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Trading Under the Symbol: ISDR

Transcript of

Imprimis Pharmaceuticals First Quarter 2016 Financial Results Conference Call

May 12, 2016

Participants Mark L. Baum - Founder and Chief Executive Officer Andrew Boll - Chief Financial Officer

Analysts

Bill Morrison - National Securities Donald Besser - Manchester Management John Grimley – TJW Capital

Presentation Operator Good afternoon and welcome to the conference call covering Imprimis Pharmaceuticals’ financial results and business update for the first quarter 2016. My name is Adam and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

Before the call begins, the company would like to note the following. First, the company’s press release discussing its financial results is available on the Investor Relations page of the company’s website at www.imprimispharma.com. Second, this call is being recorded. Replays of the call will be available shortly after the call concludes through June 12, 2016. Please visit the Investor Relations page of the Imprimis website to access the replay. Third, management’s prepared remarks include discussion of adjusted EBITDA, which is a financial measure not prepared in accordance with the US generally accepted accounting principles, or GAAP. Management is presenting this non-GAAP financial measure because it believes it may be useful to investors for various reasons, but it is not to be viewed as a substitute for, or superior to, the company’s results prepared in accordance with GAAP. Please see the company’s press release discussing its financial results for more information, including a description of how the company calculates adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most comparable GAAP financial measure. Fourth, management’s prepared remarks and answers to your questions on today’s call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially and adversely from the statements contained herein. The factors that could cause actual results to differ from those predicted are detailed in the company’s reports on Forms 10-Q and 10-K filed with the US Securities and Exchange Commission, and include risks and uncertainties related to Imprimis’ ability to make commercially available its compounded formulations and technologies in a timely manner or at all. The company encourages all listeners to review the more detailed discussions related to these forward-looking statements contained in the filings the company makes with the SEC, which are available at www.sec.gov and on the company’s website.


Transcript: Imprimis Pharmaceuticals

First Quarter 2016 Financial Results Conference Call May 12, 2016

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Except as required by law, Imprimis undertakes no obligation to update any forward-looking statements to reflect new information, events or circumstances after the date they are made, or to reflect occurrence of unanticipated events. I will now turn the call over to Mark L. Baum, Chief Executive Officer of Imprimis Pharmaceuticals. Mark? Mark L. Baum - Founder and Chief Executive Officer Thank you for joining us. Today, I will provide an update of our first quarter for 2016, discuss some recent developments and touch on our goals for the remainder of the year. I will then turn the call over to our CFO, Andrew Boll, to review the quarterly financials. Following Andrew’s review of the financial data, we’ll open the call to questions.

For any newcomers who may not be familiar with Imprimis, we are a people-focused pharmaceutical company dedicated to making drugs affordable again by using our Branded Compounding business model. Our company is founded on the belief that all Americans deserve access to the critical medicines that they need. We are showing that you can bring innovative drugs to market while still driving down costs. Our Branded Compounding business model is simple: we use old, well tested FDA approved generic drugs in new ways to make novel, and in many cases, patentable compounded drugs. We bring them to market rapidly to solve serious unmet needs in the marketplace. We do this while never compromising on quality. Now, I have always appreciated Wayne Gretsky’s famous quote that one should skate to where the puck is going to be. And this was certainly top of mind when we constructed our business model. The need and market acceptance for what we call Branded Compounding is being driven by market factors, including where we are now to a certain extent, and where we believe the market is going as a result of the increased branded and generic drug prices, higher deductible drug benefit plans, bundling of payments connected to physician and facility quality measures and the grinding conclusion of fee for service for most Americans. We believe that these factors are causing patients, employers, insurance plan sponsors and PBMs to consider and accept high [audio disruption] quality, innovative compounded alternatives to FDA-approved branded and generic drugs. All of the drugs that we make are created from FDA-approved ingredients and they’re made in FDA-inspected facilities. All of our sterile drugs come with copies of the sterility test results in each order. Quality for Imprimis is paramount. All of our finished formulations are made in the United States, in one of our four facilities, and they’re shipped to all 50 states. There are some markets we’re in where we have the opportunity to dominate. The cataract surgery market is one such example. And there are other markets where we may only capture smaller percentages of the market by increasing access to a therapy for a marginalized patient population. But when you add up the overall opportunity that we have before us, we have a massive potential opportunity. Given the hundreds of billions of dollars of drugs that will likely be disrupted by changes to payment models for public and private payors, we are just at the very beginning of our process of building a significant and important pharmaceutical company for our shareholders, and as important, for the thousands of people that we serve each week.

