HLS Therapeutics Inc

TSX:HLS

Earnings Call Transcript 2019-Q1

[Operator]

Good morning and welcome to the Q1 Fiscal 2019 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 months ended March 31, 2019. 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 or 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 results are detailed in the company's annual information form dated April 1, 2019, 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 IFRS. Adjusted EBITDA is defined in the company's press release and annual filings that are available on SEDAR and on the company's website. Please note that all financial information provided is in U.S. dollars unless otherwise specified.I would now like to turn the meeting over to Mr. Gubitz. Please go ahead, sir.

[Gregory David Gubitz, Co]

Thank you, operator. Good morning, everyone, and thank you for joining us on the call. In terms of an agenda today, I'll start off with a look at our activity during the 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.Q1 was a solid start for the year with good financial performance from our foundational products, positive new developments with Vascepa and concrete steps taken to expand our product portfolio. Revenue was $13.2 million, adjusted EBITDA was $8.3 million and cash generated from operations was also $8.3 million. With Vascepa, we had several notable developments in the quarter and subsequent to it we were granted priority review status by Health Canada for Vascepa, which reduces the time period by up to 4.5 months. Priority review is generally granted if 3 conditions are met: one, the drug addresses a serious life-threatening condition; two, there is no medication currently in the market to address that condition; and three, there is substantial evidence of clinical effectiveness of that new treatment. Health Canada agreed that Vascepa met each component of this definition. And hence, it was granted priority review. Subsequent to the quarter-end, on April 29, we announced that we have filed our new drug submission for Vascepa with Health Canada. We look forward to working with Health Canada in the coming months to bring this innovative therapy to Canadians. In Q1, Amarin released positive new data that extends the scope of consistent effects of Vascepa beyond the patient's first major adverse cardiac event, or MACE, to all subsequent MACE events, including cardiovascular death. The new data showed that Vascepa reduced total major adverse cardiac events [ being ] first and subsequent events by 30% compared to placebo for patients studied over the 5-year period in the REDUCE-IT trial. These are very strong results building on the already very significant risk reduction REDUCE-IT trial results previously disclosed.Finally, regarding Vascepa, in March, the American Diabetes Association issued updates to their standards of medical care for diabetes for 2019. In its update, the ADA stated that for patients with diabetes and atherosclerotic cardiovascular disease or other cardiovascular risk factors that are stabilized on a statin but have elevated triglycerides that icosapent ethyl, or Vascepa, should be considered to reduce cardiovascular risk. While we are very focused on Vascepa, we also continue to work towards expanding our product portfolio. With our earnings release today, we announced that we acquired a license for the Canadian rights to PERSERIS, a novel long-acting injectable risperidone product for the treatment of schizophrenia [ that is ] already approved by the FDA in the U.S. And our view of this product to bring another treatment option to patients and practitioners contending with this very difficult disease state and from a business perspective is a very nice complement to our existing CNS franchise. Under terms of the agreement, HLS will pay $1 million up front and up to $4 million in regulatory and pre-commercial milestones, along with tiered double-digit sales royalties. We believe we have structured the transaction to be in line with our risk-return profiles. As most of you know, in Q1, we in-licensed the exclusive Canadian rights for CSAN Pronto, a point-of-care medical device that uses just a single drop of blood from a finger-stick test and that produces blood results in minutes. The conventional mandatory venous blood monitoring process has been cited as a major barrier leading to underutilization of clozapine. CSAN Pronto was designed to help simplify the mandatory safety blood monitoring process for treatment-resistant schizophrenic patients that are prescribed Clozaril or clozapine and to potentially provide better access for those patients to that proven treatment. The device has already been cleared in the U.S. by the FDA, and we filed it for review with Health Canada in Q1. We believe this initiative fits very well with our Clozaril franchise.And finally, on the operational front in Q1, a few additional highlights. We paid a $0.05 per common share dividend and declared another dividend, which will be paid in June. We reduced our interest expense by more than 60%, owing to the debt restructuring we closed in 2018. We added Laura Brege, an experienced health care executive with extensive life science public company background to our Board and to our audit committee. And we graduated to the TSX Senior Exchange after having been listed on the TSX Venture Exchange for only about 1 year.In sum, it was a very busy and productive quarter with many exciting developments to look forward to throughout the rest of 2019 and beyond.And with that, I'll turn it over to Gilbert for a look at the broader product portfolio. Gilbert?

