Valeritas Holdings, Inc. (NASDAQ:VLRX) Q3 2018 Earnings Conference Call November 9, 2018 8:30 AM ET
Greg Chodaczek - Gilmartin Group
John Timberlake - CEO, President & Director
Erick Lucera - CFO
Steven Lichtman - Oppenheimer
Good morning. My name is Carol, and I will be your operator today. At this time, I would like to welcome everyone to the Valeritas Holding Inc. Third Quarter 2018 Earnings Conference Call. [Operator Instructions].
At this time, I would like to turn the call over to Greg Chodaczek from the Gilmartin Group.
Thank you, Operator. This is Greg Chodaczek with the Gilmartin Group. Thanks for participating in today's call. Joining me from Valeritas is President and Chief Executive Officer, John Timberlake; and Chief Financial Officer, Erick Lucera.Earlier today, Valeritas released financial results for the quarter ended September 30, 2018. If you've not received this news release, or if you'd like to be added to the company's distribution list, please send an e-mail to email@example.com.
Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of the federal securities laws, such as our financial guidance. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. 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 with the Securities Exchange Commission. Valeritas 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, and claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 9, 2018.
I will now turn the call over to John Timberlake. John?
Thank you, Greg. Good morning, and thank you all for joining us today. Our third quarter results demonstrate our continued momentum in generating strong legal prescriptions and sales growth. I would like to take the first few minutes to provide some recent business highlights and how they support our -- both our short term and our long term strategies for Valeritas to build a substantial and valuable enterprise for our V-Go, Wearable and SIM delivery device.
As we discussed on previous earnings call this year, we believe that our sustainable growth is anchored around 3 pillars, which include: number one, growing our sales volume in patient market share with our existing sales team; number two, expanding the number of prescribers we introduced to V-Go and subsequently call on and support; and three, leveraging our product pipeline to expand our offerings and to increase our target patient base. The third quarter was another robust quarter for our company. For the quarter, total revenue was $6.9 million, an increase of approximately 37% over the third quarter of 2017 and up approximately 7% sequentially. This is the fifth consecutive quarter of record revenue and our third consecutive quarter with revenue growth in excess of 30%.
During third quarter, we also booked revenue for product shipments to one of our international distribution partners. These shipments, which relate to initial inventory stocking, represented approximately 5% of our total third quarter revenue. We do not expect to book any international revenue during the fourth quarter of this year. Our continued strong 30% growth and year-over-year revenue in the United States stems from an increase in our sales force productivity, driven by our strategic focus on providing targeted prescribers with a higher level service resulting in increased prescriptions. This strategic shift, implemented in 2017, has demonstrated excellent results throughout 2018 as total prescriptions to target accounts have increased by 25% year-to-date through September 30. Total U.S. prescriptions in the third quarter, which included our target and in our nontargeted accounts, grew 14% year-over-year and increased 5% sequentially.
In our targeted accounts, total prescriptions grew 26% year-over-year for the quarter and 7% sequentially. This marks the fourth consecutive quarter that the year-over-year prescription growth in our targeted accounts have now exceeded 20%, demonstrating the success of our sales and marketing efforts. Total prescriptions from our nontargeted accounts were down 5% year-over-year and were flat sequentially as we have largely been able to maintain this volume through cost-effective resources without using our direct sales force. So we are thrilled with the productivity increases from our sales force, and we do expect that productivity will continue to increase.
Given our strong sales growth, we look to expand the number of sales representatives in United States during 2019, as we believe, there remains much fertile ground for an increase in the number of territories, and believe we will be able to continue to increase the productivity while also expanding our number of sales representatives. During third quarter, we continued to expand our direct-to-patient marketing efforts. We have seen that once a prospective user is introduced to V-Go and they can see, touch and wear a V-Go nonfunctional demo unit, they are highly inclined to talk to their healthcare provider about the V-Go. Among the millions of patients taking multiple daily shots every day, there is largely a lack of awareness of V-Go as an effective and easy-to-use alternative to taking multiple daily insulin shots.
We have seen consistent demand for the V-Go demo kits and in September, the number of demo kits requested and delivered nearly doubled as compared to our average month, the average throughout the year 2018, as we continue to adapt our direct-to-patient market. We are seeing that 9 out of 10 patients, who have received the demo kit, state that they have already or a planned to discuss V-Go with their doctor and 85% of them, who have actually received the kit, have elected to opt into our customer care CRM system.
Starting the third quarter, we implemented a V-Go initiation program in territories covered by our direct sales force, because we have found that one important factor that drives prescriber adoption is the doctor being able to see real-world results of V-Go with their own patients. As part of this program, Valeritas allotted physician interested in the program, the ability to identify and prescribe V-Go for up to 10 of their patients with type 2 diabetes.
These patients were identified by the physician, trained by our team and each patient could then obtain V-Go product at their pharmacy through December of this year. While the program is a short-term investment that will have modest negative impact on our fourth quarter revenues, we believe this investment will have a significant benefit to the company in 2019, well beyond just those enrolled program patients. We expect many of those doctors, who have participated in the program, will see real-world benefits and the improvements in their patients A1C levels, leading to expanded prescriptions and use of V-Go for their appropriate type 2 patient population.
