NUCRYST Pharmaceuticals Corp. Q1 2009 Earnings Call Transcript

NUCRYST Pharmaceuticals Corp. (NCST) Q1 2009 Earnings Call May 6, 2009 9:00 AM ET

Executives

David Holtz - Interim President, Chief Executive Officer & Chief Financial Officer

Analysts

Ailon Grushkin - Nano-Cap Growth Funds

Operator

Good day ladies and gentlemen. Welcome to NUCRYST Pharmaceuticals 2009 first quarter financial results conference call. Today’s call is being recorded for replay purposes. At this time all participants are in a listen-only mode. After the speaker’s remarks there will be a question-and-answer period.

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 Laws 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 NUCRYST annual report on Form 10-K for the year ended December 31, 2008, which is filed in 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 expressly qualified in their entirety by 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 today, to discuss NUCRYST 2009 first quarter financial result and business update. For those of you who might be new to our call, we develop, manufacture and commercialize medical products that fight infection and inflammation, using our patented anatomically disordered nanocrystalline silver technology we call SILCRYST.

We have licensed the worldwide rights for wound care products using our SILCRYST coating to Smith & Nephew which markets these products in over 30 countries under their Acticoat trademark. We have also developed our 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 you with a business update. Following that, we will open the call for your questions.

Total revenues for the first quarter of 2009 decreased $4.1 million compared to $5.2 million in the first quarter of 2008. The decline in revenues was due to lower royalty revenue on Smith & Nephews end sales and a decline in product shift to Smith & Nephew.

Product unit shipments were down 29% year-over-year as Smith & Nephew has been reducing its Acticoat inventory levels. Revenues based on Smith & Nephews end sales were also down, but this due to the impact of changes in foreign exchange rates. Smith & Nephews end sales of Acticoat, increased approximately 7% excluding the impact of foreign currency changes.

Under our agreement with Smith & Nephew we continue to provide them with an annual manufacturing cost rebate of $4.5 million. The method we used to price the products we manufacture and supply to Smith & Nephew was changed from a fully allocated cost of manufacturing reimbursement mechanism, the system whereby we recover a fixed over ahead charge, plus all direct costs incurred in manufacturing the Acticoat products.

This pricing mechanism allows us to recover the manufacturing cost rebate to the extent we are able to reduce our actual manufacturing cost below the fixed recovery amounts. This modified reimbursement cost approach was established for three years through the end of 2009, after which we are negotiating a new pricing program based on the cost reductions we have achieved over the three year period. In addition to these cost reimbursements, we receive a manufacturing profit and royalty that are based on Smith & Nephew sales for their customers.

Our gross margin on product revenues was 46% in the first quarter of 2009, compared to 21% in the first quarter of 2008. The significant improvement is the result of cost reductions achieved through the implementation of manufacturing production efficiencies, reductions in our workforce and other overhead cost reduction initiatives, as well as the decline in unit shift.

Our gross margin percentage may vary from period-to-period due to differences in the timing of product shipped to Smith & Nephew and when Smith & Nephew sells products to its customers.

Our research and development spending in the first quarter of 2009 totaled $749,000 compared to $1.5 million in the first quarter of 2008. The decrease is a result of reductions in our research and development staff and overall activities, including the closure of our Wakefield, Massachusetts research facility.

We intend to continue to continue our expenses, so that 2009 development costs will remain at reduced level compared to 2008. We have significantly reduced to eliminate its spending on several development programs, until development or commercialization partners for these programs are secured.

Our general and administrative costs in the first quarter of 2009, totaled $2.6 million, compared to $2.5 million in the first quarter of 2008, as higher severance and other administrative cost in the first quarter of 2009 offset staff reductions in the U.S. and lower facility costs compared to the prior year. We expect to achieve quarterly reductions in our general and administrative cost on a year-over-year basis for the remainder of 2009.

Our operating loss before interest income and foreign exchange gains was $1.5 million for the first quarter of 2009, compared to an operating loss of $2.9 million in the first quarter of 2008. We continue to make progress on bringing our operating costs inline with the current revenue base.

Our other income and expenses for the first quarter of 2009, included foreign exchange gains of $385,000, compared to foreign exchange gains of $708,000 for the same period in 2008. Majority of these gains are the result of unrealized gains and losses created by changes in the US dollar to the Canadian dollar exchange rate. Our net loss for the first quarter of 2009 was $1.1 million or $0.06 per share. This compares to a net loss of $2.2 million or $0.12 per share in the first quarter of 2008.

