Alimera Sciences, Inc. (NASDAQ:ALIM) Q3 2021 Earnings Conference Call October 28, 2021 9:00 AM ET

Company Participants

Scott Gordon - CORE IR
Richard Eiswirth - President, CEO & Director
Philip Jones - CFO

Conference Call Participants

Alexander Nowak - Craig-Hallum
Yi Chen - H.C. Wainwright & Co.
James Molloy - Alliance Global Partners

Operator

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Alimera Sciences Third Quarter 2021 Financial Results and Corporate Update Conference Call. [Operator Instructions]. Participants of 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 1 hour after the end of the call through January 28, 2022.

I would now like to turn over the call to Mr. Scott Gordon of CORE IR, the company's Investor Relations firm. Please go ahead, sir.

Scott Gordon

Thank you, operator. Good morning, and thank you for participating in today's conference call. Joining me from Alimera's leadership team are Rick Eiswirth, President and Chief Executive Officer; and Phil Jones, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address Alimera'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 cautionary statements in Alimera's press release today.

Today's conference call includes adjusted EBITDA, a non-GAAP financial measure, that Alimera 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 a reconciliation of this non-GAAP financial measure to net income -- loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in Alimera's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, October 28, 2021. Except as required by law, Alimera disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call.

It is now my pleasure to turn the call over to Rick Eiswirth. Rick, please go ahead.

Richard Eiswirth

Thank you, Scott, and good morning to everyone on the call. The third quarter marked continued recovery from the challenges of the COVID pandemic, as we saw net revenue growth sequentially over the second quarter in both our U.S. and International segments. Our U.S. GAAP revenue of $7 million was unchanged on a year-over-year basis due to the timing of distributor orders, but end-user demand continue to improve. Our U.S. distributors had replenished their inventories in the third quarter of 2020 when the pandemic temporarily subsided, while their purchases in this current quarter were more consistent with demand. Importantly, our third quarter U.S. end-user demand was up 15% over both the third quarter of last year and the recently completed second quarter. We believe we are finally bending the curve as our access to physicians and patients continues to improve. Further, we believe the investments we discussed on our second quarter call and initiated in Q3 to reestablish the awareness of ILUVIEN, increase our share of voice and strength and advocacy are already starting to achieve results.

Since August 1, we've been able to engage more than 130 physicians in nonclinical settings. And year-to-date, end-user demand in the U.S. is up 4% for the 9 months ended September 30 versus the same period last year, after being down at the end of the first and second quarters. As a result, we expect to report positive U.S. unit volume and revenue growth for the full year of 2021.

Our International segment continues to lag U.S. performance in terms of the pace of recovery. GAAP revenue in our International segment was down slightly to $5.2 million for the quarter as access to hospitals and physicians remains inconsistent in Europe. However, we are seeing positive trends. In Germany, where a surge in COVID-19 cases occurred in Q2, we saw sequential improvement in ILUVIEN utilization in Q3. Additionally, our distributor partners sold much of their buildup inventory due to the prolonged pandemic and began taking new deliveries in Q3. As a result, we did see our international product revenue grow 37% sequentially over the recently completed second quarter, a signing return of demand and recovery.

To provide a broader perspective on our business, the global end user demand for the month of September was within approximately 10% of what we saw back in Q4 2019 and Q1 2020 prior to the impact of the pandemic. Geographic expansion continues to be a critical part of our strategy. At the end of 2020, ILUVIEN was commercialized in 8 European countries. In the first 9 months of this year, we have opened 6 new markets with units being sold despite little promotional support due to the pandemic. We expect to see growth from the Nordic territories and the Benelux region in 2022 with greater access and active promotion.

As I mentioned on last quarter's call, we are increasing our spend to reestablish our share of voice and drive advocacy of ILUVIEN. A critical element of our spend is engaging more with physicians outside their offices, increasing our advocacy efforts and our communications. As noted earlier, we believe these initial investments in the U.S. have yielded better access to physicians and that led to increased utilization.

