Teligent, Inc. (NASDAQ:TLGT) Q1 2019 Results Conference Call May 6, 2019 4:30 PM ET
Jason Grenfell-Gardner - President and CEO
Damian Finio - CFO
Conference Call Participants
Lucas Baranowski - Craig-Hallum Capital
Lucas Lee - Raymond James
Good day, ladies and gentlemen. And welcome to the Teligent First Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct the question-and-answer session, and instructions will follow at that time [Operator Instructions].
Except for historical facts, the statements in this presentation, as well as oral statements or other written statements made or to be made by Teligent, Inc., are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. For example, without limitations, statements about the company's anticipated growth and future operations, the current or expected market size for its products, the success of current or future products offerings and the research and development efforts, and the company's ability to file for and obtain U.S. Food and Drug Administration approvals for future products are forward-looking statements.
Forward-looking statements are merely the company's current predictions of future events. The statements are inherently uncertain, and actual results could differ materially from the statements made herein. There is no assurance that the company will achieve the sale levels that make its operations profitable or that FDA filings and approvals will be completed and obtained as anticipated.
For a description of additional risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including its latest annual reports on Form 10-K and its latest quarterly report on Form 10-Q. The company assumes no obligation to update its forward-looking statements to reflect new information and developments.
I would now like to introduce your host for today's conference, Mr. Jason Grenfell-Gardner, President and CEO. You may begin.
Thank you, Skyler and good afternoon, ladies and gentlemen. Welcome to the Teligent business update covering the first quarter of 2019. I'm Jason Grenfell-Gardner, President and CEO of Teligent. And I'm joined today by Damian Finio, our Chief Financial Officer. Thank you for joining us this afternoon today.
I will be providing you an update on the core elements of our business and the latest on our injectable plans. Damian will then provide a more detailed breakout of our financial performance for the first quarter of 2019.
Today, we released results for the first quarter of 2019 that were in line with our expectations and our guidance. Revenue for the quarter came in at $13.1 million with adjusted EBITDA ahead of our expectations at negative $0.7 million. This better than expect performance was largely driven by an improvement in gross margin to 44%, a significant change of over 1,000 basis points from the prior quarter at 33.7%. This gross margin improvement was largely a result of three things. First, we began a process last year of rationalizing products that were high-volume and low margin. This allowed us to focus manufacturing resources on higher-margin products and on providing a better customer service level that eliminated failure to supply penalties in the first quarter.
Second, we executed on our strategy to service a longer list of customers, including more regional chains, independent and smaller distributors. Although, these channels may require more effort to drive volume, they generally have provided us with a better margin profile. And finally, we executed on our private label and contract manufacturing development plans. And while the results in the first quarter were tentative, they reinforced for us the compelling opportunity in these business lines.
Dan will speak more to the guidance in his remarks, but I wanted to briefly point out that the biggest difference in top line revenue between the fourth quarter 2018 and the first quarter 2019 came from the sequential decline in revenue in our Canadian business. Now, this was expected and baked into our guidance for the year. Canada had a very strong fourth quarter last year as customers prepared for system challenges related to serialization, primarily in Europe. Our contract manufacturing partners have begun to recover from the business disruption caused by serialization, implementation and supply is beginning to recover for the market. We expect Canadian supply to normalize over the course of the second quarter and be back to full supply levels by the third quarter of 2019.
Turning now to the U.S. manufacturing site in Buena, New Jersey where we are today. We continue to make significant progress towards injectable readiness and are on track with our plans. We've already made exhibit batches for four products to support either prior approval supplements, PASs, to transfer existing approved products to the site or new ANDA submissions to seek approval of generic drugs developed by Teligent's R&D team. We have also begun discussion with industry peers who may have the need for contract manufacturing to utilize our capacity, and welcoming the opportunities to continue to grow capacity utilization and partner with industry peers.
In order to accelerate our site inspection and approval, our regulatory team has sought and received FDA consent to review our first drug submission on an expedited basis. FDA has given this consent as the first target drug that that we are submitting is an already approved NDA that is currently on drug shortage. Working together with FDA, Teligent will submit stability data concurrent with the ability program to allow FDA to move quickly to review the product and ease the drug shortage for this specific product.
We have already made the supporting batches for this submission and our R&D and regulatory teams will be reviewing the data generated from these batches to eventually trigger the prior approval supplement submission to FDA. We believe that depending on the results of the data generated, we should be able to submit to this PAS to the FDA this quarter.
Finally, I would like to talk a little bit about our pipeline. During the first quarter this year, Teligent received FDA approval for four products and we also launched three drugs. These launches will help us to continue to drive profitable growth in the remaining quarters this year. Moving forward, more of our development program will be based on our anticipated injectable PAS and ANDA submissions. We anticipate preparing injectable exhibit batches for over 10 products this year to support submissions in 2019 and into 2022, and this transition to injectable development is well underway.
