Dimethaid Q2 loss grows to $7.3-million (U.S.)
2005-01-14 09:15 ET - News Release
Ms. Jodi Peake reports
DIMETHAID ANNOUNCES SECOND QUARTER FINANCIAL RESULTS
Dimethaid Research Inc. has provided consolidated fiscal 2005 results for the second quarter ended Nov. 30, 2004, including the following message to shareholders. The full fiscal 2005 second quarter report, including financial statements and notes, is posted on the company's website at www.dimethaid.com.
All dollar amounts are expressed in United States currency, unless otherwise noted.
Message to shareholders
Restructuring operations
Since Dimethaid's last report to shareholders, it has made significant progress with its restructuring plan and implementation of a new strategic direction for the company. As Dimethaid communicated in its initial letter to shareholders in Stockwatch on Oct. 6, 2004, the company's affairs are complex and it is still continuing to review a considerable volume of documentation. In addition, the recent financing process consumed significant attention and resources. Dimethaid is working to complete the restructuring as quickly as possible and is confident this can be substantially accomplished by the spring of 2005.
Key elements of the restructuring successfully completed during the quarter include:
securing longer term financing by raising $11.2-million (Canadian);
renewing the company's agreement with Solvay Pharma for Pennsaid sales and promotion in Canada;
terminating the McNeil Consumer Healthcare standstill agreement, freeing Dimethaid to negotiate with potential U.S. marketing partners for Pennsaid;
terminating the In2Focus agreement covering Pennsaid sales and promotion in the United Kingdom;
restructuring the $28-million debt owed to Dr. Kuhne for the company's 2002 purchase of Oxo Chemie AG;
reducing overall fixed costs by 50 per cent;
reducing Dimethaid's work force by over 40 per cent; and
listing the Markham head office for sale.
Consistent with Dimethaid's new strategic direction is its longer-term goal of finding a contract manufacturer that can assume operation of the Varennes facility. In the meantime, Dimethaid is investigating contract manufacturing opportunities to use excess capacity for other products and maximize revenue.
Important additions to Dimethaid's management team occurred during the quarter. Directors Daniel Chicoine and John London have officially joined Dimethaid's management team as chairman and vice-chairman, respectively. In addition, Grant Britchford has been promoted to vice-president, finance, and chief financial officer.
Growing Pennsaid sales
Pennsaid sales experienced strong growth during the second quarter of fiscal 2005. Total Pennsaid revenue grew to $1.9-million ($2.4-million (Canadian)) for the second quarter, up 54 per cent from the same period last year and up 25 per cent from the first quarter of fiscal 2005 (approximately 8 per cent due to foreign exchange effect). This growth reflects the establishment of Pennsaid in the Canadian market as well as the first shipment of product to Dimethaid's Portuguese partner Jaba Farmaceutica in advance of an official launch in early calendar 2005.
Canadian market
Breaking out Canadian Pennsaid sales, revenue for the second quarter totalled $1.6-million ($2-million (Canadian)), up 65 per cent from the same period last year and up 24 per cent from the first quarter of fiscal 2005.
Since the Canadian launch of Pennsaid in May, 2003, sales have been negatively affected by Dimethaid's financial constraints and the lack of a fully financed marketing program. An additional challenge to date has been the absence of provincial formulary coverage for the product. Included in Dimethaid's co-promotion partner's strategic marketing plan is the resubmission of applications to provincial formularies for coverage of Pennsaid, to which several responses are expected in calendar 2005.
Dimethaid expect Canadian Pennsaid sales will continue to grow based on:
the recent publication of three Pennsaid clinical studies demonstrating safety and efficacy in prestigious Canadian and U.S. medical journals;
a fully financed sales and marketing campaign led by Dimethaid's co-promotion partner Solvay Pharma;
arthritis patients' increasing need for treatment alternatives given the recent safety issues with COX-2s and traditional oral NSAIDS; and
establishing and enhancing relationships with key opinion leaders in the field of arthritis in Canada.
Dimethaid and Solvay Pharma have finalized an amended agreement covering marketing and sales of Pennsaid in Canada. Under the new terms, Solvay will assume primary responsibility for Pennsaid sales and promotion in Canada. Dimethaid will continue to participate in Canadian marketing initiatives and will retain full responsibility for Canadian distribution and customer service as well as managing international marketing, distribution, licensing and business development. The two companies will continue to share revenues from Canadian Pennsaid sales according to an agreed percentage formula.
The recent Vioxx withdrawal and increased scrutiny on other COX-2 inhibitors has created a significant market opportunity for Pennsaid. Solvay has developed a comprehensive marketing and promotional program to continue to increase awareness of Pennsaid among Canadian health care practitioners and patients, including strategic public relations and consumer campaigns. Dimethaid is confident that Solvay has the expertise to capitalize on this opportunity and expects to see the effect of its efforts beginning next quarter.
