Executives
Seth Lewis – The Trout Group, Columbia’s Investor Relations
Lawrence A. Gyenes – Senior Vice President, Chief Financial Officer & Treasurer
Frank C. Condella, Jr. – President & Chief Executive Officer
Analyst
Raymond Myers – The Benchmark Co. LLC
Walter Schnecker – MAZ Partners
Harry Rosengart – HK & Associates
Raymond Myers – The Benchmark Co. LLC
James Dowling – Jefferies Capital Partners
Ralph Labriola – Stifel, Nicolaus & Co., Inc.
Christopher Castroviejo – Directional Research & Trading, Inc.
Columbia Laboratories (CBRX) Q2 2012 Earnings Call August 8, 2012 11:00 AM ET
Operator
Good day, ladies and gentlemen. Welcome to Columbia Laboratories Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
Now, I’ll turn the conference over to Seth Lewis from the Trout Group. Please begin.
Seth Lewis
Thank you, operator, and thank you for joining us this morning for Columbia Laboratories second quarter 2012 financials results conference call. I am Seth Lewis of The Trout Group, Columbia’s Investor Relations firm, and with me this morning are Frank Condella, President and CEO, and Larry Gyenes, Senior Vice President, CFO and Treasurer of Columbia.
If you have not already received it, you can access the press release Columbia issued this morning at www.columbialabs.com under the Investor’s tab, and you can also access the live webcast of this call from there.
During the course of this call, management will make projections and other forward-looking remarks regarding the future events and the company’s future performance. These forward-looking statements reflect Columbia’s perspective on current trends and information, and can be identified by such words as “expect,” “plan,” “will,” “may,” “anticipate,” “believe,” “could,” “should,” “intend,” “estimate,” “project,” and other words of similar meaning.
Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in Columbia’s filings with the SEC on Forms 10-K, 10-Q, and 8-K. Actual results may differ materially from those projected in those forward-looking statements. Columbia disclaims any intent or obligation to update these forward-looking statements.
A replay of this call will be available two hours after completion through Wednesday, August 15. You’ll find the dial-in information in today’s press release and the archived webcast will be available for one year on the company’s website, columbialabs.com.
For the benefit of those who maybe listening to the replay, this call was held and recorded on August 8, 2012, and since then, Columbia may have made announcements related to topics discussed. So please reference the company’s most recent press releases and SEC filings.
With that, I’ll turn the call over to Larry Gyenes. Larry?
Lawrence A. Gyenes
Thanks, Seth, and good morning all. Today we are reporting total net revenues of $8.2 million for the second quarter of 2012. Total net revenues are comprised of net product revenues, royalties, and other revenues. Total net product revenues, which are primarily CRINONE sales to Merck Serono and Watson, were up $2.4 million from last year’s Q2 levels.
Net product revenues from Merck Serono increased 25% due to penetration of higher price country markets, while net product revenues from Watson increased nearly threefold on a 45% volume increase over second quarter of 2011 levels, as we moved quickly to convert some batches destined for the preterm birth market to the CRINONE and fertility market.
The gross profit margin on net product revenues remained the same at 39% compared with a year ago. Total net revenues were $8.2 million compared to $19.2 million in the same quarter last year. Last year’s quarter included $13.6 million in other revenues, which was the amortization of $8.6 million in revenue related to the gain on the sale of the progesterone assets to Watson in 2010, plus the $5 million milestone from Watson for the FDA’s acceptance for filing of the preterm birth NDA. There were no other special or non-recurring revenues in the 2012 second quarter. Since the amortization concluded in the second quarter of 2011 this is the last quarter in which we will see this.
Exclusive of the $2.5 million gain from the sale of STRIANT recognized in the second quarter of 2011, total operating expenses decreased by $1 million versus the same quarter last year. This was driven primarily by the absence of sales and marketing expenses and lower R&D and G&A costs, largely reflecting the workforce reduction earlier this year.
As a result, we posted operating income of $1.7 million in the second quarter of 2012. This compares to operating income of $15.7 million in the second quarter of 2011, but again that included the $13.6 million in other revenue. Without this other revenue and the gain from the sale of STRIANT, we would have generated an operating loss of $400,000 a year ago. After accounting for the non-cash change and the fair value of outstanding stock warrants, we reported net income for the second quarter of 2012 of $1.9 million or $0.02 per basic and diluted share.
