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Columbia Laboratories, Inc. (NASDAQ:CBRX)

Q4 2013 Earnings Conference Call

March 5, 2014 08:30 AM ET

Executives

Frank Condella - President and CEO

Jonathan Lloyd Jones - CFO

Nikin Patel - CEO, Molecular Profiles Ltd.

Amy Raskopf - Manager, IR

Analysts

Raymond Myers - Alere Financial Partners

Jeffrey Link - Invemed

Operator

Good day and welcome to the Fourth Quarter and Year-end 2013 Earnings Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I’d now like to turn the conference over to Amy Raskopf. Please go ahead ma’am.

Amy Raskopf

Thanks, Janice. Thank you all for joining us this morning for Columbia Laboratories fourth quarter and year-end 2013 earnings call. If you have not already received it, you can access the press release issued this morning at columbialabs.com, under the Investors tab. You can also access the webcast of the call from there.

During the course of this call, management will make projections and other forward-looking remarks regarding future events and the Company’s future performance. These forward-looking statements reflect Columbia’s perspective on current trends and information, and can be identified by such words as expect, plan, will, may, anticipate, believe, could, should, intend, estimate, project, and other words of similar meaning. Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in this morning’s press release and Columbia’s filings with the SEC on Forms 10-K, 10-Q and 8-K.

Actual results may differ materially from those projected in the forward-looking statements. Columbia specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. A telephone replay of this call will be available shortly after completion through Tuesday, March 11. You’ll find the dial-in information in today’s press release. The archived webcast will be available for one-year on the Company’s website, columbialabs.com.

For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on March 5, 2014. Since then, Columbia may have made announcements related to the topics discussed, so please reference the Company’s most recent press releases and SEC filings.

With that, I’ll turn the call over to Columbia’s President and CEO, Frank Condella.

Frank Condella

Thanks, Amy, and good morning, everyone. 2013 was a transformative year for us. Columbia today have a strong footing in the fast growing outsourced pharmaceutical development market, streamline U.S operating expenses and diversified work revenue stream.

We’ve all the right elements in place to deliver a long-term revenue growth. More specifically we transition to a lower cost operating model and relocated our corporate office to Boston. We secured the long-term supply for CRINONE, progesterone gel with our largest customer Merck Serono. And in September we acquired Molecular Profiles, a U.K. based Company providing pharmaceutical development, clinical trial manufacturing and advanced analytical and consulting services to the pharmaceutical industry.

I look forward to discussing the business in greater detail, but first, I will ask Jonathan Lloyd Jones to review our financial results. Jonathan?

Jonathan Lloyd Jones

Thank you, Frank. Good morning, everyone. Revenues for the fourth quarter of 2013 were $7.8 million, up 10% over the prior year quarter. The increase in revenues reflects $3 million in service revenues from our first full quarter of sales attributable to the Molecular Profiles acquisition.

Product revenues for Merck Serono were $3.5 million in the fourth quarter of 2013, a decrease of $1.4 million or 29% compared with the fourth quarter last year. This reflects the absence of CRINONE orders from one of Merck Serono’s higher volume, higher margin markets during the fourth quarter of 2013 as noted in our press release. There were no product sales for Actavis in the fourth quarter of 2013 versus $1.2 million in the prior year quarter.

In November, we agreed to an early termination of our manufacturing agreement with Actavis. We expect no further product revenues from Actavis going forward. We will, however, continue to receive a 10% royalty on Actavis’ sales of CRINONE.

Gross profit decreased by $500,000 to $3.5 million or 44% of total revenues. The decline over the prior year quarter was driven by the absence of sales to the Merck Serono -- to Merck Serono for the higher volume, higher margin market that I’ve previously mentioned. Net income was $1.1 million or $0.06 per diluted share compared to net income of $2.6 million, or $0.09 per diluted share for the fourth quarter of 2012.

Turning to the full-year, our strong results for the year ended December 31, 2013 showed a positive impact of Merck Serono’s increased product shipments during the first three quarter of 2013 and the impact of the Molecular Profiles acquisition. Total net revenues grew 13% to $29.2 million, product revenues from Merck Serono were up 19%. Our gross profit increased 23% or $60 million and gross margin improved from 50% to 55%. As a result, our income from operations increased by 109% to $5.9 million for the year.

