Kamada Ltd. (KMDA) Q3 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the Kamada Ltd., Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I will turn the conference over to Bob Yedid of LifeSci Advisors. Bob, you may now begin.

Rob, thank you very much. This is Bob Yedid from LifeSci Advisors. Thank you all for participating in today’s call. Joining me from Kamada are Amir London, Chief Executive Officer; and Chaime Orlev, Chief Financial Officer. Earlier today Kamada announced its financial results for the three and nine months ended September 30, 2022. If you have not received this news release, please go to the Investors page of the company's website at www.kamada.com. If there are any questions at the end of this call, please feel free to email your questions to ir@kamada.com. Before we begin, I'd like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Kamada. I encourage you to review the company's filings with the Securities and Exchange Commission, including without limitation the company's Forms 20-F and 6-K, which identifies specific risk factors which may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, Tuesday, November 22, 2022. Kamada undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, it's my pleasure to turn the call over to Amir London, Chief Executive Officer. Amir?

Thank you, Bob. My thanks also to our investors and analysts for your interest in Kamada and for participating in today’s call. I'm pleased to report Kamada’s strong third quarter performance, which demonstrates the successful strategic transition of the company and is consistent with our previously communicated positive outlook. You will recall that we had focused that our financial results in the second half would meaningfully improve as compared to the last year and the first six months of this year. Our performance in the third quarter indicates that our business is beginning to realize the significant benefits of the acquired portfolio of full FDA approved IgG consisting of CYTOGAM, HEPAGAM, VARIZIG and WINRHOSDF. In fact, I can now confidently say that we have completed our rapid transition from our past dependency on GLASSIA sales to Takeda into a diversified, fully integrated commercial company and a global leader in the plasma-derived specialty market. On our last call, I laid out our expected key sales and profitability drivers for the second half of the year. This included our IgG portfolio, sales of aircraft to KEDRAB and Kedrion and GLASSIA royalty income. All of these were indeed important contributors to the sales of stability growth in the third quarter in which we generated total revenues of $32.2 million, representing a 40% increase year-over-year and gross margins of 40%, up from the 25% in the third quarter of 2021 and 31% in the second quarter of 2022. Our adjusted EBITDA for the third quarter was $6 million, representing a 19% margin. And for the first nine months of the year, adjusted EBITDA was $10.6 million, representing a 13% margin. This EBITDA level is consistent with our annual guidance and it represents a 58% increase as compared to last year. We also continue to generate positive cash flow from operating activities for the third consecutive quarter, resulting in a cash position of $31.3 million as of September 30, 2022. This significant cash generation is indicative of our profitable commercial operations. We expect to report further sales growth and enhanced profitability in the fourth quarter and as a result we are reiterating our full-year 2022 revenue guidance of between $125 million to $135 million with expected EBITDA margins of 12% to 15%. This guidance represents a 20% to 30% increase of a 2021 revenue, it will be more than 2.5x 2021 EBITDA. Looking farther ahead, we continue to focus growth at a double-digit rate in the foreseeable year beyond 2022. The portfolio of the full FDA-approved immunoglobulins we acquired late last year continues to gain traction in multiple markets and again delivered strong sales and profitability for Kamada during the third quarter. As a reminder, the acquired product generated collective revenues of approximately $42 million in 2021 with over 50% gross margins and we anticipate that we will significantly grow the new portfolio revenues year-over-year beginning already this year. I am pleased to report that in recent months, as part of the establishment of our direct presence in the U.S. market, we deployed a team of U.S.-based experienced sales and medical affairs professionals who rapidly established our operations in this key market. The U.S. sales team is making good progress in promoting our portfolio of specialty plasma-derived immunoglobulin to physicians and other healthcare professional through direct engagement and opportunities at medical meetings. Our Medical Affairs team is working to educate physicians, while addressing their scientific and clinical inquiries. Throughout 2022 our team participated and presented its major medical conferences in the U.S., including International Society of Heart and Lung transplant, American Transplant Congress, and the American Association for the Study of Liver Disease. This area of activity represents the first time over a decade to this high premium product to being supported by field-based activity in the U.S. We are encouraged by the positive feedback received from key U.S. physicians who are seeking to publish new clinical data related to our portfolio, while conducting educational symposiums that we believe will have a positive impact on the understanding of these products contributing to continued growth in demand. Outside the U.S., we continue to generate meaningful sales growth from this product in the international markets. I would highlight the recently signed $11.4 million agreement to supply VARIZIG, one of the four products to international organization operating principally in Latin America. This agreement will be a key driver for us in the fourth quarter