Parnell Pharmaceuticals Holdings Ltd. (OTC PINK: PARNF), a fully integrated, commercial-stage pharmaceutical company focused on developing, manufacturing and marketing innovative animal health solutions, today announced business results for the period ended September 30, 2017, including ongoing revenue growth of 4% to $14.4 million, a $12.6 million improvement in profitability to an EBITDAOI loss of $0.6 million year to date and advances in partnering negotiations and contract manufacturing agreements.
Brad McCarthy, CEO and Executive Director of the Board, said, “Parnell furthered its sales growth in the September quarter whilst maintaining a strong emphasis on cost control to progress towards our communicated goal of becoming EBITDA (being Earnings Before Interest, Tax, Depreciation, Amortization) break-even in 2017.
“Through 30 September proprietary in-Market product sales in our key US Production business remained on track with 2017 guidance delivering 22% growth over the same period in 2016, although changes in distributor purchasing patterns saw our ex-Parnell sales grow 2% for the period. This strong in-Market growth continues despite not having a full complement of territory managers in place, which we believe further emphasizes our success and the opportunity presented to us in this market. Our CMO business based in Sydney Australia continued to perform well, growing 18% year to date and advancing the Technology Transfer activities of the CMO agreement awarded to us in Quarter 2 of 2017. Unfortunately, sales in our US Companion business did not meet expectations, being 33% down on prior year. As such, US Companion costs were further reduced in line with continued underachievement in sales to customers. We have now reconfigured the US Companion business in expectation of it achieving EBITDA profitability in 2018 by driving sales through our digital and e-commerce business model. In contrast to the US, sales in our Australian, New Zealand and Rest of World divisions continued to track to guidance and together delivered 20% year on year growth. We expect to release our 2017 year-end financial results after final 2017 accounting and audit procedures are completed.”
Board and Management Changes
Dr. Alan Bell, Executive Chairman of the Board, stated, “Since mid-October my fellow executive director Mr. Brad McCarthy and I have taken direct operational responsibility for ensuring all elements of the business are managed for earnings, growth and shareholder value. Former CEO Mr. Robert Joseph is no longer with the Company as per previous communications.
“As set out in this release, our Board is now united and focused on maximizing shareholder returns from our high performing business units and managing expenditures for profit and growth.”
Dr. Bell continued, “In further strengthening our Board, we were very pleased to announce the recent appointment of a new independent director to the board. Mr. Tony Hartnell (AM) is an august public company director who has chaired six ASX-listed companies during a distinguished career in corporate governance that also includes his service as the inaugural Chairman of the Australian Securities Commission, the peak corporate regulator in Australia. In recognition of his achievements in structuring and chairing the peak bodies for corporate regulation in Australia, Mr. Hartnell was awarded a Member in the Order of Australia (AM), and subsequently the Centenary Medal. Mr. Hartnell brings great experience and wisdom to the board, as well as a keen commercial mind and a very broad set of contacts in the governance, legal, accounting, investment banking and securities broking sectors.”
To give a full operational effect of the changes outlined above, the board has determined that Dr. Bell becomes Executive Chairman and Mr. McCarthy will be Chief Executive Officer effective immediately.
Unfortunately, against the wishes of the Board (which considers it a significant waste of time and money), Mr. Joseph has sought to convene a Shareholders Meeting to remove Dr. Bell as a director. That meeting will be held at the Sydney headquarters of the Company at 9 a.m. Australian Eastern Standard Time (AEST) on February 22, 2018.
Strategic Review of Product Development Pipeline
Dr. Bell said, “In the second half of 2017 we further advanced several key regulatory submissions for Zydax Canine and read out a number of preclinical and clinical study results portfolio-wide in preparation for a complete board-level review of our development pipeline in early 2018. This review will not apply to our skin candidate PAR 122, which has not shown sufficient promise in studies to date to warrant further investment; the board has taken the decision to terminate this project effective immediately.
“The Center for Veterinary Medicine (‘CVM’) of FDA has advised that the most recent clinical study we conducted on Zydax Canine (CP1502) did not, in CVM’s view, meet its predetermined endpoint and hence the CVM requirements for efficacy were not met by the study. Our review of the development path for Zydax will include an evaluation of canine skeletal disease states that may respond to Zydax Injection and may also have more empirical clinical endpoints than Client Specific Outcome Measures provides. NSAID studies apart, client-scored measures have proven problematic to regulatory approval for the canine arthritis drug category generally and not just to Zydax alone.
