Earnings Call Transcript - ETON Q3 2023

Operator, Operator

Good afternoon, and welcome to the Eton Pharmaceuticals Third Quarter 2023 Financial Results Conference Call. Please be advised that this call is being recorded at the company's request. At this time, I would like to turn it over to David Krempa, Chief Business Officer at Eton Pharmaceuticals. Please proceed.

David Krempa, Chief Business Officer

Thank you, operator. Good afternoon, everyone, and welcome to Eton's third quarter 2023 conference call. This afternoon, we issued a press release that outlines the topics we plan to discuss on today's call. The release is available on our website, etonpharma.com. Joining me on our call today, we have Sean Brynjelsen, our CEO; and James Gruber, our CFO. In addition to taking live questions on today's call, we will be answering questions that are emailed to us. Investors can send your questions to investorrelations@etonpharma.com. Before we begin, I would like to remind everyone that remarks made during today's call may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. Please see the forward-looking statements disclaimer in our earnings release and the risk factors in the company's filings with the SEC. Now I will turn the call over to our CEO, Sean Brynjelsen.

Sean Brynjelsen, CEO

Thank you, David. Thank you, everyone, for joining. And I'd like to first start off with a discussion of our third quarter. This was a very strong quarter for the company, and in fact, our 11th straight quarter of sequential product revenue growth. More importantly, though, we achieved a critical milestone for the company by delivering positive cash flow from operations. This positive cash flow from operations is solely from product sales and royalty revenue. There were no one-time benefits from licensing revenue in the quarter. And as many of you know, we had previously communicated to investors that our goal was to reach cash flow breakeven by the end of this year. So I am pleased that our strong revenue growth and disciplined cost structure allowed us to reach this critical mark a whole quarter ahead of schedule. We are growing rapidly and expect that to continue for the foreseeable future, but we are also committed to profitable growth. I think our recent results are proving that to investors. While our revenue this quarter increased an impressive 118% year-over-year, our selling, general and administrative expenses increased by only 4% year-over-year. This underscores the very attractive operating leverage in our business, and we expect to continue delivering rapid revenue growth, both from existing products and new product launches, while seeing minimal increases in expenses. Having our business reach a cash flow positive state also means that our significant cash balance, which finished the quarter at more than $22 million, is largely excess cash that can be invested in additional rare disease products to expand our portfolio and increase our revenue and earnings growth even further. Now turning to specific product detail. Sales of ALKINDI SPRINKLE continue to be strong, delivering significant growth over the prior year period of Q2 2023. With an estimated 5,000 patients that suffer from adrenal insufficiency under the age of 10, we continue to believe we are in the early innings of the ALKINDI growth story. The product has a long runway for growth ahead of it throughout the 2034 patent. In fact, we are in the midst of launching the ALKINDI SPRINKLE sampling program, which I expect to go live in the coming weeks. These samples will be available in pediatric endocrinology offices and will also allow newly diagnosed patients or converting patients to immediately start therapy on ALKINDI SPRINKLE as they leave the doctor's office. We believe the sampling program will have a positive impact on the product's growth in the quarters to come. As many of you know, we are doubling down on our commitment to the pediatric adrenal insufficiency community with the development of our ET-400 product candidate. ET-400 is a proprietary patent-pending formulation of liquid hydrocortisone. We believe the product will appeal to a significant portion of the market that is still relying on unapproved compounded hydrocortisone oral suspensions, where safety and efficacy have not been proven. Once approved, patients will be able to choose ALKINDI SPRINKLE or ET-400 for the hydrocortisone replacement therapy. With both products, we believe we will be able to offer a compelling portfolio that addresses the full spectrum of unique preferences among the estimated 5,000 children under the age of 10 that suffer from this disease. We expect the combined peak sales of these products to exceed $50 million annually. Last week, we held a pre-NDA meeting with the FDA to discuss our NDA submission for ET-400. The meeting went very well, and we believe the agency is supportive of the program. However, we will be conducting one additional bioequivalency study to address some of the questions from the agency and to put ourselves in the best position for a smooth application review and approval. We intend to immediately kick off the process for this study and expect to be in a position to submit the NDA in the middle of 2024. Moving on to Carglumic Acid, which also had a strong quarter. The product continues to outperform our original estimates, and we are continuing to reap the benefits of our expanded sales force as well as the recent launch of Betaine Anhydrous. Betaine shares the same prescriber base as Carglumic Acid and its launch has increased our interactions with metabolic geneticists. Betaine is still early in its commercialization, but we are already seeing good adoption and have received positive feedback from patients and prescribers. In early October, we announced the acquisition of FDA-approved Nitisinone Capsules, which will further leverage our presence in metabolic genetics. We believe there are roughly 200 to 300 patients in the United States currently on Nitisinone, and the market is estimated to be more than $50 million annually. We expect to launch Nitisinone during the first quarter of 2024 and will offer all patients our Eton Cares support program, which helps increase accessibility, including prescription fulfillment, insurance benefits investigation, educational support, and help in obtaining financial assistance for qualified patients. We believe our commercial advantages, existing relationships with prescribers, and experienced sales force will allow us to capture a meaningful percentage of the $50 million market. I hope it is clear that our existing commercial products and our late-stage pipeline have us very well positioned to deliver strong organic growth for many years to come. But we are not resting. We believe there is a significant opportunity for us to leverage our resources and grow even faster through additional business development. Our strong balance sheet has put us in a very advantageous position relative to many industry peers that are over-leveraged, unprofitable, or struggling to raise capital. We believe the environment for new product acquisitions is the best it's been in a while, and we remain hard at work to close acquisitions of rare disease products that are commercial or in late-stage development. We are very pleased to close the acquisition of Nitisinone in October, which was acquired out of bankruptcy, but on very attractive terms. The transaction is expected to deliver a very high return on investment and was a terrific strategic fit with our metabolic genetics presence. However, we look forward to even larger opportunities, preferably branded, patent-protected assets where we can add value with our sales infrastructure and expertise. With Nitisinone launching in Q1, we will have four commercial products on the market. Adding on the potential from our numerous late-stage pipeline candidates and the attractive business development environment, I remain very confident in our ability to reach our goal of having 10 commercial rare disease products on the market by the end of 2025. Before we wrap up, I just wanted to acknowledge and thank our dedicated employees. Building the business to reach cash flow positivity is an impressive milestone that is the result of years of hard work from our dedicated employees. However, it's just a stop along the way to our much larger goal of becoming a highly profitable and well-respected leading rare disease company. We are just getting started. I couldn't be more excited as I look forward to Eton's prospects for 2024 and beyond. With that, I'll turn it over to James, our Chief Financial Officer to discuss the financials.

