Medexus Pharmaceuticals Inc.

Good day, ladies and gentlemen, and welcome to the Medexis Pharmaceuticals Third Quarter 2022 Earnings Call. At this time, all participants have been placed on the listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Victoria Rutherford. Ma'am, the floor is yours.

Thank you, and good morning, everyone. Welcome to the Medexus Pharmaceuticals third quarter fiscal 2022 earnings call. On the call this morning are Ken D'Entremont, Chief Executive Officer, and Marcel Conrad, Chief Financial Officer. If you have any questions after the conference call or would like further information about the company, please contact Adelaide Capital at 480-625-5772. I would like to remind everyone that this discussion will include forward-looking information that is based on certain material factors or assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. In addition, during the course of this call, there may also be references to certain non-IFRS financial measures, including references to adjusted net loss and adjusted EBITDA. which do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-IFRS financial measures, including a reconciliation of each adjusted net loss and adjusted EBITDA to net loss, please refer to the company's management discussion and analysis, which, along with the financial statements, are available on the company's website at www.medexis.com and the company's corporate filings on CDAR at www.cdar.com. I would now like to turn the call over to Ken D'Entremont.

Thank you, Victoria. Good morning, everyone. Thanks for joining us on the call today. We've got some prepared statements that we'll read and then be happy to take questions at the end. In the third quarter of fiscal 2022, we achieved revenue of $21.3 million compared to $17.9 million in the second quarter of fiscal 2022 and $24.3 million in the quarter ending December 31st, 2020 or the previous year. Revenues during Q3 were positively impacted by stronger Xfinity sales quarter over quarter. as we began to see the results of the channel correction we initiated a few quarters ago. This improvement was partially moderated by the typical seasonality we have in our portfolio, specifically with the repel sales, which reflected a severe allergy season in Canada, and then, as expected, returned to normal levels in the fall. Adjusted EBITDA was positive at 1.9 million, compared to negative $2 million in Q2 and compares to $3.9 million for Q3 last year. This improvement from Q2 also reflects the improvements we have seen in Xfinity, in particular in the manufacturing process, which we will touch on later in the call, as well as the reduction of expenses in Q3. Our net loss of $1.2 million compared to a net loss of $12.8 million for the same period last year. Our Q3 figure included a non-cash unrealized gain of $2.2 million on the fair value of the embedded derivatives in our convertible debentures, which was driven by a change in our share price at the end of the applicable periods. Our adjusted net loss, which adjusts for these unrealized losses or gains, was 3.4 million compared to 0.4 million for the same period last year. Our net cash flow was 1.4 million in the period compared to a use of 2.9 million for the same period last year. And at December 31st, 2021, we had 9.6 million in cash and cash equivalents with 10.1 million of total available liquidity. Turning to our specific product lines, we saw a sequential quarter-over-quarter improvement overall in our core business and are excited about the new and potential additions to our product portfolio, which we believe will generate growth momentum over the coming years. During the quarter, we saw a recovery in Xfinity sales that validates our recent initiatives to reset the supply chain and selling process over the last few quarters. And our unit market demand figures suggest a moderate level of patient conversions on top of a stable existing base of patients. We're also continuing to invest in a phase four pediatric study that, if successful, will expand the Xfinity product label to include the pediatric population of patients under 12 years of age with hemophilia B. During Q3, we completed enrollment in our trial. and the trial is expected to be completed by June of 2022 this year. Once completed, a successful study could support an expansion of the indicated patient population for Xfinity, and we are exploring approaches to address this potentially expanded market. Rupal saw strong and continued unit demand growth of 30% for the trailing 12 months ended December 31st, 2021. continuing its trend as one of the