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Operator
Good afternoon, everyone, and thank you for joining us for A2 Biopharma's fiscal 2024 first quarter financial results conference call for the period ended September 30, 2023. Joining us on today's call is A2's CEO, Josh Disbrow, and the company's chief financial officer, Mark Oke. At the conclusion of today's prepared remarks, we'll open the call for question and answer sessions. I'd like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release issued earlier today. Finally, I'd also like to call your attention to the customary 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 A2 Biopharma. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, these statements are not guarantees 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 risks, uncertainties, and other factors, including but not limited to the factors sent forth in the company's filings with the SEC. A2 undertakes no obligation to update or revise any of these forward-looking statements. With that said, I'd like to turn the event over to Josh Disbrow, Chief Executive Officer of A2 Biopharma. Josh, please proceed.
Josh Disbrow
Thank you, Roger, and thanks, everyone, for joining us. I'm once again excited to be speaking with you today following yet another quarter that showed positive results from the initiatives we've undertaken to position A2 as a specialty pharmaceutical company focused on commercializing novel therapeutics and is continuing proof that we're clearly executing on our plan. I'm thrilled with the team's progress across the board, and I believe we've put ourselves in the best position we've ever been in as a company. I'm happy to share that this was our second consecutive quarter of company-wide positive adjusted EBITDA and the fifth out of the last six quarters of positive adjusted EBITDA for our Rx segment, which is where our focus is now and going forward. The deliberate strategic plan we undertook to place the company on a financial pathway to sustainability started initially about a year ago when we indefinitely suspended our clinical programs to minimize R&D expenses until such time that we can fund those efforts either with internally generated cash flow or through a strategic partnership. It then continued in June of this year when we announced that we would focus our commercial efforts exclusively on our growing and positive adjusted EBITDA Rx segment. We did this while de-emphasizing our consumer health segment and winding down those unprofitable operations and potentially monetizing it. As we progress along this path, our Rx segment composed of our ADHD and pediatric products becomes the go-forward business. We are laser-focused on growing prescriptions, increasing Rx revenue, and driving EBITDA and cash flow, full stop. Positive EBITDA is our calling card, and we're executing on that front. Further, we're growing prescriptions while also reducing OpEx, which we've done. This is all part of our measured plan, and I'm proud of our results. During the first quarter, our ADHD brand's prescriptions grew an impressive 28% over the first quarter of last year, which is a testament to the commercial team's strong execution and our ability to effectively leverage our innovative A2RX Connect patient access platform. From a revenue standpoint, ADHD net revenue aligned closely with script growth, increasing 31% to $15.1 million compared to $11.6 million in the year-ago quarter. We're also focusing on driving manufacturing efficiencies and improving OPEX and margin improvements. Overall, margins during the first quarter improved to 67% compared to 65% in the year-ago first quarter, and as Mark will share shortly, our operating expenses are down materially. In the coming quarters, our ADHD products will benefit from the recent FDA approvals of the Contempla XR-ODT and Adzenis XR-ODT manufacturing site transfer prior approval supplements, or PASs. These two PAS approvals allow us now to ramp up manufacturing in our contract manufacturer for ADHD brands and will be a key driver of further gross margin improvement as we get Adzenis and Cotempla fully transitioned. As I touched on in the past few quarters, the trends we talked about within the ADHD category continue to persist, including the supply disruptions for generic Adderall XR and various methylphenidate products, and several stimulant products have been discontinued altogether as of late. At least three generic manufacturers have discontinued their Adderall XR generics in the past few months, and another large generic manufacturer is no longer marketing its extended-release methylphenidate, so the problem continues. Just last month, I read a Time magazine article titled, One Year Later, Where's All the Adderall? In the article, it highlights that October 12th marked one year since the FDA's formal announcement that pharmaceutical manufacturers weren't able to produce enough Adderall and other stimulants. This continuing dislocation has forced many of the 40-plus million ADHD patients nationwide to encounter refill delays or depleted pharmacy inventories, and importantly, we continue to hear of these issues daily still. Without adequate access to these important meds, this large patient group continues to suffer from an inability to manage their ADHD symptoms, and this really wreaks havoc on a patient's day-to-day functioning. Overall, eight drug manufacturers have reported shortages of amphetamine, which also means that other manufacturers Other major ADHD