“In contrast to the outcome of the latest Zydax efficacy filing, the Chemistry and Manufacturing Controls, (“CMC”), and the Drug Master File (“DMF”) submissions have progressed well, with the latest round of comments received from the FDA appearing to require mainly procedural responses. This achievement is significant to discussions on the potential out-licensing of the active pharmaceutical ingredient (API) of Zydax for human generic use,” Dr. Bell said.
Dr. Bell concluded, “Subject to the board evaluation process and to relevant responses from regulatory authorities, we anticipate reporting the outcome of this review, including reassessment of the ZydaxCanine project, in the first half of 2018.”
“With the management initiatives we have put in place in recent weeks to focus on recruitment of sales executives in chronically vacant US Production territories, improve sales processes and operations for all our proprietary product businesses, win new customers and better service existing ones, and utilize our clinical, technical and digital leadership in a more systematic and effective manner, we believe we can achieve sales and net contribution growth in proprietary products across our target geographies of 15% in 2018 over 2017,” Dr. Bell said.
During late 2017 we secured further offtake agreements and advance purchase orders from our contract manufacturing customers that we believe now allow us to forecast that our ‘sterile-injectable’ contract manufacturing revenues will double in 2018 over 2017, with $6.0 million in Purchase Orders received for 2018 sales as at December 31, 2017. We have moved rapidly in recent weeks to ensure the manufacturing plant and team are configured and prepared to deliver the increased product volumes and attendant regulatory filings in 2018.
In late 2017 we commissioned a new ‘soft-chew’ manufacturing line in our Sydney facility that is intended to make us self-sufficient in Glyde chew production for all our global markets from early 2018 onwards. Beyond the intended supply security for our own products, the new line opens the opportunity to establish, over time, a significant new ‘soft-chew’ revenue stream within our contract-manufacturing business.
In the final weeks of 2017 we entered into a Heads of Agreement with a leading global human pharmaceutical company to conduct due diligence after which, if appropriate, the parties would seek to negotiate a definitive agreement in early 2018. As presently contemplated, Parnell would grant the counterparty an exclusive license to commercialize Parnell’s proprietary active drug substance in the Pentosan Polysulfate class for human generic use. Due diligence is underway and, subject to the parties conducting their respective evaluations, we expect to announce the outcome in Quarter 1 of 2018. As the outcome of these negotiations is unknown, the present 2018 guidance does not take into account any potential revenue from this item.
In the same period, we continued to assess an ongoing approach from a third party to acquire the licensing and distribution rights for our US Production Animal products. While negotiations remain on foot, the headline terms of the proposal in its present form do not appear to benefit shareholders to the extent that it would win the support of the board. Accordingly, our 2018 guidance does not include any financial contribution from this item.
Dr. Bell continued, “Licensing transactions aside, the trajectory toward sustained profitability is the primary operational imperative and, to that end, the board of directors has the business focusing firmly on the following 2018 objectives:”
- Grow sales and net contribution within the Production Animal and Companion Animal businesses by at least 15% over the 2017 results;
- Double 2017 sales from our existing contract-manufacturing customer base;
- Secure significant new customers, with an objective to triple our 2017 contract-manufacturing revenues in 2019 and beyond, and deploy the required capital as demand dictates;
- Establish or re-establish proprietary product sales in geographies limited during 2017 by lack of effective territory management, marketing authorizations and/or distribution expansion;
- Deliver a positive EBITDA and NPAT (being Net Profit After Tax) contribution from all revenue generating Business Units and across the group in totality;
- Stringently review and assess the risk/benefit from continued investment of shareholder funds in pipeline product development, including a possible future clinical path for Zydax Canine;
- Manage shareholders’ capital with discipline and prudence, and explore ways to reduce the cost of our debt.
Commercial Highlights to September 30, 2017
Unless otherwise specified, all amounts are presented in Australian Dollars (AUD).
Turning to the business performance for the period to 30 September 2017, your directors report the following achievements:
- Total Company sales of $14.4 million for the nine months ended September 30, 2017, comprising growth of 4% over the same period in 2016;
- Production Animal sales of $8.8 million for the nine months ended September 30, 2017, comprising growth of 7% over the same period in 2016. This growth was underpinned by strong performances in the ANZ & ROW businesses (41% above 2016) and modest growth ex-Parnell (from Parnell to Distribution) sales in the U.S. (2% above 2016). In-Market (from Distribution to Veterinarians and Producers) sales in the U.S. continued to grow strongly, up 22% over the same period in 2016, despite not all open territories being fully recruited. This strong in-Market performance continues to demonstrate the success of our strategy of clinical science leadership through our breeding program PROCEPT® and through mySYNCH® our innovative digital technology that assists dairy farmers to improve the profitability of their operations.