On to our first quarter highlights. We made significant sales progress in the first quarter and are pleased to report revenues totaling $4.4 million, which is a 180% increase compared to $1.6 million reported in the first quarter of last year. This represents our 6th consecutive quarter of double digit growth and record revenues.




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Ophthalmology related sales grew 450% and accounted for $1.8 million of total sales in the quarter, compared to ophthalmology sales of $320,000 for the same period a year ago. We’re currently making drug for about 10,000 cataract surgeries per week and we estimate that we’re capturing over 10% of the cataract surgeries being performed each year in the United States. We are largely taking our market share from companies like Alcon, Bausch + Lomb, and a few others. We continue to move through the early adopter sales cycle, and based on the interest from ophthalmologists attending the recent 2016 ASCRS meeting in New Orleans and our successful sales and marketing efforts, we believe that we’re poised to move sales into the category that’s commonly referred to as the early majority category, as we begin to become mass market. Our land and expand strategy continues to work in ophthalmology as customers embrace the convenience of being able to one-stop shop and order from the wide array of complementary offerings they need in their practices to meet their needs. At last week’s ASCRS meeting, clinical studies related to our ophthalmic formulations were presented. All of our ophthalmic formulations performed exceedingly well and the data demonstrated statistically significant results, and according to the investigators, excellent patient outcomes. At ASCRS, we introduced two new patent-pending formulations, our Pred-Moxi-Nepafenac combination topical eye drop and our innovative IV Free conscious sedation formulations for patients undergoing ocular and other surgeries. The reaction to our new offerings was outstanding. On Saturday evening, this last Saturday, in the face of competition from events from much larger companies, our goals were exceeded with more than 200 ophthalmologists attending our event. Having personally worked at our booth meeting old and new customers, I can tell you that even though we have a sizable and growing customer base, we have only just cracked the surface of our opportunity in ophthalmology. I was so happy to meet new physicians visiting our booth and hearing them say, I think I’m ready to Go Dropless, or I really want to start using your LessDrops eye drops. And nearly all of them, universally said, I can’t hear another patient complain about the high cost of branded and generic drops. This happened over and over, enough for us to far exceed our goal of 175 new account requests. We continue to make progress in our campaign for a policy change allowing patients to pay for Dropless Therapy. I urge you to check out the website, Cataract Surgeons for Improved Eyecare, at www.improvedeyecare.org, and view the celebrity Dropless patient, the fabulous Dionne Warwick, who joined us in meetings recently with legislators on Capitol Hill in our campaign for a policy change. Please also review the economic [audio disruption] study on this site that demonstrates that Dropless Therapy could save Medicare and Medicaid and patients up to $13 billion, and that assumes a cost of $100 per Dropless Therapy dose. Although we cannot provide a timeline on when a policy change could occur, we do anticipate that in due course patients will win the freedom to pay for Dropless Therapy if they so choose. Interestingly, at the ASCRS meeting, we discovered and learned about new rules that are related to bundling and what I’m now calling Superbundling™ of payments for cataract surgeries. We believe these new bipartisan and bicameral policies, and the related rules that have already been drafted, will first equalize payments between hospitals and surgery centers for cataract surgery. And soon thereafter, CMS will provide a single fee to the physician for a cataract surgery plus the time between 90 and 180 days post-surgery for that care, which would include the eye drop therapy and what is commonly called the Part D benefit. When this happens and it appears not to be an if this happens, but a when it happens, as a lower cost high quality innovation focus pharmaceutical company with the type of ophthalmology portfolio we have, Imprimis should be well positioned to capture more of the drug dollars spent on every single cataract surgery. That said, we continue to pursue patient choice for Dropless Therapy.