fastest-growing antihistamines in the Canadian prescription market. Again, this growth reflects a severe allergy season across Canada and physicians increasingly switching patients to Rupal from either the generic prescription antihistamines or over-the-counter products. Turning to Resubo, a once-weekly, subcutaneous, single-dose autoinjector of methotrexate indicated for the treatment of rheumatoid arthritis, psoriasis, and juvenile idiopathic arthritis. On a unit-sold basis, Resuvo continued to maintain and, in fact, slightly increased its market share in the United States, and the trailing 12 months ended December 31, 2021. However, product revenue was negatively impacted by a decrease in the effective unit-level prices we implemented during this period to defend our strong market share in light of increased competition in the branded methotrexate market. Medoject is a pre-filled syringe of methotrexate, which is indicated for the treatment of rheumatoid arthritis and psoriasis. Even with a generic entry into the Canadian market in 2020, Medoject had a unit demand increase of 8% in the trailing 12 months ended December 31st, 2021. Again, product revenue was negatively impacted by a similarly motivated decrease in effective unit-level prices. As we have discussed in the past, we continue to be excited about triosulfan. We expect that it will become a leading agent for use in conditioning regimens as part of allogeneic hematopoietic stem cell transplantation protocols, or thankfully abbreviated, alloHSCT. This is a therapeutic area of great strategic interest for us. In June of 2021, we received notice of compliance from Health Canada to commercialize Triosulfan, which we currently market in Canada under the trade name Precondiff. We have entered into an exclusive license with MedAct GmbH to commercialize Triosulfan in Canada and now have fully launched in the Canadian market. We also entered into an exclusive license with MedAct in February 2021 to commercialize Triosulfan in the United States. As we have previously discussed, on August 2, 2021, we were notified by MedAct of a complete response letter from the U.S. Food and Drug Administration relating to the new drug application for the use of Triosulfan in the United States. We participated in MedAct's Type A meeting with the FDA on November 23, 2021, to review MED Act resubmission plan. Following that meeting and based on our discussions with MED Act, our view is that there is a path towards approval that does not involve completing an additional phase three study, provided that MED Act delivers to the FDA materials that address the FDA's outstanding issues set out in the CRL. The MDA resubmission is currently expected to occur in the second quarter of 2022. with a final FDA decision expected two to six months after the NDA resubmission, timing that is substantially consistent with our previous estimates. We continue to believe that Triosulfan could eventually overtake the current market leading product in the U.S., Busulfan, which realized 126 million in the U.S. sales prior to genericization. In the meantime, We do not expect to make additional milestone payments to MedAct until we have received FDA approval. In addition to our current product portfolio, we also have a right of first refusal on current products from MedAct, the previous owner of MedExis US. We believe that several of these products represent a promising commercial opportunity in North America, and we are in the process of assessing the licensing of these products. We are also in discussion with several partners regarding other licensing opportunities that we believe have the potential to material contribute to the revenue over the next few years. A key component of our growth strategy will be to continue to leverage our infrastructure through new product acquisitions and partnerships. We are exploring a number of opportunities, including a portion of the deal pipeline in the negotiation phase in both the US and Canada. We will continue to look at optimizing our portfolio and leveraging our resources with the goal of executing near-term accretive transactions to achieve our sales growth targets over the coming years. We aim to continue to grow revenue, leverage our North American sales force across products, realize synergies from our predecessor companies, and maintain strict financial discipline. In summary, we believe we have built a highly scalable business model which should provide significant incremental earnings potential. I'll now turn the call over to Marcel, who will discuss our financial results in more detail. Marcel?

