Kerry Gray - President & CEO
Jason Napodano - Zacks Investment Research
ULURU Inc. (OTCQB:ULUR) Q4 2013 Results Earnings Conference Call April 1, 2014 9:00 AM ET
Good morning and welcome to the 2013 year-end conference call. Just to let you know, all lines will be muted during the presentation portions of the call with an opportunity for questions-and-answers at the end.
At this time I would like to introduce your host Mr. Kerry Gray, President and CEO of ULURU. You may proceed Mr. Gray.
Thank you very much. Good morning and thank you for joining the conference call. Let me start by reading the Safe Harbor language. This conference call will contain certain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 as amended, including but not limited to statements made relating to the future product and financial performance of ULURU Inc., expected business development, projections of product sales, plans and strategic relationships, technical advances and our commercialization of Altrazeal.
When used in the conference call, the words may, targets, goal, could, should, would, believe, feel, expect, confident, anticipate, estimate, intend, plan, potential and other similar expressions maybe indicative of forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the company's control.
The company cautions that various factors including industry trends in the industry and the food and drug administration regulations could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the company.
Any forward-looking statements speak only as of the date on which such statement is made and the company undertakes no obligation to update any forward-looking statement or statements. These statements are subject to numerous risks and uncertainties, including but not limited to risk factors detailed in the company's Annual Report on Form 10-K for the year ended December 31, 2013 and other reports filed by us with the Securities and Exchange Commission.
With that being said, let me start. First of all based upon the number on people on call, I’d like to welcome some new folks and certainly welcome back the group of very loyal shareholders that we’ve had over the past number of years.
Let me briefly start with an introduction, as it has been four and a half months since our last call. There are a lot of updates and issues to cover. In advance I apologize if this is a little long. I’ll try to be as brief and to the point as possible.
No doubt from our press releases you will realize that this is being – well, it’s an extremely busy and exciting time for the company. Major activities are ongoing in commercialization, production, quality, clinical, pharmacoeconomic and strategic partnership within the company. This is a pool played (ph) for such a small organization.
Let me now walk through the progress we have made and the ongoing initiatives. Before going there I will briefly discuss the financial statements that we issued this morning. I will not dwell too long on the financial statements. I believe that the most important points are in 2013 we reduced the operating loss by a further $600,000 for the year.
We restructured our balance sheet eliminating all of the preferred stock and the secured convertible note. Liabilities were reduced by almost $700,000 and we were able to operate the company with cash expenses, which were approximately $1.9 million. Given what we’ve accomplished, I believe that is quite an achievement.
As we entered 2014, we are in a much stronger financial position with 2.3 million of equity to be received by April 30, 2014 from warrant exercise and equity investments. At this point in the company’s development, it is difficult to project or to make quarter-on-quarter revenue comparisons.
In the fourth quarter for example we had an order stranded at our sterilization facility in New York due to the bad weather in the northeast, which precluded as booking that sale in 2013. Additionally due to equipment instillation and production scheduling we were unable to fulfill another two orders.
I’m hopeful that by the end of the second quarter our revenue should start to reflect order flow. There’s been some start-up production issues, which have delayed our fulfillment of orders, and I will address those a little later in the call. The reduction or elimination of the Altrazeal royalties has also impacted our 2013 performance. This is being addressed and hopefully we can quickly resolve this issue.
We have continued to run the company very tightly from the cost perspective and will continue to do so. Operating expenses, except the clinical studies expense are not anticipated to grow significantly in 2014. With regard to capital, we will need to make some relatively minor capital expenditures in 2014, which will be principally for production equipment.
Let me now move on to discuss the various commercial activities within the company. Let me address global expansion. Since the last conference call we have reported a significant expansion in the global distribution network for Altrazeal. Work is ongoing to further expand this network and by year-end it’s our objective to have secured marketing and distribution partners in approximately 70 territories, including all major markets except Japan.
I have read that a number of companies are targeting markets such as India; however, given the product economics, this is a totally unrealistic expectation. The benefits of Altrazeal and the cost effectiveness is now almost universally accepted in both developed and underdeveloped markets. The response we have received gives us a high level of confidence as a commitment and the ultimate commercial success we can achieve in these markets.
In markets where the CE mark is not recognized and in fact in some markets where the CE mark is recognized, there are local regulatory approval processes that we have to fulfill. Some of these are very simple and then require basically our CE Mark file; however, in some cases this process can take considerably longer, up to six to 12 months.
I believe we are on track to achieve our globalization objectives for 2014. I should note that Altrazeal’s profile is attracting some larger companies now, which tends to slow the process down due to the more bureaucratic processes within the company. However, given that we are able to bring more than one party to the table, we haven’t seen this dramatically slowing our progress to this point.
