NovaBay Pharmaceuticals Inc (NBY) 2016 Q4 法說會逐字稿

Welcome to the NovaBay Pharmaceuticals 2016 fourth-quarter financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded today, March 23, 2017. 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. Joining me from NovaBay Pharmaceuticals are Mark Sieczkarek, President and CEO, and Tom Paulson, the Company's CFO.

I would like to remind listeners that comments made during this call by management 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 23, 2017. NovaBay Pharmaceuticals undertakes no obligation to revise or update statements to reflect events or circumstances after the date of this conference call, except as required by law. And now I'd like to turn the call over to Mark Sieczkarek. Mark.

Thank you, Jody, and good afternoon, everyone, and thank you for joining the call. Let me just start by saying how proud I am of the exceptional performance over the past year of this organization as we executed on a tightly focused business strategy and delivered record annual and fourth-quarter results.

We achieved all our stated financial goals for 2016, most notably reaching adjusted positive cash flow from operations during the month of December. We grew sales by 172% over 2015 to $11.9 million. And we proved the success of the marketing strategy we introduced in early 2016 to shift our sales mix to the more profitable pharmacy channel.

By the fourth quarter more than three-fourths of Avenova sales came through this channel. The impact of the shift in sales mix is dramatic with both higher revenue per unit and higher gross margin on Avenova sales which reached 86% for the year. We tightly managed our expenses throughout 2016 and we narrowed our operating loss by nearly half from the prior year.

We also strengthen our balance sheet by raising $20 million last year through equity transactions priced at reasonable terms with investors who strongly believe in the future of Avenova. We ended 2016 with $9.5 million in cash and equivalents. We now have sufficient financial resources to fund our operations and continue top-line growth throughout 2017.

Now importantly we built what we believe is a strong foundation to support our plans for another year of exceptional growth. Our expected outlook for 2017 is for total sales to increase by more than 60% over 2016 to $19 million with the gross margin in Avenova product sales to remain in the high [80s] range. We expect ample room for sales growth having barely scratched the surface of a market we estimate at 41 million Americans.

Our plans for this year is to capitalize on this substantial market opportunity by investing in our new employee-based sales organization and targeted clinical studies while prudently continuing to manage expenses and cash burn. But before discussing these plans in more granularity, I'm going to turn the call over to Tom Paulson to review our financial results and our excellent momentum across several key metrics. Tom.

Thank you, Mark, and good afternoon, everyone, and thank you for joining us today. I will start with some highlights from the fourth quarter and then I'll review our financial results in greater detail. As has been our practice on past quarterly calls, I will be reviewing performance on a sequential quarter basis, which we believe provides the best gauge of our [products].

Total sales for the fourth quarter of 2016 reached a record $4.1 million, up 19% from Q3, and Avenova sales of $3.9 million, also a record, were up 26% from Q3 reflecting both volume and price improvements. Prescription sales through the high margin pharmacy channel grew to $3 million, up 45% from Q3. Sales through this channel represent 77% of total Avenova sales versus 68% in Q3, with the increased mainly due to higher volumes.

This continuing shift in sales mix towards the reimbursed pharmacy channel is reflected in both the increase in total Avenova sales and improved gross margins which support positive cash flow. As part of this focus we are successfully converting sales to this channel from the practitioner office channel which declined 12% from Q3.

And importantly, during the fourth quarter we added more than 1,000 new Avenova prescribers, bringing the total number of prescribers who have prescribed Avenova to more than 8,700. In reviewing fourth-quarter financial highlights we are providing comparisons with both the prior year and the preceding quarter, again to reflect our progress.

As noted earlier, total net sales for the fourth quarter of 2016 reached a record $4.1 million, up 149% from the fourth quarter of 2015 and up 19% from the third quarter of 2016. As I mentioned, Avenova sales in the fourth quarter of 2016 reached $3.9 million, up 146% from fourth quarter of 2015, with both unit growth and favorable price and mix through the ophthalmology channel driving the increase.

Gross profit margin as a percentage of total sales of 80% for the fourth quarter 2016 was up from 64% for the fourth quarter of 2015 due to higher sales of [Avenova] -- gross margin for the fourth quarter of 2016 and was down from 84% in the preceding quarter due to reserves for excess and obsolete inventory, which was due to upgrading both our bottles and pumps. Importantly, gross profit margin on Avenova sales grew to 87% for the fourth quarter 2016.

The operating loss for the fourth quarter of 2016 was $2 million, a significant improvement of 67% from the prior year and slightly reduced from the preceding quarter. The year-over-year reduction was due to restructuring and cost reduction measures implemented in late 2015 and early 2016 with our decision to focus resources on Avenova commercialization.