Pennsaid is continuing to gain credibility with health care practitioners with the first-time publication of three Pennsaid clinical trials in important Canadian and U.S. medical journals. Both the Canadian Medical Association Journal and the U.S. Archives of Internal Medicine published two separate studies demonstrating the safety and efficacy of Pennsaid. In October, the Canadian Journal of Rheumatology published a study demonstrating that Pennsaid works as well as an oral drug and has an overall better safety profile. In an accompanying editorial, Dr. R. Andrew Moore, director of research, pain research, University of Oxford, describes the pyramid of evidence supporting topical NSAID efficacy and his view that "the pinnacle is this new trial, demonstrating equivalence of topical and oral diclofenac in a large, valid, high-quality trial." These results support Dimethaid in demonstrating the unique position of Pennsaid among other osteoarthritis medications.
International markets
Earlier this year, Dimethaid launched two phase III clinical trials to confirm the long-term safety of Pennsaid and investigate the product's advantages in combination with a conventional analgesic. Dimethaid has successfully enrolled patients at over 40 sites across Canada, and is currently adding several sites in the United States. At the current pace of enrolment, Dimethaid remains on track to complete the studies by the end of calendar 2005 and expect to submit an amended new drug application to the FDA by mid-2006. During this process, Dimethaid will be meeting with potential marketing and distribution partners in an effort to secure a U.S. licensing agreement in advance of FDA approval.
In Europe, Pennsaid sales have not met Dimethaid's expectations. During the quarter, the company terminated its agreement with In2Focus covering Pennsaid sales and promotion in the United Kingdom. While Dimethaid seeks a new marketing arrangement, Pennsaid will remain available to health care professionals and patients through its U.K. distributor Healthcare Logistics Ltd. Some of the issues Dimethaid has identified in the European markets generally include the lack of relationships with key opinion leaders in the field of arthritis, underinvestment in sales and marketing activities, and the incorrect positioning of Pennsaid to compete in the smaller topical market rather than in the larger oral market. In the meantime, Dimethaid expects European sales will be lower than previously expected until the company can analyze and rectify the situation. Dimethaid's marketing team is currently developing an international product life cycle strategy for Pennsaid. Elements of the strategy include evaluating the most promising international markets for Pennsaid, identifying the most appropriate partners and ensuring brand enhancement and protection.
Developing Dimethaid's product pipeline
Penecure
Last year, the company received Health Canada and FDA approval of its clinical trial protocol for Penecure, Dimethaid's antifungal treatment. Subject to confirming patentability pursuant to continuing Penecure patent applications, Dimethaid is planning to move ahead with a phase I/II clinical trial this calendar year.
WF10
Dimethaid also plans to move ahead this year with the development of its immune regulation drug, WF10. Encouraging clinical work done on WF10 in cancer therapy to date leads the company to believe that WF10 may play a therapeutic role enhancing the effectiveness of existing treatments and mitigating the side effects of chemotherapy and radiation therapy. Dimethaid is currently examining a number of possible indications for a phase I/II clinical trial.
Improving the value of your investment
Dimethaid's long-term vision is to transition the company from a fully integrated model to one focused on drug research and development. Under this plan, Dimethaid's goal is to minimize its expenditures while maximizing Pennsaid sales and other revenue via a network of partners to ensure the company has the resources to support its planned R&D program.
While Dimethaid has made considerable progress since the new board's election on Sept. 21, 2004, it continues to face several challenges including:
Capitalization -- although Dimethaid has dramatically reduced fixed costs, drug development is a capital-intensive business. Dimethaid will need to aggressively pursue co-development partners and sources of capital in order to develop its product pipeline.
Intellectual property -- Dimethaid is refining its intellectual property strategy to ensure maximum proprietary protection for its products.
Corporate credibility -- in the past, Dimethaid's financial difficulties and communications issues have negatively affected the company's reputation in the business and financial world. The new board and management team is committed to repairing relationships with these communities and recovering Dimethaid's credibility.
Throughout calendar 2005, Dimethaid expects to make progress securing international marketing and distribution partners for Pennsaid and further advancing development of its promising product pipeline.
On behalf of the board, Dimethaid wishes to thank its shareholders for their continued patience and support. The company is pleased with the progress it has made in such a short time period and it assures shareholders that management and the board will continue to work diligently on their behalf to improve the value of their investment in Dimethaid.
Financial results
Revenue
For the second quarter ended Nov. 30, 2004, total revenue grew to $2.1-million, up 45 per cent from the same period last year and up 23 per cent from the first quarter of fiscal 2005. Revenue for the six-month period was $3.8-million, an increase of $1.6-million from the comparable period last year.
Total Pennsaid revenue grew to $1.9-million for the second quarter, up 54 per cent from the same period last year and up 25 per cent from the first quarter of fiscal 2005 (approximately 8 per cent due to foreign exchange effect). This growth reflects the establishment of Pennsaid in the Canadian market as well as the first shipment of product to its Portuguese partner Jaba Farmaceutica in advance of an official launch in early calendar 2005.
