Kamada Ltd. (NASDAQ:KMDA) Q2 2022 Earnings Conference Call August 17, 2022 8:30 AM ET
Company Representatives
Amir London – Chief Executive Officer
Chaime Orlev – Chief Financial Officer
Bob Yedid – LifeSci Advisors
Conference Call Participants
Anthony Petrone – Mizuho Group
Operator
Greetings, and welcome to the Kamada Ltd., Second Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Bob Yedid. Thank you. You may begin.
Bob Yedid
Thank you all for participating in today’s call. This is Bob Yedid with LifeSci Advisors. Joining me from Kamada are Amir London, Chief Executive Officer; and Chaime Orlev, Chief Financial Officer.
Earlier today Kamada announced its financial results for the three and six months ended June 30, 2022. If you have not received this news release, please go to the Investors page of the company’s website at www.kamada.com.
Before we begin, I’d like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Kamada. I encourage you to review the company’s filings with the Securities and Exchange Commission, including without limitation the company’s Forms 20-F and 6-K, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.
Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, Wednesday, August 17, 2022. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.
Before turning the call over to management, analysts or investors can email questions for the question-and-answer session to my email address at the end of the press release, Bob Yedid – excuse me, bob@lifesciadvisors.com Also you can prompt and ask questions live as usual on any conference call at the end here and Melissa will give those instructions.
With that said, it’s my pleasure to turn the call over to Amir London, CEO. Amir?
Amir London
Thank you, Bob. My thanks also to our investors and analysts who have interest in Kamada and for participating in today’s call. Let me start by emphasizing the six months into 2022 and based on our positive outlook for the rest of the year, we are highly encouraged by the performance of our business in 2022. I believe it is a testament to our ability to rapidly transition from our past dependency on GLASSIA sales to Takeda to a diversified fully integrated commercial company and a global leader in the plasma-derived specialty market.
Importantly, we are making critical progress leveraging each of our key growth categories, which include the commercialization of our immunoglobulin portfolio in the U.S. market, as well as in new territories, KEDRAB growth in the U.S., our distribution product in Israel, our U.S. plasma collection business, GLASSIA royalty income and the recently expanded Inhaled AAT clinical program.
During the first half of 2022 we generated total revenue of $51.7 million, representing a 5% increase year-over-year. Our adjusted EBITDA was $4.6 million and excluding loss associated with the Labor Strike, the adjusted EBITDA could have been $8 million representing a 15% margin.
It’s important to note that during the first six months of the year we generated $16.4 million of operating cash flow, which supported the increase of our cash position to almost $30 million as of June 30, 2022. This increase validates our effective operations being a cash generating business.
The portfolio of the full FDA-approved immunoglobulins we acquired late last year continues to gain traction in multiple markets and delivered strong sales and profitability for Kamada in the second quarter. As a reminder, the acquired product generated collective revenue of approximately $42 million in 2021 with over 50% gross margin, and we anticipate to significantly grow the new portfolio revenues year-over-year. Currently already received through proactive promotion activities in the U.S., where our new established subsidiary Kamada Inc. is responsible for the commercialization in direct sales of the product. We expect this marketing effort will begin to bear fruit in the U.S. commencing in the second half of this year, 2022.
We are also seeing already meaningful sales growth from this product in the international market outside of North America, including the recently signed $11.4 million agreement to supply VARIZIG, one of the four acquired FDA approved commercial products, to an undisclosed international organization operating principally in Latin America.
Half of the anticipated revenue to be generated by this agreement are expected in the fourth quarter of the year and the balance will be extended to the first half of 2023. This important supply agreement strongly validates our ability to grow the sales of our newly acquired portfolio to the international markets.
We are continuing to pursue additional commercial contrast in key strategic territories and are encouraged by the significant opportunities ahead of us. These new supply agreements and our proactive selling efforts through our current distribution relationship, underscore Kamada’s shear commitment to leveraging with new strategic assets.
I should also add that we continue to expect receipt of FDA approval for the production of CYTOGAM, the largest of the four acquired products at our Israeli facility during the first half of 2023, after completion of the tech transfer activities which are now nearly compete. The ability through the effect of CYTOGAM leveraging our own facility to generate higher gross margin in the future as compared to the current sourcing from a contract manufacturer.
Our outlook for stronger second half of the year is driven by multiple key factors, including anticipated continued growth of the new IgG portfolio, including sales boosted by the new VARIZIG supply agreement, and the expected growth of KEDRAB sales to Kedrion, supporting the product continued increased in-market sales during 2022. In addition, total revenues in the second half of the year will include two full quarters of GLASSIA royalty income, as compared to only four months in the first half of the year.
