Aytu Biopharma Inc (AYTU) 2019 Q4 法說會逐字稿

Good afternoon, everyone. Thank you for joining us for the Aytu BioScience's Year-end and Fourth Quarter Business Update Call for the year ended June 30, 2019. With me this afternoon are Aytu's Chairman and Chief Executive Officer, Josh Disbrow; and Chief Financial Officer, Dave Green. Aytu BioSciences 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. (Operator Instructions)

Finally, I'd 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, beliefs, expectations and future potential operating results of Aytu BioSciences. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, September 26, 2019, 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, 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. Sir, please go ahead.

Thank you, Tom. Good afternoon, and thanks for joining us for today's fiscal 2019 full year operational and financial highlights call. We're glad to be with you this afternoon. Today's call will primarily focus on 2019's key accomplishments, our growth plans as we enter our fiscal 2020 and the recently announced acquisition of Innovus Pharmaceuticals, which we're extremely excited about. Starting with the company's key accomplishments. Fiscal 2019 was an exceptional year of growth, doubling revenue and going from 2 commercial products in fiscal '18 to now 4 with the licensing of ZolpiMist and Tuzistra XR for both huge developments for the company in 2019. It was also a pivotal year from a capital markets perspective, having completed 2 financings, bringing in over $20 million led by health care institutional investor, Armistice Capital. Following that, we were successful in attracting 2 reputable Wall Street health care analysts from Ladenburg Thalmann and Northland Securities. Finally, this past year, we added 2 exceptional board members in Steve Boyd and Ketan Mehta. Steve is a highly respected investor and founder of health care institutional investor, Pharmacist Capital, and Ketan is a pharmaceutical entrepreneur and President of Specialty Pharmaceutical Company, Tris Pharma. We're pleased to have both gentlemen on the Board, and we couldn't be more pleased with the progress we made in 2019. Now a specific regard to our financial and operational performance. I'm pleased to reiterate that revenues increased 100% this year to $7.3 million, up from $3.7 million that prior year. And this performance was largely driven by Natesto and MiOXSYS, which both saw strong year-over-year growth.

Diving a little deeper on both products performance, Natesto total prescriptions grew 33% for the year, and this prescription growth was accompanied by growth of the prescriber base to almost 2,800 writers nationwide.

Additionally, the product refill rate increased dramatically due in part to the successful rollout of Natesto Direct, which we recently modified and are now calling Natesto At Home. Refills increased by 95% to take total prescriptions for the year to over 10,000. To be more specific, total prescriptions for the year ended June 30 were 10,280, which is up from the prior year's 7,700 TRxs. I'll also provide a quick snapshot of the recent Natesto prescription activity, which we're pleased with.

Both new and total prescriptions for Natesto were up from the previous quarter. Total prescriptions increased from 2,600 prescriptions in Q3 to 2,900 prescriptions in Q4 or up to an average of 225 TRxs per week. This is a quarterly high, and this growth is significant. It's significant because we grew Natesto prescriptions in the face of transition.

In the late spring and early summer, we transitioned service providers on the Natesto Direct program and modified it to make it a stronger offering for patients and clinicians. Through our constant improvement efforts, we identified a better and more comprehensive solution to assist patients, and we're looking forward to expanding the services to patients on the reimbursement and patient support front.

This new provider has begun its transition of prescriptions from previous providers and previous pharmacies. So there's a natural start-up time and a (inaudible) to get the patients and physicians onboarded. We expect some continuing transition pains and potentially a short-term impact on scripts, but we're happy with the new provider and believe we're better positioned to grow Natesto through this much more robust scalable provider. So again, despite some disruption to the patient capture and patient-support process, Natesto scripts are actually up quarter-to-quarter, and we're very happy to see that. We're excited about the new Natesto At Home program and how this further supports patients and providers in getting Natesto filled and covered.

Moving over to MiOXSYS now. Our Mailand fertility product, MiOXSYS also saw substantial growth in fiscal 2019. The company placed 91 instruments for the year, which takes the MiOXSYS instrument placement total to 269 around the world, having now sold the product into 35 countries. Multiple clinical presentations and scientific publications further showcase the product's clinical utility at leading conferences around the world. Of note, at this summer's ESHRE Scientific conference in Vienna, 6 presentations were made by some of the world's leading enterologist and urologists to several large audiences of thought leaders from around the globe. The business showed strong growth as evidenced by Natesto and MiOXSYS performance, and the addition of Sleep Aid Zolpimist and antitussive Tuzistra in 2019 are expected to propel additional growth with an expanded revenue base. Zolpimist in the second half of fiscal 2019 became a higher promotional priority for the sales force. And since we initiated our Pay No More Than $49 co-pay program, we've grown NRxs 46% and TRxs 21% quarter-to-quarter. The Rx numbers are still relatively small, but it's early in this relaunch, and we expect to see steady growth from here.

