NovaBay Pharmaceuticals Inc (NBY) 2014 Q4 法說會逐字稿

Welcome to the NovaBay conference call. (Operator Instructions). As a reminder, this conference is being recorded March 26, 2015. I would now like to turn the conference over to Jody Cain. Please go ahead, ma'am.

This is Jody Cain with LHA. Thank you for participating in today's call to discuss NovaBay's 2014 fourth-quarter and full-year financial results and business progress. Joining me from NovaBay Pharmaceuticals are Dr. Ron Najafi, Chairman and CEO; Tom Paulson, the Company's CFO; and Glenn Moro, Vice President of Sales and Marketing for Avenova.

I'd like to remind listeners that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. For a list and description of those risks and uncertainties, please review NovaBay Pharmaceuticals' filings with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 26, 2015. NovaBay Pharmaceuticals undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

And now, I would like to turn the call over to Ron Najafi. Ron?

Thank you, Jody, and my thanks to all of you for joining us.

While we are still in the early stages of our commercial launch of Avenova, I am pleased to report that we are gaining excellent traction in the market. Sales of Avenova doubled in February compared with January and sales to date in March are well outpacing February numbers. Equally exciting is that the growth is coming from both first-time orders and from reorders as ophthalmologists and optometrists are incorporating Avenova into their practices.

I am delighted to report that in the three months since introducing our new business strategy, we are making significant progress. As you may recall, our plan is aimed at driving near-term revenue, with the ultimate goals of reaching profitability.

On today's call, I will discuss recent developments. Tom Paulson, our CFO, will review financial results. Glenn Moro, our Vice President of Sales and Marketing, will provide an update on our commercial activities, and then I will share some final comments and we will take your questions.

As announced on January 7 of this year, following a comprehensive review of our assets, competitive positions, markets, and market dynamics, we made the decision to focus NovaBay's business primarily on the eye care market. We implemented a three-part strategy, with the first component being the commercialization of Avenova. This is our proprietary prescription-based product for the management of blepharitis and Meibomian gland dysfunction and associated dry eye syndrome.

Our decision to make this a business priority has the full support of our highly respected members of our ophthalmology and optometric scientific boards.

I want to spend a minute to share my enthusiasm for Avenova and why we believe commercializing this product is the best path to near-term revenue growth. Approximately 30 million Americans suffer from blepharitis or dry eye syndrome. These are difficult-to-treat chronic conditions that can cause irritation, inflammation, and itchiness of the eyelid.

Alternative treatments for managing blepharitis include antibiotics, steroids, and OTC detergent-based lid wipes. The soap in these wipes can counteract the eye's natural moisturizing mechanism. All of them offer minimal relief at best and can further irritate tissue that is already inflamed.

Avenova is the only eye care product to contain our pure proprietary hypochlorous acid, which we call Neutrox, and has no bleach impurity or drying soaps. Hypochlorous acid is a naturally occurring substance produced by white blood cells to fight microbial invaders. Laboratory tests shows that it has potent antimicrobial activity, yet it is non-toxic to mammalian cells, and it is easy to use as patients simply wipe their eyelid area twice daily with this soothing product.

Patients with blepharitis and dry eye tend to return time and again to their eye care professional to find better ways of managing their condition. This is a frustrating pattern to patients who cannot obtain relief from their symptoms and to clinicians who are unable to offer an effective treatment to their -- for their patients.

After years of suffering, patients are now experiencing relief with Avenova in as little as two weeks. This is a significant market opportunity for NovaBay. We estimate the annual market for Avenova in managing blepharitis and dry eye syndrome at $500 million in the US alone. And we are already hearing that some ophthalmologists are expanding its use to cataract and LASIK surgery.

We expect continued sales momentum with Avenova as we execute on a well-conceived commercial strategy to reach ophthalmologists and optometrists throughout the United States. This plan is under the leadership of Glenn Moro, who has 27 years of experience with Alcon, a leader in ophthalmology. Glenn will provide an update on commercialization later in the call.

The second component of our strategy is to introduce additional innovative eye care product that allows us to leverage our sales force. The next product we expect to launch is Avenova in the form of cream or ointment formulation for overnight management of blepharitis, subject to FDA clearance.