Let me now move on with some initiatives that we have implemented in the U.S. over the past 90 to 120 days. We have initiated these pilot initiatives and these initiatives include, a pilot Accountable Care Organization project, an alternative reimbursement pilot study and partnering with a large wound care management company to rapidly accumulate clinical data. These are three projects, which could yield models that could be expanded, and precipitate changes with the reimbursement system for would care.
Accountable Care Organization partner with insurance companies who offer an extensive bonus program that is shared with the members of the Accountable Care Organization, be it the physicians. By more rapidly getting patients to wound care centers and now that primary care physician can enroll alone could save valuable time and cost for wound care. This is one of the projects that we have that started communication on.
We’ve also looked at an alternative reimbursement system and that is approaching an insurance company and offering to heal a particular wound type for set fees, where all parties benefit, the insurance company, the wound care center and the patient. This motivates the physician to use the most cost effective approach to wound treatment. We are looking at doing this in conjunction with one would care center and an insurance company.
The third project is to use a wound management company that controls approximately 100 would care centers to conduct clinical studies and to more rapidly accumulate date. We believe that this could certainly accelerate some of the data we believe we require to change our reimbursement status in the Untied States.
With regard to clinical studies, as previously reported, we have ongoing activities in two areas, venous leg ulcers and diabetic foot ulcers. We anticipate data from the venous leg ulcer study in Europe by the middle of this year.
With regard to the diabetic foot ulcer study we have slightly changed our strategy and we are looking to conduct this study in conjunction with the would management company that I just mentioned. This should enable us to complete this study more rapidly as more centers will be enrolled. It will also substantially reduce the customer study and will provide a large commercial opportunity at the completion of the study.
We are also evaluating the possibility of conducting some smaller studies in highly regarded state sites in Europe, where clinical costs are significantly less than they are in the U.S.
I would now like to address pharmacoeconomic. I’m continually surprised at the lack of attention being paid to the subject to pharmacoeconomics by other wound care companies. Sometime back I sat on the panel and the group was asked what is more important, cost or clinical benefit. I was shocked that nobody responded it is a cost benefit ratio or the pharmacoeconomics as a product. Frankly I see this as a failure to recognize a direction this industry will ultimately take. This represents for us a major opportunity.
In the past three to four months, despite the reimbursement reduction that skin substitute products have experienced and now the to distributor companies have announced that they will enter this already crowded market. As I’ll address shortly, this market segment is clearly in the cross areas of CMS and I believe there will be further changes to reimbursement.
We have an ongoing pharmacoeconomic program, which we believe will generate positive data. By midyear we anticipate completion of the initial phase of this project. Solid pharmacoeconomic data will form the backbone of our global commercialization strategy. To-date this phenomena has been clearly observed in every country where the project has been extensively used, but it will be far more compelling being able to present solid pear reviewed data.
Let me now address reimbursements. In November 2013 revised reimbursement guidelines were issued for the skin substitute products, significantly reducing reimbursement levels. I see this as a very positive development for Altrazeal. Previously CMS had engaged a consultant to evaluate the clinical data supporting these products. The conclusion was that there were few well-controlled, unbiased studies supporting their use. Ultimately clinical outcomes will determine reimbursement levels.
Unless a product can demonstrate a cost benefit, then reimbursement will be adjusted to a viable level. It is important to note that these expenses in substitute products are not available in many important global markets.
Liquid product costing $1371 per application had to be used on six occasions to achieve a 62% healing rate in 42 days. This opens the door for a significantly lower priced product, even appealing in seven to 10 longer as the U.S Healthcare System ultimately had to significantly reduce treatment costs and it is impossible to adjust it by spending an incremental $7000 plus to achieve such a small incremental benefit. I believe data we will be generating over the next 12 months will place us in a very favorable position to approach CMS.
I’d now like to address publications in an area where we are devoting more attention now and that is on science and the mechanism of Altrazeal. We are continually asked what is the mechanism or action of Altrazeal that provides the observed benefits of accelerating the healing and pain reduction.
While we believe there are probably numerous mechanisms that provide the benefits and we can spend considerable time, effort and resources and ultimately understand only a portion of the science behind the technology, we intend collaborating with the universities to further develop the understanding of the science. Over the next 90 days we anticipate commencing a number of studies, looking at the ability of Altrazeal to impact pathway known to cause pain and to inhibit healing. This is a part of our overall publication strategy to provide fundamental scientific support for Altrazeal.
