Theratechnologies' (THERF) CEO Luc Tanguay on Q2 2017 Results - Earnings Call Transcript

Theratechnologies Inc. (THERF) Q2 2017 Results Earnings Conference Call July 12, 2017 8:30 AM ET

Executives

Denis Boucher - IR, EXOCET Public Relations

Luc Tanguay - President and CEO

Philippe Dubuc - SVP and CFO

Christian Marsolais - SVP and Chief Medical Officer

Analysts

Neil Maruoka - Cannacord Genuity

Alan Ridgeway - Scotiabank

Doug Loe - Echelon Wealth Partners

Ryan Lee - CIBC

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to Theratechnologies’ Earnings Conference Call for the Second Quarter of 2017. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Wednesday, July 12 at 8:30 am Eastern Time.

I would now like to turn the conference over to Denis Boucher. Mr. Boucher, please go ahead.

Denis Boucher

Thank you and welcome Mr. Luc Tanguay, President and Chief Executive Officer of Theratechnologies as well as Mr. Philippe Dubuc, Senior Vice President and Chief Financial Officer, will be the speakers on today’s call. A Q&A period open exclusively to financial analysts will follow their presentation. Before Mr. Tanguay begins his remarks, I have been asked by Theratechnologies to read the following message regarding forward-looking statements.

I would like to remind everyone that Theratechnologies’ remarks today contain forward-looking statements about its current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements, or other future events or developments. In preparing these forward-looking statements, several assumptions were made by Theratechnologies and there are risks that results actually obtained by the Company will differ materially from those statements.

As a consequence, the Company cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on them. Theratechnologies refers current and potential investors to the forward-looking information section of its press release issued this morning and to its annual information form dated February 7, 2017 and the Risk Factors section therein, available at www.sedar.com under Theratechnologies’ public filings.

Forward-looking statements represent Theratechnologies’ expectations as of July 12, 2017. Except as maybe required by securities laws, Theratechnologies does not undertake any obligation to update any forward-looking statement whether as a result of new information, future events or otherwise.

I would now like to turn the conference over to Mr. Tanguay.

Luc Tanguay

Thank you, Denis. Good morning everyone and thank you for being with us this morning. For the last couple of years, we have been working hard to bring growth to the Company and to develop new opportunities. I can say today that our last quarter was very much in line with that strategy. In fact, our second quarter was most significantly characterized by the continued growth and significant expansion of our organization.

To start with, EGRIFTA sales were the best recorded for a second quarter and in fact the second best ever recorded since beginning commercial rights of EGRIFTA. In addition, the ibalizumab launch preparation plan is now in full gear and is going according to plans. As we stand today, we are now only a few months away from a decision by the by the FDA, which explains why we have increased our level of investments in preparation of the launch. In fact, several important milestones were reached during our last quarter. Among them is the completion of the hiring process of our sales team in the U.S. We also now have a full contingent of medical science liaison calling on unprecedented number of physicians and key opinion leaders in the U.S. and an expanded management markets team working on all aspects of reimbursement.

Another achievement is the completion on May 3rd of the signing of the BLA by our partner TaiMed. The BLA is based on the results obtained during the Phase 3 clinical trial, which show that Ibalizumab is effective and well-tolerated in patients with multi-drug resistant HIV. Shortly after the end of our second quarter on June 30th we announced that the FDA had accepted the BLA filing. At the same time, we also announced that ibalizumab would be evaluated under the priority review process, which accelerates FDA review time to a goal of six months from the date of acceptance. As a consequence, the FDA has set a Prescription Drug User Fee Act, or PDUFA, target action date of January 3, 2018 for ibalizumab application. In other words, a decision should normally be received from the FDA by January 3, 2018.

Last but mostly definitely not least, we announced at the beginning of the quarter that we had acquired the commercial rights to ibalizumab for all European Union countries in addition to Russia, Norway, Switzerland and Israel. Needless to say, Europe represents a sizeable opportunity for us. After all, Europe is the single most important pharmaceutical market in the world after the U.S. If approved, it could become an important growth vector for years to come. While we remain largely focused on preparing the launch in the U.S., we have started to develop our regulatory strategy for Europe. As development warrants, we will keep you informed of our progress in that territory.

