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Edited Transcript of PTX earnings conference call or presentation 9-Aug-18 8:30pm GMT

Q2 2018 Pernix Therapeutics Holdings Inc Earnings Call

The Woodlands Sep 11, 2018 (Thomson StreetEvents) -- Edited Transcript of Pernix Therapeutics Holdings Inc earnings conference call or presentation Thursday, August 9, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angus W. Smith

Pernix Therapeutics Holdings, Inc. - Senior VP, Chief Business Officer & Principal Financial Officer

* George P. Jones

Pernix Therapeutics Holdings, Inc. - VP of Sales & Marketing

* John Anthony Sedor

Pernix Therapeutics Holdings, Inc. - Chairman & CEO

* Robert A. Yedid

LifeSci Advisors, LLC - MD

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Conference Call Participants

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* Nicole Vizorosky

- Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Pernix Therapeutics' Second Quarter 2018 Earnings Conference Call. My name is Cody, and I'll be your event specialist today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Bob Yedid. Please go ahead, sir.

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Robert A. Yedid, LifeSci Advisors, LLC - MD [2]

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Good afternoon. This is Bob Yedid, and thank you for participating in today's call.

On the call today are John Sedor, Chairman and CEO; George Jones, Vice President of Sales and marketing; and Angus Smith, Senior Vice President, Chief Business Officer and Principal Financial Officer of Pernix Therapeutics.

Please be advised that Pernix issued a press release this afternoon containing financial results for the quarter ended June 30, 2018. The release, including the financial tables and reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, is available on the company's website at www.pernixtx.com. The company also expects to file its Form 10-Q for the second quarter of 2018 with the SEC later today.

During today's call, the company will be making forward-looking statements and actual results may differ from current expectations. Please note that under safe harbor rules, Pernix has no obligation to update the information contained in these forward-looking statements even if actual results or future expectations change materially. The company recommends that you refer to cautionary statements contained in the SEC filings for more detailed explanation of the inherent limitations of such forward-looking statements.

I would like to now turn the call over to John Sedor, the company's Chairman and CEO. John?

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John Anthony Sedor, Pernix Therapeutics Holdings, Inc. - Chairman & CEO [3]

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Thank you, Bob.

Good afternoon, and thank you for joining us today. This afternoon, we announced our financial results for the second quarter of 2018.

Before getting into the specifics of the quarter, I want to remind you that our three-pronged strategy for the company is comprised of: one, improving cost structure and balance sheet while positioning the company to drive sales; two, to acquire new assets and solidifying a path forward for Silenor OTC; and three, building sustainable enterprise value. I believe we have continued to execute on this strategy since our last earnings call, highlighted by the completion of the Contrave transaction, the debt restructuring transaction we announced last week and the solid revenue growth we have just reported for both Zohydro ER and Silenor during the second quarter.

I want to begin by discussing the unique opportunity provided by our participation in Nalpropion Pharmaceuticals' recently closed acquisition of the global rights to Contrave, a market-leading prescription product indicated for weight loss. Prior to discussing the specifics of the transaction and what it means for Pernix' business, I'd like to highlight how the transaction represents the continued execution of our long-term strategy and our long-term plan.

I believe our participation in the recent acquisition of Contrave is consistent with our strategy of acquiring new assets and will help Pernix to build sustainable long-term enterprise value.

With that, let's discuss the Contrave transaction in further detail. Nalpropion's investors are comprised of Pernix and funds affiliated with 2 leading investment management firms: Highbridge Capital Management and Whitebox Advisors. Just as a reminder, Highbridge knows Pernix well, as they were the lead investor in July 2017's financial restructuring of our balance sheet. Nalpropion acquired certain assets of Orexigen Therapeutics, including worldwide rights to Contrave for $73.5 million in cash.

Pursuant to a service agreement with Nalpropion, Pernix will receive a management fee equal to 5% of Contrave's net revenues. We will also assume the responsibility for production and -- for product distribution in the U.S. and manage Nalpropion for the initial term of 2 years. Additionally, Pernix will be entitled to reimbursement of certain shared expenses at cost, initially capped at $6 million per year. Importantly, we expect to provide these services to Nalpropion using our existing resources.

As part of Nalpropion's investment group, Pernix agreed to contribute 10% of the capital required for the purchase price and working capital needs, funded through the company's existing delayed draw term loan facility. Pernix invested a total of $9.2 million, consisting of $7.4 million for the purchase price and $1.8 million in working capital. We believe that the structure of this transaction enable us -- enables us to recognize an immediate benefit in the form of management fee and shared service reimbursement, which we believe will allow us to recoup our initial investment quickly.

Longer term, Pernix will receive 2 purchase options to acquire up to 49.9% and 100% of Nalpropion at specified time periods and purchase prices, which remain confidential.

