Medexus Pharmaceuticals Inc. (MDP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. And welcome to the Medexus Pharmaceuticals Third Quarter 2020 Earnings Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host for today, Mr. David Waldman with Investor Relations. Sir, the floor is yours.

Thank you. Good morning, everyone. And welcome to Medexus Pharmaceuticals Third Quarter Fiscal 2020 Conference Call. On the call with us this morning are Ken d'Entremont, Chief Executive Officer; and Roland Boivin, Chief Financial Officer. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. I'd also like to remind everyone that the discussion during this call will include certain forward-looking information that is based on certain assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided during this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information. Medexus disclaims any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information, except as required by applicable law. In addition, during the course of this call, there may be references to certain non-IFRS financial measures, including references to adjusted EBITDA, which do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-IFRS financial measures, including a reconciliation of adjusted EBITDA to net loss, please refer to the company's management discussion and analysis which, along with the financial statements, are available on the company's corporate website at www.medexus.com and the company's corporate filings on SEDAR at www.sedar.com. I'd now like to turn the call over to Ken d'Entremont. Please go ahead, Ken.

Thank you, David. Thanks to everyone for joining us on the call today. Let me start by saying we are encouraged by the overall market trends for our products, and we've built a very strong North American sales force. As a result, we believe that we have a very scalable business model with tremendous earnings potential, and we look forward to introducing new products using the infrastructure that we have put in place. For the third quarter, we have achieved revenue of $16.2 million for the 3 months ending December 31, 2019, compared to $14.4 million for the same period last year. This increase was due in part to the acquisitions in October 2018 as well as market demand across each of our products. Specifically, Metoject unit market demand increased by 88%, Rupall unit market demand increased by 62% and Rasuvo unit market demand increased by 8% compared to the same period last year. We believe this continued unit sales growth is clear evidence that our strategy is working. As reported last quarter, while gross revenue continues to grow, net revenue in the United States continues to be impacted by the consolidation of our payers in the U.S. market. As a result of this consolidation, we have experienced an increase in discounts given to payers in the form of rebates and a corresponding reduction in the net selling price of Rasuvo. Additionally, we received a substantial rebate invoice from one of our main payers in the United States, which negatively impacted net revenue and gross margin for Rasuvo in respect to the 3-month period ending December 31, 2019. The invoice also included unexpected rebates related to prior periods, which resulted in further reduction in net revenue for the 3-month period ending December 31, 2019. The late receipt of the invoice in respect to these additional rebates was due to an error in the payer's internal reporting system. Occasionally, we experience extensive time delays between the recording of the actual in respect to such rebates and the ultimate settlement of U.S. Medicare Part D commercial- and performance-based contracts. We continue to investigate the cause of the late receipt of this rebate invoice and to analyze and monitor the impact of the consolidation of our payers in the United States and the potential impact that such consolidation has on the net selling price of Rasuvo. We are not aware of any other potentially delayed rebates, and we anticipate sustained growth in our key products going forward. We also believe there are substantial opportunities to leverage our strong U.S. sales force by introducing new products to this channel. I'll talk more about this in a moment. We recorded an adjusted EBITDA of approximately $700,000 for the fiscal third quarter of 2020 and $1.8 million for the 9 months ending December 31, 2019. This compares to adjusted EBITDA of $2.2 million and $2.3 million for the same periods last year. These results reflect the impact of the consolidation of payers in the United States and the catch-up rebate I mentioned earlier as well as additional R&D expenses and business development expenses that we believe will further accelerate our growth in the future. Roland will explain -- expand on these investments later. Turning to our individual product lines. During the third quarter, we launched new Metoject subcutaneous doses of 10 and 12.5 milligrams in addition to the previous announced 15-milligram dose. Metoject is a prefilled syringe of methotrexate, which is indicated for the treatment of rheumatoid arthritis and psoriasis. Metoject is a highly effective and cost-efficient treatment for these debilitating diseases, and public reimbursement creates access for a large group of patients who previously could not get the product. The new 10 and 12.5 milligram strengths are important additions to the Metoject product line as it enables physicians the flexibility to prescribe an appropriate strength for their patients. We anticipate the majority of provinces will reimburse these new strengths in the near term, which we anticipate driving new prescriptions and unit growth. Market data shows that during the quarter, Metoject unit market demand increased 88% compared to the same period last year. This is a continuing trend that has improved as we've added additional strengths. Turning to Rasuvo. In the U.S., market data shows that Rasuvo unit market demand increased by 8% for our fiscal third quarter 2020 as compared to fiscal third quarter 2019. Rasuvo was a once-weekly subcutaneous single-dose auto-injector of methotrexate indicated for the treatment of rheumatoid arthritis, psoriasis and Juvenile Idiopathic Arthritis. Rasuvo has gained excellent payer, prescriber and patient acceptance, which has positioned us as an emerging leader