Sonoma Pharmaceuticals, Inc. (SNOA) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. And welcome to the Fiscal Second Quarter 2016 Conference Call. At this time, all participants are in 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 would now like to turn the conference call over to your host, Mr. Dan McFadden.

Thanks, Christine. Good afternoon and thank you for joining us this afternoon. With me on the call today 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 our business strategy moving forward. This afternoon Oculus issued a press release detailing fiscal second quarter 2016 financial results and recent corporate developments. Copy of the release can be downloaded from our website, 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. Before we begin, I 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, 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 discuss the financial presentation of our businesses; secondly, our key strategies to achieve strong revenue growth for fiscal year 2016; third, a review of the financial results for our derm strategy, and our overall financial results for the September quarter; and lastly, we’ll provide some revenue guidance for the quarter ending December 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 and royalty fees. For instance, all of our revenue related to our former partner [indiscernible] and animal healthcare 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 year for fiscal year 2016? Our key strategies for growth for the rest of this fiscal year have not changed since detailed in the March earnings call and they are the following. The number one strategy is to focus on growing revenue in the U.S. dermatology market with our direct sales-force and a robust product pipeline. The U.S. dermatology segment provides us with the largest potential growth and will lead us to overall breakeven. Our number two strategy is to continue strong unit growth in our international business with new product launches and stronger partners. The international segment is 65% of our product revenue and will give us the largest dollar growth and further more generates cash to help us fund the U.S. term loan. Consistent with our strategy just mentioned to focus on growing revenue in dermatology with a direct sales-force, we hired a very talented sales and marketing dermatology team of 13 in October 2014, and four additional field salespeople more recently in October 2015. Also, we launched six dermatology products, Alevicyn Gel, a novel Alevicyn Spray Gel, for treatment of atopic dermatitis; and Alevicyn Dermal Spray for the treatment of skin procedures; one of two prescription products in the market for scars, treatment scars, branded Celacyn; and during September we shipped an oral derm drug and a combination post-procedure kit to wholesalers. What have been our financial results for dermatology actions, we started in October 2014 through the current quarter, second quarter, ending September 3? There are two ways to look at our success in the derm market. One is the sales of our products, which are recognized as revenue when shipped to the wholesale distributors. This is a common way of recognizing revenue and is reflected in the following reported revenue. Our U.S. product revenue was $356,000 for the September quarter last year 2014, $621,000 for the March quarter this year, $787,000 for the June quarter, and $1.2 million for the just ended September quarter. U.S. product revenue for September quarter was up $830,000 or 233% compared to the same period last year led by the growth for our dermatology revenue. More specifically, our U.S. dermatology product revenue was $733,000, $773,000 for the quarter ending September 30, compared to $99,000 in the same period last year, an increase of $679,000. On annualized basis, our derm net product net revenue is over $3 million. Even with a 29% growth in international product revenue for the September quarter compared to the same period last year, the U.S. product revenue has grown from 17% of the total product revenue for the September quarter last year to 35% this year, double of what it was last year, and almost equal to our product revenue from Latin America. While we recognized our derm revenue when we shipped the product to the wholesalers, a second good way