James Gruber, CFO

Thank you, Sean. Our third quarter revenue was $7.0 million compared to $3.2 million in the third quarter of 2022, or a 118% increase driven by increased sales volume for ALKINDI SPRINKLE and Carglumic Acid. Revenue is comprised entirely of product sales and royalties in both periods. Product sales and royalty revenue grew $0.5 million or 8% compared to the second quarter of 2023. We expect continued product sales growth moving forward, and ALKINDI SPRINKLE revenue will likely trigger a one-time sales-related milestone payment of $1.0 million under the terms of the ALKINDI SPRINKLE licensing agreement from 2020. While this payment in the fourth quarter will negatively impact gross margin, it serves as an important milestone for the product as we continue to provide meaningful treatment to new patients. R&D expenses for the quarter were $0.6 million, compared to $0.7 million in the prior year period. The decrease was primarily due to decreased expenses associated with hospital products sold to Dr. Reddy's in 2022. We expect a slight increase in R&D spend in future quarters due to development activities related to ET-400 and ET-600. General and administrative expenses for the quarter were $4.3 million compared to $4.2 million in the prior year period. The slight increase in G&A expenses was mainly due to increased employee-related expenses related to sales force expansion, partially offset by decreased sales and marketing expenses associated with third-party sales commissions. We expect G&A expenses to remain consistent throughout the rest of the year and still anticipate our full year G&A expenses to be approximately $20 million. Total company net loss for the third quarter of 2023 was $0.6 million or $0.02 per basic and diluted share, compared to a net loss of $3.0 million or $0.12 per basic and diluted share in the prior year period. Eton finished the third quarter with $22.1 million of cash on hand and generated $0.9 million of operating cash during the quarter, solely from product sales and royalty revenue, which, as Sean mentioned, was ahead of schedule. We remain confident that our cash position is sufficient to allow us to execute our plan and continue pursuing bolt-on transactions and new product developments. This concludes our remarks on third quarter results. And with that, I'll turn it back over to the operator for Q&A.