Our balance sheet remains strong, with $23 million in cash, cash equivalents and short-term investments at June 30, 2012. This is a nearly $300,000 increase from the close of the first quarter in line with our stated financial guidance. We will continue to operate generally as cash flow neutral to positive for the foreseeable future. However, quarterly results may fluctuate due to the nature and timing of product orders. For further details on our financial results, please look to today’s press release, which is available at our website columbialabs.com.
And with that, I’ll turn the call over to Frank.
Frank C. Condella, Jr.
Thanks, Larry. In the second quarter of 2012, we saw continued CRINONE growth from Watson and Merck Serono, both in the U.S. and foreign markets. In the U.S., total prescriptions for progesterone vaginal gel 8% grew 40% as compared to the second quarter of 2011 and reached their highest levels on both a quarterly and monthly a monthly basis since the product was first launched over 14 years ago.
Outside the U.S., the increase in revenue reflects the penetration of higher value country markets, including China, Australia and Korea by our partner Merck Serono. We expect volume will increase in the second half of this year as Merck Serono increases the number of batches of CRINONE required for its markets.
We continue to believe that revenue streams from Merck Serono and Watson for CRINONE in infertility will grow for several years to come as Merck Serono continues to expand its franchise into new markets and Watson pursues its life cycle management program.
We are encouraged that Watson continues to pursue a path to approval for progesterone vaginal gel for prevention of preterm birth. We maintain our financial interest in the product and if Watson receives FDA approval and launches, our contract provides for receipt of $30 million milestone payment and royalties in all future product sales. We believe this could be a long-term upside for our shareholders.
Turning back to Columbia’s present business and assets, with the workforce reduction behind us we have better aligned our costs with our current base of revenues from sales of CRINONE to Merck Serono and Watson. We continue to work with Cowen and Company to help us evaluate potential strategic transactions that would add additional long-term value for our shareholders.
As Larry mentioned, we will continue to operate a cash flow neutral to positive platform for the foreseeable future.
With that, operator, please open the call to questions.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) First question is from Raymond Myers of Benchmark. Your line is open.
Raymond Myers – The Benchmark Co. LLC
Thank you. Good morning and congratulations on the strong results. I want to ask you first about the trend in end market sales to Merck Serono. Could you discuss how many batches were sold to Merck in the second quarter and what the actual trend in end market sales are if you have that visibility?
Frank C. Condella, Jr.
Well, Ray, this is Frank. I don’t think we ever disclosed the exact number of batches and I wouldn’t want to get into that kind of detail because it really fluctuates from quarter-to-quarter. We do talk about volume year-on-year and right now volume for the quarter versus last quarter was essentially flat. But the sales were up because of the price mix. And so, I mean, there is good end market demand, particularly the emerging markets. Like I said, China, Australia and Korea were particularly strong. We don’t have our second quarter third party data. We do buy data from IMS. We don’t have the second quarter and we won’t have that for another probably a month or so.
Raymond Myers – The Benchmark Co. LLC
Could you maybe discuss the gross margin split that you have with Merck? How do the economics work? And just start with that, please.
Lawrence A. Gyenes
Yeah, this is Larry, Ray. We get the greater of 30% of the net selling price on a market-by-market basis or cost plus 20%. And as we’ve consistently said that that generally works out to be on a blended basis, about a 40% gross margin.
Raymond Myers – The Benchmark Co. LLC
Okay. And do you have a sense of what Merck’s global run rate of sales are for them, so we get a sense of how large a product is this?
Lawrence A. Gyenes
Yeah, Ray, last year, okay, on the end market sales Merck Serono did about $37 million.
Raymond Myers – The Benchmark Co. LLC
And do you have a sense of how fast that’s growing?
Lawrence A. Gyenes
No. We don’t have that data available to us yet.
Raymond Myers – The Benchmark Co. LLC
Okay. Thanks. I’ll go back in the queue.
Lawrence A. Gyenes
Thanks, Ray.
Operator
Thank you. (Operator Instructions) Next question is from Walter Schnecker of MAZ Partners. Your line is open.
Walter Schnecker – MAZ Partners
Thank you. Just to make sure, to ask a question on gross margin which you already
answered for Merck Serono. Your sale of product to Watson is identified in the release as related party, they are the related party?
Lawrence A. Gyenes
That is correct.
Walter Schnecker – MAZ Partners
Okay. So both the royalty and the product sales are actually broken out in your press release?