to gauge and determine the Oculus derm performance is the number of prescriptions sold to patients via the pharmacies. This information is available to the public for a fee via several well-known data bases on a weekly basis. According to Walter-Scores-Data [ph], which is the database we use, the total prescription sold to patients via the pharmacy for our Alevicyn and Celacyn products were, and I’m rounding it, per quarter, 1,300 scripts for quarter ending December 2014, 4,400 scripts for the March quarter, 7,000 scripts for the June quarter, and 8,600 scripts for the September quarter. This represents a strong growth trend or more specifically 14% average month-over-month growth for the last nine months. Looking at this another way, with 8,600 prescriptions per quarter, with a price of $85 per script, the annual gross revenue run-rate is $2.9 million, up from zero last year. We are happy with our progress. One way to keep this trend going is via the introduction of new products and factors I mentioned earlier during the September quarter we introduced two new products to the wholesalers. Our target is to launch at least one new product per quarter. Jim, will talk later about this, about our pipeline of these new products. Bottom line is that for the first nine months, the execution of our strategy to focus on and grow the dermatology business has been effective, meaningful, and then showing a significant tangible impact on our overall financial results. Moving now to a review of our overall financial results, total revenue for the second quarter ending September 30 was $4.1 million, up 24% compared to $3.3 million for the same quarter last year. And total product revenue was up $1.3 million or 64% to $3.4 million from $2.1 million. During the second quarter U.S. product revenue increased as I mentioned earlier, $830,000, up 233%, mostly related to the increase in the dermatology product revenue. And international product revenue decreased - sorry, increased $497,000 or 29% outstripping the decline in the royalty revenue of $657,000, mostly related to our discontinued animal health care partner. As I mentioned, the international product revenue was $2.2 million, up 29% or $497,000 from $1.7 million caused by sharp increases in sales to Asia and the Middle East. Local currency growth in Europe was 15%, and in Latin America was 36%. Our new powerhouse partner in Latin America, Sanfer continues to demonstrate a step-up level of revenue compared to that from our former partner last year. Operating expenses minus non-cash expenses for the second quarter were $3.5 million, up $641,000 compared to the same period last year. The increase in the cash operating expenses were due to higher sales and marketing expenses in U.S. with; one, salaries for the new direct sales force in dermatology; and two, higher new product expenses for dermatology. On the balance sheet, our cash position at the end of September was $8 million, and our long-term debt was zero. What is our guidance for the quarter ending December 31, 2015, we expect our U.S. product revenue for December quarter to grow in the range of 92% to 110% compared to the same period last year. And our total international product revenue to grow in the range of 12% to 18% compared to the same period last year. Our substantial growth in derm sales has been reflected in the growth of our total revenue for the last three quarters. We have had positive year-over-year growth for the total revenue, 37% for the March quarter compared to the same period last year, 8% for the June quarter and 24% for the September quarter. We continue to believe that Oculus remains a strong investment candidate for the value investor, who is also looking for strong revenue growth. We have a market cap of about $20 million, if one deducts the $8 million of cash from the market cap and the ratio of the adjusted market cap of $12 million to the $16 million annual run rate is 0.8 times less than 1 times ratio. For the first half of the fiscal year, product revenue grew at 51% and total revenue at 16%. The multiple of market cap to revenue for the typical derm company stand a range from 3x to 6x. Let’s say potential investor can benefit not only from a strong derm product growth but also from the expansion of the multiple. With that, I’ll turn over to Jim.

