Journey Medical Corporation

Good afternoon and welcome to the Journey Medical fourth quarter and full year 2021 financial results and corporate update conference call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. And to withdraw your question, please press star then two. Participants on this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call for approximately 30 days. I would now like to turn the call over to Jules Abraham of CoreIR, the company's investor relations firm. Please go ahead, sir.

Jules Abraham Thank you, Chuck. Good afternoon, and thank you, everyone, for participating in today's conference call. Joining me from Journey Medical Corporation's leadership team today are Claude Merawi, co-founder, president, and chief executive officer, Ernie DiPalantonio, chief financial officer, and Ram Vialouche, general counsel, who will be joining for the question and answer session. During this call, management will be making forward-looking statements, including statements that address Journey Medical's expectations for future performance or operational results. Forward-looking statements involve risks and other factors, that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk doctors described in Journey Medical's most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the FCC today, and the company's press release that accompanies this call, particularly the cautionary statements within. Today's conference call includes non-GAAP financial measures that Journey Medical believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in the company's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, March 23, 2022. And except as required by law, Journey Medical disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. With that, it's my pleasure to turn the call over to Claude Morawi, co-founder, president, and chief executive officer of Journey Medical. Go ahead, Claude.

Thanks, Jules, and good afternoon to everyone on the call. As you know, this is our first investor update call since our initial public offering onto the NASDAQ exchange in November 2021. While the express purpose of these quarterly calls is to report our financial results to our shareholders, I think it is also important that we provide context to these numbers. Let me begin by reviewing the significant milestones achieved in 2021. In March 2021, we launched arguably the most iconic brand name in dermatology, Accutane, which has contributed to our revenue growth for the company since its launch, and by all measurements, has a tremendous launch. The isotretinoin market has well over 2 million prescriptions annually. Accutane has achieved over 11% market share as of February 2022 Symphony data with 18,641 prescriptions. Notably, each prescription is equivalent to approximately 1.8 units sold. In the fourth quarter of 2021, Accutane generated net revenue of $4.4 million. In May, we acquired Q-Brexa from Dermira, a wholly owned subsidiary of Eli Lilly and Company. Q-Brexa is the first and only cloth towelette approved to treat primary axillary hyperhidrosis in patients nine years and older. There are approximately 10 million patients who suffer from this condition in the US. The second half of 2021, During our initial launch, we had approximately a 14% prescription growth versus the second half of 2020 under Dermira's sales team, which was more than double the size of Journey's sales team. In June, our next acquisition was a Phase III clinical asset, which we acquired from Dr. Reddy's for the Collaborative development and commercialization of the DFD29 program. That is modified release minocycline capsules, 40 milligram strength, currently being evaluated for the treatment of papulopustular rosacea. We acquired global commercialization rights, including the U.S. and Europe. In the phase two study, DFD29 demonstrated nearly double the efficacy over oratia in IGA success and total reduction in inflammatory lesion count, while maintaining a similar safety profile. Sixteen million patients suffer from rosacea, which correlates to an estimated one billion in prescription sales, with oratia holding approximately 340 million in prescription sales. We are pleased that the first patient dose in our Phase