Earnings Call Transcript - AYTU Q2 2025

Operator, Operator

Good day, everyone, and welcome to the Aytu BioPharma Fiscal 2025 Q2 Earnings Call. At this time, all participants have been placed on a listen-only. It is now my pleasure to turn the floor over to your host, Robert Blum. Sir, the floor is yours.

Robert Blum, Host

All right. Thank you very much and good afternoon, everyone. As the operator indicated, during today's call, we will be discussing Aytu BioPharma's fiscal 2025 second quarter operational and financial results for the period ended December 31, 2024. Joining us on today's call is Aytu's Chief Executive Officer, Josh Disbrow; and Ryan Selhorn, the company's Chief Financial Officer. 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 teleconference numbers and conference ID provided in the press release issued earlier today or by utilizing a link on the company's website under Events & Presentations. Finally, I'd also like to call to your attention 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, 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, let me turn the call over to Josh Disbrow, Chief Executive Officer of Aytu BioPharma. Josh, please proceed.

Josh Disbrow, CEO

Thank you, Robert, and welcome everyone. I'm pleased to be speaking with you again this quarter. During the second fiscal quarter, we successfully returned both our ADHD and pediatric portfolios to positive sequential prescription growth. The first such occurrence where both portfolios exhibited sequential growth since late 2022. Our commercial team has done a great job navigating the various dynamics of the macro landscape for our addressable markets, with our sales team increasing physician demand as we also drive improvement in payer coverage and broaden distribution and dispensing. We're achieving this while continuing to leverage the benefits of our first-in-class Aytu RxConnect platform. I’ll touch more on both our ADHD and Pediatric market trends shortly. This positive commercial momentum runs parallel to our corporate optimization initiatives, driving efficiencies within our operating structure with at least $2 million in future cost savings expected annually. This cost saving, which we recently announced, is in addition to the significant operating expense reductions we're already realizing due to the transformation we've undergone in the last two years, including the suspension of pipeline spending, discontinuing our consumer health operations, and exiting our manufacturing operations. Our focus going forward is on our profitable prescription business and leveraging the unique capabilities of our commercial infrastructure in the Aytu RxConnect platform, while also pursuing additional in-licensed or acquired products. Even before the full realization of our optimization savings takes hold, we reported our seventh consecutive quarter of positive adjusted EBITDA and our second consecutive quarter of net income. We remain on track to drive the business to positive cash flows. In fact, our cash balance at the end of December was $20.4 million, which was up slightly from $20.1 million at the end of September. All told, I’m very pleased with the continued progress made during the second quarter and the outlook for the rest of the fiscal year. Let's jump into the script numbers, trends, and outlook for each of our portfolio areas, starting with ADHD. For the quarter, scripts for the ADHD portfolio were slightly over 99,000, which compares to just under 99,000 in the first quarter and 111,000 in Q2 of last year. From a top-line perspective, ADHD net revenue was $13.8 million in Q2 compared to $15.3 million in Q1 fiscal 2025 and $16.6 million in Q2 of last year. We went into great detail last quarter discussing the commercial re-pickup we had that boosted ADHD net revenue. I want to reiterate this as it highlights the improvement we saw during this quarter on a like-for-like net revenue basis. As you may recall, quarter we resolved a multiyear rebate dispute with a payer concerning unauthorized commercial rebates on our ADHD products, which had previously reduced our net revenue in prior periods. The resolution resulted in a one-time increase in net revenue of $3.3 million during the first quarter and a reduction of that liability we've been carrying on our balance sheet for the past few years. If you exclude the $3.3 million from Q1's net revenue, ADHD net revenue would have been $11.9 million. Thus, the $13.8 million we just reported in Q2 on approximately 99,000 scripts compares very favorably with $11.9 million in net revenue on about 99,000 scripts in Q1. Our per-script net price actually increased sequentially. ADHD net revenue was up 16% sequentially on a like-for-like basis, excluding a one-time item. This highlights an improvement in our gross to net, which, given our business model, is somewhat expected heading into the final quarter of the calendar year. Looking more broadly at the ADHD stimulant market, we continue to see conditions returning to a more normalized state following significant market-wide stimulant shortages that began in early 2023, which impacted the supply of products like Adzenys XR and other ADHD stimulant medications. Fortunately, Aytu's supply was never impacted, allowing us to realize both short-term and long-term benefits from the shortages others were facing. With the market more normalized, the short-term benefits we experienced have complicated year-over-year comparisons. However, as I mentioned earlier, the sequential trends are quite positive, and we are above the base levels from just a few years ago, as many patients that were moved over to Adzenys or Cotempla have stayed on longer term. Now, transitioning over to the Pediatric Portfolio. As we've communicated over the last few quarters, within Pediatrics, we were impacted by several payer changes. Initially, we noticed the impact when a large payer stopped covering a significant portion of Pediatric multivitamins, affecting the entire multivitamin class. This was worsened by our concentrated dispensing areas where this payer holds a large market share. Our antihistamine was similarly affected by a payer change in an area where we had a significant concentration of prescribers with that product predominantly covered by Medicaid. Fast forward, we've focused on diversifying our prescriber base and improving payer coverage for both franchises, multivitamins and our antihistamine franchise. In particular, we've concentrated on expanding promotional areas, diversifying our base of dispensing pharmacies, and bringing on several state Medicaid plans that we weren’t covering before. Rather than relying solely on one or two baskets, we're now in many more states that are covering our products, and this improvement has primarily occurred in the last six months. With that said, Q2 is really the first quarter where we started to see the benefits of this improved coverage and access, with significantly better public and commercial coverage for our Pediatric brands. We've also deployed sales representatives and shifted resources to our Pediatric products. Previously, Pediatric sales were managed by a much smaller group of sales specialists focused solely on promoting these products. We've now broadened our sales force's product mix, providing a better balance and more impactful product penetration, with increased emphasis on Pediatric products across much of the sales force. As stated in our press release, we're already reaping dividends and feeling encouraged by our latest prescription and net revenue trends. During Q2, Pediatric portfolio net revenue was up 86% sequentially as prescriptions increased significantly. We're not yet back to previous levels, but I'm pleased with the positive trends over the last two quarters, reflecting a $10 million annualized run rate for these products when considering this current quarter. We're seeing good momentum as we implement our three key strategies: improve coverage, diversify the prescriber base, and diversify and increase our promotional footprint with the sales force. More broadly, we remain focused on continuing to leverage our flagship best-in-class patient access platform, Aytu RxConnect, which we believe is a significant differentiator for the company and truly benefits patients. Allow me a moment to hop on my healthcare ecosystem soapbox. In today's healthcare environment, it's simply not enough as a pharmaceutical company to approach a prescriber and offer a better clinical solution. You've got to solve the entire problem for the patient, which clearly includes clinical benefits but also solving pervasive payer access challenges that impact patients, pharmacies, and physicians alike. Today, patients can walk into a neighborhood Walgreens, CVS, or Walmart and often have no idea whether they will receive the prescribed product, whether it will arrive in a timely manner, and what price they will pay at the time of purchase, whether that's in the form of a co-pay, cash, or otherwise. The U.S. Pharmaceutical Distribution and Payment System lacks transparency and consistency, which is where Aytu RxConnect comes in. This is a proprietary, comprehensive solution we've developed in-house. Its value protects the dispensing pharmacy, provides confidence to the prescriber, caps patient cash outlays, and minimizes hassles, ultimately allowing patients to get that branded prescription at a predictable and affordable price. RxConnect involves, among other things, a network of about 1,000 pharmacies we partner with across the country. Most of these are independent pharmacies within local geographies that do an excellent job for patients and prescribers and are often well established and recognized in their communities. They are small businesses that work hard to serve patients well and deliver high levels of service. Our network also includes two regional grocery chains that are customer-centric, providing excellent service, and collaborating with us to ensure appropriate stocking of our products. Thus, when we sell our products, we promote both clinical benefits and the full advantages of RxConnect if physicians send these prescriptions to our partner pharmacies. This includes a co-pay that does not exceed $50 for commercially insured patients; in some cases, the co-pay can even be $0. We essentially underwrite the prescription in instances where it’s not covered or a prior authorization is needed. Additionally, in situations requiring prior authorization, our partners can assist in obtaining approval, alleviating that burden from the physician's office. This helps the patient first and foremost by ensuring they receive prescribed products at a predictable, affordable price. It gives physicians confidence that their patients will receive their prescriptions on time and as intended. These are products that patients may take routinely for years or even for life. So it addresses significant issues faced today. One month, a patient pays one price for their prescription; the next month, it may be entirely different because of the pricing strategies employed by pharmacy benefit managers, creating confusion for patients. With RxConnect, we have empowered physicians to prescribe our brands without the fear of callbacks from pharmacies, which might say either they don’t have it, can’t procure it, or worse, receive a call back from the parents of patients about unexpectedly high co-pays. We cut through all of that. For the first time with RxConnect, we've put prescription power back into the hands of physicians and patients. With RxConnect, we believe Aytu can succeed, which means winning for prescribers, patients, and pharmacies alike. We view the Aytu RxConnect program as a game-changer enabling our products to thrive in the marketplace. Looking to the mid and long term, our primary focus will remain on the organic growth of our ADHD and Pediatric portfolios, along with cost containment initiatives on our path to achieving positive cash flows. Beyond that, we also expect inorganic growth, given Aytu's history of strategic transactions. We've demonstrated our ability to identify valuable, smaller assets that may no longer fit within a particular organization. So, we see tremendous potential to leverage our infrastructure capabilities and expertise by in-licensing or acquiring such assets. Of course, we’ll be discerning and aim to acquire these assets at the most attractive terms possible. Presently, our preference is for smaller tuck-in assets that we can integrate into our commercial footprint at a low cost. Ultimately, our aim is to continue bolstering our portfolio, diversifying our revenue base further, and maximizing our high-performing commercial infrastructure. Let me now turn the call over to Ryan to review the financials in more detail, after which I will provide a few closing comments, and we can take your questions. Ryan?

Ryan Selhorn, CFO

Thank you, Josh. Before we delve into the numbers, I'd like to provide a big picture overview of our company's financial standing as we move through calendar 2025 and are more than halfway through our fiscal 2025 year. The company has made significant strides both operationally and financially in the last few years, though it remains somewhat challenging to fully appreciate our progress due to some lingering noise. I would like to remind our stockholders and listeners of our achievements over the last few years and give you a glimpse of where we believe we can go in the near future. To reach this point, we shuttered our Clinical Development program, saving between $20 million and $30 million in R&D expenditures. We powered down and ultimately sold off our cash-consuming consumer health business, and we spent over two years methodically navigating the regulatory processes, demonstrating bioequivalence of our ADHD brands, ultimately outsourcing the manufacture of these products from our underutilized and expensive Grand Prairie Facility. Alongside all of these actions, we've continued to cut overhead while simultaneously investing in business growth. Looking back just two years ago, for the six months ending December 31, 2022, we incurred $15.3 million in G&A expenses, while today we reported $9.6 million for the same period in fiscal 2025, representing a reduction of 37%. Additionally, our sales and marketing expenses for the six months ended December 31, 2022, were $20.7 million compared to the current period's $10.9 million, a 47% reduction, yielding a total reduction of $15.5 million or approximately $31 million on an annualized basis. This signifies a 43% reduction in SG&A expenses on an annualized basis. These strategic changes have allowed us to generate positive adjusted EBITDA and maintain steady cash levels, offering us flexibility and options. The noise I mentioned earlier consists of challenges like working through the higher-cost ADHD inventory produced at our now-shuttered Grand Prairie Facility, one-time restructuring expenses related to our optimization, accounting reclassifications, and reinvigorating our Pediatric Rx business. As we continue to work through these items over the next few quarters, we expect to see ADHD sales rise alongside market growth and the Pediatric sales recover and bolster revenue in new territories. We anticipate gross profit margins improving towards the low to mid-70% range and expect operating margins to reflect our reduced headcount, leaner management structure, and outsourced manufacturing. Now, let's move to the numbers. Please note that our second fiscal quarter financial results are detailed in both our press release and Q2 fiscal 2025 Form 10-Q, which we issued earlier today. Our second quarter net revenue was $16.2 million, down from $18.7 million in last year's second fiscal quarter. The ADHD portfolio net revenue decreased 17% to $13.8 million compared to $16.6 million in Q2 fiscal 2024, illustrating the normalization of the ADHD stimulant supply chain following market shortages that persisted through much of fiscal 2024. As Josh highlighted, excluding the payer resolution entered into last quarter, which produced a one-time increase in our fiscal 2025 net revenue of $3.3 million, ADHD net revenue increased 16% sequentially. On the Pediatric side, net revenue was $2.4 million versus $2.1 million in Q2 of last year. As Josh mentioned, we are pleased with our Pediatric results, demonstrating a year-over-year rebound. Sequentially, these numbers are up approximately 86%. This net revenue improvement for Pediatrics indicates recovery from the previous year when payer changes negatively affected scripts. This turnaround became visible last quarter as the sales and marketing programs we implemented began to reflect through recaptured lost share and geographic expansion. The gross margin for the second quarter was 66%, down from 78% in Q2 of last year. As noted previously, the outsourcing of production from Grand Prairie to a contract manufacturer is creating noise regarding current quarter gross margins, a situation likely to persist over the next few quarters. With the switch to contract manufacturing, we needed to reduce our in-house production while simultaneously boosting ADHD production at the contract manufacturer. Unfortunately, this manufacturing transition leads to decreased gross margins on ADHD inventory made at Grand Prairie since fewer units manufactured meant that a greater share of facility and overhead costs was applied to these fewer units. Consequently, optimal gross margins should improve in the future as we finish selling through the higher-cost, internally produced product. Additionally, we expect gross margins to benefit from the rebound in Pediatric sales, which traditionally yield the highest margins in our product mix. Reviewing the quarter’s operating expenses, excluding amortization of intangible assets and restructuring costs, we saw a slight decrease to $10.2 million from $10.5 million last year. This decline stems from continued cost reduction efforts and improved operational efficiencies discussed earlier. Note that this operating expense figure excludes the Consumer Health business as it has been classified as discontinued. If you take into account actual operating expenses from the prior year quarter, savings are even more substantial. Specifically, looking solely at G&A on a trailing 12-month basis, excluding the Consumer Health business, we have achieved over $7 million in savings. On the sales and marketing front, there’s an additional $2.5 million in savings for a total of $9.5 million in real savings. This has significantly lowered our revenue breakeven level. Net income for the second quarter of fiscal 2025 was $0.8 million or $0.13 net income per share basic and $0.26 net loss per share diluted, contrasting with a net loss of $0.2 million or $0.04 net loss per share basic and diluted in the same period last year. The fiscal 2025 second quarter results were influenced by $3 million of derivative warrant liability gains due primarily to decreases in the company's stock price, compared to a derivative warrant liability loss of $0.6 million in the same quarter during fiscal 2024. Our adjusted EBITDA for this quarter came in at a positive $1.3 million against $5.5 million in the prior year's quarter. The major change here is the impact from the gross margins discussed earlier due to our exit from the manufacturing facility, along with the decrease in ADHD net revenue. Reconciliations for adjusted EBITDA can be found in the press release. Now turning to the balance sheet, cash and cash equivalents as of December 31, 2024, were $20.4 million compared to $20.1 million at September 30, 2024. We continue to manage our receivables healthily while optimizing our inventories through timely deliveries from our various outsourced manufacturers. On the liability side, we are fully compliant with all of our debt covenants. Also, as a reminder, our term note amortizes monthly, and we continue to pay down our outstanding principal balance, which has decreased to $12.1 million as of December 31, 2024. As we've indicated periodically, our business's gross margin percentages can vary due to seasonal and other factors. I’d like to remind all listeners that although we're reviewing second fiscal quarter 2025 results, we are currently operating within the third fiscal quarter, which began on January 1 with the new calendar year. Many, if not most, plan participants today, including consumers of our products or their parents, have had their annual insurance deductibles reset at the start of the new year. Consequently, we anticipate a greater utilization of our Aytu RxConnect Price Protection program in Q3 fiscal 2025, which historically reduces our gross to net margin. Remember that this value add is part of our normal seasonality and our business model. Gross to net adjustments become less pronounced throughout the calendar year as families meet their deductibles and our need to provide out-of-pocket backstop subsidies diminishes. With that, let me turn it back over to Josh.

Josh Disbrow, CEO

Thanks, Ryan. Let me just conclude by saying that we've successfully implemented a multiyear strategic realignment to focus on our profitable prescription business and leverage the unique capabilities of our now streamlined organization. These changes have led to the growth of our novel commercialized prescription therapeutics while driving positive adjusted EBITDA and inching toward profitability. With positive operational trends established, we remain focused on identifying opportunities to leverage our commercial infrastructure in the Aytu RxConnect platform, while we pursue additional in-licensed or acquired products. We continue to expect net revenue and adjusted EBITDA growth from current levels as we strive for positive cash flows. I'm pleased with the significant progress made and look forward to the continued execution of our strategy in the quarters to come. As always, I'd like to thank the Aytu team for their hard work and dedication in delivering for both patients and stockholders. I'm very proud of our collective achievements. With that, thank you to everyone participating on today's call. We are now happy to answer any questions.

Operator, Operator

Certainly. Everyone at this time, we will be conducting a question-and-answer session. Your first question is coming from Naz Rahman from Maxim Group. Your line is live.

Naz Rahman, Analyst

Hi everyone. Congrats on the quarter and thanks for taking our questions. I had a few, first to start the ADHD franchise. It looks like the franchise on a quarterly basis has been hovering around this $14 million to $15 million rate for the last several quarters and see how the shortage issues are improving. Do you think the franchise will return to generating $16 million or $17 million anytime soon? What do you think is the pathway to get there?

Josh Disbrow, CEO

Thanks, Naz, for your question, and I appreciate you being on. We absolutely anticipate growth, and the notion of $16 million to $17 million a quarter seems very feasible. There has been some regression to the mean as the market normalizes. Sequentially, we just need to keep pace with overall market growth and gain a bit of market share to return to that range. I'm confident about that and equally optimistic about the Pediatric products continuing to grow and getting back closer to prior levels after the payer changes.

Naz Rahman, Analyst

Got it. That was helpful. On the Pediatric business, a few questions. It seems like you're seeing growth again, but were there any one-time effects in Q2 or outsized orders that had an impact? Which product had the largest impact during the quarter?

Josh Disbrow, CEO

Good question. No one-time effects. This is organic growth. We can look at prescription growth that aligns well with our net revenue increases, with some variability in gross to net based on seasonality and other factors. So, we are experiencing genuine organic growth from the initiatives we've implemented. As for the primary driver, the antihistamine franchise is the largest contributor to that growth. For instance, carbonol prescriptions hit their highest levels since Q2 of 2024, after a lengthy period of decline. Pediatric multivitamins have bottomed out, and while they haven't returned to desired levels, they're starting to recover.

Naz Rahman, Analyst

Got it. Continuing on Pediatrics, I believe you mentioned that you expanded coverage, including state Medicaid coverage. Can you elaborate on that dynamics across different states? Are you experiencing similar reimbursement levels and frictions across the additional states?

Josh Disbrow, CEO

Yes, happy to elaborate. When we reference expanding coverage, we've secured it broadly. Our Medicaid coverage has multiplied, especially following strategies to lessen our reliance on concentrated states. Prior to these changes, we had limited coverage primarily in a few states, but now we have expanded our antihistamine franchise coverage across many more states. The dynamics vary by state, but we have managed to secure relatively broad-based Medicaid coverage. The rebates remain essentially unchanged, meaning we maintain healthy margins within our reimbursed business. This diversification has alleviated our dependence on any one state. We have also provided increased promotional support and resources in states we expanded to, including the addition of the antihistamine franchise in our representatives' Plan of Action.

