Investor update

Sep 21, 2022

Everyone, this is Victoria Rutherford from Adelaide Capital. Thanks for joining us today. We're here with Ken d'Entremont and Marcel Konrad, CEO and CFO of Medexus Pharmaceuticals. Before we begin, I would like to remind everyone that this discussion will include forward-looking information that is based on management's current information and assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical or anticipated results. This discussion may also reference non-IFRS financial measures or non-GAAP measures, including references to adjusted net loss and adjusted EBITDA. These measures do not have a standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. For more information about forward-looking information and non-GAAP measures and a reconciliation of adjusted net loss and adjusted EBITDA to net loss, refer to Medexus's most recent management's discussion and analysis. Medexus's MD&A and other filings are available on the company's website at www.medexus.com and on SEDAR at www.sedar.com. I also wanted to let everyone know that this webinar will be recorded and available on Medexus's website after the call, and it will also be available on Adelaide Capital's YouTube channel. I want to remind people at the end of the discussion, if you do have a question, there's a Q&A box in the bottom of your screen, and you can type the question in there, and we will get to you as we flow through the Q&A. With that, I would like to turn things over to CEO Ken d'Entremont. Hey, Ken. Hey, Victoria. Thank you very much, and welcome to all our investors. We've got quite a good group today, so very pleased that we'll be able to share our outlook with a big group of our investors. The agenda for today is we're going to obviously review the news on Treo, give you what we know at this point. We'll also review the core business and the plan moving forward, obviously. Then, as Victoria says, we will open it up to questions from the group. As you saw in our press release on Monday, on Friday, September the 17th, we were notified that medac, our partner and sponsor on the treosulfan FDA filing, had been notified of acknowledgment of incomplete response. This is the second incomplete response that they had received, and I guess the good news is on that it does mean it's an ongoing review. This is not a situation where you have to restart. This is a continuation of the review, although very disappointing. Obviously, it was not the news that we were expecting, nor was medac expecting that. What this means is it's a delay. We recognize this is not going to happen on the timeline that we had anticipated. Unfortunately, we don't have a new timeline. Clearly, that is one of the key questions, what is the new timeline? I can say that it's probably not measured in weeks, but it's also probably not measured in years. It's going to be some months, and we are working hard to try and figure out exactly when the resubmission can be submitted to the agency. Again, upon resubmission, it then will become a Type A or a Type B. We're assuming a Type B, which means a six-month review period. The obvious question is, what are they looking for? What I can say is that this is again related to the pivotal study that supports the efficacy and safety of treosulfan in conditioning. It's related to the primary endpoint. Many of you probably know that the primary endpoint in that study is event-free survival. Event-free survival is kind of a subjective measure because you have to define what is an event. Answering one set of questions or one question can lead to another question. Although extremely disappointing, this is quite possible in this review period. An endpoint like overall survival obviously is very objective in that overall survival, either the patient has survived or not. Very objective and much easier to answer. That's not the primary endpoint in this study. That is a secondary endpoint in this study. That is what they're looking for. The plan from here is for medac to prepare the response to the question. They obviously are fully responsible for that. We are doing whatever we can to support that because here the ultimate goal is approval of treosulfan. We will clearly be working with the partner to find a way to prepare an effective resubmission that ultimately we hope will bring a decision on treosulfan. Again, I'd like to reinforce that this is all at medac's cost. It is their responsibility to get this approved. All the costs associated with those efforts. There is no cost to Medexus other than obviously the delay, which is extremely frustrating. The plan for us going forward is clearly to support that resubmission, but also, as we've been doing, continue to focus on our core business, which is doing very well. We're going to speak a little bit to that this morning and give you some sense of where we see the business and what the plan is going forward. I will share my slides so we can walk through this presentation. Perfect. We can see them. Thanks, Ken. Thanks, Victoria. This is the forward-looking statement that Victoria had read. You can find it on our website at medexus.com, along with a lot of