Call Start: 08:32
Call End: 09:07
QLT, Inc. (QLTI)
Q4 2011 Earnings Results Conference
February 23, 2012 8:30 am ET
Executives
Robert Butchofsky – President and CEO
Cameron Nelson – Vice President, Finance and Chief Financial Officer
Karen Peterson – Investor Relations Specialist
Analysts
Doug Miehm - RBC Capital Markets
Scott Henry – Roth Capital Partners
Jason Aryeh - JALAA Equities, LP
Operator
Hello. This is the Chorus Call conference operator. Welcome to the QLT Inc. Fourth Quarter and Year-End 2011 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)
At this time, I’d like to turn the conference over to Karen Peterson, Investor Relations Specialist. Please go ahead.
Karen Peterson
Good morning, everyone. And welcome to QLT’s fourth quarter and year-end 2011 earnings conference call. If you have not yet received a copy of our press release, you can find it by visiting our website at www.qltinc.com. The conference call is being webcast live and will be available on our website for the next 30 days.
Presenting today is Bob Butchofsky, our President and CEO; and Cameron Nelson, Senior Vice President and Chief Financial Officer. Before I turn the call over to Bob, let me review the Safe Harbor statement.
On behalf of the speakers who follow, we caution investors that certain statements in this conference call is forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and constitute forward-looking information within the meaning of Canadian Securities Laws. For the purposes of this caution, we refer to such statements as forward-looking statements.
Forward-looking statements are predictions only, which involve known and unknown risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.
For additional information about the material factors or assumptions underlying such statements, and about the material factors that may cause actual results to vary from those expressed or implied in such statements, please consult our earnings press release sent out earlier this morning and available on our corporate website, as well as our filings with the U.S. Securities and Exchange Commission and the Canadian Securities regulatory authorities, including the risk factors detailed in the most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q.
QLT undertakes no obligation to update such information to reflect later events or developments, except as required by law. This call also includes a discussion of non-GAAP financial measures as defined by applicable securities laws. The most directly comparable U.S. GAAP financial measures and the information reconciling these non-GAAP finance measures to QLT’s financial results prepared in accordance with U.S. GAAP have been included in the earnings press release issued earlier today and posted on our website.
And, with that, I’ll turn the call over to Bob.
Robert Butchofsky
All right. Thanks a lot, Karen. Good morning, everyone, and thank you for joining us on our fourth quarter and year-end 2011 conference call. I’m going to spend most of my time this morning highlighting updates or development pipeline starting first with review of the synthetic retinoid program, followed by our punctal plug delivery program and have a short discussion on Visudyne and the macular degeneration market.
Let’s start with QLT091001, our retinoid product for inherited retinal diseases. As most of you know the next milestone for the program as the upcoming data for the Retinitis Pigmentosa or RP Phase 1B trial, which we expect to have it you before the end of the current quarter. The QLT R&D Day we held in New York last December, I told you that based on higher than expected demand especially from the new treatment centers in both the U.S. and Europe that we were expanding the trial from the original target of 14 RP patients, up to a maximum of 20 RP patients.
We are now expecting to report top-line data in the first quarter on 17 subjects from the trial. And you should expect this will be a top-line preliminary endpoint summary release. We are expecting that a more detailed presentation of the results from the RP trial will be made in the second quarter this year. If the results of the RP trial are positive, then we plan on presenting at the ARVO meeting held in Florida in early May and potentially to other meetings as well.
We’ve also initiated a retreatment study for RP patients and we will be able to discuss that with you later in 2012. Last on this program, I like to take the opportunity to thank our global investigators and their patience for the work and input in the RP program. We hope to generate positive data from this trial.
Now let’s turn briefly to our Leber Congenital Amaurosis or LCA program, which is a Phase 1B trial for pediatric subjects. We completed the four cohort study of 14 subjects in the second half of last year and we are continuing to focus our efforts on collecting retreatment data in patients with LCA. Some patients are in the process of being retreated and we’re expecting to continue to retreat patients into the second quarter of this year.
As a reminder, I want to mention that we face some logistical challenges and get any LCA patients back at children’s hospital at McGill University in Montreal where all of the retreatments are taking place. The patient follow-up takes place over 30 days and most of the children in trial have to travel to Montreal with one or both of their parents or guardians. So we face some difficulties getting children out of school and parents out to work for that period of time.
Our goal is to have enough patients retreated with QLT001 to help guide us in our development planning and also discuss with the FDA and other regulators in the second quarter this year, so we can help facilitate final decision making on the proposed treatment regimen.
