Innovus Pharmaceuticals' (INNV) CEO Bassam Damaj on Q4 2016 Results - Earnings Call Transcript

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Innovus Pharmaceuticals, Inc. (OTCQB:INNV) Q4 2016 Results Earnings Conference Call March 6, 2017 4:30 PM ET

Executives

Kerry Ahearn - Director of Communications, Chesapeake Group

Bassam Damaj - President and Chief Executive Officer

Robert Hoffman - EVP and Chief Financial Officer

Rauly Gutierrez - VP, Finance

Randy Berholtz - EVP of Corporate Development and General Counsel

Analysts

Operator

Good afternoon and welcome to the Innovus Pharmaceuticals Incorporated Fourth Quarter and Full Year Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Kerry Ahearn with Chesapeake Group. Please go ahead.

Kerry Ahearn

Thank you, and good afternoon and thank you everyone for joining us today. My name is Kerry Ahearn and I'm from Chesapeake Group. We provide Investor Relations for Innovus Pharmaceuticals. And with me today from Innovus is President and Chief Executive Officer, Dr. Bassam Damaj; Executive Vice President and Chief Financial Officer, Mr. Robert E. Hoffman; Mr. Randy Berholtz, Executive Vice President of Corporate Development and General Counsel; and Vice President of Finance, Mr. Rauly Gutierrez.

During today's call, management will provide a brief overview of the company's progress in the fourth quarter and for the full year ended December 31, 2016, as well as provide a corporate roadmap for 2017. Management will also provide an overview of the financial statements and discuss the product pipeline. We will then open the line up for questions.

I'd like to remind everyone that certain information discussed on today's conference call is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act and that during today's conference call management will be making some certain forward-looking statements regarding future events or future financial performance of the company, including statements relating to the expectations around the timing for the commercial launch of products, the timing of outcomes of clinical trial results, and the regulatory approval process of Innovus Pharma product candidates, business development, plans and objectives such as out-licensing and acquiring products and product candidates, the amount and source of future revenues, expected use of cash reserves, and the development of the company's products pipeline. Such statements are predictions based upon current expectations and actual results could differ materially.

Please refer to the company's most recent filings with the Securities and Exchange Commission, including Innovus Pharmaceuticals' Annual and Quarterly reports on Forms 10-K and 10-Q for additional discussions regarding these and other risks that may affect the company's business. These documents can also be found on the company's Web site at innovuspharma.com. Innovus Pharma's financial results press release for the fourth quarter and full year ended December 30, 2016 was released earlier today and can be accessed on the company's Web site.

And with that, I will now turn the call over to Dr. Bassam Damaj. Dr. Damaj?

Bassam Damaj

Thank you, Kerry. Good afternoon everyone. In 2016, we drove growth across many areas of our product portfolio which enabled us to grow our annual revenues from $750,000 in 2015 to close to $5 million in 2016, and grow our pipeline from four to 17 commercial products.

Looking forward, we remain confident in the ongoing performance of our key inline franchises and our core brands, as well as the growing momentum behind our growing pipeline and major product launches including FlutiCare, if approved by the FDA. I am delighted to be on the call today to give our shareholders our fourth quarter and our full year 2016 updates.

2016 was a record year for Innovus Pharma, as we reported close to $5 million in revenues for the full year. This is approximately a 555% increase over full year 2015 revenues. The team has done a tremendous job in integrating our products under the Beyond Human sales and marketing platform, which resulted in having now several products generating revenue, including the Beyond Human Testosterone Booster, our Vesele product, Sensum+, UriVarx, Zestra and RecalMax.

Vesele is an excellent example of our integration, of our product integration and success. This product was acquired for $40,000 in 2015 and did minimal sales at that time for the company we purchased it from. From our launch of the product in May 2016 until December 2016 under our Beyond Human platform, Vesele has contributed over $3 million to our full year 2016 revenues. We currently see Sensum+ following the same path to revenue growth along with UriVarx, our newest product launch which is selling very well.

The vast majority of our revenues are generated from six core products. Starting with Vesele, Beyond Human products, Sensum+, Zestra, RecalMax, and UriVarx. While planning in the current environment has its challenges, we believe we have put forward very achievable and reasonable expectations to achieve $15 million in revenues for all of 2017 and that excludes any revenues from FlutiCare, if approved by the FDA. Achieving our projected revenue of $15 million exiting 2017 should swing the company into profitability, the largest milestone yet in the history of the company.

