Eton Pharmaceuticals, Inc.

Good afternoon and welcome to the Eton Pharmaceuticals first quarter 2023 financial results conference call. At this time, all participants are in the 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, Chief Business Officer at Eton Pharmaceuticals.

Please proceed. Thank you, Operator.

Good afternoon, everyone, and welcome to Eaton's first quarter 2023 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 Brinjelson, 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 EatonPharma.com. Before we begin, I would like to remind everyone the 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. Good afternoon, everyone, and thank you for joining us today. I'm excited to talk with all of you to go over our first quarter results as well as our outlook for the rest of the year and beyond. As previously communicated, we knew 2023 was going to be a major inflection point in Eaton's history. We seek to more than double product sales, launch new rare disease products, and reach profitability. I am pleased to say we're off to a very good start with the exceptional first quarter results we announced today. It was another quarter of record product sales for Eaton, our ninth straight sequential product revenue growth. Total product sales and royalty revenue was $5.4 million, an increase of 52% over the fourth quarter of 2022, and up 144% from the quarter of 2022. Elkindi Sprinkle and Carglymic Acid both reported record sales in the quarter. Elkindi Sprinkle saw strong growth in patients on treatment during the quarter, Having our reps solely focused on Alkindi during interactions with pediatric endocrinologists has allowed for more in-depth discussions, which I believe, we believe, increases the likelihood of a physician changing their prescribing habits and may reduce the number of visits required to do so. Eaton also launched a new Alkindi Sprinkle direct-to-consumer marketing campaign during the quarter and have implemented initiatives to further increase our engagement with the adrenal insufficiency patient community throughout 2023. Even with our strong Alkindi sales in Q1, a huge opportunity remains in front of us. A large percentage of patient population remains unconverted. We are optimistic that this provides us with a long runway of growth for the product, which is patented throughout 2034. We believe our expanded sales force can help increase the pace of adoption, and our ET400 product will further accelerate adoption. Our patent-pending ET400 product, which will be sold alongside Alkindi Sprinkle as a new treatment alternative, remains on track for an NDA submission at the end of this year. This could provide for a potential commercial launch in 2024. We continue to believe Alkindi Sprinkle and ET400 have the potential for combined peak sales of more than 50 million annually. Moving over to Kerglimic Acid. Kerglimic Acid also had a very strong quarter, aided in part by a few significant conversions in the quarter, which we believe were a direct result of our expanded sales force. We will be leveraging the relationships we have successfully developed commercializing perglymic acid for the launch of betaine anhydrous, which shares the same prescriber base. We are pleased to announce this week that betaine is now commercially available. With betaine, we will be offering our full patient and provider services through our Eaton Cares program. Eaton Cares will provide prescription fulfillment, insurance benefits investigation, and educational support. as well as financial assistance and other services designed to help eligible patients access treatment. Even prior to the launch, we had received strong interest from patients and providers trying to gain the product from us, so we believe we are well positioned for launch. We believe Betain has the potential to generate several million dollars in annual revenue with minimal incremental investment in SG&A. I've been very pleased with the performance of our sales force thus far. As a reminder, the final members of our expanded 12-person sales team were fully trained and in the field in February. We believe the expanded force helped contribute to the record sales of both products in the first quarter, and we expect the benefit of this larger team to be even more pronounced in the second half of the year as new members develop deeper relationships with prescribers. An additional benefit of the expanded team is that it has allowed us to increase our attendance and presence at medical conferences, including many smaller regional conferences, Our commercial team will be attending more than 35 medical conferences this year. Our second potential product launch this year is our dehydrated alcohol injection. As many of you are aware, the product has been assigned a PDUFA date of June 27th by the FDA. We have been in regular communication with the FDA and believe we have fully addressed or will shortly address all of the agency's information requests. As a result, we have implemented a launch execution plan with our commercial partner that will allow for the launch of the product as quickly as possible after the PDUFA date if it is approved. During the quarter, we also acquired ET600, an innovative product candidate under development for a rare pediatric endocrinology condition that would address a significant unmet need. ET600 has the same prescriber base as Alkindi Sprinkle, which makes it a perfect strategic fit. Physicians have repeatedly expressed a need for this product, and we believe we can address this unmet need. If all goes according to plan, we expect to file the NDA in 2024. Our short-term goal for 2023 was to more than double product sales this year, and as you can see with the impressive first quarter results, we're well on our way to achieving that. Longer term, our goal is to have 10 commercial rare disease products on market by the end of 2025. The launch of Betaine is now our third commercial product. We are in a very solid position. I believe our current pipeline can deliver four more and I'm confident that we will continue to find and close attractive business development transactions that can provide at least three more commercial products by the end of 2025. In recent months, we have seen an increasing number of pharmaceutical companies that have attractive commercial late stage assets but are facing financial challenges. Due to less favorable capital markets environment, they are struggling to raise needed capital and ultimately will not be able to advance or commercialize products by themselves. Given our strong cash position, our prudent spending, and our expectation to be profitable in the near future, we believe we are in an ideal position to capitalize on these type of opportunities as we move forward. I hope everyone is as pleased today with the results as I am. Our team has put in a lot of hard work behind the scenes in recent quarters and years to lay the groundwork for results that are starting to materialize. We knew 2023 was going to be a critical year for the company, and we are off to a terrific start. The outlook could not be better. Curgumic acid and Alkindi sprinkle, which were already growing at impressive rates, now have the power of a dedicated in-house sales force behind them. We have launched Betaine, which will further add growth. We have the potential to launch dehydrated alcohol in the coming months. And on top of all of that, we continue to execute on our internal development and external business development activities to advance our vision of creating a profitable, diverse portfolio of commercial rare disease products. In summary, we are just getting started. We are getting some great traction and look forward to sharing more good news as we move forward in the quarters ahead. Thank you. And with that, I'll turn it over to James, our Chief Financial Officer, to discuss the financial. James?

