Aytu BioPharma, Inc.
Q3 2018 Earnings Call Transcript

Published: 12 Nov 2018

[Operator:]

Good afternoon, everyone. Thank you for joining us for the Aytu BioScience First Quarter Fiscal 2019 Business Update Call. With me this afternoon are Aytu’s Chief Executive Officer, Josh Disbrow; Chief Financial Officer, Dave Green; and Chief Operating Officer, Jarrett Disbrow. Aytu BioScience issued a press release earlier this afternoon with details of the Company’s operational and financial results. A copy of the press release is available on the news page of the Company’s website at aytubio.com. 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. In addition, an archived webcast replay will be available on the Company’s Investor page, under Corporate Presentations and Media at aytubio.com, following the conclusion of this conference call. Finally, I would also 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, belief, expectations, and future potential operating results of Aytu BioScience. Although management believes these statements are reasonable based on estimates assumptions and projections as of today, November 7, 2018 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. I’d now like to turn the call over to Aytu’s CEO, Josh Disbrow.

[Josh Disbrow:]

Thank you, Moira. Good afternoon, everyone, and thanks for joining us for today’s first quarter update call. This was an exciting quarter on multiple fronts and the great start to the year. We’re very pleased with the results we brought in and the recent developments that followed quarter end. During the quarter, Natesto achieved all time high revenue numbers and the gross-to-net increased markedly. Also, we just licensed and other exciting commercial stage product in Tuzistra XR, product competing in the $3 billion U.S. anti-tested market. And soon we’re expecting to close on a $5 million debt investment from a very reputable healthcare institutional investor Armistice Capital. The strategic commercial changes we implemented back in the spring with Natesto have taken root and along with the salesforce that keeps getting more effective, we have grown revenues to all time highs. Further, we successfully launched ZolpiMist and earlier than we previously announced. That further strengthens the sales force’s bag it is driving incremental revenue. And later, we’ll discuss the acquisition of Tuzistra XR that nicely complements our primary care portfolio. It was a very busy quarter and I’m proud of what the team has accomplished already this fiscal year. Taking a deeper dive now into our commercial strategy and progress against our stated goals. When we last spoke to investors in August, we said that are transformed commercial strategy and are drive to increase revenue would start to really pay off this quarter. We also said we expected to post substantial sequential revenue growth. That we would launch ZolpiMist and that our commercial model shift would continue to yield a higher Natesto gross-to-net that we’d seen before. And we show that this change wasn’t a blip. I’m happy to share that we’ve done all of these things and more and we believe even more growth is on the way. This quarter we posted 55% topline growth sequentially and netting over $1.4 million in revenue. We also posted a significantly higher gross-to-net and starting on October had begun growing prescriptions at this new higher level profitable scripts. This is due to the continuing success of the Natesto Support Program and the recent enhancements we’ve implemented to drive patients to the newly launched Natesto Direct. The sales team has done an exceptional job in transitioning our physician customers to our patient access model and physicians are increasingly sending patients through the support program. From the first full month of the programs launch in August to October, Natesto total prescriptions through the Natesto Direct program have grown nearly 108% and refills have grown multiples of that. This is to say there’s been strong uptake in patients’ stickiness with the programs now operating at full capacity. We are continuously monitoring and improving the operations of the support programs and we expect to get better at driving scripts into the system, getting these scripts covered by payers and then driving refills. Moving over to ZolpiMist, we booked early revenue from initial stocking orders and are already seeing pharmacy pull-through. While secondary to Natesto in terms of field promotion, our representatives are driving renewed awareness around ZolpiMist and prescriptions are getting pull-through. As a reminder, ZolpiMist and Natesto both compete in nearly $2 billion market. And with ZolpiMist specifically, there are 30 million scripts written annually for just zolpidem. Just 1% of that market is approximately 300,000 ZolpiMist prescriptions are over $50 million in potential net revenue. Our message around ZolpiMist rapid oral spray delivery resonates with physicians and the patient feedback is positive. We’re still in the early innings with respect to ZolpiMist that are happy with the start. With respect to our broader market development activities, it was a very active quarter. It was particularly active as it relates to Natesto. In September, the Journal of European Urology focused – published a clinical trial update on Dr. Ramasamy’s ongoing Spermatogenesis Study. As you may recall, this landmark study at the University of Miami seeks to determine the effect of Natesto on hypogonadal men sperm function and production. With five patients treated for a full six months with Natesto three times daily, the evidence is quite encouraging. Very simply Dr. Ramasamy study has shown and the authors report that after both three and six months Natesto therapy, there was no negative impact on sperm concentration, sperm motility or total motile sperm count from baseline. The key semen parameters correlated to male fertility. Median total sperm count decreased only slightly, but it was not statistically or clinically significant. Also, and to some degree as we would have expected levels for luteinizing hormone, LH, and follicle stimulating hormone, FSH, were reduced but also remain within the normal reference range. Additionally, from an efficacy perspective, 80% of the men had their total testosterone levels restored to above 300 nanograms per deciliter, with the median level at a robust 654 nanograms per deciliter. We reported early in the quarter that the first 20 patients have been enrolled in the study and we expect 40 patients to be enrolled in total. We’re optimistic about the study and potentially what it means for Natesto as the only testosterone replacement therapy that doesn’t appear to impact fertility. We expect to learn of interim results this calendar year and we’ll keep you posted. The final readout is expected next summer. If the study continues to demonstrate limited or no impact on spermatogenesis, the implications are far reaching. This data may enable increased IP protection could solidify an exclusive grab on the 2 million plus younger men with Low T and may even enables specific label claims to be made. We’re excited to see more. We recently met with an academic advisory board comprised of the leading reproductive urologist from around U.S. These academic thought leaders for Dr. Ramasamy present the clinical data from the Natesto Spermatogenesis Study and the response was overwhelmingly positive. The results are so unexpected and compelling that even skeptics sitting in the room have since prescribed Natesto for the first time. We’ll continue to engage with these influential positions around the country to continue to build awareness and efficacy for this one of a kind testosterone therapy. Before speaking just on recent developments and then opening the call for questions, I’ll hand it over to Dave to cover the quarter’s financials. Dave?