Of course, none of this would have been possible without the contribution of EGRIFTA. Philippe will give you all the numbers in just a moment, but as I was mentioning, EGRIFTA sales reached a new high for second quarter. This was accomplished even though we have not yet started to benefit from the presence of many more sales representatives in the field. We also anticipated that our EBITDA in the second quarter will be affected given the investments towards the expansion of our commercial organization in the U.S. In March, we announced the significant expansion of our commercial team in preparation of the potential launch of ibalizumab. As I mentioned previously, we completed the hiring process just a couple of weeks after the end of the quarter. Thus, our sales organization is now comprised of 41 employees compared to just 12, a few months ago.

Our sales team is now in position to reach close to 5,000 of the most important physicians in the field of HIV, whereas we used to be able to reach about 1,100 before. While our team is awaiting the potential launch of ibalizumab, its sole focus is on the sales initiatives targeting EGRIFTA. You will remember that our market studies concluded that such an expanded reach would lead to higher sales for EGRIFTA. This is why we issued revised guidance on March 1st and announced that we were expecting to end the year with EGRIFTA sales in the range of $44 million to $46 million Canadian.

Our guidance also considered that the impact on EGRIFTA sales will start being felt only in the third quarter. As a matter of fact, I’m happy to report that this is what we have been witnessing since completing the expansion of our sales force in April with an increase in new prescriptions being received at our call center. This is in line with our expectations. Sales in the current quarter are also in line with what we have forecasted. Based on this, I have every reason to believe that indeed, we will be seeing positive effects on our results, giving great comfort and confidence in our guidance.

On that note, I will now let Philippe present our results for the second quarter. Philippe?

Philippe Dubuc

Thank you, Luc and good morning everyone. We recorded our second quarter results, our best second quarter results ever. This is quite an accomplishment, especially since, as Luc mentioned, we haven’t yet felt the impact of our expanded commercial efforts on sales revenue. That being said, our sales in Q2 2017 stood at $10,015,000 compared to $9,000,000 in the same quarter of last year. Given the fluctuation in the exchange rate compared to last year, sales revenues were up by 7% in U.S. dollars or 11% in Canadian dollars.

Higher sales in Q2 are a result of higher unit sales volume, higher pricing, favorable exchange rates, and were partially offset by changes in the mix of third party payers that reduced the average net selling price. While we recorded higher sales revenue in Q2, also increased our investment in order to get ready for the launch of ibalizumab. As such, we ended the quarter with a negative EBITDA, which is what we expected and what we announced last March when we unveiled our launch preparedness plan for ibalizumab. As a result, we recorded negative EBITDA of $3.7 million on sales of $10 million compared to a positive EBITDA of $1.4 million on sales of $9 million last year. In the six months period ended May 31, 2017, adjusted EBITDA was negative $3.0 million on sales of $19 million compared to positive $2.5 million on sales of $17.7 million in the prior year period.

In Q2, 2017 cost of sales amounted to just over $2 million compared to $1.7 million for the same period last year. Almost half of the $2 million is attributable to royalties paid to EMD Serono which were just shy of $1 million compared to $660,000 for the comparable quarter last year.

Royalty percentage varies according to the sales levels and the percentage being applied in fiscal 2017 is a blended rate based on expected sales for the year. As for cost of goods sold, it rose to approximately $1.2 million compared to $1.1 million for the same quarter last year, representing 12% of sales, reflecting stable gross margins.

Research and development expenses increased to $3.7 million in Q2 2017 from $2.1 million in Q2 2016. R&D expenses include $400,000 in non-recurring cost associated with the development of the F4 formulation as batch of the new formulation was manufactured in preparation of the bio-equivalency test. The balance of the increase in R&D expenses is mostly associated with higher staffing and spending in medical affairs to increase awareness about excess abdominal fat in HIV infected patients as well as multi-drug resistance in HIV.

