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Good morning, and welcome to the Q2 Fiscal 2019 Financial Results Conference Call for HLS Therapeutics. On this morning's call, we have Greg Gubitz, Chief Executive Officer; Gilbert Godin, President and Chief Operating Officer; and Tim Hendrickson, Chief Financial Officer. [Operator Instructions] Earlier this morning, HLS issued a news release announcing its financial results for the 3- and 6-month periods ending June 30, 2019. This news release, along with the company's MD&A and financial statements, will be available on HLS's website and on SEDAR. Certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form dated April 1, 2019, which has been filed on SEDAR and can be accessed at www.sedar.com. During this conference call, HLS will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Adjusted EBITDA is defined as the company's press release and annual filings that are available on SEDAR and on the company's website. Please note that all financial information provided is in U.S. dollars, unless otherwise specified. I'd now like to turn the call over to Mr. Gubitz. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thank you for joining us at this very exciting time in the evolution of our company. As we have in prior calls, I'll start off with a look at our accomplishments during the quarter and our near-term priorities, Gilbert will review developments with our product portfolio and Tim will take a more detailed look at our financials. Following Tim, I'll provide some closing remarks, then we'll hold a Q&A session. The second quarter demonstrated our continued steady financial performance and cash flow generation. Looking at the numbers, Q2 revenue was $13.6 million, adjusted EBITDA was $8.1 million and cash generated from operations was $9 million. As such, Q2 was another quarter that reflected the strong fundamentals underpinning HLS, namely attractive margins and reliable cash flows. Revenues in the quarter were a bit lighter than our expectations, due primarily to the timing of several Clozaril orders totaling approximately $0.7 million that came in uncharacteristically late in the period, actually, they came in on the last day of the quarter, and were subsequently received by customers in Q3. This impacted Q2 revenue, but should have a favorable impact in Q3. This was simply a timing issue. It does not reflect lost orders. Tim and Gilbert will provide some additional color on this in their sections. And secondly, Absorica royalties were below Q2 2018 levels by $1.6 million, which was frankly a disappointment. And nevertheless, as you know, Absorica is a passive investment, has done very well for us over the course of our involvement with it, and on a cumulative basis has been a solid financial contributor to our business. Beyond the impact of those 2 items in Q2, our core fundamentals remain solid. And with a number of growth catalysts on the horizon, we achieved several key operational milestones in the quarter. A key development in Q2 was the filing of our New Drug Submission, or NDS, for Vascepa, after having been granted priority review status by Health Canada. Based on the landmark cardiovascular outcomes of REDUCE-IT trial results, the NDS is proposing that Vascepa be indicated to reduce the risk of major adverse cardiac events or MACE in statin-treated patients with elevated triglycerides and other risk factors. These are events such as cardiac death, heart attack, stroke and surgical bypass. With cardiovascular disease being a leading cause of death worldwide, we believe that Vascepa has the potential to be a transformative product for HLS and has the potential to enhance the quality of life for many Canadians. We are further encouraged by the level and pace of activity that we are seeing with our Vascepa licensor, Amarin, who released strong Q2 results last week. Amarin reported Vascepa revenue for Q2 in the U.S. of more than $100 million, up more than 90% year-over-year. And this was based on the legacy label, not the broader cardiovascular prevention indication they are currently seeking with the FDA. Amarin are looking to double the size of their sales force from 400 to 800 by October, which gives you a sense for the aggressive trajectory that they are pursuing for their Vascepa business. As mentioned on our last call, while we are very focused on Vascepa, we also continued to work towards expanding our product portfolio. In Q2, we acquired a license for the Canadian rights to PERSERIS, a long-acting injectable risperidone product for the treatment of schizophrenia that is already approved by the FDA in the U.S. We believe PERSERIS could bring another treatment option to patients and practitioners contending with a difficult disease state. And it is complementary to our CNS business, which also includes Clozaril and CSAN Pronto. We believe we have structured the transaction in line with our desired risk/return profiles. We paid $1 million upfront, with up to $4 million in regulatory and pre-commercial milestone payments and a tiered double-digit sales royalty as part of the agreement. Also in Q2, we completed a Canadian $50 million bought-deal financing, which included the exercise in full of the underwriters' over-allotment option. We expect the funds raised to be used to strengthen our business development activities and pursue additional growth opportunities. The financing also served to broaden our institutional investor base in both Canada and the U.S. I want to thank the underwriters for their hard work on completing the financing on very favorable terms. I want to welcome those investors who participated in the financing. Our number one near-term priority is the prelaunch preparation and launch of Vascepa, so that we can maximize the value of what we believe is a very material and transformative opportunity for the company. In parallel, we continue to focus on building out our CNS and cardiovascular franchises with products such as CSAN Pronto, Trinomia and PERSERIS. We also have the capacity to continue actively pursuing additional business development activities. I am confident that our recent successful fundraising will help support those initiatives. In sum, in Q2, we delivered strong margins and cash flows; filed our NDS for Vascepa, a significant potential catalyst for growth; expanded our product portfolio with PERSERIS; and strengthened our balance sheet with a bought-deal financing. We expect the second half of the year to continue this busy trend of activity. And with that, I'll turn it over to Gilbert for a look at our broader product portfolio. Gilbert?
