Pernix Therapeutics Holdings' CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Pernix Therapeutics (PTX)

Pernix Therapeutics Holdings, Inc. (NYSEMKT:PTX)

Q1 2014 Earnings Conference Call

May 12, 2014, 10:00 am EDT


Tracy S. Clifford – Vice President of Accounting and Corporate Controller

Douglas L. Drysdale – Chairman, President and Chief Executive Officer


Louise A. Chen – Guggenheim Securities LLC


Good morning and welcome to the Pernix Therapeutics’ First Quarter 2014 Conference Call. Today’s call is being recorded. All lines have been placed on mute. (Operator Instructions).

At this time, I would like to turn the conference call over to the company’s Principal Accounting Officer, Tracy Clifford. Please go ahead.

Tracy S. Clifford

Thank you and welcome to Pernix Therapeutics' First Quarter 2014 financial results conference call. On the call with me today is 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 March 31, 2014. The release, including the financial tables and reconciliation of non-GAAP financials, is available on the Company's website at 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 quarterly report on Form 10-Q.

The forward-looking statements in this press release are qualified by these risk factors. These are factors that, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results. 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. Doug.

Douglas L. Drysdale

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 launch of our new product, Khedezla, for major depressive disorder. Later in the call, Tracy will provide a more detailed review of our first quarter financial results.

The first quarter 2014, so several actions and reshaping and repositioning Pernix for future growth. Good progress has been made and further actions to reduce our G&A spending run rate and improved margins will continue through at least mid-year, would benefits being realized in the third quarter. In addition, we’re working to drive revenue growth through price increases an improved promotional activity on co-brand.

At the end of April, we’ve re-launched our non-narcotic insomnia product SILENOR and introduced our new product major depressive disorder. Khedezla, the high prescribing psychiatrists and primary care physicians. These launches are important milestones in leveraging greater value from our professional sales team and establishing Pernix in the CNS and psychiatry space.

Over the past three months, the management team has taken several actions including reshaping the company’s Board of Directors, to include new Directors with Pharmaceutical experience that can support management as the company seeks to make new acquisitions. During the quarter the company announced the addition of John Sedor and Tasos Konidaris to its Board. We are pleased to have such season directors on the Pernix team.

In terms of management, we’ve added several new executives including Terry Novak as Chief Operating Officer and Rick Shalaby as Senior VP of Sales and Marketing, as well as filling other key positions in compliance, supply chain and marketing. We entered into an agreement with Cardinal to exclusively manage our distribution and logistics. The company will be closing its distribution centers in Magnolia, Texas and Madison, Mississippi by June 30, 2014, resulting in net cost savings there after.

We completed the sale of our Houston-based manufacturing facility the Woodfield Pharmaceutical, which we expect to provide the company with approximately $5 million in annual operating savings. We have performed detailed lock-in analysis of each of our products branded and generic. And have implemented price increases on several co-products. This will improve the margins on these products for the rest of 2014 as fresh inventory reaches the channel.

We’ve entered into lease agreement for office space to relocate our corporate headquarters from Houston, Texas, to Morristown, New Jersey, an area rich in pharmaceutical talents, providing the company with a sustainable pool of an experienced employees as the company expands its specialty brand offerings.

We launch Khedezla ER Tablets for major depressive disorder at the end of April. Khedezla desvenlafaxine is a bioequivalent version of Pristiq, a product with sales, a product with sales of approximately $700 million in 2013. Pernix’s team of 90 sales professionals is targeting high prescribers of Pristiq, including select psychiatrists and primary care physicians.

We are also implementing our trade and managed care strategies to enter a good challenges distribution and reimbursement coverage. And finally we are excited to be re-launching SILENOR, the company’s non-narcotic insomnia product to high-prescribing psychiatrists and primary care physicians, further leveraging our sales organization within the new specialist community. We now have all 90 sales professionals promoting SILENOR and have engaged a marketing agency to help reengineer our marketing campaign for implementation later in the year.

These actions and many other are the pillars of our base business turn around. We expect strong sales and improved margins in the second half of 2014, supported by recent price increases. Combined with the actions we have taken to reduce our operating costs, Pernix expects to deliver improved margins over 2013. We are making good progress and look forward to sharing more news with you, as the year unfolds.

Over to Tracy now for the first quarter 2014 financial results.

