NUCRYST Pharmaceuticals Corp. Q4 2008 Earnings Call Transcript

NUCRYST Pharmaceuticals Corp. (NCST) Q4 2008 Earnings Call Transcript February 17, 2009 9:00 AM ET

Executives

Mr. David Holtz - Interim President and Chief Executive Officer and Chief Financial Officer

Analysts

Operator

Good day ladies and gentlemen. Welcome to Nucryst Pharmaceuticals 2008 fourth quarter and year end financial results conference call. Today’s call is being recorded for replay purposes. (Operator instructions).

Before we begin, I would like to remind everyone that a number of statements will be made in this conference call that constitutes forward looking statements of Nucryst within meaning of the United States Federal and Canadian Provincial Security Law or otherwise. Forward looking statements and information are current predictions only and are not guarantees of future performance. They involve significant risks, uncertainties and assumptions. Their actual results could differ materially from those indicated by the forward looking statements for reasons generally beyond our control. For a discussion of the risks and uncertainties that may affect these forward looking statements, please refer to the risk factor section in our quarterly report on form 10-Q for the quarter ended September 30th 2008 and our annual report on form 10-K for the year ended December 31st, 2007 both of which are filed with the US Securities and Exchange Commission on Edgar and with the Securities Authorities in Canada on Sedar.

Nucryst disclaims any intention or obligation to revise forward looking statements whether as a result of new information, future developments or otherwise after the date of this broadcast except as required by law. All forward looking statements in this conference call are expressedly qualified in their entirety by the cautionary statement.

I will now turn the call over to Mr. David Holtz, Interim President and Chief Executive Officer and Chief Financial Officer of Nucryst. Please go ahead, sir.

David Holtz

Thank you, operator. Good morning everyone and thank you for joining us to discuss Nucryst 2008 fourth quarter and year end financial result and business update. For those of you who might be new to our call, we develop and manufacture medical products that fight infection and inflammation using our patented anatomically disordered nanocrystalline silver technology we call Silcryst.

We have licensed to Smith and Nephew PLC the worldwide rights to sell products with our Silcryst technology for use in the field of serious wounds and burns. Smith and Nephew now markets Silcryst wound care products in over 30 countries under the Acticoat trademark. We have also developed the proprietary nanocrystalline silver in a powder form which we refer to as NPI32101 for use in medical devices and as an active pharmaceutical ingredient.

I will now review our financial results and then provide a business update. Following that, we will open the call for your questions. I will begin by going over the fourth quarter results and then review the highlights for the full year.

Total revenues for the fourth quarter of 2008 were $5.8 million compared to $11.2 million in the fourth quarter of 2007. The fourth quarter of 2007 included $5 million in milestone revenues, whereas no milestone revenue was earned in 2008. Wound care product revenues less the manufacturing cost rebate for the fourth quarter of 2008 were $5.8 million compared to $6.2 million in the fourth quarter of 2007. The decline in wound care product revenues was due to lower royalty revenue on Smith and Nephew sales and a decline in product shift in Smith and Nephew.

Under our agreement with Smith and Nephew, we continue to provide them with an annual manufacturing cost rebate of $4.5 million for each year for 2007, 2008 and 2009 in anticipation of annual cost reductions we intend to achieve as an offset for the rebate. Our product revenue from Smith and Nephew under the revised agreement during these three years was modified to a cost reimbursement method based on a fixed level of overhead and variable cost recovery. In addition to these cost reimbursements, we receive a manufacturing profit and a royalty there based on Smith and Nephew sales to their customers.

Our gross margin on product revenues excluding milestone revenue was 44% in both the fourth quarter of 2008 and 2007 as the 2008 declining revenues from unit shift in royalties was offset by cost reductions and an increase in the level of fixed overhead cost reimbursed by Smith and Nephew.

Our gross margin percentage may vary from period to period due to differences and the timing of product shift in Smith and Nephew and when Smith and Nephew sells products to its customers. Manufacturing cost rebate we provide Smith and Nephew will continue to negatively affect our gross margin in 2009, however to the extent we are able to realize higher production volumes and additional manufacturing cost reduction we expect to offset all for a significant amount of the impact of the rebate on our gross margins.

We continue to look for efficiencies and improvements in our manufacturing operations to further reduce our cost.

Our research and development spending in the fourth quarter of 2008 totaled $930,000 compared to $1.5 million in the fourth quarter of 2007. We have completed the transfer of all development programs to our Canadian operations as part of our closure of the Wakefield, Massachusetts facility. We have also significantly reduced or eliminated spending on several development programs until commercialization partners for these programs are identified.

Our general administrative cost from the fourth quarter 2008 totaled $2.4 million as compared to $2.8 million in the fourth quarter of 2007 as a result of staff reductions in the US and lower facility related cost in Canada. These declines were partially offset by $320,000 in additional facility closure cost. We also incurred a $170,000 right off of leasehold improvements related to the Wakefield, Massachusetts facility closure.

In 2009, we will continue review additional opportunities to further reduce our overall general and administrative cost. Our operating loss before interesting common foreign exchange gains and losses was $960,000 for the fourth quarter of 2008 compared to an operating income of $3.5 million in the fourth quarter of 2007.

The 2007 operating income included the $5 million in milestone revenue. Our other income and expenses in the fourth quarter of 2008 included foreign exchange gains of $1.9 million compared to foreign exchange losses of $150,000 for the same period in 2007. The majority of these gains and losses are a result of unrealized gains and losses created by changes in the US dollar to Canadian dollar exchange rates.