medications are now in short supply after prescribers turn to other treatment options for their patients. And again, some manufacturers have discontinued their stimulants altogether. As these shortages have continued, our team has done an exceptional job meeting the demands of patients, having maintained supply to meet the growing demand for both Adzenis and Cotempla. As a reminder, at Zennis, the only approved extended release ODT amphetamine for the treatment of ADHD is approved as bioequivalent to Adderall XR. So, our brand is well positioned to continue to capture additional share as the amphetamine mix salt shortage remains. Cotempla is the only approved extended release ODT methylphenidate for the treatment of ADHD, which competes against Concerta and other methylphenidates. And again, those products are experiencing shortages and discontinuations. We expect the ongoing ADHD supply situation to likely continue for the foreseeable future in some form or fashion. And with that, this creates a continuing opportunity for more and more patients and prescribers to get experience with Adzenis and Cotempla, such that once they've tried our medicines in conjunction with an improved patient experience through A2Rx Connect, they'll continue on these meds. And I should say, as it relates specifically to RxConnect, that it's not enough to simply have better products that fill a clinical need, which, by the way, we believe ours are and do. Today, you need to couple your unique products, features, and benefits with an improved experience for patients, caregivers, clinicians, and their staff, one that brings predictability, consistency, transparency, convenience, and cost effectiveness. And with A2RxConnect, that's what we bring. And that's how we're winning with our products in today's competitive environments. Our A2RX Connect patient support program stands alone as truly best in class, and when clinicians and patients experience it, they like it. The growth we're seeing with our ADHD brands has been a testament to our manufacturing team's focus on meeting increased demand while managing the transition to the CMO, as well as our commercial team's strong execution and ability to showcase the benefits of our brand and, of course, our innovative A2RX Connect patient access platform. We believe more growth is in store for the ADHD brands given the ongoing ADHD stimulant disruptions. Our sales force's execution increases in new ADHD diagnoses and the continued refinement of our commercial tactics that complement and surround A2RxConnect. Within pediatrics, as communicated last quarter, we were impacted by payer changes that impacted net revenue in scripts. Scripts were down 24% sequentially, although importantly, are still up over 2022 levels. However, due to timing of customer ordering, revenues attributable to the multivitamin line decreased more appreciably. Scripts are stabilizing from the payer change, and once we've worked through the Unix shipment slack in the system due to what was in the channel pre-payer change, we expect to get back to growth. Payer changes are a fact of life in pharma and not something that is unexpected to us or something that we don't know how to deal with. To the contrary. Also, often when we experience a negative change with one payer, we'll see positive change from another payer that often stands to offset it. We're seeing that here, recently picking up coverage for the multivitamins with a different payer, and that is now starting to pay dividends. That is to say, we fully expect that we'll get back to growth. Again, even with the payer impact, our multivitamin Q1 scripts are up over 15% from the fiscal 22 quarterly RX average, and that's before we've begun to realize the benefits of many of the commercial strategies we're putting into place. And I'll remind you, inclusive of the ADHD brands, our overall RX portfolio was up 13%. from a script count standpoint over the same quarter last year. We've implemented numerous strategies to further penetrate pediatric prescriptions from current writers and broaden our overall prescriber base in both new and existing geographies. Our expectation is for both script and revenue improvement in the pediatrics business to occur in the coming quarters. Again, the largest revenue impact in pediatrics is attributed to the timing of customer ordering, and that's being worked through. Our initiatives to drive long-term shareholder value in the company by focusing on our RX segment and the planned wind down of our consumer health segment are progressing according to plan. I personally couldn't be more optimistic about how well we're positioned. Our RX segment had its segment adjusted EBITDA remain healthy at 2.4 million for the quarter, which when coupled with the improvement from the wind down of our consumer health segment and the discontinuation of our pipeline R&D activities, saw our combined company-wide adjusted EBITDA improve by 32%. Adjusted EBITDA is a critical performance metric as we move forward, and I'm happy to say that adjusted EBITDA continues to hold strong with five of the last six quarters positive for the RX segment and now two consecutive positive quarters company-wide. Our balance sheet remains strong with $20 million in cash at the end of September 23, and with a keen focus on driving growth and profitability in our RX segment, I believe we're well-positioned for success going forward. With that, let me now turn the call over to Mark to run through the numbers in some more detail. Mark?