We're making progress developing additional products that are synergistic to Avenova. We believe these products will have exceptional additions to our eye care portfolio. We expect to introduce several of these products in the next -- in the 12 to 18 months' time period.

The third and final component of our strategy is to monetize select assets in urology, dermatology, wound care, and cosmetic and aesthetic dermatology. We see this as a mean of generating cash inflow, adding new revenue stream, and allowing our management team to focus on the eye care opportunity, while also reducing our expenses.

We have received preliminary interest in auriclosene, or NVC-422, our product to reduce encrustation and blockage in indwelling urinary catheter, as well as with our dermatology asset. We will make announcement on these activities when appropriate.

I want to make it clear that we remain fully committed to our current partnerships with our NeutroPhase products. In wound care, this includes China Pioneer Pharma in China, Shin-Poong Pharma in South Korea, and Biopharm Group in the Middle East, as well as our recently signed exclusive distribution agreement with Alpha Pharma for Ukraine.

The potential in these markets are significant, with an estimated 24 million people suffering from diabetic ulcer and other chronic wound conditions in China alone and millions more in Middle Eastern countries and Ukraine.

We also have partnership in animal care with Virbac and dermatology with Galderma.

As an update on our agreement with China Pioneer, that firm began promoting NeutroPhase through its extensive network in China early this month. We have received orders for 200,000 units of NeutroPhase and are currently shipping product.

China Pioneer is a major supporter of our product and our Company. In addition to being our distributor, China Pioneer has invested in NovaBay, including participating in the financing we completed earlier this month at full market cost, and we're delighted by our strong relationship.

As a final comment, we recently signed an exclusive agreement with Sarmedic to market Avenova in Israel. We continue working to seek additional agreements with Avenova in other overseas markets.

At this time, I would like to turn the call over to Tom Paulson, our CFO.

Thanks, Ron, and I would like to add my welcome to those joining us today.

I will review our financial results, starting with the fourth quarter of 2014. We reported sales revenue of $385,000 for the quarter, consisting of $219,000 in Avenova product sales and the remainder was primarily NeutroPhase sales to our partner Pioneer at the end of the year when we began to ship the 200,000 units they ordered in anticipation of their full-scale launch of NeutroPhase throughout mainland China.

Given we launched in the later part of the year, we expected the revenue contribution from Avenova to be modest in 2014 while we were building our commercial organization, training our first group of 15 medical direct sales representatives, and preparing to execute on additional outreach activities.

That said, even without the full launch underway, sales for Avenova for the fourth quarter of $219,000 were more than double the $90,000 we recorded for the third quarter.

We are also receiving strong pullthrough since the launches with both McKesson in the fourth quarter and Cardinal in Quarter 1. Glenn will add more details on our distributors, but we are very pleased with the steady rise in Avenova sales from pharmacies supplied by McKesson. In fact, we have seen a sixfold increase in pharmacy orders since we began the agreement just four months ago.

Gross profit on total sales revenue was $89,000 with gross profit margins of 23%. However, Avenova provides us with pharmaceutical-like margin levels and we expect gross profit margins to improve handily as sales of Avenova increase over time, as well as proportional decreases in sales and promotional material costs that are now needed to support our countrywide launch.

Net loss for the fourth quarter of 2014 was $4.4 million or $0.09 per share on 51.5 million shares outstanding. This compares with a net loss for the fourth quarter of 2013 of $4.1 million or $0.10 per share on 41.2 million shares outstanding. The increase in net loss for 2014 period was due to higher spending on sales and marketing for Avenova launch, offset partially by lower research and development expenses.

SG&A expenses were $2.7 million and R&D expenses were $2.4 million. The Company expects lower R&D expenses as it shifts into further commercialization of Avenova and other products.

Turning to the full year of 2014, we reported sales revenue of $684,000, of which almost half, $329,000, were sales of Avenova. Gross profit on product sales was $198,000. License, collaboration, distribution, and other revenues was $370,000, compared with $3.5 million in 2013. This decrease in 2014 was related to the full amortization of the upfront payments from our agreement with Galderma in 2013 and the end of the full-time equivalent funding from the same contract. This was offset partially by an increase in sales of NeutroPhase products.

