one, which is on the website, that's $2.7 million So we add back to the opening cash balance of $3.2 million to come to a closing balance of $6 million. We'll move on to the next slide, and I'll pass back to Hartley.

Yes. Thank you, Malcolm. So summary and outlook is Page 17 and then moving on to Page 18. Look, this is just a summary of sort of our outlook. And I mean, I just draw you to the picture on Page 18. So in case you sort of think that we're kind of over-exaggerating some of this COVID impact. This is an example of one of our pharmacy customers. It could be in Australia or it could be in New Zealand. And I think, as you can appreciate from looking at it, the picture tells a thousand words. But it just shows why our OTC sales do get impacted in this particular situation because literally, you can't get near them. So that's obviously been one of the challenges. And clearly, that's what we're looking forward to, the situation easing, which it has in Australia and parts of New Zealand, it has as well, and we look forward to further restrictions reducing. But look, I mean, just not to dwell on problems. I mean, certainly regardless we've had positive achievements across our key markets where we've seen pretty good growth in New Zealand and Asia. We're making good progress with commercializing Maxigesic. And we've nailed down some key things like our licensing deal with Hikma. I mean it's just pace to sort of make the point that some of these agreements, there was a bit of, as you may or may not be aware, there's a bit of discussion around this sort of thing at the end of our financial year. But these agreements are very complex, and we do think long term. So basically the Hikma one happened just after our closing balance date for the last financial year. And maybe we could have rushed it through and given up on a whole lot of points, but it's really important to think long term. And so therefore, that one did take a little bit longer than we thought, but we still managed to close that off during this financial year rather than last financial year. And the important thing is that we've really done the deal, and we believe it's a good deal and good terms for AFT. And then we've moved on as well to gain acceptance by U.S. FDA of our Maxigesic IV application. We were pleased to see actually the PDUFA date. There's normally a bit of a range, but we actually got the bottom end of the range, which means it's a bit earlier than we thought. So the PDUFA date is June 2022. So basically, that's the date the FDA has to get back to us with all their questions. So provided we can answer all those questions in a timely manner, then we would achieve registration that date. Otherwise, we could have a slight delay. But clearly, our aim will be to have that June to PDUFA date. So look, as we've noted, there's been some supply disruptions. Just generally, product launches take a bit longer because getting shipments and things is a more protracted exercise. Once we have got them, as Malcolm has mentioned, we hold the extra inventory, but they generally do slightly launches down because it takes longer to get stock. It is what it is. And we've seen some slowdown in some territories of regulatory approvals due to COVID conditions. But they will happen, and they are happening and that's the important thing. Lockdowns, travel restrictions, government imposed limits and things have impacted our OTC business, which normally is a very bad weather kind of thing where sales progress pretty well regardless of economic conditions. And this has been one of the few things really that could have impacted OTC sales. Having said that, we've still got pretty reasonable results and we're well set up going forward. And that's really the key message. So that's Page 18. And then look, just to look to finalize on Page 19, the overview and focus for the remainder of FY '22 and our outlook. It's looking at further driving international sales. So we want to accelerate the number of new countries we're launching Maxigesic in. And obviously, then it's growing sales in our newly launched markets; Canada, Germany, Switzerland, for example. And then it's rolling in the new line extensions; Maxigesic IV, the Hot Drink, we're having our first launch in Australia quite soon, at the end of this year, starting next year. So that's our first launch for that one. Oral Liquid, we're working on launching that in Europe following our first registrations. Then it's extending still further our international licensing agreement. So it's looking to add other major jurisdictions like Brazil, China and Japan. So those are all pretty reasonable sized markets. So we'll look to add in. What we do see as well, though, is the feedback we're getting from all our licensees is they're saying to us, what else have you guys got coming? Because we see that you do have products, with innovation products, with points of difference. So we want to make sure we keep engaged with you so that as you get new products, we can look at them. So really we see that as a positive going forward, where we've got this network around the world that we can tap into with the R&D portfolio. So that's that. And then locally, our biggest sales are still Australia and also New Zealand. I really want to drive our Maxigesic sales, and we've got our line extensions, as I mentioned, the Hot Drink coming. And in many ways, the toughest time was when we just had the Maxigesic tablet. And a lot of -- I know we've talked to some of our larger competitors. They've actually been quite surprised how well we've done with just kind of one product line. So literally going forward, we will get a lot more product lines and that will actually help us. So that's an important part of the strategy going forward. And then it's the ongoing in-licensing to expand the ANZ business. I mean one of the positives, actually, of this current COVID is that we've had a lot of time at home. And therefore, actually, we've done more in-licensing than what we would have done. So this is now starting to feed into our business where we literally are targeting the launch over the next 18 months of an additional 30 products into the Australian and also the New Zealand market. So in terms of financial outlook, yes, I appreciate things are still changeable. But as long as we don't get any major curveballs in our markets, we still foresee that we will hit our guidance of $18 million to $23 million. Some have said, it's pretty brave making sort of guidance in these conditions. But look, we are working very hard. We realize these things are important and things are changeable, but we're definitely working hard to hit what we seek we do. And that assumes things like the market doesn't change drastically. And dividend policy is something I know we've been asked quite frequently by investors, and it is, as we've always said, we're targeting debt down to that $25 million to $30 million level. And as long as we're hitting our earnings targets, we certainly the company sees that we'd be able to pay a dividend in those circumstances, and that is our aim. So look, thank you very much for your attention and happy to take and try and answer any questions. Thank you.

[Operator Instructions] Your first question comes from Matt Montgomerie with Forsyth Barr.