Roger
Thank you, Josh, and welcome to everyone joining us on this call. Let's take a closer look at the financials, starting with revenue. Net revenue for the first quarter of fiscal 2024 was $22.1 million, down compared to the 2023 first quarter of $27.7 million, and directionally where we expected to see revenue given the wind down of the consumer health segment and the corresponding revenue decline associated with that. Looking at the segment contributions, Net revenue from RX product sales in the 2024 fiscal first quarter was $17.8 million compared to $18.7 million in the same quarter last year. Our ADHD products logged a 31% net revenue growth to $15.1 million in the 2024 first quarter against $11.6 million in last year's light quarter. This continued ADHD sale gains reflected consistent Salesforce execution the implementation of numerous commercial strategies, and market share gains related to the ongoing manufacturing and supply issues at large providers of ADHD products. Our quarterly ADHD written prescriptions were up 20% year over year and provide a bit of insight into our short-term future revenues. Moving on to our prescription pediatric portfolio, which experienced a 61% decrease in net revenue to $2.61 million, in our 2024 fiscal first quarter compared to $6.6 million in 2023. As Josh previously noted, this decline resulted largely from timing-related ordering of our prescription multivitamins following a payer change. If we normalized pediatric revenue to reflect actual prescription demand once the supply chain slack realigns to prescription demand, pediatric Rx-driven demand revenue would have been in the $4.4 million range. with a corresponding increase to adjusted EBITDA of approximately $1.5 million. We are confident that we'll be able to return these multivitamin products to growth trends over the next few quarters. And again, even in the face this time-based revenue impact on multivitamins, we remained adjusted EBITDA positive for the quarter and now have posted two consecutive adjusted EBITDA positive quarters as a company. Adjusted EBITDA is our critical performance metrics, and we're pleased with our results. As we announced this past June, we are in the process of a wind-down of the consumer health segment with a focus on improving corporate profitability. For the 2024 first quarter, net revenue from consumer health was $4.3 million compared to $9 million in the same quarter a year ago, a decrease of 52%. Our goal is to continue to sell through inventory with a goal of converting inventory to cash and ceasing consumer health operations by the end of fiscal 2024. Obviously, should a buyer for this segment materialize during the process, then we'd prefer to sell off either a portion of or all of the operations. But as we continue the wind down, the likelihood of any partial or full segment sale decreases. Overall, we expect the segment to be approximately adjusted EBITDA neutral over the next few quarters into the company's fiscal year end. As we noted previously, we continue to have a small amount of other prescription revenue both this year and last and reflects discontinued RX products, which continue to gradually tail off. In the 2024 first quarter, other revenue dropped to $124,000 versus last year's first quarter of $509,000. As we move forward, we would expect these amounts to continue to decrease and ultimately stop. Gross margins improved to 67% in the first quarter compared to 65% of net revenues in the quarter a year ago. The 2024 first quarter gross margins were positively impacted as ADHD sales continued their strong growth, which provided for better overhead utilization at the Grand Prairie facility, along with significantly reduced lower margin consumer health sales. However, even though margins improved year over year, gross margins were negatively impacted by the above described decline in our higher margin pediatric products portfolio. As we have commented in each quarter, Our business gross margin percentages can and do vary due to both seasonal and other factors. Additionally, we continue to progress with the manufacturing outsourcing of our ADHD products. A few weeks ago, the company received FDA approval of the Cotempla PAS. This approval enables us to transfer the manufacturing of Cotempla to the company's third-party manufacturer, and follows a similar milestone for Adzenes, which received PAS approval this past spring. With both Adzenes and Cotempla PAS approvals now in hand, we expect to begin the initial ramp-up of contract manufacturing of Adzenes and Cotempla in this current quarter. We expect that this production transfer to the contract manufacturer, coupled with our planned exiting of operations at the