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The reaction to the new patent-pending MKO Melt formulation at ASCRS used for conscious sedation was also positive, with many of our existing and new customers wanting to realize the many potential benefits of conscious sedation as opposed to IV-based sedation in their surgical suites. The MKO Melt, available in a troche format, provides consistent and predictable dosing and allows for quick and easy administration. Traditionally, sedation medications for ocular surgery have been administered intravenously, which requires IV medications and supplies, and the need for additional staff to assist in preparation, administration and monitoring related to this process. All of these factors often cause delays and disruptions in the operating room. Our formulations or variations thereof have now been used in thousands and thousands of LASIK and cataract surgeries to date and as a part of the investigators evaluation process, and a growing number of physicians have made the switch now to IV Free conscious sedation formulations. These formulations are now available for the low cost of $25.00 per case, which includes two troches in a pack. Based on the clinical experience of the ophthalmologist inventors and other prescribers, it has been reported that in addition to the cost savings and increased patient and staff satisfaction with MKO Melt, these inventors and prescribers are now able to perform an extra one or two surgeries per day. And another interesting factor that I learned about, at the ASCRS meeting, is certainly worth nothing, and that is that the MKO Melt, at least with a handful of the physicians I spoke to who are using it, are now gaining economic control of the anesthesia dollars that are being paid in connection with the cataract surgery. By actually creating their own anesthesia companies and hiring anesthesia staff and assuming control over anesthesia, some physicians are making up to $200 to $300 additionally per cataract case. So, this may also help drive adoption of the MKO Melt. Beyond the ocular surgery market, we believe there are other significantly large markets that can also benefit from IV Free therapy. In fact, we introduced the MKO Melt to attendees this past weekend in San Diego at the American Urologist Association annual meeting. There are about 500,000 vasectomies performed annually in the US and I can imagine that those individuals on the receiving end of a vasectomy might be interested in the MKO Melt and the idea of conscious sedation. Additionally, a much larger opportunity is seen in the GI and colonoscopy market. There are about 14 million colonoscopies performed each year in the United States. Tooth extractions are another opportunity. The MKO Melt may be attractive to many in-office procedures of less than one hour. Beyond the MKO Melt, we also recently announced the availability of our tiopronin delayed-release formulations, a lower-cost therapeutic alternative to Thiola for cystinuria patients. I am hopeful that patients and payors will embrace our service of the cystinuria community with our lower cost tiopronin-based formulation. In order to keep up with the demand system-wide, in April, we registered our Texas pharmacy with the FDA as a 503B outsourcing facility and expect to begin operations as an outsourcing facility around the end of the second quarter. We also plan to register our new Roxbury facility with the FDA as a 503B outsourcing facility once we have it and the formulations we intend to make validated and fully qualified. We’re planning for significant growth this year and for the foreseeable future and that’s why we’re investing in capacity, particularly for sterile high volume drugs. This year, we’re not only increasing the number of cleanrooms we have from 5 to 12, but we are also preparing to move to double shifts and we are integrating more efficient automation to streamline our production. To give you an idea of what our automated systems are capable of producing with our Dropless Therapy formulations, we can now fill, or we will be able to soon, fill, stopper, cap, and crimp 26 vials of Dropless Therapy per minute, much more efficient process than we currently have in place.




