Sonoma Pharmaceuticals, Inc. (SNOA) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the Oculus Innovative Sciences’ Fiscal Third Quarter 2015 Conference Call. My name is Jonathan, and I'll be your coordinator for today's conference. At this time, all participants are in a listen-only mode. At the end of the call, we will be holding a question-and-answer session with the company management. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mr. Dan McFadden. Please proceed, sir.

Thanks, Jonathan. Good afternoon and thank you for joining us today. With me on the call are our CEO, Jim Schutz; and our CFO, COO, Bob Miller. We will open the call with Bob Miller's review of our financial results for the quarter, followed by Jim's update on current activities as well as our business focus moving forward. This afternoon Oculus issued a press release detailing fiscal third quarter 2015 financial results and recent corporate developments. A copy of the release can be downloaded from our website which is www.oculusis.com, or you can call Investor Relations at (425) 753-2105 and we’ll be happy to assist you. Before we begin, I'll remind listeners that this conference call contains forward-looking statements within the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words such as expect, to expand, would, and anticipate, among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risks inherent in the development and commercialization of potential products, the risks that potential clinical studies or trials will not proceed as anticipated or may not be successful or sufficient to meet regulatory standards or receive the regulatory clearance or approvals, as well as the company’s future capital needs and its ability to obtain additional funding and other risks detailed from time-to-time in the company’s filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q and the annual report on Form 10-K. Identified product applications and/or uses are intended to highlight potential applications for the investment community and does not infer that the company is marketing for these indications. The company does not provide any assurances that such applications will receive regulatory approvals. Oculus disclaims any obligation to update these forward-looking statements. So with that I will now turn the call over to Bob Miller, our CFO and COO.

Thank you, Dan. I'll first summarize our financial results for the third quarter and lastly, we will address some of the general revenue growth guidelines. Moving now to a summary of the results for our third fiscal quarter ending December 31, 2014. As we have done in the past so as not to duplicate the detailed press release I will only cover the highlights of the financials and also talk about the initiatives we are working on to reignite our revenue growth. Total revenues of 3.2 million were down 2% almost flat, compared to 3.3 million for the same quarter last year with the decline in the US of 511,000, mostly offset by an increase mark international revenue of 457,000. More specifically the decline in revenue is attributable to the drop in sales of the animal healthcare products from 681,000 last year to 136,000 down 554,000. In June 2014, we started process of finding and transitioning to new animal healthcare partners. Several months ago we selected two new partners who were highly experienced in sales and marketing in these markets. We are re-launching the sale of our animal healthcare products into this market next month in March under the brand name of MicrocynAH. AS I mentioned above, the international revenue increased 26% or 457,000 to 2.2 million from 1.7 million mostly offsetting the decline in animal healthcare. But more specifically; one, in Europe our revenue growth for the quarter was 28% with new products approved and introduced and new country specific distributor partners. Two, in Mexico our dollar sales growth was 18% while our product revenue growth in pesos was 32% with strong increases in the hydrogel and the 120 ml liquid genes. Number three, the rest of the world sales were up 59% driven by bigger than normal shipment to the Middle East of $338,000. As we mentioned last quarter, we are focusing on growing the revenue in the dermatology market with our direct sales force which was higher in October. We launched our first two dermatology products, Alevicyn Gel for the treatment of atopic dermatitis and Alevicyn Dermal Spray for the treatment of skin procedures such as most skin surgeries. We are happy to announce that the number of units sold to the patients of Alevicyn was just below a 1000 units for the month in the month of January, the third month of the launch. This is well ahead of our forecasted sales ramp. Also last week we launched Celacyn for the treatment of scars which had a very robust sales for the first week which Jim will discuss in greater detail. Gross product margins were down to 53% from 67% due to the decline in the higher margin sales in the U.S. versus growth in the lower margin products outside the U.S. Operating expenses minus non-cash expenses for the third quarter were 3.2 million down $3000 compared to the same period last year. The decrease in the cash operating expense was a result of lower expenses related to our former Ruthigen subsidiary partially offset by higher sales and marketing expenses in the U.S. related to the hiring of the direct sales force. On the balance sheet our cash position at the end of December was 2.2 million and our total debt was $6000 and in effect no debt. Relating to the balance sheet and our financial strengths, there are two key recent events which occurred in January; one, we were asked and then agreed to sell our 2 million shares of Ruthigen for 5.5 million to current investors in Ruthigen to help facilitate a merger transaction for Ruthigen. This sale will occur only if the merger transaction is executed. Secondly, we completed a sale of our common stock in January providing net proceeds of 5.3 million. In addition to these we expect a clinical milestone payment of 1.5 million from Ruthigen during the spring of this year 2015 treated by the enrollment of the last patient in the Ruthigen Phase 1/2 trial. If you combine our total cash position of 2.2 million, the January funding of 5.3 million, the potential sale of the Ruthigen shares of 5.5, and the milestone payment of 5.1.5, the sum of 14.5 million is greater than our market cap of 12.5 million. If you then factor in the 12 month trailing revenue of 12.7 million one could make a case that the Oculus market cap is undervalued. Over the last five quarters, our total revenue has been relatively flat from 2.9 million on the low side to 3.4 million on the high side and quarterly average of 3.2 million. During the same period in general our increase in the international sales has offset the decline in the animal health care maintaining a flat 3.2 million revenue average. What does our future growth in revenue look like. One, the animal healthcare revenue has bottomed out and now we expect to see this grow as we launched our MicrocynAH products with our new partners. The launch as I mentioned will start in March in about a month. Number two, the international revenue will continue grow legally in the 10% to 15% plus range in constant currency. Our most recent revenue growth of over 16% over the last nine months in international tends to substantiate this expectation. Furthermore this segment currently represents over 70% of our product revenue, that's a major driver in our short-term future growth. Number three, the direct sales forces for the dermatology and acute care markets will continue to grow the revenue rapidly as the current and new products growth to sales ramp curve from a relatively small base. As a result we are targeting double-digit product revenue growth for fiscal year 2016 as we feel that Oculus is a perfect investment candidate for the value investor who is looking for strong revenue growth. In other words, a $12.5 million market cap is smaller than our potential cash value and with a $13 million of revenue with expected double-digit revenue growth. With that I will turn it over to Jim.

