Aytu BioPharma, Inc.

Good afternoon, everyone, and welcome to the A2 Biopharma Fiscal 2024 Third Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star 1 on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Roger Weiss. Sir, the floor is yours.

Good afternoon, everyone, and thank you for joining us for A2 Biopharma's Fiscal 2024 Third Quarter Financial and Operational Results Conference Call for the period ended March 31, 2024. Joining us in today's call is A2 CEO Josh Disbrow and the company's Chief Financial Officer, Mark Occhi. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. 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 press release issued earlier today. Finally, I'd 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 otherwise to update or revise any of these forward-looking statements. With that said, let me turn the call over to Josh Disbrow, Chief Executive Officer of A2 Biopharma. Josh, the mic is yours.

Thank you, Roger, and welcome, everyone. The positive operating momentum we've experienced over the past two years continued during the third quarter of fiscal 24 as ADHD portfolio revenue continued its rapid growth, increasing 49% of the fiscal 23 third quarter. Further, we improved our adjusted EBITDA by $7 million compared to the year-ago third quarter. On a trailing 12-month look back, our company-wide adjusted EBITDA is now in excess of $15 million, and our RxBusiness operating income over that same period is over $7 million, a significant achievement for the company as it continues to reinforce the strategic initiatives we've undertaken to reposition A2 as a growing specialty pharmaceutical company focused on commercializing novel prescription therapeutics. Recall that just two years ago, we had an annual net loss in excess of $100 million, so this has been quite a transformation of our operating profile. As a reminder, our repositioning started back in October of 2022 when we indefinitely suspended our clinical development programs and continued with that decision to wind down our consumer health segment, which we announced in mid-calendar 23. These two parts of our business were a drain on cash and masked the strength of our RX segment. When you look back specifically at the RX business, it has generated over $17 million in adjusted EBITDA over the last four quarters and has achieved positive adjusted EBITDA in seven of the last eight quarters. Our goal is for the consumer health segment to be wound down and closed in mid-calendar 2024. And once completed, A2 will solely be a specialty pharmaceutical business with our growing ADHD portfolio as our lead products, coupled with our pediatric portfolio focused on our multivitamin franchise and carbonyl ER. As we close the loop on the wind down of the consumer business, we believe aforementioned operating highlights will be made clearly visible to the market. And those investors that screen for growth, margin expansion, and profitability And this could lead to a re-rating of our corporate valuation as we go forward. Importantly, our financial wherewithal is solid, as seen by our cash balance holding steady at $19.8 million compared to $19.5 million at the end of the December quarter. To expand on the financials in more detail, let me run through a few key points within both our ADHD and pediatric portfolios, starting first with ADHD. As I mentioned, our ADHD portfolio demonstrated a 49% year-over-year increase in net revenue during the third quarter to $12.3 million. The growth in net revenue was driven by strong Salesforce execution, along with the company continuing to leverage and adapt our innovative A2RxConnect platform, which we believe is a best-in-class patient support program. As a reminder, from a seasonality standpoint, our third fiscal quarter is where RxConnect's access and pricing guarantees provide the greatest benefit to patients and healthcare providers as a result of the January deductible reset for many health insurance plans. Our transparent drug pricing plan works directly through our 1,000-plus RxPartner ARCS Connect partner pharmacies nationwide to deliver our products, ensuring predictability of out-of-pocket costs for the patients who need our treatments. A2 remains committed to ensuring predictable and clear out-of-pocket costs around our branded portfolio. In addition to our strong operational execution, the trends we've talked about the past two years within the ADHD market have continued. The market continues to experience intermittent supply disruptions and accompanying patient access challenges for generic amphetamine and now Lisdex amphetamine with Vyvanse having gone generic, along of course with various methylphenidase products which continue to experience shortages and in some cases discontinuations. These access disruptions are negatively impacting the lives of too many ADHD patients and their families and continue to frustrate physicians and pharmacies alike. Having just been in the field visiting with customers, I can tell you that these disruptions are very real, and the positive impact RxConnect and our products are having is notable as a real solution for these patients and providers. As these intermittent shortages and patient access challenges have continued, our team has done an exceptional job meeting the demands of patients, having maintained supply to meet the growing demand for Adzenis and Cotempla. As a reminder, Adzenis, 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 market share as amphetamine patient access remains unpredictable. Gotemple is the only approved extended release ODT methylphenidate for the treatment of ADHD, which competes against the likes of Concerta and other long-acting methylphenidates, which are also in the midst of continuing channel uncertainties. We view the ongoing ADHD supply and patient access situation as one that will likely continue for the foreseeable future in some form or fashion. And perhaps more importantly, this long-term disruption is causing and has caused undue uncertainty well into the future. Even as some manufacturer stimulant products have returned to more normal levels, patients, parents, and physicians continue to question when the next shortage will pop up. And in many providers' minds, other shortages will occur as they have in the past. We just don't know when, and we don't know what coverage may be at that time. So that's where RxConnect comes in. And that creates the opportunity for more and more patients and prescribers to get experience with Adzenos and Gotempla. Not only do patients get effective, reliable ADHD brands at a pharmacy they know and trust, they get these products at a consistent price, and