I’d now like to move on to a very important area and that is wound care company evaluation. Recently there was a would care company MediWound Limited that completed an IPO. The post completion evaluation at MediWound was approximately $350 million. MediWound has recently received European approval for a chemical debridement agent for burns. To-date no revenue has been reported.
There are numerous others smaller wound care companies, including Liqua, which has limited revenue, which has recently on a fully diluted basis traded at the market capital agent of over $150 million. There are numerous other wound care companies with revenues less that $100 million that have traded at market capitalization’s of $300 million to $800 million. In most cases these companies are reporting operating losses.
What excites me is that in the majority of cases these companies have very limited international opportunities as pricing or more importantly the inability to demonstrate a cost benefit to preclude them from entering many global markets. I believe these valuations clearly indicate that assuming overall successfully executing a business plan there is substantial room for market capitalization growth.
Let me briefly mention strategic partnerships. Although our primary focus is Altrazeal, both internally and our European colleagues, progress has been made attracting strategic partners for the OraDisc technology. There is a significant interest in a number of potential product applications of this technology, both in the United States and Europe.
I would now like to briefly mention the possibility of uplifting our common cost. In conjunction with an investment bank, we have initiated internal discussions on the possibility to up lift to a national exchange. There is no doubt that this will be advantageous to the visibility of the company and enable a larger audience of investors to participate in acquiring company shares.
To achieve this there are two requirements that would need to be addressed, a minimum net equity, a $3 share price and an expansion of our Board of Directors. We believe that the company is in compliance with corporate governance requirements. Our plan will be achieve the minimum share price through the growth and development of the company. Consequently any such actions will be delayed until the required share price is achieved.
I’d now like to address Investor Relations. Based upon both, its share volume and the dollar volume created daily, which I consider as the only measurement parameter and the most recent investor relations program has shown success. We have now signed the investor relations firm for a period of 12 months. I intend over the upcoming three to six months to develop more time and effort to this activity.
I am very pleased with the positive response we’ve been receiving at investor meetings. The story has been well received and easily understood and the current value proposition is recognized. Given our market capitalization increase, I believe we’re now in a position to expand our activities to include targeting small micro-cap institutional investors. Obviously an uplifting to a national exchange would make these activities a little easier.
I have been approached on a number of occasions by investors to address the Inter-Mountain situation, as people see this as an overhang on our stock. Today we announced that we have redeemed the Inter-Mountain convertible note. This is an important milestone, as we now believe that if for any reason we required additional funding, we could still acquire this from strategic investors.
I realize there’s been significant shareholder frustration with the continuous selling pressure Inter-Mountain has exerted on the stock over the past 19 months. However, I’m convinced that an analysis of this transaction clearly demonstrates that this structure despite not being ideal has greatly benefited the company.
When we added this transaction we had fewer calamities. If a pipe transaction was available, which is highly questionable, we would have had to offer at least a 30% discount, which would have resulted in offering the stock at $0.14 with a 100% loan coverage at $0.20.
With the Inter-Mountain structure our average offering price was approximately $0.27 with 50% warrant coverage at $0.35, which equates to issuing 12 million shares less, than would have been the case if we raised $1.3 million via a pipe under the terms I just outlined.
Of the total convertible note facility of $2.2 million, only $1,512,500 inclusive of the origination discounts was drawn down. By avoiding drawing down the remaining $687,500 we saved issuing an additional approximate 3 million shares. I anticipate that as the current trading volumes are maintained, the remaining recent stock should be sold within the next 10 to 15 days.
Let me address financing. The financing that was completed with IPMD in January 2013 has delivered the desired results. As part of this financing that was granted, 60% loan coverage at $0.60, which at that time was an approximate 200% premium to the market.
With the stock appreciation of above $0.60 towards the end of the year, the warrant term which was only one year, this warrant was exercised bringing $1.8 million into the company and allowing us to redeem the needed amount of secured convertible notes. This is important from numerous viewpoints, the significant additional dilution and if you remove the security interest in our assets, including our intellectual property.
Let me now briefly speak about productions. Of all the issues we’ve had to deal with most recently, this has been the most time consuming and challenging. There are so many factors outside our control, including equipment manufacturing, production scheduling, equipment installation, equipment modifications and so on. A week delay in one area can cause a month’s delay in scheduling revised production times. Most issues have now been overcome; however, further equipment modification is required to optimize some production process.
Dealing with the powder that has a density of 5% of water creates some interesting challenges. We are currently embarking on a major production campaign. With a number of additional markets and the paper intensive process to comply with ISO standards and our quality system, we are now having to get additional outside assistance.
