Aytu BioPharma, Inc. (NASDAQ:AYTU) Q1 2023 Earnings Call Transcript

Aytu BioPharma, Inc. (NASDAQ:AYTU) Q1 2023 Earnings Call Transcript November 14, 2022

Aytu BioPharma, Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.18.

Operator: Good afternoon, ladies and gentlemen, and welcome to the Aytu BioPharma Fiscal 2023 Q1 Results Call. At this time, all participants are placed on a listen-only mode and the floor for 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.

Roger Weiss: Thank you very much. Good afternoon, everyone, and thank you for joining us for Aytu BioPharma’s first quarter fiscal year 2023 financial results conference call. Joining us on today’s call is Aytu’s CEO, Josh Disbrow; and the company’s Chief Financial Officer, Mark Oki. 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 earnings press release issued earlier today. Finally, I’d also like to call to your attention the customary Safe Harbor disclosure regarding future-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 Aytu BioPharma.

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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. Aytu undertakes no obligation to update or revise any of these forward-looking statements. With that said, I’d now like to turn the event over to Josh Disbrow, Chief Executive Officer of Aytu BioPharma. Josh, please proceed.

Josh Disbrow: Thank you, Roger, and welcome, everyone. I’m extremely excited to share with you the first quarter of fiscal ’23 financial results today, which include the company’s first ever quarter of positive adjusted EBITDA and record quarterly revenue. Clearly, achieving positive adjusted EBITDA is transformational for us and positively changes the trajectory of Aytu in the years to come. As outlined in today’s press release the record quarterly net revenues of $27.7 million, which was an increase of 26% compared to the year ago quarter was driven by strong performances in both our Rx and Consumer Health segments. The Rx segment experienced 34% revenue growth due to the continuing execution of our sales force and the leverage we’re continuing to gain through RxConnect our novel proprietary patient access program.

Aytu RxConnect enables affordable predictable hassle free patient access to a Aytu’s prescription products and along with our salesforce and products is a cornerstone of our Rx business. Further our Rx segment had positive adjusted EBITDA of $2.7 million, understanding that virtually all corporate overhead in G&A is burden to the segment. This is now the second consecutive quarter in which the Rx segment has had positive adjusted EBITDA. Please note that you can see the adjusted EBITDA reconciliation to GAAP net income in the press release we issued earlier this afternoon. As I mentioned back in September our salesforce is making significant strides with our physicians and patient centric messaging. And we witnessed that momentum once again in the first quarter.

Additionally, we are experiencing tailwinds from the growth of the markets we serve both in ADHD and in pediatrics. I’ll dive into additional drivers within our Rx segment in a moment. On the Consumer Health side, we posted strong 12% revenue growth compared to last year’s first quarter and reduced our adjusted EBITDA loss in the segment to just 493,000. Importantly, we saw solid growth drivers coming up this fiscal year within Consumer Health, including the launch of additional OTC medicines and the C’rcle brand family which I will talk more about here in a moment. All told adjusted EBITDA for the company was positive $1.4 million during the first quarter compared to a negative $4.2 million in last year’s first quarter, a dramatic improvement to be sure.

On October 13, we announced an important shift to the company strategy aimed at accelerating the growth of our commercial business and achieving profitability. As a result, we noted the indefinite suspension of our clinical development programs, including AR101 Enzastaurin for the treatment of vascular Ehlers-Danlos Syndrome or VEDS. The suspension is expected to save the company over 20 million in projected future study costs and allow us to continue the positive trajectory we have with positive adjusted EBITDA as we center our efforts on growing revenue, maximizing synergies and driving down expenses, all of which will serve to accelerate our path to profitability. With our first adjusted EBITDA quarter now in hand, that path has become markedly clearer.