[Dave Green:]

Thank you, Josh, and thank you all for joining us today. Today, I’ll review our financial results for this first quarter of our 2019 fiscal year that ended September 30, 2018. First, a couple of housekeeping items. Earlier today, we filed Form 10-Q at the SEC. We also issued a press release earlier today with a summary of the Q1 results. The press release including Q1 financial statements and the 10-Q report can be found on our website, www.aytubio.com. I’ll start this report by acknowledging topline net revenue of $1.4 million is the highest ever quarterly revenue recorded by Aytu since beginning operations in 2015. The $1.4 million of revenue represents 33% year-over-year growth compared to Q1 of 2018 and 55% growth sequentially compared to the fourth quarter of 2018. Adjusting out $245,000 of revenue from discontinued products from last year’s first quarter, our year-over-year revenue growth increases from the reported 33% to 72%. We recognized growth from both Natesto and MiOXSYS was stronger than expected ZolpiMist revenue. The accelerated ZolpiMist launch was began during the second half of July, provided for earlier than expected stocking orders and pull through. That said, record revenue for the quarter was led by Natesto with 44% year-over-year growth. The strong Natesto performance was driven by a favorable gross to net performance, which translates to more revenue dollars for Natesto script. The higher gross-to-net performance was accomplished as a result of the commercial model changes, implemented at the beginning of Q4 last year. This is now two consecutive quarters of strong revenue growth that is directly connected to the strategic changes that were implemented last fiscal year. Our gross profit margin came in at 71% for Q1 which produced more than $1 million of gross profit another Aytu record. The 71% gross margin was slightly lower than the 73% and 74% gross margins reported in Q1 and Q4 of last year. The small relative increase in cost of goods sold was due to shipping costs. Operating expenses this quarter, excluding cost of good sold were $4.4 million and 14% lower than operating expenses reported in the year ago quarter. Q1 operating expenses were also in line with last quarter’s operating expense. Adjusting out non-cash operating expense items required by U.S. GAAP, which are largely depreciation, amortization and equity comp costs aggregate Q1 cash operating expense came in at $3.8 million. This lower level of cash operating expense compares favorably to the $4.4 million of Q1 2018 cash operating expense and to Q4 2018, when we recognized $2.9 million of cash operating expense. Our bottom line loss was $3.4 million, which was reduced from the $4.2 million loss recognized in Q1 of last year. Loss per share of $1.96 was based on a weighted average share counts or approximately 1.76 million shares on September 30. And the balance sheet, we ended the quarter with approximately $4.1 million of cash, restricted cash and cash equivalence giving effect to the $15.2 million of gross proceeds from the public offering we completed on October 9. Our cash balance at the end of October was approximately $16 million. Other than the impact of cash, key balance sheet items at the end of Q1 were stable relative to last quarter. In summary, I echo Josh in a certain that the strategic changes we’ve made to the business implemented just six months ago or making a substantial positive impacts on the financial performance of the company. With 55% topline growth controlled operating expenses, plus it even stronger balance sheet, Aytu’s positioned better than ever. So with that, let me turn the call back over to Josh for some additional commentary.

