HLS Therapeutics Inc. (HLS) Earnings Call Transcript

Thank you. Good morning and welcome to the second quarter fiscal 2026 financial results conference call for HLS Therapeutics. At this point, I would like to turn the call over to David Mason, Investor Relations, for the introductory remarks. Please go ahead.

Good morning, everyone, and thank you for joining us today. With me on the call are Craig Millian, Chief Executive Officer; John Hanna, Chief Financial Officer; and Brian Walsh, Chief Operating Officer. Earlier this morning, we issued a news release announcing our financial results for the three and six months ended June 30, 2026. This news release, along with our MD&A and financial statements, is available on our website and on SEDAR+. Please note that slides accompanying today's call can be viewed via the webcast, a link to which is available in our earnings press release and on our website on the events page. Certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Factors that could affect results are detailed in the company's annual information form which has been filed on SEDAR+. During the call, we will refer to Adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Adjusted EBITDA is defined in our press release and annual filings that are available on SEDAR+ and on our website. Please note that all financial information provided is in U.S. dollars unless otherwise specified. I would now like to turn the meeting over to Mr. Millian. Please go ahead.

Thanks, Dave. Good morning, everyone, and thank you for joining us today. On our call today, I'll take you through our second quarter performance along with a corporate update. Brian will then follow with a closer look at each of our products. John will cover the financials in detail. And then I'll be back with a few closing thoughts before we open it up for questions. Starting with the big picture, the story of this quarter is the acceleration of our cardiovascular growth engine. Our cardiovascular portfolio delivered second quarter net sales growth of 25% year-over-year, driven by double-digit Vascepa growth, along with a strong first quarter of sales for newly launched Nilemdo. At the same time, our Clozaril patient base in Canada has grown sequentially for five consecutive months, including July. This is a positive sign that business is stabilizing. HLS is consistently generating cash, and with the strongest balance sheet in many years, we can invest in growing the company while also returning capital to shareholders. Now, let's briefly review the second quarter financial highlights. Starting with the top line, revenue in Q2 was $14.7 million, up 3.5% year-over-year. The cardiovascular portfolio led the way with a 25% increase in net sales in both local and reporting currency. Vascepa net sales grew 18%, which was a slight improvement over the strong growth it had in the first quarter. And Nilemdo, in its first full quarter on the market, generated over $300,000 in net sales. This is slightly ahead of our forecast and particularly encouraging in that meaningful private payer coverage only started to take effect late in the quarter. In addition, as we announced last week, Nilemdo has now secured reimbursement with the largest private payers in Canada and achieved a unanimous recommendation for public reimbursement from Canada's Drug Agency. Brian will take you through greater detail on the Nilemdo launch and the near-term catalysts on the horizon. Turning to Clozaril. In Canada, the trend we highlighted last quarter continued with consistent monthly gains in the base of patients on branded Clozaril. Net sales were down just 1% versus the second quarter of last year in both local and reporting currency, a further positive sign that the business is stabilizing. In the U.S., Q2 Clozaril net sales were down versus the prior year and are down about $600,000 year-to-date. This is in part due to a slight decrease in demand, but also reflected a challenging year-over-year comparison, as the second quarter of last year accounted for 28% of full-year U.S. Clozaril sales. We expect a relatively flat year-over-year sales comparison for U.S. Clozaril for the second half of 2026. Adjusted EBITDA for the quarter was $4.7 million, about 10% less than prior year, similar to the Q1 decline, and in line with our expectations related to the incremental first half launch investment in Nilemdo. As we're now seeing the expected uptick in revenue growth driven by the Nilemdo launch, we expect margin expansion for our cardiovascular portfolio in the coming quarters. Even with the incremental investment to launch Nilemdo, and with only 1 full quarter of sales, the direct brand contribution from our cardiovascular portfolio is breakeven for the year. And that brings me to capital allocation. Over the past couple of years, we set out to put HLS on a stronger financial footing, and that work is largely done. We have successfully delevered the balance sheet, reduced our interest costs, and built a business that is now consistently generating significant cash flow. Cash from operations is up 14% year-to-date, which reflects the operational improvements made over the past two years. With that foundation in place, our capital priorities have shifted to responsibly investing in new growth opportunities and returning capital to shareholders. In June, we launched a normal course issuer bid for up to 1.5 million shares and have been active buyers since. And on the growth side, we continue to pursue business development opportunities that are consistent with our strategic focus, organizational capabilities, and financial resources. HLS is highly regarded as a potential partner in Canada based on our capabilities and customer relationships in specialty therapeutic areas. Our intent is to bring in assets at a reasonable cost that can meaningfully grow the top line, are accretive in the near term, and allow us to more fully leverage the infrastructure we've built in Canadian specialty markets. With our balance sheet in great shape, we will remain disciplined in our approach with the capacity to act when attractive opportunities present themselves. Moving to guidance, we are reaffirming our 2026 outlook. Revenue of $56 million to $60 million and Adjusted EBITDA of $18.5 million to $21 million. Consistent with the quarterly gating we outlined last quarter, we expect year-over-year Adjusted EBITDA comps to improve in the second half of the year as the cardiovascular portfolio revenue continues to ramp. With that, let me hand things over to Brian. And before I do, you may have noticed in Dave's introduction that Brian is now our Chief Operating Officer. Brian has been an impactful leader since joining HLS three years ago as Chief Commercial Officer. In his expanded role, Brian will continue to lead our commercial organization and will also oversee our field medical and patient support functions, creating even stronger alignment at the field and customer level. Brian, over to you.