III clinical program occurred earlier this month. Most recently, in January of this year, we entered into a definitive agreement with Vine Therapeutics to purchase its molecule stabilizing technology franchise. The franchise includes the first and only FDA-approved topical minocycline products, Amzeek and Zilxy, along with the MST proprietary platform. We estimate that total investment in these products from development to launch prior to our purchase was between $200 million and $300 million. As a reminder, Our initial investment was $20 million up front and an additional $5 million on the one-year anniversary with no related royalties. Our first priority is to flatten out the regression trend on both of these new assets. After Vine dismissed their sales force back in August of 2021, the prescription volume fell considerably. Amzeek was down approximately 33%, and Zilksie was down approximately 22% before we acquired them. In 2021, under Vine, Amzeek and Zilksie brought in $13.8 million in net product revenue. With a targeted marketing message, the right copay assistance program coupled with the reach and frequency by Journey's seasoned sales force, we anticipate flattening the line and beginning to increase both of these efficacious quality brands. Notably, in 2022, our exclusive licensing partner in Japan, Maruho, announced that Japan's Ministry of Health, Labor, and Welfare approved Rapafort Wipes 2.5 percent, the Japanese equivalent of Cubrexa, for the treatment of primary axillary hyperhidrosis. This approval triggered a milestone payment of $10 million to Journey Medical, $7.5 million of which was paid to Dermira pursuant to the terms of the asset purchase agreement between Journey Medical and Dermira with net proceeds of $2.5 million earned by Journey Medical. In 2021, Journey Medical entered into an agreement with EastWest Bank in which EastWest Bank provided a $7.5 million working capital line of credit. In January 2022, Journey Medical successfully expanded the EastWest Bank credit agreement to $30 million. In July 2021, Journey Medical completed final closings under the cumulative convertible Class A preferred stock offering, receiving approximately 17 million in net proceeds. These shares were converted into Journey Medical common stock upon the IPO. In November 2021, Journey Medical completed its initial public offering of common stock of 3.52 million shares at a public offering price of $10 per share for net proceeds of 30.6 million after deducting underwriting discounts and offering expenses. IPO funding is in support of the clinical development and launch of DFD29, the expansion of our sales force, and marketing support of our recent acquisitions and general working capital. So simply from a product perspective, we expanded our dermatologic footprint to include nine marketed dermatology products and have two pivotal phase three clinical trials underway for DFD29, which is being evaluated for the treatment of papulopustular rosacea. We plan to launch one additional prescription product in the first half of 2022. This will be an antipyretic topical product that is free of histamines and steroids. Additionally, we are pleased to have expanded our sales force from 42 sales representatives to our optimized 84-member team. As you can see, we wasted no time prior to nor since our entry into the NASDAQ to create future value for our shareholders by entering into accretive acquisitions. And as Ernie will delve more into shortly, we have been laser-focused on creating that shareholder value through the generation of $63.1 million in revenue for the entirety of 2021, a 42 percent increase over the prior year of $44.5 million. The fourth quarter results of $17.5 million is a 28 percent year-over-year increase over $13.7 million in the same period in 2020. Finally, with a post-IPO cash position of $49.1 million, a seasoned sales force averaging 11 years of dermatology pharmaceutical experience, a 10-year leadership team, and a strategic development pipeline, we believe that Journey Medical is well positioned for continued growth in 2022 and beyond. With that, I'll turn the call over to Ernie, who will review our financial results for the fourth quarter and the full year.

