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Good morning, and welcome to the Q4 and 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 12 months ending December 31, 2018. 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 and 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 actual 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 the IFRS. Adjusted EBITDA is defined in the company's press release in annual findings -- filings that are available on SEDAR and on the company's website. Please note that all financial information provided is in US dollars unless otherwise specified. I would now like to turn the call -- turn the meeting over to Mr. Gubitz. Please go ahead, sir
Good morning, everyone, and thank you for joining us on the call today. In terms of an agenda, I'll start off with a look at our activity during the year and quarter, 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, and then we'll hold the Q&A session. Q4 was a strong finish to a great year for HLS. We delivered solid financial performance in the year while achieving several important developments in the growth and evolution of our business. Revenue was $61.4 million, adjusted EBITDA was $41.1 million and cash generated from operations was $32.7 million. From our operational standpoint, in 2018, we took the company public on the TSX Venture Exchange and subsequent to year-end, we graduated to the senior Toronto Stock Exchange. We also refinanced our debt on attractive terms, introduced a dividend and received very positive REDUCE-IT trial results regarding Vascepa, one of our key portfolio products. I'll touch briefly on each of these positive developments as well as several other newsworthy items we announced subsequent to year-end. In late September, Amarin released top line results from the Vascepa cardiovascular outcomes trial known as REDUCE-IT. As a reminder, HLS has in-licensed the exclusive rights to Vascepa for the Canadian market. These top line results were groundbreaking as REDUCE-IT exceeded its primary endpoint, demonstrating an approximately 25% relative risk reduction to a high degree of statistical significance in the 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. Some commentators have even stated this may be the biggest involvement in cardiovascular prevention since statins. In November, Amarin released primary 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. They showed significant reduction in cardiovascular death, heart attack and stroke and reinforced our view that Vascepa has the potential to be an important drug at reducing MACE among patients with cardiovascular disease. Then just this past week at the American College of Cardiologist's 68th Annual Scientific Session in New Orleans, Amarin released positive new data that extends the scope of consistent effects of Vascepa beyond the patient's first cardiovascular event to all subsequent cardiovascular events, including cardiovascular death. Gilbert will provide some additional detail on the trial results along with our regulatory pathway for Vascepa. I remind you that Vascepa has not been submitted to Health Canada for regulatory approval and is not approved for use in Canada. Another highlight for the year was the refinancing of our debt in Q3. We reduced both the principal amount outstanding by $37.9 million and our interest rate by approximately 600 basis points, while increasing our future funding options. We also established new relationships with a 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 in interest costs, which will free up cash to support our operations, business development efforts and other strategic initiatives such as the dividends.Along those lines, in Q3, we also announced that we would be implementing a dividend policy on our common shares. The dividend policy is to pay a quarterly dividend in amount of CAD 0.05 per common share, representing an annual return of capital to shareholders of approximately USD 4 million. In addition to our year-end results, we also announced today that Laura Brege, an experienced healthcare executive with extensive life science public company background, was appointed to the HLS Board of Directors and will be a member of our audit committee. Laura replaces Daniel Tassé who has accepted the position as CEO of DBV Technologies and is stepping down from the HLS board to focus on his new role. Laura sits on the board of several NASDAQ-listed companies, including Acadia Pharmaceuticals and Pharmaceuticals, and she also has C-level experience at several NASDAQ companies, and we look forward to tapping into her skill set and experience as we execute on our organic and acquisition growth opportunities in both Canada and the U.S. I would be remiss if I did not thank Daniel for his contributions to HLS during a very busy and productive time for us and to wish him all the best in his future endeavors. On the BD front, last week, we announced that we have in-licensed the exclusive Canadian rights to the Athelas One device in the field of schizophrenia. The Athelas One is an FDA-cleared, capillary point of care medical device that may help simplify the mandatory blood safety monitoring process for patients that are prescribed Clozaril. Following its filing in January, the device was accepted for review by Health Canada on March 13. Conditionalized approval in Canada, HLS will introduce the device as part of the current Clozaril support and assistance network known as CSAN under the name CSAN Pronto. This initiative fits very well with our Clozaril franchise and has the potential to enhance the lives of the patients and caregivers that use it. Assuming we achieve approval, we believe CSAN Pronto can be a meaningful product for HLS, and we have structured the transaction to be in line with our typical risk return profiles. With that, I'll turn it over to Gilbert to provide some additional detail on CSAN Pronto along with a look at our broader product portfolio.
