Valeritas Holdings, Inc. (OTCQB:VLRX) Q3 2016 Earnings Conference Call November 10, 2016 4:30 PM ET
Robert Flamm - Senior Vice President, The Ruth Group
John Timberlake - President & Chief Executive Officer
Erick Lucera - Executive Vice President & Chief Financial Officer
Greg Chodaczek - B. Riley & Co., LLC
Good afternoon. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeritas Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to turn the call over to Robert Flamm, Senior Vice President of The Ruth Group. You may begin your conference.
Thank you, operator, and thank you, everyone, for participating in today’s call. Joining me from Valeritas are John Timberlake, President and Chief Executive Officer; and Erick Lucera, Chief Financial Officer. I’d like to remind you that this call is also being broadcast live over the Internet at www.valeritas.com. A replay of the call will be available on the company’s website for 90 days.
Before we begin, I would like to caution listeners the comments made by management during this conference call may include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. Thus forward-looking statements are not guarantees of future performance an actual results and outcomes could differ materially from our current expectations.
For a discussion of risk factors, I encourage you to review the Valeritas Form 8-K filed on May 9, 2016 and other reports as filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast November 10, 2016. Valeritas undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.
With that said, I’d like to turn the call over to John Timberlake. John?
Thank you, Robert, and good afternoon, everyone. I’d like to welcome you to the Valeritas third quarter 2016 earnings conference call. I’d like to begin the call by thanking our loyal customers, employees, and investors for their support during the year. Since being named as CEO in the first quarter of this year, it has become even more apparent to me and Valeritas has the right people to make V-Go a standard of care for patients with Type 2 diabetes, who require a basal-bolus insulin regimen.
On the call today, I will cover three topics, which together demonstrate the outstanding progress we have made on each of our strategic initiatives. First, I will provide a top line review of the quarter with an update on how we have been effectively executing on our new capital efficient sales and marketing strategy.
Second, I will highlight some of the recent corporate events, key additions to our management team, and the Board of Directors. I will then hand the call over to our newest member of executive team, Erick Lucera, who joined Valeritas as CFO at the end of August. Erick will briefly review our financial trends.
And then finally, I will offer some perspective on our expectations going forward for the fourth quarter and beyond, followed by some closing statements, after which we will open the call for questions and answers.
For those that are new to our story, let me start with a brief recap of our history to provide important context to our sales and marketing strategy, which we began to implement earlier this year. Our lead product of V-Go, Disposable Insulin Delivery device is a very simple, discreet, wearable, basal-bolus insulin delivery device is designed for patients with Type 2 diabetes.
V-Go is creating a new and exciting category within the diabetes industry, as it is the only commercially available simple to use, single use, wearable, non-electronic disposable basal-bolus insulin delivery option. There are currently approximately 6 million patients with Type 2 diabetes who prescribe daily insulin injections in the United States and an outstanding 80% or roughly 4.6 million of those patients are unable to reach their glucose control levels.
For these patients, the result is a higher risk of diabetic complication and major health problem for the patient and a major incremental cost to their health insurance provider. A 4.6 million patients with Type 2 diabetes on insulin, but not as a glucose goals translate into an addressable $15 billion annual market in the United States alone.
Now V-Go clearly addresses two main concerns for insulin non-compliance, especially when it comes to patients with Type 2 diabetes taking mealtime insulin. Patients self-consciousness of taking insulin in a public and the inconvenience. V-Go provides for these – for the discreet delivery of mealtime insulin, thereby reducing the embarrassment or the feeling of self-consciousness and reduces the inconveniences of mealtime dosing as V-Go is always on the patient and can be dosed with a simple push of a button.
Patients can wear V-Go, while working, shopping, flying, exercising, showering, and while sleeping. As they go about the activity, they can administer and then by discreetly clicking V-Go where ever they – whenever they have a meal or snack without anybody noticing.
A couple of data has been presented and published that has validated V-Go’s effectiveness in helping patients reduce their A1C with a less prescribed insulin in an average cost that is neutral or lower to both patient – to both the patient and to the payor.