Thanks, Claude. And hello, everyone. I will now review the fourth quarter and full year financial results. Net revenue for 2021 were $63.1 million for the full year, an increase of $18.6 million, or 42%. when compared to 2020 net revenue of $44.5 million. 2021 full-year revenue includes $27.1 million from new product launches, $17.1 million for Cubrexa, and $10.1 million for Accutane. Net revenue for the fourth quarter of 2021 was $17.5 million, which represents a 28% increase over net revenue of $13.7 million generated in the fourth quarter of 2020. Contributing to the fourth quarter year-over-year growth were both Cubrexa, $5.9 million, and Accutane, $4.4 million. Net revenues for the fourth quarter were less than third quarter net revenues of $19.6 million due to the introduction of generic competition for TargetOx the seasonality of Q-Brexa, and the additional cost of managed care. Gross profit for 2021 was $31.1 million versus $29.9 million in 2020 and includes a non-cash $6.5 million inventory step-up cost for Q-Brexa as part of a bargain purchase accounting adjustment for inventory purchased as part of the acquisition of Q-Brexa from Dermira which is reflective of the favorable terms negotiated in the deal. Non-GAAP gross profit adding back the step-up charge would adjust gross profit to $37.6 million, or a 26% increase versus 2020. Additionally, CubeRXA has a high royalty rate as part of the purchase agreement for the first 12 months and will decrease on the anniversary of the purchase in the second quarter of 2022. Gross profit in the fourth quarter of 2021 was $8 million versus $9.4 million in 2020, due mainly to the inclusion of a non-cash inventory step-up charge of $2.3 million, resulting from CubeRXA-purchased inventory and the high royalty rate previously explained, as well as the previously mentioned TargetOx generic competition Qbrexa seasonality, and the increased managed care expense. Non-GAAP gross profit without the step-up cost would have been $10.3 million, a 10% increase over the fourth quarter of 2020. The inventory from Qbrexa with the non-cash step-up charge associated with it was sold through in 2021 and will not be part of the gross profit in 2022. With these two events, the step-up cost of inventory and the reduction in our royalty rate for CubeRexa, we should have the effect of increasing our overall gross profit back to our 2020 rate between 60 and 65 percent. Selling, general, and administrative expenses were $39.8 million for the full year of 2021, compared to $22.1 million for 2020. This represents the continued expansion of the company's sales force from 42 to the planned optimization of 84 total representatives. It also includes additional marketing expenses in support of our newly launched products, legal and other costs associated with being a new publicly traded company. Selling general and administrative expenses were $15.1 million for the fourth quarter of 2021 compared to $5.8 million for the fourth quarter of 2020 and mirrors the cost as previously mentioned. Research and development costs were $16.6 million in 2021 and represent the upfront payment of the $10 million license fee for DFD 29, a contingent liability of $3.8 million, and $2.8 million of activity in the fourth quarter to initiate the two Phase III clinical trials. In 2020, there were no research and development costs. Net loss attributable to common shareholders was $44 million, and is inclusive of one-time charges of $16.6 million of R&D attributable to the license and activity of DFD 29, QBREXA non-cash step-up cost of $6.5 million, The cybersecurity loss of $9.5 million and deferred taxes of $10.9 million were $4.32 per share basic and diluted for the full year 2021 compared to net income of $5.3 million or $0.58 basic and $0.49 diluted per share attributable to common shareholders for the full year 2020. Net loss attributable to common shareholders was $21.8 million, or $1.64 per share, basic and diluted, for the fourth quarter of 2021, and is inclusive of the cybersecurity loss and deferred tax adjustment compared to net income of $2.5 million, or 27 cents basic and 23 cents diluted, attributable to common shareholders for the fourth quarter of 2020. Journey's non-GAAP EBITDA for the full year including one-time charges of non-cash stock compensation, the non-cash Q-Brexit inventory step-up costs, the cybersecurity loss, R&D license and activity, still yields a positive $2.9 million. Even with all the one-time expenses that were captured in 2021, as well as the expenses associated with nearly doubling our sales force, we still managed to maintain a positive EBITDA on a non-GAAP adjusted basis. For the full year 2022, we anticipate our non-GAAP EBITDA will substantially increase over 2021. As of December 31st, 2021, Journey Medical's cash and cash equivalents totaled $49.1 million, representing our previous cash balances as well as the proceeds from the IPO. And with that, I'll turn it back to Claude.

