Acerus Pharmaceuticals Corporation (OTCQB:ASPCF) Q1 2019 Earnings Conference Call May 13, 2019 8:30 AM ET
Bob Motz – Chief Financial Officer
Ed Gudaitis – President and Chief Executive Officer
Gavin Damstra – Senior Vice President-International Commercial
Conference Call Participants
Chris Boucher – Private Investor
Good morning, ladies and gentlemen. And welcome to the First Quarter 2019 Conference Call for Acerus Pharmaceuticals Corporation. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow this discussion [Operator Instructions] As a reminder, this conference is being recorded. It will be available for replay through Tuesday, May 21, 2019 by dialing 905-694-9451 or 1-800-408-3053, using access code 7327615#.
I will now turn the call over to Mr. Bob Motz, Chief Financial Officer for Acerus Pharmaceuticals Corporation. Mr. Motz will moderate today's call. Mr. Motz, please proceed.
Thank you very much operator. Good morning to everyone on the line and welcome to the Acerus Pharma first quarter 2019 conference call. I'm pleased to be join today by the members of our senior management team Ed Gudaitis, our President and Chief Executive Officer; Nathan Bryson, our Chief Scientific Officer; and Philippe Savard, our Vice President and General Counsel.
Before we begin, I'd like to comment on forward-looking statements in this call. On behalf of the speakers who follow investors are cautioned that the presentation and responses to questions on this call may contain forward-looking statements. Such statements may contain forward-looking information within the meaning of applicable securities laws. Forward-looking statements are given as of the date of this call, may involve risks and uncertainties, and they include but are not limited to the company's goals, targets, strategies, intentions, plans, beliefs, estimates, expectations, outlook and other statements, which may contain language such as believe, anticipate, expect, intend, plan, will, may and other similar expressions.
Certain material factors or assumptions are applied in the formulation of forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about the statements, the material factors or assumptions underlying such statements and about the material factors or assumptions that may cause actual results to vary for those expressed or implied in such statements, please consult the press release issued today entitled, Acerus Reports First 2019 Financial Results and the company's other filings, which are available on SEDAR at www.sedar.com.
I'd like to now turn the call over to Mr. Ed Gudaitis, President and Chief Executive Officer for his remarks. Ed?
Thanks, Bob and welcome, everyone. Before I comment on the operational highlights for the quarter, I would like to provide an update on a number of recent organizational changes that we've implemented at Acerus. In order to streamline our operations, we've made the decision to eliminate the role of Chief Operating Officer at Acerus. As a result, Tricia Symmes is no longer employed by the company. We think Tricia for her contributions to Acerus over the past two plus years and wish her great success in the future.
Given the importance of the continued grow of Natesto across our international markets, we've established a new leadership role, Senior Vice President and International Commercial reporting to the CEO. This role only responsible for driving the global brand strategy and execution for Natesto for driving commercial success in our international markets, Canada, Medac and other partners and for leading commercial strategy input into corporate and business development activities.
I'm pleased to announce that Gavin Damstra has joined Acerus as the Senior VP International Commercial. Gavin brings significant international pharmaceutical and operational experience to this role. Most recently he was Executive Vice President of Women's Health & GI for Allergan in Canada. In this role, he was responsible for leading the commercial and P&L results of C$160 million business unit.
Prior to Allergan, Gavin was employed by Takeda Pharmaceuticals as General Manager for Columbia and a surrounding distributor markets, Costa Rica and Panama, where he implemented a successful launch of Takeda specialty in oncology businesses resulting in the leading growth and financial performance across all of Takeda's emerging markets. He also worked for Cadence International headquarters based in Switzerland leading several new product launches and business development initiatives to expand international and emerging markets.
Prior to Takeda, Gavin was employed by Nobel Biocare, a Swiss medical device company as the GM for India and in business development lead for [indiscernible] at Asia and as the Global Strategic Auditor and Risk Manager. Gavin has joined us on the call today and he's looking forward to contributing to future earnings calls going forward. I'll ask Gavin to just briefly say, hello.
Thank you, Ed for that kind of introduction, and I'm looking forward to joining these calls in the future and contributing to them.
Excellent. Now onto my remarks. Both during the first quarter and subsequent to quarter end, we continue to execute as a management team making further meaningful steps towards our long-term growth strategy. Key highlights for Q1 in the sub period subsequent to the quarter end included growing product revenue largely driven by our core Natesto franchise. Filing of a new drug submission in Canada for Avanafil, a treatment for erectile dysfunction that will expand our men's health portfolio in Canada. Engaging paradigm capital to pursue cannabinoid opportunities using our proprietary nasal gel delivery device, the closing of a C$4.5 million private placement. Two, purchase orders from Hyundai Pharm for Natesto for the South Korean market with deliveries in Q1 and Q2 of 2019. Publication of a positive clinical study, the My-T study, a multi-center open label clinical trial to assess treatment safety and efficacy of Natesto as well as patient preference in subject switch from prior topical medication to the nasal products.