Thank you, Greg, and good morning, everyone. I will start off with a few comments on our growth products, Vascepa and Trinomia. As Greg mentioned, we received a Priority Review for Vascepa and announced the filing of a New Drug Submission with Health Canada on April 29. Based on the Priority Review, we would expect to receive communication on the submission by the end of December this year. In turn, if the product is approved, we would target a commercial launch in the February 2020 time frame. With the filing under review, we will remain available to work with Health Canada during the review process. And at the same time, we will continue to prepare the launch and be ready to hit the ground running in early 2020. As we've said previously, we believe Vascepa could generate peak revenues in Canada in a range of CAD 150 million to CAD 250 million per year. We are being conservative in our estimate, yet even at those level, it represents significant growth for HLS. Like Vascepa, our second product in the growth-oriented category, Trinomia is also in the cardiovascular space. As you know, we're currently conducting bioequivalency studies with our partner, Ferrer, with the objective to bridge the existing product data for Trinomia to the individual Canadian reference product. That study will be completed during the third quarter. And assuming it is supportive, our intent is to file Trinomia in the fourth quarter of this year with commercialization to follow about a year later and about a year after the launch of Vascepa, a desirable timing for us. Looking now at Clozaril, the foundation of our CNS franchise and a key driver of cash flows to support and grow the business. As Greg mentioned, in Q2, we had to defer the recognition of several orders for Clozaril that came in uncharacteristically late. While they were immediately shipped, they were received by our clients after the July 1 long weekend. We have no reason to believe this is a new trend or pattern and view it simply as a timing issue, unique to this year's long Canada Day weekend. The underlying trend remains positive for our Canadian Clozaril business. Year-to-date, we have grown our patient population by more than 2%. Towards the end of last year, we began to discuss the relative underutilization of Clozaril or clozapine the molecule in Canada, in the U.S. versus other gold standard countries and the factors driving that. Earlier this year, we took step -- we took steps to address what is often cited in the clinical literature as the biggest barrier to treatment by in-licensing the exclusive Canadian rights to the CSAN Pronto device. As a reminder, CSAN Pronto is a point-of-care diagnostic device that may help simplify the mandatory safety blood monitoring process, which requires 39 venous blood draws in the first year of treatment for those patients that are prescribed clozapine molecule. By providing a less invasive process that is using only a finger prick and a single drop of blood and a diagnostic results in minutes in a more favorable environment for the patient, we think CSAN Pronto could help reduce barriers and provide better access to a proven treatment. The device was filed for review with Health Canada in the first quarter. We continue to work through the review process, and we now expect to have a response from them around the end of the third quarter. Should we achieve approval in that time frame, our goal will be to bring it to market in this calendar year. In the U.S., our pilot program with this device remains ongoing with initial results looking positive as patients' onboarding continues. We expect to run the pilot study until the end of the year, at which point we will draw a conclusion and decide on our U.S. plans for 2020. Finally, I will conclude with a few words on PERSERIS. While Clozaril is indicated for treatment-resistant schizophrenia patients that are not responding or only partially responding to first-line antipsychotics, PERSERIS has the potential to become a broadly used therapy for many other schizophrenic patients. PERSERIS contains risperidone, a well-established treatment for schizophrenia, and uses an extended-release delivery system to form a subcutaneous deposit that provides sustained levels of risperidone over a 1-month period. This opportunity could allow us to directly leverage our commercial infrastructure, relationships and reach in the Canadian psychiatric market, while delivering a new, clinically meaningful therapeutic option for patients with schizophrenia. PERSERIS has not been approved by Health Canada, and at this time, we are in our prefiling planning stage and expect to submit our filing to Health Canada by the end of this year. With that, I will pass it off to Tim to look at the financials.
