Q2 2024 Aytu Biopharma Inc Earnings Call

Participants

Josh Disbrow; Chairman and CEO; Aytu Biopharma, Inc.

Mark Oki; CFO; Aytu Biopharma, Inc.

Roger Rice

Naz Rahman; Analyst; Maxim Group, Inc

Presentation

Operator

Welcome to the Aytu Biopharma fiscal 2024 Q2 earnings call. At this time, all participants are in a listen only mode. (Operator Instructions) question and answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, [Roger Rice]. You may begin.

Roger Rice

Good afternoon, everyone, and thank you for joining us for Aytu Biopharma's fiscal 2024 second quarter financial and operational results. Conference call for the period ended December 31, 2023. Joining us on today's call is Aytu CEO, Josh Disbrow; and the Company's Chief Financial Officer, Mark Oki. At the conclusion of today's prepared remarks, we'll 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 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 A. to 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 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. A two undertakes no obligation to update or revise any of these forward-looking statements.
With that said, I'd like to turn the event over to Josh Disbrow, Chief Executive Officer of Aytu Biopharma. Josh, please proceed.

Josh Disbrow

Thank you, Roger, and welcome, everyone. I'm extremely pleased to be speaking with you today following the release of our fiscal 26nd quarter financial results, which culminated in our first quarter of positive operating income in company history. This is clearly quite an achievement and a significant inflection point for a business that incurred more than $100 million consolidated loss from operations in fiscal 22.
Also, another key accomplishment during the quarter was positive. Adjusted EBITDA of $5.1 million, up from $0.7 million last year. Further, this is now our six out of the last seven quarters with positive adjusted EBITDA for our Rx segment. Equally important, our cash balance remained steady at $19.5 million compared to $20 million at the end of the September quarter. All told a very strong quarter. The strategic initiatives we've undertaken to reposition a two as a growing and now operating profitable specialty pharma company focused on commercializing novel prescription therapeutics are clearly working. I'll remind you that this repositioning started in October of 22 when we indefinitely suspended our clinical development programs and continue with the wind-down of our Consumer Health segment, which we announced in mid calendar 23 these two parts of our business were a drain on cash and masks the strength of our Rx segment, which has been growing nicely and has been profitable from a segment perspective, with the Consumer Health segment almost completely wound down, which should be completed around the end of June. The go forward A2 business will be highlighted by our rapidly growing ADHD portfolio which just posted record quarterly revenues of $16.6 million, up 49% compared to Q2 of last year. And our pediatric portfolio focused on poly by floor and tried by floor to complementary prescription fluoride based multivitamins as well as carbon or ER extended release carbon oxygen based antihistamines suspension indicated to treat allergic conditions for patients two years and older on the whole.
Our Rx segment reported Q2 revenue of $18.7 million, up from 18 million last year. Gross profit margin of 78%, up from 72% last year. Rx segment adjusted EBITDA of $5.5 million, up from $3.1 million and Rx segment net income of $0.7 million with continued prescription growth anticipated coupled with further margin improvement driven by our ongoing operational improvements, we believe the future financial profile of a to look strong to expand on the financials in more detail, let me run through a key few points within both our ADHD and pediatric portfolios, starting with ADHD. As I mentioned, our ADHD portfolio experienced a 49% year-over-year increase in net revenue during the second quarter to an A. to record of $16.6 million. Adhd portfolio prescriptions grew an impressive 14.5% over the second quarter of last year. The growth in net revenue and Scripps was driven by strong sales force execution. A significant increase in prescribers of our ADHD brands improve gross to nets due to program and coverage improvements, along with continuing to leverage our innovative A. to Rx Connect platform, which we believe is best in class.
