Veru Inc. (VERU) Q1 2015 Earnings Report, Transcript and Summary

Hello and welcome to The Female Health Company, First Quarter Fiscal Year 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. The statements made on this conference call which are not historical fact and forward-looking statements based upon the Company’s current plans and strategies. Such forward-looking statements reflect the Company’s current assessment of the risks and uncertainties related to its business. The Company’s actual results and future developments could differ materially from the results or developments in such forward-looking statements. Factors that may cause actual results or developments to differ materially include such things as product demand and market acceptance, the timing of receipt and shipment of large orders, competition, the economic and business environment, and the impact of government pressures, currency risks, capacity, efficiency and supply constraints, and other risks detailed in the Company’s press releases, shareholder communication and Securities and Exchange Commission filings. For additional information regarding such risks, the Company urges you to review its 10-Q and 10-K SEC filings. I would now like to turn the conference over to Karen King. Please go ahead.

Thank you, Chad. Good morning everyone. This is Karen King, President and CEO of The Female Health Company, and I’d like to welcome you all to The Female Health Company’s fiscal 2015 first quarter conference call. Joining me on the call today are the Company’s Chairman, OB Parrish and our CFO, Michele Greco. First, Michele will review the financial results for the first quarter ended December 31, 2014. Then I will provide an update on the progress we are making on our strategic initiatives and comment on key factors that may impact future results. Afterwards, Michele and I will take your questions. Please note, when we refer to years, it is FHC’s fiscal year, which ends on September 30 unless otherwise stated. I’ll turn the call over to Michele now.

Thanks Karen and hello to everyone. During the first quarter of 2015, the Company recorded increases in unit volumes and revenues, compared with both the previous quarter and the prior year first quarter. Unit sales totaled 12.2 million in the most recent quarter, up 25% from 9.7 million units in the fourth quarter of fiscal 2014 and 3% higher than last year’s first quarter. Net revenues for the quarter totaled $6.7 million up 20% from $5.6 million in the previous quarter and roughly unchanged from the first quarter of fiscal 2014. Gross profit increased 4% to $3.8 million, which represented 57% of net revenues compared with $3.7 million or 55% of net revenues in the prior year quarter. Our operating expenses totaled $2.4 million compared with $2.1 million a year earlier. Two-thirds of the $270,000 increase in expense was due to cost associated with the 2012 and 2014 Brazilian tenders. The remaining increase was related to sales and marketing initiatives, including the salary and travel expense for our Executive Vice President of Sales and Marketing, who joined FHC in the Company’s third quarter of 2014. Our operating income was $1.5 million, compared with $1.6 million for the prior year first quarter. The operating profit in the most recent quarter represented a significant improvement relative to the fourth quarter of last year when we recorded an operating loss of $500,000. As of December 31, 2014 our accounts receivable and inventory balances increased from the previous quarter due to orders received under the awarded Brazil 2014 tender. As of December 31, 2014, the Company’s cash and equivalents totaled $4.6 million, compared to cash and equivalents of $5.8 million at the end of fiscal 2014. FHC has significant tax loss carry-forwards that maybe used to offset the cash payments of taxes on future earnings. These tax loss carry-forwards include $17 million in state $17.3 million in Federal carry-forwards in the U.S. and $62.9 million in the UK, which do not expire. The Company is no longer recognize in income tax benefit associated with reducing the Company’s valuation allowance on its deferred tax assets, related to net operating loss carry-forwards. During the period ended December 31, 2013, the valuation allowance on the Company’s deferred tax assets was fully reversed and as a result the Company does not expect to recognize such tax benefits to any significant extent in its consolidated statements of income for periods after December 31, 2013. However the Company’s net operating loss carry-forwards will be utilized to reduce cash payments for income taxes based on the statutory rate in effect at the time of such utilization. Actual income taxes paid are reflected on the Company’s consolidated statements of cash flows, while the Company recorded an income tax expense of $670,000 in the most recent quarter. The amount of income tax actually paid during the quarter with much less at $61,430. In summary, on an annual basis, the Company has remained profitable since 2006 during quarters of increasing and decreasing volumes and revenues. I’ll now turn it back to Karen.