Net loss for 2014 was $15.2 million or $0.31 per share, compared with a net loss in 2013 of $16 million or $0.42 per share. R&D expenses in 2014 were $9.5 million and SG&A expenses were $8 million.

We reported cash, cash equivalents, and short-term investments of $5.4 million as of December 31, 2014. Also, as we announced earlier this month, we completed an equity financing with net proceeds to the Company of $4.6 million.

With those comments, I would like to turn the call over to Glenn Moro.

Thanks, Tom.

As Ron discussed, we are executing on a well-conceived sales and marketing strategy to promote Avenova to ophthalmologists and optometrists across the US.

Earlier this year, we hired 20 additional medical representatives, thereby increasing our direct sales force to 35. Our hiring has benefited from the dislocation in the eye care industry due to several large M&A transactions, and we were able to secure reps with more than 10 years of experience in the eye care market and they came with established relationships with optometrists and ophthalmologists.

These reps are in the major US metropolitan areas that our extensive market research indicates have the highest sales potential for Avenova. Key to successful sales will be the frequency of sales calls. So even with the directly relevant past experience, we estimate that it will take approximately eight to 10 months for a new rep to reach a breakeven level of sales, with upside thereafter.

We recently hired a second regional sales manager and our sales organization is rounded out by four district managers.

We are currently -- excuse me, we are working diligently to improve upon our early sales success by replicating tactics that are producing results. We track each sale each day by market and by sales reps, which allows us to duplicate tactics that work in one market to other markets.

As we gain traction, we plan to add reps to our force. When our sales force is fully built out to around 50 reps, we will be able to reach the approximate 20% of the prescribing physicians who produce approximately 80% of the patient volume. Each sales territory will have approximately 200 to [240] eye care specialists, which is a typical territory size for a pharmaceutical rep. About 60% of our current sales are to optometrists and the remaining 40% to ophthalmologists, although we expect that percentage to even out over time.

Avenova is now available to be ordered through 90% of the 67,000 retail pharmacies throughout our nation by distribution agreements with McKesson Corporation and Cardinal Health. Patients are also able to fill their prescriptions via the Internet from our website at www.Avenova.com, as well as directly from some optometrists and ophthalmologists who carry Avenova inventory in their offices.

As expected, the vast majority of ophthalmologists and optometrists carrying Avenova are selling a 30-day supply for $30 to $40. Avenova is a private-pay product. It is not reimbursed by third-party payers, and this price is in line with a patient's co-pay on covered prescription for a branded pharmaceutical. So although our product is not reimbursed, from the patient's perspective the cash outlay is in line with a reimbursed product.

We are gaining awareness of Avenova through our distribution agreement with the Vision Source independent optometry network. This is the largest independent optometry network in the US, representing 2,800 independent optometrists' offices.

Word of mouth in this physician population is among the most powerful tools in gaining acceptance and our marketing collateral features testimonials from highly respected ophthalmologists and optometrists. We placed full-page advertisement in eight of the top trade journals in March.

We are also raising visibility through our presence at 10 industry conferences this year, such as the American Academy of Ophthalmology, the American Optometric Association, and through numerous Vision Expo meetings held around the US. Additionally, we are holding our own educational and marketing programs.

We believe this multifaceted approach to sales and marketing is effectively increasing visibility of Avenova within the eye care community and we are pleased to see early results in the form of increased sales.

With those comments, I would like to turn it back to Ron Najafi.

Thank you, Glenn. We are firmly committed to the success of NovaBay by executing on our strategy.

We also continue to dedicate modest resources to develop our products with our proprietary aganocide compounds. Aganocide is our fast-acting, broad-spectrum, non-antibiotic antimicrobial that is effective against multidrug-resistant bacteria and has a good safety profile. Pending FDA clearance, we are targeting commercial product launch in the first quarter of 2016.