We understand that the suspension of our AR101 clinical development program is a disappointment to the beds community, and we do not take that lightly. We intend to revisit the program at the appropriate time with the expectation of funding all future clinical development with internally generated cash flow or through partnering. In today’s economic environment we strongly believe it is in the best interest of all stakeholders for us to focus our efforts on accelerating the growth of the commercial businesses and generating positive cash flow to minimize our reliance on the capital markets. The bottom line is that we want to avoid a large and highly diluted financing. And given the steps we’ve taken and the trajectory of our commercial operations coupled with our cash position, we believe we are positioned to do avoid just that.

Let’s dive into the commercial business a bit more, beginning with our Rx segment. As a reminder, within the Rx segment, we operate primarily in two therapeutic areas, ADHD and pediatrics. We acquired our ADHD product portfolio in March of last year with the acquisition of Neos Therapeutics. The portfolio includes extended release stimulant medications formulated in patient friendly orally disintegrating tablets that utilize the proprietary microparticle modified release, drug delivery technology platform developed by Neos. Adzenys XR-ODT and Cotempla XR-ODT are the first and only FDA approved amphetamine and methylphenidate extended release ODTs respectively, for the treatment of ADHD, and they are finding a well-earned position within this large and growing ADHD stimulant category, a category generating nearly 85 million prescriptions annually in the United States.

Mark will hit more on the numbers but across the Board we are seeing strong growth in the ADHD products which contributed to $11.6 million in 2023 first quarter revenues, an increase of 24% compared to a year ago. The key drivers to growth can largely be attributable to three things First, the overall growth in the ADHD market as we continue to come out of the pandemic and see an increase in diagnoses. Further there are numerous Adderall XR generic manufacturers reporting ongoing manufacturing delays, contributing to supply shortages of amphetamine, the most prescribed molecule in this category. While the supply disruptions associated with the Adderall XR generics has caused confusion and concern among the ADHD patients taking these medications, we’ve made it clear to our prescribers and clinician partners that Adzenys XR-ODT supply remains robust and uninterrupted.

Keep in mind that Adzenys is approved as bioequivalent to Adderall XR so the supply disruption could enable Adzenys to gain meaningful market and mindshare. I expect that we will see some continued tailwinds for Adzenys XR in the coming quarters as a supply disruptions are expected to continue intermittently for the foreseeable future. The second key driver to the ADHD growth has been our young energized and highly motivated sales force that is getting better and making more consistent strides with overall targeting and improvement of sales, execution and messaging. We have a great team in the field, one that is populated with mostly new to industry sales professionals who are motivated and hungry. They’re getting their legs under them following the turnover of much of the sales force in favor of this lower cost high upside profile and we’re excited about the traction they’re getting with health care providers.

And finally, the leverage we’re gaining through Aytu RxConnect. As we continue to cultivate our roughly 1,000 network pharmacies in key markets across the country, our improved distribution channel drives growth for all our prescription products. Based on some recent data points, we’ve shown that compared to prescriptions filled by non-network pharmacies, Aytu RxConnect results in a nearly 50% reduction in patient out of pocket co-payments of roughly 2x improvement in a Aytu’s net margin per Rx, and more than a 40% increase in prescription refills. The platform truly does drive value for patients, for healthcare providers, and for Aytu which has been the purpose since the inception of the program. Further, Aytu RxConnect can be leveraged more in the future with our current products and new products we may bring into the portfolio.

We’ve already demonstrated significant growth of our Aytu legacy products Poly-Vi-Flor, Tri-Vi-Flor and Karbinal since we included them in the Aytu RxConnect platform. One of the keys to continued improvement on the bottom line to further accelerate the path to profitability is to plan tech transfers of both Adzenys and Cotempla. As we reported back in September, the process is well underway with the contract manufacturer, including the conduct of bioequivalence studies and other FDA mandated work. It is our goal of having everything finalized and the CMO producing our ADHD products in calendar 2023. This outsourcing stands to improve the gross profit margin to ADHD product by 15% or more, a meaningful step change that if achieved will further improve our already improved P&L.