Second half profitability will continue to be driven by the new IgG products and KEDRAB sales, all of which generate more than 50% gross margins and GLASSIA royalties which are pure profit. Moreover, the now concluded Labor Strike will have a substantially reduced impact on the second half of the year profitability as compared to the first half.
Based on our promising outlook for the remainder of the year, we are reiterating our full year 2022 revenue guidance of between $125 million to $135 million, with expected EBITDA margins of 12% to 15%. This guidance represents a 20% to 30% increase of the 2021 revenue, and more than 2.5x 2021 EBITDA. Moreover, we continue to projects revenue growth at a double-digit rate in the foreseeable years ahead.
Before I continue to discuss other prospects in our business, I will mention that the recently withdraw of Labor Strike at our researching facility in Israel was concluded with an execution of an 80 year collective agreement. This new agreement will be effective through the end of 2029, while certain economic terms may be legally negotiated by the parties after the first four years of the agreement.
Of significance, the strike had no impact on the availability of our products in international markets. However, as previous indicated, the company’s second quarter financial results were negatively impacted by this one-time loss associated with the effect of the work stoppage at the Israeli plant, which Chaime will discuss further shortly.
I would like now to discuss, Kamada Plasma, our U.S. based Plasma collection company. Our early 2021 acquisition of the plasma collection center represented Kamada’s entry into the U.S. plasma collection market and supported our strategic goal of becoming a fully integrated specialty plasma product company. We remain focused on expanding the hyperimmune plasma collection capacity at this center and continue to advance our plans to open additional centers in the U.S. to further enhance our supply of specialty and regular plasma.
Our site selection process for a second collection center is close to finalization and we will be followed by construction and startup activities in the second half of this year. We also intend to initiate the required activities for a third center by year-end. As a reminder, the plant expansion of our plasma collection capabilities is expected to enhance our IgG competitive position in various markets, boost continued revenue growth and strengthen our supply chain.
Moving on to KEDRAB, our rabies immunoglobulin. Based on the continued moderation of the COVID pandemic in the U.S., we are highly encouraged by the product in market sales by Kedrion during the first half of the year, which grew significantly in comparison to pre-COVID pandemic sales level. We believe this trend will continue and expect KEDRAB to be an increasingly important growth driver for us over the next few years, as it continues to gain market share in the $150 million U.S market.
We expect a royalty income on GLASSIA sales. The second quarter represented the first full quarter for which we received royalty income from Kamada around sales of this products. Royalty revenue for the second quarter was $3.7 million, meeting our expectation and prior guidance.
With that, let’s now turn to our recently expanded in-house AAT clinical program, an ongoing pivotal Phase 3 InnovAATe clinical trial that is evaluating the safety and efficacy of our innovative inhaled AAT product for the treatment of AAT deficiency. Over the past few months, patients screening and recruitment began at traditional European sites. We are pleased with the current rate of involvement in this study.
As we said in our last call, the Independent Data Safety Monitoring Board recommended in the second quarter, the trial continued without modification. To-date no patients have discontinued treatment prematurely and no drug-related series of adverse events have been reported. As a reminder, this is a unified study as the trial’s data are expected to qualify for regulatory submissions with both the FDA and the EMA.
To reiterate, what we said previously, the substantial opportunity exists for Inhaled AAT to be a transformation product in the market that is already over $1 billion in annual sales in the U.S and Europe and growing steadily and we are excited to further advance these stride.
Moving on to our Israel Distribution segment, as we have said previously, we intend to launch a portfolio of 11 biosimilar products through 2028. The products are expected to be launched upon the state of the Israeli regulatory approval. Collectively, this product has an annual anticipated peak sales achievable within several years of launch of more than $40 million. This anticipated revenues are in addition to our current distribution product segment sales.
In closing, I’d like to highlight the successful virtual Investor and Analyst Day we hosted in June, that emphasize the dramatic transformation of our business that we accomplished over just several months. If not already done so, I will encourage you to review this material so you can gain a deeper understanding of our anticipated growth catalyst.
Moving forward, we continue to execute on our corporate strategy on all fronts, and believe we have the appropriate catalyst to drive double-digit growth in the years ahead. We are excited about our prospects as Kamada is uniquely positioned for growth as a global leader in the specialty plasma industry, with multiple value creating upcoming milestones.
With that, I’ll now turn the call over to Chaime for his review of our second quarter of 2022 financial results. Chaime, please.