Before we open the call to your question, I want to assure you that we are fully aware of the challenges of commercializing a product such as Avenova. This makes the early acceptance of our product that much more gratifying, and while we're still in the early adopter phase of our launch, the feedback we are receiving from clinicians and patients alike is highly encouraging.

Let me summarize why we are so excited about the prospects for Avenova. We have a product that works and fills an unmet medical need in a large patient population. We have manufacturing in place with ample capacity to fill product orders. We have an expanded sales organization covering the major markets where we see the greatest opportunity. We have the support of highly respected key opinion leaders and we have nationwide distribution through our agreements with McKesson and Cardinal to more than 90% of the nation's retail pharmacies.

Also, I wanted to let our investors know that we are now beginning the practice of holding regular quarterly conference calls to keep you updated on our progress and our financial results and to answer your questions.

In closing, we are highly focused on supporting our commercial operations. Under the leadership of a proven sales and marketing veteran, we plan to leverage our sales organization by introducing new products and we are seeking opportunities to monetize our assets, while continuing to support our established partnerships.

With that overview, Operator, let's open the call up to questions.

(Operator Instructions).

While we're waiting for the first question, I want to let you know that we will have a major display in the exhibition floor at the American Society for Cataract and Refractive Surgery conference in San Diego next month, April 17 through 19. We are taking the opportunity to showcase Avenova to thousands of ophthalmologists and optometrists who are expected to be in attendance.

Okay, Operator, we are ready for the first question.

Yale Jen, Laidlaw.

Good afternoon and congrats on a very good start. My first question is that given the sales growth you have seen in the last few months and just pretty much close to the end of the quarter, would you be able to start to make some sort of projection or thoughts in terms of all the first quarter's potential revenue from Avenova, as well as the full-year projection, anything of that nature?

You are right, Yale. Right, we are almost through the quarter. I think we had mentioned in the release today, and I think that's as far as we could go so far since we're still in the early stages, is that what we are seeing in the first quarter so far is well above what we saw for both the combined third and fourth quarter of last year.

So the momentum is really continuing in the first quarter. But as I said, it's still early in the game and too early to predict full-year numbers.

Okay, great. That's fine. And secondly, I think you had mentioned earlier the cost of goods for the fourth quarter seems a little bit higher than the prior quarters, and do you suggest that will coming down? How should we think over long term that the cost of goods will be (multiple speakers)

There are three factors here. Really, one is it's disproportionally impacted by -- as I mentioned, there is a lot of free goods in that number as we supply physicians with product to get the product -- get the brand out there and get physicians using it.

And then, another issue is that as our sales become more and more dominated by Avenova, which really is traditional-grade pharmaceutical-level margins, we're going to see a much higher uptake.

And also as we launch additional products, we anticipate them to be in the same high-margin category, so it's really an aberration if you see this low of a product margin from us. We should see steady growth, and actually, there is a fourth factor. So we're going to migrating to larger sizes or, let's say, two bottle sizes where the margin will only be more significant for us.

But Yale, that's very typical in any launch of a product.

Right, I understand. So should we anticipate at least for the first half of this year, 2015, there may be still some of these impact there, and as we move forward, these margins should be further improved, let's say, in second half and going forward?

Right, oh, yes, that's safe. It will become less and less a factor.

Okay, great. And overall, do you guys will start to give any guidance in terms of other operating expenditures for this year -- or let's say it's for 2015. Should we anticipate a reduced R&D expenditure whereas other expenditure could increase because of you changing the focus or emphasis of the operation?

Yes, Yale, I would say yes. R&D will become less and less of a number, except if it relates to supporting the Avenova product line. We have moved on from extensive clinical testing as we have done in the past. Our expenses are going to be dominated by sales and marketing expense going forward.

Okay, great. And the last question is that I think Ron mentioned that you will start to develop or in the process of completing developing the cream formulation of Avenova. So what kind of timeline we may anticipate that to be completed and then maybe the FDA possible clearance on that?

So as I stated, we are looking at 12 to 18 months time frame from today, so I would say first half of 2016 you should expect, pending FDA clearance, product on the market from NovaBay, yes.

And what would be the benefits of this versus the eye drop you currently have?