On the topic of Rx Connect, some of you may have seen an op-ed piece that are recently authored in Medical Economics discussing prescription drug pricing transparency to help address it exposed the opaque pricing system that surrounds U.S. prescription drugs are transparent drug pricing plan works different directly through our 1,000 plus Rx Connect partner pharmacies nationwide to deliver our products at out of pocket costs lower than if our prescriptions were flowed through regular way retail pharmacies. It is taking bold action like companies like ours, along with real commitment to provide patients with access option through programs like Rx Connect is our charge to ensure predictability of out-of-pocket costs for the patients who need our products and through our innovative Rx Connect patient support platform. We are a leading real change. Our team remains committed to ensuring predictable clear out of pocket costs for our novel products.
In addition to our strong operational execution, the trends we've talked about the fast past few quarters within the ADHD market continue to persist, including the evolving supply disruptions for generic Adderall, IR and ER and various methylphenidate products from several stimulant products being discontinued. All together as of late articles and broadcast news reports air as recently as this week are highlighting the issues which continue to negatively impact patients across the country. Currently, three drug manufacturers are reporting shortages of generic Adderall XR and now five generic manufacturers have discontinued their Adderall XR generics altogether. This is about as of last week as it relates to extended-release methylphenidate as of the end of January eight manufacturers were reporting shortages of ER mental Saturday, while three have discontinued their methylphenidate products. While supply has been constrained, the system is also stress on the demand side of the equation as we continue to see an increase in new ADHD diagnoses of both children and adults with the FDA forecasting get more prescription growth this year as these market wide supply challenges have continued. We've done an exceptional job meeting the demands of patients having maintained supply to meet the growing demand for Xenos and Cotempla. As a reminder, at Xenon as the only approved extended release ODT amphetamine for the treatment of ADHD and is approved is bioequivalent to Adderall XR. So our brand is well positioned to continue to capture additional market share as the extended release and Federman shortage remains ongoing and supply means remains rather very unpredictable. Cotempla is the only approved extended release ODT methylphenidate for the treatment of ADHD and it competes against Concerta and other extended-release methylphenidate, again, several of which are being discontinued. We view the ongoing ADHD supply situation as one that will likely to continue for the foreseeable future in some form or fashion. And with that, a continuing opportunity for more and more patients and prescribers to get experience with both Xenos and Cotempla, it is becoming increasingly apparent that the success we have achieved to capture increased market share is due to two key factors. One, our manufacturing team's focus on meeting increased demand while simultaneously working to transition to our new CMO into our commercial team's strong execution and ability to showcase the benefits of our brand while also fully also effectively leveraging a two Rx Connect. I couldn't be more proud of the tremendous execution of our team to meet the needs of patients that have been so desperately seeking solutions during this time of market turmoil in ADHD, transitioning out of pediatrics, which as a reminder, represents about 11% of our total second quarter Rx segment revenues. Similar to what we discussed last quarter, our pediatric portfolio, net revenues and scripts were impacted primarily by customer ordering timing as a result of payer changes. We've made great progress during the quarter, expanding our customer base, having recently implemented multiple commercial initiatives and have also seen someone slacking of the distribution channel, which has resulted in probably by four shipped units being up significantly for the month of January when looking at it versus December of 23. This is a very good sign. We're excited to see it. There's still work to be done. But based on what we're now seeing, we believe the trend in the pediatric portfolio is in fact, heading in the positive direction. And despite the soft pediatric revenue for the quarter, we're very pleased to see a very healthy Rx segment, adjusted EBITDA of $5.5 million for the quarter.
So to wrap things up, before I turn it over to Mark, it's been our objective to transition a two way from a multipronged 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 highly focused pharmaceutical company that can grow and achieve profitability.
While we have been Rx segment adjusted EBITDA positive for six of the last quarters, six of the last seven quarters witnessed by our trailing three quarter Company-wide adjusted EBITDA of $15 million. The ability to transition this business to operating income is a tremendous accomplishment.
Let me turn the core call now over to Mark and then I'll come back to wrap things up before turning it over to questions.

Mark Oki

Mark?

