ProPhase Labs, Inc. (NASDAQ:PRPH) Q1 2023 Earnings Call Transcript May 11, 2023

ProPhase Labs, Inc. reports earnings inline with expectations. Reported EPS is $0.03 EPS, expectations were $0.03.

Operator: Good day, and welcome to the ProPhase Labs Inc. First Quarter 2023 Financial Results and Corporate Update Conference Call. All participants will be in listen only mode [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Ted Karkus, CEO and Chairman of the Board of ProPhase Labs. Please go ahead.

Ted Karkus: Thank you, Sarah. And thank you everybody for joining me today. Before we get started, I would like to remind you of the company’s Safe Harbor language. During this presentation, we will make forward-looking statements, including statements regarding our strategies, plans, objectives and initiatives and the underlying assumptions. While we believe that these forward-looking statements are reasonable as and when made, forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, our ability to obtain and maintain necessary regulatory approval, general economic conditions, consumer demand for our products and services, challenges relating to entering into and growing new business lines, the competitive environment and the risk factors listed from time-to-time in our filings with the SEC filings.

This call will present non-GAAP financial measures, such as adjusted EBITDA. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC prior to this call and available on our Web site. All right, now that we’ve got the forward looking statements out of the way, I want to welcome you all and really appreciate you joining me and appreciate your interest in our company ProPhase Labs. Just couple of quick shoutouts. First of all, we work with a company called Renmark that creates virtual non-deal roadshows. I do these approximately twice per month. If you are interested in hearing updates on our company, our company is constantly evolving. We are a dynamic company.

We are growing in so many different areas. We are working on so many exciting things. There is so much going on. And so I like to keep our shareholders up-to-date. And if you are interested in keeping up to date, please contact Renmark, find out — sign up with them, find out when we have another VNDR. And feel free those are video calls and I go through slide presentations and so forth. I should also remind everyone that, we have presentations on our Web site. We have two presentations. One is just for biotech division and the other is our company presentation, that was significantly updated recently. So if you haven’t looked at it, you might want to go through our company presentation update, I think just in the last couple of weeks. So go to our Web site, it is really a wealth of information.

I also want to just highlight, we are now covered by four companies ThinkEquity, H.C. Wainwright, Joshua Levine, Confluence, and our most recent Diamond Equity Research. All four of these analysts that are following our company have us estimated to lose money this year, while having stock price objectives of roughly $15 to $20 per share. The most recent we updated research report from Diamond Equity has us with a $20 dollars stock price objective. The reason I highlight this is because we are not an earnings story this year. Anybody that’s focused on us for earnings, you invested or are following the wrong company, unless I guess you are short and you think that you are going to make money short in our stock while we are developing underlying assets, which we believe have multi-billion dollar potential that’s up to you.

But the point is, we took advantage of an opportunity with COVID, which was a wonderful windfall for the company and for the shareholders. We got to help people while making an awful lot of money. We always knew that was not going to be the future of the company. But we took advantage of a two and half year bear market or two year bear market in the microcap biotech stocks. And so while we were making all of this money, we were planning for our future by building out the underlying value of our company with some fantastic acquisitions and developing some fantastic technologies. And so that’s what we have been spending the last two and half years doing not COVID testing, COVID testing generated revenues. I look long term. I always tell people.

I believe it is my destiny to build a multi-billion dollar company. I believe that we have the platform and the infrastructure now to do so. We didn’t have that before. And so what the COVID testing did is it gave us that opportunity. The other thing I would point out to you is that when we raised capital with ThinkEquity two and half years ago, we did not take that capital for granted. We used that capital to grow a substantial CLIA lab in New York and CLIA lab business with the COVID and the flu and the upper respiratory testing, we also used that capital to build out all these businesses that I’m going to talk about in the coming minutes, and all of these subsidiaries that we are developing now. And at the end of the day, we still have more working capital now than what they raised for us two and a half years ago.

