Aytu BioPharma, Inc. (NASDAQ:AYTU) Q3 2023 Earnings Call Transcript

Aytu BioPharma, Inc. (NASDAQ:AYTU) Q3 2023 Earnings Call Transcript May 11, 2023

Aytu BioPharma, Inc. misses on earnings expectations. Reported EPS is $-1.93 EPS, expectations were $-0.63.

Operator: Greetings. Welcome to the Aytu BioPharma Fiscal 2023 Q3 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the conference over to your host, Roger Weiss. You may begin.

Roger Weiss: Good afternoon, everyone, and thank you for joining us for the Aytu BioPharma’s third quarter fiscal year 2023 financial results conference call for the period ending March 31, 2023. 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 to the customary Safe Harbor disclosure 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 Aytu 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. Aytu undertakes no obligation to update or revise any of these forward-looking statements.

With that being said, I’d 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. Thanks for joining the call. Our core prescription segment continues to perform at a high-level with record total prescriptions of more than 153,000 during the third fiscal quarter. Our ADHD scripts were up 27%, while our pediatric scripts were up 55% compared to the year ago period. The combined 32% growth in total prescriptions is a testament to the continued strong execution of our commercial team, along with the unique capabilities of the Aytu RxConnect platform. Further to that, we’ve done an exceptional job maximizing the opportunity presented by the ongoing ADHD market supply disruptions, most notably the Adderall XR, generic shortages and more recently, the methylphenidate disruptions.

But as you likely saw in the press release, there’s a little bit of a disconnect between the prescription growth especially within our ADHD portfolio, and net revenue reported this quarter. Let me dive in for some details. To be responsive to market dynamics and to keep up with rising costs, we implemented a price increase for ADHD products effective April 1. As a result, we recorded a onetime channel adjustment which resulted in a reduction of revenue of $1.2 million during the third quarter. Excluding this adjustment, Rx segment net revenue would have increased 8% year-over-year. The remaining difference relates to payer changes in the resetting of the underlying patient insurance deductibles at the beginning of each calendar year that impact our patient savings offers and gross to nets this time of year.

Absent these items, the reception to our ADHD products continues to be robust against a market backdrop that continues to provide tailwinds for the company. On the pediatric side, our portfolio continues to perform at a high-level with prescriptions at 55% compared to the year ago quarter and net revenue up 81% to $5.3 million during the fiscal year’s third quarter. I’ll expand on peds and Rx segment in more detail momentarily, including the new line extensions we have planned for the multivitamins. On the consumer health side, we continue the strategic transition we implemented as we phase out of the direct mail channel with a focus on OTC medicines through the e-commerce channel. This shift resulted in sales on Amazon increasing 13% compared to the year ago period.

We’re planning the launch of our C’rcle Health branding initiative later this year, and had begun a soft launch with various products and several are now in the channel. We believe branding will build more equity, improve our return on ad spend and lead to higher customer repeat purchases. We will see future improvement within this segment as we focus squarely on getting the consumer health segment profitable. I’ll expand a bit more on this in a moment. So due to the pricing, channel and payer timing dynamics that I mentioned, we didn’t achieve positive adjusted EBITDA during the third quarter, but we are still EBITDA positive year-to-date for the Rx segment. That said we believe the absence of pricing effects and the improvement of these items coupled with the overall momentum in the business we have in Q4 should allow us to achieve positive companywide adjusted EBITDA and end the year on a strong note.

And to get perspective on how the current quarter is shaping up and how much momentum we do have through yesterday May 10, which is to say through the first 27 shipping days of the quarter, ADHD product factory shipments are up 30% over the same number of shipping days last year — last quarter, excuse me. And peds factory shipments are up 41% over last quarter. When looking at shipments from April 1 to May 1 this year versus those same dates last year, the growth numbers are even larger. ADHD shipments are up 60% and ped shipments are up 104% and illustrate just how well Adzenys is currently performing. Adzenys April estimated Rxs are up an impressive 48% over last April. So to say the least, we’re quite pleased with our continuing momentum.

Let’s dive into the commercial business a bit more beginning with our Rx segment and our ADHD portfolio, which includes a Adzenys XR-ODT and Cotempla XR-ODT, the first and only FDA approved amphetamine and methylphenidate extended-release ODTs, respectively for the treatment of ADHD. These novel extended release stimulant medications are formulated as orally disintegrating tablets that utilize a proprietary microparticle modified release drug delivery technology platform. As I mentioned, we had an extremely strong prescription growth quarter during this third quarter with ADHD scripts up 27% year-over-year. The long-term trends we’ve talked about the last few quarters continue to remain intact, including overall growth in the ADHD market as we see an increase in diagnoses and the impacts from the various generic Adderall XR manufacture delays and supply disruptions we’ve discussed over the last few quarters.

