Edited Transcript of AYTU.OQ earnings conference call or presentation 14-May-19 1:00pm GMT

Also, we cut the cash burn and ended the quarter with a healthy $15 million on the balance sheet. Dave will provide specifics on our financial performance shortly.

Now for some commercial and product specifics. This quarter, we continued the growth of Natesto and increased total prescriptions, units shipped and product revenue sequentially, and we did this while launching Tuzistra XR through the sales force. Natesto again contributed the lion’s share of quarterly revenues as Natesto revenue grew more than 380% over the same quarter last year. This growth came through a combination of new and refill Rxs and a dramatically improved gross-to-net.

We’re pleased with the momentum we’ve captured with Natesto following our implementation of our patient support program, Natesto Direct, just over 4 quarters ago. We expect continued growth given the broadening acceptance of Natesto Direct by patients, physicians and their staff. We also expect to grow by exposing more clinicians to the growing clinical data set that we believe establishes Natesto as a treatment with an unmatched clinical profile in testosterone replacement. I’ll share some more on the clinical results relating to both the ongoing spermatogenesis study as well as 2 recently published head-to-head studies highlighting Natesto’s efficacy and patients’ preference for Natesto over topical TGLs.

With respect to Tuzistra XR, the launch has gone quite well. The sales force got into the field fully in January. And despite getting into the field after the cough season had already started, we were able to capitalize on the second half of the season.

While the season was more muted than last season’s near record numbers, we are pleased to have gotten back in front of previous Tuzistra writers and get many of them writing again. Having laid the groundwork late this season, we’re enthusiastic about how we’ll be entering our first full cough season in the fall.

With a full team getting out ahead of the onset of coughs and colds, we expect to do even better and ramp prescription growth this fall and winter.

ZolpiMist also made a solid revenue contribution this quarter in what was the first full quarter in the sales force’s bag. By that, I mean, this is the quarter — first quarter during which inventory and channel issues didn’t need to be addressed as we had assumed the product from the previous owner. Going forward now, our sales force will turn more towards ZolpiMist and deemphasize Tuzistra as the cough season winds down.

With that, we’ll have a solid one-two punch with Natesto and ZolpiMist in the late spring and summer months and shift back to Natesto and Tuzistra in the fall. Also, ZolpiMist has promising activity now occurring outside the U.S., and I’ll close out my comments by providing some color on that.

Finally, as it relates to our product performance. I’m pleased to remind you that MiOXSYS is doing quite well. As you recall, MiOXSYS is our proprietary male infertility diagnostic device that we commercialize largely overseas. Very simply, we believe MiOXSYS stands to change the way infertility is assessed and managed. MiOXSYS is now used in over 30 countries, and our distribution network around the world continues to expand the install base and add to the number of routine users of this breakthrough test. MiOXSYS now has approvals in Canada, the EU, Australia and Mexico, and the footprint of targeted approval countries continues to expand. We’ll be traveling to Europe this summer to interface with the world’s leading urology and Andrology academicians at ESHRE, the largest fertility focused scientific conference in the world. And there, we expect to have a spotlight on MiOXSYS and the latest clinical data demonstrating its efficacy and accuracy in fertility assessment.

The awareness and use of MiOXSYS are growing, and we’re proud of the progress being made at this business within a business.

Before getting into the Natesto clinical results in more detail around the global ZolpiMist activities, let me now hand it over to Dave to cover our financials. Dave?

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David A. Green, Aytu BioScience, Inc. – CFO, Secretary & Treasurer [3]

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Thank you, Josh, and thank you all for joining us this morning. Today, I’ll review our financial results for this third quarter of our 2019 fiscal year that ended March 31, 2019.

A couple of housekeeping notes before the results. Earlier today, we filed Form 10-Q with the SEC for the 3- and 9-month periods ended 3/31/19. That filing contains our full third quarter report. We also issued a press release this morning with a summary of the Q3 results. The press release, which includes Q3 summary financial statements and the 10-Q report can be found in the Investors section of our website, www.aytubio.com.

And now our Q3 financial results. Revenue for the quarter ended March 31, 2019 was $2.4 million, another new quarterly record for Aytu. The $2.4 million of revenue represents sequential growth of 33% over the $1.8 million of revenue recognized 3 months ago for Q2.