Turning to a few of these highlights in greater detail. Product revenue for the first quarter of 2019 increased 33% to $2.2 million, up from $1.6 million for the same period prior year. The increase was mainly due to higher sales of Natesto in Canada, which increased by over 113% from the first quarter of 2018. Revenue recognized from Natesto sales in the U.S. also increased year-over-year principally due to a change in revenue recognition for the Tier 2 revenue that is generated from sales to our partner Aytu BioScience. We've also had another solid contribution from Urivarx, the product we launched in Q1 of 2018 with sales up to almost $0.2 million in the quarter.
Now looking at our Canadian Natesto business more closely. We saw accelerated total prescription volume growth again for the first quarter of 2019, up sequentially over the fourth quarter of 2018 and up 146.6% from the same period a year ago. Across the four major provinces where we actively promote Natesto Ontario, Quebec, Alberta and BC, we've attained a 6.1% total prescription market share of the topical TRT market up from 5.6% in Q4 2018.
On a regional basis, Alberta posted a significant growth in total prescription volume of 0.7% to Q1 2019 versus Q4 2018. British Columbian tobacco posted the growth of 0.5% for that same comparative period and growth in the Ontario market was 0.3% in Q1 2019 versus Q4 2018. As we continue to see prescription volume insured growth in the Canadian market as our internal marketing and sales team effectively implement strategies and tactics to raise the awareness of Natesto and to educate physicians about the very real convenience and safety benefits our inter nasal delivery technology offers. We continue to feel that our success in the Canadian market provides insight into the true potential for this product and the success we've seen domestically can be duplicated in other markets globally.
Turning briefly to our U.S. Natesto business. Our revenue and cash flow from the U.S. is comprised of two components, inventory shipments to our partner Aytu BioScience and a second milestone when Aytu sell Natesto to the end customer. As gross to net ratios in the U.S. have stabilized over the last few quarters, we were able to recognize additional revenue in Q1 of 2019 from the second tier sales by Aytu for the quarter plus a portion of second tier revenue for inventory that Aytu has on hand. This change in accounting estimate, which is required under IFRS 15 allows us better match revenues and expenses going forward into the future.
We did not have any inventory shipments to Aytu in the quarter, but another shipment is currently planned in the second half of 2019. That said, we're encouraged that Aytu BioScience's revenue and unit volumes continue to increase both sequentially over the quarter ended December 31, 2018, as well as compared to the quarter ended March 31, 2018. In particular, Natesto net revenue has grown 380% for the quarter ended March 31, 2019, when compared to the quarter ended March 31, 2018. As well refill prescriptions have grown by over 100% year-over-year. We continue to work with Aytu to drive awareness and adoption of Natesto in the U.S. Aytu will be reporting their quarterly results tomorrow May 14 and we encourage you to listen to their earnings call for more detail.
Taking a look at the rest of the world Natesto business. We had our first shipment of Natesto to Hyundai Pharm in Q1 2019 and a second shipment was completed this May. Hyundai is launching Natesto into the South Korean market imminently and we're looking forward to gaining traction in this market especially as this market is dominated by injectable testosterone. South Korea will be an excellent test market to determine if Natesto can displace injections through the ease, convenience and pulsatility of nasal gel delivery.
Turning to our Natesto initiatives in Europe and beyond. We continue to work with Medac to launch Natesto in all 28 current EU member states along with Norway, Liechtenstein, Iceland, Turkey, Australia, New Zealand, Israel and South Africa. Our management team visited Medac early in April of this year and we are pleased with the level of launch readiness displayed by Medac. As noted in prior earnings call, the regulatory dossier for Natesto was filed with the EMA in September of 2018. This dossier is under active review and Acerus is working with Medac to address the questions that have been generated during the review.
Our current expectation is, if we have approval process for the EU and other licensed countries will accelerate throughout 2019. With Pan-European approval being achieved in late 2019 and access to specific countries in the EU are occurring in early 2020. We continue to evaluate opportunities to introduce Natesto in other select geographies. However, at this time, our current partners provide us access to the largest market opportunities for testosterone replacement therapies, the United States, Europe and Brazil. In combination with our Canadian commercial team, we will continue to focus our efforts on ensuring successful launches and strong uptake on Natesto in these major markets.
