Pernix Therapeutics Holdings, Inc. (NYSEMKT:PTX) Q3 2018 Earnings Conference Call November 8, 2018 4:30 PM ET
Robert Yedid - MD, LifeSci Advisors, LLC
John Sedor - Chairman and CEO
George Jones - VP, Sales and Marketing
Angus Smith - SVP, Chief Business Officer and Principal Financial Officer
Good afternoon, ladies and gentlemen, and welcome to the Pernix Therapeutics' Third Quarter 2018 Earnings Conference Call. My name is Dan, and I'll be your event specialist today. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded for replay purposes.
And I'd now like to turn the call over to Bob Yedid. Please go ahead, sir.
Good afternoon. This is Bob Yedid, and thank you for participating in today's call. On the call today are John Sedor, Chairman and CEO; George Jones, Vice President of Sales and marketing; and Angus Smith, Senior Vice President, Chief Business Officer, and Principal Financial Officer of Pernix Therapeutics.
Please be advised that Pernix issued a press release this afternoon containing financial results for the quarter ended September 30, 2018. The release, including the financial tables and reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, is available on the company's Web site at www.pernixtx.com. The company also expects to file its Form 10-Q for the third quarter of 2018 with the SEC later today.
During today's call, the company will be making forward-looking statements and the actual results may differ from current expectations. Please note that under safe harbor rules, Pernix has no obligation to update the information contained in these forward-looking statements even if the actual results or future expectations change materially. The company recommends that you refer to the cautionary statements contained in the SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.
I would now like to turn the call over to John Sedor, the company's Chairman and Chief Executive Officer. John?
Thank you, Bob. Good afternoon and thank you for joining us today. This afternoon, we announced our financial results for the third quarter of 2018. Before getting into the specifics of the quarter, let me begin by commenting on recent events. As you are well aware, we have faced and continue to face a number of challenges, including the recent court decision in the Zohydro ER patent litigation, and more aggressive generic competition for Treximet. Please note that we're working hard to address these events, and are focused on stabilizing our business.
I will now briefly review Pernix key financial results for the third quarter. Our net revenues for the third quarter of 2018 were $37.2 million, down 8% from $40.5 million in the prior year. Net revenues for Zohydro ER grew 6% year-over-year. And this product has generated year-over-year sales growth in each of the first three quarters of the year. For the first nine months of 2018, revenues for Zohydro ER and Silenor were up 22% and 11% year-over-year respectively. Following the loss of exclusivity, in February 15th, sales of branded Treximet have substantially shifted to generic versions of Treximet, including our own authorized generic. With multiple additional generic versions now in the marketplace, we expect further sales erosion in both the brand and our authorized generic.
Turning to Contrave, a market-leading prescription product indicated for weight loss. We began distributing the product at the end of July, following the completion of the transaction. Net sales for August and September represented the two strongest months in the U.S. during 2018. We have spent the first 90 days working within the Nalpropion team to stabilize that business from the disruption caused by Orexigen's bankruptcy process.
Turning to our core business, the last several months have certainly not been without their challenges, as I stated earlier. As you know, in the company's litigation against Alvogen, the court recently found that the asserted claims of our two U.S. method of use patents relative to Zohydro ER with BeadTek were in fact infringed. However, the court also concluded that our patents were invalid, citing obviousness and the lack of adequate written description.
Pernix strongly disagrees with this judgment and we filed notice of appeal on September 7, 2018. We and Alvogen now have to submit our written arguments to the Court of Appeals and an oral argument on the appeals expected in the second quarter of 2019 with a written decision to follow their act. Although, I cannot provide you with any assurance that our appeal will be successful but I can say is that we intend to vigorously defend the validity of our patents and are pursuing multiple avenues to protect our Zohydro exclusivity.
With that said, if it was not successful pursuant to a previous settlement Alvogen can launch a generic version of Zohydro ER with BeadTek subject to final approval of an MDA from the FDA as early as October 1, 2019. Further it is important to understand that the Court's decision has no immediate impact on Pernix's January 2018 settlement agreement with Actavis Laboratories now part of Teva Pharmaceuticals.
Relating to the proposed version of Zohydro ER, under the terms of the Actavis settlement agreement, Pernix expanded activists are licensed to begin selling generic version of Zohydro ER on March 1, 2029.
