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Good morning, ladies and gentlemen, and welcome to the Nuvo Pharmaceuticals Inc. 2018 Second Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 2, 2018.I would now like to turn the conference over to Jesse Ledger, President and CEO. Please go ahead.
Thank you. Good morning. Thank you for joining our call today. On the call with me this morning from Nuvo Pharmaceuticals are John London, Nuvo's Executive Chairman; and Nicole Rusaw, Nuvo's Interim Chief Financial Officer.Before we begin, I will remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties relating to Nuvo's future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Nuvo's periodic and annual disclosure documents as well as the news release that we issued this morning, and you can access these documents in the SEDAR database under www.sedar.com. Except as required by law, Nuvo is under no obligation to update any forward-looking statements discussed today and investors are cautioned not to place undue reliance on these statements.Earlier this morning, we announced our second quarter results. In the call, we'll walk you through the financial results in a moment. But first, I would like to provide a review of our developments in the second quarter of 2018. During the quarter, we continue to execute on our plans for Pennsaid 2% end results and the growth of our business. We saw improved results from our Pennsaid 2% business, bolstered by a reinstatement of physician sample production for our U.S. partner, Horizon Pharma.Nuvo is focused on targeting 2 main areas to build our business: growth of our revenue streams through geographic expansion of our current product offerings, and the diversification of our product portfolio through the completion of disciplined product in-licensing and acquisition transactions. Last quarter, we announced that we would be filing our marketing authorization application for Pennsaid 2% in Europe within the next 12 months. We have accelerated our time lines and now plan to submit this new dossier to the Austrian Medicines and Medical Devices Agency during the fourth quarter of this year. The agency has agreed to assume the role of Reference Member State for the purpose of completing the initial evaluation of the Pennsaid 2% dossier under a decentralized procedure review within the European Union. A Reference Member State review typically takes 12 to 24 months to complete. Once the initial evaluation has been completed, the review decision will be passed on to other EU Member States or Concerned Member States who will participate in the decentralized procedure review. The Concerned Member States review is typically completed within 6 months from receipt of the initial Reference Member State review decision. An initial review decision could be obtained in Austria 1 year after our submission or during Q4 2019 and the subsequent Concerned Member States decisions could be obtained 18 months after our submission which would be during Q2 2020. The confirmation of this regulatory time line has allowed us to provide potential Pennsaid 2% licensing partners with an established path forward for the submission of the Pennsaid 2% dossier in the European Union. We are in active discussions with a number of interested partners. We anticipate additional partnering arrangements for Pennsaid 2% during the second half of 2018.Our Pennsaid 2% partner in Switzerland, Gebro Pharma, plans to file their marketing authorization application with Swissmedic during the third quarter of this year. A Swissmedic review typically takes 12 to 18 months from submission of the dossier. Based on these time lines, a Pennsaid 2% review decision in Switzerland could be obtained in Q3 2019. We've also made progress on partnering Resultz internationally. Our first Resultz partnering transaction has been completed with Fagron Belgium for Belgium, the Netherlands and Luxembourg. Resultz was previously marketed by Takeda Belgium in Belgium. Fagron has already initialized commercial activities for Resultz in Belgium and will be working towards developing a commercial launch plan for the Netherlands in 2019. We believe Fagron is a strong addition to our international roster of commercial partners for Resultz. Fagron's existing European commercial infrastructure for its pharmacy compounding business is particularly well-suited to the commercialization of Resultz. Furthermore, the commercial team at Fagron Belgium has recent experience working for one of Resultz' main competitors and have intimate knowledge of the lice market in the region. Discussions continue regarding Resultz partnering in the United States and other global jurisdictions, and we anticipate announcing additional partnering arrangements throughout the remainder of the year. We are continually seeking high-quality product and business acquisition targets. While it is always challenging to provide more substantive details on timing or potential targets, I can confirm that our deal pipeline is active and robust.The second quarter was an active period for our Normal Course Issuer Bid, or NCIB. During the quarter, the company purchased 229,394 common shares with available cash on hand for a total cost of $729,659 or $3.18 per share. The common shares acquired were canceled. We will continue to evaluate opportunities to utilize the NCIB program moving forward. Additional details on our share repurchases are available on the -- at SEDI database.Our financial results for the second quarter reflect a return to positive net income and adjusted EBITDA. Pennsaid 2% commercial bottle production has stabilized and our Varennes manufacturing facility shipped physician samples to Horizon. We had not supplied physician samples to Horizon since Q2 2017. The return of physician sample manufacturing was a welcome addition to our financial results, and we anticipate production to continue going forward.Nicole will provide further details on our second quarter financial results.
