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Edited Transcript of NRI.TO earnings conference call or presentation 10-May-18 11:45am GMT

Q1 2018 Nuvo Pharmaceuticals Inc Earnings Call

MISSISSAUGA May 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Nuvo Pharmaceuticals Inc earnings conference call or presentation Thursday, May 10, 2018 at 11:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jesse F. Ledger

Nuvo Pharmaceuticals Inc. - President & CEO

* Nicole Rusaw-George

Nuvo Pharmaceuticals Inc. - Interim CFO

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Conference Call Participants

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* Antonia Borovina

Bloom Burton & Co., Research Division - Associate of Equity Research

* Robert Gibson

PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst

* Meredith Brill

- Analyst

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Presentation

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Operator [1]

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Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nuvo Pharmaceuticals First Quarter Results Conference Call. (Operator Instructions) Jesse Ledger, President and Chief Executive Officer of Nuvo Pharmaceuticals, you may begin your conference.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [2]

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Thanks, Kim.

Good morning. Thank you for joining our call today. On the call with me this morning from Nuvo Pharmaceuticals are John London, Nuvo's Executive Chairman; Nicole Rusaw, Nuvo's Interim Chief Financial Officer; and Tina Loucaides, Nuvo's Vice President, Secretary and General Counsel.

Before we begin, I will remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties related to Nuvo's future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements.

The risk factors that may affect results are detailed in Nuvo's periodic and annual disclosure documents as well as the news release that we issued this morning, and you can access these documents in the SEDAR database under www.sedar.com. Except as required by law, Nuvo is under no obligation to update any forward-looking statements discussed today and investors are cautioned not to place undue reliance on these statements.

Earlier this morning, we announced our first quarter results. Nicole will walk you through the financial results in a moment. But first, I would like to provide a review of our developments in the first quarter of 2018.

During the quarter, we made significant progress in executing on the growth strategy we have been highlighting over the past few quarters. Notably, we completed a global product acquisition and established definitive next steps towards a European submission for Pennsaid 2%.

It is also important to note that as of January 1, 2018, Nuvo adopted the new IFRS 15 revenue recognition and IFRS 9 Financial Instruments Accounting Standards, resulting in changes to the timing of our revenue recognition and expanded disclosures on our financial statements.

Nuvo continues to focus on 2 main areas of growth: first is the growth of our revenue streams by expanding the geographies where existing Nuvo products are commercialized around the world; and second is the growth of our product portfolio through disciplined product in-licensing and acquisition transactions. During the first quarter, the Nuvo team made significant advances in both areas.

We previously noted that Nuvo management would be holding scientific advice meetings with select European Union regulatory agencies to discuss the potential pathway towards Pennsaid 2% regulatory submissions in select EU countries. We recently presented a meta-analysis of the existing clinical data supporting Pennsaid and Pennsaid 2% in safely treating osteoarthritis to these EU-based regulatory agencies. We did receive a favorable response from the regulators, and there is an opportunity for Nuvo to submit a revised registration dossier containing our existing clinical data to select EU member states without an additional costly and lengthy Phase III clinical trial.

This is clearly a step in the right direction towards potential Pennsaid 2% registration in Europe. With this positive feedback, we are preparing to file our new revised registration dossier to these EU regulators within the next 12 months.

Through the course of developing Pennsaid and Pennsaid 2%, Nuvo or our partners have completed more than 20 clinical trials and 10 nonclinical studies for Pennsaid and Pennsaid 2% and their key ingredients. A significant portion of this clinical and nonclinical evidence was generated after our original European Pennsaid approval in 2000. This newer clinical and nonclinical data was primarily generated to support our Pennsaid and Pennsaid 2% U.S. approvals obtained in 2009 and 2014, respectively.

Assembling and consolidating this new information and the significant post market safety data that has been generated since the original European approval of Pennsaid into a reviewable regulatory dossier is a tremendous undertaking. Fortunately, we have an experienced and expert team of internal employees and external advisers who are currently working diligently on this important project. While there's no guarantee that an approval will be granted, we're encouraged by the discussions we've had with the regulators to date and feel this is an important step in the right direction toward expanding the global footprint for Pennsaid 2%.

Furthermore, we believe having a clear path to a regulatory submission in Europe will benefit our partnering discussions with both EU and ex-EU-based pharmaceutical companies. As the year progresses, we'll provide updates on our anticipated timelines and partnering transactions.

