HLS Therapeutics Inc

TSX:HLS

Earnings Call Transcript 2018-Q3

[Operator]

Good Morning, and welcome to the Q3 Fiscal 2018 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 9 months ended September 30, 2018. This news release, along with the company's MD&A and financial statements are available on HLS 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 October 26, 2018, 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 in 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 in -- is provided in U.S. dollars unless otherwise specified.I would now like to turn the meeting over to Mr. Gubitz. Please go ahead.

[Gregory David Gubitz, Co]

Good morning, everyone, and thank you for joining us on the call. In terms of an agenda today, I'll start the call with the look at our corporate activity during the quarter, and 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.At a high level, Q3 was another solid quarter, with results that reflect the ability of our business to deliver steady revenues with strong margins and reliable cash flows. Revenue was $15.3 million. Adjusted EBITDA was $10.3 million and cash generated from operations was $6.4 million. We also refinanced our debt, which resulted in significant annual interest expense savings and introduced a dividend. I'll touch on both of those positive developments in a moment. But first, I want to spend a minute addressing the key highlights in the quarter.In late September, Amarin released top line results from the Vascepa cardiovascular outcome trial, REDUCE-IT. As a reminder, HLS has in-licensed the exclusive rights to Vascepa for the Canadian market. These top line results were very strong, as REDUCE-IT exceeded its primary endpoint, demonstrating an approximately 25% relative risk reduction to a high degree of statistical significance, in first occurrence of major adverse cardiac events, known as MACE. These results greatly exceeded our internal expectations and were considered by many to be exceptional.Just last weekend, on September -- on Saturday, November 10, Amarin released full details of the REDUCE-IT trial at the American Heart Association Scientific Session in Chicago. These broader results were consistent with the top line findings and show a significant reduction in cardiovascular death, heart attack and stroke, and reinforce our view that Vascepa has the potential to be an important drug at reducing MACE among patients with cardiovascular disease. I remind you that the Vascepa has not been submitted to Health Canada for regulatory approval and is not approved for use in Canada. Gilbert will provide some additional detail on the trial results, along with our regulatory pathway for Canada. But suffice it to say, we are very excited about the potential for this product, for its ability to help Canadians and for its ability to be a key organic growth driver for our business.Overall, we have executed well on our strategy, and with 2 reliable cash flow generating products in the portfolio that have enabled us to steadily pay down our debt, 2 very promising preregistration growth-oriented products on deck, including Vascepa, and a disciplined operational mindset, we were able to refinance our debt at significantly lower interest rates in Q3.As I mentioned on our last call, we have reduced both the principal amount outstanding and our interest rate, while increasing our future funding options and establishing new relationships with the syndicate of well-known blue chip banks led by JPMorgan and Silicon Valley Bank.Our estimate is that combined, these actions will save us approximately USD 10 million per year, which will free up cash to support our operations, business development efforts and other strategic initiatives, such as a dividend.Along those lines, in Q3, we also announced that we will be implementing a dividend policy on our common shares. The dividend policy is to pay a quarterly dividend in the amount of CAD 0.05 per common share, representing an annual return of capital to shareholders of approximately USD 4 million. We believe that the unique elements of our strategy will enable us to return a portion of our cash flow to shareholders, while still aggressively pursuing opportunities to acquire other specialty pharmaceutical assets.As many of you know, our strategy focuses on 3 components: Number one is our foundational component, where we acquire in-market established products, such as Clozaril, manage them effectively and generate significant and stable cash flows from it; number two is our transformative growth component, where we acquire in-license promotable products that are commercialized or approved in another major jurisdiction, such as Vascepa, to create organic growth; and number three is our late-stage clinical component where we license or take an option on late-stage development assets, where we see potential for explosive growth. On this last step, we have yet to deploy any capital but when we do, we will only take measure for gated risks.On the BD front, our deal flow remains strong, both in terms of potential in-licensing and product acquisitions and also on the M&A side. But as we've said in the past, we will be patient and only deploy capital when the transaction meets our strict investment and operational criteria. Our focus continues to be on existing revenue streams in compatible therapeutic areas and on organic growth opportunities, which for us, means in-licensing products that we can grow and promote in either Canada or the U.S.At this point, I'll turn it over to Gilbert, to look at developments and upcoming milestones in our product portfolio.

