Pernix Therapeutics Holdings (PTX) CEO Doug Drysdale on Q2 2014 Results - Earnings Call Transcript

| About: Pernix Therapeutics (PTX)

Pernix Therapeutics Holdings, Inc. (NYSEMKT:PTX)

Q2 2014 Results Conference Call

August 11, 2014; 10:00 a.m. ET


Doug Drysdale - Chairman, President & Chief Executive Officer

Sanjay Patel - Chief Financial Officer

Tracy Clifford - Corporate Secretary


Louise Chen - Guggenheim Partners

Elliot Wilbur - Needham & Company

Michael Higgins - Highline Research Advisors


Good morning and welcome to the Pernix Therapeutics, Second 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 Corporate Secretary, Tracy Clifford. Please go ahead.

Tracy Clifford

Thank you and welcome to Pernix Therapeutics, second quarter 2014 financial results conference call. On the call with me today is Doug Drysdale, Chairman, President and CEO and Sanjay Patel, Chief Financial Officer.

Before we begin, I would like to point out that Pernix has issued a press release this morning containing financial results for the quarter ended June 30, 2014. The release, including the financial tables and reconciliation of non-GAAP financial results is available on the company's website at The company also expects to file its current report on Form 10-Q 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’d like to turn the call over to Doug Drysdale to begin our discussion of Pernix’s quarterly performance. Doug.

Doug Drysdale

Thank you Tracy. Good morning everyone and welcome to this morning’s call. I’ll be providing an update on our business activities and progress since the close of the first quarter. Sanjay will then provide a more detailed description of our second quarter financial results.

As you have seen in the press release that we distributed on Monday, August 4, the closing of our transaction to acquire the U.S rights to Treximet has been delayed due to a short-term supply constraint for the product. We remain committed to closing the transaction and are working collaboratively with GSK to ensure sufficient supply to meet anticipated demand.

During the last week we and our lenders have been performing additional due diligence related to this supply constraint and are optimistic about our ability to close the acquisition of Treximet in the near term. We do not see any material change in the fundamental value of the asset to Pernix at this time and look forward to adding Treximet to our CNS portfolio.

Now, to a discussion of our base business. The second quarter of 2014 saw a tremendous progress towards Pernix’s transformation to profitability. While we expect full year 2014 sales from our non-promoted products to be relatively flat year-over-year, we expect our insomnia brand, Silenor, to be a key growth driver.

Silenor weekly prescriptions have increased 18% since we began promoting the product with our original 87 person sales team back in May, just 12 weeks ago, and we have achieved a 52-week high in prescriptions in four out of the last six weeks. We have just begun to roll out our revised Silenor promotional campaign and are optimistic about the impact that this will have on the Silenor growth

In addition, we have recently expanded our sales organization to 100 sales territories, including the addition of 25 new geographies where Pernix was previously absent. This expansion and realignment, which will be fully implemented on August 25, results in our sales team covering 97% of our business geographically versus 64% previously. This provides significant upside potential for Silenor and ensures that we are well positioned for the near term addition of Treximet to our CNS portfolio.

Supplemental to our promotional efforts, activities focused on managed care access have resulted in an additional 58 million lives that now have coverage for Silenor. The majority of insomnia patients have problems staying a sleep, not falling asleep and Silenor is the only non-scheduled prescription medication to maintain patients sleep. Additionally with the issues frequently reported with the other prescription sleep agents, Silenor is well positioned to achieve and exceed our 2014 goals.

Pernix has added significant experience and talent to our executive leadership team in the areas of Marketing, Legal, Regulatory Affairs, Supply Chain, Sales Operations and Trade Operations. The new and expanded management team have been working to rapidly evaluate and improve the majority of the company’s key operating systems and processes, positioning us for continued growth.

Areas of improvement include: A redesigned sales operations system, including such components as an updated Incentive Compensation plan for the sales team; key performance indicator tracking around specific objectives; and a state of the art automated territory mapping and planning system for the sales team that will go live next week.