Chaime Orlev
Thank you, Amir, and good day everyone. In the second quarter of 2022, total revenues were $23.6 million. For the first six months of 2022 total revenues were $51.7 million, an increase of 5% year-over-year. It is a solid indication to our rapid transition from prior dependency on GLASSIA sales to Takeda, into have a more diversified operation with multiple growth drivers.
The year-over-year growth during the first six months of 2022 was primarily driven by continued strong sales of our recently acquired IgG products. As Amir mentioned, we forecast a strong second half of the year, driven by multiple factors, including continued growth of the IgG product sales in the U.S., which will be driven by the ongoing marketing efforts, as well as expansion of ex-U.S. sales of these products by the VARIZIG supply agreement.
Moreover, we expect continued growth of Kedrion’s, KEDRAB in the second half of the year in support of the products in market sales growth. The three months ended June 30, 2022 represents our first full quarter receiving royalty income from Takeda on their sales of GLASSIA. We recognized $3.7 million of royalty income in the second quarter, which is in line with our anticipated quarterly projections. The second half of the year is expected to include two full quarters of royalty income as compared to only four months in the first half.
The gross profit for the second quarter of 2022 was $7.2 million, representing 31% margins, compared to $9.1 million or 37% margin in the second quarter of 2021. Gross profit for the first six months of 2022 was $18.5 million, an increase of 3% year-over-year and representing 36% margin.
We recently resolved a Labor Strike at our manufacturing facility in Israel. As result of the strike, we incurred a loss of $3.3 million, which significantly impacted our gross profit for the second quarter and first half of the year. Excluding such loss, the company’s reported gross profit and gross margins would have increased year-over-year. It is important to note that as the labor strike ended in mid-July, we are expecting to record a subsequent portion of such loss in the third quarter.
As discussed in the first quarter, the company is accounting for depreciation expenses associated with intangible assets which were generated through the recent acquisition of the four IgG products. In the second quarter and first half of 2022, cost of goods sold in our proprietary segment included $1.4 million and $3.7 million respectively of depreciation expenses associated with these assets.
Second quarter and first half gross margins, excluding such intangible assets, depreciation and the labor strike related loss would have been 51% of 48% respectively. Looking ahead to the second half of 2022, the increased sales of the new IgG portfolio and KEDRAB would generate meaningful gross profitability, as each of these products generates more than 50% gross margin. The GLASSIA royalty generates pure profits, and the now concluded labor strike will have a substantially reduced impact on the second half profitability as compared to the first half.
Research and development investments during the first half of the year increased compared to the prior year period, primarily due to the expansion of our ongoing physical pivotal Phase 3 trial for Inhaled AAT, and is related to the opening of new clinical sites and the manufacturing of clinical supply for the study.
Selling and marketing expenses for the second quarter and first half of 2022 increased as well. This increase is attributable to the establishment of our U.S. commercial operations to support the distribution and sale of the recently acquired portfolio of four FDA approved commercial products. In addition, these costs include pre-commercial activities associated with new product launches in the Israeli distribution segment, including one of the 11 biosimilar products which recently obtained Israeli Ministry of Health approval.
As in Q1 we continue to account for financing expenses with respect to revaluation of the contingent consideration and the long term assumed liabilities, all of which are related to the recent acquisition. During the second quarter and first half of the year, these finance charges totaled $1.9 million and $3.9 million respectively.
For the second quarter we recorded a net loss of $3.9 million or $0.09 per share on a fully diluted basis. Our adjusted EBITDA was $1.3 million for the second quarter of 2022. Adjusted EBITDA for the first six months of 2022 was $4.6 million. Adjusted EBITDA for the first six months, excluding the Labor Strike related loss would have been $6.2 million, which would represent 15% margins over first half.
Based on our expectation of significant revenue growth and enhanced profitability in the second half of the year, we continue to expect meeting our 2022 annual guidance of revenues. At the range of $125 million to $135 million, and anticipate generating adjusted EBITDA at the rate of 12% to 15% of total revenue.
Lastly, during the second quarter of 2022 we generated $10.9 million of operating cash flow, which is the strong testament of the company’s operation cash generating capability. As of the end of June, the company’s total cash position was approximately $30 million.
That concludes our prepared remarks. We will now open the call for questions. Melissa?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.
Anthony Petrone
Thanks and congratulations on a strong quarter here and execution with the new portfolio. Amir, I want to start with the contract on VARIZIG, $11.4 million in the second half to Latin America. Just a little bit more detail on that; was that a one-time quarter or should we expect that to continue into next year, and then I have several follow-ups. Thanks.