Thank you, Greg, and good morning, everyone. I will start off with a look at our growth oriented products, Vascepa and Trinomia. As most of you know, Vascepa is an FDA-approved, 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. In these top line results, the REDUCE-IT trial exceeded this primary endpoint trial, demonstrating a 25% relative risk reduction of major cardiac event. This means that patients who are on a statin and who took Vascepa were 25% less likely to experience a major cardiac event versus patients who took a placebo with their statin. Other select highlights of the full trial results included: fatal or nonfatal heart attack showed a 31% relative risk reduction; cardiovascular death, a 20% reduction; fatal or nonfatal stroke, a 28% reduction. The trial also demonstrated that on average, cardiac event could be avoided for every 21 patients at risk that is treated. As Greg mentioned earlier this week, Amarin released additional data that supports a further positive outlook for Vascepa. In terms of background to this new data, it is generally recognized that recurrent cardiovascular events are common in people who have already had a first attack. Various studies have found a recurrence rate of close to 50% for any cardiovascular event or for subsequent surgical bypass in the year after a heart attack, and up to 75% of patient have a recurrent event within 3 years. The latest REDUCE-IT data presented earlier this week showed that Vascepa reduced total events, first and subsequent events by 30% compared to placebo, reflecting that for every 1,000 patients treated for 5 years with Vascepa versus placebo, approximately 159 major cardiac event could be prevented with Vascepa. This is an impressive degree of risk reduction. From the patient's perspective and from the perspective of physicians, caring about repeat events and the risk of surviving a first stroke or heart attack only to go on to have a subsequent and potentially fatal one is dramatic and costly. The degree of benefit that this latest analysis reveals is quite large, especially considering that Vascepa showed an additional benefit on top of what statin and other therapies have already provided. Cardiovascular disease is among the most expensive areas of healthcare treating and treating major cardiac event is expensive, both at the time of the event and often for years to follow. This causes not only financial, it impacts patients through pain and suffering and loss of productivity. Preventing such cardiovascular events would be beneficial for patients, their families and for healthcare systems at large. HLS believes that reducing approximately 159 event for every 1,000 patients treated should translate into a clear patient and payer benefit. Also this week, Amarin commented on data and analysis that underscores that people with elevated triglycerides without known cardiovascular disease could be at a high risk for cardiovascular events. Thus, elevated triglycerides may provide a means of identifying increased cardiovascular risk beyond the sole cholesterol levels. As a result, we believe that there is a strong market opportunity for Vascepa in this country and that it has the characteristics of a category leader. First of all, cardiovascular disease is the #1 killer in the world. In Canada, it is on par with cancer as the leading cause of death, and Vascepa has shown itself to be effective in fighting this disease when taken with the statin. Secondly, Vascepa has very good safety profile, and that overall adverse events rates were similar across treatment groups and in the low-single bits in the REDUCE-IT trial. And finally, no other pure EPA product with cardiovascular indication is available in Canada nor are there any medications in existence today that can help reduce the residual cardiovascular risk and statin-treated patients with elevated triglycerides and other risk factors. We look forward to bringing this important product to Canadians, and we believe Vascepa could generate revenues in Canada in a range of $150 million to $250 million per year. This new data certainly gives us greater confidence in our outlook. We expect to submit our filing to Health Canada following Amarin's supplemental filing to the FDA for label expansion. Like Vascepa, our second product in the growth-oriented category is Trinomia, and it's also in the cardiovascular space. In our view, there are excellent synergies to be achieved between Trinomia and Vascepa, essentially resulting from the same sales force calling on the same prescribers. We are currently undertaking a 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. This study is comprehensive, and we estimate it will be completed