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Columbia Laboratories Inc. (NASDAQ:CBRX)

Q1 2014 Earnings Conference Call

April 29, 2014 8:30 AM ET

Executives

Amy Raskopf – IR

Frank Condella – President and CEO

Jonathan Lloyd Jones – VP, CFO, Treasurer and Secretary

Nikin Patel – CEO, Molecular Profiles Ltd.

Analysts

Raymond Myers – Alere

Jeffrey Link – Invemed

Robin Davison – Edison Group

Operator

Good morning and welcome to Columbia Laboratories First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ms. Amy Raskopf. Please go ahead.

Amy Raskopf

Thanks Patty. Thank you all for joining us this morning for Columbia Laboratories first quarter 2014 earnings call. If you have not already received it, please access the press release issued this morning at www.columbialabs.com, under the Investors tab, you can also access the webcast of this 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, can be identified by such words as expect, can, will, may, anticipate, could, should, intent, 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 today’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, May 06, you’ll find the dial-in information in today’s press release. The archived webcast will be available for 1 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 April 29, 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.

I’m joined today by Columbia’s President and CEO, Frank Condella; Jonathan Lloyd Jones, CFO; and Nikin Patel, CEO of Molecular Profiles.

With that, I’ll turn the call over to Frank Condella.

Frank Condella

Thanks Amy and good morning everyone. This morning Columbia reported strong revenue growth for the first quarter of 2014 compared with the same period a year ago, thanks to the addition of our services business which offset and expected temporary decline in product revenues.

Our diversified revenue stream is one of the many benefits of our recent acquisition on molecular profiles. I’ll discuss our first quarter business highlights and growth strategy after Jonathan reviews the financial results in more detail. Jonathan?

Jonathan Lloyd Jones

Thank you, Frank. Good morning everyone. Total revenues for the first quarter of 2014 were $7.2 million up 15% over the prior year quarter. This includes product revenues of $3.5 million, service revenues of $2.7 million, and $1.1 million in royalties. A $1.9 million decrease in product revenues primarily reflects the absence of CRINONE order from one of Merck Serono’s higher volume, higher margin markets during the first quarter of 2014 as it undergoes a routine license renewal process. During which process the product cannot be imported without special agreement. We call it Merck Serono increased product shipments during the first three quarter of 2013 for this market in order to meet anticipated inventory requirements during this license renewal period.

Royalty revenues increased by $200,000 due to higher net sales of CRINONE by Actavis. Service revenues were $2.7 million for the first quarter of 2014 stemming from our acquisition of molecular profiles in September last year. Gross profit decreased by $500,000 to $3.5 million or 41% of total revenues. The decline over the prior year quarter which driven by the absence of sales to Merck Serono for the higher volume, higher margin markets and the impact of the new tiered pricing provisions of the renewed Merck Serono’s agreement which took effect in January of this year.

Operating expenses increased by $400,000 as compared to the first quarter of 2013, but as a percentage of sales with the same year-on-year. Net income was $400,000 or 1% per diluted share compared to net income of $1.2 million or $0.09 per diluted share for the first quarter of 2013.

We reported non-GAAP adjusted EBITDA of $800,000 versus $1.9 million in the prior year. Before non-GAAP adjusted EBITDA reconciliation is on the last page of the press release. We expected underlying in-market global sales of CRINONE will continue to increase throughout 2014 and beyond driven by Merck Serono’s continued promotion in merchant markets and entry into new markets.

Our revenue from Merck Serono will continue to fluctuate due to cause to the timing of product shipments. Regarding the product license renewal, while we have not expected any shipments in this market in the first half of 2014, Merck Serono recently placed such an order which will ship in the second and third quarter of 2014. This order is to replenish inventory, the one-time exemption during the license renewal process.

Based on our current market conditions, based upon the current market conditions and visibility, we expect the total revenues for the fiscal 2014 will increase between 8% and 12% of the total revenues in 2013. And we expect to remain cash flow positive from operations going forward.

For further details on our financial results, please look today’s press release which is available on our website columbialabs.com. We will be filing our 10-Q on May the 1st.

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

Frank Condella

Thanks, Jonathan. We had a very productive first quarter adversely completed the commercial and intellectual property assessment, COL 1077 our extended-release lidocaine vaginal gel and have moved into diligence on the clinical and regulatory pathway for this product candidate.

Pending in successful outcome of these two areas, we expect to advance in the full development with a target indication of prevention of pain related to gynecological procedures. There are no products approved for this indication and we believe that to be a sizeable market opportunity.

