Imprimis Pharmaceuticals' (IMMY) CEO Mark Baum on Q4 2017 Results - Earnings Call Transcript
Imprimis Pharmaceuticals, Inc. (NASDAQ:IMMY-OLD) Q4 2017 Earnings Conference Call March 8, 2018 4:30 PM ET
Mark Baum - Chief Executive Officer
Andrew Boll - Chief Financial Officer
Donald Besser - Manchester Management
Good afternoon and welcome to the conference call covering Imprimis Pharmaceuticals Financial Results and Business Update for the Fourth Quarter 2017. My name is Tim and I will be your operator for today's call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. By now, you should have received a copy of the earnings press release. If you have not received a copy, please go to the Investor Relations page of the Company's website at www.imprimisrx.com.
Before we begin today, let me remind you that the Company's remarks include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Imprimis' control, including risks and uncertainties described from time to time in its SEC filings, such as the risks and uncertainties related to Imprimis' ability to make commercially available its compounded formulations and technologies and FDA approval of certain drug candidates in a timely manner or at all.
For a list and description of those risks and uncertainties, please see the risk factors section of the Company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.
Imprimis' results may differ materially from those projected. Imprimis disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.
This conference call contains time-sensitive information and is accurate only as of today. Additionally, Imprimis will refer to non-GAAP financial metrics, specifically adjusted EBITDA. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the Company's press release, available on the website.
With that, I would like to turn the call over to Mark Baum, Chief Executive Officer of Imprimis. Mark?
Thank you. Imprimis Pharmaceuticals Company was a simple mission. To make innovative medicines affordable and accessible in the United States. We own over 60 drug formulation patents and patents pending. And we have a flexible business model allows us to sell our drug formulation either as compounded drugs or as candidates for traditional FDA approval through one of our subsidiaries or spinout companies. Our business model is also uniquely efficient because we do not rely on middle parties. Insurance companies, benefit managers, wholesalers or distributors. We make important medicines for patients and we sell them at a fair price direct to the user. With Imprimis, our physician customers don't have to deal with prior authorizations, coupon card, wait and switch discounts or any other nonsense.
We allow our physician customers to practice medicine and treat their patients. Not spend their time and money to support a crazy and Byzantine prescription drug distribution system. During our last conference call, we described specific goals for our ImprimisRX ophthalmology business that we believe will generate value for our shareholders and the accomplishment of our corporate mission. This specific goal described on our last call was to make Imprimis a $100 million revenue company in the next three years. Here is a brief recap to remind investors how we see this strategy coming together. Within the ophthalmic surgical market, we estimate our formulations in some or another are now used in roughly 10% of the cataract and refractive surgeries in the United States, or about 400,000 surgeries. We believe in three years we can serve at least 525,000 of these surgeries annually and increase our revenue per surgery from about $40 to $75 per case, which would equate to about $40 million in annual revenue.
There are 90 million prescriptions written each year that we believe can potentially be won by our simple drops combination topical formulations. We believe at least 3% penetration of this 90 million prescriptions is achievable within three years, which is 600,000 prescription and a roughly $65 per month would result in just under $40 million in annual revenue. There are 4 million prescriptions written each year that can potentially be won by our clarity plus cyclosporine formulations. And there are millions of patients who could benefit from a cyclosporine based formulation, but for one reason or another are not on therapy.
We believe our proprietary clarity plus cyclosporine formulations could reach10% of the potential existing prescription market which would be about 400,000 prescriptions and at roughly $50 a month would result in north of $20 million in annual sales potential. Of course, that does not include our ability to grow the market and bring a cyclosporine based formulation to those who have failed therapy or who are otherwise not on any therapy. Because these goals only focus on parts of our ImprimisRX portfolio and do not include other meaningful existing lines of business or formulations we plan to bring to market, we believe our $100 million revenue goal is achievable. And may allow us to over deliver on your expectations of our company.
Today and for each quarter going forward, one chief objective of our quarterly conference calls is to provide a progress report on our achievement of these goals. For competitive reasons, we will not give granular detail on specific products or strategic activities we've undertaken. That said to the extent there are questions we can answer to clarify points we make, I will do my best to add clarity in Q&A at the end of the call.
Before I continue, let me note that it has been less than four years since Imprimis became a revenue generating business. During that time, we've been able to increase revenue at a compound annual growth rate of 126%. We owned three drug production facilities because we believe it is critical to control quality and compliance. And we've been able to take some of our drug formulation assets and vend them into new subsidiaries that we have funded and managed as standalone new businesses. And as an Imprimis shareholder, you are the largest shareholder of each of those new businesses.