Also, we’re continuing to hear of methylphenidate shortages and Johnson & Johnson’s confirmed discontinuation of the Concerta-authorized generic. So now both of our ADHD brands have significant market factors providing tailwinds that we believe may persist for some time and present a compelling growth opportunity for these brands. We continue to see an increase in both ADHD awareness and treatment. The CDC reports that approximately 6 million children ages 3 to 17 have been diagnosed with ADHD based on survey data from 2016 through 2019. This patient population has grown by approximately 36% since 2003s 4.4 million figure. The CDC cites various states estimates that of these 6 million figures somewhere between 58% — 92% of the kids actually receive treatment through medication and/or behavioral therapy.

Interestingly, a recent study of almost 12,000 kids ages 9 and 10 found that only about 26% of kids with parent reported ADHD had ever received outpatient mental health care. Thus, the study suggests that pervasive gaps exist in the treatment of children, especially girls with parent reported ADHD and especially in this post-COVID period, a potentially larger population is in need of treatment. While the study suggests debate about the actual size of the childhood ADHD population, there are also questions concerning adult sufferers. ADHD among adults has also been increasingly recognized over the years. A March 2023 report from the CDC showed a large uptick in stimulant prescriptions to treat adult ADHD concurrent with the COVID pandemic. Insurance claims from employer sponsored plans from 2016 to 2021 showed a 14% increase with the largest single year increase in the 2020, 2021 timeframe.

Yet even as the diagnosed population expands, the current market supply disruptions persisted. In the first 3 months of this year, media attention on these disruptions continued with numerous news articles reporting on this. Fortunately, our supply has remained uninterrupted. I believe the supply disruptions over the past few quarters have enabled Adzenys to gain market and mindshare, and we expect this to persist as new prescribers and patients find their way to Adzenys. As a reminder, Adzenys is approved as bioequivalence to Adderall XR, so our brand is well-positioned to continue to capture additional share as the remnants of the extended release amphetamine shortage remain. We’re on a strong trajectory and have reset our average weekly TRx levels higher than ever before.

Copyright: dolgachov / 123RF Stock Photo

And we believe that will persist long after the supply disruptions have dissipated. As we have discussed for a few quarters now, in the pursuit of continued profitability, one of the key initiatives we have undertaken has been the goal of outsourced manufacturing of Adzenys and Cotempla. This is a lengthy process, but we’ve hit on a number of important markers of late. One of the key miles — one of the two key milestones we achieved was the FDA approval of the Adzenys prior approval supplement, PAS. This approval enables the transfer of manufacturing of Adzenys to our designated third-party manufacturer. The second milestone, the Cotempla bioequivalence study has been successfully completed, and we expect to submit the Cotempla site transfer PAS to the FDA in mid calendar ’23.

This could enable FDA approval by late calendar ’23. As we have communicated, upon the completion of the site transfers of both products and exiting the Grand Prairie Texas facility, we expect to realize an estimated 15% margin improvement of the ADHD brands. Another key step we took in the interim was the sublease of a portion of the Grand Prairie manufacturing site. This is another significant step forward in our goal of improving the margins of our ADHD products in both the short-term through overhead expense reduction, and longer term as we fully exit the facility. I’m definitely pleased with the progress made on this front and look forward to continued progress throughout this calendar year. Let’s transition to our pediatric portfolio, which includes Poly-Vi-Flor and Tri-Vi-Flor.

Two complementary 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, an extended released carbinoxamine based antihistamine suspension indicated to treat numerous allergic conditions for patients 2 years and older. These products serve established pediatric markets and offer distinct clinical features and patient benefits over both branded and generic competitive products. During the quarter, we achieved 81% growth in revenues from a prescription pediatric line, with revenues ramping to $5.3 million compared to $2.9 million in the year ago quarter. The key drivers here are the ongoing commercial execution and increasing product awareness as well as the Aytu RxConnect platform leverage.