Thanks, Craig. Good morning, everyone. I'll take you through the portfolio this morning, starting with our cardiovascular growth drivers, Vascepa and Nilemdo, then Clozaril in Canada and the U.S. Starting with Vascepa, net sales grew 18% in Q2 year-over-year, and units grew 16%. Year-to-date, net sales grew 14% and units grew 17%. That's our second consecutive quarter of double-digit growth, reflecting the changes we made to the cardiovascular sales team in 2025. First of all, thank you to all of our partners at the cardiovascular sales team for their efforts. Prescriber breadth and depth both continue to track positively, meaning we are expanding our writer base, not just deepening it, and payer mix remains stable, supporting brand profitability. With patent protection through the late 2030s, Vascepa remains a durable growth driver in its seventh year on the market and will become an increasingly meaningful contributor to margin going forward. Now to Nilemdo, which completed its first full quarter on the market. Net sales were ahead of forecast with wholesaler reorders continuing and the weekly ex-factory run rate strengthening as the quarter progressed. I shared previously the enthusiasm that prescribers across Canada have shown for Nilemdo. Many reported having created lists of their patients that they pre-identified for this treatment. In Q2, we witnessed this excitement translate to action, where at the end of Q2, prescribers had started nearly 1,200 new patients on Nilemdo as measured by new-to-brand Rx, or NBRx. For comparison, this is about 3.5x greater than where Vascepa was at the same point in its launch. What makes these early results especially encouraging is that most of the quarter was ahead of the full private coverage now coming into effect in Q3. On that front, private payer access is running ahead of our plan. As we announced on August 5th, we have now secured reimbursement with the largest private payers in Canada, representing approximately 80% of privately insured Canadians. The vast majority of these patients can now access Nilemdo as a full benefit without restrictions. Several of these agreements are already in effect, with the remainder taking effect during the third quarter. On the public side, also announced, Canada's Drug Agency has finalized its reimbursement recommendation for Nilemdo, with its expert committee voting unanimously to recommend reimbursement by participating public drug plans. This opens the window for us to begin negotiations with the pan-Canadian Pharmaceutical Alliance for product listing agreements. We intend to commence these negotiations later this year, keeping us on track for initial provincial listings in the first half of 2027. And on Nexlizet, the fixed-dose combination, we remain on track for a Health Canada decision by year-end with launch to follow in the first half of 2027. As we have described, Nilemdo is a differentiated new entity, bempedoic acid, and it establishes the foundation. Once approved, Nexlizet, which combines bempedoic acid with a commonly used lipid-lowering drug, ezetimibe, will bring the combined benefits of both medicines to patients in 1 daily pill. Nexlizet potentially gives us another important growth catalyst within 12 months. Turning now to Clozaril in Canada, our national patient base has now grown for five consecutive months through July, and that growth is broad-based. Ontario posted sequential gains in each of those months, and in Western Canada we saw double-digit patient growth in British Columbia versus last year, and growth rates accelerating in both Alberta and Saskatchewan. The fundamentals are intact. The brand continues to hold about a 50% market share, and Clozaril remains a strong, stable cash contributor. For Clozaril in the U.S., as Craig noted, the year-over-year decline primarily reflects a comparably large Q2 last year. The timing of the July 4th holiday last year pulled some ordering into June, contributing to the outsized comparable. This remains a high-margin cash-generating business, and we continue to look for ways to maintain patient volumes and expand the specialty pharmacy program. With that, I'll turn it over to John for a detailed look at our financials. John?

