ProPhase Labs, Inc. Q1 FY2023 Earnings Call

Good day, and welcome to the ProPhase Labs Inc. First Quarter 2023 Financial Results and Corporate Update Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Ted Karkus, CEO and Chairman of the Board of ProPhase Labs. Please go ahead.

Thank you, Sarah. Thank you everyone for joining me today. Before we begin, I would like to remind you of the company’s Safe Harbor language. During this presentation, we will make forward-looking statements regarding our strategies, plans, objectives, initiatives, and underlying assumptions. While we believe these statements are reasonable, they are based on expectations that involve risks and uncertainties that could lead to significantly different actual results. These risks include our ability to obtain regulatory approvals, general economic conditions, consumer demand, challenges in growing new business lines, the competitive environment, and the risk factors listed in our SEC filings. This call will present non-GAAP financial measures, such as adjusted EBITDA. Reconciliations of these measures to the most comparable GAAP measures are included in the earnings release shared with the SEC prior to this call and available on our website. Now that we’ve covered the forward-looking statements, I want to welcome you all and sincerely appreciate your interest in ProPhase Labs. A few quick updates: we collaborate with a company that creates virtual non-deal roadshows. I lead these roughly twice a month. If you want to keep up with our evolving company, please reach out to them and sign up for updates on our VNDRs, which are video calls with slide presentations. I also want to remind everyone that our website hosts two presentations: one specifically for our biotech division and an updated company presentation. If you haven't checked it out recently, it’s a great resource. Our company is now covered by four analysts: ThinkEquity, H.C. Wainwright, Joshua Levine, and Diamond Equity Research. All four expect us to incur losses this year but project our stock price objectives to be around $15 to $20 per share, with Diamond Equity assigning a $20 target. I highlight this because we are not focused on earnings this year. If you are looking for earnings, you may want to reconsider your investment in our company, unless you are shorting the stock while we work on developing valuable assets we believe have multi-billion dollar potential. We capitalized on an opportunity with COVID, which was a remarkable benefit for the company and its shareholders, allowing us to assist people while generating substantial profits. We recognized that this would not define our future but leveraged a two-and-a-half-year bear market in microcap biotech stocks. During this profitable period, we focused on building long-term value through impressive acquisitions and technological development, which has been our focus for the past two and a half years, not COVID testing. COVID testing generated revenue, but I tend to think long term. I believe it is my destiny to build a multi-billion dollar company, and now we have the platform and infrastructure to achieve this, which we did not have before. The COVID testing opportunity equipped us with the means to grow a significant CLIA lab in New York, which we used to expand our business in COVID, flu, and respiratory testing. We still have more working capital now than when we raised it two and a half years ago. We executed effectively, earning the trust of investment banks like ThinkEquity and H.C. Wainwright, who know we're focused on protecting shareholder interests and building the underlying value of our company. I do not take investments lightly, and we have spent the last few years developing valuable assets, several of which are beginning to generate significant value right now. This year will not be centered around earnings; while it’s nice that we earned some in the first quarter, my focus is on adjusted EBITDA due to significant issues we face with net income and adjusted EBITDA. Many public companies deal with similar challenges due to acquisitions, stock options expensing, and depreciation, even as asset value grows. We also have concerns with Nebula Genomics regarding deferred revenue, making these issues complicated. Personally, I prefer to concentrate on adjusted EBITDA. Our testing revenues from COVID and flu will likely decline as the public health emergency has ended, and we are entering a-seasonally weaker time, particularly in Q2, historically being a weaker quarter across our businesses. Therefore, you can expect further weakening in these numbers. However, our priority remains on building the underlying value of our company. I'm confident that many of you on this call know our company well, and I won’t read our press release from this morning, but I want to note a few key points. We have a manufacturing facility operating at full capacity, and demand is enormous. We are well-regarded in our industry, especially for our lozenge brand, where the reliability of supply is crucial. Retailers panic when they lack products on their shelves. I've learned this firsthand from selling the Cold-EEZE brand, as the most important factor for retailers is ensuring they carry products that consumers wish to buy, followed closely by product availability. Empty shelves mean lost profits. Supply chain issues exist in the lozenge business globally, and major brands are