Okay, thank you, Michele. Our fiscal 2015 is off to a very solid start with a good first quarter followed by last week’s announcement that we had received orders for 25 million units from the Brazilian Ministry of Health. The orders represent the largest tender purchase in the Company’s history, a 25% increase over the previous largest tender order which was also from Brazil. Important to note is that when the company received the $20 million unit order from Brazil Ministry of Health in 2012, it had been almost four years since their previous purchase and shipments. This new set of orders came in less than two years after our last shipment to Brazil. This clearly shows the level of female condom usage is significantly increasing in the world’s fifth most populated country. We do not know if the Ministry of Health will place any additional orders under this tender or not, however, we are very pleased with these orders and the growth demonstrated in the Brazil program. Now moving to our strategic initiative, we continue to make good progress with our new growth strategy. Our first priority is to increase the demand for FC2 female condom and we are addressing this priority on several fronts. First, in our existing global public sector channel, we have focused extensively on relationships and approaches with our four key customers, which include the United Nations Population Fund, the AIDS branch of the U.S. Government which is called USAID, the Brazil Ministry of Health and the South African National Department of Health. In November, FHC was invited to attend a UN consultation on the role of condoms in the prevention of HIV, STIs and unwanted pregnancy, and strengthening condom programming. Held at the UNA’s headquarters in Geneva, the meeting brought together donors, major procurement organizations, ministries of health, key advocate groups and noted experts to review the state of condom use globally and plan how to strengthen condom programming efforts around the world, particularly as it relates to the continuing fight against HIV and AIDS. We have been transforming our training organization to include a sales marketing capability. We have brought on three experienced sales and marketing professionals and are seeking one additional marketing expert, all without adding headcount to the organization. We are also carefully examining the performance of our distributors and have brought on several new distributors to drive greater female condom activity in targeted regions. We are rebalancing our website to improve marketing of FC2 and importantly add online purchasing capability, which we expect to go live shortly. We have finalized the inclusion of UPC codes on the U.S. product, which is an essential step to achieve reimbursement coverage through many major health plans in the U.S., including through the new Affordable Healthcare Act. We are actively working with major healthcare providers to make FC2 available through their network. I am pleased to report that Kaiser Permanente has recently initiated an FC2 Program. We are also initiating a program with OB/GYN to create greater product awareness and support. We’re evaluating how best to expand consumer awareness of FC2 in the U.S., a market we have not previously focused on, but believe has significant potential. We have a completed a series of focused grouped evaluations with targeted populations and gain valuable insights in how to best approach the consumer space. We are beginning work on brand development as a result of the research. The second critical element of our growth strategy is portfolio diversification. We are seeking to mitigate the significant inherit risks associated with being a single product company by broadening our product portfolio to drive growth and working very closely with the 35 year industry M&A veteran with extensive experience in medical devices and phrama, to help us identify and evaluate potential acquisition candidates. Together he and I have examined many products and/or companies, as well as many existing [ph] opportunities originating from the epidemic settings. Several discussions are progressing. Well I’m optimistic that we will find the right products to add to our portfolio, I cannot give you a specific timeframe for completion of the first deal. We are very actively engaged in these activities, and have found several strong candidates in the field of women’s reproductive and intimate health. We are taking the right steps, we are building the right team and we are beginning to show progress against our plans. Now turning to the long-term outlook on FC2 sales and factors that could impact demand. There have been no changes in the primary demand drivers. HIV/AIDS continues to be a very serious challenge in many parts of the world, particularly among women who can benefit from a protection method under their control. The global public sector world continues to support the importance of prevention through procurement of condom. Other STI incidents resolving [ph] all around the world including in the U.S. and disturbingly it is often among young people aged 15 to 24. While treatable STI’s can impart less in consequences including infertility. The female condom is the only method initiated by women that can provide protection against unwanted pregnancy, STI and also address the growing concerned about the impact of STIs on fertility. FC2 female condom has none of the side effects associated with hormonal birth control methods. And we are discovering through our focused group work that this is a significant issue and concern for many American women. Now moving to competition, there have been no developments in the competitive landscape since our last conference call. I will quickly recap the status of the competitor. Cupid Ltd., an Indian-based public company introduced a female condom by the same name and achieved WHO clearance in 2012. It does not have FDA approval. We are aware that Cupid was awarded a portion of the last South African tender and also has received some very limited orders from UNFPA. We know that Cupid bid on the recently awarded Brazil tender through its local distributor, but the tender was awarded exclusively to FHC through its distributor, Semina. The other female condoms in development that I have previously mentioned, the women’s condom developed by PATH, the Pleasure More and Fonar’s condoms developed by Chinese companies, and the Be Well [ph] product under development by an Indian company have not received regulatory clearance by either WHO or FDA. FC2 remains the only female condom to achieve both FDA approval and WHO clearance. FC2 is covered by 38 patents across 50 countries, more than 460 million FC1 and FC2 condoms have been distributed in more than 144 countries with no recalls or customer rejected lots. The Female Health Company has the capacity to produce up to 100 million units annually, making it the only manufacturer with the current ability to fulfill very large tenders. With regards to our outlook, we do not provide revenue and earnings guidance. Although, over the long-term, we believe the market for FC2 will continue to grow and there remains a significant untapped opportunity in demand and usage. We believe FHC will experience growth and continued profitability due to the following, first, the continued incidence and associated cost of sexually transmitted diseases in both developed and developing countries and the continuing significance of HIV/AIDS and the increasing global focused on family planning. Next, internal efforts within the company to focus on untapped demand through more conventional sales and marketing activities, developing relationships with critical customers and marketing the unique features and benefits of FC2 directly to Ministries of Health. Efforts to create more demand in the U.S. consumer space have been under investigation and a support infrastructure is now being put into place. Next, Semina, our Brazilian distributor has been awarded an exclusive contract under a public tender to supply up to 50 million FC2s to the Brazilian Ministry of Health. The contract is valid through August 20, 2015 and the Ministry of Health has to date placed orders for 25 million units under this tender. As noted previously, this is the largest order received in the history of FHC surpassing the previous Brazilian MOH order of 20 million units. And last, commitment of our resources and focused on a growth strategy to drive demand for our existing product, increase our growth opportunities through product diversifications and improve the predictability and consistency of our revenue and earnings. To summarize, we continue to drive sales of FC2 through a multi-facetted sales and marketing efforts. We are implementing a new strategic plan designed to drive future growth for the Company and we are actively searching for product candidates that have the ability to increase sales, diversify our revenue sources and deliver long-term value to our shareholders. This concludes our formal comments. Chad, we would now like to take questions.

