Sonoma Pharmaceuticals, Inc. (SNOA) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Oculus Innovative Sciences’ Fiscal First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I will now like to turn the conference over Mr. Dan McFadden. Please begin.

Thanks, Abigail, good afternoon and thank you for joining us. With me on the call today our CEO, Jim Schutz; and our CFO, COO, Bob Miller, we will open the call with Bob's review of our financial results for the quarter, followed by Jim's update on our business strategy moving forward. This afternoon Oculus issued a press release detailing fiscal first quarter 2016 financial results and recent corporate developments. A copy of the release can be downloaded from our Web site, which is at oculusis.com, that’s oculusis.com or you can call Investor Relations at (425) 753-2105 and we’ll be happy to assist you. 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.

Thank you, Dan. I'll first discus the financial presentation of our businesses secondly our key strategies to achieve strong revenue growth for fiscal year 2016; then summarize our financial results for the first quarter fiscal year 2016, and lastly we’ll provide some revenue growth guidelines for quarter ending September 2015. First of all, we have changed the detailed financial presentation of our businesses compared to last year by separating product revenues which are shown on the last page of the press release into two categories, one, revenue from direct product sales, and two, revenue in the form of product licensing on royalty fees. For instance, all of our revenue related to our former partner Innovacyn in animal health care is a royalty. This provides more transparency on the true sales growth of our continuing products in various geographic areas especially as we focus on growing sales in U.S. with our direct sales force. Secondly, what are our key strategies to ignite revenue growth for fiscal year 2016, our key strategies for the growth for the rest of the fiscal year have not changed since detailed in the last earnings call and they are the following. Number one strategy is to focus on growing revenue in U.S. dermatology market with our direct sales force and a robust product pipeline. The U.S. derm segment provides us with the largest long-term growth potential and will lead us in the overall breakeven. Our second strategy is to continue strong unit growth in our international business with new product launches and stronger partners. The international segment is 73% of our product revenue and will give us the largest dollar growth and furthermore generates cash to help us fund the U.S. derm growth. The objective of these two strategies is to achieve strong unit growth for the fiscal year 2016, while more than offsetting the loss from our discontinued animal healthcare partner into strong dollar. Obviously, these strategies worked for our last quarter ending March 31, 2015, we have a [indiscernible] quarter with the total revenue of $4 million, up 37% with international product revenue up 1.2 million or 79% from the same period last year and U.S. revenue is up 336,000 or 117% led by growth in dermatology. As I mentioned on the last earnings call for the quarter ending June quote, “the year-over-year total revenue growth in the June quarter will be lower than 37% in the March quarter.” Due to lower Middle East revenue the strong dollar and the high animal health royalty revenue in the June quarter last year. As was also mentioned in the Q&A in the last earnings call, for the quarter ended March, we had stronger than normal growth in the Middle East of about 180,000 and higher than normal revenue in Mexico due to additional stocking distribution channels up 350,000, the total of 530,000 higher than normal revenue in the March quarter. With that as a backdrop having seen these strategies work in the first quarter ending June 30, 2015. In summary, total revenue for the first quarter ending June 30th was 3.7 million, up 8% compared to 3.4 million on the same quarter last year and total product revenue was up 795,000 or 37% to 2.9 million from 2.1 million. During the first quarter, U.S. product revenues increased 432,000, up 122% and international product revenue increased 363,000 or 21% outstripping the decline on royalty revenue of 602,000. Mostly related to our discontinue animal health care partner. More specifically the U.S. product revenue is 787,000 as I mentioned 122% from 433,000 with our U.S. dermatology product revenue of 429,000 for the quarter ending June 30th compared to 100,000 in the same period last year. The international product revenue was 2.1 million, up 21% or 364,000 from 1.8 million caused by a 68% local currency unit growth in Mexico during the first quarter compared to the same period last year with an 18% decline in peso, the Mexican sale growth in U.S. dollars was 43%. Our new powerhouse partner Sanfer continues to demonstrate a step-up level of revenue compared to that from