Compared to our third quarter last year, our Q3 2019 revenue is up nearly 4x. Gross profit for Q3 2019 was $1.76 million compared to $1.27 million for Q2, representing a 39% sequential increase. The increased Q3 gross profit is attributable to both our higher product revenue and a stronger gross profit margin across the portfolio.

The operating loss for Q3 2019 was $4.3 million and lower than the $4.6 million reported in Q2 and 43% lower than the same quarter last year. The sequential quarter improvement is attributable to higher revenue and lower product costs, partially offset by marginally higher operating expenses, which resulted primarily from the launch of Tuzistra XR.

The Q3 operating loss was also $3.2 million stronger than the $7.5 million loss recorded for the same quarter 1 year ago, which was negatively impacted by write-offs totaling $2.7 million from discontinued products. Net loss for Q3 was $4.5 million or $0.50 per share.

Turning to the cash flow statement. Net cash used in operating activities for the first 3 quarters of fiscal 2019 was $10.4 million, which is approximately $1 million less than the same period of fiscal 2018.

Net cash used in operating activities for the third quarter was $3.3 million, which was $992,000 lower than the cash used in operating activities last quarter. The reduced burn rate was largely due to higher revenue and lower product costs while controlling expenses.

Turning to the balance sheet. We ended the quarter with a cash balance of $14.75 million compared to $17.9 million at the end of Q2.

Finally, we reported — we recorded an important subsequent event, an exchange transaction with Armistice Capital that eliminated 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 eliminated approximately $5.1 million of debt and accrued interest.

Altogether and in summary, with revenue up 33% sequentially and nearly 4x year-over-year, a 39% increase in gross profit, a nearly $1 million reduction in burn and the elimination of all interest-bearing debt, Q3 was another strong quarter and continued forward progress for the company.

And with that, I’ll turn the call back over to Josh.

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Joshua R. Disbrow, Aytu BioScience, Inc. – Chairman & CEO [4]

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Thank you, Dave. It was a very solid quarter for us across the board, and the financials, obviously, speak well to that. Getting essentially to a $10 million revenue run rate this quarter puts us in a great position, and we’re excited about the company’s current momentum.

Now I’ll speak to some of the recent clinical developments surrounding Natesto. As you’re likely aware, the Natesto’s spermatogenesis study is well underway. Based on the last update provided by the University of Miami and Dr. Ramasamy’s Research team, 56 men now have been enrolled in the study, and 15 patients have completed the 6-month treatment period. 43 men have completed 1 month and 23 patients have completed 3 months.

I’ll remind you that this study seeks to conclude whether Natesto treatment enables hypogonadal men to maintain their fertility potential while still boosting T levels. Clinicians in the field understand very well that testosterone treatment diminishes or, in some cases, entirely disables fertility in men. Thus, a study that demonstrates no or minimal impact of a testosterone product on fertility would be potentially groundbreaking in this field.

Interim data have now been published in the peer-reviewed journal European Urology Focus, and demonstrate that at both month 3 and month 6, all semen parameters remain statistically unchanged, specifically patients’ sperm concentration, sperm motility and total motile sperm count remain normal while on 6 months of Natesto treatment. The remaining enrolled patients now need to progress to the 6-month treatment period and upon their completion this summer, we expect the study to wrap up.

Following that, and depending on the publication and conference plans of Dr. Ramasamy, we’d expect to see the results made public thereafter.

The 2 million or so hypogonadal men seeking to preserve fertility during their family formation years could uniquely benefit from these clinical results. So we’re excited about Natesto’s potential to be the only testosterone available to this large group of men. More to follow as the study nears completion.

Several reproductive medicine-related conferences are scheduled for the fall, so we’ll be excited to learn where final data may be presented by Dr. Ramasamy and his team.

Staying on the clinical front, we also reported on 2 additional clinical publications reporting on Natesto. Two publications in the Canadian Neurological Association Journal, published online and authored by Jay Lee and colleagues, demonstrated several key factors in the first ever published head-to-head study with Natesto. First, when patients were switched from a topical gel like Androgel to Natesto, and after being on Natesto for 90 to 120 days, patients experienced significant improvements in their low T symptoms, 15% on average and a 20% improvement in overall effectiveness.

Further, the vast majority of patients who switched actually preferred Natesto over their previous treatment. Over 70% of the men preferred Natesto over their gel after having been on a gel for, in some cases, years.