Lawrence A. Gyenes
Yes, they are.
Walter Schnecker – MAZ Partners
Okay.
Lawrence A. Gyenes
[They’re] in the parenthetical.
Walter Schnecker – MAZ Partners
The sales on the product have a much lower gross margin than Merck Serono because you also get a royalty?
Lawrence A. Gyenes
That is correct. Yeah. We sell to Watson on a cost plus 10% basis.
Walter Schnecker – MAZ Partners
Okay. So to the extent Watson should grow meaningfully faster at some point than Merck Serono, what we’ll see is lower gross margin as the mix changes, but an increase in royalties.
Lawrence A. Gyenes
That’s correct.
Walter Schnecker – MAZ Partners
So there’s to be a shift in the income if in fact Watson grows meaningfully faster to more royalty and lower gross margin.
Lawrence A. Gyenes
Yes.
Walter Schnecker – MAZ Partners
Okay. Second question, did the quarter just ended fully reflect the cost savings or on a full quarter basis will the research and management costs be somewhat lower in the third quarter than the second quarter? I don’t know the timing of when people left and things got cut down.
Lawrence A. Gyenes
They should be marginally lower in the third quarter.
Walter Schnecker – MAZ Partners
Okay. But marginally being an operative term. So what you see is pretty close to what you get?
Lawrence A. Gyenes
Yeah.
Walter Schnecker – MAZ Partners
Okay. And lastly, as an editorial comment as a shareholder, to Frank and the Board if they are listening, I personally believe that until there is further clarification of where things are going and the path forward, it would be singularly inappropriate and the timing would be wrong to do anything from a M&A new product addition, or any changes based on the banking analysis you are doing. Since as a shareholder I’d like to see how or get some better feel for how the path forward is before I get some, have to make a decision or you make a decision on what we might want to do incrementally to where we currently stand.
Frank C. Condella, Jr.
Walter, this is Frank, and we appreciate your view. I mean we obviously haven’t found anything that we want to bring to shareholders that we think requires a decision and I think that we are prepared to wait as long as the wait is reasonable. Otherwise, you have to recognize that we are not adding any additional value right now, other than managing the ongoing business and most pharmaceutical companies do have some sort of future-looking business to them. Other than the deal we did to get someone from the outside to move one of our pipeline products forward. We’re not adding any additional value other than the opportunity pre-term birth. Now having said that, we recognize that if suddenly there is news on pre-term birth that’s positive that the incremental gain that shareholders will get will be significant, and we want you to be able to get that. So we’re recognizing all these things and I don’t think we hopefully will bring anything to you that is silly or that we will do anything, but we’ll keep that in mind. Appreciate it.
Walter Schenker – MAZ Partners
Let me editorialize my last comment, which is all efforts because we can give you lots of examples of medical technology biotech companies taking transactions, which they believe will add value for shareholders as an M&A is not always the case. And therefore you are doing no harm. I realize you are not doing no gain, but you’re also doing no harm.
Frank C. Condella, Jr.
Got it, Walter. Thank you.
Walter Schenker – MAZ Partners
Thank you.
Operator
Thank you. We have a question from Harry Rosengart of HK & Associates. Your line is open.
Harry Rosengart – HK & Associates
Hi, good morning. I have actually two questions. One question is could you elaborate a little bit more as to what is going on with the FDA regarding the path going forward for PROCHIEVE?
Frank C. Condella, Jr.
Harry, I can’t really say anything other than what Watson reported just a couple of weeks ago on their call and that they are continuing to work with the agency and exploring all avenues. They say they are having an ongoing discussion with the agency, but they’re not going to give any further details or adjudicate their discussions with the agency in public.
Harry Rosengart – HK & Associates
Okay, that’s fair enough. Second question is Merck Serono, there a couple quarters ago, you had announced that they are reviewing their options strategically, I don’t know if that’s come to some fruitful conclusions. But given what you just reported that there is some robust activities going on in the number of the countries. Correct me if I’m wrong, their contract ends in several years 2014 or 2015 if my memory is urging correctly. So if that’s the case, why aren’t they going to extend the contract beyond the period of question, and is there other plans to extend the contract on their part and your part?
Frank C. Condella, Jr.