Excluding acquisitions, severance and relocation costs, and the change in the fair value of our common stock warrants, non-GAAP adjusted net income was $8.2 million or $0.73 per fully diluted share for 2013. This compares to $4.3 million or $0.39 per fully diluted share for 2012.

Turning to the balance sheet, we closed 2013 with $20.7 million in cash and cash equivalents. Cash flow generated from operations was $2.1 million for the quarter and $7.1 million for the year.

CRINONE product revenues fluctuate from quarter-to-quarter and year-to-year based in part on the timing of product batch shipments to Merck Serono. Merck Serono built up its inventory of CRINONE during the first three quarters of 2013 for one of its higher-volume, higher-margin markets in anticipation of a routine license renewal.

During the renewal period, which commenced in the fourth quarter of 2013 and is expected to continue through the first half of 2014, Merck Serono is not expected to ship CRINONE into this market. We expect this will result in lower product revenues through the first half of 2014.

We expect underlying in-market sales of CRINONE ex-U.S., will continue to increase throughout 2014 and beyond driven by Merck Serono’s continued growth in emerging markets and entry into new markets. We expect continued growth in our royalty revenue from Actavis on its U.S sales of CRINONE due both to volume and price gains.

Finally, we expect to maintain a positive cash flow from operations going forward. For further details on our financial results, please look to today’s press release and our 10-K both of which will be available on our websites columbialabs.com.

With that, I will turn it back to Frank.

Frank Condella

Thank you, Jonathan. Columbia today provides pharmaceutical development services, manufacturing clinical trials in advanced analytical and consulting services to the pharmaceutical industry. I’m going to ask Nikin Patel, CEO of Molecular Profiles to discuss the services and progress during the fourth quarter. Nikin?

Nikin Patel

Thank you, Frank, and good morning, everyone. Outsourcing strategies in the pharmaceutical industry are focused on reducing time to market, lowering fixed costs and minimizing operational risk enabling companies to concentrate on their core competencies. This trend includes outsourcing R&D and manufacturing activity to service providers like Molecular Profiles.

The outsourcing market that we operate in is growing and is currently valued at $21.5 billion. Within this market there is a healthy competition between the service providers and so the ability to differentiate our self is very important.

At Molecular Profiles we’ve established a world class range of pharmaceutical development services which are underpinned by our internationally acclaimed scientific knowledge and expertise. As Frank just mentioned, the key services that Molecular Profiles offers are formulation developments, clinical trial manufacturing, advanced analytical characterization and consulting services.

We work in the early stages of the product development with clients who have a promising new molecule that they wish to test in the clinic. Our key differentiating factor is our ability to gain a detailed understanding of the products that we’re developing through the application of our advanced characterization expertise. This science led approach enables us to deliver robust, value-added formulations to our clients in a timely and cost-effective manner.

Last summer we opened our new developments on clinical manufacturing facility, which has significantly expanded our capacity and enhanced our offering to the pharmaceutical and biotech clients. While I’m not at the liberty to divulge specific details due to client confidentiality, in the fourth quarter we ran multiple projects in parallel and commenced several new collaborations from a broader range of clients than we’ve seen in previous quarters.

Highlights include successfully delivering on higher value projects or new mid-size clients in the EU and also winning a project to provide formulation and manufacturing support for a large Phase 3 study for U.S. based clients. In addition, in the past quarter we've worked on over 40 different projects requiring our advanced analytical and consulting services, which are mainly supporting both our clients’ internal R&D program, but also for post marketing IP support.

Our revenues are dependent on the completion of a range of phases in individual contracts, which sometimes change, are delayed or accelerate based on the needs of the project and the client. Accordingly there can be some variability in the revenues from quarter-to-quarter. That said, the total value of the projects and the proposals that we are attracting today is growing in size, which should help these fluctuations.

Molecular Profiles continues to implement fresh initiatives to attract new customers and leverage existing relationships to further capitalize on the growth of the outsourcing market. We are utilizing our base in Boston to grow the client network in North America and our own track with our initiative to enter new market outside the EU and the U.S., with Japan being a particular area of focus.

Within our new facility, we have invested in expanding our technical offerings with the recent introduction of hot melt extrusion, which allows our scientific team to compete for a broader range of projects.

With that, I'll turn it back to Frank.

Frank Condella

Thanks, Nikin. Through the acquisition of Molecular Profiles last September, we significantly diversified our revenue stream. However, CRINONE continues to be our largest single revenue source. In 2013 we extended our exclusive supply agreement with Merck Serono through 2020.

