Aytu BioPharma, Inc. (NASDAQ:AYTU) Q2 2023 Earnings Call Transcript
Aytu BioPharma, Inc. (NASDAQ:AYTU) Q2 2023 Earnings Call Transcript February 21, 2023
Operator: Greetings. Welcome to the Aytu BioPharma Fiscal 2023 Q2 Results Conference Call. At this time, all participants are on a listen-only mode. . Please note this conference is being recorded. I'll now turn the conference over to your host, Roger Weiss. You may begin.
Roger Weiss: Good afternoon, everyone, and thank you for joining us for Aytu BioPharma's second quarter fiscal year 2023 financial results conference call. Joining us today on the call is Aytu's CEO, Josh Disbrow; and the company's Chief Financial Officer, Mark Oki. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. I'd like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release issued earlier today. Finally, I'd also like to call to your attention the customary Safe Harbor disclosure regarding future-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future potential operating results of Aytu BioPharma.
Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors including, 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. 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. First off, I'd like to share how extremely pleased I am with the recent momentum the business has gained as we report our second consecutive quarter of company wide positive adjusted EBITDA and strong revenue growth. Achieving positive adjusted EBITDA for the second consecutive quarter is another key milestone for Aytu and helps to positively change the trajectory of Aytu in the years to come. And I'm very enthusiastic about our continued momentum into this current March quarter, particularly in prescription trends at the ADHD franchise posted all time weekly Rx numbers here in February. More on that as we get into specifics. As outlined in today's press release, quarterly net revenue increased by 14%, compared to the year-ago quarter to $26.3 million, driven by strong performance in our Rx segments.
The Rx segment experienced 23% revenue growth to $18 million, due to the continuing execution of our sales force and the leverage we're generating through Aytu RxConnect, our novel and proprietary patient access program, along with some market tailwinds associated with the ADHD stimulant shortages, which we are capitalizing on. Within the Rx segment, pediatric portfolio net revenue increased 95% while ADHD scripts for the quarter rose 8.1% sequentially, highlighting the growing demand for products. Further our Rx segment had a positive adjusted EBITDA of $3.1 million and improvement compared to the negative adjusted EBITDA reported in the year-ago period of $1.9 million and was also a sequential increase from our first fiscal quarter of 2023.
This is now the third consecutive quarter, in which the prescription segment has had positive adjusted EBITDA. I'll explain more on that business in a bit. On the Consumer Health side, the segment continues to execute on our objective to improve segment profitability with a focus on more efficient, higher contribution margin online sales channels, resulting in a significant 30% improvement in the segment's negative adjusted EBITDA. As we discussed a bit last quarter, near-term revenue from the Consumer Health segment will likely be impacted as we phase out the direct mail channel and focus on the more profitable OTC medicines and their e-commerce sales channel. Further, as we prepare to launch our C'rcle Health branding initiative later this year, we believe we are well positioned to build upon our recent gains and propel this segment forward to generating positive adjusted EBITDA and thereafter to free cash flow.
I'll expand more on this in a moment as well. All told, adjusted EBITDA for the company was a positive $0.7 million during the second quarter of 2023, which compares to a negative $7.6 million in last year's second quarter, an improvement of more than $8 million. I would also like to note that the company generated a positive $2 million of adjusted EBITDA when you exclude the residual expenditures associated with the now suspended clinical development programs. This pro forma adjusted EBITDA highlights the operating strength that Aytu has going forward. On October 13 of last year, we announced an important shift of the company's strategy aimed at accelerating the growth of our commercial business and achieving profitability. We suspended our clinical development programs, including AR101 or enzastaurin for the treatment of Vascular Ehlers-Danlos syndrome.
The suspension is expected to save the company over $20 million in projected future study costs, allowing us to continue the upward trajectory of our positive adjusted EBITDA. We have refocused our efforts on growing revenue, maximizing synergies and driving down expenses, all of which will serve to accelerate our path to profitability. With our second adjusted EBITDA quarter now in hand, that path has become markedly clear. Let's dive into the commercial business a bit more, beginning with our Rx segment. As a reminder, within the Rx segment, we operate primarily in two therapeutic areas, ADHD and pediatrics. Let's start with ADHD. This portfolio includes Adzenys XR-ODT and Cotempla XR-ODT, the first and only FDA approved amphetamine and methylphenidate extended-release orally disintegrating tablets, respectively for the treatment of ADHD.
These extended release stimulant medications are formulated in patient-friendly oral disintegrating tablets that utilize our proprietary micro particle modified release drug delivery technology platform. During the quarter, our ADHD products contributed $11.1 million in net revenue, an increase of 2% compared to a year ago period and down 4% sequentially. There's a little bit of noise in the revenue number, however, as the scripts were actually up over 8% sequentially. We believe the script number is a better characterization of prescriber and patient demand and the revenue impact during the quarter is largely due to the end of year shipping issues resulting from sustained inclement weather throughout the holidays. Remember that there was a significant winter storm that impacted logistics in the US at the end of calendar 2022.
