HLS Therapeutics Inc. (HLS) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining our fireside chat with HLS Therapeutics. I'm Justin Keywood, a health care analyst at Stifel, and I'll be moderating the chat. We're going to start with a brief introduction to management and the company. And then we'll just jump right into the discussion and Q&A. For those of you online, you do have the ability to ask questions throughout the 30-minute presentation here, and we'll try to fit in as many as we can. But as you can see, the slide that we have up, HLS, it's about a $500 million market cap company, specialty health care business in the CNS and cardiovascular space. From HLS, joining us today, we have the Chief Executive Officer and Co-Founder, Gilbert Godin; and Chief Financial Officer, Tim Hendrickson. Thank you, gentlemen, for both joining and congratulations on all the recent success. And I'll turn it over to Gilbert for a brief overview of the business. Thank you.

Justin, well, thank you very much for the introduction. Also, I want to take a moment to thank Stifel as well for having us today. HLS is a Canadian-based North America focus pharma company. As Justin pointed out, we're present in the field of CNS and in the field of cardiovascular. Actually, the therapeutic areas we're contemplating are therapeutic areas where we've had previous successes, a lot of experience that we understand well the lay of the land. HLS in a nutshell founded in 2015. At that time, to jump start the company, we raised USD 385 million. And our strategy at that time was to jump start the company via the acquisition of stable, resilient, what we call, foundational cash-flowing assets. Hence, product earning money from day 1, the company earning money from day 1 and using that cash flow to build a platform, acquire subsequent asset and get into a virtuous mode of organic growth. And therefore, we used some of those proceeds early on to acquire Clozaril from Novartis to launch the company. And I want to say that Clozaril, as we will talk about it in a few minutes here, has fully met our investment thesis, generating USD 45 million to USD 50 million over each of the last 5 years. Today, 5 years later, HLS is an operating, profitable pharma company. We got 90-plus employees. We're at the doorstep of substantial growth, and that's what that slide intends to illustrate. The next 5 years will see our revenues and our EBITDA grow four to five-fold as we diversify their source and as we fully materialize our lead product. And that's a product that you may know called Vascepa, for which we have acquired the right as a cardiovascular protective agent for the Canadian market. This product alone will, at its peak, bring between CAD 275 million to CAD 325 million per year, along with an additional $100 million to $130 million of adjusted EBITDA at peak year sales and beyond. It's a product with a very long runway, as we will talk about it in a minute. In respect of the multiples that you may choose to apply to our projection, you can appreciate the extent of the value creation that we're about to see at HLS.

Thanks, Gilbert, for that overview. And I think it's helpful just to frame the discussion around Vascepa because, obviously, 2 distinct markets in the U.S. and Canada. But maybe if you can provide a bit of history of how you came across it and acquired the Canadian rights and the differences between the IP and patent protection in Canada versus the U.S.?

Yes, most certainly. Well, Vascepa, like all other transactions we've done since inception, was a proprietary transaction. We identify -- we, first of all, characterize our need to identify targets, we knock on those doors, and we try to present an opportunity here in a way that is mutually beneficial to the eventual party that we were approaching. And it was the case for Vascepa. Vascepa was not -- and Amarin was not trying to find a partner for Canada, they were actually looking for a partner for Europe. And we knocked on their door and presented what in the end was a pretty compelling case of why they could entrust us with their product, and we signed that licensing deal in 2017. The similarities and difference, well, first of all, let's talk about some of the differences here. Vascepa was introduced in the U.S. by Amarin in 2012. At that time, it was an agent that was indicated to reduce very high triglycerides, a competitive product to Lovaza. You may remember, Lovaza from GSK, a $1 billion product in the U.S., but Lovaza was being genericized. Lovaza was a mixed omega-3 product, and therefore, contained a fraction of the DHA that appeared to be counterproductive to the proper lipid management -- proper management of the cholesterol, where you manage the triglycerides. They were continuing on the path of further development to show that the drug could be beneficial in preventing major adverse cardiac events. We essentially knocked on their door in 2017, negotiated the exclusive rights to the product in Canada and having secured those rights, we decided to wait for the outcome of the major cardiac trial called the REDUCE-IT trial. We knew that our back -- our backstep position -- our backup position was actually to have a drug for triglyceride reduction, but we were hoping that something good would come out of the REDUCE-IT trial. I think the rest is history. The trial showed that Vascepa has a potential to become the next pillar of cardiovascular protection, as a product that continues in the great tradition of the statin to reduce further, on top of the statin, the risk of having a heart attack, a stroke, the need for a surgical bypass or death as one of the outcome that was also reduced as shown by the trial. So here in lies the second difference. Vascepa in Canada is a product that came to the market through the big front double door of cardiovascular protection. We never filed for triglyceride reduction. The IP associated with the product is uniquely related to cardiovascular protection. And I want to add that in Canada, there were never any kind of approval in the earlier years of any kind of prescription grade omega-3 products. So we are essentially the first and the only product that can address the need and reduce cardiovascular event in a patient population that has an established cardiac disease, is treated on a statin and has elevated triglyceride or a population that has diabetes, is on a statin with elevated triglyceride and has additional risk factors. So we essentially are building the franchise as a cardiac protective agent, and we're doing so as the only product in that field that can actually have such indication.

