Juniper Pharmaceuticals, Inc. (NASDAQ:JNP)
Q3 2016 Earnings Conference Call
November 15, 2016, 8:30 A.M. ET
Amy Raskopf - Director of Corporate Communications
Alicia Secor - President and Chief Executive Officer
George Elston - Chief Financial Officer, Treasurer, Secretary
Nikin Patel - Chief Operating Officer, Director
Michael Higgins - Roth Capital Partners
Robert LeBoyer - Aegis Capital
Good morning and welcome to the Juniper Pharmaceuticals Third Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Amy Raskopf. Please go ahead.
Thanks Kate and good morning everyone. This is Amy Raskopf, Juniper's Director of Corporate Communications. Thanks for joining us this morning. If you have not already seen it, please access our Q3 results press release online at ir.juniperpharma.com. This call is being webcast in that location as well.
During the course of the call, management will make projections and other forward-looking remarks regarding future events and Juniper's future performance. These forward-looking statements reflect our perspective on current trends and information and are not based on historical information.
Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in today's press release and Juniper's filings with the SEC on Forms 10-K/A, 10-Q/A, 10-Q and 8-K. Actual results may differ materially from those projected in the forward-looking statements. Juniper specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law.
Information about the replay and archived webcast of the call are included in this morning's press release, so please have a look there. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on November 15, 2016. Please reference our most recent press releases and filings for any subsequent announcements related to the topics discussed.
Now, I’ll turn the call over to our CEO, Alicia Secor.
Thanks Amy and good morning everyone. This was another solid quarter for Juniper. The continued revenue growth from our core business is providing important cash flow enabling targeted investments and product development, while also allowing the company to maintain a strong balance sheet.
I am very pleased to add that this morning we announced the monetization of our U.S. Crinone Royalty Stream with our partner Allergan. This transaction provides Juniper with $11 million of non-dilutive cash to support the execution of our near term strategy and long-term growth plan. I’ll discuss these topics and our pipeline later on in the call.
Before I transition over to our CFO, George Elston to review the financial results, I’d like to highlight that yesterday afternoon we filed our restated financial results on Forms 10-K/A and 10-Q/A along with our 10-Q for the 2016 third quarter. Congratulations to the finance team for a job well done.
Now, I’ll turn it over to George.
Thanks Alicia. The restated financials reflect changes in how a portion of revenue from the sale of our product to our partner Merck KGaA is recognized in a particular period. After a review of the historical agreement, we concluded that because Juniper is entitled to revenue participation in certain countries based on Merck KGaA sales performance, a portion of the ultimate purchase price is considered contingent under accounting rules.
Under this new revenue recognition methodology, the portion of revenue built by Juniper above the minimum selling price, which is our direct manufacturing cost plus 20% is deferred until that product is sold through to customers or disposed of by Merck KGaA. This difference is included in deferred revenue on our balance sheet. We will continue to generate quarterly reconciliations with Merck to record the appropriate revenue based on their performance.
While this accounting change has resulted in the moment of revenue recognition between accounting periods it did not affect our cash position or the economics from the Merck relationship.
Moving on to our Q3 results, which are compared to the restated prior year amounts as filed yesterday with the SEC and reflect the new revenue recognition methodology for sales to Merck. Our total revenues increased 5% year-over-year to $11.6 million. This reflects ongoing strong performance by the ex-U.S. Crinone franchise and another quarter of solid growth for our Juniper Pharma Services Business.
Product revenues from sales of Crinone to Merck were $7.1 million, a 5% increase from the $6.7 million in the third quarter of 2015. Under the new accounting methodology, this includes $2.2 million and $900,000 in Q3 2016 and 2015, respectively. Our revenue recognized from the sell-through of products by Merck KGaA. This increase was driven by end market growth in key markets supported by new market sales in Japan where one Crinone and was approved in July and launched in September of this year.
Juniper Pharma Services revenues were up 4% over the third quarter of 2015, despite the weakness of the British pound against the U.S. dollar. Strong customer volume continues, as well as largest scope in higher value programs within our service business. On a local currency basis, JPS revenues were up 22%, as compared to the same quarter in 2015.
Our third quarter royalty revenues from Allergan sales of Crinone in the U.S. were up $100,000 year-over-year. Gross profit rose to $5.9 million versus $4.4 million in the prior year. Gross profit as a percentage of total revenues increased to 51% for the third quarter of 2016 compared to 42% last year supported by improved JPS margins.
Total operating expenses increased by $1.5 million over the prior quarter to $5.7 million. This was driven by higher R&D costs associated with the now concluded Phase 2b clinical trials for COL-1077 and G&A costs associated with organizational growth.
Turning to the nine months ended September 30, 2016 and using the same revenue recognition methodology and restated prior-year figures, total revenues increased 13% over the same period last year to $33.6 million. Product revenues increased 13% to $20.7 million from $18.4 million in 2015. This includes $5.5 million and $3.8 million in 2016 and 2015, respectively of revenue from the sell-through of products by Merck KGaA.