our former partner last year. In Europe the unit growth and local currency growth was 16% and that reflecting a 23% decline in euro, the dollar revenue growth is down 5%, rest of world sales were down $87,000 declines in Middle East, Singapore and India. As we mentioned last quarter we are focusing on growing revenue in the dermatology market with our direct sales force which was deployed in October, we launched our first four dermatology products. Alevicyn Gel for the treatment of atopic dermatitis, Alevicyn dermal spray and the treatment of skin procedures. The only prescription product on the market for scars, branded Celacyn and the end of June Alevicyn spray gel and a novel no touch spray delivery for the treatment of atopic dermatitis for which we received FDA approval in June. While we recognized our derm revenue when we shipped the product to wholesale, a good way to gauge the Oculus derm performance is the number of prescriptions sold to patients from the pharmacies. This information was available to the public for a free via the several well-known data bases on a weekly basis. According to the [indiscernible] data which is the data base we use, the total prescriptions sold to patients from the pharmacy were our Alevicyn and Celacyn products when rounded 1,300 for the quarter ending December, 4,400 units for the March quarter and 7,000 units for the June quarter, this represents a strong growth trend early more than a number of units sold patients I believe of Alevicyn and Celacyn in month of June was 2,700. One way to keep this trend going is via introduction of new products. We will be launching an additional two derm products in the September, October timeframe. Our target is to launch at least one new product before that. Operating expenses minus non-cash expenses for the first quarter were 3.7 million, up 683,000 compared to the same period last year. The increase in the cash operating expenses were due to higher sales and marketing expenses in the U.S. with one, additional salaries for the new direct sales force in dermatology, and two, higher new product expenses for dermatology of $125,000, and a banker fee of $165,000 for the sale of Ruthigen shares. On the balance sheet, our cash position at the end of June was 8.8 million, and our long-term debt was zero. As of June 1, our stock price as most of you know increased from $0.90 to about $1.80, up almost 100% and market cap from 14 million up about 28 million, and our 30 day trading volume grew about $100,000 per the day to 650,000 share per day. In fact over a 7-day trading periods starting June 1, we traded 45 million shares, it was about 15 million total shares outstanding. All of these factors have substantial improved the liquidity and market value thus our financial strength. After five quarters of negative or no growth, we have shown two quarters of strong product revenue growth, quarter ending March of 85% and 37% for the June quarter, and quarter ending March we identified 530,000 in product revenue which was higher than normal. If you adjust with the abnormally high revenue in March the product revenue growth would have been about 43%. Will this growth continued or asked differently, what does our future growth in product revenue look like for the quarter ending September, for the quarter ending September we expect U.S. product revenue growth to be in the range -- to grow in the range of 80% to 110%. For the last two quarters our U.S. product revenues growth was 100% albeit from a small base. For the quarter ending September, we expect the international product revenue to grow in the range of 15% to 25%. The international product revenue growth was 21% in the June quarter. Our international growth revenue will continue to be negatively impacted by the weak peso and the weak euro. Royalty revenue will be about 280,000 for the September quarter 2015 compared to about $1 million for the same period last year. We continue to believe that Oculus is a good investment candidate for the value investors who is looking for strong revenue growth even with the market cap of about 28 million. Our combination of cash in 8.8 million and 14 million on total revenue with strong product revenue growth expected for the full fiscal year based on a highly effective technology with a focused on branded high priced product in the attractive U.S. dermatology market which tends to demand high valuations. Speaking of high derm valuations, since 2008 there has been seven major acquisitions of dermatology companies and the multiple of revenue paid for six of the seven dermatology companies ranged from 3.5 to 6 times revenue. The Company's interested with the smallest revenue we acquired at 5 to 6 times of revenue. While one could make a change that is premature to apply these higher valuation multiples to Oculus at this time, we believe that as we execute our current strategic plan with the growth in the derm products, our valuations multiples will continue to expand.