Thank you, Jesse. Total revenue, consisting of product sales, license revenue and contract revenue for the 3 months ended June 30, 2018, was $5.9 million compared to $3.1 million for the comparative 3 months period. The increase in total revenue was primarily related to an increase in Pennsaid 2% product sales to our U.S. partner, Horizon. Total revenue for the 6 months ended June 30, 2017 (sic) [ June 30, 2018 ], was $10.3 million compared to $10.1 million for the comparative 6-month period.Total operating expenses for the 3 months ended June 30, 2018, were $4.7 million compared to $3.2 million for the 3 months ended June 30, 2017. The increase in operating expenses was due to an increase in cost of goods sold, G&A expenses and depreciation and amortization. Total operating expenses for the 6 months ended June 30, 2018, were $9.5 million, an increase from $8 million for the comparative 6 months period.Cost of goods sold for the 3 months ended June 30, 2018, was $2.3 million compared to $1.5 million for the comparative 3 months period. Gross margin on product sales was $3 million or 56% for the 3 months ended June 30, 2018, compared to a gross margin of $1.3 million or 48% for the 3 months ended June 30, 2017. For the 6 months ended June 30, 2018, cost of goods sold was $4.3 million compared to $4.2 million in the comparative 6-month period. Gross margin on product sales for the 6 months ended June 30, 2018, was $4.9 million or 53% compared to $5.2 million or 55% for the comparative 6-month period. The company's gross margin on product sales was impacted by the volume and mix of products sold during the current and comparative 3-month and 6-month period. The company's gross margin was also impacted by the Canadian dollar versus the U.S. dollar, the currency in which it earns certain product revenues and sources select Pennsaid 2% and Pennsaid raw materials.General and administrative expenses were $1.9 million for the 3 months ended June 30, 2018, compared to $1.6 million for the comparative 3-month period. G&A expenses were $4.3 million for the 6 months ended June 30, 2018, compared to $3.3 million for the comparative 6-month period. The increase in both this current 3- and 6-month periods was largely due to compensation and stock-based comp associated with an increased employee headcount resulting from the strengthening of the executive and senior management team to facilitate the company's growth strategy. Furthermore, the company recognized costs to support the transition and establishment of the Resultz business and in scientific and regulatory costs associated with the advancement of the company's Pennsaid 2% European regulatory strategy, the majority of which are onetime in nature. For the 3 and 6 months ended June 30, 2018, the company recognized noncash costs of $0.5 million and $1 million in amortization relating to the Resultz patent.Net income for the 3 months ended June 30, 2018, was $1.1 million compared to a net loss of $0.2 million for the comparative 3-month period. In the current quarter, the increase was primarily attributable to a $1.7 million increase in gross margin and a $0.2 million increase in other revenue, offset by a $0.5 million increase in amortization and a $0.1 million increase in the fair value remeasurement of the company's contingent and variable consideration. Net income for the 6 months ended June 30, 2018, was $0.9 million compared to $2 million for the comparative 6 months period. Adjusted EBITDA increased to $1.9 million for the 3 months ended June 30, 2018, compared to negative $0.1 million for the comparative quarter. The increase in adjusted EBITDA for the current quarter was primarily attributable to an increase in gross margin and an increase in other revenue related to the Resultz sales-based royalties. Adjusted EBITDA increased to $2.4 million for the 6 months ended June 30, 2018, compared to $2.2 million for the comparative 6-month period.Cash and short-term investments were $8.7 million as at June 30, 2018, compared to $6.5 million as at March 31, 2018. The increase in cash was primarily related to an increase in cash provided by operations.I will now turn the call back to Jesse.
Thanks, Nicole. We remain optimistic about the continued growth prospects for the Nuvo business during the remainder of the year. As previously communicated, our business has moved beyond the challenges that were present in 2017 and we are focused on continuing to create shareholder value from our business. That ends our formal remarks. And I will now turn this back to the operator for questions.
[Operator Instructions] And your first question is from Bob Gibson from PI Financial.
Just a couple of quick things, so first, maybe we could talk about Resultz and potential U.S. partners?
Sure. So obviously, we're still in discussions with a number of partners. We've cast a fairly wide net in terms of talking to a variety of different companies. We've got a couple of discussions that are fairly advanced, and so I think we're pretty optimistic about those discussions and where that will get us to. I think when we initially did the deal, I've communicated at the start of the year that the plan was to try to get somebody in place by the middle part of this year. Obviously, we're a little bit behind schedule on that front. But I think we’re still making very good progress. The ultimate goal is to have somebody in place by the end of the year so that we're in a position to commercially launch in early 2019. And I think we're still moving towards that goal, so active discussions and things are going well.
Great. And how should I think about Resultz breakdown as far as product sales versus license revenue now and then next year?
Sure. So the product sales that showed up in the second quarter were related to some product sales to Fagron for Belgium. And so I think for the rest of this year, depending on what happens with partnering efforts there -- I'm not sure how much more product sales you’ll see, it will be mainly royalty revenue for the rest of this year. And then next year, the blend is obviously dependent on the additional partnering relationships that we have in the United States and other European markets. So it's a little difficult to sort of pinpoint what that's going to look like now. But obviously, as we get closer and as we get partners put in place, we'll be able to provide more specific details in terms of when we think product sales would really start on a regular basis.
Okay. And then it seems that physician samples are more profitable than just the regular product, is that fair?
That's correct.
Okay. And then lastly, any color on the capacity of your facility and where you see that going?
Well, I think we’re sort of continue to operate at a similar level as in the past. Obviously, we're producing the samples again, but with the addition of the new sachet equipment, our capacity -- production capacity for samples actually increased. So I'd say we're probably at a similar level as to where we were historically, although the sachet production is a lot more efficient now, which is part of the reason why the margin on those samples is a little bit higher than what we see on the commercial bottles. As we move forward, as new -- the Swiss business for Pennsaid 2% starts to gain traction hopefully later on next year, we’ll start to add more product and utilize more capacity. But I think everything is sort of status quo for the time being.
Okay. And lastly, I know you're looking at more potential acquisitions -- potential targets, are prices going up or going down sort of based on sort of your historical experience?
It's a good question. It really depends on -- there are a lot of factors that come into the price. And whether -- one is how competitive of a process is being run for the assets, what's the patent protection look like, barriers to entry, all these different things. So it's kind of hard to say whether prices are up or down. It really depends on the assets that you're looking at. I think, in general, the prices that we're seeing are reasonable and there are price points that would work for us. We're not seeing that we're getting priced out of opportunities because of other party's willingness to pay extremely high multiples. So I think everything seems to be fairly reasonable from what we're seeing.
[Operator Instructions] At this time, we have no further questions. You may proceed.
Okay. Well, thanks everyone for joining in on the call today. Appreciate your ongoing support and enjoy the rest of your summer.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.