Naz Rahman

Josh?
Thank you, and welcome to everyone joining us on this call. Let's dive in and take a closer look at this quarter's numbers.
Starting with revenue, net revenue for our fiscal 2024 second quarter was $22.9 million, down 13% compared to fiscal 2023 second quarter of $26.3 million and reflects the planned wind-down of the Consumer Health segment.
Looking at the segment contributions, net revenue from prescription for I'm sorry, from Rx product sales in the 2024 second quarter was $18.8 million, up 4% from $18 million in the same quarter a year ago. Within our segments. The ADHD portfolio products notched 49% revenue growth to $16.6 million in the 2024 second quarter against $11.1 million in the quarter a year ago. These robust ADHD portfolio revenue gains reflected the ongoing successful execution of our commercial efforts and market share gains as the ADHD market continues to experience manufacturing and supply chain issues that Josh outlined earlier, our quarterly ADHD written prescriptions were up 14.5% year over year. The second part of the Rx segment is the prescription pediatric portfolio, which again, this quarter reflected declines from the timing related ordering of our prescription multivitamins. Following the payer change feeds experienced a 66% decrease in net revenue to $2.2 million in our 2024 second quarter compared to $6.3 million in 2023. We are confident that we will be able to reinvigorate the multivitamin revenues to more to more normalized levels over the next few quarters since the second quarter's end, we have been seeing some unlocking of this channel and in return and the return of more reasonable channel inventory levels. I want to highlight that even with the impact from this time base multivitamin issue, we continue to post strong results in our Rx segment. In regard to our Consumer Health segment, as I noted, we are winding this winding down this segment, focus our efforts to improve our profitability and cash flows for the 2024 second quarter net revenue from consumer health declined 49% to $4.2 million compared to $8.3 million in the same quarter last year. Our game plan is to sell through all inventory and wrap up Consumer Health operations around June. Overall, as we execute this process, we would expect the segment to generate slightly negative to neutral adjusted EBITDA contribution. Consumer Health contributed a negative adjusted EBITDA of just $280,000 during the second quarter, consolidated gross margin improved to 71% in the second quarter compared to 66% in the quarter years a year ago. The second quarter gross margin was aided by strong ADHD sales growth, enabling improved efficiencies at our Grande Prairie manufacturing facility, coupled with the halving of lower margin sales from our now winding down Consumer Health segments.
One important note to Josh touched on is that our Rx segment gross margin was 78% during the quarter, up from 72% in last year's second quarter. This is a good metric to understand the go-forward business. Once Consumer Health is completely wound down. As we have commented on in each quarter, our business businesses, gross margin percentage can and do vary due to both seasonal and other factors. I want to remind all listeners that well, we are viewing the second quarter results. We are operating in the third fiscal quarter were most consumers of our products have had their annual insurance deductibles reset starting January first. As such, we expect to experience a greater use of our A. two Rx Connect price protection program, which historically has lowered our gross to net margins. Please remember that this is part of our normal seasonality and that those gross to net adjustments are expected to improve throughout the calendar year.
Operating expenses, excluding impairment expense, changes in contingent consideration and amortization of intangible assets were $12.5 million in the second quarter of 2024 compared to $20.3 million in the same period a year ago. This represents a decrease of 38% for reflection of our continued focused on reducing costs and winding down the Consumer Health segment.
Research and development expense was $524,000 in the second quarter of 2024 compared to $1.7 million in the corresponding 2023 quarter, reflecting a normalized base level, highlighting the absence of any substantial drug development expense consistent with our prior announcements. As you saw in our second quarter 2024 press release and heard in Josh's initial comments, we recorded our first quarterly operating profit as a CFO, I'm especially pleased to say the world's operating profit. The primary focus for the swing in profitability were the previously previously noted growth in the ADHD portfolio gross margin improvements along with drops in sales and marketing and general administrative expenses, which produced $2.4 million in operating income against last year's $6.9 million operating loss. While we generated both an operating profit and income before taxes, we recorded $820,000 of income tax expense, resulting in a $220,000 net loss four $0.04 loss per share for the quarter compared to a $6.7 million loss or $2.15 net loss per share for the same quarter last year on top of our pretax earnings, we generated a solid positive adjusted EBITDA this quarter of $5.1 million compared to $727,000 in last year's second quarter. Adjusted EBITDA for the RX segment was $5.5 million. Cash and cash equivalents on December 31st, 2023 were $19.5 million compared to $20 million on September 30th, 2023. We are comfortable with the capital level and believe that our balance sheet provides us with a solid foundation to execute our corporate game plan. As I've noted in prior quarters, we don't give forward guidance. However, we do anticipate that around the end of this fiscal year, we have some we'll have exited our Consumer Health segment as well as continue to hit to move ahead with the outsourcing of our ADHD. productions. These operational changes plus the expected recovery of our pediatric sales should position us for a strong end to our fiscal 2024 and a good start to our fiscal 2025.
With that, let me turn it back over to Josh.

