Mediwound Ltd (MDWD) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MediWound Q4 2018 Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Jeremy Feffer, Investor Relations. Please go ahead.

Thank you, Candice, and good morning, everyone. Earlier today, MediWound issued a press release announcing its fourth quarter and year-end 2018 financial results and business update. You may access that release on the website under the Investors tab. With us today are Steve Wills, Active Chairman of the Board; Gal Cohen, President and Chief Executive Officer; and Sharon Malka, Chief Financial and Chief Operations Officer. Steve will share an update on the discussions regarding the potential strategic transaction, Gal will provide an update on the company's programs and Sharon will summarize the company's financial remarks and review upcoming milestones. After those prepared remarks, we will open the call for Q&A.

Before we begin, I would like to remind everyone that statements made during this call, including the Q&A session, relating to MediWound's expected future performance, future business prospects or future events or plans are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, actual outcomes and results are subject to risks and uncertainties and could differ materially from those forecast due to the impact of many factors beyond the control of MediWound.

The company assumes no obligation to update or supplement any forward-looking statements, whether as a result of new information, future events or otherwise. Participants are directed to the cautionary note set forth in today's press release as well as the risk factors set forth in MediWound's annual report with the SEC for factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

At this time, I will turn the call over to Steve Wills, Active Chairman of the Board. Steve?

Thank you, Jeremy, and good morning, everyone. Before we commence with our operational and financial review, I would like to update everyone on our ongoing strategic discussions. As we have discussed in our prior earnings calls, we received approaches and engaged in discussions and diligence with several strategic parties on different strategic transaction scenarios. Following the DETECT positive top line results announced earlier this year, we continue to move ahead with the strategic process related to a potential transaction or collaboration, which is in advanced stages, in order to generate the highest possible value for our shareholders.

The board continues to be advised by Moelis & Company regarding evaluation and assessment of all strategic options and avenues. We cannot give specific guidance as to how long these discussions will take, nor can there be any assurance that a definitive agreement between the parties or any other agreement will be reached. We will be happy to answer questions during the Q&A session at the completion of our team's remarks, but it is important to note that I'm limited in what I can say about this topic.

Earlier this month, we announced that Gal Cohen will step down as President and CEO by the end of May. Gal has led this company for more than 12 years, during which MediWound has moved to the forefront of burn care worldwide. His leadership and dedication are worthy of our great appreciation. And before I turn the call over to him, I would like to thank him for his years of service and commitment to MediWound.

We are fortunate to have Sharon Malka, our esteemed COO and CFO, who has been with us for 12 years, ready to step into the role and take over the reins. I'm confident that Sharon's outstanding skills and deep history with and knowledge of the company will allow for a smooth transition to his new role as CEO. I will serve as Active Chairman of the company and will continue to lead the ongoing strategic process. We wish Gal well in his future endeavors and thank him for all that he has done.

With that, I will now turn the call over to Gal. Gal?

Thank you, Steve. Greatly appreciated. Good morning, everyone. It is a pleasure to speak with you today. We appreciate you all joining our call to review our fourth quarter and year-end 2018 financial earnings and corporate update.

As Steve mentioned, I have decided to step down after 12 years as the CEO of MediWound. It has been an exciting ride and a tremendous honor to work with this talented and committed group of people. I leave the company in very good hands. Sharon is a great fit and knows the company very well. I'm certain that Sharon will guide MediWound to the next level, and I wish him, Steve and MediWound great success.

Now for review of our programs.

We are progressing in our commercial plans and making significant progress on our clinical front. First, we announced positive top line results in January from our pivotal Phase III DETECT study in NexoBrid for eschar removal, where we met our primary endpoint and all secondary endpoints in patients with deep partial-thickness and full-thickness thermal burns.

Our DETECT Phase III study was one of the most comprehensive, randomized, controlled studies ever conducted in burn care with 175 patients randomized to either NexoBrid, standard of care or the Gel Vehicle and involved 44 burn centers. We are looking forward to further advancing NexoBrid as it will meaningfully impact patients' lives and has the potential to change the practice of medicine.

We plan to ask the FDA in a pre-BLA meeting to allow for the submission of a BLA based on the acute results, as they include the primary, the secondary and the safety acute data.

