ULURU (ULUR) CEO Kerry Gray on Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: ULURU Inc. (ULUR)

ULURU Inc. (OTCQB:ULUR) Q2 2014 Results Earnings Conference Call August 15, 2014 9:00 AM ET


Kerry Gray - President and CEO


Steven Smith - Matrix Capital

Jason Napodano - Zacks Investment Research


Good morning. And welcome to the ULURU Second Quarter Earnings Conference Call. All lines will be muted during the presentation portion of the call with opportunity for questions-and-answers at the end.

At this time, I would like to introduce your host, President and CEO of ULURU Inc., Mr. Kerry Gray. Thank you and enjoy your conference. You may proceed, Mr. Gray.

Kerry Gray

Thank you. Good morning and thank you for joining the earnings call. Let me start by reading the Safe Harbor language. This conference call will contain certain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 as amended, included but not limited to statements made relating to the future and financial performance of ULURU Inc., expected business development, projections of product sales, plans and strategic relationships, and our commercialization of Altrazeal.

When used in this conference call, the words may, targets, goal, could, should, would, believe, feel, expect, confident, anticipate, estimate, intend, plan, potential and the similar expressions maybe indicative of forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the company's control.

The company cautions that various factors, industry trends and the Food and Drug Administration regulation could cause actual results and outcomes to differ materially from those expressed in any forward-looking statements of the company.

Any forward-looking statements speak only to the date on which such statements are made and the company undertakes no obligation to update any forward-looking statement or statements.

These statements are subject to numerous risks and uncertainties, including but not limited to the risk factors detailed in the company's annual report on Form 10-K for the year ended December 31, 2013, and other reports filed by us with the Securities and Exchange Commission.

That being said, let me now commence, a brief introduction. Without question, second quarter has been one of, if not the most productive quarters in the company’s history. This activity level has continued and may have even further escalated in the third quarter with the significant production activities which are now ongoing.

As of today, our production activity is ongoing in four locations, at ULURU, Indigo Pharma, who produces our (indiscernible) powder, A+ Secure Packaging and STERIS, who sterilize the finished product.

In addition to this, we have this week our annual ISO Compliance Audit. We are developing packaging materials in additional languages and supporting the registration activities in the Middle East, Asia and Russia.

Furthermore, as I will address shortly, we have reached long-term resolutions, the majority of the previous production issues. I believe this is an outstanding achievement for such a small organization.

Additionally, our European partners in conjunction with country licensees have further enhanced our clinical data. A review of the clinical data from the European Wound Management Association meeting clearly shows the outstanding quality of the data being generated in Europe.

Let me now address the financial statements. I will briefly address the financial report which was issued this morning. I believe that this is the last quarter that we will impacted by production issues. In the past 60 days, we have received in excess of 100,000 blisters from our supplier and are currently producing further 40,000.

Both powder productions are ongoing to produced 135 kilograms of powder, which will allow the production of Altrazeal 160,000 blisters. In total, that is sufficient for approximately $1.4 million in revenue at the international distributor prices. Further more powder production is scheduled for the fourth quarter.

As announced earlier this week, our production plan calls for us to be up to date by September. Going forward, we are earning meaningful revenue comparison for the company will be to the prior quarter, as prior comparisons including the second quarter are truly meaningless. The third quarter will commence what we consider meaningful revenue growth.

In our second quarter, our gross profit for the quarter is not representative of our long-term profit projections. We are currently working through expensive initial powder production and we are experiencing scale up expenses.

SG&A expense compared to prior year is impacted by accounting items. In 2013 for the second quarter and six months, there was -- this quarter was favorably impacted by the reversal of expense accruals of 26,000 and 46,000, respectively, in sales and marketing expense. With the exception of legal expense, our expenses remained in line with our forecast.

Importantly, our loss from operations, excluding non-cash items in the second quarter was less than $500,000. With revenue growth we are well-positioned to reduce this quarterly loss rapidly.