as approximately half of the anticipated revenues to be generated by this agreement are expected during this period, when the balance will be extended, to the first half of 2023. From a strategic standpoint, this important supply agreement strongly validates our ability to grow the sales of our newly acquired portfolio in the different international markets. In addition, we recently secured a second significant tender with extension of an existing supply agreement from the Canadian Blood Services, CBS, for the supply of all four products for an additional three years for approximate total value of $22 million. This [award] [ph] secures the ongoing service of product in the Canadian market. CBS manages the Canadian supplier of that product for all Canadian provinces and territories excluding Quebec. The extension with CBS is for a 3-year period, commencing on April 1, 2023, with an option to extend for up to two additional years. We are continuing to pursue additional commercial contract in key strategic territories and are highly encouraged by the significant opportunities ahead of us. These supply agreements in our proactive selling efforts through our long standing distribution relationship underscore Kamada's [field commitment] [ph] to leveraging these new strategic assets. I should also add that we continue to expect receipt of FDA approval for the production of CYTOGAM, the largest of the four acquired products at our Israeli facility during the first half of 2023. Let's move on to KEDRAB, our rabies immunoglobulin. Based on the continued moderation of the COVID pandemic in the U.S. and increased travel and outdoor activities, we remain encouraged by the product in market sales by Kedrion through the first nine months of the year, which again grew significantly during the third quarter in comparison to the pre-COVID pandemic sales levels. We believe the trend will continue and expect KEDRAB to be an increasingly important growth driver for us over the next few years as it continues to gain market share in $150 million U.S. market. I should highlight that this product also generates more than 50% gross margins for Kamada. Next, we continue to receive royalty income on GLASSIA sales to Takeda. During the third quarter, we generated royalty income of $3.5 million. As a reminder, royalty income from Takeda represents pure profit for Kamada. I our GLASSIA royalty [indiscernible] Takeda extends out to 2040. Now, let's look a little farther ahead at future catalysts. I'll begin with Kamada Plasma, our U.S.-based plasma collection company. Our early 2021acquisition of plasma collection center in the Houston, Texas represented Kamada’s entry into the U.S. plasma collection market and supported our strategic goal of becoming a fully integrated specialty plasma product company. We remain focused on expanding the hyperimmune plasma collection capacity at this center and continue to advance our plans to open additional centers in the U.S. to further enhance our supply of specialty and [normal source plasma] [ph]. In fact, we're in the process of finalizing the selection of a site in Texas for second collection center with construction and startup activities to be initiated in the near future. As we have said previously, the planned expansion of our plasma collection capabilities is expected to enhance our IgG competitive position in various markets, boost continued revenue growth and strengthen our supply chain. Let's now turn to our ongoing pivotal Phase 3 InnovAATe clinical trial that is evaluating the safety and efficacy over InnovAATe in Inhaled AAT products for the treatment of AAT deficiency. You will recall that early this year, following the duration of the COVID pandemic, the study was expanded and now include six sites across Europe. [Indiscernible] enrollment has recently begun to accelerate. To date, 30 patients were enrolled for treatment including 14 patients who have already completed the two years study treatment period at the initial trial site in-light of the Netherlands. Importantly, none of the patients discontinued treatment prematurely and no drug related serious adverse events were reported. This high level of patient adherence through the treatment is encouraging. Additionally, as part of routine and planned monitoring process and for the first time since study initiation, the independent Data Safety Monitoring Board, the DSMB, recently recommended that the trial continue without modification. Moreover, based on encouraging safety indicators observed to date, the DSMB supported an expansion of the inclusion criteria to also include subjects with severe airflow limitations. The period including criteria limited the trial to include only patients with FEV1 between 80% and 50%, while the extended criteria also allows us to include patients with FEV1 over 40%. This important change is expected to further expedite patients enrollment. Importantly, we intend to meet with FDA and with EMA through the first half of 2023 to discuss [study progress] [ph] and explore potential opportunities to shorten the regulatory pathway. As the most advanced investigational products for AAT deficiency, the substantial commercial opportunity exists for Inhaled AAT to be a transformational next generation augmentation therapy in the growing AAT market, which is already over $1 billion market in annual sales in the U.S. and the EU. In summary, we continue to execute on our corporate strategy on all fronts and believe we have the profit catalyst to drive double-digit growth in the foreseeable years ahead of us. We're excited about our near-term prospects, as well as our longer-term outlook as Kamada is uniquely positioned for growth as a global leader in the specialty plasma industry with multiple value creating milestones expected in the month and the quarters ahead. With that, I'll now turn the call over to Chaime for his review of our third quarter 2022 financial results. Chaime, please.