Business development and acquisitions of additional OTC or our RX to OTC switch ANDAs, remain an important priority for us as we are committed to building on our current commercial portfolio and pipeline. We continue to seek the best scientific and clinically validated opportunities via acquisitions, partnerships and collaborations at the right financial valuation with particular focus on our three main therapeutic areas. Men's health, women's health and respiratory diseases. Our business development team has been successful in bringing in products such as Sensum+, which is currently our third best seller, and UriVarx product we licensed and launched in late 2016 is gaining sales momentum heading into 2017 and we continue to evaluate other products to add to our growing commercial portfolio.

It is just impressive to see how the company has grown from $735,000 in revenues in 2015 to close to $5 million in 2016. We are efficiently utilizing our Beyond Human sales and marketing platform and integrating our products under this platform and the results speak for themselves. Our ability to efficiently integrate our own product under the Beyond Human platform is a testimony to the strength of the platform as is evident by the growth of our gross margins from approximately 53% in 2015 to approximately 78% in 2016.

We remain committed to FlutiCare, as we await for approval such that we can start significant commercial activity. If approved in 2017, we would expect to launch in the second half of 2017. Please note that our $15 million projected revenues for 2017 do not include any revenues from FlutiCare and if such launch occurs as is currently planned, our total revenues should be greater than $15 million in 2017. Our growth however, is not limited to our commercial activities in the United States. We have received approval to commercialize several of our products now in close to 30 countries including Europe, India, Canada, South Korea and others. And we expect that our ex-U.S. sales to be a significant amount of our revenues for 2017 as we start shipping products to our partners.

With that, I will turn the call over to Robert who will discuss the specific financial results of the company for the quarter and year ended December 31, 2016. Robert?

Robert Hoffman

Thank you, Bassam. As Bassam mentioned, we recorded revenues in the fourth quarter and full year of 2016 totaling $1.7 million and $4.8 million respectively. Products contributing to our revenues included BHT, Vesele, Sensum+, Zestra and RecalMax. Equally impressive are gross margins for the fourth quarter and full year were both 78%, which is significantly higher than our full year 2015 gross margins of 53%.

We believe this highlights the strength of our Beyond Human platform and the efficiencies we have been able to create by adding our existing products such as Vesele, Zestra, RecalMax, UriVarx, and Sensum+ into the platform. We will continue to look for ways to optimize our gross margins in the following quarters. Sales and marketing expense increased to $1.4 million in the fourth quarter and totaled $3.6 million for the year ended December 31, 2016. This was primarily driven by the cost of integrating our existing products into the Beyond Human sales and marketing platform and the increase in the number of print and online media advertising of our existing products through the Beyond Human platform.

The increase is also attributable to increased cost in sales and marketing support services due to higher volume of sales orders received as a result of the Beyond Human asset acquisition and the integration of more products into this platform. We expect this to moderate as the percentage of sales going forward as we see customers utilizing more and more of the subscription model to purchase our products.

General and administrative expenses increased to $1.9 million in the fourth quarter and totaled $5.9 million in the year ended December 31, 2016. These amounts did however include non-cash share-based compensation totaling $0.8 million in the fourth quarter and $2.7 million in the year ended December 31, 2016. These amounts also included non-cash amortization expense of $0.1 million in the fourth quarter and $0.6 million in the year ended December 31, 2016.

At December 31, 2016, our cash balances grew to $0.8 million compared to $56,000 at the beginning of 2016. Our cash balances were strengthened by the $3 million financing we completed in the third quarter. We continue to be focused on our goals of expanding our product line by further leveraging our beyond human sales and marketing platform, achieving our goal of profitability exiting 2017 with $15 million in revenues in 2017 before taking into account ever any revenues from FlutiCare, revenues from potential companies we may purchase, or the in-licensing of additional future products.

With that, I will turn the call back over to Bassam.

Bassam Damaj

Thank you, Robert. We have been diligently working towards achieving our two main goals. First, we are working towards reaching profitability at the end of 2017 with $15 million in revenue and this revenue does not include any revenues from the potential sales of FlutiCare.

I believe the revenue growth we have been experiencing speaks for itself. Our year to year growth for 2015 to 2016 is 555%. 555%. And we are currently achieving overall gross margins of around 80%. We are continuously adding more products and expanding our commercial territories. As a result, we are confident with our ability to achieved this goal.

