Photocure ASA

OSE:PHO

Earnings Call Transcript 2019-Q1

[Daniel Schneider, President & CEO]

Welcome to Photocure's first quarter 2019 update. I'm Dan Schneider, President and CEO. With me today also is Erik Dahl, the CFO for Photocure.I'll take you through a number of slides kicking off and then I'll hand it over to Erik for financials and I'll wrap up at the end, if that's okay. All right. Reminder, today as usual disclaimers are in effect for today's presentation. So 2019 objectives, simply put this is going to be a year about focused execution but we're off to a great start. Q1 revenue growth in the US was up 52% and in market volume up 44%. This is the highest unit and revenue quarter to date for Photocure. We had a 51% growth in year-over-year installed Blue Light enabled cystoscopes in the market bringing the total to 171, of which 11 are flex cystoscopes and I'll talk a little more about the process of getting these scopes put into hospitals. It does take time. It is not an easy process. It's complicated and time consuming.Total Hexvix/Cysview revenue increased 26% year-over-year to NOK 51.2 million. This is the highest quarter ever and it is our sixth consecutive quarter with increased quarter-over-quarter sales. So we have a great momentum turning the corner into 2019. Our total in-market unit sales increased 7% in quarter one and this is the highest in-market sales ever in the history of Photocure. The momentum is clear, you can see in this depiction, the chart depicts an accelerated momentum that we intend to carry into 2019 and beyond years to come.This is a typical launch phase product with each quarter setting all-time record highs and you can see the acceleration of the past several quarters. Underlying that growth in momentum is the placement of cystoscopes into the market and this is a key to our future as we bring on new accounts and expand the Blue Light Cystoscopy market. This quick chart is showing the accelerated momentum of the cystoscopes in particular the last 2 years. Keep in mind there is a similar sales cycle to that of rigid for the flexible cystoscopy and cystoscopes, it's a complex and long process.Let me just take you through a little bit of what happens. A representative meets with the urologist, finds a urology champion, develops that champion, gets them sold on Blue Light Cystoscopy in the need for Cysview put into their practice, they then bring the product to a VAC committee, value-add committee, which could be scheduled 2, 3, 4 months out, they bring it to a [ PINTE ] committee to get the product approved, then they go through a capital equipment acquisition process, which requires approvals and purchasing.They then coordinate with KARL STORZ -- at least in the US with KARL STORZ, who is our equipment supplier for the delivery and installation of that equipment. As you can see, this process is going over months, not days, not weeks but months. And finally, once installed they're trained by our surgical sales specialists as well as the key account managers of KARL STORZ, educating them and implementing the processes necessary to bring patients this benefit. And then, of course, is the ongoing support. Key to this is once you get the cystoscope installed, is expanding its use both from the number of urologists that will access the equipment as well as the types of patients they'll treat. This process can take upwards of 12 months or longer. So, one of the patients from your perspective, and I completely understand it, I can say to you with all honesty coming into Photocure 6, 7 months ago, that's what struck me the most, it's also a very good selling point for Photocure, makes it difficult for others to enter when you've got this type of process behind it.But the process is long, but, I'm here to also let you know that we have a very strong pipeline and are working that actively month-to-month and we expect this continued momentum into 2019 and beyond. Our strategic focus is on transforming cancer detection and management. Hexvix/Cysview sales are roughly NOK 35 million in 2018. We have treated over 0.5 million patients, which is a milestone for Photocure in any product in the market.From a competitive position, our product is a drug-device platform that requires account and capital equipment company coordination, which I just took you through, is therefore not a product that generic manufacturers would necessarily find attractive and as of our last market scan, there were no known organizations pursuing alternative diagnostics for bladder cancer in this space.We see significant growth prospects in particular in the US, with the label extensions into the flexible cystoscopy or surveillance market which is 3 to 4x the size of the rigid surgical market. We have very strong relations with our uro-oncologists, unique to this product is the fact that our representatives have to work very closely with urologists. It's not like a pharmaceutical product where you go in, detail the physician and walk out leaving samples. This actually requires our representatives to stand side-by-side with those physicians and walk them through the procedure and looking at the screens. That also makes us a very attractive partner to other commercial organizations looking for a partner in the US or worldwide.These slides you've seen before, but just -- it sort of lays up the market opportunity and a perspective vis-a-vis, the disease state. Bladder cancer is the fourth most common cancer in the US and the fifth most common in the EU 7, has a 50% recurrence rate and requires ongoing surveillance. There are over 200,000 new patients diagnosed with bladder cancer each year and in the US alone, 80,000. There are still 16,000 plus deaths in the US due to bladder cancer. This comes usually with inadequate management and surveillance through the patient's disease state. 