Yeah, absolutely. Thanks, Ken. Total revenue was $21.3 million and $56.4 million for the three- and nine-month periods ended December 31, 2021, respectively. compared to revenue of $24.3 million and $62 million for the three- and nine-month period ended December 31, 2020. Revenue for the quarter benefited from end-of-year wholesale buying by approximately $2 million. The comparative revenue period in 2020 similarly benefited from over $2.5 million in Xfinity revenues that was collected in October of 2020 versus September 2020 as expected due to a delay in receipt of finished product from our contract manufacturing partner. We expect that timing of large orders like these will continue to affect quarter-to-quarter comparisons of our revenues. Gross profit was $11.5 million and $27.8 million for the three- and nine-month periods ended December 31, 2021, respectively. compared to gross profits of $12.7 million and $33.2 million for the same period last year. The decline for the nine-month period ended December 31, 2021 was due, in part, to an increase in cost of goods sold caused by additional expenses related to failures during the Xfinity manufacturing process in the quarter ended June 30, 2021, as previously disclosed. The gross margin was $15. 54.1% and 49.3% for the three- and nine-month periods ended December 31, 2021, respectively, compared to 52.2% and 53.5% for the three- and nine-month periods ended December 31, 2020. For the most recent quarter, we are encouraged to see initial results of improvements made to Xfinity manufacturing. The investments we made in people and in the manufacturing process are beginning to show good results. Selling and administrative expenses was 10.7 million and 34.1 million for the three and nine months period ended December 31st, 2021, respectively, compared to 9.4 million and 25.9 million for the three and nine months period ended December 31st, 2020, respectively. The increase over the comparative periods reflect important investment in our personnel and infrastructure to support our anticipated growth going forward, including preparation for the commercial launch of Fusulfan in the United States. We reacted quickly to defer or cancel any further significant expenditures related to the Fusulfan launch after receiving notice of the CRL on August 2nd, 2021. However, We believe that the CRL provides a path to review and approval and therefore have continued to incur some expenses in anticipation of Creosulfan's eventual commercial launch. Research and development was $1 million and $5 million for the three- and nine-month periods ended December 31, 2021, respectively, compared to $1.2 million and $2.6 million for the three- and nine-month periods ended December 31, 2020, respectively, as we continue to fund the Xfinity Pediatric pediatric study, which is now 100% enrolled. Adjusted EBITDA for the three and nine months periods ended December 31st, 2021 was 1.9 million and minus 5 million respectively compared to 3.9 million and 9.8 million for the three and nine months period ended December 31st, 2020. Adjusted EBITDA of 1.9 million reflects an increase from the minus 2 million of the second quarter in our fiscal year 2022. Sequential quarterly improvement was primarily attributable to improved Xfinity net sales in the third quarter and the reduction of expenses. As mentioned earlier, the company's recent inventory management and manufacturing process modernization initiatives have also started to produce positive results. The three- and nine-month periods ended December 31, 2021, saw a year-over-year decrease in adjusted EBITDA due to the impact of the Xfinity manufacturing failures during the three months ended June 30, 2021. The large increase in research and development costs over the comparative period and the significant investments we made to improve our capacity for future business development and prepare for the anticipated commercialization of clear solvent in the United States. Net income for the three and nine months period ended December 31st, 2021 was minus 1.2 million and 2.4 million respectively, compared to net loss of 12.8 million and 17.8 million for the same period last year. Included in net income or loss is a non-cash unrealized gain or loss on fair value of the embedded derivatives in our outstanding convertible debentures. which are sensitive to, amongst others, fluctuations of our share price. We believe that adjusted net income or loss, which excludes the impact of unrealized gains or losses on the fair value of derivatives, provides a better representation of performance of our operations because it excludes non-cash fair value adjustments and liabilities which may be settled for shares. Our adjusted net loss for the three- and nine-month periods ended December 31, 2021, was 3.4 million and 19.4 million respectively compared to 0.4 million and 2.5 million for the three and nine months period ended December 31st, 2020. Cash and cash equivalents was 9.6 million at December 31st, reflecting an increase of 1.4 million during Q3 and a decrease of 9.1 million over the first three quarters of fiscal 2020. Our available liquidity was $10.1 million at December 31, 2021, which consisted of $9.6 million in cash and cash equivalents and an undrawn credit of $0.5 million available under our ABL facility. We are continually exploring various financing strategies to enhance our liquidity to support our execution of our business plan that includes an eventual launch of Free Assaultman in the United States. we're exploring various options to bolster our liquidity both pre- and post-FDA decision, including to fund any milestone payment announced that may become payable as a result of the FDA decision. As mentioned during previous earnings results, no further milestone payments will be owed to MEDAC unless and until FDA approval of shear solvent is obtained. Furthermore, we want to reiterate to investors that we do not expect

the CRL for triosulfan to result in any default on our credit facility. Operator, we'll now open the call to questions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Andre Udine. Please announce your affiliation, then pose your question.

Research Capital. Hi, Ken and Marcel. Inventory issues are now resolved, which is good to see. Just looking at, you know, the pediatric Xenity trial results, are those going to be coming out this June, or when should we expect that data?