Second, we made significant investments in enabling technologies and appointed a head of U.S. sales to drive growth in our services business. Third, we completed the transfer of operation and responsibility for CRINONE to our Nottingham UK site to realize cost synergies and improve customer service to Merck Serono.

Fourth, we acquired all the outstanding shares held by Actavis at a 10.75% discount, to market price at that time. This was a one-time opportunity to buy back shares in a private transaction.

And finally, we continue to refresh our Board the new skills with the appointment of Don Hunter, as we noticed – as we noted the resignation of Fred Wilkinson and decision of Ed Blechschmidt not to stand for reelection. We are grateful to Ed and Fred for the long service to the company and wish them well in their future endeavors.

Over the past eight months, we have fully integrated the operations of molecular profiles in Columbia Laboratories and while we continue to operate under both brands, we are functioning as one company. Our strategy moving forward is quite straightforward. We will grow our pharmaceutical development services, while supporting CRINONE revenue growth and build and in-house proprietary product pipeline, while maintaining positive cash flow from operations.

This hybrid business model is somewhat unique in today’s market, but there are examples of other companies that pursued similar strategy successfully. I would like Nikin Patel to expand a bit on each component of our strategy. Nikin?

Nikin Patel

Thanks Frank and good morning everyone. The first leg of our strategy is to grow our pharmaceutical development services. There is increasing market demand from pharmaceutical companies for outsource formation developments and clinical trial manufacturing.

We have a high quality, potentially innovative team that we believe going to effectively compete in this area. We recently completed investments in new enabling technologies to expand our capabilities switching to the decision of GMP hot melt extrusion equipment which at the basic lab will provide roots to improve bioavailability with poorly soluble growth compounds.

We expect high prevalence in poorly soluble drug candidates in development there is a growing need to use these technologies, a well-known product example using hot melt extrusion is [indiscernible] colorectal polyps. The investments in these new enabling technologies combined with our expertise in our high-end analytic characterization, really does delineate us from those other technology companies that are more platform based.

Now we also created a head of U.S. sales position to increase visibility for our service offering in the U.S. and drive domestic growth. To run this new role, we hired Charles Maher, whose extensive senior commercial experience in global contract services market should benefit our efforts to capitalize on our newly expanded Nottingham facility, manufacturing capabilities and growing suite of enabling technologies.

The second leg of our strategy is to support CRINONE growth by our partner Merck Serono. In-markets growth outside the U.S. remains strong and we believe our long-term revenue stream is very solid. We expect Merck Serono will continue to build the franchise through continued promotion as part of their facility products offering. We will support them by maintaining superior service levels and regulatory support, especially for entries into new major markets.

Our third leg of the strategy is to build an in-house product portfolio to make this a reality, we planned to leverage the unique capabilities of our team in Nottingham and focus on the new therapeutic entity using an bloviated regulatory pathway.

While we have a number of projects under consideration our efforts this year have focused on COL 1077 and extended-release lidocaine vaginal gel, which we are developing for gynecological procedure related pain. This is a sizeable market opportunity with no approved products and ineffective pain management options.

We have completed our commercial and intellectual property assessment, clinical and regulatory planning is underway and we aim to move this project into the full development later this year. Our disciplined approach will be to develop each project in-house through proof-of-concept and then partner it for later stage developments and commercialization.

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

Frank Condella

Thanks Nikin. We planned to continue to pursue our three legged strategy while maintaining positive cash flow from operations. In order to do this, we have to place our product development efforts to our cash generation from services and product revenues. We are confident that our strategy will capitalize on our assets and build shareholder value. We look forward to updating you further as we progress throughout this financial year.

With that operator, please open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Raymond Myers of Alere. Please go ahead.

Raymond Myers – Alere

Thank you and good morning.

Frank Condella

Good morning Ray, how are you?

Raymond Myers – Alere

Doing well, thank you. Could you partly describe more detail about the progress you made in the lidocaine gel product candidate, during the quarter and provide some more detail about how much more work there is to take this into the clinical and what risk is involved there?

Jonathan Lloyd Jones

Well Ray, I don’t want to build too far offerings what we said in the press release, we will update the market as we progress. All I would say is that this product had been developed previously for a different indication and so we’ve got quite a bit of good safety data and formulation data on this product. Now it’s been a few years, but I think that moving this product ahead at this time is very timely, there is a market interest in it. And we think if we can confirm our regulatory and clinical pathway that we believe exist, once we’ve done that then we can give a lot more detail about the timing and what needs to be done to get it approved.