during the third quarter of this year leading to a filing in the fourth quarter if all goes well. This would allow us to roll out Trinomia in optimal fashion 6 to 9 months after the Vascepa launch. Moving on to Absorica. Our royalty revenues bounced back to higher levels in Q4 from Q3. As most of you know, Absorica is more of a royalty play for us, a passive transactions. We bought it intending to be flat, and so far, it has outperformed our initial investment thesis and continues to generate positive net cash flow for the business with the script level now hovering above 11,000 scripts per month. Clozaril is the foundation of our CNS franchise and a key driver of cash flow to support and grow the business. In 2018, Clozaril grew in both Canada and the U.S. maintaining a slight growth profile and good strong cash flows. Even though it has been genericized in Canada for 14 years, we remain the market leader, with approximately 55% of the volume and longer time, we -- in the longer term, we think there is additional growth available in Canada. Our view of this longer-term growth opportunity for Clozaril is based on the well-documented fact in medical circles that the utilization of clozapine in the treatment of refractory schizophrenic patients in Canada is about 1/3 of what it is in other countries, such as Germany, Sweden and the United Kingdom. Since clozapine is the only approved treatment for treatment-resistant schizophrenia, many patients do not respond to first-line treatments, remain untreated or they are treated with drugs that provide little to no benefits. We view this utilization difference as an opportunity to extend the use of Clozaril and the announcement made last week regarding CSAN Pronto is a step in that direction. CSAN Pronto is a point-of-care diagnostic solution that may help simplify the mandatory safety blood monitoring process for patients that are prescribed Clozaril. Patients' nonadherence to blood work and the burden of the blood work regimen itself on the patients are the most widely cited barriers to the use of clozapine. In the first year of the treatment, a minimum of 39 intravenous blood draws are required to monitor patients, with 12 or more intravenous blood draws required each year thereafter for as long as patients are under treatment. Traditionally, such blood monitoring required patients to undergo venous blood draw at a clinic or a lab, and results would be available a day or 2 later. CSAN Pronto is designed to streamline blood testing for both patients and healthcare practitioners by enabling patients to have their blood monitoring work done right in their healthcare provider's office and to receive test results during their visit. In addition, only a single drop of blood obtained from the fingerstick blood test is required. Results are available to patients and practitioners in just minutes. By providing a less invasive process and more favorable environment for blood work, we think CSAN Pronto could help reduce barriers and provide better access to a proven treatment. As Greg mentioned, the device was accepted for a review by Health Canada on March 13, and we expect the review process to take 60 to 90 days. With that, I will pass it off to Tim to look at the financials
Thank you, Gilbert, and good morning, everyone. I'll take a few minutes here to drill down into some of the key numbers and metrics from Q4 and for the year. Starting with revenue. In both Canada and the U.S., product sales benefited from typically stronger sales in the fourth quarter as a result of customer inventory down [indiscernible] that then usually resolve themselves in the first quarter of the following year. In Canada, where Clozaril is actively promoted and supported by a team at HLS, sales rose 6% in Q4 and 4% for fiscal 2018. In the U.S., volumes continued to experience moderate declines that were partially mitigated by a price increase earlier in 2018. Consistent with the seasonal inventory pattern seen in Canada, increased seasonal demand in Q4 further moderated volume declines in the U.S., product sales benefited from lower than previously estimated product returns and increased efficiency in distribution programs under company management. Full year product sales increased by 7% in the U.S. market as lower than previously estimated expired product returns, and greater sales deduction efficiency were offset by lower authorized generic supplies. As Gilbert mentioned, in Q4, we saw that royalty revenue increased from Q3 2018 trending to levels more consistent with the pre-2017 period. Regarding operating expenses, cost of product sales decreased in 2018 in line with reduced authorized generic supplies and improved manufacturing