other good information related to our company. As many of you know, our business model is fairly straightforward. We're a commercial organization that licenses, acquires drug products in the rare disease orphan drug space. To date, we've got 17 products on market. We've got a nice broad portfolio. As disappointing as the delay on treosulfan is, we do have a very strong base of business from which we clearly expect to grow. As you know, we did about CAD 77 million of revenue last year, and we're growing strongly from that level and do expect to be over CAD 100 million this year. Clearly continuing a very strong growth trajectory with the products that we have in market. Again, we have a fully built-out team, both U.S. and Canada, upon which we can add other products, and Gleolan is an excellent example of that because we have added that in the space of institutional sales, and our teams are busy driving those revenues forward. Management owns 12%, so clearly we feel your pain with the most recent decline in our share price. I'd like to also point out that I think we have three pillars of growth for our business, and two of the three are doing extremely well. Obviously, the organic growth, which we'll describe in more detail in future slides, is doing very well. Product development is doing very well. The improvements we've made on IXINITY, our U.S. team has done an excellent job in improving the profitability of that drug. Where we've had some frustration is in the business development section, where treosulfan obviously has disappointed us with respect to the timeline. Otherwise, our business is doing extremely well, and we continue to look for other products that will allow us to grow strongly into the future. As you look at our business now, I think you should be assured that we have a nice, strong portfolio of products in the therapeutic areas that we're interested in both U.S. and Canada. We have a very solid base from which to grow, and we have the commercial platform that can drive that growth. Clearly over the last several years, we've been growing a portfolio of products, particularly in the U.S., and building the team to support those products. We've got that fully built out now. As you know, when we added Gleolan some months ago, we only added three people to drive that product forward. We've hired an additional three since, and those people are all in place at this point. I also want to just kind of reflect on the track record that we've had with respect to executing deals. Clearly treosulfan is disappointing because of the delay, but again, we think it's a delay and not a decision. Rasuvo, clearly we licensed that and acquired that drug, excuse me, for $13.9 million and $1.9 in stock. Clearly that has been an excellent performer. This last quarter it had record demand in total prescriptions, and so clearly that continues to perform extremely well and was well priced. IXINITY is a very similar situation whereby we paid CAD 30 million in cash for that drug, and it continues to grow and is generating strong revenue, which we think will keep getting better into the future, and we're going to talk a little bit more about IXINITY in a future slide. I think our history has been quite good, which has allowed us to bring this business from CAD 10 million when it was first amalgamated to now what we think is over CAD 100 million. IXINITY clearly is an important product in our portfolio and perhaps has been misrepresented because of the difficulty of promoting this product during the pandemic. We've acquired this in March of 2020 and went straight into a global pandemic for two years. Clearly, that's a challenge for taking over a new drug. I can point out that in those ensuing couple of years, we've made significant improvements in this product. Our team has improved the gross margin through some process improvements, so the margin gets better. The demand has always been strong. We've corrected the channel, and now we're showing this will be the fourth quarter of plus $20 million revenue. Last quarter, we set a record for a Q1. Clearly now executing on IXINITY, and we expect that to continue and provide us growth into the future, not just with the current indication, which is for adults, but also for pediatrics, where we've now completed that study, preparing for the submission, and we'll put that in soon. So that will provide us with additional opportunities to grow this important product within our portfolio. The other piece of business that continues to do extremely well is Rupall. Rupall is our fourth largest product, I think, in our portfolio. Compound annual growth over 40%. Last year, fifth year of launch, growing at 30%. Continues to do extremely well, and we clearly expect that to continue into the future. Really pleased with the team that is driving IXINITY forward. Gleolan, as you know, is a more recent acquisition. We had had that product in Canada. Again, it was affected by the pandemic, but that is changing now. We're seeing nice uptake in Gleolan units and dollars. Clearly, the Canadian performance is good, and now we've got the opportunity to duplicate that in the U.S., which obviously