The other significant challenges for us have been Treximet generic competition, while sales of our branded Treximet doubled sequentially in the – in the third quarter of 2018, there are now four generic competitors in the market including our own authorized generic and we expect to face additional pricing and volume pressure going forward.
To point to this in context to our investors, branded Treximet sales were $50.4 million in the first nine months of 2017 accounting for over 45% of the company's sales as compared to $17.2 million for the first nine months of 2018, a decrease of two-thirds. However as expected to launch of our authorized generic had bolstered earnings overall sales to some degree.
Finally, I noticed on our lifecycle management is an area of particular interest, I want to reiterate that securing an Rx-to-OTC partnership remains a high priority for the company, we should also recognize that the path of securing such partnerships is complicated and can be a lengthy process. We cannot say would certainly what the outcome will be or speculate on its timing, I can tell you that the company remains engaged in discussions regarding a partnership.
With that, now let me turn the call over to George to discuss our commercial progress. George?
Thank you, John. Let me begin with a brief comment on Contrave. The Pernix team is working closely with Nalpropion to support their commercial and marketing efforts. During the third quarter, Contrave remained the leading prescription weight loss brand in the United States and we are currently exploring a number of initiatives to enhance the value of the brand globally.
Angus will provide an update on the financial performance of the product shortly. Moving onto the Pernix portfolio of full branded products for Zohydro ER the efforts of our sales specialists have been focused on enhancing the awareness of health care professionals relative to the appropriate and safety use of prescription opioid medications as well as the transition of appropriate patients from other forms of hydrocodone. This has led to continue growth in our share of the long acting hydrocodone market in the third quarter. We have increased our share of that market to 30% compared to 25% in January of this year.
Our prescription trends remain positive for Zohydro ER with the 7% year-over-year increase in total prescriptions in the third quarter of 2018. Importantly, this is the second consecutive quarter that Zohydro ER has demonstrated year-over-year total prescription growth and has turned us to positive year-over-year growth for the first nine months of 2018.
Turning to Silenor, prescription demand for the third quarter was flat year-over-year although it increased 3% for the first nine months of 2018 compared to the same period in 2017.
Moving on to Treximet, I will review the overall franchise including prescriptions sold of both our authorized generic and branded versions.
As a reminder, we launched our own authorized generic version of Treximet on February 15 in an effort to mitigate the impact on our business from the last exclusivity of branded Treximet. Our authorized generic version now faces competition from a total of three generics including two that launched during the third quarter, however we were still able to capture 50% market share of generic Treximet market during the quarter.
Branded Treximet total prescriptions continue to demonstrate significant year-over-year declines in the third quarter in the face of heightened generic competition, we expect to continue to experience significant declines in Treximet branded volumes in 2018.
I will now turn the call over to our Principal Financial Officer, Angus Smith for his review of the financials. Angus?
Thank you, George. Good afternoon everyone, before I discuss our financial results, I want to make sure that everyone understands how we are accounting for Nalpropion in our financial statements.
Since we have the power to direct activities that most significantly impact Nalpropion's economic performance, we have determined that Nalpropion qualifies as a variable interest entity based on the governance structure and contractual relationship with Pernix.
We are therefore consolidating Nalpropion's financial results in this, on our income statement we adjust through line entitled net gain or loss from non-controlling interests for the amount of gain or loss associated with Nalpropion that is proportional to the amount of that entity that we don't own.
In other words at this point, 90% of the income or losses are adjusted out of our earnings. On the balance sheet, the net assets and liabilities that are attributable to other Nalpropion shareholders are adjusted out within shareholders' equity in the line entitled non-controlling interests.
With that, let me review our financial results for the three months period ended September 30, 2018. For the third quarter of 2018, net revenues were $37.2 million an 8% decrease from $40.5 million in the third quarter of 2017.
The year-over-year decrease was attributable primarily to a decline in net revenues of branded Treximet, our non-core generic drugs Silenor partially offset by our first net revenues from Contrave, growth in Zohydro ER and net revenues from our Treximet authorized generic.
Excluding Contrave, net revenues were $20.5 million down 49% compared to the prior year period. Now let's review the specifics for each major product, Contrave generated net revenues of $16.4 million during the three months ended September 30, 2018 which was attributable to Nalpropion's acquisition of the assets of Orexigen which closed on July 27, 2018.
