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Nuvo Research Inc. (OTCPK:NRIFF)

Q1 2013 Earnings Conference Call

May 02, 2013, 08:30 AM ET

Executives

John C. London - President and Co-CEO

Stephen L. Lemieux - VP and CFO

Bradley S. Galer - President, Pain Group

Analysts

Michael Higgins - Brinson Patrick

Philippa Flint - Bloom Burton & Co. Inc.

Operator

Good morning, everyone. My name is Sarah and I'll be your conference operator today. At this time, I'd like to welcome you all to the Nuvo Research Inc. First Quarter 2013 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I'd now like to turn the call over to our host, Mr. John London, President and Co-CEO. Sir, you may begin your conference.

John C. London

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us on today's call. With me today are Dr. Brad Galer, President of Nuvo's Pain Group; and Steven Lemieux, our Vice President and CFO.

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 relating 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 and you can access these documents in the SEDAR database under sedar.com.

Nuvo Research is under no obligation to update any forward-looking statements discussed today and investors are cautioned not to place undue reliance on these statements.

Hopefully, by this time, you would have reviewed our press release that was issued last night, which provided details of our 2013 first quarter results, along with recent operational highlights.

We are excited to now have three FDA approved topical pain products; Pennsaid, Synera and most recently Pliaglis. By mid 2013, we expect all three products to be generating revenue that will move Nuvo closer to our goal of profitability and cash flow self-sufficiency.

Pliaglis is our most recently launched product that will start generating revenue for Nuvo. It is a topical local anesthetic cream used prior to dermatological procedures in cosmetic surgery. Pliaglis is applied to the cream, dries and then it's peeled off about 20 minutes later anesthetizing the underlying skin.

Nuvo has licensed worldwide marketing rights for Pliaglis to Galderma Pharma S.A., which is a joint venture between Nestle and L'Oreal and is the second largest dermatology company in the world.

In October 2012, the FDA approved the sale and marketing of Pliaglis in the U.S. Galderma launched its commercial U.S. marketing of Pliaglis in early March of this year at the American Academy of Dermatology Conference in Miami.

In late 2012 and early 2013, Galderma has received regulatory approval to market Pliaglis in 15 EU countries and is expecting one more EU national approval later this year. It launched Pliaglis in the EU last month, April of this year, at the Anti-Aging Medicine World Congress in Monaco.

While it's too early to start predicting the Pliaglis sales trajectory in the U.S. and the EU, we are very impressed with the enthusiasm of Galderma's global Pliaglis team and Galderma's professional and total sales and marketing strategy for the U.S. and EU markets.

Over the next two years, Galderma plans to obtain regulatory approval for Pliaglis and launch it in a number of South American and Asian countries, as well as South Africa, Canada and Australia.

Nuvo will receive revenue from worldwide Pliaglis sales via royalties, and we also expect to receive a $2 million milestone payment in late 2013 based on anticipated approval in the next South American country which is likely Brazil.

Now on to Pennsaid, U.S. prescriptions of Pennsaid, our topical NSAID for the treatment of the signs and symptoms of osteoarthritis of the knee, decreased 16% in the first quarter of 43,000 compared to the fourth quarter of 2012. This represents a decline of 54% from the 93,000 prescriptions in the first quarter of 2012.

You may recall that in that first quarter 2012, there was a significant increase in Pennsaid U.S. prescriptions coincident with a disruption in the supply of Voltaren Gel, Pennsaid main competitive product.

In the U.S., we received a 20% royalty of net sales from our U.S. marketing partner, Mallinckrodt. While we are disappointed that U.S. prescriptions have declined somewhat, we remain optimistic that once Pennsaid 2% is approved by the U.S. FDA and launched by Mallinckrodt in replacement of the original NSAID, U.S. prescription growth for the Pennsaid franchise will resume.

As most of you know, Pennsaid 2% is the follow-on product to our original Pennsaid. It's more viscous than original Pennsaid, is supplied in the metered dose pump bottle and it designs to be applied twice each day compared to four times a day for original Pennsaid.

In July 2012, Mallinckrodt submitted an NDA for Pennsaid 2% which the FDA accepted for review. And on March 4, Mallinckrodt received a complete response letter from the FDA which requires completion of a new pharmacokinetic or PK study comparing Pennsaid 2% to original Pennsaid.

