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Good morning, ladies and gentlemen, and welcome to the Nuvo Pharmaceuticals Inc. Third Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 8, 2018. And I would now like to turn the conference over to Jesse Ledger, Nuvo's President and CEO. Please go ahead.
Thank you. Good morning, everyone. Thank you for joining our call today. On the call with me this morning from Nuvo Pharmaceuticals are John London, Nuvo's Executive Chairman; Mary-Jane Burkett, Nuvo's Vice President and Chief Financial Officer; and Tina Loucaides, Nuvo's Vice President, Secretary and General Counsel. 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. The 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 third quarter results. Mary-Jane will walk you through the financial results in a moment, but first, I would like to provide a review of our developments in the third quarter of 2018. During the quarter, we continued to execute on our plans for expanding our business and reinforcing its growth potential. We announced the signing of definitive agreements to acquire a portfolio of revenue-generating products as well as the associated personnel and infrastructure to continue the products' management and growth from Aralez Pharmaceuticals. As part of the Aralez transaction, Nuvo would acquire the business of Aralez in Canada, which includes multiple products sold in Canada by Aralez' Canadian sales force, along with royalty streams and global product rights for Vimovo, Treximet and Yosprala. Aralez has filed for Chapter 11 bankruptcy protection in the U.S. and Companies' Creditors Arrangement Act, or CCAA, protection in Canada. While definitive agreements have been signed, we still need to work through the bankruptcy process in the U.S. and the CCAA process in Canada. Nuvo's definitive agreements with Aralez have resulted in Nuvo being designated as the so-called stalking horse bidder by the courts. This means that our definitive agreements established Nuvo as the court-approved buyer of the Aralez Canada business and the global rights to Vimovo, Treximet and Yosprala unless we are outbid in the bankruptcy process. As the court-approved stalking horse bidder, Nuvo is entitled to certain expense reimbursement, return of our USD 4.4 million deposit and a payment of defined break-fees if we are ultimately outbid for the assets that we have agreed to purchase. Other qualified parties may submit competing bids until November 26, 2018. For a qualified bidder to outbid Nuvo, it must bid an amount that exceeds the Nuvo bid by a defined amount plus the value of our expense reimbursement and break-fee payments, which would currently amount to approximately USD 4.6 million. Nuvo has the right to match or top competing qualified bids in a court-approved auction process currently scheduled for November 29, 2018. Closing of the transactions for the successful bidder are expected before end of the year. As a former employee of Tribute Pharmaceuticals, the predecessor to Aralez Pharmaceuticals Canada Inc. and member of the team that built the product portfolio that makes up the Aralez Canada business today, I know that business well. I believe it has the potential to be transformational for Nuvo and to create significant value for you, our shareholders. While Aralez is in bankruptcy protection, it is important to highlight that we are proposing to acquire what, in our view, are some of the strongest and most profitable segments of this business. Furthermore, these segments have the potential to deliver continued value and growth post-closing. The business includes multiple products with high-growth potential, patent protection or other forms of market protection and significant royalty streams, some with guaranteed minimum payments. The business has the potential to provide substantial cash flow for years to come. As part of the transaction, we would acquire the infrastructure and a team that has built this Canadian business over the past 2 years. While closing is not guaranteed for the reasons already mentioned, we are hopeful and excited about our prospects. Our U.S. Pennsaid 2% business continues to deliver consistent manufacturing revenue for Nuvo, and Pennsaid 2%'s prescriptions have stabilized throughout 2018. Our U.S. partner, Horizon Pharma, has confirmed that its primary care business, of which Pennsaid 2% continues to be the #1 product from a revenue and profit generation standpoint, is in maintenance mode, and that it has no current intention to change its Pennsaid 2% marketing efforts. Our Pennsaid 2% partner in Switzerland, Gebro Pharma, filed their marketing authorization application to Swissmedic in October. This triggered a milestone payment from Gebro and represents the first European regulatory submission for Pennsaid 2%. While Switzerland is a relatively small market, total topical diclofenac sales last year were approximately $25 million, it is a very attractive market from a pricing standpoint. Our agreement with Gebro includes a royalty on net sales and revenue generated from an exclusive supply agreement. Pennsaid 2% is manufactured at the company's facility in Varennes, Québec. In India, our exclusive licensee for Pennsaid 2%, Sayre Therapeutics, is making good progress with their regulatory