In January, we announced the acquisition of the global rights to Resultz, a best-in-class, pesticide-free head lice treatment including related intellectual property and established royalty stream. This transaction was in line with our strategy to diversify our product portfolio and revenue streams. We believe a considerable opportunity exists to partner Resultz in the U.S., Germany and Italy, 3 markets where we have current regulatory agency approvals and are actively seeking commercial partners.

The retail value of the head lice market in these 3 countries alone is greater than USD 300 million annually. Our main focus in 2018 is to engage a commercial partner or partners for these territories and execute licensing transactions. Our expectation is to receive upfront and milestone payments, royalties on net sales and to realize gross margin on finished product supplies. We are in active discussions with a variety of consumer healthcare and pharmaceutical companies that are interested in Resultz for various territories globally, including the United States, Germany and Italy.

Identifying the right partner, allowing them to complete an appropriate market assessment and diligence review, negotiating financial terms of the transaction and ultimately finalizing a definitive license agreement takes a substantial amount of time and human capital. More importantly, we need to ensure that we identify the right partner that will put appropriate resources and support behind Resultz to ensure a successful commercial launch in the U.S. and other key and partner territories. Nuvo's partner history -- partnering history has shown the impact that a strong or weak partner can have on a commercial success of a product. While we are actively engaged in discussions with potential partners, we are taking a disciplined approach to ensure we execute the best deal with the right partner for Resultz.

Our business development team continues to seek product acquisition and licensing opportunities as well as more transformative transactions. We are balancing new acquisition activities with our Resultz and Pennsaid 2% out-licensing initiatives and filing our EU regulatory submission for Pennsaid 2%. Business development is a constantly evolving process, and we currently have a variety of opportunities under evaluation. We routinely review all our projects and opportunities to ensure we are prioritizing those that have the greatest potential to enhance shareholder value.

In Q4 2017, we put a Normal Course Issuer Bid or NCIB program in place that allows Nuvo to buy back its common shares in the open market. Nuvo is an insider for the purposes of trading Nuvo's stock. Due to internal insider trading blackouts and effects because of the Resultz transactions and routine quarter end insider trading restrictions, we were not in a position through Q1 to make any share purchases. After the end of Q1, when our trading restrictions were lifted, we had a small window in April to make share purchases . During that period, we repurchased 164,049 common shares with available cash on hand for a total cost of $547,930 or $3.34 per share. The common shares acquired by Nuvo were canceled upon purchase.

We will continue to evaluate opportunities to utilize the NCIB program moving forward. Additional details on our share repurchases are available on the SEDI database.

Nicole will now walk you through our first quarter results.

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Nicole Rusaw-George, Nuvo Pharmaceuticals Inc. - Interim CFO [3]

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Thank you, Jesse.

Total revenue consisting of product sales, license revenue and contracting royalty revenue for the 3 months ended March 31, 2018 was $4.4 million compared to $7 million for the 3 months ended March 31, 2017. The decrease in total revenue was primarily related to a decrease in Pennsaid 2% product sales, specifically physician samples.

Total operating expenses for the 3 months period ended March 31, 2018 were $4.8 million compared to $4.7 million for the 3-month period ended March 31, 2017. The slight increase in operating expenses was primarily attributable to an increase in general and administrative expenses and depreciation and amortization, partially offset by a decrease in cost of goods sold and research and development expenses. Cost of goods sold, or COGS for the current quarter was $1.9 million compared to $2.8 million for the 3 months ended March 31, 2017. COGS decreased in the quarter due to decreased product sales.

Gross margin on product sales was $1.8 million or 49% for the current quarter compared to a gross margin of $3.9 million or 58% for the 3 months ended March 31, 2017. The company's gross margin on product sales was impacted by the volume and mix of products sold during the current and comparative quarter. The company's gross margin was also impacted by the Canadian dollar versus the U.S. dollar, the currency in which it sources certain Pennsaid 2% and Pennsaid raw materials.

G&A expenses were $2.4 million for the 3 months ended March 31, 2018 compared to $1.7 million for the 3 months ended March 31, 2017. Increase in the current quarter was primarily related to a $0.3 million onetime cost associated with the transition and establishment of the Resultz business. Furthermore, the company recognized $0.1 million in scientific affairs and regulatory cost primarily attributable to the advancement of the company's Pennsaid 2% European regulatory strategy. During the current quarter, the company recognized noncash costs of $0.5 million in amortization for the Resultz patent.