On the pediatric side, our portfolio includes Poly-Vi-Flor and Tri-Vi-Flor two complimentary prescription fluoride based multivitamin product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency. We also market Karbinal ER and extended released carbinoxamine based antihistamine suspension indicated to treat numerous allergic conditions for patients two years and older. These products serve large established pediatric markets and offer distinct clinical features and patient benefits over the branded and generic competitive products. During the quarter we achieved 73% growth in revenues from our prescription pediatric lines with revenues growing to $6.6 million and putting that portfolio on a $25 million plus revenue annualized run rate.

Again, the key drivers here are first salesforce execution, second leveraging of Aytu RxConnect, and third a solid payor environment, particularly for the multivitamins and various geographies, which has provided some tailwind for the products. Since we added PVF and TVF to RxConnect, we have grown prescriptions significantly and continue to demonstrate truly remarkable growth with those brands. The American Dental Association has stated that fluoride supplements should be prescribed for children six months to 16 years of age, who are at high risk for tooth decay and whose primary drinking water contains low or no fluoride. While the majority of U.S. drinking water is in fact fluoridated, some major geographic areas including much of New Jersey, and New York’s Long Island lack it.

Approximately one in four American children live in municipalities that do not fluoridate the water supply or in rural areas that rely on well water do not receive recommended levels of fluoride through fluoridation. We think that with the increased understanding of the risks coupled with the well documented support from the ADA, we will see continued growth in this business. We’re continually evaluating expansion opportunities for the fluoride multivitamin line as we look to additional areas in need of fluoride supplementation. And growth across both new and existing geographies will serve as the basis from which we expect to grow Poly-Vi-Flor and Tri-Vi-Flor sales. Overall, we feel confident about the traction we are achieving in our Rx segment.

As mentioned, we experienced 34% revenue growth in the first quarter and generated a positive $2.7 million in adjusted EBITDA. With continued growth cost reductions and gross margin improvement measures in place, we expect positive EBITDA quarters going forward. Let’s transition now to our Consumer Health segment. During the first quarter of 2023 net sales were $9 million for Consumer Health segment, an increase of 12% over Q1 a year ago. For those listeners not familiar with our Consumer Health segment, our core product focus is on branded value based products competing in large categories such as hair loss, digestive health, diabetes, management, and allergy, all competing with higher price national brands. At a time when consumers are looking for opportunities to save anywhere they can, we believe these value brands have a great opportunity for continued growth.

All products address chronic or recurring conditions and are largely intended to be used by consumers on a regular basis. As such, we offer a monthly subscription program which allows for ongoing use and easy product reordering and used by customers building strong annuity value for these brands and for the company. We sell directly to consumers through e-commerce platforms, including branded websites in the Amazon platform. Additionally, the consumer segment sells products through our proprietary sales and marketing platform, which focuses primarily on direct mail, allowing consumers to purchase directly through business reply, or through call centers with shipment directly to their homes. The solid double digit growth of the quarter within Consumer Health was primarily due to the growth in the Amazon channel coupled with new product launches.

Recall that we made a strategic decision in fiscal ’22 to pivot our efforts to the more efficient higher margin online channel with a primary focus on improving our visibility on in sales of our value OTC medicines through Amazon and our website. While we could have driven revenue by simply continuing to focus on the direct mail business, it was clear to us that the opportunity to scale this business and generate consistent profit lay with driving growth of the online OTC medicines business. The shift to more e-commerce and these OTC brands has borne fruit and this channel will be our primary focus going forward on the consumer side. Importantly, we are planning to further build out the OTC medicines line while establishing a value brand family we branded C’rcle Health.