And so because we executed ThinkEquity and H.C. Wainwright and the other investment bankers that we work with trust us and know that we are here to protect the shareholders and develop the underlying value of our company on behalf of the shareholders. I do not take a single dollar in our company for granted. And so we spent these last years developing these other assets, which now have not only enormous potential but some of them are starting to generate significant underlying value to our company right now. So this year will not be an earning story, it’s nice that we earned a little money in the first quarter. And again, I focus on adjusted EBITDA, because we have significant issues with our net income versus our adjusted EBITDA. I’m sure lots of public companies have this, because of acquisitions we made, between expensing stock options, expensing acquisitions that we depreciate over time even while the value of these assets is growing, there are some issues — we have issues with Nebula Genomics in terms of deferred revenue.

And so there are all these complicated issues. So personally, I like to focus on the adjusted EBITDA. We had a wonderful adjusted EBITDA number in the first quarter. I am not focused this year on earnings, I’m not even focused on adjusted EBITDA. You can bet that our testing, COVID testing and flu testing revenues, obviously, that’s going to slow as the public health emergency is over. Also, we’re going into a seasonally weaker period of time, particularly in the second quarter. We historically have been seasonally weaker in virtually every business that we’re in. So you can expect that the numbers are going to weaken further. But again, we’re not focused on earnings this year, we’re focused on building the underlying value of our company. I’m sure most of the people on this call know our company relatively well.

And I’m not going to read our press release — earnings release this morning to you, but just a couple of items to highlight. I’ve certainly mentioned this on the Renmark calls. I want to make sure we’re all on the same page. We have a manufacturing facility that is at capacity for which we have enormous demand. We are extremely well thought of in the industry. And from a lozenge brand’s point of view, reliability of supply is critically important. The retailers go ballistic and I know this from turning around and selling the Cold-EEZE brand. The number one most important factor to the retailers after having a — they want to carry products on their shelves that consumers want to buy, obviously. But then the second most important factor is they want product on the shelves at all times.

If there is a shelf that is empty, they lose out on profitability. And that’s how these buyers at Walgreens, Walmart, CVS and so forth, that’s what the reviews are based on. It’s making sure that they’re generating profits on every square inch of shelf space. So when there’s a shelf that does not have product on it, the retailers literally freak. And so there are supply chain issues in the lozenges business, which is a rather large business globally. And so we have brands, some of the largest brands in the world are coming to us and want us to do their manufacturing, some of them want us to do all of their manufacturing, not only in the United States but globally. So the potential for a manufactured facility is extraordinary. I originally kept this business primarily just to keep our infrastructure and distribution in place so that we touch all 40,000 food, drug and mass storage in the United States.

But this is a business that’s actually exploding. It’s growing almost a 100% per year. I’ve mentioned in the past that I think we have demand for at least $25 million of revenues next year in 2024, and we’re just constrained by how quickly we can build out the additional capacity, which is going to take this year to do so. So right now, our revenues are running up almost a 100% year over year. And realistically, I’d say $25 million for next year. I don’t give estimates but I’ve already given this number out there, so I may as well continue to do so. $25 million is a reasonable target for next year for a manufacturing facility. It’s the least interesting business we’re developing and even that business has enormous value relative to the market cap of our company.

And that’s going to be an ongoing theme during this call is the market cap of our company relative to the various assets that we’re developing, that have nothing to do with earnings this year. All right. Think about what our manufacturing facility could be worth next year. I estimate in the back of my head, there’s no guarantee, certainly, but I think our manufacturing facility could be worth $70 million next year, whether that’s $65 million or $75 million or some kind of number like that. And then of course, we have $40 million in net working capital, and we have tens of millions of dollars equipment. Forget that we even have a COVID testing or enough for respiratory business or any other business in our lab. Just the equipment itself that we’ve acquired is probably in the tens of millions of dollars.

So we could almost get to a market cap without ever even thinking about our Nebula Genomics business, our Linebacker cancer compound or esophageal cancer test. So I just wanted to give you — or the full clinical lab business we’re building. So let’s talk about a few of those things. We have fully diversified our laboratory to have a full clinical lab and then we’ve also fully diversified it to have a state-of-the-art genomic testing lab. We are waiting for the validations, which will take another couple of months and then we will start to build out those businesses in the second half of this year with our whole genome sequencing business. Right now, we process our specimens abroad. We cannot aggressively build a B2B business until we are processing these specimens in-house.