[Gilbert Godin, President & COO]

Thank you, Greg, and good morning, everyone. I will start with a look at our growth-oriented products, Vascepa and Trinomia. As Greg mentioned, we received priority review for Vascepa and announced the filing of our new drug submission with Health Canada on April 29. The proposed indication for Vascepa is to reduce the risk of major adverse cardiovascular events. And more specifically, here, we're talking of death due to cardiovascular event, myocardial infarction, stroke, surgical bypass and acute unstable angina in statin-treated patients with elevated triglycerides and other risk factors. Priority review shortens the standard review window to 215 days from 355 days. Based on that, we would expect to receive communication on the submission at the end of November or beginning of December. If the product is approved, we will target a commercial launch into February 2020 time frame. With the filing completed, we will remain available to work with Health Canada during the review process. And at the same time, we will continue to prepare the launch and be ready to enact our commercialization strategy and hit the ground running in early 2020. Greg touched on a couple of other positive developments in Q1 related to Vascepa. Namely, the new data showing that taking Vascepa reduced total events, first and subsequent events, by 30% compared to placebo. The data showed that approximately 159 major cardiac events could be prevented with Vascepa for every 1,000 patients treated over a period of 5 years when compared to placebo. This is an impressive degree of risk reduction. From a 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 event is dramatic and costly. We believe that reducing approximately 159 events like strokes, heart attacks and the need for bypass surgery for every 1,000 patients treated should translate into a clear patient and payer benefit. As we've said previously, we believe Vascepa could generate revenue in Canada in a range of CAD 150 million to CAD 250 million per year. We believe this is a conservative view, and this new data certainly gives us greater confidence in our outlook. Like Vascepa, our second product in the growth category -- growth-oriented category is Trinomia, it's also in the cardiovascular space. We are currently conducting bioequivalence studies with our partner, Ferrer, with the objective to bridge the existing product data for Trinomia to the individual Canadian reference products. We estimate the study will be completed during the third quarter. Assuming the study is conclusive, we will look to file Trinomia in the fourth quarter of this year with commercialization to follow about a year later and about a year after the launch of Vascepa. As it turns out, the additional time to complete the studies will allow our cardiovascular sales force to be focused entirely on Vascepa.Moving on to Absorica. Our royalty revenues were $1 million higher in Q1 than in the same period a year ago but down sequentially from the last quarter. Market share and prescription volume both appears to be stable. As most of you know, Absorica was a smart tactical opportunity for HLS, and it is more of a royalty play for us, a passive transaction.Looking now at Clozaril, the foundation of our CNS franchise and a key driver of cash flows to support and grow the business. For the first quarter, Clozaril volumes were basically at the same level year-over-year. This was somewhat anticipated after a very strong Q4 2018 and actually a very strong year overall. Going forward, we are especially positive on Clozaril and its prospect for maintaining and even growing market share. We have spoken often of the relative underutilization of Clozaril or clozapine in Canada and U.S. and the factors driving that. We took steps in the first quarter to address what is often cited in the clinical literature as the biggest barrier to treatment with the announcement that we had in-licensed the exclusive Canadian rights to the CSAN Pronto device. 