Gross profit for the second quarter was $1.1-million or 74 per cent of net revenue, compared with $1.2-million or 81 per cent of net revenue, for the same period a year ago. The decrease in margin percentage due to revenue allocation with our co-promotion partner in Canada is offset by revenue growth.
Research and development expenses
Research and development expenses increased to $1.2-million for the second quarter ended Nov. 30, 2004, up from $379,000 for the comparable period last year. For the six-month period, research and development expenses amounted to $2.1-million, compared with $776,000 for the same period last year. The three- and six-month-period increases are mainly due to expenses incurred in relation to Pennsaid phase III clinical trials. The two phase III studies are designed to confirm the long-term safety of Pennsaid and investigate the product's advantages in combination with a conventional analgesic.
SG&A expenses
Selling and marketing expenses for the second quarter were $1.3-million, down from $2.8-million for the comparable period last year. This decrease is mostly due to the termination of the company's Canadian sales force and the cancellation of its U.K. sales and marketing contract. For the six-month period, selling and marketing expenses amounted to $3.5-million, down from $4.1-million for the same period last year.
Administrative expenses for the quarter ended Nov. 30, 2004, were $778,000 compared with $539,000 for the same period last year. Year-to-date administrative expenses were $1.4-million versus $1.3-million for the comparable period last year. This slight increase is mainly due to increased insurance costs and, commencing this fiscal year, the expensing of non-cash stock-based compensation.
The company's adoption of the CICA handbook Section 3870 resulted in a $223,000 year-to-date charge to administrative expenses based on the fair value attributed to stock options granted and vested. In prior years the company provided note disclosure of options, rather than a charge to SG&A.
Manufacturing expenses increased marginally to $234,000 during the second quarter, up from $221,000 from the comparable period last year. Year-to-date manufacturing expenses totalled $521,000, up from $449,000 last year, reflecting higher Pennsaid production volumes commensurate with increased sales.
Amortization
Amortization of property, plant and equipment for the quarter was $102,000, down from $162,000 for the first quarter of fiscal 2005. This reduction is due to the company's decision to discontinue expansion of the Varennes facility. Following this decision, packaging machinery acquired last year has been sold, resulting in a continuing reduction in amortization charges.
Amortization of intangibles decreased $96,000 to $246,000 this quarter versus the same period last year. Year-to-date amortization decreased $191,000, compared with the same period last year, reflecting a partial writedown of intangibles on May 31, 2004.
Foreign currency
Foreign exchange gains amounted to $74,000 for the current quarter, compared with $95,000 for the same quarter last year. For the six-month period, foreign exchange gains amounted to $135,000, versus $106,000 for the same period last year. The decrease in foreign exchange gains realized in calendar 2004 is due to the decline in value of the U.S. dollar.
Interest expense
Interest expense amounted to $176,000 ($336,000 for the six-month period), compared with $103,000 for the comparable period last year ($143,000 for the six-month period last year). The increase results from increased short-term borrowings.
Restructuring costs
Restructuring costs of approximately $4.5-million were recorded in the second quarter of fiscal 2005. These charges include a $3-million non-cash writedown of construction in progress and loss on disposal of packaging machinery following the company's decision not to complete the expansion project at its Varennes, Que., manufacturing facility. It also includes $744,000 in severance costs, $394,000 in expenses related to the recent proxy fight and $314,000 related to the termination of the company's U.K. sales and marketing contract.
Net loss
Net loss for the quarter ended Nov. 30, 2004, was $7.3-million, or 11 cents per share, compared with $6.2-million, or 14 cents per share, for the quarter ended Nov. 30, 2003. For the six-months ended Nov. 30, 2004, net loss was $11.1-million, or 18 cents per share, compared with $8.7-million, or 21 cents per share, for the corresponding period last year.
Cash position
Cash and cash equivalents at the end of the second quarter totalled approximately $7.8-million, compared with $305,000 as at May 31, 2004. This substantial increase is mainly a result of funds generated by the Nov. 16, 2004, convertible debenture unit financing, net of the funds applied to operating activities during the period.
Conference call
Dimethaid will host a conference call on Monday, Jan. 17, 2005, at 8:30 a.m. (ET) to discuss its second quarter fiscal 2005 results. To access the conference call by telephone, dial 416-640-4127 or 1-800-796-7558. Please connect approximately five minutes prior to the beginning of the call to ensure participation. The conference call will be archived for replay until Monday, Jan. 24, 2005, at midnight. To access the archived conference call, dial 416-640-1917 or 1-877-289-8525 and enter the reservation No. 21109657 followed by the number sign. A live audio webcast of the conference call will be available at www.dimethaid.com and www.newswire.ca/webcast/. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any required software downloads. The webcast will be archived at the above websites for 90 days.
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