Zolpimist got a recent boost with the publishing of a peer-reviewed article by doctors [Rafael and Westfield], documenting that both the PK profile and clinical attributes stack up very favorably to ambient tablets. In a publication in the peer-reviewed journal of Pharmacology and Pharmacy, it was clearly demonstrated that Zolpimist spray outperforms ambien tablets in both time to blood levels as well as in key clinical insomnia markers. The sales force has now been armed with this publication, and the early results are encouraging. And again, scripts are growing.

Also encouraging is the solid start we have with Tuzistra this past cough season. Despite getting out into the field after the cough season was underway, and it being a lighter than normal cold season. We got Tuzistra XR to over 400 prescriptions weekly and a total of 7,700 TRxs this fiscal year. We expect this year to be even stronger as we'll have a full season to be in the field. We also just launched a co-promotion partnership that I'll speak to shortly. Before I do that, though, I'll turn it over to Dave to walk through the financials. Dave, please go ahead.

Thank you, Josh, and thank you all for joining us this afternoon. Today, I'll review our financial results for the fiscal year ended June 30, 2019, which was the strongest year for the company since inception. First, a couple of housekeeping notes. Our Form 10-K covering the 12-month periods ended June 30, 2019, and June 30, 2018, will be filed with the SEC later today. That report contains our full annual report.

We also issued a press release earlier this afternoon with a summary of the 2019 results. The press release, which includes summary financial statements, can be found in the Investors section of our website, www.aytubio.com. And now our 2019 financial results.

As Josh mentioned, revenue for 2019 was $7.32 million, which represents a doubling of 2018 revenue. The 100% revenue growth was led by Natesto surging 97% year-over-year. Next in line, our medical device MiOXSYS, grew 89% year-over-year with strong performances in both Europe and Japan. And finally, both products launched in 2019, Tuzistra and Zolpimist contributed to our 2019 top-line growth.

While Q4 revenue was generally in line with expectations, we did come in at the lower end of the range -- of our range for Q4 due to the seasonal drop-off of Tuzistra and a onetime accrual related to the new revenue recognition standard, ASC 606, which we adopted this year. That said, Natesto's Rxs were up and the business is strong. Gross profit for 2019 was $5.1 million compared to $1.6 million in 2018. That's a more than 3x increase on higher revenue and a stronger gross profit margin. Operating expenses, excluding COGS, were approximately $22 million in 2019 compared to $21.3 million in 2018. Factoring out noncash items, operating expenses were $18.7 million in 2019 compared to $17 million in 2018. The increase was driven by sales and marketing and personnel expenses tied to new product launches and the addition of patient services for Natesto, all in support of the strong revenue growth. G&A expenses declined in 2019 and offset some of the commercial cost increases. The operating loss for 2019 was $16.8 million compared to $19.7 million in 2018. The roughly $2.9 million improvement was largely driven by revenue and gross profit growth offset by increased selling and personnel costs. Net loss for 2019 was $27.1 million or $3.48 per share. Of note, approximately $9.8 million of the net loss is tied to a below-the-line noncash loss due to an increase in our contingent consideration liability. The sharp noncash increase is due to higher expected contingent consideration in connection with the licensing of Tuzistra XR as well as higher expected future revenue across the product portfolio. This is a positive development as higher expected revenue goes hand-in-hand with the expectation of increased contingent payouts such as royalties and milestones. Turning to the cash flow statement.

Net cash used in operating activities for 2019 was approximately $13.8 million which is $2.1 million less than cash used in 2018. A few balance sheet items to note include our year-end cash balance was $11.3 million and total assets were $34.7 million compared to $21 million in our 2018 year-end. Finally, during the fourth quarter, we completed a shareholder approved exchange transaction, eliminating all of our outstanding interest-bearing debt and related accrued interest. In connection with the exchange, we issued approximately 5.9 million shares and 4.4 million warrants and extinguished approximately $5.1 million of debt and accrued interest. Altogether, and to summarize 2019 from a financial perspective, we achieved 100% revenue growth, increased profit more than -- gross profit more than 3x, reduced net cash used in operating activities by $2.1 million and eliminated all interest-bearing debt. That financial performance, together with the product launches, Tuzistra XR and Zolpimist and the strategic and operational initiatives that Josh will describe next, sets the stage for continued top line growth and accelerating burn reduction. And with that, I'll turn the call back over to Josh.