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Two of our facilities will move to double shifts before the end of the second quarter. We have also hired a director of manufacturing with 20+ years of experience working at large pharmaceutical cGMP facilities. With the assistance of our team of production managers, our new director of manufacturing will oversee our production and related processes at all four facilities. And finally, we are rebranding our consumer and customer-facing messaging around the ImprimisRx brand, and we have begun the process of changing the names of our facilities to ImprimisRx. As a part of this rebranding, we plan to launch a new ImprimisRx website in June that will serve as both our corporate site and customer website. The website is designed to easily access our formulary of medications and to provide new ordering technologies. We have a vast array of offerings for physicians, insurance companies, pharmacy benefit managers, and patients to choose from and believe the new site will streamline the ordering process and, in turn, increase customer satisfaction. Our urology business, outside of HLA, is growing. HLA specifically has not produced the growth we once expected, partly because of a challenging reimbursement environment and also due to other factors not in our control. Although there is a sizable need for HLA in the IC community, and our HLA drug has helped so many IC patients, many challenges, including physicians compounding a low cost non-pH balanced combination of heparin and lidocaine in their offices has further limited our ability to penetrate the market. That said, I am personally committed to serving interstitial cystitis patients with not only HLA, but also our pentosan polysulfate sodium delayed-release tablets which we’ve developed as a lower cost alternative to the off-patent drug Elmiron®. We continue to believe, regardless of the specific offering, that IC patients are underserved. We’re committed to this community, and there is a significant opportunity to serve them and create value for our shareholders going forward. Within urology, other segments of our business have not been so challenged, including our erectile dysfunction formulations and various hormone therapies. I’m happy to report that one of the largest managed care systems in the United States is now providing patients with our Tri-Mix formulations, including a proprietary lyophilized compounded formulation, which is available in single doses that may last up to six months before needing to be reconstituted. And as I mentioned, we have begun marketing our IV Free MKO Melt for patients undergoing vasectomies and other outpatient surgical procedures that may require conscious sedation, or they may benefit from conscious sedation. We have re-launched the sinus business, which was acquired as part of the purchase of our Pennsylvania pharmacy. We are in the slow season for sinus, and during this time, we’re focusing on attaining a leadership position again in the compounding sinus market and are continuing our marketing and sales efforts targeted at previous customers as well as first time customers interested in prescribing our sinus medications and related delivery systems. Let me conclude by telling you why I’m excited about being the leader of and a large shareholder of Imprimis Pharmaceuticals. First, Imprimis is making a difference in the lives of our customers, both physicians and patients, every day. Second, the markets for the drugs we sell and what we plan to sell are massive and we’re pioneering a totally new approach to serving these markets by making drugs affordable again. Third, we own an extensive and growing portfolio of patented and patent-pending formulations that allow us to own intellectual property and to have protection in the markets we serve. Fourth, even though we’re a small company with limited resources, we have managed to harness the efficiency of our Branded Compounding business model, enter the marketplace, and capture share from large competitors, ultimately allowing us to take care of people. Fifth, we are on a strong growth trajectory and have consistently reported record sales quarter-over-quarter. Finally, sixth, we innovate each and every day, serving our constituents, in order to expand the value proposition of our company.




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I’m confident that all of these factors result in significant shareholder value now and a very solid opportunity for large returns for our shareholders in the future. Many of you on the call are familiar with the specialty pharmaceuticals market and many of the leading specialty pharma companies. For many spec pharma companies, as they’re called, it is a challenging time. I have argued publicly that there is a drug pricing bubble for many of these spec pharma drugs, particularly older drugs that have historically had little to no competition. Pricing is contracting and imminent and unstoppable changes to reimbursement and payment in general is going to affect the stock prices, I believe, of these companies. For some, this has already happened. But it likely just the beginning of this cycle. Lower cost innovators can grow and take advantage of the coming changes in the payment landscape. Imprimis happens to not be a specialty pharma company. Rather, simply, I like to call us a special pharmaceutical company, one that is dedicated to serving people and towards the long-term development of a business model that is going to gain acceptance and take market share. We’re not even through the first batter of the first inning of a very long game. I’m going to continue to build this business strategically, with our team, with an eye towards generating long-term value for our shareholders. I want to thank you for your support and your interest in helping me build Imprimis, a truly special pharmaceutical company. I will now hand over the call to Andrew Boll, our CFO. Andrew Boll - Chief Financial Officer Thanks, Mark. Before I jump into discussing our first quarter 2016 financial results, I will remind everyone that 2015 was our first complete year where we reported revenues, which means, we now, for the first time, also have a relative watermark to compare our current year’s progress to. That being said, here are some highlights from the first quarter. As Mark mentioned, total revenues for the first quarter were $4.4 million, compared to $1.6 million reported for the same period in 2015. Total cost of sales for the first quarter 2016 was $2.2 million, yielding a gross profit of approximately $2.1 million and a gross margin of approximately 49%, compared to a gross profit of about $550,000 last year and a gross margin of approximately 36%. Operating and other expenses totaled $6.63 million yielding a net loss of about $4.5 million for the first quarter, compared to the first quarter last year which we reported operating expenses of $3.7 million and a net loss of $3.1 million. Backing out certain expenses and income line items, we recorded an adjusted EBITDA loss of approximately $2.5 million for the first quarter of 2016, compared to an adjusted loss of $2.3 million for the first quarter last year. We closed out the first quarter with just under $12 million in cash and cash equivalents, and we currently have about 13.3 million shares of common stock outstanding. Importantly, we also made significant financial and operational progress during the first quarter of 2016 when compared to the previous quarter ended December 31, 2015. Revenues increased 25% quarter-over-quarter, gross margins increased and operating expenses decreased. All of these things led to an improvement in our adjusted EBITDA loss, which was nearly $3 million for the fourth quarter in 2015.