As these statements clearly demonstrate, achieving cash flow positive operations does not require massive revenue increases. Currently, there are no plans to dramatically increase our expense base, so that even further helps our cause.

To achieve our production goals, we will need to purchase some additional equipment, which we intend financing by a way of capital leases. It is estimated that that will impact our quarterly results by less than $10,000.

I would also like to note, the significant improvement we have made to the balance sheet during the past 18 months, dramatically reducing our debt and total liabilities.

Let me now move on to the BSI audit. This week the BDSI who is our notified body responsible for issuing our CE Mark, as well as our ISO compliance conducted their annual audit, which this year lasted two days as there was a recertification audit.

We get recertified for the compliance with ISO 9001 and ISO 13485 every three years, which is required by the Canadian authorities. Although, at this point we do not have a Canadian license and this is essential for us to maintain our CE Mark.

This audit is to determine our compliance with the requirement of these certifications. I’m very pleased to report we successfully completed the audit with no audit comments. Given the size of our organization and the complexities of the requirements of ISO, I believe, this is an outstanding achievement.

We have now translated the patient instructionally fleet and created design control files. So, packaging fits patient information leaflets for 17 different languages, which cover 29 countries.

Fortunately, in a number of markets, particular the Middle East, a European Union generic labeling is accepted, which is a great help as it eliminates the need to translate our package leaflets into languages such as Arabic and Afghan.

Now, I’d like to briefly address our global expansion. As reported, since May, by the end of August we will ship to an additional 13 new markets. The momentum is now building. As stated last call, our objective was to be in 24 markets by the end of June. Although, we are two months behind schedule and we’ll be in 22 markets. I believe, given the issues that we've been confronted with, this is still quite a great achievement.

I'm optimistic that this rollout will continue at a rapid rate during the balance of the year and throughout 2015. In certain markets, including some Southeast Asian markets, India and Russia we are in the registration process. We are looking forward to completing this phase and launching on to these large markets where revenue expectation are very exciting.

There are still many opportunities to further expand our activities, including Latin America, Asia, the Middle East and Africa. We continue to work aggressively to secure marketing partnerships in those locations.

Let me now address some U.S. initiatives. I’m now convinced that the U.S. market will undergo a total transformation in the near-term. In the past 90 days, I’ve experienced numerous indications that change is approaching.

Including companies are being established to assist self-insured major corporations, reduce healthcare costs, utilizing outcomes and cost data. One recently formed company already has 250,000 insured lives. Similarly, small companies are being established to provide a similar service to small employers.

Thirdly, Accountable Care Organization, who were originally focused on cardiovascular disease and stems and alike are now becoming increasingly interested in wound care. Our consultant has been asked to put together plan for one of these Accountable Care Organizations.

Mostly, insurance companies are now realizing the enormous data they have that could be mine for cost-effective outcome data. Organizations have been formed within these groups solely for this purpose.

And lastly, CMS recently eliminated postured cost reimbursements for number of the skin substitute products were previously had been anticipated that that would not occur until 2016.

There is also growing awareness of Wound Care Centers have cost-effective outcomes is the future. As I mentioned on the past conference call, we’ve engaged the clinical consult with extensive wound care experience to assist us with the U.S market. His initial contributions being outstanding, as he has representative of the company approaching numerous of the important groups mentioned above.

He is also assisting us making clinical decision and advising us on the science of wound care and how we can address it. I’m now more optimistic that the benefits of Altrazeal will allow him with the direction of the U.S. market more quickly than I previously anticipated.

I’d now like to address the European Wound Management Association presentation. On the past call, I announced we had a very successful participation at the European Wound Management Association meeting in Madrid in May which included a podium presentation from a nurse from the Czech Republic.

Recently, I have had an opportunity to again review this presentation. It contained highly significant data on the use of Altrazeal. A survey was conducted in which 12 nurses were interviewed, for a nurse to participate, the nurse had to have treated at least 5 patients with Altrazeal.