- Companion Animal sales of $2.4 million for the nine months ended September 30, 2017, comprising a 15% reduction over the same period in 2016. This year on year reduction is fully attributable to the US Companion Animal segment, which was 33% below the same period in 2016. As stated above we have recently further reduced the cost base of this business to achieve EBITDA profitability in 2018. This contrasts the continuing and strongly positive sales performance in the Australian Companion business. In addition, we anticipate that profitability of the Companion Animal business will be further enhanced with the commissioning of our own ‘soft-chew’ manufacturing line in our Sydney facility.
- Contract Manufacturing revenues for the nine months to September 30, 2017, of $3.2 million, comprising an 18% increase over the same period in 2016. We commenced a new contract manufacturing agreement in May 2017 which delivered associated technology transfer revenues in 2017. In Quarter 4 of 2017, we secured additional CMO business through our current agreements such that our full year revenues will exceed previous guidance.
- EBITDAOI (being Earnings Before Interest, Tax, Depreciation, Amortization and Other Income/(Expenses)) improved $12.6 million to a loss of $0.6 million for the nine months ended September 30, 2017, compared to the same period ended September 30, 2016.
Mr. McCarthy said, “We reiterate the majority of our 2017 revenue guidance as previously stated in our 2016 Earnings Release dated March 21, 2017, although underperformance in our US Companion business has resulted in a reduction in guidance for this segment. As stated, the cost base of this business has been correspondingly reduced to support a positive EBITDA contribution in 2018. This is partially offset by the recent securing of additional CMO in Q4’17, and Q1’18, driving full-year growth in this business unit of 15%”. As such, 2017 revenue guidance is revised as follows:
- Strong double-digit revenue growth in our Production Animal Business across the Australia/New Zealand and Rest of World. In the US, ex-Parnell sales are expected to show low single-digit revenue growth, however, in-Market growth is expected to be approximately 15% for the full year.
- In contrast to previous guidance of double-digit revenue growth in our Companion Animal business, we expect revenue to fall short of prior year revenue of approximately 15%. We expect to report double-digit growth of 10 to 12% in Australia in 2017, a very solid achievement some 10-years post-launch in this market. In the US we expect full-year sales to be approximately 40% down year on year for 2017, a reduction from a forecast of modest growth in the previous guidance.
- We expect Contract Manufacturing to continue to grow strongly in 2017 as a result of the business secured during the year, with growth expected to be approximately 15% and hence above previous guidance.
- EBITDAOI (being Earnings Before Interest, Tax, Depreciation, Amortization and Other Income/(Expenses) is expected to be close to break-even for the full year 2017, a $15 million year on year improvement.
Unless otherwise specified, all amounts are presented in Australian Dollars (AUD).
“As a result of the implementation of recent initiatives and changes in cost base, the board now provides 2018 full year revenue guidance in the range of $25.0 to $26.0 million, being a 30% to 35% increase over 2017 and an EBITDA profit range of $5.0 to $6.0 million, compared to an anticipated break-even result in 2017,” said Mr. McCarthy.
“We anticipate the successful implementation of the 2018 business plan will be delivered via disciplined sales processes and effective customer and territory management in our core business units. This is in addition to the CMO business already secured for 2018 and continued meticulous cost control across all business units and corporate operations,” Mr. McCarthy expanded.
Further details of full-year 2018 Guidance are provided as follows:
- Production Animal revenue guidance of $12.5 to $13.0 million, compared to approximately $11.4 million in 2017, via the following initiatives;
- full complement of territory managers in the US for 2018,
- implementation of mySYNCH fertility insights to leverage our clinical science leadership and reproduction expertise,
- focus on winning additional corporate accounts in US and Rest of World markets,
- Contract Manufacturing (or CMO) revenue guidance of $9.0 to $9.5 million, compared to approximately $4.5 million in 2017, via the following initiatives;
- $6 million in purchase orders already received as at December 31, 2017 for 2018 sales from current secured CMO agreements,
- implementation of capacity improvements in the Sydney facility to further enhance CMO capabilities for 2019 and beyond.
- Companion Animal revenue guidance of $3.5 to $3.7 million, compared to approximately $3.3 million in 2017 and a $1.5 million EBITDA improvement in this business unit year on year, via the following initiatives;
- replacement of US Companion field sales force with in-house and targeted e-commerce sales.
- further leveraging our well-established brands in the ANZ Companion Animal business in corporate accounts and vet clinics, building on success in 2017.
