Pernix Therapeutics Holdings Inc. (NYSEMKT:PTX)
Q4 2013 Earnings Conference Call
March 17, 2014 9:00 am ET
Doug Drysdale – President, Chief Executive Officer
Tracy Clifford – Vice President, Accounting
Elliot Wilbur – Needham & Co.
Louise Chen – Guggenheim
Good morning and welcome to the Pernix Therapeutics 2013 Fourth Quarter conference call. Today’s call is being recorded. All lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press the star key then the number one on your touchtone phone.
At this time, I would like to turn the conference call over to the company’s Principal Accounting Officer, Tracy Clifford. Please go ahead.
Thank you and welcome to Pernix Therapeutics' Fourth Quarter 2013 conference call. On the call today with is me Doug Drysdale, President and CEO. Before we begin, I would like to point out that the company issued a press release this morning containing financial results for the quarter and fiscal year ended December 31, 2013. The release, including the financial tables and reconciliation of non-GAAP financials, is available on the company's website at www.pernixtx.com. The company also expects to file its annual report on Form 10-K with the SEC by the end of the day.
Before we begin, allow me to read the following Safe Harbor statement. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements including words such as estimate, plan, project, forecast, intend, expect, anticipate, believe, seek, target or similar expressions are forward-looking statements. Because these statements reflect the company's current views, expectations and beliefs concerning future events, these forward-looking statements involve risks and uncertainties.
Investors should note that many factors as more fully described under the caption Risk Factors in our Form 10-K, Form 10-Q and Form 8-K filings with the Securities and Exchange Commission, and as otherwise enumerated herein or therein, could affect the company's future financial results and could cause actual results to differ materially from those expressed in forward-looking statements contained in the company's annual report on Form 10-K or our other SEC filings or other public statements. The forward-looking statements are qualified by these risk factors. The company assumes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
During the call, we may also discuss certain non-GAAP financial measures such as EBITDA. The company believes that EBITDA, which we define as earnings before interest, taxes, depreciation and amortization, is a meaningful non-GAAP financial measure.
At this time, I would like to turn the call over to Doug Drysdale to begin our discussion of the company's quarterly performance.
Thanks Tracy. Good morning everyone and welcome to this morning’s call. I will be providing updates on our business activities included in this morning’s press release as well as commentary on our activities since the close of the quarter, including the licensing and preparation for launch of our new product, Khedezla, for major depressive disorder. Later in the call, Tracy will provide a more detailed review of our financial results for the fourth quarter and fiscal year ended December 31, 2013.
This past year was a difficult time for Pernix’s management, employees and shareholders. Significant efforts have been made towards reducing operating costs, improving operating efficiencies, ensuring robust compliance systems, and increasing margins. Good progress has been made but further actions to reduce our G&A spending run rate will continue through at least the next two quarters. We believe that these efforts will position the company’s base business for a solid performance in 2014, providing a sound specialty pharma platform ready to acquire and launch new products.
Our recent licensing deal with Osmotica will result in the launch of Khedezla to select psychiatrists and primary care physicians in April. This is our first step toward better leveraging our greatest asset, our 90 sales professionals, within targeted specialty audiences.
Before we talk about the future, let me recap a few key events and activities from the recent past. As previously announced, two major contingent liabilities were recently resolved by the company. In January, the company entered into a settlement agreement with the former shareholders of Cypress Pharmaceuticals. All claims were waived and released by the parties and Pernix made a one-time payment to Cypress shareholders of $1.33 million in full and final settlement. Further details can be found in our 10-K filing.
In February, our Cypress subsidiary entered into a settlement agreement with the Texas Attorney General to settle all Medicaid claims against Cypress for a total of $12 million, with $2 million paid up front and five payments of $2 million to be made annually thereafter. Pernix recorded the expense and related accrual for the $12 million settlement in the fourth quarter. Further details can be found in our 10-K filing. The settlement of these two pending litigations closes a tough chapter in Pernix’s history and provides a clean slate from which to move forward.