Net loss for the 3 months period ended March 31, 2018 was $0.2 million compared to net income of $2.2 million for the comparable quarter. In the current quarter, the decrease was primarily attributable to a $2 million decrease in gross margin, a $0.5 million increase in amortization and a $0.7 million increase in G&A expenses, offset by a $0.4 million increase in royalty revenue, a $0.3 million decrease in R&D expenses and a $0.2 million income tax recovery.

Adjusted EBITDA decreased $2.6 million for the 6 month period ended March 31, 2018 compared to $2.3 million for the 3 months ended March 31, 2017. The decrease in adjusted EBITDA for the current quarter was primarily related to a decrease in gross margin, an increase in G&A expenses, which was largely a factor of onetime costs associated with the company's acquisition and transition of the Resultz business as well as increased costs incurred for the advancement of the company's Pennsaid 2% European regulatory strategy.

Cash and short-term investments were $6.5 million as of March 31, 2018 compared to $10.4 million as at December 31, 2017. The decrease included the USD 1.5 million or CAD 1.9 million that was paid to Piedmont to acquire the U.S. product and intellectual property rights to Resultz and a $2.6 million investment in our working capital, primarily the result of timing of shipments to our customers.

I will now turn the call over to Jesse who will discuss our outlook for 2018.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [4]

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Thanks, Nicole.

We anticipate 2018 will be a turning point in our business. In 2017, Horizon, our U.S. distribution partner for Pennsaid 2% ordered significantly less Pennsaid 2% from us than they did in 2016. This was due to a number of factors, including Horizon inventory reductions and our plant shutdown in Q2 and Q3 2017 to install U.S. Food and Drug Administration mandated serialization equipment. In 2017, Horizon faced increased managed care challenges, which led to portfolio-wide changes in their inventory management, a reduction in the number of sales representatives and an approximately 50% decrease in their physician sample purchases. We anticipate that 2018 Pennsaid 2% business should remain relatively steady. And accordingly, we expect that our commercial bottle production for Horizon will stabilize through the year.

Horizon's decision to reduce distribution of physician samples in 2017 resulted in a buildup of its sample inventory that we believe has largely been worked through. We therefore anticipate that our production of physician samples will return in the second half of the year. Furthermore, the addition of our newly acquired Resultz royalty stream, which contributed approximately $0.6 million to our revenue for Q1, should also show more robust numbers later in the year as we get closer to the traditional late summer, early fall lice season.

As communicated previously, we anticipated a number of onetime Resultz transaction-related expenses throughout the year, and we recognized some of these expenses in Q1. In addition, amortization of the Resultz patent has resulted in significantly higher noncash depreciation expenses in the first quarter that will continue over the remaining life of the underlying patent. Even considering these items, our Q1 results demonstrate that Nuvo continues to be a cash flow generating company with positive adjusted EBITDA.

That ends our formal remarks. And I will now turn this back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from David Martin from Bloomingburg -- Burton (sic) [Bloom Burton].

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Antonia Borovina, Bloom Burton & Co., Research Division - Associate of Equity Research [2]

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It's Antonia on the line for Dave. I actually only have 1 question, and it's related to the potential EU approval of Pennsaid 2%. So I'm just hoping you could provide maybe a bit more color in terms of which specific countries you are going to be pursuing or whether this is going to be a broad EMA approval strategy? And then you mentioned that you're not expecting to have to do a large Phase III study, but do you expect that you're going to have to do additional clinical work? And if so, what are some of the timelines associated with that?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [3]

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Sure, okay. So as far as the countries that are targeted, we -- obviously, there are a number of considerations that have to be thought of. One is which countries originally approved the original version of Pennsaid and which ones didn't. And so that obviously comes into play.

So we've identified the original Pennsaid approval countries as being sort of the first wave. So that would include Italy, Austria, Portugal, Greece and a few other smaller countries. And so it gives us access to a sizable market opportunity. If you look at the Italian market alone, it's -- the retail value of topical diclofenac products in Italy last year was about EUR 120 million. So this is a sizable chunk of Europe that will -- that we're targeting here. And then other countries will come along as we go down the road, but there are commercial and regulatory considerations that have to come into play there.