Finally, and perhaps most notable is related to the safety of Natesto. Patients who were on a topical gel demonstrated an increase in their hematocrit levels during the course of their gel treatment. However, in this study, when men were switched from a gel to Natesto, their hematocrit levels actually went back down, back into the middle of the normal range. This is the first such study to demonstrate this and goes a long way to emphasize the safety of Natesto when compared to other T treatments.

Safety considerations are key in the testosterone category, so we believe these results highlight an important aspect of what makes Natesto unique. These data, in conjunction with the previously reported safety data, we believe will continue to improve the market position of Natesto with patients, clinicians as well as payers and may yet again stand to set Natesto aside from other low T treatments.

Moving to ZolpiMist. This quarter, we announced our partnership with SUDA Pharmaceuticals. SUDA has commercial rights to ZolpiMist outside the U.S. and Canada, and this sublicense agreement allows for Aytu to benefit from rest of world sales through this perpetual milestone-based and royalty-bearing sublicense. Through the term of the deal, SUDA will pursue commercial sublicenses around the world and Aytu will be eligible to receive a portion of any country-specific deal they make. We’ll receive a portion of upfronts, a portion of any regulatory and commercial milestones and ongoing royalties for all future sales.

SUDA has already put sublicensing deals in place in major markets like China and South America and has just announced a sublicense with Mitsubishi Tanabe that covers Southeast Asia. Further, they recently announced their submission of ZolpiMist to the Australian TGA for approval, which, if obtained, would result in an early 2020 approval. This would be the first approval of ZolpiMist outside the U.S. and 1 of more we expect to follow as SUDA builds out the global footprint.

In closing, we recently expanded our Board of Directors with the formal appointment of Steve Boyd to the Board. Steve is a respected and very knowledgeable healthcare investor, and he’s the founder of Armistice Capital. His joining the Board marks an important point in our history, whereby we’ve been able to attract a high-caliber of industry professionals and now a well-respected health care institutional investor to our leadership team.

So we’re pleased with the many accomplishments from this quarter and look forward to providing additional updates as we continue to execute.

With our prepared remarks now complete, we’ll pause and open the phone lines up for questions. Jess, go ahead and open the lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We’ll go first to Jeffrey Cohen at Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [2]

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So could you talk to us a little bit about the schedule for Tuzistra and what you’d expect because we believe that may be advantageous to be the two, not three. Could you talk about that a little bit?

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Joshua R. Disbrow, Aytu BioScience, Inc. – Chairman & CEO [3]

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Two, not 3. I’m sorry, I missed that part of the question.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [4]

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The Schedule III versus Schedule II for Tuzistra.

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Joshua R. Disbrow, Aytu BioScience, Inc. – Chairman & CEO [5]

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Yes. Thank you, Jeff. So it’s a subtlety that you picked up on and I think that’s important as we move into this category. So obviously, we acquired Tuzistra XR. We acquired it fairly late in the season, got into the field in January, as I noted in my prepared remarks, and it got off to a very nice start. We’ll obviously now have some wind in our sales heading into the fall where we can get ahead of sampling and really seed the market prior to our first full cough cold season.

But the point you made around Tuzistra being a Schedule 3 versus being a schedule 2 is relevant and it’s frankly quite subtle. Obviously, the DEA has begun scrutinizing controlled substances, specifically opioid-based products. And most of those products, inclusive of really the long time market incumbent, is a schedule 2 by the DEA. So that is inclusive of products that primarily contain hydrocodone.

Interestingly though, codeine is also a schedule 2, making it a little bit more challenging. In fact, in some states, extremely difficult for physicians to prescribe and in many cases, not even maintain samples in their offices. What’s important about Tuzistra XR is that while it does contain codeine, because of the dosage — because of the dosing related to the extended-release polystyrex formulation, Tuzistra XR is actually a Schedule 3. So providing a significant advantage in the marketplace in that there’s obviously a safety element to be considered and a physician obviously has a practical component, whereby they can more easily, more readily write a Schedule 3 like Tuzistra than they could a Schedule 2, say, like Tussionex, for example, which is the long time hydrocodone based market incumbent. So it enables us to get better access to the physicians. From a pharmacy perspective, it enables better access as well. And ultimately offers, we believe, a safer alternative for patients to get relief from cough with a Schedule 3 versus a Schedule 2 product.