Well, we certainly would like to continue our ongoing relationship with Merck Serono, its growing well they’re going into new markets, which have a significant opportunities. They are undergoing, it’s no secret, it’s actually public that they are undergoing a major reorganization particularly with the Serono group based in Geneva, they’re closing that facility. So they’re in a quite a bit of flux right now, we have made personal contact with the new head of their business, the infertility and endocrinology business, and have a good dialogue with them. I don’t think it’s the appropriate time to try to negotiate, or renegotiate, or re-up a contract that’s still going to be around until 2015. It’s a little bit premature to initiate those discussions, but if Merck Serono were are to come to us we would certainly be open to it.
Harry Rosengart – HK & Associates
I see, thank you. I’ll jump back into the queue.
Operator
Thank you. Next question is from Raymond Myers of Benchmark. Your line is open.
Raymond Myers – The Benchmark Co. LLC
Yeah, thank you. I had a follow-up question. I understand there may be some stand still agreements regarding M&A possibilities with Watson and Merck Serono. Can you remind us until when is Columbia protected from potential overtures apart from those companies?
Frank C. Condella, Jr.
Ray, there is no stand still agreements with either of those companies.
Raymond Myers – The Benchmark Co. LLC
So they both have the option of making a bid for the company.
Frank C. Condella, Jr.
As does any company or any shareholder, yes. We have a shareholder right plan in place, which would – it could trigger if there was a hostile situation. So anybody that holds a significant amount of shares is going to have been recognized that.
Raymond Myers – The Benchmark Co. LLC
Okay, excellent. And then also with regard to the stock price recently, there is some concern over the possibility of a NASDAQ de-listing. Can you discuss your plans and process for avoiding a NASDAQ de-listing?
Lawrence A. Gyenes
Yeah, Ray this is Larry. We will be going forward to NASDAQ prior to the end of a 180-day period, which is September 6, and will request a transfer to the NASDAQ capital markets, okay, which will give us another 180-day extension beyond that, and therefore the ability to see what potential good news may or may not occur during that timeframe.
Raymond Myers – The Benchmark Co. LLC
Okay, excellent. Thank you very much.
Operator
Thank you. Our next question is from Jim Dowling of Jefferies Capital. Your line is open.
James Dowling – Jefferies Capital Partners
Good morning gentlemen. If you mentioned it before, I didn’t catch it. But on a domestic sales of CRINONE, do you have hard data or anecdotal evidence of any split between the use for infertility on the one hand and preterm birth on the other.
Frank C. Condella, Jr.
Jim, this is Frank. All we know is that the prescriptions are up 40% year-over-year. They are still within the range of possibility that they could all be coming from the infertility market, but we know that there are some institutions that are using CRINONE in the prevention of preterm birth. We do know that for example Michigan, the State of Michigan recently, the Medicaid authorities there or the state authorities put in a program to screen women and recommend treatment with vaginal progesterone. I don’t believe they recommend a particular brand, but we do know that there are some institutions there that are using CRINONE, but we don’t have anyway of splitting it out of what portion of sales are being used for infertility or other uses.
James Dowling – Jefferies Capital Partners
Would you care to hazard a personal guess?
Frank C. Condella, Jr.
No, no. I’m sorry, I can’t.
James Dowling – Jefferies Capital Partners
Okay. Thank you.
Frank C. Condella, Jr.
Yeah.
Operator
Thank you. We do have a follow-up from Harry Rosengart of HK & Associates. Your line is open.
Harry Rosengart – HK & Associates
Thanks. In terms of total scripts for the Q, is that a number that you can share with us?
Frank C. Condella, Jr.
Total scripts for the quarter, no we’re not supposed to give that information. We buy it from IMS as anybody couldn’t get a contract with IMS, but that contract requires that we keep the data confidential. So I can’t give you a total prescriptions.
Harry Rosengart – HK & Associates
Okay. Second question, given that Michigan, did go forward and recommend the use of progesterone. Are there any commercial activities that Watson can underwrite to go forward i.e. limited promotion medical education. Is there anything under the FDA guidelines that they can go forward with?
Frank C. Condella, Jr.
As far as I know Harry the only thing they can do is respond to physician questions. If the physician were to approach Watson with a medical question I believe that their medical group can answer that. But they would be very careful not to undergo any off label promotion that would be not a good thing for any company doing this. You probably have seen other companies have been subject to penalties for doing such things. So anyway, from my ancient history of being a marketer, many years ago I do remember an ability to respond to questions that come from physicians.