is a much bigger market. That is now going to help drive our revenues forward. In the press release the other day, we also pointed out that we are now booking full revenue for Gleolan. We had not done that until September this month, because product being shipped was labeled with the old company, so we weren't booking the full revenue, and now we are. Clearly that will help this quarter that we're working on and clearly will help future quarters. We expect that to be a good contributor to our growth going forward. When you think about our business, clearly we've got a bunch of value drivers that are going to allow us to grow IXINITY, which I just described, commercial execution on Gleolan. We continue to look for other products to build our portfolio, IXINITY pediatric study, and then eventually, hopefully, we've got treosulfan, which everyone knows is a significant opportunity. We see this revenue growth continuing, following the pause that we saw in fiscal 2022, partially due to the pandemic, partially due to the IXINITY channel reset, which is clearly fixed. We have now got four quarters of CAD 20 million plus in revenue and growing. Clearly that starts to produce very strong EBITDA. You know that we had CAD 1.9 million of EBITDA last quarter on CAD 23 million of revenue. We're certain that this is going to be another record quarter, not just for Q2, but a total record for our business, and we'll exceed the previous record, which was CAD 24.3 million in Q3 of 2021, I believe it was. We will nicely go over that and exceed, obviously, the EBITDA levels that we achieved last quarter, which was CAD 1.9 million. We see that EBITDA continuing to trend strongly upwards. The underlying business is very strong. We know that if we weren't spending in order to prepare for treosulfan, this business would generate something in the range of a 20% EBITDA margin. A very strong underlying business, and that's clearly what we're focused on now as we figure out what the timeline is on the treosulfan resubmission. What we will continue to do going forward is execute commercially. We've done that extremely well. We will continue to do that, and we will look for good business development opportunities to continue to grow our business. That in a nutshell is the plan going forward. I'm now going to turn it over to Marcel Konrad, our CFO, to speak to some of the more recent financials. All right. Thank you. Thank you, Ken. I first want to maybe focus attention on that chart on the right-hand side again. For those who are new to the story, the company has a proven record of continuous growth with a 44% compound annual growth rate. You can see every year, almost every year, there has been a transformational event leading to CAD 80 million in 2021. We had channel reset for IXINITY in 2022. Then as Ken mentioned, we're trending towards CAD 100 million, and this is CAD 100 million revenue for 2023, and can grow beyond. Very strong growth, very proven record for the past. Now translating a little bit into the short term here, obviously the regulatory setback is part of every growth company. Looking at our Q1 financials, we had disclosed a few months ago, we had a record Q1 of CAD 23 million. Just to reiterate, that has been the fourth consecutive quarter where we generated over CAD 20 million. Not only that, but we had a positive EBITDA for the last four quarters as well. This company is producing record growth revenue, is producing positive EBITDA. Our cash levels have been stabilized. We are from an operating standpoint, turning into positive territory again. The situation has since we basically stopped the spending in 2022, as you can see, the adjusted EBITDA back then when we started to prepare for the Trecondyv launch, plus the Xofigo generally set. Since then, there has been a tremendous change quarter over quarter. The company overall, if you look at the trajectory, is doing as projected with the fundamental growth of the core business. The fundamentals are really good. Again, as Ken mentioned, if you look at that, how we're actually looking at this going forward, we're looking at a growing core business. We're looking at Gleolan that is coming in, will produce bottom line ultimately from a deal perspective. We have the Xofigo gross margin improvements that we've been talking about. We're expecting due to the continuous improvement projects. We've got Rupall there that will help further spur the company into the higher territories. Overall, in the bigger picture, this is a growth story, and we're very pleased with Q1. We will be obviously announcing Q2, sometime in early November, and we'll elaborate more what that record quarter will look like. So far, we're pleased with the development. Just quickly on the capital structure. The fundamentals actually have not changed. We obviously see the stock price here, the ups and downs, the treo setbacks have hurt the stock price. The ultimate fundamentals, since if you look at that timeframe 12 months ago, have really not changed a lot. In fact, it's gotten better. We're seeing now we're executing against the core business expectations, and we're pleased with the most recent