A PK study that had been submitted by Mallinckrodt was not acceptable to the FDA because the contract research organization retained by Mallinckrodt did not retain product samples at the clinic site as required by the study protocol and FDA regulations.

In April, Mallinckrodt commenced the new PK study. It expects to submit the results to FDA in the third quarter of this year. Assuming a full six months review, we would expect FDA to respond in Q1 of 2014.

We believe that because there will not be substantial data for FDA to review that there may be an opportunity for an earlier response. However, for the moment, we are anticipating an approval in Q1 2014 and the launch of Pennsaid 2% soon thereafter.

Mallinckrodt current plans are to replace original Pennsaid with Pennsaid 2% once it's approved. As I mentioned earlier, we continue to believe that upon approval, Pennsaid 2% has the potential to provide increased revenues and a longer product life for the Pennsaid franchise [build] with more viscous formulations, it's first-to-market two times per day metered dosing convenience and two issued patents that upon approval can be listed in the FDA's Orange Book.

Nuvo and Mallinckrodt have filed a patent infringement lawsuit against three companies we believe are developing generic versions of original Pennsaid for the U.S. market. In January 2013, Nuvo and Mallinckrodt entered into a settlement agreement with Apotex Inc. which we believe is [further along] in the FDA approval process for a generic version of Pennsaid.

Under the terms of the settlement agreement, Nuvo and Mallinckrodt granted a license to Apotex that permits it, upon FDA approval to launch its generic of Pennsaid on the earlier of 45 days after first commercial shipment of Pennsaid 2% in the U.S. and April 1, 2014. I should note that none of the generic versions of Pennsaid including the Apotex generic has yet been approved. The lawsuit is still pending against the other two companies, Lupin and Taro, that we believe are behind Apotex in the generic approval process.

In Canada, Pennsaid sales remain relatively stable at approximately $10 million. We received both royalty from Paladin Labs Inc. our Canadian licensing partner and product sales revenue from our sale of Pennsaid to Paladin for Canadian distribution.

Our third product, Synera is a topical lidocaine, tetracaine path with heat that's supplied in the U.S. to provide – it's approved in the U.S. to provide local dermal analgesia for superficial venous access and superficial dermatological procedures. In other words, needle stick pain.

Synera currently sells about $1 million annually in the U.S., mostly to pediatric hospitals and interventional pain doctors. Our Pain Group executive team is currently focused on increasing sales by selling Synera to large national accounts such as dialysis centers, infusion centers, home nursing care and blood diagnostic laboratories that conduct thousands of needle stick procedures each year.

Later this year, we expect to receive the results of two pilot studies that have or will be conducted by potential national accounts customers that are tying Synera in some populations of their patients. While we have not yet secured a major national account, the opportunity continues to be very promising.

We continue to believe that the current approved indication for Synera of needle stick pain is not optimal. In the U.S., based on three positive Phase 2 studies and the clear regulatory pathway that the FDA has agreed to, we believe that the value of Synera can be substantially enhanced by expanding the indication to include acute pain.

This expanded indication would include conditions such as tennis elbow, frozen shoulder and acute low back pain. This would require two Phase 3 studies in two different acute musculoskeletal pain indications and would allow Synera to compete with the most successful topical pain products in the U.S., in particular the Lidoderm patch of products marketed by Endo Pharmaceuticals that currently sells more than $1 billion in the U.S. each year.

We are currently seeking the license fee that could share in the cost of developing the expanded indication and have the resources to affectively help market the product once it's approved for the expanded identification.

I will now comment briefly on developments that are Germany based Immunology Group, which is developing WF10. We believe based on animal and clinical data that WF10 has the capability of being an efficacious treatment for a broad range of autoimmune and oncology indications.

However, while Nuvo has a number of method of used patents in some territories, it covers specific disease treatments with original WF10, they do not provide us with the broad range of patent protection that would be required to support original WF10 as a platform technology that can used to treat a broad range of medical conditions.

Our scientists have spent significant amount of time and effort developing improved versions of WF10, and in December 2011 we filed the supporting patent application for improved WF10 formulations with the United States Patent Office.

In 2013, we are conducting preclinical studies to confirm the stability, efficacy and safety of the new WF10 formulations. Our goal is to demonstrate that the new formulations are equally efficacious or superior to existing WF10, which demonstrated clinical efficacy in a Phase 2 allergic rhinitis trial completed in 2010.