Now let's get into the results for the fourth quarter of 2017, the full year 2017 and then at the end of the call I'll make additional comments on our business going forward. Imprimis recorded record revenues for the fourth quarter 2017 and the full year 2017. Fourth quarter revenues were $7.3 million versus $5.8 million for the same period in 2016. This was a 27% increase for the year-over-year period, and a 13% increase compared to the prior quarter, the third quarter of 2017. The fourth quarter of 2017 was record high revenue for a single quarter and our 15th consecutive quarter of double-digit or better year-over-year revenue growth. Gross ophthalmology related revenue was $5.8 million in the quarter compared to $3.5 million for the same period a year ago. And $4.9 million recorded in Q3 of 2017. This was a 64% increase from the same period a year ago and a 19% increase from the third quarter of 2017.
As we said in the past, we believed that ophthalmology revenues would grow as a percentage of our overall revenues, and in the fourth quarter of 2017 ophthalmology revenues reached a new record high of 79% of total revenues. Our adjusted EBITDA came in at a loss of $794,000 for the fourth quarter, less than half of the prior quarter loss. This is the third consecutive quarter of narrowing adjusted EBITDA loss and we expect that trend to continue as revenues steadily increase. Operating cash used during the fourth quarter was $300,000, a record low. And our cash balance actually increased at the end of the fourth quarter compared to the third quarter of 2017.
Here are a few additional noteworthy items. First off, while the foundation of our business is quality. The spirit of what makes our company special is our commitment to innovation, consistent with and in furtherance of the goals we described on our last call, we continue to innovate and provide customers with formulations that help them better serve their patients. In the first quarter of 2018, we will likely add five new formulations to our 503B offerings. And we expect to add new ophthalmic formulations both from our 503A and 503B facilities throughout 2018. January of 2018 was an important month because our 503B outsourcing facility was issued a DEA manufacturing certificate which will expand our ability to make and dispense our MKO Melt formulations.
Also New York State approved our 503B application which leaves California is the only large US market we are awaiting licensure from. We also began to spend some preservative-free dorzolamide and preservative-free dorzolamide/timolol in all 50 states after dorzolamide and the commercial products Cosopt and Cosopt PF were added to the FDA's drug shortage list. And finally to drive continued growth, we added a significant number of seasoned ophthalmology contract sales professionals. One of the keys to our business is the fact that many of our formulations are either patented or patent pending. And second and most important perhaps that there is a growing body of data being published on the clinical use of our formulations. Today, I am pleased to announce that there are no less than eight studies underway or near completion on the MKO Melt, LessDrops OmegaDoxy, Simple Drops and our cyclosporine formulations. We look forward to the publication of these studies, and the accompanying data. And I believe the quality of these studies will continue to support our growth in 2018 and beyond.
The first of these studies on our Simple Drops formulations will be presented at the upcoming American Society of Cataract & Refractive Surgeons meeting next month in Washington DC. At ASCRS, I hope to see many of our customers and by the way there are now more than 2.000, U.S. prescribers benefiting from our products and services.
Here are brief updates on our spin outs and subsidiaries. Eton Pharmaceuticals, our first spin out which we completed last year recently released a shareholder update, Based on what we've read including news of the company's filing of its first new drug application or NDA which by the way was granted an accelerated review by the FDA, and other programs that should see NDA filings within the next 12 to 18 months or so. We're optimistic the valuation for Eton has and will continue to increase as Eton's largest shareholder and the royalty holder for two of Eton's drug candidates that hold $billion dollar revenue potential. We are looking forward to Eton's continued progress.
Surface Pharmaceuticals is a newly created subsidiary that will seek FDA approval through the 505b2 regulatory pathway for its drug candidates, which are focused on ocular surface diseases, Surface's three drug candidates target certain segments and patient profiles that suffer from dry eye disease, particularly those who do not respond well to the current existing approved therapy, and the other approved therapy that is used in dry eye. Like Eton, we intend to finance and manage Surface as a separate entity. We are currently in discussions with investment banks and investors, and we hope to close an initial round of financing for Surface during 2018. To the extent we are able to close around the funding for Surface, we will likely lose our controlling interest, but will remain one of Surface's largest shareholders, as well as the royalty holder on all Imprimis contributed drugs.