Grand Prairie, Texas manufacturing facility, should allow us to realize enhanced margin improvement in these ADHD products beginning in calendar 2024. While we are focused on enhancing margins, we continue to be mindful of the underlying patient needs. We are committed to a consistent and orderly transition of production to the new manufacturing facility over the coming months to ensure adequate inventory is available to meet the strong prescription growth experience for both Advenis and Cotempla. Operating expenses, excluding impairment expense, changes in contingent consideration, and amortization of intangible assets were $15 million in the 2024 first quarter, compared to $18.5 million in the same period a year ago. This 19% decrease reflects our continued emphasis on cost reductions and the ramp down of sales and marketing expense related to the consumer health segment. Research and development expenses were $604,000 in the first quarter of 2024, compared to $1.1 million in the 2023 light quarter. Net loss for the first quarter of 2024 was $8.1 million, or $1.48 per share, compared to $701,000, or $0.28 per share, for the same quarter last year. The primary factor for this jump was the swing in non-cash expense related to the gain or loss on derivative warrant liabilities. which gyrated from a $2.2 million gain in the first quarter of last year to a $5.9 million loss this year, a result of the increase in our stock price. Even with this quarter's net loss, we generated a solid positive adjusted EBITDA this quarter of $2.2 million compared to $1.7 million in last year's first quarter, an improvement of 32%. Cash and cash equivalents on June 30th, 2023, We're $20 million compared to $23 million in June 30, 2023. We're comfortable with this capital level and believe our balance sheet provides us with good foundation to fall through on all of our corporate changes, which we believe will lead us from positive adjusted EBITDA to profitability. As many of you already know, we don't give forward guidance. We have slimmed down our product lines and now just focus on our RX products. We received FDA PAS approvals to transition all of our ADHD production from our underutilized Grand Prairie plant to our outsourced and efficient manufacturing partner. We continue to be excited about how A2 is positioned for fiscal 2024 and beyond. With that, let me turn it back over to Josh.
Josh Disbrow
Thanks, Mark. Let me just conclude where I started. I'm pleased with the results generated following the initiatives we have undertaken to position A2. As a growing specialty pharmaceutical company focused on commercializing our novel therapeutics and providing patients with a much improved access experience. We are executing, and I'm proud of the work the entire team has done to get us into this strong position. Our ADHD revenue, which represents the substantial majority of our go-forward business, was up 31% and was driven by the commercial team's strong execution and our ability to effectively leverage our innovative A2RX Connect platform. We have some work to do to fully address the impact from the payer surrounding pediatrics, and we're addressing it in real time. But as PEDS represents a relatively small component of our overall business and had a comparatively small impact on our overall business, particularly when you put the revenue decline in context around order timing and the normalization as we've spoken to. And again, even with that order timing issue and the corresponding revenue impact, we reported our second consecutive quarter of company-wide positive adjusted EBITDA. And again, the fifth of the last six quarters of positive adjusted EBITDA specifically for our RX segment. With $20 million in cash on the balance sheet, initiatives in place to drive script growth and continuing improvement in our gross margin and OPEX, and you couple that with a wind down of our consumer product segment that's happening now, I believe the profile of A2 is becoming increasingly attractive to investors. I mentioned this last quarter, but it bears repeating. I understand the path here at A2 has not always been straight, as it's not for almost every company. And not every quarter is going to set records, but in the long run, and as we execute on all the initiatives we've described, we will position A2 as a strong operating company that drives meaningful cash flow. To that end, our focus and our objectives are clear, and we believe that there's a great opportunity going forward to drive shareholder value. We're laser focused on that. I appreciate everyone's support and commitment to the future of A2, and I thank you for your time today. With that, I'll be happy to answer any questions.