[Josh Disbrow:]

Thank you, Dave. I’ll touch on some of the developments that have occurred since the quarter closed. As Dave just said, we closed on a $15.2 million oversubscribed offering the first week in October. We had participation from both new and existing investors and brought in multiple fundamental healthcare investors. The offering was led by a large healthcare institutional investor. This new cash infusion position with the company very well, and along with the expected senior note from Armistice Capital, we have the longest cash runway we’ve ever had. In another recent development, I’m very excited to share with you that last Friday we entered into an exclusive license to commercialize the FDA approved antitussive Tuzistra XR and Aytu be named complimentary antitussive that is pending FDA approval. We license these assets from privately held Tris Pharma and look forward the beginning of working relationship with Founder, Ketan Mehta and his team. Tuzistra XR is a truly unique product. They were pleased that we were able to get this deal done with TRIS. Tuzistra XR is the only FDA approved 12 hour codeine antitussive oral solution. It competes in estimated $3 billion market with over $30 million prescriptions written annually. Current codeine antitussives have inherent short term, as they need to be dosed every four to six hours. Thus sleepless nights due to cough and drippy throats persist. This nighttime awakening due to cough is a huge unmet need. As the only 12 hour codeine antitussive on the market, Tuzistra will deliver all day, all night relief from patients cough and cold symptoms. Importantly, Tuzistra have been introduced to the U.S. market and generated more than 40,000 prescriptions in calendar 2017. We believe we can rapidly win back prescribers and her quickly prepping for our launch this cough and cold season. 40,000 prescriptions translates to over 4 million in annual net sales, so we expect Tuzistra to be additive to Aytu’s topline this year. The pipeline antitussive asset is deeply attractive and has already been submitted to the FDA. As that moves forward, we’ll keep you informed. Given that it is complimentary to Tuzistra, the physician overlap will be high. And we’ll of course have overlap with the current primary care in Natesto and ZolpiMist targets. Tuzistra is a seasonal product, so it fits in nicely and can be efficiently promoted during the cold weather months. We expect Natesto and ZolpiMist will continue to be promoted year round. Finally, we expect to close on a $5 million secured note with Armistice Capital very soon as part of securing the TRIS assets. As you may know, Armistice Capital is a very reputable institutional investor focused on healthcare, founded by Steve Boyd, and it’s based in New York City. Armistice focuses on healthcare and largely on small cap companies and it has over $800 million in assets under management. Steve has done an exceptional job in identifying, investing in and advising healthcare companies like Aytu and we’re excited to be working with Steve and Armistice Capital as we grow. Some closing things out, with our significant revenue growth, the launch of ZolpiMist, the licensing of Tuzistra, the Armistice investment in more, a lot was accomplished in our first quarter and here recently. We’re enthusiastic about our current position and our prospects for more growth across our commercial portfolio and we’re very pleased with this quarter’s results. That concludes our prepared remarks, so I’ll ask our operator to open the phones for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question is from Carl Byrnes from Northland Securities. Please go ahead.

[Carl Byrnes:]

Thank you. Congratulations on the progress. With the addition of Tuzistra, can you talk little bit about your expectation in terms of SG&A, how that may change if at all during the course of the year? Are you looking to augment your direct sales force? Or had any sort of direct campaigns and sampling? So anything that you can amplify in terms of how the marketing approach entering with investment here for the cold and flu season. Thanks.

[Dave Green:]

Thanks for your question, Carl. This is Dave. And yes, we do expect to step up in operating expense, its very early at this point. The launch is still kind of being pulled together and in development. So we don’t have a lot of guidance and additional incremental cost at this point. That said, it’s not expected to be anything near proportional with what we’re spending now on our current two marketed products. And I’d also say that we do expect a much larger step up in revenue relative to expense with the launch of Tuzistra for this fiscal year.

[Carl Byrnes:]

Great. And just as a follow-up question if I could. We’re looking at the selling effort with Natesto Being over ZolpiMist being over 50% of folks that are targeted, how would you qualify or quantify Tuzistra with that. I mean mainly it’s going to be marketed to primary care practices. So I think there will be a significant amount of overlap, but any comments you provide along those lines would be great.

[Josh Disbrow:]

Yes. Thank you, Carl. This is Josh. Yes, generally speaking, we call on primary care about half the time. So if you look at Natesto, the targets are cross section of endocrinology, urology and primary care. Some folks are surprised to hear that, some of the largest prescribers of testosterone replacement therapy are primary care physicians. So we’re in those offices. So we can certainly around the winter months really augments the portfolio. Obviously Natesto remains the priority. And then Tuzistra is a frankly a quite simple story, it’s a very straightforward 12 hour cough relief versus the standard four to six-hour dosing. So when there is – in those PCP offices, you offer a quick detail samples. And by the way, that market, the cough and cold market is very sample sensitive. So it’s a less intensive detail than Natesto, so it compliments very well and again, it’s seasonal. So it’s really sort of pulse – and pulse on, pulse off promotion. So we’ll be able to very efficiently do that. While there will be a small step up in SG&A, it will be as Dave said, far less than what we expect to generate an incremental revenue.

[Carl Byrnes:]

Great. And then just one final question, considering Tuzistra is the only coding based 12 hour, if we look at what’s happened with reclassification of Hydrocodone from class Schedule III to Schedule II. How significant [indiscernible] in your eyes.

[Josh Disbrow:]

That’s a good question, Carl. We feel like it’s quite significant and frankly, since the reclassification of Hydrocodone with products like Tussionex, there has been almost no promotion in the field. There’s a smattering of small cough, cold companies that market the old disease and so forth, but generally speaking, there’s not a national footprint out there talking about this. So we expect it to be a significant factor. Moving from his Class III to a Class II is a game changer with respect to receiving samples in a physician office, how their shift, how they’re controlled for and just the overarching concern around opiates and specifically controlled products like C IIs, whereas our product is coding based and because of the level of coding, if it’s a C III. So everything from sampling to the distribution channel to physicians, just overall comfort is different. We believe there’ll be significantly more comfortable writing at Class III, and essentially gives the same efficacy of a Hydrocodone without some of the potential concerns. When you start seeing Schedule II many physicians have began to run for the hills. And that’s quite notable. Just look at the Oxycontin and Hydrocodone markets – Oxycodone, Hydrocodone markets in general, they’ve been greatly depressed. Codeine we think can be a very nice replacement and really help realize some of the gap that that will need to be filled.

[Carl Byrnes:]

Great. Thanks so much and congratulations.

[Josh Disbrow:]

Thanks, Carl.

[Operator:]

[Operator Instructions] The next question is from Tony Pollock from Aegis Capital. Please go ahead.

[Tony Pollock:]

Good afternoon.

[Josh Disbrow:]

Hi Tony.

[Tony Pollock:]

Could you address the insurance, what the insurance is on the two new products to Tuzistra and the ZolpiMist?

[Josh Disbrow:]

Yes, good question. So it’s a different insurance situation, then for example, we have with Natesto. Both Tuzistra and the ZolpiMist are generally speaking the third tier products. And ZolpiMist is a bit different and that it often requires that a patient had been on Ambien before. But many times what we’re seeing if they’d been on Ambien, the physician simply have that included in the chart, the pharmacy calls to get that information, they can get the prescription filled. But the product like Tuzistra, the cough, cold allergy market is not heavily managed, if you will. So these products tend to default relatively readily to just the Tier 3 copay. And with both products, we offer copay savings cards to buy down the patients copay such that it’s competitive with a Tier 2 or even in some cases the price of a generic copay. So the insurance cover is pretty good. Obviously, its 2018 nothing is universally covered anymore. We know that, we understand that and we’ve worked very well within that system. And so we would expect certainly some early learnings and we’ll have to put some things in place to potentially fill any gaps. But at this point, we feel good about the fact that there’ll be largely covered on Tier 3 and then we’ll have the opportunity to buy that down.

[Tony Pollock:]

Great. On the University of Miami study, you talked about you’re having some interim results this year. Is that in 2018 or is that this fiscal year.

