Journey Medical Corp

NASDAQ:DERM

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to Journey Medical's First Quarter 2023 Financial Results and Corporate Update Conference Call. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of this call will be available approximately 1 hour after the end of the call for approximately 30 days.

I would now like to turn the call over to Matt Blazei of CORE IR, the company's Investor Relations firm. Please go ahead, sir.

[Matt Blazei]

Good afternoon, and thank you for participating in today's conference call. Joining me from Journey Medical Corporation's leadership team are Claude Maraoui, Co-Founder, President and Chief Executive Officer; and Joseph Benesch, Interim Chief Financial Officer.

During this call, management will be making forward-looking statements, including statements that address among other things, Journey Medical's expectations for future performance, operational results, financial condition and receipt of regulatory approvals. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Journey Medical's most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today and the company's press release that accompanies this call, particularly the cautionary statements in it.

Today's conference call includes non-GAAP financial measures that Journey Medical believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in the company's earnings press release.

The content of this call contains time-sensitive information that is accurate only as of today, May 22, 2023. Except as required by law, Journey Medical disclaims any obligation to publicly update or revise any information which reflect events or circumstances that occur after this call.

It is now my pleasure to turn the call over to Claude Maraoui, Co-Founder, President and Chief Executive Officer of Journey Medical.

[Claude Maraoui, executive]

Thanks, Matt. Good afternoon, and thanks to everyone for joining our first quarter 2023 conference call. Since Journey's inception, we have made significant investments and have committed to enhancing our commercial product, portfolio and infrastructure to position ourselves for future revenue growth.

For the first quarter of 2023, our total revenues were $12.2 million, which is lower than expected. Despite higher unit sales volumes and gross sales from period to period for Accutane, Amzeeq, Zilxi and Exelderm, our net product revenues for first quarter were unfavorably impacted by higher gross-to-net adjustments and lower unit sales volumes for Qbrexza, Targadox and Ximino. However, in April, we have already seen a bounce back in our product net revenues and lower gross-to-net adjustments from the isolated occurrences from the first quarter, particularly for Qbrexza.

For the remainder of 2023, we plan on achieving major clinical milestones in our Phase III clinical trials evaluating DFD-29 and for the treatment of papulopustular rosacea. During the first quarter of 2023, we made significant progress in achieving our goal of commercializing DFD-29. We achieved 100% enrollment in the clinical trials in January 2023 and reached the last patient-out milestone in May of 2023. We expect the top line data readout from the DFD-29 Phase III clinical trials in June of 2023, and anticipate filing a new drug application in the second half of 2023.

In addition, we announced completion of treatment in our Phase I clinical trial assessing the impact of DFD-29 on the microbial flora with no significant safety issues noted during the study.

The market opportunity for DFD-29 is immense, with an estimated 16 million people in the U.S. suffering from rosacea and as many as 415 million worldwide. The rosacea market continues to grow and had 3.6 million prescriptions in 2022, up from 3.4 million prescriptions in 2021, according to Symphony data.

The Phase II trial results for DFD-29 demonstrated nearly double the efficacy of Oraycea, which is the current market leader and standard of care with respect to both co-primary endpoints in the study, which were first, the reduction of inflammatory lesion count and second, Investigator Global Assessment success. Oraycea had approximately $300 million in prescription sales in 2022 according to Symphony data. Once approved and launched, we believe that DFD-29 will be able to achieve U.S. net sales in excess of $100 million annually, which to put in context, would eclipse Journeys' total revenue of $73.7 million in fiscal year 2022.

With the anticipated sequential revenue growth, beginning in the second quarter and ongoing efforts to maximize internal efficiencies, we expect our commercial operations to return to operating profitability. Through the combination of revenue growth and expense optimization, our goal for Journey is to be non-GAAP adjusted EBITDA positive for fiscal 2023.

Our plan on reducing SG&A is currently on track to exceed $12 million, beating our previous guidance of $5 million to $7 million. Our strategic focus on the continued expansion of our product portfolio through in-licensing, acquiring and developing novel dermatology products and future product candidates, combined with our industry-leading sales force, continues to be the cornerstone of our future growth.

With that, I'll now turn the call over to Joe, who will review our financial results for the first quarter.

[Joseph Benesch, executive]

Thank you, Claude, and hello, everyone. I will now review the company's financial results for the first quarter of 2023.

Our net product revenues for the first quarter of 2023 were $12.2 million, reflecting an $8.6 million decrease from the prior year quarter. While unit volumes and gross revenues were higher for Accutane, Amzeeq, Zilxi and Exelderm, total net product revenues for the first quarter of 2023 were negatively impacted by higher gross-to-net adjustments and lower unit sales volumes for Qbrexza, Targadox and Ximino.