Also in February, we announced the closing of the issuance of $65 million of 8% convertible senior notes. The notes mature in 2019 and are convertible into shares of Pernix common stock at a conversion price of $3.60, representing a conversion premium of more than 30% over the share price on February 4, 2014, which was the date we entered into purchase agreements with investors. Free from the historic litigation overhangs and with cash on the balance sheet, Pernix is now well positioned to invest in new commercial product assets and is poised for a new period of growth.
While we’re out shopping for new products, my first point of order has been to secure our base business and position it for a solid 2014. In the past several weeks, we have taken several actions, including the following: a request that three of our directors step down from our board in order to make way for new members with strong pharmaceutical resumes that can support management as we seek to make new acquisitions. On Thursday, we announced that industry veteran, John Sedor will join our board and we are in the midst of the selection process and trying to appoint a further director as soon as practical.
We added new pharmaceutical talent to our management team, including the hiring of Terry Novak as Chief Operating Officer. Terry brings 30 years of pharmaceutical experience, including positions as president of Norwich Pharma Services, president and chief commercial officer at Patheon, and president of DSM Pharmaceuticals. Terry is already immersed in the nuts and bolts of Permix’s operations.
We entered into an agreement with Cardinal to exclusively manage our distribution and logistics. We expect to have all of our products move to Cardinal by the end of April 2014. As a result, we will be closing our distribution centers in Magnolia, Texas and Madison, Mississippi by June 30, 2014, resulting in net cost savings.
We are in the midst of a strategic review our Houston manufacturing operations and are assessing options to stop the cash burn at that site. After an in-depth review, we have implemented price increases on certain core products which will improve the margins on these products in 2014.
Finally, we announced on February 27 that we have entered into a license agreement with Osmotica Pharmaceuticals to sell and market Khedezla ER tablets for major depressive disorder. Khedezla is the bioequivalent version of Pristiq, a product with sales of approximately $700 million in 2013. Our team of 90 sales professionals will be targeting high prescribers of Pristiq, including select psychiatrists and primary care physicians. We believe that there is also strong synergy amongst these physicians for our insomnia product, Silenor, as psychiatrists on average write approximately twice as many prescriptions for sleep products than PCPs. We are strong believers in the growth potential for Silenor and are continuing to evaluate our promotional investments behind this product as we prepare for the launch of Khedezla in April.
I am encouraged by the progress we are seeing in our base business in the first two months of this year. We expect continued strong sales supported by recent price increases. This, combined with the actions we are taking to reduce and simplify our operating costs are expected to result in improved margins over 2013. While I am reluctant to provide specific guidance during this period of transition, I fully expect 2014 revenues to be above the prior year, EBITDA to be positive, and cash flows to be at least neutral. We are off to a great start in 2014 and I look forward to sharing more news with you as we progress.
Over to Tracy now for the 2013 financial results.
Thanks Doug. I will begin with a discussion of net revenues for the fourth quarter of 2013. The company’s net revenues increased 31% to $23.9 million in the fourth quarter of 2013 compared to $18.2 million for the fourth quarter of 2012. The company experienced growth in net revenues due to sales revenues of branded and generic products that the company acquired from Cypress Hawthorn and the Silenor product acquired in the merger with Somaxon. In addition as Doug noted, we implemented price increases in certain of our high volume products in 2013. These increases were offset by a decrease in the company’s legacy portfolio of products which was due in part to the discontinuation of certain generic products as a result of related patent litigation settlement terms and of certain brand and generic cough and cold products that were recalled during the year. As it relates to revenue contribution, 32% of our revenue in the fourth quarter was from generic product sales and 68% was from brand product sales.