Thanks, Gilbert. Good morning, everyone. I'll take a few minutes here to drill down into some of the key numbers and metrics from Q2. Starting with revenue. Greg and Gilbert have commented on Clozaril results for Canada. To recap, an uncharacteristically large number of orders totaling $0.7 million in Canadian Clozaril product sales came in and were shipped on the last business day of Q2 before the Canada Day long weekend. As these shipments were not delivered to customers until the first week of July, they will be included in Q3 product sales. In addition, fluctuations in exchange rates during Q2 also negatively impacted Canadian Clozaril revenue by 3.4% or $0.2 million. So for illustration purposes, if we were to exclude the impact of foreign exchange and delivery timing of these June 28 orders, Q2 revenue from the Canadian Clozaril business would have been ahead of prior year levels, which would be consistent with the patient growth trend that Gilbert outlined earlier. While we do not normally comment on results for the current quarter, under the circumstances, it is helpful to note that July shipments, not including the June shipments delivered in July, were solid, and year-to-date shipment volumes are consistent with prior year levels through both the June year-to-date and July year-to-date periods. Over time, we expect that long-term results will reflect the stable growth in the number of Canadian Clozaril patients. Turning to the U.S., in terms of year-to-date Clozaril gross sales, Clozaril experienced the lowest erosion in the U.S. market since we acquired the product with a 3.25% decrease in Clozaril gross revenues in Q2 2019 and a 1.4% decrease for the year-to-date period in 2019. U.S. market Clozaril net revenues for the year-to-date period are down as the prior year benefited from favorable gross-to-net adjustments as well as authorized generic supplies in that period prior to the termination of that supply agreement. As Greg mentioned, in Q2, royalty revenue from Absorica was down $1.6 million year-over-year to $2.2 million, though Absorica royalties are down only $0.6 million on a year-to-date basis. Regarding operating expenses, cost of product sales were relatively flat to Q2 last year. The year-over-year increases in other operating expenses were primarily driven by additional activity to support the planned introductions of Vascepa and CSAN Pronto to the Canadian market and higher patient registry program costs, notably following a temporary reduction in these costs in the earlier period. Adjusted EBITDA in Q2 was $8.1 million, which is 60% of the $13.6 million in revenues for the quarter. The decrease in adjusted EBITDA for Q2 was driven by lower Absorica royalties and, to a lesser extent, due to the timing of certain Clozaril orders in Canada discussed earlier. Q2 adjusted EBITDA was also moderated by the higher levels of selling and marketing costs tied to the preparations to commercialize Vascepa and CSAN Pronto and increased cost for medical, regulatory and patient support costs. Interest on the senior secured term loan in Q2 was $1.5 million compared to $4 million in Q2 2018. For the year-to-date 2019 period, interest expense was $3.1 million compared to $8.1 million in the same period last year. The decrease in interest is primarily due to the refinancing of the company's debt in August 2018. Through the first half of the year, we have saved $5 million in cash interest expense, which is consistent with the $10 million per year of estimated annual cash interest expense savings at the time of the refinancing. As at June 30, 2019, the principal debt balance outstanding under the new senior secured term facility was $96.25 million compared to $98.75 million at December 31, 2018, and $137.9 million at June 30 of last year prior to the debt refinancing. Cash from operations was again strong in Q2 at $9 million, bringing year-to-date cash from operations to $17.2 million, which compares favorably to the $15.2 million in the same 6-month period last year. As at June 30, 2019, we had cash and cash equivalents of $52.3 million compared to $10.9 million at December 31, 2018. The largest driver of this increased cash balance are the net proceeds from the CAD 50 million bought-deal equity offering completed in Q2, which Greg spoke about earlier. However, separate from the equity financing, net cash generated from operations also contributed to the growth in cash balance in the quarter. And finally, in Q2, we returned just over $1 million to shareholders in the form of a CAD 0.05 per common share dividend. During the quarter, the Board of Directors declared a quarterly dividend to be paid on September 13, 2019, to shareholders of record as of July 31, 2019. And in addition to that, yesterday, on August 7, the Board of Directors declared another quarterly dividend of CAD 0.05 per outstanding common share, which is to be paid on December 13, 2019, to shareholders of record as of October 31, 2019. And with that, I will pass it back to Greg for closing comments.