According to IMS data, CRINONE in-market sales outside the U.S grew 22% in the fourth quarter of 2013 over the period year. Year-over-year in-market sales were up 12% over 2012. In a recent interview Merck Serono’s CEO, Belén Garijo, said that there is significant growth potential for fertility products in China, where the government is easing its one child rule as well as in Turkey and Russia.

So we believe that our long-term revenue stream for Merck Serono is very solid and we expect Merck Serono will continue to build the franchise throughout the life of our extended supply agreement through a combination of entries into new major markets and continued organic growth.

In United States Actavis continues to market CRINONE through its specialty sales force focusing on women's health. Total U.S prescriptions for CRINONE continued their upward trend in 2013 increasing 6.5% over 2012. The product market share continues to hold steady at around 65%.Product growth reflects a greater overall use of vaginal progesterone in a slightly women's health market.

Last fall Actavis received FDA approval for a next-generation CRINONE 8%. At the Actavis Analyst Day in January, CRINONE NG was included as one of six significant potential new product opportunities from their existing pipeline for 2014. We are pleased with their ongoing commitment to the product.

Actavis is manufacturing CRINONE NG in-house following our November agreement to early terminate the exclusive manufacturing agreement as Jonathan discussed. We continue to receive a 10% royalty on Actavis net sales of CRINONE and CRINONE NG. We expect this royalty revenue will grow as Actavis continues its effort behind the product.

Columbia has a strong heritage in pharmaceutical development, particularly in women's healthcare and drug delivery. We now have world-class capabilities in materials characterization, analytics, formulation development and manufacturing. We also have intellectual properties that could be applied to develop -- development of new proprietary products.

By utilizing these new in-house capabilities, we believe that with a relatively low level of investment, we could add value to known chemical entities to create new commercially viable therapeutics in areas of unmet medical needs. Our disciplined approach would be to develop a project through proof-of-concept and then partner it for late stage development and commercialization.

We're evaluating our prospects here and will update our go forward plan later this year. Business development opportunities open to us include strategic alliances, M&A or in-licensing products for further development. We will continue to explore all these opportunities while working to leverage our combined capabilities and expertise to build revenues going forward.

With a top-notch team focused on meeting the needs of our many customers and a strong balance sheet, we’re confident that we’ve the right elements in place to capitalize our macro-trends in the industry, deliver long-term revenue growth and build shareholder value.

With that operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from Raymond Myers from Alere Financial Partners. Please go ahead sir.

Raymond Myers - Alere Financial Partners

Thank you for taking the questions, and good morning.

Frank Condella

Hi, Ray.

Raymond Myers - Alere Financial Partners

Hi, Frank. My first question would be for Nikin. I am interested in his assessment of the progress that has been made at integrating with Columbia’s process and infrastructure at Molecular Profiles?

Nikin Patel

Yes, we made significant progress between the two teams in Boston and Nottingham. In Molecular Profiles we have effectively become the operational units of the company. We’ve taken onboard the quality and the supply chain aspects of the CRINONE. And we’re also progressing on infrastructure IT initiatives that will bring the two companies closer together. But so far it's been very smooth in terms of the transition.

Raymond Myers - Alere Financial Partners

Very good. And maybe could you comment on the revenue growth trajectory that you would expect going into 2014, is it what you thought it would be when you joined the company?

Nikin Patel

We have explained previously in terms of our growth in recent year’s call, in particularly the pharmaceutical development services market which is the larger part of our business which is growing. Looking forward, we expect the pharmaceutical development services business to continue growing and that’s what we’re focusing on currently.

Raymond Myers - Alere Financial Partners

Okay, great. And then, maybe one for Frank; what have you learned about Molecular Profiles since the acquisition that may have surprised you either favorably or not?

Frank Condella

Well, I think that even though they tend to be soft spoken, I think they’re highly competitive and quite aggressive in getting new contracts which I really like to see. So, we’re very pleased at the way that they’re expanding their business.

Raymond Myers - Alere Financial Partners

Okay, great. And shifting to the operating expenses, what kind of operating expense trends do you expect from here going into 2014?

Frank Condella

I think Ray, what I would say is, is that we’ve reduced the sized of our staff quite substantially here in the U.S. and I think that we don’t see any need to grow that any further. The only growth that would come in the U.S. would be business development people for Molecular Profiles and eventually we could have additional feet on the growth as the business grows. There’s certain activities happening down in the U.S. that can’t be done overseas, but right now we’re focusing on just increasing customer service and building business development resources. But just for the core G&A expense we’re seeing natural inflation in our increases, but nothing really and substantial beyond that.