Certainly we will now begin the question-and-answer session. [Operator Instructions] Our first question comes today from Jack Wallace with Sidoti & Company.

Thank you for taking my questions this morning. Just looking at the backlog come into the year, just late around $9 million, almost $10 million, how much of that was reflective of demand from Brazil and how much of that was rest of the world demand?

So I’m going to - first of all, good morning, Jack. I’m just looking at Michele for that, because that would have been as of September 30.

As of September 30.

Correct.

Right. So do you have any heels on that Michele?

Yes, there was talk, about half of that was related to Brazil.

Okay, great, thanks. That’s helpful. And then I noticed the cost free unit actually came down really, substantially in the quarter, whereas year-over-year and even more sequentially was there, I guess, kind of anything going on there from manufacturing standpoint and it’s obviously great news.

Well, one of the things that we have highlighted is that, our local manufactures in Malaysia and we’ve had favorable pricing. We buy a product in local currency. So the currency has been favorable for us.

Great thanks. I’ll hop back in the queue then.

[Operator Instructions] Our next question again is from Jack Wallace. Please go ahead.

All right. I’ll go more than two this time. And then the kind of the other flip side of that is price per unit sales looks pretty right around that kind of $0.55 may be just slightly below that level where I believe Brazil gets their units. Just curious with demand coming not exclusively from Brazil on the quarter, why did we see a slightly higher price per unit figure?

A slightly higher price per unit figure?

Right, so if you sounded Brazil at $0.55 a unit and you’ve got units the rest of the world, call it 7% and change million units, is right? Theoretically that’s going to be, I guess, a price flow at higher than $0.55 right? Why wouldn’t we see the price per unit be a little bit higher?

So we sell to the rest of the world at $0.55, but then we also have free goods, the 5% free goods, and I think as we’ve also pointed out in our - you’ll be seeing that’s in the quarter, we’re going to be removing that 5% free goods, and adjusting the price to the customers by 5%. And so the change in our price per unit has to do with, for Brazil they can’t accept the 5% free goods, so we’ve adjusted their price per unit here in the first quarter.

Got you, okay. Thanks, that’s makes sense. And then, so that’s we’ll see to that figure be a little bit lower since last we had a number somewhere around at $0.57750 [ph] [indiscernible].

Right this is all impacted by mix.

Got it. Maybe can you just talk a little bit about the kind of the relationships you have down there in Brazil, looks like Brazil has kind of void map a little bit on what - they’re allowing you to say and not say in regards to order flows. I guess has anything changed down there or it’s just maybe the political environment softening a little bit?

Well, as I had mentioned in the last call, the Brazilian Ministry of Health had asked us to not speak to orders until the product was actually received in their warehouses and this was such a very significant piece of news for us that we really have been negotiating hard with the ministry to be able to make this announcement. In general, the rules under the tender are that they still have the rights to first of all review and edit any comments that we want to make regarding supply under this tender and making also restrict what we say. So for now we’ve been successful in this one instance being able to put out this release, but they still have control of what we’re able to announce.