Thank you, Sean. Our first quarter revenue was $5.3 million compared to $2.2 million in the first quarter of 2022, or a 144% increase. In both periods, revenue was comprised entirely of product sales and royalties, and the increase was driven by growth in Alkindi sprinkle and carglymic acid. Sequentially, product sales and royalty revenue grew 52% compared to the fourth quarter of 2022. We expect product sales to continue growing quarter over quarter throughout the rest of this year and beyond. R&D expenses for the quarter were $0.5 million, compared with $1.6 million in the prior year period due primarily to decreased development costs for new product candidates. We expect to see a slight increase in R&D spend in future quarters due to development activities and payments related to ET400 and ET600. General and administrative expenses for the quarter were $5.3 million compared with $4.8 million in the prior year period due primarily to incremental employee-related expenses associated with our Salesforce expansion. The increased costs related to the Salesforce expansion are being partially offset by lower legal costs, the elimination of the co-promotion commission paid to our marketing partner, and the elimination of expenses associated with supporting products that were divested in 2022. Q1 is seasonally our highest quarter of expense, and we still anticipate our full-year G&A expense to be approximately $20 million. Total company net loss was $2.7 million for the quarter compared to a net loss of $5.3 million in the prior year period. Net loss per basic and diluted share was $0.10 during the quarter compared to a net loss per basic and diluted share of $0.21 in the prior year period. Eaton finished the first quarter with $14.7 million of cash on hand, and our operating cash burn during the quarter was $1.5 million. We remain confident that our cash position is sufficient to allow us to execute our plan and continue pursuing bolt-on transactions and new product developments. This concludes our remarks on first quarter results, and with that, we'll turn it back over to the operator for Q&A.

At this time, in order to ask a question, please press TAR11 on your telephone and wait for your name to be announced. To withdraw your question, please press TAR11 again. Thank you. Please stand by while we compile the Q&A roster. And we have a question from Raghuram Selvaraj with HTC Wainwright & Co. Your line is now open.

Hi, thanks very much for taking my question. So in light of the robust revenue that you're seeing, can you give us your updated thoughts on whether or not you anticipate potentially expanding the field sales force? And if so, you know, in what cadence and on what timeline?

Sure, Hiram. Yeah, we have decided to keep our sales force where it's at for the next quarter or two. But as sales ramp up and we bring in new products, we will be ultimately expanding that. I don't see a significant increase in SG&A, at least for the next few quarters. We believe the sales force is the right size for where we're at today. Obviously, for the future, we'll need to plan accordingly. um but it's uh so far so good with uh the results and as you can see we're we're very pleased with their performance i think that you'll see that accelerate there will come a point though maybe necessary to add additional headcount and can you give us an update on what you expect to be the next steps in uh the legal front on the legal front with respect to uh

your collaboration with Dr. Reddy's and, in particular, what you expect the outlook to be there at this point in time?

Sure. The Sistine Appeal has been filed. It's in process. We remain confident of winning that, ultimately. That would translate into a $20 million commercial payment or commercialization milestone payment to Eaton. I would expect that. The exact timing, obviously, is always tough to predict when you're talking about court cases, but we think it will likely be sometime in 2024. I have read several of the briefing documents, and I think Dr. Reddy's, you know, has done a very good job with their case so far. They have a very good track record of winning.

Lastly, with respect to R&D,

Do you anticipate that this is likely to trend up meaningfully in the course of the coming quarters, say over the remainder of 2023? Or do you expect, you know, the number for the first quarter to be more or less where it's going to stay, you know, given some of these upcoming activities, including the preparation for filing of ET600?

Yeah, the first quarter is... Our R&D spending for the rest of the year is going to tick up a little bit higher than it was in first quarter, just due to the timing of development activities with both ET400 and ET600. So it would not be reasonable to assume Q1 is not representative of full year spend. So we do expect it to tick up a little bit. Not multiples, but slight increases over Q1.

And last question for me, if you look at the potential evolution of gross margin, which of the newer products, for example, betaine anhydrous, ET400, and down the pike ET600, are likely to be the most significant positive contributors to improvement in gross margin?

Yes. Hey, Ron. The biggest gross margin Benefitters would be ET400 and ET600. On the Betain, we do have a 35% profit split to the original licensing partner that comes out of the COGS line, so the gross profit is a little bit lower because of that payment. But ET400, ET600 will be very high margin with relatively low royalty obligations, so they should boost the overall company gross margin. Thank you.

Again, in order to ask a question, please press star 11 on your telephone. And I see no more questions at this time. I will now turn the call over back to David Cranpa.

Thank you. We do have one emailed question that we haven't covered yet today. It was asking for an update on ET400. Can you provide any color on the indication it is going for?

Sure. So with ET400, this is one of our most exciting pipeline products. As you know, as we've stated in our press release, sold alongside Elkindi Sprinkle. The indication would also be for adrenal cortical insufficiency. And we would envision there's roughly 10,000 patients that could benefit from this, but We're really going after about 3,000 of those, six and under primarily is the patient population. It may be indicated all the way up to 18. We think it would mainly be used in that zero to six range. So that's about what we can say at this point. I think as the year progresses and our patent gets issued, we'll share more information about the product. Suffice to say, physicians are very excited about it. It's one that we've spoken to a couple dozen doctors that specialize in this area, and it'll fulfill an unmet need today.

Thank you, everyone, for joining us today. That's the end of the emailed questions that we've received.

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