So maybe just firstly on guidance. It'd be interesting to hear, you're able to provide any insight into assumptions around licensing income for the year. From memory, the full year it was around $4 million to $6 million, clearly we're already at the midpoint. So I'm just wondering if you could expand on that for the remainder of the year.

Yes. So wait, I mean, I'll let Malcolm answer part of this. But I mean, we've always historically had a skewed year where we trade and we have a lot better profit contribution from the second half as opposed to the first half. We basically looked at our predicted launches and our sales patterns. And yes, we're still getting the result coming within that guidance provided there's no drastic market change. Malcolm, do you want to add to that because it's your area?

No, that's properly about it. And then in terms of licensing income, we don't forecast any big -- any other big amounts coming in. And if we do get those, if they're significant, we'll announce those at the market.

Maybe just secondly on the Australia business. So just interested in your view, thinking more beyond FY '22 here, if you've sort of seen any change to that sort of $100 million revenue ambition over the next 2 or 3 years and following on from that, the last 12 months with COVID has caused any change to the way you do business in that market? And if so, what could that mean?

Yes. Look, to be frank, it hasn't really given us any changes. I mean we had some slow spots in this first 6 months. We've seen quite a significant pickup, now teams back up and running, especially in the Eastern States. As I mentioned, actually, in sort of passing, I know that I picked up literally a couple of days ago, our team is working pretty hard because they're having some complaints with some of their wholesalers running out of stock. But that's a good thing and a bad thing because we are fixing it. But what it means is our sales patterns are accelerating past the wholesalers traditional sales. So that's a good sign and early kind of indicator that sales are ramping up. And I know certainly, look, I mean, as you know, Victoria and New South Wales are now well and truly out and about, and then that really helps things. So we don't see any change in the next 2 or 3 years at our target to hit that $100 million. We slowed down maybe some of our new product launches because we didn't really want to do them during lockdown. Some new launches will help as well. Yes, so it's really just very much carrying on appreciating curveballs and COVID, but really the general business and the strategy does not really change, and it's important that we keep on advancing things, and that's really what we're doing.

[Operator Instructions] Your next question comes from Christian Bell with Jarden.

Just a couple of questions from me. Just firstly, the increase in the royalties, is it from selling across the country or better sales rates with existing customers or a combination of both?

It's a combination of both, but it is the more established markets and we've seen them recovering well and…

Yes, they did last year, like established markets is quite interesting. Look at the sales graph, they stocked up and bought stock to cover themselves and then there were some dips, but they've rebounded pretty strongly in the last sort of time period. Obviously, that's flowed through as Malcolm said, the royalty is going up.

Okay, good. And then just, I guess, almost building up one of the previous questions. You don't sort of assume too much license revenue guidance in the second half, but obviously quite a strong second half is inquired. And you also kind of mentioned that you don't expect -- well, that your assumption is that conditions don't change materially from here. And you've got -- you're in the maintenance of margins. So if conditions were to improve from here, does that mean there is upside to your current -- is it kind of more the upper end of guidance, I mean, the lower end is, I guess, the status quo?

That broke up a little bit, unfortunately, Christian. I think that you were talking about where the growth is going and you mentioned license income. So we don't see it increasing the -- it's not being the same amount as it was in the first half. It's not going to be that same amount doubling up again in the second half. So that means that, overall, the margin -- it won't -- the effect on the margin will decline as the sales from products grow, if that makes sense.

Yes, we've got some price increases, which Malcolm touched upon. I mean, a lot of them, you often can't do them straight away. You have to notify customers on day X like the new price would apply. So some of those will start to come in over the second half, which will also be helpful. But also some of them only come in at the end of the financial year. And generally, though, the -- I guess, the other assumption where, I mean, the most important thing is actually the Australian market and the international markets. So really we're planning that we wouldn't have sort of say, further lockdowns in Australia that would block off pharmacies in the way that we showed in the photo during the presentation. So sort of assuming things carry on really as they are.

Yes, yes. So I guess to probably frame my question better, does the volume in the guidance reflects because this condition is not changing from here. And in the top end of guidance issuance, perhaps a better recovery from here.

Yes. I mean we appreciate this kind of wide guidance. And really, I guess, the reason that's quite wide is because just how changeable things are. But I think that's probably fair, Malcolm, I guess, it is.

Yes. And there is -- with that license income, there is some -- there's a potential for some commercial milestones to be coming through. So that sort of impacts on that range as well. If we feel comfortable, to narrow, we would question, but that is when we run through the numbers, we still do come up with that range.

Yes. Okay. I guess what I'm just trying to get at is, if there is a bit of recovery from the current condition, there probably is a little bit of upside, yes, I mean, is that kind of a fair statement to make?

I'd love to be able to get it -- I'd love it to be more than 23.

No, look, I still think we're sort of saying in current situation, we're just looking to get within the guidance, and we will be satisfied with that sort of results, given that it is. There's still elements of changeability and stuff. But yes, it is what it is.

Great. Thank you. I mean just lastly for me, the price increases. What were those for? Does that include the Maxigesic products?

Yes. There's a bit of Maxigesic, a bit of OTC. And then internationally, we've been able to put some increases in. But it's not because there -- that's only from orders that after we've made that announcement, then they'll make the order. So there is quite a time lag to those.

Yes. I mean there's been some quite significant increases, as you know, in freight, but also some of the active ingredient costs like paracetamol, used to be actually pretty cheap. And then the price has pretty much doubled actually. So I mean, at this stage, we put us what we call a surcharge, a [indiscernible] define it, we've called it a surcharge. So the API price came down again, we've certainly cut it back. But I mean we've actually absorbed that during the first half, and we won that as a company. So that has a margin bit. However, as Malcolm has noted, we should be able to get that price increase to let surcharges coming through from the second half, and that will help.

[Operator Instructions] There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.