Moving on to bottom line results for the quarter, the company recognized a net loss of approximately $5.6 million or $0.15 per basic and diluted share for the fourth quarter of 2013 compared to a net loss of approximately $1.4 million or $0.05 per basic and diluted share for the same quarter of the prior year. Adjusted EBITDA, which represents earnings before interest, taxes, depreciation and amortization, and further adjusted by certain non-cash and/or non-recurring items, is a non-GAAP measure that we provide for informational purposes. Adjusted EBITDA for the fourth quarter of ’13 remained flat to the same quarter in the prior year at $1 million. The adjustments between EBITDA and adjusted EBITDA for the three months ended December 31, 2013 included approximately $267,000 in deal-related expenses, $654,000 in stock compensation expense, $1.2 million in the cost of sales related to the increase in the basis of inventory acquired in connection with the Cypress Hawthorn and Somaxon acquisitions, $2.2 million related to the increase in the value of the put right issues in connection with the Cypress Hawthorn acquisition, and $9.8 million representing the fair value of the settlement of the Texas Medicaid ligation of the former Cypress shareholders, offset by $11.7 million gain as a result of the waiver of the put right and $4.5 million from the gain on the contingent consideration, both realized as a result of the settlement with the former shareholders of Cypress. You can refer to the table at the end of our press release that was distributed this morning for a reconciliation of net loss income to EBITDA and adjusted EBITDA.
As it relates to expenses, cost of product sales were approximately $10.1 million for the fourth quarter of 2013 as compared to approximately $7.5 million for the fourth quarter of 2012. This resulted in gross margin of 63% of net sales excluding the increase in the cost of sales attributed to the sale of acquired inventory, which has a significantly higher basis than the inventory purchased post-closing. The gross margin compares to a gross margin of 59% of net sales for the same quarter of the prior year. The increase in the gross margin is due to the price increases implemented in 2013 on certain high volume products.
SG&A expenses in the fourth quarter of 2013 were $23.6 million compared to $11.1 million for the fourth quarter of 2012. Approximately $9.8 million of the increase in SG&A represents the fair value of the settlement of the Texas Medicaid litigation of the former Cypress shareholders, $1 million of the increase relates to an increase in overall compensation expense that was primarily attributable to the addition of Cypress employees effective January 1, 2013, partially offset by decreases resulting from the reorganization of the consolidated company and the elimination and consolidation of certain management-level and staff positions. This remaining increase was primarily due to the incremental increase of the facilities and overhead operating expenses from the acquisitions of Cypress and Somaxon subsequent to December 31, 2012, offset by certain synergistic savings in the operations as a consolidated basis.
Research and development expense was approximately $1.2 million compared to approximately $220,000 in the same quarter of 2012. This increase was primarily due to expenses related to the in-process research and development, including the compensation of individuals in the R&D department that we acquired in connection with the acquisition of Cypress and furthering the development of our late-stage pediatric product. As of year-end, we reviewed our R&D portfolio and have elected to only pursue certain projects, including the Silenor OTC switch and the pediatric product currently in development. As a result, we recorded an impairment charge of approximately $19.6 million primarily related to the in-process R&D projects acquired in the Cypress acquisition.
Depreciation and amortization expense was approximately $1.2 million for the fourth quarter of ’13 compared to $881,000 for the fourth quarter of 2012. The company recognized an income tax benefit of $12.7 million for the fourth quarter of 2013 compared to an income tax benefit of approximately $204,000 for the fourth quarter of 2012. Weighted average common shares outstanding were 37.1 million basic and diluted shares for the quarter ended December 31, 2013, and 29.3 million basic and diluted shares for the same quarter of the prior year.
Now onto the results for the full year ended December 31, 2013. I’m pleased to report that for the year ended December 31, 2013, we met our previously announced guidance of net revenues of $80 million. Net revenues increased by approximately 38% to $84.9 million compared to $61.3 million for the prior year period. The increase in net revenues is attributed to the same reasons as previously described to the quarter fluctuations. The net loss for this period was approximately $25.6 million compared to net loss of approximately $1.4 million in the prior year-to-date period. The adjusted EBITDA was a loss of approximately $6.2 million compared to earnings of approximately $5.9 million for the year ended December 31, 2012.