So we anticipate building a very nice Nebula Genomics business the second half of this year, particularly in the fourth quarter. In the meantime, our revenues are running up more than 100% year over year anyway. So Nebula Genomics, understand there are similar businesses that are far behind us. We’re probably three to five years ahead of some of these other businesses. And yet, they have $50 million and $100 million market caps for these startup genomics businesses. And we believe that we are situated, well situated, to be the low cost provider of whole genome sequencing in the United States and potentially globally. So our Nebula Genomics business, again, right now, we’re only selling direct to consumers. We’re looking to leverage this business in the second half of this year.

I don’t know when, but all of the — several of the major drug retailers are doing tests right now. The tests are going very well. And at some point I believe that we will get our whole genome sequencing test on store shelves like Walgreens and CVS and so forth. And then we have this fantastic B2B business. I’m not going to explain again what personalized precision medicine is, but it is the future of medicine, it’s the future of research and at the heart of it is the whole genome sequencing test. And we expect to be the low cost provider of whole genome sequencing in this country. I believe that, that business is going to grow rapidly. So we are already growing 100% year-over-year. Just imagine the hockey stick acceleration of that growth when our B2B business starts.

And of course, that’s in addition to retail stores. I’m happy in the Q&A, if you have specific questions about Nebula Genomics. It is a very valuable business and I’m looking forward to building it further. Again, we have world renowned experts, George Church and Russ Altman from Stanford University, George Church, of course is world renowned in genomics. They are on our advisory board. We talk to them regularly. We just had a call with them a couple of days ago, and they are really involved in helping us build this business, introducing us to global players in the genomics field. There is just enormous potential. This is where the Internet was 20, 25 years ago. We are so well situated. And so then everyone knows I’m very excited about our esophageal cancer test.

In fact, it’s really kind of mind blowing that we have the market cap we do and we have a cancer test that literally could be commercialized early next year that has the potential of our esophageal cancer test. So I just — it’s interesting. I just happened to note just the other day, there was a company called — actually, I’m going give you a different example first. Exact Sciences has a $12 billion market cap. They have a product called Cologuard, which is a test for colon cancer. We have a test for esophageal cancer. We believe that we are going to have CPT codes and be able to commercialize our test early next year. So just to put that in perspective, if our esophageal cancer test, if we’re 10% as successful as Exact Sciences is, the value of our company would be almost 10 times what it is today.

I just want to put it in that perspective for you. And when you look at our test versus theirs and it’s really apples-and-oranges, because they are colon cancer tests and it’s a test that consumers can take at home. Our test has higher sensitivity and higher specificity. In the 200 specimens that we tested, our test was accurate at all 200 to tell you whether or not you were going to get esophageal cancer. It’s really a remarkable test. We are just looking to do more studies similar to the ones that we have already done. And then we are looking to commercialize this next year. I don’t know what the ramp up looks like but the potential for our esophageal cancer test is enormous, and put it in the perspective of an Exact Sciences, it’s really scary.

And so again, that’s why I go back to, it’s silly to focus on revenues. I say that, I did trip out into the Midwest a few weeks ago and I met with several institutional investors. And they were focused on revenues and earnings. And if you are going to focus on that again, you are invested in the wrong company. We are building enormous value. What you should take away from the last two and half years is that we have yet again executed on behalf of the shareholders. I’ve been investing in small cap development stage companies for 40 years. The one thing I have learned is that 95% of the time the managements don’t execute on behalf of shareholders. This is what we have done, this is all I’ve done my entire life and this is what we are doing right now.

And now we have potential multi-billion dollar assets to develop and execute on. Before they were smaller projects, turning around and selling the Cold-EEZE brand where we sold it for 50 million, that was a huge win for us. Huge. But it doesn’t have the potential of the types of activities that we’re working on now. And then we can talk about Linebacker, and I’m not going to go into too much detail and then I’ll open it up for Q&A. And again, you can go to our Renmark presentations if you want to hear the full presentation on each of our subsidiaries. But on Linebacker, we’re continuing to get really exciting results. It’s one thing when you acquire technologies and you do your due diligence, it’s another thing when you’re actually doing the studies yourself.