submission. After some review delays with the Drug Controller General of India, which were beyond our and Sayre's control, we understand that a review decision will be made in the first quarter of 2019. As always, these dates are moving targets, but we are encouraged that a decision will hopefully be made soon, which could result in a commercial launch in India as early as the second half of 2019. We are making progress on our partnering efforts for Resultz. When we announced the Resultz transaction in January 2018, we anticipated having a U.S. partner in place by the middle of this year. Despite significant outreach and many interested parties, we have not yet concluded a license deal. The initial launch for a branded consumer health product, like Resultz, is a key determinant to its commercial success, and therefore, we want to ensure we have the right partner who shares our dedication and enthusiasm for the brand. In light of the partnering delays, timelines for U.S. revenue from Resultz have been pushed out. We will keep you updated as we continue to make progress with our U.S. partnering activities. We have had significant interest in Resultz from some key European markets and expect to make progress with Resultz partnering in this region before the end of this year. Mary-Jane will now provide further details on our third quarter financial results.
Thanks, Jesse. Total revenue, consisting of product sales, license revenue and contract revenue for the 3 months ended September 30, 2018, was $5.1 million compared to $3 million for the comparative 3-month period. The increase in total revenue was primarily related to an increase in Pennsaid 2% product sales to our U.S. partner, Horizon, and royalty revenue from the Resultz net sales in select international markets. Total revenue for the 9 months ended September 30, 2018, was $15.4 million compared to $13 million for the comparative 9-month period. Total operating expenses for the 3 months ended September 30, 2018, were $7.2 million compared to $3.1 million for the comparative 3-month period. The increase in operating expenses was primarily related to an increase of cost of goods sold, general and administrative expenses, which included $2.4 million of transaction costs incurred in the quarter relating to the Aralez transaction, and amortization of intangibles. Total operating expenses for the 9 months ended September 30, 2018, were $16.7 million, an increase from $11 million for the comparative 9-month period. Cost of goods sold for the 3 and 9 months ended September 30, 2018, was $2.2 million and $6.4 million compared to $1.6 million and $5.8 million for the comparative 3- and 9-month periods. Gross margin on product sales was $2.3 million or 51% and $7.1 million or 53% for the 3 and 9 months ended September 30, 2018, compared to a gross margin of $1.1 million or 40% and $6.3 million or 52% for the 3 and 9 months ended September 30, 2017. General and administrative expenses were $4.5 million for the 3 months ended September 30, 2018, compared to $1.4 million for the comparative 3-month period. The increase in the current 3-month period includes $2.4 million for legal and diligence transaction costs related to the Aralez transaction; incremental costs related to the Resultz business; increased scientific and regulatory costs associated with the advancement of the company's Pennsaid 2% European regulatory strategy; and an increase in compensation costs due to increased employee headcount, resulting from strengthening of the executive and senior management team to facilitate the company's growth strategy. General and administrative expenses were $8.8 million for the 9 months ended September 30, 2018, compared to $4.8 million for the comparative 9-month period. For the 3 and 9 months ended September 30, 2018, the company recognized noncash costs of $0.5 million and $1.5 million in amortization related to the Resultz patent. Net loss for the 3 months ended September 30, 2018, was $2.4 million compared to a net loss of $0.2 million for the comparative 3-month period. In the current quarter, the increase in net loss was primarily related to an increase in general and administrative expenses, which included $2.4 million of transaction expenses for the Aralez transaction, and an increase in amortization related to the Resultz patent, partially offset by an increase in gross margin and other revenue. Net loss for the 9 months ended September 30, 2018, was $1.5 million compared to net income of $1.8 million for the comparative 9-month period. Adjusted EBITDA is decreased to a negative $1.6 million for the 3 months ended September 30, 2018, compared to a negative $0.1 million for the comparative 3-month period. The decrease in adjusted EBITDA in the current quarter was primarily related to an increase in general and administrative expenses, partially offset by an increase in gross margin and other revenue. Adjusted EBITDA increased to $0.8 million for the 9 months ended September 30, 2018, compared to $2.1 million for the comparative 9-month period. Cash was $4.1 million as at September 30, 2018, compared to $6.7 million at June 30, 2018. The decrease was primarily related to a deposit of USD 4.4 million related to the Aralez transaction. I will now turn the call back over to Jesse.