Now let me address the investor questions. I believe that during the call I have covered the majority of questions that have been brought to my attention. One issue that I’ve heard discuss frequently is profitability. We are focused on achieving this objective, however it will be some time before financial performance is a sole driver of our valuation.
As with all similar companies, a discounted cash flow evaluation of future revenue streams is what drives new term valuation, not our prior quarter performance. I also mentioned of our right to acquire Altrazeal Trading. Obviously with the appreciation in our share price, this could quickly become a very attractive proposition.
In summary, as we have previously stated, our objective is to have Altrazeal in the market, in 50 markets by year end and have 70 countries covered by marketing and distribution agreements. Equally important is to continue to develop clinical and pharmacoeconomic guidance’s for the use of Altrazeal in numerous wound types. Although other products have not had to demonstrate clinical efficacy through controlled studies, the bar is now higher and has essentially conducted required studies.
The company has never been in a stronger position. With a tightly focused and clear direction, I believe that the programs and initiatives are in place to establish Altrazeal as a market leader. We are not just another wound care company selling what are basically generic products, collagen, silva, hydrogel, superabsorbent and really even skin substitute products. We have a disruptive technology that has the ability to transform this market that requires innovation to reduce the rapidly escalating cost to treat wounds.
I’d now like to answer any questions you may have.
(Operator Instructions) The first question comes from the line of Jason Napodano. Please proceed.
Jason Napodano - Zacks Investment Research
Hi Kerry, thanks for taking the questions.
Yes Jason, how are you?
Jason Napodano - Zacks Investment Research
Good, good. Thanks for the detailed update. Just, I’d like to start with just kind of a big picture question and talking about the U.S. and the changes that CMS instituted late last year. I’m wondering what changes are you seeing in the U.S. wound care market over the past three months. Is this a revolutionary type decision and change that CMS has made or is it kind of more incremental and then the opportunity for Altrazeal in the U.S. now that CMS has attempted to level the playing field a little bit?
I think, Jason what I see is they’ve just started. I think that there’s a lot of catching up to do to get to where countries like Europe are. I mean I’ve mentioned this previously with things like Hyperbaric Oxygen, which is extensively used in the United States. In Austria, which has the population equal to the Dallas, Fort Worth area, there’s one Hyperbaric Chamber and in Dallas I would project this between 80 and 100.
I think that CMS is just coming to terms with what is going to be essential to bring costs under control. I mean no other country in the world will they pay the type of reimbursement that is being paid here for the skin substitute products, even at the lower level, not deserting 71.
Jason Napodano - Zacks Investment Research
So in terms of where you are with reimbursement in the U.S., does this kind of kick open some doors in the sense for you guys to come in with a low cost product and in terms of the requirement to actually get reimbursed. Maybe you could just kind of give us the sense of the steps there and then the need for reimbursement of a product like Altrazeal, which is already so cheap compared to the bit more expensive skin substitute products.
Right. Well we are reimbursed, but we don’t have a fee schedule and what we need is a fee schedule, which enables all the DMEs to bill the product. I see a product such as Altrazeal supported by good clinical data and strong pharmacoeconomic data going to CMS and saying, look, this is what we can do. Even if we’re not, and I believe we will be as good as healing, just say instead of 42 days we’re 49 days. But if we get a fee schedule of $25, where the skin substitutes, that’s heard in 71, there’s $7000 that can be saved by changing from one of these products to Altrazeal. So our focus has to be on producing the clinical and the pharmacoeconomics that clearly demonstrate how much money CMS can save through giving us a fee schedule.
Jason Napodano - Zacks Investment Research
Got you, okay. In terms of outside the U.S., can you give us an update on the key international markets for Altrazeal growth? I know you mentioned India in your prepared remarks. You’ve been aggressively signing up distributors over the past years. So give us a sense of kind of where most of the action is coming from an international sense and then what particular markets are most exciting in your mind for Altrazeal.
The most exciting markets have to be the UK, Italy, Spain, Germany, to a lesser extent places like Korea, ultimately Japan, but we have made a conscious decision not to divert our resources here at the moment, because there’s a longer timeline getting a Japanese partner, but we get a lot of excitement and in some of the smaller markets in Europe as well, because some of them had outstanding results and have really moved forward very quickly and very positively.
But markets like India, the figures, the numbers are just so staggering and their willingness to commit to quite large minimum orders in contract. I mean we’re also having great success in the eastern block. I mean I’m surprised that it’s so broad and the thing that always amazes me is countries that I never ever thought will ever be able to afford Altrazeal, they are not even blinking. I mean they can see the benefit and they can see.