development there and heading into the right direction. Our analyst coverage, for those who are maybe new to the story here, we've added Raymond James and Research Capital, hopefully supporting our story here, going forward. We're very pleased with the coverage overall. Thank you, Marcel. That is where we are today. Again, disappointed with the news on treosulfan, but working to correct that, and continuing to focus on core business, which is what I think is a prudent thing to do, as we figure out the timeline with that opportunity. That's where we are, and happy to open it up to questions. Thanks, Ken. Thanks, Marcel, for the presentation. There's quite a few questions in the queue already, so let's try to get through them. Just starting off, with your focus now being on the core business and the growth of the base business, how much growth do you guys see left in your core portfolio? Yeah, it's an excellent question, and I might rephrase the question that we've always been focusing on the core business. I mean, it's not like we've taken our eye off the core business. You're now seeing the effects of the work that we've done on that core business over the last two years starting to play out in our revenue. It's a great question. We think there's significant growth continuing. Obviously, IXINITY is growing strongly. With the pediatric indication, there'll be more opportunity with that drug. Rasuvo is setting records of demand. We are the market leader in that marketplace, and we continue to grow demand. Gleolan is the newest addition, a fantastic addition to our portfolio, because it's a really unique product. It has a strong base of business, and we think we can significantly grow that base of business. We've more than doubled the sales force on it, and put some very clever marketing programs in place in order to make physicians aware of the drug that can assist in the resection of a very deadly glioblastoma tumor. Rupall, clearly Rupall just continues to perform quarter after quarter, 5 years in, is still growing at 30%. We clearly expect that trend to continue. There's plenty of growth left in our core business. What kind of EBITDA do you think that you guys could generate in association with that growth? Yeah. Another good question. Clearly, we've been focusing on producing EBITDA in the last four quarters, and it's been positive. I think we've been in the range of 5%-10% EBITDA. Historically, prior to Trio, before we built up our organization to support Trio, we were in a 10% range and growing. We think we're back there. Now we've got Gleolan. A lot of that infrastructure that we had added is applied to Gleolan. That takes up a lot of those costs. If you were to strip out the incremental spending for Trio, we'd probably be in the 20% range. It's a very strong EBITDA margin in this business. That's what encourages us. I just wanted to move into some of the treo questions. There's a few questions regarding just timelines, asking, is there a deadline by which medac will need to resubmit the file with answers to the FDA? Yeah, that's a great question. No, they did not give a deadline that we view as a good development that they're looking for the information in order to ultimately make a decision. There's no specific timeline that medac has to perform to. Having said that, it's too early for us to speculate on how long it will take. Clearly, we're working hard to figure that out ourselves. Given the delays, will you guys have any opportunity to maybe renegotiate with medac something more favorable for Medexus? Yeah, that's a good question. Obviously, we have been doing that on previous delays. You recall that we negotiated a CAD 2.5 million loan, which is not repayable if it doesn't get approved. We recently renegotiated the timeline on the milestones and pushed that out nine months from approval. We are always thinking about those possibilities. Should point out that there is no expense for Medexus in this situation. This is Medac's responsibility to make this happen, no cost to us, but we're very conscious of potential opportunities to make it a little more fair for Medexus. is there an opportunity to cut costs now or reallocate some of the treo costs to maybe other parts of your business? Yeah, that's a great question. Yes. I think I want to keep reinforcing, that was the reason that we did Gleolan, or one of the reasons that, we had this infrastructure that was preparing for Treo. We had the delay from the original CRL. We licensed Gleolan because it's the same institutions, or there's good overlap of those same institutions. We could apply that infrastructure that we had put in place to Gleolan. Some of them are also working on IXINITY, so we are seeing the benefit of those people apply to IXINITY. I think both is happening, and it's obviously the direction that we're going. Let's find a way to continue to grow our revenue strongly and produce strong EBITDA. Okay. Sorry, just reading some more questions over here. This is kind of a two-part question. Does Treo being approved in Canada help in any way with getting it through the FDA process? Then the second part of the question, are there any