As countries continue to open in Europe as the pandemic subsides, we expect to obtain similar additional access to our European customers behind our spending plans there. As you probably know, there are numerous companies out there attempting to develop more durable therapies for retinal disease with the goal to reduce the recurrence of disease and treatment burden like ILUVIEN. Their messaging further highlights our core message of maintaining vision longer with fewer injections. We expect this noise level will increase in publications, presentations and educational programs, as well as advertising, which should benefit ILUVIEN in the future.

At the recent American Society of Retina Specialists Annual Meeting, we presented an analysis from the Phase IV palleted study demonstrating a significant reduction in the number of treatments needed by patients with DME after receiving ILUVIEN. The real-world data showed that patients receiving 1 or less total injections per year for their DME after the ILUVIEN injection increased threefold from prior to the ILUVIEN injection.

The data also showed that the percentage of patients who needed more than 4 DME treatments per year was reduced by 50% with ILUVIEN on board. This data provides additional support for our claims that ILUVIEN clearly reduces the recurrence of DME and keeps the retina dryer longer with fewer injections. These results from the Phase IV PALADIN study support the premise of our landmark NEW DAY Study, our head-to-head comparison of ILUVIEN and Eylea in the treatment of naive and near-naive patients. We continue to screen and randomize additional patients, and September has been our highest screening month to date, bringing us to 75 patients randomized in the study with an additional 16 in the screening phase. Further, we've seen additional and renewed interest in the study from clinicians, as they are inquiring about the study and coming on board as new clinical sites. We're pleased to see this trial gaining momentum, and we are looking forward to reporting results, which we believe will establish ILUVIEN as baseline treatment for DME.

We also still believe in the value of our message with patients and their caregivers that ILUVIEN maintains vision longer with fewer injections and remain on track to restart our direct-to-patient campaign in the U.S. as we move into 2022. Before I turn the call over to Phil, I want you to know that we are very confident in our ability to return to growth and significantly expand the utilization of ILUVIEN in 2022 and beyond. We believe we will do this with solid execution of our corporate priorities, which are as follows: one, restoring ILUVIEN sales to pre-pandemic growth rates. Absent the COVID-19 challenges, we remain confident we can grow our business organically, increasing both the number of physicians using ILUVIEN and the frequency of use in our markets; two, executing on our strategy to expand the number of international territories in which ILUVIEN is approved, reimbursed and launched with our direct sales organization and through our distributor partners. This includes both DME and the approval and uptake of ILUVIEN's noninfectious uveitis indication in new and existing territories; and three, advancing the NEW DAY Study, by driving patient enrollment and completion of that trial. Recall that we plan to enroll 300 DME patients across the 45 active centers participating in this landmark head-to-head clinical study.

And with that, Phil will now review the financial results for the quarter. Phil?

Philip Jones

Thanks, Rick. Hello, everyone. For the third quarter of 2021, we reported consolidated net revenue of $12.2 million down approximately 2% compared to the $12.5 million that we reported in the third quarter of 2020. U.S. net revenue was approximately $7 million for the third quarter of 2021, which is unchanged from the $7 million reported in the 2020 comparable period. U.S. end-user demand, which represents units purchased by physicians and pharmacies from our distributors, rose 15% in the third quarter of 2021 to 837 units compared to 728 units in the third quarter of 2020. As we have previously shared, our GAAP revenues in the U.S. do not always correlate with end-user demand due to the timing of purchases by our specialty distributors.

In the third quarter of 2021, our distributors purchased approximately the same number of units as they sold to end users. While in Q3 2020, our U.S. distributors purchased 19% more units then they sold to end users as the pandemic appeared to be subsiding. Net revenue from our international segment decreased by approximately 5% to $5.2 million for the third quarter of 2021 compared to $5.5 million reported for the same period last year. The decrease in product revenue was driven by 2 factors: one, fewer orders from our distributor partners who continue to reduce inventory acquired in 2020; and two, a decrease in end-user demand in Germany in Q3 2021 compared to Q3 2020. This was due to continued restricted access to health care facilities associated with the COVID-19 pandemic.