We have also implementation new government pricing software to improve efficiencies and provide robust calculation documentation in this area. Additionally we have also put in place a formal sales and operations planning process to manage Pernix’s CMO relationships and ensure our supply chain is optimized.

Finally, Pernix announced last month the appointment of Sanjay Patel as Chief Financial Officer. Sanjay was previously an investment banker at Cantor Fitzgerald and brings to Pernix over 15 years of investment banking, institutional investment and public policy experience. Sanjay has assisted specialty pharmaceutical and healthcare companies raise more than $7 billion in initial public offerings and follow-on offerings, net offerings and private placements. Sanjay will be instrumental in our efforts to close and finance current and future acquisitions and in managing our capital structure.

I would now like to hand the call over to Sanjay for the second quarter financial results, as well as formally welcome Sanjay to the Pernix team.

Sanjay Patel

Thank you Dough and good morning. As you will see in this morning’s release, net sales this quarter were $17.4 million compared to $20.6 million for the second quarter of 2013. Net sales from branded products, including sales to other channels such as authorized generics were approximately 65% of total, and net sales from generic products made up the balance.

As Doug mentioned, we experienced significant growth for Silenor this quarter. This growth was offset by reductions in other areas such as the sale of certain Cypress generic products to Breckenridge in September 2013; the termination of our co-promotion agreement for Natroba; the discontinuation of certain generic, cough and cold products; and the increase in government rebates on certain of our products.

Our gross profit margin for the second quarter of 2014 was 50% of net sales, compared to 46% of net sales for the same quarter last year. On an adjusted basis, excluding the impact of the stepped up basis of acquired inventory for Cypress Hawthorn and Somaxon, our gross profit margin was 54% of net sales for the second quarter, compared to 50% for the same quarter last year.

Total operating expenses this quarter were $16.4 million compared to $17.2 million for the same quarter last year. Second quarter operating expense included SG&A expense of $13.7 million and approximately $2.0 million of depreciation and amortization expense.

On a GAAP basis, net loss for the quarter of 2014 was $6.2 million or $0.16 per share, compared to a net loss of $5.7 million or $0.15 per share for the same quarter last year. Consistent with prior quarters we are reporting adjusted operating results, which are non-GAAP measures that we believe are important for evaluating our financial results.

This quarter our adjusted EBITDA was negative $4.0 million and our adjusted non-GAAP net loss was $0.10 per share. The add backs used in computing our adjusted figures include $700,000 of stock based compensation expenses, $1.3 million from the cancellation of ParaPRO stock options, $800,000 from inventory revaluations related to the acquisition of Cypress Hawthorn and Somaxon, $200,000 related to a loss in the sale of PLM, $500,000 in field related expenses and $800,000 of non-recurring severance costs.

For the six-month period ended June 30, 2014 net sales were $36.4 million compared with net sales of $42.7 million for the same period last year. Gross profit margin this period was 49% of net sales, up from 43% from the prior period.

On an adjusted basis, excluding the impact of the stepped up basis of acquired inventory for Cypress Hawthorn and Somaxon, our gross profit margin was 55% of net sales this period, compared to 54% for the same period last year.

On a GAAP basis, net loss was $15.8 million or $0.42 per share this period, compared to a net loss of $13.6 million or $0.38 per share for the same period last year. Adjusted EBITDA for the first half of 2014 was negative $5.9 million and our adjusted non-GAAP net loss was $0.16 per share. As of June 30, 2014 we had cash on hand of $60.8 million with $65 million outstanding in senior convertible notes and $13.1 million drawn under our revolving credit facility.

This concludes my prepared remarks. I will now turn the call back over to Doug.

Douglas Drysdale

Thank you Sanjay. As expected, while our base portfolio contains a meaningful number of cough and cold products, we will continue to see seasonality impact sales in the middle two quarters of the year. However as we progress through the second half of 2014, we are already seeing the impact of our intensified promotional efforts behind Silenor and the price increases taken earlier in the year.