Josh Disbrow

Thanks, Mark. So as you might imagine, I'm extremely pleased with the results of the second quarter, highlighted by the Company's first ever quarter of positive operating income and growing adjusted EBITDA. The wind down of the Consumer Health segment has completed combined with the continued growth and operational improvements within our Rx segment. We believe the financial profile of A. two will continue to become increasingly strong with the expectation of positive cash flow generation in the quarters to come, coupled with a strong balance sheet of $19.5 million in cash at the end of December. I couldn't be more excited for the future of the company. I want to sincerely thank the entire team and a team for their hard work and dedication to delivering for patients, clinicians and our stockholders. It has taken a disciplined approach and the whole organization to get to this point and the management team and I are grateful to our A. two colleagues for making such tremendous progress.
Thank you to everyone participating on today's call.
We'll now be happy to answer any questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Naz Rahman, Maxim Group.
Hi, everyone, and thanks for taking our questions and congratulations on all the progress you've made, especially over the last couple of years. So obviously, as you talked about it, there's a shortage is still ongoing and obviously manufacturers are sort of exiting the space and what gives you confidence that you could on get enough quota for your products, like how are you from conversations with the FDA going? And I guess, do you have a time line of for how much or for what period of time you have inventory for?

Mark Oki

Yes.
Thanks knows a good question.

Josh Disbrow

And obviously, it's and that's an ongoing challenge of every company in the stimulant space is facing I will say the DDAs is becoming increasingly accommodating and open to meetings with us.
In fact, at a recent meeting with the FDA or with the DEA rather in a really good dialogue and really good open lines of communication.
They certainly want to be be helpful.
They understand the situation with the shortage. And while that would stand to benefit, not just small manufacturers, but large ones, we're confident that the line of the line of communications are wide open and definitely a high level of interest from the DDA and making sure that they don't put anybody out of stock. They recognize the rise in demand that communicate regularly with the FDA to understand exactly where where they think prescription trends are going.
And while they have a responsibility to obviously curtail problems like diversion.
They don't want to put anybody in a spot, most notably smaller manufacturers. So we're comfortable with them with the current inventory we frankly could always use more were always in a position to go back and request supplemental and API. and have been doing that as long as frankly, since since the beginning.
And that goes all the way back to prior to the acquisition of Neos.
And we've got a great team on the ground, great team that is operating diligently. We have we don't have infinite supply, but we're comfortable for the foreseeable future and are comfortable that we can continue to get more API. as as as as we need it.
And what's important about us is we continue to be very nimble. Obviously, we're a small company.
We still are operating in the Grand Prairie facility as we transition to the contract manufacturer.
So we've availed ourselves now to two facilities continue with that transition process while we still make product in Grande Prairie, what I'll say generally speaking is we're we've not stocked out to date and don't have any plans to Got it.
That was very helpful on. So obviously, you're on MyDigi franchise has seen a lot of growth over the last call it, let's call it the calendar quarter and obviously the fiscal on calendar year and the fiscal year two. Could you talk a little bit about how much of that growth or what Nightstar growth is due to, I guess, what percentage growth in prescribers and how much there was a threat in or how much of an increase you saw like on a per prescriber base for writing the scripts, like how much more prescribers writing now versus like last January versus how many more how much more prescribers you have that drove the growth?

