Kamada Ltd Q3 FY2022 Earnings Call

Greetings. Welcome to the Kamada Ltd., Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I will turn the conference over to Bob Yedid of LifeSci Advisors. Bob, you may now begin.

Rob, thank you very much. This is Bob Yedid from LifeSci Advisors. Thank you all for participating in today’s call. Joining me from Kamada are Amir London, Chief Executive Officer; and Chaime Orlev, Chief Financial Officer. Earlier today Kamada announced its financial results for the three and nine months ended September 30, 2022. If you have not received this news release, please go to the Investors page of the company's website at www.kamada.com. If there are any questions at the end of this call, please feel free to email your questions to ir@kamada.com. Before we begin, I'd like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Kamada. I encourage you to review the company's filings with the Securities and Exchange Commission, including without limitation the company's Forms 20-F and 6-K, which identifies specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, Tuesday, November 22, 2022. Kamada undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, it's my pleasure to turn the call over to Amir London, Chief Executive Officer. Amir?

Thank you, Bob. My thanks also to our investors and analysts for your interest in Kamada and for participating in today’s call. I'm pleased to report Kamada’s strong third-quarter performance, which demonstrates the successful strategic transition of the company and is consistent with our previously communicated positive outlook. You will recall that we focused on the fact that our financial results in the second half would meaningfully improve compared to last year and the first six months of this year. Our performance in the third quarter indicates that our business is beginning to realize the significant benefits of the acquired portfolio of fully FDA-approved IgG comprising CYTOGAM, HEPAGAM, VARIZIG, and WINRHO. In fact, I can now confidently say that we have completed our rapid transition from our past dependency on GLASSIA sales to Takeda into a diversified, fully integrated commercial company and global leader in the plasma-derived specialty market. On our last call, I laid out our expected key sales and profitability drivers for the second half of the year. This included our IgG portfolio, sales of KEDRAB, and GLASSIA royalty income. All of these were indeed important contributors to the stability in third-quarter sales, which we generated total revenues of $32.2 million, representing a 40% increase year-over-year, with gross margins of 40%, up from 25% in the third quarter of 2021 and 31% in the second quarter of 2022. Our adjusted EBITDA for the third quarter was $6 million, representing a 19% margin. For the first nine months of the year, adjusted EBITDA was $10.6 million, representing a 13% margin. This EBITDA level is consistent with our annual guidance and represents a 58% increase compared to last year. We also continue to generate positive cash flow from operating activities for the third consecutive quarter, resulting in a cash position of $31.3 million as of September 30, 2022. This significant cash generation is indicative of our profitable commercial operations. We expect further sales growth and enhanced profitability in the fourth quarter, and as a result, we are reiterating our full-year 2022 revenue guidance of between $125 million to $135 million, with expected EBITDA margins of 12% to 15%. This guidance represents a 20% to 30% increase over 2021 revenue and will be more than 2.5 times the 2021 EBITDA. Looking further ahead, we continue to target growth at a double-digit rate in the foreseeable years beyond 2022. The portfolio of the fully FDA-approved immunoglobulins we acquired late last year continues to gain traction in multiple markets and again delivered strong sales and profitability for Kamada during the third quarter. As a reminder, the acquired product generated collective revenues of approximately $42 million in 2021 with over 50% gross margins, and we anticipate significant year-over-year growth in the new portfolio revenues beginning this year. I am pleased to report that in recent months, as part of our direct presence in the U.S. market, we deployed a team of U.S.-based experienced sales and medical affairs professionals who rapidly established our operations in this key market. The U.S. sales team is making good progress in promoting our portfolio of specialty plasma-derived immunoglobulins to physicians and other healthcare professionals through direct engagement and opportunities at medical meetings. Our Medical Affairs team is working to educate physicians while addressing their scientific and clinical inquiries. Throughout 2022, our team participated and presented at major medical conferences in the U.S., including the International Society of Heart and Lung Transplant, American Transplant Congress, and the American Association for the Study of Liver Disease. This area of activity represents the first time in over a decade that these high-premium products are being supported by field-based activity in the U.S. We are encouraged by the positive feedback received from key U.S. physicians who are seeking to publish new clinical data related to our portfolio while conducting educational symposiums that we believe will have a positive impact on the understanding of these products and contribute to continued growth in demand. Outside the U.S., we continue to generate meaningful sales growth from this product in international markets. I would highlight the recently signed $11.4 million agreement to supply VARIZIG, one of the four products, to an international organization operating