Medicure, Inc. (OTCPK:MCUJF) Q3 2020 Earnings Conference Call November 12, 2020 8:30 AM ET
Albert Friesen – Founder, CEO & Chairman
James Kinley – CFO & Secretary
Neil Owens – President & COO
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Conference Call Participants
Sam Rebotsky – SER Asset Management
Welcome to Medicure’s earnings conference call for the quarter ended September 30, 2020. My name is Colin, and I’ll be your conference operator for today’s call. [Operator Instructions].
Before we proceed. I would like to remind everyone that this presentation contains forward-looking statements related to future results, events and expectations, which are made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the company’s actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, those described in the company’s most recent annual information form and Form 20-F. Later, we will conduct a question-and-answer session. Please note that this conference call is being recorded, and today’s date is November 12, 2020.
I would now like to turn the conference over to Dr. Albert Friesen, Chief Executive Officer of Medicure Inc. Please go ahead, Dr. Friesen.
Thank you, Colin, and good morning to all on the call. We appreciate your interest and participation in today’s call. Joining me today is CFO, James Kinley; and are Dr. Neil Owens, President and Chief Operating Officer. Net income has stabilized, and we experienced a modest but positive EBITDA for the quarter despite the decline in business due to COVID-19. This is good news. A positive change from the losses that had been reported in previous quarters before Q2. Medicure still has a strong balance sheet with over $11 million in cash and no debt. The sales of AGGRASTAT were down substantially this quarter because of reduced surgical procedures due to COVID, but we are starting to see some stabilization from the significant dip.
The focus of the business has shifted strongly to the AGGRASTAT franchise and growing the ZYPITAMAG business with more directed marketing to patients as well as healthcare providers. The revenue for the quarter was $3.5 million, which was up from the previous quarter of $2.7 million. AGGRASTAT was the vast majority of that at $3.4 million, the balance from ZYPITAMAG and SNP. Medicure has transitioned away from the sales and marketing of the ReDS device with the goal of reducing operating expenses, while retaining value in the sensible medical investment.
As mentioned, the main focus at the present is on the sales and marketing of AGGRASTAT and ZYPITAMAG, which continues to have great margins and potential.
We believe the past few quarters, investments in our programs and new products will provide the growth in revenue and profits for the coming quarters and years. It takes time and persistence to make this a reality. Our shareholders have been patient in the past, and we believe the substantial issuer bid was a good way to provide a near-term value as we build an even stronger future. Medicure has a good cardiovascular product portfolio, a track record of growing sales and great team with energy, talent, experience to build a strong growing company.
I’d now like to turn the call over to CFO, James Kinley, to review and provide some color on the financial results for our third quarter 2020.
Thank you, Bert, and good morning, everyone. A couple of quick items to note before I start. All dollar figures are in Canadian dollars unless otherwise noted by each presenter. And as a reminder, you can obtain a complete copy of our financial statements for the 3 and 9 months ended September 30, 2020, along with previous financial statements on the Investors page of our website and a copy of the financial statements and management’s discussion and analysis can be obtained from sedar.com.
I will now take you through the key highlights of financial performance for the third quarter ended September 30, 2020. Total revenues for Q3 2020 were $3.5 million compared to $5.5 million for Q3 of 2019. Net revenues from AGGRASTAT for the quarter ended September 30, 2020, totaled $3.4 million, a decrease from net revenues from AGGRASTAT for the same quarter of 2019, of $5.3 million, but an increase from Q2 2020 of $2.6 million. The decrease in revenues from AGGRASTAT is due to a decrease in procedures performed in the quarter, primarily due to COVID-19 as well as higher discounted selling prices of the product due to increased pricing pressures from generic versions of Integrilin when compared to Q3 2019.
The company earned net revenues from ZYPITAMAG for Q3 2020 of $105,000 compared to $78,000 from Q3 2019. The company will continue to focus on ZYPITAMAG and expects revenues to grow through the remainder of 2020 and beyond. There were no revenues recorded from ReDS during Q3 2020 compared to $117,000 in the same quarter of 2019, and the company earned $5,000 of revenue from sodium nitroprusside for SNP during Q3 2020.