So that delayed some of our shipments. We expect to see the timing of this issue catch up to itself in the current quarter. The market dynamics surrounding ADHD continue to provide tailwinds for the company. First, we continue to see overall growth in the ADHD market as we see an increase in diagnosis. According to the health data company, Trilliant Health, Adderall prescriptions for adults rose 15.1% during 2020, double the 7.4% rise seen the year before. Additionally, the impact from the various generic Adderall XR manufacturer delays and supply disruptions I talked about last quarter still remain. Just last week, a Bloomberg article reported once again discussing the ongoing impact of these shortages. Fortunately, our supply has remained robust and uninterrupted.
We believe the competitive supply disruptions over the past few quarters have enabled Adzenys to gain market share and mind share and in fact, we're seeing evidence of that in the data. As a reminder, Adzenys is approved as bioequivalent to Adderall XR, so our brand is well positioned to continue to capture additional share as the remnants of the extended-release amphetamine shortage remain. To further highlight how we're continuing to leverage the ongoing Adderall XR shortage and our execution, I'll note that for the week ending February 10th, Adzenys registered over 7,200 total prescriptions. This is an all-time high and is up 26% from the previous week. This is by far the highest weekly TRx level ever registered for the brand. Cotempla also registered among its highest weekly numbers with over 3,200 TRxs that same week.
This is up 16% over the previous week. We're now hearing of methylphenidate shortages and know of Johnson & Johnson's discontinuation of the Concerta-authorized generic. So, now both of our ADHD brands have significant market factors providing tailwinds that we believe may persist for some time. For the four weeks ending February 10th, our combined ADHD scripts are up 20% over the preceding four weeks and again, at an all-time high level. And across the entire Rx portfolio, we're up 24% year-to-date over last year. To say the very least, we have tremendous momentum on our side with our prescription brands. Beyond the macro tailwinds, I believe our team has done a tremendous job creating and delivering on the tools headlined by RxConnect and building a highly motivated and refreshed sales team to drive growth.
I'll remind you that following the acquisition of Neos nearly two years ago, we began the process of revamping the salesforce. With the preference for newer-to-industry sales representatives and a stronger pay for outsized performance compensation model, we turned over a large portion of the former Neos sales team. This transition and change of mindset took time, but it has now begun paying dividends across the still new and highly motivated sales team. In conjunction with our commercial team, a key part of our success lies with Aytu RxConnect. With RxConnect, we have roughly 1,000 network pharmacies in key markets across the country on the platform. RxConnect creates real value for all stakeholders, so we seek to drive our prescriptions through that platform.
Photo by Kelly Sikkema on Unsplash
Compared to prescriptions filled outside the platform, Aytu RxConnect results in nearly 50% reduction in patient out-of-pocket co-payments, a 2x improvement in Aytu's net margin per Rx, and a more than 40% increase in prescription refills by patients. The platform truly does drive value for patients, health care providers and Aytu, which, of course, has been the purpose since the inception of the program. With Aytu RxConnect, the growth of this platform can largely be attributed to the fact that many prescriber hassles associated with dealing with payers are removed. Further, patients' co-pays remain consistent and predictable. In the friction, patients and clinicians often experience when writing and filling branded scripts largely goes away.
Going forward, RxConnect will continue to leverage our current products and the new products we are evaluating to bring into the portfolio. Again, we're pleased with where we are, but I'm most excited about where we're going with these great recent script trends. A lot of work has gone into creating this momentum and I'm grateful for the entire team for putting us in such a strong position. Before I transition to the Pediatric Portfolio, just a quick note on the manufacturing transfer both at Adzenys and Cotempla that we have underway, which is expected to further improve our profitability. As we reported back in September, the process is well underway with the prospective contract manufacturer, including the conduct of bioequivalent studies and the other required work.
It is our goal of having everything finalized in the CMO producing our ADHD products in calendar 2023. This outsourcing stands to improve the gross profit margin of the ADHD brands by 15% or more, a meaningful step change that, if achieved, will further improve our P&L. More to follow as this process continues, but we are pleased with our progress on this front. Let's now transition to our Pediatric Portfolio, which includes Poly-Vi-Flor, Tri-Vi-Flor, two complementary prescription, fluoride-based multivitamin product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency. We also market Karbinal ER, an extended released carbinoxamine based antihistamine suspension indicated to treat numerous allergic conditions for patients two years and older.