As expected, the selling and market development expenses were up substantially compared to the same quarter last year. In Q2, 2017, we invested close to $7.2 million on that budget item while we had spent roughly $3.3 million in Q2 of 2016. The increase is largely attributable to our decision to expand our sales force in preparation for the launch of ibalizumab. We also initiated preparatory work on branded and non-branded ibalizumab campaigns and intensified our work on the pricing strategy for ibalizumab. As you know, our goal is also to support EGRIFTA. This additional spending in the second quarter has already started generating results. Increased spending also includes $600,000 in non-recurring costs associated with the implementation of our commercial expansion.

General and administrative expenses grew to $1.7 million in Q2 2017 in comparison to $1.1 million last year. The granting of stock options to members of the Company’s Board of Directors, a non-cash item, accounted for $300,000 of the increase with the balance being attributable to the growth and development of business. As for finance costs, they were once again impacted by the fair value of the warrant liability.

Our stock continues to do well and as a consequence, the market value of our outstanding warrants went up substantially as it did increase this quarter. This resulted in a $4 million loss to reflect the higher value of the warrant liability. This is a non-cash item and is strictly due to accounting rules. Therefore, finance costs amounted to $4.6 million in Q2 2017 compared to $1.3 million last year. Of course, this accounting measure again had a negative impact on our earnings. Taking this $4.6 million item into account and of course other non-recurring expenses related to ibalizumab, we recorded a net loss of 9.286 million or $0.13 per share in Q2 2017, compared to a net loss of $500,000 or $0.01 per share last year.

I want to emphasize that we expected our earnings to be impacted in such away as we prepared for the launch of ibalizumab. This should be seen as an essential investment to successfully launching ibalizumab and to ensure that we rapidly gain market acceptance, it is approved by the FDA. In the second quarter of fiscal 2017, changes in operating assets and liabilities had a positive impact on cash flow of $3.9 million. These changes, which reflect the growth of our business and organizational expansion including increasing trade and other receivables of $1.8 million and a $5.7 million increase in accounts payable and accrued liabilities.

In terms of our financial position, we ended the quarter with close to $30 million in cash and cash equivalents, despite having paid our third annual payment of US$4 million to EMD Serono. In light of our second quarter results and with what we have been witnessing so far during our third quarter, our previously reported guidance remains unchanged. We still expect net sales revenue of EGRIFTA for fiscal 2017 to be in the range of $44 million to $46 million. Adjusted EBITDA for fiscal 2017 is expected to be in the range of minus $2 million to minus $3 million.

So, on that note, let me turn it back over to Luc who has some closing remarks.

Luc Tanguay

Thanks Philippe. As you can appreciate, we are meticulously and methodically implementing our launch strategy for ibalizumab while working on building the EGRIFTA franchise. The impact of adding 29 people to our sales organization should start being felt in our third quarter results and the positive effect should be even greater in the future quarters. We have also increased our MSL team to 6 headcount and our reimbursement to 5 people. This expansion will of course support EGRIFTA sales growth for 2017 and beyond and will optimize the launch of ibalizumab once approved. We are now just a few months away from a decision by the FDA regarding ibalizumab. As we enter the last stretch before the potential launch, I’m pleased with the level of preparedness we have reached at this stage.

Our goal is to ensure that we will quickly generate market acceptance and enthusiasm for ibalizumab. We have reached several milestones during our last quarter which have brought us much closer to where we want to be when the FDA announce a decision regarding ibalizumab. And we have been able to accomplish all of this while respecting our financial targets and maintaining our good cash position.

I want to thank all of you for being on the call today and we will now take questions from the analysts.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Mr. Neil Maruoka with Cannacord Genuity. Your line is open.

Neil Maruoka

Good morning, guys. First question just on EGRIFTA, and maybe it’s too early to say, but given the projected EGRIFTA growth that you hope to see, if you didn’t have ibalizumab, do you expect that your sales force investment that’s more than tripling your sales force size, that alone, do you expect that that would be accretive to EBITDA next year?