Thank you, Bob. A former Wall Street analyst said something interesting recently. He said, I regard Oculus has a commercial story for the first time, so I suggest you focus during your earnings on the financial results and your prospects for continued performance. Bob and I’ll follow his good advice today. In the next seven minutes or so, I’d like to cover our general strategy, provide a few highlights on our execution towards that strategy. And then, as Bob said, spend just a moment looking ahead in our pipeline. First our general strategy, given the world as we see it and given our organization as we believe it exist today, here is how we envision our future. We’ll continue to grow our U.S. dermatology sales force as our core market, starting with our 11 medical device clearances, our growing sales force and using our Microcyn-based dermatology products as the initial cornerstone. We’ll diversify in the non-hypochlorous acid technologies to be license and acquisition becoming a multi technology specialty pharma company, again focused on dermatology. We’ll identify orphan drugs and low cost new drug applications for our direct sales forces itself. We think that strategy solidified competitive projection, especially our intellectual property portfolio. We will provide real reimbursement coverage and provide strong and on-label [indiscernible]. For our non-core markets, which we defined as all other U.S. and international products. Our non-core markets will use a partnership model to generate excess cash for the growth of our core market again U.S. derm. We believe that executing on the strategy is a transformational step that will provide our shareholders and employees, we can increasing market cap and increased stock price, and create long term shareholder value. Hopefully, our strategy is clear to shareholders, we certainly spend a lot of time with our teammate employees, to make sure everyone buys into the strategy and then we ask them for their goals and objectives to execute towards that strategy. We believe that with a clear goal in mind for the team as a whole, our teammate employees are able to establish a clear line of site between their specific day-to-day responsibilities and the broader long-term objectives with our business. So how we executed towards our goals and objectives and the strategy I just mentioned. Bob, cover the numbers, but few of my favorites, few of the highlights from my perspective. Total company revenue $4.1 million and our EPS was negative a $0.11. For those of you who track consensus growth revenue of $3.69 million and EPS was negative a $0.11. As Bob mentioned, we have $8 million in cash and are debt free. 10% consecutive quarter growth for total revenue versus the quarter ending June 30, 2015. 14% total revenue year-to-date, 22% total revenue growth versus the same quarter last year. And we’re especially proud of this U.S. sales for the quarter were up, as Bob said, 233% and U.S. derm growth revenue is it an annual run rate of $3 million versus zero from this time last year. So beyond those numbers, how we’re executing towards our strategy. We think the blocking and tackling is in place to execute. With key drivers being a quality of our sales team, selling great products that meet a need, expanding our sales force and our pipeline of products. The quality of our sales professionals as Bob mentioned is outstanding. Our three key sales managers and our U.S. derm sales force, I wonderfully experience to have deep relationships with our dermatologists, customers, and well-known in the industry. As Bob mentioned, our sales team have six products in their bag now, just recently adding our first non-hypochlorous acid product and you remember from our strategy conversation just a moment ago, that’s been one of our goals and objectives. We believe we are on time and on track with the FDA to set out several additional derm products in the next eight months, two of which, I’ll highlight just a moment. We just added four new sales people to our U.S. derm division and hope to have 20 to 24 reps in total in the next 12 months. Our non-core businesses are also getting healthy. Latin America, Europe and rest of world are all currently breakeven and throwing off small and growing amounts of cash to help us to grow our core market. And we continue to study attractive orphan drugs and lower cost NDAs for our own sales force itself. Finally, a quick look ahead, at our pipeline at new FDA approvals and products. We have several interesting new product candidates in the FDA queue, but I’ll focus on two of those for today. The first, atopic eczema or dermatitis, it’s typically characterized by red skin - excuse me reduced skin hydrate - let me start that started again. Atopic eczema or dermatitis, is characterized by reduced skin hydration and an impaired skin barrier in the epidermis. We are working a European company on developing an emollient, containing ceramide, precursor lipid and moisturizing factor. We’ve been testing early versions of this technology or in the FDA queue and hope to have an approval by March of 2016. The second product in our pipeline that we’d like to highlight is for seborrheic dermatitis, which you may know is a common and chronic skin condition that causes scaly patches, red skin and stubborn dandruff, normally around the scalp or other oily areas of the body, such as the face, upper chest and back. We have a product candidate from our own R&D in the FDA queue and hope to have an approval by summer of 2016. Seb-derm [ph] is an attractive new product candidate for us with $35 million prescriptions written every year in the U.S. to all specialties with dermatologist writing a small percentage of the total. Competitive products for seb-derm heavily - or dominated by topical corticosteroids, topical and systemic antifungals, serious immunomodulators like Protopic and Eladome [ph] and even light therapy. Our sales team is especially excited about this product candidate, and of course, Bob loves those market size numbers. So Bob discussed our numbers and gave guidance for the quarter ending December 31, 2015. I covered our strategy, provided an update on how we’re executing towards that strategy and finally spent just a few minutes on our pipeline. So with that, Christine, would you please open the call for Q&A?