40% of the patients are mid-to-high risk, which is the sweet spot for our product. It's a manageable cancer with proper detection and we believe Hexvix/Cysview has no equal diagnostic in the market.The feature and benefit: why use Blue Light Cystoscopy? With Blue Light Cystoscopy, additional tumors are found in 25% of the patients and remember bladder cancer is a treatable disease if you detect it early and treat it completely. Cysview's benefits are clear, it has a significant reduction of disease reoccurrence, a reduction in disease progression, potential for reduction in cystectomies and improved cost benefit for health outcomes. With our product, there is a potential for one in 4 patients without our product. There is a potential for one in 4 patients to go home believing they are cancer free. Meanwhile, something treatable becomes far more serious for that patient. Cysview/Hexvix can change that dynamic.The opportunity in the US is quite large. We have less than a 5% penetration and we are in the beginning phase of launch not only in the flex surveillance market but I'd argue also in the rigid surgical market.We started our investment program in early 2018 and we have carried it into 2019. It's now about focused execution, optimizing our commercial resources, increasing Blue Light Cystoscopy awareness, expanding the installed Blue Light Cystoscopes in the market and increasing the number of procedures that are done in each clinic and hospital. And there are 5 keys to their success, the 5 As. Our ambition is clear, we would like Cysview/Hexvix to become the standard of care. To achieve the lofty goal, there are 5 key things that need to be in place to succeed and I'm happy to say we have them in place. First, an approval and expanded [ PI ]. We have an PI that covers most of the patients.Most of the patients, their -- oh, boy, I've lost my words but the patient journey. Both in the surgical, where there are over 300,000 patients in the US in surveillance with 1.4 million cystoscopies, bringing the total of 1.7 million cystoscopies done a year. We have acceptance in all the major guidelines as well as included flex and surveillance in the recently published expert consensus guidelines in May of 2019, which we'll talk about shortly. We have access and reimbursement, a permanent A code replacing a temporary C code in 2018, increasing the complexity adjustment, offering a favorable economic in all settings of care. We have activated awareness, we have increased patient and physician demand in the marketplace and acceleration in commercial. As we turn into 2019, we have optimized our commercial footprint and focused our execution to drive maximum return on opportunities and investments.I'll illustrate each of these 5 As over the future slides but, I would argue that getting one A in school is really good, having 5 is a home run and we feel like we're in a good place. First, approval to treat patients throughout the journey. We're focused on the top 2 sections of the pyramid, where Hexvix/Cysview show the greatest economic and health benefit. Flex remains the market 3 times larger than surgical providing a tremendous growth opportunity for Photocure.Acceptance, by experts and urologic associations, getting into guidelines are absolutely crucial to awareness acceptance and adoption in the marketplace. Hexvix/Cysview are featured in all the major guidelines around the globe. These guidelines are now being translated and adopted by local institutions. Acceptance, our 2 most recent publications in the past 30 days underscore the importance of establishing Blue Light Cystoscopy in the surveillance and management of bladder cancer patients. Our new expert consensus guidelines will be important to institutions and health plans looking to map out the appropriate treatment regime for bladder cancer patients. From diagnosis to surgery to surveillance, Blue Light Cystoscopy with Cysview and Hexvix is positioned for complete patient care.Acceptance, by key institutions; key to oncology products is the adoption of key reference centers. Now, with expanded US sales team, we are aiming to get 100% adoption by these most reputable institutions in the United States. These reference centers set the standard for patient care.Access and reimbursement; we now have a permanent and favorable reimbursement for Blue Light Cystoscopy and Cysview in all settings of care, both moving to the A code as well as the increased complexity adjustment.Activated awareness; this is a recent survey results from our close collaboration with BCAN, the Bladder Cancer Advocacy group in the US. Over the past 4 years, Cysview and Blue Light Cystoscopy awareness by bladder cancer patients has increased each year. We currently are at 99% awareness and active seek by patients looking for Blue Light Cystoscopy. We have expanded the sales team footprint, improved reimbursement and positive practice economics. We intend to take Blue Light Cystoscopy readily available to all patients who desire more complete and thorough diagnosis and treatment.Activated awareness; we had a great presence at AUA, the American Urologic Association, just a few weeks ago. We had a large booth with KOL videos, data and a model bladder for hands-on demonstrations. We had several presentations by key KOLs, Dr. Konety and Dr. Lotan. We had poster presentations on the data from the flexible Cystoscopy Nordic patient registry. An interesting observation was that there were many presentations unbeknownst to us here at Photocure talking about cystoscopies and TURBTs that show Blue Light Cystoscopy as a diagnostic of choice. In fact, there were 12 different sessions in all that highlighted Blue Light Cystoscopy, sorry about that, apologize, in Cysview in the settings. This is further positioning us to be the standard of care.Awareness: also at the European Association Urology in March, we had a main stage plenary session with a presentation done by Dr. Lotan on flexible cystoscopy in the surveillance market. During the Q&A, he was asked about his use. He's performed over 80 cases since the fall when he started. His message was very clear. He said, “Patients are returning for follow-ups and demanding Blue Light Cystoscopy and Cysview.” So even if he in his own thinking don't believe that they would need Blue Light that they could actually get away with white light. The patients are now demanding it. which is a great sign.Awareness online: we have a strong and consistent media and advertising campaign on key web sites visited by urologists. Here's an example of HCP UroToday and UroCare, which focuses on large group practices. In activated commercial investment: we have the right commercial investment to capitalize on the opportunity and maximize returns targeting the top 750 accounts plus large integrated delivery networks like Kaiser etc and large group urology practices. With focused execution, we'll achieve our ambition to make Cysview the standard of care in bladder cancer.I'd like to turn over to Erik.

