Eton Pharmaceuticals, Inc.

Good afternoon and welcome to the Eaton Pharmaceuticals fourth quarter 2020 financial and operating results conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will open the call up for your questions. Please be advised that this call is being recorded at the company's request. At this time, I'd like to turn it over to David Krempa, Vice President of Business Development at Eaton Pharmaceuticals. Please proceed.

Thank you, Operator. Good afternoon, everyone, and welcome to Eaton's fourth quarter 2020 conference call. This afternoon, we issued a press release that outlines the topics we plan to discuss on today's call. The release is available on our website, eatonpharma.com. Joining me on the call today, we have Sean Brinjelson, our CEO, Wilson Troutman, our CFO, and Paul Stickler, our Senior Vice President of Sales and Marketing. Before we begin, I would like to remind everyone that statements made during this call may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. Please see the forward-looking statements disclaimer in our earnings release and the risk factors in the company's filings with the SEC. Now, I will turn the call over to our CEO, Sean Brinkelsen.

Thank you, everyone, for joining us today. We have a lot of exciting topics to discuss as we share our 2020 results and look forward to 2021. 2020 was a transformative year for Eaton. We submitted our last four NDAs of our nine product pipeline and successfully completed our transition from an R&D stage company to a commercial organization. In addition, in recent months, we have seen two of our products commercially launched, and completed a major transaction with our oral liquid products. First, I'll start with the commercial launch of our lead product, Elkindi Sprinkle. Elkindi Sprinkle is the first and only FDA-approved granular hydrocortisone formulation for the treatment of adrenal cortical insufficiency specifically designed for use in children. Although the product launched in late Q4, promotional activities really accelerated in January after the holiday season. Our sales reps have been pleased with the initial reception they have received from physicians and nurses in the endocrinology community. Caregivers have been eager to learn more about Alkindi Sprinkle and how it can benefit their young patients. While the sales rep meetings to date have been mostly virtual, in recent weeks we've actually seen certain doctors welcome in-person meetings, and we expect the frequency of those meetings to increase in the coming months. While virtual meetings have been helpful to give us a broad reach in a short amount of time, we believe the improved quality of face-to-face interactions will lead to even faster adoption of the product. Many of these new patients are provided with a quick start, quote-unquote quick start, where we immediately fill their first script free of charge, while the administrative paperwork is facilitated by their physician's office, specialty pharmacy, and the payer. While this means the revenue benefit may lag a month or two behind new patient starts, our number one priority is is to get Alkindi Sprinkle to the patients in need, and we don't believe they should have to wait while the administrative paperwork is being sorted out. While it is still early, with only two full months of launch behind us, we are encouraged by our adoption rates we have seen thus far, and we believe we are on pace for our 2021 plan. We have seen an increased number of new patient scripts every month since launch, and March is on pace to show substantial growth over February. We continue to expect positive profit contribution throughout the year, and expect to have approximately 400 patients on the product by the end of 2021. Given this demand for Alkindi and due to inbound interest from physicians and patients, we decided to grow our Alkindi franchise and acquire the Canadian rights to the product, which we announced in January. We are now working to bring the product to Canadian patients as quickly as possible. Also pleased, secondly, to announce that Bausch Health has launched Aloe Preservative Free into all major U.S. retailers in February. This product is the first preservative-free ophthalmic approved for allergy conjunctivitis. The launch triggered a $1.5 million payment owed to Eaton, and we will also receive a double-digit royalty on sales of the product. Next, I'd like to discuss our recently announced transaction with Azzurri Pharmaceuticals. When we began assembling our neurology oral liquid products in 2018, we knew that we were working on important products for patients that address critical needs in the market, and as a result, they would have significant value, regardless of how we ultimately decided to monetize them. After much analysis and thought, it was clear to us, though, that partnering with Azurity was the most attractive way to capitalize on these assets. First, it allowed us to lock in a very attractive return on our investment, We will be entitled to receive up to $45 million in milestone payments, plus still receive royalties on sales of the product. Azurety is a leader in branded oral liquid products that successfully launched numerous oral solutions in recent years. Their experience and infrastructure in the space gives us confidence they are the best company to market these products. Lastly, it boosts our profitability, which as you know is one of our key priorities. In addition to the significant amount of cash coming in from the transaction, expenses will be reduced because Eaton will no longer need to invest in a neurology sales force and the associated product launch expenses. This drastically improves our company's profitability over the next couple of years and allows us to focus our commercial efforts on our orphan drug strategy. We expect to use the proceeds from the Azurety transaction to acquire additional orphan drug products in 2021. We are focused on finding products with attributes similar to Akindi, meaning products that are late stage, address critical unmet needs for orphan indications, have significant revenue potential, and can be commercialized with a targeted sales force. In addition to our three commercial products, we have six additional products that are under review with the FDA. We believe the regulatory reviews are going well, which should set us up for a number of exciting product launches in 2021. A few of the key potential product approvals include our orphan drug product, dehydrated alcohol, which is under FDA review and assigned a PDUFA date of May 27th. We've been engaged in standard review communications with the FDA and expect the product to be approved on its PDUFA date. Zonisamide oral suspension, which is now owned by Azurity and has a PDUFA date of May 29th. Upon the product's approval and launch, we will be entitled to receive a $5 million payment and a royalty on product sales. Topiramate Oral Solution, which is also owned by Azurity and has a PDUFA date of August 6th. Topiramate launch will also trigger a $5 million payment to Eaton, and we believe this product is also on track for approval for August 6th. As we look forward to 2021, I could not be more excited about our prospects. Eaton has never been stronger or better positioned than it is today. We now have three commercial products generating revenue. We have six additional products under review. many of which are expected to be approved and launched in the coming months, and our financial position has never been better. We are on the cusp of becoming profitable and sitting in a strong cash position, with even more cash expected to come later in the year when we realize additional product approvals. With that, we would like to now open up the call for your questions. Operator?