Thank you, Bob. I would like to cover two topics on today's call and then open the call up to investors for question-and-answers. First, spend a minute discussing our new focus on dermatology and in second, spend a moment on our new prescription scar management product Celacyn. First, dermatology. Bob and I spent much of December on a road show for this recent financing that Bob just discussed. Talking about the new and improved Oculus and our new focus on dermatology. We viewed it as our coming out party or the unveiling of our new plant and while speaking with targeted institutional investors on the road show, we got great feedback on our point of attack. Speaking of which, in our January financing we picked up two handfuls of new buy and hold institutional investors that we are pleased to have as new shareholders. Bob did a great job in cutting out the fast money funds in the financing and we seem to be holding steady at or near their financing stock price if you look at the comments, stock price at OCLS and our tradable warrants at the ticker symbol OCLSW. So during the road show one of the questions we got over and over was why dermatology. Oculus used to partner everything and you finally picked a therapeutic area so why derm. And our answer is and was as follows, our old partnership strategy had its pros and cons. Certainly the pros were where we got to establish the safety and efficacy of our Microcyn products in multiple markets via our partners efforts. We gained knowledge via these partners on a wide variety of therapeutic areas and the biggest plus or pro was we didn’t spend the money necessary to hire a direct sales force. But on the other hand the disadvantages of our partnership strategy were we had no control over the sales process. Of course our partners controlled that. Our partners selected the priority of our products in their product portfolio and we didn’t get to pick that. We had indirect contact with our customers and as a result found it really difficult to maintain sustained controllable revenue growth. So on March of 2014 following the IPO of our surgical drug company, Ruthigen we reconstituted our Board of Directors and management team. Our new Board has a strong background in sales, marketing, strategy, and dermatology. So this new team including the Board commenced the strategic realignment of our business and in evaluating our various market opportunities we concluded that our dermatology opportunities was the most attractive for the following reasons. Our Hypochlorous Acid dermatology products has generated 145,000 prescriptions written since 2011 supported by four excellent clinical studies showing a reduction in itch, pain, scaring, and harmful inflammatory responses. The slide is of just the U.S. atopic dermatitis market is estimated to be somewhere between $500 million and $700 million per year. Dermatology call points were concentrated with approximately 4000 dermatologists writing 75% of the scripts or prescriptions meaning that they can be covered by a relatively small sales force. Dermatology patients tend to be more affluent and less reliant on Medicare or Medicaid which we think translates into stronger product pricing and margins. IMS data, which is pharmacy level data shows that dermatology sales ramps are quick to peek in six to nine months quickly covering sales expenses and as a result of all these factors, dermatology companies tend to have higher valuations as evidenced by over the last two years many of the small to medium size dermatology companies have been acquired at very attractive valuations. So with our new Board and all the homework we did to study the dermatology market and with the Board’s blessing in the fall of 2014 as Bob mentioned, we hired a sales team of 20 direct sales people and nine sales staff in support via telesales. And we placed this new team geographically based upon IMS data targeting heavy physician prescription writers. As Bob said, we’re off through a good start and really excited about our pipeline of products in dermatology both Microcyn and Hypochlorous Acid base and in the future with other actives. In Europe we will not build a derm sales force but instead find country specific dermatology distributors for our great products. Indications over there are acne, scars, atopic dermatitis and skin procedures. Really excited to see what happens this spring in Europe. Last topic before we open it up for Q&A, we are very enthusiastic about our new prescription scar management product Celacyn. We conducted a double blind controlled clinical study at four sites in the United States. In New Mexico, North Carolina and two in Texas head to head against the silicon based scar product. End point from the study included scar vascularity, viability, height, the total Vancouver scar scale, pain and itch, and we’re pleased to report that Celacyn outperformed the control in every category of measure. So with that clinical trial in hand we got through the FDA process and then right before the Holidays we loaded Celacyn into pharmacies across the country and our growing direct sales force just launched Celacyn last week. We’re very pleased with physician response and truly enjoy being the only prescription scar management product on the market. For those of you who have access to IMS data you’ll be able to track our efforts, our sales efforts at the pharmacy level, and for those investors who do not have IMS data feedings we’ll keep you posted. On the other side of the Atlantic, armed with that same solid clinical data we received European approval for Celacyn this last fall, and we are targeting the launch throughout Europe this spring. We like data here with that driven so a few thoughts on the market opportunity for Celacyn. Approximately 42 million surgical skin procedures are performed in the U.S. each year according to the – group in 2009. 62 million scars are formed annually according to CDC. And according to Frost &Sullivan Data, 169 million existing scars in the United States can be characterized as hypertrophic or keloid which in plain English means raised and red color scars due to hyper granulation or over growth of the repairing tissues. So some obvious markets for the data that I just described, surgical scar revision there is approximately 250,000 procedures each year according to Frost & Sullivan. In cosmetic surgery our data shows approximately 6 million skin surgery procedures that’s hard to say, skin surgery procedures each year and last data points 3.4 million procedures each year in the U.S. just to remove moles. So we think the surgical scar revision market, cosmetic surgery, and mole removal all fit nicely into this dermatology call point. Well my older and wiser colleague to my left here reminds me that we can’t do all that I just prescribed as fast as I would like with our 20 plus 9 sales force. But nonetheless my point is that we are in a large market with a unique product and a unique position being the only prescription scar management product. So we covered the numbers in the quarter, Bob provided a peak ahead at our future growth, we spent a few minutes discussing our new derm efforts and highlighted our new Celacyn prescription scar management product. Thanks for joining us today and Jonathan if you will we’d like to open the line for questions.