A – Amir London
Hi Anthony! Thank you for the question and for participating. So the current agreement is between the fourth quarter this year and the first half of 2023. So we’re looking at $11.4 million, which is roughly half of it will be this year and the balance will be next year.
Beyond that, we would need to wait and see that international organization is issuing another tender. I feel that if it happens, it will happen towards the end of 2023 and we’ll be covering 2024 and beyond. That organization is the organization that we have done some business in the past and they have other tenders for other products, which we have – which are part of our portfolio. So we believe that there’s an opportunity to grow the business with that organization beyond just VARIZIG.
Anthony Petrone
That’s helpful. And then VARIZIG, I know obviously prophylactic treatment for varicella, chickenpox and you know that’s certainly quite different than monkeypox. But is there any chance potentially of a reformulated version of VARIZIG to address monkeypox. If not, is there anything out there you know potentially that Kamada can participate in on that front? And then I have a couple more.
A – Amir London
Okay. So as far as I know, there is no connection at all between the VARIZIG and the monkeypox. The increase in the demand for VARIZIG and we see it’s not only from that organization, but we have grown our sales of this product also in other territories. Its linked to COVID. There are payers coming, especially from Latin America that show a link between the prevalence of [inaudible] and COVID. So that’s the main result or the main reason why we see such a significant increase in VARIZIG demand in multiple territories.
We are selling the product in the U.S., Canada, some European countries, some international territories and now the significant new agreement with that international organization and we anticipate to continue seeing the growth of that product beyond just the agreement with additional clients around the world.
In regards to your question, so we don’t have in our portfolio currently something which is directly for the treatment or for the prophylactic treatment or all treatment of monkeypox and very few as you may know, potential for such a product. It is not something which will be covered in our portfolio. If there will be indication that general IgG has “cocktail” of immunoglobulins is a relevant treatment for monkeypox, and I’m saying if and putting a disclaimer on this right now, then of course we have IgG for these new markets and this can drive growth of that quarter.
Anthony Petrone
Okay. And then you know second half international sales of the four IgG products, CYTOGAM, HEPAGAM, as well as VARIZIG, we talked about that, and WINRHO. Are any of these products not launched at this point or did 2Q have active sales internationally from the entire portfolio. And then when you just think about the second half ramp internationally for the portfolio, you know maybe just a little bit more detail on which of the four products you expect to sort of lead the sort of uptake and which countries we should be expecting the most traction from?
Amir London
Okay. So when we bought the portfolio, the business was primarily North America. I think we talked about it just after the acquisition. I believe that over 95% of sales of last year came from the U.S. and Canada.
We are leveraging our international presence, our very strong international network. As we anticipated and we said like after the acquisition, which we believe that we can do better with those products and not only in the U.S. and Canada by proactively promoting the product, but also to leverage our international network to grow the business significantly in other markets. And we are very happy that we are already seeing meaningful sales growth for those products in those markets.
VARIZIG is just one example. But we also – all four products are being sold in additional territories and this is of course in addition to KamRAB, our anti-rabies IgG and our legacy [inaudible] of KamRAB and GLASSIA, which is sold outside of the U.S. without our Kamada business and related to Takeda.
So as I said, all four products are being sold in international markets. In some of the markets we sold the registered products, some is unregistered, but the biggest is growing and this is becoming a more and more significant component of growth and new catalyst of our business and we are very happy with that.
Anthony Petrone
Thanks for that Amir. And the last one for me is on CYTOGAM specifically. One of the synergies the company spoke about at the time of the acquisition here was in the United States, maybe even North America as well more broadly, that that product specifically really did not have any sales and marketing push behind it, and so you know maybe just a little bit of an update on that initiative around CYTOGAM, on the marketing front. Thanks.
A – Amir London
Yes, we established our core marketing and sales team in the U.S. We hired the people and we are already in the previous quarter that Jon Knight is our VP, Commercial Operations for the U.S. market. We also already hired the regional sales managers and the medical service team to support it and sales and marketing executives have been initiated.
We are focused on the key transportation centers of the U.S., because CYTOGAM of course is a treatment related to consolidation. We are also leveraging the same sales and marketing team when we talk about HEPAGAM, because it’s also a full consultation centers. VARIZIG is also for immunocompromised patient, so consultation centers are relevant for that.
