Palatin Technologies, Inc.

Greetings. Welcome to Palatine's second quarter fiscal year 2024 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 call 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 Palatin's prospects. Now I would like to turn the call over to our host, Dr. Carl Spana, President and Chief Executive Officer of Palatin. Please go ahead.

Thank you. Good morning, and welcome to the Palatin's second quarter fiscal year 2024 call. I'm Dr. Carl Spana, the CEO and President of Palatin. With me on the call today is Steve Wills, Palatine's Executive Vice President, Chief Financial Officer, and Chief Operating Officer. I'll turn the call over to Steve, and he will give a financial and operating update. Steve. Thank you, Carl.

Good morning. Good afternoon. Good evening, everyone. For Palatine's fiscal, second quarter ended December 31st, 2023. Certain business highlights and recent updates follow. Regarding by LISI, which is our pre-melanotide injection for a FDA approved for a hypoactive sexual desire disorder, or HSDD. We completed an asset sale to CoSET Pharmaceuticals for up to $171 million in December of 2023 for female HSDD. We received $12 million up front, plus potential sales-based milestones of up to $159 million based on annual net sales ranging from $15 million up to $200 million. Importantly, Palatin retained the rights and use of remolanotide for obesity and male erectile dysfunction indications. Regarding other, we had two equity offerings. A registered direct offering in January 30th, 2024, we entered into a securities purchase agreement with healthcare-focused institutional investors, selling and issuing an aggregate of approximately 1.8 million shares of Palatin common stock at a purchase price of $5.46 per share of common stock, which was our market price at the time of the transaction. Palatin also agreed to issue, in a private placement, warrants to purchase up to an aggregate of approximately 1.8 million shares of Palatin common stock at an exercise price of the same $5.46 per share. The offering was completed on February 1, 2024, with gross proceeds of $10 million. The common warrants are exercisable beginning six months after the date of issuance and will expire on the date that is four years after the closing date. Second equity offering was October 23, 2023. We entered into a securities purchase agreement with one institutional investor selling and issuing an aggregate of approximately 2.4 million shares of Palatin common stock at a purchase price of $2.12 per share of common stock. Palatin also agreed to issue in a private placement warrants to purchase up to an aggregate of approximately 2.4 million shares of Palatin common stock at the exercise price of $2.12 per share. This offering was completed on October 24, 2023, with gross proceeds of $5 million. The common warrants are exercisable beginning six months after the date of issuance and will expire on the date that is five and a half years after the closing date. Moving over to our fiscal second quarter ended December 31st, 2023 financial results. Regarding revenue, total revenue consists of gross product sales of Vilesi, net of allowances and accruals. Vilesi gross product sales to pharmacy distributors for the quarter ended December 31st, 2023 were 4.3 million with net product revenue of approximately 2 million. This compared to gross product sales of 2.6 million and net product revenue of 1 million for the comparable quarter last year. Gross product sales for this period, December 31st, 2023 quarter, increased 64 percent, and net product revenue increased 98 percent over the comparable quarter last year. Regarding operating expenses, total operating expenses were $0.9 million net of a $7.8 million gain on the sale of By Lisi, compared to $6.6 million net of a $1 million gain on By Lisi purchase commitments for the comparable quarter last year. The decrease in operating expenses was mainly the result of the gain