Thank you, Amir, and good day everyone. In the third quarter of 2022, total revenues were $32.2 million, a 40% increase from the third quarter of 2021. For the first nine months of 2022, total revenues were $83.9 million, an increase of 16% year-over-year. These quarterly results are indicative of the successful strategic transformation we achieved through the strategic acquisition [acquired] [ph] during 2021 and resulting in a vertically integrated global commercial biopharmaceutical company with multiple growth drivers. The year-over-year growth during the third quarter and first nine months of 2022 was primarily driven by continued strong sales of our recently acquired IgG products. As Amir mentioned, the previously forecasted strong second half of the year was driven by multiple factors, including the continued growth of the new IgG product sales in the U.S. fueled by the ongoing marketing efforts, as well as the expansion of ex-U.S. sales of these products. The continued growth of KEDRAB to Kedrion in support of the product in market sales growth and full impact from royalty income from GLASSIA. In addition, fourth quarter revenue will be further aided by the VARIZIG supply agreement, which will include approximately half of the $11.4 million in total revenues to be generated from this contract. We recognized $3.5 million of royalty income from Takeda based on their sales of GLASSIA in the third quarter, which was in-line with our anticipated quarterly projections. As a reminder, the second half of the year will include two full quarters of royalty income as compared to only four months in the first half. Total gross profit for the third quarter of 2022 was $12.9 million, representing 40% margins, compared to $5.7 million or 25% margin in the third quarter of 2021. Gross profit for the first nine months of 2022 was $31.4 million, representing 37% margins up from the 33% last year. Let's turn to depreciation expenses. As previously discussed, the company is accounting for depreciation expenses associated with intangible assets, which were generated through the recent acquisition of the four IgG products. In the third quarter and first nine months of 2022, cost of goods sold in our Proprietary segment included $1.3 million and $3.9 million, respectively of depreciation expenses associated with these intangible assets. Research and development investments during the first nine months of the year increased to $10.2 million as compared to $7.9 million in the prior year period, primarily due to the expansion of our ongoing pivotal Phase 3 InnovAATe trial for Inhaled AAT. Selling and marketing expenses for the third quarter and first nine months of 2022 also increased. These increases are attributable to the establishment of our U.S. commercial operation to support the distribution and sales of the recently acquired portfolio of four FDA approved commercial products. In addition, these costs include pre-commercial activities associated with new product launches in the Israeli distribution segment. As we have since the beginning of the year, we continue to account for financing expenses with respect to revaluation of contingent consideration and long-term assumed liabilities, all of which are related to the recent acquisition. During the third quarter and first nine months of the year, these finances charges totaled $2 million and $5.9 million, respectively. For the third quarter, we recorded a net income of approximately $480,000 or 1% per share on a fully diluted basis. Our adjusted EBITDA was $6 million for the third quarter of 2022. Adjusted EBITDA for the first nine months of 2022 was $10.6 million, representing 13% margin, which is in-line with our annual financial guidance and represent a substantial increase over the $6.7 million of adjusted EBITDA in the prior year period. Based on our expectation of significant revenue growth and enhanced profitability for the remainder of the year, we continue to expect revenue in the range of $125 million to $135 million and anticipate generating adjusted EBITDA at a rate of 12% to 15% of total bookings. Finally, for the third straight quarter, we generated positive operating cash flow, demonstrating the ability of the company's commercial operations to generate cash. During the third quarter of 2022 we generated $5.5 million of operating cash flows, which led to a cash position of approximately $31.3 million at the end of September. That concludes our prepared remarks. We will now open the call for questions. Operator?

Thank you. [Operator Instructions]

Rob, thank you. While we wait for some additional questions to queue up, I have some that have been emailed into us. So, let me go through those. First is for Amir and Chaime. In order to meet your full-year revenue guidance of $125 million to $135 million, your fourth quarter revenue will have to be significantly stronger than the third quarter. So, can you please provide us a breakdown of how that will be achieved?