mainly in Latin America. This agreement will be a key driver for us in the fourth quarter as approximately half of the anticipated revenues from this agreement are expected during this period, with the balance extending into the first half of 2023. From a strategic standpoint, this important supply agreement strongly validates our ability to grow the sales of our newly acquired portfolio in different international markets. In addition, we recently secured a second significant tender with an extension of an existing supply agreement from Canadian Blood Services for the supply of all four products for an additional three years for an approximate total value of $22 million. This agreement secures the ongoing service of products in the Canadian market. Canadian Blood Services manages the Canadian supply of that product for all provinces and territories excluding Quebec. The extension with Canadian Blood Services is for a three-year period, commencing on April 1, 2023, with an option to extend for up to two additional years. We are continuing to pursue additional commercial contracts in key strategic territories and are highly encouraged by the significant opportunities ahead of us. These supply agreements and our proactive selling efforts through our long-standing distribution relationship underscore Kamada's strong commitment to leveraging these new strategic assets. I should also add that we continue to expect receipt of FDA approval for the production of CYTOGAM, the largest of the four acquired products, at our Israeli facility during the first half of 2023. Let's move on to KEDRAB, our rabies immunoglobulin. Based on the continued moderation of the COVID pandemic in the U.S. and increased travel and outdoor activities, we remain encouraged by the in-market sales of KEDRAB through Kedrion over the first nine months of the year, which again grew significantly during the third quarter compared to pre-COVID pandemic sales levels. We believe this trend will continue, and expect KEDRAB to be an increasingly important growth driver for us over the next few years as it continues to gain market share in the $150 million U.S. market. I should highlight that this product also generates more than 50% gross margins for Kamada. Next, we continue to receive royalty income from GLASSIA sales to Takeda. During the third quarter, we generated royalty income of $3.5 million. As a reminder, royalty income from Takeda represents pure profit for Kamada. Our GLASSIA royalty agreement with Takeda extends out to 2040. Now, let's look a little further ahead at future catalysts. I'll begin with Kamada Plasma, our U.S.-based plasma collection company. Our early 2021 acquisition of a plasma collection center in Houston, Texas represented Kamada’s entry into the U.S. plasma collection market and supports our strategic goal of becoming a fully integrated specialty plasma product company. We remain focused on expanding the hyperimmune plasma collection capacity at this center and continue to advance our plans to open additional centers in the U.S. to further enhance our supply of specialty and normal source plasma. In fact, we're in the process of finalizing the selection of a site in Texas for a second collection center, with construction and startup activities to begin in the near future. As we have stated previously, the planned expansion of our plasma collection capabilities is expected to enhance our IgG competitive position in various markets, boost continued revenue growth, and strengthen our supply chain. Let's now turn to our ongoing pivotal Phase 3 InnovAATe clinical trial that is evaluating the safety and efficacy of inhaled AAT products for the treatment of AAT deficiency. You will recall that earlier this year, following the moderation of the COVID pandemic, the study was expanded to include six sites across Europe. Patient enrollment has recently begun to accelerate. To date, 30 patients have been enrolled for treatment, including 14 patients who have already completed the two-year study treatment period at the initial trial site in the Netherlands. Importantly, none of the patients discontinued treatment prematurely, and no drug-related serious adverse events were reported. This high level of patient adherence throughout the treatment is encouraging. Additionally, as part of our routine and planned monitoring process, the independent Data Safety Monitoring Board recently recommended that the trial continue without modification. Moreover, based on encouraging safety indicators observed to date, the DSMB supported an expansion of the inclusion criteria to also include subjects with severe airflow limitations. This change is expected to facilitate faster patient enrollment. Importantly, we intend to meet with the FDA and EMA during the first half of 2023 to discuss study progress and explore potential opportunities to shorten the regulatory pathway. As the most advanced investigational product for AAT deficiency, there is a substantial commercial opportunity for inhaled AAT to be a transformational next-generation augmentation therapy in the growing AAT market, which already exceeds $1 billion in annual sales in the U.S. and the EU. In summary, we continue to execute our corporate strategy on all fronts and believe we have the profit catalysts to drive double-digit growth in the foreseeable years ahead of us. We're excited about our near-term prospects as well as our long-term outlook as Kamada is uniquely positioned for growth as a global leader in the specialty plasma industry with multiple value-creating milestones expected in the months and quarters ahead. With that, I'll now turn the call over to Chaime for his review of our third-quarter 2022 financial results. Chaime, please.