[Erik Dahl, Chief Financial Officer]

Thank you, Dan. Well, as usual, my part of the presentation will be a financial review of our 2 segments. We will follow on with the consolidated income statement. We'll do the cash flow and finally the balance sheet. But before we do that, a couple of comments related to foreign exchange impact as well as implementation of the IFRS 16 on the results. First quarter FX impacts was for revenue positive. Let's change this -- was for revenue positive, approximately NOK 2 million and for EBITDA, we had no significant impact from foreign exchange as we had a negative impact on the operating expenses.Regarding IFRS 16, you will find the information in the Note 1 and 3 to the accounts. We have adopted IFRS 16 for lease accounting from January 1 and the impact on the income statement is that the rental cost of the company leases is replaced by amortization of [ right-of-lease ] assets. Overall, and very simplified, we have a lease expense, so NOK 1 million in Q1 that due to IFRS 16 is being replaced by an amortization of approximately the same amount.With this, we will discuss the financials and just to remind you, all amounts here are in Norwegian kroner, unless I specify differently.First the segments. And the first, the commercial franchise and we have 3 headlines. First of all, we had a strong revenue growth in the first quarter as we have had in the previous quarters. Secondly, we have continued our investments in the US as we have done in the previous quarters. And thirdly, we have had the positive EBITDA for the commercial segments as we also have had in the previous quarters.Total Hexvix/Cysview sales in Q1 increased 26% compared to Q1 2018 and in constant currencies, the growth was approximately 21%. In-market unit sales increased 7% in the first quarter compared to last year. We have a strong growth in US. In US dollars, we had a 52% revenue growth in the quarter and this was mainly driven by a growth in the in-market unit sales to 44%.The US sales improvement reflects improved productivity as well as added sales resources. Furthermore, sales have been impacted by improved reimbursement in the country, which again has driven a significant growth in the installed base of Blue Light Cystoscopes. A total of 171 cystoscopes was installed at the end of the first quarter, of which 11 was flex scopes and this is a growth of about 51% compared to -- over the last 12 months.Nordic revenues increased 8% in the first quarter, the increase in constant currencies were approximately at the same level. In-market unit sales increased 13% in the quarter and was mainly driven by a significant increase in Denmark, 30% from first quarter last year. Our partner business had a revenue increase of 7% in the first quarter; measured in constant currencies, the increase was approximately 6% and the in-market unit sales were at level with 2018 for the quarter. We had a good increase in Germany but we had declines in a number of other countries.Total revenue, including milestones and other sales, increased 26% in the quarter. Included in other revenues, we have IFRS 15 adjustments of NOK 0.8 million for the quarter. Operating expenses within the commercial segment increased 21% in Q1, same percentage as for the full year 2018. This increase was as in 2018 planned and is within sales and marketing costs in the US. Recurring EBITDA for the commercial segment was NOK 1.7 million in the first quarter. EBITDA margin of 3% compared to 2% the first quarter last year.A few words about the development portfolio. We continue to show significant declines in operating cost, fully loaded cost in the first quarter was NOK 3.2 million compared to first quarter last year of NOK 5 million, so it's a decline of 36% year-over-year. The decline is driven by a reduction in capacity due to the restructuring that we did in 2018 as well as lower activity level.Moving onto the consolidated income statement. We continue to improve recurring EBITDA. This improvement is driven by revenue increase particularly in US. We increased our revenue in total with 26% year-over-year in the first quarter. Our operating cost increased 14% in Q1 compared to Q1 2018 but was flat with fourth quarter 2018. We have a significant reduction in R&D cost as well as other operating