Beyond Eton and Surface, we've recently been notified of an important change in the patent status for one of our key drug formulation assets that may allow us to launch yet another large market opportunity 505b2 focus company in the next year or so. We intend to update our shareholders about this change and our plans regarding this opportunity in the coming months. Before I hand the call over to Andrew, I want to address two issues investors may be interested in. First is the overall regulatory environment for compounding. In January, FDA Commissioner Dr. Scott Gottlieb announced the FDA's 2018 compounding policy priorities plan. To date, we've been encouraged by comments and statements made by FDA representatives including those of Dr. Gottlieb that it will embrace current good manufacturing practices or see GMP compounding, and the outsourcing facility model as the agency works to finalize and clarify rules for compounding. We agree with FDA that more CGMP compounding is good for patients, but we also believe it is good for our company.
And lastly, the pending lawsuits with Allergan. Our company has no comment on this litigation. Now I will turn the call over to our CFO Andrew Boll for more detail on our financials before I provide closing comments.
Thank you, Mark. And thanks to everyone for joining the call today, As Mark mentioned, total revenues for the fourth quarter were $7.3 million compared to $5.8 million a year ago, a 27% increase. This is our 15th consecutive quarter of double-digit or better year-over-year revenue growth. We also grew revenue sequentially up 13% from the third quarter of 2017. For the full year 2017, revenue came in at $26.7 million compared to $19.9 million in 2016. Total costs of sales for the fourth quarter 2017 was $3.5 million, yielding a gross profit of about $3.9 million and a gross margin of 53%, compared to a gross profit of $2.7 million last year, and a gross margin of 4.7 %.
Operating expenses totaled just over $6 million which resulted in a loss from operations of approximately $2.2 million, compared to the fourth quarter last year, we reported operating expenses of $6.2 million and an operating loss of approximately $3.5 million. Backing out certain expenses and income line items, we recorded an adjusted EBITDA loss of approximately $794,000 for the fourth quarter of 2017, 67% improvement compared to an adjusted loss of $2.4 million for the fourth quarter last year. We also have their adjusted EBITDA loss on a sequential basis compared to a loss of $1.6 million in the third quarter of 2017. And lastly as Mark mentioned, we saw cash used in operating activities during the fourth quarter totaled $300,000. And we saw our cash balance increased slightly from the first quarter compared to the third.
Going forward, we are expecting to keep our sales and marketing expenses at a reasonable level, but it will increase somewhat over the course of 2018 due to the additions we have made to the commission only based salesforce. We're also expecting our gross margins to increase in 2018 as we add on revenues and utilize capacities at our production sites. Quarter-over-quarter, we continue to see more revenue come out of our New Jersey based outsourcing facility which is important as we expect and have seen 60% gross margins come from that facility over the last two quarters. We have a goal and a plan of expanding gross margin significantly in 2018, which will play a major factor as we look to flip our adjusted EBITDA loss into a profit at some point this year.
We're hopeful to see an increase in the value of our Eton common stock position this year, and deconsolidation of our Surface subsidiary in 2018. And last as Mark alluded to, we're also reviewing the opportunity to launch at another 505b2 focus company. 2018 will be a year focused on gross profitability and value creation.
I will now hand the call back to Mark to close things up.
Thank you, Andrew. In terms of where the businesses and where we're heading, we expect investments we've made an automation, quality and compliance, information technology, customer care and sales and marketing, they will continue to improve our customers experiences. We believe terrific customer experiences with our high-quality compounded medicines should foster continued growth. In the near term, on our last call I stated that our historical Q3 to Q4 growth in ophthalmology revenue had been about 20%. I also said our expectation based on a few years of history was that the following quarter, the first quarter of this year we would see a continuation of that growth. Well consistent with what I said, our Q3 to Q4 ophthalmology revenue growth was 19%. And I'm pleased to say that the continuation and growth we expected from Q4 of 2017 to Q1 of 2018 is happening now.
In summary, our business is good and growing. Our investments in Eton and Surface are poised to perform well. And we continue to demonstrate an ability to drive value from Imprimis, which is a valuable pharmaceutical innovation platform. Importantly, today we are closer than ever to meeting our simple mission, which is to make innovative pharmaceuticals affordable and accessible in the United States.
At this time, I'd like to open up the call to questions from our participants. Operator?
Thank you. Our first question comes from the line of Donald Besser of Manchester Management. Please proceed with your question.
