SciClone Pharmaceuticals, Inc. (NASDAQ:SCLN) Q2 2016 Earnings Conference Call August 9, 2016 4:30 PM ET
Jane Green - Investor Relations
Friedhelm Blobel - President and Chief Executive Officer
Hong Zhao - Chief Executive Officer of China Operations
Wilson Cheung - Chief Financial Officer and Senior Vice President, Finance
Sam Slutsky - LifeSci Capital
Good day, ladies and gentlemen, and welcome to the SciClone Pharmaceuticals Second Quarter 2016 Financial Results Conference Call. At this time, all participants’ lines are in a listen-only mode to reduce background noise. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]
I would now like to introduce your first speaker for today Jane Green, Investor Relations. You have the floor.
Good afternoon. SciClone would like to thank you for joining the call today. The company would also like to remind you that today's call is being recorded. Speaking on today's call are Dr. Friedhelm Blobel, President and Chief Executive Officer; Wilson Cheung, Senior Vice President and Chief Financial Officer; and Hong Zhao, Chief Executive Officer, China Operations.
It is SciClone's intent that all forward-looking statements, including statements regarding financial guidance and commercial and development activity made during today's call, be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current information available, and SciClone assumes no obligation to update these statements.
To better understand these risk factors, please refer to the documents that SciClone filed with the Securities and Exchange Commission, including Forms 10-Q and 10-K.
I'll now turn the call over to Friedhelm Blobel.
Good afternoon and welcome to SciClone’s conference call and webcast to discuss second quarter 2016 financial results and to provide a corporate update.
In today's call, I will commentary on the Company's performance in the quarter and year-to-date, as well as on the outcome of a strategic review on the way since February. Following my comments, Hong will give additional color on our direct-to-patient strategies for ZADAXIN and Wilson will then provide an update on corporate developments and discuss our second quarter financial results and 2016 guidance. Then we’ll open the call for questions.
We are pleased with our performance in the second quarter and year-to-date which is in line with our expectation and reflects the value and continued growth potential of our core business, led by ZADAXIN. In 2016, we expect our growth to continue at a rate that reflects both the opportunities and challenges in the evolving China pharmaceuticals market.
As we have previously noted, the challenges include provincial pressures on drug pricing which, though slower to be implemented than anticipated earlier, are likely to affect the whole sector over time. However, we have confidence in our ability to implement innovative commercial strategies designed to address and offset these challenges, and to continue to grow our business.
The expected China pharma market growth rate in the high single digits still far exceeds that operates markets underscoring the continued opportunities for SciClone success.
We continue to believe that the overall reform movement in China including the government's both strategies to bring healthcare product and services to the entire population, address serious public health issues, enhance the efficiency of the CFDA review and approval process, SPIL innovation and create the level playing field for local as well as international pharma companies, represent opportunities for SciClone to grow our marketed product portfolio and to advance our development pipeline of high quality differentiated medicines.
While, 2016 maybe a transitional year for our company and for the industry. We are confident that SciClone’s prospects for near term growth and maximizing long term value creation remains strong.
Our commitment to maximizing value creation was the key motivating for us for the strategic review that our Board of Directors undertook. We announced a formal review of strategic alternatives in February of this year. In connection with such review together with our financial advisor Lazard, we approach the significant number of potential acquirers of the company. We’re pleased with the interest expressed from potential acquirers, which included financial institutions, as well as strategic acquirers such as multinational corporations and Chinese pharmaceutical companies.
SciClone’s strong fundamentals were significant positives for the parties which with - with which we had discussions. We’re attractive on many fronts. Our standing as a profitable cash flow positive, high quality company with valuable marketed and development portfolios, ZADAXIN’s continued growth prospect, the proven experience of our sales and marketing teams and excellent commercial infrastructure are well structures collaborations with respect to pharma and biotech companies, our partner of choice reputation and our industry leading compliance program. In essence, what was reflected back to us was that the whole positioning of SciClone as a unique China focused specialty pharma company was very highly regarded by these third parties.
While that was certifying and confirmed our own assumptions but our business as we noted our announcement of July 19th. In the end, those discussions ended without an offer that our board was willing to pursue. And none of the bids under discussion reflected a premium to our trading price at the time. We determined that keeping the business in our hands continuing to execute in our strategic growth plans for our commercial business and remaining an independent publically traded company was the best path forward at this time to maximize long term stockholder value.