Subject to FDA concurrence, we plan to submit the BLA in the second half of 2019 and supplement the filing with the 12-month long-term follow-up safety data during the FDA review period.

In addition to DETECT, we are progressing in our Phase III CIDS study in children with thermal burns and continue to enroll in both Europe and the U.S. Recently, after reviewing the data of 50 pediatric patients, the study's Data Safety Monitoring Board recommended to lower the study exclusion criteria age even further to include pediatric patients also from newborn to 1 years old. Based on this recommendation, we intend to approach the study sites' Institutional Review Boards, the IRBs, and ask to allow to include into the study pediatric patients of all ages, from newborn to 18 years of age, offering NexoBrid to this important and sensitive group of patients.

Also, this past quarter, we were awarded a new contract from BARDA for the development of NexoBrid for the treatment of sulfur mustard injuries. We will receive up to $43 million in funding to develop NexoBrid for injuries as a result of exposure to sulfur mustard, which is a chemical warfare agent that can create severe burns. FDA already advised that the development pathway falls into the agency Animal Rule, allowing the agency to grant marketing approval based on adequate and well-controlled animal efficacy studies.

This 8-year contract from BARDA for the development of NexoBrid for sulfur mustard injuries provides approximately $12 million of funding to support research and development activities up to pivotal studies in animals under the FDA Animal Rule. It also includes options for additional funding of up to $31 million for additional and subsequent development activities, including the animal pivotal studies and the FDA BLA submission.

We are very pleased to see the acceptance NexoBrid is receiving by both regulatory authorities and by BARDA.

This past quarter, the Ministry of Health in Russia authorized the marketing and distribution of NexoBrid for removal of dead or damaged tissue in adults with deep partial and full-thickness thermal burns. And our exclusive distributor, Genfa, in Russia is working to launch NexoBrid in the first half of this year. We hope to see additional launches globally in the coming years as we seek to expand the use of NexoBrid in other international markets, such as Latin America, Asia Pacific and CIS.

As we have done in South Korea and now in Russia, we would seek to partner with local companies that possess expertise in local regulatory, in market access and marketing efforts and while funding such activities as part of the collaboration.

Moving on to EscharEx. As requested by the FDA, we submitted information on the additional suggested secondary endpoints, and subject to FDA agreement, plan to initiate EscharEx U.S. clinical development program in the first half of 2019.

As reported earlier today, we reached a settlement agreement with Teva Pharmaceutical Industries resulting in a onetime income recognition of $12.1 million. In addition, we entered into a settlement agreement with certain shareholders of PolyHeal Ltd., which contingent upon the Israeli Supreme Court's approval of the settlement agreement, will result in the acceptance of our appeal by the Supreme Court and the cancellation of the 2017 ruling that was issued by the District Court against MediWound. Sharon will further elaborate on the settlement agreements' financial implications in the financial review.

It is now my great pleasure to turn the call over to Sharon Malka for a review of our fourth quarter and year-end 2018 financials as well as upcoming milestones. Sharon?

Thank you, Gal, and good morning, everyone. I'm excited for the opportunity to become MediWound's CEO and to lead our talented team at this important time for our company. I would also like to thank Gal for his long tenure of leadership and dedication to MediWound and to our employees and shareholders. I have enjoyed working with him and wish him the best in his future endeavors.

Turning now to our fourth quarter and year-end financial results. We are pleased with our financial performance in the fourth quarter of 2018, which was highlighted by growing revenues combined with disciplined cost management and with a continued support by BARDA. We reported revenues in the fourth quarter of 2018 of $1 million, an increase of 87% over the last fourth quarter. Revenues for the full year 2018 were $3.4 million, an increase of 36% compared with $2.5 million for the full year of 2017.

Gross profit was $0.3 million for the fourth quarter of 2018 and $1.3 million for the full year, reflecting a gross margin of about 40% compared to a gross profit of $0.1 million for the fourth quarter of 2017 and $0.9 million for the full year of 2017.