As we discussed in our last earnings call, Contrave, known as Mysimba in certain markets outside the United States, was approved by the FDA in September of 2014. The product is also marketed in 25 additional countries, where it is distributed by a network of partners. Since its launch in 2014, Contrave has grown to be the #1 prescribed branded weight loss drug in the United States, with over 2.5 million prescriptions and over 100,000 unique prescribers since U.S. launch. In 2017, net sales in the U.S. were approximately $75 million. Contrave also delivered over 20% total prescription growth in 2017.

We believe that the disruption caused by Orexigen's bankruptcy process will impact prescription growth for 2018. However, in the long term, we believe Contrave is an attractive product because it is a market-leading branded weight loss prescription drug, is approximately approaching $100 million of global net sales, has a patent runway out to 2030 and possesses a differentiated clinical profile. Importantly, this is a product we view as having long -- having significant growth potential.

Let me conclude my remarks on this transaction by saying we believe it can generate significant upside for Pernix if we can reestablish the growth trajectory for the product while providing a path to an outright acquisition on Contrave over time.

Now let me review some of Pernix' key financial results from the second quarter. Our net revenues for the quarter of -- second quarter of 2018 was $21.1 million, which was down 39% from $34.3 million in the prior year period. Net revenues for both Zohydro ER and Silenor delivered strong year-over-year growth of 28% and 23%, respectively, continuing the strong growth rates from the first quarter.

For the first half of 2018, revenues from both of these core brand -- branded products grew over 30% year-over-year. Offsetting these results was the decline in the sales of our branded Treximet due to the loss of exclusivity as of February 15. The second quarter was the first full quarter without Treximet exclusivity. As expected, the market has substantially shifted to the generic version of Treximet, including our own authorized generic and one generic offered by a competitor.

Next I want to update you on Silenor life cycle management. We continue to have meaningful partnership discussions with global pharmaceutical companies who have deep Rx-to-OTC switch capabilities, and remain in active dialogue with interested parties. Let's be clear that these discussions have been more prolonged than we expected, but the switch to OTC remains a priority for our team and is an important opportunity for Pernix.

Before I turn the call over to George, I'd like to comment on the series of transactions announced on August 1 concerning our balance sheet. We believe these transactions represent another significant step forward for Pernix in addressing our debt outstanding and improving our financial flexibility. The transactions reduced total debt by $12 million, provide incremental liquidity to Pernix and result in a total annual interest savings of more than $1 million per year.

Furthermore, we have provided a mechanism for further deleveraging through an exchange agreement using preferred stock. These transactions are consistent with our previously stated desire to continue to address our balance sheet and improve our liquidity in advance of our August 2020 maturity of the 12% senior notes. And we will continue to pursue transactions that will help us achieve this objective. Angus will provide more details on these transactions shortly.

In summary, we have accomplished a lot in the recent months, including our participation in Nalpropion's acquisition of Contrave assets, several transactions to improve our balance sheet and financial flexibility and improve sales of Zohydro ER and Silenor. I want to thank our team for their extraordinary efforts in these negotiations, due diligence and execution of the transaction.

Now let me turn the call over to George to discuss our commercial progress. George?

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George P. Jones, Pernix Therapeutics Holdings, Inc. - VP of Sales & Marketing [4]

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Thank you, John.

Before I discuss the results of our core branded products, I want to convey my excitement about the potential for Contrave. We look forward to providing the Nalpropion team with the necessary support in order to continue the momentum that Contrave has generated to date.

Moving to the Pernix portfolio of core branded products, I'm excited about the results that we were able to achieve in Q2. As John reviewed, from a net revenue standpoint, both Silenor and Zohydro ER continued to deliver solid growth in the second quarter.

Taking a look at prescriptions, for Zohydro ER our trends were strong, with a 6% year-over-year increase in total prescriptions in the second quarter of 2018. Importantly, this is the first quarter that Zohydro ER has shown year-over-year total prescription growth since Q1 2017.

We were also able to grow our market share of the long-acting hydrocodone market in Q2, increasing our share from 25% to 28% since January 2018. This is important because our sales specialists focus on the education of health care professionals around the appropriate and safe use of opioids focusing on the transition of patients from other forms of hydrocodone.

Turning to our ongoing patent litigation with Alvogen regarding Zohydro ER, trial testimony in the case was heard mid-June, and closing arguments were heard late July. We're expecting the judge's final decision shortly.

In the second quarter, we also saw higher prescription demand for Silenor, with total prescriptions growing 4% year-over-year, representing the third consecutive quarter of year-over-year growth. Overall, the prescription results of our core branded portfolio, Zohydro ER and Silenor, highlight the effectiveness of our newly realigned sales force as well as the impact of our highly focused marketing efforts.