In July 2012, the Development Bank of Saxony agreed to provide Nuvo with up to €4.4 million of non-repayable funding for the further development of the improved reformulations. With this most recent commitment, the SAB will be funding approximately €6.6 million of our €10.8 million development plan program, with the balance of the funds provided by euro.

That completes the overview of developments relating to our products. And at this time, I'll now turn the call over to Stephen Lemieux, Nuvo's CFO, to detail our first quarter financial results. Stephen?

Stephen L. Lemieux

Thanks, John. Total revenue decreased in the quarter to 2.3 million compared to 6.2 million for the comparable period. Total revenue in the quarter was unusually low, as we had no shipments of Pennsaid to our partners in the U.S., Greece or Canada. We expect Pennsaid product sales to increase in the second quarter, as we do have shipments to our partners in the U.S. and Greece.

In addition, the prior-year product revenue included significant shipments of Pennsaid to the U.S. due to the temporary shortage of Voltaren Gel. This shortage also significantly increased our royalty revenue in the comparable period.

Sales of Synera were consistent at 0.3 million versus the comparable period. Gross margin on product sales was a negative 368,000 compared to 748,000 in the comparable quarter of 2012. The decrease in gross margin was related to significantly lower Pennsaid product sales.

Total operating expenses, which include research and development, sales and marketing and general and administrative expenses decreased by 1.9 million to 4.4 million versus 6.3 million in the comparable period in 2012. The decrease primarily relates to lower sales and marketing costs.

For the quarter, research and development expenses were 1.9 million compared to 1.7 million in the comparable period in 2012. In the quarter, the company reduced its operating costs in the Pain Group by closing its office in Salt Lake City, which was the former ZARS head office, resulting in termination costs of 400,000.

Sales and marketing expenses were 200,000 for the quarter, a decrease from 2 million in the comparable quarter in 2012, and represents a cost related to the company's U.S. launched Synera.

As you all know, sales for the interventional pain doctors did not materialize as anticipated last year. And in August, we made a strategic decision to refocus our resources on large national accounts.

General and administrative expenses decreased to 2.3 million for the quarter compared to 2.6 million for the comparable quarter in 2012. The decrease in G&A expenses was related to a decrease in value of the deferred stock units and a refund related to the company's insurance portfolio.

Partially offset by an increase in amortization expense on intangible assets related to Pliaglis as Pliaglis launched in the quarter. Net loss for the quarter was 3.3 million compared to a net loss of 4.4 million for the comparable quarter in 2012.

The improvement is related to the 2.3 million non-cash charge in the competitive period related to the reevaluation of the ZARS contingent consideration. Cash and cash equivalents were 10 million at March 31 of 2013 compared to 12.1 million at December 31 of 2012.

I will now turn the call back to John for closing remarks.

John C. London

Thanks, Stephen. With the approval and launch of Pliaglis in the U.S. and the EU, we are well through our transition from a sole product company depending only on Pennsaid to a company with three FDA approved product franchises.

We are committed to maximizing the revenue that can be generated from these products throughout the world as we move closer to our goal of profitability and cash self-sufficiency.

We thank you for your continued interest and look forward to updating you on our progress throughout the year.

That completes our remarks for this morning and I would like to open the call for questions. I'll turn it back.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Michael Higgins of Brinson Patrick. Your line is now open.

Michael Higgins - Brinson Patrick

Thank you, operator. Good morning, guys. How are you?

John C. London

Michael, how are you?

Michael Higgins - Brinson Patrick

I'm good. Thanks. Can you update us – I'm not sure if you're even aware, but possibly if you do, you can help us on when Apotex has filed their ANDA? You had mentioned that they are not approved, but when did they file?

John C. London

We don't know for sure, Michael. We look at sort of registration numbers and come back into it, and right now we can tell you that they're in the window of what would typically take for generics to get approved these days which is somewhere between 30 and 36 months after filing. So they could get approved. Now there's a bunch of things we don't know obviously. The other thing we don't know is apparently, their plans are to make the generic or Pennsaid at the Richmond Hill plant and as I think we've all read in the press, it look like that Richmond Hill is under some FDA scrutiny. As to whether that's going to have an impact on their ability to get approved or not, we just don't know.