[Gilbert Godin, President & COO]

Thank you, Greg. Good morning, everyone. Bonjour a tous. I will start off with a look at our growth-oriented products, Vascepa and Trinomia. As Greg mentioned, Amarin's REDUCE-IT trial results suggest a very positive future for this product. Vascepa is a pharmaceutical-grade prescription product, consisting of highly purified EPA, better known as the good Omega-3, and is indicated in the USA to lower very high triglyceride levels. Later in this section, I will spend some time discussing the significant differences between the composition and the demonstrated clinical outcomes recently communicated by Amarin on Vascepa and those of other Omega-3 products. But first, I will start by looking at some of the highlights of the REDUCE-IT trial. REDUCE-IT was a global study of 8,179 statin-treated adults, with elevated cardiovascular or CV risk. The study contained a placebo group and a second group treated with Vascepa at a dose of 4 grams per day.As Greg mentioned in his top line results, REDUCE-IT exceeded its primary endpoint, demonstrating a 25% relative risk reduction to a high degree of statistical significance in MACE. This means that patients who were on statin and who took Vascepa were 25% less likely to experience a major cardiac event versus patients who took a statin with a placebo.This past weekend, Amarin presented detailed results of this study at the AHA, which confirmed the initial positive top line number as well as strong secondary endpoint results. The results were simultaneously published by the New England Journal of Medicine. The highlights were as follow, and I want to point out that all the numbers are at relative risk reduction. As we pointed out, the primary endpoint was achieved with a 25% reduction. The key secondary endpoint, which was an amalgamation of 3 components, a 3-point MACE consisting of a composite of cardiovascular death, nonfatal heart attack and nonfatal stroke, achieved 26% reduction. Seven additional secondary endpoint were achieved as follows: cardiovascular death or nonfatal heart attack at 25% reduction; fatal or nonfatal heart attack with a 31% reduction; urgent or emergent revascularization, that's a surgical bypass, with a 35% reduction; cardiovascular death alone with a 20% reduction; hospitalization for unstable angina with a 32% reduction; fatal or nonfatal stroke with a 28% reduction; and total mortality plus nonfatal heart attack or nonfatal stroke with a 23% reduction. The only secondary endpoint that did not achieve statistical significance was as follows: total mortality, which includes mortality from non-cardiovascular and cardiovascular events, has a 13% relative risk reduction, which frankly, is still noteworthy, but an outcome for which the trial was not powered. These are exceptional numbers and are on top of the benefits obtained from statin therapy. It is also worth noting the low rate of adverse events between the treatment and placebo groups, though a small increase in atrial fibrillation or flutter was observed, and so was the occurrence of a nonstatistically significant increase in serious bleeding.Looking now at the differences between Vascepa and other Omega-3 products. In terms of composition, Vascepa is 96% purified EPA. Fish oil supplements and Omega-3 mixtures typically contain DHA, some EPA and other byproducts. DHA is the Omega-3 that has been shown to increase the bad cholesterol, the LDL cholesterol, whereas Vascepa's purified EPA does not.In terms of patient impact, as we just presented, Vascepa purified EPA has demonstrated in this large 4-year $300 million clinical trial with 8,200 patients a 25% reduction in major adverse cardiovascular events. Over the course of the last decade, and more recently, with the failure of 2 large trials called the ASCEND trial and the VITAL trial, Omega-3 mixtures and fish oils have failed to demonstrate in a well-controlled clinical trial any reduction in major adverse cardiovascular event. The cardiovascular benefits presented at the AHA are solely related to the extraction and purification of Vascepa's 96% pure EPA fraction and should not be