C’rcle which we are planning to roll out in calendar ’23 will represent a brand family of value based over the counter medicines addressing a range of common conditions. We believe showcasing an OTC products through a single recognized family brand will build collective brand equity, create a common one stop shop for family seeking value brands addressing common everyday conditions and ultimately drive more repeat customer use of ordering all yielding higher annuity value and higher overall margins. As part of the build out and launch of C’rcle, we expect to launch new products as well as rebrand existing products and integrate these all into the C’rcle brand family more to follow as we approach the C’rcle launch. During the quarter, we posted a Consumer Health segment adjusted EBITDA of negative $493,000 compared to negative $934,000 a year ago, marking a seeing a significant improvement in this segment that is now getting very close to generating cash.

In connection with the strategic decision to focus on our commercial business and the indefinite suspension of our clinical development program, we announced a series of executive leadership changes aimed at aligning the skills of our leadership team members to the goals of driving revenue growth, further consolidating expenses, improving gross margins and driving long term profitability. First, we appointed Co-Founder Jarrett Disbrow to the newly created role of Chief Business Officer and President, Consumer Health. Having Co-Founded at Aytu and leading the company with since inception, Jarrett is poised to take his experience across both Rx and consumer brands to build our Consumer Health segment into a dynamic high growth consumer centric enterprise.

Jarrett has an exciting vision for this growing business segment and has begun implementing plans for continued expansion, new product launches, and the rebranding of the Consumer Health business, specifically the OTC medicines as part of the C’rcle Health rollout I just discussed. We think this should bode well for continued growth and transition to segment profitability and cash flow in the coming quarters. Additionally, we announced the promotion of Topher Brooke to Chief Operating Officer. Topher’s executive leadership at both large global pharma companies and smaller biotech business units coupled with his entrepreneurial orientation as the Co-Founder of pediatric centric biotech Rumpus Therapeutics makes him especially well-suited to step into the newly re-established role of Chief Operating Officer.

As COO, Topher will be responsible for the Grand Prairie manufacturing transition as we move to significantly increase prescription margins by outsourcing the production of Adzenys and Cotempla to a global contract manufacturer. He will also lead regulatory and quality affairs, scientific and medical affairs and key aspects of strategy and corporate and business development going forward. Finally, we promoted Ryan Selhorn to the newly created role of Executive Vice President, Finance and Business Optimization. Ryan was previously Senior Vice President, Finance and Operations for the Consumer Health segment. Ryan’s prior experience in public accounting, and as a public company CFO in both pharma and Consumer Health, coupled with his expertise in organizational improvement dovetails perfectly into our revised strategic plans.

He will oversee the finance and accounting functions while also lead in the ongoing consolidation and streamlining of internal processes, and spearheading numerous financial projects expected to drive efficiencies and significant cost savings throughout the organization. Greg Pyszczymuka will remain in his role as Chief Commercial Officer, overseeing all aspects of the Rx commercial business, which I’ll repeat has grown 34% year-over-year. We’ve experienced strong growth, a significant upgrade in talent and a streamlining of our commercial operations under Greg’s leadership, and look forward to Greg and his team continuing our growth trajectory across the Rx portfolio. I’m thankful for these leaders in their leadership and enthusiasm and support of this next phase of the company’s growth in this renewed focus.

Before I turn it over to Mark, let me just say how incredibly proud I am of the entire organization. The team has rallied around the opportunity to build a truly great operating company which has led to record quarterly revenue and our first ever quarter with positive adjusted EBITDA. Importantly, there are future drivers that have the ability to enhance this performance even further, including continued sales growth in both segments driving additional post Neos merger synergies, and the implementation of cost cutting activities such as the outsource manufacturing and elimination of the expenses, and cash flows tied to our R&D pipeline. We know there can be variations in any single quarter for any multitude of reasons but it’s clear to us that the trends are heading in the right direction as we execute on our goal of being self-sustaining in the near term.

It goes without saying that becoming self-sustaining stands to dramatically change the way we think about funding on a go forward basis. With that overview, let me turn it over to our CFO, Mark Oki to add some additional color to the numbers. Mark?