Thanks, Dave. As I alluded to in my opening remarks, we're very proud of our fiscal 2019 performance, but believe that our current year fiscal 2020 will be even stronger, and you might say transformational. We think this for a number of reasons, which includes some announcements that were made in our current fiscal first quarter ending September 30, 2019. First, on September 4, we announced the co-promotion agreement for Tuzistra XR with privately held specialty pharmaceutical company, Poly Pharmaceuticals. This commercial collaboration will nearly double the Tuzistra XR sales force to approximately 60 representatives across the United States. Poly's geographic footprint covers approximately 750,000 anti-tested prescriptions annually accounting for approximately $128 million in annual revenue. Poly sales force started to position its pharmacy promotional Tuzistra XR on September 3 and expects to promote to approximately 5,000 prescribers to the 2019, 2020 cough and allergy season. We're excited about the new relationship and excited about having Poly onboard. Since Poly's founding in 1980, the company has been mostly focused on the antitussive and allergy markets. So they're an ideal partner for us as we launch into our first full season of promotion with Tuzistra XR. While only a few weeks into promotion and squarely ahead of the cough season setting in, we're encouraged by the early physician customer feedback. Secondly, in fiscal Q1 2020, we also announced that the Natesto Spermatogenesis Study results have been accepted for presentation as a late-breaking abstract at the American Society for reproductive medicine ASRM annual meeting. And Natesto Spermatogenesis Study results have been submitted in abstract form at ASRM, and the complete results will remain embargoed until the date of the presentation, which is October 16, 2019. We've talked about the Natesto's Spermatogenesis study and its planned data release for several months, and the readout is now just a few weeks away. So why is this data readout important? Well, as a reminder, approximately 20% of the 13-million-plus men in the U.S. with low-T are in their family formation years. However, it's well-known that testosterone replacement therapy causes sperm parameters to be negatively impacted and therefore, often render men infertile. Thus, TRT treatment isn't really an option for these 2-plus-million men.

So with these Natesto data and following this readout, for the first time, we may see that there's a treatment that doesn't impact semen parameters on the whole and may become a go-to treatment for this large segment of younger men with low-T or any men, for that matter, seeking to remain fertile. As it further relates to Natesto, we're excited about our recently announced change and strategic transformation we've undertaken via our partnership with Acerus Pharmaceuticals. Acerus, our partner and the global licensor of Natesto and Aytu announced our joint plan to expand the commercial footprint for Natesto through their planned launch of a U.S.-based sales force. Acerus, following a planned financing, expects to launch a 25-person sales force focused on urology and endocrinology to complement the Aytu Salesforce. Through this, we'll effectively double the sales footprint and through Acerus resourcing enable more focused coverage of the key specialists and Aytu's more focused cover of the high-prescribing primary care physicians. In turn, this will enable greater reach and much increased frequency to our key prescribers, who I'll remind you, have now increased to almost 3,000 nationwide.

Acerus expects to close their financing soon, and will launch their sales team shortly thereafter. With this adjusted commercial plan, our reps will be freed up to call on primary care physicians and sell the entire product portfolio. We'll also shed some liabilities, inclusive of up to $75 million in revenue based milestones while also shedding some regulatory and clinical expenses, among others. Acerus, we believe is going to be very well positioned to be successful and to help us take this to a very high level of prescription sales. So this deal makes sense for Aytu, and we're looking forward to formally implementing this following Acerus' closing of the financing.

So I've highlighted 2019's key accomplishments in our organic growth plans and dynamics as we've entered fiscal 2020. Now I'd like to discuss the recently announced acquisition of Innovus pharmaceuticals, the deal rationale and why we're so excited about it. Starting with deal details. On September 12, 2019, we signed a definitive merger agreement, whereby Aytu will acquire all outstanding securities in Innovus for up to $8 million upfront almost entirely in Aytu stock and issue approximately 4.2 million shares to Innovus shareholders. Innovus generated more than $24 million in revenue in the 4 quarters ending June 30, 2019. And for that reason, and many others, we believe this is a very good deal for Aytu and our shareholders. Additional consideration may be paid to Innovus shareholders in the form of contingent value rights or CVRs, and milestone payments of up to $16 million over the next 5 years, if specific revenue and profitability milestones are met.