Thank you, Ernie. With these accretive acquisitions, which include differentiated and proprietary products with strong patent protection and wider margins with at least one additional product launch in 2022, and as we leverage our existing infrastructure, we expect to achieve record revenue in 2022. Between the years of 2017 through 2021, we have been able to achieve a CAGR of 42%. As we continue to fully optimize and integrate these most recent acquisitions, we hope to be in a position to give guidance in the near future. I will now turn the call over to the operator for questions. Thank you.

Ladies and gentlemen, If you wish to ask a question on today's call, you will need to press the star and the number one on your telephone. If your question has been answered and you wish to withdraw your question, you may do so by pressing the pound key. If you're using a speakerphone, please pick up the handset before entering your request and speaking on the call. One moment for our first question. And the first question will come from Scott Henry with Roth Capital. Please go ahead.

Thank you. Good afternoon, and thanks for letting me ask the first question for the company as a public entity. A couple questions. First, Q4, do you think the revenue numbers for that quarter were representative of the business, meaning was there any noise with regards to Cubrexa or Accutane or any of the other products?

Yeah. Hi, Scott. Yes. In terms of Cubrexa and Accutane, everything is going at normal pace and as we've anticipated. There is seasonality with the brand Cubrexa And I think we've noted that. But business is as normal and going well.

Okay. And then similarly, the $15.1 million in SG&A for Q4, is that a good way to think about the business going forward?

I'm going to pass that along to Ernie. Ernie, if you want to handle that?

Sure. Hi, Scott. Thank you for your question. As you look at our SG&A costs going forward, they aren't going to be reflective because there were some one-time costs that we had in the fourth quarter with being a public company and getting ourselves up and running. So there will be less than that going forward.

Could you just kind of give us a degree of those one-time costs? Are we talking about? You know, a million dollars, a couple million dollars? I don't know, just trying to get a sense of the magnitude.

Yeah, we had a couple of million dollars in there for public cost, as well as some non-cash stock vesting and some headcount additions that were in there. So we had about $3 or $4 million in there for that, Scott.

And we're talking about Q4, and these are three or four million of one-time costs. Obviously, a lot of the public company costs continue. Okay. And then, Ernie, while I got you, first, always good to talk to you. Is it fair to think of the company as an EBITDA-positive company if you pull out R&D? Is that where you're trying to get across, is that The base operating business is positive from a cash flow standpoint, including G&A, but, you know, we'll just think of R&D as kind of a separate basket of investment. Is that the right way to think of it?

Scott, exactly. That's the exact way to think of it. We're going to have some R&D costs that are upcoming, but if you pull those R&D costs, which are for the DFD29, two clinicals that we have going on over the next couple of years, as well as the launch cost. If you pull them out, we are a commercially cash flow positive company.

Okay, and I'll try to wrap up pretty quick here. But for DFD 29, when should we expect data? I think in the past I thought about kind of first quarter of 23, or maybe should we think about a first half of 2023? Yeah.

Scott, we believe that we'll be able to deliver top line data right there in the first quarter of 2023. That seems like a very suitable time expectation.

Okay, great. Final question. The Accutane prescription data looks really strong. Do you think we can expect kind of this 4.4 million, you know, this 4 to 5 million a quarter? Can it grow higher than that going forward? Or should we kind of expect it to top out at these levels? Because the data, the prescription data looks pretty strong.

So, you know, Scott, think of this market. There's seven isotretinoins in this marketplace. And again, this has been a textbook perfect launch to date. Our Our commercial team, our Salesforce marketing message, seeing the right physicians with the right targeting and frequency has gone flawlessly. We have been growing each month since we've launched. We expect to have continued growth, but I think you can certainly expect the similar type of numbers at a minimum as we go forward here. in 2022 with Accutane.

Okay, great. That should do it for me. Thank you for taking the questions.

Thanks, Scott.

The next question will come from Kalpit Patel with B. Reilly Securities. Please go ahead.

Yes, hi. Good afternoon, and thanks for taking the questions. A few from me I want to dig a little deeper on the discrepancy in the revenue ramp from 3Q to 4Q. Specifically, I think you mentioned three factors. One was the generic competition of target docs. I think from my understanding, the generic has always been there. So, A, why are you seeing that reflected into the sales number now? And then I think the second factor that you relayed was the seasonality of Cubrexa. Has that been realized in the past with Dermira or Eli Lilly when the drug was there? Any color there would be useful.