[Operator Instructions]. Our first question comes from the line of Keith Sonatrak [ph] from National Securities, your question please.

Three questions, one did you give revenue guidance for the current quarter? The next question is the new veterinary medicine, will it do -- can you comment on whether it will be available on any sort of retail stores? And then as far as the dermatology sales are concerned I believe on the last conference call you made a roundabout reference that you thought one day the dermatology sales could overtake any of the other sales divisions where Mexico whatever in revenues per year, which I believe Mexico was I think somewhere in the 7.5 million range. So I guess the question is do you still feel that way and if you do I guess can we have any guidance on a timeframe as something where we think it happened within a couple of years or we think 10 years or something, so just wondering if what comments you have on those questions?

Hey, thanks Keith from National Securities. Bob you want to?

Here were the -- he asked three quick questions. I got revenue guidance, is that going to retail and derm sales will overtake Mexico or give us a timeframe. So let me work with one, the last one first and we didn’t give any specific timeframe. We did say that way, we did say that we still feel that way. We were given longer-term timeframe because Mexico is drawing nicely too. So it will probably be in the three to five years type range that we are looking at for that to occur. In terms of the vet...

I’ll get the Vet. Vet, Keith from National Securities I’d correct your language just slightly, it’s not veterinary medicine its actually companion animal and equine wound and skin products for consumers and yes, we are targeting retail shelves and we’ll keep you posted as to how we do. And then the last question I have Bob was revenue guidance for the quarter ending...

We did not give guidance for that. We gave you a general guidance for growth in our various businesses on the last call and not a specific number for the quarter and this time guidance for the full year in terms of revenue growth.