Raymond Myers - Alere Financial Partners

Very good. Could you describe what the $300,000 of other revenue was in the fourth quarter and what you expect of that revenue line in the future?

Frank Condella

Jonathan, you want to take that?

Jonathan Lloyd Jones

Yes, hi Ray, it’s Jonathan. The $300,000 was actually a onetime payment in connection with the termination of the supply agreement with Actavis, and it basically made us whole for the assumed number of batches we might have shipped to them in the period through to the end, the actual original end of that agreement which was mid 2015.

Raymond Myers - Alere Financial Partners

Good. I assume that was at a 100% gross margin?

Jonathan Lloyd Jones

Well, it's a 100% gross margin, yes.

Raymond Myers - Alere Financial Partners

Okay, good. Could you describe how much revenue you believe was lost for the Merck Serono stocking issue in the fourth quarter?

Frank Condella

Ray, this is Frank. I think the thing you got to look at is, is that those revenues were brought forward as we mentioned into the, in the first three quarters of the year and if you look at our last corporate presentation there’s a nice bar chart in there showing CRINONE revenues to mature on a quarter-on-quarter related trend line. They have been growing pretty consistently at 13% compound annual growth rate. And so after that inventory has worked off we would expect to continue the growth in the foreseeable future at around that rate.

Raymond Myers - Alere Financial Partners

Good. And you guided to expect that, that would be worked off through the first half of this year. Would we expect any revenue at all in the second quarter?

Frank Condella

Well, I think we will be seeing revenue in the first and second quarter, it's just a question of whether we -- how much revenue we see in the higher priced, higher margin market that’s under regulatory renewal. And I think we are seeing a small amount in the second quarter, but we’re expecting most of that to come back in the second half of the year.

Raymond Myers - Alere Financial Partners

Okay, that’s great, that’s what I was looking for. Maybe could you describe the potential of the new product pipeline, maybe providing a little color on how the acquisition environment or product licensure environment and how that might be evolving?

Frank Condella

Yes, I think what we’re doing right now is that we’re looking at a number of opportunities in the new product development area. As we have mentioned in the first half of this year, we do expect revenues to be softer on the CRINONE side so that we will be generating cash but not as much as we expect to in the second half of the year. So, what we’re using the first half of the year is to focus on really flushing out the various product development opportunities that we have, some that have been on the shelf here, some that are new.

One of the areas that with the downsizing of Columbia that we removed that you’ll remember is any type of clinical or regulatory capability. So we have got to partner with people in those areas to fully assess product development pathways and to really understand the costs and risks of development of the products that we’re looking at. So, there’s a lot of activities going on, but at this point I’m not going to focus on a particular product that we have in the pipeline or that we’re adding to the pipeline, and once we do that then we’ll make an announcement and we’ll also give an estimate on how much we expect to spend.

So any money that we’re spending right now is just strictly investigating and making sure that we have strong solid commercial rational for any products that we would develop in-house. But focusing on the growth of CRINONE and focus on lifecycle opportunities of CRINONE for Merck Serono around the world and focusing on organic growth at Molecular Profiles services business.

Raymond Myers - Alere Financial Partners

Okay, that’s great. And then just one final question for Jonathan, I think you might have said it but I missed it on the call, how much cash was generated in the fourth quarter?

Jonathan Lloyd Jones

$2.1 million.

Raymond Myers - Alere Financial Partners

$2.1 million, excellent. Okay, thank you very much.

Jonathan Lloyd Jones

Thanks, Ray.

Operator

(Operator Instructions) Our next question is from Jeffrey Link from Invemed. Please go ahead.

Jeffrey Link - Invemed

Good morning.

Frank Condella

Good morning, Jeff.

Jeffrey Link - Invemed

I just wanted to clarify and follow-up on a couple of points. First with regard to Actavis on the product revenue front, you talked about that no longer -- yet you no longer would be manufacturing for them. How much revenue did you do with them in 2013, what kind of margin’s were associated with that?

Frank Condella

[Go on] [ph] Jonathan.

Jonathan Lloyd Jones

Yes, this is Jonathan. So we had no revenues from Actavis for product sales in 2013. In 2012 revenues were $4.3 million. The margin on that was at a cost plus 10% margin, so in fact the margin was only 9.09% on the sales in 2012.