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We believe our gross margins will continue to improve in second half of the year as our Texas facility goes on-line at the end of the second quarter and our New Jersey facility begins operating at an efficient level. While our operating expenses have stabilized at the current level, we plan to invest in our sales and marketing efforts during the second half of this year, and we will add to our customer service and production staff to help support those efforts and expand our business. While we expect operating expenses to increase as related to these efforts, we believe, the expenses will be made at a rate much slower than those made last year. We continue to make capital investments to our infrastructure, both facility related and also IT related. We believe these investments will help create efficiencies in the near and longer term and set a framework that will help support us as we build a much larger company in the coming years. We are really excited about our prospects this year and our long-term growth strategy. Drug prices have been a topic of discussion at many levels, both private and public, and we believe our business is well positioned on that pricing curve to drive long-term value for our shareholders. The fundamentals for the business continue to get stronger and we believe policies are being put into place to help us further our current market shares, and establish new ones. We’d also continue to expect our revenues to grow as we open up the doors of our two outsourcing facilities, which we believe will open up new lines of revenue opportunities, customer bases, and further our existing relationships. I will now hand the call back to Mark. Mark L. Baum - Founder and Chief Executive Officer Thanks, Andrew, and thank you to everyone on this call for your interest in Imprimis. I always thank our shareholders, employees, patients and physician customers before I conclude every call, and this call will be no different. So I want to give you thanks to each of you, for without you, I would not have this opportunity to do what I am personally passionate about and what our team is passionate about, and that is serving patients, being a people-focused pharmaceutical company, and building this amazing company, not only for tomorrow but for the long future that we have ahead of us. At this time, I’d like to open up the call to questions from our participants.

Operator Thank you, ladies and gentlemen. We will now be conducting our question and answer session. (Operator instructions.) One moment while we poll for questions. Our first question comes from the line of Bill Morrison from National Securities. Please go ahead. Q: Hi, Mark and Andrew. This is a question around the MKO Melt. When do you expect that to start to contribute to revenues? Mark L. Baum - Founder and Chief Executive Officer Thanks, Bill. The MKO Melt is being prescribed now, and it is contributing now. We built a significant inventory for the launch both at the ASCRS meeting, as well as the AUA meeting here in San Diego. The answer to your question is it’s started now, and I believe it will grow. We think there’s a bright future for this formulation. We certainly had less pushback from physicians that we discussed the formulation with than we had when we launched our Dropless formulation, so we really remain hopeful that we’ll be able to make an impact, not only in ophthalmology, but in urology and in other specialties as well.




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The nice thing is that I can report, and I’m happy to report, that we’ve filled prescriptions for the MKO Melt, not only in ophthalmology, but also in urology and other subspecialties. The ability to sell into other therapeutic areas outside of ophthalmology with this formulation has begun, and I think it will contribute to revenues in the coming quarters as our penetration grows. Q: That’s great, and what would be the size of that market for just those two use cases? Mark L. Baum - Founder and Chief Executive Officer There are literally tens of millions of in-office procedures where the procedure takes less than an hour, which is the target for this formulation. Cataract surgery, depending on the physician, can run anywhere from 5 minutes to 15 to 20 minutes long. When you think about the number of procedures that run in that 5- to 25-minute timeframe, it’s an extremely large number of procedures. As I said, tooth extractions are a great example. There are millions of tooth extractions every year; vasectomies, colonoscopies, dermatology procedures, many plastics procedures. There are literally tens of millions of procedures. The alternative to what we’re offering is IV sedation, and we’ve found from our experience with physicians that have used the formulation, particularly with older patients, that there is a preference for avoiding an IV, and that’s what our formulation allows, and importantly, it’s not theoretical. Physicians have now used our formulation in thousands and thousands of procedures successfully, and we think there’s a bright future ahead. It’s taken us a year and a half, two years, to get where we are with Dropless. We think that the adoption for the Melt is going to be faster than the adoption was for Dropless. The market is significantly larger for the Melt than the Dropless formulations, and importantly, from a producibility standpoint, from a manufacturing perspective, the formulation is a non-sterile formulation, and we can make it from start to finish in about, each production batch takes about two hours to make. So it is a very efficient formulation to make. It’s a safe formulation to make as a non-sterile formulation, and so there are a lot of advantages internally when we sell a formulation like this. It’s a lot more scalable. Dropless, for example, our injectables take about 36 hours to make from the time that we start until the time that we’re finished, plus we have to wait 14 days to test for sterility. That is not required with this particular formulation, so a lot of exciting opportunities in the market on the margin side for a formulation like this. Q: Sounds like you’ll have significantly better margins. Mark L. Baum - Founder and Chief Executive Officer I think at some point we’ll probably show a video of how we make them. The drug is actually pipetted into a mold, and when you think about every time that pipette hits the mold, it’s $25. It’s pretty exciting when you just see those pipettes go and go and go. Beyond the economic opportunity though, I can tell you having talked to physicians about the formulation who have used it, patients love avoiding an IV. The physicians have efficient practices when they avoid IV when it is appropriate, and as I said in my prepared remarks, physicians now are making more money per cataract surgery when they use the MKO Melt. That word, I can tell you, on a peer-to-peer basis is going to spread. Much of adoption, and particularly in ophthalmology world and in urology, spreads when physicians talk to one another about the success that they have, not only in terms of patient outcomes, that’s critical, but also in terms of the economics and how this affects their practice. I think over the course of the next coming quarters, as this adoption grows, that will be a contributing factor to adoption, not only great outcomes for patients, but also the economic opportunity for the physician who is getting squeezed left and right in all directions. Like everything else we sell kind of un-squeezes the physician a little bit.