Thank you, Brian, and good morning, everyone. In my section, I'll review Q2 results, the balance sheet, and our capital allocation priorities. My comments are all in U.S. dollars as per our reported numbers, unless otherwise noted. Starting with revenue, total revenue for Q2 was $14.7 million, up 3.5% from Q2 last year, and up 2.8% year-to-date. The increase was driven by our CV portfolio, which, as Craig mentioned, grew 25% in Q2 in local currency, reflecting continued growth in Vascepa and the first full quarter of net sales from Nilemdo. Clozaril net sales in Canada were down just 1% in local currency versus Q2 last year, a significant improvement from Q1 comparables. Clozaril net sales in the U.S. were $3 million compared to $3.5 million in Q2 last year, and were impacted by the factors discussed by Craig and Brian earlier. Finally, royalty revenue was $205,000 in Q2 compared to $148,000 in Q2 last year. Cost of sales in Q2 was up 14% compared to Q2 last year and up 13% year-to-date, with the increases due to demand growth in Vascepa and initial sales of Nilemdo. On the expense side, Q2 operating expenses comprising sales and marketing, medical, regulatory, and patient support, as well as G&A, were $7.2 million, up 10% compared to Q2 last year. Year-to-date operating expenses were up 8%. The increases reflect our investment in the Nilemdo launch. Q2 Adjusted EBITDA was $4.7 million compared to $5.2 million in Q2 last year. Adjusted EBITDA was impacted by the Nilemdo launch investment as just described. As we have discussed, we expect margins to improve for the second half of the year as Nilemdo revenue ramps. There's generally seasonal variation by quarter in Adjusted EBITDA, as those of you on the webcast can see on this slide. We expect a similar pattern in 2026 with a first-half dip followed by improving Adjusted EBITDA in the second half. Looking past the quarterly variation, since 2024, Adjusted EBITDA margin, excluding royalty revenue, on a trailing 12-month basis has increased from 20% to 32%. This reflects the operational improvements we've made, as well as growth in our CV portfolio. For Q2, the direct brand contribution from Clozaril to Adjusted EBITDA was $6.7 million. For the year-to-date period, the direct brand contribution was $12.4 million. Turning to the cardiovascular portfolio, even with additional launch expenses, the direct brand contribution was breakeven in both the Q2 and year-to-date periods. Cash from operations in Q2 was $2.9 million compared to $4.6 million in Q2 last year, while year-to-date, cash from operations was $9.3 million compared to $8.1 million, up 14%. The year-to-date increase reflects the operational improvements made over the last two years, along with significantly lower interest expense. Interest was $1.3 million year-to-date compared to $3.1 million in the same period last year, the result of our 2025 credit agreement and a lower debt balance overall. This next slide highlights our cash generation. We can start by taking Adjusted EBITDA as a useful proxy for cash flow over time. From that, we first deduct royalty revenue, which is not core to our ongoing business, and then deduct net interest paid. What is left, shown in the bars, is a view of the capital we have available to allocate on a trailing 12-month basis. Excluding royalty matters here because at the start of this period, royalties were contributing more than $9 million a year to Adjusted EBITDA. The dotted line shows trailing 12-month interest paid over the same period. Two things are happening at once. Our net interest paid has fallen from as high as $8.8 million in 2024 to $3.2 million, reflecting the debt we have repaid and the improved terms of our 2025 credit agreement. At the same time, we stripped out considerable sales and marketing expense while still growing the underlying business. Put that all together, and what the core business generates after servicing interest on our debt has grown from $2.3 million at the beginning of 2024 to $14.7 million at the end of Q2 this year. That combination is funding the capital priorities I'll turn to next. As Craig outlined, with the balance sheet work largely complete, our capital allocation priorities have shifted. Let me take each in turn. First, investing in growth. We have the flexibility to pursue business development opportunities that meet the goals Craig outlined earlier, and we are well positioned to act when the right opportunity presents itself. Second, returning capital to shareholders. In June, we launched a normal course issuer bid, allowing us to purchase up to 1.5 million common shares, and we have been active purchasers under the bid since inception. Through to July 31st, we have repurchased approximately 340,000 shares, returning CAD 1.4 million to shareholders. We believe our shares represent compelling value at current prices, and the NCIB provides a flexible vehicle for returning capital as our cash flow allows. Third, on debt, the heavy lifting of delevering is behind us. In Q2, we made a principal repayment of $1.1 million. At June 30, 2026, the principal balance on our term loan stood at $42.2 million, down 16% from the end of 2025. And net debt stood at $28.5 million, down 26% from the end of 2025. Taken together significantly over the past two years, this is the strongest balance sheet position we've been in for years and is what gives us the flexibility Craig described. Going forward, debt will continue to decline through scheduled amortization with any additional payments made at our discretion. Finally, looking at the balance sheet, cash was $13.7 million at quarter end, up from $11.7 million at the end of 2025. I would note that provisions rose to $14.6 million at the end of Q2. As a reminder, one of our largest provincial rebates settles only once a year, typically in Q3, so we see a cyclical trend whereby provisions rise for three quarters and then drop back when the annual rebate is settled. In summary, the business is generating cash to fund both of our capital priorities simultaneously, while debt continues to decline through scheduled prepayments. We are well positioned to act on the right business development opportunities as they arise. And with that, I'll pass it back to Craig for his closing comments.