And what I can tell you is that unanimously every single scientist, medical doctor, professional in the biotech industry that we are working with on our esophageal cancer test and on our Linebacker cancer compound are truly excited about what they’re working on. Dr. Chris Hartley at Mayo Clinic is so excited. We talk to him on almost a daily basis. He’s so excited about our esophageal cancer test. And Mayo Clinic is not just based in New York or I’m sorry, in the United States, they’re actually — but they also have offices in other places around the world, including in Abu Dhabi. And as you all know, we are developing ties into Abu Dhabi, and I’ll have more to talk about that in the future. So there’s just so much. And if you think about it, what we’re developing with the esophageal cancer, with Nebula Genomics and with Linebacker, these are all initiatives that should be developed around the world.

If we’re going to save lives in the United States, why wouldn’t we also save lives around the world? And so with our esophageal cancer, in particular, it turns out there are other parts of the world, such as in the MENA region, where the incidents of GERD and Barrett’s esophagus are actually higher than in the United States. So there’s just tremendous potential. And so on the Linebacker, as I was saying, we’re getting fantastic results. We recently announced very positive results in some initial studies and analysis that we did with Eurofins. And I’m looking forward to updating our shareholders further in the coming weeks with regard to the studies that we’re doing at Dana-Farber Cancer Institute in the Harvard University Society. So there’s a lot to talk about there.

And so while I gave the example of Exact Sciences and how that potentially relates to our esophageal cancer test, by the same token, I just happened to notice this the other day, there’s a company called Biomea Fusion, BMEA, was stocking last year went from $3 to $30 on some positive Phase 2 results. And in fact in one day, the market value increased by over $500 million. Over that year, their market cap went from $100 million to over $1 billion dollars. I put that in perspective with us developing Linebacker, because it’s interesting. You always want to argue that the market is efficient, but was the market efficient? If this stock was $3 a year ago, now it’s $30. It had $100 million market cap, now has $1 billion dollar market cap, 10 times in one year.

And we are developing assets with the same type of potential. So I don’t really want to focus on stock price, but I do want to let our shareholders know we’re developing assets that have the potential to dwarf the market cap of our company. And that’s why, my suggestion is focus less on revenues and earnings. This is a transition year. I used the word transition in our press release today. Focus on the underlying value of the assets that we’re building, because that underlying value, I believe, is enormous relative to our market cap. And I believe that the long term investors will be well rewarded if you continue to follow our stock. And so that just gives you a little bit perspective on how I’m thinking. I could obviously talk for another half an hour, another hour.

I’m not going to. I’m sure there are going to be some questions in our Q&A. And again, I just want to thank you all for joining me today. And I hope that there are some good questions out there and we can get more into details on some of these various subsidiaries. So with that, Sarah, I would like to hand it over to you for questions.

Q&A Session

Operator: [Operator Instructions] Our first question will come from Fred McDonald, Investor.

Operator: Our next question comes from Hunter Diamond with Diamond Equity Research.

Operator: Our next question comes from Yi Chen of H.C. Wainwright.

Operator: Our next question comes from [Lee Alper] with [Semiconductor].

Operator: There are no questions left at this time [Operator Instructions].

Ted Karkus: Okay. If there are no more questions, Sarah, then I would just like to wrap up and tell everybody thank you for being with me for this past hour. It’s now 56 minutes. I think I covered a lot. Look, there is a lot I can go into. I could spend an hour just talking about each subsidiary of our company. You can get a lot more information if you go to our Web site and look at the new company presentation, which has been updated and goes into much more detail. And of course, we also have the Renmark presentations that you are welcome to join [58.41] [Indiscernible] for Renmark. I want to thank the support of our investment bankers. They have been incredibly helpful in helping our company build. I appreciate your following.

Yi Chen, of course, always and Ashok Kumar, and our latest to follow, Hunter Diamond from Diamond Equity Research. I appreciate that report that you wrote on us. I’m really looking forward to the future. And thank you all for your time and best of luck. Have a great day. And thank you, Sarah.

Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.