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 or clozapine. Clozaril is a potent drug indicated for patients that do not respond to first-line therapies. It may, in rare occasions, create a drop in a patient's white blood cell count and threaten their immune system. To mitigate the risk of this rare adverse event, mandatory blood testing is required for a patient to be able to start and remain on Clozaril therapy. As a result, in the first year of treatment, a minimum of 39 venous blood draws are required to monitor patients with 12 or more venous blood draws required in each year thereafter that the patient remains on the medication. Patients nonadherence to blood work and the burden of the blood work regimen on the patients are the most widely cited barriers to the use of clozapine. Traditional blood monitoring requires patient to undergo venous blood draws at the laboratory or at the clinic, and results are typically available a day or 2 later for reviews by the health care practitioner. CSAN Pronto is designed to streamline blood testing for both patients and health care practitioners by enabling patients to have their blood monitoring work done right in their health care provider's office and to receive test results during the same visit. In addition, only a single drop of blood obtained from a finger-stick blood test is required. Results are available to patients and practitioners in just minutes and can be immediately documented in the CSAN registry so that the patient can get their prescription without delays. 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. The device was filed for a review with Health Canada on January 31, and we expect to have a response from Health Canada by the end of the second quarter. A final note on Clozaril. We have terminated the commercialization agreement for the authorized generic of Clozaril in the U.S.A. While the prescription volumes for the authorized generics were noticeable, the endeavor never really got to a point of sustainable profitability. Hence, we have decided to terminate this tactical program and repatriate the product rights under HLS. We are studying other ways that could put the NDA and the authorized generics to good use in the U.S.A.And finally, I will conclude with a few words on PERSERIS. We acquired the license from the -- for the Canadian rights to this schizophrenia medication from Indivior PLC. While Clozaril is indicated for treatment-resistant schizophrenia and is considered a drug of last recourse for patients that are not responding or partially responding to first-line antipsychotics, PERSERIS has the potential to become a broadly used therapy for first-line schizophrenia. PERSERIS was approved by the FDA in July 2018 and is the first once-per-month subcutaneous, and that means under the skin rather than intramuscular, long-acting injectable for the treatment of adult schizophrenia. PERSERIS contains risperidone, a well-established treatment for schizophrenia and uses an extended-release delivery system to form a subcutaneous deposit that provides sustained levels of risperidone over a 1-month period. This opportunity could allow us to directly leverage HLS' commercial infrastructure, relationships and reach in the Canadian psychiatric market while delivering a new clinically meaningful therapeutic option for patients with schizophrenia. PERSERIS has not been approved by Health Canada. And at this time, we expect to submit our filing to Health Canada in the second half of this year.With that, I will pass it off to Tim to look at the financials.