extended to general Omega-3 mixture and fish oil supplements.Finally, in the U.S., where it has FDA approval, Vascepa is pharmaceutical-grade and only available by prescription. Health care practitioners and people with serious medical condition should be able to trust and access drugs that have such scientific and regulatory credentials. While approved in the U.S. as a prescription product, Vascepa is not approved in Canada, where we have in-licensed the exclusive rights.In terms of our path forward, we intend to submit a new drug submission to Health Canada in early 2019, seeking approval for Vascepa based on the results of the REDUCE-IT study and other previous trials. We look forward to bringing this important product to Canadians. We believe that in light of the REDUCE-IT trial -- the REDUCE-IT trial results, there is a strong market opportunity for Vascepa in this country. We believe this opportunity could be in a range of CAD 150 million to CAD 250 million per year. Should we ultimately gain approval and achieve numbers in that range, it would, again, demonstrate the success of our strategy and approach of acquiring products in our transformative stage that can deliver biotech-like upside without biotech development risk.Few words about Trinomia. Like Vascepa, our second product in the growth-oriented category, Trinomia, is also in the cardiovascular space. Trinomia combines 3 common medications in 1 daily pill and is intended for patients who have already experienced a cardiac event. These patients are heavily polymedicated, taking on average 8 drugs every day. We believe that an affordable and accessible Trinomia polypill can bring simplicity and enhance compliance to a treatment that is important in reducing the likelihood of a second cardiovascular event.We believe there are excellent synergies to be achieved between Trinomia and Vascepa, as both would be promoted with the same sales force calling on the same prescribers. We will be conducting fed and fast bioequivalence studies with our partner Ferrer, with the objective to bridge the existing product data for Trinomia to the individual Canadian reference products. We estimate this will put us on a path to file Trinomia for filing with Health Canada in the first half of 2019.I will now take a brief look at our 2 foundational products, Clozaril and Absorica. Clozaril is the foundation of our CNS franchise and a key driver of cash flows to support and grow the business. For Q3, Clozaril continued to grow in Canada in Canadian currency terms and for the year-to-date period, Clozaril grew in both Canada and the U.S. The key thing to note for Clozaril is that performance continues to be steady and reliable with a slight growth profile and good strong cash flows.And as we said previously, longer term, we think there is additional growth potential in Canada. In general, our view of this longer-term growth opportunity for Clozaril is based on the well-known fact in medical circles that the utilization of clozapine in the treatment of refractory schizophrenic patients in Canada is well below what it is in other countries, such as U.K., Sweden and Germany, where the use of the molecule is almost 3x greater than it is in Canada. Since clozapine is the only approved treatment for treatment-resistant schizophrenia, many patients that could benefit from it remain untreated or they are treated with drugs that provide little to no benefit. We view this utilization difference as an opportunity to extend the use of Clozaril to more patients in need of this treatment, and we are working on ways to narrow this gap in the future.Finally, on Absorica. The Absorica royalty revenues were impacted by the usual seasonal factors in Q3, but our expectation is that they will trend back to higher levels here in Q4. Due to the strong unexpected results generated during the promotional period of 2017, we have already recouped our investment made when we acquired the royalty rights in mid-'16 and it continues to generate positive net cash flow for the business while adding to our total return.With that, I will pass it off to Tim to look at the financials.