SG&A expenses in the year ended December 31, 2013 were $62.6 million compared to $35.5 million for the prior year, an increase of approximately $27.1 million. As previously noted, approximately $9.8 million of increase in SG&A represents the fair value of the settlement of the Texas Medicaid litigation of the former Cypress shareholders. Approximately $8.8 million of the increase relates to an increase in overall compensation primarily due to the addition of Cypress employees effective January 1, 2013 and the addition of Pernix manufacturing employees in July 2012, offset by decreases resulting from the reorganization of the consolidated company, as previously noted. The remaining increase was primarily due to the incremental increase of expenses from the acquisition of Cypress Somaxon and the manufacturing facility subsequent to December 31, 2012. The integration of these businesses is ongoing and we are taking further actions to reduce G&A spending.
As previously noted, the company also invested in its R&D projects during 2013. R&D expenses were approximately $4.8 million in the current year compared to $732,000 in the prior year. Weighted average common shares outstanding were 36.4 million basic and diluted for the current year and 28.1 million basic and diluted for the prior year.
Turning now to the balance sheet, as of December 31, 2013 the company had $15.6 million of cash, $27.5 million in accounts receivable, and $13.8 million in inventory. As previously announced, we recently closed on the issuance of $65 million of 8% convertible senior notes due 2019 to a group of institutional investors. The net proceeds from these notes of approximately $60 million in addition to the new accordion feature in the amendment with our lender, Midcap Financial providing for the revolver proceeds of up to $40 million, positions us with the capital necessary to make one or more, possibly several, strategic acquisitions in 2014 to grow the company. As of March 12, 2014, our cash balance is approximately $64.6 million and the balance outstanding on our revolver with Midcap is approximately $8 million.
That concludes my financial review this morning, and now we’ll turn it back over to Doug for his final comments.
Thank you, Tracy. In closing, let me summarize the key points I want to convey on this call. We have fortified our financial division by divesting non-core assets, removing historic contingent liabilities, and by adding cash to the balance sheet. We are securing our base business through the addition of new pharmaceutical talent, several price increases on key products, and the licensing of Khedezla. We have achieved significant SG&A cost savings and we foresee additional cost savings during the balance of 2014 with the aim of delivering a self-sustaining cost structure. We are well capitalized and poised to acquire new specialty products that better leverage our sales organization.
That will conclude my prepared remarks, and we will now ask the operator to please open the line for questions. Thank you.
Question and Answer Session
Thank you. [Operator instructions]
Our first question is from Elliot Wilbur of Needham. You may begin.
Elliot Wilbur – Needham & Co.
Thanks, good morning. I have several questions, maybe first just a couple of specifics on some aspects of the P&L. Thinking about Khedezla specifically, Doug and Tracy, is this actually an asset that you’re going to record revenue on, and maybe if you can just talk a little bit about P&L impact of the product in terms of thinking about whether or not it’s a co-promote fee that you’re going to recognize or actually recognize revenue from the sale of the asset and there is a higher cost of sales associated with the product reflecting any royalties back to Osmotica. Just wondering how that specifically flows through the P&L.
Based on our analysis so far prior to the launch, since we’ll be distributing the product through our distribution channels with our customers and our contracts and the like, we will recognize the growth to net sales aspect of it and then of course have a COGS component for the co-promotion piece that goes back to Osmotica.
Elliot Wilbur – Needham & Co.
Okay, and then taking it a step further, Doug, maybe can you just talk a little bit about the changes in the product portfolio and the like, sort of where the sales force is focused currently, where the reps are spending the majority of their time in terms of product detailing, and just maybe kind of a rank order in terms of which products are being highlighted currently.
Sure. Thanks for joining, Elliot, and thanks for your questions. So right now as we’re in cough and cold season, the reps are very much focused on Cedax and Zutripro, and the Zutripro family of products through until about mid-April while we’re in this peak season. We’ve got all the reps, and we have about 90 sales professionals, selling that basket of products quite heavily, which is a change for us because they’ve been quite fragmented in the past. Remember back at 2013, the reps were divided up across several products in chunks – 25 reps here, 35 reps there. But now we have the whole of the sales force selling the cough and cold portfolio at this point in time.