Turning to cost of goods sold. AGGRASTAT cost of goods sold for Q3 2020 totaled $733,000 compared to $662,000 for Q2 2019. This resulted in gross margins for the quarter of approximately 79%, a decrease from approximately 88% for the same quarter in the prior year. ZYPITAMAG cost of goods sold for Q3 2020 totaled $625,000 and includes $19,000 related to products sold to customers, $603,000 from amortization of the ZYPITAMAG intangible assets and 3,000 relating to royalties on the sale of ZYPITAMAG, resulting from the acquisition of the product in September of 2019. Removal of the amortization would result in a strong gross margin from the product of approximately 80%.
ReDS’ cost of goods sold for the prior year Q3 2019, totaled $174,000 and pertained to the amortization of the ReDS’ license prior to its impairment recorded over those intangible assets in Q4 of 2019. And additionally, SNP cost of goods sold during the quarter totaled $5,000.
Selling expenses totaled $923,000 for Q3 2020, down significantly from $3.3 million for Q3 2019. The reduction in selling expenses when compared to the same quarter in the prior year is due to significant reductions in spending pertaining to travel and conference attendance as a result of COVID-19 as well as cost reductions, primarily pertaining to ReDS selling costs, including headcount reductions implemented by the company during 2020. Additionally, during Q3 2020, the company recorded a recovery of salary expenditures of $311,000 through government assistance resulting from the Canadian emergency wage subsidy recorded within selling expenses.
General and administrative expenses totaled $1.3 million for Q3 2020, higher than Q3 2019, G&A cost of $1 million. During Q3 2020, the company recorded a recovery of salary expenditures of $52,000 through government assistance resulting from the Canadian emergency wage subsidy within G&A expenses. This as well as other cost savings were offset by higher legal expenses resulting from the company’s defense of a challenge against its patent for AGGRASTAT.
Research and development expenses for Q3 2020 totaled $737,000 compared to $976,000 for Q3 2019. Timing of various development projects, which were underway resulted in this decrease. During Q3 of 2020, the company recorded salary — recovery of salary expenditures of $41,000 through the government assistance described earlier through R&D expenses. Medicure is in the process of developing additional cardiovascular products with the development costs being approximately $2 million each, consistent with our research and development strategy to focus on low-cost projects with higher probabilities for success, and we don’t expect our research and development cost to increase relative to this. The company recorded finance expense of $99,000 for Q3 2020. This relates to accretion on the company’s AGGRASTAT royalty and the acquisition payable pertaining to the ZYPITAMAG acquisition from September of 2019. This compares to finance income for Q3 of 2019, of $116,000, which related to interest on cash held by the company, which was significantly higher during 2019, and partially offset by the accretion on the company’s royalty obligation. The company recorded a foreign exchange loss of $210,000 for Q3 2020 compared to a gain of $601,000 for Q3 2019.
The change relates to changes in the U.S. dollar exchange rate during the respective periods, which led to foreign exchange gains and losses as it applies to the significant U.S. cash balances held by the company as at the end of both periods. This results in net loss for the quarter of $1 million or $0.10 per share compared to $599,000 or $0.04 per share for Q3 2019.
The change in the net loss is due to the reduction in operating expenses, offset by decreased revenues and foreign exchange loss for the quarter. Adjusted EBITDA for Q3 was $4,000 compared to adjusted EBITDA of negative $319,000 for Q3 2019. The change is primarily due to the lower operating expenses, again, partially offset by lower revenues experienced in 2020. As of September 30, 2020, the company had cash totaling approximately $11.9 million compared to $13 million as of December 31, 2019. As at September 30, 2020, the company had working capital of $17.9 million, a decrease from networking capital at December 31, 2019, of $19.7 million. Additionally, after the end of the quarter, in October, we purchased 211,000 common shares for cancellation under our existing normal course issuer bid for a cost of just over $200,000. And as of September 30, 2020, the company did not have any debt recorded on its statement of financial position. I want to remind you there will be an opportunity at the end of today’s call for you to ask questions regarding the financial results and the company as a whole.