[Tim Hendrickson, Chief Financial Officer]

Thanks, Gilbert, and good morning, everyone. I'll take a few minutes here to drill down into some of the key numbers and metrics from Q3. Starting with revenue. Q3 2018 revenue was $15.3 million, bringing year-to-date revenue to $44.8 million. In the Canadian market, where Clozaril is actively promoted and supported by HLS, revenue in fiscal 2018 increased by 2%, both in the third quarter and year-to-date periods in Canadian dollar terms. Translated to U.S. dollars, the Canadian Clozaril revenue declined 2% in the third quarter to $7.1 million, but increased by 3% for the year-to-date period to $21 million. For the U.S. market, product sales were down 4% in the quarter due to lower authorized generic supplies in Q3 2018, while year-to-date product sales are up 3%. Royalty revenues were down year-over-year due to the promotional campaign for Absorica that took place in 2017. On a sequential basis, royalty revenue was lower in Q3 from Q2 due primarily to seasonal factors, and as Gilbert just said, we expect royalty revenue to increase here in Q4.Operating expenses were lower year-over-year in Q3, primarily due to cost of product sales expenses incurred in Q3 2017 related to the completion of the manufacturing transition of Clozaril for the U.S. market to lower cost production sources as well as the cost of product sales benefit of lower authorized generic supplies in Q3 2018. The year-over-year increase in other operating expenses for the year-to-date period was driven primarily by the addition of public company costs, investment in the teams to support growth, a return to more typical patient support and regulatory compliance costs in the U.S. after lower costs last year and costs associated with initial work on commercial plans for potential new cardiovascular product launches.Adjusted EBITDA was $10.3 million in Q3, bringing year-to-date adjusted EBITDA to $29.9 million. The decrease for the year-to-date period, relative to the same period last year, is due primarily to lower royalty revenue from Absorica and additional operating costs related to the expansion of the business, which were partially offset by the decrease in cost of product sales and the year-to-date increase in Clozaril product sales.Cash flow from operations was $6.4 million in Q3, reflecting our ability to generate strong reliable cash from our foundational products. Year-to-date, we have generated $21.6 million in cash from operations compared to $18.3 million in the same 9-month period last year. As at September 30, we had cash and cash equivalents of $9.9 million on the balance sheet compared to $36.2 million at December 31, 2017. The decrease in cash is primarily due to the use of surplus cash, including some of the $21.6 million in year-to-date cash flow from operations to reduce the loan principal outstanding and pay the cash portion of the debt refinancing costs.Accordingly, the loan principal outstanding decreased from $137.9 million at June 30 to $100 million at September 30. On that topic, in Q3, we refinanced our senior secured term loan to obtain more favorable terms and extend the maturity to 2023. As I just stated, we used some of our surplus cash to pay down the principal amount outstanding of $137.9 million with a new senior secured term loan of $100 million and a $25 million revolving facility, which is undrawn. So over the course of roughly 3 years, we reduced our principal debt outstanding from $185 million at inception to $100 million today.A very important part of the refinancing, both for us and for the blue chip banks in the lending group, is that we also have the ability to request additional loans of up to $100 million to support acquisitions and growth opportunities. In addition to the significant deleveraging, we also lowered our interest rate on borrowings by approximately 6%. The old loan was at LIBOR plus 9%, while the interest rate on the new loan is in a range of LIBOR plus 2.75% to LIBOR plus 3.25%, tiered based on our leverage in each quarter.These actions combined will reduce our annual interest expense from approximately $16 million a year to approximately $6 million per year. In Q3, our interest expense was $2.7 million compared to $4.2 million in Q3 last year, primarily due to the impact of the refinancing done midway through the quarter. For the year-to-date period, interest expense was $10.8 million versus $12.4 million in the same period last year. Related to the refinancing, we incurred $19 million in onetime debt refinancing costs in Q3, which included a $12.2 million noncash expense for the write down of the remaining unamortized costs associated with the issuance of the previous debt agreement. Regarding our normal course issuer bid initiated earlier this year in May, we spent $686,000 on share purchases in the quarter, and for the year-to-date period, we have spent $924,000 to repurchase 134,600 shares. And finally, regarding the dividend, on August 15, the Board of Directors declared an initial dividend of CAD 0.05 per outstanding common share to be paid on December 14, 2018, to shareholders of record as of October 25, 2018.Yesterday, on November 14, the Board of Directors declared the company's second dividend of CAD 0.05 per outstanding common share which is to be paid on March 15, 2019, to shareholders of record as of January 31, 2019.And with that, I'll pass it back to Greg for his closing comments.

[Gregory David Gubitz, Co]

Thanks, Tim. In closing, Q3 was an exciting and very productive quarter. We refinanced our debt under favorable terms with an outstanding syndicate of top-tier banks that reflect the success we have had executing on our growth strategy, generating reliable cash flows and building a platform for future growth. Our dividend further reflects the board's and management's confidence in our ability to capitalize on emerging opportunities, while maintaining operational discipline. Most importantly, during Q3, we continue to generate steady cash flows from our foundational products, while experiencing the thrill that can come from our transformational products, with the release by Amarin of the REDUCE-IT trial results for Vascepa. We are working towards the filing of Vascepa with Health Canada in early 2019, and in the meantime, we remain on the lookout for other products and assets that we can add to our portfolio by M&A. And that concludes my prepared remarks.At this point, I will ask the operator to please provide instructions for asking a question. Operator?

[Operator]

[Operator Instructions] Your first question comes from Justin Keywood from GMP Securities.

[Justin Keywood, Director of Equity Research]

On the business development pipeline, you mentioned some areas of pursuit. I'm wondering if there's a preference for royalty versus operating assets. And also, if there's been any change in the business development pipeline since the Vascepa REDUCE-IT trial was announced.

[Gilbert Godin, President & COO]

In terms of royalty opportunities versus operational assets, we're very much focused on operational assets. Assets that we can either acquire or bring on board that we can promote and grow organically. Royalties are great, if you can find the right transaction like Absorica. But those are, from my point of view, opportunistic versus a focus of our business development activities. In terms of overall business development activities, I would say there has been no change as a result of the exceptional Vascepa results. We're very much focused on growing the business through in-licensing and acquiring other products, and that's going to continue independent of the Vascepa results and ultimate rollout.