Research and development expenses for the fourth quarter of 2018 were $0.3 million, a decrease of 77% compared to last year as a result of a decrease of $0.5 million in gross research and development expenses and an increase of $0.4 million in participation by BARDA and the Israeli Innovation Authority. For the full year 2018, research and development expenses, net of participations, were $4.1 million compared with $5.5 million last year. The decrease compared to the prior year was as a result of an increase of $3.3 million, primarily in NexoBrid clinical trial expenses, and by an increase of $4.7 million in BARDA participation in the company's R&D programs.

Selling, general and administrative expenses were $2.2 million in the fourth quarter of 2018 compared with $2.5 million in the fourth quarter of last year. Full year 2018 SG&A expenses were $8 million compared to $9.1 million in the prior year. The decrease was primarily as a result of a decrease in sales and marketing expenses associated with launch activities.

Operating loss from ongoing operating activities for the fourth quarter was $2.2 million, an improvement of 38% from $3.5 million during the same period last year. The operating loss from ongoing operating activities for the full year 2018 was $10.7 million, down 21% from $13.7 million in the prior year. The decrease in operating loss from ongoing operating activities was primarily due to the decrease in research and development expenses net of participation, a decrease in selling and marketing expenses and an increase of revenues.

Following the Teva settlement agreement signed in March 2019, we recognized onetime income of $12.1 million in the fourth quarter and in the year ending December 31, 2018, of which about $7.5 million was recorded as other income from settlement agreement as part of the operating expenses net, and the balance of about $4.6 million was recorded as profit from discontinued operation. In addition, operating expenses included other expenses of about $0.8 million associated with the review and analysis of potential strategic transactions.

As a result of the Teva settlement agreement, the company posted net profit for the fourth quarter of $10.6 million or $0.39 per share compared with a net loss of $2.4 million or $0.09 per share for the fourth quarter last year. In addition, net loss for year-end 2018 was $1.1 million or $0.04 per share compared to a net loss of $22.1 million or $0.95 per share for the prior year period.

Adjusted EBITDA for the fourth quarter was a loss of $1.9 million compared with the loss of $3 million for the fourth quarter last year. The adjusted EBITDA for the full year 2018 was a loss of $9.5 million compared to a loss of $11.8 million for the prior year period.

A reconciliation of the adjusted EBITDA to GAAP net income is included in the press release we filed with the SEC earlier this morning.

Turning now to our balance sheet. As of December 31, 2018, the company had cash, cash equivalents and short-term deposits of $23.6 million compared to $36.1 million as of December 31, 2017. We utilized about $12.5 million in cash to fund ongoing operating activities during 2018.

Looking ahead, we expect to concentrate our resources on EscharEx and funding its development programs, while NexoBrid becomes a self-funded product as its research and development programs are fully funded by BARDA. As a result, expected cash use to support all our ongoing development and operating activities will be in the range of $12 million to $14 million for 2019.

To recap, this has been a very active period for us, and we look forward to 2019, continuing to progress our programs forward and achieving several important milestones, including filing our BLA for the NexoBrid in the second half of 2019, continuing the recruitment in our pediatric Phase III study also in the U.S. Pediatric Burn Center, initiating our clinical program for EscharEx in the U.S. and further global expansion of NexoBrid as certain of our international distributors and partners are expecting to gain regulatory approvals and launch.

We will continue to progress our product development and commercial programs, and we'll update you on our future earnings calls.

In addition, the company will report, as applicable, on the status of the strategic process mentioned at the opening of the call by our Active Chairman, Steve Wills.

With that, we will take your questions. Operator, kindly open the call for questions?

(Operator Instructions) And our first question comes from Raj Denhoy of Jefferies.

Wondering if maybe I could start with the commentary around the cash burn for next year. I'm just trying to understand kind of some of the moving parts around whether you're going to be receiving any revenues from BARDA, and then how to think about the spending in the middle of the income statement. Are you imagining it's going to continue sort of similar to what we've seen now in 2018, or do you expect we'll see actually a pickup in maybe R&D spending as you start to support some of the EscharEx trial work?

It's Sharon. So basically, the 2019 estimated cash use is taking into consideration a part of the procurement of BARDA during the second half of 2019. Regarding the R&D expenses, we believe that as we begin the EscharEx development plan in the U.S., the R&D expenses will increase [reasonably] to take to as part of our estimation for next year, while SG&A expenses will be around the same level as it was in 2018.

