Nuvo Pharmaceuticals™ Announces 2016 Year-End and Fourth Quarter Results

• Total revenue for the year ended December 31, 2016 was $27.0 million compared to $20.5 million for the year ended December 31, 2015.  Total revenue was $5.6 million for the three months ended December 31, 2016 compared to $7.7 million for the three months ended December 31, 2015. 
  
  
• Adjusted EBITDA⁽²⁾ increased to $8.9 million for the year ended December 31, 2016 compared to $8.0 million in the comparative year.  Adjusted EBITDA decreased to $1.3 million for the three months ended December 31, 2016 compared to $4.0 million for the three months ended December 31, 2015.
  
  
• Net income from continuing operations was $7.4 million for the year ended December 31, 2016 compared to $8.3 million in the comparative year.  Net income from continuing operations was $1.7 million for the three months ended December 31, 2016 compared to $4.7 million for the three months ended December 31, 2015. 
  
  
• Cash and short-term investments were $17.6 million at December 31, 2016 compared to $17.4 million at September 30, 2016.

"2016 was a very positive and pivotal year for Nuvo," said John London, Nuvo's CEO.  "Effective March 1, 2016, we spun out our R&D assets and related expenses to Crescita Therapeutics (TSX:CTX) making Nuvo a pure-play profitable specialty pharmaceutical company with approved products, growing revenue, and a strong balance sheet with over $17M of cash and no debt.  We are thrilled that Horizon increased year-over-year U.S. prescriptions of Pennsaid 2% by 43% in 2016.  Our plan for 2017 is to expand our revenue streams through Pennsaid 2% international out-licensing transactions, and product acquisitions; thereby, making Nuvo a stronger and more diversified company."

Pennsaid 2%

Pennsaid 2% Phase 3 Trial
The Company's 2016 Pennsaid 2% Trial is being conducted in Germany and commenced in November of 2016.  The trial is being conducted to support regulatory applications for marketing approval of Pennsaid 2% for the treatment of acute pain in the E.U., Canada and Australia.  The Company believes that most other jurisdictions will base their marketing approval on the current U.S. Food and Drug Administration (FDA) approval of Pennsaid 2% for the treatment of the pain of osteoarthritis (OA) of the knee and will not require additional clinical efficacy data.  As of February 27, 2017, 85% of the target number of patients had been enrolled in the study.  The Company expects the trial to be completed and top-line results available in Q2 2017. 

Out-licensing Update
Nuvo is in a number of active discussions with potential commercial licensees of Pennsaid 2% for various global territories.  Nuvo anticipates signing licensing agreements covering multiple countries beginning in 2017.  Nuvo projects that incremental revenue from licensing agreements signed in 2017 will commence in 2018 and 2019, subject to obtaining regulatory approvals for Pennsaid 2% in the related territories.

Licensing and Product Acquisitions
Nuvo is in active discussions relating to potential transactions to license or acquire additional, accretive commercial assets to further diversify the Company's product portfolio (including Pennsaid, Pennsaid 2% and the heated lidocaine/tetracaine patch and maximize the Company's manufacturing capabilities at our GMP approved site in Varennes, Québec.  Nuvo is charting a course to build a business with greater product and geographic diversification.

Horizon Ordering Patterns
Nuvo records revenue to Horizon when it ships Pennsaid 2% commercial bottles and product samples to Horizon for the U.S. market.  The Company earns product revenue from Horizon pursuant to a long-term, exclusive supply agreement as well as contract service revenue.  The timing of Nuvo shipments to Horizon does not necessarily align with when U.S. patients fill prescriptions written by their physicians.

Horizon's orders from Nuvo are influenced by demand in the U.S. market, Horizon inventory levels and their management strategies.  On November 27, 2017, the Federal Drug Supply Chain Security Act (DSCSA) rules come into force that require all manufacturers of drug products sold in the U.S. to "serialize" each individual package to enhance drug traceability in the event of an adverse event and to prevent drug counterfeiting.  In order to be in compliance with the DSCSA, also known as the Serialization Track and Trace Bill, the Company has purchased new packaging equipment and technology systems that will give it the ability to individually serialize all Pennsaid 2% packaging.  In coordination with Horizon, the Company has planned to install this new equipment well before the November 27, 2017 implementation date of the FDA rule change.  The FDA was expected to publish regulations that grandfather existing non-serialized inventory in the supply chain, but has not released these much anticipated regulations yet.  Due to this uncertainty, Horizon has decided to draw down some of its existing Pennsaid 2% inventory of non-serialized product in advance of the November 27, 2017 implementation date.  Horizon has therefore advised the Company's Varennes manufacturing plant to shift commercial bottle production planned for Q2 to later in the year.  Sample production is not affected by the serialization issue and Horizon has asked that the Company pull forward into Q2 some sample orders planned for later in the year.  These production changes will have a negative impact on Q2 sales and earnings; however, the Company expects that sales to Horizon will increase in the second half of the year, as the serialization equipment comes on stream and Horizon resumes its more typical ordering patterns. 

Q4 Financial Review

Table of Selected Financial Results
For further details on the results, please refer to Nuvo's Management, Discussion and Analysis (MD&A) and Consolidated Financial Statements which are available on the Company's website (www.nuvopharmaceuticals.com).