In reviewing expenses by line item, R&D expenses were $156,000 for the fourth quarter of 2016, down $1 million from the prior year, reflecting our focus on Avenova commercialization and lower spending on clinical trials, which are now only being pursued on a limited and targeted basis.

G&A expenses were $2 million for the fourth quarter of 2016. This was down from $2.7 million for the prior year primarily due to reorganizational charges in the fourth quarter 2015 and down from $2.3 million for the third quarter of 2016 mainly due to modifications to the exercised price of warrants issued May 2015 in the third quarter.

Also in the third quarter we reported one-time costs associated with the sublease of our previous headquarters location. As announced in last quarter's call, we have relocated our team to a more economical space and we are now benefiting from the sizable reduction in our rent and utility expenses related to the sublet of our former office and lab space. We estimate this move will generate approximately $3 million of savings during the life of the lease.

Sales and marketing expenses for the fourth quarter of 2016 of $3.1 million decreased 3% from the prior year and increased 18% from the third quarter of 2016 reflecting charges in our outsourced sales force expenses. As Mark mentioned, all our sale reps and regional managers are now on our team as direct full-time NovaBay employees.

The net loss for the fourth quarter of 2016 was $1.6 million or $0.11 per share on a basic basis. This is a significant 62% decrease from the net loss in fourth quarter 2015 of $4.2 million or $1.26 per share on a basic basis.

Our narrowed net loss includes the impact of recognizing $400,000 of non-cash gain on the increase in the fair market value of our warrant liability primarily caused by the decrease in our stock price of -- our stock price during the quarter, versus a gain of $2 million for the prior year quarter. The net loss for the fourth quarter of 2016 improved by $2.1 million from $3.7 million for the third quarter of 2016.

Now turning to 2016 results, net sales for the year were in $11.9 million, as Mark mentioned, up 172% from 2015 due to significantly higher sales of Avenova. Avenova sales for 2016 of $10.9 million increased by 175% from 2015. Total gross margin for 2016 was 79% compared with 71% in 2015, and gross profit margin on Avenova sales [was] 86% for 2016.

Our operating loss for 2016 narrowed by 48% to $11 million, down from $21.1 million in the prior year. The lower operating loss in 2016 reflects declines of 76% in R&D expenses and 10% in G&A expenses and a 12% increase in sales and marketing expenses over the prior year to grow the top line.

Non-cash warrant liability loss for 2016 was $2.1 million versus $2.1 million gain in 2015. The non-operating charge in 2016 was primarily due to the increase in our stock price since 2015 yearend. This is a non-cash item. The net loss for 2016 was [$13.2 million, or $1.40] per share, an improvement from the net loss of $19 million or $6.82 per share for 2015.

In reviewing our balance sheet, as of December 31, 2016 we had cash and equivalents of $9.5 million, the highest level in over two years.

Turning to cash flow, we are reporting another quarter of substantially reduced cash burn from operations of only $700,000. This is down from a burn of $4.5 million for the fourth quarter of 2015 and down from a burn of $3.8 million for the third quarter of last year. This demonstrates how growing Avenova sales and managing costs are significantly reducing our cash consumption as we promised.

As Mark stated earlier, our new marketing and pricing strategies and cost reduction measures helped us achieve our goal of positive adjusted cash flow from operations in December, which we define as GAAP cash flow from operations minus changes in operating assets and liabilities.

And finally, we are introducing our 2017 financial guidance as follows. We expect total sales for 2017 to reach $19 million, which is a 60% increase over 2016 with growth driven by higher Avenova sales. We expect gross profit on Avenova sales to be in the high 80% range. Net loss of $6.2 million is expected -- of course this excludes the effect of non-cash gain or loss on changes in fair market value of our warrant liability and, finally, a cash burn of $3 million.

Now -- and also we expect to continue to invest in revenue growth while appropriately managing our expenses and balance sheet. With that I will turn the call back to Mark.

Yes, thanks, Tom. So as we are moving forward here we are clearly excited about the prospects for Avenova certainly in 2017 and beyond. We intend to continue driving sales growth and supporting key metrics including the number of total prescriptions, the number of total prescribers and the number of prescribers writing multiple prescriptions. We will also continue to direct our sales activities toward the more profitable ophthalmology channel and benefit from reimbursed pricing.

Now the introduction in the fourth quarter of another commercial product in the dry eye marketplace has brought renewed heavy interest and investment in the category were Avenova serves as a strong complementary product to current first-line and dry eye therapy both. So we plan to capitalize on this growth momentum and also our strengthened balance sheet this year by opportunistically expanding our sales force.