As far as additional clinical work, we actually don't have to perform additional clinical trials. So that's -- that was one of the key outcomes from the scientific advice meetings, that we have sufficient existing clinical data along with the new data that was generated in Russia for the NovaMedica approval, which was a comparative head-to-head study between Pennsaid 2% and Voltaren 2%. So this data is all supportive of this submission, so we don't actually have to complete any additional clinical work. And ultimately, what we're doing now is simply working, well, not simply, it's a complicated task because there's a lot of data to come together. But basically, compiling the revised dossier.

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Operator [4]

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(Operator Instructions) Your next question comes from the line of Bob Gibson from PI Financial.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [5]

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With all the cash, what are you looking at? What should we be thinking about as far as products that you might bring into your stable? Are you narrowing it down? Or give me some color on what your thoughts are.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [6]

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Sure. I think -- I obviously can't comment specifically on individual product opportunities. But obviously, other opportunities similar to the Resultz transaction. So assets that we can acquire the business. There's some revenue being generated, and we can manufacture the product in our facility. And then, obviously, add some value by expanding the geographies. That's kind of the ideal situation. And so we've got a number of opportunities that kind of fit that mold that we're looking at in various stages of review.

But ultimately, that's kind of what we like to earmark most of that cash for, is for business development activities. And then of course, we continue to look at other opportunities that would be a little more transformative in nature. And obviously, that cash position is helpful in those discussions as well.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [7]

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Excellent. And as far as your facility, how is it coming with getting the new equipment or anything you need, how is that going?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [8]

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So all of the equipment that we purchased last year, the sachet equipment and the serialization equipment, everything is installed, it's all fully operational and functioning. So there are no additional equipment purchases or installations that are ongoing. So everything's in place, and we're good to go.

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Operator [9]

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Your next question comes from the line of [Meredith Brill] from [Brill Capital.]

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Meredith Brill, - Analyst [10]

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You mentioned in the remarks that you expect a downstack of the sample volumes in the second half of 2018. My understanding is that the Horizon reps are (inaudible) from about 350 to 250. Do you expect the linear reduction in the samples going forward and, for example, 30% of when you had 350, 30% plus?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [11]

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Sorry, what was the last part there?

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Meredith Brill, - Analyst [12]

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Are you expecting like a linear reduction in -- like is each rep going to give out the same number of bottles? So instead of 250 reps -- instead of 350 reps, now you have 250, so it's approximately 30% less than when you had 350 reps, are you -- is that what you're expecting?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [13]

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You know what, I don't think it's not necessarily a linear connection there. And ultimately, we don't have visibility into Horizon's sample strategy and what their plans are and how many samples their reps are going to hand out, and how many physicians they're going to visit. We've got visibility in forecast, and in terms of we know from our production planning, that sachet production is coming back online. But I can't comment on whether there's a linear -- I wouldn't say that there's a linear relationship between the number of reps and the number of samples that we're producing.

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Meredith Brill, - Analyst [14]

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Okay. So you can't comment on some sort of guidance on how much...

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [15]

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No, we -- yes, we don't -- as you know, we don't provide forward guidance. But I think the main point is that sample production comes back online, they've worked through the inventory of sachets as they built up as a result of the reduction of the sales force and their reduction of sample spend, which both combined for that -- the last 4 quarters where we didn't produce any samples. And -- so that's worked itself through. And as we get into the second half of this year, we'll return to more consistent sample production.

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Meredith Brill, - Analyst [16]

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Okay. And do you expect to possibly start repurchasing shares at this level?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [17]

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That's something that we'll continue to evaluate on an ongoing basis. We have to balance share purchases with business and corporate development opportunities and ensure that we've got sufficient cash on the balance sheet to be able to continue to transact. And ultimately, I think the business development efforts are really the efforts that are going to drive long-term shareholder value. And so those are certainly priority, but we'll continue to evaluate the share price and whether it makes sense to purchase shares or not on an ongoing basis. So it's a nice tool to have that we can elect to use as needed.

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Operator [18]

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(Operator Instructions) There are no further questions at this time. I turn the call back to the presenters.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [19]

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Okay. Well, thank you very much, everybody, for listening in on the call. And of course, if you have other questions or like to follow up after the fact, you can always reach out to us through the Investor Relations contact information on our website. So thank you very much.

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Operator [20]

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This concludes today's conference call. You may now disconnect.