[Tim Hendrickson, Chief Financial Officer]

Thanks, Gilbert, and good morning, everyone. I'll take a few minutes here to drill down into some of the key numbers and metrics from Q1. Starting with revenue. Canadian Clozaril results in Q1 were in line with expectations and were essentially flat compared to a year ago in Canadian dollar terms. As a result of fluctuations in exchange rates, Canadian Clozaril product sales decreased by 5.5% for the quarter when the results were translated to U.S. dollars. Clozaril continued to experience modest volume declines in the U.S. market, offset by the impact of a nominal price increase last year resulting in a modest increase in Clozaril gross revenues year-over-year. Per Gilbert's comments, there were no authorized generic supplies in Q1 as we continue to explore options for the optimal strategy in this area. As we've said in the past, the authorized generic sales have not been contributing to our adjusted EBITDA margin and cash flow, though the financial impact of this program has not been material to date. On our Q4 call, we have said that in both Canada and the U.S., product sales benefited from typically strongest results in the fourth quarter due to customer inventory dynamics, which then tend to resolve themselves in the first quarter of the next year. And this again played out this year. So overall, there is some modest seasonal impact to Clozaril to consider in the Q1 period. As Gilbert mentioned, in Q1, we saw that royalty revenue from Absorica increased $1 million year-over-year.Regarding operating expenses. Cost of product sales decreased in the first quarter of 2019, 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 higher patient registry program costs following a temporary reduction in these costs in the earlier period, additional commercial activity to prepare and support the planned introductions of Vascepa and CSAN Pronto to the Canadian market and additional public company costs. With Vascepa now filed with Health Canada for review and with a clearer time line to commercialization, we do expect to see some ramp on related expenses beginning in Q2 and rising gradually through the year. We've spoken previously of these commercialization launch costs being in a range of $4 million to $6 million in total for the year. Adjusted EBITDA in Q1 was $8.3 million, which is indicative of the steady and reliable performance of our foundational products. Year-over-year adjusted EBITDA was down approximately $300,000 due primarily to higher operating costs such as patient registry program costs and additional activity to prepare for the planned introductions of Vascepa and CSAN Pronto. Cash interest expense on the senior secured term loan was $1.6 million compared to $4.1 million in Q1 2018. The decrease in interest is due to the refinancing of the company's debt in August 2018. The company's current debt structure has both a lower principal amount outstanding and a lower interest rate than its original debt facility. The decrease in Q1 interest expense is consistent with the expected savings of $10 million per year in cash interest expenses. As at March 31, 2019, the principal debt balance outstanding under the new senior secured term facility was $97.5 million compared to $98.75 million dollars at December 31, 2018. This compares with the original senior secured loan borrowing of $185 million at the company's inception and $137.9 million original loan balance at the end of Q2 2018, just prior to restructuring our debt. Cash from operations was strong in Q1 at $8.3 million, again, reflecting the steady performance of our foundational products. As at March 31, 2019, we had cash and cash equivalents of $12.8 million on the balance sheet compared to $10.9 million at December 31, 2018. On the bottom line, net loss in Q1 2019 was $3.7 million compared to a net loss of $4.9 million in Q1 2018. Net loss improved year-over-year due primarily to the $2.5 million decrease in interest expense, offset in part by the increase in operating expenses described earlier.And finally, regarding the dividend, as Greg mentioned, in Q1, we paid a dividend of CAD 0.05 per outstanding common share and declared another dividend to be paid on June 14, 2019, to shareholders of record as of April 30, 2019. In addition to that, yesterday, on May 8, the Board of Directors declared a future dividend of CAD 0.05 per outstanding common share, which is to be paid on September 13, 2019, to shareholders of record as of July 31, 2019.And with that, I'll pass it back to Greg for his closing comments.

[Gregory David Gubitz, Co]

Thanks, Tim. In closing, Q1 was a busy and exciting start to the year with good financial performance, positive developments with Vascepa and promising signs towards expanding the product portfolio. Regarding CSAN Pronto and PERSERIS, we view both of these products as having important roles to play in supporting and strengthening the company's position in the Canadian CNS market by bringing new and innovated techniques and applications to address some of the treatment challenges that exist in the CNS therapeutic area. While we are still in the early stages on both, we believe CSAN pronto and PERSERIS can be meaningful products for HLS, and we believe we have structured the respective transactions to be in line with our risk-return profiles. That concludes my prepared remarks. At this point, I will ask the operator to please provide instructions for asking a question. Operator?

[Operator]

[Operator Instructions] You first question comes from the line of David Martin from Bloom Burton.

[David C. Martin, MD & Head of Equity Research]

I've got a couple of questions. So the Canadian sales of Clozaril had been rolling, and this quarter was flat year-over-year on a Canadian dollar basis, what about on a [ script ] basis? Was this flatness solely due to inventory fluctuations in the channel where the scripts actually are still growing?

[Gilbert Godin, President & COO]

Yes. I think that's the -- essentially, the message we wanted to convey. We, in Canada, as in most countries, will attend to quarter-over-quarter [ hold and trend-related ] synchronicity elements. In that case, it's nothing else than that. We're seeing cost and progressive demand for Clozaril remaining. And what we have alluded to is really the junction of 1 year over the other coming out of a very strong quarter and expecting the following one to essentially witness in that quarter a softness that we saw coming just because of the strength of previous one. I don't -- Tim, is there anything else you want to say?

[Tim Hendrickson, Chief Financial Officer]

I think that captures it. It really is a trade customer inventory dynamic that played out. Yes.

[Gilbert Godin, President & COO]

And one we've seen in the past, right? So if you were to compare that to previous years, it's been fairly consistent to first quarter, as always. And that's not uncommon in the industry, always a weaker quarter than the preceding one.