in the methotrexate auto-injector market. We expect this growth to continue due to the efficiency and convenience of the delivery mechanism. More importantly, as I mentioned earlier, we have aggressive plans to leverage our U.S. sales force by introducing new products through this channel, either through licensing agreements or through accretive acquisitions. This has always been our strategy, and we're currently in discussions with potential targets. We look forward to providing further updates as soon as possible. We also plan to launch additional rheumatology products. As I've said previously, we are developing a reformulated rheumatology product that we believe will improve the delivery of this therapy and the treatment of RA and other autoimmune diseases. We believe the results of this development project have been positive and support the product's concept moving into the next phase of development. Right now, we have only one product in the U.S. market, but we have a seasoned and accomplished sales force. By adding new products and effectively leveraging this U.S. sales force, we believe we can rapidly grow revenue, while at the same time, delivering significant cash flow. Turning back to our products in Canada. As previously reported, Health Canada has granted authorization to distribute Treosulfan under the Special Access Program. This program provides health care providers with access to nonregistered drugs for treating patients with serious or life-threatening conditions. Treosulfan is indicated as part of a conditioning treatment prior to stem cell transplantation in adult patients with malignant and nonmalignant diseases such as leukemia, and in pediatric patients older than 1 month with malignant diseases. Treosulfan is a significant improvement over current products used as conditioning agents prior to bone marrow transplantation, particularly in children due to the increased rate of event-free survival after 2 years. We are actively shipping to hospitals across Canada and expect to distribute -- and expect to expand the distribution of Treosulfan once the product has received approval as a fully registered product. In late 2019, we announced we had been granted prior review status for the new drug application for Gliolan, which should significantly accelerate our path to approval. Prior review status assigns eligible submissions a shortened review target of 180 days in comparison to 300 days for a nonpriority review. This, coupled with anticipated reimbursement upon approval, leads us to believe that the sales uptake upon launch could be significant. Gliolan is used for guided maximal surgical reception of high-grade gliomas, malignant brain tumors in adults. Gliolan assists neurosurgeons to better visualize and more completely remove gliomas by causing them to become fluorescent and glow during surgery. We filed for registration of Gliolan with Health Canada in December 2019 and anticipate receiving full registration in 2020. In the meantime, feedback from the medical community has been extremely positive, and we've continued to distribute Gliolan via the Special Access Program. Once Gliolan becomes a fully registered product, we expect it to rapidly gain much broader distribution in Canada, which represents a sizable underserved market opportunity. Turning now to our pediatric and allergy business. Each of our 3 products, Rupall, Otixal and Cuvposa, are generating solid year-over-year prescription growth. Rupall, launched in January of 2017, has experienced very strong growth with unit market demand showing an increase of approximately 62% in the third quarter 2020 compared to the same period last year as we continue to gain market share. We believe physicians are switching patients from either the generic prescription antihistamines or over-the-counter products. This quarter and year-to-date, Rupall has been one of the fastest-growing antihistamines in the Canadian prescription market. Given these trends, we believe Rupall is positioned to become a leading prescription antihistamine in a total market value at approximately $144.7 million, including $53.5 million from the prescription market, which is growing at an annual rate of 16%. As we previously reported, there has been a long-standing drug shortage of Triamcinolone Hexacetonide in Canada. Triamcinolone Hexacetonide is a leading treatment for Juvenile Idiopathic Arthritis. In October of 2018, we launched our own Triamcinolone Hexacetonide product. The fact we can now offer our own product means that children suffering from this debilitating condition, and the clinicians who care for them, now have a reliable source of Triamcinolone Hexacetonide. We are currently in active negotiations for the public reimbursement of TH and expect to initiate provincial listings in the near term. Public reimbursement of TH will dramatically increase the sales potential of the drug as it will significantly improve market access for both children and adult patients suffering from various forms of joint disease. Switching gears a bit. I would also like to note that under our normal course issuer bid, or NCIB, we purchased and canceled 361,900 common shares in the market for consideration of $1.4 million during the 3-month period ending December 31, 2019, and 779,900 common shares in the market for consideration of $3.2 million during the 9-month period ending December 31, 2019. We put this in place due to the fact we do not believe the market price for our common shares reflects the underlying value of what we've built and our continued use of the NCIB during the quarter reflects our confidence in the outlook for the business. To wrap up, we have a solid balance sheet with $22.6 million of cash and cash equivalents at the end of the quarter, which provides us with a solid platform to execute our 3 pillars of growth. First, we're focused on strong organic growth from our existing portfolio. Second, we plan to license and acquire additional products where we can leverage our North American sales force and infrastructure. And third, we are developing products within our core therapeutic areas. Overall, we remain extremely encouraged by the outlook for the business, and we look forward to providing updates as developments unfold. I'll now turn the call over to Roland, who will discuss the financial results in more detail.