We expect to see strong sales in the second half as the cough and cold season begins and as Silenor volumes continue to grow. Additionally, our net sales margins are expect to improve as we implement efforts to increase our gross and net sale drop through and as patients meet the limits of their prescription plan deductibles, which reduces our co-pay assistance cost.

Combined with the actions we have taken to reduce our operating cost, we expect to deliver improved margins over 2013. We are making significant progress and I look forward to sharing more news with you as the year unfolds.

That will conclude our prepared remarks. And I will now ask the operator to please open the line for questions. Thank you.

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from Louise Chen from Guggenheim. Your line is now open. Please go ahead.

Louise Chen - Guggenheim Partners

Hi, thanks for taking my question, I have a few. So first question I had was if you could give us a sense now under the new management team, where is Pernix today and where do you want to take the company over the three to five years.

And second question I had was the Treximet deal close. Are you expecting it will still close sometime in August or what are the swing factors here. And then last question I had was just on gross margin. How we should we think about gross margins for ’14 and then beyond if you are expansion and what will be driving that? Thank you.

Sanjay Patel

Hi, good morning Louise. Thanks for your question; I appreciate it. Okay, so let me start maybe by talking about Treximet. I think that’s probably a question that’s on many people’s minds. We unfortunately had a delay in closing of Treximet last week, caused by a batch failure and also which was combined by a low inventory situation.

So it was just a cosmetic issue with the product that occurred in coating, not anything that affected the integrity of the product. But the combination of the batch failure and the low inventory situation results we think in a potential outage of the product between maybe a couple of days and a week towards the end of the August. So this is something we had to disclose to our lenders at the end of last week. So this is an unfortunate timing.

Last week though a replacement batch was manufactured over the weekend. We learnt that it appears to have passed the coating process properly as we fully expected and we expect it to move through the QC release process and be fully released by the end of this week.

So I think this situation is being rectified in our minds and we’ll get that confirmed with the QC release and then once we have that data point, we can close out on our due-diligence with our lender and move to closing. So to answer your question, yes, we fully expect at this point to close the transaction by the end of the month.

In terms of gross margins, Louise we are working constantly to improve our top-line and our bottom-line. From the sales point of view we see continued growth with Silenor, from promotion and from price increases earlier in the year, through the addition of Treximet and through further acquisitions and we’ve been working on several.

We are constantly working to improve our gross to net drop through by negotiating fees that we pay and managing our terms very closely. We are working on gross margins by increasing the percentage of our business that comes from brands rather than generics and we are already making progress in that area. And we are (Inaudible) our EBITDA margins through the overall leverage of our sales platform and adding products like Treximet helps us tremendously as we are able to do so without any real significant expansion in infrastructure.

In terms of guidance there Louise, we’ll be updating our guidance once we close the Treximet transaction. I think that’s the correct point in which to give some further outlook, given that that situation is still pending.

In terms of where we are taking the company overall, I think we stated this in the past, but we’ve made this shift already I think since we came in February. We made a shift away from begin a kind of mishmash of products in various segments to really very much focusing the company towards specialty audiences, primarily in CNS and psychiatry.

The addition of Treximet really helps us leverage our sales team and this recent expansion is exciting. We’ve expanded the sales team by about 15% in terms of the number of territories, but we are increasing our coverage of our sales geographically by over 50%, so its really good leverage of that platform and we expect to see far increased sales per representative as we close Treximet and continue to grow Silenor.

So the plan is to keep adding specialty brands and with the focus on CNS and psychiatry, but we are also looking at other therapy areas as well where we can leverage a good strong sales platform to smaller specialty audiences. I hope that answers your questions.

Louise Chen - Guggenheim Partners

Yes. Thank you.


Thank you. And our next question comes from Elliot Wilbur from Needham & Company. Your line is now open. Please go ahead.

Elliot Wilbur - Needham & Company

Thanks. Good morning. I just want to ask a quick follow up question around your commentary around the Treximet deal. Doug, specifically is the ball really in the court of GlaxoSmithKline in terms of the key deliverables; meaning that once the QA, QC aspects of this latest production batch have been signed off, then that’s essentially what’s necessary to close the transaction or are we looking at addition diligence of the part of a company and the lenders, something that could potentially drag on for a bit here in the back half of the current month.