Mark
Thank you. 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 two if you'd 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. Once again, that's star one if you have a question or a comment. The first question comes from Naz Rahman with Maxim Group. Please proceed.
Naz Rahman
Hi, everyone. Thanks for taking my question, and congrats on all the progress. I actually have several questions, if you don't mind. So first, I just want to start on the pediatric business, the multivitamin business specifically. Obviously, you said that you have the one-time impact due to payer changes and you expect to return a growth. But when you return to growth, do you expect to return to like the same level of sales you were previously seeing like in the six, seven million range? Or do you just expect to return a growth from these levels?
Josh Disbrow
TBD now, but I would say generally speaking, I'm optimistic about at some point in the future being able to get back to where we were. And as I mentioned, sometimes when one payer change happens to the negative, you know, you can get a positive on the other. And we did, you know, did see some improvement in an area outside of kind of our traditional footprint, so to speak, and that's starting to pay some dividends. So, you know, I'd like to think, and I think we collectively believe we can kind of get back to those historical levels, maybe not immediately, you know, maybe not in the next quarter or two, but I think over the long term, yeah, I think we can get back to That being kind of in in that range, it's not going to maybe be again in an immediate context, but pretty optimistic that we can can grow our way through it. I mean, look, I mean, fiscal twenty three, which for us ended back in June was, you know, was a significant growth year. And so even with this sort of drawback, so to speak, I mean, we're, you know, we're comfortably kind of at fiscal twenty two levels. And so, you know, again, how quickly do we get back to those levels? You know, we need to continue to work through some things. I never, again, never sort of a straight line. And these changes, while you don't necessarily anticipate them in real time, you anticipate them in general. And, you know, the team really has done a good job putting a lot of things in place to get us back to growth. So I'm optimistic that in the long run, yeah, we can get back to those types of levels.
Naz Rahman
Thanks. That was very helpful. Now, on the ADHD business, I actually have several questions here, if you don't mind. The first thing is, on a high level, you talked about your script growth. Could you provide some more color and commentary? on your prescriber growth. How much are you seeing additional prescriber growth versus just increase in scripts written per prescribers?
Josh Disbrow
You know, we're seeing both, Naz, which is great and a real sign of health across the business. We're seeing new prescribers come in at higher levels. I mean, that really started, you know, essentially earlier part of this calendar year, early actually at the beginning of the calendar year. We saw a significant uptick in the number of prescribers, and we're seeing those prescribers increase their prescribing as they get more comfortable And then we are seeing existing prescribers go broader as well, not just in response to the shortages, but as they're getting more comfortable with RxConnect and the conveniences that that offers. So, we're really – it's great to see it's a combination of both, which is really what you want to see. So, yeah, it's – and I don't want to necessarily quantify it other than to say it's sort of healthy – Healthy parts, not necessarily equal parts, but healthy parts, sort of both components of going deeper within the current prescribers and then, of course, expanding into new prescribers. And that applies to areas where we have sales representation within our footprint, as well as in areas outside of our footprint, which is encouraging to see that prescribers are finding their way towards Zanisco Templa, irrespective of any direct contact. And that's by virtue of some of the indirect, non-personal things that we're doing to bring in prescribers outside of our established geographies.
Naz Rahman
Got it. That was very helpful. So due to the shortages, relatively recently, there were members of Congress that were like inquiring or investigating both the DEA and the FDA regarding the shortages. I believe the FDA and the DEA released like a joint letter that they found or stated that manufacturers only sold like 70% of their allocated quota. And there was like about like a billion of additional authorized doses that were in producer shipped. Do you have any comments or thoughts around what's going on here? here in terms of these inquiries and what also like shields A2 from these issues or does it?