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Q: You mentioned that earlier in the early majority of the adoption phase, are you talking about as in the technology adoption lifecycle like passing the chasm and now you’re in the early majority? Mark L. Baum - Founder and Chief Executive Officer If you think about the Geoffrey Moore book, we’re past the innovators and probably more than halfway through the early adopters. We’re “crossing the chasm” as he would say, and that’s exciting with our Dropless formulations, and there will be a point in time where we hit mass market. I think we’ll have been the only compounded drug formulation to really ever do that, and there are others behind that. Our eye drops are some of our hottest selling formulations. I think the Melt has the potential to certainly eclipse what we’re doing with Dropless, so we’re moving forward, but we just launched the Melt. It literally is only a week or two old, and it has a long patent-life potential, and it’s really just started. We have a lot of work to do to continue to gain market share. Q: One last question. You said you had five payors now, PBMs. How does that stack up against last quarter? Mark L. Baum - Founder and Chief Executive Officer What we were saying was if you look at the top five PBMs, we’re in network with them. We’re in network with the top five PBMs, and all you have to do is Google compounding and pharmacy benefit manager, and you’ll see that most of the PBMs including Express Scripts and Caremark, and you can go down the list, they kicked compounders out of network for the whole of 2015 pretty much. So, when we say that we’re in network with the top five pharmacy benefit managers in the United States that means that we’re in network, and we can better adjudicate a compounded claim. What does that really mean? It means that as we develop this Imprimis Cares program, we will be able to work with these benefit managers and have a friction-free transaction to adjudicate a claim. We can come up with the greatest formulations in the world, and they can help people, and they can be priced right, but at the end of the day, you’ve got to figure out how to get paid, and most of what we sell is paid for in cash, but we’re moving as we grow the business with their Imprimis Cares program to more insurance reimbursement. In order to do that, you have to have these relationships with the payors, which means you have to be in network, and we have NDC codes for many of our formulations. I think when you see what happens on the back half of the year, and as we get into 2017, these PBM relationships in terms of adjudicating larger numbers of claims is going to be an important part of how we deliver value for our shareholders. Q: Sounds great. I really appreciate it. Thanks. Operator Thank you. Our next question comes from the line of Donald Besser from Manchester Management. Please go ahead. Q: Mark, just three quick questions here. You talked about HLA being formulated by the doctors in their offices. Does this mean we can’t look for a significant ramp from HLA and concentrate on these other products you’re talking about or is there still hope that that could ramp up at some point? Mark L. Baum - Founder and Chief Executive Officer You want me to answer them serially? You had three? Q: That’s the first one.