Raymond Myers – Alere

Okay great. And you expected to confirm that regulatory pathway this year, is that a near-term in the next several months objective or more toward the end of the year?

Jonathan Lloyd Jones

As I said we expect to move the product into full development which means that we would be able to tell you exactly what the clinical and regulatory pathway is with specific timelines and milestones by before the end of the year.

Raymond Myers – Alere

Okay, great. And is it possible to give us a sense of the addressable market for this application?

Frank Condella

Well, I would say that the target indication is for pain-related gynecological procedures and these include things like endometrial biopsy, [indiscernible] IUD placements and removals, hysteroscopy and those type of procedures. We don’t have the most recent data on this, but I think that there is probably over 2.5 million of these procedures in the U.S. every year.

Raymond Myers – Alere

So it’s a fairly sizeable opportunity?

Frank Condella

Yes, we do believe so, yes.

Raymond Myers – Alere

Great. Regarding the CRINONE inventory adjustments and the related shipments. Can you provide more detail about what is happening there specifically it sounds like you would be normalizing shipments again in Q2 and Q3, can you explain why this is temporary and maybe will be back to or explain what will happen in Q4?

Frank Condella

Yeah, so Ray, this market that they are undergoing a routine license renewal and doesn’t allow importation of the product during the renewal period except under exception. And so, Merck Serono built up a significant amount of inventory in during the first three quarters of 2013 for this market and that helped drive our product sales numbers in 2013, even though we had no sales in that market in the fourth quarter. We say no sales in that market in the first quarter and they have now placed an order under a one-time exception through the regulatory process that allow importation whilst the renewal process is ongoing. That order will ship over the course of June and July, so the orders between second and third quarters.

We don’t have visibility yet orders for sure in the fourth quarter, they could happen but, we expect that its more likely that its currently that they will get back to in more routine orders beginning next fiscal year. But again that’s subject to change. Our visibility right now is tenanted going out, all I can say is that the IMS data for this market is very strong underlying in-market sales are very good. We expect that it will back to normal after the renewal process is completed, but that’s about as much as I can say at this point.

Raymond Myers – Alere

Its clarified Frank, has been, has there been a delay in the renewal process, as somehow expected event happened or is it just still the standard procedure?

Frank Condella

We don’t have a lot of clarity with that, they haven’t raised any red flags and there is a -that the renewal is going to happen, I don’t think that they would be, I think it’s encouraging as they need to ship product into the market, but I think they have to open up windows at certain times. Like any regulatory procedures sometimes there can be delays, but they don’t necessarily signal fatal issues and that we’ve had no indication from our partner that would be the case. But, right now we do have orders a little bit sooner than we had expected, we didn’t expect them to start shipping for the second half of this year. But we don’t have clarity or visibility of their in-market inventory levels. So I can’t give you any more information than that.

Raymond Myers – Alere

Okay that helps. I’ll get back into queue and see if there is any other questioners. Thank you.

Frank Condella

Okay thanks.

Operator

And our next question comes from Jeffrey Link of Invemed. Please go ahead.

Jeffrey Link – Invemed

Good morning.

Frank Condella

Hi, Jeff.

Jeffrey Link – Invemed

Couple of questions, one just on the higher royalty sales from CRINONE, I don’t know if that was a surprise or not, but I’m curious do you have any feel to whether you think it’s because of fertility or preterm birth that we’re seeing some strength there from Actavis?

Frank Condella

Jeff, we haven’t been able to, in all the ways that we tried to figure out how much CRINONE sales are being generated by off-label use for prevention preterm birth or how much is being used for the fertility market. We do track IMS data and we saw through that the women’s health market is increasing slowly and CRINONE sales is sort of flattened in terms of prescription data, but on the other hand that could be due to the fact that they launched a new dose into form in January and IMS isn’t picking it up yet.

I do a regular dialogue with Actavis and they seem to think that, their projection for increasing sales this year is still valid. So I guess this underlying growth, I have no way to tell what that’s based on in terms of its usage for different fertility indications or whether its usage for off-label.

Jeffrey Link – Invemed

And also, I had read that the gross margin had been impacted by the new tiered pricing from Merck Serono what is changed now that part of that has impacted gross margin?