Volume increases for Accutane and Zilxi and Exelderm contributed to an increase in net product revenue as compared to the prior year quarter. However, this increase was offset by higher coupon rebates as a result of higher deductible rate resets, which occur at the beginning of each year, greater discounts for Accutane and higher managed care rebates due to increased managed care costs.

Unit volume decreases for Targadox and Ximino contributed further to the overall decrease in product revenue. In addition, Targadox return experience increased from the prior year quarter leading to higher than prior year period returns. Targadox continues to be negatively affected by the impact of generic competition that began in December of 2021.

In March 2023, we modified our Ximino and Targadox co-pay savings programs, which will result in lower unit sales volumes. However, this will increase each brand's profitability.

Qbrexza unit volume decreased from the prior year quarter. However, Qbrexza gross-to-net adjustments increased from the prior year quarter as a result of higher coupon rate resets, greater managed care costs and higher government rebates from increases in certain state rebate programs. Qbrexza also experienced higher product returns from product lots sold by Dermira prior to the Qbrexza acquisition.

Cost of goods sold decreased $1.8 million from the prior year quarter, mainly due to a decrease in Qbrexza and Targadox royalties. Qbrexza royalty percent has contractually decreased by 10% in May of 2022 and was further reduced by an additional 12.5% in May of this year 2023.

R&D expenses increased by $800,000 from the prior year quarter, driven by our continuing clinical trial expenses for the development of DFD-29.

SG&A expenses decreased by $1.4 million to $13.3 million for the first quarter of 2023 from $14.7 million for the first quarter of 2022. The decrease of 10% is primarily due to decrease in legal costs associated with our patent litigation settlements in 2022 and expense reduction efforts, primarily in sales and marketing. These expense reduction efforts are part of an overall cost reduction initiative we implemented that is designed to improve operational efficiencies, optimize expenses and reduce overall costs.

In connection with the cost reduction initiative, we executed a headcount reduction to our sales force and implementing marketing cost cuts in the first quarter of 2023. We incurred onetime costs of approximately $500,000 in termination benefits due to the impacted employees, including severance payments.

Continuing to our net loss for the periods. Net loss to common shareholders was $10.1 million or $0.57 per share basic and diluted for the first quarter of 2023 compared to a net loss to common shareholders of $1.4 million or $0.08 per share of basic and diluted for the first quarter of 2022.

Our non-GAAP adjusted EBITDA for the first quarter of 2023 resulted in a net loss of $5.3 million or $0.30 per share basic and diluted versus net income of $2.3 million or $0.13 per share basic and $0.11 per share diluted for the first quarter of 2022. We expect sequential improvement in our non-GAAP adjusted EBITDA as we progress through 2023 and work towards our goal to be non-GAAP adjusted EBITDA positive for the fiscal year 2023.

Moving to cash. At March 31, 2023, we had $26.1 million in cash and cash equivalents and restricted cash. Also at March 31, 2023, we reclassified $8.75 million of cash from cash and cash equivalents to restricted cash on our balance sheet to reflect the minimum cash requirement ratio under our new amendment to our facility with East West Bank.

As a result of this recent amendment, we paid down $10 million on the term loan and closed the revolving credit facility. Also as a result, all previous financial covenants were removed. After the term loan is paid in full, which we may pay down at any time prior to maturity without penalty, we expect that our assets will be unencumbered and available to support a new borrowing relationship, which we plan to pursue along with our ongoing cost reduction initiatives in 2023. We may also seek to raise capital through additional debt or equity financing including through the use of our recently filed ATM program.

Thank you very much, and now I'll turn it back to Claude.

[Claude Maraoui, executive]

Thank you, Joe. Our strategy with our product portfolio expansion was designed to pivot during the life cycle challenges we have faced with Targadox. We remain optimistic about the future performance of our newly launched products throughout 2023. We are also excited about the recent completion for both Phase III clinical trials for DFD-29 and near-term top line results.

Additionally, we anticipate sequential net revenue growth throughout 2023 beginning in the second quarter and expect further reductions in SG&A from our previous guidance of $5 million to $7 million to result in SG&A annual savings in excess of $12 million when compared to 2022.

Finally, as mentioned before, our goal continues to be achieving non-GAAP adjusted EBITDA positive for fiscal year 2023. We look forward to sharing our ongoing progress when we report our second quarter results in August. Thank you very much.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.