Luc Tanguay

Simple answer to that is yes. Of course, this year, we’ll have to take into consideration that we have one full quarter, almost one full quarter without any revenue from that new sales force. But on an ongoing basis, we think that the investment will generate an additional EBITDA to what we had last year. That’s definitely our estimate.

Neil Maruoka

Okay. And can you provide -- I mean, we haven’t seen that data yet, it hasn’t been -- isn’t available, but can you give us an idea or quantify what you’re seeing with EGRIFTA?

Luc Tanguay

I prefer it’s very short. We have one month and fee weeks -- one month and one week in fact of that now in the new quarter. So, I will prefer before to do any forecast -- but it’s substantial increase in prescription. It’s not slight or small increase; it’s a very significant increase.

Neil Maruoka

Okay, that’s great. That’s good color. And in terms of maybe moving to ibalizumab, do you have any maybe progress on pricing, can you provide us kind of some color on what your thoughts are on where that might fall?

Luc Tanguay

In fact, we’re doing a lot of work on pricing. We’re working with different kind of specialists, pharmacodynamics. We have a new team, as I mentioned and managed market team. So, we’re working on that. We will announce the price once the product is approved. But, we are very comfortable with what we have provided you as information in the past. For now, we prefer not to give more. There is a lot of work to be done with different parties. But, we always mention that highest price product in HIV is Fuzeon, which is approximately 50,000 a year and we still think that we would be at premium compared to Fuzeon, we’re still there.

Neil Maruoka

And just finally, on your filing strategy in Europe. Can you provide some color on how you expect to approach that and maybe if you have any early thoughts on your commercialization strategy, how you’re going to approach that market? And I’ll leave it that.

Luc Tanguay

It’s very early, Neil. We hired a few weeks ago, our regulatory consultant in Europe, which is a very complex thing to do to synchronize all the countries. We are going to go with a centralized filing, that’s for sure, but it’s early. And as I mentioned in my speech, as soon as we have more information and we should have more in the -- by the end of this quarter, so we’ll be able to update you on that. But definitely, it’s moving as we speak, but it’s very early in the process to make sure. What we want to look at for sure in the beginning is to have discussion with the authorities to what kind of information, data or additional studies needed. And second one to also look to other aspect, regulatory aspect like orphan drug or stuff like that. But it’s very early to tell what we -- to tell more at this time, sorry. So, I’ll keep you informed in the next quarter.

Operator

Your next question is from Alan Ridgeway with Scotiabank. Your line is open.

Alan Ridgeway

Just kind of following up on Neil’s question on EGRIFTA, as far as what you guys are seeing internally. So, we’re not really seeing it come through at the script level or at sort of patient -- pharmacy patient level at this point yet. What data are you guys seeing that makes you confident that you’re seeing an initial increase rather than negate with the new sales force?

Luc Tanguay

You have to understand before -- the first step in the process is script or prescription being sent or what we call Statement of Medical Necessarily to be sent to our call center. That’s the first step. Once a physician prescribed EGRIFTA to a new patient, we receive those kinds of formularies in our call center. So, the first thing we’re seeing is a significant increase in those, new Statement of Medical Necessity. So that’s the first step.

Of course, we have to work on that, fulfill all the documentation to work with the figures. So, it’s taking few weeks before the patient gets the prescription to the real product to a pharmacy. I’ve always said in the past that it’s probably taking around one month between the SMN or the script in our call center to patient really having the drug in its hands. But as we see today, we are also seeing -- and after that what you have to understand also, Alan, is that the once the patient is buying or more patients are buying drug, the pharmacy needs to adjust their inventory. So, it could take another two weeks before they realize that there’s more demand for the product. So, overall, it’s probably a process of four to six weeks, once you have new patient before you see in Thera the real impact on our sales. But today we are seeing effect on all those levels, prescription, in our call center and also demand from the specialty pharmacies sales are increasing at that level as well. So that’s why we’re confident with our guidance and we’re really seeing that the new sales force has a real impact on the sales of EGRIFTA.