Okay. So, I think you said double digit revenue growth for the year is what you’re hoping for?

Yes. Double-digit.

And then actually going back to when were commenting on the dermatology sales I think you said something about how many prescriptions were written in the month of January or how many bottles were sold, can you go over that again?

Yes, there was 1000 units that had been sold in the month of January, those are prescriptions that are actually going out to patients, that’s the IMS data that we’re talking about. We would forecast this market -- it well has our forecast. Our forecast was double that size for over seven to nine month round.

To state it simply but, we are pleased with the ramp and we are ahead of forecast.

And all the dermatology sales that you have right now are the 100% coming from you or do you still have some trickling in from Quinnova?

We still have -- Quinnova is still selling those products. We would expect that they would continue to sell those products towards the end of the year which is our agreement with them.

But they are selling different products, different brands, and the numbers that Bob provided did not include Quinnova product sales Keith.

Yes, they are not including in the number I mentioned but they are down from last year but they are still selling those products and doing reasonably well them.

So I guess we could say you are kind of competing against them at the moment?

Their contract expires in 2015. We’re friendly, we’re not going to sit ideally by while that contract expires.

So if you look at the atopic dermatitis market in the prescriptions we estimate the prescriptions written for that market is about 13.5 million, that’s where Jim got his 500 million to 700 million addressable market in atopic dermatitis. That most of those are steroid based products for atopic dermatitis and to the extent that you got two companies selling actually helps make a lot of these dermatologists aware that we can be used and replaced in the place of lot of the steroids, especially on the maintenance level.

I got it and do we know -- did you say how much the revenue is for the quarter or actually from dermatology?

I don’t think are Q just hit 2, I don’t think we break it out by derm and don’t intend to.

Okay.

We have not done that. It’s all in the U.S. number. We have broken out in the past, in the animal healthcare because that was with one of our partners and that’s why we continue to do that but it's all combined in one.

Okay, alright, thank you.

Thanks Keith.

Thank you. [Operator Instructions]. Our next question comes from the line of Dan Trang from Stonegate Capital Partners. Your question please.

Hi Jim, Bob thank you for taking my question. First I want to ask you about is kind of the margins with the new direct sales force just hired and now with the new dermatology focus, when can we kind of see -- expect to kind of see a year-over-year improvement in the margins.

There is a quite a difference with the margins in the dermatology area that we’re selling now are in the 70% range, gross margins. So in Mexico or rest of outside of the United States those margins are less than that. So as we see both the dermatology grow in the U.S. you will see those margins improve. At the same time we’re seeing pretty darn fast growth in the international areas I pointed out. It is going to take a while, they will start to improve but it’s going to take a while for the dermatology businesses to catch up if you will with the international. But I would suspect to try to give you an answer that they would return sometime like this year.

Okay, alright and Jim you mentioned part of your strategy going forward was the new focus on Europe right, am I correct?

Yes, we divide our core market opportunities as U.S. and rest of the world. European derm is important for us but it's -- we’re not going to build the direct sales force there like we have.

Okay and I know that you mentioned in your press release that’s going to be country specific, so you are partnering with distributors in Europe right?

Right.

Is it more upon you guys or is it on them as far as okay, going into a certain country and really spending a lot of time on that one as opposed to another country?

Good question. Who is doing the diligent to meet the end and their expertise in that country?

Yes.

Well great question. We hired a country -- we hired a guy from Netherlands to run European derm for us and very experienced, seasoned sales guy. And so his -- he is doing all the diligence to make sure that we are getting the best and brightest of talents country by country basis.

So he is independent of these distributors?

Correct, he works for us full time.

Okay, alright. And my last question is with the two new partners for the animal health division, can you provide some color behind those partners and kind of their footprints?

Sure, actually one of them is more focused on the sort of mass distribution if you will and it has a number of products that they sell into the mass distribution like the Wal-Mart, etc. The other partner is more of a pet specialty sales and marketing expert. They sell a lot of products into the pet specialty market like Petco, PetSmart and so those are two -- and the pet specialty stores, those are the two different groups.

We should be able to speak with more clarity next earnings call or the earnings call following to that once we are out and selling. But for competitive reasons you can tell we are being a bit coy.

Alright, thank you.

Hey, thank you Dan.

Thank you. [Operator Instructions]. Okay and this does conclude the question-and-answer session of today's program. I would like to hand the program back for any further remarks.

Hey, thanks for joining us. We look forward to speaking to you.