Service revenues increased 19% to $10 million, despite the negative impact of the strong dollar versus the British pound. On a local currency basis, service revenues were up 31% versus the first nine months of last year. Royalty revenues were 2% higher in 2016 versus the prior-year period. And gross profit increased to $15.1 million with a gross margin of 45%.
Operating expenses increased to $19 million in 2016, driven mainly by higher R&D and G&A costs, which increased by $3.1 million and $2.5 million respectively over the same period last year. Cash and cash equivalents were $15 million as of September 30, 2016, which is $1.1 million increase from December 31 of last year. With the monetization of the U.S. Crinone royalty stream with Allergan, we will record a one-time $11 million payment plus the month of October as royalty income in the fourth quarter of this year, and thereafter our total revenue will consist only of product and service revenues.
With that I’ll turn the call over to Nikin Patel, our Chief Operating Officer to discuss our core business activities.
Thanks George. Starting with our largest single revenue source Crinone, our long time partner Merck KGaA is the global leader in the area of fertility treatment thereby Pharma division markets Crinone alongside five other leading fertility products to provide strong support to the couple struggling with infertility.
Our [indiscernible] production to Merck has essentially doubled over the past three years, which testifies to the products growth outside of the U.S. We expect continued value from this product with China established as the largest growth market for Crinone and expect contributions from Japan going forward.
We will continue to support Merck as they build market share for one Crinone in Japan and look forward to seeing how the launch progresses over the next few quarters. In both China and Japan there were two underlying factors at play. Couples are marrying later in life, and the average age of first-time mothers is rising. Pregnancy rates decreased progressively as women age. So it’s no surprise that ARC rates are on the rise in those countries.
Additionally, China's universal two-child policy took effect this year on January 1, replacing the former long-standing one child policy. As a result, millions of couples are now eligible to have a second child. This is an important contributor to the growth in China.
Moving on to our service business, this was our seventh consecutive quarter of revenue growth on a local currency basis, trends across the business are posted, our client base is expanded and continues to grow, our average project revenue is up, and our gross margin continues to improve.
We made incremental capital investments in advanced manufacturing technologies to support newly contracted customers. This will enable value-added expanded service offerings to support anticipated JPS revenues beginning in 2017. Additionally, I am pleased to announce that JPS is recently named a preferred provider by one of the Top 10 global pharmaceutical companies.
We expect our strong pipeline of projects from both current and new customers on both sides of the Atlantic, we feel on growing growth at JPS.
Now back to Alicia for an R&D update.
Thank you, Nikin. We are committed to our strategy of creating long-term shareholder value through the development and the selective commercialization of proprietary products, including our current pipeline that leverages our intravaginal ring or IVR technology. We believe this innovative IVR platform holds significant potential to deliver a wide variety of drugs to address both unmet and underserved needs in women's health.
We have greatly enhanced our scientific knowledge of our multi-segment IVR technology this year through the advancement of our pipeline Canada, importantly though it’s not a one type fits all technology. The approach to IVR drug formulation must be customized to the unique properties of each product candidate.
In addition to determining the release profile of a drug, each program is dependent on a number of factors including specific drugs characteristics, polymer chemistry, and manufacturability. For example, a different technical approach is required with a hydrophilic molecule like oxybutynin in order to slow down the release rate versus the hydrophobic molecule.
We are applying our expertise at JPS to tailor the formulation approach for each program, while also working to expand both our know-how and our IP portfolio in the process. In Q3, we conducted an animal study of JNP-0101, which successfully delivered oxybutynin vaginally in a sheet [ph] model. Although this was only a pilot study, the results were consistent to the extent that we observed an in vitro in vivo correlation. This gives us an excellent model to allow us to make rational adjustments to the IVR design and to test different IVR formulations quickly.
This facilitates timely goal, no-go decision points prior to proceeding into the clinic and significantly de-risks our program. We will provide an update on the IVR clinical trial timing in the coming months. Work on our natural hormone IVRs also continues to advance and the prototype development for both JNP-0201 and JNP-0301 remains on track.
JNP-0201, a two segment IVR for hormone replacement therapy is comprised of an estradiol segment to address the symptoms of Menopause coupled with a natural progesterone segment to protect against endometrial hyperplasia. JNP-0301 is a natural progesterone IVR intended to prevent pre-term birth in women with a short cervix at mid-pregnancy.
We expect to report on our meeting with the FDA and discuss next steps for the program by the end of this year. We are taking a very fresh look at all Juniper programs to ensure that we appropriately prioritize resourced allocation and program sequencing in the near-term. We’re planning for selective and judicious use of cash and cash flow from operations next year to ensure that we maintain a strong balance sheet.
In addition, we plan to select selectively evaluate acquisitions and in licensing opportunities with the goal of bringing in one or more women's health therapeutics to enhance our portfolio. We are being very deliberate about the opportunities that we’re evaluating and we look forward to bringing in something that’s a clinical stage or commercial asset. Our aim is to create a new trajectory for the company and to support our next stage of growth.