Doug Drysdale

I think the gating point Elliot and thanks for your question. The gating point has really become I think initially this batch across. Of course batch failings are fairly common in pharmaceutical production. This is not something that’s particularly unusual. It was just unfortunate timing, and then it came right on the eve of funding the deal, which we had fully funded and ready to go.

So it was poor timing really, but you can understand that in that situation when something happens it was unexpected. That the company and its lenders wants to complete diligent. So that’s really where we are, waiting for this batch to be fully released from QC. We closed out our due diligence and then we had to close the transaction. But the guidance I think we just gave around the end of August sounds I think reasonable and realistic to us.

Elliot Wilbur - Needham & Company

Okay, and next question is, and I think certainly, probably even more important around Treximet and the company’s strategy going forward. Obviously the markets confidence in the company’s and any company’s ability really to kind of re-price product assets has been shaken by some recent high profile moves amongst some of the larger PBMs and obviously they involve a very small number of products.

But Express Scripts in particular has targeted the Triptan category and I guess in light of some of these moves are you looking at the value proposition of Treximet any different today than at the time that you announced the acquisitions, and you still believe that there is the potential to close the value gap with other branded Triptan’s that you had talked about at the time of announcing the deal?

Doug Drysdale

Yes, a good question. I think that this question around the PBMs and price action, etcetera is on lot of people’s minds as well. When we look at what’s happened over recent weeks, these actions are not really a lot surprised. I think these organizations have been expressing their concern about price increases for sometime. That said, the exclusions seems to affect a very small number of products out of several thousand pharmaceutical products and that we’re still seeing several hundred price increases over 100% in the last several years.

That said though, we’ve been very proactive with our PBM and our Managed Care customers and we’ve been talking to them well in advance. We are taking a multi year collaborative approach with these customers. We’ve listened to them and we understand that their main concerns for their business are around stability and predictability.

What they don’t like is multiple price increases, sequential price increases, all close together. It makes their business quite unpredictable and as you can imagine that’s hard for them to manage and I think that’s led to some exclusions.

We do think these discussions that we’re having with our major PBMs will still enable us to implement our price increases and be very competitive and along the same order of magnitude as we’ve expected previously for Treximet. And what we are doing at the same time is working collaboratively with these customers who offer them some level of price protection going forward for some period of time, so that they have that ongoing stability and predictability.

And as far as the exclusions are concerned, they appear to be complete with those customers you mentioned. Caremark, ESI and just a bit of background that ESI and Treximet is in a separate category for Triptan, so treated somewhat differently and I think that’s appropriate given the different levels, the superior level of the accuracy that the brand has and I think these exclusions of the Triptans (inaudible) and prova. I guess I can see the justification of that. I don’t know the rational for excluding those, by I imagine its somewhat – its difficult to differentiate follow-on Triptan’s like that.

What we’re seeing with Treximet is that in general PBMs are not really focused on this category and what they are reluctant to do, but given the debilitating nature of migraine, they are reluctant to exclude products that show superior efficacy and Treximet shows not only superior efficacy to Triptans, but also is a solid oral choice of something that provides more efficacy, but without moving to something more evasive such as injectable sumatriptan or DAG. So we think there’s a good clinical rational and a good economic rational for the Treximet continuing to be covered and this was our assumptions around pricing and the growth had not changed.

Elliot Wilbur - Needham & Company

Doug, can you maybe just sort of take that question and we can just maybe translate into sort of a bigger picture outlook in terms of the deal environment in general.

Are you starting to maybe look at assets a little bit differently in terms of maybe there is been an inflection point in terms of the pricing trends that we've seen in the past couple of years or do you still think in the bottom line is it funding the right product and it's significantly undervalued. You can still re-price it along the lines that we've seen some companies do in the past couple of years?

