SciClone Pharmaceuticals, Inc. (NASDAQ:SCLN) Lazard Capital Markets Healthcare Conference November 15, 2012 2:00 PM ET
Gary Titus – CFO
Jane Green – Lazard Capital Markets
Jane Green – Lazard Capital Markets
Good afternoon. I’m here today with Gary Titus from SciClone, he’s the CFO, and he’s going to give you a presentation about the company. So, without further adieu, Gary.
Good afternoon everyone and thank you for joining me today. And special thanks to Lazard for inviting me here today to update you SciClone’s progress. I much appreciate it. So, throughout the talk today, I will be making some statements that are forward looking and I do ask you to refer to our filings with the SEC as it relates to risks around those statements.
So, if you don’t know SciClone, I think you’ll be a bit surprised to learn that it’s a very different company from most of the companies you may have heard about or seen today. We’re a US based, China focused specialty pharmaceutical company. Our focus is really on building, growing sales and growing profits and reaching the China specialty pharmaceutical market in a very thoughtful and different approach.
We do have a successful and advanced product portfolio both in the market as well as products that we’re bringing to the market. I do plan to bring those to much more detail in a few minutes but I do want to start by mentioning our late products that Zadaxin has crossed over $100 million sales mark last year. And that’s quite a major milestone for any pharmaceutical product in the China market but we’re quite pleased with the progress that we’ve had so far.
But we are profitable we have them profitable for three years and have had growing top-line and bottom line over that period of time. It has been the key goal of the company to focus on the commercial aspects of the business and to focus less on R&D activities which the company had previously focused on.
So on the next slide, as we look at the revenue estimates here, I think it gives you a little bit of a picture of the companies that are operating, list of companies that are operating in the China Pharmaceutical market and in orange on this slide, you’ll see that we are somewhere in the middle there of list of companies. And only a couple of NASDAQ listed companies on this slide. But Hong Kong listing seemed to be more of the preference.
So, as we talk about strategy, I think it’s really important to again emphasize that we are focused on building top-line and bottom line for the company. We do have significant products in the market, we’ve built a strong presence in a number of therapeutic areas, CNS oncology, cardiovascular disease being the most notable. We’re also building a momentum for the company with trying to grow our business through higher margin products that we bring online. And I’ll highlight that in a few minutes and some comparisons to some of the existing products we have.
Our near-term revenue is not dependent on new product approvals, in fact we give guidance to the stream and our guidance is always focused on existing products in the market. And we’ll again get into that in more detail in a few minutes.
We look to grow the company and we want to do that through not only our pipeline, bringing those products to the market and there will be an update on progress there. But in addition we look for in-licensing opportunities for late stage western approved products that we can bring in to the marketplace as well as products being developed locally in China. So, that’s our strategy for trying to continue to grow the company.
So, I do want to emphasize, this is a company focused on China, and very much on the China opportunity. But we are a US listed company. Our office – corporate office is based in California in the San Francisco Bay area. And therefore we play by all the rules that other US listed companies play by including all the SEC regulations, surveying and related standards.
We do have an experienced team in place, we won’t go through that team here but our team is really spread across, a little bit across the globe with a corporate team here in the US. But the bulk of our team exists actually in China, we have some 850 sales people, sales professional, operating in China and then long for core distribution in Hong Kong. So, we are a little bit again of a global presence.
So, our strategy to grow as I said is really focused on what’s happening for us in the market primarily, in other words it’s largely about our lead products Zadaxin. I did mention before, it’s already successful for many years and commercially in China and has not only been able to grow through – in many years of commercialization efforts but has significantly grown in the last few years which I’ll illustrate in a future slide.
But at the end of the day our strategy really has been focused on reaching wider and deeper within commercial market with Zadaxin and what I mean by that is being able to get into additional departments in hospitals that we’re already selling into that’s probably the lowest hanging fruit.
And that generally is in the large – large hospitals here – the largest hospitals in China. But at the same time, we’re also focused on trying to grow a little bit more geographically as the country begins to have broader base wealth more away from the shore-board and inside the country as well. We’re looking to expand in that way into hospitals that we haven’t previously been selling in.