Tracy S. Clifford

Thanks Doug. For the first quarter of 2014, net revenues decreased by approximately 14% to $19.1 million compared to $22.1 million for the first quarter of 2013. Net product revenues consisted 58% revenue contribution from generic products and 42% revenue contribution from branded products in the first quarter. We realized increases and growth sales revenues for CEDAX and SILENOR certain brand and generic products as a result of price increases, partially offset by decreases in revenue from certain legacy cough and cold products were phased out in 2013.

The increase in gross products sales revenue of approximately $2 million was offset by an increase in revenue deductions of approximately $4.4 million and a decrease in other revenues such as manufacturing and co-promotion revenue of approximately $600,000. The increase in gross to net deduction is primarily due to an increase in price adjustments of approximately $4 million, which is attributable to our coupon program.

We changed our coupon programs in January 2014, to increase the “pay no more than” value to the customer and we also added our authorized generics for CEDAX and ZUTRIPRO to the coupon program. This increased our coupon redemption expense significantly on our cough and cold products. We are currently benchmarking our coupon program against our competitors and we’ll be making adjustment this month to our coupon caps to reduce our redemption cost on these products moving forward.

In addition to coupon cost, we also realized increases in our customer admin fees, managed care rebate expense, product returns, and government rebates, all of which were primarily attributed to the product price increases. The increases in these deductions were offset by decreases in customer rebates, charge backs and other discounts as a result of product sales mix.

For the first quarter of 2014, we are reporting a net loss of approximately $9.5 million, or $0.26 per basic and diluted share, compared to net loss of approximately $7.9 million, or $0.23 per basic and diluted share, for the first quarter of 2013. The first quarter of 2014 loss included an impairment charge and a carrying value of our manufacturing facility of approximately $6.5 million.

As Dough previously noted, we closed on the sale of this facility on April 21. We believe that adjusted EBITDA and non-GAAP measure is important in evaluating our financial result. For the three months ended March 31, 2014 adjusted EBITDA was a non-GAAP net loss of $2 million or $0.05 per basic and diluted share. The adjustments between EBITDA and adjusted EBITDA for the three months ended March 31, 2014 included approximately $1.9 million of stock based compensation expense and $1.6 million in the cost of sales related to the increase in the basis of inventory in connection with the acquisition this Cypress, Hawthorn and Somaxon.

For the quarter ended March 31, 2013 adjusted EBITDA was a non-GAAP net loss of $1.4 million or $0.04 per basic and diluted share. The adjustments between EBITDA and adjusted EBITDA for this period included approximately 400,000 in transaction expenses in connection with our acquisition, 700,000 of stock based compensation expense, $3.8 million in amortization of the increase in the basis of inventory related to the acquisition, $2.1 million related to the increase in the value of the put right issues in connection with the Cypress, Hawthorn acquisition partially offset by change in the fair value of contingent consideration in connection with the Cypress, Hawthorn acquisition of approximately 300,000.

Cost of product sales was approximately $10 million for the first quarter of 2014 as compared to $13 million for the same period last year. This resulted in a in a gross margin of 56% for the first quarter of 2014 compared to a gross margin of 57% for the first quarter of 2013. This calculated gross margin for both periods excludes the cost of sales attributed to the sale of acquired inventory for Cypress Hawthorn and Somaxon which has a significantly higher basis than the inventory purchase post-closing.

The remaining increase in the basis of the inventory acquired in connection with Cypress and Hawthorn acquisition is approximately $1.1 million and will be amortized on a pro-rata basis as the acquired inventory continues to be sold and included in cost of sales in those periods. Selling general and administrative expenses in the first quarter of 2014 decreased by approximately $500,000 to $13.6 million, compared to $14.1 million for the first quarter 2013. Overall, compensation expense represented approximately $7.9 million or 58% and $6.8 million or 49% of total SG&A for the respective period.

The increase in overall compensation expense of approximately $1 million is primarily related to the issuance of stock options to members of the new management team and the acceleration divesting of the options issued to our former CEO upon his departure partially offset by a decrease in base compensation as a result of consolidation and integration of certain Cypress positions after the three months ended March 31, 2013.

The increase in overall compensation expense was offset by a decrease in other SG&A expenses of approximately $1.5 million which is primarily a result of the decrease in professional and legal fees of approximately $1.2 million and a decrease in deal expenses of approximately $400 thousand. Depreciation and amortization expense was $2.2 million for the first quarter of 2014, compared to $1.8 million for the prior year period.