Second, up listing to NASDAQ under the right market conditions. And here I would like to stress, under the right market conditions. We continue to diligently evaluate the market conditions along with our share prices and shareholder equity to move forward in our up listing process. And as I mentioned in previous calls and interviews, we will do the up list when it is the optimal time for the company and the shareholders in terms of the share price. This is a very important point for us.

What have we done in 2016? We have accomplished a lot in 2016. And some of the most important highlights of the last year include the initiation of the pre-clinical and clinical program intended to evaluate the safety and efficacy of the combination of our supplement result for promoting sexual health with sildenafil which is sold under the brand Viagra in the U.S. by Pfizer and indicated for treating erectile dysfunction. Pending positive results from the ongoing studies, we believe Vesele could be a significant value driver for us.

Second, we entered into an exclusive agreement with Seipel Group for the rights to market Urox Formulation which has been clinically proven to reduce urine urgency, accidents, and both day and night frequency in overactive bladder and urine incontinence, and is currently marketed under the name UriVarx. The OAB market is a large market. This product sold $1 million last year and we expect it to add $3 million a year in revenues due to the strength of the double blind trials showing very strong and statistically significant results and to the strength and robustness of our Beyond Human sales and marketing platform.

The product is doing very well right now under our Beyond Human platform and is tracking as one of our best selling products. Third, we announced the launch of Sensum in the U.S. under the Beyond Human sales and marketing platform which is clinically tested to increase penile sensitivity and in the U.S. the sales are growing and in a short period of time the product has become a good seller and part of our core product offering.

Since we launched Sensum+ under our Beyond Human platform in September 2016, it has become our third best selling product. Fourth, we announced the launch of our brain health supplement, RecalMax, under the Beyond Human sales and marketing platform in the U.S. RecalMax has been shown to increase recall of words and focus and we are tackling a very large market. And I can tell you we are very pleased with the growth the product has shown under the Beyond Human sales and marketing platform. RecalMax rapidly grew under our platform since its launch in September and is now our fifth best selling product.

Of course, we announced the appointment of Mr. Robert Hoffman as our Executive Vice President and Chief Financial Officer. Robert is a very experienced executive not just in the financial arena but also in the operations, manufacturing and pharma space. Fifth, we closed on $4.5 million in financing and warrant exercises which was very helpful in acquiring more products and increasing our sales and marketing efforts which resulted in our 555% increase in revenues for 2016 as compared to 2015.

We continue our preparation for the launch of FlutiCare in 2017 as approved by the FDA. The management is confident on the prospect of an approval by the FDA in 2017 and we are working diligently on the launch plan and structure not just in retail stores but under our Beyond Human sales and marketing platform as the market since the RX switch has been moving towards a subscription model versus a one unit purchase. And as you know, our Beyond Human platform is very powerful and can reach between 20 million to 30 million potential customers on monthly basis and we believe FlutiCare is approved by the FDA will do very well under our platform with little competition.

As you are all aware, we are operating in a period of significant volatility and uncertainty, including the current political and policy environment in the United States. Innovus Pharma, however, remains steadfast in our mission to continue our growth at additional innovative products to improve quality of life. We believe our broad and continuously expanding and balanced portfolio in the OTC space which is shielded from any price regulation by the government and in the areas of continuously high demand of our new products, will enable us to weather these uncertainties and positions us well to deliver long-term value to shareholders. We will stay focused on driving the performance of our core business, expanding our market outside the U.S., expanding our product portfolio and offering and executing on our key launch products to maximize short and long-term growth. And with this, I would like to thank you for listening to our call today and I open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from [Seria Johnson] [ph]. Please go ahead.

Unidentified Analyst

My name is [Seria Johnson] [ph]. Well, the question I had was, what is the update on FlutiCare and can you walk us through some of the preparations for the launch, assuming an approval by FDA.

Bassam Damaj

Thank you for the question. FlutiCare is still an important asset for the company and we remain committed to it, as I said in my call, while we await the approval from the FDA. As soon as the company receives notice of approval, we will update the market very fast. Believe me, we want to see this product on the market as much as the shareholders. As I said in my call, if approved, we expect it to add a tremendous amount of revenue to our revenues in 2017. And for this, while we await the approval, we continue our planning and preparation for the launch of the product and as I said, not only in the retail stores but also under our beyond human sales and marketing platform. And as I said, with the switch of the market from Rx to OTC, the market has switched to a more [model] [ph] of multiuse, multi-bottles orders, and a subscription model. And this is where our Beyond Human sales and marketing platform excels.