seeking us to manage their manufacturing on a global scale. Our manufacturing facility has extraordinary potential. Initially, this business primarily maintained our infrastructure and distribution across 40,000 food, drug, and mass storage retailers in the U.S., but it is now growing rapidly, nearly doubling year-over-year. I previously mentioned that we anticipate at least $25 million in revenue for 2024, constrained only by how quickly we can boost capacity, which we expect to achieve this year. Currently, revenues are rising almost 100% year-over-year, making $25 million a reasonable target for next year’s manufacturing facility. Despite being the least interesting business we're developing, it still holds immense value regarding our market cap. Consider the potential value of our manufacturing facility next year, which I estimate could be around $70 million. Additionally, we hold $40 million in net working capital and own tens of millions of dollars' worth of equipment. If we did not include our COVID-testing operations, respiratory business, or any other lab operations, the value of our equipment alone possibly approaches our market cap. Now let’s discuss a few aspects further. We've fully diversified our lab to encompass a complete clinical lab while building a state-of-the-art genomic testing lab. We are awaiting validations, which will take a couple of months, before expanding these businesses in the latter half of this year with our whole genome sequencing business. Currently, we process specimens abroad, limiting our ability to scale a B2B operation until we can handle these in-house. We expect rapid growth in Nebula Genomics in the second half of this year, particularly in Q4. While we currently sell directly to consumers, we aim to expand this business in the latter half of the year, engaging with various major drug retailers whose tests are progressing well. I believe we will eventually see our whole genome sequencing test available in stores like Walgreens and CVS. Our B2B business has immense value; personalized precision medicine is the future, anchored by whole genome sequencing tests. We aim to become the low-cost provider in this area, setting us apart from similar businesses with larger market caps but far behind us. I'm excited about our esophageal cancer test, as it’s remarkable we have our current market cap with a test that could be commercialized early next year. A company called Exact Sciences currently holds a $12 billion market cap for their colon cancer test, Cologuard. We believe we can obtain CPT codes for our esophageal cancer test, allowing commercialization early next year. If our test achieves even 10% of their success, our company’s value could be nearly tenfold. It's essential to understand that our technology is distinct, showing higher sensitivity and specificity. In tests conducted, our test accurately verified esophageal cancer risk in all 200 specimens. We are seeking to conduct further studies and aim to commercialize this next year. While I can’t define a precise timeline, the potential is enormous. It’s concerning our market cap is positioned against this backdrop. I find it amusing, as during recent meetings with institutional investors, their questions focused on revenues and earnings again. If that’s your focus, this might not be the right company for you; we are building significant long-term value. The key takeaway from the past two and a half years is our execution on behalf of shareholders. In my 40 years of investing in small-cap companies, management rarely executes in favor of shareholders, but this is our goal now. We are developing multi-billion dollar assets, and previous successes like the Cold-EEZE brand sale pale compared to our current ambitions. I won’t provide details on Linebacker now, but I am eager for your questions. You can review our presentations for a comprehensive view of our subsidiaries. On Linebacker, we are achieving exciting results; running studies ourselves adds credibility to our efforts. All I can say is that healthcare professionals we engage with are genuinely enthusiastic about our esophageal cancer test and Linebacker. Dr. Chris Hartley at Mayo Clinic is particularly invested, and our connections there are growing. We see vast potential in our initiatives to save lives not only in the U.S. but globally. We’ve also observed favorable results in preliminary Linebacker studies via Eurofins, and I look forward to updates from the Dana-Farber Cancer Institute within Harvard University. For context, I’ve compared our value to companies like Biomea Fusion, which experienced significant stock price increases based on positive results. Their market cap surged from $100 million to over a billion in a single day, which emphasizes our progress with Linebacker. While I don’t wish to emphasize stock price, I reassure shareholders that we are developing valuable assets likely to surpass our current market cap. Therefore, I encourage you to prioritize asset valuation over short-term earnings. This is crucial transitional year, as highlighted in our press release. Take the time to reflect on the significant asset value we are creating; long-term investors will be well-rewarded for their commitment. I could continue discussing at length, but I don't want to extend our time unnecessarily. I hope to hear some excellent questions, and with that, Sarah, I will turn it over to you for questions.