Yeah. Thanks, Andre. Good question. So, the last patient dosed will be June of this year, and then it'll likely take about six months to prepare

um the results for submission and just um obviously there's lots of stuff going on here in canada um i'm just wondering if you foresee any supply chain issues with your business given the current order closures maybe you could just talk a little bit about that uh no we don't uh we you know since the beginning of the pandemic we've been seeking to hold significant inventory on hand you know

many months we try we shoot for six and so temporary delays don't affect us it certainly is much more challenging to move product it costs more and it takes more time but because of the safety stock we've got built in it hasn't affected us we haven't had any significant backwaters okay okay that's great thanks ken

Your next question is coming from Scott Henry. Please announce your affiliation, then pose your question.

Thank you. Roth Capital. A couple questions. First, did you disclose what product had the $2 million order at the end of the quarter?

I don't believe we did, but it was Xfinity. And so, you know, as we've been describing, we have been resetting the channel to whatever we think we anticipate the right level is. We were somewhat surprised that that order came in. We didn't think that that customer wanted to hold that much inventory, but they do. And so we filled it. So we ended up with a higher quarter than we expected. Um, so we'll, we'll, we'll see what happens this quarter. We, uh, I think the good news is that, uh, demand matched X factory, uh, revenue this quarter or Xfinity. Um, and if there are no further corrections in the channel, then, you know, we would go forward from here, but, you know, we thought that we'd go a little bit lower in terms of months on hand in the channel. It's a little bit higher than we anticipated, but that's totally up to the wholesale and retail customers at this point.

If we look at the sequential gain in U.S. sales from Q2 to Q3, is the large bulk of that gain all coming from Xenity?

Yes, absolutely. Metalject is mature. We hold very strong market share there. I think we're like 80%. And so it's basically flat on a unit basis, a slight increase, and a little bit down in dollars as we protect our share. So yeah, all of the gain that was realized came from Xfinity.

Okay.

And now, uh, maybe, uh, maybe Scott, just to, uh, since you asked, uh, you asked for the Q2 or the Q3, uh, variant, is that correct? Yeah. That was your question. Yes. Um, yeah, so that is, uh, the, uh, the majority, as I mentioned, is from the, um, It's from the top line. We've also been very consistent in saying that we've produced and we've stopped obviously the spend from the launch. So we see, if you look at our operating expenses, for example, Q3 over Q2, that has also decreased, which is a factor that contributed to an increased EBITDA this quarter.

Okay. Now, given that you had this $2 million order in Q3, how should we think about fourth quarter? I mean, I know the trends are going in the higher direction, but do you think Q4 could be as strong as Q3? And should we think about positive EBITDA as a continuing event or more of a one-time event? Thank you.

Yeah, we're obviously heading in the right direction, and we're anticipating that, you know, I think we kind of thought we'd be break-even this quarter and then positive next quarter. It may be the inverse. If the channel further corrects, then, you know, we might have a break-even quarter this quarter or maybe a little bit down, a little bit up. I mean, it really depends on where the channel settles. The good news is that there are no incentives, so we're selling all the Xfinity at normal pricing, which is great. It helps the margins. We think we're near where the channel should be, but the channel will determine exactly where it wants to be. So it's hard to call this quarter. I think the good news and direction I would give is that the XFactory sales match demand this quarter.

Okay, great. And final question on the balance sheet. Current portion of long-term debt is a sizable number, but I know there's a lot of noise in that. Do you have any debt that you expect to be due within the next 12 months? And maybe you could give some color around that.

I'll let myself take care of that.

Yes, Scott, good question. And it's a bit difficult to decipher footnote 5 on this particular $18 million. The huge majority of this is our ABL, the asset-based loan, which is a revolver that is going in there. That obviously is not within the 12 months. And then we have, you know, $4 million or so started accumulating the true debt that we have to repay in the next 12 months.

Okay, great. Thank you for that color, and thank you for taking the questions.

Thanks, Scott.

You do have an email question from Thomas Newman, and Thomas asks, is Medexis still planning to uplist to a U.S. national exchange in 2022?