Okay, that’s helpful. And then lastly Michele, this one is for you, you kind of going forward obviously, we’re not going to see the tax benefit hit the P&L but we’ll see it hit the cash flow from operations. Is there - it may sound to a number of different tax environments, but is there may be a kind of a rough rule of thumb or range that you’d feel comfortable with in terms of giving some kind of soft guidance for what tax benefit might feel like for the given level of, what I call, pretax income?

So you’re asking what the tax expense rate would be our effective rate? It’s probably going to be around 40%.

I’m thinking more from a cash standpoint where your cash…

That’s we’re actually paying.

Right.

Well, we’re paying - right now we are paying really for Malaysia tax is around 25%. And Malaysia brings in about 10% of our process. There’s a biggest component of tax that we pay. Illinois the four year moratorium is up, we get to use our NOL, so we’re not going to paying Illinois tax anymore, we may be paying a small AMT tax in the U.S. about 2% on our earnings. So we’ll continue to see some tax similar to the level that we saw here and the financial.

Yes in her prepared statements, Michele pointed to the fact that we’ve recorded an income tax expense of $670,000 in the most recent quarter, but the actual amounts of tax paid was $61,430. So that’s gives you an indication of the level of order of magnitude.

Okay. So I guess that maybe something around that I guess the relationship there called maybe 10% rather than kind of 40% what you’ve shown on the P&L?

Right, that’s significantly well.

Okay, great. Thanks. That will be all from me.

[Operator Instructions] Our next question comes from Eric Weinstein with Chancellor Capital.

Hi, it sounds like you’ve been investing heavily in U.S. distribution and probably more to come perhaps in the consumer side, can you give us little bit more color, what’s in the pipeline with respect to that and when we may start to see some impact in terms of revenues to the Company? And then sort of secondly in terms of the other side of strategic initiatives, it seems like we’re acting the distributor in the U.S., that’s not necessary true, through the rest of the world. So if you can also comment on M&A with respect to buying a new product to push through your channels versus distributing a new product, as opposed to buying at a company your product line, are there opportunities for that or because you don’t necessarily act as your own distributor throughout most of the world, there is not enough more generic for you, if you could talk to those questions that would be great.

Okay, thanks Eric. So on the U.S. basically what we’ve been focusing on is doing our homework so that when we do rollout a program here that we’re going to be the most effective that we can be and we also plan to do that’s in a very measured tactical way. The things that we’ve been doing so far is really getting the infrastructure in place, so all other things that we think are going to be essential to supporting, creating more of a consumer presence for FC and a lot of this is based on what we’ve already found out through our research, including the importance of OB/GYNs and having it available in the provider setting. So, I don’t have a specific plan yet as exactly how this is going to look, I think, we’d really hound in and have a very good idea of where our best target would be, learn some things we definitely didn’t know and what we think would be the best angle for approach into the U.S., but we’re really right now in that stage of formulating and planning exactly what this will look like and what the timeline will be. Some of what will go with it has to be some minor what I would call product enhancements or modifications, including a brand name, for example. So there’s several things that we’re doing to prepare. So again when we do go with that, it will have the most impact.

You did mention that, getting proper UPC codes I think on the product are there reimbursement codes today for specifically for female condoms?

Yes, so many of the major healthcare plans do provide reimbursement coverage for both male and female condoms and even the Affordable Health Care Act provides coverage for male and female condoms. So an individual who would like to get female condoms needs to have a script from their physician and then would be able to be reimbursed for that.

And there is obviously a large price discrepancy between female and male condoms, how does that impact the female condom?

Yes, in terms of the reimbursement it doesn't. So if it’s covered, it’s covered. So there is no difference in how that’s treated.

Great.

Okay. And then to your second question Eric about sort of the nature of the M&A activities that we’re focusing in on and would we entertain a distributor type arrangement versus actually an outright acquisition, we’re open to all possibilities for the right opportunity, but I can tell you that my effort is more focused on acquisitions.

Okay, fair enough, thanks.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Ms. King for any closing remarks.

So thank you all for joining us today. As is our usual practice, if any of you would like to do a follow-up conversation with Michele or I we’re available through the rest of the day today. Please contact Michele directly via e-mail if you would like to set up some time with us. We thank you all for joining and look forward to speaking to you with next quarter’s results. Thank you.

Thank you. To access the digital replay of this conference you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 12:30 PM Eastern Time today. You will be prompted to enter a conference number, which will be 10059808. Please record your name and company when joining. The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect.