Eton Pharmaceuticals, Inc.

Good afternoon and welcome to the Eaton Pharmaceuticals' fourth quarter 2022 financial results conference call. At this time, all participants are on a listen-only mode. Following the formal remarks, we will open the call 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, Chief Business Officer at Eaton Pharmaceuticals.

Please proceed.

Thank you, Operator.

Good afternoon, everyone, and welcome to Eaton's fourth quarter 2022 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 our call today, we have Sean Bridgelson, our CEO, and James Gruber, our CFO. In addition to taking live questions on today's call, we will be answering questions that are emailed to us. Investors can send their questions to investorrelations at etinfarma.com. Before we begin, I would like to remind everyone that remarks made during the call may contain forward-looking statements and 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 Brinjelson.

Thank you, David. Thank you everyone for attending today's call. Good afternoon, everyone. And thank you for joining us to discuss Eaton's fourth quarter results. I'm pleased to share that the company's momentum continued in the fourth quarter of 2022 with 8.5 million in revenue and positive net income of 0.9 million. This was our eighth straight quarter of sequential growth in product sales. And not only do we expect that streak to continue through 2023 and beyond, We are expecting that growth to accelerate in 2023 due to some of the items we will be talking about today. We expect our product sales and royalty revenue, most importantly, to at least double this year compared to 2022. First off, I would like to start today with an exciting update on our commercial organization. As many of you know, in 2021, we were in the early stages of our Alkindi Sprinkle launch. we entered into a co-promotion agreement with Tolmar Pharmaceuticals. This agreement allowed us to leverage Tolmar's existing large pediatric endocrinology sales force to promote Alkindi Sprinkle and SaveEaton millions of dollars in sales force costs. Due to the significant growth in the product since we entered the agreement and our strong forecast for 2023, our projected sales commission to Tolmar for this year was going to be roughly the same amount as it would cost us to expand our own Salesforce. So in January, we exercised our right to exit the co-promotion agreement at no cost, and we hired our own team. Tolmar was a good partner, and we thanked them for their contributions to the product. But ultimately, there's no replacement for having complete control over your own sales team. Now that the financials justify it, we are excited to bring it fully in-house. Eaton Salesforce is now completely staffed with 12 highly experienced rare disease specialists that have been deployed into the field. The new sales force will be solely focused on Eaton's products, and it will allow us to exercise much greater control over sales force strategies, incentive plan structure, and personnel decisions. We believe these benefits will allow us to grow our candy sprinkle even faster than when we were growing under the co-promotion agreement. In addition, our new sales force is also promoting carglymic acid and soon betaine, which should both boost both of these products' revenues. In fact, we've already seen our new sales reps drive incredible growth on carglymic acid patients in 2023. I just returned from our national sales meeting in Texas, and the entire team, our corporate leadership, and the sales reps were all very fired up about the opportunities for our products in 2023. Now turning to product specific updates. Alkindi continued to see strong growth in patients on treatment in the quarter, and we are very excited to see what our new sales force can do with the product. Early results are very promising. We believe they will help accelerate what is already a strong adoption rate for the product. In addition to the sales force enhancements, we've also launched a new direct-to-consumer marketing campaign, and we have plans to further increase our engagement with the adrenal insufficiency patient community in 2023. Curglimic acid. Curglimic acid showed strong growth in the quarter, and we are extremely pleased with how this product is performing. We continue to see a steady cadence of new patient starts, and the product is off to a very good start in 2023 with some notable new patient ads. We believe the curglimic acid commercial success can be replicated with our Betaine product. As a reminder, we acquired Betaine late last year and are now preparing to relaunch the product under our label and commercial infrastructure. The product has the same prescriber base as curglimic acid, and we are already seeing strong interest from physicians. We received numerous requests directly from patients that are eager to get access to Eaton's product. Our launch inventory has now been manufactured, and it is currently being labeled and tested for release, so we hope to have it commercially available within the next few weeks. I believe the current betaine market size is between 10 and 20 million annually, so once ramped up, betaine should provide many millions of dollars of revenue with minimal incremental SG&A expenses. Turning now to our development pipeline, we have had a number of exciting developments in recent months. Starting with dehydrated alcohol injection, at the end of the fourth quarter, we submitted our NDA response to the FDA. We are pleased to see the FDA accepted that for review and assigned us a PDUFA date of June 27. We are now working with our commercial partner to prepare launch activities so that the product can be commercialized as quickly as possible if and when it is approved. Based on the latest IQVIA data, the dehydrated alcohol market is more than 70 million annually, and our target would be a market share of 40%. We have also made progress advancing our ET400 product candidate. This is our innovative patent-pending product candidate that we plan to promote alongside our candy sprinkle. We believe ET400 will help us rapidly penetrate the market that's greater than 100 million opportunity in the pediatric adrenal insufficiency space. Our registration batches for the product have been successfully manufactured and we expect to submit the NDA later this year. This could allow for an approval and launch as early as the second half of 2024 And we plan to share more details of this product as we get closer to the NDA submission. Suffice it to say, we expect between ET400 and Elkindi sprinkle that we will have peak combined sales in excess of 50 million annually. And that will happen in the near future. Moving on to Xenio. Xenio hydrocortisone autoinjector, which is very important potential treatment for adrenal insufficiency community, Our partner is actively engaged in development activities and expects to be ready for NDA submission next year. During the quarter, we also met with the FDA regarding our early stage product candidate, ET500. The FDA requested significantly more extensive clinical studies than we thought justified for that product. As a result, we plan to focus our resources on other more near-term opportunities while we work behind the scenes to try to reach FDA agreement on a less burdensome clinical pathway. One of those near-term opportunities is ET600, which we announced the acquisition of this week. ET600 is an innovative product under development for a very rare pediatric endocrinology condition. We are excited about this product opportunity and believe it will address a significant unmet need for pediatric patients. It is the same prescriber base as Alkindi Sprinkle, so it's a perfect strategic fit for our company with minimal incremental expenses. Physicians have repeatedly expressed to us the need for this product and they have been very excited to hear that we will be working to bring it to market shortly. We believe this product will be relatively straightforward and quick development project with the NDA submission possible just over a year from now. We will continue to hunt for more rare disease assets and we are optimistic about our prospects of finding additional products that are late stage development opportunities such as ET600 or our already approved products that can provide immediate revenue contributions, such as our recent acquisitions of carglymic acid and betaine. My goal for the company is for us to have 10 commercial rare disease products on the market by 2025. I believe this is achievable through a combination of our existing pipeline products and future business development transactions. Given all that is going on in the company, I hope it is clear to investors, as it is to me, how well Eaton is positioned for this year. A few closing points. Carglymic Acid, Alkindi Sprinkle were already on pace to deliver massive growth this year, and now we have put the full power of an in-house sales force behind them to supercharge this growth. Batein is launching in the coming weeks. We'll provide additional revenue, meaningful revenue and earnings contribution. Dehydrated Alcohol is well positioned to launch mid-year. could be one of the two products in a $70 million plus market. We have a strong cash position to deliver on this plan. No plans at the moment to do any kind of raise or dilution, and still pursue both on business development opportunities that we believe we can create significant near-term value. As such, I could not be more excited about our prospects for 2023. I have two financial goals for the company this year. First, I expect our product sales and royalty revenue to at least double from last year. Of course, it could be significantly more than that if dehydrated alcohol is approved and launched as we expect it will be. Secondly, I'm expecting to reach profitability at some point in the second half of this year. And lastly, the whole team here at Eaton is dedicated to executing on our vision and making these goals a reality in 2023. This is a breakout year. It's an exciting year. We thank you for your support. I look forward to continuing to update you on our progress throughout the year. And with that, I turn it over to James, our Chief Financial Officer, to discuss the financials. James?

Thank you, Sean. Our fourth quarter revenue was $8.5 million compared to $6.1 million in the fourth quarter of 2021, or a 39% increase. The increase was largely due to growth in Alkindi Sprinkle and the launch of Cardalumic Acid. Revenue for the fourth quarter of 2022 included a $5.0 million milestone received from Azurity for the launch of Zonestate. The prior year period included a $5.0 million milestone related to the launch of Aprantia from Azurity. Product sales and royalty revenue totaled $3.5 million for the quarter, compared to $1.1 million in the fourth quarter of 2021, or a 220% increase. Sequentially, product sales and royalty revenue grew 9% over the third quarter of 2022. Sequential growth was impacted by the timing of product orders from our specialty pharmacy, plus a slight slowdown in the number of new patient starts for both products in Q4 due to the holidays. We expect the growth rate to accelerate significantly in the first quarter of 2023. Gross profit for the quarter was $6.4 million. compared with 5.7 million in the prior year period. R&D expenses for the quarter were 0.9 million compared with 0.7 million in the prior year period. Barring any not yet announced business development activities or new project initiations, we expect to see only a small increase in R&D spend in 2023 relative to 2022 due primarily to the development activities and payments related to ET400 and ET600. General and administrative expenses for the quarter were $4.4 million compared with $3.7 million in the prior year period due primarily to incremental marketing and compensation expenses to support our product commercialization partially offset by decreased legal and consulting expenses. Despite the expansion of our internal sales force, we expect only a minor increase in SG&A expense for 2023 and expect full-year SG&A expenses to remain below $20 million. The increased costs related to the sales force are being partially offset by lower legal costs, reduced marketing spend from some initial launch-related expenses that will not repeat in 2023, the elimination of the co-promotion commission paid to our marketing partner, and the elimination of expenses that were associated with supporting products that were divested in 2022. Total company net income was $0.9 million for the fourth quarter, which was a slight decrease compared to $1.0 million in the prior year period. Net income per basic and diluted share was $0.04 in both periods. Eaton finished the fourth quarter with $16.3 million of cash on hand, and our operating cash flow during the quarter was $2.8 million. We continue to feel confident that our cash position is sufficient to allow us to execute our commercialization plan, allow us to continue to pursue bolt-on transactions or new product developments, and take us to profitability. That concludes our remarks on fourth quarter results. And with that, we'll turn it over to the operator for Q&A.

And thank you. As a reminder, to ask a question, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

And there's the one moment.

And we have Jim Kennedy from Marathon Micro Fund. Your line is now open.

Thank you. Hi, guys. Good job. How are you? Congratulations on the tremendous progress. Sounds like you're very well positioned for a very nice 2023 and beyond. Sean, I wanted to start with understanding a little bit about the, I'll call it the internal expansion of Salesforce. Now, the people coming over Were they actually Tomar employees that you just acquired?

No, they weren't. Actually, we spent a fair amount of time recruiting from some of the top rare disease companies. Tomar was not one of them. The focus was on sales personnel that had a track record of success. So really, we're looking at individuals from companies really across the United States that had proven over time that they really could go out there and get it, and we're really pleased with the team we've put together.

Good. Now, when Tomar was in place, were their reps responsible for more than just Alkindi Sprinkle, or were they dedicated strictly to Alkindi Sprinkle?

No, they were responsible for their own products as well as Alkindi Sprinkle. Our product was not, from a commission standpoint, was not at the top. And that was one of the reasons that we felt having a dedicated team would make all the difference. We've already started seeing that, even though the team was not fully deployed until February. And I'm really happy with the results thus far, not just on O'Kindy Sprinkle, but on Cargloomic. You know, Tomar did a... They're fine people, great, great sales force, but it was just a matter of focus, and I think that anyone would agree. Sometimes you just need to do it yourself.

Yeah, no, it sounds like a wonderful expansion. Now, in terms of those, I think you said 12 people, will they be dedicated to Alkindi, or they will have also multiple products?

They will be primarily dedicated to Alkindi, let's say 80%, and then maybe 20% to carglymic acid and betaine. The reason for that at this point is there aren't that many call points for betaine and carglymic acid, so we feel we can do that without really diluting the Alkindi sales effort. As we bring in more products and launch more products, we ultimately will have to expand that sales team And whether we have two teams where one focuses on Alkindi and the other team focuses on this bucket of ultra rare disease products, we haven't decided. We may still end up with one large team, but perhaps having two people in each of the major areas to ensure that we cover all of the Alkindi call points.

Great. And to the uninitiated like myself about your ET products, What is the overlap or how do they coordinate with Alkindi? Because they both sound like they're sort of in that adrenal deficiency market. Are they complementary? Would a doctor use both? How do they fit together?

David, go ahead. Yeah, so the ET400 is the product that's complementary to Alkindi Sprinkle. It would be targeting the same condition. the patients would actually probably take either Alkindi Sprinkle or the ET400. We think having this second option would help us penetrate that market much faster. The ET600 product, which we announced today, we're very excited, or we announced this week, we're very excited about. It's a completely different condition. It's not in the adrenal insufficiency space, but it is in pediatric endocrinology. So it's the same doctors that are treating patients and prescribing Alkindi Sprinkle would be prescribing the ET600 product. So there's a lot of synergies and overlap there. It's a space we know well. We know those doctors very well. They've told us about the need for this ET600 product, so we think it'll be a very good fit to our portfolio.

Excellent. And can you comment on either the structure of the deal or what it looked like compared to your prior acquisitions in terms of ET600s?

Yeah, it was relatively similar structure that payments are de-risked over time, paid with success-based milestones. It's not going to be an extremely expensive project. We think we've found a pretty good pathway to market that it can be done pretty inexpensively. So I think James mentioned even including it into our R&D for this year, you're only going to see a slight increase versus last year. But for Competitive reasons, we're not going into too much detail on the product at this time, but we hope to share more about it as we get closer to bringing it to market.

Very good. Okay. Thank you for taking my questions.

Thank you. And thank you. And I would now like to turn the call back over to David Krempa for further remarks.

Thank you, Operator. So we had two questions emailed into us. I think Jim touched on both of them. The first was about ET600. We talked about it's the same prescriber base. We don't expect a significant increase in R&D related to the project. The second question was on the sales reps and how quickly you expect to see a benefit. I think we already touched on that, that we're starting to see the early indications now. I think cargluomic acid, we see the benefit much more quickly. It's a little bit of an easier switch to convince the doctor to make. The Alkindi sprinkle, you are actually doing some changing of prescribing habits. There's a little more education that goes into it. So oftentimes you need to see a couple visits with the doctor before they change their habits. So that one takes a little bit longer than a cargluomic acid switch, but we still expect to have a pretty good indication of the efficiency of the sales force in the next few months.

Thanks, David. And last, I'd just like to say this is by far the most exciting year in our company's history. I'd like to thank everybody who attended the call today. We are really looking forward to providing further updates as the year progresses, and we would anticipate additional, let's say, transactions, licensing deals, late-stage products that will be part of that 10 that I mentioned.

This concludes today's conference call. Thank you for participating. You may now disconnect.