Aytu BioPharma, Inc.

Good afternoon and thank you for joining us today for the Aytu BioPharma financial results and business update call for the fiscal third quarter ended March 31st, 2021. With me this afternoon are Aytu's chairman and chief executive officer, Josh Disbrow, and chief financial officer, Richard Eisenstadt. Aytu BioPharma issued a press release earlier today with the details of the company's operational and financial results for the fiscal third quarter. Thank you for joining us. and Safe Harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations and future potential operating results of Aytu BioPharma. Although management believes these statements are reasonable based on estimates, assumptions and projections, as of today, May 17, 2021, these statements are not guaranteed of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of certain risks, uncertainties, and other factors, including but not limited to the factors set forth in the company's filing with the SEC. ATU undertakes no obligation to update or revise any of the forward-looking statements. I'd now like to turn the call over to ATU's CEO, Josh Disbrow.

Thank you, Devin. Good afternoon, everyone, and thanks for joining us today. This quarter, we accomplished many key milestones as we continue to grow our commercial portfolio of prescription therapeutics and consumer health products while also pursuing the expansion of our late-stage development pipeline with a focus on the underserved pediatric population. Notably, we closed our merger with Neos Therapeutics, which has transformed Aytu into a pro forma $100 million annual revenue specialty pharma company with an enhanced footprint in the pediatrics and adjacent specialty care segments, now with the addition of Neosys 3 ADHD branded products at Xenis XR ODT, Cotempla XR ODT, and at Xenis ER. In addition to expanding our portfolio with these products, which I'll touch on shortly, we also expect the merger to result in annual operating cost synergies of approximately $15 million in fiscal year 2022. We've now begun the integration process and realization of these expected synergies, particularly on our commercial and general and administrative processes and organizations. Subsequent to the end of the quarter in April, we also acquired a late-stage pediatric onset rare disease pipeline asset and brought on the executive team from Rumpus Therapeutics. This acquisition fits within one of our key goals, which is to complement our pediatric-centric commercial portfolio with a novel product pipeline that can be efficiently progressed, serves to address areas of significant unmet medical need, and supports the company's future growth potential beyond the current commercial portfolios. Additionally, this quarter, we continue to make strides with HealLight, the UVA light catheter technology license from Cedars-Sinai Medical Center, and the completion of a pilot study in SARS-CoV-2 and the preprint publication of that study. In subsequent to quarter end, we announced the preprint publication of an in vitro study demonstrating a potential mechanism of action of the UVA light that may lead to the technology's demonstrated antiviral effects. During the quarter, we took a significant step in refining our focus on building a leading pediatrics company by divesting Natesto. We've returned all US rights to Natesto to Aceris Pharmaceuticals in exchange for $7.5 million in cash paid out in equal installments of $250,000 over 30 months. Through this divestiture, we are now able to allocate our commercial resources on the Rx side of the business to the ADHD and pediatric brands and fully establish ourselves as a pediatric-focused company. Rich will go into more detail shortly on the financials, but I want to take a moment to touch on revenues and our cash position. Net revenue for the quarter was $13.5 million compared to $8.2 million for the same quarter last year. This growth was mainly driven by our consumer health division, which had had multiple product launches and growth of the e-commerce channel, notably growth of our OTC Monograph products, OmepraCare, Regoxidine, and Fluticare. While we saw somewhat more modest net growth in our RX division, I want to stress that these numbers include revenue contribution for the NEOS legacy business only for the period between March 19th and March 31st of 2021. So the next reported quarter will represent our first quarter of fully integrated revenue. We ended the quarter with $46.8 million in cash, cash equivalents, and restricted cash, and that's after having paid down $15 million in principal on the NEOS term loan held by Deerfield. Turning to our commercial products, RX revenue growth was largely driven by growth in Aytu's heritage pediatric portfolio led by Polyviflor, our multivitamin and fluoride supplement product line. With the close of the NEOS merger, on the RX side of the business, we added core complementary ADHD products, Adzenis XR-ODT and Cotempla XR-ODT, to our pediatric-focused portfolio. Not only are these growing brands, but the accompanying sales team we're bringing on further enhances our footprint in pediatrics while also expanding our presence in adjacent specialty segments. We expect this will enable increased promotional opportunities for Aytu Heritage products while continuing the growth of the core ADHD brands. As we integrate the two companies' Rx portfolios, An important initiative for us is to integrate the Aytu Heritage products into the NEOS RxConnect pharmacy network and patient support program, which we're renaming Aytu RxConnect. This program was developed by NEOS to improve patient access to ADHD brands through an improved patient and physician experience of predictability and consistency in getting prescriptions filled at a consistent, predictable price for patients. In our diligence leading up to the NEOS merger, we observed the benefits that the RxConnect program brought to the ADHD brands, and viewed RxConnect