Earnings Call Transcript - KMDA Q2 2022

Operator, Operator

Greetings, and welcome to the Kamada Ltd., Second Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bob Yedid. Thank you. You may begin.

Bob Yedid, Investor Relations

Thank you all for participating in today’s call. This is Bob Yedid. 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 six months ended June 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. 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 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 the live broadcast, Wednesday, August 17, 2022. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. Before turning the call over to management, analysts or investors can email questions for the question-and-answer session to my email address at the end of the press release. Additionally, you can prompt and ask questions live as usual on any conference call at the end here. With that said, it's my pleasure to turn the call over to Amir London, CEO. Amir?

Amir London, Chief Executive Officer

Thank you, Bob. My thanks also to our investors and analysts who have interest in Kamada and for participating in today’s call. Let me start by emphasizing that six months into 2022, based on our positive outlook for the rest of the year, we are highly encouraged by the performance of our business. I believe it is a testament to our ability to rapidly transition from our past dependency on GLASSIA sales to Takeda to a diversified, fully integrated commercial company and a global leader in the plasma-derived specialty market. Importantly, we are making critical progress leveraging each of our key growth categories, including the commercialization of our immunoglobulin portfolio in the U.S. market and in new territories, KEDRAB growth in the U.S., our distribution product in Israel, our U.S. plasma collection business, GLASSIA royalty income, and the recently expanded Inhaled AAT clinical program. During the first half of 2022, we generated total revenue of $51.7 million, representing a 5% increase year-over-year. Our adjusted EBITDA was $4.6 million and excluding losses associated with the Labor Strike, the adjusted EBITDA could have been $8 million representing a 15% margin. It’s important to note that during the first six months of the year, we generated $16.4 million of operating cash flow, which supported the increase of our cash position to nearly $30 million as of June 30, 2022. This increase validates our effective operations as a cash-generating business. The portfolio of the fully FDA-approved immunoglobulins we acquired late last year continues to gain traction in multiple markets and delivered strong sales and profitability for Kamada in the second quarter. As a reminder, the acquired products generated collective revenue of approximately $42 million in 2021 with over 50% gross margin, and we anticipate significant growth in the new portfolio revenues year-over-year. We have already received this through proactive promotion activities in the U.S., where our new established subsidiary Kamada Inc. is responsible for the commercialization and direct sales of the product. We expect this marketing effort will begin to bear fruit in the U.S. commencing in the second half of this year, 2022. We are already seeing meaningful sales growth from this product in international markets outside of North America, including the recently signed $11.4 million agreement to supply VARIZIG, one of the four acquired FDA-approved commercial products, to an undisclosed international organization operating principally in Latin America. Half of the anticipated revenue to be generated by this agreement is expected in the fourth quarter of the year, and the balance will extend into the first half of 2023. This important supply agreement strongly validates our ability to grow the sales of our newly acquired portfolio in international markets. We are continuing to pursue additional commercial contracts in key strategic territories and are encouraged by the significant opportunities ahead of us. These new supply agreements and our proactive selling efforts through our current distribution relationships underscore Kamada’s commitment to leverage 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, after completion of the tech transfer activities which are now nearly complete. The ability to use our facility to generate higher gross margins in the future compared to the current sourcing from a contract manufacturer is crucial. Our outlook for a stronger second half of the year is driven by multiple key factors, including anticipated continued growth of the new IgG portfolio, including sales boosted by the new VARIZIG supply agreement, and the expected growth of KEDRAB sales to Kedrion, supporting the product's continued increased market sales during 2022. In addition, total revenues in the second half of the year will include two full quarters of GLASSIA royalty income, as compared to only four months in the first half of the year. Second half profitability will continue to be driven by the new IgG products and KEDRAB sales, all of which generate more than 50% gross margins, with GLASSIA royalties being pure profit. Moreover, the now concluded Labor Strike will substantially reduce its impact on second half profitability compared to the first half. Based on our promising outlook for the remainder of the year, 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 from the 2021 revenue, and more than 2.5 times the 2021 EBITDA. Moreover, we continue to project revenue growth at a double-digit rate in the foreseeable years ahead. Before I continue to discuss other prospects for our business, I would like to mention that the recently resolved Labor Strike at our research facility in Israel concluded with the execution of an 80-year collective agreement. This new agreement will be effective through the end of 2029, while certain economic terms may be negotiated by the parties after the first four years of the agreement. Of significance, the strike had no impact on the availability of our products in international markets. However, as previously indicated, the company’s second quarter financial results were negatively impacted by a one-time loss associated with the effects of the work stoppage at the Israeli plant, which Chaime will discuss further shortly. I would now like to discuss Kamada Plasma, our U.S.-based plasma collection company. Our early 2021 acquisition of the plasma collection center represented Kamada’s entry into the U.S. plasma collection market and supported 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 enhance our supply of specialty and regular plasma. Our site selection process for a second collection center is close to finalization and will be followed by construction and startup activities in the second half of this year. We also intend to initiate activities for a third center by year-end. As a reminder, the plant 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. Moving on to KEDRAB, our rabies immunoglobulin, we are highly encouraged by the product’s in-market sales by Kedrion during the first half of the year, which grew significantly 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. Regarding GLASSIA sales, the second quarter represented our first full quarter where we received royalty income from Kamada's sales of this product. Royalty revenue for the second quarter was $3.7 million, meeting our expectations and prior guidance. With that, let’s now turn to our recently expanded in-house AAT clinical program, an ongoing pivotal Phase 3 InnovAATe clinical trial evaluating the safety and efficacy of our innovative inhaled AAT product for the treatment of AAT deficiency. Over the past few months, patient screening and recruitment began at traditional European sites. We are pleased with the current rate of involvement in this study. As mentioned in our last call, the Independent Data Safety Monitoring Board recommended continuing the trial in the second quarter without modification. To date, no patients have discontinued treatment prematurely, and no drug-related serious adverse events have been reported. As a reminder, this is a unified study as the trial’s data are expected to qualify for regulatory submissions with both the FDA and the EMA. To reiterate, a substantial opportunity exists for Inhaled AAT to be a transformative product in the market that is already over $1 billion in annual sales in the U.S. and Europe, and growing steadily, and we are excited to further advance these strides. Moving on to our Israel Distribution segment, we intend to launch a portfolio of 11 biosimilar products through 2028. Collectively, these products are expected to achieve annual peak sales of more than $40 million within several years of launch. This anticipated revenue is in addition to our current distribution product segment sales. In closing, I’d like to highlight the successful virtual Investor and Analyst Day we hosted in June, emphasizing the dramatic transformation of our business that we accomplished over just several months. If you have not already done so, I encourage you to review this material for a deeper understanding of our anticipated growth catalyst. Moving forward, we continue to execute on our corporate strategy on all fronts and believe we have the appropriate catalysts to drive double-digit growth in the years ahead. We are excited about our prospects as Kamada is uniquely positioned for growth as a global leader in the specialty plasma industry, with multiple value-creating upcoming milestones. With that, I'll now turn the call over to Chaime for his review of our second quarter of 2022 financial results. Chaime, please.