We currently address only about one-third of the geographic market opportunity with our 50 sales representatives who are all in major metropolitan areas across the United States. Again we intend to balance sales force expansion with our goal of managing expenses and our available cash.

Let me remind you that, like January, we successfully transitioned our contract sales force to be direct employees in NovaBay with the move made successfully in conjunction with our national sales meeting that was held in January. Our sales representatives are definitely excited about becoming direct employees and our joint commitment to the Company's success. I am pleased to report that we have an enthusiastic highly energized team that right now is solely focused on Avenova's success.

We also plan to invest in post-marketing clinical studies this year to provide eye care specialists with additional clinical support for prescribing Avenova to their patients for a wide array of uses that they have identified as practitioners. You may recall that last year we reported clinical data that supports Avenova's effectiveness in the management of blepharitis.

So now we certainly have a high level of confidence in reaching our growth objectives for this coming year. We have a superior and well-tolerated product in Avenova based on its formulation with 100% pure hypochlorous acid and [no bleach] impurities. We see continued evidence of customer satisfaction and patient testimonials and strong reorder rates.

We believe we have ample room for growth in the US for Avenova which, again, we estimate at 41 million Americans. Now this includes an estimated 30 million who suffer from blepharitis and dry eye. Many physicians have found that these chronic conditions are best managed by regular twice-daily use of Avenova. The remaining 11 million in our market count includes use for ophthalmic procedures such as pre- and post-LASIK and cataract surgeries, as well as for contact lens wearers with tolerance issues.

We are also going to continue to pursue opportunities to monetize the non-core NovaBay assets to bring in additional capital while we focus on building our core Avenova franchise.

So in conclusion, we have accomplished a great deal having successfully transitioned our Company to focus on Avenova commercialization, we executed on a new strategy to increase sales and margin, we managed expenses and rebuilt the balance sheet to sustain our high-growth. This has resulted in growing our market cap by over five times this past year as the market has recognized the long-term potential of Avenova in this large market.

We plan to support continued revenue growth by executing on our now proven strategy as we focus on continuing to enhance value for all our shareholders. So with that overview of our business and our plans for 2017 we are ready to take your questions. Operator?

(Operator Instructions). Yi Chen, Rodman & Renshaw.

My first question is do you expect to continue to bring new prescribers at a rate you observed in the [fourth] quarter of 2016? And from the feedback of prescribers do you see that the blepharitis and dry eye still represent the majority of the patients that are being treated by Avenova currently?

Yes, Yi, thanks for the question. I will start with the second question first. Yes, the majority of Avenova is prescribed for blepharitis and dry eye sufferers. We're seeing a lot -- many more doctors who are beginning to use this for what they call first level therapy.

And let me define first level therapy -- that basically in the past doctors have prescribed baby shampoo, hot compresses and detergent-based lid cleaners for first level therapy. Obviously that is a big market by itself and we are seeing more and more people move to Avenova, again, to replace what I previously mentioned as first-line therapy.

Relative to your first question in terms of continued prescription growth, yes, we obviously expect to see continued uptake. We have -- now have good year's worth of data, Yi, that substantiates the high prescribers in the marketplace across the US. And we are very targeted there in going after these high prescribers not only of Avenova but of dry eye products such as Restasis and Xiidra.

And these are also prescribers that have a good commercial business which is really important on the reimbursement side as well. So, I think from that perspective we are going to have a much more efficient sales force as we continue to grow prescriptions.

I just want to remind you that, again, as you look -- again, we have given full-year guidance. And as you look at this business, just recall that because of co-pays and deductibles, typically we do see some seasonality in revenues in the first quarter and to a degree in the third as well because of the summer season. So that is something that everybody should take a look at.

But all signs currently are that, again, even current prescribers are using the product more -- on a more wide basis. Again, that was a broad answer to your questions, but I think hopefully it will answer a lot of the other follow-up questions that I am sure will come. Thanks, Yi, for the question.

Yes, that is very helpful, thank you. Just a quick question on the financial side. So I guess you will continue to invest in your sales forces and the sales and marketing expenses in fourth quarter is on the same level of the first quarter, a little bit higher than the second and third quarter. So going forward I think we should probably -- is it okay to expect that the sales and marketing expenses will be a bit higher but not too significantly, is that correct?

Yes, that is -- I think that is a good assumption, Yi. Again, they are all in that one line. As we pointed out the clinical expenses; we have some clinicals that are -- again, these are marketing clinicals that will carry over from last year as well as some new programs in 2017.