[Operator Instructions] Your first question comes from Jason McCarthy from Maxim. Your line is open.

They’re continuing to progress. I’m glad to see that U.S. sales are up over 200%, that’s pretty impressive. So I just had a couple of questions. Could you just quickly or briefly review how many products you have on the market right now? And how many expect by the end of this year and then going into the first quarter of 2016? Because we want to get a sense of where that next burst of growth could come from?

You want to cover, Bob, the six products that our U.S. derm sales-force is selling now. I think you outlined them, but repeating them is a…

Yes, we have two - we have a gel, Alevicyn Gel, regular gel. We have Alevicyn regular or Spray Gel, a no-touch spray gel. We have Alevicyn Dermal Spray for surgical procedures like mouth procedures. We have a one or two prescription scar products called Celacyn. And then, Jim, talked about the two that we just loaded into the wholesale system. One is a combo-pack which is for people that have a procedure that can get it and take it home. And the other one is an oral drug product.

And Jason, to answer your question, in the March 2016 timeframe we expect an approval for this LMS, it’s lipid and moisturizing factor product that we’re enthusiastic about it. No guarantees on timing. You know better than we do about the FDA, but it would be great to add that product this spring to add a seven total product in our U.S. derm sales-force’s bag.

Okay. And can you - well, thank you for that. Can you also talk a little about the MicrocynAH products, the spray gel, it’s spray in the hot spot. I think the animal market. Now, listen, I have dogs and they have hot spots. So I think it’s an underserved market and there is a real opportunity there. And maybe you can just give us a second and walk us through what the potential is in that market, because I don’t think it’s talked about that much, but there’s certain is an opportunity there.

All right, it’s a great question and we happen to have our animal health guru on the phone today, Tuesday [indiscernible]. But frankly, Jason, we got into the animal health business because of that mange hot spot description you just gave us. We thought that was really interesting and some homework by R&D on the mammalian cells associated with the itch in mange, normally associated with dog mange, really caught our attention. So it was one of our bigger sellers through our previous partner. Of course, you’ll remember, we manufactured those great products for our previous partner. So Dan is working with one current partner under our own brand in the animal health space. And we hope to add more there soon.

Great. Thank you, guys.

Yes, we do plan to - for going forward in terms of…

Great. Thank you, guys.

Yes. We do plan to - for going forward in terms of our pipeline. Our target is to have one new product per quarter and in some cases were two that we have planned for, but at least one per quarter over the next year.

Great. Thanks for the update. I congratulations on the progress in the last quarter.

Thank you, Jason.

[Operator Instruction] The next question comes from the line of Clark Lehman, from Logos Partners. Your line is open.

Hi, guys.

Hi, Clark.

I had a question about penetration. You talked about prescription Q1, Q2, Q3, what was that progression, 4,400, 7,000, 8,600. Yes, we - how many, how many…

Yes, we went from [indiscernible] 8,600.

So how many docs wrote prescriptions, how many - and what percentage - I’m trying to get to the penetration rate. How many dermatologists actually wrote prescriptions in those quarters, and are you seeing - where is that in terms of the overall market?

Yes. We - best estimate is that we’re selling into about 200 to 300 dermatologists at this point. Our target group, of course you don’t realize, we only had 10 salespeople from most of the year, field salespeople. So that’s limited, our target is 3,000 to 5,000 dermatologist per year. We obviously need to expand our sales force to do that, which we are in the process of doing. We think we’ve got tremendous ability to penetrate the market, if you just take atopic dermatitis alone, and I think we mentioned that when we saw you up here, we have 13.5 million strips of relating to a year, relating to atopic dermatitis and obviously we have a very small percentage of that overall market at this time.

Well, again, so the 200 to 300, you don’t know exactly, so the 8,600 strips if you look back. Did you - so that’s only you’re talking less than 10% of the docs?

That’s correct. Yes.

Here half a percent, I mean here 5% of the docs didn’t even know about you guys.

That’s correct.

Are you getting any feedback to the satisfaction or the - the performance of the prescriptions versus competition, I mean what are the docs telling him. Do you get any feedback from the docs?

Well, two docs there, focused on two products. Our star product is generating our biggest number of TRXs card, we get great feedback on that from a clinical perspective and we love this from a price point. The second product, our Alevicyn atopic dermatitis products are typically compared to the corticosteroids, which are good anti-inflammatories, but also carries some serious side effects denim itch skin. You certainly won’t use them on children or the elderly. And it’s in that area that, are we occurring 300 dermatologists script writers are giving us praise, so affordable attractive prices with the [indiscernible].