Turning to Treximet, I'll review the overall franchise, including prescriptions sold of both our authorized generic and branded versions. As a reminder, we launched our own authorized generic version of Treximet on February 15 in order to mitigate the impact on our business from the loss of exclusivity on branded Treximet. In the second quarter, our authorized generic captured -- our authorized generic version captured a solid 53% share of the generic market that currently includes just one other competitor.

When looking at the overall molecule, which includes the brand, our share was 63% for the second quarter. I also wanted to note that prescriptions for Treximet brand and authorized generic through our pharmacy-direct program, Pernix Prescriptions Direct, or PPD, are not included in Symphony Health or IMS data but are included in the data that I just discussed. While we are pleased with this performance during the quarter, it's important to note that the authorized generic prescriptions have a much lower net revenue per prescription than the branded products.

As mentioned on the Q1 call, we were initially expecting one generic entrant in January and 2 entrants in February. However, to date, only one of these competitors has entered the market, allowing Pernix and our Treximet authorized generic to be the market share leader for the second quarter. A second potential generic competitor received FDA approval on July 20. However, that product has not yet launched. As previously -- as mentioned previously, we expect to continue to experience significant year-over-year declines in Treximet brand revenues in 2018.

In our PPD channel, weekly prescriptions as a percentage of total prescriptions for Silenor reached as high as 14% in the second quarter 2018. Silenor PPD prescriptions in the second quarter were up a robust 17% year-over-year.

So in summary, we are pleased with the results we delivered this quarter with our core branded products, Zohydro ER and Silenor, and our continued commercial progress. We are also pleased with the execution around the launch of our authorized generic for Treximet.

I will now turn the call over to our Principal Financial Officer, Angus Smith, for his review of the financials. Angus?

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Angus W. Smith, Pernix Therapeutics Holdings, Inc. - Senior VP, Chief Business Officer & Principal Financial Officer [5]

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Thank you, George, and good afternoon, everybody.

Our core business continues to improve, as we achieved strong year-over-year growth in net sales for both Zohydro ER and Silenor during the second quarter. Our participation in the acquisition of Contrave is a great example of the work we are doing to diversify and grow our business. Through our business development efforts, we are opportunistically identifying additional in-licensing or acquisition candidates to drive sustainable enterprise value.

With that, let me review our financial results for the 3 months period ended June 30, 2018. For the second quarter of 2018, net revenues were $21.1 million, a 39% decrease from $34.3 million in the second quarter of 2017. The year-over-year decrease during the second quarter of 2018 was primarily attributable to declines in net revenues of branded Treximet and our noncore generic drugs, partially offset by growth in Zohydro ER, Silenor and our Treximet authorized generic.

Now let's review the specifics for each major product. Zohydro ER net revenue increased by $1.8 million or 28% to $8.3 million during the second quarter of 2018 compared to the second quarter of 2017. The increase was due to an increase in net price, primarily related to favorable growth in net accrual rates, and higher sales volume. Zohydro ER sales volume was favorably impacted by the improving prescription trends for the product, which resulted in increased volume pull-through from our customers.

Gross to net for Zohydro ER were 73% in the second quarter compared to 61% in the prior year period. The increase in gross to nets during the second quarter was due to a favorable true-up in managed care accrual rates as a result of billing adjustments from a managed care provider. We expect gross-to-nets for calendar 2018 to be in the high 50s.

Silenor net revenue increased by $1.2 million or 23% compared to $6.4 million during the second quarter of 2018 -- compared to the second quarter of 2017 due to an increase in net price, primarily related to favorable growth in net accrual rates and higher sales volume. Gross to nets for Silenor in the second quarter were 32% as compared to 30% in the prior year period. We expect gross to nets for 2018 to be in the low 30s.

Treximet brand net revenues decreased by $15.3 million or 91% during the 3 months ended June 30, 2018, compared to the prior year period, due primarily to the loss of exclusivity of Treximet in February 2018 and subsequent generic competition. Sales volumes during the quarter were negatively impacted by wholesaler destocking, as wholesalers worked to reduce their inventory to levels more suitable for the reduced demand for the branded product. Gross to nets for branded Treximet in the second quarter were 27% as compared to 42% in the prior year period. We continued to accrue managed care rebates on the brand during the second quarter, so we expect these will begin to roll off once PBMs establish a maximum allowable cost for the generic versions of Treximet.

As discussed, we launched an authorized generic or AG version of Treximet on February 15, and Q2 represents its first full quarter of revenue. Treximet AG net revenues in the second quarter were $3 million.

The company's gross margin in the second quarter of 2018 was 74%, up from 69% in the corresponding period of 2017, due primarily to favorable product mix.

Selling, general and administrative expense decreased by $800,000 or 4% during the second quarter of 2018 compared to the prior year period. The decrease was driven primarily by lower sales force-related expenses due to the restructuring announced in January 2018, our decision to lower marketing expenditures for Treximet due to the entrance of generic competition and other cost reductions, partially offset by higher legal fees and settlement costs.

