SciClone Pharmaceuticals' (SCLN) CEO Friedhelm Blobel on Q2 2014 Results - Earnings Call Transcript

SciClone Pharmaceuticals, Inc. (NASDAQ:SCLN)

Q2 2014 Earnings Conference Call

August 11, 2014 4:30 p.m. ET

Executives

Jane Green - IR

Friedhelm Blobel - President & CEO

Wilson Cheung - SVP & CFO

Hong Zhao - CEO of China Operations

Analysts

Hamed Khorsand - BWS Financial

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 SciClone Pharmaceuticals Inc. Financial Results Conference Call. My name is Denise, and I'll be the operator for today. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. (Operator Instructions) As a remainder, this conference is being recorded for replay purposes.

I'd now turn the conference over to Jane Green, Investor Relations. Please proceed.

Jane Green

Good afternoon. SciClone would like to thank you for joining the call today. The company would also like to remind you that today's call is being recorded.

Speaking on today's call are Dr. Friedhelm Blobel, President and Chief Executive Officer; Wilson Cheung, Senior Vice President and Chief Financial Officer; and Hong Zhao, Chief Executive Officer, China Operations.

It is SciClone's intent that all forward-looking statements, including statements regarding financial guidance and commercial and development activity made during today's call be protected under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current information available, and SciClone assumes no obligation to update these statements.

To better understand these risk factors, please refer to the documents that SciClone filed with the Securities and Exchange Commission, including Forms 10-Q and 10-K.

I'll now turn the call over to Friedhelm Blobel.

Friedhelm Blobel

Good afternoon, and welcome to SciClone's conference call and webcast to discuss second quarter 2014 financial results. We're very pleased with the continued strong performance of our core business in the first half of the year, including our ability to remain on track relative to our 2014 revenue guidance, while at the same time reducing expenses.

Our strong fiscal management has been a driving factor in both the Board's authorization of an additional up to $15 million for our stock repurchase program, and in our ability to revise upward our projected non-GAAP earnings per share.

Our revenues grew approximately 11% in the second quarter of 2014 compared to the second quarter 2013. Recall, however, that the second quarter of 2013 still included revenue booked as Sanofi promotion fees. If we look at the second quarter 2013 relative to our core business, which includes ZADAXIN, Aggrastat and all Pfizer and Baxter products, and this excludes the Sanofi revenue, our growth rate in the second quarter of 2014 was 46%, representing a very substantial growth rate and underscoring the strong recovery we've made in our business over the last few quarters.

On a year-to-date basis, the growth rate of our core business compared to the same period in the prior year was 36%.

ZADAXIN continues to be a major growth driver, and it's growing at an attractive pace. Continuing the growth trend that resumed in the fourth quarter of 2013 and that pick up speed in the first quarter, ZADAXIN's sales growth in the second quarter was very strong, and translated into a 39% increase over the second quarter of 2013.

Besides strong fundamental growth contributing to this increase were favorable exchange rates of approximately 5%, and the negative impact of the ZADAXIN channel inventory buildup, which took the company several quarters in 2013 to rectify.

As we anticipated, we continue to see the loss of revenue as a result of expiration of the promotion agreements with Sanofi at the end of their term on December 31, 2013, when comparing our year-to-date performance versus the prior year.

The thymalfasin margin and ZADAXIN as the leading brand is continuing to expand. Based on market research conducted for the first quarter of 2014 this margin reached approximately RMB 1.7 billion on a trailing-12 months basis or about $217 million at current exchange rates and sold at unit growth rate of 12% in the first quarter of 2014 of the same period in the prior year. As we reported in May, ZADAXIN in-hospital unit growth in the first quarter actually exceeded this rate.

We're pleased to note that ZADAXIN's market share has recently stabilized, and is about 14% of the RMB value share in this important therapeutic category. We anticipate continued growth opportunity for ZADAXIN in the indications for which it is currently approved as well as in potential new indications.

As we've previously discussed, we believe that the therapeutic areas of hepatitis B and sepsis continue to represent growth areas for ZADAXIN.

We're also pleased to report that we have continued to exercise significant discipline in controlling expenses in the quarter and year-to-date, and that our cash balance remains strong even with continued spending on our stock repurchase trend. We believe that our focus on expense management and ability to preserve our strong cash position was a key factor in our Board's decision to increase our stock repurchase program.