drugs you guys are aware of that have been approved in Canada that ultimately didn't get approval by the FDA? I'm sure there are. None come to mind immediately, but I'm sure there are. I would like to think that a Canadian approval would help in the FDA, but I think not. The opposite is true, though. That if you were to be refused in any jurisdiction, the FDA would be certainly aware of that and would probe as to why. That's not the case here. The drug has been approved in every other jurisdiction. Medexus got it approved in Canada through an expedited review in six months on the same file. We think it is approvable. It's a matter of satisfying the agency to make that decision. Okay, this one. What is the main question that the FDA, I guess, is asking you guys? What is the main thing that they're focusing on in terms of getting the approval? Yeah. As I mentioned, the primary endpoint, being event-free survival. They're asking specific questions related to the efficacy measures to determine what the improvement in event-free survival is or if there is an appreciable improvement. Clearly, the clinical study, which has been published twice now, the interim study and now the final study, both published in reputable journals, demonstrating 26% improvement in overall survival. That data is out there if you would like to search for it, and you can read the conclusions yourselves, in that those investigators concluded that treosulfan was superior to Busulfan in event-free survival and overall survival, overall survival being a secondary endpoint. Okay, one more question that came in going back to the Health Canada versus EMA. How different is the files that you would submit to Health Canada or the EMA versus what has to be submitted to the FDA? I can only comment on the Health Canada file versus the FDA file. They're very similar. Obviously, the formats are different because each agency has different formats, but based on the same information. Okay. A lot of these questions are doubled, so I'm trying to filter through them. One question just asking about the communication with the FDA. Like if the FDA has a question, can they just not go back to medac and get the answer during the process versus having to not accept or come back saying it's not complete? Yes, it's a good question. That is the process. A resubmission goes in, various information requests go back and forth between the parties, until there's an information request that may take some time. This is one that's going to take some time. It's not days, which typically these other information requests are days, and the agency communicates back and forth with the sponsor on a fairly regular basis. Okay. Switching gears here for a minute because there are questions outside of Treo, just on Gleolan. What do you guys anticipate for the ramp of that product, and what revenue do you think Gleolan could generate over the next few years? Yeah. We've said that the Gleolan, when we acquired it, was doing $12 million-$16 million annual revenue, US dollars. We've now determined that it's at the high end of that range. We think we can grow it significantly. Our view is that the penetration of fluorescence-guided resection, which is Gleolan only, is only about 50% of the development that you would see in other established markets, mainly Western Europe. We think there's significant growth opportunity in the U.S. as we get out there and promote this product more broadly. Okay. Could you talk about the patent protection for some of your largest drugs? Sure. IXINITY is patented out to 2030, but would not expect generic competition even after patent expiration. It's a biologic agent, and the cost to develop biosimilars is quite high, making those smaller products unprofitable. Even our largest competitor, which is BeneFix from Pfizer, is many years past patent expiry. It's $230-ish million in revenue in the US and has no generic competition. Rasuvo is 2029. Metoject, under which we've got a patent argument, is 2027. Rupall, the data exclusivity, which is very similar to a patent, is end of 2024. I think that's most of the portfolio. Okay. With the initiatives that you guys have been investing in for manufacturing improvements for IXINITY, have you guys been seeing or getting, I guess, the desired results, and how do you think this will impact your margin profile? Yeah, I think that's really a highlight of our business. The team in the U.S. has done a phenomenal job of increasing the yield beyond what our expectations were. That is now starting to play itself out in the cost of goods for IXINITY. We're seeing it come down. I'll let Marcel speak to the actual numbers or give some sense of what the numbers are. Yeah. Certainly. This is obvious as we've talked, is a biologic, very volatile product. Those initiatives really targeted not only the cost or sort of the gross margin improvement, but also the stability. For those who were with us 12 or more months ago, we had to take reserves. It is expected that that product has difficulties in its manufacturing cycles, but we are very pleased with the most recent batches that are actually trending into the right direction, targeting