Operator, Operator

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from Raghuram Selvaraju from H.C. Wainwright & Company. Your line is open.

Raghuram Selvaraju, Analyst

Hi. Thanks very much for taking my question. So I was just wondering if you could elaborate a little bit on what you expect your broader commercial strategy to be in the cortisone product space and within endocrinology as a whole. And if you can give us a sense of what additional product opportunities or types of markets you might be looking at alongside, for example, CAH?

Sean Brynjelsen, CEO

Hey, Ram. Our commercial strategy in pediatric endocrinology and around CAH. We feel like we cover our targets very well today as we launch additional products, including ET-400 and ET-600, which is in the same call point. We would potentially look to expand our sales force if warranted at that point. We are looking to expand with additional pediatric endocrinology products, but we would also move into other specialties in other ultra-rare conditions. As long as it's a product that can justify some incremental spend, typically, these ultra-rare products have a very small prescriber base, so we can commercialize with a very small targeted sales force. So we are open to other therapeutic areas as well as our current pediatric and metabolic genetic specialties.

Raghuram Selvaraju, Analyst

Thanks. And can you give us an update on the situation with Dr. Reddy's and cysteine hydrochloride and if there has been no substantive update so far recently, when we might expect the next development in the case?

James Gruber, CFO

We do not anticipate any further milestones from that product. It seems unlikely that there will be an imminent launch that would activate the outstanding milestone payment to us. As a result, our focus has been on our commercialized products. We do not expect any revenue related to that transaction, but we are primarily concentrating on the products we are launching ourselves.

Sean Brynjelsen, CEO

Ron, this is Sean. How are you? Yes, so on the system, from what we've been able to gather from the public domain, Dr. Reddy's had some sort of a settlement. We don't know the exact details of it, but it appears that there's a 2029 launch possibility. But that's outside the window of what we would expect in terms of getting any kind of milestone payment from them. So we've really taken it off of our radar, so I wouldn't say it's a non-event on a go-forward basis.

Raghuram Selvaraju, Analyst

Okay. Thank you. That's helpful. And then lastly, I was wondering if you could just recap for us the long-term timeline for Zane.

Sean Brynjelsen, CEO

Yes, the auto-injector. So we're looking at that product as the development work is largely completed. There had to be a site transfer for reasons I won't go into. They're in the middle of that site transfer, and they expect to make the registration batches early next year. What that would mean is a filing about 12 months later, so that filing would be in 2025, followed by a launch. We're hoping in 2026. The product still is in really high demand where we know that it's something that's needed. And as far as we can tell, there's nothing else really imminent on the horizon. So that's where that project is at. We may consider doing another version of it as a prefilled syringe since the formula is stable and so it might be quicker to initially launch with the prefilled syringe as well. We're in discussion with costs to check on that possibility. We'll see what happens.

Raghuram Selvaraju, Analyst

Thank you very much.

Sean Brynjelsen, CEO

You're welcome.

Operator, Operator

Thank you for your question. Our next question comes from Rami. Your line is open.

David Krempa, Chief Business Officer

Thank you, operator. So, with two emailed questions that we can answer. First one, do you expect positive cash flow to be repeated in Q4 and beyond?

Sean Brynjelsen, CEO

So, James, why don't you take that?

James Gruber, CFO

Sure. Since the third quarter was a significant turning point for us with positive operating cash flow, we anticipate that trend to continue in the normal seasonality of the first quarter. As mentioned, with the substantial growth of ALKINDI SPRINKLE, we will receive a milestone payment in the first quarter. Despite the usual seasonal factors at the start of the year, we expect to maintain positive operating cash flow beyond that, certainly throughout the full year of 2024.

David Krempa, Chief Business Officer

Second question, what's your expectation for 2024 revenue and earnings?

James Gruber, CFO

We still expect revenue to increase significantly for product revenue over 2023. We will not be providing detailed guidance for 2024 at this time. However, when we release our Q4 earnings, we will offer more guidance for the full year 2024.

David Krempa, Chief Business Officer

That's the end of the emailed questions. Thank you, everyone, for joining us for our third quarter earnings.

Operator, Operator

Thanks, everyone, for the participation in today's conference. It does conclude the program. You may now disconnect. Have a good evening.