Thanks, Tim. In closing, the fundamentals of the business remain sound as we continue to drive healthy margins and cash flows with our in-market products, while advancing our pipeline of exciting growth opportunities. We have 2 products currently being reviewed with Health Canada. One is CSAN Pronto, which is capable of driving growth of our Clozaril franchise; and the other is Vascepa, which has the potential to drive transformative growth for the business. And we have 2 products for which we are in prefiling stage and which stand to complement nicely both our cardiovascular and CNS franchises. Underpinning this activity is a strong balance sheet with cash to support our acquisitive and organic growth efforts. We expect several key events related to our product portfolio to occur throughout the duration of 2019, and we look forward to reporting to you on our progress in these areas in the coming months. That concludes our prepared remarks. At this point, I will ask the operator to please provide instructions for asking a question. Operator?
[Operator Instructions] And your first question comes from the line of David Martin from Bloom Burton.
This is Prasath on the line for Dave. Firstly, would you be able to share any updates on the pricing strategy for Vascepa? And how things are progressing with [ CAD and INS ] and so on? And second, could you quantify the extent to which the diagnostic is expected to impact Clozaril sales in Canada?
Sure. I think that with respect to the pricing strategy, these are elements that are really at inception. We have taken steps for the Price Review Board [ Cavet and Linesse ] to have a chance to look at the dossier that we have filed, and we have provided all the information that they require to initiate that process. It's a little premature to comment on what that outcome might be. We think that Vascepa has a -- not only a formidable clinical track record, as established by the REDUCE-IT trial, but will also provide substantial cost/benefit for those patients and for the health care systems. However, this is, as I said before, is only an inception. Within the next few months And in parallel with the review process, this dialogue will continue. We are available in the normal course of those reviews to engage with all of those organizations. But we are confident that the price point here will be appropriate from our standpoint, but also and most importantly, will also be appropriate to the health care systems, the payers, whether they are private or public. With respect to the -- your second question, if I recall, was related to the benefit of the diagnostic technology on Clozaril?
Yes, Clozaril sales in Canada.
Well, we believe, and that's, not out thin air, but out of the fairly extensive literature in existence on that topic, that some of the barriers to treatment -- the clozapine treatment, are actually reducing the level of use of this compound in a population that would greatly benefit from it. Now those reasons are multiples, but some of the most important ones that are cited and are at the forefront of this is the intense requirement, the safety testing requirements that those patients are subject to because of the risk of agranulocytosis to which they are subject. It's rare, but it's a potentially lethal side effect and, therefore, that [ monitoring ] is mandatory. We believe that the intensity of that monitoring, those 39 blood draws in the first year and once per month thereafter forever, are resulting in many patients either having a knee-jerk reaction when proposed -- when the treatment is proposed to them or will undergo and initiate the treatment, and often [indiscernible] out of fatigue and the, let's call it, the invasiveness of that safety monitoring. Our technology has been identified by us and really cherrypicked in order to alleviate all the consequences of those requirements. And as a result, we think that we can influence the overall market progression, the market growth that is currently 2% to 4%. We think this could increase in a visible way. And we believe that if we are the driver of a better expectation of treatment initiation and a lower abandonment of treatment that those 2 factors will accrue to us exclusively because they will be related to a better, less invasive, friendlier modality, one that provides a result out of a single drop of blood, provides results in minutes in the setting of care where the patient is actually visiting with his doctor. So all those considerations, we think will give us a -- will have pretty good impact on treatment and use of our molecule as this is being delivered through our [indiscernible] network [indiscernible]
Are you in the position to quantify the benefit on sales?
I think what we've commented on is that the current growth in the market, we've seen 2% to 4%, is a growth that we've experienced ourselves. In any given year, we've been matching or slightly exceeding the market. We think that the market growth could increase by a couple, maybe 4 percentage points. And that increment would essentially accrue to us, but we have not quantified that in actual dollar volume.
[Operator Instructions] And our next question comes from the line of Justin Keywood from GMP Securities.
Just for the prelaunch of Vascepa, when do you anticipate that sales reps will start to be hired and investments being made to commercially launch this product?