Chaime Orlev, Chief Financial Officer

Thank you, Amir, and good day everyone. In the second quarter of 2022, total revenues were $23.6 million. For the first six months of 2022, total revenues were $51.7 million, an increase of 5% year-over-year. This is a solid indication of our rapid transition from prior dependency on GLASSIA sales to Takeda, moving toward a more diversified operation with multiple growth drivers. The year-over-year growth during the first six months of 2022 was primarily driven by continued strong sales of our recently acquired IgG products. As Amir mentioned, we forecast a strong second half of the year, driven by several factors, including continued growth of IgG product sales in the U.S., which will be supported by ongoing marketing efforts, as well as expansion of ex-U.S. sales of these products through the VARIZIG supply agreement. Moreover, we expect continued growth of Kedrion’s KEDRAB in the second half of the year, supporting the product in-market sales growth. The three months ended June 30, 2022, represent our first full quarter receiving royalty income from Takeda based on their sales of GLASSIA. We recognized $3.7 million of royalty income in the second quarter, which aligns with our anticipated quarterly projections. The second half of the year is expected to include two full quarters of royalty income compared to only four months in the first half. The gross profit for the second quarter of 2022 was $7.2 million, representing 31% margins, compared to $9.1 million or 37% margin in the second quarter of 2021. Gross profit for the first six months of 2022 was $18.5 million, an increase of 3% year-over-year, representing 36% margin. We recently resolved a Labor Strike at our manufacturing facility in Israel. As a result of the strike, we incurred a loss of $3.3 million, which significantly impacted our gross profit for the second quarter and first half of the year. Excluding this loss, the company's reported gross profit and gross margins would have increased year-over-year. It is important to note that, as the labor strike ended in mid-July, we expect to record a subsequent portion of that loss in the third quarter. As discussed in the first quarter, the company is accounting for depreciation expenses associated with intangible assets generated through the recent acquisition of the four IgG products. In the second quarter and first half of 2022, cost of goods sold in our proprietary segment included $1.4 million and $3.7 million respectively of depreciation expenses associated with these assets. Second quarter and first half gross margins, excluding such intangible assets depreciation and the labor strike-related loss, would have been 51% and 48% respectively. Looking ahead to the second half of 2022, increased sales of the new IgG portfolio and KEDRAB will generate meaningful gross profitability, as each of these products generates more than 50% gross margin. The GLASSIA royalty generates pure profits, and with the labor strike concluded, its impact on second half profitability will be substantially reduced compared to the first half. Research and development investments during the first half of the year increased compared to the prior year period, primarily due to the expansion of our ongoing pivotal Phase 3 trial for Inhaled AAT, related to the opening of new clinical sites and the manufacturing of clinical supply for the study. Selling and marketing expenses for the second quarter and first half of 2022 also increased. This increase is attributable to the establishment of our U.S. commercial operations to support the distribution and sale of the recently acquired portfolio of four FDA-approved commercial products. Additionally, these costs include pre-commercial activities associated with new product launches in the Israeli distribution segment, including one of the 11 biosimilar products that recently obtained Israeli Ministry of Health approval. As in Q1, we continue to account for financing expenses concerning the revaluation of the contingent consideration and the long-term assumed liabilities, which are related to the recent acquisition. During the second quarter and first half of the year, these finance charges totaled $1.9 million and $3.9 million respectively. For the second quarter, we recorded a net loss of $3.9 million, or $0.09 per share on a fully diluted basis. Our adjusted EBITDA was $1.3 million for the second quarter of 2022. Adjusted EBITDA for the first six months of 2022 was $4.6 million. Adjusted EBITDA for the first six months, excluding the Labor Strike related loss would have been $6.2 million, representing 15% margins over the first half. Based on our expectation of significant revenue growth and enhanced profitability in the second half of the year, we continue to expect to meet our 2022 annual revenue guidance of $125 million to $135 million and anticipate generating adjusted EBITDA at the rate of 12% to 15% of total revenue. Lastly, during the second quarter of 2022, we generated $10.9 million of operating cash flow, which is a strong testament to the company's cash-generating capability. As of the end of June, the company's total cash position was approximately $30 million. That concludes our prepared remarks. We will now open the call for questions.