A key opportunity for us that we need to just to make a key strong and effort on this year is really on trying to use our sales teams, a bit cross functionally. It’s very typical in China that our sales rep will sell only one product, which is of course not the case in western markets. We believe and there is quite a bit of emerging data that indicates the multinational companies were actually doing that, it’s been a little different away now with sales people actually detailing more than one product and we certainly want to take advantage of that with the large size of our sales organization.
In terms of profitability, I think, we have to do two things, we have to really grow our sales – that’s going to be challenging this year as many of you may have listened to our earnings call from last week. We did run into some challenges for the company and we can talk about those in more detail in a few minutes. But at the end of the day, we have to grow to the top line but almost and most importantly we need to also grow profitability for the company. And we do that too with the helpful management of expenses and that’s going to be a key focus for us as well this year. And I will talk about that as it relates to the different types of business that we have.
In terms of growing, we need to build the portfolio and we need to do that in a thoughtful way but also aggressively to make sure that we have future growth potential for the company.
In terms of evaluation, this is again not a typical slide you might see in corporate deck. But what we try to do here is demonstrate that pipeline continues to be undervalued as we see ourselves compared to some peer groups. And particularly here you see the China peer group as well as the DTK average. It’s intended to just be a illustration that this company continues to be performing well, bottom line there, cash generation there. But unfortunately we haven’t managed to get the evaluation for our shareholders that we would like to see. And so that again continues to be a key focus for our CEO and for our CFO.
So, next one we get into some of the products, I think that’s the key area that we should spend the next few minutes on. As you see on the slide here, we’ve highlighted our top five products we will go through the rest in a few minutes. But, the flags-down for our company is Zadaxin. It has been in the market in China since 1996 and has grown consistently since then. As I mentioned in the beginning it’s more than a $100 million in sales last year in China and moving towards the $120 million mark, which is actually quite successful product in that market, generally people characterize that as a blockbuster.
In terms of the second largest, it’s Depakine, this is a Sanofi product that we have licensed. Depakine is one of our key focuses in terms of how to grow the company and growth possibility. The two Zadaxin and Depakine is the cornerstone of how we see our growth, still not you and they know in the US says in the end it’s a marketed and it’s a Sanofi product as well.
Tritace and others that you see on the right side, our Tritace is an ace inhibitor, it’s an quite interesting product also coming from Sanofi relatively small at this point, we are trying to grow it. Aggrastat is one we’ll spend a little bit more time in the few minutes, but it’s actually one we are quite excited about trying to make that a quite large product for us.
So, to listen in a little more detail at some of the key line of Zadaxin as I mentioned is a huge product for us, it’s an immune stimulator on the market for quite sometime. It has been quite a success in the eyes of the divisions in China as they continue to see the opportunity for this product. It is in the category of thymalfasins, which is one of the top five categories in China and continues to be a very rapidly growing category within the commercial opportunity in China.
Depakine, as mentioned before broad-spectrum treatment for all types of epilepsy disorders as well. We recently got approval for bipolar disorder with this product as well or I should say Sanofi did. And with that we have a little broader opportunity to you to commercialize this. It is again probably the second to Zadaxin and the two together are largely responsible for much of these company sales.
In terms of potential for the future and related to the in the market products that we have, Aggrastat, is a 2B3A inhibitor, it’s quite useful for patients with the myocardial infarction indication in one area that we see ourselves despite a market leader. The competitive products that are sold in the US and Europe are not to our knowledge even in the approval process in China, which means we probably we have a significant advantage at least several years or more. The key for us here is to get broader uptake into the market and to grow this one. It’s important because it is not only unmet need for us to be able to penetrate. But at the same time it’s also a very commercially viable product with significant margins that we want to make sure we take advantage of can be a nice follow on to Zadaxin in future.
So, to get a bigger picture of the various products that we sell, this is a list, there is 13 products on the list here that we are selling into the China market. And then use this as away just kind of describe our different elements of business. On the top, our Zadaxin product and on the bottom Aggrastat or typical license products where the company essentially reflects the top line sales as well as takes advantage of what we believe are nice margins and then profitability.
In between we have our collaboration to a Sanofi, Baxter and Pfizer, we are really happy to have these collaborations in particularly the collaboration with Sanofi, being able to sell Depakine into the China pharmaceutical market. But they are different in structure essentially with arcading into the nuances here essentially these are products where we to see of a promotion fee for selling them. So that’s a bit of promotion model rather than taking ownership for the product and inventories and cost of sales, this is essentially just stay a promotion model.