Thank you, Amir, and good day everyone. In the third quarter of 2022, total revenues were $32.2 million, a 40% increase from the third quarter of 2021. For the first nine months of 2022, total revenues were $83.9 million, an increase of 16% year-over-year. These quarterly results are indicative of the successful strategic transformation we achieved through the strategic acquisitions during 2021, resulting in a vertically integrated global commercial biopharmaceutical company with multiple growth drivers. The year-over-year growth during the third quarter and the first nine months of 2022 was primarily driven by continued strong sales of our recently acquired IgG products. As Amir mentioned, the previously forecasted strong second half of the year was driven by multiple factors, including the growth of the new IgG product sales in the U.S. fueled by ongoing marketing efforts, as well as the expansion of ex-U.S. sales of these products. The continued growth of KEDRAB through Kedrion supported product market sales growth and the full impact from royalty income from GLASSIA. Additionally, fourth-quarter revenue will be further aided by the VARIZIG supply agreement, which will include approximately half of the $11.4 million in total revenues generated from this contract. We recognized $3.5 million of royalty income from Takeda based on their sales of GLASSIA in the third quarter, which was in line with our anticipated quarterly projections. As a reminder, the second half of the year will also include two complete quarters of royalty income compared to only four months in the first half. Total gross profit for the third quarter of 2022 was $12.9 million, representing 40% margins, compared to $5.7 million or 25% margin in the third quarter of 2021. Gross profit for the first nine months of 2022 was $31.4 million, representing 37% margins up from the 33% last year's previous margins. Let's turn to depreciation expenses. As previously discussed, the company is accounting for depreciation expenses associated with intangible assets generated through the recent acquisition of the four IgG products. In the third quarter and first nine months of 2022, the cost of goods sold in our proprietary segment included $1.3 million and $3.9 million, respectively of depreciation expenses associated with these intangible assets. Research and development investments during the first nine months of the year increased to $10.2 million compared to $7.9 million in the prior year, primarily due to the expansion of our ongoing pivotal Phase 3 InnovAATe trial for inhaled AAT. Selling and marketing expenses for the third quarter and first nine months of 2022 also increased. These increases are attributable to the establishment of our U.S. commercial operation to support the distribution and sales of the recently acquired portfolio of four FDA-approved commercial products. In addition, these costs include pre-commercial activities associated with new product launches in the Israeli distribution segment. As we have since the beginning of the year, we continue to account for financing expenses with respect to revaluation of contingent consideration and long-term assumed liabilities, all of which are related to the recent acquisition. During the third quarter and first nine months of the year, these finance charges totaled $2 million and $5.9 million, respectively. For the third quarter, we recorded a net income of approximately $480,000 or 1% per share on a fully diluted basis. Our adjusted EBITDA was $6 million for the third quarter of 2022. Adjusted EBITDA for the first nine months of 2022 was $10.6 million, representing a 13% margin, which is in line with our annual financial guidance and represents a substantial increase over the $6.7 million of adjusted EBITDA in the prior year period. Based on our expectation of significant revenue growth and enhanced profitability for the remainder of the year, we continue to expect revenue in the range of $125 million to $135 million and anticipate generating adjusted EBITDA at a rate of 12% to 15% of total bookings. Finally, for the third straight quarter, we generated positive operating cash flow, demonstrating the ability of the company's commercial operations to generate cash. During the third quarter of 2022, we generated $5.5 million of operating cash flows, which led to a cash position of approximately $31.3 million at the end of September. That concludes our prepared remarks. We will now open the call for questions. Operator?