As we move into April, towards the end of April, we have a launch of Khedezla and will be shifting our targeting towards high prescribers of Pristiq, which will primarily be psychiatrists and high prescribing PCPs, and we’ll overlay sleep prescribers on top of that. So all of the reps will be selling Khedezla in first position for a period of time and Silenor in second position, so I think we’re pretty excited about the launch of Khedezla and think it has some good potential, and also about the re-shifting of our targeting for Silenor because I think that’s a product that we’ve under-promoted and under-marketed in the past.
Elliot Wilbur – Needham & Co.
Okay, thanks. Maybe shifting to some big picture macro questions for you, Doug, obviously everyone is greatly anticipating the first transaction that Pernix executes. But in terms of thinking about the deal environment, there’s certainly been tremendous activity in the life sciences sector within the past couple of years, but definitely a sellers’ market and I guess a lot of the valuation benefits that accrue to some of the larger acquisitors have really come as a result of their ability to take advantage of cheap credit and to rationalize infrastructure costs across much larger platforms. So I guess given the environment where assets seem relatively rich, are you confident that you are seeing the range of opportunities that would allow you to execute transactions according to sort of what market expectations seem to currently be?
I guess the real question here is what type of deals should we be thinking about? Obviously revenue-generating assets are highly prized, but the company is potentially at a point where maybe you could take advantage of current slippage in expectations and begin to think about the longer term growth profile here and maybe invest in some assets which have yet to be launched, or maybe even acquire a little bit of development work. So just in terms of thinking about how you sort of rank order the acquisition opportunity set, what your current thinking is there.
Okay. I think that was a long, roundabout way of asking us why we haven’t done a deal yet.
Elliot Wilbur – Needham & Co.
I figured it’s been three months.
Exactly. I think you gave us about one month, but thanks for that. You’re right – it’s competitive out there, and that’s no news to anybody; but we have a team that has a strong track record of closing deals, very extensive industry connections, we are well capitalized. We’ve got a great sales force, highly motivated, and I think they’re a huge asset when it comes to bringing in products for the bag.
But it is competitive, but the good news is that even though it’s competitive, our cost base is very leverageable. We have space in the bag to add additional products and I think we can add new products without adding substantially to the cost base. Our primary focus and our priority is to bring in revenue-generating products. I think that makes the most sense right now to make the most of the asset base, the cost base that we have. Over time, I can see us looking backwards towards later stage development projects as we look to the future, but certainly our first priority is to bring in revenue generating specialty products, chronic products rather than seasonal would be preferred, that fit well alongside Silenor and Khedezla would be ideal. We’re out looking pretty aggressively and we have a good pipeline of assets that we’re looking at right now.
Elliot Wilbur – Needham & Co.
All right, thank you for taking the questions.
Thanks Elliot, appreciate it.
Thank you. Our next question is from Louise Chen of Guggenheim. You may begin.
Louise Chen – Guggenheim
Hi, thanks for taking my questions. I have a few. So first question I had, following on the M&A question, is what percent of your sales currently are in the psychiatry space and where do you want this to be over time? And then it sounded like you’re looking at several deals versus one large acquisition. What’s your focus there? Would you prefer one large deal, or do you prefer to do tuck-in deals and kind of build out a portfolio that way?
And then I had a question on Khedezla, just in market opportunity there and why physicians would use your product over Pristiq. And then the last question is just on quarterly level of SG&A spend, what’s your target here and when do you want to get there? Thanks.
Okay, lots of questions. Thank you, Louise, for joining us and for the questions. In terms of our sales in psych, I think we’re under-represented in psych and that’s not really a surprise as we haven’t really promoted there. Psychiatrists prescribe about twice as many sleep prescriptions as PCPs, but we haven’t been directing our activity there. My view is that with a sales force of 90, which is a good size in psychiatry, it’s really under critical mass in PCP, in primary care, so we should get better leverage of that asset of that sales force as you move into psychiatry. And the fact that we have two products in the bag there means that we can get good synergy between Khedezla and Silenor.