As I mentioned previously, our goal is to initiate a potential pivotal trial in the second half of this year. We continue to have an ongoing dialogue with both the FDA and EMA as for our pivotal trial design and our retreatment data will be a very important part of that overall dialogue. As always we will continue to keep you updated on our progress, especially as it relates to the timing of the initiation of our pivotal trial.
Now I want to switch gears and turn briefly to our Punctal Plug Delivery System program in Glaucoma. We are actively enrolling patients in the Glau – Phase II Glau 12 and 13 trials. Our goal is to get a total of a 110 subjects into the two studies. Recall that the Glau 12 trial is designed to see if there is a dose response in a double plugging regimen or replace punctal plugs with latanoprost in both the upper and lower punctum.
In this study we are using the same drug dosing as the Glau 11 trial and that is a total drug load of a 141 micrograms with 95 micrograms in the lower plug and 46 micrograms in the upper plug. This arm of the study compares with the new higher dose with a 190 microgram total drug load and that consists of 95 micrograms in both the lower and upper punctum.
Additionally, the Glau 13 trial is underway and that trial is designed to assess whether the positioning of plugs is of greater significance than the dose, thus helping to determine if the additional efficacy we demonstrated in Glau 11 last year was due to the positioning of the plug in the upper lid. Both of these trials will also inform us of the duration of the efficacy, since the trials will follow patients for up to 90 days, recalls that our Glau 11 study only follow patients for 30 days.
As I mentioned both the Glau 12 and 13 trials are actively enrolling patients here in Q1 and we’re on track to deliver results from these trials and that’s expected in the second half of 2012. These trials are using our initial proprietary upper plug, which demonstrated retention rate of 81% at four weeks which we report on our conference call last quarter.
We have a device only trial also going in parallel in which we’re making slight design modifications to our proprietary upper plugs with a goal of improving the overall retention rate over a longer period of follow-up. Our goal is to complete our design changes in the upper plug, so we can finalize our plug design before year-end to enable the potential initiation of a pivotal trial with this platform in 2013, if the Glau 12 and 13 studies yield positive results.
Overall, we’ve a corporate objective of advancing our current pipeline so that we could potentially have three Phase III pivotal studies occurring next year. And that’s broken down as follows. The LCA trial was 001. The RP trial was 001 and the Punctal Plug program in glaucoma.
A summary of our clinical milestones for the rest of year starts with the upcoming announcement of RP data before the end of the current quarter, and ongoing generation of retreatment data in the LCA program in the second quarter.
We’re also working towards a desired final agreement from the FDA and EMA on pivotal trial designs for 001 and LCA. And we expect to complete enrollment in the glaucoma punctal plug trials in Q2 and report data in the second half of 2012. So, it’s obviously a very busy year for us on the development side.
I’d like to turn briefly to Visudyne. As you can see from our release today, the U.S. Visudyne results, we had a good quarter in the fourth quarter last year. The demand was 63 vials per day in the U.S., that’s up from 56 vials per day in the third quarter. It’s certainly possible that we could see a short-term negative impact on our Visudyne sales based on the launch of the new anti-VEGF agent from Regeneron. However, we’re not currently experiencing any significant impact on our business from the introduction of this new molecule in the AMD market.
Our commercial team continues to do a good job of ensuring that physicians are aware of Visudyne’s unique mechanism of action and treatment of predominantly classic wet AMD patients with persistent activity.
We’re also on track to file an application for approval for new PDT laser in the first half of this year. Historically, most PMA submissions are reviewed in six months. So we’re hoping for positive response from the FDA that will allow us to launch the new laser in early 2013.
Final comment around our financial guidance, I wanted to highlight that last year, our percentage of R&D allocated to each of the development programs was approximately 55% to the retinoid program, 40% to punctal plugs and the remaining 5% of our budget allocated to Visudyne. The Visudyne allocation is primarily financial support for investigator sponsored trials and also development expenses for the new laser.
Broadly, we expect this allocation to be similar in 2012, although there is always a potential for spending to shift through the year as we do adjust our spending based on data generated from clinical and preclinical trials. The other piece of financial guidance I want to address is our expected adjusted cash flow, which does include the contingent consideration for Eligard for 2012.
As I’ve been saying for several months, we expect the adjusted cash flow negative in 2012 with the mid-point of our financial guidance at about negative $13 million. We feel strongly that the investments we’re making on our pipeline are warranted. We’re very excited about our prospects generating meaningful clinical trial results in 2012.