[David C. Martin, MD & Head of Equity Research]

Okay. On the PERSERIS product, is Risperdal Consta approved and marketed in Canada? And how is that product doing if it is?

[Gilbert Godin, President & COO]

Yes. Risperdal Consta is commercializing in Canada. Overall, I can talk about the market in general. And the long-acting market is really in its infancy in that about 5% -- I think the latest data is about 5% of the market is now represented by one form or the other of various long-acting formulations of the existing competitive set. It is expected to grow, however. And we could see as much as 35% or 40% of the market using long-acting formulas in the future. So we will see a growth within the market itself and a switch from [ boroughs ] to long-acting as physicians get more comfortable with the use of long-acting. Risperdal Consta has been on the market. It's a biweekly formulation. The benefit of the long-acting is that, of course, it ensures that patients remain and comply with their dosing regimen. And the 1-month time frame appears to be in the sweet spot in that it still allows the physician to visit with their patient periodically, but guarantees that between those visits, the patient is protected, so to speak, with an appropriate dosage of the antipsychotic. So that's pretty much what we can say at this point on this market. We think that the use of long-actings will grow. We think that the benefit of PERSERIS being a subcutaneous product as opposed to an intramuscular will present some benefit to many. The other benefit of this product is that there are no supplemental on top of oral doses or booster injections that are required. In other words, we reach clinically relevant dosages right from the get-go with the first dose. So all these elements will eventually, when the product is approved and goes to market, would essentially be the key features and benefits of PERSERIS.

[David C. Martin, MD & Head of Equity Research]

Okay. Switching to Vascepa. So Amarin in the U.S. reached a settlement with Teva, which show us the launch of Vascepa generic in August 2029, about 6 months before the Orange Book -- the last Orange Book patent expires. And at the same time, Amarin is also filing a new IP based on results of REDUCE-IT. So I have few questions on Canada. The first is, does Teva have the same [ rate ] in Canada to launch in 2029? And will there be patents filed in Canada based on REDUCE-IT? And how long should those patents protect HLS' visibility to sell Vascepa without generic competition?

[Gilbert Godin, President & COO]

Okay. Well, to your first question, no, there are no such rights for Teva in Canada. Together with our partner, Amarin, we have the rights to up to 10 patents, 6 are issued and 4 are currently pending. They relate to formulation, manufacturing claims and method-of-use claims. And the date of expiry of these patents here could -- will range from 2026 at the earliest to 2039 at the latest. The actual listing of each patent on the patent register will be subject to review and acceptance by Health Canada. In due course, we will be, I would say, discrete until we get to that point. These are elements that are competitively sensitive. But we think that we have a pretty strong hand with a good [ slate ] of patents to defend the franchise and also want to point out that some of the litigations ongoing in the U.S. are of no concern to us in Canada because they concern patents that are unlikely to be used by us in Canada.

[David C. Martin, MD & Head of Equity Research]

Is the 10 patents, do they include some of the ones that came out of REDUCE-IT?

[Gilbert Godin, President & COO]

Yes. They do.

[Operator]

[Operator Instructions] And your next question comes from Justin Keywood with JMP (sic) [ GMP ] Securities.

[Justin Keywood, Director of Equity Research]

Is there an expected time line for the filing of PERSERIS with Health Canada?

[Gilbert Godin, President & COO]

We assume, at this stage, that we will file in the back end of the year. Typically, once we have a dossier and all the data in our hand, it's a matter of approximately 3, 3.5 to 4 months to shape the filing and put it through. So we're really at the early days here. And as early as we can get our hands on the essential information will lead us to a filing, I think late in Q3 or early Q4 appears to be the likely time frame, we will present more specific time frame shortly on that.

[Justin Keywood, Director of Equity Research]

Okay. And I was wondering if you could comment on how this drug will be marketed alongside Clozaril or if it's completely different, and just how that dynamic will play out.