We believe that our continued strong cash balance is an important asset that is enabling us to pursue strategic initiatives, besides expand and strengthen our product portfolio and drive growth. We have numerous strategic discussions underway relative to both promotional and in-licensing opportunities. And remain hopeful of being in position to establish additional industry partnerships that can expand our product portfolio, and have a positive near-term impact on our revenue and profitability.

We were pleased in the second quarter to have made meaningful progress in completing the transition of some of our current collaborations. The extension for another five years of our promotional service agreement with Pfizer has been signed and completed. And we have moved from month-to-month contract again to a long-term relationship with improved economics.

In addition, we're pleased that the settlement with Sanofi concerning the non-renewal of promotion services agreement has been satisfactorily completed. We wish Sanofi well in meeting the challenges of the China marketplace.

Wilson will discuss the financial implications in a few minutes. Relative to MEDA, you'll recall that we noted last quarter that a final award of the arbitral tribunal in the arbitration with MEDA has issued. We're in the process of pursuing a financial settlement with that.

Relative to the overall pharma market, reports indicate that there is more positive sentiment about China than six or nine months ago when there were macroeconomic concerns about the growth rate of China economy, including manufacturing and exports and specific concerns about the impact of the government's very public anticorruption campaign in the pharma industry. While the government is continuing to implement an active campaign, the overall pace of business in the pharma market has resumed with the current growth rate of about of 15% to 16%. This growth trend certainly compares favorably to the periods timing in the third quarter of 2013 when the growth rate fell to single-digit.

As we've discussed before, the China pharma market is dynamic and complex. The China government emphasis on compliance that represents challenges for many of the multinational companies as well as local companies, whose compliance programs may not be of sufficiently high quality to withstand scrutiny. While the public focus of the campaign has thus far been on the MNCs, the impact will be felt across the whole industry.

We believe that SciClone may have certain advantages in this environment, given the company's high quality compliance program, zero tolerance for non-compliance, experienced management team and corporate commitment to constant improvement in compliance practices.

As you all know, building and enhancing our program over the last few years has required a significant investment of time and money. We're convinced this has been a highly worthwhile initiative that our company is stronger for these efforts.

We believe that our compliance program is a value-added differentiator. Other companies that has no invested heavily like we have may need to catch-up. They may conclude that this is more expedient to limit their exposure in the China market and either reduce their presence or not invest internally in growing their China business.

Industry reports have noted, for example, that sales force hiring throughout the industry has slowed considerably over that last six to nine months.

Instead of expanding operations, these companies may rethink their market strategies and opt to seek partnering opportunities with a company like SciClone, which have a strong reputation for compliance, and established market presence and well-organized commercial inside structure. We believe that we're well positioned to take advantage of such opportunities.

As I mentioned, we have an active business development program underway. We've been very open in communications with industry peers that we're looking to expand our commercial business for in-licensing and promotional arrangements. We believe that the response has been positive based on the number and breadth of conversations we've been having over the last several months. Of course, in order for collaborations to make sense to us, they have to be reasonably structured and profitable, and that can include a premium placement doing business with a company that has a strong and intact compliance program.

So, despite the complexities of the China markets, we're optimistic about our prospect for continuing to take advantage of its growth opportunities. Our outlook on the second half of the year remains positive in terms of our anticipated financial performance, business development pursuits and overall operations.

We're becoming more optimistic that we can see some progress in our development pipeline, [DCB] (ph) which has been under regulatory review for quite a while and maybe nearly a decision product.

Our in-license products, Neucardin and ProFlow continue to progress. We are pleased to learn from our partner TLC that the clinical trial accusation or CTA to conduct the registration trial for ProFlow in peripheral arterial disease or PAD is now under active review. There have been several steps in the CTA process including a waiting period ahead of any of the FDA evaluation action, and this step represents important progress through the registration process. It is anticipated that the review process could be finalized this year which should enable initiation of the registration trial in 2015.

Our organization continues to be strong and cohesive and focused on delivering on our growth and the constant improvement in compliance that is one of our highest corporate priorities and one of our most valuable assets.

Now, I'd like to ask Hong to share his perspective on the second quarter results. Hong?

Hong Zhao

Thank you, Friedhelm. I'm pleased to report that growth trend for ZADAXIN continued in the second quarter and exceeded our expectation. We believe that our wide and deeper strategy continues to be successful, which have streamlined and optimized our sales and marketing team. And we're focusing on the key target hospitals, all of which needs having a cost impact on driving the ZADAXIN demand, as our second quarter results show.