[Justin Keywood, Director of Equity Research]

Okay. And then as you prepare for the regulatory filings for Vascepa and commercial launch, should we anticipate some increased costs?

[Gregory David Gubitz, Co]

Do you want to comment on that?

[Gilbert Godin, President & COO]

Actually, not necessarily with respect to the preparation of the filing. But obviously, with good -- the good results that came from the Vascepa trial, the strength of the trial results would -- could support that we increase our investment to prelaunch and launch the product to reach its fullest potential. So we believe that our plans until now were based on a case that had now been exceeded in terms of potential outcome. So we will very be -- very mindful here, doing justice to the product and taking every steps at the prelaunch and the launch level to fully maximize the potential of the product. So I think that in the weeks and months to come, we will continue to make some of those decisions and proceed with the deployment. We now have what we think is a very material product, and that we certainly will not change ourselves in taking it to market.

[Operator]

Your next question comes from David Martin from Bloom Burton.

[David C. Martin, MD & Head of Equity Research]

I've got a couple of questions. The first one is, with Lundbeck failing in Phase III with their refractory schizophrenia drug, I'm wondering does that change your plans for Clozaril in Canada or the U.S. I know you see a bigger opportunity in Canada, you mentioned that. Are you going to go after that more aggressively? And then, in the U.S, I think you were waiting to determine whether or not the authorized generic was going to continue or be canceled, and I wonder if you come to that decision point and if the Lundbeck results impact that?

[Gilbert Godin, President & COO]

This is Gilbert. Concerning the Lundbeck result, we knew that this was a pretty high bar. However, they could have succeeded. Unfortunately, they didn't. What it changes for us is certainly not in the short or in the midterm, but now when we look at the long-term perspective, we see no reason why clozapine and Clozaril our brand couldn't continue to thrive in the same and maybe, even in a better fashion than what we have seen under our recent tenure. So that's where we are excited that the longer-term perspective, we think that this treatment -- the need for that treatment has been in existence for now 25 years will continue for a long period of time. There is nothing currently that is likely to come anytime soon to the market to help alleviate the burden of that terrible disease. So that's something that will simply solidify our intent to continue to build a franchise, continue to build our role and the equity of the brand of HLS in the field as trusted compassionate partners of the physicians, the nurses and the patients that are taking care of those patients. In the U.S., the situation with the authorized generic has been stable with very few developments as of now. In other words, there's been, I guess, the development of a significant level of market shares, I think we're in 8% to 10% market share level. The product continues to be the subject of interim discussion in terms of its long-term viability and profitability. At this point in time, it's stable but it's not highly accretive to our results. I think that we will, in the forthcoming quarters, make decisions with respect to the long-term intent in terms of those specific products. I just want and I think all along, we always mentioned the tactical nature of that launch, it is still the case. It was useful but not necessarily material. I think that things have not fundamentally changed for us and that's why we haven't rushed our decision, but you can probably expect in the next few months -- next few quarters that we will indeed make a determination as to the longer term of the AG.

[David C. Martin, MD & Head of Equity Research]

Okay. I've got one last housekeeping question. A, is there a milestone payment due to Amarin reflective of the REDUCE-IT results? And if so, did it come before September 30? Or will it come after September 30? And would you need to draw on your credit facility to make that payments? Or you've got enough cash in the bank to do that?

[Tim Hendrickson, Chief Financial Officer]

David, it's Tim. Thanks for the question. Yes, there was an additional milestone payment associated with the REDUCE-IT results meeting. And in fact, exceeding the primary endpoint. That milestone payment was USD 2.5 million. That became due because of the results being released in September, so that is included in our Q3 results. And the payment actually has already been made now in Q4 and was funded out of available cash balances that did not require us to tap into the revolver.

[David C. Martin, MD & Head of Equity Research]

It was made with great joy.

[Tim Hendrickson, Chief Financial Officer]

Yes, yes there was tremendous joy in making that payment.

[Operator]

[Operator Instructions] I have no questions in queue. I turn the call back over to the presenters.

[Gregory David Gubitz, Co]

Thanks, operator, and thank you all for participating on today's call. We look forward to speaking with you and reporting you in the coming months, and have a nice day.

[Operator]

Thank you, everyone. This will conclude today's conference call. You may now disconnect.