We announced in March that we filed a new drug submission for Avanafil in Canada. Avanafil is a PDE5 inhibitor that represents a new second-generation treatment for erectile dysfunction, which has a faster onset of action and lower side effects target – off target side effects than other erectile dysfunction products in the Canadian market. Avanafil, which is sold in the U.S. under the brand name Stendra represents an excellent compliments in Natesto for our men's franchise in Canada and represents a key growth driver for our business, leveraging the same sales force and call points that we have in place today. The review process by Health Canada is underway and we will provide ongoing updates in future calls.
Now turning to our legacy Canadian prescription women's health business. While we continue to see solid contribution of high margin revenue
While we continue to see solid contribution of high margin revenue from Estrace, we are disappointed with the pace of remediation of the license suspension at the facility of our UK based contract manufacturer. After meeting with the manufacturer and reviewing the status of the response plan to the UK health authority audit, we had originally expected that manufacturing would recommence midyear with an expectation that a shipment to Estrace would take place by September 2019.
After our latest meetings with the manufacturer, we are now with the view that this target is no longer feasible and delivery will not be possible until the end of 2019. In addition, Health Canada has now advised us that the UK manufacturers should be removed from our drug establishment license which requires a resubmission to allow for the importation of the product.
As a result, we're now with the view that we will not receive our further shipment of Estrace from our UK manufacturer until mid 2020. Based on this further delay, we did record non-cash impairment charge of $2.5 million in Q1 of 2019, Bob will speak to this impairment charge in further detail during his comments.
We are looking at various strategies to potentially accelerate delivery timelines including contracting Estrace production with an alternate contract manufacturer. We've identified such as supplier and are currently working towards the final agreement and we'll update investors when such an agreement is consummated.
Before turning the call over to Bob for the financial review, I will touch briefly on our announcement regarding the continued development of our nasal gel technology for cannabinoid applications. On December 11, 2019 – excuse me that would be 2018, we announced the results of our Phase 1 clinical trial with a proprietary nasal formulation of THC-rich cannabis oil. The nasal formulation was absorbed and result in an extended PK profile with maximum peak levels occurring seven hours after administration on average. Bio-availability of THC from the nasal formulation was approximately 2.2 times better than oral dronabinol capsules as described in the recent literature. Additionally, a majority of the subject's reported appreciation of several key features of the nasal products including quick/easy use, consistent dosing, affordability and absence of smoke.
That said, we are currently not and do not intend to become a licensed producer. We believe that nasal gel technology represents an excellent value proposition to another entity in the cannabis space. As a result, we've engaged paradigm capital to assist us with identifying and securing a partner for our nasal gel delivery technology in this field. As the process evolves, we will provide updates to you with further announcements on this initiative later this year.
That concludes the key operational highlights for the quarter. I would like to thank the entire Acerus's team for all of their diligent work during a very productive and busy Q1 2019. I would now like to turn the call over to Bob for the financial review. Bob?
Thanks, Ed, and good morning everyone. In the comments that follow, please note that all dollar amounts are expect – expressed in U.S. dollars unless otherwise stated. The results are reported under both standard IFRS and certain non-IFRS measures. Such non-IFRS measures do not have standardized meeting prescribed by IFRS and may not be comparable to similar measures presented by other issuers. These measures are provided as additional information to supplement those IFRS measures set out in the financial statements. They provide further understanding of the company's results of operations from management's perspective.
Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. Management believes that securities analysts, investors and other interested parties frequently use these non-IFRS measures to value issuers. We also use non-IFRS measures to facilitate operating performance comparisons from period to period to prepare annual operating budgets, and to assess our ability to service any current and future debt obligations, capital expenditure and working capital requirements.
Now moving onto the results, total revenues which included upfront and other milestone payments received from out-licensing activities for the three months ended March 31, 2019 increased to $2.2 million from $1.6 million in the three months ended March 31, 2018. That said all of this revenue represented product revenue during both the current year and the prior year periods as no milestone or other licensing revenue was received.
As Ed mentioned, this improvement was mainly due to higher in Natesto revenue in both Canada and the U.S., and the introduction of Urivarx in Q1 of 2018. There was a decline in Estrace sales, which were $0.6 million in the first quarter of 2019 versus $0.9 million in the prior year quarter. We again saw steady growth in the Natesto sales in Canada, as we continued to see the benefits of our ongoing marketing initiatives.
Increased U.S. revenue was principally due to partial revenue recognition on Tier 2 revenue related to the Natesto units currently in Aytu inventory, due to a change in accounting estimate on revenue recognition prescribed by IFRS 15. This change will also result in future revenues on sales to Aytu being recognized more upfront on inventory shipments and less on future sales to the end customer simply to allow for better matching of revenue and expenses.