So moving to why we're so excited. Well, through this combined entity, Aytu expands into the $40 billion consumer health care market with a portfolio of over 30 consumer products competing in large therapeutic categories, including diabetes, men's health, sexual wellness and respiratory Health. This expanded product line broadens our portfolio beyond prescription therapeutics to enable wider revenue distribution, reduced seasonality associated with our seasonal antitussive product line and higher revenue from an expanded base of proprietary products. In short, it strengthens Aytu via additional products and a management team that has doubled their revenue since 2017. From a pro forma perspective, combined, Aytu and Innovus generated more than $31 million in revenue over the preceding 4 reported quarters ending June 30. As it pertains to earnings, this business combination immediately provides increased revenue scale and enables operational synergies that can be leveraged to accelerate the company's path to profitability. We believe we can gain synergies and cost cuts in removing Innovus' public company costs and reducing redundant process fees and overhead. Taken as a whole, we really view this transaction as transformative and thus are thrilled with where we stand today. The deal is expected to close as early as our quarter ending December 31 and is subject to shareholder votes at both Aytu and Innovus.

So to summarize, Aytu had an outstanding fiscal 2019, doubling revenue to $7.3 million and executing across the board. Our momentum exiting fiscal '19, coupled with our Q1 2020 announcements, including a co-promote with Poly, upcoming Natesto's Spermatogenesis results, an amended agreement with Acerus, all supported a solid organic growth opportunity and improved potential -- our potential expense profile. On top of that, we're now looking at combined trailing 12-month revenue of more than 4x our stand-alone '19 results and potentially a faster path to profitability for the combined company as the new Aytu Bioscience. So I hope we've made clear today that Aytu had a strong fiscal '19, but we're even more optimistic about the new Aytu in fiscal 2020 and beyond.

So with that, operator, at this time, I'd ask you to open the lines for the Q&A section of the call.

(Operator Instructions) We'll take our first question from Jeffrey Cohen with Ladenburg Thalmann.

So a few questions. I'll just roll through in no specific order. So you called out some MiOXSYS strength for the quarter, in particular. Could you give us any additional color as far as what geographic areas were strong there?

Yes, we can. As Steve mentioned in his comments, Japan and Europe were both quite strong for us. We're building a nice base of installed instruments in both areas. We've got an excellent partner in both areas, in fact, have multiple partners potentially in the works in the Asia Pacific region. So both Asia and Europe were quite strong.

Okay. Got it. Dave, a couple of questions on the financial side, 2 in particular. One, could you talk about what was the actual Q4 accrual size? And the second one is, could you speak to the amortization in the fourth quarter seemed a little heavier versus what we had expected?

Yes. So Jeff, the amortization is really due to product acquisitions and there were probably a partial quarter that you've seen in the past. We now have kind of the full year and a full accounting of the accruals. On the Rev/Rec side, that accrual is kind of a little deepen in the weeds for discussion today. But I would say that the quarter would have shown better on the top line, much further in line with past experience without 606 adjustments that we made at the end of the year. This was our first year. We had just implemented ASC 606. So as the year progressed and we collected more data and got more experience with the new pronouncement. It just created a need for an adjustment at the end of the year. And it's -- I would say that it's a onetime. So it's not something that really needs to be analyzed and considered for moving forward. It's a onetime, it's behind us, and it's -- won't affect future quarters.

Okay. Got it. And then finally, Josh, could you talk a little bit about -- more about the upcoming ASRM conference and the embarked on the abstract with a publication and podium, can you hypothesize with us when we might see a publication afterwards prior to the full presentation?

Yes. So as I mentioned, Jeff, ASRM, it's coming up. It's been accepted for the abstract that -- accepted for a late-breaking abstract the afternoon of October 16. And so we would expect to be in a position to release that shortly thereafter. In terms of publication planning, there is a rather extensive publication plan in the context of obviously the main set of data and then subsets because this is an investigator initiated study and because there's sort of an impact around the embargo status. We can't speak to specifics other than to say there obviously are efforts underway being led by Dr. Ramasamy and his team to get to get the product -- to get the publication out relatively quickly. I will say the abstract will publish in abstract form in fertility/sterility as is typical with any of the presentations or abstracts presented at ASRM. So that will be the first publication that the abstract will be formally put out and then TBD, but as soon as practical with respect to a full peer reviewed publication, and the expectations are high in terms of the impact of the journals. So look forward to that.

Okay. That does it for me.

We'll take our next question from Carl Byrnes with Northland Capital.