It's a good question. It depends on the circumstances. Obviously, we had believed that the FDA approval of triosulfan would have been a good catalyst for upgrading to a major U.S. exchange. We still believe that's the case, and we're evaluating those options.

Thank you. Your next question is coming from Prasath. Please announce your affiliation, then pose your question.

Good morning. I'm from Bloomburton. Thanks for taking my questions. My first one relates to the impact of Xfinity. What's the target gross margin once the channel inventory is completely normalized and the manufacturing process improvements are fully in place?

Great question. Complicated answer. The gross margin obviously improved probably points as a result of withdrawing the discounts. The improvement in cost of goods is far more difficult to forecast. We're on a very good trajectory. We're seeing nice improvements, and those will be realized as we go forward. It's a long manufacturing process for Xfinity. Remember, it's a biologic product, so it takes a long time to make it. And so the improvements that we're seeing are as a result of work we've been doing over the last year, and it's now starting to be realized and will continue to be realized as we go forward. The target is a little ambiguous in that we don't know the improvement that each of the steps will make. We've been pleasantly surprised that the improvements we've made so far have exceeded expectations. The yields have gone up more than we expected. And so we've had very good impact with the money that we spent so far and the work that our U.S. team has done, which has been excellent so far. And so it's hard to forecast how much better it will get, but we're confident it will get better

Okay, that sounds good. And then I had, as you look at potential capital raise for milestone payments as well as the eventual launch of Triosult in the US, how do you see the market changing over the past year and how do you plan to overcome any potential challenges?

I think I'll turn that over to Marcel.

Yeah, Prashant, thanks for that question. So we have obviously a lot going on right now with our base business. Ken alluded to business development. We're looking at launching product. The dynamics per se, obviously, if you look at the past versus where we're at right now, it hasn't really fundamentally changed. uh specifically with uh you know uh with the share price we had up to now now obviously we're looking at this uh a little bit short mid and long term now um in the short term um where as you as you've seen now we have about 10 million dollars of available liquidity and now now we're looking into the next step sort of the midterm uh phase here up to the fda approval um fda decision ultimately then to say uh after the decision point we have a long-term view on this uh on this race as you mentioned on the um on the milestone payments and so forth. So we look at various financing strategies within those periods, and we'll be tackling them over the next few quarters.

Great. Thank you.

Your next question is coming from Justin Keywood. Please announce your affiliation and pose your question.

Hi, Stifo, and thanks for taking my call, and nice to see the base business stabilize in the quarter. On the resubmission of triosulfan, what determines the FDA response being two months versus six months?

Yeah, good question, Justin. It's totally up to the FDA, and it's dependent on the amount of material that they need to review. We're planning for the worst, which is the six months. And it's either two or six. It's not really anything in between, probably. We're assuming it's going to be six. That would put us at an October decision point. But it could be two. We will know 30 days after resubmission. So they will tell us whether it's type one or type two 30 days after resubmission. So we will communicate that once we know.

Okay. And the resubmission is in Q2. Any... Indication when in Q2 or difficult to say?

We think it's early Q2. MEDAC is obviously the party responsible for preparing it. We're reviewing and involved with it, but they are the party preparing it. We think very early Q2. We had previously said, I think at the very beginning when we first got to CRL, that we're shooting for end of Q1. It looks like it's beginning of Q2. Again, as soon as we put it in, we will announce that.

What indicators are you looking for to resume some increased spending in anticipation to launch Triosulfan? Would that happen, perhaps, if it's a two-month or six-month review, or how are you planning that?

Yeah, again, great question. First, remind you that we are carrying spending associated with TRIO Solfen now. The medical team, the MSLs, some ITTs, investigator-initiated trials. So there is TRIO spending that's in our numbers. We will... initiate the sales force after a decision. So that's the big spending. And we've said previously that we anticipate about 16 reps, 1-6, to support Trio Solfan commercialization. And so that spending will not happen until we get a decision. We have some months before commercial product is available. So we have time between the decision and availability of product in order to establish the sales force and That's the plan.

Seems like a prudent strategy, and thank you for taking my call.

Thanks, Justin.