And Gilbert, if we could just maybe expand on that. In Canada, HLS achieved a data protection for Vascepa for 8 years, right, preventing generic entry. And then maybe just it would be helpful to mention the patents that should extend the exclusivity beyond that?

Yes. I certainly welcome that question because, as you may know, Amarin and Vascepa in the U.S. experienced unfortunate development in terms of their loss of exclusivity. The couldn't -- the situation couldn't be different in Canada. Since we brought that new molecule, that new active product ingredient to the market in Canada, we were rewarded upfront with 8 years of what we call data exclusivity. It's actually a marketing exclusivity. And beyond those 8 years, we have -- or we can rely on an estate of up to 15 patents, distinct patents related to cardiovascular protection for the most part, that will carry us well into the 2030s and possibly as late as 2039. And I think it's important to mention that the patent that were successfully challenged in the U.S. are not the patent that we are defending or using in Canada. And that gives us a runway that will, at is shortest, be 10 years, but most likely closer to 15 and maybe up to 19 years of patent protection. So dramatically different landscape, both from a market perspective, but also from the standpoint of our exclusivity. And I think that this is probably one of the reasons why there is not to this day a full recognition of the true potential of Vascepa for our company, but I think that, that recognition will certainly, sooner rather than later, be fully appreciated.

Absolutely. And I also think it's important that for HLS and Vascepa, it's been through most of the regulatory milestones, the Health Canada approval, you mentioned the data protection, and it has been commercialized. I know there were some initial COVID-19 impacts just in reaching doctors and trying to sell the product, but maybe you can just mention how the commercial sales are going just in the past couple of months? And how you see that sales progressing to your peak estimate of $275 million to $325 million?

Certainly. So it certainly proved to be an exciting past 12 months. First of all, our drug was a subject of priority review in Canada. We were eventually granted an approval and this followed, as you may know, the FDA's unanimous support from the advisory panel. As we introduced the product in Canada, we introduced it more specifically, I think, mid-February. A mere 30 days later, major lockdown across country. The country forced us to repatriate our employees and have them all work from home. In the case of sales force, it's far from being a trivial. So we took a while to pivot, retool our sales representatives, give them access to means and tools that would allow them to reengage with the physicians, but there was essentially a lull, I would say, 6 to 8 to 10 weeks, where the activity was either very low or slowly restarting. I think that we regained our footing through the early days or mid -- at midpoint in June as we started to redeploy our sales force, the market was reopening somewhat, some doctors were accepting sales representative again. Through the third quarter, that continued to expand. And we reported that more than 70% of our contacts through the third quarter were actually live interactions with physicians, either in a face-to-face traditional nature, using Zoom media, using phone conversations or any other live interactions. So the result of that, and that was one of our concern here, you're launching a product, a very potent product, a product that was extremely well received in the first 30 days. And then suddenly, we had to pull back. What we've managed to accomplish and reported at the end of the third quarter is that between the second and the third quarter, we more than doubled our number of patients on the product. Actually, it was a growth of 124% of patients on Vascepa in that quarter. We also managed to augment the number of prescribers by close to 100%, actually, almost double, 88% or 90%, I believe, which was reassuring to us because those are kind of numbers that are a testament to the product thesis for one part, the value we're bringing the story forward and the result that physicians are getting themselves in the motion and start to use the product with the patients that fit the bill of the indication that is, by the way, the same as the patients that had the inclusion criteria at the REDUCE-IT trial. So notwithstanding a pandemic, we would have been in even better position, but in spite of the pandemic, we're getting a large amount of interest, and we're posting very strong growth numbers. It's quite encouraging. Now we don't know what the future may reserve here in terms of subsequent hiccups. There are surges here and there nationally or regionally. But overall, I think that we both have found a way to mitigate that impact, and I think that the results speak for themselves until now. So it leaves no doubt in our mind about, first of all, the fact that the long-term need doesn't change, right? We are long on this game. This is a product that at maturity will be used broadly. And cardiovascular disease is still #1 killer worldwide. We have a unique solution that cannot be accomplished otherwise. I think that once we see the effect of the pandemic recede, this long-term steady state is untouched. That potential is untouched. And we have the nascent evidence here that the product is certainly meeting a need.