higher yields that will ultimately translate once it hits our cost of goods sold. It will translate in an improvement of our gross margins, yeah. A couple of percentage points, we should see that. We will be going forward explaining very carefully our gross margin, dissecting that very carefully with our current business with IXINITY, and then of course also with Gleolan coming in. We will talk a little bit more about gross margins going forward, that's for sure. Marcel, I guess another question while we have you. A few questions here asking our plans, how we're going to address the convert that's maturing next year. Yes. The convert is on our minds. It's been on our minds for a while. We know that there's an October sort of "deadline" looming where those converts can convert into equity or we can repay it in debt. We're addressing this. We're looking at various financial options there. We've hired an investment banker to address this, and we will be talking more about it in the next few months. Okay. I guess another question here. Are there any non-core assets in your business that you guys could divest to generate cash? Yes. We're always reviewing our portfolio. There are some, but they produce strong EBITDA. We like the idea of keeping those if they don't have a lot of promotion associated with them because they have excellent margins and produce a good return. If needed, we could divest some of those assets. It's obviously something that we have considered in the past, and it's always in our toolkit for the future if needed. Okay. This one's just asking about, I guess, your stock price and obviously it's come up. Could you just talk a little bit about your valuation now and where you guys stand against your peers? Yeah, I guess depending on what metric you use. Many of our peers don't produce any positive EBITDA, so that's not always possible. If you look at a revenue metric, I think we're trading like at 25% of our revenue, which is ridiculously low. If you do it on EBITDA, I think it's also quite low in comparison to those other companies that do produce some positive EBITDA. I think as our EBITDA margin improves, people will recognize the value of the underlying business, and not just look at us as just a Trecondyv company, which we seem to have become for some reason. A question on IXINITY and the pediatric study. What does the full timeline look like? I know that they're saying that you guys are expecting, obviously Q1 next year, a study, and then what happens after that? Yeah. We hope to submit it in that timeframe. Then we believe it's a 6- or 9-month review. We would expect to see a decision on that indication in the latter part of next calendar year. Okay. A question asking if we could address some of the trading that we saw in the stock last week leading into the announcement. I can't address it. I can't explain it. I don't know. We received the news on Friday. We put the news out as soon as possible. Anything that transpired before that is unknown to me. Yeah. I guess one thing that I would say, just getting a lot of questions from investors, is people were definitely asking, since the 30-day period was over, for after you guys had resubmitted, people were asking what was happening, and it's been 30 days, and it's been longer than 30 days. I think maybe there were questions around just why we hadn't said anything yet. Sure. Yeah, no, that's a fair question. Yes. The guidance is for the authority to make a decision within 30 days of the filing. In this situation, there was a lot of back and forth, a lot of information requests, which went beyond the 30 days. Instead of the agency just saying, "Okay, well, your timeline's up. We're going to not accept this resubmission," they left that door open, and that clock continued to tick. Ultimately, we ended up with that letter anyway, but it looked as if the agency was seeking to try and acknowledge and accept that submission even after the guideline 30 days. There was nothing we could put out, and we didn't have any decisions, so we didn't have any news that we could possibly put out. Okay. I'm just going through the questions, and I think that you guys have pretty much addressed everything in one way or another that has been asked. I guess, Ken, I just wanted to turn it over to you. I know obviously disappointing the news on treosulfan, but aside from that, you guys have had two sequential record quarters in a row. Your base business seems really strong. What note do you want to leave for shareholders, I guess, that are watching this webinar? Yeah. We share the pain and the disappointment with the Trecondyv news, but we continue to execute strongly on our core business, and that is our business plan. Let's continue to grow organically through business development and through product development. Clearly we are executing on that. I'm really pleased that there's such a large group of investors who are showing interest and paying attention to this development. I hope that we can continue to develop and produce strong revenue growth, positive EBITDA, positive cash flow. Okay. Thanks, Ken. Thanks, Marcel. Thank you everyone for joining today.