So to put a finer point on that, so second half of the year, you will start to receive BARDA revenue. Are you thinking $4 million to $6 million? We have previously modeled $8 million in revenue from BARDA this year. How do we think about that now?

It probably would be around $4 million to $6 million in the second half of this year.

Okay. That's helpful. Maybe, Steve, I could ask you some questions about the strategic process. I'm curious if there's anything more you can describe about where we are in terms of the stage. Is it a question of still narrowing down potential suitors? Is it a question of what assets are being talked about? Is it simply a question on valuation? Anything more you can give us in terms of helping us understand the stage of the process?

Sure. At this stage, there is absolutely no question we're in advanced discussions. I'm also, at this stage, not comfortable stating exactly what those discussions are around. Nothing is finalized, nothing is absolute. Nostradamus has not called me back. We are still looking at all the assets. I mean, obviously, NexoBrid, being the most advanced asset, is probably the cleanest and clearest because we have an approval in Europe and the Phase III results were quite positive. EscharEx being a bit further behind, but from a development standpoint, not true Phase III, but definitely a very strong asset with a lot of interest. And we really only have 2 -- we have 2 primary assets with the NexoBrid and EscharEx. We have a little bit more in the pipeline, but those are absolutely even earlier stage. I mean, last year, I think the first half of the year, whether it was in the second or third quarter, as we were advancing, it came to the point that with the NexoBrid Phase III results just around the corner, it made sense to just wait and see how strong the results are, and that frankly garnered a bit more activity. While there was people that were interested and we were in current discussions, they were enhanced and advanced, and we actually had a few other people come over the wall to talk about doing something with us. At this stage, I'm comfortable that we've run a very comprehensive process. We've had some excellent assistance from the Moelis & Company, investment banking folk. And we're going to remain data-driven and take a measured approach because we have options. I do look forward to giving very specific guidance, whether it's next quarter or the quarter after, I think that's the way I would frame it. I think at some point, you just have to decide which avenue you're going to go forward with and get excited with that. So that's -- I'm sure it's not as responsive or as comprehensive as you would like, but at this stage, it's really the best I can do.

No, it's helpful. Maybe just my last question sort of related to that, and while certainly sad to see Gal moving on, but when you think about Sharon now taking the CEO, CFO and COO role, it's kind of unique to have all those concentrated within one person. Is that a reflection of your kind of views that maybe this isn't going to be a long-term situation, perhaps?

No, no. We're doing this in a sequential manner because we have some options. Because of Sharon's history, greater than 12 years with the company and being the existing CFO and COO, we can transition Sharon into the CEO role very smoothly. Gal, as we've mentioned, is going to be available through May, and we're starting the process to bring in a new CFO. But again, from a sequential standpoint, we thought it's absolutely best to -- let's get the transition, Sharon moving in, Gal moving -- evolving there. And over the next several months, we'll be advancing the process to bring in a new CFO at MediWound.

And our next question comes from Bruce Nudell of SunTrust.

I have 2 brief questions. First, with this new BARDA arrangement, if the data proves to be good, how should we think about kind of inventory stocking similar to the mass casualty event? Is this going to be a separate inventory stocking amount that the government will likely take on?

This is Gal. According to our discussions with the BARDA currently, since the current stock is being produced under what we call emergency authorization rather than the commercial labeling, then BARDA will stockpile this inventory. And once the product will become commercially available, once we get the BLA approval or subject to FDA BLA approval, new stock will need to be produced for the market, which at this point in time can also serve under what we call a VMI to support a mass casualty event. So in short, our expectations are that the $16.4 million that BARDA is committed to procure would be not with the commercial-label product, and thereafter, the commercial-label product would replace it.

And if I may add that about -- that the second agreement, the second -- the new contract of BARDA currently does not include a procurement section, and probably this will be discussed later on when we advance our development plan of this contract.

Perfect, that's really -- and Steve, just a quick follow-up. I mean, it almost seems as though an external gating event or some sort of thing is going on beyond the normal course of negotiations. Am I misapprised of that assumption? Is this just a regular, but just protracted negotiation?