Naz Rahman, Analyst

Got it. That was helpful. During prepared remarks, you mentioned expecting an additional $2 million in cost savings. Can you clarify whether that $2 million is expected on top of previous savings?

Josh Disbrow, CEO

No, we would expect that to be in addition to what we've generally realized, starting to yield some benefit in the current quarter. That’s $2 million on an annualized basis—think of it as approximately $0.5 million on a quarterly basis beginning around this quarter. Ryan, do you want to add anything?

Ryan Selhorn, CFO

Sure, this is the result of some of the actions taken in the second quarter, including headcount reductions in G&A and a slimmed-down approach to some of our contracted services. These changes will start yielding benefits in Q3 and Q4.

Naz Rahman, Analyst

Understood. If I could ask one last question regarding business development—could you provide more insight into your progress on potential tuck-in or larger acquisitions? What are the key gating factors, if any?

Josh Disbrow, CEO

In our discussions, I’m enthusiastic about the opportunities we've identified. That said, deals take time and can be unpredictable—even until the final hour. Currently, we’re in active discussions under CDA and assessing these opportunities. We’re looking across CNS/Psychiatry and Pediatrics in terms of opportunities, preferring ones where we might secure small or no upfront costs, even though they can be difficult to arrange. We're focusing on assets that show solid potential and will be accretive. Importantly, we won’t deploy large amounts of capital for major upfront payments but are staying open-minded for the right types of opportunities. I'm optimistic that the current environment stocks will work in our favor.

Naz Rahman, Analyst

Thank you for addressing my questions, and congratulations on the quarter.

Josh Disbrow, CEO

Thanks, Naz.

Operator, Operator

Thank you, Robert. While we wait for any further questions, I have a couple of off-line queries that Naz didn't address, so I will present them. Firstly, are there any updates on the legal matters that were mentioned in earlier calls?

Josh Disbrow, CEO

Thanks, Robert. I'm pleased to report that all of the shareholder litigation outstanding for several years is now resolved. As noted in the 10-Q, both the Witmer class action suit and the Revive Investing case, where Aytu was a nominal defendant, have been settled. One case was settled for governance changes, and the Revive Investing case went through jury trial and was ruled in favor of the defendant. This case has reached a final verdict unless any appeals arise, which we don’t anticipate.

Robert Blum, Host

Fantastic. Ryan, this query is more directed at you—can you expand on what the future operating expense levels might look like? You noted an additional $2 million in savings, but could you provide more context?

Ryan Selhorn, CFO

Certainly. Our management team is keen on controlling future operating expenses, particularly those that don’t affect top-line results. I do not foresee any substantial restructuring expenses impacting our financial statements going forward. With our headcount reductions finalized in Q2, we expect to see ongoing benefits on our operating expense level in Q3 and Q4. To provide context, we've reduced net headcount by 12 individuals recently, which will positively impact future quarters. We also finalized a few residual contracts related to our previous pipeline in early Q3, leading to additional savings. With this in mind, I'm optimistic that the third and fourth quarters will illustrate an optimized operating expense level, allowing top-line growth with minimal incremental cost, especially in G&A.

Robert Blum, Host

Excellent, Ryan. Josh, it appears we have no more questions from the live call. I will now turn it back to you for any final remarks.

Josh Disbrow, CEO

Thanks, Robert. Thanks, Naz, for your questions, and thank you to everyone for joining us on today's call. I’d like to reiterate how grateful I am to the Aytu team for their hard work and for achieving our mission to support patients and stakeholders. I’m immensely proud of our collective progress. We’re enthusiastic about the future and hopeful for the opportunities ahead as we continue to execute our strategies. Thank you once again for participating, and we look forward to sharing our results with you in the next quarter. Until then, have a good evening.

Operator, Operator

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