So from the outset of our commercialization launch in the United States, we feel strongly that we have a product that provides significant patient in healthcare provider clinical advantages. Our initial marketing strategy was largely a low catch pharmaceutical sales approach, whereby we deployed a field eight sales team of approximately 64 reps to introduce the V-Go to as many prescribing physicians as possible. with a greater focus on the reach, meaning, covering about 50 to 60 prescribers per sales representative, rather than focusing on frequency, calling at few prescribers, but much more often.
Late in the first quarter of 2016, we began to execute on a much more targeted sales and marketing strategy that is a higher touch more capital efficient commercial approach. We reduced our field-based sales force by over 50% and we focused our sales force detailing efforts on a smaller number of high insulin volume prescriber physicians. The new model allows for increased focus with a higher frequency of our sales reps supporting the V-Go prescribing physician, with supplemental support from an inside sales team, while concurrently reducing our expenses.
The third quarter was our first full quarter operating under a new capital efficient sales and marketing strategy. We continue to see very encouraging results from this more focused approach. Third quarter sales grew by 3% year-over-year to $4.9 million. Again, it’s important to consider this achievement of growing sales despite the fact the sales force are less reduced by more than 50%.
Revenue from our vacated territories continue to decline. But it is important to note that this decline was only 10% in the second quarter. Our retention of existing customers in vacated territories remain high demonstrating the value V-Go provides to those on therapy.
We believe it is important to complement the efforts of our sales force with targeted high impact, multi-channel marketing support to demonstrate the benefit in the value of V-Go to our targeted healthcare providers and to drive awareness and action amongst our patients with Type 2 diabetes who aren’t basal-bolus insulin in these markets.
To that end, in June, we added David Lewis to our management team as our Vice President of Marketing. David brings over two decades of brand building in the diabetes field, including leading the launch of Januvia and Forxiga. David has already made significant contributions to our professional marketing program for V-Go and he is overseeing several new marketing initiatives planned for the balance of 2016 and into 2017.
Our goal is to increase the number of new prescription each of our targeted healthcare prescribers right every month. And even a modest increase in the scripts written by existing prescribers will have a significant impact on our financial performance. The success of V-Go is not only showing up in sales numbers, but also in positive feedback from our prescribers, including those I have met recently while at the same time in the field with our sales force.
Many physicians shared with me an increased understanding and appreciation of the value of V-Go and highlighted they are seeing positive results by – reduced A1C level of the patient they’re putting on V-Go. V-Go I also beginning to capture the attention of local media in our targeted territory.
Just in the past four weeks, the V-Go has been profiled with live on-air television passions with different prescribers and patients in Hartford, Connecticut; Austin, Texas; New Orleans, Louisiana; Cincinnati, Ohio; and Biloxi, Mississippi. Building on our success since transitioning to our new higher touch sales and marketing strategy, we are taking a financially prudent and disciplined approach to gradually expand the number of our field sales representatives into additional targeted territories over the next three to nine months.
We believe this is the best use of our resources and allows the company to continue to execute upon a capital efficient model, increasing our share of voice through other professional promotional programs, and by educating and driving action by patient in our targeted territories, while we strategically add field sales representatives to leverage our existing resources and increase revenue over time.
Turning now to operations. I’d like to highlight a number of third quarter developments that had better positioned the company to execute on our plan. As I mentioned earlier. Erick Lucera has joined Valeritas, as our CFO. And he joined the company in the last week of August.
Erick brings with him managerial experience as a CFO and as a business development executive with other life science companies, as well as being a professional buy-side healthcare investor for over 15 years. We are thrilled to have Erick as part of the team, as he fills a critical position for the company. And I will introduce to you Erick in a bit later on this call.
During the third quarter, we also added Brian Roberts and Kathy Crothall to our Board of Directors. Repositioning our Board to being a majority independent Board, Brian now chairs our audit committee and brings with him valuable perspective from serving as a CFO in several public and private medical technology companies, including Insulet.
Kathy also brings a wealth of medical device and diabetes experience, including from her time at Animas, where she founded and led a company through a successful commercialization process until it was ultimately acquired by Johnson & Johnson. Brian and Kathy know what it takes to drive the adoption of innovative technology each brings with them proven track records of building and growing several successful medical device companies. We look forward to their contributions, as we move forward.