Sure. Yeah, and good to hear your voice, Cal. I'll start this off. You know, when we When we licensed TargetDocs and we began our launch back in 2016, we really did a phenomenal deal negotiating that. We ended up getting that product for just a little over $1.2 million. When we did it at the time, what we licensed was an ANDA, so in fact it was a generic. Now, what was unique about it was the fact that it was a doxycycline hyclate 50 milligram immediate release tablet. There was nothing else out there like it. We knew that generics could come in since there was no patent life on this whatsoever. So we've been anticipating and expecting competition over time. And again, credit to the sales and marketing team here, we've grown that to well over 220,000 prescriptions in the year 2021. And we started that at zero when we launched. So we know how to ramp and move product. In terms of the generic actually coming in and competing with us, there was an approval that we were able to see back in July. So there was an approval back in July, but really no launch of the product in any significant manner whatsoever until December of this year. And what's nice about the way we've looked at Target Ox is we came out with the brand Target Ox, but we also came out with a generic approximately two years into launching Target Ox. So we have our own doxycycline high-clate 50-milligram tablet. And we sell that currently, so the impact of this generic to date has been modified, minimized, if you will, because of our strategy of not just having the brand out there of TargetOx, but also including our generic form. And to give you a little more color, In terms of prescription data, again, using Symphony data, we have well over 15,000 prescriptions for the most recent month of February. And, you know, since it technically officially launched, I guess you can say on the books back in, say, August, they've only been able to manage about 2,500 prescriptions for the most recent month. So I think our strategy has been sound. Now, you know, when you're dealing with generics, they do cut their prices compared to the brand. So we're dealing with that competitive issue. And we are combating that accordingly in a very well-planned, thought-out plan as we move forward. Our numbers... to date have always included a generic in 2022. Now, I'd like to move over to your second part of your question with Q-Brexa. There's no doubt about it. The seasonality is there. It's inherent in this brand. We're the first and only product towelette that's available. out there. We look at our trends. As we mentioned, we've had approximately a 14% prescription growth with half the size of the sales force that Dermira did. So we certainly are calling on the right customers. And this trend line is very, very indicative. So we see it through. It definitely backs off in the winter months. And as the warmer months of the year start to happen, you'll see things pick up dramatically with Cubrexa. So we're expecting and anticipating some good growth with this brand. I hope that answers your questions.

Yeah, very helpful, Claude. My second question is, you know, with the recent acquisitions you have from Lyme Therapeutics, How should we think about the go-forward OPEX, you know, for the next 12 to 24 months? And then, you know, maybe if you exclude the R&D investment that you're currently doing, when would you expect stabilization of the OPEX as a percentage of revenues? Would that be maybe by 2023 or 2024? Just some idea of what that, you know, the number would be, the OPEX as a percentage of revenues in a steady state.

Okay, great question. I am going to ask Ernie to step in here and take that on.

Yeah, sure. Hi, Calvert, and thanks for your question. With respect to the additional OPEX for the vine products, other than the variable expenses for marketing and product costs for material, we have leveraged our organization to be able to handle it on the sales side without adding any additional heads. So the company is leveraged other than some additional variable expenses that go along with the sales of the Vine products. As far as where we would be without R&D, with respect to our OpEx, again, we're going to be going back probably to where we were in the 2020 range. I mean, if you look at, without giving guidance, with looking at our sales force, our sales force is roughly a little bit less than what our operations are, but they're pretty well split 50-50. So, you know, again, without giving any guidance, we would be at a point where with our sales force and operations, we're still going to be EBITDA positive going forward.

And Calpit, if I may, one last thing about TargetOx because I forgot to mention this, and I think this is rather impressive. When you look at a brand that gets generic intrusion, typically you'll see – a 90%, up to 90% plus regression in that brand once a generic comes out over six months. We're already defying that significantly by far, and we anticipate continuing to do a good job with that. But that's really quite an achievement. We've already been able to start off in a good, positive manner.

And I'll add one other thing as well, Calc. I'm sorry. If you look at our 2020 SG&A, it was 50%. So we should be back in that territory.

Fair enough. Thank you for the detailed answers. Appreciate it. Thank you.

The next question will come from Brandon Folks with Cancer 50. Please go ahead.