Michael Higgins - Brinson Patrick

Great. Thanks. That was helpful. You've given us a good update on the fundamentals. Can you speak to the non-fundamentals, I guess, regarding potential reverse split, company structure, risk things, et cetera? Any updates for us as how 2013 is going to shape up?

John C. London

Sure. Our capital markets strategy I think remains the same. We know that we need to do a share consolidation to put us in a position so that a number of U.S. and Canadian institutional investors that currently can't look at the stock, because it's a penny stock, we need to fix that. And certainly that remains as part of our action plans. In terms of dividing the company in two and having an Immunology Group and a Pain Group, I mean that's one of the things that we're considering but we don't have any imminent plans to be executed on that strategy at the moment.

Michael Higgins - Brinson Patrick

Okay. And then regarding Pliaglis, remind again a number of reps that are out there selling this?

John C. London

And I go to Brad.

Bradley S. Galer

In Europe, they have 17 nationals there using sales managers not reps, so they can't come to a decision to (inaudible) where they need to really evaluate and use Pliaglis, learn to use it correctly, and also teach the nurses. And although 17, actually they are higher sales people have 10 high volume key opinion leaders in their accounts and they're focusing on them. In the U.S., they are using a variety of different ways to market it with sales reps and with some other types of people. And they again in the U.S. are focusing on the key opinion leaders in the United States. They really want to make sure everyone has very good experience, the physician, nurse and the patient of course with their first several uses of Pliaglis. They're very, very pleased with how things are going. For instance, in their launch that they had in the UK, in the first couple of days they had over a 1,000 orders for units. So they're very happy with how it's going.

Michael Higgins - Brinson Patrick

Okay. In U.S., how many reps again?

Bradley S. Galer

It's unclear right now. They're still evaluating it. They're going to be focusing on key opinion leaders, again a top-down approach. They may be looking at alternatives right now (inaudible) realizing that the sale is important to that agent and physicians have a good experience when the use the product correctly. So they're going out slowly with a very tight-knit group with the key opinion leaders and hoping to (inaudible) down from there.

Michael Higgins - Brinson Patrick

Have they passed on any order of metrics that you provided for the UK?

Bradley S. Galer

No, we haven't received that of the United States yet.

Michael Higgins - Brinson Patrick

Okay, I appreciate it. I'll jump back in the queue. Thanks, guys.

John C. London

Thank you.

Operator

Our next question comes from Philippa Flint of Bloom Burton. You line is now open.

Philippa Flint - Bloom Burton & Co. Inc.

Thank you. Good morning. Can you talk a little bit about Covidien and Pennsaid? Do they have less on the product? Are they focused on it? And maybe a little bit about your relationship with [Covidien] and their commitment to the license and agreement?

John C. London

Sure. Currently, Covidien has other products and Nuvo is sitting together with another product in third position in their bag which we're not particularly pleased with, but that is where we are right now. And I think that's one of the reasons why we've seen a decline in Pennsaid strips quite frankly. What we're assured by Covidien is that once Pennsaid 2% is approved, it's their intention to put more resources on that product just in part because it will be a proprietary product, but in part because I think everybody acknowledges that that's always been the end game to get to it because it's of the metered dosing and two times a day and all those good things about Pennsaid 2%. I guess the other thing that we're hopeful about is Covidien is in the process of spinning out Mallinckrodt as a separate public company and that will occur in June. And what we're told and we will go with the spin, the specialty pharma group will be part of the new company Mallinckrodt that spun out. And what we're told by the Mallinckrodt folks is that they believe that they're going to be unleashed from restraints corporately from Covidien and that have prevented them from adding other pain products and have prevented them from adding resources. So we're optimistic that they will bring other products, they will add resources and they will increase their sales force. The sales force, you asked about the number, right now I believe it's somewhere around 230 in that range and we're hoping that number is going to increase as Pennsaid 2% gets approved and as we execute the spinout and hopefully increase resources.

Philippa Flint - Bloom Burton & Co. Inc.

That's great. Thanks very much for the update.

John C. London

Thanks, Philippa.

Operator

(Operator Instructions). And no further questions are queued up at this time. I'll turn the call back over to the presenters for closing remarks.

John C. London

Thanks, operator. Again, thank you for your participation on today's call. We will look forward to updating you on our progress in the future. Have a good day.

Operator

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

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