On October 18, our S-1 Registration Statement must be quite effective. Among the shares included in the registration statement were shares issued as a result of common stock financing we completed in May of 2016, which is priced at $5 per share with no warrant coverage. The effective S-1 increases are non-affiliates tradable flow from approximately 200 shares – 200,000 shares to approximately 2.6 million shares.
During the last quarter, we presented data at the American Academy of Diabetes Educators Annual Meeting in San Diego, the benefits of V-Go were highlighted in their multi-clinician or a presentation on a recent advances in insulin delivery. The presentation cited strong V-Go clinical data for patients Type 2 diabetes showing that those initiatives V-Go for basal-bolus insulin experience significantly greater glycemic improvement from baseline compared to those patients receiving basal-bolus therapy via multiple daily injections of insulin.
This weekend, at the Diabetes Technology Society Meeting in Bethesda, Maryland, new data will be presented from a retrospective study of patients who switched from injectable insulin therapy to V-Go, demonstrating that patients who utilize the V-Go were able to lower the glucose and reduce their prescribed total daily insulin dose consistent to our previously published data with V-Go.
Finally, two new publication have highlighted V-Go’s data and clinical application. Practical considerations for switching patients to – with who have Type 2 diabetes on insulin injection to the V-Go was recently published in practical diabetology and data demonstrating the clinical effectiveness and cost benefit of switching patients to V-Go was just published in the clinical diabetes a Journal of the American Diabetes Association.
These along with our previously presented studies in our ongoing and future studies are part of our comprehensive strategy to demonstrate advantages and the value of V-Go that offers to both patients and payors. These data had consistently demonstrated that V-Go can lower A1C levels with less prescribed endpoint, while enhancing both compliance and quality of life. We will continue to be very active with respect to generating and publishing additional clinical data in 2017.
Now, I would like to introduce you to Erick Lucera, our CFO who will summarize the trends driving our financials. Erick?
Thank you, John. First, let me tell you how excited I’m to be at Valeritas. When deciding to join the team, I analyzed the opportunity like any investment opportunity I would look at during my buy-side career. Most importantly, I was impressed with the quality and the experience of the senior management team, the commitment of our largest shareholder in CRG, the Board, and the outstanding talent that runs throughout our dedicated employees.
During my due diligence, I found a significant advantages that V-Go offers to people with Type 2 diabetes compared to insulin pens and syringes were compelling from a patient, a clinical, and a pharmacoeconomic perspective. I also recognize the importance of the company successfully clearing many of the hurdles that can challenge emerging med-tech companies such as obtaining regulatory approvals, achieving commercial manufacturing scale, obtaining reimbursement and building a commercial organization.
Now, turning to our results. I will not recite every specific number for the quarter and the nine months, as they can be found in the financial statements provided in the news release and in the 10-Q filed today. Instead, I would like to provide some color on the underlying financial trends.
During the quarter, the gross margin increased to 35.6%, up from 13.1% in the same quarter of the prior year. We expect to maintain this gross margin during the fourth quarter. Additionally, it is worth noting that we see an opportunity. We have substantial gross margin expansion, as our revenues increase, given how much our cost of goods model are tied to production volumes.
This is driven today due to a substantial component of the cost of goods being comprised of fixed overhead, and in the future benefiting from volume-based cost reductions from our CMO. Aside from the overall positive revenue and gross margin trends, most obvious impact on our P&L from our new cost-efficient sales and marketing within the expense management.
However, a portion of the cost savings was partially offset by a modest increase in non-cash stock-based compensation and restructuring charges and some additional costs related to being a public company. Total operating expenses for the third quarter of 2016 decreased 18% to $9.4 million, compared to $11.4 million in the third quarter of 2015.
Reduction in operating expenses across the board of approximately 29% was offset by increase in costs related to being a public company restructuring charges and non-cash stock compensation charges. We expect our expenses to be relatively stable in the fourth quarter. We do expect to be adding some additional field-based sales representatives and consequently expect a moderate and gradual increase in SG&A during 2017.
