Cosmo N.V. (COPN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Cosmo Pharmaceuticals Half Year Results 2020 Conference Call. I am Alice, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to the management team of Cosmo Pharmaceuticals. Please go ahead, gentlemen.

Good morning, everyone. This is Alessandro Della Chà. Thanks for joining our call. And let me walk you through the introduction and the first half 2020 key events. As you might have seen from the press releases that we have released in the past days, we're very pleased to report a series of very good and positive developments that have happened to date. And first of all, let us confirm that we are on track to return to operating profit for the financial year 2020, as already announced, as a result of the actions that we have taken in the last 18 months. So to begin with the good news. The first one was the EMA's CHMP has adopted a positive opinion for Methylene Blue MMX. This was a good news that we have long been waiting for, and I hope that this finally clears the fog in terms of what the company has actually been doing. It's important for me to stress that the documentation and the information that we have submitted to the EMA for the centralized registration was exactly the same that was submitted to the FDA. And one may find odd somehow that while one agency believes that the information pack is not sufficient and asks for a second trial, notwithstanding the written agreement that one trial would have been sufficient, you have another agency as respected as the EMA that believes that the package is, in fact, more than sufficient, and let alone that we did not have something similar to a special protocol agreement with the EMA. But this is the way regulatory things go sometimes. For us, it's important that the EMA has deemed the package more than sufficient to grant not just registration but centralized registration. The other good thing is that Byfavo was approved by the FDA. This has triggered a further milestone in the form of additional equity in Acacia Pharma group shares. We've also announced very positive results of the first investigator-initiated prospective study for GI Genius, which has demonstrated that GI Genius really significantly increases Adenoma Detection Rate and Adenoma Per Colonoscopy when compared to the standard of care. Notwithstanding the pandemic, our production facilities have continued to operate. We've continued to ship products and receive all the materials needed for the production so that we didn't have to access our strategic reserves of materials. Delivery and supply continued to work as usual, so we have no fear of potential disruptions. Though, clearly, measures remained in place to protect the health and welfare of our employees. Nonetheless, the pandemic has slowed down our development pipeline and our clinical trials. And it's also impacting both GI Genius, Aemcolo and Eleview sales. In this respect, what's happening to us is not different from what's happening to all other pharmaceutical company. The promotion and field activities by the reps is severely hampered to the point, in some cases, of being nullified by the fact that reps cannot enter hospitals or cannot enter doctors' cabinets. And we just have to hope that this will clear up in the next future. Slide #6 details just the 30,000-feet view of the company. It shows our market cash, our net cash, which is currently EUR 238 million. You can see here just a quick representation of what our stakes are. And probably going forward, we will have to dedicate a little bit more time in explaining exactly how this important portion of our activity, which is holding stakes in other company, is actually slowly changing the way we're looking at business. So as I was saying, in terms of key events, important -- the European Medicines Agency has adopted a positive opinion for Methylene Blue MMX. As most of you probably know, the report from the CHMP does not exactly amount to an approval because the approval of drugs is made directly by the European Commission. And this is normally something that happens 67 days -- don't ask me why such an odd time line, 67 days after the issuance of the CHMP report. So we will have to wait another bit. But I have no doubt that we're going to get the authorization in the end. And we are, in fact, now entertaining multiple discussions with potential partner to enter into either a license or a distribution agreement for Europe. And we've made progress with the FDA in relation to the second Methylene Blue MMX Phase III trial design. This is taking way more time than expected because this kind of activities that the FDA has been severely hampered by the pandemic. The FDA has shifted its capacity in trying to keep, as much as possible, the PDUFAs they have been set. And we've had, I think, a very good example with Byfavo. The PDUFA was moved from beginning of April to beginning of July because we had submitted additional documentation that was asked by the agency in relation to an excipient. But then they did all they could to keep the 5 -- the 5th of July time line, which is exactly what they did. And we have been told, looking forward to a very important PDUFA date that's coming soon, the 27th of August, for Cassiopea's Winlevi. We do have hopes that, that PDUFA date will be respected as well. But as I was saying, this is having an impact on all the other collateral activities, so protocol review and protocol interaction is taking more time. So this advancement of the protocol for the second Phase III is taking way more time than expected. We still hope we might be able to start the trial in Q4, but this really depends on when the answer from the FDA will come. The approval of Byfavo has triggered a -- milestones from Acacia. Acacia will pay us, in the next days, EUR 15 million cash plus EUR 15 million in Acacia shares. And we will receive also EUR 5 million milestone in shares at the first commercial sale, which is expected to occur within end of December 2020 anyways. One of the things that we've done here in this respect, which has also been announced, is that we have assigned the license agreement, which we have from PAION directly to Acacia. So now Acacia entertains a direct contractual relationship with PAION, and we are out of that. Therefore, now we don't have any more contractual responsibilities or contractual tasks to be performed in respect of PAION. We're just financial investors in both PAION and Acacia. The Italian Agenzia del Farmaco has granted a marketing authorization to Stadmycin, which is the brand name of Rifamycin SV MMX, which has been licensed just for the Italian territory to the STADA Group. This has triggered a EUR 1.5 million milestone. The Aemcolo Phase II proof-of-concept in IBS-D has progressed, and we expect that this should be over, hopefully, with data released by year-end. As I said, very positive results of GI Genius investigator-initiated prospective clinical study announced in February. And U.S. trial required for GI Genius FDA approval commenced. This is also going very slow. I don't know whether you all know that all elective procedures in the United States are basically on hold. So this is slowly progressing because only very urgent colonoscopies are being done right now in U.S. hospitals, and this is one of the reasons why we're seeing impact also on Eleview sales. Nonetheless, the cooperation with Medtronic continues to go full throttle, and we have received news of the approval of GI Genius, both in Australia, Israel and United Arab Emirates and more to come, which I hope is going to be seen by the market as a good show of efforts from the side of Medtronic in order to have this approved in all the countries covered by our agreement. Cassiopea has completed the rights offering. So Cassiopea is now poised to wait calmly for the approval of Winlevi, which should come soon. I will not entertain a further discussion on the Acacia Pharma deal, which I believe you're all perfectly aware of, but happy to answer to any question. In terms of progress update in Methylene Blue MMX, I think I've told you already what our feeling is and why we feel satisfied by the fact that the info package has been deemed more than enough to grant the approvals. As I was mentioning, Aemcolo sales have been severely impacted by the pandemic because, basically, people is just not traveling at all. But we have progress, not just the IBS-D Phase II clinical programs, but also the 3 investigator-initiated studies, which now have all commenced. So we hope we will be able soon to provide additional information in this respect. GI Genius. I think, I have already told you how things are progressing. And I would then pass the word to Niall, our CFO, for the H1 2020 financial review. Thanks, Niall.