Our first question will come from Fred McDonald, Investor.

Ted, you mentioned that we were going international. Does this mean we are looking for partners, or are we selling our products directly?

So we have different subsidiaries. You have to understand Linebacker is a cancer compound, and maybe I should elaborate a bit. And this is why I appreciate questions; they encourage me to provide additional detail. Regarding Linebacker, originally, we aimed to develop it as a co-therapy potentially effective with leading cancer drugs like Doxorubicin. We found that, when combined with other cancer drugs, critically it is important from an FDA perspective to use the lowest possible dose that can still yield therapeutic benefits. This is critical as cancer drugs, while effective against malignant cells, can also harm healthy cells. Thus, we want the lowest possible dose. Initially, Linebacker was seen as a co-therapy but now has potential as an independent cancer drug, with the ability to potentially surpass many multi-billion dollar cancer drugs out there. Why I extended this explanation is that we have also begun to think globally. Historically, I didn't consider international aspects. When I turned Cold-EEZE around, it was a U.S. operation. Even with the COVID testing, we confined ourselves to the U.S. market. Now, however, we are developing international businesses. Just imagine the impact we could have worldwide. We should pursue partnerships globally for Linebacker and our esophageal cancer test to save lives everywhere. Regarding our esophageal cancer test, we’re preparing to commercialize it in the U.S. next year, but we should also introduce it in other regions. It is life-saving and transformative. The scientists involved genuinely believe in this impact. The current methodology for diagnosing esophageal cancer is flawed; pathologists assess biopsies under a microscope, which can lead to late diagnoses, resulting in 80% to 90% mortality rates among those diagnosed. Our esophageal cancer test has the capacity to detect cancer sooner. In many regions, such as the MENA area, occurrences of GERD and Barrett’s esophagus—precursors to esophageal cancer—are more prevalent than in the U.S. Hence, we aim to develop our esophageal cancer test globally. Furthermore, in Nebula Genomics, the focus is on genomic research, precision medicine. This is a global endeavor, as all health-related research centers on genetic predispositions and drug efficacy. If two individuals receive the same cancer diagnosis and administer the same drug, it may succeed for one but fail for the other; the distinction lies within their genetic makeups. Genetic variations are at the core of medical treatments. Thus, Nebula Genomics will be a global initiative. Our operation aims to deliver the whole genome sequencing at a low cost while simultaneously reaching out to global audiences. We have numerous subsidiaries revisiting a global expansion. Therefore, it is not singular; we have many sectors contemplating international outreach. And there’s no cap on our market potential. Furthermore, I pose a challenge to anyone: find me another biotech microcap company that is developing multi-billion dollar assets and turning a profit. It’s almost an unthinkable task. Hence, our present focus is not on making profits; instead, it is all about asset development. The return on investments in these assets could be substantial—just look at Biomea, rising tenfold over a year due to a Phase 2 study revealing positive results. Then consider Exact Sciences—if our esophageal cancer test achieves even 10% success like theirs, there’s massive potential for our stock price to increase ten-fold. I want to emphasize the vast possibilities ahead of us. My history shows we've executed effectively for our shareholders, and I see no reason to believe we won't continue. I know my response was more detailed than what you asked, but I aimed to illustrate our expansive global vision.

Ted, one more question. When are you going back to Abu Dhabi?

Listen, I have to be very careful what I say publicly and what I don't, and I'm not sure what I should disclose on a shareholder's conference call. I have made it clear that we do have an MOU with G42 Healthcare. G42 Healthcare merged with Mubadala Healthcare to form M42. They are companies worth billions. We have an MOU in place currently, and I am traveling back and forth to Abu Dhabi. I hope to have more updates for our shareholders soon—whether that's in weeks or months, I won't provide a specific timeline. However, I assure you we’re not idly sitting by. We didn't remain stagnant over the past two years while diversifying our company, and we continue to work on developing our acquired assets. Thank you for your question, Fred. Sarah, next question, please.

Our next question comes from Hunter Diamond with Diamond Equity Research.

Firstly, congrats on the results. So I saw you recently made a senior-level hire in diagnostics. Maybe you can discuss the company's ambitions within oncology and how it ties into your existing assets and facilities.

Sure. What's interesting is there are synergies between our different subsidiaries. It’s advantageous when we hire someone with expertise in developing Linebacker, as that expertise often translates to our esophageal cancer test. As results for Linebacker look positive, we’re hiring more personnel and conducting further studies. We’re cautious not to overspend, keeping in mind that we’re discussing millions—not tens of millions—for studies. That’s why we are focused on augmenting the underlying value of our company rather than chasing profits this year. However, by the fourth quarter, our earnings could become compelling. For now, we are prioritizing asset development. We have recently hired Dr. Matt Halpert, who brings remarkable experience and perspective to developing cancer assets. We're charting our focus, considering many cell lines, and discovering that Linebacker has potential as a stand-alone drug, not solely as a co-therapy. We are uncovering that Linebacker can inhibit other kinases, creating opportunities for partnership in development with major pharma. The other aspect of commercialization is esophageal cancer. This is not a portfolio that must wait seven years and $100 million for FDA testing; our timeline is considerably shorter, with commercial potential in less than a year. We are addressing a market with significant needs—a target of 2 million endoscopies annually for Barrett’s esophagus, translating to a revenue opportunity of $2 billion to $14 billion—a value proposition that will address both patient needs and insurance costs. Therefore, while Linebacker has multi-billion dollar potential, our esophageal cancer test is on a much faster track to market. The synergies between team members are beneficial as they contribute to both initiatives, and we’re collaborating with top-tier cancer organizations and research universities. I appreciate your understanding of our strategic alignment.

No, it makes perfect sense. I appreciate the color, and that’s all I have. It was a fairly comprehensive call. So thank you for taking the question.