So, that’s it from my prepared comments, I’ll turn it over to Cam now, who will walk you through the financials for the fourth quarter and year-end.
Cameron Nelson
Thanks, Bob. We’re pleased to maintain positive adjusted EBITDA in the fourth quarter of 2011 at $2.1 million and for the year we generated $5 million of adjusted EBITDA and ended 2011 with over $205 million of cash, which was down about $4 million from the end of 2010 even though we returned almost $19 million of cash to shareholders through our share buybacks.
I’m going to briefly outline our Q4, 2011 financial results and then review the highlights of our 2012 guidance before we open the call for Q&A. Leading off with Visudyne sales, as noted in the press release, worldwide sales in Q4, 2011 were $22.4 million, which was down $2.1 million from the fourth quarter of 2010 with declines in both the U.S. and rest of world.
The regional split for sales in Q4, 2011 was U.S. $5.4 million, Europe $5.7 million and rest of world $11.4 million. The U.S. end-user demand averaged 63 vials per days in Q4 2011, down from 73 vials per day in Q4, 2010, but up sequentially from 56 vials per day in the third quarter of 2011.
Full-year worldwide sales of $90.3 million were basically flat to 2010 as U.S. sales declined by 7% while rest of world sales were up almost 2% year-over-year. U.S. end-user demand averaged 64 vials per day for the full-year in 2011, down from 71 vials per day in 2010.
Foreign exchange rate movements had a favorable impact on rest of world sales growth. Compared to 2010 full-year rest of world sales were up $1.2 million, but there was a favorable FX impact of approximately $3.9 million that drove this improvement. The regional breakdown for full-year 2011 sales was U.S. $21 million, Europe $25.5 million and rest of world $43.7 million.
And just one final note on Visudyne sales, our U.S. distributors ended the year holding about eight days of supply, which is inline with the typical inventory levels that they hold.
Now turning to the financial statements, in the fourth quarter we reported total revenue of $11.1 million, which bought our full-year total revenue to $42.2 million. In the quarter, net product revenue was $7.7 million, which included the $5.4 million of U.S. end-user Visudyne sales and $1.9 million related to the shipment of a batch of Visudyne to Novartis, plus about $0.3 million for reimbursement from Novartis of rest of world royalties and other expenses.
Royalty revenue, which is the 20% royalty that we earn on Novartis is sales of Visudyne outside the U.S., with $3.4 million in Q4. This is down 8.2% from the prior-year, which was inline with the decrease in end-user sales outside the U.S. Cost of sales was $3 million in Q4, and this included $1.6 million related to the product shipment to Novartis.
R&D expense was $11.2 million in the fourth quarter and $43.5 million for the full-year 2011. The full-year R&D expense was up 30% from 2010 mainly due to higher spend on our Synthetic Retinoid program. In 2011, about 53% of our R&D expense related to the retinoid and 43% was on plugs, while in 2010 only about 28% of our R&D spend was on the retinoid, while 62% was on the plug program.
SG&A expense was $6.5 million in the fourth quarter and $25.7 million for the full-year. The $4.9 million increase for the full-year 2011 was mainly due to higher Visudyne sales and marketing costs, pre-launch research and activities to potentially establish a payor program for the retinoid product as well as separation costs related to the departure of our former CMO in the first quarter last year.
Investment and other income was driven by gains on the fair value change in our contingent consideration asset, which totaled $3.2 million for the quarter and $10.1 million for the full-year 2011. The gain reported in the fourth quarter benefited from a 1 percentage point reduction in the discount rate used to revalue the contingent consideration asset, and this rate now stands at 9%.
On the balance sheet, the contingent consideration asset was reported at $99.9 million, which was split into a current portion and the long-term portion. And again, this amount represents the estimated present value of the $114 million of payments that as of December 31, 2011, we expect to be paid from Eligard royalties over the next three to four years.
Moving on, we had positive adjusted EBITDA plus contingent consideration of $2.1 million in the fourth quarter and $5 million for the full-year. Our contingent consideration earnings totaled $11.1 million in Q4 and $38.9 million for the year.
At year-end, we had a mortgage receivable of $5.9 million on our balance sheet that has subsequently been collected in January 2012. This was the final installment owed to us, so beginning in Q1 2012 we’ll no longer have a mortgage receivable on our books.
On the share buyback, during the quarter we repurchased just over half a million shares at an average price of $6.85 per share for a cost of approximately $3.5 million. In total, under the normal course issuer bid program, which expired on December 15, 2011, we repurchased 2.7 million shares at an average price of $6.99 per share for a total cost of $18.9 million.