These products serve large established pediatric markets and offer distinct clinical features and patient benefits over both branded and generic competitive products. During the quarter, we achieved 95% growth in revenue from a prescription pediatric line with revenue ramping to $6.3 million. This was in addition to the 73% year-over-year growth in revenue from pediatric products that we achieved in the first quarter. So the growth just continues. Similar to our ADHD portfolio, the key drivers here are the improved sales force execution as well as the Aytu RxConnect platform leverage. These improvements are providing tailwinds for the product prescription growth trajectory. Since we added PVF and TVF to RxConnect platform, we have grown prescription significant and continue to demonstrate remarkable growth.
The most recent CDC data shows that only 63% of the US population has access to fluoride in their water and in some states like New Jersey that percentage is in the mid-teens or even less. We're continually evaluating geographic expansion opportunities for the fluoride multivitamin line as we look to additional areas in need of fluoride supplementation. We believe that growth across both new and existing geographies will serve as the basis from, which we will continue to grow Poly-Vi-Flor, Tri-Vi-Flor sales. To provide additional recent context on the growth of our pediatric brands, I'll note the tremendous growth they're also experiencing. Again, using the week ending February 10th, when we look at the year-to-date prescription growth over the same period last year, Combined Poly-Vi-Flor and Tri-Vi-Flor scripts are up over 120% while Karbinal scripts are up over 33%.
Overall, I'm pleased with the traction we're achieving across our RX segment. As mentioned, we experienced 23% revenue growth in the second quarter and generated a positive $3.1 million in adjusted EBITDA, our third consecutive quarter with positive RX segment adjusted EBITDA. With continued growth, cost reductions and gross margin improvement measures in place, we expect to continue the positive EBITDA quarters going forward. Let's transition to our Consumer Health segment now. As a reminder, within Consumer Health, our core product focus is on branded value-based products competing in large categories such as hair loss, digestive health, diabetes management and allergy, all competing with large national brands. We sell directly to consumers through e-commerce platforms, including branded websites and on the Amazon platform.
Additionally, the consumer segment sells products through our proprietary sales and marketing platform, which focuses primarily on direct mail. As we touched on last quarter, our objective has been to improve Consumer Health segment profitability with a focus on more efficient, higher contribution margin online sales channels. As a result, we are phasing out the direct mail channel in order to focus on higher profitability OTC medicines and specifically through our e-commerce channel. This just may negatively impact revenues in the near-term, but will drive improved EBITDA within the Consumer Health segment. Focusing our efforts on a more profitable OTC e-commerce portfolio, which I'll point out were 70% over the year ago quarter, resulted in adjusted EBITDA for this segment improving by 30% or nearly $500,000.
This improvement was achieved despite the segment experiencing a 3% year-over-year decrease in total segment revenues to $8.3 million. Our efforts to drive sustainable profitable growth in this segment are beginning to pay off. As we have alluded to in the past and a big part of Consumer Health growth plan, we are establishing a value brand called C'rcle Health, which we expect to officially launch later this year. C'rcle Health will represent a brand family of value based over the counter medicines addressing a range of conditions. Showcasing our OTC medicine products through a single recognized family brand will build more collective brand equity. This brand initiative is expected to create a common one-stop shop for families seeking value brands addressing common, everyday conditions ultimately driving more repeat customer sales, thus yielding higher overall margins and creating annuity value.
As part of the formation of the C'rcle brand, we expect to rebrand existing products, add new products and integrate all those into the C'rcle brand family. More to follow as we approach the C'rcle Launch. Before I turn it over to Mark, let me just say, how incredibly proud I am of the entire organization. The team continues to rally around the opportunity to build a truly great execution-oriented company, which has led to strong revenue growth and our second consecutive quarter with positive company-wide adjusted EBITDA. And again, the prescription trends through the middle of February are very encouraging to further add to our strong position. With initiatives in place for further growth, coupled with operational improvements and further cost reductions and margin improvements during the remainder of the fiscal year, we are in a much stronger financial position to drive long-term shareholder value.
With that overview now complete, let me turn it over to our CFO, Mark Oki for some additional color to the numbers. Mark?
Mark Oki: Thank you, Josh, and welcome to everyone joining us on the call. Earlier today, you may have seen that we filed a Form 10-Q/A to restate our first quarter earnings. During the second quarter, we evaluated the accounting for previously granted warrants included in-debt and equity transactions. With this, the company concluded that certain warrants should have been accounted for as a liability rather than as equity. The changes resulted in a balance sheet reclassification of the value of these warrants from additional paid in capital to a liability and a gain on derivative warranty liabilities. The company will value these warrants on a quarterly basis, which could result in additional gains or losses on derivative warranty liabilities.