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Mark Oki: Thank you, Josh. And welcome to everyone joining us on this call. Let me build upon the comments Josh has already provided starting with revenue. Net revenue for fiscal 2023 first quarter was $27.7 million compared to $21.9 million for the first — for the fiscal 2022 first quarter, a 26% increase. Breaking down the quarter, net revenue from Rx product sales in the 2023 first quarter was $18.7 million compared to $13.9 million in the same quarter a year last year, an increase of 34%. As Josh noted, ADHD experienced 24% growth in net revenue to $11.6 million in the 2023 first quarter compared to $9.3 million during the 2022 first quarter. The prescription pediatric portfolio experienced 73% growth in net revenue to $6.6 million in our 2023 first quarter compared to $3.8 million in 2022.

For the first quarter of 2023, net revenue from the Consumer Health franchise was $9 million compared to $8 million in the same quarter last year, an increase of 12%. We have a small amount of other revenue, both this year and last. This other revenue pertains to COVID related test kits and discontinued or deprioritize products. During this year’s first quarter, it was $509,000 and last year’s first quarter had $758,000. In general, we expect other revenue to decrease going forward. Gross margins improved nicely to 65% in the 2023 first quarter compared to 50% of net revenue in the year ago first quarter. This improvement in gross margin percentage was primarily driven by improvements in the ADHD and pediatric product lines, a result of cost reduction efforts in greater volume.

Gross margin percentages can vary from period-to-period for various reasons. This improvement does not yet account for any improvements we expect from the tech transfer we’ve discussed. So we are optimistic that the margins will improve further upon the completion of the ADHD brands transfer. On the OpEx side for the first quarter of 2023, excluding impairment expense and amortization of intangible assets, operating expenses were $18.5 million compared to $19.2 million, the same period a year ago, a decrease of about $700,000. Research and development expenses were $1.1 million in the first quarter of 2023, compared to $1.7 million in the 2022 first quarter. Of this $1.1 million, 875,000 was related to the pipeline R&D which we recently suspended.

Net loss for the first quarter of fiscal 2023 was $2.9 million or $0.06 per share, compared to $27.9 million, or $1.09 per share for the same quarter last year. Net loss from operations for the first quarter of fiscal 2023 was $1.7 million. For the quarter adjusted EBITDA was a positive $1.4 million compared to a negative $4.2 million, an improvement of $5.6 million. When you look at the breakdown by segment, adjusted EBITDA though our Rx segment during the first quarter of fiscal 2023 was a positive $2.7 million compared to a negative $2.2 million a year ago. In the Consumer Health segment, quarterly adjusted EBITDA was a negative $493,000 compared to a negative $934,000 in the year ago period, a 47% improvement year-over-year. Finally, adjusted EBITDA tied to our now suspended R&D pipeline was a negative 866,000 during the first quarter of fiscal 2023 compared to negative $1.1 million in the first quarter of fiscal 2022.

Going forward, there will be some costs related to the winddown out of AR101 efforts and as we complete the Healight porcelain study. But generally we expect pipeline R&D spend to be minimal until such time that we can fund R&D from operations or engage a partner. Full reconciliation from net income to adjusted EBITDA are provided in the tables included in today’s press release. Finally on the balance sheet, cash and cash equivalents at September 30, 2022 were $23.8 million. One final item I want to point out is that subsequent to the end of the quarter, we announced an agreement with Avenue Venture Opportunities Fund, L.P. to extend the interest-only period of our existing senior secured loan facility with them. This amendment to the original secured loan agreement, which was executed in January 2022, which is our first principal payment into January of 2024.

The maturity date of the Avenue secured loan is January 2025 and remains subject to additional interest-only period extensions upon the achievement of certain milestones by the Company. The extension of the interest-only period will conserve cash and save the Company over $3 million in calendar 2023 principal payments by deferring those payments into calendar 2024 and 2025. In exchange for this extension, the Company and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $0.43, corresponding to the warrant exercise price associated with the Company’s latest equity financing. We appreciate the ongoing support of Avenue and extending the interest only period to help us preserve near term cash and execute on our operational plan.