costs as a result of the completion of the manufacturing transition for the U.S. market. The Year-over-year increase in other operating expenses was driven primarily by the addition of public company costs, the development of the HLS team to support our growth plans and increase in patient support and regulatory compliance costs in the U.S. after a short-term decrease in those costs a year earlier and the costs associated with initial work to develop commercial plans for Vascepa. Adjusted EBITDA was $11.2 million in Q4 and $41.1 million year-to-date. These numbers reflect strong adjusted EBITDA margins of 67% and are indicative of the steady reliable performance of our foundational products. Stable cash generation from the Clozaril business, supplemented by royalty revenues from Absorica, resulted in cash from operations of $11.2 million in Q4 and $32.7 million for the year. Cash from operations increased year-over-year, due primarily to the reduction in interest expense, due to the debt refinancing in August 2018 and reduced investment in noncash working capital. While working capital requirements are relatively stable, there is some fluctuation quarter-to-quarter and the 2018 results benefited from lower levels at year-end. As at December 31, 2018, we had cash of $10.9 million on the balance sheet compared to $9.9 million at September 30 and $36.2 million at December 31, 2017. The decrease in cash from year ago was primarily due to the use of surplus cash 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 just $98.75 million at December 31, 2018. In Q4, the company paid additional deferred purchase consideration for Absorica rights, paid $3 million as part of the repurchase of the lender royalty that was a part of the August 2015 refinancing, and most notably, we were very pleased to pay $2.5 million as a milestone payment for Vascepa as a result of the REDUCE-IT trial results exceeding expectations. As you know, in Q3, we refinanced our senior secured term loan to obtain more favorable terms and extend the maturity to 2023. We are already seeing the positive effects of the restructuring. As at year-end, our principal amount outstanding is now below $100 million down from $137.9 million at midyear, and our cash interest expense in Q4 was $1.4 million compared to $4.2 million in Q4 2017. For the full year, cash interest expense was $12.2 million compared to $16.6 million last year. It's worth pointing out that a very important part of the refinancing is that we also have the ability to request additional loans up to $100 million to support acquisitions and growth opportunities. We also have access to a $25 million revolver that remains undrawn at this point. So in addition to a lower cost to carry the debt, we have also increased our flexibility around it. On the bottom line, the strong operating results in Q4 combined with the interest expense savings from the refinancing, resulted in positive net income in Q4 of $0.4 million compared to a net loss of $0.4 million in Q4 last year. For the full year, our net loss of $24.8 million includes $19 million and onetime debt refinancing expense, which included a $12.2 million noncash charge to expense the remaining unamortized costs associated with the previous debt agreement.And finally, regarding the dividend, yesterday, on March 20, the Board of Directors declared the company's next dividend payment of CAD 0.05 per outstanding common share, which is to be paid on June 14 to shareholders of record as of April 30. With that, I'll pass it back to Greg for his closing comments.
Thank you, Tim. In closing, 2018 was an exciting and productive year for the company, which took place against the backdrop of solid financial performance from our foundational assets and very positive developments from our transformative assets. We've carried that momentum into 2019, having completed the transaction with Athelas for the CSAN Pronto device. The transaction extends our presence in the CNS therapeutic area and strengthens the growth potential for Clozaril. And we expect to see, and look forward to, important milestones in 2019 with our transformative assets, Vascepa and Trinomia, as we prepare for the promising organic growth potential of these 2 products. Now that concludes our prepared remarks. At this point, I will ask the operator to please provide instructions for taking the question. Operator?
[Operator Instructions] Your first question comes from Dan Martin from Bloom Burton.
That'd be Dave. I've got a few questions. The first one's the Athelas One device, has that impacted the clozapine market in the U.S. since its launch, I think it was in August 2017?
Yes, maybe, Gilbert, you want to speak to that?