Research and development expense decreased by $76,000 during the second quarter of 2018 compared to the prior year period, primarily due to the discontinuation of certain Zohydro-related research projects.

Net loss was $13.5 million for the 3 months ended June 30, 2018, compared to a net loss of $21.6 million in the same period last year. The reduced net loss was driven primarily by a reduction in operating expenses.

Adjusted EBITDA was negative $200,000 for the second quarter of 2018 compared to adjusted EBITDA of $5.7 million in the same period last year. Of note, we were able to partially offset the $13 million decrease in net revenues through our proactive cost reduction programs.

On the balance sheet, as of June 30, 2018, the company had total liquidity of $27.8 million, consisting of cash of approximately $19.9 million and availability under our revolving credit facility of $7.9 million.

On August 1, 2018, we entered into a series of transactions with holders of our 12% senior secured notes, our asset-based credit facility and our delayed draw term loan. In the first transaction, we exchanged approximately $2.7 million of 12% senior secured notes for 1.2 million shares or 9.9% of our pre-deal common stock and $8 million principal amount of such notes, plus certain accrued and unpaid interest for $8.1 million of convertible preferred stock.

The transaction resulted in reduction of nearly $11 million to the principal amount of our 12% senior secured notes and results in immediate annualized interest savings of $1.3 million. As part of this transaction, we gave the holders the right to exchange up to an additional $65 million of their 12% senior secured notes into the same convertible preferred stock.

In separate transactions, we entered into amendments to our ABL credit facility in delayed draw term loans. The ABL amendment allows us to include Contrave inventory owned by Pernix in our borrowing base going forward and provided for certain other adjustments, which we expect will create additional borrowing capacity under the ABL facility.

We also reduced the size of the ABL facility to $32.5 million from $40 million, which will reduce fees that we pay on unused capacity, but which we believe will not impact our borrowing base availability in the near term. The amendment to our delayed-draw term loan gives us access to up to $5.8 million of the delayed-draw feature for working capital purposes, further enhancing our liquidity while increasing the minimum cash interest rate on the facility to 6% from 4.5%.

In conjunction with these transactions, the lenders under the ABL and delayed draw term loan converted $1.5 million of their 12% senior secured notes into common stock, which will result in additional annualized interest savings of approximately $200,000.

As John mentioned earlier, we believe these transactions represent another significant step forward for Pernix in addressing our outstanding debt and improving our liquidity.

Finally, on the business development front, we remain active beyond Contrave and continue to have ongoing discussions focused primarily on potential acquisition, in-license and co-promotion opportunities.

With that, I'll now hand the call back to John Sedor for closing remarks.

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John Anthony Sedor, Pernix Therapeutics Holdings, Inc. - Chairman & CEO [6]

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Thank you, Angus.

So to summarize, we're excited about the outstanding opportunity with Contrave, and we're pleased with the progress achieved improving our core brands, optimizing our cost structure and improving our balance sheet. We remain confident in our growth strategy and are focused on sustaining our momentum through 2018 and beyond. We look forward to providing you with further updates throughout the year.

With that, I'll turn the call over to Cody, the operator, for any Q&As.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from [Nicole Vizorosky] with [Lyndale Capital].

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Nicole Vizorosky, - Analyst [2]

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This is in regard to your activity with Nalpropion Pharmaceuticals. Do you anticipate to increase your cost structure to manage the activities at Nalpropion?

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John Anthony Sedor, Pernix Therapeutics Holdings, Inc. - Chairman & CEO [3]

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We expect to be able to manage Nalpropion and the Contrave brand by leveraging our existing headcount and our infrastructure we have. And that's thanks to -- in large part to the extremely talented team that we have been able to retain at Nalpropion.

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Nicole Vizorosky, - Analyst [4]

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Okay. I have just one more question. Could you maybe shed some light on why there has been such delay in obtaining a partnership for Silenor OTC?

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John Anthony Sedor, Pernix Therapeutics Holdings, Inc. - Chairman & CEO [5]

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Yes. Let me address that. As I mentioned in our previous calls and this call, we are in discussions with multiple parties. As I said, this is taking longer than we had hoped it would take. But it's important to note that these partnerships in these transactions are complex, and we're working to get the best deal possible for our shareholders.

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Operator [6]

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(Operator Instructions) And that does conclude today's question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

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John Anthony Sedor, Pernix Therapeutics Holdings, Inc. - Chairman & CEO [7]

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No, I want to again, thank the people for participating on this call, and we look forward to updating you on our next quarterly call. Thank you.

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Operator [8]

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Thank you. That does conclude today's conference. Thank you all for your participation. And you may now disconnect.