As Rick mentioned, end-user demand continues to pick up in our distributor partner markets, leading to new stocking orders in the third quarter. We anticipate that our partners will be back to regular ordering patterns over the next 3 to 6 months. Total operating expenses were approximately $12.5 million in the third quarter of 2021, an increase of approximately 19% compared to $10.5 million reported in the third quarter of 2020. We are spending to support our key initiatives to drive the sales recovery and growth in the fourth quarter and into 2022.

Additionally, we have resumed our travel and sales engagement as we continue to regain access to accounts. We reported an adjusted EBITDA loss of $1.1 million in the third quarter of 2021 compared to a positive adjusted EBITDA of $1.4 million in Q3 2020, when we benefited from our restricted level of spending due to the lockdown seen in many of our markets and our efforts to conserve cash.

For the third quarter of 2021, we reported a net loss of approximately $4.1 million compared to a net loss of approximately $600,000 for the third quarter of 2020. The net loss was impacted unfavorably by the downward revaluation of our warrant that gives us the right to purchase Ocumension common shares. The unfavorable amount associated with the revaluation amounted to $1.1 million. This warrant will be evaluated on a quarterly basis until exercise and could generate quarterly gains and losses affecting the overall financial result.

On the other hand, the license that we granted to Ocumension in Q2 for the rights to develop and commercialize our ILUVIEN formulation in the Greater China territory and other Western Pacific countries, along with Ocumension's equity investment in Alimera has significantly improved our balance sheet. Basic and diluted net loss per share for the third quarter was $0.60 on approximately 6.92 million weighted average shares outstanding. This compares to basic and diluted net loss per share for the third quarter of 2020 of $0.12 on approximately 5.1 million weighted average shares outstanding.

On September 30, 2021, we had cash and cash equivalents of approximately $21.5 million compared to $11.2 million in cash and cash equivalents that we reported on December 31, 2020. With that, I'll now turn the call over to the operator to begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question is from Alex Nowak of Craig-Hallum Capital.

Alexander Nowak

Rick, you spoke a lot about the inventory sitting out with distributors. I really just wanted to kind of summarize it here. So am I correct in saying that the level of inventory sitting out there is more normalized exiting Q3, and you're either going to see some stocking going forward or at least sales tracking closer to demand, or do you think you still have another quarter to go on the destocking front?

Richard Eiswirth

Yes. So Alex, great question. In general, we think their stocking levels are back to normal, the majority of distributors, I would say. You'll see -- you are seeing orders come in, there were orders in Q3. As I said on the Q2 call, we already had orders for Q3, Q4 and Q1 of next year. So you're going to start to see some more regularity there. I think it will still be a little bit rocky over the next, I guess, 4 quarters or so until that demand gets to a level where they can justify orders on a quarterly basis and get more consistency. But you're going to start to see them come back more like you saw in 2019.

Alexander Nowak

All right. That's helpful. Can you detail what you saw with rep access in the U.S. clinics and also patient flow going into the practice throughout Q3, just with the Delta virus increasing and then waiting?

Richard Eiswirth

Yes. So our access in the U.S. has definitely continued to get better. Our face-to-face office visits grew from Q1 to Q2 and continue to go higher in Q3. So we're getting more access. And as we alluded to on the call, we're also getting more access to physicians in nonclinical settings, advisory boards, dinners with practices, et cetera. So we're getting more and more face time to those doctors. And I think that's having a big impact because we're able to deliver more quality content or get just a longer period of time with the doctors outside of the clinical lane. So that's helping a lot.