Thank you, Alex. So I'm on Slide #19 now. In the first half of 2020, our revenues increased to EUR 25.9 million compared to EUR 21.5 million in the prior year. Our net expenses reduced by 40%, down to EUR 23.2 million, that's down EUR 15.5 million, mainly as a result of a reduction in expenses related to the restructuring of our U.S. organization that we carried out last year, so we're now seeing the impact in the current P&L. And also, we booked EUR 5.3 million increase in other income as a result of the sublicense deal with Acacia. We have an operating profit of EUR 2.7 million compared to an operating loss of EUR 17.2 million in the prior year. Our net financial expenses were EUR 5.8 million compared to EUR 2.6 million last year, and this includes imputed convertible bond interest of EUR 4.2 million and an unrealized net loss on investment in funds of EUR 1.6 million, which we have, by and large, recovered by the end of July. Our loss after tax for the period was EUR 3 million compared to a loss after tax of EUR 20.8 million in the same period last year. This includes our share of Cassiopea's loss of EUR 2.2 million. On Slide #20, we have some more detail on the revenue compared to last year. So Lialda revenue increased by EUR 2.9 million to EUR 11.7 million, mainly due to the increase in U.S.-related sales. Our Uceris service income was down, however, to EUR 2.5 million compared to EUR 4.6 million last year. And net sales by Bausch were EUR 16.3 million in the first half compared to EUR 32.5 million in the same period last year. Net sales by Ferring of Cortiment increased to EUR 8.9 million. And our income was EUR 2.3 million versus EUR 1.8 million last year. As Alex mentioned, we received a EUR 1.5 million milestone from Crinos S.p.A. in relation to the granting of Italian marketing authorization for Rifamycin. And our Eleview revenue was EUR 400,000 versus EUR 1 million last year. So Slide #21 is a recap of our profit/loss for the period. Moving to Slide 22, it's a summary of our statement of financial position. At the end of the period, we had total equity of EUR 405.4 million. We had cash and investments in funds of EUR 238.5 million. Our shareholdings in PAION, RedHill, Acacia and Volition were worth EUR 97.8 million. And our investment in Cassiopea was carried at EUR 138.8 million. As at the end of June, the market value of our stake was EUR 188.2 million. We were carrying intangible assets of EUR 25.7 million. And during the period, we did recognize the remimazolam intangible asset to the value of EUR 24 million. We had property plant and equipment of EUR 29.5 million, and trade and other receivables of EUR 44 million. So on the liability side on our balance sheet, the liabilities mainly consist of the liability component of the convertible bonds of EUR 160.1 million. Moving to our cash flow on Slide #24. We had a positive cash inflow from operating activities of EUR 3.4 million, and this compares to an outflow in the same period last year of EUR 15.5 million. So we see the effect of the cost reductions coming through here on our cash flow. We have investments in property, plant and equipment of EUR 1.9 million. Investments in intangibles, by way of our clinical trials, are EUR 1.8 million. And we participated in the capital increase in Cassiopea, which resulted in a net outflow in the period of EUR 4 million. We also converted the loan we had to Cassiopea into equity there. We had a net outflow in relation to the investment and disposal of financial assets of EUR 19.1 million. Moving to Slide 25. We paid interest on our convertible bonds of EUR 2.2 million, and we purchased treasury shares to the value of EUR 3.4 million. So I will now hand back to Alex for the 2020 outlook and the key priorities.