And with that, I would like to turn the call over to our President and Chief Operating Officer, Dr. Neil Owens, for some additional commentary regarding our operations.
Thank you, James, and good morning, everyone. First, to provide some perspective on the effect of the COVID-19 pandemic in Q3. There continue to be an impact on the sales and marketing of Medicure’s products as we are focused on the U.S. market, which continues to report high infection and hospitalization rates.
There is still no impact on manufacturing, inventory, distribution or product development. More specifically, through Q3, the number of interventional procedures carried out has varied based on a particular hospital and region within the U.S., although it has increased relative to Q2. All meetings with health care professionals continue to be virtual, which has had a greater impact on AGGRASTAT and ReDS compared to ZYPITAMAG due to the types of meetings and access required. The change to virtual meetings has resulted in reduced selling costs. And because of the cost effectiveness of virtual meetings, the sales team will likely benefit from this approach even when U.S. trial resumes.
The sales of the ReDS device was by far impacted the most by COVID-19, where hospitals are facing tremendous financial pressure and have put most capital purchases on hold. Following discussions and a strategic review, in Q3, Medicure announced the termination of the marketing and distribution agreement was sensible for the marketing of the ReDS device in the United States. Medicure supported sensible through this transition and provided information on all lead accounts to help sensible succeed and secure Medicure’s investment in the company.
Because of the reduced revenue seen in Q3, there continued to be a concerted effort to be as efficient as possible with spending. And as a result, we significantly reduced selling costs. In Q3, there was an increase in revenue from AGGRASTAT, through an increase in demand. We have renewed our focus on working with key opinion leaders to effectively market. And AGGRASTAT remains the preferred glycoprotein IIb/IIIa inhibitor in more than 1,200 U.S. hospitals. We also continue to work with hospital pharmacists to make AGGRASTAT the preferred IV antiplatelet agent as there remains cost savings opportunities by doing so.
In order to reduce some of the costs related to distribution of AGGRASTAT, we recently launched the Medicure Direct Portal, which allows hospitals to make bulk purchases directly from Medicure, which is the more cost-effective approach for both parties.
We continue to make selective investments in AGGRASTAT, including clinical research that we believe will help expand the market and new indications, which can extend the life cycle of the product.
Early investigator-sponsored clinical reports evaluating the efficacy of AGGRASTAT showed promise for preventing and treating thrombotic complications due to the COVID-19. AGGRASTAT is not currently indicated for use in patients with COVID-19. However, Medicure is evaluating sponsorship of further U.S.-based randomized clinical studies to rapidly assess the efficacy and safety of using AGGRASTAT for preventing thrombotic complications due to COVID-19.
Recently, the first clinical study to compare AGGRASTAT to cangrelor was published in the journal circulation, which was an investigator-sponsored study led by Dr. Marco Valgimigli, called FABOLUS-FASTER, supported by an unrestricted educational grant from Medicure. The study showed significant superiority of AGGRASTAT over cangrelor in terms of platelet inhibition in patients undergoing PCI. While only recently published, the study continues to generate a lot of discussion within the cardiology community. We recommend reviewing Medicure’s press release on the study for further details.
Turning our attention to ZYPITAMAG. Medicure is focused on making access to ZYPITAMAG as straightforward as possible for physicians and patients. In Q2, Medicure announced the launch of a direct-to-patient online pharmacy program for the distribution of ZYPITAMAG. The program offers many advantages to increase patient access, including home delivery at no added cost, no added pharmacy fees and refill reminders to their mobile device. The program also offers advantages to prescribers as there is support for prior authorizations and the product is shifted nationwide.
There is still a savings card program in place for patients who prefer to fill their prescription at their local pharmacy. We continue to focus on adding new prescribers, new patients and having a high refill rate. We are increasing our focus on digital and social media advertising to consumers to explain the benefits of ZYPITAMAG for other statins and its accessibility in terms of price and home delivery.