Josh Disbrow
So, yeah, a lot to unpack there, Naz, and I appreciate the question. You're exactly right. There's been a significant amount of scrutiny to both the FDA as well as the DEA around this issue. And what I'll tell you is the other companies that we've spoken to do not have any excess quota. They're not sitting on any excess quota. There may be some manufacturers that are not being forthcoming, but I can tell you, as it relates specifically to us at A2, we're using every bit of quota that we request. We're obviously going back and getting incremental requests for additional quota, and we've been successful in getting that. So we're using every single bit that we can get allocated to us. And really, the genesis of it is pretty straightforward from my perspective, Naz. This is obviously a critical need. These are and it is members of Congress as well as now some of the government agencies that are, you know, obviously getting very frustrated with the fact that they don't have access to these needed treatments, and so it's cut into a point where it is of sort of national interest and has gotten to Capitol Hill. I've been fortunate enough to have conversations with some staff members, some various members of Congress, getting our perspective on various aspects as it relates to the shortages and things that we could potentially do, and look, I'm happy to say that We're doing our part in producing every bit of Xenis and Cotempla that we can. And we are able to, you know, meet the demand. We've been very adept at, you know, going back and getting incremental quota. It's a very extensive process. There's a high level of data scrutiny that the DEA applies. We've been able to obviously satisfy their request to demonstrate that the products are going, you know, into the retail or into our distribution network in terms of filling actual demand. And we'll continue to do that, demonstrate that demand is increasing. Obviously, the need for additional API quota increases along with that. And again, we've been successful in being able to, you know, consistently increase our supply and get more quota from the DEA. So, but again, it doesn't seem to be lighting up anytime soon, which we expect to be to our benefit as we're able to step in and fill some of these gaps.
Naz Rahman
Thanks for the thoughtful and comprehensive response on that one. And just one last question on the ADHD business. Have you seen a material impact from the generic Vyvanse entrance, and do you think it could materially impact A2 going forward?
Josh Disbrow
You know, that's a good question, Naz, and not really. You know, I mean, obviously it is a stimulant, and it was the leading brand until such time as it went off patent, and we are certainly seeing, you know, a material impact from those generics, but it's, of course, cannibalizing that Vyvanse business And might it present an opportunity for us? It could, you know, in similar ways as the Adderall generics. They sort of create confusion within the channel. Patients get switched from one generic to another. You know, there may be sort of PBM impacts in terms of which one is contracted versus which one is not. So there could be some noise sort of around that. Anything that sort of comes from that would be upside, not necessarily anything that we specifically model in terms of us being able to take advantage or take some of that share. What it does sort of further emphasize, though, is just the overall issue that exists in the ADHD category, which is there's There's inherent variability across multiple perspectives. There may be clinical response variability if you're talking about one generic versus another, specifically as it relates to mixed salts or Adderall generics. But there's also variability in the context of, you know, what they're going to pay at the pharmacy counter. And so irrespective of sort of what goes generic and when, the inherent variability in terms of just patient experience, in terms of what they're going to get, you know, how much of it they can get, whether they can actually get it filled this month or they have to wait, you know, several days or even weeks to track it down somewhere across town, and when they get it, how much they're going to pay for it, and ultimately, when they're taking it, how they're going to feel, because if you are taking one generic versus another, patients and physicians sort of universally acknowledge that the responses might be different, and so it is just another example of why you need something like RxConnect, why you want to have a brand prescribed because of the inherent predictability that all of that affords to these patients. So we're keeping an eye on the Vyvanse situation. And, you know, ultimately, you know, we're going to win out by virtue of the fact that all of these products have their own sort of challenges, whether they be clinical, economic, or both.
Naz Rahman
Got it. Thank you. Thanks for sending my questions and congrats on the progress.
Josh Disbrow
Thanks, Nathan.
Mark
Once again, if you have a question or a comment, please indicate so by pressing star one.
Operator
Operator, while you're polling, I'm going to just jump in and I'll ask Josh a question or two. Say, Josh, obviously you showed some very strong ADHD script growth this quarter again. How much of the 28% script growth do you think is category growth versus market share gains?