Our board intense to continue to review and refine our corporate strategy and evaluate further opportunities as we continue to execute in our strategic growth plan for our core commercial business.
In terms of our overall perspective on the quarter and the year, when we reported first quarter results back in May, we noted that a single digit ZADAXIN revenue growth percentage compared to prior quarters in which the percentage growth was higher was reflective of changing provincial pricing arrangements led by the Zhejiang Province. Despite these external factors, we continued to see positive overall trends in our volume and value share for ZADAXIN. Underscoring our belief that ZADAXIN continues to have significant growth potential as a differentiated, high quality, best for manufacture brand and that marketplace demand remains strong and growing. We’re very pleased to see also continued strong growth in our oncology portfolio, the 50 plus percent year-over-year growth on a value basis.
This portfolio includes the products we promote for our pharma partners Baxter and Pfizer. It is a modest size business at this time, but it is an important strategic asset for our company. Its extraordinary growth underlines the strength and capabilities of our commercial teams to sell pharma products to medium and large hospitals. We anticipate continued growth of this portfolio in the coming years as we introduce additional oncology products into the market.
As I noted in my comments about the strategic review process, expertise and excellence of our China Commercial team was very highly prized by the parties with which we engage. Our China team continues to do an impressive job of executing our wider and deeper sales and marketing strategies. We’re pleased that the e-commerce initiatives we have implemented with our distribution partners Sinopharm leveraging their extensive national retail pharmacy network. And our telemarketing collaboration with our newer partner Bayang are continuing to have a positive impact on our business and continue to represent potential mitigation strategies to offset pricing pressures the strategies to grow volume.
We are pleased that Sinopharm remain strongly supportive of our relationship and our business. Consistent with the major strategies we outlined last quarter, they are continuing to pursue strategies to grow ZADAXIN sales in the indications for which it is approved as well as new indications such as sepsis. The goal of the Phase III trial in sepsis, that we are sponsoring is to build on the positive data from the smaller trial performed three years ago, which showed, survival advantage for sepsis patients treated with ZADAXIN. We expect that data should be available in about three years.
Our academic marketing strategies to build the market for DC Bead, as a novel treatment for liver cancer and alternative to conventional TACE procedures using gels are continuing. We are seeing increased adoption in the market still on a small level which we believe will translate into gradually growing sales over the coming years.
We’ve started the regulatory process to expand the DCB product offering but different Bead sizes, smaller as well as larger than the already marketed product. These new DC Beads sizes are expected to be approved within about one year and will then allow to treat patients more individually with the best product size for the goal of achieving easy administration, as well as enhancing safety and efficacy. On the tendering front, we succeeded recently in three more provinces and we are pleased that the pricing for DC Bead is holding steady.
We continued to believe that DC Bead has a very positive revenue potential for SciClone. Our development portfolio continues to progress as we deal with details in our last conference call. Neucardin for congestive heart failure, which we in-licensed for China from Zensun is currently enrolling a Phase III trial and we anticipating an interim look within the coming months, which should inform further development decisions.
We anticipate being in a position to file an NDA for Loramyc to treat oropharyngeal candidiasis later this year, which could lead to approval in the late 2017 early 2018 time frame. And discussions with key opinion leaders and regulators about a possible accelerated pathway for the innovative antibiotic VIBATIV are continuing. If accelerated strategy is successful, we could see approval in the first half of 2019. At the same time, we are pursuing a standard Class-3 pathway, which could mean approval around two years later. We should have some insight into which pathway is more feasible in coming months.
Last quarter we announced two new oncology focus in-licensing partnerships for the ability and for stock in which our valuable product our development portfolio and advance our strategy to increasingly participate in the Class-1 regulatory pathway which enables a faster development and regulatory reviewed timeline for innovative medicines developed locally in China.
For PTE-112 from Phosplatin, we are preparing a Phase I, II trial in Taiwan in combination with Turkcell [ph] for non-small cell lung cancer patients. Non-small cell lung cancer is highly prevalent in China and Asia. Platinum base drugs are widely used as standard of care chemotherapy for these patients but with various side effects. PTE-112 is a new class of platinum drug this different mechanism of action and has shown activity in current platinum drug resistant cancers with fewer side effects in preclinical and early clinical studies in U.S.