expenses, which are offset by increase in sales and marketing costs mainly in US.In the first quarter, our R&D costs declined 61% while sales and marketing cost increased 33%. The first quarter recurring EBITDA improved with NOK 2.5 million to negative NOK 1.5million. The EBITDA is positively impacted by IFRS 16 lease accounting by approximately NOK 1 million. Depreciation and amortization were in the quarter NOK 4.2 million, the increase from last year is NOK 1 million, which is driven by IFRS 16 lease accounting.The main single item within depreciation and amortization is the amortization of the investments in the Cysview Phase 3 program. This item has a quarterly amortization of approximately NOK 2.5 million. This project is, obviously, closed and the remaining amount on the balance sheet was NOK 17.1 million at the end of the first quarter.[ And after ] net financial items and tax, we have in the first quarter a net loss of NOK 4.9 million compared with a net loss of NOK 3 million last year. Cash flow, net cash flow from operations negative NOK 15.7 million in the first quarter compared to NOK 18.5 million in 2018. First quarter improvement in operational cash flow was driven mainly by improved EBITDA that partly offset by a one-off working capital change of NOK 3.2 million relating to the 2018 restructuring we did.Cash flow from investment, fairly limited, first quarter positive NOK 0.5 million at level with first quarter 2018 and this amount reflects interest income in the quarter. Cash flow from financing, first quarter negative NOK 0.2 million, mainly driven by a small share issue in the first quarter for the long-term incentive program for employees, which were offset by payments of lease liabilities classified according to IFRS 16.Net cash flow was negative NOK 15.9 million in the first quarter compared to negative NOK 18.6 million first quarter last year. And if you adjust for the one-off cash outlay related to restructuring in the first quarter, which was NOK 3.2 million, we have an improvement from 2018 of NOK 6.4 million. And based on this, we end the first quarter with a cash balance of NOK 91.4 million.Balance sheet; at the end of the first quarter we had total assets of NOK 232 million, this included cash totaling NOK 91 million. Non-current assets was NOK 84.9 million at the quarter end and this includes the tax asset of NOK 53.4 million. The asset was reassessed at the end of 2018 based on the change in the tax rate in Norway going from 23% to 22%.Furthermore, non-current assets include investments in tangible and intangible assets of NOK 21.5 million and these investments are mainly related to the intangible assets related to the Cysview Phase 3 program. We also find a new line and other line in the balance sheet. This line is a part of -- this mainly relates to the balance sheet impact of adoption of IFRS 16 on lease accounting from January 1, 2019. We have a similar increase in long-term liabilities also driven by IFRS 16 and you will find an explanation of these amounts under the Note 1 and 3 to the accounts.Current assets excluding cash is NOK 56.1 million. We have, obviously, had a revenue driven increase in accounts receivable. In addition, a significant part of the first quarter billing took place at the end of the quarter, which have increased our receivables above what we would normally see in the quarter.In terms of funding, company had at the end of the quarter no interest bearing debt and equity of NOK 172 million, which reflects 74% of total assets.Couple of final comments, financial takeaways from the first quarter. We continue to invest in the US commercial structure with positive results in terms of increased revenue. We have a U.S. revenue growth measured in dollars of 52% in the quarter and this growth is mainly driven by increased volume. The investments in US commercial activities have increased the sales and marketing expenses in the company. On the other hand, we have reduced the R&D cost and other operating costs and have thereby limited the overall cost increase for the company.We ended the quarter for the company with 26% revenue growth and 14% growth in operating expenses. We are on track as we are improving EBITDA. This quarter, we improved EBITDA with NOK 2.5 millionThis concludes my part of the presentation.