Josh Disbrow
It's a good chunk of sort of share growth, and it depends on the month because the market grows at different rates throughout the year and actually declines during the summer, as folks likely know. But there's a good chunk of our prescription growth that is coming from gobbling up patients that otherwise would have been on Adderall XR or other stimulants, and you see some of that with Gotempla as well. But even if we just kept up with category growth, that's sizable. These prescription categories continue to demonstrate strong year-over-year growth. It's it's not the growth that we saw, say, coming out of the pandemic, but this category has consistently grown as, obviously, the diagnoses of ADHD continue to go up. So, but, you know, I'm happy to see that some, particularly in some territories and some geographies, you know, we've really grabbed sort of outsized share from what we had, say, prior to the shortages. So, There's good growth from both perspectives. And again, even if you just took growing kind of with the market, that's going to be really solid growth. But we're always striving, obviously, to grow beyond what the market growth rate is. And we're seeing that in various circumstances, depending on, again, the time points that you look at.
Operator
Got it. Josh, also during your prior comments, You spoke about the pass approvals for both Adzenis and Contempla that you received from the FDA. Do you have a specific timeline for the ramp up of the contract manufacturing? And on the other side, the eventual exit from your Grand Prairie facility?
Josh Disbrow
Yeah, so the ramp up, Roger, is really, it's happening now. Given the fact that we had Adzenis, the PAS approved earlier in the year and just got the Contempla PAS approved. The manufacturer has, you know, purchase orders in hand, is beginning the process of scaling up manufacturing. You know, those FEOs, again, are being sort of acted on, and we're happy to see that. You know, we do have said, you know, almost by definition, we'll be out of Grand Prairie sort of by, you know, the end of next year. Just the lease expires at the end of calendar 24, and so certainly no later than that, we would expect. And really, the process will be you know, essentially kind of a seesaw as we're producing, as we're increasing production levels at the CMO, we'll be decreasing production levels in Grand Prairie, Texas. But there will be a caveat to that, which is we need to make sure we don't do anything to interrupt supply. And so we're going to continue to build inventory in Texas while the CMO is building their inventory. That will create some noisiness in the P&L specifically as it relates to gross margin. You're not going to see an immediate step down in COGS, for example, because we're going to have to build supply really on both sides. But generally expecting to be sort of fully exited by, you know, kind of summer and into the fall. And then again, definitely out as it relates to the lease expiry, you know, at the end of next calendar year. Everything's going very well. It really has gone according to plan. If we look at sort of how we cast things about a year ago, it's really on on the same timeline that we had sort of presupposed back then, uh, finishing sort of on budget. And so we're, uh, we're excited about the progress we're making there as we, uh, as we exit. And, um, obviously difficult to part ways with some of these longtime colleagues that have been working at the facility there for years, but we've implemented a really good communication plan. I think we've been forthright along the way. Um, everybody's had a good heads up in terms of what the timing for their end of employment will be. And so, you know, we've got some of that, some of that's already occurred, some of that's coming up here shortly. And then, some of the separations will happen a little bit further down the road as we sort of fully start to exit the facility and close the doors.
Operator
Got it. Well, Josh, thank you. Let me turn it back to the operator. Operator, any additional Q&A?
Mark
We have no further questions in queue. I'd like to turn the call back to management for any closing remarks.
Josh Disbrow
Great. Thank you, John. Well, let me just say again, thanks to everyone for your time on the call today. Thanks for your interest in A2 Biopharma. We are very, very pleased with the progress we've made to date. We're excited about where we're going. Really, my hat's off to the entire team at A2. A lot has gone on to enable this transformation. It's still underway. As I mentioned, it's not always a straight line, but we continue to really demonstrate solid progress across all of the initiatives that we've undertaken. Really proud of the growth that we're seeing, particularly as it relates to the ADHD brands. And we're really optimistic about how we're positioned here as we move forward. So until next time, thanks very much for your time. Thanks for your interest in A2 BioPharm and have a good rest of the afternoon or evening. Thank you.
Mark
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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