Thank you so much. Next question, please, Sarah.

Our next question comes from Yi Chen of H.C. Wainwright.

My first question is could you comment on the current trend of COVID testing, probably in the current quarter, and also the trend of non-COVID testing volume in your CLIA lab?

So that's probably the least interesting part of our business, but of course, it accounted for the majority of revenues over the last two years. So COVID testing will continue to decline; the public health emergency has concluded. You can expect that COVID testing volumes will diminish. Additionally, we are moving into the summer months, which traditionally bring reduced upper respiratory testing. Consequently, we are approaching the seasonally weakest quarters for our business. Historically, for 25 years, the middle of the year has always represented our slowest period. Cold lozenges, for example, aren't typically sold in spring and summer, which will affect manufacturing volumes, and COVID testing will also diminish with lower incidence rates. As for our Nebula Genomics, that business is growing year-over-year more than 100%. However, certain factors, like holidays and seasonal promotions, will influence volumes. Thus, while our testing will slow, the foundational value of our assets is rapidly increasing, overshadowing any potential losses. We reported a profit in the first quarter; however, this will not affect the company’s value or our objectives as we’re not managing for profitability right now. So, expect COVID testing to continue to slow, and overall testing will decline. The clinical lab won’t ramp up until validating processes are completed. Our whole genome sequencing business is poised for significant growth once validations are finalized; we are currently in the extraction phase while sending specimens abroad. Many universities and companies shy away from having specimens processed overseas, which presents opportunities for us in other nations that share that sentiment. With our expertise in whole genome sequencing, we believe we have solid capabilities to build a leading lab in the country.

My second question is, you used the Exact Sciences as an example. So I wonder if you can comment on how many sales reps Exact Sciences is using to market their colorectal cancer test, and how many sales reps you think you would need to successfully market the esophageal cancer test? And another related question: for colorectal cancer, it is currently recommended by the United States Preventive Services Taskforce. I mean, is esophageal cancer screening test recommended by any national guidelines? And if not, what can the company do to enhance visibility and recommendations for guidelines?

These are great questions. I don't want to delve too extensively into Exact Sciences. I don’t want to focus on other firms. I merely meant this to provide our shareholders with context about the magnitude of our potential. It might be useful as a case study to explore how long it took Exact Sciences to achieve a $12 billion market cap. However, the dynamics vary slightly since they have a product that can be sent home. There exists issues with patient adherence. Regarding recommendations for esophageal cancer, currently gastroenterologists suggest patients receive endoscopies. This initiative will be driven by physicians who will recommend our tests. Our primary target market initially involves those already experiencing endoscopies, thereby removing the necessity for them to advocate for endoscopy tests. We aim to engage physicians preemptively advising, “You're already performing an endoscopy; let us analyze a small portion of those specimens using our test for improved accuracy.” Therefore, the quantity of sales representatives we would need won’t be substantial. We must cultivate relationships with key opinion leaders and major cancer institutes to raise awareness and support for our product. We aim to assemble more physicians who can champion our offerings while also presenting at key cancer conferences. It’s complex to secure slots at these events, but our favorable results are garnering acceptance for presentations. We’re working on influential endorsements that will help disseminate this information among GIs who need to know about our tests. Given that we are actively pursuing CPT codes, we believe these steps combined will position us strongly for reimbursement, effectively making it a logical recommendation for anyone performing endoscopies. Ultimately, any patient concerned about dying from esophageal cancer would want this test. I believe our test will gain traction quickly once more individuals become aware of it. Let me emphasize that the market is looking for our solution; once our tests are established, it will be viewed as essential among gastroenterologists. Thus we won’t need a large sales team—just the requisite relationships to generate interest and enthusiasm from physicians who want to save their patients’ lives. I hope that adequately answers your question.

Thank you, Ted. That’s very helpful.

Thank you. And Sarah, do we have any more questions?

There are no questions left at this time.

Okay. If there are no more questions, Sarah, then I would just like to wrap up and thank everybody for being with me for this past hour. It's now 56 minutes, and I think I covered a lot. There is so much more I could delve into; I could spend an hour discussing each subsidiary of our company. For further insights, you can access our newly updated website and look at the revised company presentation. Additionally, we welcome you to join our Renmark presentations for in-depth details. I want to acknowledge the invaluable support of our investment bankers who have been instrumental in our success. I immensely appreciate your following. A special thanks to Yi Chen, Ashok Kumar, and our latest follower, Hunter Diamond from Diamond Equity Research. I appreciate the thoughtful report you compiled on us. I am eagerly anticipating our future! Thank you all for your time, and best of luck! Have a wonderful day, and thank you, Sarah.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.