Our net income for the fourth quarter 2008, was $990,000 or $0.05 per share. This compares to net income of $3.2 million or $0.17 per share for the same period in 2007. Moving on to our full year financial results, total revenues for 2008 were $20.9 million compared to $30.1 million in 2007. The 2007 revenues included $10 million in milestone revenue compared to zero in 2008.

Wound care product revenues for 2008 were $20.9 million compared to $20.1 in 2007. The increase in revenues earned based on higher fixed overhead cost reimbursement by Smith and Nephew was offset by a 5% decline in unit shift. Royalty revenues based on Smith and Nephew’s end sales were roughly flat year over year.

Our gross margin on product revenues excluding milestone revenue was 39% in 2008 compared to 28% in 2007. The improvement in gross margin was primarily attributable to a decrease in manufacturing cost which offsets a substantial portion of the fixed manufacturing cost rebate provided to Smith and Nephew in 2008 and an increase in the level of fixed overhead cost charged on product shift.

Our research and development spending in 2008 totaled $5 million compared to $6.3 million in 2007. The decrease is due to reductions in spending on our pharmaceutical research and development program.

Our general administrative cost in 2008 totaled $9.1 million as compared to $9.5 million in 2007 representing reduced general administrative cost at our Canadian operations, lower contractual consulting cost and a decline in stock option expense, recognized in the year. The decrease in general administrative cost was partially offset by cost associated with the fourth quarter closure of the Wakefield, Massachusetts facility.

The 2008 operating loss increased to $6.1 million compared to $1.3 million in 2007. Included in other income and expenses, our foreign exchange gains in 2008 of $2.8 million compared to foreign exchange losses of $3.3 million for the full year 2007. The net loss for 2008 was $3 million or $0.16 per share which represents an improvement of approximately $1 million from the net loss of $4 million or $0.22 per share in 2007.

The improvement in our net loss reflects a reduction in our operating expenses and the benefit of the foreign currency gain in 2008 compared to a loss in the prior year. Moving on to our balance sheet, as of December 31st, 2008, we had $23.4 million in cash and cash equivalents compared to $17.8 million on December 31st, 2007. This of course is prior to the impact of the returning capital to our shareholders which I will speak to in a moment.

Moving to an update on our business, I will start by recapping some of the announcements made throughout 2008. We began 2008 with a clear strategic focus on cost reduction to improve operating efficiencies in our manufacturing processes and a reduction in the size of our US operations. We were also focused on preserving liquidity of our balance sheet as we look for opportunities to expand the business. In May 2008, we announced the discontinuation of the development of our NPI32101 formulation to treat inflammatory skin disease while we continued some pre-clinical work on the use of the NPI32101 formulation for the treatment of [10:32]. Our development efforts around NPI32101 as an act of pharmaceutical ingredient began shifting towards the transition of these programs while we reviewed commercial partnering alternatives.

At the closure of our research and development facility in Wakefield, Massachusetts, we have now significantly reduced and in some cases eliminated our spending on these development programs until we identify commercial partners.

In addition to our pharmaceutical development programs, we continue to look for commercial partners for our anti-microbial barrier cream product which is produced with our NPI32101 material and has already received 510(k) clearance in the United States.

Turning now to an update on our relationship with Smith and Nephew. Smith and Nephew reported last week that its advanced wound management business grew revenues by 7% in 2008 excluding foreign currency changes, its best growth performance in the last five years driven by a strong European and rest of world performance. Smith and Nephew has identified the US wound care market as a significant focus for 2009. The Acticoat product sales for 2008 were flat with 2007. The Acticoat brand remains a significant product in Smith and Nephews overall wound care business and we continue to explore additional opportunities for the brand with them.

In this regard, we were please to announce in November 2008 that Health Canada granted marketing approval for Acticoat flex barrier dressing for wounds requiring up to 7 days of sustained anti-microbial activity. The Acticoat flex product uses our Silcryst nanocrystalline silver technology with the new improved dressing material that makes it ideal for treating awkward anatomical areas and improving patient comfort during wear. Initially the Acticoat flex product will be available in Canada with the US and EU market launches expected during this year once regulatory approvals are obtained.

Like us, Smith and Nephew views this new product as an exciting and significant development for the Acticoat brand. More recently we announced last week the results of a special meeting of our shareholders which was called to consider a special resolution to reduce the Company’s stated capital for the purposes of distributing $0.80 per common share in cash to our shareholders. The $0.80 per common share distribution represents a $14.7 million distribution of capital which equals approximately 59% of the $25 million in cash and cash equivalent we had on hand as of January 31st, 2009. Distribution payable date has been set for February 25th, 2009.

The Toronto Stock Exchange has determined that mandatory special sediment rules should be applied and the common shares will commence trading X distribution on the TSX at the opening of the markets today. Under the Nasdaq OMX rules the shares will continue to trade with the distribution until its [X] distribution date of February 25th, 2009.

In conclusion, we at Nucryst are very focused on moving the company towards a sustainable level of profitability with our current business. In my new role as Interim President and CEO, the board has asked us to remain focused on achieving this financial goal while maintaining the core components of the business so that we can look to realize the long term value of our technology.

In light of the return of capital, it is important for us to take the necessary steps to reduce our cost structure to an appropriate level.

We will now open up the call for your questions. Operator, please review the procedures for questions from the audience.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session.

(Operator Instruction).

Again, ladies and gentlemen, if there are any questions, please press the star followed by the 1.

Mr. Holtz, there are no questions at this time. Please continue.

David Holtz

Okay, well thank you. Thank you for joining us today on the call and we look forward to updating you on our progress during the year. Thank you operator, you may terminate the call.

Operator

Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, you may now disconnect your line.

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