Aytu Biopharma, Inc Q3 FY2024 Earnings Call

Good afternoon, everyone and welcome to the Aytu BioPharma Fiscal 2024 Third Quarter Earnings Call. All participants are currently in listen-only mode. We will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to Roger Weiss. Sir, the floor is yours.

Good afternoon, everyone and thank you for joining us for Aytu BioPharma's Fiscal 2024 Third Quarter Financial and Operational Results Conference Call for the period ended March 31, 2024. Joining us in 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 press release issued earlier today. Finally, I'd like to call 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 otherwise update or revise any of these forward-looking statements. With that said, let me turn the call over to Josh Disbrow, Chief Executive Officer of Aytu BioPharma. Josh, the mic is yours.

Thank you, Roger, and welcome everyone. The positive operating momentum we've experienced over the past two years continued during the third quarter of fiscal 2024 as ADHD portfolio revenue continued its rapid growth, increasing 49% over the fiscal 2023 third quarter. Further, we improved our adjusted EBITDA by $7 million compared to the year-ago third quarter. On a trailing 12 month look back, our company-wide adjusted EBITDA is now in excess of $15 million, and our Rx business operating income over that same period is over $7 million, a significant achievement for the company as it continues to reinforce the strategic initiatives we've undertaken to reposition Aytu as a growing specialty pharmaceutical company focused on commercializing novel prescription therapeutics. Recall that just two years ago, we had an annual net loss in excess of $100 million. So this has been quite a transformation of our operating profile. As a reminder, our repositioning started back in October of 2022, when we indefinitely suspended our clinical development programs and continued with that decision to wind down our consumer health segment, which we announced in mid-calendar 2023. These two parts of our business were a drain on cash and masked the strength of our Rx segment. When you look back specifically at the Rx business, it has generated over $17 million in adjusted EBITDA over the last four quarters and has achieved positive adjusted EBITDA in seven of the last eight quarters. Our goal is for the consumer health segment to be wound down and closed in mid-calendar 2024. And once completed, Aytu will solely be a specialty pharmaceutical business with our growing ADHD portfolio as our lead products, coupled with our pediatric portfolio focused on our multivitamin franchise and carbonate ER. As we close the loop on the wind down of the consumer business, we believe the aforementioned operating highlights will be made clearly visible to the market, and those investors that screen for growth, margin expansion, and profitability, and this could lead to a re-rating of our corporate valuation as we go forward. Importantly, our financial wherewithal is solid, as seen by our cash balance holding steady at $19.8 million compared to $19.5 million at the end of the December quarter. To expand on the financials in more detail, let me run through a few key points within both our ADHD and pediatric portfolios, starting first with ADHD. As I mentioned, our ADHD portfolio demonstrated a 49% year-over-year increase in net revenue during the third quarter to $12.3 million. The growth in net revenue was driven by strong sales force execution along with the company continuing to leverage and adapt our innovative Aytu RxConnect platform, which we believe is the best-in-class patient support program. As a reminder, from a seasonality standpoint, our third fiscal quarter is where RxConnect access and pricing guarantees provide the greatest benefit to patients and healthcare providers as a result of the January deductible reset from many health insurance plans. Our transparent drug pricing plan works directly through our 1,000 plus RxConnect partner pharmacies nationwide to deliver our products, ensuring predictability of out-of-pocket costs for the patients who need our treatments. Aytu remains committed to ensuring predictable and clear out-of-pocket costs around our branded portfolio. In addition to our strong operational execution, the trends we have talked about over the past two years within the ADHD market have continued. The market continues to experience intermittent supply disruptions and accompanying patient access challenges for generic amphetamine and now Lisdexamfetamine with the recent generic, along of course with various methylphenidate products which continue to experience shortages and in some cases discontinuations. These access disruptions are negatively impacting the lives of too many ADHD patients and their families and continue to frustrate physicians and pharmacies alike. Having just been in the field visiting with customers, I can tell you that these disruptions are very real, and the positive impact RxConnect and our products are having is notable as a real solution for these patients and providers. As these intermittent shortages and patient access challenges have continued, our team has done an exceptional job meeting the demands of patients, having maintained supply to meet the growing demand for Adzenys and Cotempla. As a reminder, Adzenys, the only approved extended release ODT amphetamine for the treatment of ADHD, is approved as bioequivalent to Adderall XR. So our brand is well positioned to continue to capture additional market share as amphetamine patient access remains unpredictable. Cotempla is the only approved extended release ODT methylphenidate for the treatment of ADHD, which competes against the likes of Concerta and other long-acting methylphenidates, which are also in the midst of continuing channel uncertainties. We view the ongoing ADHD supply and patient access situation as one that will likely continue for the foreseeable future in some form or fashion. And perhaps more importantly, this long-term disruption is causing and has caused undue uncertainty well into the future. Even as some manufacturer stimulant products have returned to more normal levels, patients, parents, and physicians continue to question when the next shortage will pop up. And in many providers' minds, other shortages will occur as they have in the past. We just don't know when, and we don't know what coverage may be at that time. So that's where RxConnect comes in. And that creates the opportunity for more and more patients and prescribers to get experience with Adzenys and Cotempla. Not only do patients get effective, reliable ADHD brands at a pharmacy they know and trust, they get these products at a consistent price and perhaps more importantly on a timely and predictable basis. With our products and our robust support services, we are filling a huge gap that continues to be pervasive across the pharmaceutical ecosystem, affecting both brands and generics and reaching beyond ADHD stimulants. We're solving this issue and our results speak to that. And as we look at prescription trends in April and into May, we're seeing growth in Rx’s for the ADHD brands. In fact, ADHD TRXs through the middle of May are trending to make this the highest month in a year following what were consistent all-time highs last year. We're excited about finishing fiscal 2024 with both a growing and strong stimulant franchise. Transitioning now to pediatrics, which represents about 12% of our third quarter Rx net revenue. Similar to what we discussed last quarter, our pediatric portfolio net revenue, which was down $3.5 million, was impacted primarily by payer changes that occurred in the September 2023 quarter. We've seen the multivitamin business stabilize during the past quarter and have started to see some growth here almost halfway through the fourth quarter. We've implemented a number of tactics that give us comfort that we can get back to growth mode across the pediatric portfolio. Given the early signs of recovery and some recent coverage wins across the pediatric portfolio, we're reallocating resources in real time to the pediatric products to capitalize on numerous opportunities with respect to this improved coverage and patient access. The team has moved swiftly and those actions are beginning to show some positive early results. I think it's important for everyone to note how well the overall operations of our business have progressed in light of the current downdraft on the pediatric operations and the potential positive swing that can occur as the initiatives we have implemented come to fruition. But transitioning just here for a bit, one item I think is important to discuss in context to our third quarter was the widespread and widely reported cyberattack that impacted UnitedHealthcare subsidiary, Change Healthcare, beginning back in February. For those not familiar, Change Healthcare, among many other things, enables branded manufacturers, copay programs, savings programs, buy downs, etc., to be processed through what is essentially a switchboard that interfaces with pharmacy dispensing and reimbursement systems. It also interacts with physician billing and reimbursement systems to get those physician offices paid for their services. Among other things, the cyberattack created havoc across the healthcare ecosystem and resulted in many pharma companies' coupon programs not working properly or in some cases not working at all for extended periods of time. This in turn significantly impacted out-of-pocket pricing and patient access to branded products and often resulted in prescriptions going unfilled, in some cases for long durations of time or in some cases losing those prescriptions altogether. Fortunately, we at Aytu felt minimal impact due to the unique attributes of RxConnect and how we interface with pharmacy partner systems along with the broader commercialization approach we take that doesn't rely on any single system of adjudication or any single switch. But it did have some very minimal and transient impact on us, but I'm happy to say we fully recovered and moved past it very quickly. Moving to our progress on the outsourcing of our ADHD brand manufacturing and overall operation improvements, we continue to do a great job on improving our gross margins. Rx gross margins during the quarter were 74% compared to 61% in Q3 of last year, an improvement of 1,300 basis points. We believe there will be continued, albeit smaller improvement, as we complete the transition of Adzenys and Cotempla manufacturing to our outsourcing partners. For those that may not be familiar, we will be shutting down our manufacturing operations in Texas, where we have a manufacturing facility that’s much larger than we need and therefore a source of large fixed overhead expenses and significant elevated costs of goods sold. Everything is on track in terms of the manufacturing transfer and we expect to complete our final in-house production run by the end of June and that remains very much on track. We will continue to incur some costs related to the manufacturing facility through the calendar year as we close down the facility to return it to the landlord. An additional exciting change we've recently implemented is the onboarding of a new distributor to help further optimize the RxConnect platform. Integration of this new distributor into the program along with some modifications around our pharmacy interfacing has been going well and with these changes, we expect to further improve the robustness of our pharmacy partner offerings to further add to the stickiness of the business overall. We view this change as an important one, and it's already showing positive signs for future growth. Quickly on the Consumer Health wind down now. Our team has done an exceptional job effectively managing the wind down of our Consumer Health operations. The process's effect on our adjusted EBITDA was minimal, which is the negative $370,000 impact during the third quarter, more than a $1 million improvement from the third quarter a year ago. We expect to have inventory write-downs and final shutdown expenses booked in the fourth quarter, and then minimal revenue into the first quarter of fiscal 2025. From that point forward we don't expect to discuss the consumer health segment further, as we will be 100% focused on the prescription business. To wrap things up before I turn it over to Mark, it has been our objective to transition Aytu from a multi-pronged operation, which included not only our Rx segment but also our consumer health segment and pipeline development programs, both of which generated negative cash flows. To a hyper-focused pharmaceutical company with management concentrated on growing sales, increasing margins, and adjusted EBITDA and profitability. The Rx business has been adjusted EBITDA positive for seven of the last eight quarters, witnessed by our trailing four quarter company-wide adjusted EBITDA of over $15 million and generating over $7 million in operating income for our Rx business. Our team's planning, coordination, and hard work are all resulting in transitioning this business from a negative cash flow one with losses to now being on the cusp of free cash flow generation and net income as we move forward. Let me turn the call over now to Mark, and I will then come back to wrap things up briefly before turning over to questions.