Please note that, the reclassification and these gains or losses have no impact on cash, working capital, loss from operations, cash flows from operations or adjusted EBITDA. I will now build upon the comments Josh has already provided regarding our quarterly results, starting with revenue. Net revenue for the fiscal 2023 second quarter was $26.3 million compared to $23.1 million for the fiscal 2022 second quarter, a 14% increase. Looking at the component parts, net revenue from prescription product sales in the fiscal 2023 second quarter was $18 million compared to $14.6 million in the same quarter last year, an increase of 23%. As Josh noted, ADHD experienced 2% growth in net revenue to $11.1 million in the fiscal 2023 second quarter against $10.9 million during the fiscal 2022 second quarter.
The prescription Pediatric Portfolio experienced 95% growth in net revenue to $6.3 million in our fiscal 2023 second quarter compared to $3.2 million in 2022. And again, this growth was somewhat muted due to the end of calendar year shipping delays that pushed revenue into the following quarter. For the second quarter of 2023, net revenue from the Consumer Health segment was $8.3 million compared to $8.5 million in the same quarter last year. A decrease of 3% attributed to the channel strategy shift Josh described. We continue to have a small amount of other prescription revenue both this year and last. This other pertains to discontinued or de-prioritized prescription products. During this year's second quarter, it totaled $581,000 in net revenue and last year's second quarter had $545,000 of net revenue.
In general, we expect other revenue to decrease going forward. Gross margins improved strongly to 66% in the 2023 second quarter compared to 53% of net revenues in the year ago like quarter. This improvement in gross margin percentage was primarily driven by product mix, improvements in the ADHD and Pediatric Product lines, a result of cost reduction efforts and greater volumes. Gross margin percentages can vary from period to period for various reasons. This improvement does not yet account for any improvements we expect from the manufacturing transfer we've discussed. So we are optimistic that the margins will further improve upon the completion of the ADHD manufacturing transfer. On the OpEx side, for the second quarter of 2023, excluding impairment expense and amortization of intangible assets, operating expenses were $20.3 million compared to $22.1 million the same period a year ago, a decrease of about $1.8 million.
Research and development expenses were $1.7 million in the second quarter of 2023 compared to $4.5 million in the 2022 second quarter. Of this $1.7 million, $1.3 million was expense associated with the recently suspended pipeline programs. This quarter's net loss was impacted by an intangible asset impairment charge of $2.6 million related to our now former drug candidate, NT-502, a result of our announced suspension of drug development. There were no impairments during the second quarter of fiscal 2022. The net loss for the second quarter of fiscal 2023 was $6.7million or $2.15 per share compared to $11.5 million or $8.74 per share for the same quarter last year. Adjusted EBITDA for the second quarter was a positive $727,000 compared to a negative $7.6 million a year ago.
When you look at the breakdown by segment, adjusted EBITDA for our Prescription segment during the second quarter of fiscal 2023 was a positive $3.1 million compared to a negative $1.9 million in the year ago quarter. In the Consumer Health segment, quarterly adjusted EBITDA was a negative $1.1 million compared to a negative $1.5 million in the year ago period, a 30% improvement year-over-year. Finally, adjusted EBITDA tied to our now suspended R&D pipeline was a negative $1.3 million during the second quarter of fiscal 2023, compared to a negative $4.1 million in the second quarter of fiscal 2022. Going forward, we expect pipeline R&D spend to be minimal until such time that we can fund R&D from operations or engage a partner. Full reconciliations from net income to adjusted EBITDA are provided in the tables included in today's press release.
Finally, on the balance sheet, cash and cash equivalents at December 31, 2022, were $19.5 million compared to $23.8 million on September 30, 2022. During the second quarter, we announced an agreement with Avenue Venture Opportunities Fund to extend the interest-only period of our existing senior secured loan facility to January of 2024. We discussed this extension in some detail during our previous quarterly conference call. Please refer to today's press release for a recap of the details. Let me note that we implemented a 1-for-20 reverse stock split effective January 6, 2023. This action enabled the company to regain full compliance with NASDAQ's listing requirements effective January 20 of this year. With that, let me turn it back over to Josh.
Josh Disbrow: Thank you, Mark. So let me just conclude with where I started. I'm extremely pleased with the recent momentum the business has gained as we report our second consecutive quarter of company-wide positive adjusted EBITDA. The strategic decisions back in October of 2022 to accelerate the growth of our commercial businesses and indefinitely suspend our clinical development programs have put us on the path to profitability, evidenced by two consecutive quarters now of positive adjusted EBITDA. With product tailwinds in both ADHD and our pediatric Rx business, coupled with the shift within our consumer health business toward more profitable e-commerce sales and the upcoming launch of our C'rcle family of brands, I believe we are poised to continue the recent trends throughout the second half of the year. I appreciate everyone's participation on the call today and we'll now be happy to answer any questions you might have.
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