Yes, absolutely. And we're all adapting to virtual means, including this great conference today. But just one more question on Vascepa, and then I want to shift the conversation to Clozaril and the foundational business. What years do you anticipate as far as reaching the peak sales estimate for Vascepa?

Well, typically, for a product of that importance here, they reach -- we're talking of an S-curve here and the curve starts to flat, then we call that peak here, typically around the fifth year of commercialization, it could be the fourth, it could be the sixth, but it's typically in that time frame. And that's reflective of the -- I guess, the adoption of all of the medical community, not only of the early adopter or the near-term followers, but also eventually rallying even the laggards. So I think that 5 years, 6 years is fairly customary. Beyond that point, there could still be growth. That growth is usually more correlated with population growth or if there's some pricing growth, that could be those elements. But I would say that by 2025, in that neighborhood here, we should pretty much be at very close if not at the peak of potential.

Thank you. We'll look forward to monitor that progression. And for Vascepa, we value it as $18 a share, which is actually above where HLS is trading right now as a combined company, it's around $16 a share. So there is an undervalued component of the story. And that would be incremental to the foundational business that Gilbert mentioned in his opening remarks. It primarily consists of Clozaril right now. And HLS, they did disclose another Health Canada approval for a complement product in schizophrenia area, PERSERIS. But Gilbert, maybe just to provide some background on Clozaril, kind of the revenue outlook there? And then also how you plan to incorporate these new CNS assets?

Certainly. So Clozaril, as I mentioned before, was the first asset. And actually, it's an asset that we acquired for both, we acquired the brand for both Canada and the U.S. But the product have -- we have a very distinct, very different presence in both markets. In Canada, Clozaril that has been present in that market for 25 years and has been genericized for 15 years now, is still market leader. We have a market share in excess of 55%. And in the U.S., the product is literally, what we call, a tail product, with less than 1% market share, non-promoted in the U.S., and therefore, a product with high profitability that is slowly decreasing, but one and the other. And since we are promoting and are market leader with Clozaril in Canada, we've had a franchise that has been maintaining itself and cash flowing as per the intent of our strategy. We're now seeing the opportunity to grow Clozaril in Canada in a significant fashion. And that is because with 5 years of ownership under our belt, we eventually identified one of the reason why Clozaril -- while Clozaril is a life-saving product, it's used for those schizophrenic patients that do not respond to first-line therapy, and therefore, Clozaril becomes a drug of last recourse. It's a very potent drug, has a high response rate, but it comes with a caveat. And that's a rare -- the possibility of a rare and possibly lethal side effect. That side effect requires a very intense safety monitoring regimen and that safety monitoring regimen, that requires, among other things, 39 venal blood draws in the hand of a schizophrenic patient in the first year alone, is the reason why so many patients that could use that life-saving drugs decide to forgo it, avoid it or abandon treatment. And as we identify that through our ownership of Clozaril, we also eventually identified the technology that minimizes the burdensome and the invasiveness of that safety regimen. It's called -- we christened it CSAN Pronto. CSAN is our patient registry in Canada, where all the patients are maintained and where all the safety information is documented. And Pronto is a little device that will be used at the point of care by the physician that eliminates the need for taking an appointment at the lab, get a diagnostic test, get the needle stuck there, wait 1.5 days for the result, all of that with CSAN Pronto is now a reality, can be done at the point of care in minutes with a single drop of blood coming from a finger prick. And therefore, we see this as a growth driver of the market. And since that device is embedded in our patient registry, and our patient registry is uniquely associated with the dispensation of the brand, that incremental growth will strictly accrue to us. So that growth strategy is being deployed. It was delayed because of the pandemic. We finally started to deploy the technology in the third quarter. We're seeing some results, 3 consecutive months with encouraging patient growth. And we plan to continue the deployment at the best possible clip, recognizing that the pandemic continues, and we need to take extra precautions that are slowing us down a little bit. But this summarizes really why Vascepa is so central in cardiovascular, Clozaril is central to neuroscience and CNS for us, and then we have other assets that you've alluded to. One of them was approved yesterday. It's PERSERIS. PERSERIS will be a companion, a detailing companion to Clozaril in psychiatry. It's also for schizophrenia, but for the first-line patients. So no overlap and no competition with Clozaril. And in cardiovascular, we have a product that's under review by Health Canada called Trinomia. It's a smaller and much more tactical product, but it's one that we will layer on top of Vascepa, if and when it's approved at the right time. And that product will bring incremental sales opportunities, albeit much smaller, but it will make the sales force even more productive. We all like to have sales force detailing a couple, if not 3 products, but always recognizing that one of them is the anchor and will mobilize the majority of the time.