as a key element that should drive growth across our Rx portfolio, specifically including the Aytu Heritage brands. So with all the brands getting integrated now into RxConnect, we expect to drive incremental product growth. On the consumer health side of the business, our over-the-counter medicines include OmepraCare, our OTC private label proton pump inhibitor for acid reflux, which competes with CryoSec, Regoxidine is our private label OTC foam formulation of Minoxidil, competing with Rogaine for hair loss, and Fluticare is our private label Fluticasone propionate nasal spray, which competes with Flonase. E-commerce remains a strong channel on that side of the business, and we believe these products continue to have significant growth potential. And by virtue of being sold through our e-commerce channels, these products can be sold efficiently with a lower marketing spend. We expect to see continued trajectory of our three core OTC medicines and expect to launch new products that compete with national brands as lower cost alternatives. We are planning additional product launches to continue to build scale on the consumer health side. Our direct consumer business also continues to drive revenue scale through a diverse range of consumer health products. We expect to launch multiple dietary supplements, OTC monograph products, and cosmetics through this channel through the second half of this calendar year. Turning now to our pipeline. HealLite is our first-in-class UV light-based antimicrobial catheter investigational device. We have a worldwide license from Cedars-Sinai Medical Center for all nasopharyngeal and esophageal applications for HealLite. Last week, we reported that in vitro data was published in BioArchive. The manuscript concluded that UVA light increases the expression of mitochondrial antiviral signaling, or MAVs, protein within cells. And the results suggest that this transmission of an increase in intracellular MAVs involves cell-to-cell communication. These findings confirm that an increase in MAVs in response to UVA light can be transmitted from cells directly exposed to UVA light to neighboring cells that have not been directly exposed to UVA light. and suggest further that cell-to-cell signaling is involved in the process of eliciting HealLight's antiviral effect. These findings are important as they indicate that the wavelength and form of light delivered via the HealLight device may not need to directly hit infected cells to have an antiviral effect against viruses like SARS-CoV-2. In March, we reported data from a first-in-human, open-label clinical trial in SARS-CoV-2 patients. The data show that endotracheal UVA light treatment was associated with a significant reduction of SARS-CoV-2 viral load and improvement in clinical severity scores. Additionally, the endotracheal UVA light treatment did not result in any serious adverse device effects and was well tolerated. The data was published in MedArchive, and a manuscript has been submitted for peer review. We plan to initiate a phase two trial of HealLite in COVID-19 in the second half of the calendar year and to continue discussions with the FDA and other regulatory agencies regarding the advancement of our HealLite UVA light catheter technology. The potential commercial opportunity is large here, with applications going well beyond COVID-19. Ventilator-associated pneumonia, severe influenza, and other difficult to treat respiratory infections represent large market opportunities, and we're eager to fully explore HealLite's full potential. Turning now to our newly acquired product candidate. In April, we announced the acquisition of a global license to AR101, or enzostorin, a pivotal study-ready therapeutic candidate initially targeting the treatment of vascular Ehlers-Danlos syndrome, or VEDS. We acquired this potential VEDS treatment from Rumpus Therapeutics, a privately held biopharmaceutical company focused on the treatment of pediatric-onset rare and orphan diseases. VEDS is a rare genetic disorder typically diagnosed in childhood and characterized by arterial aneurysm, dissection and rupture, bowel rupture, and rupture of the gravid uterus. There are currently no FDA-approved treatments for VEDS, and the unmet need is massive. On average, VEDS patients don't survive past their 51st birthday. We expect the AR101 EnzoStorm Pivotal Trial to get underway following the completion of the Pivotal Study Protocol and submission of an IND application in the second half of this year. We continue to identify additional growth drivers and target acquisitions while focusing on streamlining our operations and driving annual revenue growth through a commercial model focused on growing sales and gaining G&A synergies across our business segments. To that effect, in April, and as alluded to earlier, we announced an agreement with Aceris, whereby Aceris acquired all remaining rights to Natesto in the U.S., will receive $7.5 million in consideration, which is payable in 30 equal monthly payments of $250,000, which began in April. We also grew our leadership team, hiring three new executives. In April, as part of the AR101 transaction, we added Rumpus Therapeutics co-founders and principal executive officers, Topher Brook and Nate Massari, as executive vice presidents. They will be responsible for the AR101 program and the development of our pediatric onset rare disease pipeline. We're very eager to draw from their deep experience in rare disease business and product development and commercialization. And we appointed Rich Eisenstadt as CFO. Rich is an accomplished pharmaceutical industry executive with more than 20 years of experience in leading finance and accounting operations, supporting clinical development and commercialization, and raising capital within the life sciences sector. Welcome, Rich. We're excited to have you on board. And with that, I'll now turn the call over to Rich for some additional financial highlights. Rich?