The Company recognized an income tax benefit of $5.9 million in the first quarter 2014 compared to an income tax benefit of $3.1 million in the first quarter of 2013. Weighted average common shares outstanding for the quarter ended March 31, 2014 was $37.3 million per basic and diluted share as compared to $35.1 million basic and diluted shares for the same quarter in prior year.

As of March 31, 2014 the company had cash balances of approximately $55.9 million and approximately $5 million outstanding under its credit facility, which was subsequently paid. We currently don’t have any balance drawn under our credit facility.

That concludes my financial review this morning and now I’ll turn the call back over to Doug.

Douglas L. Drysdale

Thank you, Tracy. That will conclude our prepared remarks for this morning and now we’ll ask the operator to please open the line for questions. Thanks.

Question-and-Answer Session


Thank you, sir. (Operator instructions) Our first question comes from Louise Chen of Guggenheim. Your line is now opened.

Louise A. Chen – Guggenheim Securities LLC

Hi, thanks for taking my question, so I just had a few. First, when was the exact timing when the price increases became effective just want make sure we are modeling that going forward and then secondly, your CFO search any update there and then lastly on the gross margin, when should we start to see that improve meaningfully through out 2014? Thanks.

Douglas L. Drysdale

Good morning Lousie thanks for your questions. in terms of timing to price increases, we took the majority of them of them right at the end of 2013 and I think the SILENOR price increases – and Tracy, you can correct me if I’m slightly off on timing. The SILENOR price increases came in the beginning of January – end of January sorry, along with ZUTRIPRO and we initiated a second SILENOR price increase April, I believe, Tracy, March or April. So its all of them were implemented by the end the first quarter with the majority being at the end of 2013.

In terms of the CFO search, its ongoing active and we have had plenty of good candidates, still trying to find the ideal fit and it’s important to have the right chemistry and the right person when you have fairly small management team. So that’s still an active and ongoing search, with lots of good candidates. The gross margins, I think you will gross margins increase from here on in.

I think we will see a good increase in the first quarter if it were not for the coupon issue that Tracy mentioned. And that’s really a one time event that we've now corrected, but price increase are really starting to take effect now as the [discretionary] (ph) inventory comes through the channel and we should see margins improve from here on it. So thanks for your question Lousie.

Tracy S. Clifford

Doug I just wanted to add just a few points for Louise's modeling. On the SILENOR, Louise, we did have an increase effective 11/26 and then we will have another increase in April, effective just at the beginning of April, April 2. And then on CEDAX, our increase went in 10/1 of 2013 and then we had some other increases on some of the products, some of our generic portfolio that went into play in December of 2013 and then a few of our cough and cold products that went in February of 2014. So a little bit varied across the board, but the core products were CEDAX in October of 2013 and the SILENOR as I mentioned in November and then again in April.

Louise A. Chen – Guggenheim Securities LLC

Can you elaborate a little bit more in the magnitude of the price increase, just help us modeling.

Tracy S. Clifford

Yes. One second. So on the CEDAX we actually we took in October, it was actually right at 100% price increase on the WACC there and SILENOR, the November increase was 30% and then the generic price increases were varied across several products that I would say its safe to say that it was between 90% and 100% on some of those lower cost generics and then some of our cough and cold products that was increased November it was a 60% increase there.

Louise A. Chen – Guggenheim Securities LLC

Thank you.

Tracy S. Clifford

And on the point that Dough made on the coupon we've made the changes to hopefully right size those changes we made there, but it will likely take about 30 days for us to be able to see that. Just as that change works its way through the reset in couponing system and all the trials are out there. So we’re hoping that we’ll see the effective change by mid-June.


Thank you. (Operator Instructions) At this time I’m showing no further questions, I would like to turn the call back to management for any further remarks.

Douglas L. Drysdale

So I think that concludes the call for today, as I said during our comments. First quarter is really the beginning of the turn around, we've made some good actions to solidify our base business and we have made it very quickly. We’re starting to see the impacts of those changes now and we've been very active at looking for deals, looking for new products, which we expect to add over the coming months.

So thank for joining the call. Thanks for the questions. And look forward to giving you an update next quarter.


Ladies and gentlemen thank you for participating in today’s conference. This does concludes today’s program, you may all disconnect. Everyone have a wonderful day.

Tracy S. Clifford

Thank you.


You’re welcome.

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