In the past six months, we established new sales leadership for our ZADAXIN team. We had brought our new incentive plan and the [compensation structure] (ph) in lines with our compliance efforts. And our sales force retention [reckon] (ph) rate has improved. This has delivered us for increased penetration in additional hospital department. This includes hospitals that specialize in treating hepatitis B and intensive care units.

We had also successfully increased the number of the customers we sell-through in existing hospital departments. For 2014, we're confident that we will be able to maintain the movement our ZADAXIN business by increasing our medical marketing activities.

Finally, we're pleased that our organization is stable and cohesive, and that our leadership needs to perform at the very high level.

Back to you, Friedhelm.

Friedhelm Blobel

Thank you very much, Hong. Now, I'd like to ask Wilson to discuss our financial performance for the second quarter of 2014. Wilson?

Wilson Cheung

Thanks, Friedhelm. Before I would review our second quarter 2014 financial results I'd like to provide brief updates on the Sanofi and MEDA situations, the SEC/DoJ investigations and the status of our stock repurchase program.

First, I'm pleased to report that we have settled our dispute concerning matters related to the non-renewal of the promotion services agreement. While the specific terms are to be kept confidential, three financial elements are important to mention. A) We recorded additional revenues in the amount of 254,000 in the second quarter which have been deferred since the fourth quarter of 2013. B) We incurred no refund of any sort of fees earned during 2013. C) We collected earlier today on the disputed receivable in the amount of $3.5 million.

Relative to the arbitration with MEDA as Friedhelm mentioned and as we disclosed last quarter, an arbitration award was announced in our favor at April. We are in the process of attempting to resolve the matter and pursue a financial settlement with MEDA in the next few months. We plan to provide updates as the situation evolves.

With respect to the SEC/DoJ ongoing investigation, while there have been no significant developments to be reported publicly in the current quarter, discussion among members of our Board of Directors, our attorneys and the government are continuing. We're still not yet in a position to predict what the outcome of those investigations will be or the timing of any resolution.

We have not recorded any additional charge above the 2 million we reported in March to reflect our estimate of a probable loss incurred related to potential penalties, fines and rather remedies in the ongoing investigations. It should be noted that we could be required to pay higher fines or other penalties.

Relative to our stock repurchase program, of the 50.5 million authorized for this program by the Board of Directors, approximately 49.4 million have been utilized through June 30, 2014; an approximate 1.1 million of the remainder was depleted in July. Accordingly, and as Friedhelm noted, we have obtained additional authorization from our Board of Directors to increase our repurchase by up to 15 million through the end of 2015. We believe that the prudent fiscal management we are exercising has enabled us to preserve our capital and provide the flexibility to both continue the stock repurchase program and support our business development initiatives designed to expand our portfolio and grow our revenue.

We continue to believe that our stock repurchase program is a value creating strategy for our stockholders and we are very pleased to be able to continue such implementations.

Now, I would like to review our financial results for the second quarter of 2014. I will focus my comments on the second quarter results. Please consult the press release we issued today for full details.

Revenues in the second quarter of 2014 were 32.5 million, 3.2 million or 11% increase compared to 29.3 million for the same period in 2013. ZADAXIN revenues were 30.3 million in the second quarter of 2014, 8.5 million or 39% increase compared to 21.8 million for the same period in 2013. As Friedhelm noted, in addition to strong fundamental growth, favorable exchange rates of approximately 5% and the negative impact of the ZADAXIN channel inventory build out which took the company's several quarters in 2013 to rectify attributed to this increase.

Promotion services revenue were 1 million for the second quarter of 2014, 6.6 million or 87% decrease compared to 7.6 million in the same period in 2013. As previously discussed, our promotion services revenues for the first half of 2014 were negatively affected by the expiration of the promotion agreements with Sanofi at the end of their terms on December 31, 2013.

On a GAAP basis, we reported net income in the second quarter portfolio 2014 of 9.6 million or $0.19 or $0.18 per share on a basic and diluted basis respectively compared to net loss of 2 million or $0.04 loss per share on both a basic and diluted basis for the same period in 2013.

Our non-GAAP net income in the second quarter of 2013 was 10.5 million compared with a non-GAAP income of 4.3 million for the same period of last year or $0.20 per share on both a basic and diluted basis for the second quarter and $0.08 per share on both a basic and diluted basis for the same period of prior year.

For the second quarter of 2014, sales and marketing expenses were 11.2 million compared with 14.3 million for the same period in 2013. We restructured our sales force in the fourth quarter of 2013 related to the expiration of the Sanofi promotion agreements resulting in a reduction of over 200 sales persons by June 30, 2014 compared to the second half of 2013.