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Mark L. Baum - Founder and Chief Executive Officer I think HLA has, as I said in my remarks, tremendous potential. I happen to know that it works incredibly well for patients because I talk to patients about the value of the formulation. We are dealing with a cost situation, and we’re dealing with physicians that are making a combination of the components of the drug in their offices. It’s not pH balanced. It’s nothing, as a practical matter, like what we make. It’s got the same pharmaceutical ingredients in it, but it’s not pH balanced, which is a critical factor for effectiveness. Physicians are making it fairly inexpensively in their offices, and we’ve been challenged in that regard. We do think that it can contribute, and we think that there are some other factors that were really not in our control that have contributed to the issues associated with the launch. But I do believe there is an opportunity with HLA in the future, we just need to work through a few issues. One of the opportunities, as I’ve said on prior calls, is to make the formulation in an outsourcing facility so that the physician does not need to write a prescription for every individual patient. That opportunity will be available for us when we go to an outsourcing facility. But right now if you’re a doctor, you’ve got to write a prescription for every single one of those patients, send it to us, and then we have to send it out. So, the doctors are now choosing to make it themselves or make an alternative formulation in their office that’s pretty cheap. We’re hopeful that when we switch to an outsourcing facility, we can again begin to ramp up that business. Q: That’s supposed to happen in the June quarter or the September quarter? Mark L. Baum - Founder and Chief Executive Officer The first outsourcing facility is going to be focused on making our two injectable ophthalmic formulations, and the HLA formulation would be made in our Roxbury facility and qualified in that facility probably in the third quarter. Q: You mentioned 36 hours to make the Dropless. That’s not on the new line. The new line, how long would it take to make it? Mark L. Baum - Founder and Chief Executive Officer Well the time to make the formulation, about half of those hours involves mixing. It’s literally just mixing the formulation, and we can’t shorten that at all. The key factor that we’re reducing is the filtering and filling part of the process. That used to take, let’s say eight to ten hours, and we’re going to reduce that down to an hour and a half or so. It’s dramatically reduced filling time, and that’s because of this equipment, this filling equipment. Q: A financial question. There’s something on the latest report about derivative liabilities cost. What’s that refer to? Andrew Boll - Chief Financial Officer We had some costs associated with derivatives related to the convertible note that we issued in January. It was a one-time cost, kind of a GAAP-related cost, noncash cost that popped up in Q1 and shouldn’t have any effect on the financials going forward. Q: Good. Okay, thank you very much. Operator Thank you. (Operator instructions.) Our next question comes from the line of John Grimley from TJW Capital. Please go ahead.




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Q: Hello, Mark. I’m sorry if I missed this. Did you mention expected timing on the New Jersey facility for 503B and where we’re at as far as getting product registered 503B? Mark L. Baum - Founder and Chief Executive Officer I kind of commented on it, John. I think it’s important to note, we’ve moved into the facility. We’re actually operating from the facility in Roxbury. We’ve moved into part of the facility now, and we have been there since April. Construction should be completed, actually, this month on the facility. Soon thereafter, we will register as a 503B facility. The challenge though is in order to make a drug in a GMP environment, you actually have to qualify the drug and make it in the facility that you’re shipping it from. In order to be able to qualify a drug, the facility’s got to be open and completed and qualified itself, and we have to go through the process for each of those drugs. Right now, we’ve got about 20 formulations that we want to make in that facility, and we intend to qualify each one of them through a GMP process, but the good news is I think the construction should be completed this month. Q: Great, thanks. And then I guess by the end of the year, how many of your products do you expect to have registered to sell in those 503B facilities? Mark L. Baum - Founder and Chief Executive Officer The Texas facility is going to exclusively make, at least initially, two drugs: Tri-Moxi and Tri-Moxi-Vanc. We have enough demand for that formulation, and it’s our cornerstone formulation, and we’re going to have one team there making it. As I said I think on a prior call, that facility is a fairly small facility, and I think we have about 14 people working on that in New Jersey. When we transfer that production to Texas, the entire facility for these two formulations will be run by six people in total, so we’re going to reduce our headcount to make that drug and they’ll still only be at about 25% capacity. That’s what I talked about on prior calls about margin opportunities. But the facility should be able, at least in Texas, be able to produce additional drugs as they get qualified. Probably won’t have more than another one or two formulations out of Texas, but the 20 or so formulations that I’ve referenced out of Roxbury will start fairly immediately once we complete construction and qualify the facility. Takes about 30 days to develop a method, a testing method for each one of those formulations. So if you think about 20 of them, they don’t need to be developed serially. We can do them in parallel. I hope within a few months, three or four months, we have all of them knocked out. Q: Got it. Okay. Within ophthalmology, I don’t think you shared the mix, but how important is LessDrops compared to Dropless? Is that a key driver, and then last question, just want to get an update on how you think the process is going for an ABN for reimbursement? Mark L. Baum - Founder and Chief Executive Officer Dropless is a critical formulation for us because we’re selling so much of it that if we were successful with the ABN, we would immediately become a pretty profitable company relatively instantly. So, Dropless is important. Dropless continues to grow. We take on new accounts every week. There was a study that was released this morning actually about Tri-Moxi-Vanc, about the ability to reduce CME rates with Tri-Moxi-Vanc and an NSAID going down to one drop for this particular office and that had an [indiscernible] of 1,200 people that were a part of that research, so Dropless is important and it continues to be. But I have to tell you there are literally thousands of physicians in the US that don’t really know about Dropless or who work in facilities that have made it challenging for us to get into the facility, and we have to go through a process. And so while we go through a process, they buy our drops, and the drops happen to be a much higher