Our team remains motivated and driven to increase sales at the fills ZYPITAMAG’s market potential. In terms of our generic products, the sales of sodium nitroprusside, or SNP, were impacted to some extent in Q2 due to COVID-19 and were still lower than targeted in Q3. Despite pricing pressure from multiple generics, we believe that SNP can provide the modest revenue to the company through improved pricing and distribution.
Medicure continues to develop additional cardiovascular abbreviated new drug applications, or ANDAs, for in-hospital use. And we are targeting the next ANDA to launch in Q1 of 2021. We believe this ANDA will have a higher-margin and less generic competition compared to SNP. We continue to evaluate branded products and products with high market share potential to add to Medicure’s product portfolio and those that would align well with our focus and contacts in U.S. cardiovascular market. In Q3, Medicure announced it had entered into a license, manufacture and supply agreement with Reliance Life Sciences for a cardiovascular biosimilar product. The agreement grants an exclusive rights from Medicure to market and sell the product in the U.S., Canada and the European Union. If approved, this product will become the first ever cardiovascular biosimilar approved by the FDA with significant market potential.
In summary, although there have been challenges presented by COVID-19, there remains significant opportunity from AGGRASTAT, ZYPITAMAG and our future cardiovascular products.
Despite reduced revenue, because of control of spending, we are pleased we can still report a small positive EBITDA in Q3. Our team wants our investors to know that we are driven and dedicated to growing revenue and making Medicure a long-term success.
With that, I’d like to turn the call back to Dr. Friesen for final comments.
Thank you, Neil. As mentioned previously, Q2 and Q3 have seen breakeven or slight positive cash flow revenue despite COVID-19 and including some investment as you’ve seen reported in the R&D and some new products coming on stream in the coming months and years.
This is a substantial change from the previous 5 quarters where we showed losses. And so there has been considerable learning, which will be the basis of the market push for the remainder of this year and next year. We are thankful for AGGRASTAT, the additional cardio assets and a strong balance sheet. We continue to focus on growing the business with a pipeline of cardiovascular drugs that will further diversify our revenue and asset base, carefully investing to grow our future profitability.
My goal and that of the Board, management and staff is to continue to build this business with a stable long-term outlook generating value for our shareholders. And as always, I want to express my deep appreciation to the outstanding team of employees that we’ve been blessed with.
Thank you for our shareholders, for your continued support and interest. And with that, I’ll turn it over to Colin, the moderator, to open up the question-and-answer portion. Thank you.
[Operator Instructions]. So your first question comes from Sam Rebotsky from SER Asset Management.
The R&D that we spent in this quarter was substantially higher than the second quarter. Was this — could you talk about what we spent this on? And why the spending decored in this quarter and the unevenness of the R&D? And how much we expect to spend going forward in R&D?
I think the first — this is James. The first item to note on that is that in Q2, we actually received a significant refund from the FDA, which actually essentially wiped out the R&D spend it offset it. That’s why Q2 was so much lower. In Q3, the spending was mainly — I mean, we have an ANDA that’s being developed with expecting to be launched the product early in the next year. We also have a BLA product that we announced with RLS as well as some other ongoing AGGRASTAT developments. If Dr. Friesen, any other thing…
That provides it. As you noticed, there was a difference between the quarters, but it wasn’t a reflection. The R&D spend has been fairly flat and will continue. Our — the third quarter might be a bit higher, some of the expenses that were incurred, but it will continue for the next, I would say, quarter and into ’21. We did announce the addition of the biosimilar, which was — and as progress is made in some of the others, we may provide further updates.
And as far as the FABOLUS-FASTER that is being done, are we spending money on this product, on this research? Or — and because that has indicated positive about any Medicure product?
There was some — so there was some of the AGGRASTAT expense in Q3 relating to FABOLUS-FASTER that did occur in the third quarter, but there won’t be any ongoing expense because of that going forward.
Okay. And now the Reliance relationship, how long does that take to get the products out there?
It will take a couple of years.