In terms of deals, Louise, we are looking at a number of things. Of course, we have to have a lot of balls in the air as we’re trying to do M&A here. We’re looking at individual products as well as small portfolios, and while we’d be opportunistic and close on deals that made the most sense, I’d really like to see us add a substantial amount of revenue and really try and move the needle, and preferably with a product that we can put in the bag for the reps. So something sizeable – I mean, I hate to give a size, but something in the $40 million to $50 million revenue range would be great to add at this point and really make a difference.
In terms of Khedezla market opportunity, I’m not going to say much about our Khedezla strategy right now because we’re pre-launch and it is a mix of a brand and somewhat generic potential market, so the launch strategy is a little sensitive. But it’s a good sized opportunity. Pristiq had sales between $600 million and $700 million last year. We’ll be promoting the product as bioequivalent to Pristiq, which it is, and needless to say we’ll be providing some good commercial rationale for physicians to prescribe it but also for it to be used in the trade of managed care and in Medicare Part D plans. So it’s an extensive plan we’re putting together, but I don’t want to go into full details just because of the sensitive timing of the launch.
Getting into the last question, which I think was G&A, our G&A run rate is still not where we want it to be. We’ve made some substantial improvements over 2013. We’ve been making improvements in the beginning of this year. We will see an improvement in G&A as we close down our distribution facilities and move to Cardinal and down source our distribution. We’re looking at strategic options for PML, our manufacturing facility to see how we can stop the cash burn there and how to make a significant impact, but there are still other areas of G&A where we think we can make savings, and we’re doing a bottoms-up review right now and expect to see impact as we move through 2014 with a goal of getting to a cost structure that is more typical for a company in the spec pharma space as we move to the second half of the year. So still work to do on G&A, but it’s in progress.
Louise Chen – Guggenheim
No problem. Thanks for your questions.
Thank you. Once again ladies and gentlemen, if you wish to ask a question at this time, please press the star then the number one key on your touchtone telephone. Our next question is a follow-up from Elliot Wilbur of Needham. You may begin.
Elliot Wilburn – Needham & Co.
Just real quickly, Doug, following up on your last line of commentary around some of the cost initiatives that have been undertaken thus far, maybe you could just quantify those for us, and specifically thinking about what the next savings impact is going to be from rationalizing the company’s distribution center and switching to Cardinal, and then if you could give us maybe a little bit better sense of what exactly is the current cash burn associated around—with the manufacturing operations. Thanks.
Yeah, I can do that. I think you could probably back into these things in any case, Elliot. We have two distribution centers, one in Madison, Mississippi, one in Magnolia, Texas. Between them, net savings full year run rate when we move to Cardinal should be in the $1 million to $2 million range, maybe a little more as we make those transitions. There are some operations, there are some functions at those facilities that we’ll be backfilling in Morristown, New Jersey as we move our headquarters, so there will be some offset; but that’s roughly the range to think about.
As for the manufacturing side, I can say the manufacturing side burns roughly $6 million a year. We are looking at options there, including adding additional volume or potentially divesting the site. There’s different options that we’re reviewing, so that could be the potential full year run rate savings once we decide what to do with that facility.
Thank you. I’m showing no further questions at this time. I would like to turn the conference back over to Doug Drysdale for closing remarks.
Okay, well thanks Elliot, thanks Louise for the questions. I think we’re off to a great start in 2014. Good to have the contingent liabilities from last year all cleaned up and cash on the balance sheet. We’ve started to add new talent to the business and we’ve got an active deal pipeline, so I’m certainly encouraged and excited by the start to the year and look forward to sharing more news of you as we move forward. Thanks very much for joining the call.
Ladies and gentlemen, this concludes today’s Pernix Therapeutics earnings conference call. Thank you and have a nice day.
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