Josh, Dave. Couple of questions here. Just a follow-up on the Natesto Spermatogenesis readout at the ASRM that's coming up. What's your expectations in terms of using the data? Do you see it as a supplemental clinical data NPI or would you take it to potentially a supplemental NDA filing? And how do you see that just affecting marketing over the course of the next, let's call it, 12 to 24-months? And then I have a couple more follow-up questions.

Thanks for that, Carl. And so this will be a great opportunity for us to engage with our partners at Acerus, who are obviously going to get much more intimately involved with the U.S. business. But suffice it to say, we're excited about collectively the prospect of what the data readout might mean. Obviously, we're not tipping our hand specifically as to what the data will be. But assuming that the data readout is positive, there certainly are fairly broad implications. There are opportunities to engage with the FDA. And again, we'll sit down with our partners at Acerus and really evaluate what makes the most sense in terms of potential label changes and a specific pathway by which we follow. So more to follow-on that. But I think there's good optimism.

There's also a fairly substantial implication around intellectual property so more to follow-on that. But with respect to really how the product is protected, the portfolio surrounding Natesto, this could become a relatively important piece of that. And again, in partnership with our partners at Acerus will evaluate the best ways to really pursue and exploit the additional patent protection. So the specifics around whether it's a sNDA filing or some other sort of supplemental submission to the FDA. Obviously, we've got to see the data first. Get feedback and collaborate. And obviously, our plan would be to, as assertively, but compliantly as possible to showcase the data to clinicians. And I will say even with the really relatively limited data sets that are out there today, there's quite a bit of interest around it, particularly in the reproductive medicine arena. So we're excited about getting it out there on a more fulsome basis. So excited about the prospects, again, with the hope that the data readout is positive on the 16th of October.

Great. Understood. And then just with respect to Natesto. Is there any details that you can give us with respect to covered lives and formulary where they are now versus where they were at year-end last year, obviously, given the announcements of recent time?

Yes. So we've announced here in the last couple of months, the addition of Natesto to formularies representing in excess of 36 million lives. I will say it's actually significantly more than that. And we've opened up multiple more lives. So what we've done is signed the first 2 commercial contracts with payers this year. We previously had not had the product contracted. So we've dramatically broadened the coverage again to well in excess of 36 million lives for confidentiality reasons, we can't speak to the exact number of lives because it, frankly, tips the hand of which PBM we may be referring to. So suffice it to say, we've landed contracts with very influential pharmacy benefit manager and think this will go a long way to broadening the uptake. This -- both contracts affect patients nationwide, quite literally in every key area, key MSA, that are lives impacted by this positive decision. So looking forward to, again, working with our partners at Acerus as they get underway with their commercial footprint here of really driving home the importance of picking up such a substantial plan, excited about it.

Great. Great. And then switching gears a little bit with respect to cash. Your $11 million of cash and change in the fiscal year, the burn in terms of cash use of $13.8 million. What's your expectations looking at closing in your fiscal second quarter, the Innovus deal for your cash over the next 12 to, let's say, 18 months. And I guess maybe another way to look at it, how long -- how much cash do you think you have in terms of sustaining operations, if you can comment on that at all.

Yes, Carl. So what I would say is that we have been reducing the burn. We reduced it by a little over $2 million this past fiscal year. With the addition of Innovus, as close as they are to cash flow breakeven we think that pulling out the public company cost, the duplicative costs in that regard. And some of the other, say, synergistic cost that we can remove when we combine the 2 entities will -- is expected to wipe out pretty much all of the losses -- cash losses at Innovus. And on top of that, that company is growing, we're growing nicely. With some of the initiatives that we have put into place that Josh covered like the Acerus situation and some of the new co-promotion partners, which really have no cash cost to us, but do have -- expected to have a significant impact on lifting the top line we do expect that $11.3 million we have on the balance sheet as of June 30 to stretch even quite a bit longer than we have in the past. So don't have a specific forecast for you, but we do believe that the burn will be reduced as we move forward more rapidly than we have over the past 12 months.

At this time, I'd like to turn the call back over to Josh Disbrow. Please go ahead, Sir.

Great. Thank you, Tom. Well, thanks, everyone, for joining us on today's call. Again, we are very pleased with how fiscal 2019 went and are extremely optimistic about all that we have planned for 2020. And so with that, I'll just say thanks again for joining. Thanks for your interest, and we look forward to updating you following our fiscal 2020 first quarter's results. So with that, I wish you a good afternoon and a pleasant evening, and thanks again for joining.