Your next question is coming from Simon Jerry. Please announce your affiliation, then pose your question.

Hi, again. This is Simon Pierre from Raymond James. My question was regarding the margin you are experiencing with Xenity. So what I understand is that you changed the manufacturing process. Can you talk about that?

Uh, sure. So what has been done?

My question is more.

Yeah. Yeah. Yeah. Uh, just to be clear, we haven't changed the process. We're, we're improving the process. So these are all small incremental improvements that, you know, when you layer one on top of another, start to make a difference. So that, that's what we're doing. it's really hard to quantify the improvement. I mean, I'll turn it over to Marcel. We're seeing small improvements in some of the SKUs, and we anticipate that to get better as we go forward. And so there is a percentage improvement, probably single digit in cost of goods so far, and we expect that to continue to grow as we go forward. Marcel, is there any more color you can add to that?

Yeah, I mean, as I mentioned, we've just now seen this quarter, for example, initial, it's a long process, obviously, with a biologics product, we've seen initial encouraging results. And maybe the question around gross margin versus improvements versus the overall stability is an important one, as you had maybe, you know, just for example, this quarter, you know, we had earlier this year, we had to, you know, for the reserve for batches which now which now has been turned out to be, because of this project, where we seem to be in a more stable environment. So it's not only, these investments are not only about targeting, obviously, the gross margins, but stabilizing the product stability. And hence, then, you know, we don't want to see these reserves, which, as you have seen this quarter, we haven't done. So it's a two-sided view on this. One, obviously, direct impact on the financial statements when you talk about gross margin, but the other one is really targeting on the overall manufacturing process to make sure that we see these products coming through the manufacturing process in a way we want to see them through and don't have to assess results.

Thank you.

Your next question is coming from Alan Firth. Please announce your affiliation, then pose your question.

Hi there. I'm a private investor. Hi, Ken. Thanks for taking the question. I've got two questions, if that's okay. The first one is just on Xfinity. Are you able to confirm what the end user demand growth was over the last 12 months? And I appreciate it's been tricky with COVID, but what were your thoughts on the prospects of getting back to kind of the prior growth levels? And then I've got one on Vesudo afterwards.

Yeah. So the, uh, extremely demand is primarily made up of existing customers. So we've got a strong base of customers that have been with us for a long time. So that's very, very stable. Uh, the challenging pieces is new patient growth, which became more challenging, you know, with the initiation of a COVID that because the face to face visits just aren't happening. Um, so, The growth, I would estimate to be in the high single digit, low double digit sort of growth over the period, over 12 months. And quarter to quarter, it fluctuates. But I think the good news for us is that we've got a very stable base of existing business that is quite easy to project in terms of demand.

Thank you, that's really helpful. And then just on Resuvo, I saw the ATREXA being acquired by a 30A. And I was just, this might be a kind of basic question, but they had 12-month revenue of about $15 million. And my understanding was that Resuvo was some, you know, not described exactly, but being somewhere around kind of in the $30 million range. And it's just can't quite relate the two. If a receiver has an 80% market share and a track set is obviously much, much smaller. So if you're going to kind of explain what I'm missing there, that'd be really helpful.

Yeah. So when, when we quote the market share, we are quoting prescriptions. So that's, that's demand really units. And so the dollar value shares may be different depending on pricing. Okay, so you're saying a much lighter price product. Is that the right take? I think those measures, yeah, we're a little bit lower. Therefore, we'd have a lower share of dollar volume and much higher share of unit volume.

Okay, that's posted, and I guess that's a good position to be in.

Okay, thanks very much.

Once again, if there are any questions or comments, please press star one.

There are no questions in queue at this time.

Great. Well, thank you, everyone, for joining us on the call today. Despite the challenging start to fiscal 22, we are confident that Medex has now turned a corner with the Xfinity supply chain process changes we were making, and we're back to a positive growth trajectory. We're pleased with the clarity provided in the Type A meeting on triosulfan resubmission and expect the FDA decision later this calendar year. We do anticipate that we will continue to execute our business strategy, and we're in a good place to do that. I'm looking forward to future updates. Thanks very much for tuning in.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.