And finally on the 2011 results, capital expenditures in Q4 were approximately $1.2 million, which brought the full-year CapEx to about $3.3 million.
In terms of guidance for 2012, you’ll notice in the press release that we’re no longer guiding on Visudyne sales, but we continue to guide on revenue and cost of sales, which we believe really reflect the relevant economics of the brand to the company.
The guidance range for total revenue is $35 million to $40 million with cost of sales of $6.5 million to $8.5 million. The declines from 2011 are primarily because we shipped three batches of Visudyne to Novartis in 2011, but are expecting only one shipment in 2012, and this accounts for approximately $4 million drop in revenue year-over-year.
Its worth noting that the mid-point of our revenue on COGS guidance yields a gross margin of approximately $30 million which is basically inline with the gross profit of $29.5 million that we saw in 2010 and $31.8 million in 2011.
We expect R&D activity to increase in 2012 and our $52 million to $57 million guidance range represents 19% to 31% increase over R&D spend in 2011. The SG&A guidance range for the year of $27 million to $30 million is up from $25.7 million in 2011. And the increase is primarily due to planned recruiting and relocation cost to expand our R&D team.
Visudyne sales and marketing spend is expected to be between $9 million and $10 million in 2012 and this is inline with the spending we saw in 2011. Also of note we expect to earn approximately $35 million to $39 million in contingent consideration in 2012, representing 80% of the royalties on Eligard sales occurring in 2012 and this is compared to $38.9 million in 2011.
Due to the anticipated ramp-up in R&D expense, we’re projecting that adjusted EBITDA plus contingent consideration in 2012 will be a loss of between $10 million and $17 million, which again is down from $5 million of positive earnings in 2011. And one final note for 2012, we expect our inventory balance to increase by approximately $5 million this year. The increase is due to the plant manufacturing of an intermediate material that is used in the production of Visudyne. The manufacturing plant for the second half of the year and it fulfills a minimum purchase requirement with our supplier.
And with that, I’ll turn it back to Bob.
Bob Butchofsky
All right, thanks a lot Cam. Laura, if you don’t mind, can you open the call for questions please.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Doug Miehm of RBC Capital Markets. Please go ahead.
Doug Miehm - RBC Capital Markets
Good morning, Bob and Cam.
Bob Butchofsky
Hi, Doug.
Doug Miehm - RBC Capital Markets
Just with respect to the outlook for the Phase III trial that will start in the second half of this year in LCA, can you give us maybe a bit more detail with respect to some of the key considerations that you’re going to be talking to the regulatory agencies about?
Bob Butchofsky
Sure. I'll tell you, kind of what's finalized at this point or what looks to be finalized. We’re at a point where the agency has basically agreed to the sizing of the trial, we’re expected to be around 30 to 40 subjects. The dosing and the dose frequency and administration is still something that we’re actively going to be talking to them about, and that’s where the retreatment data is going to be extremely important to understand. And as a result, the duration of the study is still up in the air.
But we've agreed to the primary endpoint being, that will be measured as Goldmann Visual Field which we’ve been reporting, visual acuity and quality of life will be secondary endpoints. And so basically where we’re in the process Doug, we still are providing the agency with some data, both retreatment, but also the remaining portions of our preclinical and clinical package. And we’re planning and hoping to have an End-of-Phase II type of meeting during the second quarter so that we can advance the program and get the pivotal started just as soon as we can thereafter.
Doug Miehm - RBC Capital Markets
Okay, perfect. When you think about the punctal plug programs then and hopefully getting into Phase III clinical trials as well in glaucoma in 2013, do you think you kind of gen – be able to generate all the data that you want under these Phase II trials that you’re running this year?
Bob Butchofsky
Well, that’s certainly the goal. We think that the Glau 12 and Glau 13 studies will give us the read on the duration of benefit and on which dosing regimen and – or if we need to take multiple dosing regimens potentially two dosing regimens into the Phase III. In parallel the plug design work for the upper plug, in particular, is really designed to help them improve our retention rate and the goal remains to try and demonstrate a 90% retention rate in both the upper and lower plugs over 90 days.
So we’ll be advancing the program to try and meet those objectives and as we said we should complete enrollment in the Glau 12, 13 studies in the second quarter which should put us in position to had a readout in the second half and then we’ll be making decisions about whether or not the data is sufficient to allow us move into pivotal. And if so, then we also start to plan for our End-of-Phase II meeting with the agency, going to view our data with them before we start the trial.