Total revenue, consisting of product sales, royalties and contract revenue for the three months ended December 31, 2016 was $5.6 million compared to $7.7 million for the three months ended December 31, 2015.  The decrease in revenue was primarily related to a $0.9 million decrease in Pennsaid 2% product sales, a $0.8 million decrease in Pennsaid product sales to the Company's partner in Greece, a $0.2 million decrease in Pennsaid product sales to the Company's partner in Italy due to the timing of shipments and a $0.2 million decrease in contract revenue.  Total revenue for the year ended December 31, 2016 was $27.0 million compared to $20.5 million in the comparative year.

Total operating expenses for the three months ended December 31, 2016 increased to $4.0 million compared to $3.3 million for the three months ended December 31, 2015.  The increase in operating expenses was primarily attributable to an increase in general and administrative (G&A) and research and development (R&D) expenses, partially offset by a decrease in cost of goods sold (COGS).  Total operating expenses for the year ended December 31, 2016 were $19.3 million, an increase from $13.2 million in the comparative year.

COGS decreased to $2.5 million for the three months ended December 31, 2016 compared to $3.0 million for the three months ended December 31, 2015.  The decrease in COGS was primarily related to a decrease in Pennsaid 2% and Pennsaid product sales.  The decrease in product sales during the current three-month period reduced the gross margin on product sales to $2.7 million or 51% compared to $4.0 million or 57% in the comparative three-month period.  COGS increased to $11.4 million for the year ended December 31, 2016 compared to $9.8 million in the comparative year.  The increase in COGS was due to increased product sales year-over-year.  Gross margin on product sales was $13.5 million or 54% for the year ended December 31, 2016 compared to a gross margin of $8.8 million or 47% in the comparative year.

R&D expenses increased to $0.6 million for the three months ended December 31, 2016 compared to $0.3 million for the three months ended December 31, 2015.  The increase in R&D expenses related to costs associated with the 2016 Pennsaid 2% clinical trial for the treatment of acute ankle sprains.  R&D expenses were $1.4 million for the year ended December 31, 2016 compared to $1.3 million in the comparative year.  

G&A expenses increased to $0.9 million for the three months ended December 31, 2016 compared to $0.1 million for the three months ended December 31, 2015.  The increase in G&A expenses was primarily related to a $0.2 million increase in stock-based compensation (SBC) expense, an increase of $0.1 million for transition services provided by Crescita and an increase in corporate costs primarily related to the allocation of certain corporate G&A costs to Crescita in the comparative period.  G&A expenses were $6.7 million for the year ended December 31, 2016 compared to $2.6 million in the comparative year.  

The Company earned net interest income of $37,000 for the three months ended December 31, 2016 compared to $0.1 million for the three months ended December 31, 2015.  For the year ended December 31, 2016, the Company earned net interest income of $0.1 million compared to $0.5 million in the comparative year.  The decrease in net interest income in both the current three-month and twelve-month periods related to the significantly lower cash balances due to the $35.0 million transfer of funds to Crescita as part of the Reorganization.

The Company experienced a net foreign currency gain of $0.1 million for the three months ended December 31, 2016 compared to a net foreign currency gain of $0.3 million for the three months ended December 31, 2015.  For the year ended December 31, 2016, the Company experienced a net foreign currency loss of $0.3 million compared to a net foreign currency gain of $1.0 million in the comparative year. 

Net income from continuing operations was $1.7 million for the three months ended December 31, 2016 compared to $4.7 million for the three months ended December 31, 2015.  The decrease in net income from continuing operations was primarily related to a decrease in gross margin coupled with an increase in G&A expenses and R&D expenses.  Net income from continuing operations was $7.4 million for the year ended December 31, 2016 compared to $8.3 million in the comparative year. 

Adjusted EBITDA decreased to $1.3 million for the three months ended December 31, 2016 compared to $4.0 million for the three months ended December 31, 2015.  The decrease in Adjusted EBITDA for the current three-month period was primarily related to a decrease in gross margin coupled with an increase in G&A expenses, R&D expenses, and lower net interest income and foreign exchange gains.  Adjusted EBITDA increased to $8.9 million for the year ended December 31, 2016 compared to $8.0 million in the comparative year.

Cash and short-term investments were $17.6 million as at December 31, 2016 compared to $17.4 million at September 30, 2016 and $48.7 million at December 31, 2015.  The decrease in cash from December 31, 2015 related to the $35.0 million that was transferred to Crescita as part of the reorganization.

The number of common shares outstanding as at December 31, 2016 was 11,546,397.

Non-IFRS Financial Measures

Adjusted EBITDA
EBITDA is a non-IFRS financial measure.  The term EBITDA does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies.  The Company defines Adjusted EBITDA as net income from continuing operations before net interest income, plus taxes, depreciation, amortization and SBC.  Management believes Adjusted EBITDA is a useful supplemental measure from which to determine the Company's ability to generate cash available for working capital, capital expenditures and income taxes.

The following is a summary of how EBITDA and Adjusted EBITDA are calculated:

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