Thanks, Niall. So our strategy going forward now has been set. We've decided to enter into partnerships with select payers in exchange of equity stake and/or milestones and/or royalties or a combination of both, as you have seen with Medtronic, RedHill and Acacia Pharma. Now you've seen a further expression of this with the assignment of the license agreement, which transforms Cosmo into a pure financial investor and not anymore a commercial counterpart. Going forward, we want to stress again the point that at this stage, it should be sufficiently clear that we have no long-term strategic objectives for Cassiopea. We will review our options after the Winlevi PDUFA's date. I know that the company is entertaining discussions with multiple players, and we will see how this discussion will end up. Slide 29 is just a recap of the advancement in our pipeline. And we have good upcoming milestones. Well one should have been taken out by favorable approval because this has happened already, but we are now really looking forward the PDUFA date of Winlevi on the 27th of August. This is going to be, I think, a major value creation event for us and the completion of a long, long work where you would remember, it has been Cosmo's infrastructure and Cosmo personnel that have been 100% responsible for this because the clinical development activities are performed by the Cosmo team through a service agreement that we have entered into with Cassiopea when Cassiopea was spun off. So even though we have "only" a 45% stake in Cassiopea, we will hopefully look at the approval of Winlevi as 100% success of Cosmo and a further success in getting approvals. What we're looking forward in Q4 is the MB MMX, hopefully, the start of the second Phase III trial, depending on, as I told you, on the interaction with the FDA and the speed of this interaction. In respect to GI Genius, the U.S. trial completion, assuming that we will be able to quickly go back to normal in terms of clinical activities and also, hopefully, the delivery of the Phase III IBS-D results. Our 2020 guidance is unchanged, notwithstanding the particular circumstances and notwithstanding the impact on Aemcolo, GI Genius and Eleview sales. So we're confirming revenues in the range of EUR 52 million to EUR 56 million and total expenses in the range of EUR 48 million to EUR 50 million, of which we want to stress ESOP for EUR 7.2 million and depreciation and amortization for EUR 6.4 million are not monetary items. And therefore, we still expect we will be able to close the year with an operating profit in the range of EUR 2 million to EUR 8 million. This will also depend on several things we're currently negotiating, and we will see how this will unfold. So I think that this is all for now in respect of the presentation, and we'll be more than happy to answer to any question you may have. Thanks.

