Aytu BioPharma, Inc.

Greetings. Welcome to the A2 Biopharma Fiscal 2024 Q4 Earnings 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. If you would like to ask a question, please press star one on your telephone keypad. 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. Please note, this conference is being recorded. I will now turn the conference over to your host, Robert Bloom with Lithium Partners. You may begin.

All right. Thank you very much. Good afternoon, everyone. And thank you for joining us for, as the operator indicated, A2 Biopharma's fiscal 2024 full year and fourth quarter operational and financial results conference call for the period ended June 30th, 2024. Joining us on today's call is A2's Chief Executive Officer, 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 or by utilizing the link on the company's website under Events and Presentations. Finally, I'd also like to call your attention to customary safe harbor disclosures 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 set 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, let me turn the call over to Josh Disbrow, Chief Executive Officer of A2 Biopharma. Josh, the mic is yours.

Thank you, Robert, and welcome, everyone. During fiscal 2024, we successfully repositioned A2 as a growing specialty pharmaceutical company focused exclusively on commercializing our novel prescription therapeutics consisting of our ADHD and pediatric portfolios. Since this repositioning commenced, which included indefinitely suspending our clinical development programs in 2022 and winding down our consumer health business, which was completed in July of this year, and both of which were drains on cash flows, we have positively transformed the operating profile of A2. For fiscal 24, adjusted EBITDA improved 162% to $9.2 million, compared to $3.5 million in fiscal 23. And when you look back at fiscal 22, our adjusted EBITDA was a negative $21.5 million. So over a two-year span, we've achieved a more than $30 million positive swing in our operating results, quite an achievement by the entire A2 team, and I thank them all for their efforts to get us to this point. As mentioned, in June of 23, we announced that we would wind down our consumer health business, which in the previous year had revenue of $33.6 million, but did not generate positive operating cash flows. We tasked our consumer health team this past year to sell off remaining inventory and minimize expenses associated with this business with the goal to have minimal impact to the bottom line. And those goals were indeed achieved. While we were selling through some final inventory in the first quarter of fiscal 25 to minimize destruction costs, the consumer health business has been effectively shut down as of the end of fiscal 24. Further, we looked at ways to monetize the remaining consumer health assets. Again, this goal was achieved when we entered into an agreement to divest our consumer health business to a private e-commerce-focused company. As part of the agreement, Atool received up to a half a million dollars of revenue-based royalty payments on future sales of the now former consumer health business products. As we close the loop in the wind down of the consumer health business, we believe the company's operating profile will be made clearly visible to the market and to those investors that screen for growth, margin expansion, and profitability. We believe this could lead to a re-rating of our corporate valuation going forward. Another key aspect of our strategic pivot to drive efficiencies across the organization has been the closure of our Grand Prairie, Texas manufacturing facility, which was acquired as part of the NEOS acquisition and was much larger than what we needed. It was therefore a source of large fixed overhead expenses and a driver of increased COGS. We started the process about 36 months ago, initially with the identification of a US-based third-party manufacturer that could meet the requirements to manufacture our ADHD product line. We then successfully received approval from the FDA to commence the transfer and have worked diligently since to ensure a consistent and orderly transition of production to this third party manufacturer. We completed our final in-house production run in June and have ceased using the facility for all intents and purposes, but we will continue to incur some costs related to the manufacturing facility through calendar 24 as we prepare to return the facility to the landlord. The end result has been the gradual improvement of the past year and our gross margins, our gross margins during fiscal twenty four or seventy five percent compared to seventy one percent last year. And we believe it is realistic to see that margin more or less maintain, depending on the product mix between ADHD and pediatric products and following the old inventory getting sold through the channel. This has been an intense and time consuming process led by our operations leadership team. I want to thank everyone involved in the Grand Prairie wind down as we move A2 into this next important phase of the company. I'm particularly impressed that through this challenging tech transfer process, the team maintained production levels and have gotten all products to inventory levels among the highest in our brand's respective histories. The aforementioned focus on driving towards profitability put us in a position to pay down a portion of our term loan and refinance our term loan on more favorable terms to A2. In mid-June, we announced that we entered into a new $13 million secured