Also, with respect to our generic orphan drug application. As mentioned in our press release on April 22nd 2019, our development partner has submitted our response to the FDA's complete response letter on April 16th of this year. As a result, the FDA has assigned us a new PDUFA goal date of December 16, 2019 based on not needing to re-inspect any associated facilities. Our submission has been granted competitive to generic therapy or CGT designation, which means per FDA's draft guidance that the FDA may ask to expedite the review of our ANDA. However, we cannot guarantee that FDA will do so. I am personally hopeful for the patients that need better access to this life-saving drug that we will see an efficient review process.
Let me now turn the call over to Damian Finio, our CFO to review the financial performance for the quarter and our guidance, and also to touch on a couple of key questions that we've been hearing from stakeholders. Damian?
Thank you, Jason and good afternoon everyone. Today, I will review highlights of our first quarter 2019 financial performance and explain how the first quarter laid the foundation to reaffirm and deliver our 2019 market guidance. Then before I close, I will address two important line items on the balance sheet, debt and cash.
Starting with highlights of our first quarter 2019 financial performance. On our March 18th earnings call, I mentioned that we anticipated a sequential decline revenue from fourth quarter 2018 to first quarter 2019 of approximately 20%. In line with our expectations, we posted $13.1 million net revenues for the first quarter, a decline of 21.8% from the $16.8 million of revenue posted in the fourth quarter of 2018.
Although, top line revenue did decline, revenue generated by our U.S. portfolio of topical products increased more than 2% over the fourth quarter of 2018. This increase was more than offset by the 44% quarter-on-quarter decline of revenues generated by our Canadian business. The decline in Canada was expected and is directly related to the supply chain disruptions caused by the implementation of the new serialization standards by our European contract manufacturing partners. Our European partners are working towards returning to normal manufacturing in the second quarter.
The remaining decline in revenues related to timing differences across our other revenue streams, mainly U.S injectables, contract manufacturing and products development. We are encouraged by a 1,000 basis point gross margin improvement over the prior quarter. Gross margin for the first quarter of 2019 was 44%, in line with our full-year guidance of gross margins in excess of 40%. The improvement in gross margin was driven primarily by a favorable change in both customer and product mix. Jason addressed this in his opening remarks.
In addition, this quarter's improved gross margin relates to one-offs recorded in the prior quarter, variance supply fees and inventory write-offs recorded in the first quarter of 2019 were minimal. In summary, from a gross margin perspective, we are clearly starting to realize the positive consequences of our prior year and ongoing actions. We expect gross margins to continue in line with guidance which will drive positive adjusted EBITDA as product supply normalizes and top line revenue improvement follows.
Turning to operating expenses, we invested $3 million in product development in the first quarter compared to $3.6 million in the fourth quarter of 2018. The decline was attributed, primarily to delaying the manufacturer of certain pilot batches. We incurred $5.5 million in selling, general and administrative expenses or the first SG&A in the first quarter of 2019. This includes $0.7 million incremental legal fees over the fourth quarter of 2018. We expect legal fees to decline moving forward as certain matters approach a conclusion. And although, we do not comment on the specifics of ongoing litigation, it's important to note that we believe the recent class action lawsuits are without merit. Our intent is to fight those cases vigorously.
To calculate a more meaningful comparison of quarter-on-quarter SG&A, subtract the $1.9 million of intangible assets impairment charges taken in the fourth quarter of 2018 from the $7.5 million of reported fourth quarter 2018 SG&A. In the first quarter of 2019, we subtracted $0.7 million of legal expenses from the $5.5 million of first quarter 2019 SG&A reported. After taking these subtractions into consideration, adjusted 2019 first quarter SG&A is $4.8 million compared to the adjusted amount of $5.6 million for the fourth quarter of 2018, that’s a 14% reduction and further evidence of our increased focus on operational efficiency initiated in May 2018.
The significant improvements in gross margin and reduction in operating expenses led to an improvement in adjusted EBITDA. Adjusted EBITDA for the quarter was a loss of $0.7 and adding back those incremental legal expenses that I mentioned earlier, we broke even. Although, that's in our We've invested in our full year guidance of greater than 10% EBITDA margins, this is an improvement over both the prior quarters and the same quarters in 2018. Keeping all else constant, we can achieve 10% EBITDA margin with revenues in excess of about $19 million.
There are several encouraging trends in our first quarter financial performance of that, but the anticipated normalization of supply to come lay the foundation to reaffirm and deliver our 2019 market guidance. Our guidance continues to be achieving double-digit top line percentage growth with revenues in excess of $72.5 million, a consolidated gross margin above 40%, a consistent investment in R&D of $13 million to $15 million and an adjusted EBITDA margin greater than 10% after adding back any foreign currency gains or losses and non-cash stock expenses.