Good afternoon, Mark. Great progress in the quarter, congratulations. I have just a couple questions. Could you update Eton's cash balance? Where do they stand in terms of they raise $20 million, how much do they have now?
Yes. I cannot give you an exact update on their cash balance. I can tell you that they're based on what I know they're well positioned from a cash perspective. And they're in good shape there.
When you announce the two new dorzolamide products for to answer the shortage issue. The stock had a good run up. Can you quantify it all? What kind of sales we've had so far this quarter in those two products?
I can't give you an exact figure on sales for those two products. What I can tell you is it was - it is terrific and frankly unexpected opportunity to introduce a very large number of physicians to our company. And to our offerings in general. And so I just in fact we're not going to give any granular detail, but I did look at the number of new accounts that we received that had been ordering that formulation. And I was frankly surprised at the high number, so we have added a lot of new physicians and our goal over the next 6 to 12 months is to continue those relationships to introduce those physicians to offerings that we have, the Simple Drops offerings as well as the rest of the offerings because a lot of overlap between physicians that are ordering these formulations, and physicians who do cataract surgery, and could potentially benefit from other products and services.
Okay, okay and finally on my service here there was this FDA letter that was sent to you guys in the late December. Can you update what's happening on that and then whether these clinical studies that you mentioned are in response to that? And what was all that or what can you give me in terms of an update on that situation?
Well, with respect to the FDA's warning letter, the FDA's warning letter was not necessarily about what we make per se. It was about what we say about what we make, and we have a similar mission as the FDA. We want to protect patients. Fortunately, the folks that order our formulations are physicians. They're very smart and well-informed purchasers, but nevertheless our position is to be compliant with the FDA's requests. And so we have provided the FDA with a plan to comply 100%. And we are meeting our responsibilities on that plan and updating the FDA as we make progress on the promises that we made to them. As far as the studies go, last year one of the things, one of the challenges with some of the formulations we make is that they're compound. And there's not a lot of data. These are not FDA approved drugs. They don't have an indication or a label. But that said, as you can tell from our numbers and the number of physicians that use our formulations, they're important in these physicians practices. And what we've tried to do is to work with leading physicians and ophthalmology in particular to support them in their interest to clinically study these compounded drugs. I don't know of any other large compounding companies in the United States that do that that actually support clinical research, and that's what we're doing. And we've been doing for the last 12 months. You probably know, if you don't you should know that there are numerous papers that have been published, peer-reviewed papers on our formulations. And I'm really excited about what I know about the work that's being done now around the country on our other formulations. These are not Mickey Mouse clinical studies; some of them are studies that would probably be accepted as pivotal studies by the FDA. They're complex studies, and I think they're going to be important as we continue to grow the company. But once again, we'll be able to grow our business and get more physicians comfortable with what we do, when their peers communicate to them about the success that they're having integrating our formulations into their practice.
So has the response to the FDA letter affected sales this quarter or can you give some guidance on the current quarter?
No. I mean you can look at the numbers for the fourth quarter. We had two things kind of hit us; the Allergan litigation and the FDA warning letter. Our sales have never been better and the number of physicians that purchase from us has never been higher, particularly as we've gotten into the first quarter of 2018, our business has really never been better than it is now. And we're really excited about the future. So the key for us is to work with the FDA on compliance. And get this right and we're doing that, we're a 100% committed to doing that. So we're going to work with the FDA on compliance and we're going to continue to grow our business. And as I said during the call, the key for us is to focus on patients. If we continue to focus on patients, we continue to focus on meeting the needs of our physician customers. I think we're going to do just fine.
Good, the progress is very encouraging. Thank you very much, thank you.
There are no further questions over the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.
Yes. I wanted to add that this is International Women's Day and I wanted to say is the proud son of a mother who gave me life and who helped inspire my work ethic. The husband of a brilliant, gorgeous wife who served our country with distinction, and father of a five year old little girl who's really the light of my life, and filled with endless promise that I'm proud to say that women make up 55% of all Imprimis employees. And importantly, two out of three drug production facilities that we operate are led by smart, hardworking, creative and dedicated women. So Imprimis currently has 17 open positions and we hope we get many great people to apply for these positions including lots of women who want to work with me and our team to make innovative drugs affordable and accessible to all Americans. That'll be the end of the call and if anyone has any further investor relations related questions, please call Jon Patton; his direct number is 858-704-4587. Thank you.
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful rest of your day.
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