Okay. So what do we expect to middle - when do we - is the lack of salespeople or feet on the street still the limiting factoring of - I mean wouldn’t that information in the marketplace get distributed fairly fast that your product that Alevicyn is…

It’s important to have the feet on the street, we will - we believe thus far we’ve shown only strong growth, in our scripts or - and in our sales, especially with just 10 salespeople. We think part of it is continuing to grow the salespeople and territories, because there is just some territories we’re just not in, and we’re - we just added somebody to Dallas recently. We didn’t have anybody in Dallas. So you need to obviously have the salespeople out there to sell the product. And so, that’s important. We think that the Alevicyn and Celacyn will continue to grow like it’s grown. And as we - just on a normal - a little bit slower plateau growth-fully.

Yes, one thought there, Clark, because we love talking about our growth rate there, 233%, we’re awfully proud of, we agree, we’d really like to expand the footprint. And regen-frequency, we just had an interesting clinical published in The Dermatologist in the September 2015 publication of The Dermatologist. It’s a great document for our sales-force to then going and bang the drum to increase the number of dermatologist that we call on and increase the territory. So we think we’re just getting started.

Okay. Did you tell me - did you mention what you thought 2016 - what you thought the prescription growth rate was going to be?

We think that there are two things to key off of both the prescriptions and the dollars, the total dollars related to those prescriptions. Next month, we’ll start providing that information, the dollars related to those prescriptions. So we would expect to see the dollar growth go up substantially, because at the beginning of October we actually raised our prices of Alevicyn, Celacyn, the Alevicyn/Celacyn products from $40, $45 up to $80. So you’ll see a very - you’ll see an uptake in the scripts. You’ll also see almost a double in the dollars related - the total dollars relating to those scripts.

And so, everything else being equal - everything else being equal, you go from - you did the equivalence of $2.5 million in the quarter?

You mean off the eight, off the - exactly.

Okay.

You mean, on a per…

Of your most recently reported $1.2 million revenues that’s really $2.4 million.

No, no, no, it’s not - not all of that is derm. I think we said 700-and-some-thousnd of that external.

Okay. Okay.

So you need to - and see, you also got to remember that that’s shipped. That’s not a product that goes out to the pharmacy.

Okay.

Now, we also have as a part of that, we shipped two new products in September. And on a ship basis you pick up - when you ship it to the wholesalers, you pick up some of that revenue. And then it gets sold out as scripts later on. So you have to look at it - the best way is to look at it both ways and have an understanding of both ways book, the dollars related to shipment and also the dollars relating to scripts being dispensed from the pharmacy.

Are you seeing any anecdotal and where can you direct me to go to see anecdotal descriptions of the actual performance vis-à-vis steroids? Is there some site or some…?

Yes, there is the Walter-Scores-Data, if that’s what you’re asking. Some people - some investors do have data that they can access like IMS data or Walter-Scores-Data that actually you can see on a weekly basis what kind of scripts we’re selling or…

No, no, not the actual scripts. I’m talking about the actual response by a patient.

Oh, okay.

Got you, you mean that there is some dermatology…

I mean, I’m a simple guys, does this stuff or doesn’t work? I mean, I don’t - if Alevicyn solves my problem then it’s - I’m trying to find…

Well, let me try to - well, let me try this. We’re a science and clinical company first and foremost. So we have terrific clinicals. I wouldn’t rely upon anecdotal evidence.

Okay. Smart. That makes sense. That makes sense.

And we certainly can share the clinicals, yes.

We can sell you the clinicals on reduction of itch and improvement in scarring. And in fact, the article that Jim referred to in The Dermatologist, I can send you that article or a copy of that article.

Okay. Wonderful. Thank you, guys. Good work.

Thank you, Clark.

I am showing not further questions at this time. I would now like to turn the call back to the presenters.

Hey, thank you very much for joining us today. We look forward to talking to you in February for the quarter ending December 31.