Now, moving away from the P&L, I would like to address two important line items on our balance sheet, debt and cash. Beginning with debt, the fact value of our debt at March 31, 2019 is about $179 million. $88 million related to convertible bonds, $13 million of which matures in December 2019 and $75 million of which matures in May 2023. The remaining $91 million of the $179 million of total debt relates to the Ares financing commitment executed last December.
Of this $91 million, $20 million is in the form of a revolver and $71 million is in the form of a term loan. Each component of debt carries a different interest rate, but the weighted average interest rate is between 7% and 8%, depending on changes in the LIBOR. We have the option to pick or defer interest payable on the $71 million Ares term loan. We're exercising our right to pick interest now to provide the incremental liquidity needed to address our highest priorities. When our LIBOR contract expire we can choose to continue with the pick option or to pay interest in cash for the next contract period. At this point, we are choosing three months LIBOR contract periods to give us some flexibility with the option to pick or not pick interest.
In relation to these components of our debt structure, in the first quarter, we accrued $4.9 million of interest expense. Of this $4.9 million, $1.5 million relates to the amortization of original issued discounts on our convertible bonds, and is considered non-cash. Of the $3.4 million remaining, $1.1 million relates to convertible bonds. And although, accrued in the first quarter, is not paid until the second quarter. Interest on our convertible bonds is payable every six months, so that’s the second and fourth quarters of each calendar year.
Remaining $2.3 million of interest relates to our Ares loans. Of this $2.3 million, $0.3 million relates to the revolver and was paid in the first quarter, whereas the remaining $2 million relates to the term loan. The company chose to pick or defer the payment of this $2 million of interest. In summary, we accrued $4.99 of interest, $0.3 million of which was paid in cash in the first quarter.
In addition to quantifying cash and non-cash interest in the first quarter, I wanted to also address projected covenant compliance. As disclosed in further detail and the Ares loan agreement filed with the SEC via Form-8K in mid-December of 2018, we are required to meet certain financial covenants on the revolving credit facility and the term loan. The financial covenants on the revolver are more restrictive than the term loan. So for purposes of discussion today, I will refer to the revolver current requirements.
In the first and second quarter of 2019, we are required to meet trailing 12 month revenue covenants of greater than $55 million. In the third and fourth quarters of 2019, we are required to meet a trailing 12 month consolidated EBITDA covenant of greater than $3 million and $5 million, respectively. Note the consolidated EBITDA that I’m referring to here is defined in the Ares loan agreement. As mentioned in my earlier remarks, our adjusted EBITDA results for the first quarter exceeded our expectations and we reaffirmed our full year guidance. Executing our 2019 plan translate into delivering our guidance and passing this year's financial covenant.
Moving on some debt, let me share a few words about another important line item on our balance sheet, our cash position. We began the first quarter of 2019 with $9.7 million of available cash on a consolidated basis. We ended the quarter with $6.4 million. There are four major movements of cash in the quarter worth highlighting: One, $5 million draw on the revolver, offset by; two, a $5.1 million inventory builds; three, prior approval inspection readiness expenses of $2.1 million, which are capitalized; and the fourth and last major movement, a $1.1 million decline in cash due to normal changes in working capital.
In summary, the $5 million draw on revolver was used to fund our two highest priorities, building inventory and preparing for the FDA prior approval inspection.
In closing, we are encouraged by a 44% gross margin, evidence of our ability to drive operational efficiencies and a bottom line exceeding our internal expectations. These factors lay the foundations to reaffirm and deliver our 2019 market guidance, which ensures passing our debt covenant and maintaining the cash levels needed to continue scaling up this business. More details on our first quarter 2019 financial performance will be provided in Form 10-Q scheduled to be filed on Friday May 10th.
With that, let me turn the call back over to Jason for closing comments before we take any questions.
All right, thank you, Damian. Before opening up for questions, I would like to extend again my personal thanks to our Teligent teams in the United States, Canada and Estonia, who have been working to make Teligent successful.
During this past quarter, all of these teams meaningfully moved Teligent's business forward, as we regained inventory levels, improved margins and managed costs. I remain grateful and proud of their dedication and generosity and spirit that they have poured into this company. Thank you to all of them for what they do every day.
With that, Skyler, let's open this up to questions.
[Operator instructions] Our first question comes from Matt Hewitt with Craig-Hallum Capital. Your line is now open.
Thanks for taking the question. This is Lucas Baranowski on for Matt Hewitt, at Craig Hallum. I think our first question relate to the portfolio rationalization that you touched upon briefly in the prepared remarks. Are those -- rationalization activities, are those complete at this point? Or do you envision maybe doing a little more of that.