Doug Miehm - RBC Capital Markets
Okay. And then just to wrap up, you still have a lot of cash. Are you looking at any new technologies or opportunities or do you think you have enough on your plate right now?
Bob Butchofsky
Well, we’re pretty excited about the potential to have three Phase III programs next year, but we’re always opportunistic in looking for other opportunities to invest in. So yeah I certainly would never want to guarantee we're going to do something, but we remain active in the space and would look for opportunities that we think could add value and especially for earlier stage molecules or platforms that we think would be complementary to the programs we've ongoing.
Doug Miehm - RBC Capital Markets
Okay, great. Thanks.
Bob Butchofsky
Thanks, Doug.
Operator
[Operator Instructions] The next question comes from Scott Henry of Roth Capital. Please go ahead.
Scott Henry – Roth Capital Partners
Thank you, and good morning guys.
Bob Butchofsky
Hi, Scott.
Cameron Nelson
Hi, Scott.
Scott Henry – Roth Capital Partners
Just for clarity on 091001, the LCA trial will or should start in the second half of 2012, what's the timeline on RP from in terms of a pivotal trial?
Bob Butchofsky
We need to cross the barrier first Scott, and make sure or see what the results are from the original 17 subjects. So we’ll be reporting that data as I said this quarter. If that data is positive, then we’ll be generating retreatment data for the next quarter or two. And – but then if that goes well then we’ll look to potentially start a pivotal either late this year or early next year, I think would be the overall goal.
Scott Henry – Roth Capital Partners
Okay. And that you’re going to report a 17 patient versus 14. Is there a mix we should look for in terms of LRAT or RPE65?
Bob Butchofsky
No, I mean RPE65 is the more prevalent of the two mutations. So the expectation would be that you see more of those patients in the trial. And it definitely is our goal to definitely treat some LRAT subjects in the study, but we’ll break that out whenever we’ve our trial results.
Scott Henry – Roth Capital Partners
Okay. And then when we do our modeling for 2012, how should we think about the quarterly mix which really just comes down to the R&D spend? Is it steady throughout the year or should we see a peak in the middle of the year, how should we kind of think of quarterly timing?
Bob Butchofsky
I think you should view it more as a ramp Scott, I think as we advance the things towards Phase III our spending should pick up in the second half and that’s assuming, and our R&D budget really assumes that all of our programs continue to advance. So I’d look at it as a slight ramp throughout the year.
Scott Henry – Roth Capital Partners
Okay. And then just a couple of other financial questions, the share buyback, I forget, what is the timing? When should we hear of [packet 3] initiated or updates there?
Bob Butchofsky
So the buyback that we had in place expired in the middle of December. We do not have another program in place, to think a big difference is over the past several years we’ve been managing the company with positive cash flow, and that’s no long positive based on the investments we’re making in particular in R&D and in the pipeline. So we will continue to view that opportunistically, but at the current time we do not have a stock buyback plan in place.
Scott Henry – Roth Capital Partners
Okay. And then even now, I am not going to ask you for guidance longer term, but when we think about 2013 and 2014, if these programs are successful which is obviously a good thing, how should we think of R&D spend in outer years? Should we think about kind of Q4, 2012 that rate continuing, or how should we think of the cost of pivotal versus the kind of Phase II work you’re doing right now, kind of varies in magnitude?
Bob Butchofsky
I’ll give you the 10,000 [foot to] you Scott, which is – R&D is going to continue to go up I think next year. We expect to offset some of those expenses, in particular, if the glaucoma program continues to go forward, we would seek to out license that program for Europe and Asia. And I think that will offset some of the additional cash burn in investments we are – we’ll be making in that program in the Phase III trial. So broadly I do expect our R&D programs to go up, but I expect to offset some of that expense without licensing of plugs as we advance that program.
Scott Henry – Roth Capital Partners
Okay. I guess just the final question, there’s been a lot of acquisitions in the ophthalmology sector. When you think about Visudyne, as opposed to adding on to it, is it possible that you could divest that product, I mean, do you think there’s any interest out there for it?
Bob Butchofsky
Sure, I mean that the product is a nice product, it is generating positive cash flow to us. Is it possible? Absolutely, I think if we wanted to I think we could divest Visudyne. I think there’s a strategic benefit to us to continue to market Visudyne. I think it parallels well with the advancements we’re making with QLT001 and that we’re calling on retina specialists today, we've established relationships with them in the U.S., there is brand and name recognition of QLT within the retina space and I think all those things will be beneficial to us as we consider bringing 001 to market. So while I think we could divest Visudyne, I don’t think it’s the right strategic move based on the advances we’re making with 001.