Therefore this presentation included data on over 60 patients treated with Altrazeal. There were four areas investigated and reported on the use of Altrazeal, the benefits to the patient, the benefits to the caregivers, and the obstacles for the use of Altrazeal. Altrazeal was considered easy to use, allowed total wound coverage, gave the ability to continually inspect the wound and allowed for few dressing changes. It was considered inappropriate for highly exuding wounds which confirms our instructions for use.

Benefits for the patients included lower pain after application; 5 to 8 pain prior to application was reduced to 1 to 3 on application, that’s on a pain scale of 0 to 10; lower sensitivity and irritation at the wound bed which was reported by all patients, reduced aorta, reduced bleeding and accelerated healing.

The benefits to the care giver was simple application and removal, few dressing changes and reduction in the negative patient clinical symptoms. In terms of the issues with Altrazeal, there is a need to educate physicians on when to use the secondary dressing, when to use additional sealing and to educate the physician not to be impatient and not to change the dressing so regularly. On average in these patients, the dressings will change every 7 days. All of the above could be overcome with education.

It is anticipated that this important study will be published in the peer-review journal. This clinical experience as I said is highly significant as it includes data on over 60 patients. Another presentation focus on Altrazeal compared with the desired expectations for a new wound dressing. Those expectations was then listed as easy to work with, effective wound support, wound safety, protection from contamination, pain reduction and excellent management and cost effectiveness saving both time and money.

The presentation conclusion was that Altrazeal met with success in all four categories. These presentations were very well received by the medical and meeting participants, including potential new strategic partners. Additional presentations that confirm prior findings were also presented. This is the most extensive presentation of clinical data ever presented at any wound management meeting.

Let me now move on to production. I’m pleased to report that the major production issues are now behind us. The issues we experienced with the exception of fill weight and equipment installation were frankly unexpected by both ourselves and our contract manufacturers.

The major issue involved putting the fill and seal on the blister and printing the lidding in line on the blister. The result is we took the temporary step to label the blisters. To our surprise, this resulted in a significant improvement in the product image as the printing quality is far superior to what can be achieved online without lidding material.

In conjunction with our partners, it is now being decided that this is the permanent solution. Importantly this can be achieved for an incremental cost of only approximately three-tens of volume, with the purchase of the simple label applicator. This also gives us great production packaging and inventory advantages. The filing can be continuous, without stopping to change the living print for different languages.

There is also more flexibility, filling orders as individual blister configurations are now no longer an issue and results in reduction in inventory levels as there is only one inventory item for the blister.

We have one remaining modification that is required. Now we have achieved relatively consistent flow rates, some additional work is required to improve yields by reducing overdose.

This was not a simple process, as we are dealing with a total new packaging configuration that requires materials that are moisture resistant, which eliminates many alternatives. We are also dealing with component lead times as long as 24 weeks.

On top of that we are filing a powder at a very low volume that is extremely light. I am optimistic, the major issues are result and now it is a matter of implementing some minor modifications.

Let me address Investor Relations. Historically, June and July, sorry, July and August tend to be difficult months with low trading volumes. This year has been no exception. Commencing in September it is plan to increase our Investor Relations activities directing our attention to small both health and general institutions.

We are looking to expand our research coverage and with this expansion and expansion in the investor audience that we address. I believe the improved fundamentals within the company together with the expanding strength of the Altrazeal opportunity position us well to aggressively approach the investment community.

Some recently developed clinical data graphically and clearly demonstrates the clinical and economic of Altrazeal. This extensive data package gives greater credibility to our story. In some ways it is visual and much easy to understand.

In addition, based on conversations, I have had with financial analysts, there is a growing appreciation that we are in a changing wound care environment. With value based products, we will play an increasingly important role. The potential for Altrazeal to stand out in this environment is becoming more recognized.