The -- typically, this is a back scheduling activity that is predicated on when we anticipate the product to be approved and, therefore, that can be launched. I think that as a review continues to progress, in the normal course, we should have interactions that are indicative of a review that is going well or that could encounter some delays. So based on that, we will firm up the notion that our launch should take place during the course of February. Typically, we would onboard sales force in the 4 to 6 weeks preceding a launch so that we can train them appropriately on the product, ensure that all the elements that are peripheral to their activity are being addressed prior to their deployment. So I think that you can expect that really in the back end of Q4, we will be, with all hands on deck, proceeding with that process so that notionally in the early days of 2020, those people are officially joining, trained and eventually deployed during the course of February. That's kind of the generic sequence of it. And in the case of Vascepa, given the importance of that product and the materiality of that product, we'll err on the safe side to make sure that we have an adequate number, both qualitatively and quantitatively to deploy at the best possible time and the earliest possible time.
That's helpful. And just to be clear, would these investments and hiring start after the Health Canada response or maybe after the FDA response in the U.S. expected at the end of September, assuming that's a good indication for Canada?
Yes. Not all the expenses are really of a go/no-go nature triggered by the regulator's decision. We think this product will be approved in Canada. The question is, will it be approved exactly on the date that we expect. We think it could or it should, but we will see. And therefore, we're on a path to a launch under an expedited review. So we're certainly not putting an inordinate number of considerations to pull back on the spending that we need to do to gain market intelligence, to structure the activity of our future sales force and to prepare the promotional and commercial plans. So I want to say that there is a gated nature to an approval, but in this case, I wouldn't say that all the commitments that we are planning to do are regulated by that gate. That's probably more some of the latter ones that are either more meaningful or for which it's kind of useless to commit to before we have a complete label and a good understanding of what we are taking to market.
Understood. And would you be looking for any type of a marketing partner to help launch Vascepa in Canada?
It's certainly something we've given some consideration and that keeps coming up. As you know, Vascepa is a material transformative product in the landscape, so there's been some interest and inquiries on that front. Having said that, we already have a partner in Amarin across the border. And I mean this by saying that the multiplying partnership dilutes the economics of a product. And here, we have a product that is nice, clear and crisp in terms of its value, its clinical value, its market value. We would rather retain the bulk, if not the totality of the value that we will create, and this can best be done through our own activity, our own sales force and under our own HLS brand. Vascepa is a very material product around which we've decided to constitute a full-fledged business unit and commercial set of activities. We believe that we will be much better served by ourselves, given our existing knowledge and past credentials in the field. We have no complex in that respect. We think that we can cover well the market and the task at hand. And most importantly, we're launching Vascepa, we'll make it a success. But we're also creating what will amount to a large amount of equity for HLS in cardiovascular, a category that we plan to grow with the addition of additional products over time. So using a partner always dilutes and sometimes, diminishes dramatically, not only the economics but the benefits in terms of company equity. So for all those reasons, at this point in time, we are planning to deploy our own resources, and we will do so in a way that will do justice to the product.
That's helpful. And on launching potential other CV assets in conjunction with Vascepa, are these efforts continuing? Or how would that play out? Like, is it predicated on the Health Canada approval? Or are these going to progress regardless?
No, I think if you're alluding to our business development effort that could amount to licensing or acquisition of existing products, they are continuing. Trinomia is actually a proof of that commitment. Trinomia was a -- is the second product in the bag. It's not the key asset and the rationale to build the sales force, but it is one that will round up the revenues and will fill the reps' bag when they call on the cardiologists. There will be others. And our efforts are certainly focused in part on that therapeutic area in addition to what we're currently doing in psychiatry and the eye we're keeping also on the variety of possibilities in the U.S. market. So clearly, dedicated to build a strong franchise, at the core of which Vascepa will be, but that will be surrounded with other complementary product from a commercial standpoint.
And then one more question, if I may. The cash from ops was very strong in the quarter and for the first 6 months, showing a very good trend. Was there anything unusual that contributed to that spike? And how should we look at the cash flow for the back half of the year?
Thanks, Justin. I wouldn't say unusual. It's continued cash flow from operations coming from our end-market products, whether it's Clozaril as well as the royalties on Absorica. You'll also note that there's also been some favorable changes in working capital. I wouldn't say -- I think that's a sustainable change given the nature of the business. And what you see from cash from operations also reflects the benefit of the savings and cash interest expense from the debt refinancing that we did last August. And so that's throwing off a very helpful amount of additional cash.
And with that, there are no further questions in queue. I'd like to turn the call back to Mr. Gubitz for some closing remarks.
Thanks, operator, and thank you all for participating in today's call. We look forward to speaking with you and reporting to you in the coming quarters. Bye-bye.
This concludes today's conference call. You may now disconnect.