We’ll take time to be thoughtful, just strike the right deal at the right time. And while this may be a long-term effort, it remains a priority for the company. We are coming at Q3 with the great momentum. Crinone and our service business continue to grow and we have additional evidence that validates our IVR technology. We have a strong cash balance sheet and cash position strengthened by the royalty monetization that we announced today. We are poised to enter 2017 in a strong position focused on operational execution.
So with that, I’ll conclude and ask the operator to please open up the call to questions.
[Operator Instructions] And we have a question from Michael Higgins of Roth Capital Partners. Please go ahead.
Thank you, operator. Good morning guys. I apologize, I may have missed some of the comments that were in call this morning. But I want to ask a few questions if I could. Let me start with the restatements, congrats on your restatements completed so quickly from just a few weeks ago. I know you worked with current [indiscernible] any additional restatements expected as far as your internal efforts, is the issue behind you?
Thanks for that question Michael. Yes, the team worked very diligently to get through this. As we announced on the 8-K it’s really an accounting driven change not anything related to our core business of practices and we’re able to get through that pretty quickly. And to answer your question very directly is no, we do not expect any additional restatements. I mean I think we've been through this very thoroughly. You may recall this is an accounting practice that had been in place for 16 years at the company, and so we are all a little bit shocked when we got the re-look at it, but it is what it is and we've gotten through it.
I think the important takeaway there is it doesn't affect our economics and it didn't affect our cash. And so we worked through the accounting. To your point, we did have two accounting firms because we were in the middle of the transition, they worked very well to gather and help us get through this. No one was more pleased than me to see the SEC filings go in yesterday.
Yes, I'm sure. All right thanks. And speaking of cash, congrats on the monetization of U.S. any potential full monetization of the ex-U.S. in terms of the parts and pieces, JPS is quite integrated into your company, what about the ex-U.S., any plans there?
Yes. I think, certainly the U.S. was very simple. It is a passive royalty and we did that deal with our partner and so the modeling, it made sense for both companies and I think it was a very fair transaction that we struck with them. Ex-U.S., remember the Crinone franchise outside of the U.S. is we manage and take product risk and there is multifaceted production that we oversee for our partner and so monetizing that, obviously it would be very different, I mean there is always the option to do a structured deal on that cash flow or that revenue, but as you know that’s pretty expensive money and we're not looking to do that anytime soon.
Right. Make sense. And can you give me an update on the government plans [indiscernible], maybe you commented, but any potential for a second pilot study, I think that’s what was in the works as of the last summer, but things may have changed and then the timing for the start.
Right, thanks Michael and good morning. And so, as I mentioned you may have missed the comment, but we did receive results from our first pilot chief study with oxybutynin and we did see a nice consistency in terms of the in vitro in vivo correlation. The pilot study gives us a nice model to be able to iterate and quickly test new formulations, and I think our plan is to make slight iterations, which is the natural part of drug development, especially when you're working with a sophisticated drug delivery system like the IVR. And moving into the next pilot study will allow us to make sure that we've got the right optimized formulation before we move forward with clinical plans.
Okay very good. Thanks guys.
[Operator Instructions] The next question is from Robert LeBoyer of Aegis Capital. Please go ahead.
Good morning and congratulations on the results of the quarter. I have a question on revenues and any updates for guidance for sales of the coming year or 2017?
Good morning Robert, thanks for the question. It's been - because of - there is really two factors at play, I think the volatility in the currency translation along with the new accounting policy for revenue recognitions making it a little difficult for us to - a firm will provide guidance at this time. I think as we think about the Crinone franchise forward, I think the underlying volume growth in our shipments to Merck remains strong and positive and we expect that to continue to drive cash flow.
I think, as we move into next year we're going to look, we need to get a couple of quarters of this new methodology under our belt before we really see how it takes hold, and so at this point in time we’re not going to perform guidance except to point you to the fact that underlying Crinone business is growing strong and we haven't guided on each business segment separately.
The other factor is, I think our revenues will be pretty significant this year because we will be recognizing the monetization in Q4 and grand it will be a one-time event. And I think as we roll this forward we've been pretty busy affecting the new policy, but it kind of gives us a little bit of a feature question on what moves through, but I think that said, the underlying business continues to grow very strong. We are looking at using our shipments to Merck and as volume driven and while there may be a correlation to revenue we need to get a little bit more experience with that under this new policy.
Yes, you mention the fact that I was getting too. And one-time benefit and the recognition in catch up is really the question, any idea of the magnitude of that or any ballpark guesses as to what that might be?
Well, I think and we will confirm this with our auditors in Q4, but I’m pretty sure, short of some other accounting technicality, which I’m not a technical accounting expert, that 11 million should be a Q4 revenue number for us.
Okay, good. All right, thank you very much, and congratulations again.
There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Alicia Secor for any closing remarks.
Thank you. Well, I’d like to thank everyone for your time on the call today. We appreciate your support. Have a great day everyone and we look forward to keeping you updated again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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