It's absolutely the latter. There's nothing special here. Since we had both somewhat smaller, somewhat regional companies to very large global companies, they have different types of autonomy from an operation standpoint. The only reset that I think I would characterize as a little bit special is that we've started these discussions, negotiations after the initial approach in the first quarter of 2018. Since something didn't happen very quickly -- and it didn't happen very quickly because we wanted to run a comprehensive process. I mean, if somebody would have come in with a very significant preemptive outlier bid, we might have pursued it differently. But once we started getting into the comprehensive process, we were several months into the process and then the NexoBrid results were going to be announced. We weren't going to be able to sign something and ascribe the value that we were looking for until those results came in. So we had a little bit of a reset when that announcement came in, in December, January time frame. And that has slowed it down a bit, not because of anything else or anything special, whether it's internal or external.

And just a follow-up on that in response to Raj's question. It almost seems as though the kind of the ball is in your court and you're not waiting for other things and you just need to decide what's in the best interest of the company and shareholders. Or am I misapprised of that as well?

No, no, that one, I'll give you. One for two. That one is accurately reflective. We have options. We have multiple options. And again, I look forward to -- whether it's within the next quarter or the quarter after that, I think that's the time frame I would bracket that we will announce what MediWound is doing going forward regarding the strategic process/collaborations.

And our next question comes from Josh Jennings of Cowen.

Gal, good luck on your next chapter; and congratulations, Sharon, on a new seat. I was hoping to just start with Gal. I mean, I know we had a discussion 2 weeks ago when the announcement was made that you were stepping down. And I guess it might be just helpful to just hear again your decision to leave when a strategic event could be imminent, and I think Steve just said maybe in the next quarter or 2. It might be just helpful to review your decision process.

Absolutely. Thank you. So I feel, at this point, comfortable with where the company is today because of several reasons. One, I waited to see the DETECT results, and we were very, very happy to see that we particularly met all endpoints, primary, secondary. The DSMB issued a report saying that the safety profile looks good, which particularly paves the way for the BLA and lifts a little bit of weight off my shoulders. I think that the collaboration with BARDA is going very, very well now, very fruitful, very strong, and I think that we're going to hear more about that going forward. Sharon has been working with me for many, many years, for 12 years. He knows the company very well. I did it on purpose. He was the CFO, I appointed him as the COO and I gave him more and more tasks and responsibilities to have a nice process going forward, succession process. I think, at this point, the strategic process is going well. It's in advanced stages. Steve knows well how to manage it. He did it already twice in Palatin and in Derma Sciences. The company now is well funded. We didn't spend a lot of money in 2018. If you look at our initial guidance on spending and our final results, we saved a little bit of money. So we have enough money to go forward. And after about 1/4 of my life, based on the above, I feel comfortable to go to the next chapter of my life and pursue other opportunities and at the same time, as Steve mentioned, I'm going to still be here until -- up to the end of May. And MediWound is very, very dear to me, so I'm not going away. I'm always one phone call away. If my assistance is needed in any way, I'm available to contribute. So this is why I decided that this is the good time to do this move.

And I just wanted to follow-up on EscharEx. I do understand NexoBrid is front and center here just from a time line perspective. I just want to make sure that you guys aren't deemphasizing the EscharEx opportunity. Do you still look at that asset as the real long-term value-creating asset in the portfolio? And maybe you could just help us understand the timing with the FDA. It sounds like you're going to start the trial in the first half, but anything you can share on the secondary endpoints? And how that decision process played out would be helpful as well.