Thank you, Josh, and thank you to everyone joining this call. Let's look at the third quarter results in a bit more detail. Net revenue in the third quarter of 2024 declined 21% to $18 million from $22.7 million in the prior year period, as we continued our ongoing wind down of our Consumer Health segments. As a reminder, in October 2022, we initiated a strategic mandate to focus our efforts solely on the existing Rx business. This process continues with the Consumer Health segments revenue declining from $8.9 million in the third quarter of 2023 to $4 million in the current quarter, which primarily consists of selling off existing inventory. The other component of our consolidated revenue is Rx segment sales, which rose to $14 million from last year's light quarter of $13.8 million. Breaking down the Rx revenue shows that our core ADHD franchise increased 49% to $12.3 million from $8.3 million in 2023 and the pediatric portfolio declined to $1.7 million from $5.3 million in 2023. As we've discussed previously, the decline in our pediatric portfolio resulted from some ongoing reimbursement issues. As Josh mentioned, we are implementing several initiatives in real time to improve the demand for pediatric portfolio products and are seeing solid signs of improved reimbursement across the portfolio. Gross margins increased to 65% in 2024's third quarter from 56% in 2023, driven by increasing ADHD revenue and the decline in consumer product sales. This improvement was adversely impacted by the previously noted decline in sales of our pediatric products, our historically highest margin product group. As a reminder to any new listeners today, Aytu's top line and margins are impacted by the seasonal nature of our business. On the demand side, many patients take a summer break from the ADHD meds, which primarily affects our first fiscal quarter and to a lesser extent, our fourth fiscal quarter. During the third fiscal quarter, most insurance plans reset deductible amounts beginning January 1st. From January through March, we generally experience greater use of our RxConnect price protection program, which historically has lowered our gross-to-net margins. Please remember that this is part of our normal seasonality and those gross-to-net adjustments historically improve throughout the calendar year. Our operating expenses, excluding restructuring costs, changes in contingent consideration, and amortization of intangible assets were $12.6 million in the third quarter of 2024 compared to $20.8 million in the same period a year ago. This 39% decrease reflects our continued focus on cost reduction and the winding down of the consumer health segment. Research and development expenses were $619,000 in the third quarter of 2024, compared to the $856,000 in the corresponding 2023 quarter. Reflecting a normalized base level and highlighting the absence of any substantive drug involvement expenses consistent with our prior announcements. We recorded a $2.9 million net loss or $0.52 per share versus last year's $7.2 million net loss or $1.93 per share. Please note that due to the difference between US-GAAP and tax accounting, almost $250,000 of the net loss was from an income tax expense. Adjusted EBITDA expanded by $7 million to a positive $425,000 from a negative $6.5 million on a year-over-year basis. Cash and cash equivalents on March 31, 2024, were $19.8 million compared to $19.5 million on December 31, 2023. We are comfortable with this capital level and believe that our balance sheet provides us with a continuing solid foundation to execute our corporate game plan. I should point out that the biggest change in the balance sheet is the classification shift of our $15 million term note from long-term to short-term as it matures in January 2025. In our 10-Q filed earlier today, we continue to include going concern language footnotes to our financial statements. Given our success in restructuring the company's operations, financials, and outlook, we are quite pleased with where we sit regarding our borrowings. We have begun the refinancing process of our term loan and believe that a new facility can be obtained at equal or better terms compared to the maturing one. We will re-evaluate the requirement to include going concern language in our financial statements if and when we complete this refinancing. Again, as we finish up our fiscal 2024 and look into fiscal 2025, we anticipate the exit from our Consumer Health segment, a completed ADHD production shift to our outside contract manufacturer, and related exit from our Texas manufacturing facility, a steady rebound in our pediatric portfolio revenue, and the refinancing of our term loan. These ongoing shifts and improvements should bolster our top line, while lowering our cost structure and allowing us to focus on free cash flow and net income aspiration.

Thanks, Mark. As you might imagine, I continue to be extremely pleased with the continued progress in our business. It's better positioned today than at any point in our history. With over $15 million in company-wide trailing 12 month adjusted EBITDA and nearly $12 million of cash at the end of March. And while there is still work to be done with our pediatric portfolio, given the strength of our ADHD portfolio, the pending benefits from the wind down of the consumer health business, as well as the outsourcing of the manufacturing. We're excited about the overall trajectory of the business as we finish fiscal 2024 on a high note. I want to thank the entire team at Aytu for their hard work and dedication to delivering for both patients and stockholders. Thank you to everyone participating on today's call. I'll now be happy to answer any questions.

Certainly. At this time, we will begin the question-and-answer session. Your first question is from Naz Rahman from Maxim. Your line is live.

Hi everyone. Congrats on the progress and thanks for taking my questions. I'd like to start on the ADHD business. Seeing how the sales are continuing to grow and the franchise is seemingly growing larger and larger every day. How has your conversation with the DEA evolved? Have they changed at all? Has the frequency changed or has there been any concerns or anything regarding getting additional quota?

Yes, the communications with the DEA have been very productive. Our team that interacts with the DEA regularly has had significant discussions. The DEA has increased the frequency of quotas, and their engagement with the industry has notably improved. We are well-positioned to benefit from this, as is the rest of the industry. We feel confident in our ability to secure quota moving forward, as we have increased our dialogue with them. The transparency from the DEA is at its highest level ever regarding their criteria for allocating and granting quotas, and the data sources they use. The industry is also doing a better job of providing the DEA with what they need and understanding their criteria. I want to emphasize that our products Adzenys and Cotempla have never experienced a stock out, and we maintain solid supply levels. We are continuously working to increase our supply while staying within our desired inventory levels. We are comfortable with our position as we transition to the outsourcing arrangement with our manufacturer and believe we will continue to have access to what we need. The key is effective communication, and the DEA's recent improvement in communication with the industry, especially with us, has been exceptional.

Got it. Thank you. That's helpful. And in terms of your promotional strategy, could you just comment on what the current strategy is now with prescribers? Are you trying to get your existing prescribers to write more scripts or are you also more focused on getting more prescribers? Probably a combination of both. Could you also comment on what that dynamic is right now too?

We are always focused on both expanding our prescriber base and ensuring that existing prescribers continue to write prescriptions. The recent shortages have brought in a significant number of new prescribers, and our goal is to keep Adzenys and Cotempla at the forefront of their minds when they choose stimulants. Amid ongoing uncertainties, we emphasize that we've never faced stock issues with these products, we maintain consistent pricing programs, and RxConnect offers substantial benefits to their patients. We guarantee that prescriptions will not exceed $50 for commercially insured patients, regardless of the form or status of coverage. This eliminates uncertainty regarding availability, as patients know they can obtain these products from one of the RxConnect partner pharmacies at a fixed price. This comprehensive approach provides a complete solution for physicians. We have seen growth in prescriptions not only because our products effectively alleviate symptoms but also because they are consistently available at a reliable price from trusted neighborhood pharmacies. This message resonates well with prescribers, especially as they transition back to previously available options like Adderall XR and its generics. The lingering concerns from past shortages for both physicians and patients motivate them to consider our products, which has positively influenced prescribing patterns. It's encouraging to see this trend continue.

That was helpful, thank you. On the pediatric multivitamin business, obviously, you said you were engaged in a lot of initiatives and you're starting to sort of see a return to normalization. I think you could elaborate more on that. How much of the prior business do you think you can get back, like revenue-wise, and what do you think a new normal might look like for that piece of business?

Yeah, good question, Naz. We haven't guided, as you know, historically. So as not to guide, I would suggest we think we can get a significant percentage of our business back across the portfolio. Without giving a specific number, what I can say is, look, we've recently done some work and have really started to put some things into place to capitalize on some of the positive payer changes that we've observed in some major areas. And if things go as we're sort of projecting, I think we can get both Karbinal and the multivitamin line back to a substantial level. Is that to suggest we bring it all the way back? You know, perhaps not, but I think over the long term with all the things that we have in place and being able to manage some of these new coverage aspects, particularly if we look at some of the state plans that have begun covering both sets of products, both portfolios, feel very good that we can get these back to a reasonable level. Obviously, coupled with that is what we expect to be continuing growth on the ADHD side. And so, imagine if you will for a company that still, even in our lowest quarter, which is seasonally consistently our lowest revenue quarter, and that's our lowest margin quarter, for us to have generated almost $0.5 million in positive EBITDA, despite the fact that the pediatric side really has significantly declined. If we can bring those products back to any degree, 20%, 30%, 40% or even more, that obviously starts to translate immediately into not just operating income but net income and free cash flow. So we don't need to see a tremendous amount of growth back from the bottom, which we think we're at. At this point, we think we've actually sort of started to move up from the bottom as we really see the business stabilize, again, on both Karbinal as well as the multivitamin. So encouraged with the early work that's been done. Our commercial team's done an exceptional job of moving very quickly, being very nimble and responsive to some of these payer changes and excited to see how these favors as we move forward. We'll take some time to get it back to a significant level, but encouraged with the momentum and we're looking solid here as we enter our fiscal 2025 here in the next month and a half.