Thank you, Bob. I will cover two topics in the next six minutes or so. First, a quick look back for our new shareholders on why we pick U.S. dermatology and plastics as our core market. Second, provide an update on our progress toward implementing our strategic plan and finally then open the call up for Q&A. For first a quick look back, when Bob and I took over the range here at Oculus in the spring of 2013, our market capital was approximately 16 million and as we've said before we were a mile wide and an inch deep various therapeutic areas and high depended upon the performance of our partner sales efforts. With the new Board of Directors, we hunkered down to study our various therapeutic opportunities pick one and own it with advice from the board. After several month of homework, we handpicked derm and plastics in the U.S. as our core market and classified all international animal health and acute care sales as non-core. So why did we picked derm and plastics as our core market. As David Steinberg, Managing Director of Equity Research at Jefferies phrased it, U.S. dermatology products have several general attributes worthy of note. One, shorter development timelines; two, lower clinical trial cost; three, lower regulatory hurdles; four, high cash pay component especially for the aesthetic products; five, our recent track record of success and six, our really active M&A market which Mr. Steinberg describes as a second way for shareholders to roll. Bob and I understated that derm and plastics also have the following attractive attributes doting on Mr. Steinberg comment. Seven, derm has strong pricing, product margin and insurance coverage; eight, it’s the concentrated call point, meaning companies like our size don’t need them enormous sales force to cover; nine, derm has fast sales revs and 10 as Bob pointed out, dermatology companies have great valuations or multiples on revenue. So starting in light of late 2014 actively spin out of our surgical drug candidate RUT58-60, we took key steps to further our strategy including hiring and experienced dermatology management team and sales force. In U.S. comprised of seasoned sales reps that have established relationships with dermatologist in the respective territories. So how did we do, with the attributes to Bob and I thought would be attractive to building long-term shareholder value did they turn out to be correct, first our derm sales gurus [ph] turned out to be terrific and as we soon learned seasoned sales veterans with big role decks are definitely preferred to right out of the box new sales reps. Second as predicted our derm products have strong pricing, product margin and insurance coverage, even our international dermatology products have much more attractive margin than our hospital products. As a recent example, a product price increase for three of our U.S. dermatology products has had zero impact on our unit growth and in fact as Bob said, unit growth is up attractively to the right. Third, we confirmed the derm is a concentrated call point, meaning, we don’t need that enormously sales force to cover our key prescription writers. Four, we confirmed that derm has past sales ramps, meaning our rest with breakeven much more quickly and other therapeutic opportunities. But finally as Bob said, we see other dermatology companies with wonderfully attractive valuations, as Bob showed our market cap is not up reflective of our dermatology efforts. In fact we still think we are undervalued, but as we climb in all things derm, we expect Wall Street to take notice and our market cap will be like there. So how has our progress been with U.S. derm as our core market? We received a handful of FDA approvals including Celacyn our strong management product and as Bob said our recent Alevicyn SG approval. Our clinical trial portfolio confirming efficacy on itch, pain, scaring and harmful inflammatory responses continues to grow. Our concentrated sales force is growing nicely with key sales reps in key territories and more to come, you may remember for economic and cash flow purposes we starting with the smaller sales force and are planning to add headcount this fall when current sales reps are breakeven as they grew. Our recent U.S. issued patent for the use of our active with very broad specifications for the treatment and mitigation of atopic dermatitis expires in 2027 which should give us some breathing room and our effort to reduce the use and prescriptions written for topical steroids which are indiscriminate cell kills. And finally our market cap, as Bob mentioned as of yesterday as of today, close of market was 28 million which we think is a solid start to our future growth. So what’s next in U.S. derms and plastics, we have strong pipeline that neat derm products that we look forward to sharing with you all soon. As I said we hope to add more feet on the street this fall, which we believe will result in higher sales and faster growth, than finally our European, Asian, Latin America and Middle East derm effort should start showing traction. Using the same product portfolio we have here in the states. So as you can probably tell from Bob’s presentation and mine, we’re pleased with our progress in our first seven months of U.S. derm sales our core market. And we think we’ve proven to ourselves that we picked a terrific call point with attractive growth ahead. So in summary Bob covered the numbers and gave guidance for our quarter ending September 30th, I spent a few minute looking back on why we picked U.S. derm and plastics as our core market and provided and update on our progress towards implementing our shares. So with that operator, please open the call for Q&A.