Jeffrey Link - Invemed

I see. And so, given -- I guess can you talk a little bit about the relationship that you have with Actavis as it does appear as though they’re I guess stepping back from the relationship with you somewhat other than them paying the royalties on their CRINONE sales?

Frank Condella

Yes, Jeff I mean as you know Fred Wilkinson still sits on our board, our largest shareholders with about 11.5% of the annual shares. But we do have annual meetings on the joint development committee and as well as the joint commercialization committee. And from time-to-time we get their assistance on things that we need for Merck Serono that’s part of our arrangement. We have a very corporative relationship and they continue to promote the products and they’ll let us know about their product promotion plans and their upcoming expectations.

But primarily other than that we collect royalties on their product sales at 10% of net sales. Hence we’ve said the prescriptions for those sales last year grew about 6.5% and that along with price increases that they took allowed our royalties to increase year-on-year, I think it was around 10%. And we’re hoping that, that will continue along those lines for the foreseeable future.

Jeffrey Link - Invemed

When you talked about the potential uses for your cash, I don’t recall if buyback was one of the many things that you listed, stock buyback that it?

Frank Condella

I think I have said many times in the past that we would not pursue an open market share buyback or dividend strategy. From time-to-time we have to investigate other opportunities that may be beneficial to shareholders. But I think you need to do specifics on that right now.

Jeffrey Link - Invemed

Okay. I wanted to switch gears for a second to the Molecular Profiles. Jonathan, have the $3 million rate in this last year as to what they generated, how much of that is contributing to earnings, just that $3 million that Molecular Profiles is producing?

Jonathan Lloyd Jones

Well, I think if you look at the press release you’ll see that on a gross margin basis they, it was gross margin about 35%.

Jeffrey Link - Invemed

Okay, thank you. And also since there’s been discussion’s again on the Molecular Profiles -- as it relates to Molecular Profiles, is there a possibility that one can give some kind of an idea as your backlog or pipeline since it does sound like there’s a lot of deals that are in the works or deals that have been signed to give us a better sense as to what kind of revenue opportunities could be coming down if we see how the pipeline or the backlog is developing?

Jonathan Lloyd Jones

Well, Jeff we’re working on better systems to understand that. I think that as Nikin pointed out he’s got a number of proposals and larger ones that they’ve been working on. But as he mentioned in his comments they are also changeable. So that once you’ve won a contract in this business, there tends to be lots of change orders. So, we are looking at producing a metric in the future, but we don’t have that really in good enough shape yet to use with the market, but I think just overall we’re very happy with the way the progress of the business, the utilization of enabling technologies, new contracts, bigger contracts and unfortunately most of the companies that we work with are not -- don’t want to go out with individual press releases on our work. So, it's been a bit frustrating on the news flow front. We would like to be able to count a little bit more about some of the successes that when we talk about partners as Nikin has pointed out for a confidentiality reason as they prefer not to talk about it. So, well work on that, but overall I can say is I’m very happy with the trend of the business.

Jeffrey Link - Invemed

All right, Jonathan I have just a final question for you, and I know the company doesn’t really provide guidance per se, but if you look into the second half of 2014 given what happened in 2013 with the Merck Serono business slowing down with that one market, given now Molecular Profiles and the business coming back to Merck Serono as they kind of more normalized their business distribution again, can you give us even a rough idea how much you think revenues could be up based on the more normalization of business in the back half of this year?

Jonathan Lloyd Jones

As you said we don’t tend to give guidance on revenues and because of the lumpiness of -- historic lumpiness of Merck Serono, and unfortunately the future looks no less lumpy than the past. I can say that we, obviously if you look at our presentation on our website that Frank alluded to in terms of historic growth rates of Merck Serono and we expect underlying growth of Merck Serono’s in-market sales to continue in that vein. But as for the time we have orders, it's always very difficult to judge, so we don’t provide guidance.

Frank Condella

I think just as we said, we expect the second half of 2014 to be stronger than the first half both from a continued gross Molecular Profiles and Merck Serono coming back in that high margin, high volume market. So, thanks a lot for your questions.

Jeffrey Link - Invemed

Okay. Thank you.

Frank Condella

Okay. Thank you, operator. I just would like to thank everyone for attending to our conference call today and your continued support and we look forward to catching up with you again soon.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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