Moving onto our balance sheet, as of March 31, 2009, we had $8.4 million in cash and cash equivalents, compared to $23.4 million on December 31, 2008. The significant decline is due to the $14.7 million distribution of capital to shareholders we completed in the first quarter of this year.

Moving to the update on our business, during the first quarter of 2009, we achieved further reductions in our operating costs as we continued our efforts to right-size the operations to reflect the existing business. We also continue to work closely with Smith & Nephew on the new Acticoat Flex product launch. The Acticoat Flex product uses our SILCRYST nanocrystalline silver technology with a new improved dressing material that makes it ideal for treating awkward anatomical areas and improving patient comfort during wear.

Smith & Nephew began a limited market launch of the Acticoat Flex in Canada during the first quarter as it awaits U.S. and EU market clearances for a full market launch later this year. Smith & Nephew has continued to receive positive feedback on the products and we are working on manufacturing efficiencies in order to accommodate the product launch requirements.

We also continue to look for commercial partners for our antimicrobial barrier cream product, which is produced with our NPI 32101 material and has already received 510(k) clearance in the U.S., as well as for other development opportunities with our nanocrystalline coating technology outside of wound care.

In conclusion, we at NUCRYST are very focused on driving the company towards sustainable level of profitability with our existing revenue base. In my current role as Interim President and CEO, our Board of Directors has asked us to remain focused on achieving this financial goal, while maintaining the core components of the business as we look for opportunities to realize additional value from the SILCRYST technology. In lieu of the return to capital of shareholders this quarter, we continue to take the necessary steps to reduce our cost structure to an appropriate level.

We will now open the call up 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 Instructions) Your first question comes from Ailon Grushkin from Nano-Cap Growth Funds. Please go ahead.

Ailon Grushkin - Nano-Cap Growth Funds

Hi, how are you?

David Holtz

Good Ailon, how are you?

Ailon Grushkin - Nano-Cap Growth Funds

Good. Alright, my first question is the Smith & Nephew sold more products, but it was smaller on the dollar amount because of the euro and their inventory is being the carrying lower levels and that’s why you shipped less two them.

David Holtz

Yes, I mean there’s two different components there. The year-over-year decline in units shipped is a result of Smith & Nephew’s efforts to reduce the level of inventory they’ve been carrying; that’s been going on for several quarters now and really the first quarter of last year was the last quarter that we had shipped an amount that was larger than their current rate.

So, really for the last three quarters now or four quarter I should say, we have been shipping at a lower level than as Smith & Nephew reduces their inventory levels. The thing to remember about the Acticoat business inside of Smith & Nephew is the significant component of it is outside the U.S. in terms of end sales. So, the significant increase in the value of the dollar had a major impact really on the whole advance wound management business, but certainly on the Acticoat sales that are reported to us in US dollars.

Ailon Grushkin - Nano-Cap Growth Funds

Okay. Is there a certain run rate at which NUCRYST actually turned cash flow breakeven?

David Holtz

Well, as I stated in our remarks, that is our objective for the year, we are driving towards it. The first quarter, you can see on the development side that the significant reductions with the facility, is sort of coming through there.

On the G&A side, we just had a number of events in the current quarter-on-quarter, including the transition of the management team, that sort of resulted in a number of charges that I do not expect to continue and so I look for the second quarter to see a decline in G&A, both year-over-year as well as certainly sequentially, because the first quarter is a pretty big number.

So, our objective is within the current context of the business to get to a sustainable level of profitability. That is depended on Smith & Nephews sales and capability with the product, but again we remain positive in that light, in the sense that the Acticoat Flex product should be a good launch for the business and provide some positive output and really the objective of achieving profitability is really our focus on costs, as long as the revenues can sustain where they have been historically.

Ailon Grushkin - Nano-Cap Growth Funds

Okay, have they started building any inventory with the flex coat yet, that’s in the numbers yet?

David Holtz

Yes, again without approvals in the major markets in the U.S. and CE Mark approval for Europe, it’s difficult to build a significant amount of inventory, particularly finished good inventory, because they don’t have approval of exactly what the labels going to say and things like that final packaging.

We are making Acticoat Flex product then we have in-process material and obviously finished goods for the Canadian markets. So yes, we are building some inventory, but it’s not a major build until the approvals are received.

Ailon Grushkin - Nano-Cap Growth Funds

Okay, great. Thank you so much.

David Holtz

Sure Ailon.

Operator

(Operator Instructions) Mr. Holtz, there are no further questions at this time; please continue.

David Holtz

Okay. Well, thank you for joining us on our first quarter call and we look forward to updating you further as the year progresses. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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