So, a little bit – two different types of business that we have in our model. So, let me talk about pipeline, real quickly a little bit about our pipeline. Though our five products on the slide here as you can see, it’s a pretty interesting pipeline detail, these are all approved products in the western markets. So, the risk of regulatory approval is relatively manageable, not zero but definitely better than a product that hasn’t been through EMEA or FDA approval process. Tramadol was recently approved in the first quarter of this year and now we are beginning the commercialization process with that we licensed our product from ADA and it could be a very interesting one in the marketplace.
DC Bead is one we’ve talked about for a long time for those who followed the company. It’s been a long and painful process to get this through SFDA. Again, it is approved in western markets and sold in western markets. But, it’s basically in an embolic bead that can be loaded with chemotherapy agents and administered directly to the side of the tumor. I think it can be a very compelling product into the China pharmaceutical market. But it’s at approval that we haven’t managed to get yet, we are for a long and have in fact a submitted the file to the SFDA, The State Food and Drug Administration for approval. And we hope to hear back something soon but as I said it’s been long and challenging process.
The next we won’t go into detail at this moment, but just to let you know the pipeline for the company does have additional products coming through SFDA approval process in various stages through that process. So, we are quite confidence that we have a good pipeline and we do plan to add to that pipeline with additional products in the near term.
So, with that I will give you a few highlights of a corporate overview. I think, this slide is actually a very nice picture of the way you could see the revenue growth in the company overtime. It has been growing quite significantly, last year in the 2011, the revenues jumped even faster than typical and that was related to our acquisition of NovaMed Pharmaceuticals in April of 2011. But, setting down aside, you see a pretty quick uptake of growth over the last five or so years, which is emphasized by Zadaxin primarily as again the cornerstone for what we’re growing the company, what we are using to grow the company.
I think it’s important to note that this company has also generated a quite strong profits and earnings but most importantly or importantly the cash balances as well, which we’ve been able to use to initiate stock repurchase program for the company. And so unlike the companies you may hear about selling stock, we are doing the opposite, we are buying it and we are buying every day. The share repurchase program was originally assessed to be 20 million that was increased to 30 million and now stands at 40 million and as of the third quarter we have about 16 million left to use in that program with 24 million already having been used to reacquire some of the company’s stock. So, that note I wanted to make at this stage.
In terms of where we see the results for the year, I think, it’s important to note that the company has made changes to guidance for 2012. Unfortunately, we did run went into some step backs this year in terms of growing, essentially all three of our business units and that’s just the typical challenges you might encounter as you grow our company but nonetheless we are on track to see significant revenue growth compared to 2012 at $152 to $157 million being the targets this year for our revenue.
In terms of earnings $0.62 to $0.68 and I have to emphasize that is on our non-GAAP measure as it relates to GAAP, take a look at our recent filings as well. But we have, I think, very compelling earnings driven story here. And then as I mentioned cash, again the cash and investments guidance is to be more than 90 million and I did mention previously that the company has spent already 24 million in the last 12 months in the stock repurchase program. So, you can do the map that essentially it’s a very cash flow positive business and we expect we will continue to be that way.
So, in a brief kind of summary, I just want to emphasize again SciClone is a very well positioned and financially strong company operating in the China pharmaceutical market. We have a very good collaboration with partners in particular Sanofi is the most important and one that we feel is contributing most to our sales and profitability in terms of cornerstone it is Zadaxin, but at the same Aggrastat is the nice follow on product that we believe will be able to keep growing the company. We do have a really nice portfolio and you saw that a few minutes ago five products in the SFDA approval process and we’ve planned to add more.
And so with that I actually will leave just a few minutes in case there is, any questions from the audience. Yes, in the back please.
I’m new to the company, could you expand on what would occur this year in China that caused your – I mean, you mentioned that but I think, I didn’t – if you could provided like just a few details if you could?
Sure, sure, happy to do that.
I mean, what sort of market situation as suppose to your company or a little bit of both that sort of thing.