[Daniel Schneider, President & CEO]

Alright. Thank you, Erik. Thank you, everyone. I underscore that we're really in the early stages of both the flexible Cystoscopy and the Rigid Cystoscopy launches in particular in the US. But as I mentioned in my presentation, the 5 A's are in place. What it takes now is patience, persistence and focused execution and we're in a very good position as we turn into 2019 and beyond. It was only recently we got these tailwinds. We need to continue accelerate Cysview in the US. We have strengthened our customer facing teams and we are holding our partners worldwide accountable for performance.Our 2020 financial guidance is $20 million to $25 million in the US. which represents a 60% year-over-year growth as we go from $7.8 million in 2018 to over $20 million in 2 year, driven by rigid and flex kicking in later this year. We feel that which is an achievable goal. We expect significant and sustainable revenue growth and profit opportunities in the US beyond 2020. Again patience, persistence and focused execution in 2019 will get us there.With that, thank you and we'll take questions.

[Unknown Analyst]

I would like to ask one question from the medical point of view. I'm a urologist and you are -- the FDA approvement is dependent on the use of STORZ cystoscopes. Are you trying to loosen this connection because a lot of urologists they use other scopes and in the future, we could guess that a lot of disposable flexible cystoscopes will be used in the outpatient clinic.

[Daniel Schneider, President & CEO]

Yes. So the short answer is yes. We're talking both to Olympus and Wolf around entering into the US market with Blue Light Cystoscopes and then we are keeping eye as well on the disposal market, we see that as an opportunity as well into the future. So on all fronts, absolutely.

[Unknown Analyst]

In your final remarks, you said that you are in the early stages of launch, in particular the US. Well, that's correct with regards to the US but in Europe, you're not in the first phase so to say, you didn't touch upon Ipsen and their poor performance. Can you say a little bit about what you are doing in that regard and how Ipsen is expected to…

[Daniel Schneider, President & CEO]

You're right. I didn't -- what I said was we're holding our partners extremely accountable for performance. And that has happened. We had a slight improvement, obviously, in this first quarter of 7% growth by Ipsen, but it's not where we expect it to be. I think in particular the flexible cystoscopy market is something that's a real opportunity for them. At EAU, we mentioned Dr. Lotan presented to the European Urologic Group on the use of flexible cystoscopy, it had a lot of interest. We had a very packed house for that. So we are putting as much pressure on our partner as we can. Obviously, all other options, it is a contractual arrangement, all options are always on the table for those sorts of things. But it is something that we are doing actively, very actively.

[Unknown Analyst]

Thank you for the presentation. I was just wondering, relating to the sales reps, has there's been any changes in the number of sales reps compared to last quarter?