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, if you'd like to ask a question, please press star then 1. One moment for our first question. Our first question comes from Andrew DeSillo of B-Rotary Securities. Your line is open.

Hey, thanks for taking my questions. Good to hear your voices. Just to start, last quarter there was a shelf stock adjustment charge that took place. Did that happen again during the fourth quarter or can you just maybe let us know either what Biorphin or Alkindi product sales were for the quarter so we can have a sense of how each product's tracking?

Yeah, no, Andy, the shelf stock adjustment was a one-time factor for a price reduction on Biorphin. That will not recur.

Yeah, that was not, that was, this is Sean, that was not Alkindi related. That had to do with Biorphin, which, by the way, the sales on Biorphin were very strong over the past couple of months. We've been going up, significant percentages. So it looks like that product is getting some traction in the market, and we're confident when we launch the vial to see it achieve our aspirations.

So the sales that were recognized in the fourth quarter were Biorphin sales, you didn't recognize anything for Alkindi.

I remember when we previously discussed the... No, so there were some Alkindi sales, but the reality is Alkindi launched in December. You know, you've got holidays. There really wasn't a proper... launch in the sense that you're not getting a full month. You're launching it in the middle of December. So from my perspective, the real launch for Alkindi started in earnest in January. That's where we had all the sales reps out there trained, communicating. So having product on the shelf or in the warehouse, yes, we did have some units ship out, but it's different from you know, having it in the warehouse versus actively out there selling, promoting, and so on. So that's really how I look at it. You know, we got it out the door in December, but really the selling is really started in January and February and March.

Okay, that makes sense. And then could you maybe just discuss the difference between the U.S. market for LKND Sprinkles relative to the Canadian market? I'm really interested in just patient population and market dynamics as you would kind of consider pricing. I would imagine it wouldn't be as high as the U.S. market, but if you could provide color.

I'll turn that question over to Paul Stickler, our Senior Vice President of Sales.

Paul? Hey, thanks, Sean. Good afternoon, Andrew. Yeah, in terms of the Canadian market, as a general rule, it's about 10% the size of the United States market. And in Canada, there are some pricing controls in place And so when we completed the deal back in January with Diurnal to gain the Canadian rights, we've started a process of building out a plan in terms of how we want to bring Alkindi into that marketplace. And we intend to move on that in the near future.

Okay. That makes sense. And then it's the last question for me. I really want to better understand the neurology sale situation. Should we expect payment streams to be recognized either as other income or actually as revenue? And how do we calculate the rev share, profit share, and milestone payments those candidates previously had with the entities you acquired and in-licensed the offerings from?

Yeah, Andy, that'll be recognized as a top line licensing revenue, like the $9.5 million that we received in February, for instance. And then, you know, any milestone payments that we have, you know, going back out to their ex-development partners, we'd go through as like a profit share cost of goods sold. Okay, perfect. I'll take everything else offline.

Thank you very much. Okay.

Thank you. Our next question comes from Ram Savaraju of HC Rainwright. Your line is open.

Thank you very much for taking my questions. Can you hear me? Yes, we can. So just very quickly on biorphine, can you comment on what you expect the change in receptivity at the hospital level to be, given that you're now changing the formulation presentation of this drug away from the ampules?

