- Published: 09 November 2016
- Written by Editor
Sucampo Reports Third Quarter 2016 Financial Results
Key Updates
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Recently completed a settlement and license agreement with Dr. Reddy’s Laboratories, Ltd. and certain of its affiliates (Dr. Reddy’s) that resolves patent litigation in the United States related to Sucampo’s AMITIZA (lubiprostone) 8 mcg and 24 mcg soft gelatin capsules. The agreement provides for an entry date more than six years from today’s date and profit sharing on product sales by Dr. Reddy’s.
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A phase 3 trial of AMITIZA in pediatric functional constipation in children six to seventeen years of age did not achieve its primary endpoint of overall spontaneous bowel movement (SBM) response. However, the trial did show a trend in favor of lubiprostone for the primary endpoint, and achieved statistical significance in some secondary endpoints, notably overall SBM frequency, straining, and stool consistency. Clinical development of AMITIZA with a sprinkle formulation and phase three trials in adults and children six months to less than six years of age using the sprinkle formulation will continue as planned.
- Increased adjusted 2016 guidance as follows: revenue guidance to $220-225 million, adjusted net income guidance to $50-55 million, adjusted EPS guidance to $1.20-1.25, and adjusted EBITDA guidance to $110-115 million.
“We are very excited that we have achieved another significant quarter of strong financial results, driven by solid global performance of our flagship brand, AMITIZA. Additionally, we continued to make significant progress on many important areas of our business, including the resolution of our patent litigation with Dr. Reddy’s Laboratories that affords us greater certainty on the significant future value of the AMITIZA franchise, ” said Peter Greenleaf, Chairman and Chief Executive Officer of Sucampo. “Looking forward to the remainder of 2016 and throughout 2017, we will be focused on the execution of our base business, next steps in our phase three program for AMITIZA in pediatric functional constipation and development of a sprinkle formulation, and completion of strategic transactions to further boost growth and diversify our company.”
For the three months ended September 30, 2016, Sucampo reported year-over-year total revenue growth of 73% to $57.9 million. Product sales revenue increased to $31.6 million, representing 186% year-over-year growth, and product royalty revenue grew 7% year-over-year to $20.8 million. Revenue for the quarter included an additional $13.3 million because of the R-Tech Ueno acquisition. Excluding this additional revenue from the acquisition, base revenue grew by 33%.
Sucampo reported a GAAP net income of $8.1 million, or $0.19 per diluted share during the third quarter of 2016 compared to GAAP net income of $7.2 million, or $0.16 per diluted share, during the third quarter of 2015, an increase of 12% and 19% respectively. On an adjusted basis, Sucampo reported net income of $12.4 million, or $0.28 per diluted share, during the third quarter of 2016, compared to net income of $7.8 million, or $0.17 per diluted shares, during the third quarter of 2015, an increase year-over-year of 58% and 68% respectively.
Third Quarter 2016 Operational Review
AMITIZA
Corporate
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Sucampo Pharmaceuticals, Inc., together with certain of its affiliates and Takeda Pharmaceutical Company Limited (Takeda) and certain of its affiliates, have entered into a settlement and license agreement with Dr. Reddy’s and certain of its affiliates that resolves patent litigation in the United States related to AMITIZA 8 mcg and 24 mcg soft gelatin capsules.
Under the terms of the settlement and license agreement, Sucampo is granting Dr. Reddy’s a non-exclusive license to market a generic version of lubiprostone in the United States beginning more than six years from today’s date, or earlier under certain circumstances. Dr. Reddy’s would pay to Sucampo a share of net profits of generic lubiprostone products sold during the term of the agreement, which decreases over time and ends when all of the related patents have expired. Dr. Reddy’s may elect to purchase generic lubiprostone products from Sucampo under the terms of a manufacturing and supply agreement at a negotiated price.
Sucampo, Takeda and Dr. Reddy’s have agreed to dismiss with prejudice the patent litigation filed in the U.S. District Court for the Southern District of New Jersey.
United States
- AMITIZA total prescriptions were 374,194 in the third quarter of 2016, as reported by IMS, a decrease of 1.4% compared to the third quarter of 2015. For the first nine months of 2016, AMITIZA total prescriptions were 1,103,778, an increase of 2% compared to the first nine months of 2015. Net sales of AMITIZA, reported by Takeda Pharmaceuticals U.S.A., Inc. (Takeda) for royalty calculation purposes, increased 7% to $108.8 million for the third quarter of 2016, compared to $101.7 million in the same period of 2015. Royalty revenue was $20.8 million compared to $19.3 million, an increase of 7%. Also included in third quarter revenue are Takeda AMITIZA sales from R-Tech Ueno of $10.9 million.
Global Markets
- In Japan, Sucampo's revenue from sales of AMITIZA to Mylan N.V. was $17.4 million for the third quarter of 2016, compared to $10.3 million in the same period of 2015, an increase of 69%. Unit volume as reported by Mylan grew more than 40% through the first nine months of 2016 compared to the first nine months of 2015, to 89.3 million units versus 62 million units in 2015.
Research and Development
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A phase 3 trial of AMITIZA in pediatric functional constipation in children six to seventeen years of age did not achieve its primary endpoint of overall spontaneous bowel movement (SBM) response. However, the trial did show a trend in favor of lubiprostone for the primary endpoint, and achieved statistical significance in some secondary endpoints, notably overall SBM frequency, straining, and stool consistency. In this study, tolerability of lubiprostone was consistent with the safety profile in adults. Sucampo will first review these results with the U.S. Food and Drug Administration and then will announce next steps at the completion of this review. Sucampo intends to initiate enrollment in its clinical development program of the sprinkle formulation of AMITZA in adults by the end of 2016 as planned. After completion of this sprinkle formulation program in adults, a further consultation with the FDA so as to better determine the doses and endpoints that should be studied in the younger pediatric population will follow, aiming at initiation of a phase three program in children 6 months to six years of age using the sprinkle formulation in mid 2017.