I would now like to address some shareholder questions that I have become aware of. First issue is commercialization. There appears to some confusion regarding international strategy and activity? We have a strategic partner in Europe who operate through two entities, Altrazeal AG and Altrazeal GmbH. Both of which are 25% owned by ULURU and our ownership can be -- cannot be diluted.

This group is responsible for the identification and negotiation of signing agreements with marketing partners with the various international territories we have licensed to these entities. Depending on the market, the county licensees have a sales and marketing organization of tens to hundreds of sales representatives.

Ultimately, at the appropriate time when we believe value has been maximized, we will make a similar appointment in the United States and other markets including Canada, Japan and Korea. Consequently, we are represented internationally by many sales representatives who are an extension of our operations.

I had to clarify, how we can compete with major service competitors. Although, we do not have sold employee direct sales forces, we team with partners who have extensive sales and marketing capabilities.

Let me now address Altrazeal AG and Altrazeal Trading GmbH. As I just stated, we have a 25% non-dilutable ownership in these two entities. ULURU sells Altrazeal to these entities who in turn sell to country licensees capturing an undisclosed margin in these entities. Both of these entities have a relatively small expense base. Consequently, as revenue expands, they will quickly become profitable entities.

ULURU reserved the right to purchase the 75% we do not own. I’m asked when will we exercise this option. We would not exercise the option until this was accretive to our earnings where the dilution was inappropriate. As a purchase price is formula based, we can create novels which can optimize the value creation for ULURU. Obviously, such an acquisition will provide a sizable revenue increase.

In summary, it is very rewarding to see product shipped to new markets. This is a culmination of the integration of many labor-intensive activities from securing a partner to designing, packaging, translating and improving our work through quality control and production of packaging. Needles to say the commercialization activities over the past 120 days have been very rewarding and highly motivating.

Nevertheless, our employees recognize we’re just starting. There is a lot of hard work ahead of us to achieve the objectives we have established and more importantly our vision to improve human health and provide benefits to patients, caregivers and payers. To continually see the impact we are having on the quality of life and patients is extremely pleasing.

I remain convinced that Altrazeal has a potential to become the leading wound dressing in the world. Thank you for listening. And now I’d like to open the floor for any questions you may have.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Steven Smith. You may proceed.

Steven Smith - Matrix Capital

Very good morning. How are you sir?

Kerry Gray

Fine. Thank you.

Steven Smith - Matrix Capital

Just a quick question, you mentioned two things, your opening line was on a paraphrase that the revenue for the second quarter is proceeding rapidly and the third quarter perhaps even at a higher pace. You also mentioned a little bit -- later on the financials that only comparison now is quarter-over-quarter and roughly it looks like Q1 versus Q2 was about a double. Since we’re 45 days into Q3, halfway there, I know you don't like to predict but can you give us any color on Q3. And in fact, maybe I’ll help you along. Do you think we're looking at another double for Q3 over Q2 or can you comment along those lines in anyway at all in terms of topline revenue?

Kerry Gray

Certainly, I mean -- as you say we’re 45 days in and as I said we have orders we haven’t been able to fill. So I do have a somewhat of an idea and I would like to think that we could approach the same type of growth in the third quarter.

Steven Smith - Matrix Capital

Wonderful. Thank you sir.


Thank you. Our next question comes from the line of Jason Napodano. You may proceed.

Jason Napodano - Zacks Investment Research

Hi Kerry. How are you doing?

Kerry Gray

Fine, Jason.

Jason Napodano - Zacks Investment Research

So just trying to get a sense of -- from the guidance in terms of countries or markets, you said that you’ll be at 22 by the end of August?

Kerry Gray

That’s correct.

Jason Napodano - Zacks Investment Research

And we’re still online for around 30 or so by the end of the year.

Kerry Gray

No, I think we’ll -- depending on one area, I think we could significantly exceed 30.

Jason Napodano - Zacks Investment Research

Okay. That will be interesting.

Kerry Gray

Yeah. I think -- I would like to think that we could be between 40 and 50.

Jason Napodano - Zacks Investment Research

Okay. So that’s a very obvious large opportunity in terms of revenues from new market. Can you talk a little bit about reorders or whether or not some of your existing markets are starting to essentially re-up on product?

Kerry Gray

Yes, I believe in the announcement earlier this week, we had mentioned they would be filling additional orders for Portugal, for Austria, for Afghanistan. And I think there was one other market and we’ve really got indications that there will be further reorders from the fourth quarter.

Jason Napodano - Zacks Investment Research

Okay. So one of the things, I think is interesting and you touched on it in your prepared remarks, the Accountable Care Organizations and it seems like there is an enormous market opportunity in finding ways to save insurance company’s money and there is no doubt. But then within that, there is an opportunity to be the company that essentially partners with the insurance company on a specific way to save their money.

So I wonder if you could go into a little more detail on your efforts with this Accountable Care Organization and how exactly the process plays out where either ULURU or the partnership’s company that you’re working with, essentially goes in and tries to orchestrate an order or savings of money by introducing the product?

Kerry Gray

Very good. Let me Jason, you raised really three issues in that question. One is we talk about insurance companies but one of the problems is insurance companies, 70% of their business is shuffling PIPA where they are really only doing is processing claims for large corporations. I think the number is 70%.

Now what is happening the large corporations are saying we must reduce healthcare. I’m aware of one corporation that their healthcare bill is $125 million and they say if we increase revenue of $1 billion we only put $25 million on the bottomline. If we could take $25 million at healthcare, it’s same as our major revenue increase.

So I see what we are seeing and I alluded to with this group here in Dallas I’m aware of. They are running new business in short period of time. And they’ve already got 235,000 insured lives from major, major employers. So I think some of the healthcare reform is going to be driven by the major employers saying to the insurance companies, hey, you people have to get involve, you have this enormous amount of data, you should be directing how patients are treated.

Now with the Accountable Care, I met with our physician advisor and I was quite surprised. One of the problems with wound care is, general practice physicians contained to keep a person with a wound for four to six weeks before they sent to wound care center and during that time they can get multiple rounds, probably three rounds of antibiotics and have suboptimal wound care.

One other things that this Accountable Care organization we are looking at, is saying, okay. Whenever general practice physician sees a wound, we want them to send it to Wound Care Center. If not, we want to give them directions on exactly what should be done, preferably to get a Wound Care Center.

So what happens then is, the Accountable Care Organization says, we wanted to give you product, A, B or C, we do not wanted to give you hyperbaric oxygen, we do not wanted to give you the skin substitute, we wanted to use as much cheaper interventions.

And then, how they get rewarded, the amount of money that has saved they have to pay a bonus to the general practice physician for referring the patient then they have to pay a bonus to the wound practitioner for accelerating the healing of the patient. So that’s the model.

Jason Napodano - Zacks Investment Research

Yeah. It’s a complicated process, but I think there is clearly an opportunity there for you guys. So, and just to follow up on that, the data that you’ve generated in Europe, can you give us the sense, you mentioned that you would like to publish it? Can you give us the sense on when we might see that?

Kerry Gray

I instead going to Europe next month and one of the number that follow up items. I had wanted to put the presentations on my website and I was advised that they didn’t want us to do that because it was hardly significant data that they want it published. So, I would, I will be checking on that in the next 30 days, together with some other outstanding clinical issues.

Jason Napodano - Zacks Investment Research

Got you. I appreciate the update. Congrats on the good quarter.

Kerry Gray

Thank you.


(Operator Instructions) There are no questions waiting from the phone line.

Kerry Gray

Well, thank you very much for participating. We are, obviously, very excited here. There has been some delays, I apologies for those. I mean, frankly, a lot of problems we kind of were unforeseen, but now, I think, we are on a very, very, very positive track and I am looking forward to having Altrazeal available globally and that’s our current push. Thank you very much.

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