Thank you, Josh. Thank you for the questions. So regarding EscharEx, you're absolutely right. We do not believe -- we didn't change our mind for 1 second that EscharEx is a great asset. We truly believe that this, potentially, once approved, if we meet what we want to gain with this product, we can get a product that can save hundreds of millions of dollars. We have discussed with FDA, as I mentioned in previous calls, we agreed with the FDA on the primary endpoint being incidence of complete eschar removal, like we did in the Phase II studies before, like we have in the Phase III program of NexoBrid. We agreed with the FDA that wound closure would be a safety measurement that we need to show that we don't have any impairment or deleterious effect on wound healing as we had in previous Phase II studies with EscharEx, as we had with NexoBrid in the Phase III program. And then we provided all the clinical information or the CMC information, which FDA already knows on NexoBrid and they -- I think the feedback is good. It doesn't seem to say that we need to do any more preclinical work, or the CMC is fine. And then we had a discussion with them, and we offered them several secondary endpoints. Now because this is a novel treatment and there's not a lot of precedents and history with that, FDA asked for some more information on the secondary efficacy endpoints, and we have provided this information recently to the FDA as they requested. And subject to FDA concurrence, if we don't see any surprise, we are prepared to initiate the program in the second half of this year. Does that address your question?

(Operator Instructions) And our next question comes from Jay Olson of Oppenheimer.

Thanks to Gal for all his work. I wish you all the best, and I look forward to continue working with Sharon. You described the NexoBrid BLA filing, which is planned for the second half of this year. Is that something that's well defined at this point in time? Or is that still subject to further discussions with the FDA?

So thank you, Jay, for the question, and thank you for your warm words. As we mentioned, we believe that based on the acute data that is available, that includes the primary, all the secondaries, practically all the safety information up to 3 months follow-up post wound closure, which is in accordance with the FDA guidelines -- FDA guidelines has said up to 3 months follow-up of wound closure -- all this body of information is available. The product is approved in Europe. FDA knows how we manufacture and control it, they saw the preclinical work. We already have a study in Europe that includes 89 patients that documents the cosmesis and function of the NexoBrid patients showing that NexoBrid has at least as good, if not better cosmesis and functional result. Because we don't see any issues currently with infections, and we don't see any issues with wound closure in the results, we don't think that there should be a big concern about long-term outcomes. With all this medical and regulatory logic, we intend to meet with the FDA in the second quarter and to discuss with the FDA the possibility to submit the BLA based on all this body of information and to supplement the 12-months follow-up of the study during the early stages of review by the FDA. The 12-months follow-up, as I mentioned, mainly includes 3 things: cosmesis; function; and quality of life, which we already have data on from previous studies and which FDA should be able to receive very early on in the review process. This is our plan. If FDA concurs, we'll submit the file in the second half of '19, the BLA, and we supplement the 12 months in the first half of 2020. If FDA will insist to get the 12 months, then we'll have to delay the process by about a quarter or 2. And this is where we are coming from, and we hope that FDA will see eye to eye with us. We obviously cannot commit because we cannot speak on behalf of the FDA, and FDA has a tendency to have its own mind. So we'll have to see.

Okay. When should we expect to see the full publication and presentation of the Phase III NexoBrid data?

So as you know, FDA doesn't work with what we call top line data. We have to submit a full clinical study report according to ICH E3 and E6, and we are preparing that and the teams are particularly working now to already generate the BLA. We believe that we'll have this information for the FDA in the second quarter, and this is why we timed the meeting for the second quarter of this year. Now regarding what we call scientific publication, obviously, out of that, we'll need to write a publication or investigator will need to write a publication. And if you go through a scientific publication process with a reputable journal, we expect the time that it takes to publish a paper about that, of the review process of a reputable journal.

Okay. All right. And then maybe if I could, just one financial question. It seems like your gross profit margins came down in the fourth quarter compared to the third quarter. Can you just help us understand how we should think about the gross profit margins for NexoBrid in the long term?

So basically in 2018, the gross -- the average gross profit during the whole year was around 40%, and the fluctuation between the different quarters are a result of number of batches manufactured per quarter. Going forward, our gross margin will be comprised of 2 elements: the commercial gross margin and the BARDA procurement gross margin, which will be probably higher than the commercial one. Looking forward to 2019, we believe that we will be around 50% on average, comprised of about 40% for the commercial part and about 60% for BARDA. On a steady state, when we'll utilize the full capacity of our manufacturing capabilities, we will end up with about 75% gross margin.

And that concludes our question-and-answer session. I'd now like to turn the conference back over to Sharon Malka for closing remarks.

Thank you. Thank you, everyone, for joining the call today. We look forward to updating you further on our progress in the near future. Have a good day. Thank you.

Thank you, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.