Scott Henry – Roth Capital Partners
Okay. Well, thank you for taking the questions.
Bob Butchofsky
Thanks a lot, Scott.
Operator
The next question comes from Jason Aryeh of JALAA Equities. Please go ahead.
Jason Aryeh - JALAA Equities, LP
Good morning, Bob and Cam.
Bob Butchofsky
Hi, Jason. How are you?
Jason Aryeh - JALAA Equities, LP
Good. Couple of questions; what type of data do you need to move into a pivotal for a punctal plug?
Bob Butchofsky
So the overall goal has always been to see a greater equal to 5 millimeter increase or decrease in intraocular pressure. We chose that specifically because the assumption for the pivotal study is that we’ll be running a non-inferiority trial against Timolol eye drops, and we think that’s really a threshold.
In market research data that we’ve generated, we think physicians would prescribe this product even if we had a lower efficacy outcome than 5-millimeters of pressure. Obviously, we’ve better pressure control than that and I really think it is simple product and we’ll continue to advance that from there.
Also on the retention rate, which is the second key parameter, I mean, again our goal is always been trying to demonstrate 90% retention in plugs that are placed in the eye. We mitigate some of the risk of that by the development of a detection tool that we expect to use in our Phase III study, but those are the two real parameters, 5-millimeter or greater efficacy and we’re striving for 90% retention.
Jason Aryeh - JALAA Equities, LP
Great, thank you. Now, you’ve given a little bit of a breakdown in what’s in R&D spend on retinoid, but what is – can you breakdown the rest of R&D and tell us where it brings you in each program to what stage of development?
Robert Butchofsky
Well, the overall assumptions are that the pipeline progresses through the year. So, the retinoid – the two main studies are basically the LCA, the retreatment data that we’re collecting moving into the pivotal, RP assumes that we move towards the pivotal, then also it includes all the manufacturing and preclinical studies that are ongoing that would include TOX and PK and all those programs. So that’s included in about the 55% level spend for this year.
In the plugs, 40% or so spending, it’s broken down by the ongoing glaucoma study, the device-only trial work on our detection tool. And also we’ve two or three preclinical programs, one or two of which could advance in the clinical studies this year. We’ve another molecule in glaucoma and we’re also looking at anti-inflammatory. So that would encompass the 40% or so of the plug expense.
And then on Visudyne, it’s primarily investigator sponsored studies that we continue to support and then the development work around the laser.
Jason Aryeh - JALAA Equities, LP
Great. Around Visudyne, you said just now that its cash flow positive for us, is that including the royalty because the numbers are unclear?
Robert Butchofsky
Well, Cam, why don’t you break that down for Jason?
Cameron Nelson
Yeah. The U.S. business on its own is profitable and I’m just rounding, so last year we did a little over $20 million of sales, but for math simplicity, if you assume a top-line in the U.S., let’s say, $20 million at about 90% gross profit you’re looking about $18 million of gross margin and then takeaway the 9 or 10 that we spend in the U.S. to support that and you’re still generating $8 million or $9 million of operating profit just on the U.S. business and then the royalty that we get on the rest of the world would be an addition to that and brings the total brand probably up to $20 million of profit.
Jason Aryeh - JALAA Equities, LP
Okay, great. And I assume Bob from what you had said to the prior question or that, you really looking at – that the sales force is going to stay in place in Visudyne, eventually to transition to plug and/or LCA RP, is that right?
Robert Butchofsky
That’s correct. That sales force should really transition towards supporting the retinoid.
Jason Aryeh - JALAA Equities, LP
Okay, great. And I assume if any of the pipeline assets, God forbid have negative readouts this year that will bring this years burn down or is it already embedded in the year?
Robert Butchofsky
It really depends – Jason, it depends on when and where we had a failure if you will. So I don’t really want to speculate, but I think all I can tell you is that the R&D budget is based on success.
Jason Aryeh - JALAA Equities, LP
Great. Thank you, guys. Good job in a quarter.
Robert Butchofsky
All right. Thank you, Jason.
Operator
There are no further questions at this time. I’ll now turn the call back over to Mr. Butchofsky for concluding comments.
Robert Butchofsky
All right. Well, thank you everyone for joining us on the call. Look forward to a release before the end of the quarter with our RP data and then we look forward to hopefully presenting positive results at ARVO in May. Thanks again everyone.
Operator
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day.
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