Thank you, Ken. I'm pleased to report we generated revenue growth for the fiscal third quarter despite the payer consolidation and the unexpected catch-up rebate invoice that Ken mentioned earlier. We remain encouraged by market trends and expect to see continued growth for the remainder of 2020 and beyond, given the opportunities within our product portfolio. We achieved quarterly revenue of $16.2 million for the 3 months ended December 31, 2019, versus $14.4 million for the 3 months ended December 31, 2018. Gross profit for the 3 months ended December 31, 2019, was $9 million or 55.4% of sales compared to $9 million or 62.1% of sales for the same period last year. Impact on revenue and gross margin for the third quarter ended December 31, 2019, compared to the same period last year is mainly due to the consolidation of its payer -- of our payers in the United States market as well as the aforementioned unexpected rebate invoice that we received from one of our main payers in the U.S. The company continues to analyze and monitor the impact of the consolidation and the potential impact it has on its net selling price. For the 3-month period ended December 31, 2019, amortization of product licenses totaling $1.2 million was included in cost of sales versus approximately $1 million for the same period last year. Operating loss for the 3 months ended December 31, 2019, was $3.3 million compared to approximately $100,000 for the 3 months ended December 31, 2018. Operating loss for the 3 months ended December 31, 2019, included approximately $2.1 million of termination benefits and $1.2 million of business development and regulatory affairs expense compared to 0 of termination benefits and $0.7 million of business development and regulatory affairs expense for the same period last year. Increase in business development and regulatory affairs expense was mainly due to accelerated business development activities and an increased volume of transactions under consideration. Adjusted EBITDA for the 3 months ended December 31, 2019, was approximately $700,000 compared to $2.2 million for the 3-month period ended December 31, 2018. EBITDA included approximately $1.2 million of business development and regulatory affairs expenses I mentioned compared to $0.7 million for the same period last year. As well, there was also approximately $500,000 in R&D expenses for the quarter. Net loss for the 3-month period ended December 31, 2019, was $2.6 million compared to a net loss of $1.3 million for the 3-month period ended December 31, 2018. We finished the third quarter of fiscal 2020 with cash and cash equivalents of $22.6 million. Turning now to the 9 months ended December 31, 2019. We achieved revenue of $48.7 million versus $21.1 million for the 9 months ended December 31, 2018. Gross profit for the 9 months ended December 31, 2019, increased to $28.5 million or 58.4% of sales compared to $12.5 million or 59.4% of sales for the same period last year. The lower gross margin for the 9 months ended December 31, 2019, compared to the same period last year is mainly due to what we said before, the consolidation of the payers in the United States as well as the aforementioned unexpected rebate invoice that we received. That rebate invoice that we received included a catch-up rebate covering a period of several months prior to the 3 months ended December 31, 2019. For the 9-month period ended December 31, 2019, amortization of product licenses totaling $3.2 million was included in cost of sales versus $1 million for the same period last year. Operating loss for the 9 months ended December 31, 2019, was $5.8 million compared to $3.8 million for the 9 months ended December 31, 2018. Adjusted EBITDA for the 9-month period ended December 31, 2019, was $1.8 million, which included approximately $1 million of R&D expenses, compared to adjusted EBITDA of $2.3 million for the 9-month period ended December 31, 2018. Net loss for the 9-month period ended December 31, 2019 was $4.1 million compared to $5.6 million for the 9-month period ended December 31, 2018. Operator, we'll now open the call to questions. Actually, no, there are some, I think -- yes, no, apologies. Yes, we are opening the call for questions, operator.