recognized on the sale by Leacy to Cosette Pharmaceuticals. Moving over to other income slash expense, this net figure consists mainly of the change in fair value of warrant liabilities, which Palatin has recorded as a liability on the consolidated financial statements, including the revisions of certain prior period, excuse me, of certain prior period amounts to correct a misstatement with respect to classifying warrants as equity instead of a liability. The statement of operations is adjusted each quarter to reflect changes in the fair value of these warrants. For the quarters ended December 31st, 2023 and 2022, Palatin recorded a fair value adjustment loss of 8.1 million and a gain of 5.2 million respectively. Regarding warrant liabilities, Palatin has assessed the impact of improperly classifying the warrants related to the October 2022 financing within equity rather than as a warrant liability that is adjusted through charges or credits to the statement of operations to reflect changes in the fair value of the warrants. And we've determined that the impact is not material to any prior period impacted. Accordingly, Palatin will adjust prior periods only as those financial statements are presented for comparative purposes in future filings. On January 24, 2024, Palatin and the warrant holders amended the terms of the warrants related to the October 22 and October 2023 financings. As a result, the $11.9 million of warrant liabilities as of December 31, 2023, will be reclassified to additional paid-in capital upon amendment. So let me give you the concise version. No harm, no foul. There'll be no future adjustments to the statement of operations regarding the warrants starting with the first quarter of 2024 filing and the liability that's on the balance sheet as of December 31st, 2023. will be reallocated to equity. We amended the warrants to characterize it as equity versus the liability treatment. Regarding Palatin's net loss for the quarter ended December 31st, 2023 was 7.8 million or 56 cents per basic and diluted common share compared to income of 2.7 million or 25 cents per basic and diluted common share for the comparable period last year. The change in net loss of the comparable quarter last year was due to several factors. Since the derivative liability accounting took place in the fourth quarter, we have several, and also the sale of Vilesi. So specifically, we had an increase in net product revenue of Vilesi of one million compared to the prior quarter of last year. We had a gain on the sale of Vilesi of 7.8 million And we had a change in fair value of warrant liabilities of $8.1 million of expense in 2023. For 2022, we had $5.2 million of income related to the change in fair value of warrant liabilities. And we had the recognition of an income tax benefit of $4.7 million during the 2022 period. The income tax benefit is related to that very nice program they have in the state of New Jersey for net operating losses. Moving over to cash position, as of December 31st, 2023, Peloton's cash, cash equivalents, excuse me, and marketable securities were $9.5 million, plus we had $2.3 million of accounts receivable compared to cash, cash equivalents, and marketable securities of $5.5 million, plus $1.3 million of accounts receivable as of September 30th, 2023. The $9.5 million of cash, cash equivalents, and marketable securities as of December 31st, 2023, does not include the $9.2 million of net proceeds from the registered direct equity offering, which closed in February of 2024. So pro forma, as of December 31st, January 1st, 2024, we have approximately $18.7 million of cash equivalents and marketable securities. We believe that existing cash, cash equivalents and marketable securities and accounts receivable will be sufficient to fund currently anticipated operating expenses and disbursements into the second half of calendar year 2024. Now I'll turn the call back over to Carl. Carl? Thank you, Steve.

Nice lesson in accounting. As you know, our focus has been on understanding the biology and chemistry of the melanocortin system with the goal of developing selective melanocortin agonists for a variety of medical indications. Our research efforts have resulted in a growing portfolio of melanocortin-based therapeutics. We have three active clinical programs based on melanocortin agonists with multiple new programs ready to advance into clinical development pending resources, all coming from our highly productive research activities. As we have previously reported, we have locked the database and instructed the statistical contract research organization to unblind the data for the PL9643 Melody I Phase III study in dry eye disease. We expect to report the top line data this month. Our Phase II study evaluating oral PL8177, a selective melanocortin receptor 1 agonist in ulcerative colitis patients, is on track for an interim assessment of the clinical data in the first half of 2024. Supporting oral PL8177 development are preclinical studies demonstrating that treatment with oral PL8177 and disease models causes disease colons to improve toward a healthy state and to resolve inflammation. Resolving inflammation rather than blocking it provides the possibility of efficacy coupled with significantly differentiating safety in treating colitis and inflammatory bowel disease. Additionally, research work at Paladin has mapped clear mechanisms of action pathways in melanocortin agonists in supporting the resolution of inflammation. Breakout, our Phase II open-label study evaluating the melanocortin agonists in diabetic patients with kidney disease, is also on track for top-line data in the first half of 2024. So clearly, this is a big half for us, three clinical trial readouts. As far as what is on the horizon at Palatin, I would like to take a minute to highlight two new clinical studies that we are anticipating starting in the first half of calendar 2024. The first is a phase two study evaluating co-administration of remelanotide, a melanocortin agonist with a phosphodiesterase 5 inhibitor. And those are just Viagra, Cialis. So those are the drugs that are currently used to treat rectal dysfunction. This would be in erectile dysfunction patients that have not responded to current therapy. So these are guys that are failing Cialis, Viagra, and so on. This clinical study will support the development program of a combination product, which is the co-formulation of our MCR4 agonist bremelanotide with a phosphatidylglycerase V inhibitor. Just as a reminder, bremelanotide is the active agent in Vilise, our approved product for female sexual dysfunction. All of this work is an extension of our commercial efforts in sexual dysfunction. Just to note, approximately 35% of men with erectile dysfunction fail or have an inadequate response to current therapy and represent a large underserved market. The only treatment options for these failure patients are highly invasive such as direct penile injections or penile implants. We have previously conducted clinical trials showing the synergistic effects of combining bremelanotide with a PD-5 inhibitor as a treatment for erectile dysfunction and feel well-positioned for an efficient and successful development program of this co-formulated product. The second planned study will evaluate a melanocortin-4 receptor agonist in obese patients, taking it glucose-unlike peptide 1 or the GLP-1. And you know those as Monjaro or Govi. These are all over the rage now. These are the current treatments that are being used for obesity. Since drug treatment for obesity is now established and growing rapidly, we believe the treatment goal will switch from driving down weight loss to overall weight management. This will require a variety of drugs with different mechanisms of action that affect weight loss, and very importantly, weight loss maintenance. We strongly believe that drugs targeting the melanocortin system will be an important part of future obesity treatment and weight loss management. With our extensive experience in the design and development of melanocortin agonists for treating obesity, including two clinical studies, completed, and published, we are well-positioned to be a leader in the development of melanocortin-based therapeutics for weight loss and, importantly, weight loss maintenance. The operating highlights for the second quarter fiscal year 2024 are as follows. As Steve noted, we completed the asset sale of Ilesi to COSEP Pharmaceuticals for up to $171 million, with $12 million received as an upfront payment. We are planning on initiating two new melanocortin programs Phase 2 clinical studies starting in the first half of calendar 24 with readout later in the calendar year. And as we noted, the studies are, one, we'll evaluate the co-formulation of remolanotide with a PD-5 inhibitor in ED patients that have failed first-line therapy. And the second, as we also noted, we'll evaluate the addition of a lanocortin-4 receptor agonist, meaning remolanotide, to obese patients taking a CLIP-1 agonist. Our clinical programs also continue to make good advancements for our PL9643 Melody I Phase III dry eye disease study. We should report top-line data this month. The emerging product profile for PL9643 is highly differentiated from current treatments, with excellent ocular tolerability and broad efficacy that we believe will make it a leading treatment for dry eye disease. Our oral PL8177 clinical trial in ulcerative colitis will have the interim analysis in the first half of this year, as will our breakout open-label Phase II study evaluating a melanocortin agonist in diabetic kidney disease. I'd like to thank you for listening to the Paladin Second Quarter Fiscal Year 2024 conference call. You can find additional information on our science and clinical programs on our website, www.paladin.com, and you can find additional information on Vilisi at the vilisi.com website. Steve and I would like to thank you all for participating on the conference call, and we will now open the call to questions.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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, please, while we poll for questions. Your first question for today is coming from Joe Pangenis at HC Wainwright.

Hey, guys. Good morning. Thanks for taking the question. A couple questions first, if you don't mind. Carl, starting at the back end of your comments, I was hoping you could provide me.

Okay.

Hello? It looks like we lost the line. Just one moment.

Can you hear me now? We can, Joe.

Your line is live.

Okay. No idea what happened there because I don't even have a mute on this phone. Not a mute. Anyway, so I was hoping maybe starting at the back end of your comments about providing some level of the mechanistic rationale of combining bremelanotide with a GLP-1 agonist or one of those therapies for weight loss right now about whether it could be the maintenance setting or why those two drugs can really work together for the broader audience.

Sure, I'll try to do it in a simple way. Well, first and foremost, we've done and have presented data on combining a lanoclonal-4 agonist with a GLP-1 agonist, and they work quite nicely together. They work quite synergistically. When you think about it, in part, the GLP-1s have probably multiple mechanisms of how they bring about a patient feeling being satiated and changing their energy use. And part of that is actually through the leptin-melanocortin system. So these things are working in kind of similar pathways. But when you add the melanocortin-4 agonist on top, you get full activation of the leptin-melanocortin pathway. And that's a very key pathway in regulating energy homeostasis overall. And that actually leads us into why it will be also very useful in weight loss maintenance. There have actually been several studies published, preclinical studies published on weight loss maintenance using a melanocortin agonist in animals. And both of those are actually with paladin compounds. And you see very, very nice maintenance of the reduced weight state. And one way to think about this is there are differences in how obese patients respond to various treatments for weight loss. For example, when you're obese, You respond one way when you are losing weight. You respond slightly differently. But importantly, when you get to that weight loss reduced state, you don't always respond the same way to the GLP-1s as you do when you're obese. And you're going to need treatments that effectively leptin melanocortin pathways, things like remelanotide or some of the new compounds that we are bringing forward to actually maintain that weight. And that's really the key here. We can drive a lot of weight loss with the GLP-1s and the other incretin therapies, but we really need to keep these patients at a reduced weight if you want to have long-term benefits. So if you think that the weight loss market is huge, the weight loss maintenance market is probably dwarfs it because these patients are going to be on treatment for many, many years. So that's why we're very excited about where we stand and really the biology and the science behind targeting the leptomelanocortin pathway for weight loss maintenance is pretty compelling.

That's a helpful summary. I appreciate that. So I have a specific question, which will then segue into sort of a broader strategy question. So when you look at the upcoming 8177 ulcerative colitis data, you have interim data coming up, or I'm sorry, an interim analysis coming up, which is part of my question. What is your communication strategy around the interim analysis? Is this a, you know, just a continuous plan type of announcement that we hope to see, or will you be providing any data?

No, we'll provide, we're trying to be transparent, so we'll provide the data that we have, you know, and to the best of our ability are, you know, how we see it playing out from the interim analysis to the final analysis. You know, our goal here is to, we do want this out in public because one of our key goals is to, you know, to continue to work with the people that are interested in licensing this product, so we want to make sure that it's out there and people understand where we're going in the ulcerative colitis space.

No, perfect. And then with us having saying ulcerative colitis, I said going to the broader question and strategy, you know, when you look at the indications that you guys are addressing overall with your different assets, you know, these are very large markets. So I guess, you know, as of today, you know, how do you view your business development strategy? You know, because they're very large markets, you know, are you looking at, you know, the potential for global, regional, you know, when you're balancing against, you know, your current cash needs?

Well, you've hit it on the head. Let me backtrack for a second. I'm talking a little bit faster, or thinking faster than I'm talking. When it comes to ulcerative colitis or dry eye disease, our goals for those are really to partner those programs. They represent very large markets, but in the case of dry eye disease, we have multiple larger, assuming success with 9643, there are still several phase three trials that have to be done, plus all the commercial manufacturing. And that really, in today's world, is more of a commercial market, a consumer market. So we really like to see that product, assuming success, in the hands of a larger company that's going to eventually market it and has the ability to do the outreach there. And that's not really what Paladin plays. Steve will tell you, he learned a tremendous amount about marketing to consumers through Vilesi. And it's expensive, and it requires a very consistent effort. And that's not kind of how Paladin is set up, and certainly not with the resources we currently have. Again, with ulcerative colitis, medical need is extremely high, but again, a competitive marketplace, meaning there are lots of therapies out there competing for patients for the larger trials and then for voice in the commercial sphere. With that being said, the need is very high. Believe it or not, that's one of the programs that, even in its early stage, has a huge amount of corporate interest already. And then again, when we think about where we want to go with regards to the obesity and erectile dysfunction, the erectile dysfunction one is an area we know extremely well. We've studied thousands of patients there. It's one where a company of our size can probably make good headway, meaning that we know how to take it. We know how to get it into commercialization. And there are already distribution channels available and there's high awareness among patients. So that's one where we would probably try to keep longer because it's one where we can conceptualize, you know, thinking about, you know, assuming things go well for us, commercializing it. Obesity, the market is hot. And I think, you know, we're trying to position ourselves, which in particular is in that weight loss maintenance and then in the supplementation or the adjunct therapy, the GLP-1s, Those are novel spaces where people aren't thinking about them. I think very shortly they will be, and I think we'll be in a great position to monetize our early assets there relatively quickly.

Got it. Appreciate the call.

And Steve, actually, Steve has a business development people directly reporting to him and is really on top of all the business development activities that we're doing and making sure that they're getting done.

Got it. Appreciate it, man.

Your next question for today is coming from Michael Higgins with Lattenburg-Zellman.

Thanks, Dr. Green. Good morning, guys. How are you?

Hello, Michael. Hi, Mike.

Glad you can hear me all right. Congrats on the quarter. Looking forward to seeing Melody's data readout here in February. Wondering ahead of the data here what you would consider to be a clinically meaningful threshold from this readout, whether it be signs, symptoms, or both, what is beyond the that SIG that you may feel is important for its commercial value?

I think the, you know, in tri-I disease, the FDA does not require, you know, they only require a statistically significant endpoint. And with regards to the signs, there really aren't, the only thing the FDA accepts for signs outside of tier production is a complete resolution of the disease, which is unrealistic. Really, what we think about, it's really on the symptom side, which is really more important, because that's really what affects the patient. The signs of dry eye disease, the staining results, patients don't understand that. It doesn't really mean anything to them. So on the symptom front, you'd like to see a 10-point change, 10-point difference between vehicle and active. That would be clinically meaningful change. So that would be a really nice response for us if we could top 10 points on the scale.

We hope to see that, too. Thanks for that detail. And ahead of this, we don't want to hold you to it, but just to get your sense for timing for additional data. Obviously, you'll have a very busy first half of the year. Is there a chance you can get additional data out at conferences? How do you expect to give us a bit more than the top line we're going to see here this month?

Sure. I think there are a lot of Ocular meetings throughout the year. Assuming positive data, we'll have presentations at every one of the upcoming OCULA meetings. Again, positive data will go to the ARBO, which is in the, we've missed a date there, but we'll go for late breaking if it's good. So we'll keep a very good flow out on the data.

That'd be great. Look forward to that. And then switching over to breakout, any feedback you can give us as to what type of data we'll see when you do read that out for us?

Yeah, I think there's just an open-label study. You know, it's a single-dose study. It's really a supportive study because people realize that we haven't had a chance to talk about it, but we're actually in the final stages of selecting actually an orally active small molecule that targets the M0-1 receptor. So this is really a study that was kind of set up for that. It's an injectable study. But what we expect to see is really a drop in proteinuria and the creatinine protein ratios change. These patients don't really spontaneously, they don't spontaneously remit. So any change you see, any improvement you see is going to be really due to the drug activity. They don't get better, they just progressively get worse. So one of the reasons why we chose the indication, although the disease progresses relatively slowly, It doesn't have spontaneous remission, so you can do an open-label study. And if you see effects on, you know, kidney function, they'll be most likely really pretty much due to the drug.

Right. Yeah, that makes sense. Look forward to seeing that. And then on the obesity and ED programs, have you met with the agency to discuss trial designs yet? I'm not clear on that thing.

For the ED1, neither have been submitted yet. We haven't opened up INDs. We're going to probably run the ED study for expediency as a physician-sponsored trial. We have... We have clinicians that were involved in the early days working with us in the early development of remelanotide that are very urologists, and they have some large practices that can really get us a lot of patients very quickly. So that will be probably run, as I said, as physician-sponsored IND. We should be submitting, I think, the IND or the pre-IND request to the agency by the end of this month for the obesity study.

Interesting. And then a follow-up on the obesity question. I believe your phase two on this would be with BNT, but your phase three would be kind of a BNT XR version. Is that right?

So we have, so we've been using the brimelanotide as a test molecule for adding extended release onto all various peptides across the board. And it's been working very, very well. So we can extend brimelanotide quite nicely. The overall program, although it's really being used as a proof of concept, we will go forward and we'll be having a little bit more information out on this probably in the second quarter of the year, of this calendar year. We have novel compounds that really are highly selective for the melanocortin-4 receptor. So they have a much cleaner profile than brimelanotide does, and they're much more suited for long-term chronic use. And also the receptor profiling for long-term obesity treatment. So in other words, the degree of, I don't know, let me not go through that prior to this standpoint. But how you interact with the receptor should maybe be a little bit different than brimelanotide. So one of the things that, again, not to bore the lay people that are listening, is that we have a tremendous understanding of the structural function relationships with regards to all the various melanocortin receptors and their peptide agonists. And we're able to dial in a degree of activity that we think is probably really ideal for an obesity treatment. And that's what you're going to see going forward towards the phase twos and the eventual phase three studies.

Yeah, these are really exciting programs. So your expertise in this, we're looking forward to seeing in greater detail. So thanks for that. That's it for us for now. Congrats again. Thanks, Matt. Thanks, Michael.

Your next question for today is coming from John Newman with Canaccord.

Hi, guys. Thanks a lot for taking the question. Carl, so I just had a general question about the dry eye program rather than getting into the data details. You know, we've had several dry eye products approved, and I know that sometimes the endpoints can be hard to use in order to gauge results. the effectiveness and success of the product, but I wonder if you could talk more about how you believe 9643 could be differentiated from some of the other products in the market, maybe on the safety side as well as efficacy. Thanks.

Well, John, I think you hit it. Your last statement kind of hits it. I think at the end of the day, most of the treatments that are approved for dry eye disease have tolerability issues. Safety in these treatments are pretty good. You're giving a small amount of drug topically, so there's not an overall large concern about systemic effects. So it's really about the patient acceptance and tolerability in long-term use, and that's what's really plagued a lot of the drugs that were in the market for a long period of time and are coming into the marketplace. PL9643 has really excellent ocular tolerability and safety, so that would be a very key differentiating factor a comfortable installation without itching and tearing and burning or feeling goopiness or off-taste and things of that nature is really key for a product like this because, as I said, it is very consumer-driven. So that's a key important factor. I think one of the things I'd like to kind of distinguish is in the dry ice space, we see different types of products, right? So a product like 9643 really is trying to address the underlying disease. So we're trying to modify the disease condition and through that have an overall effect on the corneal surface health and then how the patient perceives their disease, so either symptoms improving. That's a little bit of a much more difficult challenge than agents that are what I would classify just really symptomatic treatment. In other words, i.e., they just drive a short-term tearing of the eye that maybe can alleviate symptoms over a relatively short period of time, but don't really have long-term benefit in treating dry eye disease. So there's another distinct factor there. Again, assuming success, we're likely to be having that success because we're really modifying the underlying disease, not just addressing a symptom.

Great. Thank you.

We have reached the end of the question and answer session, and I will now turn the call over to Carl for closing remarks.

Thank you. Steve and I would like to thank everyone for participating on the call, and we'd like to thank our analysts for the very insightful questions that they asked. It helps us to, Steve and I, to more or less illuminate what we're doing here. So, again, thanks, everyone. A big half for us, obviously, a big month for us, so we're looking forward to the data, and take care, and we'll catch up with you soon. Thank you.

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