Harry Rosengart – HK & Associates
Okay, thank you. That’s it for my questions.
Frank C. Condella, Jr.
Thanks Harry,
Operator
Thank you. Next question is from Ralph Labriola of Stifel Nicolaus. Your line is open.
Ralph Labriola – Stifel, Nicolaus & Co., Inc.
Good morning guys. Question, assuming that some of the product is being used for premature birth. Does the FDA, do they watch the results of any of these pregnancies that information that could be used as data to help make their decision?
Frank C. Condella, Jr.
Well, the only thing that I’m aware of is that there is some agencies like Mark Stein's and others that monitor the amount of preterm birth that’s happening and other than that, you’re going to have individual institutions maybe tracking that. But the FDA doesn’t get involved. That would be more like I think a CDC issue monitoring the number of pre-term births.
Ralph Labriola – Stifel, Nicolaus & Co., Inc.
And is there any standard protocol in terms of time wise. It’s been six months as of August 26, when the FDA gave us the complete response letter. Can we assume that it’s either a six months or nine months any guideline that might help us?
Frank C. Condella, Jr.
Unfortunately, not Ralph, it really varies, it could be months, it could be years. We just don’t know.
Ralph Labriola – Stifel, Nicolaus & Co., Inc.
Okay. Well great quarter hope that continues.
Frank C. Condella, Jr.
Thank you.
Operator
Thank you. We have a question from Christopher Castro. Your line is open.
Christopher Castroviejo – Directional Research & Trading, Inc.
Hi, Frank. Christopher Castroviejo, Directional Research.
Frank C. Condella, Jr.
Hi, Christopher.
Christopher Castroviejo – Directional Research & Trading, Inc.
Hi. It’s a two part question. First of all, if my math is approximately right and you had $7.4 million in revenues from Serono then that equates to about $25 million in sales. And if you had $800,000 from Watson, that’s equates to about $8 million on sales. So you are running $33 million on sales, if we were to assume no growth, and multiplied by four, you’ve got basically a $130 million run rate in international and domestic sales right now for all uses of CRINONE. Is that correct?
Frank C. Condella, Jr.
No, I think the math is a little wrong, Christopher. In the $7.4 million of sales that we had, if you look at our income statement to left in the parentheses the $2.2 million of that is sales to Watson. So, that would net out to, I guess $5.2 million.
Christopher Castroviejo – Directional Research & Trading, Inc.
$5.2 million, $5 million okay. $5.2 million so that would lower the international part of the business to what number from $100 million to $60 million something?
Frank C. Condella, Jr.
Well, I think if you are trying to back that into their sales, it’s not that clear, but our sales to them, if you just took the quarter on a run rate, it would be around $20 million. And then what that translates to into the market, it could be $40 million plus, in some place probably between $40 million and $50 million. I don't know for sure it’s going to depend on what market it goes to and what it’s sold for.
Christopher Castroviejo – Directional Research & Trading, Inc.
All right.
Lawrence A. Gyenes
Like we said earlier, last year it was about $37 million of end market sales.
Christopher Castroviejo – Directional Research & Trading, Inc.
Okay. Okay, fair enough. Second part of the question, what we know about the ACOG guidelines that were, “removed for redaction and grammatical correction” and we’re expecting to see them reissued. Do we have any update on when that might happen?
Frank C. Condella, Jr.
We don’t, but we understand that that is still their plan is to reissue them.
Lawrence A. Gyenes
And our understanding, the last communication that we had was that it was going to be, a correction was going to be issued, that’s what, what that means. That’s the correction in the month of August, which we’re in now.
Frank C. Condella, Jr.
Yeah, and again we also understood that the correction had to do with the wording around the measurement of cervical length and then types of measurements that were being taken. So, what we’ll see by that, we’ve gotten sometime to go this month, and I’m not sure if it will be this month or it will be early in the autumn.
Christopher Castroviejo – Directional Research & Trading, Inc.
Okay. Thanks, Frank.
Frank C. Condella, Jr.
Yeah. Thank you, Christopher.
Operator
Thank you. I’m showing no further questions at this time. I’d like to turn the call over to Frank Condella for any closing remarks.
Frank C. Condella, Jr.
Thank you, and thanks everybody for your time this morning. I want to thank all of our shareholders and our employees for their continued support. And we wish everyone a good day and enjoy the rest of the summer.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.
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