Thank you. We will now open the call for questions.

Rob, thank you. While we wait for some additional questions to queue up, I have some that have been emailed into us. So, let me go through those. First is for Amir and Chaime. In order to meet your full-year revenue guidance of $125 million to $135 million, your fourth-quarter revenue will have to be significantly stronger than the third quarter. So, can you please provide us a breakdown of how that will be achieved?

Thank you, Bob, for the question. As we said, we're reiterating our full-year guidance based on the orders that we have and the sales that have already been executed since the beginning of the fourth quarter. Three things to take into consideration compared to the third quarter are, one, the VARIZIG supply agreement, where around half of it, approximately 50% will be executed in the fourth quarter, which adds about $5 million to $6 million compared to the third quarter. Secondly, from our Israel Distribution segment, we have significant orders pending that will be executed over the next few weeks before the end of the year. And in general, the new IgG portfolio products are growing and will continue to grow in the fourth quarter. So, when we add all those items together, we reach the annual guidance that we've provided.

Okay. That's helpful. Great. The other question we have is related to whether we should expect increased operating expenses as we look out to 2023 compared to this year, and if so, can you quantify how much higher those expenses might be?

So, 2023 will be a full year of our sales and marketing activity in the U.S. This is something that we initiated gradually in 2022. So, 2023 will see a full impact in that regard. Of course, all of this activity will contribute to our top-line performance and profitability. It's definitely a worthwhile investment, and we see this actually happening in the U.S. market. Additionally, with the Inhaled AAT, we plan to expedite operations in 2023. These two components will contribute to our operational expenses for marketing and R&D, and we expect next year investments in those areas will be an increase of approximately 10% to 12% compared to this year.

Okay, great. The next question is whether you expect that sales growth from the acquired products will come from additional international contracts or if that will mainly come from discussions and engagements by your new sales and medical affairs teams with physicians and transplant centers?

Both, basically. It's actually happening now, and we see this. The VARIZIG contract for Latin America is one example, and extending the agreement in Canada is another. We're beginning to feel the impact of our sales and medical affairs activities in the U.S. market. As I mentioned during the call, it's been over a decade since these products were supported by field activity, and now we’ve started engaging in discussions with relevant physicians and transplant centers, receiving highly encouraged feedback. All of that will contribute to increased sales, alongside selling our new products through our existing distribution network across many countries. Both aspects are contributing to the growth we see and expect in the years to come.

Great. And with regards to the transplant centers, can you help quantify how many transplant centers you'd like to see covered with that sales and marketing force?

Yes. We focus on the larger centers, specifically those already using our products, and we aim to increase usage. We're also reaching out to centers that haven't used CYTOGAM in recent years. As I mentioned, supporting these products with field activity now creates a positive opportunity for growth, discussions with physicians, and data collection to present to them. We’re currently targeting about 150 to 200 centers, employing a focused effort with an experienced team, and we’re making great progress in our coverage and ability to engage the right stakeholders.

Great. And just going back to the success of your acquired portfolio of products, does Kamada have an ongoing business development effort to continue to look for products like this to expand your portfolio of proprietary products?

We are building the right infrastructure. As I said, we’re highly focused on specialty plasma products and transplant centers. In parallel, we will be looking and have started to find other synergistic products that we can bring in from a business development perspective. This is an effort that will take us through 2023 as we search for the right opportunities.

Great. Okay, great. That's all the questions we have from various questionnaires, so that was very helpful. Rob, I'll turn it back to you.

Thank you. At this time, I'll hand it over to Amir London for closing remarks.

Thank you very much. So, in closing, we begin to realize the significant benefits of our recent strategic transformation. Our strong third-quarter performance is consistent with our forecast and positive outlook. Based on expectations for continued revenue growth and enhanced profitability in the fourth quarter, we are reiterating our full-year 2022 financial guidance. As discussed during the call, we continue to target double-digit growth in the foreseeable years ahead, driven by our proprietary product categories. We thank all our investors for their support and remain extremely committed to creating long-term sustainable shareholder value. Thank you very much. We hope you all stay healthy and safe.

This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.