I would say you're also seeing an improvement in the flows back in the clinics as well. More and more of the doctors tell us things are back to normal. My gut feel is that it's still a little bit short that they're not quite seeing the volumes that they used to just because of the social distancing rules and everything. But I would say more feel like they're getting back to normal, which then tells you there's more flow coming through. And we think that's apparent also in what we're seeing from end user demand, too.

Alexander Nowak

That's great. Where you sit today with inventory and then obviously, the Delta virus waning, and we are getting back to a somewhat normal? Can you maybe provide an outlook for 2022 -- growth into 2022? But also, do you think we could get back to the pre-COVID run rate in 2022? Just any comments there.

Richard Eiswirth

No, I do. I mean that's -- our goal is to get back to that sort of end of 2019, the first couple of months of 2020 run rate as fast as we can. And as you know, that puts us in the in the low to mid-60s. So I mean, it's a little bit early to give guidance, but our trends are definitely going in the right direction, and we feel like 2022 can be a pretty strong year and get us back to the kind of growth we expect.

Alexander Nowak

That's great. And then just last question for me. Just with capital on the balance sheet, are there any specific areas you'd like to invest in to help you go faster coming out of COVID? And then any update on expanding the pipeline within the retinal space?

Richard Eiswirth

Yes. So we are committed to spending some of that money that we put on the balance sheet with Ocumension. We probably -- we managed the balance sheet really well. And being able to do that and strengthen the balance sheet, we want to take advantage of that to drive things faster as we come out of COVID. Primarily, it's been -- being spent on developing advocacy and finding other avenues outside the clinic to engage those doctors as we've talked about on this call, as well as in the U.S. trying to take a little bit broader look at that direct-to-patient campaign technique. We do believe that ILUVIEN because it's one injection or a significantly reduced number of injections is really beneficial to that patient and the caregiver. And we want to try to motivate those patients to be pushing the doctors for ILUVIEN. We saw good results when we tested that in 2019. We think we can refine our approach and do even better with it in 2022 in an increased number of markets.

Alexander Nowak

Yes, on the pipeline?

Richard Eiswirth

I was just going to say, with respect to the pipeline, we are continuing to look. We've been pretty active in looking and talking to companies, but nothing to announce yet. We're going to make sure we find the right thing to add to the pipeline.

Operator

The next question is from Yi Chen of H.C. Wainwright.

Yi Chen

My first question is, could you please remind us how many new ILUVIEN launches do you plan to have during the remainder of this year and in 2022, especially in Europe?

Richard Eiswirth

Yes. So the primary activity is around really focusing on launches in the Benelux territories, so Belgium, Luxembourg and the Netherlands, as well as the Nordic territories, so Finland, Denmark, Sweden and Norway, is where those launches will be. We actually have products available in all those markets right now. But as we alluded to on the call, there's been very little spending simply because of access. So we will start investing in the Nordic territories a little bit more in our partner Horus who managed the product in France will be focusing on the efforts in the Benelux territories.

Yi Chen

Okay. Do you have any information as of now regarding prescription for DME versus prescription for uveitis?

Richard Eiswirth

No. I mean it's -- the majority of it is still DME. We're still waiting on some final reimbursement decisions from the regulatory authorities across most of Europe. So the uveitis indication has still only been really launched in Germany and the U.K. So most of this rebound globally is related to improvements in DME sales and the uveitis is still out there in the future. But we hope to be able to get through all those negotiations and everything this year, so we can launch in the rest of Europe next year for uveitis.

Yi Chen

Okay. And then could you tell us how many patients have been enrolled into the NEW DAY trial so far?

Richard Eiswirth

Yes. So right now, the -- it's about 75 who're in the study, and there were 16 that are in active screening at the last update that we had. So we're definitely picking the momentum there. As I said, September was the highest volume screening month we've had. So it feels like, Yi, with things opening up in COVID greater patient access more of these naive and near-naive patients are coming to the office and making it into the trial as well. So hopefully, that will continue to improve over the rest of the year.