[Operator Instructions] We'll go first to Justin Keywood at GMP Securities.

Are you able to quantify the impact of the late invoice in the quarter? And do you expect gross margins to normalize in Q4 and going into next year?

Yes. This is -- thanks for the question, Justin. This rebate that we just -- we just received it now, and we're actually in the process of digging deeper into it. But yes, quantifying it right now would not necessarily be appropriate not knowing all the details. We are in contact with that payer. It's very recent, as I said. Plus, it does speak to specific customer confidential information. So in the same way that we would not disclose specific rebates for specific products, we will not be going into details on quantifying it. However, your second question about gross margin. As you know, gross margin is impacted by several factors. You've got product mix. You've got seasonality. You've got the buying patterns of certain customers. So predicting gross margin is always very difficult, and it does change quarter-by-quarter. Having said that, though, it's important to note that this gross margin that we saw here, 55.4%, because it includes a catch-up rebate that typically would -- that affected, I should say, that affected prior quarters, obviously, that 55.4% would have been higher without the catch-up rebates. So to -- as far as we're concerned, certainly, that's not what we expect the future to look like in that regard.

Maybe I could ask it another way. Would it be fair to say that the gross margin profile would be similar to last quarter without this late invoice?

Yes, it'd be similar. It'd be similar to the last one, possibly in between this one here and then the last one. But yes, roughly.

Okay. That's helpful. And then on the M&A pipeline, I'm wondering if you can give some additional color on the types of products you'd be looking to in-license or acquire and if there would be additional OpEx needed to support, possibly the additional revenue coming online.

Yes. Good question, Justin, thanks. As you saw from our results, we're spending more on business development, which is a reflection of increased activity. It's always been our view that we want to license or acquire in 2 therapeutic areas, either autoimmune disease, i.e., rheumatology around Rasuvo, or in specialty oncology where we have a pipeline of products potentially coming from the [ ROFO ] with Medac. So those 2 areas are our focus. And if we were to license or acquire into those areas, it wouldn't dramatically change our OpEx because we would use the same sales force. So that's what we're looking to do. We hope that we will be successful at some point in the future.

Okay. That's helpful. And one more, if I may. Just on the Rupall product, it showed substantial growth in the quarter. How sustainable is this? And when do you see peak sales kind of leveling out?

Yes. I still think we're a few years away from peak sales. We're seeing this dramatic growth quarter-after-quarter, and it's really a result of a pretty strong shift from OTC antihistamines to prescription antihistamines. There hasn't been any innovation in this market for many, many years. And as a result, a lot of patients drifted into the OTC market. Now that there's a strong next-generation product available in the prescription market, there's a lot of movement back to the Rx market where a patient can actually get the prescription reimbursed and doesn't have any out-of-pocket for OTC antihistamine. So we expect this will continue for a while. It's a pretty big marketplace. I mean, I think I mentioned it's around $144 million, of which currently only about $50 million is Rx. So I think both will be movement from OTC to Rx plus just new patients into the market. So we're projecting this to continue for some time into the future.