Thanks, John. Before we open it up to Q&A, three quick thoughts on the quarter and where we're headed. First, HLS is a fundamentally stronger company than at any time in my tenure. The delevering work we set out to do is largely accomplished. We have our strongest balance sheet in years, and with consistent cash generation, we've begun returning capital to shareholders through a buyback. Second, the growth engine is starting to deliver. The cardiovascular portfolio grew approximately 25% this quarter. Vascepa is sustaining double-digit growth. Nilemdo is ahead of plan with payer coverage expanding. And in Canada, the Clozaril patient base is growing once again. And third, several catalysts are ahead of us. Private coverage for Nilemdo continues to ramp. With a favorable CDA recommendation, we will begin to pursue public reimbursement. And Nexlizet remains on track for a Health Canada decision by year-end, followed by a first half 2027 launch. In addition, we have the resources to act on business development opportunities that fit our criteria. Our goal is to build scale in the coming years, both organically and through disciplined business development. This will increase operating leverage, broaden reach with our customers, and create greater value for shareholders. That concludes my prepared remarks, and we look forward to keeping you updated on our progress. At this point, I'll ask our operator to please provide instructions for asking a question.

Thank you. [Operator Instructions] First question comes from Michael Freeman with Raymond James. Please go ahead.

Good morning, Craig, John, Brian, and congratulations, Brian, on your new role. My first question here is on Vascepa. I'm really encouraged to see this return to growth. I wonder if you could describe any of the ingredients involved in this, and perhaps the contribution of sales inquiries into docs for the purpose of advertising or showing them Nilemdo while also having Vascepa in the bag.

Thanks, Mike, for the question. Hi, Michael. Good morning. Thank you. Yes, great question. I think credit to the team, a lot of enthusiasm behind the Nilemdo launch, but remaining focused on both products and the franchise. One of our hypotheses with extending the franchise was it creates more flexibility in front of their customers and we're seeing that. I'm seeing it firsthand and our managers are reporting that back that creating more absolute time for Vascepa in their interactions with customers. The Nilemdo story has a very clear value proposition and they can move through that in their details and create an opportunity to have that stand on the benefits of Vascepa for cardiovascular reduction. We've talked in the past about how these are really synergistic in that way and that we're talking largely to the same customers about a similar segment of patients in their practice. So to the team, we're seeing that strengthening in Q2 and Q3.

Optimistic it continues through the rest of the year moving forward. Yes, and just maybe to add one additional point, I would say, you know, we've done a lot of work over the last couple of years also kind of rebuilding the commercial organization. We've had some, you know, some departures and some restructuring over the past couple of years, and I think, you know, strength of our portfolio and bringing in new assets has really made HLS a desired destination for a lot of really strong talent. So we've been able to recruit both at the sales rep level at the manager level, really experienced, talented professionals with extensive experience and relationships in cardiovascular. So I think the team is as strong as it's ever been right now.

All right, thanks very much for that. Now, looking at the guidance, it looks like there's an implied acceleration in the second half EBITDA. I wonder if you could help build the bridge from here to there, talk about the growth drivers of that second half strength?