Yi Chen

Got it. And lastly, has Ocumension provided you with some update regarding the development status of ILUVIEN in China?

Richard Eiswirth

No. Right now, they're trying -- they're working on trying to get approval and access in some of the smaller markets. So there may be some availability of ILUVIEN in Hong Kong and Taiwan next year. But there's a little bit more work to do with Ocumension on that.

Operator

The next question is from Jim Molloy of Alliance Global Partners.

James Molloy

I had a quick question on the relative profitability between the U.S. and the EU. Could you speak a little bit to -- I assume that COGS is probably the same between the two. Could you talk a little bit about the profitability, how much you can make on operating margin versus -- in U.S. versus ex U.S., please?

Richard Eiswirth

Yes, Jim, I mean, the gross margin is definitely going to be higher in the U.S. because we have higher pricing in the U.S. with the exception of Germany. We've talked about this before. Our list price in the U.S. is about $8,800. On average, the pricing is probably around EUR 6,000 across Europe. So the gross margin is definitely going to be smaller. Phil, I don't -- you can comment on the operating margins, but certainly, we get a little bit more leverage of our operating costs in Europe at times below the gross margin line because we're relying on distributors to do some of the work there.

Philip Jones

Yes. I would just comment on what Rick said, Jim, to point out that, again, you got to remember with these partnerships that we have over there, we get more of a revenue share, not a full price. Therefore, the margins on those are going to be less than we see in some of our other markets just based on that lower price. But as Rick mentioned, the cost associated with that is minimal.

James Molloy

Just trying to think of the relative importance of pushing more -- driving more through the U.S. versus opening more EU Benelux territories. Could you walk us through sort of the thinking on that?

Richard Eiswirth

Yes, Jim, I think they're equally important to the future of the company, right? We certainly want to capitalize and grow in the U.S. And we realized that a lot of the investors are focused on the U.S. markets and we need to grow that. But Europe and the European expansion continues to be a big part of our strategy going forward. As I've said before, I would like to be one of the few companies out there who're the first company with multiple products in the retina space. And I think having the network and the reach in Europe that we have makes us an attractive partner for working together with us to do the drug because most companies that are small companies in the U.S. don't have a plan or strategy in Europe, right? And we've demonstrated the ability to make money there and the bigger that network gets to be the more value we're creating. So it's a big focus going forward. And I think over the long haul, you're going to continue to see about a 50-50 split in revenue between the two. So an important part of our future.

James Molloy

Understood. And last couple of questions. Looking at -- the top line is about the same for third quarter last year, EBITDA is lost 16 this quarter versus 36 third quarter last year. Can you walk through sort of the EBITDA -- the changes in EBITDA for the quarter? And then should we still be thinking around $60 million top line annually for profitability overall for the company?

Richard Eiswirth

Yes. So Jim, I mean, remember, Q3 of last year, things were pretty much shut down, right? We were not traveling at all. We weren't making big investments because we made the decision that we wanted to protect the team and the relationships. And so we weren't spending a lot of promotional dollars out there on advisory boards meetings, et cetera, because we just didn't have access to the doctors. So the spending was really controlled by the environment somewhat but was well below what we were spending to operate the company back in 2019. So we've got to move back in that direction.

In the fourth quarter of 2019, I believe we spent about $13.5 million in operating expenditures. We're still short of that. We expect to grow back to that. But that's why you see the EBITDA shortage now. It's because we made that decision at the beginning of the third quarter to start spending a little bit more to rebuild that advocacy. So I think we'll get back there. I think that $14 million, $15 million, $15 million a quarter run rate is what gets us to breakeven at EBITDA. And we think we'll be back [indiscernible]

Operator

[Operator Instructions]. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Rick Eiswirth for any closing remarks, sir.

Richard Eiswirth

Thank you all for joining us today and talking about our progress in Q3 and our expectations for next year. We do look forward to sharing results on the fourth quarter early in 2022. Thank you very much, and have a great day.