Operator

The next question comes from [Daniel] [ph]. Please go ahead.

Unidentified Analyst

Congratulations on a terrific year. Following up on FlutiCare here, I have noticed that most of the current fluticasone products on the market are the 120 sprays. Is there any reason for this and will Innovus follow the same path?

Bassam Damaj

This is actually a very good question. So there are two doses approved for the fluticasone on the market. The 120 sprays and the 60 sprays, which is the active at 50 microgram. Most if not all of the fluticasone on the market right now is the 120 sprays and it simply, it costs the same level to produce a 60 spray and 120 sprays, and with the current pricing in there it's not commercially viable to launch a 60 spray SKU. So most of all, if not all of the companies, are only launching the 120 sprays. Innovus will follow suit. We want actually to be able to maximize our margins on this and again, we will also use our 120 sprays for sampling and so forth. So, yes, we will follow the market with the 120 spray.

Unidentified Analyst

Thank you. I have one other really quick question. I noticed on page 12 of your recent presentation you were talking about the market opportunities. I guess as drugs go off patent, off prescription and then over the counter, and there's four different areas, a lot of drugs listed here. Can you sort of narrow it down and tell us your strategy and what to look for first?

Bassam Damaj

Yes. Definitely. The switch from Rx to OTC is a very important market to go after. I mean fluticasone propionate for FlutiCare is a very good example. This was, the fluticasone propionate in the U.S. was an Rx, the FDA switched it to OTC and as we can see from the sales reported by GSK and Bayer, the market is actually growing under the OTC franchise. So definitely what we are doing, we are looking into drugs that are Rx, that are on the path to -- are on switching from an Rx to OTC in order to add to our growing pipeline and complement our really complementary supplements in that same area.

We noted in our corporate presentation large therapeutic areas like erectile dysfunction. For example, we all know that Sanofi has the rights to CIALIS 5 mg in the U.S. This was all publicly made. They made a deal with Eli Lilly and they are working with the FDA to do this switch of CIALIS from Rx to OTC for the 5 mg. So definitely this is a market we have our eyes on and as you know, Vesele is our leading product now. So it's very complementary to some of the elements in the erectile dysfunction. So we are actually following that path.

Another good example, for example is the migraine area, where you have triptan that might be on the path from an Rx to OTC. So we have our eyes on that also become we have RecalMax for brain health. We are actually in the urology area. We are looking at overactive bladder. So there are also the urology space where you have BTH and prostate. So we are really looking at those main areas that we believe the market potential will increase in the OTC space and we are diligently looking to add actually products in that space, definitely.

Operator

The next question comes from [Russ Scott] [ph]. Please go ahead.

Unidentified Analyst

It's Russ Scott. I want to congratulate on all your hard work and your success and continued success. I have been following the story a while and I am very proud of you. My question is concerning, I know you have a very extensive distribution market and I see you are in most major big boxes here, Wal-Mart, Target, Kroger, Sears, Fred Meyer, and you also have very strong online sales presence. I was looking to get just a basic breakdown of sales from between the mall, percentage wise, what's direct to consumer and what's your online. What's U.S. doing and what's the rest of the world doing, now that you are in over 60 countries?

Bassam Damaj

Thank you for the question. So we have not broken down, historically, what the company does in terms of percentage online sales versus direct to consumer versus retail. We might do that in the future but at this time we have not disclosed that so I really cannot give you the specific numbers. But as you can imagine direct to consumer, we are big in direct to consumer. Online, we have close to 2 million online subscriber to our Web sites. The number of websites we have has grown dramatically. So we are very strong in growing in that area. Not that we are not present in the stores, of course we are present in retail stores in there but I think it is important to look at our gross margins from 2015 to 2016.

In 2015 we did not have much of the direct to consumer and online sales and our margins were 55%. In 2016, we had more of the direct to consumer, online and our margins went up to close to 80%. So you can see the advantage of one versus the other and where we are at. The U.S. versus the ex-U.S. is very important for us. At this stage, most of our revenues come from sales in the U.S. But please note that we did announce a lot of approvals, for example in Zestra in Europe and we had the northeast, the South Korea and India towards the end of 2015 beginning 2016. So now that we have approval in such large number of countries outside the U.S., we do expect that our revenues from ex-U.S. to increase and act to the bottom line.