perhaps more importantly, on a timely and predictable basis. With our products and our robust support services, we are filling a huge gap that continues to be pervasive across the pharmaceutical ecosystem, affecting both brands and generics and reaching beyond ADHD stimulants. We're solving this issue, and our results speak to that. And as we look at prescription trends in April and into May, we're seeing growth in Rx's for the ADHD brands. In fact, ADHD TRX's in the middle of May are trending to make this the highest month in a year, following what were consistent all-time highs last year. We're excited about finishing fiscal 24 with both a growing and strong stimulant franchise. Transitioning now to pediatrics, which represents about 12% of our third quarter RX net revenue. Similar to what we discussed last quarter, our pediatric portfolio net revenue, which was down $3.5 million, was impacted primarily by payer changes that occurred in the September 23 quarter. We've seen the multivitamin business stabilize during the past quarter and have started to see some growth here almost halfway through the fourth quarter. We've implemented a number of tactics that give us comfort that we can get back to growth mode across the pediatric portfolio. Given the early signs of recovery and some recent coverage wins across the pediatric portfolio, we're reallocating resources in real time to the pediatric products to capitalize on numerous opportunities with respect to this improved coverage and patient access. The team has moved swiftly, and those actions are beginning to show some positive early results. I think it's important for everyone to note how well the overall operations of our business have progressed in light of the current downdraft and the PEDS operations and the potential positive swing that can occur as the initiatives we have implemented come to fruition. But transitioning just here for a bit, one item I think is important to discuss in context to our third quarter was the widespread and widely reported cyber attack that impacted UnitedHealthcare's subsidiary Change Healthcare beginning back in February. For those not familiar, Change Healthcare, among many other things, enables branded manufacturers, copay programs, savings programs, buy-downs, et cetera, to be processed through what is essentially a switchboard that interfaces with pharmacy dispensing and reimbursement systems. It also interacts with physician billing and reimbursement systems to get those physician offices paid for their services. Among other things, the cyber attack created havoc across the healthcare ecosystem and resulted in many pharma companies' coupon programs not working properly or, in some cases, not working at all for extended periods of time. This, in turn, significantly impacted out-of-pocket pricing and patient access to branded products, and often resulted in prescriptions going unfilled, in some cases for long durations of time, or in some cases losing those prescriptions altogether. Fortunately, we at A2 felt minimal impact due to the unique attributes of RxConnect and how we interface with pharmacy partner systems, along with the broader commercialization approach we take that doesn't rely on any single system of adjudication or any single switch. But it did have some very minimal and transient impact on us, but I'm happy to say we fully recovered and moved past it very quickly. Moving to our progress on the outsourcing of our ADHD brand manufacturing and overall operation improvements, we continue to do a great job on improving our gross margins. RX gross margins during the quarter were 74% compared to 61% in Q3 of last year, an improvement of 1,300 basis points. We believe there will be continued, albeit smaller, improvement as we complete the transition of Adzenis and Cotempla manufacturing to our outsourcing partners. For those that may not be familiar, we will be shutting down our manufacturing operations in Texas, where we have a manufacturing facility that is much larger than we need and therefore is a source of large fixed overhead expenses and a source of significantly elevated COGS. Everything's on track in terms of the manufacturing transfer. and we expect to complete our final in-house production run by the end of June, and that remains very much on track. We will continue to incur some costs related to the manufacturing facility through the calendar year as we close down the facility to return it to the landlord. An additional exciting change we've recently implemented is the onboarding of a new distributor to help further optimize the RSConnect platform. Integration of this new distributor into the program, along with some modifications around our pharmacy interfacing, has been going well. And with these changes, we expect to further improve the robustness of our pharmacy partner offerings to further add to the stickiness of the business overall. We view this change as an important one, and it's already showing positive signs for future growth. Quickly on the consumer health wind down now. Our team has done an exceptional job effectively managing the wind down of our consumer health operations. The process's effect on our adjusted EBITDA was minimal, which is the negative $370,000 impact during the third quarter. more than a $1 million improvement from the third quarter a year ago. We expect to have inventory write-downs and final shutdown expenses booked in the fourth quarter and then minimal revenue into the first quarter of fiscal 25. From that point forward, we don't expect to discuss the consumer health segment further as we will be 100% focused on the prescription business. To wrap things up before I turn it over to Mark, It has been our objective to transition A2 from a multi-pronged operation, which included not only our RX segment, but also our consumer health segment and pipeline development programs, both of which generated negative cash flows, to a hyper-focused pharmaceutical company with management concentrated on growing sales, increasing margins, and adjusted EBITDA and profitability. The RX business has been adjusted EBITDA positive for seven of the last eight quarters, witnessed by our trailing four-quarter company-wide adjusted EBITDA of over $15 million and generating over $7 million in operating income for our RX business. Our team's planning, coordination, and hard work are all resulting in transitioning this business from a negative cash flow one with losses to now be on the cusp of free cash flow generation and net income as we move forward. Let me turn the call over now to Mark, and I will then come back to wrap things up briefly before turning over to questions. Mark?