We hope this trial will lead to the fastest regulator pathway not only for Taiwan but also for the People’s Republic of China. We believe that diversifying our development portfolio by taking advantage of Class-I regulatory pathway for products that are locally manufactured is key to our long-term value creation strategy. These products are aligned with the China government’s focus on fostering innovation and thus can potentially move more quickly for the development and regulatory process and gain more favorable pricing.
Looking ahead of perspective on our near and long-term growth prospects is positive. We intend to focus on our cost strategies to grow our commercial business advance wants and expand our development portfolio for creative partnering, maintain high levels of fiscal responsibility and compliance and continue to build our reputation and standing as a key player in the China pharma market.
Now, I will ask Hong to provide some additional color on our direct to patient strategies for ZADAXIN. Hong?
Thanks, Friedhelm. I agree with Friedhelm that ZADAXIN continues to have a potential as a major good driver for SciClone. Three important strategies are; number one, to expand a disease for which physicians use ZADAXIN based on clinical results. Number two, to continue to build our direct patient platform and demonstrate to continue to build our sales team effectiveness. A new initiative is to explore ZADAXIN’s use increasing in pharma. We are undertaking the pilot program for testing ZADAXIN in combination with chemotherapy in these indications. The clinical trial protocol is being developed with well-known Chinese clinical research and we hope to have the pilot program and the way before the end of this year. We are continuing to work with our ZADAXIN thymalfasin as well as [indiscernible] utilization of the direct patient retail channels and technologies for ZADAXIN.
We believe this can be especially use for extending ZADAXIN penetration in provincials well it’s not cost effective to have hospitals base sales force, all where we do not independent. Also as Friedhelm noted, our sales team is very highly recorded throughout industry for the quality and the experience in the China’s pharma market. We are putting in place strategies to increase our hospital coverage and the promotional activities.
We are also enhancing our internal sales training and programs so that our representatives can communicate the ZADAXIN terrific value. Our sales team is a variable access for SciClone and we are doing a lot into their continuous effect.
Back to you, Friedhelm.
Thank you, Hong. Now I would like to ask Wilson to discuss our financial performance for the second quarter of 2016, and our revenue and earnings guidance for the year. Wilson?
Thanks, Friedhelm. Before I review our quarterly financial results, I’d like to provide a brief update on MEDA. The second arbitration with MEDA has commenced and we expect this process to continue for the next few months. Concurrently, we are engaged in separate settlement negotiation with MEDA. The amount of any final payment to us remains uncertain and as such we have not recognized any gains in our financial statements.
Now I would like to review our second quarter 2016 financial results. Please consult the press release we issued today for additional details. Revenues in the second quarter of 2016 was $39 million, $1.1 million or 3% increase compared with $37.9 million for the same period in 2015. ZADAXIN revenues were $36.5 million in the second quarter of 2016, a $1 million or 3% increase compared to $35.5 million for the same period in 2015.
Promotion services revenue was $1.1 million for the second quarter of 2016, a $0.4 million or 51% increase compared to $0.7 million in the same period in 2015. On a GAAP basis, we’ve reported net income in the second quarter of 2016 of $6.3 million or $0.13 and $0.12 per share on a basic and diluted basis respectively compared to a net loss of $4 million or $0.8 per share on both a basic and diluted basis for the same period in 2015.
Our non-GAAP net income in the second quarter of 2016 was $10.7 million or $0.21 and $0.20 per share on a basic and diluted basis respectively compared with non-GAAP net income of $13.5 million or $0.27 and $0.26 per share on a basic and diluted basis respectively for the same period last year.
For the second quarter of 2016, sales and marketing expenses were $14.4 million compared with $13.3 million for the same period in 2015. The increase in sales and marketing for the second quarter of 2016 compared to the same period in 2015 primarily related to increase in sales and marketing efforts for ZADAXIN.
For the second quarter of 2016, research and development expenses were $4.8 million compared with $6.6 million of R&D expenses for the same period of 2015. For the second quarter of 2016 and 2015, we recorded $2 million and $5.5 million respectively, related to in-license arrangements of certain license fees and $2.8 million and $1.1 million respectively related to R&D expenses for clinical and pre-clinical R&D activities with certain licensees.
For the second quarter of 2016, general and administrative expenses were $8.1 million compared with $6.4 million for the same period in 2015. G&A was higher for the second quarter of 2016 compared to the same period of 2015, related to higher professional costs primarily in connection with our strategic review.