- Reduced group operating expenditure of $0.8 to $1.0 million compared to full year 2017, via the following initiatives;
- net reduction in US Corporate and Head Office cost,
- reduced US Companion Animal cost base partially offset by an increase in US Production Animal territory managers.
Financial Results (for the nine months ended September 30, 2017)
Total revenue was $14.4 million for the nine months ended September 30, 2017, a 4% increase compared to the same period in 2017.
Our operating segments performed as follows:
- Production Animal – US: ex-Parnell revenue for the period was $7.2 million, an increase of $0.1 million, or 2%, over the same period in 2016. Despite having an average of only 5 territories occupied by sales staff, our market share continued to grow with in-Market sales up 22% over the nine months ended September 30, 2016. While unoccupied territories underperformed our differentiated value proposition of combining clinical science leadership with digital technology (mySYNCH) continued to serve us well in this high margin business segment.
- Production Animal – Rest of World (ROW): Revenue for nine months ended September 30, 2017, increased by $0.5 million (41%) to $1.6 million compared to the same period in 2016. This increase is due to the combined effect of increases in Australia ($0.1 million), the Middle East & Africa ($0.2 million) and New Zealand ($0.2 million).
- Companion Animal: Companion Animal revenues were $2.4 million for the period, a 15% reduction compared to the same period in 2016. This was due to a $0.5 million (33%) reduction in US Companion revenue, partially offset by an increase in Glyde sales in Australia ($0.1 million or 14%).
- Contract Manufacturing: revenues of $3.2 million were generated in the first nine months of 2017 compared to $2.7 million during the same period in 2016, a $0.5 million or 18% increase.
Cost of Sales for the nine months ended September 30, 2017, was $5.2 million, compared to $5.8 million for the comparable period in 2016. Gross margin as a percentage of revenue, using a Cost of Goods Sold – Product basis, was 86.0% for the first nine months of 2017 compared to 82.0% in 2016, due to a higher mix of Contract Manufacturing sales in 2017 compared to 2016 and improved manufacturing operations and efficiencies.
Selling and Marketing expenses decreased by $6.6 million, or 58% to $4.8 million for the first nine months of 2017 compared to the same period in 2016 resulting from the continued reduction of our US Companion Animal field sales and marketing cost base. In total, we expect annual expenditure on sales and marketing costs across the group will fall by $8.0 million in 2017 to $6.0 million as compared to $14.0 million in 2016.
Regulatory and R&D spending year to date 2017 was $0.8 million, a 30% reduction over the same period in 2016. All development costs directly associated with the Zydax development work during the periods ended September 30, 2017 and 2016 respectively have been capitalized.
Administration expenses in line with the move from the NASDAQ to the OTC Open Market in December 2016 and due to an overall reduction in the size of corporate operations, administration expenses decreased $4.5 million, or 52% to $4.2 million, in the nine months ended September 30, 2017, compared to $8.7 million the same period in 2016. We expect to see a full year reduction in these expenditures in 2017 of $4.5 million, compared to 2016. Your directors believe these significant savings in administration expenses have been vital to our stated goal of becoming EBITDA break-even in 2017. Recent senior personnel changes are expected to flow through to a reduction in administration expenses of a further $0.8 million in 2018.
Finance costs increased $1.9 million to $3.5 million for the first nine months of 2017 compared to $1.6 million for the same period in 2016. The increase in 2017 is predominantly due to refinancing of our previously held $USD11.0 million term loan in late 2016. This facility was in place for the first 10 months of 2016 and was fully paid out with the proceeds of a $USD20.0 million term loan in November 2016, resulting in higher interest charges in 2017 compared to the same period in 2016.
Other Income/(expense) for the nine months ended September 30, 2017 was an expense of $2.5 million compared to a $1.1 million expense for the same period in 2016. This increase is primarily due to foreign exchange movements between the Australian dollar and the US dollar for the period. For both 2017 and 2016 year to date, $0.4 million was recorded in Other Income as part of research and development incentives received in Australia.
Earnings Before Interest, Tax, Depreciation, Amortization and Other Income/(Expense) (EBITDAOI) & Net Loss after Tax:
Earnings Before Interest, Tax, Depreciation, Amortization and Other Income/(Expense) for the first nine months of 2017 improved by $12.6 million to a loss of $0.6 million compared to a $13.1 million loss for the same period in 2016. This was achieved by modest total revenue growth with significant operational cost reductions of $12.0 million.
Net loss after tax for the period ended September 30, 2017 improved by $10.2 million to $8.4 million compared to $18.6 million in 2016.