Thank you, Josh, and thank you all for joining us. We ended the quarter with $46.8 million in cash, cash equivalents and restricted cash following the $15 million principal payment to Deerfield that was part of the NEOS merger. Following that payment to Deerfield, only $15 million in principal remains outstanding to Deerfield, payable in May 2022. We're now in the process of post-merger integration following the NEOS transaction. We had previously announced that we anticipate synergy savings of $15 million annually beginning in fiscal year 2022, and the process of beginning to realize these savings is well underway. That revenue for the quarter ended March 31, 2021 was $13.5 million compared to $8.2 million in the same quarter last year. The company continues to increase sales through organic product growth, and Field Realization of its recently completed transactions. Net revenue from the consumer health division was $8.4 million, a record for this division, an increase from $3.5 million in the same quarter last year, which reflected results only for the period beginning February 15, 2020, following the close of NFS consumer health acquisition. Consumer health growth was driven by multiple product launches and growth of the e-commerce channel. Net revenue for the RX division was $5.1 million for three months ended March 31st, 2021, up from $4.7 million in the same quarter last year. Prescription revenue includes net revenue for the NEOS ADHD products only for the period following the close of the merger on March 19th, 2021. So our next quarter will reflect a full integration of net product revenues. Cost of sales of $13.7 million per quarter ended March 31st, 2021, include a write-off of $7.1 million for slow-moving inventory. The net cost of $6.6 million compares the cost of sales of $2 million for the period ended March 31, 2020. 2021 costs include the fair value or market cost of the ADHD products sold in the period due to the write-off of inventory as a result of the asset purchase of NEOs. The results from 2020 included the costs associated with the Consumer Health Division only for the period beginning February 15, 2020. Deal expenses and restructuring charges in the quarter ended March 31, 2021, totaled $10.6 million compared to $300,000 for the same quarter in 2020. Loss from operations was $25.7 million for the three months ended March 31, 2021, versus $4.8 million for the three months ended March 31, 2020. After backing out these one-time costs and the inventory adjustment that I previously mentioned, adjusted loss from operations was $8 million for the quarter ended March 31, 2021. Net loss was $25.5 million for the quarter ended March 31, 2021, or $1.41 per share, versus net loss of $5.3 million, or $1.51 per share for the same period last year. As discussed in our press release, after reviewing our cost structure, we have determined that to best serve our patients and to reduce costs, it would be more efficient and cost-effective to outsource manufacturing our ADHD products. NEOS has historically manufactured its products at its Grand Prairie, Texas, manufacturing facility. We have identified a global contract manufacturer to take on the production of the ADHD brands, and we expect that the technology transfer process will be completed over the next 18 months. Upon the completion of the tech transfer, we will close our Grand Prairie manufacturing operations. I will now turn the call back over to Josh for some additional commentary. Josh.

Thank you, Rich. So as you can see, Aytu has gone through a significant transformation, and we're a new company today with combined pro forma $100 million in revenue, a diversified Rx and consumer health portfolio, a late-stage pipeline addressing significant unmet needs, and a plan to efficiently integrate the new company to reduce costs. The coming quarters will bring continuing progress and growing sales and gaining synergies, and we'll be moving closer to the initiation of the AR101 program. I'm proud of the team for the progress we've already made post-NEOS, and I'm looking forward to more accomplishments as we continue with our growth plans. With that, I'll turn the call back over to the operator for Q&A. So, Devon, if you can open up the lines.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our first question comes from the line of Jennifer Kim with Cantor Fitzgerald. Please proceed with your question.

Hey, thanks so much for taking my questions, and congrats on the other quarter, guys. I have a few questions here. I guess the first one would be, on your plans on the ADHD business to change your cost structure and move to outsourcing, how should we think about the potential impact of that over the next 18 months, either to your ADHD business sales or OpEx? And can you touch on what the long-term impact on margins that could be, that could have?