In addition, during the second quarter of 2015, we’ve recorded $0.4 million credit to bad debt expense for collection of accounts receivable from a particular customer that have been fully reserved prior to 2015, that did not recur in the corresponding 2016 period. For the second quarter of 2016, tax benefit was $0.4 million compared with a tax benefit of $0.5 million for the same period in 2015. The tax benefit for both periods was primarily due to a reversal of FIN 48 on certain tax position, which had reached the statute of limitations in China.
As of June 30, 2016, cash and cash equivalents totaled $117.6 million compared to $101.4 million as of December 31, 2015, excluding the $12.8 million of restricted cash held in escrow as of December 31, 2015 for the SEC settlement which was released and paid in February 2016. We believe that our strong cash balance is a significant asset enabling us to continue to pursue in-licensing of product acquisition opportunities to augment our marketing and development product portfolios and additional strategies to create shareholder value.
Consistent with past practices, we have presented non-GAAP information as we believe this non-GAAP information is useful for investors, taken in conjunction with our GAAP financial statements because we use such information internally for our operating, budgeting and financial planning purposes. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of our operating results as reported under GAAP.
The non-GAAP calculations and reconciliation are provided in the accompanying table in today’s press release titled “Reconciliation of GAAP to Non-GAAP Net Income” except that for the non-GAAP EPS referenced in “Outlook for 2016”, the company is unable to provide quantitative reconciliation of its forward-looking estimate of non-GAAP EPS to a forward-looking estimate of GAAP EPS because certain information needed to make a reasonable forward-looking estimate of GAAP EPS for the full fiscal year 2016 is difficult to predict and estimate and is often dependent on future events which may be uncertain or outside of the Company’s control, for example, milestone payments.
Now, I’ll discuss our 2016 revenue and non-GAAP EPS guidance. We project our 2016 revenue to be in the range of $158 million to $163 million and expect that non-GAAP earnings per share on a fully diluted basis to be in the range of $0.70 to $0.74 for the year. Our outlook for 2016 is influenced by several factors including the overall growth rate of China pharmaceuticals market, anticipated pricing pressure on the provincial level, higher R&D expenses as we continue to advance our pipeline products toward commercialization.
We expect that pricing pressures on revenue in 2016 will be offset at least in significant part through sharing of the burden with our China distributor and potentially through volume increases.
With that, I would now turn the call back over to Friedhelm.
Thank you, Wilson. Now, I would like to ask the operator to open the call for questions. Operator.
[Operator Instructions] We have a question from the line of Sam Slutsky from LifeSci Capital. Your line is open.
Q - Sam Slutsky
Hey, guys. Thanks for taking my call, a couple questions for you. In terms of selling ZADAXIN through the e-commerce and retail pharmacies, how much of the sales into these channels the past quarter and how much more has to be done to get these programs fully rolled out?
Well, there is a continuous increase of the volumes going through the e-commerce channel and driven by the e-commerce activities and a big part of that is then happening through the retail channel. So the retail channel had certainly already volume before we started this distinctive e- commerce activities. So to keep it apart is maybe a little bit of a mathematical exercise but we think that there is a growing impact of the e-commerce activities and we saying it’s a very important piece of our moment because it provides alternatives in those provinces especially where we do not agree to the requests in terms of pricing from tender authorities and there e-commerce strategies are particularly important.
Got it, thanks. And in terms of pricing, have you have seen any major decreases since the one in May of last year for ZADAXIN?
Now we have not, we have actually seen that tenders in many provinces have come out slower then it looked like a year ago or 15 months ago, and that’s positive because the slower the new tenders come out, the longer the existing pricing arrangements stay in place, so that’s overall quite a positive.
Got it. So any changes to revenues pretty much to the volume changes then, correct?
Yes, we are still and continue to be pleased about our volume growth which has been outgrowing the market and our generic competitors in the last quarters and I think it’s a testament to the good job that team does.
Awesome. Thanks guys.
Thank you. [Operator Instructions] And it looks like we have no other questioners in the queue at this time. So I’d like to turn the call back over to Dr. Friedhelm Blobel for closing remarks.
Thank you all for participating in our quarterly conference call today. Please feel free to contact us directly should you have any further questions. Thank you very much.
Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may now disconnect your telephone lines at this time. Everyone have a great day.
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