In addition total sales and marketing expenses also decreased for the second quarter of 2014 related to the expiration of the Sanofi promotion agreements and the reduction in costs associated with marketing the products under these agreements. These reductions were partially offset by growth in our sales and marketing efforts for ZADAXIN.

For the second quarter of 2014, research and development expenses were 0.8 million compared with 5.4 million of R&D expenses for the same period of 2013. The decrease in R&D of 4.6 million primarily related to expenses incurred last year for in-license arrangements with Zensun and TLC.

For the second quarter of 2014, general and administrative expenses were 5.8 million compared with 8 million for the same period in 2013 primarily related to lower legal costs associated with the ongoing government investigations and other legal matters.

Just a short note of provision for income taxes; for the second quarter of 2014 our tax provision was only $34,000. This was due to a reversal of approximately $380,000 in FIN 48 and certain tax position which amount had reached the statute of limitations in China. We do not expect additional reversals on FIN 48 charges onto another year of the second quarter of 2015.

As of June 30, 2014 cash and cash equivalents, restricted cash and investments totaled 87.1 million compared to 85.9 million as of December 31, 2013. Consistent with past practices we have presented non-GAAP as we believe this non-GAAP information is useful for investors taken in conjunction with our GAAP financial statements because we use such information internally for our operating budgeting and financial planning purposes.

Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement and understanding of our operating results as reported under GAAP. The non-GAAP calculations and reconciliation are provided in the accompanying table in today's press release titled reconciliation of GAAP to non-GAAP net income.

Finally, I would like to provide an update on our annual guidance. In light of our reduced sales and marketing and general and administrative expenses, our EPS guidance for 2014 is being revised upwards. We now project non-GAAP EPS of $0.51 to $0.57 up from our pie projection of $0.41 to $0.47. Our revenue guidance for 130 million to 135 million remains unchanged.

With that, I'll now turn the call back over to Friedhelm.

Friedhelm Blobel

Thank you very much, Wilson. Now, I'd like to ask the operator to open the call for questions. Denise?

Question-and-Answer Session

Operator

Sure. (Operator Instructions) Our first question comes from Hamed Khorsand with BWS Financial. Please proceed,

Hamed Khorsand - BWS Financial

Hi, guys. Just a couple of questions; first one, can you break out where the incremental revenue increase came from? Was it from new doctors writing prescriptions or existing doctors?

Friedhelm Blobel

Well, Hamed, it came fundamentally from both. There are certain new customers; new hospitals who are buying ZADAXIN as well as the existing hospitals, some of them are growing nicely in line. That's what Hong called the lighter and deeper strategy is getting real traction and working quite well at this point, and we're certainly also seeing a quite interesting, also on the low level increase for Aggrastat.

Hamed Khorsand - BWS Financial

Okay. From an overall perspective, is prescription per sales person increasing, is that what's happening?

Friedhelm Blobel

I mean you have had quite some change in terms of number of people because of expiration of the Sanofi agreement. And we had certainly tried to retain particularly with strongest and the best sales people. So I think also it may look like this, we are a little careful to over interpret the data in this regard in a moment.

Hamed Khorsand - BWS Financial

Okay. And then, could you talk about how many weeks of inventories in the channel, the inventory that's half of SciClone's balance sheet?

Friedhelm Blobel

Yes. We're at the low. Actually what we have said as 10% target OEM and so the current level is lower than that or the level at the end of the second quarter, but also in the current level.

Hamed Khorsand - BWS Financial

Okay. And what's driving that? Is it just hesitation at the end of the chain or is it really more about importance?

Friedhelm Blobel

I mean within -- it's always fluctuating within half a month up or down, and that has to do with the general implications, some times the release of it takes a little longer. So there is really nothing to report. We're back now for one year on appropriate and consider normal levels of inventory and turn that service segment this quarter as it had been in the three quarters of the fall.

Hamed Khorsand - BWS Financial

Okay. And my last question, given that you've raised your earnings guidance this quarter. What are you assuming for legal expenses?

Friedhelm Blobel

Wilson, maybe you can take that?

Wilson Cheung

Sure, I can. We have at the beginning of the year budgeted roughly about $6.5 million for legal expenses just for the SEC investigation alone. And for the remainder of the year we've basically taken out about 3 million of the 6.5.

Hamed Khorsand - BWS Financial

Okay. All right, that's it from me. Thank you.