If we look at where we were in the middle of 2018, there were number of products that we're cycling through our systems that had higher venture price erosion, or we're in technologies that were more challenging for us perhaps compared to peers. And we have to have a really hard look at whether or not they made sense in the long-term profile of the business, together with the customers we had, as well as what we could supply on a meaningful basis. I think some of the challenges that we had in the fourth quarter related to failure to supply was derived from that complexity. And so the work that we did in Q3 and Q4 to remove some of that velocity of product was certainly helpful in the restoration of good inventory levels that we've seen in the first quarter. I think looking ahead we have to be good stewards of our portfolio and of our business. To the extent that markets change, we can always go back into product. But for us, the most important thing here is to make sure that we're achieving the margin targets that drive the positive EBITDA that we need in the business. And that’s what we’re going to continue to do moving forward.
And then regarding the food and drugs application. You announced that you submitted a response to the CRL. Can you remind us again how long the FDA has to respond? And also once you receive the approval, how quickly you might be able to get that launch?
So the FDA did assign us a new PDUFA goal date of December 16, 2019 as a result of our response to the CRL.As I mentioned in my prepared remarks, because the drug has competitive generic therapy designation, the FDA may use its own authority to expedite that review. But we have no guarantee of that nor do we have much control over that, so we'll see how that involves as the FDA begins to process that response. As we move throughout the year, we hope that we get better informed. But for right now, the best answer is December 16th as an approval date or as a goal action date depending on whether the FDA needs to inspect any of the facilities in the application or not.
Should the FDA decided it needs to inspect facilities again as part of that application, that date may change. It could change out all the way through to February 16, 2020. But we believe that most of the facilities have been through what the FDA requires for it to appropriately review this application. In terms of product launch, we have had product launch plans ready for this drug since its original goal date back in 2018. So it's really a function of just executing those as we get better comfort with the approvability of the file. We'll be looking at that again as we get into the third and fourth quarters of this year as we go through that review cycle to be able to be ready to respond as quickly as possible to the FDA's action.
And then just in last question from a -- gross margins, taking a look at those, those have been the best that we've seen in a while. Do you think this level of gross margins is sustainable or were there may be some one-time things that boosted it this quarter?
As Damian mentioned in his remarks, our guidance for the year was to achieve a gross margin target of greater than 40%. And so obviously, 44% is pushing outside the target goal of that, but it’s a pretty good number. It was very much a quarter that was based on a mix of sales consistent with the strategy that we've laid out. So I think that in that respective, there was nothing usual in the mix. It was really more a function of the customer mix and product mix as a result of the decisions that we've made in the portfolio over time.
I would add to that that this was the first full quarter where we were outside of any contractual compliance or price protection language, Luca. So although, we took these actions in primarily the second third quarter of last year, price protection clauses can last as long as six months. So first quarter 2019 is the first full quarter where we were beyond any of those contractual agreements.
And our next question comes from Elliot Wilbur with Raymond James. Your line is now open.
This is Lucas Lee on for Elliot. So quick question on failure to supply issues, did you experienced any of that during the quarter?
We reported 1.4 million of their supply fees in the fourth quarter of last year of $0.6 million in the third quarter of last quarter. Prior to that there has never been supply fees in the U.S at Teligent. In the first quarter to-date and the numbers that we reported today, there is minimal failure-to-supply charges but none were mentioned.
And were there any material changes to launch timing since the last earnings call?
No. Actually, most of our products have been launched pretty quickly since approval. As I mentioned in my prepared remarks, we launched three in the quarter. I think subsequent to that, we've launched further two products in the second quarter of this year in the U.S. and two products in the second quarter of this year in Canada. So the team has managed to not only rebuild inventory levels, but also added the incremental complexity of launching five products I guess so far this year in the U.S. and incremental products in Canada. So those timelines continue to hold.
And lastly could you share the expected number of handouts that you are planning to file for this year?
It’s a complicated question to answer, because it’s a combination of prior approval supplements as well as new submissions. So if we look at the mix of them, I would say that there is probably, and as I mentioned in my remarks, up to 10 injectable drugs or over 10 injectable drugs that we intend to make exited batches for during the year that will support submissions this year and next year.
Obviously, those that are going to be preapproved prior approval supplements can be submitted during this year with with a required stability data. Those are new applications will take longer stability data in order to submit. So we will probably drive into 2020. There are also a handful of tropical drugs that we'll go through submission this year as well. But I think until we get the preapproval inspection fully done, it's hard to nail down a number. Right now, what we have to nail down is the number of exhibit batches that we're going to do for year and that's probably the best indication of what that pipeline health looks like.
At this time, I’m showing no further questions. I would now like to turn the call back over to for Jason any closing remarks.
Okay, thank you, Skyler. And thank you everyone for participating this afternoon. I look forward to seeing some of you at some of the various conferences coming up this spring. And thank you for joining us. Have a great evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.