It's early, but we are already beginning to see some of these doctors beginning to prescribe V-Go to more than -- to more their type 2 patients beyond the program. Now switching gears. During the third quarter, we continued to present and publish clinical and pharma-economic data demonstrating the benefits and value of switching patients who have type 2 diabetes from insulin injection therapy to the V-Go. In August -- in October, Valeritas was a contributing supporter of the interactive insulin workshops at two Metabolic & Endocrine
Disease Summit, where nurse practitioners and physician assistance participated in a 3.5 hour workshops to increase their knowledge and understanding of using insulin. This is a critical audience for V-Go as approximately 1/3 of all V-Go's are actually prescribed by nurse practitioners or physician assistants and they likely influenced the half of all V-Go prescriptions. In August, at the Metabolic & Endocrine Disease Summit conference in San Diego, California, positive data from a V-Go study was presented in a poster titled, Use of V-Go Wearable Insulin Delivery Device by advanced practitioners demonstrated improved clinical benefits in patients of type 2 diabetes uncontrolled on a multiple daily injections of insulin. Now this study demonstrated that patients treated by advanced practitioners, nurse practitioners are physician assistants experienced improved blood glucose control with less insulin after switching to V-Go from multiple daily injections of insulin.
In the study, patients benefit from an A1C reduction of over one point and a decrease in their insulin utilization of 30% with V-Go. We remain committed to delivering data, demonstrating the positive benefits of V-Go as we continue to generate and submit more clinical data for upcoming medical conferences peer review journals. During the third quarter, we were busy expanding our prescriber reach to key markets outside of United States, which supports our second pillar of sustainable growth.
On August 1, we announced that V-Go was now available for patients with type 2 diabetes in New Zealand through our exclusive distribution agreement with NZMS diabetes. On August 6, we announced our agreement with MED TRUST for the distribution of V-Go in the Czech Republic in Slovakia. This agreement comes 2.5 months after MED TRUST agreed to be the distributor for V-Go in Austria and Germany. Also in late August, our distribution partner in Australia, AMSL, announced that V-Go is now available in Australia.
And in October, on the 19, we announced that the launch of V-Go, in Italy had just occurred with our partner Movi SpA. We do not expect to see meaningful revenue from these partnership until 2020. As each of these partners will need time to secure a third-party reimbursement in their local markets. Now in late September, we announced that we have begun the process to get V-Go approved in China by signing an agreement with a highly respected international contract research organization, who has extensive experience in China and do a work directly with the China National Drug Administration to complete the requirements to gain regulatory approval for V-Go in China. To put this potential Chinese market opportunity for V-Go into perspective, there are approximately 114 million adults living with diabetes in China that equates to a market that's 4x to 5x the size of United States.
We will continue to look for additional potential international partners that will give us the best opportunity to further expand the sales and marketing channels of V-Go in more countries. These distribution partnerships will not only provide future sources of revenue but will also provide the opportunity to scale our business model by utilizing excess manufacturing capacity, which will ultimately result in increased gross margins. Now with regards to the third pillar of our strategy, leveraging our product pipeline to expand our offerings and to increase our patient base, we continue to advance our V-Go SIM, simple insulin management accessory. In the third quarter, we completed the beta testing of the SIM standalone app, and we continue to work with Glooko on the integration of the SIM data with their platform. We expect the V-Go SIM, with Glooko's diabetes data management platform, could be available in the United States across all channels during the summer of 2019.
And with that, I would now like to turn the call over to Erick Lucera, our CFO, who can summarize our financials. Erick?
Thank you, John, and hello, everyone. My comments today will focus on margin improvement, our expectations on expenses, and I will provide some guidance for the balance of the year. Our full financials can be found in our 10-Q, which will be filed later today with the Securities and Exchange Commission. Gross profit in the third quarter was $3.2 million versus $2 million in the third quarter of 2017. The Increased gross profit was driven by higher revenue as well as a 610 basis point improvement in gross margin to 45.9%, up from 39.8%. This improvement in margin is primarily due to the increase in unit sales of V-Go in 2018 versus 2017 as well as a slight increase in our net selling price for the full year.
The slight sequential decline in gross margin from the second quarter of this year was primarily due to providing V-Go units due December as part of the V-Go initiation program, we previously discussed. Total operating expenses for the third quarter were $13.8 million, up $1.9 million from the same period in 2017, driven primarily due to an increase in promotional spending to targeted health care providers and direct-to-patient advertising. The company's direct field-based sales force size was consistent between period. We ended the quarter with $24.3 million in total cash and cash equivalents.
Turning to guidance. We have now heard the full year 2018 annual revenue to be in the range of $26 million to $26.5 million, reflecting the impact of the V-Go initiation program on our fourth quarter revenue. As John mentioned, we do believe this program is a very smart, strategic investment, which'll provide a solid return in 2019. We expect to end the year with a gross margin between 46% and 47% in the fourth quarter, primarily due to the impact of V-Go initiation program. And expect to exit the year in the month of December with a gross margin of approximately 50%. We also remain confident in our long-term and immediate-term gross margin targets.