Our new cost-efficient sales and marketing strategy is not exclusively focused on the income statement, but also on our balance sheet, where we see significant opportunity to improve our working capital position. In 2015, the company plans to expand the sales for significantly, and therefore, expanded manufacturing capacity and production in anticipation of this expansion.
The result was that we had approximately seven months of finished good inventory on hand, which we now believe is more than necessary under our new capital efficient sales and marketing model.
During the second quarter of 2016, we adjusted our production schedule in order to reduce the number of months in inventory over the next few quarters and improve our working capital, because there’s a lead time to alter our committed production levels, we only began to realize this reduction in inventory levels in the third quarter as can be seen by a reduction in our inventory from $11.1 million in the second quarter of 2016 to $10.1 million in the third quarter.
Finally, we ended the quarter with approximately $15.5 million in cash.
With that, I’ll hand the call back to John.
Thank you, Erick. Now, I would like to make some comments on what we anticipate for the fourth quarter of 2016 and provide our thoughts on 2017. As I communicated during our second quarter call, we had expected revenues to decline slightly in the third quarter due to some seasonality and decay of [ph] revenues in our vacated territory, followed by some slight growth in the fourth quarter resulting in a full-year 2016 to be relatively flat or slightly above our 2015 numbers.
Given their early success of our more capital-efficient, sales and marketing strategy and stronger retention of business in our vacated territory, I’m pleased to say that despite having less than 50% of the sales representatives than we had in 2015, we now expect the fourth quarter revenues to grow both year-over-year and sequentially and to come in at approximately $5 million for the quarter and to end the year at about $19.5 million for the full-year.
This equates to a year-over-year revenue growth of approximately 8%. While it’s too early to comment fully on our 2017 revenues, we expect to continue to see significant growth in our actively promoted territories in an overall double-digit top line growth. Although, we are not providing specific gross margin guidance for 2017, we thought it was important that investors understand that due to the intentional drawdown of inventory levels that Erick discussed, we anticipate a reduction in our recognized gross margin in the second quarter of 2017 by approximately 10%.
Now this temporary variance in gross margin is driven by the fact that we are currently producing less product and we are selling, which results in overhead being allocated to park your products. This excess inventory is capitalizing the balance sheet and then it hits our income statement as non-cash cost of good charges over the next six months, with the largest impact being seen in the second quarter of next year. We anticipate returning to our normal gross margin levels in the third quarter next year and we expect to have gross margin levels in the second-half of 2017 at slightly better rate than we are ending 2016.
So in summary, we feel confident that we have the best insulin delivery solution for the roughly 4.6 million patients with Type 2 diabetes currently on insulin in the United States who are not at our target glucose levels. We are encouraged with our financial and operational results for the third quarter, which was our first full quarter operating under the new capital efficient sales marketing strategy. And we expect to see continued revenue growth and look forward to updating you all on our progress as we move forward.
So before turning the call back over to the operator, I’d like to also share that we plan to attend and present at next week’s Canaccord Medtech & Diagnostics Forum in New York on November 17, and we look forward to seeing many of you at this conference.
With that, I’d like to now turn the call over for a brief Q&A. Operator, I think we’re ready for questions.
Thank you. [Operator Instructions] Your first question comes from the line of Greg Chodaczek from B. Riley. Your line is open.
Thanks and congratulations, John, and welcome aboard Erick.
Just a couple of quick one, John, because you hit most of all in your prepared remarks. But can you talk about the percentage of doctors who are GPs compared and dose that you’re seeing and who are running prescriptions?
Yes, sure, Greg. So what we’re seeing from our current business year-to-date basis is roughly about 40% of our volume is coming from endocrinologist and roughly about 60% are coming from non-endocrinologist which is combination of primary care physicians, as well as nurse practitioners and physician assistant to have prescribing authority.
Okay. And what’s – when a salesperson makes the call, what’s – is there any pushback from the doc in terms of V-Go, I mean, because you have the data, the model, economics are very good, as compared to patents. I’m just curious what type of pushback you would receive?