We expect Natesto revenue in the U.S. to continue to fluctuate between periods based on the timing of potentially large and irregular inventory orders. These orders may cause volatility in both quarterly and annual revenue figures until inventory purchases become regular and/or top up revenues from Aytu sales become a larger portion of our U.S. derived Natesto revenues. As a result, changes in U.S. revenues on a period-to-period basis may not provide a clear indication of Natesto sales trends in the U.S.
Cost of goods sold for the three-months ended March 31, 2019, was $0.6 million compared to $1.0 million in the prior year period. In addition to the March 31, 2018 cost of goods sold, the prior year period also reflected royalty buyout accrual of $2.4 million related to the Mattern Pharma IP buyout.
The higher gross margin percentage in the first quarter of 2019 relates to the incremental Tier 2 revenue on Natesto U.S. shipments, which have no related cost of sales. As cost of sales are only recognized on inventories shipments to Aytu. On reflecting the product cost of sales in the prior year quarter royalty buyout gross margin was $1.5 million in the first quarter of 2019 compared to negative gross margin of $1.8 million in the prior year period.
Research and development costs were $1.0 million in the first quarter of 2019 versus $0.5 million in the comparative quarter a year ago. The reasons for this increases is two-fold. First, there was a C$350,000 filing fee with Health Canada for the new drug submission for Avanafil that was accrued for in the first quarter of 2019. Second, the timing of third-party Natesto study including the cardiovascular trial in the U.S. accelerated in the quarter, resulting in higher than anticipated clinical trial costs.
Selling, general, administrative expenses increased by $2.5 million for the three months ended March 31, 2019 up from $1.8 million in the prior year period. Virtually, all of this SG&A increase was due to the $2.5 million non-cash impairment charge on the Estrace intangible that was previously discussed by Ed in his comments.
This charge represents our estimate of the net impact on future Estrace business from the potential supply shortage at our UK based contract manufacturer. As Ed indicated, the potential alternative manufacturer has been identified and the Company is working towards a final agreement. Excluding this impairment charge, the remaining SG&A costs were essentially flat quarter-over-quarter.
We incurred a net loss of $4.4 million for the three months ended March 31, 2019 compared with a similar net loss of $4.4 million for the same period in the prior year. Basic and diluted loss per share in the first quarter was $0.02 the same as in the comparable 2018 period. Adjusted EBITDA, a key metric we use to assess our business performance for the first quarter of 2019 was a loss of $0.8 million, compared with an adjusted EBITDA loss of $1.0 million for the first quarter of 2018.
At March 31, 2019, the company had cash of $5.0 million compared to cash of $3.8 million on December 31, 2019. In the first quarter of 2019, we closed a private placement for gross proceeds of C$4.5 million or $3.3 million after expenses. Proceeds of this investment will be used to fund the Company's current working capital requirements, including to support its current payment on a royalty buyout for intellectual property related to the Company's nasal gel technology for Natesto, for purposes of deposits to build its inventory in advance of receiving European approval in Natesto and for ongoing selling, general, administrative expenses and research and development requirements.
Strengthening the balance sheet and gaining better access to capital remains a key strategic priority of the company. Going forward, we will continue to evaluate an array of options to further strengthen the balance sheet and improve our access to capital.
In closing, please note that the financial information on today's call and in the press release issued this morning are in summary form. Interested parties are encouraged to review the company's quarterly and year-end SEDAR filings as they include the financial statements, the accompanying notes and management's discussion and analysis as well as the Annual Information Form dated March 4, 2019. You can also find these documents posted on the investor page of our corporate website as well as on SEDAR.
This concludes my prepared comments. I'd like to now turn the call over to our operator, Ian for questions. Operator, can we open it up for Q&A, please?
Thank you. [Operator Instructions] And our first question comes from Chris Boucher who is a Private Investor. Please go ahead.
Hello. Good morning. I was wondering about the South Korea. Is that three times a day or two times daily for Natesto?
The indication in South Korea will be BID two times a day.
Okay, that's great. Thank you.
Thank you. [Operator Instructions] It appears we have no questions on the line. So I'd like to turn the meeting back to you, Mr. Motz. Thank you.
Thanks very much, Ian. And just – I would like to thank all of those who sat and listened into the call and just a reminder for those that we will have our second quarter call in early August after the conclusion of the quarter on June 30. And we thank everybody for sitting in the call. Have a great day. Thank you.
The conference is now ended. Please disconnect your lines at this time. We thank you all for your participation and have a great day.