[Operator Instructions] Our first question from the line of Jason Kolbert with Maxim. Your line is open.

Hi, guys, it's actually Jason McCarthy. Jason Kolbert is traveling in New Zealand for the past few weeks. Well, congratulations, sounds like everything is going really well and I kind of touched on this when we spoke last, while the Company is focused on commercial ramp and driving the launch of products that it has now, I kind of want to expand on additional indications. And if you could talk about maybe the potential of using hypochlorous acid or Microcyn for the treatment of moderate to severe acne, and I asked this because it seems like a bridge to acne in the label wouldn't be terribly difficult maybe you could tell me what it takes to do that bridge, and the point is that adding acne as a very attractive indication that could result in very rapid uptake particularly by teens who don't want to take prescription for it.

So I guess we agree with you, that we actually have had a study done, head-to-head against benzoyl peroxide using our Microcyn technology and it gave good results against benzoyl peroxide which is you know that the product is used by most people. For us the go to step that you were talking about, we would obviously in the United States want to do a principal study small study just to reconfirm everything and then you need to look at phase I, II. We're looking at it but our first step is to be established our platform in the derm medical device side and get a good strong platform and get to the point where we're getting closer to breakeven before we head too far down that other path and there are a number of steps before we get to the Phase I, II and looking acne, but it's a very interesting opportunistic that we would look at I guess.

Okay and could you just remind or walk us through how many reps you have in your U.S. and how many derms are you calling on other particular areas that you're more focused on that would use the product like Microcyn or Microcyn based product more than others?

James speaking, out total US sales force is 20 outside reps, 9 inside sales people, 14 dedicated to dermatology, typical call point our Hepni [ph] prescription writers because the data is available both through IMS or [indiscernible]. You can tell Bob is fighting a cold so excuse us, it's not terribly difficult to get heavy TRX writers through IMS data, so frankly that's where we placed our 14 derm specific sales reps. So it’s in territories where those heavy prescription writers were easy for us to study through IMS data.

Thank you. Our next question comes from the line of Dan Chang with Stonegate. Your line is open.

Talking about when I think Jim you've mentioned adding more sales reps, I was wondering how much that’s going to add on to SG&A for the next year?

Okay, our sales reps are fully loaded cost about the 40K per quarter, 160K year. But generally we would like before we take on new, once we like to get the current ones closer to breakeven and so that would be our first step. And then we would look at it in 2 to 4 at that point.

Okay.

So we would be doing it relatively slowly so that's not a huge cash out flow sink for us and specially when we're starting with really good set of products that they can sell right off the bat then it enables them -- their sales ramp to go up even faster.

Okay and you’ve mentioned you guys are going to be launching one new product per quarter, is it?

That is our target, yes.

Okay and that's about you looking at a new indication, are you looking at different dosages just kind of what I am wondering?

For the quarter ending September 30th, the new product has already been announced. I believe it’s SG we did the loading to the pick free distributors to [indiscernible], Cardinal at the very-very end of June, it will be in the sales force bag fully trained in three weeks or so. For the quarter ending December stay tuned in, we'd be glad to share what we're working on, but to answer your question we're looking at both new indications and new dosage and delivery forms of the current active.

And kind of my last question, you've talked about an active M&A market, Jim, are you guys looking at any potential targets? Is there anything that’s strategic or do you guys or do you guys think most of the growth is going to come organically in the next couple of years?