Thanks, Mary-Jane. 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 David Martin from Bloom Burton.
So the first question is, the Pennsaid sales were up, but scripts were down 28% year-over-year. I know the buying patterns of Horizon were different last year, and they're recovering now. But was any of the uptick in Pennsaid, do you know, stocking by distributors?
Thanks for the question, David. We don't have that kind of visibility into Horizon's business. Certainly, what we do know is that -- and what we've communicated historically is that there is a bit of a disconnect between prescriptions and when we ship and supply inventory and finished product or samples to Horizon. And certainly, this year, one thing that's been made clear to us by Horizon is that there is a further disconnect between the data -- prescription data that's being reported by IMS or Symphony Health and what's actually happening in Horizon's business, and part of that results from their distribution model and how Horizon -- the HorizonCares program and how they're fulfilling prescriptions. And so the decrease in prescriptions and the correlation with our business, as you know, historically, there's never really been a strong connection between the two. But we do believe and Horizon believes that the prescription data that's being reported by those providers is understated.
Okay. You mentioned that they're in maintenance mode right now with primary care. Are there any plans to decrease the sales force further or to decrease marketing expenditures in that group?
No. What they've told us is that this business is at the level where they're happy with it. It's contributing significant cash flow to their business. And in order to keep it at this level, they need to continue the level of sales and marketing spend that they have. So there are no plans at this point for headcount reductions or changes in their sales and marketing approach.
Okay. You mentioned that push out on the timeline for the U.S. partner for Resultz and that you want to make sure you get the right partner. Would you say the right partners haven't appeared in the process, and that's why you've had to push it out? Or you haven't been able to get the terms you want, but yes, you have seen partners show interest that would qualify under your criteria?
Yes. It's a bit of a -- sort of a combination of the two. We've had some parties that we've had very good discussions with, where we thought that this was the right fit, but then the commercial terms that they're able to commit to isn't quite what we're expecting. And we've got certain requirements in terms of the effort that these companies are going to put into a commercial launch. But -- so it's -- yes, like I said, it's a bit of a combination of the two. We're not quite there yet with a partner where we're -- that we believe shares the same commitment and enthusiasm and really sees this as a large brand for the head lice market. And so that's part of the reason for the delay.
Could you be stuck without a partner indefinitely, like if you pursued all avenues at this point? Or are there many more in your view to pursue?
Not yet. There are still opportunities. There's -- we're still confident that we will identify a partner and have the product launched. It's just taking a little more time than, obviously, we had originally anticipated.
Okay. Have you -- I may have missed it, but have you submitted the Pennsaid 2% dossier in Austria?
Not yet. So the plan all along was always to -- we were targeting fourth quarter, end of the fourth quarter of this year, so we're still making progress on that submission.
Okay. And when do you expect a decision in Switzerland?
It's, typically, it's about a 1-year review decision, so sort of aligned with what you would see in the United States, Canada and Europe. So that was -- that submission went in, in the middle of October, so yes, we would expect by sort of this time next year that we would have a decision on that.
Okay. And then is 1 of those 2 countries, Austria and Switzerland, going to be the reference state, reference member state for the product?
So the -- yes, so Austria is the reference member state for the Pennsaid 2% submission and then that -- following on from Austria's review will be Italy, Greece and Portugal. So these are the 4 markets that had originally approved the original version of Pennsaid back in the early 2000s. So the Swiss review is a separate process.
[Operator Instructions] There are no further questions at this time. You may proceed.
Great. Well, thanks, everyone, for listening into the call today. Thanks for the questions. And as always, if there are other questions, feel free to reach out to us through the IR page on our website and happy to arrange further follow-up discussions. Thanks.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.