Mark Oki

Yes.
Great question now. So the prescription growth is being driven by, as you would expect, a combination of established prescribers and new prescribers. New prescribers actually up are up about 20% year to date when you look at it versus fiscal 23. And so that pretty well mirrors the level of prescribing. And so what that suggests is that the level of prescribing on a per physician basis is it's static, which is good. That's about what you want to see there. They found a place in their practice for dentists and Cotempla. They consistently prescribe it for those types of patients.

Josh Disbrow

And I think we've done clearly a better job of getting out there, given the fact that we still have a very very small share of voice, but the fact that we have increased prescribers by call it 18% to 20% after increasing prescribers by about that same percentage year over year.
The last year or so. And that, as you recall, is coming off of a much higher baseline. So great to see that level of prescriber growth when you've got these products that are somewhat mature, obviously, very, very competitive category with some generic competition and various constraints mostly by virtue of our size, keeping in mind that we essentially work with a small commercial team of, call it 40 or so sales representatives and very encouraging to see that the word is getting out there. And as those prescribers come on board there, there's more or less prescribing at that same consistent level.
So we're encouraged by that.
Thanks.
And I was sort of on that point, and I know we've talked about and you discussed this ongoing charges, but on have you seen any impact of generic Vyvanse on your products? And also, have you seen any situations where patients if they were able to yet the prior prescriptions or prior stimulus, they switched away from your products? Or do you see a patient just kind of staying on 80s products?
I'll take the second first more, so more So staying on our products, you're always going to have patients that for whatever reason default back to what they had been on. But we've really held our gains, which has been great to see, we've had patients that have moved over from mixed salts and said, I mean, we are immune to specifically Adderall and to Agennix XR ODT and really like it like the like not just what they feel clinically. And in fact, some patients report that they like it better in some ways, some patients report not necessarily needing a booster dose, which sometimes you'll hear about with with Adderall XR and as much they like the system, they like the program, they like the fact that they can get it predictably, particularly this time of year when deductibles resetting and it can be very, very unpredictable and unexpected in terms of what you might pay at the pharmacy counter. And so equal parts sort of clinical benefits and how they feel and the service and the overall level of predictability that they're getting.
So that's been good to have.
It's been good to see that level of stickiness again, you're never going to have 100% of your patient stay once they switch to your product. That's just a fact of life of these many these patients have been on Adderall their entire lives or their entire adult lives.
But to see so many sort of come over and stay over. That's been that's been very encouraging. And what I'll say about Vyvanse is it's been a significant issue for patients and prescribers and pharmacies.
A significant number of Vyvanse generics were were approved in the low 10s, have significant issues just with some of the manufacturers getting quota so that inhibited their ability to gain any significant share. And you cross you intersect that with the natural issue around PBMs, they're naturally going to contract for a select number of generics that are going to contract with all of those. And so if you have a situation where you've got Vyvanse in supply, you've got a particular distribution center that has it available from manufacture a but manufacture B is the one that has the contract with, say two of the large PBMs.
Well, that's going to create a natural issue done that for the product that's physically available.
So physical availability does not mean actual availability in this round.
You have to have payers aligned, which is one of the things that frankly we benefit from because we really take payers out of the picture. Now, obviously, that's not to suggest we don't have coverage.
We do have coverage for our products.
But even in scenarios where coverage is maybe not if we don't get full reimbursement, our coverage is not optimal. We can still essentially underwrite that prescription. And irrespective of the payer landscape, we can get that prescription filled. So this is all to say Vyvanse has been quite a bit of noise has been quite effective, quite a bit of hassle and sort of disruption as these multiple generics. Again, it's low teen, 13, 14 that are out there. It just creates more of an issue for patients, which in turn creates more of an opportunity for us to sort of smooth that experience out and give patients an opportunity to get something that's easy that's predictable. They don't have to play catch up with the pharmacy figure out which pharmacy has my Vyvanse. And if they have it is at the Vyvanse that my PBM covers and weak again can cut through all that noise. So sort of that, that issue and sort of the fiasco that that has presented itself around Vyvanse has definitely presented a nice opportunity for our brands.