[Gilbert Godin, President & COO]

Yes. Well, it's actually very complementary to Clozaril. In other words, the patient bases in both cases do not overlap or they -- at some point, the patient is always when first diagnosed is a candidate to first-line therapy. But if shown to be nonrespondent or only partly responding to treatment, they become candidates to clozapine. This is by definition and by -- as per the indication. And therefore, us -- for us, the opportunity to have a product that we can promote and can allow us to grow our psychiatric franchise is -- as a first-line therapy product is a good thing and is quite synergistic. We plan to use our existing equity, relationships and knowledge, overall, in the firm to present this product to the health care practitioners that are treating those patients. We have a knowledge that can extend to PERSERIS with respect to all the idiosyncrasies that are related to that field. And I think that gives us pretty good efficiencies right from the get-go because we're all [ depressants ] in the field and do not have to make major investments other than just addressing certain elements that are directly related to the opportunity.

[Justin Keywood, Director of Equity Research]

Okay. Makes sense. And then I believe PERSERIS was expected to reach up to $300 million in peak sales in the U.S. Is there an expectation of what it might achieve in Canada?

[Tim Hendrickson, Chief Financial Officer]

What we have in mind here for Canada is a product that could do in U.S. dollars, $15 million to $25 million. These are our early-stage assumptions. We think this product could be quite successful in reaching $15 million and up to $25 million in annualized revenues.

[Justin Keywood, Director of Equity Research]

Okay. And just one last one. On the prelaunch activities for Vascepa, will there be any hiring in advance of Health Canada's response? Or will that ramp-up happen right after?

[Gilbert Godin, President & COO]

Oh, yes. There has actually been some hiring already, and there will be some hiring between now and the time of the response. And that talks directly to the level of prelaunch activity and investment that we're doing. Marketing campaigns and all the strategies or the preparations needed for a product to be approved, eventually submitted to various reimbursement agencies and so on has been taking place for quite some time now. What really will be triggered by the approval is the elements that are more directly related to the resources that will be deployed on the field and therefore, typically, commercial resources, sales forces, in particular.

[Operator]

And your next question comes from the line of David Martin from Bloom Burton.

[David C. Martin, MD & Head of Equity Research]

You mentioned the AG is being discontinued. But I think I heard you say that it may be part of -- an AG may be [ part of the ] plans going forward. Does that tie in to the CSAN Pronto and possibly using that in the States in conjunction with an AG? And does this discontinuation now affect your cost of goods? I thought you were using the volume at the AG to bring the cost of goods down across the franchise?

[Gilbert Godin, President & COO]

Thank you for your question, David. I'll start with the second question. The AG has served its purpose on the cost of goods in that with this agreement, we were able to amortize a fairly costly tech transfer that gave us much better product cost of goods in the end. And therefore, that purpose has been saved. That savings has been materialized. And so we're past that point here. With respect to your first question, it is correct. We're currently undergoing a pilot using the CSAN Pronto as the Athelas One device. We can't -- we don't call it CSAN Pronto in the U.S., but it's the same technology positioned in the same marketplace with exactly similar benefits. And it's a pilot because we're at the learning stage. We're trying to understand how in the U.S. framework we can put this product to good use and how we can use both our brand and the possibility of [ recoursing ] to an authorized generic to service that market in a fairly comprehensive way and view this as a program that encompasses the early need for the patient, which is the diagnostic or baseline established for the patient all the way down to providing them with product at the back end and reminders for subsequent diagnostic and product renewal. So preliminary, a complex equation in the U.S., but we're looking into it, and we're having concrete data sets being generated through that pilot. We will make a determination in due course in the course of this year. The bulk of the impact on the CSAN Pronto in the short to midterm is expected to come from Canada where, as a market leader, we hope that we will be granted an approval and that we will deploy the technology and in meaningful and impactful way.

[Operator]

This concludes the question-and-answer session. I would now like to turn the call back over to Mr. Gubitz for closing remarks.

[Gregory David Gubitz, Co]

Thank you, operator. And thank all of you for participating on today's call. We look forward to speaking with you and reporting to you in the coming quarters. Bye-bye.

[Operator]

This concludes today's conference call. You may now disconnect.