Hi, thanks for taking my questions and congratulations on all the progress. Maybe just following on from the Brexit question, what do you believe is resonating to drive this growth since acquiring the product, you know, given the smaller sales force? Are you just getting in front of the correct prescribers or have you refined the messaging a bit there? And then, you know, on the Vine product, how do we think about the timeline for flattening at the kind and returning to growth? And then, you know, maybe just our last three and we can kind of come back if need be, but on the expectation to return gross margin to 60 to 65%, was that for 2022 or a longer term goal? Thank you.

Okay, great. Great to hear your voice as well, Brandon. Thank you for the questions. I'll start off with the QBREXA. How have we had the good success in the 14% growth with the prescriptions? I think there's a couple parts to this. One, honestly, our sales team, our commercial team, we are a refined machine, and we see this day in and day out really across all our brands that we touch. With Cubrexa, absolutely. We get the data. We have proprietary ways of looking at the data and getting that information. to our sales team and marketing teams, and we let them go at it. They know what they're doing. They're looking at each of their territories as their own business. They're all shareholders of this company, and it's advantageous for them to grow our products for a number of reasons. Additionally, we brought over some representatives from Dermira on into our sales force now. And we obviously talked to a lot of key opinion leaders, a lot of dermatologists, and part of that diligence that we did was understanding through the eyes of our sales members that were at Dermira what worked, what didn't, and then we constructed our own messaging and are implementing these tactical programs this year starting in February in full force and really picking things up all the way into the summer and beyond. As we said, those will be really peak months for Q-Brexit. So we think we're putting our resources and allocations in at the right time using all the knowledge that we've been able to accrue from really people with hands-on experience and listening to our customers. That's the Qbrexa section. And I believe the second part that you're asking is with Amzeek and Zilksy and the regression of sales. Again, if you go back to some of the notes and what we've said on the call today, you know, Vine did cut their sales force back in August of 2021. We ended up finalizing the deal in the middle of January, and really our operations team here and our internal teams did an incredible job to switch over that product into our 3PL, our warehouse, and so far in literally a matter of days. Now, getting the sales force ready, getting the marketing message ready, getting our own tools in place and through our approval process and making sure we're in compliance. We did a soft launch starting in February, and officially on April 1st we're going with what we call a hard launch with our materials, our copay system, and having our sales force fully trained on the disease state, the competition, and how we want to move forward with our messaging. I can tell you we're doing some things dramatically different than the predecessor of these assets. For example, we are looking at other target products to advance our market share and flatten this line out with Amzeek, for example. we are looking at other products that just were not in the market basket of vines with their sales force. So we are looking at this differently. We believe there's low-hanging fruit, and I'm highly confident that we'll be able to execute. And then finally, regarding gross margins, I'm going to pass that off to Ernie, and I think you'll like what he has to say. Ernie?

Yeah, thanks, Claude. And hi, Brandon. Thanks for the question. If you look at our gross profit for the 12 months of 2021, it was $31.1 million. In that was the non-cash step-up cost that we had to take based on the bargain purchase accounting of $6.5 million. So when you add that to our $31.1 million you get $37.6 million over $63.1 million or a 60% gross profit. So in addition, the royalty rate that we're paying for Q-Brexa reduces in the second quarter or the anniversary date, which is in May of 2022. So when you add those two pieces together, That's where we're coming up with the 60% to 65% gross profit.

And, Ernie, are we allowed to say what that reduction, how many points reduction that is?

I'm going to ask Ramsey. Yeah, we've disclosed that it's from the mid-30% to the mid-20% on that anniversary. It's 10 percentage points.

Great, thank you to all of you, and congratulations on all the progress.

Thanks, Brent. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Claude Marawi for any closing remarks. Please go ahead.

Yes, thank you, operator, and I want to thank you all for participating on today's call and for your interest in Journey Medical. We look forward to sharing our ongoing progress, and we plan to report our first quarter results in May. Thanks, and have a good day.

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