These improvements are providing tailwinds for the products prescription growth trajectory. Since we added PVF and TVF to RxConnect platform, we have grown prescription significantly and continue to demonstrate remarkable growth. The most recent CDC data shows that only 63% of the U.S population has access to fluoridated water. And in some states like New Jersey, that percentage is in the mid-teens or less. We are continually evaluating growth opportunities for the fluoride multivitamin line as we look to additional areas in need of fluoride supplementation. In addition to the tailwinds, we’re also launching a line extension Poly-Vi-Flor and Tri-Vi-Flor with a novel folic acid ingredient Arcofolin. Arcofolin offers an improved profile of Metafolin as a body ready L-methylfolate.

Arcofolin’s low water content and low molecular weight of the counter ion yield higher levels of assay folate than other forms of elemental folate currently available on the market. It also has an improved purity profile, enhanced water solubility and an excellent overall stability profile. The transition to Arcofolin also extend the multivitamin brands patent life and provides further differentiation with this novel ingredient. We believe the addition of Arcofolin to the Poly-Vi-Flor and Tri-Vi-Flor product lines will improve these products profile, and we look forward to continued growth and adoption of our unique pediatric portfolio going forward. Overall, I’m pleased with the traction we’re achieving across our Rx segment. ADHD scripts are at record levels and we experienced 81% net revenue growth in our pediatric portfolio.

With positive trends expected to continue coupled with the successful execution of our various margin enhancement strategies, I believe the long-term outlay for the segment is very bright and can carry the company to consistent profitability. Let’s transition now to our Consumer Health segment. As a reminder, within Consumer Health, our core product focuses on branded value based products competing in large categories such as hair regrowth, digestive health, diabetes management and allergy, all competing with national brands. We sell directly to consumers through e-commerce platforms, including branded websites and the Amazon platform. Additionally, the Consumer segment has historically sold products through direct mail. As we touched on the last few quarters, our objective has been to improve the profitability of the Consumer Health segment, with a focus on historically more efficient higher contribution margin online sales channels.

As a result, we are phasing out the direct mail channel in order to focus on higher profit over the counter or OTC medicines, and specifically through our e-commerce channel. This shift may negatively impact revenue growth in the near-term, but will drive improved EBITDA within the Consumer Health segment in the long run. Very clearly across the entire company, our focus is on driving segment and companywide positive EBITDA and profitability. During the quarter, revenue was down 14% compared to the year ago period. However, our e-commerce sales through Amazon were up 13%. We did encounter incremental sales and marketing costs during the quarter primarily driven by increased ad spend. Also, we benefit from a shortage of Rogaine last year, which was a bit of an anomaly, and gave us a big pickup for our competing product Regoxidine back in 2022.

A big part of Consumer Health’s future growth plan is the establishment of a value brand family called C’rcle Health, which we expect to officially launch later this year. You may have seen that we’ve already begun rolling out products under the brand on our Amazon storefront. C’rcle Health represent a brand family of value based OTC medicines addressing a range of conditions. We believe showcasing our OTC medicine product through a single recognized family brand will build more collective brand equity and help to drive improved return on ad spend, repeat customers and overall segment profitability. We still have work to do to fully recognize the benefits within our Consumer Health segment, but incremental progress is being made. So with that overview, let me turn it over to our CFO, Mark Oki, to add some additional color to the numbers.

Mark?

Mark Oki: Thank you, Josh, and welcome to everyone joining us on this call. Let me build upon comments Josh has already provided, starting with revenue. Net revenue for the fiscal ’23 third quarter was $22.7 million compared to $24.2 million for the fiscal 2022 third quarter. Looking at the component parts, net revenue from prescription product sales in the fiscal 2023 third quarter was $13.8 million, compared to $13.9 million in the same quarter last year. As Josh noted, ADHD experienced a 21% reduction in net revenue to $8.3 million in the fiscal 2023 third quarter against $10.4 million in the fiscal 2022 third quarter. The ADHD net revenue decline occurred as quarterly ADHD filled prescriptions were up almost 27%. The net revenue decline resulted from three factors.

First, we enacted a planned price increase effective April 1, 2023 that resulted in additional gross to net accruals of $1.2 million for future returns, rebates and discounts related to the channel inventory. This adjustment will not be repeated in the fourth quarter and will result in higher per unit net sales. The second item impacting ADHD net revenue involves the dynamics of our Aytu RxConnect program. As we’ve discussed, the program provides patients comfort that they will not pay more than a fixed out of pocket per prescription price. Even if they have not satisfied the prescription drug plans deductible, our third quarter is the first calendar quarter and the period when many insurance plans reset deductibles. This is the quarter when we historically incur additional saving offers to fulfill our Aytu RxConnect price promise.