Right, right, we’re happy to do that. And sort of great question for new and existing investors in the company, I would want to refer you to the 10-Q and the various set of documents the company has filed because they have full disclosure there. But, what I would mention here is that essentially there, has been two primary elements, the first is that the company acquired NovaMed Pharmaceuticals last April 2011.
We said our important targets related to the growth of that business as well as the profitability and essentially the bottom line that it should – but we haven’t seen the growth at the level that we originally had anticipated in the acquisition, although the growth has been there, it just hasn’t been strong.
And importantly we haven’t been able to achieve the significant profitability that had also been intended from that business essentially it’s been a little bit of loss business since we bought it. So, that’s where we really focus in 2013 as a chance for us to really get the expenses besides the equation more inline. So, that’s the key part, I would also take the opportunity to emphasize since you asked a good question.
Is that we have these three collaborations with partners, we are excited about those but at the end of the day we don’t do business for charity here. If the business isn’t structured in a way to generate profits for our shareholders then we’ll discontinue it. And that’s effectively the discussion for actively underway with Sanofi, Pfizer and Baxter. We are pretty optimistic that we get to the good result we like there but if we don’t we will just simple discontinue at the set. So we like simple, we have to make profitability there.
The second element is that our lead product Zadaxin has not grown significantly in the last three or four quarters, it’s been more or less flat in terms of market performance. So, a variety of reasons for which I don’t think time will allow me to go into here. But I think, the key message for our investors in this brief period of time is that we’re very focused on how we address that and then we need to make sure we keep that in the market inventories in the right place.
We also need to make sure we have the right structure of sale support for our productivity from sales reps is the key piece, we’ve got a lot of people but we need the productivity. So, I think, there is a probably the two broad messages that I’m happy to fill in more after this meeting. Other questions? Yes.
Jane Green – Lazard Capital Markets
Yeah, we see a lot of in the newspapers about factored in intellectual in China. What are the stops of some generic company in the land of taking one of your products and knocking off, and you’re not being able to do a lot about it?
Yeah, another great question, the reality of the market situation is very much the way you described it. Intellectual property in China is valuable in some ways and probably most importantly it’s valuable in terms of getting the appropriate price for your product. In terms of competition, we’ve always had competition, for a lead product we’ve had genetic competition since about 2005 maybe in ‘04, significant competition in fact we have probably relatively small volume share of the times in market and that’s just the reality of operating there, and the IP is always challenging.
And so you have to differentiate yourself in a way that we’ve differentiated ourselves in all of our products including our promotion products, is it there all made by and imported by western companies and so the quality has been our key emphasis particularly with Zadaxin, made in Europe imported into China. So, a little bit of a robust from a typically see, that’s been our differentiation for high quality. Other questions? Yes.
Jane Green – Lazard Capital Markets
Follow up, I mean, it sounds like you have a good substantial and possibly substitute, renegotiation with your three largest partners and you could actually walk away from those?
Absolutely, as I said it’s all about making sense in the business. I don’t think that will be the case to set expectations correctly. But absolutely and we may walk away from one or two or we may be able to keep all the three, it’s really trying to get right size to the business. Just a little background since you said you are new to the company these three collaborations came as part of our NovaMed acquisition. And so it’s not unusual of course to pick the elements that you want to retain versus which don’t make sense and in the future.
Jane Green – Lazard Capital Markets
There are not as significant, and especially if you think about the Depakine piece has been the key part, as you think about Pfizer and Baxter, they’re relatively small so no key is not in significant but really the vast majority comes from Zadaxin.
Jane Green – Lazard Capital Markets
I was curious what the recent price cut that was implemented that was favorable to you than you had originally projected, I know, there is possibly some pent-up demand of the hospitals whether they are waiting for the cuts, 18% for them, on the less than 5% to you. Do you think – and I think in October or something that primarily got implemented? Could we see a dramatic uptick in hospital demand as they play inventories go down to take advantage of these cuts?
Good question, thank you. So, yes, you are correct, we had October 8, we had a change in Zadaxin price and that did workout quite positively for the company. In terms of uptick in demand it’s hard to predict for sure but we would expect that, I mean, as we generally speaking anytime product become 18% less expensive, we would expect more volume to go through, we’ll see, I mean, that’s what we hope happens but it’s too early to predict for sure.
I think I have run out of time. So, thank you everyone. I appreciate your attendance today.
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