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margin sale, and so, I love selling them drops. It’s a great sale for us, and they buy a lot of drops, not only for cataract surgeries, but our customers use our eye drops outside of refractive surgeries so the LessDrops business is growing rapidly. I expect that to continue. I expect that to accelerate this year, and it’s a really important and very profitable part of our business, but as I’ve said, the Dropless business is as well because I do believe we have the opportunity for price expansion once we get through this ABN period. So your second question was where we are with the ABN, and I think you and I have probably talked about this at least a dozen times. I can’t give you a specific date as I said in my prepared remarks, but I like to say that there are really three key factors on our side. One is economics, two is logic, and three is humanity. When I talk to members of Congress, I talk to folks on their staff, people on staff, the key committees or people at CMS or at the FDA, any part of HHS. You think about the economic argument in this economy, the ability for CMS to save seniors $1 billion a year is tremendous and the economic argument is real. The data shows that, and I think if you talk to anybody who understands economics and who has purchased eye drops, it just makes sense to be able to save this money. Logically, the data shows that patients don’t get eye drops in their eyes. There was a recent study. Over 90% of the eye drops that are administered never make it into the eye. They’re administered improperly, 90%. So imagine you’re paying tremendous amount of money for something that never—I mean it’d be like going to the 21 Club restaurant or whatever in New York City and buying a $50 steak and just walking out the door. I mean you’re paying a lot of money, and you never get to use it. It never hits the eye. Being able to deliver the medicine directly into the patient’s eye just makes sense logically. It eliminates all the compliance issues, and the last thing is something that’s important to me, and that is the human factor here. If you are someone who is an amputee or you have Alzheimer’s or you have a host of other health problems, you don’t have any kids to come over to your home and apply the eye drops. I mean I could go on and on about specific stories of patients who have been helped with Dropless and those are real stories, and it matters. It matters to the physicians. It matters to me, matters to our company, and so from a humanistic perspective, giving patients who cannot use eye drops the option to choose. Not making them pay but allowing them to choose Dropless just makes sense. So, economics, logic, and humanity, I think, are going to win the day and that patients will have the freedom to choose Dropless. That’s the argument that we make. It resonates, but in spite of a lot of what you see on TV with politicians, it is a slow process, and there are forces at work against us. I am working my tail off to spread the value that we drive, and I believe we’re going to win the day. Frankly, I also believe, as I mentioned in my prepared remarks, that the market is changing in any case and that at some point whether it’s the patients that win the right to choose to pay for Dropless, regardless, physicians are going to control those dollars at some point in the next couple of years. When those dollars flow to the physician, I believe that will be a significant event for us and our sales will pick up regardless. We’ll be able to get more money and have pricing power. Q: Right, thanks a lot. Operator Thank you. Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to Mark L. Baum for closing comments.




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Mark L. Baum - Founder and Chief Executive Officer Thanks for everybody attending. If you are a stockholder, I want to thank you again for your investment and the trust that you have placed in our company and in me as the CEO of the company and always remind you that if you have any investor-related questions, contact me or Director of Investor Relations, Bonnie Ortega. Her phone number is 858-704-4587. To order any of our formulations, please call 844-446-6979. Thank you, again, and this will conclude our call.

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