Well we have a terrific R&D department that’s created a nice pipeline of product. So the organic growth is attracted Dan. You probably remember that the Board tapped me on the shoulder because I am an attorney by training with an M&A background. I think to really understand our market here in the States you have to be constantly looking and listening. So we’re certainly paying attention to derm and plastics in the state but no promises or timelines on any M&A activity.

Our next question comes from the line of Keith Zdrowak with National Securities. Your line is open.

I had three questions for you. First question is, so in the month of June you have an FDA approval, just curious if we have any other potential FDA type scenarios you guys are working on over the next six to 12 months, you’re hoping for any more approvals? Next question would be, in Alevicyn [ph] I believe what is about $2 million in revenues a year that you loss with Alevicyn, I know you have new veterinary partner. Do we at some point see some of that getting gained back by the new partner or partners that you might have down the road and if so can you give a time frame? And then the third question would be the revenues appear to be starting to move in the right direction again, 4 million the prior quarter, 3.7 this. If we continue to see the growth coming in, do you think calendar year 2016, calendar year, do you think it would be crazy if you guys average about 4.5 million per quarter next year and the calendar year?

We took quite note, so I’ll handle one, Bob you handle two and three. So my notes on question one expected FDA approvals in the next six to 12 months, I think we’ve been and sure publicly Keith we’ve got a very interesting barrier skin repair product queued up in the FDA queue, not sure we had given a timeline on when we expect an FDA response, conservatively we like to wait for first correspondence with the FDA before we talk too much more about this, so bear with us. Until we hear more from the FDA we’ll stay a little bit quiet on that. Second product that I think we shared with the street was several dermatitis product that we’re very enthusiastic about it. But I think same thing, same answer we’ll share more after we get feedback from the FDA. So hope we have answered your first part, I think the second question Keith that was how soon do we expect to see our own animal health revenue rolling in.

We have seen revenue already, but it's not been a large number it seems to be growing, we’ve set up a lot of the distribution capability at this point especially in the pet area. We are in a number of accounts at this point. We are making good progress and we will expect that we will start to see some revenue growth come out that area.

Third question we have if I got -- if I know is accurate, revenues moving in the right direction in calendar 2016, do we expect to achieve 4.5 million in quarterly revenue.

We don’t really give that kind of guideline at this point, what we have said is that we would expect to see double-digit revenue growth for our fiscal year and this year in fact, if you do the math it gets pretty close to it what you're talking about actually. But we don’t formally give any guidance other than the general. For the year we did give guidance as you noticed for the quarter ending September just because people seemed to be very interested and trying to figure out whether the trend was going to continue in terms of our quarter growth compared to last year for the next quarter. So we are encouraged that we would be able to get to those the levels we were talking about.

Our next question comes from the line of [indiscernible]. Your line is open.

According to and I am new to this story so it maybe you guys haven’t updated data, but Bloomberg was expecting 4 million in revenue this quarter was that analytical coverage it wasn’t updated or were you that far off on your revenue?

We have four analyst who cover us, we throw Zax [ph] and Zax doesn’t give our revenue number, but the other three do and we think we’re right in the middle of consensus, quite we’re not sure where Bloomberg got their 4 million for the three group paying attention, we’re right in the middle.

Okay so the atopic dermatitis total market share, total addressable market is what?

It's in the -- there are about 13.5 million scripts we identified that relate to atopic dermatitis market at our price which -- our prices tend to range anywhere from $40 to $80 for product. So where if we’re on a conservative basis you could put us in $500 million category as an addressable market. Now substantial amount of that market and as Jim talked about this on the last earnings call, this is a steroid product which -- they're very good in terms of reducing inflation, they're pretty good in terms of reducing itch, but they have a lot of safety issues. And we think that we got very competitive product with them, specifically on the safety side.

And so how you're measuring yourself in terms of taking share, how do you -- what kind of metric you're using quarter-on-quarter?