Thank you, Bob, for the question. As we said, we're reiterating our full-year guidance, based on the orders that we have and the sales that have already been executed since beginning of the fourth quarter. Three things to take into consideration compared to the third quarter is one, the VARIZIG supply agreement, the new supply agreement around half of it, 50% of it will be executed in this fourth quarter. So, this is additional around between $5 million to $6 million in comparison to the third quarter. Secondly, our Israel Distribution segment, we have significant orders which are pending and will be executed over the next few weeks before the end of the year. And in general, the new IgG portfolio products are growing and will continue to grow in the fourth quarter. So, when we add all those items together, all those orders together, we reached the annual guidance, which we've given.

Okay. That's helpful. Great. The other question we have is, just related sort of a corollary to that, should we expect increased operating expenses as we look out to 2023 as compared to this year, and if so, can you quantify how much higher those expenses might be?

So, 2023 will be a full-year of our sales and marketing activity in the U.S. This is something with infrastructure and hiring the people something that we've done gradually over 2022. So, 2023 will be a full-year in that regard. Of course with all of this activity contribute to our top line performance and our profitability. So, it's definitely a worthwhile investment and we see this actually happening in the U.S. market. Adding to that the Inhaled AAT, which is going to run at an expedited rate in 2023, those two components add to our operational expenses for the marketing and R&D and we expect that next year investments in those items will be approximately an increase of 10% to 12% compared to this year.

Okay, great. The next question was, do you expect that sales growth from the acquired products will come from additional international contracts and/or is that coming mainly from discussions, whether it be sales, promotions, contacts with – by your new sales and medical affairs teams with physicians and transplant centers?

Both basically. So – and it's actually already happening and we see this. The VARIZIG contract for Latin America is one example, extending the agreement in Canada is another example. We were starting to see the impact of our sales activity and [medical affairs] [ph] activity in the U.S. market. As I mentioned during the call, it's been over 10 years over a decade that those products were not supported by field activity. And as of a few months ago, we started to engage in discussion with the relevant physicians in the relevant transplant centers and we are highly encouraged with the feedback we're receiving from those health care providers. So, all of that, we will contribute to increase sales adding to the fact that we are selling their new products through our existing distribution network across the world in many different countries and in both items, so basically both aspects are contributing to the growth that you already see and our expectation for continued growth in the years to come.

Great. And just – with regards to the transplant centers, are there – maybe you could help quantify that for us, is there a certain set of transplant centers you'd like to see cover with that sales and marketing force?

Yes. So, of course, we are focusing on the larger ones. We're focusing on the one that are using our products and we'd like increase usage. We are also talking to centers that have not used, especially CYTOGAM in recent years. And as I said, those products were not supported by field activity. So, now it's a good change in terms of the ability to grow the business and to promote it and to talk to physicians and to collect data and present the data to the physicians. So, all of this is actually happening as we speak with our U.S. team. In terms of [quantified quantities] [ph], we’re talking about 150 to 200 centers that we are covering. It's a very focused effort with the focused team of experienced specialist and it's going very well in terms of our coverage and our ability to talk to the right people.

Great. And just going back to, we talked obviously about success of your acquired portfolio of products, does Kamada have an ongoing [business effort] [ph] or excuse me, business development effort to continue to look for products like this to continue to expand your portfolio of proprietary products?

We are building the right infrastructure. As I said, we’re highly focused on specialty plasma products and transportation centers. And in parallel to that, we will be looking and we've started to look at what might be another synergistic product, but from a BD perspective, we can bring in, this is an effort that will take us through 2023 and we will be looking for the right opportunities.

Great. Okay, great. That's all the questions we have from the [various questionnaires] [ph], so that was very helpful. Rob, I'll turn it back to you.

Thank you. [Operator Instructions] Thank you. At this time, I'll turn the floor over to Amir London for closing remarks.

Thank you very much. So, in closing, we begin to realize the significant benefits of our recent strategic transformation. Our strong third quarter performance is consistent with our forecast as a positive outlook. Based on expectation for continued revenue growth and enhanced profitability in the fourth quarter, we are reiterating our full-year 2022 financial guidance. As discussed during the call, we continue to focus growth at the double-digit rate in the foreseeable years ahead of us, driven by our proprietary product categories. We thank all our investors for their support and remain extremely committed to creating long-term sustainable shareholder value. Thank you very much. We hope you all stay healthy and safe.

This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.