Unidentified Analyst

Thank you. I do have a quick follow up. I notice you are in men's health. It's a billion dollar market. Women's health, billion dollar market and now in the respiratory area, another billion dollar market. Is that worldwide or is that just the U.S.?

Bassam Damaj

No, the respiratory we are basing on the Rx [scripts] [ph] of the fluticasone propionate, so this is really the U.S. market for that. As I said, the worldwide market is much bigger but we are focusing on the size and the market where we are really actively present. But once we expand more into the ex-U.S. market, we will start to look more on updating the market on the market size outside the U.S. and so forth. As a rule of thumb in the pharmaceutical industry, the U.S. market is about half the size of the rest of the world. So shareholders can extrapolate and have an approximate worldwide size of the market.

Unidentified Analyst

And one final thing. You have been full of surprises, first with the fluticasone and then acquiring Beyond Human. It's been a great success for you. Any surprises you can think about at this point in time?

Bassam Damaj

If I respond, it will not be a surprise Russ.

Unidentified Analyst

I really thank you for answering my questions. I am very happy for all you have accomplished so far.

Operator

The next question comes from [Robby Wiemen] [ph]. Please go ahead.

Unidentified Analyst

A couple of questions. I think you went over this one. If you could briefly go over the ranking of your products in order of performance, possibly. And then I do have a follow up.

Bassam Damaj

Sure. I mean as I discussed in my call, the vast majority of our revenues are being generated from six core products. And I am starting with the order, Vesele, Beyond Human product, Sensum+, Zestra, RecalMax and UriVarx. And I have to point out is that, several of those products were launched late in the year. So UriVarx was launched late in 2016 and as I mentioned, it is selling extremely well and climbing fast up the ranks. So the ranking might change depending on the sales but we will definitely keep updating the shareholders on the ranking going forward.

Unidentified Analyst

Okay. I appreciate that. And, question, why does it seem like the company has been in a quiet period and if it is a quiet period, how long do you anticipate that it will last?

Bassam Damaj

I will have Robert answer the question for that. Robert?

Robert Hoffman

So we are in a quiet period currently. We did file S-1 registration statement back in early February for primary and secondary shares. The typical process of the SEC takes some time to review that and when they are declared effective there is usually -- it could be as long as 20 day-30 day period, the time after it is declared effective that the quiet period ends. So it was an obligation on our part to file that S-1 registration related to registry in this year [indiscernible].

Operator

The next question comes from [Jerry Miller] [ph] a private investor. Please go ahead.

Unidentified Analyst

Great job on these fundamental. So ramping is, I think it's just -- I am happy to be part of it, to say that way. Just for clarification. The $15 million revenue you are projecting for this year, and I know you said earlier it does not include FlutiCare revenue. Any new product included in this?

Bassam Damaj

Actually the $15 million projected revenue actually is from our current commercial pipeline, the 17 products. It does not include revenues from FlutiCare, which you are right, and it does not include revenues, as Robert mentioned, from new products that we have and also new acquisitions that we do or new in-licenses that we do.

Unidentified Analyst

How about any sales milestones payments included in this?

Bassam Damaj

And actually it does not include any sales milestones, no. So we always try to be on the conservative side of our revenues, so we are able to achieve them. We exceed that revenue, the market will be happier and we exceeded our expectations, so.

Unidentified Analyst

Beautiful. I look forward to it. The profitability, what quarter do you see profitability?

Bassam Damaj

I will defer that question to Robert.

Robert Hoffman

What we have said that if we are able to achieve the $15 million in revenue and give in the gross margins that we have been able to achieve, we believe that we can exit 2017 achieving profitability. So at the end of 2017. So it will be the fourth quarter of '17.

Unidentified Analyst

And we are looking at operating or net profitability there?

Robert Hoffman

We will get to net profitability.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Damaj for any closing remarks.

Bassam Damaj

Thank you, all for the questions. And in closing, we remain committed to investing in new products to create significant therapeutic and shareholder value. This a very important goal for us. While planning in the current environment has its challenges, we believe we have put forward a very achievable expectation for 2017 in terms of revenue and potential net profitability. And with that, thank you all for being on the call today and for the questions, and we look forward to updating you on the future in our next investor call. Have a great day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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