Frank Condella

While we’ve given volume discounts in the past and when we announce that we were extending the agreement out to 2020, we said that we were going to be giving tiered volume discounts moving forward to encourage them to move the product ahead in for new markets and that’s working. We felt more of the impact, I think going from year-to-year because, last year we had a lot of sales to a high margin, high volume market as we’ve talked about. We’re not having any of those sales in the first quarter and you have -your base is still cost plus 20%, but those countries that are net minus have a higher discount and that’s the impact. And without the highest margin, highest volume product and there you are seeing it more in the first quarter. We’ll see how it plays out throughout the year, but we do expect it overall, our margins will slightly decrease for CRINONE moving forward and we get expected that, because we did it to encourage volume growth which we expect to see over the next few years.

Jeffrey Link – Invemed

Okay. And on just lidocaine front, I am not, I don’t have an expertise in healthcare, but given the fact that you already have some safety data from I guess some clinical work you had before, can you just explain what the 505 (b)(2) entails in terms of what is the number of either patients you need for trial or how long it typically would take to get that phase completed?

Frank Condella

Well, again, I don’t want to get into a lot of details, because we until we meet with the FDA we’re not going to be know for sure what the requirements are whether we could get by with the one study or two studies. I will say it this is in the queue indication so really talking about, a short pre-treatment dosing, so it’s not like the patients have to be treated for several months and so I think that the clinical trials could be quite short. But then again we won’t know for sure until we speak to the FDA.

Jeffrey Link – Invemed

I mean I will say I’m extremely encouraged by this, I had spoken to a friend of mine who is a gynecologist and he is in complete agreement with what you said there is nothing out there right now. So, my sense is that once this would have introduced you will see immediate business?

Frank Condella

Well, we’ll be updating you as things progress, I want to -you know that, we are doing work on it right now and we will continue to.

Jeffrey Link – Invemed

On the molecular profiles front, I saw the revenue, I guess did slightly sequentially, I think it was about $3 million in the fourth quarter, $2.7 million in this quarter and I realize, there is some lumpiness to the business, but is there any sense that you can provide to us on just the pipeline?

Frank Condella

Nikin, do you want to take that question.

Nikin Patel

Sure. You are right, we had strong fourth quarter for 2103, and quarter one this year is as far as I’m concerned good. So we’re focusing year-on-year in terms of increasing revenue growth, so the quarter one for example this year is up 30% compared to quarter one of last year. And so I may name is just really focusing on year-on-year growth which is what we’re achieving, but as with any service organization you’re right there is going to be a degree of fluctuation in our revenues, it’s just the nature of the industry.

Jeffrey Link – Invemed

Nikin may be you can just comment since you’ve now brought on somebody from into the United States. What is typically the lead time that’s required from somebody starting from the point zero to begin into try and see if you can actually develop leads that turn into business?

Nikin Patel

That’s a good question. Now we are hoping that the lead time would be relatively short, one in this we brought on a very experienced commercial person into the organization with a very good track record. So combining that with our knowledge and contacts within the U.S. we’re working together with Charles, won’t be a isolated person in the U.S., he will be working with our business development team here in the U.S. as well working with us with our already good links or some good links within the U.S. all that looking to improve those our visibility in the U.S. So I’m hoping that within less than I would say six months we would hope that Charles would be fully up in running.

Jeffrey Link – Invemed

Okay, and then my final question on the, I guess the China market, the fact that Merck Serono came in for this one time exception, I would expect is a very positive note since they were planning for the fact that they weren’t going to be able to do that. Frank if you take a look now to more normalized type revenues with China once this regulatory process ends. What kind of revenue growth do you think we can expect, we’ve talked about double digit in the past, but double digit could be anywhere from 10% growth to 50%. What type of growth are you thinking we can do in that in the Chinese market?

Frank Condella

Well, Jeff we haven’t identified the market that we talked about, but if you assume that China could be one of the large markets, all we can do is and troll by what we’ve seen in IMS which is substantial. But its IMS is not necessarily super accurate in some of these emerging markets. We’ve waiting to get a better view from the Merck Serono marketing team, but unfortunately they just changed over at the beginning of this year. And we haven’t had to chance to meet with them to get their views on that.

But, if you the product was only launched in this market back and I think that two years and so it’s been on feed growth term from there, we don’t know what their expectations are moving forward. But, like I said the IMS data is very encouraging. We don’t know what the normalized shipments are going to be for CRINONE. But I think that our best guess this is that we’re going to continue to see double digit growth on a normalized basis.

Jeffrey Link – Invemed

Okay, thank you.

Operator

(Operator Instructions). And our next question comes from Robin Davison of Edison Group. Please go ahead.