Friedhelm Blobel

Sure.

Operator

Our next question comes from Yi Chen with Aegis Capital. Please proceed.

Yi Chen - Aegis Capital

Hi. Thank you for taking my questions. So regarding these exit sales growth, which therapeutic area do you see the growth mostly come from? Is it mostly coming from hepatitis or coming from oncology indications?

Friedhelm Blobel

It's pretty strong in hepatitis, but also oncology as well.

Yi Chen - Aegis Capital

Do you expect going forward more growth coming from the same area too?

Friedhelm Blobel

Well, short-term, that will be the same trend, mid-longer term we hope that we will make progress regarding the inclusion of sepsis indications in the treatment guidelines. There is some work going on. And that's -- it would be an important step and then that could become also a major contributor.

Yi Chen - Aegis Capital

Okay. For our promotion service revenues, should we expect going forward at least in the near-term revenue to remain at a comparable level excluding any potential new acquisitions and partnerships?

Friedhelm Blobel

I think that's a fair view of it and it's certainly, compared to ZADAXIN relatively small.

Yi Chen - Aegis Capital

And regarding sales and marketing efforts, shall we expect any new increased expenses to be directed to ZADAXIN sales?

Friedhelm Blobel

I think we'll certainly keep supporting the growing ZADAXIN business with appropriate supporting on the marketing and sales side, as well as with people, but this is in a lower range, now the kind of natural growth as we had explained is certainly double-digits, but we had in the particular second quarter the benefits on the one side of exchange rate gains, which corresponds to about 5% and Q2 of 2013 was the last quarter, which was still negatively impacted for the channel inventory, so these are relative gains which we had in Q2 2014. And the organization is certainly aligned now to really grow in the double-digit range, about the low 20%.

Yi Chen - Aegis Capital

Okay. Finally, just to clarify the 3.5 million amount mentioned within the -- with the MEDA situation, is your estimated cost, but not the final amount that is reached by both parties, right?

Friedhelm Blobel

Wilson, why don't you take that?

Wilson Cheung

Sure. The 3.5 million was what we originally requested as the award amount from MEDA. And we're right now still in the process of negotiating with them, so we don't actually have any numbers to report at this time. And until we actually receive any cash, we would not be recording any type of contingency.

Yi Chen - Aegis Capital

Thanks. And also, can we still reasonably expect SEC/DOJ investigation to be concluded within this year?

Friedhelm Blobel

I think now we better don't pursue anything. I mean this is not up to us. So, we may hope, but this is not up to us to decide when this will be concluded. And so I think you'll need to really read your own conclusion and what you think is the best assumption.

Yi Chen - Aegis Capital

Okay, thank you.

Friedhelm Blobel

Few more minutes.

Operator

(Operator Instructions) Our next question comes from [Alan Ioffredo] (ph) with LPL Financial. Please proceed.

Unidentified Analyst

Congratulations on a nice quarter, gentlemen. Wilson, this is a question for you. Can you comment on stock-based compensation and net of stock-based compensation and share repurchases, how much of the outstanding shares have been retired in the last year on a percentage basis?

Wilson Cheung

My best recollection is that as soon as the beginning of the year, we have at least retired 200,000 shares. What I can tell you is that -- I'm just looking at some numbers here, in the first quarter we spent about $2.5 million worth for stock repurchase. In the second quarter we spent about 6 million. So, for the total of six months, that's about $8.5 million that we've spent which we retired.

Unidentified Analyst

But do you keep track of -- again, I'm mostly interested in is what has been reissued as compensation, I guess that's reflected in GAAP earnings, but not in non-GAAP, right?

Wilson Cheung

Right. So, on the GAAP numbers on a quarterly basis, our share-based comp run rate is about 900,000 per quarter.

Unidentified Analyst

Okay.

Wilson Cheung

About two thirds of that is in G&A, about a third of that is in sales and marketing.

Unidentified Analyst

Thank you.

Operator

We have no further question. I'll now turn the call back over to management for closing remarks. Please proceed.

Friedhelm Blobel

Thank you, Denise. Thank you for participating in our quarterly conference call today. Please feel free to contact us directly should you have any follow-up questions. Thank you for your participation.

Operator

This concludes today's conference. You may now disconnect. Have a great day.

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SciClone Pharmaceuticals (NASDAQ:SCLN): Q2 EPS of $0.20 beats by $0.10. Revenue of $32.5M (+11.0% Y/Y) misses by $0.9M.