They have been an exceptional partner and have been supportive of the company as we focus on growing our commercial business, and advancing our objectives. With that, let me turn it back over to Josh.

Josh Disbrow: Thanks, Mark. Let me just conclude with where I started. This was truly a transformational quarter for a Aytu as we reported record quarterly net revenue, and our first ever company-wide positive adjusted EBITDA quarter. The strategic initiatives we put in place to drive growth and efficiency across our entire organization, coupled with the positive market drivers and leverage we’re achieving through our proprietary RxConnect platform positions us to positively change the trajectory of Aytu in the years to come. I’m incredibly proud of the hard work by the entire organization to achieve the important milestones this quarter and I look forward to a tremendous fiscal ’23. I appreciate everyone’s participation on today’s call. We will now be happy to answer any questions. Operator?

Q&A Session

Operator: Thank you. Our first question is coming from Jennifer Kim with Cantor Fitzgerald. Please go ahead.

Jennifer Kim: Hi, thanks for taking my questions. And congrats on a very impressive quarter. I have a few questions here on the commercial business. The first one is ADHD, you gave sort of color around this tailwinds that have been going on. And I’ve seen online various — generic players think supply shortages lapsing into early 2023. And I’m wondering is that how you’re seeing the market play out? And once those shortages are addressed, do you think given the increased mindshare that the patients who switch to your products will stay on those products? And we can start there?

Josh Disbrow: Yes, that’s great. Thank you, Jennifer. Appreciate the questions. We are beginning to see we believe some early signs of this issue related to the Adderall and it’s mostly almost entirely with the generics, which of course dominates the market. And so we’re seeing it’s — I think it’s gone from sort of sporadic anecdotal to a little bit more of a consistent murmur in the field. So we are starting to see some movement. We have posted near or at all-time highs for Adzenys XR-ODT on a weekly prescription basis and the momentum kind of continues through the end of the year. And we do exactly as you said, we expect these to continue into the early part of the year. And what that means exactly, I guess remains to be seen.

But certainly, calendar to Q1 is what we’re thinking and we will expect certainly once the patient gets switched, if they do in fact get switched from Adderall-XR to Adzenys XR-ODT, that they would stay on it. We of course believe it has a bit more patient friendly presentation. It’s got the ODT format, of course, which makes it easy to take very convenient. It is by equivalent to Adderall, of course, so it’s going have potentially a similar experience, although I think some patients may get an improved experience on the basis of it’s easier to use format. So very, very confident that we’re going to see some nice uptake from this market disruption going forward.

Jennifer Kim: Okay, great. And for your pediatric products, I think one thing you talked about was the solid payor environment. Is that expected to remain favorable as we head into the new calendar year?

Josh Disbrow: Yes, I think so. So the multivitamin market is one that’s largely unmanaged by payers. So that’s really favorable for us. And we’ve picked up some state Medicaid plans, that enables some broaden utilization outside of the commercial environment. So that stands to, I think, give us further tailwinds in favor of Poly-Vi-Flor in the case of some of the state payors Tri-Vi-Flor which is undergoing a bit of a renaissance, a little bit of a relaunch for us. So I would expect the payor environment particularly as it relates to the multivitamins to continue to be solid. And look, we’ve taken an approach on the commercial side of the business with respect to the ADHD’s to not actively contract. We’ll be opportunistic, and we certainly will evaluate opportunities in the future to consider commercial contracting.

But because of the leverage that we have with RxConnect, we can really in many ways serve as the underwriter. And so some of the year-to-year fluctuations with formulary changes were largely exempt from because we really haven’t been playing actively with the mindset that we’re going to do deep discounting through the payors. We’d rather underwrite those prescriptions ourselves and control our own destiny, so to speak.