[Josh Disbrow:]

We expect this calendar year. So we expect relatively shortly to have an update out to investors, whereby we can report any additional patients that have come through in an overall status. And frankly, at this point we don’t have any reason to believe and haven’t heard anything to the contrary, such that we would expect to continue to see the same types of results. As I mentioned, we had a very, very productive advisory board meeting here in Denver and the reception was nothing short of a positive. It was very, very well received. Frankly, people have a hard time getting their mind around how something like this could not impact sperm production, but the pulsatile dosing, the three times PK profile three times daily dosing seems to be playing a very important role in that. So, yes, excited to report that out here relatively shortly.

[Tony Pollock:]

How long do the patients in the study. How long do they take the product for besides three times daily? How long is that for?

[Josh Disbrow:]

So it’s 24 weeks, so essentially a six-month study. So they come in for a baseline, they come in for a one month, three-month, and then a six-month checkup, and they’re getting a full laboratories as well as human analysis at those time points. And we’re specifically reporting out baseline semen analysis, month three semen analysis, and then month six or essentially week 24 semen analysis. And what we’ve seen with just the first five patients through essentially no impact on any of the key parameters, concentration, motility, and total motile sperm count all stay, essentially flat in fact, concentration actually goes up slightly. So very exciting data.

[Tony Pollock:]

Great. Who’s paying for this?

[Josh Disbrow:]

Well, we are the sponsor, frankly we’ve paid very little. This was what you call an investigator initiated study. Dr. Ramasamy actually approached us. And so we pay by virtue of three product and then there’s some overhead costs that we pay, but it’s nominal quite frankly, call it $50,000 across the entire study. So getting very rich data, but frankly could springboard us to many more things as we get this wrapped up,

[Tony Pollock:]

Do you think this will end up being published in a journal or does that just an announcement from you guys?

[Josh Disbrow:]

I would expect minimally a presentation and likely another interim type of read out that gets published in a journal that hasn’t been specifically confirmed, but based on the level of interest and the fact that the five patient data set was specifically solicit by European urology focused. So I would expect to have additional publications and certainly a publication and what we would expect to be a high impact journal once the entire dataset is a read out.

[Tony Pollock:]

And the final should be next summer is that do you say?

[Josh Disbrow:]

Realistically, next summer, we expect to be able to read that out. And at that point, we’ll obviously take stock of the data and really evaluate next steps with respect to getting it into the label. Obviously, broadening our claims and are already moving forward in earnest around, an IP strategy in terms of how this might further support our patent coverage.

[Tony Pollock:]

All right, good. Could you give us a little idea on October and November sales?

[Josh Disbrow:]

It feels very good to say, Tony, that we continue to be very much on track with our internal expectations and while we don’t guide. What I can say is, we are absolutely where we expect it to be, where we wanted to be, the improved gross to net on Natesto has been – has really, really helped a lot. And with that new improved much higher gross to net, we’re now growing in the month of October, had our best month since the change and we would expect November to continue on that trend. Obviously, we’ve got a holiday week with Thanksgiving. We’ve got more or less a couple of holiday weeks with December. We’ve got those appropriately accounted for and I think this is going to be a very solid quarter,

[Tony Pollock:]

Thanks.

[Josh Disbrow:]

Thank you, Tony.

[Operator:]

We have a follow-up question from Carl Byrnes from Northland Securities. Please go ahead.

[Carl Byrnes:]

Thanks. I think you referenced cash around approximately $60 million and then going to close very soon on the three year note with Armistice, which is another $5 million. In terms of burn, where does that take you out to as you’re looking at it internally at this juncture?

[Josh Disbrow:]

Carl, I would say that we are well positioned for the foreseeable future, with the expectation that the topline is going to continue to grow. We’re going to have a small bump off and the operating expenses, but nothing substantial relative to where we are today. So we are confident that there’s not going to be a substantial need to access the capital markets anytime soon.

[Carl Byrnes:]

Thank you.

[Josh Disbrow:]

Thanks Carl.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Josh Disbrow for closing comments.

[Josh Disbrow:]

Thank you, Moira. Thanks for your questions. Thanks to everyone for joining today’s call. We’re excited about the quarter and the results that we just posted. We look forward to sharing more next quarter. So until then, thanks again for joining, and have a good evening.