amortizing term loan with Eclipse, which replaces our previous $15 million secured term note. Importantly, at the time of refinancing, this represented an approximate 350 basis point reduction in the interest rate, which results in potential savings of $1.3 million in interest expense. Additionally, the previous note had become a current liability as it matured in January of 2025. It now matures in June of 2028, four years from now. So, the refinancing improves our balance sheet by reclassifying most of the term loan from current to long term liabilities and decreases our overall indebtedness, helping improve key financial ratios. This refinancing, along with our improving operating results, has resulted in the removal of the going concern language from our periodic filings. Concurrently with the term note, we also extended the maturity date of a revolving credit facility agreement with Eclipse to June of 2028, with the amendment providing for a potential increase in borrowing capacity along with other terms more advantageous to the company. So, when I take a step back and look at our balance sheet, a few key points I think help summarize our improvements. First, Our cash position of $20 million is consistent with the March and December quarters. Second, the current portion of our long-term debt decreased from $15 million in March to less than $2 million at the end of June. Third, we have decreased our total debt by $2.4 million from March. And finally, we have decreased the interest rate associated with our term loan, which will provide for a potential savings of $1.3 million in interest expense. All of these improvements could not have been possible without the strategic moves we made to significantly enhance the operating and financial profile of the business. My sincere thanks to everyone on the A2 team for that. Also, I want to personally thank the team at Avenue Capital for their support and collaboration with us over the last few years and share my excitement to expand the relationship with Eclipse and the collaboration that we continue to build. With the business in a dramatically improved position compared to two years ago, our focus is on continuing to drive revenue growth and efficiencies in our core prescription business, while also leveraging the unique capabilities of our RxConnect program, which provides tremendous benefits to patients and prescribers through transparent and consistent pricing. RxConnect is innovative and is also highly leverageable to enable scale for our current products and future products that we believe can be added to the promotional mix in the future. For the year, net revenue from our ADHD portfolio increased 23% year-over-year and experienced an 8% year-over-year increase when comparing the second half of the fiscal year with that same period in 2023. Given the significant revenue fluctuations we experienced in last year's second half, driven by the dramatic, albeit temporary, effects related to a payer issue in the March quarter, impacting our growth to net in judgments that has since been corrected, by the way, it's best to view the ADHD trends by looking at the January through June timeframes. So, again, that growth rate when looking at fiscal second half to fiscal second half was 8%. We're extremely pleased with this 8% revenue growth as we achieved this growth over the timeframe last year when the Adderall shortage was peaking, and thus its Zenith scripts were way up over prior time periods. The temporary positive benefit we experienced from the supply shortages across most of the industry from which we benefited from last year, but have since normalized. And even with that normalization having taken place, we're still up 8% year over year on a half year comparative basis. And when looking at the current unit sales trajectory in this quarter, ADHD ship units are up an impressive 26% from July 1st through yesterday, September 25th. Importantly, What we believe to be a more normalized level today is a significant step change from a few years ago before the stimulant shortages occurred. To put this in perspective, in fiscal 21, there were 352,000 scripts written for ADHD brands. That number stepped up to 376,000 in fiscal 22, 433,000 in fiscal 23, and it was up again to 438,000 in fiscal 24. So the trend line from 2021 to 2024 is an increase of about 25% and at an all-time high. We've reset the baseline to well above free shortage levels, which is very exciting, to say the least. Something I touched upon last quarter that I wanted to expand upon again was the impact from the cyber attack that impacted UnitedHealthcare's subsidiary, Change Healthcare. For those not familiar, Change Healthcare, among other things, enables branded manufacturers, copay programs, savings programs, buy downs, et cetera, to be processed through what is essentially a switchboard that interacts with pharmacy dispensing and reimbursement systems. It also interacts with physician billing and reimbursement systems that get physician offices paid for their services. Among many other things, the cyber attack created havoc across the healthcare ecosystem and resulted in many pharma companies' coupon programs not working effectively for extended periods of time. This in turn significantly impacted pricing and patient access to Rx products and often resulted in prescriptions going unfilled. I mentioned last quarter that we felt an impact from the cyber attack, albeit much less than many others in the industry. In particular, one of our largest grocery chain customers was unable to make some system changes to process our