The third impact to this quarter’s lower gross to net was PBMs pushing, more prescription drug costs down to the consumer level. Even when those products are covered by a rebate agreement with the manufacturer. The prescription pediatric portfolio experienced 81% growth in net revenue to $5.3 million in our fiscal 2023 third quarter compared to $2.9 million in 2022. For the third quarter of 2023, net revenue from the Consumer Health segment was $8.9 million, compared to $10.3 million in the same quarter last year, a decrease of 14% which is attributable to the channel strategy shift just described. We continue to have a small amount of other prescription revenue. This other pertains to discontinued or deprioritized prescription products. During this year’s third quarter, it totaled $267,000 in revenue against last year’s $514,000.

In general, we expect other revenue to continue to decrease going forward. Gross margins grew to 56% in the 2023 third quarter compared to 52% of net revenues in the year ago quarter. This move in the gross margin percentage was primarily driven by improved manufacturing efficiencies, higher sales of our higher product, higher margin pediatric product lines, and the decision to discontinue low volume, low margin products in fiscal 2022. Gross margin percentages can vary from period to period for various reasons. But we remain bullish on continued improvements in our margins as we get out of the high deductible period, improving our net unit price. And as we complete the manufacturing transfers we’ve discussed, which we believe will add 15 points of margin to the ADHD product line.

As Josh mentioned, we’ve already received the FDA’s approval of the Adzenys prior approval supplement opening the door to the transfer of manufacturing. We anticipate submitting the prior approval supplement for Cotempla in mid calendar 2023 and to receive approval by the end of calendar 2023 or shortly thereafter. On the OpEx side, for the third quarter of 2023, excluding impairment expense and amortization of intangible assets, operating expenses were $20.8 million, compared to $20.6 million in the same period a year ago. Research and development expenses were 856,000 in the third quarter of 2023, compared to $3.3 million in 2022 third quarter. Approximately $401,000 of this $856,000 is associated with the suspended pipeline programs. Net loss for the quarter of fiscal 2023 was $7.2 million, or $1.93 per share compared to $53.3 million, or $35.90 per share for the same quarter last year.

Finally, on the balance sheet, cash and cash equivalents at March 31, 2023 were $19.2 million compared to $19.5 million on December 31, 2022. Let me note that we implemented a 20 for — for 20 reverse stock split effective January 6, 2023. This action enabled the company to regain full compliance with NASDAQ’s listing requirements effective January 20, 2023. With that, let me turn it back over to Josh.

Josh Disbrow: Thank you, Mark. So let me just conclude were I started. At a high-level, our core Rx segment continues to perform at a high-level with record total prescriptions showing combined 32% growth. The various factors we discussed particularly within our ADHD portfolio created some disconnect and some noise between script growth and net revenue, but we believe that will become more closely aligned in the go-forward quarters. As a whole, we remain highly focused on profitability. We had two consecutive positive EBITDA quarters during Q1 and Q2 of this year and the Rx segment is EBITDA positive through our first three quarters. Our Rx products have numerous tailwinds as I discussed. So with these trends, coupled with the actions we have taken to put us in a position to end the year on a high note with a return to those levels achieved in the first half of the year.

And to reiterate, we are off to an excellent start this quarter based on both our quarter-to-date product shipments and our prescription trends with aggregate unit demand up 30% sequentially on the ADHD products and up 41% sequentially on the peds brands, we certainly have the wind at our back. We appreciate everyone’s participation on the call today and will now be happy to answer any questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question for today is coming from Jennifer Kim with Cantor Fitzgerald.

Operator: Your next question for today is coming from Naz Rahman at Maxim Group.

Operator: [Operator Instructions]

Josh Disbrow: Okay, that’s great. Thanks, Roger. Well, thank you, Roger. Thanks, Naz. Thanks, Jennifer, for your questions. Thanks, everyone, for listening in to today’s call. Appreciate your support, your — and your interest. We are very enthusiastic about where we’re positioned today, more enthusiastic about where we’re headed. Future is bright, we have great products, we’ve got a great team that’s working hard. We’ve got great initiatives underway to dramatically improve our margins as we move forward. A lot more to accomplish here between now and the end of the calendar year as we hopefully get the PAS for Cotempla approved. But we are confident that we are on the right track. A lot of the key initiatives that we had put in place over the last couple of years are starting to bear fruit.

We’re excited to see that. So my thanks to the team for all they’re doing to enable that and thanks to all of you. With that, I’ll close out and say thank you and have a great evening.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.