Okay. Have we been seeking out other products or any acquisitions with the cash that we have? And have we seen anything of excitement to us?
That’s a good question, Sam. We are always looking for products. We would be entertaining, reviewing and negotiating anywhere from 1 or 2 to 3 products, almost always. So we are continuing to review a few right now.
Okay. And the block of stock that we purchased, was that a block? Was it from one individual? Or was it a bunch of different purchases?
Actually, we don’t know because we’re blinded from the trade, but it happened. So the broker could have accumulated a few. We don’t know whether it’s one or accumulation of a few.
So we have an additional about 300,000 more shares to buy. And would we expect if the stock stayed so low to go back and try to buy some more? What’s our thoughts on that?
Yes, we would. At the present time, according to the normal course issuer bid, there’s a maximum that we can buy, and there’s a maximum we can buy per month. So the purchase that was made at the maximum so — for the month. And so we expect that there will be some more buying.
Okay. So I had thought that we would be breakeven as we were in the previous quarter. What’s our plans as far as the fourth quarter? Has the AGGRASTAT increased where we might breakeven? Or what is the sales going forward? Do we expect an increase? Or is the COVID not permitting this to happen?
Well, we don’t know what — there’s been a resurgence of COVID. What we had seen prior to the last two weeks was a stabilization of AGGRASTAT. And we — so we thought that we would continue to see a similar modest increase over the next few quarters. But we can’t predict what COVID’s going to do in the next months. But we do — it does appear that it sort of stabilized at the bottom, and we were starting to see some modest increase.
[Operator Instructions]. So we have Sam Rebotsky again. I don’t see any other questions from anyone else. So Sam, please go ahead.
Okay. The ZYPITAMAG, I mean we have the charge against it. That’s why the cost is high. Do we — what is the total cost that we have to charge against ZYPITAMAG?
That we’re amortizing?
There would be — it’s about $600,000 a quarter that we amortize, the remaining amount is about $8 million, and that would be over the next 3 to 4 years that, that would be expensed.
Okay. So the $8 million would have to be charged off over the next 3 to 4 years. What do we have to do to get the sales up with the ZYPITAMAG?
Yes. It’s a great question, Sam. We ask ourselves that every day. And we — what we did was AGGRASTAT and what we’re doing is ZYPITAMAG as we try a few things and then see whether they make a difference or not and then measure the impact. And we’ve — as we’ve reported in this call, the focus on both patients and primary care physicians with direct marketing seems to be helping us a bit. And that’s what we’re focusing right now. This cleared the ZYPITAMAG because it has less side effects in the patients because it’s metabolized differently, has benefits for some patients who have side effects, myalgia and others from some of the statins. We need to communicate that to all physicians as well as patients, and that’s — we’re stepping up that communication.
Would we have to charge it off sooner, the amortization, or is this going to be acceptable over 3 to 4 years?
I mean we would analyze that at the end of each quarter and at the end of each year and be subject to getting through our audit. But for now, with the plans and the projections we have for the product, the 3 and — the 3 to 4 years is reasonable.
Okay. And as far as the legal expenses and defending against AGGRASTAT, what is going on there? What kind of money did we spend on legal expenses? And how is that going?
It’s going positively. Because of the competitive situation, I don’t know, do we report specific costs? We haven’t. As you can see, it has been significant, but we expect that that will be changed, and that will go away soon.
All right. That sounds good. Albert, this has been — it’s been very trying as the stock has fallen down because everybody — I guess, the marketplace doesn’t expect much out of Medicure. Hopefully, we could convince them that we have significant products. And the cash that we have will support us in whatever we want to do. And good luck going forward.
Thank you, Sam. Appreciate it.
There are no further questions at this time. Please proceed.
Thank you again to all of those that were on the call, and thank you, Sam, for the questions. We appreciate the interaction with our shareholders. And as Sam said, we also are concerned of the share price and have shown us that — shown that will support the company, which we think is tremendous value with the normal course issuer bid. And again, appreciate all the shareholder support and look forward to calling at the next year-end call coming up next. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.