Robin Davison – Edison Group

Hi Frank, I just wanted to ask and I appreciate this was covered a little bit in the last couple of questions, about the development services business. Is there any way you can describe to us, the volume of business that is going on there and how that is developing at the moment. I mean do you have sort of like you measure, the volume of inbounding queries number of sort of feasibility projects that you are working on one-time and, you sort of think of increasing from quarter-to-quarter?

Frank Condella

Well I don’t think we disclose the actual number of contracts, one of the things that we’re continuing to do is, is to move up in terms of size of contracts. So, we don’t have a meaningful year-on-year number right now. We’ve had -we got a large number of clients, the number of clients that are in the queue is increasing, because of our enabling technologies we’re looking at. New contracts from new customers and they range from big product to small to mid size. We’re seeing -that we’re bidding for larger contracts, so if we get more larger contracts that will continue to drive our business and that’s our strategy. But we don’t have any real metrics that we’re making public at this time. I can’t give you a specific and Nikin I don’t know if you want to give any more color around it.

Nikin Patel

I mean yes, we do track the various sales stages within the cycle, so looking at potential leads through to opportunities through to orders won to orders lost as well. So, these are metrics that we track in terms, but it’s not something that we’re disclosing.

Robin Davison – Edison Group

Right, okay. Just another point, really I mean on the sort of the longer term development of the proprietary pipeline using the sort of technologies you’ve got. I kind of want to -is it still those are paper exercises maybe sort of identified opportunities or you are actually doing, any sort of pre-clinical work or anything like that?

Frank Condella

Well our strategy is to take known molecules into a novel formulation and, a novel therapeutic indication, building of to a safety that already exists and taking them forward for an unmet clinical need. I think it’s in the U.S. it’s called the 505 (b)(2) approach or 505 (b)(1), but in Europe it can vary. But, we’re not looking to get into new chemical entities, we do that for our customers obviously, but we’re not at this time we’re not looking to do that.

Robin Davison – Edison Group

I think, new therapeutic entities obviously, looking at existing entities, are you just at this identifying the opportunities to develop programs or do you actually have programs effectively underway at this point?

Frank Condella

Well the only program that we really have advancing that’s worth talking about at this point is the lidocaine program, but there are other projects they are under consideration. If we, the first stage is to do commercial and intellectual property due diligence on these opportunities and once we’ve done that, as we’ve done with lidocaine, we would move ahead and if we move ahead of that point then we would update the market. But we are screening a number of opportunities at this time.

Robin Davison – Edison Group

Great, excellent this is what I want. Thank you very much Frank.

Frank Condella

I mean I just would like to emphasize as I said, our strategy is to -is to fund these opportunities currently through our cash flow. So we’re not looking for external funding or using our cash balance necessarily to fund these projects. So that is – it’s important that you always stand that we’re pacing our development for this. In sure to our strategy changes in that front and we would obviously update the market on that.

Robin Davison – Edison Group

Thanks.

Frank Condella

Thank you.

Operator

And our next question is a follow-up from Raymond Myers of Alere. Please go ahead.

Raymond Myers – Alere

Yes, thank you. Frank, I wonder if you could give us an update of new potential CRINONE geographic distribution worldwide.

Frank Condella

Ray, the only two major markets were its not really approved right now, is France a couple of Eastern European countries and Japan. I mean France and Japan are probably the most significant opportunities and work on those are underway and there are some other smaller European countries that are under future development as well. So by the way it’s sold everywhere in the world.

Raymond Myers – Alere

Roughly how long will it take you to get distribution in France or Japan?

Frank Condella

I think it’s really hard to predict regulatory processes, as we see sometimes they mark their own jumper, but I would expect to both those would come online in the next couple of years.

Raymond Myers – Alere

Okay great. And then my final question was – when does the $400,000 savings from bringing quality management to Nottingham occur?

Frank Condella

Well we should see it really hitting portion of it this year and then moving into next year. I mean all the changes are in place, so that we should realize that. You won’t see it, the place that you’ll probably see that mostly raise in the cost of goods of CRINONE, so it’s – it may not be people are looking forward on the G&A line or something like that it’s going to be, you’re not necessarily going to see it there.

Raymond Myers – Alere

Okay. If it’s March it’s great.

Frank Condella

Thank you. Thanks Ray. Operator, I think I’ll turn it back to you. Are you presenting any questions.

Operator

I show no other questions. That conclude the question-and-answer session, and I’d like to turn it back over to Mr. Frank Condella for any closing remarks.

Frank Condella

Okay. Well, I’d just like to thank everybody for participating in today’s call. And I wish you a good day. Thanks.

Operator

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

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