Operator, Operator

Thank you. Our first question comes from Anthony Petrone with Mizuho Group. Please proceed with your question.

Anthony Petrone, Analyst

Thanks and congratulations on a strong quarter here and execution with the new portfolio. Amir, I want to start with the contract on VARIZIG, $11.4 million in the second half to Latin America. Just a little bit more detail on that; was that a one-time quarter or should we expect that to continue into next year, and then I have several follow-ups. Thanks.

Amir London, Chief Executive Officer

Hi Anthony! Thank you for the question and for participating. So the current agreement is between the fourth quarter this year and the first half of 2023. So we’re looking at $11.4 million, which is roughly half of it will be this year and the balance will be next year. Beyond that, we would need to wait and see if that international organization issues another tender. I feel that if it happens, it will happen towards the end of 2023 and we’ll cover 2024 and beyond. That organization is one we have done business with in the past and they have other tenders for other products, which are part of our portfolio. So we believe that there’s an opportunity to grow the business with that organization beyond just VARIZIG.

Anthony Petrone, Analyst

That’s helpful. And then VARIZIG, I know obviously prophylactic treatment for varicella, chickenpox and you know that's certainly quite different than monkeypox. But is there any chance potentially of a reformulated version of VARIZIG to address monkeypox? If not, is there anything out there you know potentially that Kamada can participate in on that front? And then I have a couple more.

Amir London, Chief Executive Officer

Okay. So as far as I know, there is no connection at all between VARIZIG and monkeypox. The increase in demand for VARIZIG, which we see not only from that organization, but we have grown our sales of this product also in other territories, is linked to COVID. There are payers coming, especially from Latin America, that show a link between the prevalence of chickenpox and COVID. So that's the main result or reason for the significant increase in VARIZIG demand in multiple territories. We are selling the product in the U.S., Canada, some European countries, and now with the significant new agreement with that international organization, we anticipate continued growth for that product beyond just the agreement with additional clients around the world. Regarding your question, we currently don’t have in our portfolio something directly for treatment or prophylactic treatment of monkeypox, and very few products may potentially serve that. It is not something that would be covered in our portfolio. If there is an indication that general IgG as a “cocktail” of immunoglobulins is a relevant treatment for monkeypox, then of course we have IgG for these new markets, and this can drive growth for that category.

Anthony Petrone, Analyst

Okay. And then you know second half international sales of the four IgG products, CYTOGAM, HEPAGAM, as well as VARIZIG, we talked about that, and WINRHO. Are any of these products not launched at this point or did 2Q have active sales internationally from the entire portfolio? And when you just think about the second half ramp internationally for the portfolio, you know maybe just a little bit more detail on which of the four products you expect to sort of lead the sort of uptake and which countries we should be expecting the most traction from?