And just on, thanks for the color on just one last question, if I may. So that pediatric business, you often said you gave you some initiatives to reaccelerate growth on. Can you talk a little bit about what those initiatives are and on when we could see the impact of initiatives?
Yes, happy to.
So it's really threefold.
I would say first and foremost is diversification. We had some concentration risk there with some customers.
And we've now begun in earnest, really diversifying our ordering customers, those most notably some of our pharmacy customers to make sure that we don't run the risk of any one pharmacy having too much of our business.
And we're starting to see some of that come through in that that that large customers now proportionately a smaller part of our business than they were, say a couple of quarters ago. So we're starting to see that equal parts diversification into areas in different geographic areas. So for example, we've begun to move westward. And we've put some virtual reps in place to enable us to access physician customers, pharmacy customers in places outside of the traditional non-Florida areas, which are really in the tri-state area, New York, New Jersey, Connecticut, and then you would add in Pennsylvania. So by getting out into some of the areas out West, California and so forth, while those aren't and I would say, per capita or sort of per per individual state as big as maybe the tri-state area. When you add those together and aggregate all of the potential demand in this non-Ford area. It's a nice opportunity, so are starting to see some nice movement there.
As Mark mentioned, and I had as part of my prepared script, we are starting to see some of the unstacking. As we communicated on the last call, it really was a timing issue. Obviously, there's a supply chain. It has to sort of be drained before they need to reorder. We did see some nice reorders here in January or back in January and have seen some improved trajectory. Don't want to comment specifically around what that is because it would potentially create sort of a false sense of exactly where it's going to be not everything is linear.
So what I'll say is we've diversified customers.
We've diversified geographically and we put in some resources to help us very efficiently tap into some new areas and take advantage of some of the positive payer changes that have actually happened in fact there are there are some scenarios where we actually picked up coverage. So sort of one door closes, another couple of doors open up. So and in terms of timing, when I think we might start to see some real impact.
I'm optimistic that it's in the very near term.
I don't want to suggest that we'll see it this quarter for the March quarter in full, but I think we're starting to see enough signs suggest that the multivitamins are starting to recover, will they get back to where they were? I mean, as I said earlier, there's Well my last call. I think we will wait and see. I think there's an opportunity to get there sort of as we move out. But in the next couple of quarters or so. I think we'll start to see some improvement in that business.
And again, I'll highlight the fact that even with this, the pediatric business being sort of at its low point, call it a $2 million quarter.
The Rx segment posted a $5.5 million EBITDA quarter with positive net income by itself. And as we continue to wind down of the consumer business and as Pediatrix rebounds to whatever degree, that might be excited to see that $5.5 million potentially improve. So we're happy with how the the piece products are starting to show some improvement, but there's still more work to do.
Thanks for taking my questions. And once again, congrats on the quarter Thanks, Noah.
Appreciate it.

Operator

(Operator Instructions) There are currently no questions in queue. I'd like to turn it back to management for closing remarks.

Josh Disbrow

Thank you, John. Again, I just want to reiterate my thanks to the entire team at A. two for all, they've done for their hard work and dedication. We really are delivering for patients and clinicians at an important time, particularly as the ADHD category remains really challenged.
So my thanks to everybody for putting their best foot forward. We've met demand.
We've continued to get more physicians and patients introduced to our ADHD brands. And I'm really proud of the progress we're making on the pediatric side of the business as well as we start to see some recovery there. It has indeed taken a significant discipline approach from the ground up and the entire organization to get to this point. But we are grateful to our shareholders, grateful to all of our stakeholders and our our teammates for getting us to this point.
So until next time, we're excited about the progress we're making and look forward to sharing more progress on our next call after the after the March quarter closes out. So thanks, everyone, for participating on the call and have a good afternoon and good evening.
Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.