Doug Drysdale

I think it does maybe bring in the question of price increases on some products. I think some of these exclusions to meet new products indicate that if your in those kind of categories, I mean not those kind of brands that are taking price increases and making it a little more challenging. But, I do still think that is an opportunity to continue to price products competitively.

But I do want to stress that our business model is not just about price. I mean we will leverage price as far as we can and I think that’s the right thing to do to give a good return to our shareholders, but we’re also looking to grow volume. So when we’re assessing opportunities for acquisition, we’re looking at molecules of businesses that we can grow both volume and price and we have one offsetting the other if there is any kind of downside that’s there.

We’re certainly not all about price. We’re looking at long-term assets that we can grow over time and continue to add value to the business and provide a sustainable platform for growth, not just a lot of price increase.

Elliot Wilbur - Needham & Company

Okay, then the last question for you. Its been more difficult to arrest the adjusted EBITDA losses in the first half of the year than I think that you had believed. Back in connection with the fourth quarter result and just maybe some commentary there in terms of what’s taking place? Is it just simply purely a function of top line, where there’s still some things left to do on the expense side?

Doug Drysdale

It’s a bit of a mix of things. The top line is down in the second quarter. I’m not really as surprised. We’ve had – as you look year-over-year, as we stated when we first came into the business, a number of products that were discontinued in 2013 that affect the run rate and also the second quarter is typically a quieter quarter for the cough and cold products and they still form a reasonable part of the overall mix.

But as we look forward to sort of the rest of the year, we expect that hot and cold seasons kick in the third and the fourth quarter and that’s particularly material for CEDAX. We’ve seen some of our growth already start to take off very nicely and with the realignment of the sales team covering more business potential geographically and with the real launch of our marketing campaign, which we’re very happy with, we see Silenor really taking off towards the latter half of the year.

And then another factor that affects margins is at the beginning of the year, first quarter we saw this when patients begin a new year, their plans often have high deductibles and in the first half of the year they are meeting those deductibles and so their co-pays are often higher and our co-pay existence is higher. So our modules improve in the second half of the year as we are paying less in co-pay assistance.

So I think when you add those things together in the second half, we are well positioned in the second half of the year and don’t forget also that other actions that we took in the first half such as divesting our manufacturing plant, enclosing our distribution centers, the impacts of those cost savings still really haven’t fully impacted the business yet, because we’re carrying some of those costs all the way through till the end of June. So I think overall those were well positioned.

When you look at the base business though, the real growth is going to come from Silenor. We’re really excited about the products. I think this initial move in prescriptions I think really supports and justifies our excitement. We spend a long time talking to customers and talking to patients around the brand.

I think we’re re-launching the product at a really opportune time. If you look on YouTube and you might see a bunch of amusing videos of people that are taking GABA agents, but in real life those situations aren’t funny at all

To give you an example, we heard from a customer the other day, a physician. One of his patience, a woman woke up in the morning and couldn’t find her baby and obviously pretty distressed and called the police and it turned out that the baby was in the car. She had got up in the middle of the night, drove the baby around, she set the baby back to sleep and went back to bed and left the baby in the car.

Those are kind of situations that people face all the time, are real issues with these agents and we hear often that patients fear their sleep medication more than they fear their insomnia and that’s not a good position to be in.

So given that Silenor is non-addictive, non-narcotic, has a side effect profile similar to placebo, it’s hard to see why physicians at this point with all this new information would prescribe anything else. So I think to answer your question in a very long way, I think margins are improving; we’re seeing an up-tick in the second half in cough and cold, but also Silenor is a long-term trend upwards with a good IP runway.

Elliot Wilbur - Needham & Company

All right, thank you.


Thank you. (Operator Instructions) And our next question comes from (inaudible). Your line is now open. Please go ahead.

Unidentified Participant

Hi there, it’s Alex speaking. A quick question on some of the strategic initiatives that you talked about over the year and one of the things was a tax inversion and obviously there’s a lot of news about that. Is there any updates on your strategy there?