The first question comes from the line of Henrietta Rumberger with awp.

Just a quick question on your earnings guidelines. Does that actually sort of include your opting out from Cassiopea? Or can -- could the earnings also come in even higher if you have a very, let's say, lucrative way to dispose of your Cassiopea holdings?

Thanks for the question. No, that's not included at all. No. No disinvestment from -- anything is currently included in the guidance.

The next question comes from the line of Bob Pooler with ValuationLAB.

Congratulations with the excellent first half. First question is maybe on Methylene Blue. How are you progressing with finding the EU commercialization partner? When do you expect an announcement? And then on the U.S. trial, what do you believe would be the duration of the second registrational trial and the cost?

Thanks, Bob, for the questions. In respect to the first one, well, discussions are ongoing. In Europe, it takes up to 6 months before you can start, actually, negotiations with several -- with all the relevant health ministries of all member states in order to do some price determination. You all probably know that even if you have a centralized approval, like we have or we will have for Methylene Blue, which is rather exceptional in the European situation, this does not entail that you have some sort of price dissemination or price fixing with the European authorities. Once the product is approved in all member states, you have to start independent negotiations with all member states and health ministries of the member states to set the price. And normally, this doesn't complete -- at least it will take more than 6 months after the formal approval, which will come in the end of September. So we have plenty of time to conduct these negotiations with no hurries. And as I said, we're talking to multiple parties, but this is not something that has to happen imminently because of this precise reason. In respect to the U.S. trial, the current suggestion that we were making to the FDA was a trial encompassing around 700 patients and a cost that could be between EUR 10 million and EUR 15 million. This is more or less what we have in mind. And I hope this answered the question.

Definitely. If I may, just a few more questions, just on Byfavo. Indeed, you're getting most of the upside through your stakes in Acacia and PAION. But don't you -- aren't you still entitled to something like EUR 82 million on milestone payments?

Absolutely. Actually, if I'm not mistaken, it's EUR 105 million in milestone.

Okay. EUR 105 million here.

No, no. This -- well, this has been highlighted to me also by an investor of ours who said that when we communicated to the market the assignment, it was not clear that all the commercial milestones would have survived the assignment. And of course, they do. So I'm just taking this occasion to stress this point. Again, the assignment has no impact on our overall compensation. And that compensation, an integral part of the compensation was this EUR 105 million of commercial milestones, which we will expect will be paid us in due course.

Okay. Very clear. And then just a final on your pipeline strategy. If you look at now Cosmo, you've achieved a lot in the past few years, most of your pipeline products now in the market are approved. Your equity for product strategy is largely executed. So the question is what is the future of your pipeline strategy? Are you going to remain in GI? Or are you going to seek maybe a new therapeutic area? And then also following on that, probably with positive cash flows, do you see -- foresee in the future also paying dividends?

Well, the answer to the first question is that we are silently working on several new pipeline options that we will communicate to the market when appropriate. And the new products we're -- new projects we're working on, of course, will all have their IP portfolio, which will be a natural evolution of what we've been working on so far, but with significant innovations. And you might have noticed, it's also from the fact that we have now hired a new CSO, who has a specific background in product formulation and new delivery formulations. This is because we have a very precise plan in mind. And the pharmaceutical part of the development versus the medical part of the development is certainly the portion on which we want to concentrate more. So I think that this hiring should send the precise message of what's coming next. And you've been asking me another question, which has just slipped out of my mind.

That's just with the positive cash flow flowing in the future, do you foresee paying dividends?

No, of course. We're not changing our position in respect of the fact that we believe that one of the duty of management is to make as much as possible shareholders happy. So if there will be excess cash, this excess cash will be -- will be returned to shareholders. And even the most aggressive development plans that we have in mind does not entail that we will use all our cash at hand.

Great. Fingers crossed, then, for the U.S. approval of Winlevi on August 25.

Yes, yes, yes. Fingers crossed. Absolutely. Thanks, Bob.

The next question comes from the line of Barbora Blaha with Crédit Suisse.