Sure, Jennifer, I'll take that call. The cost of actually transferring the technology and performing bioequivalence studies is expected to be less than $2.5 million over the next 18 months. This will be reflected in GNA, Jennifer. We have previously been doing some work, and that's also gone into the GNA line. On a cash basis, our partner has agreed to defer payment for approximately half of the tech transfer costs until after we commence purchasing finished product. We have historically achieved gross margins in the mid-50s to mid-60s for our ADHD products, which we anticipate in the near term will comprise perhaps 50% of our revenue. We'd anticipate not only having more certainty as to the margins quarter over quarter, which of course have varied as we have historically manufactured our products, on a seasonal basis, but we anticipate that this could allow us to achieve gross margins in excess of 80% for those ADHD products after the tax transfer is complete in 2023.

Okay, that's helpful. And then do you have any thoughts on how we should think about the incremental contributions starting next quarter since that's the first full quarter of ADHD products? is it going to be like historically? I know it's been like the 67 million. Is that what we should expect to start coming in starting next quarter?

Well, yeah, I'll take that, Josh, if you want. The ADHD products, as you know, well, first, we don't give guidance, but we do anticipate that we should have quarter, like quarter, quarter over quarter. The second calendar quarter, as you know, is the beginning of the and many others. The revenue I would consider if you looked at previous years, it should be similar to that. Margins will be affected negatively, Jennifer, because of the write-up and inventory, of course, doing purchase accounting. You have to write up your inventory to fair market value. So basically, our inventory is written up close to market cost or at market cost, so we won't see margins necessarily over the next quarter. I think getting into the first fiscal quarter or the quarter beginning July 1st, we'll see a return to the margins that we historically have seen for ADHD.

Okay. And then maybe turning to the pipeline, I think you may have mentioned this, but can you remind us of So, have you started those discussions with the FDA and can you remind us when we could exactly expect an update on those plans for the pivotal trial?

Yeah, I'm happy to start that and then Rich, you can chip in as well. So, Jennifer, yes, the team at Rumpus for quite a while has obviously been working on enzastorin and has had dialogue with the FDA and fully expecting it to be a single trial that's required to move it towards approval. I would expect next quarter we'll be in a position to nail down sort of firm estimated start dates, certainly a firm submission of the IND, which we have said will be by the end of this year, and realistically study starting shortly after the start of the new calendar year is how we're thinking about it. So that's, I think, probably the cleanest way to answer that question. Rich, if you have anything else to add, feel free.

Yeah, that sounds good.

Okay, great. One last question on the net loss. I know, because of those other expenses, the one time expenses in the write off of the inventory, it would have been around like 8 million net loss for the quarter otherwise. And then you mentioned, and then GNA, the impact over the next 18 months from the change in outsourcing for ADHD, that should add around 2.5 million in GNA. And then you said there could be some lingering inventory impacts in the next quarter. So overall, How should we think about OPEX expenses for, I guess, the next quarter, but then also moving forward, you know, moving sort of beyond the short-term or one-time impact?

Yeah, Jennifer, I don't know that Aytu has historically given guidance for the operating expenses, but I know that the coming quarter is going to still have some noise reflected in it, so it's going to be higher than usual.

Okay.

We had Jennifer on the OPEX line, and yeah, to reiterate Rich's point, some deal costs and some sort of renormalization, and I'd expect to start to see a new normal with respect to OPEX, you know, starting in the new fiscal year in the first quarter, and then certainly normalizing and refining it a bit more in the second fiscal calendar, second fiscal quarter.

One thing I will add, though, Jennifer, is that the R&D line, which has been pretty minimal to date from Aytu's side and fairly small, I think NEOS has been spending probably $6 to $8 million on an annual basis, and most of that was salary. You will see a step up in the cost that runs through that. Obviously, getting the AR101 program going, we anticipate that's going to be a $25 to $30 million campaign. over the next three years. It will ramp up over time. I think the rest of this year, it's not going to be too material. It's probably going to be less than $3 million as we get the IND filed and as we start bringing sites up and getting them ready for the start of the pivotal trial. The other item that will hit going forward is, of course, the the post-marketing commitments for the ADHD products for PREA legislation. So that's probably going to be also around a three-year campaign totaling, we think, at best $15 million, and that will probably get started later on this year as well.

Okay, very helpful. Thanks, guys.

Thank you, Jennifer.

Ladies and gentlemen, we have reached the end of the question and answer session. I'd like to turn the call back over to Josh Disbrow for closing remarks.

Thank you, Devin. And thanks, everyone, for joining today's call. I hope we were able to effectively convey our progress and our accomplishments from what was a busy and productive quarter. I'm happy to be moving our key initiatives forward. Rich and I look forward to updating you on our fiscal 21 year-end call in September. Until then, thank you and good evening.

This does conclude today's teleconference. You may disconnect your lines now. Thank you for your participation and have a wonderful evening.