Yes, I think that, Greg, I think one of the greatest pushbacks we get is, what I call, clinical inertia, meaning, we have physicians who are very much in the habit from obviously in the Type 2 diabetes – treating Type 2 patients with so many other companies and so many insulin companies. And what we see a lot of times is, they see the pushback as I don’t think my patient will aware of that, or I don’t think my patient will do that.
So it really, kind of highlights the fact why we bring – why we brought on David Lewis Head our Marketing, what he is working on is really to start actually leveraging the patient more. I saw that results when I responsible for Lantus, it made a significant difference in that brand, obviously, you see a lot of direct-to-consumer being done for all of the Type 2 products.
We do not intend on doing national level brand at this stage based on our size of our field force, but there are a lot of mean to do very targeted direct-to-patient programs. So that’s one of our greatest challenges is getting a doctor to not make that self-determination or self-decision without that patient.
So that’s one of the biggest pushes from the doctor, because we – like you said, we have with our new data that came out this year, have a little bit of data to support the use of product. Initially, we’re getting issues or questions around. Dosing is big enough. I think now we don’t get that question as much, because we have some pretty good consistent data showing patient can go on the V-Go and use between 20% to 40% less prescribed insulin, it still lower the A1Cs by one to two points. So it’s now the time. It’s why we move to our new strategy, which is focused on fewer doctors, get more contact points, more frequency, so that we can break through that clinical inertia.
And does the doctor need, I know, you show along this data, there’s all those positive data, does a doctor need a aha moment with one of their patients who is switched over to the V-Go and their A1C comes down?
Those are very helpful. And sometimes what we try to encourage is to get more than one a patient, because then they’ll just say that was one patient. So we have the doctors who are the largest prescribe of the product or the ones who put four or five patients on right in the beginning. We saw that results, which is very tactful.
So as part of our new strategy and effort is, doctor don’t just try this on one, he just try this on three, four, five patients, 80% of your Type 2 is on insulin, our net goal. Let’s put four, five on, and you’re going to see the results. So, yes, the aha moment is very impactful.
I’m not sure if you can obtain this information. But any idea what the retention numbers are for patients in terms of their prescribe, I’m sorry, go ahead?
Yes. So, obviously, because 95% of our product is spent at the retail pharmacy or mail-order pharmacy. We don’t have unique or identified patients. It’s a prescription model. But we can acquire and we do acquire blinded non-identified patient prescription data and can look at that.
So what that data has shown is, in that population, which is chronically non-compliant, non-persistent and switch through a therapy is very often. The patients who go on to the V-Go are more persistent, meaning more stay on it after a year and any other diabetes products other than a pill from a DPP-4 is about the only one that have better long-term persistency.
So what you see is a little over half are very persistent, very compliant. And for those are great, there is annuity. Some of the other Type 2 diabetes insulins and injectables could be as low as 30%. And I think I just read on another company that published the papers that they thought 20% or 30% in a year.
So our persistency is better. And part of it is, as you get a lot of restart to insulin, because once the patient goes on – the Type 2 goes on insulin, they’re pretty much going to be on insulin unfortunately for most of the life. So they may take, what they call holidays and they come often since for a while and they will return.
And just a couple of quick more here. Can you talk about sales per doctor, I know, maybe this is too much information for us. But sales per doctors per salesperson, how is that going? Is that trending up, trending down? I know you’re in the right territory now, but is that start slower and then continue off as doctors write more prescriptions?
Yes, that’s kind of a whole strategy. With our old strategy, we had a lot of doctors writing very little volume, because we were seeing insulin frequent and out of sight, out of mind and that’s why with the new very focus much more medical – med technology approach, more contact, more called a high-touch model. We want to be able to increase that frequency.
So we can have a significant impact if we were to move half our doctors by adding an additional one or two scripts per month would be significantly. So we have a strong, a wide base of people who are writing, but they’re not writing on a regular basis, because there’s not yet in your mind that automatic.
So at this time, we’re not really disclosing a lot of the specifics on it, but we’re seeing that. We’re seeing that despite the decline now we expected in our territory that we vacated, which is over half of our territory. We’re still maintaining our growth this quarter over last quitter and prior year with less than half of the reps. So we’re seeing that we’re generating more per rep and now our focus at the getting not so many doctors writing one or two, getting fewer doctors to start writing in a much more regular basis like our key adaptors good adopters do.