[Daniel Schneider, President & CEO]

There's been no change in the number of territories per se. We have 27 sales territories in the US. That is an increase over last year, however, I just want to reiterate that most of the positions going from – [ was ] on average in early well late 2017 to 2018, those increased in 2018. We repurposed individuals who were moved into overhead positions back into sales rep positions. So individuals that were training specialists or reimbursement specialists, we did need them in those roles. We're hiring much more experienced sales reps now, the training isn't quite as extensive. We also have better reimbursements so the reimbursement support isn't needed. So, those 4 individuals who were in those roles, who actually were our best sales reps in the US, were moved back into sales roles and why not, right, use your best people to do the job you need most, which is the customer facing revenue-generating roles. So the territories have remained the same. We have a couple vacancies as you'd expect and those will be filled through the first half of this year. But we are intending to be at full 27 reps plus 4 corporate account guys in the US in the next near future 30 days or so.

[Unknown Analyst]

A question about the surveillance market, could you give us any experiences or impression from the development of that market these 4 or 5 months?

[Daniel Schneider, President & CEO]

Yes, so it is a long process that I mentioned. I guess, we'll separate the 2 between the rigid cystoscopy and the surveillance cystoscopy. The rigid cystoscopy is done in the hospitals. Hospitals have very, for the most part, very set processes to devices and drugs through their hospitals, it does take a minimum of 6 months and upwards of 12 and 18 months to get those installed. On the flexible or surveillance side, it's a lot of group practice physician groups that are operating. And in the US, in particular, they have to make the conscious decision to invest over $100,000 in a new Blue Light Cystoscope for cystoscopies. And that process can take a little bit longer, it's, obviously, these physicians own the financial impact, that capital acquisition hospital's got hundreds of millions of dollars, a large group practice not quite as much but what we're trying to do and what we do is shown the economic benefit as well as the patient benefit in terms of the benefits we talked about, which is reduction recurrences, less TURBTs, potentially less cystectomies, better overall patient outcomes. So, it is a process, it takes time, we're early. I think we're still very early. We got our approval mid-year last year. By time, we got into market and really got our feet under us, it was probably late third, fourth quarter. So if you look at it, we're really about 5 to 6 months into this process. And again, this process of bringing this equipment in and getting physicians to use it is one part of the process. The second part is, once you have it installed, then you have to train them. There is a process you have to put into the program -- into the physician's practice. Typically under white light, the patient walks in and goes right into a cystoscopy procedure, with our product, you have to go in an hour early to get instilled with Cysview or Hexvix. So there's a change in process. So, physicians are doing everything from moving blue light patients to -- on a Friday or just on a Thursday. So they know the processes in place for that day and the nurses know what they need to do to better scheduling overall. And then once you have the process embedded, then the key is -- when you started you may have had one, may 2 urologists using that one scope out of 6, 8, 10, 12. You want to get more urologists using it, so then -- because they're all seeing their own patients and they're learning from each other. And then on top of that, you want to expand the patients that they're treating. So they may start-off in their mind with what they think are may be more of the train wrecks, the really high risk patients. And we want to move them into an intermediate if not even earlier in the process. So, it is -- that process doesn't happen overnight, it takes time and this is a high touch sale. The representatives have to be in those offices or in those procedures from time-to-time. We are contemplating other sort of commercial structures to support it. So we have a -- I think I mentioned the last time at quarter 4, hunters and the farmers, so the hunters are out hunting getting new accounts, bring them up to speed installing them. But farmers might come in behind them and generate more urologists using and more patients receiving Cysview or Hexvix.Does that help?

[Unknown Analyst]

Yes, good.

[Daniel Schneider, President & CEO]

Any more questions?

[Erik Dahl, Chief Financial Officer]

There is one question from the web and that is related to Cevira and Visonac, what the status is?

[Daniel Schneider, President & CEO]

The status remains the same, we're actively looking for partners. Both products are Phase 3 ready. We believe in particular Cevira is a viable product and we're looking for a partner. And that process is ongoing and I'll update everyone when we have more information to share. But we're not ready to write those out of the books yet. So more to come. All right, great. Well, thank you all for joining. And we look forward to see you in quarter 2 result update. Thank you.