Alan Ridgeway

Okay, great. That’s really helpful. Thanks for that. Just one follow-up then, as far as the sales force, so everyone is in the field now. How long will it take, do you guys think for the new team to sort of reach out to the full complement of docs that you guys are targeting at this point? Is this going to be a sort of four to six-month process until you have -- until we see the full potential of what EGRIFTA could potentially grow into or what’s the timeline for them to even make those initial contacts?

Luc Tanguay

For the new team, we haven’t expected this year -- we do not expect this year the same level of productivity than the legacy team, if you will. But of course, next year, we expect depending of course of the territory because you have territories that have more potential or more HIV patient than others. But let’s say, we think that next year everybody should be up and running at the same level.

Alan Ridgeway

So, we could see in addition, I mean clearly if you’re continually promoting EGRIFTA, we could see growth over an extended period of time but it’s more of a -- it could be quite a significant run into next year as well is what you guys see sort of internally. Is that fair?

Luc Tanguay

That’s exactly what we’re seeing.

Operator

[Operator Instructions] We have a question from the line of Doug Loe with Echelon Wealth Partners. Your line is open.

Doug Loe

Yes. Good morning. Thanks very much for the update gentlemen. So, just a couple of additional questions building on the previous Q&A. So, just reflecting on some of the details on ibalizumab, the partner TaiMed has disclosed in its own investor presentation. It appears as though, they think that for the intramuscular formulation that a simple label extension might be sufficient in order to gain initial U.S. approval and they think that could happen by end of 2018. And so, I was just wondering if that timeline is sort of consistent with your own notions and then I have a follow-up.

Luc Tanguay

Doug, I think you can understand I cannot comment the coverage presentation of another company. But we always say that we are thinking that the intramuscular presentation could be available between one year to one year and a half after the approval of the IV.

Doug Loe

Sure, fair enough. And then they also separately disclosed that ibalizumab manufacturer WuXi Pharma would be undergoing its facility inspection next week. Is that information consistent with your notions as well?

Luc Tanguay

Yes. That’s the case here.

Doug Loe

Alright, perfect. And then, returning quickly to EGRIFTA, as you know, there are still some clinician sponsored clinical studies ongoing to test its utility more broadly in lipodystrophy disorders and such. And so I just wondered, if you had any specific update on that study on EGRIFTA impact on liver fat that’s going on at Mass General. According to the clinicaltrials.gov, it looks like one year follow-up data is still expected next year. I just wondered if that too is consistent with your feedback from that group. And I’ll leave it there. Thanks.

Luc Tanguay

Okay, Doug, on that I’ll ask Christian to update you on where the studies as far now.

Christian Marsolais

The study’s going well. The recruitment is going well. We think that we’ll probably be able to complete recruitment in the fall and it’s a one-year study then the results should be available by the end of next year.

Operator

Your next question is from Ryan Lee with CIBC. Your line is open.

Ryan Lee

I just had a one question. Have you had any specific label discussions with the FDA? And when you anticipate the finalization of these labels? That’s all. Thanks.

Luc Tanguay

We haven’t -- as you noticed, we just had the BLA acceptance last week. So, we haven’t yet the discussion with the FDA on the label. It will definitely happen between now and January 1st. We expect it could take a couple of months before we get there. But definitely, it’s going to be in the next few months. Is there another question?

Operator

You have another question from Alan Ridgeway with Scotiabank. Please go ahead.

Alan Ridgeway

Hi, guys. Thanks for taking the follow-up. Just quickly, could you just give us an update on what you guys think the timeline could be for the F4 formulation? When do you see running the bio-equivalence study and when might you be able to disclose some data from that and what your further plans are with that formulation?

Luc Tanguay

In fact, we, as mentioned in I think Philippe’s part, we have produced the materials for the equivalency study. We have initiated it. It’s already ongoing; some patients have been in the study already. And we expect to probably have result by the end of the year, around the end of the year on that. Yes.

Operator

There are no further questions at this time. I’ll turn the call over to Denis Boucher.

Denis Boucher

Thank you very much. As there are no additional questions, we will conclude our Q2 earnings conference call. On behalf of Theratechnologies, I would like to thank everyone for being on the call today. Have a good day.

Operator

And this concludes today’s conference call. You may now disconnect.