copay cards, such that our copays were higher than the traditional $50. The net effect is likely in the range of a 15% sequential decrease in that chain's prescription dispensing, so we would consider this to have had a temporary negative impact on our business. Couple that with additional ordering issues this customer experienced, and Q4 was surely negatively impacted. Fortunately, and finally, That issue is now fixed, and they're back to processing $50 max copay for commercial patients and are back to more normalized product ordering as well. Looking to the future a bit, based on a preliminary read of the data, with a couple of business days still to go, it is our expectation that we will see ADHD script growth as our unit sales volumes are up, as I said, 26% from July 1st through yesterday, September 25th. Now, let me caveat that this is unit growth, so this doesn't always mirror revenue growth due to gross to net variations and the timing of shipments to distributors. That said, we're very pleased with our trends here as we round out fiscal Q1. On the pediatric front, our pediatric portfolio continues to be impacted by payer changes that occurred back in September of 23. However, we are seeing very promising signs of recovery here in the first quarter. I'll touch on those numbers shortly. On the whole, pediatric scripts during fiscal 24 were 58,000 compared to 131,000 in fiscal 23. This resulted in net revenue during fiscal 24 decreasing to $7.3 million compared to $25.4 million. In the fourth quarter, revenue indeed drifted further sequentially. However, I do believe, and I know I've said this before, that we have bottomed out at these levels and can grow from here. It's taken us more time than anticipated to get the channel and pay our issues back on track, but we remain optimistic about the pediatric products growth prospects. We've implemented a number of commercial initiatives that give us confidence that we can get back to growth across the pediatric portfolio with some early signs during the first three months of fiscal twenty-five. Pediatric product unit shipments are up a hundred and fifteen percent from July first through yesterday, which is very encouraging to say the least. We've put numerous initiatives in place around securing improved reimbursement for both Carbinoxamine and the multivitamin franchise, and we've seen a significant increase in covered lives as a result of those efforts. As such, we're materially increasing our pediatric products promotion with our sales force as we're already seeing good early traction by way of both customer ordering, physician prescribing, and pharmacy dispensing and reordering. We've increased our cover lives in areas that were previously lost due to the payer changes we've discussed, so we're resourcing those areas via direct promotion to regain and grow share as we realize significant coverage improvements. Also, in areas where we didn't previously have coverage, we have had some very exciting payer wins, and we're also now beginning to resource those areas. I continue to be very confident in our collective abilities to win again with the pediatric portfolio. We acknowledge we have a long way to go to get those back to the levels we were once at, but believe we can get those products growing and back to the point of being meaningful revenue contributors for the company. For now, though, we're excited about the impact our rebuilding efforts are having. Much of the success we've achieved during the past few years has been a result of our commercial efforts, and an important part of that is our RX Connect platform, which we believe is the best-in-class patient support program. Our provider and patient-centric access program, through which we boast clear and guaranteed pay-no-more-than pricing for our brands, It works directly through our 1,000-plus partner pharmacies nationwide to deliver our brands, ensuring predictability of out-of-pocket costs for the patients who need our treatments and significantly reduce hassles for our prescribing customers. Looking forward, we will continue to evaluate ways we can leverage the unique capabilities of our commercial infrastructure and RxConnect platform to drive growth as we go forward. To wrap things up before I turn it over to Mark, it's been our objective to improve the financial profile of A2 over the past few years. We've done just that, and I couldn't be more pleased. We transitioned the business that had a negative $21.5 million in adjusted EBITDA in fiscal 22, with one with positive $9.2 million this year. Our cash balance over this time has remained steady, with over $20 million on hand at the end of June, while we've also paid down our term loan from $15 million down to $13 million and refinanced it on terms more favorable to the company. Our ADHD portfolio has had a significant positive step change over pre-shortage levels, with script growth up about 17% from fiscal 22. While the impact from the pediatric portfolio flowed through the bottom line, which negatively impacted our adjusted EBITDA on a year-over-year basis, we're beginning to show progress through the first three months of fiscal 25, with shift units up sequentially 115% through yesterday, which is providing us with a high level of optimism as we go forward. I'm confident in our plans and in our progress, and as indicated in our release earlier, we fully expect to achieve growth over our current EBITDA and NEP revenue levels in fiscal 2025. Let me turn the call over to Mark, and I'll then come back to wrap things up briefly before turning it over to questions. Mark?