Again, it will be for the same disease state, for blepharitis, and the aim is to have a night cream so patients can benefit from overnight effect of the product onto their eyelashes and eyelids and be able to essentially reduce microorganisms and have clinical benefits for the patients.

Thank you very much for the response and congrats on a good start.

Ed Woo, Ascendiant Capital.

Thank you for taking my question and also congratulations on a good start for Avenova.

My question is I just wanted to clarify. You said that the typical ramp-up for sales -- new salespeople was eight to 10 months. Is that more of a steady progression or do you really see a hockey-stick approach to when sales begin to ramp up for new salespeople?

Glenn, would you take that on?

Sure. This is really steady progression as the reps build their territories.

Now if you think about the reps we have out there, the majority of them, it's virgin territory, so none of the doctors have ever seen this product. So [we] get substantial build with them, and that's why we say eight to 10 months. It will take them about 10 months to create the kind of velocity and volume on the product where they will be at a breakeven point. Does that answer your question?

Yes, it does. And you mentioned that your eventual goal is 40 to 50 reps?

At some point, we want to be at 50 reps and, as you know, we are doing a phased-in process where we are adding in reps, we are making adjustments on what we do, we're adding more reps. So I feel that at some point we will be at 50 reps and that will give us access to 80 -- 20% of the doctors who do 80% of the volume. But, again, that will be a phased-in process.

All right, that sounds good. And the last question I have is just on the -- you talked a lot about the opportunities in the US being a $100 million opportunity, but what about international opportunities?

So I will answer that question. Right now, our entire focus is United States. The activity that is being undertaken for example in Europe, we are filing regulatory approval through CE Mark approval. We are expecting something there within the next six months or so to get regulatory approval, and then, of course, we are discussing with potential partners in Europe.

As you can see from some of our international activities, we are very active outside of the US and by no means we are underestimating the potential market outside of the US. But we are obviously active in China. NeutroPhase was launched, and we are expecting to start marketing Avenova in some fashion in China and we need some regulatory guidance there from China FDA.

And in the rest of the world, again, in Israel, for example, there is regulatory approval that are needed, so typically we like to partner and then have our partner go for regulatory approval, except in Europe where we have actually taken the lead.

Great. Thank you and good luck.

(Operator Instructions). [Bill Mahan], [WK Mahan].

I have a relatively easy question. Are the reps -- you refer to them as reps. Are they working solely for you?

Yes, they are.

(multiple speakers) other products?

No, no. I will answer that, Ron. They're working solely for us. They are NovaBay reps, and at this point they're only carrying NovaBay.

Okay, that's (multiple speakers)

Or, excuse me, Avenova.

And then, the other question is how do you pay them? (multiple speakers)

We set it up much like a pharmaceutical arrangement where they have a base salary and then they have an opportunity to make a bonus, and if they reach certain goals, their bonus gets higher.

Okay, all right, so there is good incentive in there for them.

Oh, yes.

But they are not -- in other words, it's not a draw. It's an actual salary.

It's a salary, yes.

As opposed to a draw. You know what I'm talking about.

Yes, they are compensated like your average pharmaceutical rep.

Okay. All right, thank you.

Tom, I've got some more questions, but I don't want to take up a lot of time on the call, so if you don't mind, I will give you a call tomorrow.

Please do.

Okay, swell. Thanks, Tom.

No problem. Thanks, Bill.

Good quarter, by the way.

Yale Jen, Laidlaw.

Thanks for taking the follow-up question. Just a quick one that, Glenn, you mentioned that the rep will -- are entering step one adds up to 50s. So, does that mean that the earlier stated timeline in terms of midyear could be further extended, or that timeline still holds?

It's quite possible that it could be extended. We are examining that right now, and what we want to do is we want to make sure that as we expand, we are able to optimize every rep we put in the field. So that's a question we're wrestling with now and there is a possibility we may extend that back to when -- when we get to the 50.

Okay, great. Thanks a lot. I just want to clarify that. Thank you.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Okay. Thank you again for joining us and for your interest in NovaBay. We're excited about our progress and the momentum that is building for Avenova. We look forward to keeping you updated on our progress. Have a wonderful day. Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.