I recently read a clinical patent that was a summary of some experience in Canada, where in Canada, this area in Niagara, they changed from using gauze to more advanced glue cap and they saved 75%, because of the reduced amount of labor, the accelerated healing and the like. So I think there’s clear understanding globally of the benefits that Altrazeal present.
Jason Napodano - Zacks Investment Research
That’s it, that’s helpful. Let me just ask one question and its on profitability, which you attempted to answer, but I’m going to delve a little deeper. The company, so you burned about $1.7 million in cash in 2013 and that was on revenues of $371,000. Are you open to providing any kind of guidance for 2014, either on the revenue side or on the cash burn side and is there a kind of a date in mind when you think the company could get to cash flow positive operations.
We have said we’d love to be able to do that in the next 180 days. Will we achieve that? I’m not entirely sure at the moment. Again, it gets back to being able to accurately project order flow and production flow. We are not in a position Jason right now to give guidance. I would expect by the end of this year we could when things become more predictable, but obviously I would definitely like to – I believe that we would have a profitable quarter this year. We don’t need enormous revenue to generate that.
Jason Napodano - Zacks Investment Research
Right, yes. Let me just see if I can talk a little bit about the two orders that you couldn’t fill in the fourth quarter and then the one order that I think I guess you said got stuck due to weather. Are you open to giving us a sense of the size of those orders? I mean if you were able to recognize those in the first quarter here or the second quarter, what kind of incremental growth and maybe sequential growth over the fourth quarter are we looking at for maybe the first or second quarter. If you can lets say fulfill all open orders or essentially meet demand.
I’ve stated this publicly before; I didn’t have a problem. For a major market, our minimum order is $80,000. For the smaller markets we do take orders of $40,000 and for very small markets we’ll even be a little more accommodating, but not much more. So any order of any consequence is $80,000. In certain instances our minimum orders are double that. So really our orders vary basically between $40,000 and for larger countries, very large countries $160,000.
Jason Napodano - Zacks Investment Research
Okay, that’s very helpful. Alright, thanks for answering the questions.
The next question comes from the line of (Inaudible). Please proceed.
Hello everybody. I’ll ask three question; two are technical; one is just pretty principal. I would like to refer to a press announcement made in November 2012 concerning he veterinary form of Altrazeal called Derazil. I would like to know more about this and the progress that has been made since.
We can speak very little about that product because our partner has constrained us from too much conversation.
Right. So I take it there is no progress at least financially?
Financially we made a shipment that we reported, I believe it was the end of 2012 and we have not as yet made another shipment.
All right. The second question is purely technical. In your filings you showed two subsidiaries by the name of Cardinia Acquisition Corp. and ULURU Delaware Incorporated. Could you just elaborate on the purpose of these two subsidiaries please?
Yes, certainly. One of them was used to acquire the technologies we currently have in the company and the other one was established to make an acquisition that ultimately we didn’t go forward with.
So I take it these are non-operating subsidiaries?
Well, we do operate. ULURU Delaware and ULURU Nevada are the two principal entities that we operate through, but they are consolidated.
All right. And my last question concerns the manufacturing of the product Altrazeal. I listened to what has been said before and some orders were delayed due to bad weather. Could you possibly explain if it’s possibly who are the manufacturing partners or how many there are? Are they U.S. based and will they be sufficient to fulfill the orders of the future, expecting growing demand for the product.
Very good. Yes, we have three U.S. based manufacturers. Now the powder is manufactured in Lodi in Wisconsin. We then ship that to a company A+ Secure Packaging in Nashville, Tennessee who do the packaging and then its sterilized in New York or there are other locations. They are one of the largest sterilization companies, STERIS.
In terms of capacity, the biggest challenge long term and we’ve already started to address this, is the manufacturing the powder. The powder has to be made through a lye alkalization process and the lye alkalization capacities within the United States for what we do, there’s very few companies that can do that and ultimately we would see the necessity in conjunction with probably the current company establishing a dedicated suite in the lye alkalization unit.
Okay. Are you considering contacting or like contracting more manufacturers if necessary in the future?
Yes. In particular we’re even at the initial stage of evaluating some situations in Europe.
Okay, that’s all from me. Many thanks for the answers.
(Operator Instructions). There are currently no further questions coming from the phone lines.
Well, I thank everyone for their participation. Again, I’d like to express my gratitude to our solid base of long-term investors. I know you’ve been through a great deal and its pleasing to see that your patience is being rewarded and I’d like to also thank the new group of new investors that have joined us and I’m hopeful and optimistic that you will share a very, very exciting ride with us over the next 12 to 18 months. Thank you very much.
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