Okay. And last one, I promise. I could say these things fall blue in the face, but if it’s coming from the CEO of the company that holds more weight. Can you explain to everyone on the phone, including me why a basal-bolus pumps or patch pump or device whatever you want to call it is more important just a bolus device as part of a competitor that make them up very soon?
Yes. So I think the advantage that we bring, I think, important to treat a patient with diabetes who requires insulin, which again most Type 2s are time to diagnose a block catheter pancreatic beta cell function for technically almost all the Type 2s really should be on insulin, but they don’t for a lot of reasons, including social issues.
So what you need is a background insulin or basal insulin in a mealtime. So you have alternatives today, which could be injectable therapies through vials, or syringes, or pens which patients are very non-compliant, especially within mealtime. So the one part you mentioned will address that. But the issue is, they thought to take injectable basal. For the V-Go, we believe strongly the advantage it has, especially the patient is they leave the house with all the insulin they need during the day, delivers a very good basal, and our data has shown as well been shown by other public studies by Medtronic. When you infuse insulin on a – as a background insulin, it’s much more efficient in a subcutaneous basal.
So we believe, we offer a very good basal, which is very important to create that background control, and then you have the ability to give yourself mealtime insulin. And because of our product, it requires two co-pay, one co-pay for the patient to get the V-Go, and one co-pay for the one form of insulin.
The product you mentioned will require a patient to have three co-pays; one for the device, one for mealtime insulin, and one for the basal insulin. So I think, in general, I welcome additional patch pump kind of products to the market. Every time I have been responsible for brand when you have more in the category, the tide rises and the boat there first will get the better advantage. We think we have cost advantage to the payor and to the patient and the product was proven efficacy and ability to get the job done.
Fantastic. Thanks, John, for all the answers.
[Operator Instructions] Your next question comes from the line of [Kay Mckay] [ph]. Your line is open.
Yes, thanks. Couple of questions. First, could you remind us how many salespeople you currently have? And is there a threshold whether the sales per rep that you’re looking at before you start adding within the early next year?
Yes. So during the quarter we average about 27 or 28 sales reps in the territory. And that’s been our goal this year to make sure since we did our restructuring to end the year with an average of roughly 27, 28 so balancing natural turnover in such.
Your second part of the question, is there a threshold? So the way we focus on our new strategy is by, we’re not waiting necessary to add reps when these reps are at a point they’re profitable, but at a point, where we know there’s a clear line of sight for that probability. And believe with all that we’re doing that, we will be in a position over the next three to nine months to start adding reps, because I do have reps that are generating $700 to – $700,000 to $1 million per Representative. I have reps who are producing that, because some we’ve just hired in the last quarter, for example. So there’s not an absolute number.
I think what we’re going to be doing is adding reps in a very financially prudent manner and balancing the cost of that with our revenue and our margin increases. So that we can maintain and manage our cash flow. So that we are not going backwards in the cash flow basis points.
Okay. Second question for Erick, with respect to SG&A, if we’re looking at sequentially flat and starting to increase next year with probably increases in sales and marketing. Can you give us a sense currently what percent of the SG&A is G&A?
Yes, it’s about a 70%-odd.
Okay, very good.
Oh, I’m sorry. That’s more – that’s kind of our operating expenses, right, we kind of look at the wrong numbers. So SG&A, that’s total operating expenses, I apologize for jumping in. From SG&A, it represents about – that’s probably about 75% to 80% of SG&A.
G&A 75% of the SG&A?
Okay, very good. Thanks.
There are no further questions in queue. I will turn the call back over to the presenters.
Okay. Well, thank you, operator. So I just want to thank everyone for participating in our third quarter earnings call. I do look forward to speaking to a lot of you, as we continue to grow. We’re very confident with our new strategy. And I look forward to continue to keep everybody informed of our progress, as we continue to expand and treat more patients with Type 2 diabetes.
So with that, I’ll end the call and wish everybody a good evening.
This concludes today conference call. You may now disconnect.
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