Got it. That was very helpful. And my last question is actually just on the Change Healthcare impact. I know you said it was nimble, but was it possible for you to quantify the potential sales impact? And did that Change Healthcare situation impact all the different business lines or just a couple of them or a few of them?

We haven't quantified any specific potential revenue impact because it was a temporary situation that we resolved quickly. That said, there was likely a small and indeterminate amount of revenue impact, but I'm hesitant to assign a number to it. While some companies have done so, we prefer not to because we've moved past this issue and responded effectively. We have multiple switches that our customers can use, allowing us to manage the situation without significant reliance on any single vendor. Although we know some competitors faced much greater challenges, particularly in the ADHD sector, our copay programs and prescriptions continue to perform well. There were just a few days where we had to make adjustments. Overall, any impact on us was minimal, less than 10% of our revenues, and very transient. We have positive EBITDA, and as we enter Q4, which often brings strong results, we feel optimistic. It's an afterthought for us, though it remains a concern for others. We can leverage this situation to show potential clients that our programs were unaffected. If issues persist, we can present ourselves as a solution in the market.

Thank you. That was very helpful. Thanks for taking all my questions. And once again, congrats on the progress.

Thanks, Naz.

Thank you. Roger, while we're waiting to see if there are any other questions, let me relay a couple that have been sent in offline. Josh, this quarter showed very strong ADHD revenue growth again. How much of the 49% increase do you think is due to ongoing disruptions in the category versus organic execution-based growth? The other question is, I know you don't provide forward guidance, but how do you view fiscal year 2025?

Yes, thank you, Roger, for sharing those insights. We're currently experiencing fluctuations in shortages, but I would say the macro environment concerning ADHD is beginning to stabilize. This growth is primarily organic and driven by effective execution from our sales team. We've entered new markets and are seeing growth in areas that had not been active for several years. It’s encouraging to see this uptick in different regions across the country. We continue to utilize RxConnect effectively. While the impact of previous shortages is still felt, as conditions normalize, it's important to remember that we have two reliable and effective products that patients respond well to. I want to commend our team for their excellent execution, which has shown solid growth across various territories, even in places without a sales force present. Looking ahead to 2025, we are optimistic about our future prospects. As we approach the end of fiscal 2024 in June, we expect to finish strong, acknowledging that ADHD seasonality plays a role. We anticipate continued improvement in our gross-to-net figures, thanks to various initiatives behind the scenes aimed at enhancing profitability on a per-prescription basis. The addition of a new distributor has been rewarding and has transitioned smoothly. As we move into the next calendar year, our company will be significantly streamlined compared to the past, focusing primarily on the Rx business, particularly the ADHD and pediatric portfolios. We will vacate the Grand Prairie, Texas facility by the end of this calendar year, and our R&D spending will remain minimal. We plan to refinance our debt with more favorable terms, which will further enhance the company's health as we enter 2025. We expect to maintain positive EBITDA, significantly increase revenues, and effectively manage expenses. This quarter provides a good indication of our expense base, which is likely to decrease further as we fully exit Grand Prairie and the consumer segment. We also anticipate an increase in gross margins once we transition entirely to our contract manufacturer and packager. Overall, there are many positive indicators, though some work remains. Using a baseball analogy, I’d say we’re rounding third and heading for home in completing our major initiatives. With another quarter or two, we expect to successfully finish the transformation that has been in progress for a couple of years.

Josh, thank you. Operator, are there any other questions?

Thank you. There are no further questions in the queue. I'll now hand the conference back to management for closing remarks. Please go ahead.

Thank you all for joining us today. We appreciate those who have asked questions and are eager to wrap up this quarter strong. We look forward to sharing our full-year and quarterly results in September after we file our 10-K. Thank you again for your continued support, and have a great afternoon and evening wherever you are.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.