By Brian Marckx, CFA Q3 Results: Revenue Growth Despite 50% Reduction in Sales Force, Seasonally Soft Summer Season..
Valeritas (VLRX) reported financial results for the third quarter ending September 30th. Results on both the top and bottom lines were well ahead of our estimates. Revenue, at $4.86M, was essentially flat from Q2 of this year, up about 3% from Q3 2015 and 11% better than our $4.39M estimate. We had anticipated a sequential drop due to the fact that the third quarter is typically relatively soft as a result of a seasonal dip in prescription volumes associated with summer holidays and vacations. Perhaps, even more impressive was the yoy growth given that the sales force was more than twice the size in the year-earlier period as compared to the most recent quarter.
On the earnings call (that we missed due to a time conflict) management attributed the relative strength in revenue to rather unexpected scant prescription attrition from the territories which they vacated under their recently implemented capital efficient sales and marketing strategy. As a reminder, in an effort to rapidly improve profitability Valeritas recently revamped their marketing strategy to one which now focuses more resources in territories with higher prescribing physicians. The sales force was trimmed from 63 field reps (covering 63 territories) at the end of 2015 to 28 (covering 28 high potential territories) at the end of Q1 of this year. These vacated territories have remained more vibrant than expected, shedding approximately only 10% of revenue and suggesting a high level of physician and patient stickiness to V-Go despite the lack of high-touch direct detailing.
The fruits of the more efficient sales strategy is also apparent in operating expenses, operating loss and cash burn. SG&A fell from $9.9M, or 209% of revenue, in Q3 2015 to $8.0M, or 165% of revenue in Q3 2016. Meanwhile, operating loss improved from $10.8M and $39.3M in the three and nine months ending 9/30/2015 to $7.7M and $25.4M in the 2016 comparable periods. And cash used in operating activities (ex-changes in working capital) fell from $33.4M in the first nine months of 2015 to $20.8M in the comparable period in 2016.
Management is guiding for Q4 and full-year revenue of approximately $5M and $19.5M – implying roughly flat sequential growth from Q3 to Q4 and ~8.5% growth for the full year 2016. Again – impressive given the ~50% reduction in the sales force since late 2015. VLRX expects double-digit sales growth in 2017.
Heading Into 2017: Incrementally Grow Sales Team, Layer In Additional Marketing…
The direct sales team averaged between 27 and 28 reps in Q3, which is where VLRX expects to end 2016. Recent revenue growth has been a combination of existing detailed accounts writing more prescriptions per physician as well as the aforementioned stickiness of vacated territories. Management’s plan into 2017 is to further drive prescription volumes at existing physician relationships, which provides particularly profitable incremental revenue given the virtual lack of any related additional cost (save for product COGS). They also continue to expect to expand their existing footprint to additional high-prescribing physician territories and grow the sales force over the next three to nine months. We currently model a weighted average of an additional 10 – 15 reps through the end of 2017.
In June VLRX brought on a VP of Marketing who is heading some new marketing initiatives which will begin roll-out in the short term and will be, at least in part, aimed at their goal of increasing prescription volumes of existing accounts. Management also indicated on the call that this could possibly include some local direct-to-consumer campaigns which can be effective in circumventing physicians as the gatekeepers to recommending alternatives to traditional insulin therapies.
Despite what VLRX has said is positive physician feedback which has included improved patient outcomes such as lowered A1C levels, the novel nature of V-Go is still somewhat of a headwind to more widespread physician adoption of V-Go. As such DTC campaigns, which aim to prompt type 2 diabetics to inquire about V-Go to their physician that may have not otherwise offered it as an alternative to conventional insulin therapy, seem to make sense. And patient ‘feedback’, as measured by retention rates also appears to be positive. Management noted that prescription data indicates that approximately 40% of patients that start V-Go, remain on it after one year – which compares to ~20% - 30% with traditional needle/pen insulin therapy. And another vote of confidence in V-Go is that 10 million devices has been dispensed as of October.
We are maintaining our $12/share price target. See below for access to our updated report on VLRX.
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Q3 Results: Revenue Growth Despite 50% Reduction in Sales Force, Seasonally Soft Summer Season..