Zohydro ER net revenues increased by $400,000 or 6% to $6.7 million during the third quarter of 2018 compared to the prior year period, the increase was due to an increase in net price related primarily to favorable growth to net accrual rates partially offset by lower sales volume of $200,000. Gross to net for Zohydro ER was 52% in the third quarter compared to 60% in the prior year period.
The increase in gross to net during the third quarter was due to favorable growth and that's across numerous category. We expect gross to net for 2018 to be in the low 60. Silenor net revenues decreased by $1.3 million or 19% to $5.6 million in the third quarter of 2018 compared to the prior year period. The decrease was due to a decrease in net price primarily related to a $1 million favorable settlement with one of our customers in the prior year period partially offset by higher sales volume.
Gross to net for Silenor in the third quarter were 29% as compared to 40% in the prior year period, we expect gross to net for 2018 to be in the 30% range. Treximet brand net revenues decreased by $16.4 million or 83% during the three months ended September 30, 2018 compared to the prior year period due primarily to the loss of exclusivity of Treximet in February 2018 and subsequent generic competition.
We expect further generic competition will continue to negatively impact net revenues of branded Treximet.
Gross to net for branded Treximet in the third quarter were 39% as compared to 42% in the prior year period. Treximet authorized generic net revenues were $2.3 million during the three months ended September 30, 2018.
The Treximet authorized generic has generated net revenues of $7.1 million since its launch in mid-February 2018. The company's gross margin in the third quarter of 2018 was 58% down from 74% in the corresponding period of 2017 due primarily to an unfavorable product mix.
Selling, general and administrative expense increased by $11.7 million or 58% during the third quarter of 2018 compared to the prior year period, the increase is attributable primarily to Nalpropion's acquisition of Orexigen's assets which resulted in selling, general and administrative expenses of $17.1 million during the most recent quarter.
The increase was partially offset by lower sales force related expenses due to the restructuring announced in January 2018, our decision to lower marketing expenditures for Treximet at the entrance of generic competition and other cost reduction.
Excluding the impact of Nalpropion, SG&A was approximately $14.8 million, a decrease of 27% or $5.4 million from the prior year period. Research and development expense increased by $1.4 million during the third quarter of 2018 compared to the prior year period due primarily to Nalpropion's acquisition of Orexigen's assets which resulted in research and development costs of $1.5 million partially offset by the discontinuation of certain Zohydro related research projects.
Net loss was $21.3 million for the three months ended September 30, 2018 compared to net income of $6.4 million in the same period last year, the third quarter of 2017 was favorably impacted by gains related to the restructuring of our debt and a legal settlement.
Excluding the impact of Nalpropion, net loss was $11.8 for the quarter. Adjusted EBITDA was negative $700,000 for the third quarter of 2018 compared to adjusted EBITDA of $11.6 million for the same period last year.
Excluding the impact of Nalpropion, adjusted EBITDA was $400,000 for the quarter. On the balance sheet, as of September 30, 2018 we had total liquidity of $31.3 million consisting of cash of approximately $24.5 million and availability under our revolving credit facility of $6.8 million.
Excluding Nalpropion, Pernix cash was approximately $18.2 million of which $12.2 million related to cash received from sales of Contrave. In mid-October, we received letter from NASDAQ notifying us that we no longer are in compliance with certain continued listing requirements of the NASDAQ global market.
As a result, we have until mid-April 2019 to address these deficiencies and we are in the process of assessing our alternatives in this regard. Finally, in light of recent events, we are evaluating various alternatives to improve our liquidity and our capital structure.
Lastly, I would like to briefly comment on my impending departure from Pernix. I've thoroughly enjoyed my four years with the company and I'm grateful to John and the Board of Directors for the faith that they've shown in me.
Having said that, I made a personal decision to move on to another role in the pharmaceutical industry and will be leading Pernix in the coming weeks, I'm proud of the dedication that has been shown by everyone here in Pernix over the last few years and I wish the team the best. The finance team at Pernix is in great hands with Glenn Whaley going forward.
With that, I'll now hand the call back to John Sedor for closing remarks.
Thank you, Angus. To summarize, our business has faced and continues to face challenges, our team remains committed to managing through these challenges and we look forward to providing you with further updates on our progress. Finally, I'd like to thank Angus for his valuable contributions to Pernix and to Nalpropion and wish him success in his new opportunities.
That concludes our remarks for today. Please contact Bob Yedid at LifeSci Advisors if you have any questions. Thank you.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.