When you're talking about 13.5 million scripts, we're just a sliver of that at this point. So even if we got 10% of that market, we would be pretty darned successful.

Then why wouldn't it be more?

We would like it to be more, but we'll start out with 10 for the next -- 10% of that market.

When you hit that 10%?

We don't really provide the guidance on that at this point.

But we will be enthusiastic on adding additional headcount. We can see exactly through ISM data where we want to add the new sales reps. As Bob said, they already have terrific products into the bag waiting for them. We're just waiting the fall to pull the trigger and continue to add, add, add as cash permits.

And on your medical, do you have any medical advisory board that's promoting your products, dermatologist?

Yes, we do have medical and clinical dermatology focus group, but they certainly do not promote our products. They mostly advise us on industry churns, clinical trial that could be significant to us, no way should they promote on be our behalf.

Thank you. Your next question comes from the line of Terrence Mayer with Private Investor. Your line is open.

I think all of my questions were addressed by the previous caller, so I guess I'll just look for some of the things that we've spoken about too to inspire over the next quarter?

Thank you, Terrence.

You're welcome thank you.

Thank you. Our next question comes from the line of Bob Robin, Robins Capital. Your line is open.

Question on more strategic bigger picture that you see for the animal healthcare market, how attractive is it after this prices as you're overcoming with Innovacyn and Vetericyn and whatever, how attractive might it be in terms of re-penetrating what was as I recall half the entire U.S. market was penetrated by Innovacyn and what about margins, how attracted is it to emphasize this market versus your other opportunities, margins being effected what I am seeing I think is about $10 less pricing for 16 ounce bottle of Microcyn animal healthcare versus the Vetericyn formerly?

Great question, so two prompt, do you reference to Jim, do you want to answer it?

Okay, I'll take the first. We actually happened to have key driver for our animal health efforts on the phone with us, but I'll do the talking and perhaps Dan you can interrupt me. I think our animal health opportunity Bob as you pointed out was really created through the branding efforts of our former partner and one-to-punch, terrific products coming out of our R&D department. Our real challenge in reigniting our animal health sales is in the brand in that step one because those same high quality efficacious products are still coming out of our R&D department. So the challenge as Dan would probably put much more specifically is to dig into our former partner’s revenue stream with our high quality best-in-class products. Bob Millar, you probably the better one to answer the animal health margins question.

Yes.

It's a great question.

Yes, there is no question that and one of the reasons as Jim walked through why we would pick derm, we've been in the animal health market, we have a partner, we're in it now, we have new partners. The products we might get -- our margin would be lucky to be in the 50% to 60% margins on the animal health care area and in the derm area where you will be generally 75% to 85% margins. Because of the pricing is gone, there is a huge pricing differential between our derm prescription markets where we’re selling products anywhere from $40 to $80 per product, where some of our competitors are actually selling products for $200 versus the animal healthcare where when you go in the store you're buying it for $20 to $30. But that means that includes a 50% mark up for the pet store and 30% mark up for the wholesaler, the distributor and the margins to somebody like ourselves or much smaller. So there is no question that the derm business is the one that we’re going to focus on and where we’re going to put our money.

About the margin penetration question, you expect to recapture the market-share that you once have?

[Multiple speakers] We’re certainly not going to -- go ahead I’m interrupting u Bob.

That’s alright, in the U.S. pet store market and perhaps veterinary stores I think you had over 50% saturation of the marketplace in the U.S. and of course that’s gone way down, are you thinking is attractive enough to recapture that?

Well certainly it's an attractive market, but as Bob mentioned we think we rather spend money on building on dermatology brand given those product margins. That having been said, Dan and team have partnered with industry experts headquartered here in California and expect more news in the not too distant future on adding more terrific partners there to help guidance to recapture that market-share you just described Bob.

[Operator Instructions] I am not showing any further questions at this time. I would like to turn the call back to management for further remarks.

Thanks so much for joining us today and we look forward to talking to you next quarter.