Sure, yes, I'll start and then maybe John, if I missed anything, maybe you can weigh in. I think obviously we just had our first full quarter of Nilemdo in Q2 and we expect, as Brian said, we're really encouraged by the week-over-week growth in ex-factory sales and now with private payer coverage, or in many respects just hitting the end of Q2 or into Q3, we have no reason to expect that acceleration not to continue. Generally, we're holding the line on the expense side, and we expect to see some nice growth in continued growth and accelerated growth, quite frankly, on the cardiovascular side, driven in large part by the Nilemdo ramp. We expect to continue to see the growth in Vascepa that we've seen in the first half of the year. And we're really encouraged, Michael, by the sequential growth in patients on the Clozaril side, which suggests that, and as we predicted, as the year goes by, we'll see increasing stabilization on the Clozaril side as well. So I think, you know, essentially managing our costs responsibly, which is what we I think have a pretty good track record of doing, and now starting to see that ramp in the top line we think will deliver improved margins in the back half of the year. John, I don't know if there's anything to add there.

No, I think that's right. And in the back half of the year, as compared to the first two quarters, there will be a small decrease in the OpEx as compared to second half to the first half, primarily driven by what Craig had already outlined.

Okay. All right. Thank you very much. Congrats on the quarter. I'm going to pass it on.

Thank you. Next question comes from Max Shmielewski with Stifel. Please go ahead.

Good morning, everyone. This is Max on for Justin. Nice quarter. Just the first question on Clozaril, I understand CSAN has historically been a pretty important tool in defending market share from generics. Can you maybe qualify what dynamics you're seeing more recently at the prescriber level as it relates to CSAN?

Yes. Hi, Max. Good morning. This is Brian Walsh. Thanks for the question. Yes, we're seeing, as you said, CSAN is an important differentiator for the Canadian business, Health Canada mandated registry. Where we've seen across the country the differentiation play out, we've described previously some disruptions in Ontario, more from GPO contracts, but as a result of CSAN, the services we provide, the Pronto devices integrated as part of that program, we've seen large numbers of patients move to pharmacies where they can get branded Clozaril or move to different ways to stay on the brand, and that's driven by the support that community physicians have for brand over generic because of the services and the device. Likewise, a lot of the growth in the West is driven by market share gains within the Clozaril team. So taking share from generics, largely because of that service. You know, we've had smaller whole account conversions in the West in Q2, which sets up encouraging for the rest of the year as well. And those are driven by the efforts of our team and the services that we provide on behalf of patients, again, with the devices is an important part of that. And we find patients are incredibly strong unless they're forced to switch, which typically they're not, except in rare cases. For example, in Quebec, we've had a really strong retention rate, and part of that is based on the resources we've brought to bear in our customer-facing model or go-to-market model, which provides a high level of support, as well as the preference for the Pronto device in many cases, as well as the, again, the high touch that CSAN provides. So we think the suite of services that we provide around branded Clozaril has enabled us to maintain a very stable market share over an extended period of time and certainly allowed us to weather some of these temporary disruptions that happen from time to time.

That's great, thank you. Switching gears, can you maybe describe the current status of payer mix for Vascepa and what growth you've seen in the public channel sales versus the last few quarters?

John, do you want to take that question?

Yes, I would say the public share as we exited the last couple of quarters of 2025 was sort of in the just shade over 50% range. And as we've progressed and seen some growth in 2026, we're moving up towards the 55% range and probably through the year will stay in that high end of the 50% to 55% range.

Yes, I would add that the rate of growth on the public side relative to private has slowed considerably. We are seeing much greater stability in terms of payer mix in those provinces where we've been on public listings for a longer period of time. For example, Ontario and Quebec have become quite stable, which is good for us to be able to really kind of predict our gross-to-net. Where we've seen some continued expansion on the public side, which is, as we expected, is the provinces where we were more recently listed, those being British Columbia and Alberta, where I think we've only been on listings for the last couple of years. So the good news is we are now, as predicted, starting to see that stabilization. I think we had expected to flatten out at about 50-50. I think, as John said, we're probably a shade beyond that, but still within range.

Thank you. And just one last question. $13 million, almost $14 million in cash at the end of the quarter. As I understand it, somewhere in the range of $30 million in revolving capacity. So the balance sheet's been meaningfully improved. So well done on that front. As you focus on the Nilemdo launch, do you anticipate maybe a reduced focus on business development as a follow-up to that? With the investments you've recently made on Nilemdo, how would you expect the commercial infrastructure to need to look like with the addition of additional products within cardiovascular?