With that, I'll hand the call back to John.
Thank you, Eric. So in closing, I'm confident that our business fundamentals remain strong, and I'm very proud of everything that we have accomplished in the first three quarters of the year. Our sales team has done a fantastic job growing total V-Go prescriptions in our targeted territories with another quarter of U.S. revenue growth of 30%.
Our clinical team continues to produce meaningful clinical and pharma-economic data demonstrating the benefits of V-Go over conventional insulin injection therapy. Our business development team has signed agreements for the distribution of V-Go in 8 territories outside of United States, and our manufacturing operations team has fulfilled the first set of international inventory stocking orders. We expect continued strength of V-Go prescriptions, although the growth in the fourth quarter revenue may be slightly affected by the investment in our V-Go initiation program. We believe the program will produce long term results beginning in January. We know that V-Go is a great product, and we have clinically proven the benefits compared to insulin pens and syringes, and we are focused on increasing the patient awareness and prescriber use in the geographic locations we have deployed our direct sales force team. And I remain confident in achieving our 2018 goals and in our ability to create sustained growth well beyond 2018.
With that, operator, could you please open up the call for questions?
[Operator Instructions]. Our first question this morning comes from Steven Lichtman with Oppenheimer.
How many physicians are you expecting to engage with the V-Go initiation program? And John, can you talk a little bit more about the early results. I think you mentioned that you're seeing from the program?
Sure. Yes. Good morning, Steve. So with our 50 direct sales representatives, we're targeting roughly about 100 physicians on average about 2 each, although, others in their offices are also exposed to the program. Though with the program, we don't have a lot of hard exact prescription data out of that yet, Steve, just because -- as you know there's a lag between the detail level and doctoral level. What we are seeing just from some -- the one month in September is, we are seeing doctors who basically were kind of just using a few scripts a month, who are now using and prescribing more than they were -- above and beyond the patients they have in their program. So that's the whole purpose of it. I think we've really seen that -- what, it takes some time, if a doctor is just using 1 or 2 patients, it takes them a lot longer to truly adopt the product. If they can see 5 or 10 patients in a shorter period of time, they become adopters faster and that's the goal of the program. Kind of really help jump start their exposure to direct experience of their own patients. So I think it's early, but I think we're seeing some real positive feedback from the field, getting doctors really engaged and getting their offices really excited about the product.
Got it. Okay. And then can you talk about your next steps in expanding direct-to-patient programs. What are the opportunities you see to expand that from here?
Sure. Good question. So we continue to just learn and adopt from our direct-to-patient marketing, which is more very targeted using our CRM system. So as I mentioned, I think, because we learn more about what motivates a patient to get into the act. As we continue to adapt that model, we saw a doubling of the number of patients requesting our demo kits in the month of September versus the previous months. So we will continue to be more effective both in the messaging and targeting of that very cost-effective direct-to-patient marketing. We are also, as you've mentioned, once we expand the sales force, which we planned to do in 2019, we will be looking to do some testing with more of a broader-based marketing-to-patients, because we now -- know a lot about what motivates a patient, it's a patient to be interested and talk to their doctor about it. And our biggest challenge really is just the lack of awareness that type 2 patients have about the -- there's an alternative to taking multiple shots a day. So we'll be doing that not a national basis but on a more targeted basis in some markets. We have already engaged agency to do that and it will be a program that we'll be able to have control as I see that -- I believe, based on my experience in this field and with other type 2 products, is that we can truly engage a much broader patient population and really help drive the blinds in those market. So that will be something that we'll talk more about in the future quarters.
Got it. And then you talked about expanding into some new sales territories. Can you give us a sense of how many new sales people you're potentially looking to target in 2019?
Yes. So we haven't finalized the exact number. What we are looking at with is probably increasing to up to maybe a 50% increase in our sales force, sometime next year.
Okay. Got it. And then lastly, Erick, you mentioned the impact of the initiation program on gross margin here in the near term. Can you remind us of what your medium- and long-term goals are on gross margin and the drivers from here?
Yes, thanks. So in terms of the long-term gross margin goals, we remain committed to the 80% long terms that we've discussed with folks throughout the last couple of years. In terms of the intermediate term, I think the most near measure that we said was getting to 50% in the fourth quarter, which we expect to occur in December. And in terms of how we get there, the vast majority of the path forward will be on increases in volume, which is due to the fact that we have -- already have made the investments for the manufacturing capacity or significantly higher sales than we have now. So as those sales come to fruition we'll be driving higher gross margins. There is some expected impact from continued efficiencies in the process and from improved net selling price.
[Operator Instructions]. And gentlemen, we have no one else in queue at this time. I'll turn the call back for any closing remarks.
Okay. Well, thank you, Carol. Well this will conclude our call for today. And Eric and I want to thank everyone who's joined us today. And we wish you have a great day and a great weekend. Thank you.
This concludes today's conference. You may now disconnect.