Yes. Actually, the Athelas One technology was cleared by the FDA this fall, it has not been launched. We're currently working. We have a similar arrangement for the U.S. marketplace, where under the form of a service agreement, we have exclusive use of the technology in the field of schizophrenia. And we are on the verge of deploying a pilot that will allow us to assess the merit and the benefit of the use of the technology in the context of our drug Clozaril. So that's where we stand today. I would say that we're in the initial stages. We're in the learning stages. Recognizing that the U.S. marketplace is completely different than the one we have in Canada, where we have leadership, we have a proprietary registry and an existence, a CSAN service offering that we are now developing further with the inclusion of the technology in its merits.
When you say exclusive in Canada, exclusive in the U.S., does that mean the device will only be available to patients who are being treated with your drug in both Canada and the U.S.?
That is correct. And that is because it is not only about the device, it's about including the device in the treatment continuum. We have a patient population that is very ill and that has access to a drug that in 80% of the cases, there would be a solid -- good solid response rate with the impediment of a fairly brutal safety monitoring regimen. And the only way that this device can be useful is if it's developed and incorporated in the safety monitoring -- the mandatory safety-monitoring approach, that is required by virtue of the rules and regulations in those countries. So we've took that device and in collaboration with Athela, we have incorporated them in operating systems that are in sync with those registry requirement. So that's why the solution is proprietary and exclusive to us.
Okay. I'll ask another question and then get back in the queue. Gilbert, you had mentioned that it looks like Vascepa would be beneficial for patients just with high triglycerides without any other risk factors. I'm wondering are we also seeing that it would be beneficial in patients with high cardiovascular risk factors without high triglycerides. So is this a high triglyceride drug or is this just a cardiovascular drug?
No. I think it's a very important, very relevant question. And we're making headways and understanding the complexities of the modes of action and where the triglyceride fits. I think what was clear, and I'm only trying to translate here what many experts communicated earlier this week, especially in one of the panels held at the American College of Cardiology, where they said that while triglyceride are not necessarily the cause of the heart disease, they are -- they appear to be highly correlated with risks that are sometimes known and sometimes unknown. And therefore, there's a correlation rather than a causation relationship between the triglycerides, and that's where the triglyceride markers are useful. With respect to your second question, I don't think that I could comment or anyone could comment given that REDUCE-IT 8,000 population were explicitly selected for the fact that they were stabilized on the statin, they had triglyceride above a certain level, and I think it was 150 milligram per deciliters, but they also had at least one of the additional risk factors that are identified in the protocol. So none of those patients were patients that had so called normal triglyceride level or below a certain level. So we -- I couldn't comment on that aspect in particular.
Your next question comes from Justin Keywood from GMP Securities.
On the regulatory filings for Vascepa, is there a targeted timeline to submit this after Amarin files with the FDA?
Yes. I think what we've conveyed is that we would file in the weeks following their filing. And Amarin has previously -- or their last communication on the topic was that this filing would take place before the end of March. So unless they were to review that forecast, we would most likely be filing in -- during the course of April.
Okay. And then Amarin has said that they'll seek an -- if a expedited review is possible with the FDA. Will HLS be seeking similar with Health Canada?
Yes. As you know, these decisions are not in our control but we should know before we file, so before this April deadline, whether or not Health Canada is willing to grant a priority review for the filing. And as you may know, priority reviews are usually granted to products that are, I guess, the solution to an unmet need for which there are no alternatives, and this needs to revolve around a serious or life-threatening disease. So that's pretty much what we're facing here. But we will know, we should know before we file, if we are indeed granted a priority review or not.
And sorry, just to clarify, you should know from Health Canada before you file if you're eligible for the priority review?
That is correct.
Okay. And then just back on the business development activities. Just looking for a general update there if activity remains similar to last quarter and there's been any change in the multiple levels that you're seeing?
Justin, it's Greg. Thanks for the question. We're continuing to see a steady flow of both M&A opportunities and interesting in-licensing opportunities. As I've mentioned, I guess, on a couple of the previous calls, yes, we have a fairly strict criteria, and we're only going to pull the trigger when an opportunity makes solid, commercial and financial sense. I'd rather do fewer smart deals than just a big pile of transactions. What I can tell you though, we certainly have the capacity, Justin, to digest additional transactions in parallel with Vascepa, and we have not pulled back at all on our business development activities, and we're actively searching for that next opportunity.