And as we indicated, we have added to our sales force at the beginning of this year, all those people are in place and in their respective territories. And again, we will add opportunistically and with respect to both managing expenses and the balance sheet.

Okay, got it. Thank you.

Ed Woo, Ascendiant Capital.

Yes, congratulations on the quarter and on the year. I also wanted to ask about the sales force. You mentioned that in January you transitioned over from contract sales reps to employees. Was there any changes to I guess bringing them on board? Will there be any disruptions or anything like that?

No, as a matter of fact I kind of pointed out in my remarks we had our sales meeting, our kickoff, if you will, in January with them altogether. I think they were extremely enthusiastic about coming over. As a matter of fact, I think between the transition we only lost one sales rep. I should point out there always is a fairly good turnover, either voluntary or involuntary, in the sales force.

As I said here today on March 23, every person who basically signed up with us on January 1 is still here, which is pretty amazing when you think about it. Again, in my years in business, and that number is close to 40 now, quite frankly I have never been to a more enthusiastic national sales meeting than the one I just encountered in January. So we are all pretty jazzed up, if you will, as we are heading into 2017.

You mentioned that you guys are kind of targeting some of your high prescribers or definitely targeting the pharmacy channel. [Do you think your] sales force is pretty well seasoned now or do you see it where it is just kind of still somewhat lumpy with a certain concentration of top salespeople and the rest trying to ramp up?

I think we have a good group of professionals on board. As we went through last year we turned the sales force over, again, both voluntarily and involuntarily. I think that now that people see the security, if you will, and the growth with NovaBay, they are pretty excited. I think we offer a pretty attractive overall compensation package, it is heavily based on their ability to be productive and they are all in on it, as I said.

And I think from an experience standpoint, we have a really good mix of people who are experienced certainly in ophthalmology, but I think sprinkled with people from other categories as well. And in my history, again, my experience I think it is a very productive mix.

Great and one last final question is, do you feel that you guys have enough broad coverage across all the major markets in the US right now?

Yes. The major markets I think are covered well. But again, as I said in my remarks, we are about one-third of the way where we would like to be I think in terms of sales force. But again, we are going to do -- we're going to execute on the expansion of that sales force based on the metrics that we closely watch on a week-to-week, month-to-month basis. So, we don't want to pull that cord too soon. But as we see a tipping point even in the marketplace we are going to be able to react very quickly.

Great, well thank you and best of luck for 2017.

(Operator Instructions). Lauren Chung, Maxim Group.

Congratulations on the quarter. I also have a question on the sales force. So you have 50 now and your guidance -- do you think your guidance for the next year -- you said you'll add opportunistically, but that is the number that you feel comfortable with at least in the next year, correct? And then you look to expand that in the following years?

Yes, that is a good question, Lauren, thanks for joining the call. Yes, right now we are at 50, that is, again, reps. Obviously with managers and administration we are higher than that. But 50 is kind of the number that we have in the plan that we put out in front of you in terms of the guidance.

And like I said, if we see some uptake, if you will, in the payback period we will be quick to add more to the sales force as we go. So I think that will be a key metric for us going forward because obviously we would like to cover more geography as we move forward here.

Great. And also on the comment about the post-marketing clinical studies. Does your guidance for the next year include those studies? And how do you project doing additional studies to help your -- the traction with your -- the doctors that you will be calling on?

Yes, the expenses for those, yes, are in that plan. I think as we currently sit we started three programs last year, hopefully one will be coming to fruition in terms of a published peer recognized publication. And we have three newer ones for this year planned as well and budgeted. So again, we are going to have a steady case of clinicals and, again, peer reviewed papers as we are moving forward.

And, Lauren, the point of addressing these as limited and targeted means these are multiple hundred thousand dollar studies, not multiple million dollar studies. We are keeping a tight control on that to get the essence of the result we want.

Sure, sure. And also just lastly, of your prescriptions do you have a sense of what percentage of that are resells as opposed to new prescriptions and new patients?

Yes, we do. We don't have that data in front of us. If you want to give us a call later we can probably talk more at a lower level.

Sure, sure. All right, great. Well, thanks and congratulations.

Lauren, thank you for joining.

(Operator Instructions). And there are no further questions at this time.

Okay, well thanks again for joining us and for your interest in NovaBay. Just looking at the number who joined us today, I think we are gaining more and more interest as I think we deserve. We're certainly excited about our progress and the opportunity that obviously we see with Avenova now and in its future.

And just to let you know, actually we will be on the road next week in New York and Boston as we continue to spread the Avenova story. And we look forward to updating you during the next quarterly call to discuss the first-quarter financial results. So again, thanks for joining us and have a great day.

This concludes today's conference call. You may now disconnect.