Amir London, Chief Executive Officer

Okay. So when we bought the portfolio, the business was primarily in North America. I think we previously mentioned that over 95% of sales last year came from the U.S. and Canada. We are leveraging our international presence and strong international network. As we anticipated and mentioned after the acquisition, we believe we can perform better with those products not only in the U.S. and Canada but also to leverage our international network to grow significantly in other markets. We are pleased to see meaningful sales growth for those products in those markets already. VARIZIG is just one example. All four products are being sold in additional territories, which is significant for growth and a new catalyst for our business.

Anthony Petrone, Analyst

Thanks for that, Amir. And the last one for me is on CYTOGAM specifically. One of the synergies the company spoke about at the time of the acquisition was that this product, specifically in the United States and potentially North America broadly, really did not have any sales and marketing push behind it. So maybe just a little bit of an update on that initiative around CYTOGAM, on the marketing front. Thanks.

Amir London, Chief Executive Officer

Yes, we’ve established our core marketing and sales team in the U.S. We hired people, and we have Jon Knight as our VP of Commercial Operations for the U.S. market. We have already hired regional sales managers and the medical service team to support it, along with sales and marketing executives. We are focused on key transplant centers in the U.S. because CYTOGAM is a treatment related to consolidation. We are also leveraging the same sales and marketing team for HEPAGAM, which is also strategic for consultation centers. VARIZIG is for immunocompromised patients, so consultation centers are relevant for that as well. All these activities are synergistic, and we expect commercial activity results in the second half of this year. We’ve already seen an increase in demand from Q1 to Q2 and expect to see similar increases during the second half of the year.

Anthony Petrone, Analyst

Alright, thank you very much. I’ll hop back in.

Operator, Operator

Thank you. Ladies and gentlemen, I’ll turn the floor back to Bob Yedid for any questions that came in through email.

Bob Yedid, Investor Relations

Yeah, we do have a couple of questions that came in through email. Amir, maybe you can help explain how you reduced your dependence on GLASSIA sales and accomplished the strategic shift you discussed during the call, as well as some key components.

Amir London, Chief Executive Officer

Yes, as I said during the call, we are very encouraged by our 2022 performance, and we see how we are transitioning from our past dependency on GLASSIA® sales to Takeda into a certified fully integrated company with multiple growth catalysts. That past dependency on GLASSIA, which was a reality until mid-2021, is gone. We now operate as a new company, and it’s highly encouraging how this transaction has progressed in just a few months. Looking at our current business and future projections, our multiple growth engines include a new portfolio of fully GLASSIA approved immunoglobulins, KEDRAB growth in the U.S. market, our fully owned plasma collection company in the U.S., anticipated growth in our Israeli distribution business, including the launch of 11 biosimilars that will add $40 million to our revenue, and royalty payments from Takeda that commenced earlier this year. These components represent a diversified, commercial, fully integrated leader in the specialty plasma industry, and it’s happening. A few months into 2022, I can confidently state that it's happening and we have strong prospects for continued growth moving forward.

Bob Yedid, Investor Relations

Okay, that’s helpful. The other question we have is, now that you talked about the U.S. sales and marketing organization, does that open up additional opportunities to look at other plasma-derived products or other products to bring into Kamada over time?

Amir London, Chief Executive Officer

Absolutely! As we build our U.S. presence and enhance our sales and marketing infrastructure, we plan to either acquire or in-license additional products that will fit well with our commercial team. This could include plasma-derived products or products targeting transplantation centers. We will continue to focus on business development to make this happen, so the answer is yes.

Bob Yedid, Investor Relations

Okay, great. The last question is just looking at the financials so far this year; you're running at less than half of your target for the year in terms of revenue guidance. Help us understand the key factors that give you confidence in achieving your full year revenue guidance.

Amir London, Chief Executive Officer

Yes, looking at the second half of the year, the outlook is for a substantially stronger six months, with several known catalysts in the execution phase. One is the significant growth from sales of VARIZIG, which will contribute significantly to our revenue projections. We are expecting strong increases from new immunoglobulins in the U.S. market compared to the first half. KEDRAB is also growing significantly, and we anticipate fulfilling orders in the second half of the year. The second half will include two full quarters of GLASSIA royalty income versus only four months in the first half, and when you aggregate all of this, along with our distribution business growth in Israel, we are strongly positioned to meet our revenue projections for the year.

Bob Yedid, Investor Relations

Great! Thank you. Those are the questions that we had from the analysts and investors. I’ll turn it back to Melissa.

Operator, Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn the floor back to Mr. London for any final comments.

Amir London, Chief Executive Officer

Thank you. On behalf of the entire Kamada team, we look forward to continuing to provide clinicians and patients with an expanding portfolio of important lifesaving products that we develop, manufacture, and commercialize. We thank you all for your participation in today’s call and your support, and we remain firmly committed to creating long-term sustainable shareholder value. Thank you for joining today’s call, and we hope you all stay healthy and safe. Thank you very much.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.