Your next question comes from Dave Martin from Bloom Burton.
A couple more. So in your experience in the pharma industry, if a big pharma company was interested in securing the rights for a drug like Vascepa, would it be important or essential to them to own the drug in Canada as well? Or is -- I know most big pharma companies, if not all of them, have sales and marketing infrastructure in Canada, would it be essential for them, would they view it as important to Canadian rights as well?
David, it's Greg. Yes, I think that very much depends on the individual company that you're talking about and what their strategic plans are in the territory. I think there's an argument to be made that a company would want to have the North American rights for a product and not just Canada or U.S. if we're talking about a major company. But quite frankly, I could also see scenarios where they would only want one territory.
Okay. And what about pricing in Canada. Is -- are you going to be -- or are you in discussions with Amarin? Are you going to -- align your pricing with them somehow or do they have any control whatsoever what you do on that front?
We discussed with them, and the proximity of those markets are usually such that those discussions are pretty much unavoidable. Having said that, pricing of drugs in both countries have been oftentimes similar but usually, they could be quite different. I think that what we have been discussing is pricing this product in a way that recognizes the value that it brings to patients and the healthcare systems in terms of cost avoidance, yet recognizing that this pricing structure in Canada is under the oversight of the price review board, and therefore, certain things need to be demonstrated and calculated before those determinations can be made. So we think that the pricing assumptions we have made are solid, and we think that the new data that has been issued over the course of last the 10 days would strengthen those assumptions if anything.
Can you share what your pricing assumptions are? What should be...
Yes. I think what we've communicated publicly is that Vascepa could be priced at about $180 to $200 per month of therapy.
Okay. And that's Canadian dollars?
That's correct.
Okay. Moving onto Trinomia, the trial that's underway right now, the bioequivalence trial. Have similar trials been run in other countries? Is there a reason that we should be confident that this by bioequivalence trial should come out positive and you will not need other trials going forward?
Yes. There's at least 2 sets of trials that I'm aware of. The one that really resulted in the filing and approval of this product in Europe. And similar trials were performed in the U.S. as well in the perspective of introducing that product in the U.S. eventually. So I think that there are basis and body of work here showing that the bioequivalence was demonstrated versus the local reference drugs. And we're essentially performing those trials in Canada because we couldn't -- for absolute certainty we couldn't demonstrate that those initial trials were done with drugs that were actually the same from a manufacturing standpoint.
But our local reference drugs are similar to the other countries, local reference...
They are. They are IR formulations. So that usually is the simpler approach if we were facing complex sustained delivery systems that could be a different ballgame, but they do appear to be the same. But we don't have the evidence that they are the same. All we know is that they are similar dosages, and they are instant-release formulations as well.
Okay. And I just have one last question. Tim mentioned the lower AG supplies. I am wondering, is that going to be rectified. Have you made any decisions on whether or not you want to keep the AG going? Maybe ramp it up? Or was this part of a plan to ramp it down?
Yes. Well, I think I'll just preface this by saying that, all along, I think over the course of the last year we commented on the AG as a tactical opportunity one that we were reassessing frequently, we can safely say now that our AG business, while visible and material in volume, was marginal in terms of contribution. And we're -- it's not a big moneymaker for us. So we're exploring other options to see what a better long-term strategy may be. So you should see those AG volume reduce in the near term until we decide if there is indeed an alternate strategy that could make a decent product contribution to the bottom line. Because if it doesn't, it really comes on at the top and does not make contribution at the bottom, it's something that we wouldn't pursue or wouldn't continue beyond that point.
There are no further questions. I'll turn the call back over to the presenters for 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. Thanks very much, and we'll talk again shortly. Bye-bye.
This concludes today's conference call. You may now disconnect.