- Following a detailed review of the program, Sucampo has made the decision to discontinue development of RTU-1096, a compound in its vascular adhesion protein (VAP-1) inhibitor program.
Third Quarter 2016 Financial Review
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On a GAAP basis, Sucampo reported net income of $8.1 million and a diluted EPS of $0.19 during the third quarter of 2016, compared to net income of $7.2 million and diluted EPS of $0.16 in the same period in 2015. Adjusted net income was $12.4 million, or $0.28 per diluted share, during the third quarter of 2016, compared to net income of $7.8 million, or $0.17 per diluted share.
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EBITDA was $35.6 million for the third quarter of 2016 compared to EBITDA of $11.9 million for the same period in 2015, an increase of 196%. Adjusted EBITDA, defined as net income before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring and intangible impairment, was $28.8 million for the third quarter of 2016 compared to $14.6 million in the same period in 2015, an increase of 97%.
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Total revenues were $57.9 million for the third quarter of 2016 compared to $33.4 million in the same period in 2015, an increase of $24.4 million or 73%. The increase was primarily due to the inclusion of R-Tech Ueno results and increased royalty related revenues from Takeda.
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Cost of goods sold were $15.6 million for the third quarter of 2016 compared to $5.3 million for the same period in 2015, an increase of $10.3 million or 195%. The increase was primarily due to the inclusion of R-Tech Ueno results, acquired intangible asset amortization and increased product sales. Excluding intangible asset amortization of $6.7 million, cost of goods sold was $8.9 million.
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Gross margin, calculated as product sales revenue less cost of goods sold as a percentage of product sales revenue, was 50.6% for the third quarter of 2016, compared to 52.0% for the same period in 2015, a decrease of 3%. The decrease was primarily due to intangible asset amortization. Excluding the intangible asset amortization, gross margin was 71.8%, an increase of 38%. This increase is due to the inclusion of R-Tech Ueno results and the realization of the economics resulting from the acquisition.
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Research and development expenses were $10.0 million for the third quarter of 2016 compared to $8.4 million for the same period of 2015, an increase of $1.6 million or 19%. The increase was primarily due to increased spending on lubiprostone pediatric studies, as well as the inclusion of R-Tech Ueno.
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In connection with the discountinuation of the VAP-1 Inhibitor development program, the Company has impaired the related in process research and development assets and recognized a one time non-cash write-down of $7.3 million in the third quarter of 2016, compared to $0.0 for the prior year period. The Company has adjusted for this one time charge in the results from operations.
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General and administrative expenses were $11.1 million for the third quarter of 2016 compared to $7.8 million for the same period of 2015, an increase of $3.3 million or 42%. The increase was primarily due to legal costs associated with the Dr. Reddy’s settlement, RTU intregration costs, restructuring related costs and the inclusion of RTU.
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Selling and marketing expenses were $0.7 million for the third quarter of 2016 compared to $0.4 million for the same period of 2015. Fluctuation was due to the inclusion on R-Tech Ueno related commercial activities.
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Included in other income during the quarter is a one-time gain of $9.3 million related to the termination of a loan from the Japan Agency for Medical Research & Development (AMED) for development of unoprostone, which was discontinued in early 2015.
- The effective tax rate for the third quarter of 2016 was 47.8%, compared to 37.5% in the same period of 2015. The increase in the tax rate is primarily due to the treatment of non-U.S. income.
Certain prior year non-GAAP amounts have been reclassified for consistency with the current period- adjusted presentation. These reclassifications had no effect on the reported results of operations. A reconciliation of adjusted Net Income to GAAP Net Income and adjusted EBITDA to net income, the most directly comparable GAAP financial measure, is included in the tables below.
Cash, Cash Equivalents, Restricted Cash and Marketable Securities
- At September 30, 2016, cash, cash equivalents, restricted cash and investments were $153.7 million compared to $163.5 million at December 31, 2015. This change is primarily due to payments of the outstanding notes and related interest, offset by an increase in cash flow from operating activities. At September 30, 2016 and December 31, 2015, notes payable were $218.7 million and $252.4 million, respectively, including current portions of $21.7 million and $39.1 million, respectively. The change in the overall note payable balance is due to debt repayments made during 2016. Sucampo’s net debt position at September 30, 2016 is $65 million, compared to $88.9 million at December 31, 2015.
Geographic Sales
- Company revenues by product type and geographic location for the three months ended September 30, 2016 and 2015 were as follows
Guidance
Sucampo today raised its earnings guidance for the full year ending December 31, 2016. Sucampo now expects total revenue of $220.0 million to $225.0 million, adjusted net income of $50.0 million to $55.0 million, adjusted EPS of $1.20 to $1.25, and adjusted EBITDA of $110.0 million to $115.0 million. Adjusted net income guidance excludes amortization of acquired intangibles of approximately $17.6 million, restructuring related costs of $1.9 million, debt financing related costs of $3.5 million, CPP option related expenses of $7.5 million, amortization of the remaining inventory step-up costs of approximately $8.9 million, intangible asset impairment expense of $7.3 million and one time gains associated with a legal settlement of $9.3 million. Adjusted EBITDA guidance excludes stock option related expenses of $7.3 million, one time restructuring related costs of $1.9 million and CPP option related expenses of $7.5 million. Guidance includes a one-time $10.0 million milestone in the fourth quarter of 2016 related to the achievement of sales milestone from Mylan related to sales of AMITIZA in Japan.
See the table below for a comparison of the Company's previous 2016 guidance to the updated 2016 guidance:
