Palatin Technologies, Inc.

Welcome to Palatin's third quarter fiscal year 2023 operating results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Before we begin our remarks, I would like to remind you that statements made by Palatin are not historical facts and may be forward-looking statements. These statements are based on assumptions that may or may not prove to be accurate and that the actual results may differ materially from those anticipated due to the variety of risks and uncertainties discussed in the company's most recent filings with the Securities and Exchange Commission. Please consider such risks and uncertainties carefully in evaluating these forward-looking statements by Palatine's prospects. Now I would like to turn the call over to Dr. Carl Spana, President and Chief Executive Officer of Palatin. Please go ahead.

Thank you, good morning, and welcome to the Palatin Third Quarter Fiscal 2023 Call. I'm Dr. Carl Spana, CEO and President of Palatin. With me on the call today is Steve Wills, Palatin's Executive Vice President, Chief Financial Officer, and Chief Operating Officer. I will now turn the call over to Steve, and he'll give the financial and operating updates. Steve. Thank you, Carl.

Hello, everyone. Regarding financial highlights, I'll start with Vyleesi, and Vyleesi is our FDA-approved commercial product for premenopausal women with hypoactive sexual desire disorder, or HSDD. The goal of the Vyleesi program is to demonstrate commercial product value in the marketplace with an objective of licensing the U.S. rights to a committed women's healthcare company. For the third quarter, and in March 31, 2023, Gross product sales were $3.4 million, an increase of 31% over the prior quarter, and an increase of 165% over the comparable quarter last year. Net product revenue of $1.2 million increased 16% over the prior quarter and increased 453% over the comparable quarter last year. Total prescriptions dispensed increased 27% over the prior quarter and increased 147% over the comparable quarter last year. We have achieved five consecutive quarters of double-digit growth. Refill rates, commercial insurance reimbursement, and net revenue per prescription dispense continued with positive and impactful results and trends versus the prior quarter and comparable quarter last year. We are particularly pleased that Vileci's quarterly net product revenue exceeds Vileci's quarterly operating expenses. Yep, that means we are not losing any money on Vileci. Also, we were issued a patent titled Use of Bremel Anitide in Patients with Controlled Hypertension with a term through April 29, 2041. Regarding other Palatin did receive $4.7 million in January 2023 from the State of New Jersey's Technology Business Tax Certificate Transfer Program sponsored by the New Jersey Economic Development Authority. Moving over to the actual financial operating results for the third quarter ended March 31, 2023. Regarding revenue, total revenue consists of gross product sales of by leasing, net of allowances and accruals, and license and contract revenue. I covered the V revenue, ILECE revenue numbers prior. Regarding operating expenses, total operating expenses were $8.5 million compared to $8 million for the comparable quarter last year. The increase in operating expenses was mainly the result of higher spending on our marketing efforts of ILECE. Regarding cash flows, Palatin's net cash used in operations was $1.4 million compared to net cash used in operations of $9.5 million for the same period last year. The decrease in net cash use and operations is mainly due to the company's receipt of proceeds from the state of New Jersey, NOL, stands for Net Operating Losses, and working capital changes for the quarter ended March 31st, 2023. Regarding net loss, Palatine's net loss was 7.1 million, or 63 cents per basic and diluted common share, compared to a net loss of 7.6 million, or 80 cents per basic and diluted common share, for the comparable quarter last year. The decrease in net loss of the comparable quarter last year was mainly due to an increase in net product revenue by LISI of $1 million, offset by an increase in operating expenses of approximately $500,000. Regarding Palatine's cash position, as of March 31st, 2023, cash and cash equivalents were approximately $19.6 million, plus approximately 1.7 million of accounts receivable. This was compared to cash and cash equivalents of 21.2 million with 6.5 million of accounts and other receivables as of December 31st, 2022, and 29.9 million with 1.8 million of accounts receivable as of June 30th, 2022. Based on our current operating plan, we believe that existing cash and cash equivalents and receivables will be sufficient to fund currently anticipated operating expenses through calendar year 2023. And I'll turn the call back over to Carl.

Thank you, Steve. At Palsum, we were focused on establishing the melanocortin system as a target for safe and effective medicines to treat inflammatory and autoimmune diseases and to develop a pipeline of highly effective drugs with unparalleled safety. Through research in our laboratory and in collaboration with academic thought leaders, We continue to advance our understanding of the melanocortin system, identify opportunities for novel, innovative therapeutics. Our research efforts are helping us to design better clinical trials and are becoming a key support for our business development activities. We have three active clinical programs based on melanocortin agonists developed from our research. In addition, we have two new ocular programs ready, pending resources to begin the activities required to start clinical studies. We're actively enrolling patients in the following clinical trials. MELDI-1, a phase 3 study in dry eye disease, a phase 2 study evaluating oral PL8177, a selective melanocortin-1 receptor agonist, and also colitis patients, and breakout, a phase 2 study in diabetic patients with kidney disease. We anticipate all three clinical studies will have data readouts in calendar 2023. Moving on to some of the highlights for the third quarter. But at least it continues to show impressive growth. As Steve mentioned, five quarters of double-digit increases in all key metrics, and we anticipate this growth will continue. We continue to make significant progress in establishing the melanocortin system as an innovative target for therapeutics to treat a variety of inflammatory diseases. And as I said, we are enrolling patients in three clinical studies. Our ocular programs continue to make some impressive advances this quarter. We are very excited by the emerging product profile for PL9643, are monocortin-based therapeutic for dry eye disease. PL9-643 is highly differentiated from current treatments with excellent ocular tolerability and broad efficacy that we believe will make PL9-4-3 the leading treatment for dry eye disease. We presented data from the analysis of the lead in population of the PL9-643 MELODY-1 phase three trial at the annual meeting of the Association for Research in Vision and Ophthalmology. PL9-643 demonstrated broad efficacy with statistical separation across multiple signs and symptoms of dry eye disease, and an excellent ocular tolerability and safety profile with no ocular adverse events. This analysis was important, allowing us to confidently set the primary sign and symptom endpoints, hierarchical ordering of secondary endpoints, analysis methods, and sample size for the double-blind segment of the MELODY-1 phase three trial. We also hosted a key opinion leader event for investors where the very exciting data from Melody I Phase III trial was presented. If you've missed this event, a link for the replay can be found on our website. We also presented data at Arvo on PL9588, a melanocortin-based treatment for glaucoma. In a preclinic rapid studies, PL9588 showed competitive effects on intraocular pressure with a single topical dose lowering intraocular pressure with a magnitude similar to or greater than the positive controls with Tanoprost and Timolol, with the effect lasting up to 24 hours. This important program is now ready to advance into pre-IND activities on the way to clinical trials. Our non-ocular melanocortin programs also made significant advances with multiple presentations at scientific meetings and publications in peer-reviewed journals, as well as continuing to enroll patients in Phase II trials. Our expertise in the melanocortin system and our innovative clinical programs are supporting our business development activities. Discussions with potential partners for our programs has increased, and we remain optimistic that we will enter into one or more partnerships to advance our programs. I'd like to thank you for listening to the Paladin Third Quarter Fiscal 2023 Conference Call. You can find additional information on our science and clinical programs on our website, www.paladin.com. You can also find additional information on Valisi at the valisi.com website. Steve and I would like to thank you, and we'll now open the call to questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Your first question for today is coming from Joe Pangenis at H.C. Wainwright.

Hey, guys. Good afternoon. Thanks for taking the question. So first I want to start with by Lisi. So nice to see the continued early traction here. So just curious, what is the percent inventory that you're usually keeping, you know, percentage in the distribution centers, and what are your current – plans to improve your, or ongoing efforts to improve your gross to net at this point?

Hey Joe, it's Steve. Thanks for the question there. The way our distribution is set up, we actually only have one specialty pharmacy called Nipper. So we actually sell to the Nipper 3PL and then the Nipper 3PL, if you will, sells to the pharmacy. We do a, what I believe, a very good job of making sure our dispenses for the month, the quarter, pretty much match up with the sales, which is how we actually report it. So for the first quarter, March 31st, 23, we had prescriptions dispensed of a little under $4,000 for the quarter. And that's pretty much what we had that we had sold to the 3PL. So there's just a point or two difference in that regard. To sum it up, we have virtually nothing in the distribution chain that's not already been sold.

Yeah, go ahead. Sorry.

So part B of your question is, what else are we doing? Well, our strategy, as we've been very clear, we're not looking to put significant numbers of salespeople, feet on the ground, if you will, Our target is to do a very informed and measured digital social media campaign. We spend a lot of time trying to make sure we have the right algorithms, if you will, for when patients are searching for this condition and a treatment option that they land on YLC. We do have a few sales folk, but they're mainly inside and remote, albeit they do do a little bit of traveling. So we're going to continue the digital and social media. Since our metric is to show value, have somebody be able to, upon review, get very comfortable that they can extrapolate the numbers based on what we're doing, we think we can do that. We can show that. It's been successful from our target model standpoint. Five consecutive quarters of double-digit growth. That's both at the net sales level and also with prescriptions dispensed. We are increasing demand, but that's not our top metric. Our metric was to make sure we got significant insurance coverage, making it as accessible to the patient as possible. We now have over two-thirds of all our dispensers are covered by insurance. Three-quarters of those dispensers, the patient actually pays zero. So we think we have some very robust insurance coverage in that regard. So we're going to continue the path, Joe, which is increasing demand a bit, making sure that our net gross to net number is good. And we're now into the position where we're not losing any money on Pileci. And looking forward to the time when someone sees the value that we've had yield, and we end up doing a licensing collaboration or sale of the asset at some point in the future.

Great. I appreciate that caller. So, you know, my second question, I'm going to hop over dry eye because you guys just recently held a KOL event on that. So, I'm going to ask a quick question on 8177 for ulcerative colitis. So, just curious, when you guys announce later this year the first data set, what kind of metrics are we going to be potentially given?

So, Joe, this is Carl. So, this is predominantly a proof of concept study. And it's really done by imaging. So it's a colonoscopy, and we're looking at biopsy and reduction of inflammation and damage to lesions. So it's a simple Mayo score. You also get additional things like reductions in bloody stools and other common metrics that are used in these studies. But predominantly, this is really a study that's really looking for direct evidence of the reduction of the inflammation and damage that's occurring in the colon.

Great. Thanks, guys.

Your next question for today is coming from Michael Higgins at Lattenburg-Salmon.

Thanks, Edward. Thanks, guys, for taking the questions. Congrats again on all the pipeline progress this spring. You've certainly kept us quite busy. And thanks for putting together the KWEL event. It's very helpful. Not much new in the press release here. We do have two questions. The first will fall along the lines of Joe's thinking on what we're seeing here, the allowance for product returns. We're seeing it as a relatively high percent of gross sales seems to be sticky there despite the time since launch. Certainly, it accounts for potential returns, may include expiration dates as well as potential overstocking, of course. So, surprised to see the rate on gross sales remain so high for so long, just trying to get an understanding of why that is. And then more importantly, when it might come down, does that will accelerate the reported net sales? Thanks.

Yeah, Michael, I'm not sure I'm following your question regarding the stickiness or the gross sales. It actually is we're increasing every quarter the gross sales. The net sales are increasing for the most part every quarter, hence the double-digit growth. We have very little allowances for returns because we don't have much from a return standpoint. So if you could clarify the question, A bit more, I'd appreciate. But again, we have our gross net sales every quarter. The spreads are getting better other than the first quarter. We did have a lower yield for net sales for the first quarter, but that was 100% attributable to the first quarter, the insurance. reimbursement was not as high, and that's primarily because of the deductibles that normally head in the first quarter, first half of the year. And as I look at the second quarter, we're back up to where we were prior.

Sure. The allowance for product returns is an accounting measure that's been used for all product launches, and it provides the investors or anyone, I guess, some insights from the accountants into the what potentially may be returned. And it's highly regulated. It's something that's not something that's very subjective. But it comes directly from dating and then also just returns what's coming back. A pharmacy may oversubscribe and then it goes back. Usually that wears off after the first, say, 12 months. But we're past that now. So seeing it still up there is a bit surprising. We've not modeled it. We're pretty conservative in that. But eventually that drops. Here, so far, we're about 75% of gross sales is along to product returns. We're at this stage of the launch. Typically, it's below half. So at some point, that should turn, and when that does, that hits net sales. It's a great accelerator. So we're just trying to gauge when that might come. Thanks.

I can help you when it might not come. It's not going to come. The data that you're referencing is not accurate, 100% not accurate. We have zero – In the channel, the 3PL that we sell to, they pretty much just buy what they need for the week based on the sales that are going to be going over to the pharmacy. And we're able to do that since we only have one pharmacy. And from a distribution standpoint, we have one 3PL. And they're both housed in the same industrial park, which is Nipper. So I couldn't stress any greater. I have no problem with stating that that information is 100% inaccurate. We do not expect, anticipate any significant allowances coming back. There's nothing in the channel to do that, and we actually have very, very low patient returns of the product.

Yeah, I'm just seeing the 10Q this morning, so I'm referencing that, but I appreciate the feedback there. Carl, one question for you. We're seeing a lot in the monocortin pipeline advancing, of course, in ophthalmic conditions. You've expanded into ulcerative colitis, diabetic nephropathy. Bylesia, obviously, is approved in female sexual dysfunction. We're just wondering about the potential in obesity, given the rationale there and some success with line-of-court agents. Thanks.

Sure. Michael, we've had conversations about this before. Clearly, obesity, MCR4 and obesity is very near and dear to the company and certainly to my heart. We've done a lot of research work there. And we are certainly, in light of the expanse of the GLP-1 inhibitor class in the marketplace and the potential multi-hundred, well, hundred-plus billion-dollar market there, we are certainly actively looking at our options in that space. Our belief is, based on our research work and very recent discussions with prescribers of the GLP-1, that there is a very key and important role for melanocortin agonists in the treatment of obesity. And we're evaluating that, and I would suggest that you'll hear more about it in the upcoming quarters as that plan comes into finalization. But we are very interested in that, and we do think it's a phenomenal opportunity.

Awesome. Appreciate the feedback. Thanks, guys.

Once again, if there are any questions, please press star 1 on your telephone keypad. We have reached the end of the question and answer session, and I will now turn the call over to management for closing remarks.

I think Steve would like to make a quick statement.

Yeah, I just, regarding Michael Higgins' question on the allowance and the accruals, what he's actually referencing is in our 10-Q, specifically on note, in the first notes, note three, we break out between gross sales to net sales. So actually for the three months ended March 31st, 23, gross sales were 3.4 million, net sales were 1.2 million. The difference is what it costs us to go from gross to net. We have a whack of $899, but we have to pay fees to the pharmacies, fees, reimbursement, if you will, to the PBMs, to the various insurance coverage, and all the other very standard and customary expenses that you have when you go from gross to net. There is 100%, very little, if none, no charges related to allowances that come back. And actually, if you look at our March 31st, 2023 quarter, the net sales as a percentage of the gross sales actually increased. The provision for all the various expenses was approximately 80% in the first quarter of March of 22. and it's now down to 65% for the first quarter of 23. Very significant increases, all positive. So I just wanted to clear that up if you didn't mind. Thank you. Carl?

Thank you. So I'd like to thank everyone for participating in the third quarter fiscal 2023 call. Steve and I couldn't be more excited about what we're doing. It was a tremendous quarter. with progress in all the programs. I think we really seem to be hitting it pretty well right now, and we're quite enthusiastic about the future and what the rest of the year is going to bring. So with that being said, thank you all for participating. Steven and I would like you to have a great day, and we look forward to continue updating you on our progress and on the rest of 2023. So thank you.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.