So the actual launch of the vial wouldn't occur earlier than the second half of the year. What we have seen, even though the product is in the ampule, is a significant increase the past few months in the uptake. I'm not sure exactly why that is, but it's happening really every week. We're getting more products sold. So that's a positive sign. Again, the hospitals tell us, give us the vial, we'll switch completely. So we are collecting the stability data. Can't rush that. That's just a requirement. The FDA wants six months of stability, and that's what we have to do. And then they get several months to review it. But we are confident in that product and that ability to realize 4 million units a year in sales. And then where we price the vial might be a slight premium to the ampule. So just...

to give us a sense of what the magnitude of sales could be associated with this product. At 4 million units annualized, given what you project as the price per vial, what would that translate into as an annual sales figure?

Well, the price per vial hasn't been determined, but it likely would be comparable to what they're currently paying compounders, which is in that $5 to $10 range. So you can figure it out from there. But just getting, I think with having the ampule, we'll see a couple million dollars of sales this year. But the vial, assuming we launch the vial sooner, let's say in June or July, that would be changed. But I'm, from a forecast, from an internal standpoint, I'm assuming we have the ampule for the rest of this year, and then we have the vial starting in the first quarter next year. It could be sooner than that, but I'm not That's not how I work. I normally will be more conservative in how I provide forecasts to the board. Understood.

Secondly, with regard to the dehydrated alcohol product, can you give us a sense or some frame of reference regarding what you expect receptivity to be and your current thinking regarding pricing relative to the existing dehydrated alcohol preparation that's currently available?

Well, I think the market, this isn't a product that requires detailing. We're planning on just contracting it with wholesalers and distributors, and it will go into the hospital that way. From a pricing standpoint, we're surely not going to be more, but we haven't determined where we're going to be. I imagine there would be a slight discount off the current, but not too drastic either. But we are on track, we believe, for approval on our PDUFA date. And, yeah, I mean, all the product reviews are going well for that matter. All of them seem to be on track to hit their PDUFA dates.

Okay. And then just a couple of questions on alkyl nesprinkle. Firstly, can you comment on what specific metrics relating to the the launch and continued rollout of Alkindi Sprinkle in the United States, you expect to be able to provide on an ongoing basis going forward? Like, for example, number of unique prescribers, number of repeat prescribers, number of patients on therapy, things like that?

I think the number one metric is active patients on therapy. So the rest of it is more details. But active patients on therapy, you can translate that into numbers. We said in our press release we expect to have more than 400 active patients on therapy. And I don't say 400 because I'm trying to get to 400. I believe we'll hit 400 easily. But I don't know how much higher it will be. It just depends on how quickly the uptake is. You get to the tipping point where the market starts to really turn But we're getting new patients every week. Our forecasts and what we had communicated to the board prior to doing this deal is exactly the same. We had a board meeting last week. Our head of sales, Paul, and his team are doing a fantastic job. We have seasoned veterans in the field. They know the space, and the doctors see the value of the product. So I'm happy with the deal. I'm happy with the initial launch. And we'll provide some more color on that as we get a little bit more under our belt in terms of sales experience and trajectory of the launch and so on on our next call.

And then just to follow on from that, can you comment on patient receptivity to Alkindi Sprinkle? in the U.S. so far? Have you gotten any testimonials from patients relating to the ease of use of the product and their experiences with it?

Sure. I'll let Paul take that one. Go ahead, Paul. Thanks, Sean. Hi, Rob. Paul Stickler here. Yeah, the feedback that we've received via patients through multiple different sources has been very, very positive. And Particularly the parents and caregivers who appreciate the fact that they no longer have to cut adult strength doses of hydrocortisone into quarters really makes a big difference. And so their quality of life has been increased. But most importantly, the safety of Alkindi sprinkle has really been appreciated more. And so we're quite pleased by that reception thus far.

And then lastly, on Aloe, I just wanted to get your updated thinking on this, that you're still looking at this as really only an incremental contributor to top line revenues, but also whether you'd heard anything coming out of Bausch Health BNL regarding the performance of Aloe since it was actually introduced to the market. I know that was, you know, very recently, but any feedback that you've gotten from Bausch Health that you can share would be helpful.

Yeah, Ron, we're very excited about the launch. Bausch, as you saw in their press releases, is also very excited. We don't have any further details to share about the launch trajectory. As you know, it's only been a few weeks, but we will be reporting that throughout the year when we receive our royalty payments. And I think your first comment was correct. We don't expect it to be the largest product in our pipeline, but we think it'll still be a meaningful royalty revenue that will contribute to us getting profitable by the end of the year.

I'll also say that if you go to your Walgreens or CVS, you'll find it on the shelf. It's on pretty much every shelf and also available through all the large retail stores. So that's not something many companies could claim. Bausch has the wherewithal to get product on shelves quickly. That was one of the reasons we did the deal. That's something that would take a lot of effort for a smaller company.

Absolutely. Thank you very much. Sure.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.

Thank you.