So all those activities are synergistic and we can basically with the same team follow those three products in the relevant medical centers. That is already happening and we expect to start seeing the results of this commercial activity already in the second part of this year, and actually in reality we’re just seeing – we’ve seen an increase in demand between Q1 in Q2 and we expect to see the same type of increase also during the second part of the year.
Anthony Petrone
Alright, thank you very much. I’ll hop back in.
Operator
Thank you. Ladies and gentlemen, I’ll turn the floor back to Bob Yedid for any questions that came in through email.
Bob Yedid
Yeah, we do have a couple of questions that came in through email, and Amir maybe you can help explain how you reduced your dependence on GLASSIA sales, and accomplished the sort of strategic shift that you talked about during the call, and what some of the key components are.
Amir London
Yes, so and as I said during the call, we are very, very encouraged by the performance of the business in 2022, and we actually see, and it’s happening, how we are transitioning from the past dependency we had on GLASSIA® sales to Takeda to almost new Kamada. It’s a certified fully integrated company with multiple growth catalyst. So this past dependency on GLASSIA, which was until middle 2021 is gone, it’s almost a new company, and I think it’s highly encouraging as we have made this transaction in just a matter of few months.
And when we are looking on the current business and looking forward, those multiple growth engines are the new portfolio of the full GLASSIA approved immunoglobulins, we just talked about it. KEDRAB growth in the U.S. market which is growing significantly since the beginning of the year, Kamada plasma our fully owned plasma collection company in the U.S. The growth we see and we expect to continue to seeing in our distribution business in the Israeli market, including the portfolio of the 11 biosimilars that we planned to launch between this year and 2028 adding $40 million to our business, the royalty payments from Takeda which started earlier this year and we had the full quarter, second quarter of $3.7 million, which is exactly according to our expectations and GLASSIA and KamRAB, the anti-rabies immunoglobulin in the international markets outside of the U.S.
So all those six pillars of activity, I think created a diversified, commercial, fully integrated leader in specialty plasma space and it’s happening. So if in the past we spoke about that it will happen in the future, that once we do this and that this will happen, now few months into 2022, I can say it’s happening, it’s real. It’s a new Kamada with very strong prospect for continued growth moving forward.
Bob Yedid
Okay, that’s helpful. The other question we had is, you know now that you just talked about the U.S. sales and marketing organization you have, does that open up additional opportunities – and you have an expanded product portfolio, does that open up additional opportunities to look at other plasma derived products or other products to bring in into Kamada over time.
Amir London
Absolutely! So as we continue building our U.S. presence and building our sales and marketing infrastructure, it’s our plan to either acquire or in-license additional products which will be a good fit with our commercial team, and this could be a plasma derived product or this could be product that’s geared towards or targeting transplantation centers. We will continue to focus on the business development in order to make it happen, so the answer is yes.
Bob Yedid
Okay, great. And the last question is one, just looking at the financial so far this year, you’re running at less than half of your target for the year in terms of revenue guidance, and just you know help us understand, you know you’ve expressed some confidence in hitting your full year guidance for revenues. Help us understand some of the key factors there that give you that, that give you have view point.
Amir London
So yes, looking at the second part of the year, the outlook for the second part of the year, is that it’s going to be a significantly stronger six months, with few catalysts that we already know them and we are in the execution phase. One is this growth that sales of the VARIZIG, the execution of the VARIZIG agreement, this is around 50% of the $11.4 million. This is of an additional $5.5 million, approximately $5.5 million that we did not have in the first half and we are going to have in the second half of the year.
The new portfolio immunoglobulins, the new immunoglobulins in the U.S. market are growing. This is an additional increase compared to the first half of the year. KEDRAB is growing significantly and we are seeing orders from KEDRAB, which we are going to supply in the second part of the year. The second part of the year includes two full quarters of GLASSIA royalty versus only four months that we had in the first six month. So when you add all of this, in addition to our distribution business in Israel, you basically see that we have strong support to our projection for the year and the second half will be stronger than the first half.
Bob Yedid
Great! Thank you. Those are the questions that we had from the analysts and investors. I’ll turn it back to Melisa Melissa.
Operator
Thank you. Ladies and gentlemen, there are no further questions at this time. I’ll turn the floor back to Mr. London for any final comments.
Amir London
Thank you. Thank you very much. So in closing, on behalf of the entire Kamada team, we look forward to continue to provide clinicians and patients with an expanding portfolio of important lifesaving products that we develop, manufacture and commercialize. We thank you all for your participation in today’s call and for your support and remain firmly committed to creating long-term sustainable shareholder value.
Thank you for your participation in today’s call and we hope you all stay healthy and safe. Thank you very much.
Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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