Sanjay Patel

Yes, thanks Alex for the questions. Yes, we have a number of transactions in our deal pipeline. Probably sort of around that 30 number that we’ve been talking about and given the political rhetoric, we’ve been prioritizing tax inversions as along those that we’ve been looking at.

We have turned away quite a few, because we are really not interested in something that’s cosmetic. At the end of the day we want to add products and businesses that add long-term growth and a good strategic fit for the business. So we continue to work on those. We have a few of those in our deal pipeline, but we’re also looking at other transactions and products and businesses that add fundamental growth, not just for tax.

I think the window, its clear the window is under pressure and we’re working hard on those kinds of deals. If we get there in time, we get there in time. If we don’t and we close some other strategic deals that add fundamentally to the top and the bottom line, then so be it. We are taking good advice along the way and so far it doesn’t just seem to be too much that has changed our view, but there still remains a window open and we’re certainly not putting our foot on the break just yet.

Unidentified Participant

Thank you, good. And then on the strategic transactions, how would the transaction be financed given that you won’t have been able to report kind of the former numbers for Treximet, (inaudible) be for that transaction?

Doug Drysdale

Yes, I see that we have a lot of opportunities to fund those kinds of transactions. We had no trouble really raising the funds for Treximet and the way we’ve structured that is kind of a stand-alone financing around the asset and as we continue to grow, I see no reason why we can’t fund other deals in a very similar way. We certainly do not see funding as any barrier to growing at this point in time.

Unidentified Participant

Thank you. Thanks a lot.


Thank you. And our next question comes from Michael Higgins from Highline Research Advisors. Your line is now open. Please go ahead.

Michael Higgins - Highline Research Advisors

Thanks operator and good morning guys. How are you?

Doug Drysdale

Hey Michael. Thanks for joining the call.

Michael Higgins - Highline Research Advisors

Sure. Questions for you, a couple of questions. First off getting on Silenor, what are the next steps in getting it towards OTC approval partnerships. Any updates for us on that one?

Doug Drysdale

Yes, we still see Silenor as a good OTC candidate and we’re still looking down that path, albeit a little slowly. The timeline thought hasn’t really changed. Its still in that 2018, 2019 timeframe for an approval. We haven’t moved that out at all and the IP runs out to 2020, so that will be a good time for us to switch naturally anyway. We are continuing to work on that assessment internally and also to partner. So we’ve got nothing to announce just yet, but it is something that we’re actively pursuing.

Michael Higgins - Highline Research Advisors

Okay. Given the fact that it’s a few years out, I believe I saw in the Junicor presentation, looking at Silenor combinations isomers. Any next events we should look for in terms of the pipeline development around Silenor.

Sanjay Patel

At this point those are still fairly early and as we make progress we’ll certainly be announcing any major milestones along the way.

Michael Higgins - Highline Research Advisors

Okay. So IND filing is at least a year off it looks like.

Sanjay Patel

Yes. I wouldn’t put any date on it at this point in time. It’s still very much in the evaluation phase for those kinds of line extensions, but the main focus in the Silenor extension would be OTC at this point.

Michael Higgins - Highline Research Advisors

Can you help us identify which products have higher margins versus those in your current portfolio that have lower margins and that include cost of goods sold as well as marketing investment? Which one is put more in the bottom line in terms of a larger percent.

Sanjay Patel

Yes, we’re very much focusing on shifting the business mix away from the generics portfolio and its all promoted brands in the specialty space and you can see we’ve given a strong emphases here on Silenor and Treximet and that’s definitely our focus.

As we move towards the end of the year, we’re working already on trying to provide more product level disclosure than we currently have been doing or have been doing historically. It was something that was important to us and that was important to our shareholders. We get those questions fairly frequently. So I’ll kind of watch this space towards the end of the year and we will expect to publish more detailed data in our filings later on.

Michael Higgins - Highline Research Advisors

Okay, very good. Thanks guys.

Sanjay Patel

Thank Michael.


Thank you. At this time there are no more questions. This concludes today’s Pernix Therapeutics earnings conference call. Thank you and have a nice day.

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