So we’ll obviously — we have begun showcasing that. We’ll begin elevating that as we get back out into the field here following the summer months and get into cough, cold season.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [6]

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Okay. Got it. That’s very helpful. And then I guess my second question, could you talk about mix a little bit? I know you don’t specifically break down your portfolio. But how do you expect that rolling out over the next about 6 or 7 quarters, generally speaking? I know you’re going to wrap up the year without any cough and cold season you caught a little early in the year and talk about that and maybe what the mix looks like in 4 or 5 quarters as far as the composition is currently configured?

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Joshua R. Disbrow, Aytu BioScience, Inc. – Chairman & CEO [7]

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Yes. Yes, you rightly pointed out, the cough, cold season is — we’re sort of coming out of that. So as we get into the next fall, as we build Natesto, we obviously expect Natesto to continue to be a big part of our revenue story. Obviously, it’s a significant product with a big opportunity as we go — grow forward.

What I’ll say is, generally speaking, we expect a more balanced portfolio going forward that obviously will impact our overall mix. Growth to mix, we think, will be positively impacted by that really by virtue of just a more balanced contribution. Not guiding specifically to what percent each plays, we would expect Natesto to be a significant player and carry a lot of the water for the company. But frankly, ZolpiMist and Tuzistra, they compete in large categories as well. There’s between 30 million and 35 million antitussive prescriptions written annually. There’s over 40 million in sleep aids written annually in the U.S., so very large market opportunities to complement what is about a 7 million Rx category, the testosterone category.

So while those are lower price points in the ZolpiMist and Tuzistra categories, there is, we think, ample opportunity to be meaningful contributors in the out quarters as we grow. So that’s — hopefully gives you at least some sense without giving you specifics in terms of what exactly contributes what.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [8]

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Okay. And one more, if I may. Could you talk a little bit about sequential growth? I think we were estimating mid-teens, generally speaking on a quarterly basis. And it looks like — what was this 32.1% this quarter? Could you talk about that generally speaking? Should we be thinking that you can sustain 20s on a quarterly basis?

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David A. Green, Aytu BioScience, Inc. – CFO, Secretary & Treasurer [9]

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Jeff, we — yes, we are — obviously, don’t guide at this early stage of the company’s life cycle. But we do expect to have something in the range of a doubling of revenue for year-over-year and next year, continued growth, obviously, not at the same 100% growth rate. But without getting into the quarter-over-quarter, the company will continue to grow at a very healthy clip. And there’s a lot of new revenue that we expect to come on board, especially with Tuzistra and the seasonal aspect of Tuzistra will change some of the quarter-over-quarter dynamic that we’ve experienced this year just due to the seasonality and the seasonal nature of the cough cold season.

But the big picture year-over-year, very, very strong. Next year, we expect to continue growing, although not necessarily at the same high rate that we grew this year. But overall, continued very strong growth.

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Operator [10]

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(Operator Instructions) We’ll go next to Carl Byrnes at Northland Securities.

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Carl Edward Byrnes, Northland Capital Markets, Research Division – MD & Senior Research Analyst [11]

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A quick follow-up with respect to Natesto. Can you comment at all with respect to what you’ve seen in terms of sequential total prescription growth? Obviously, we’re seeing nice revenue growth. And I would suspect that you’re seeing — also accompany strong prescription growth, but improvements in gross to net as well.

And then a follow-up on that, just in terms of the timing of the top line read out of this spermatogenesis study?

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Joshua R. Disbrow, Aytu BioScience, Inc. – Chairman & CEO [12]

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Okay. Thank you, Carl. So with respect to sequential growth, yes, absolutely, we saw nice sequential growth from a prescription perspective. We look at total prescriptions and refills, which really is the most encouraging thing that we look at, the fact that we have men that are getting on therapy, and they’re sustaining that therapy.

So even in a quarter when, frankly, we had a significant improvement in gross to net. We continue to pull up prescriptions sequentially, which was very, very nice to see. So we obviously had a product launched with Tuzistra. We launched it as a secondary. So we still were able to maintain Natesto on a primary position and saw double-digit prescription growth sequentially from our Q2 to our Q3. So very excited by that.

Again, in the face of gross to net, that really resembles a very healthy pharmaceutical gross to net. We don’t publish it by product, but you can get a sense, obviously, across the portfolio, how things are looking, gross to nets of 70-plus percent across the portfolio. And that is, frankly, you would hold that up against any major brand in the industry. So very, very pleased with that.

With your second question relating to the readout of the spermatogenesis study, we’re obviously getting close. We are excited by what we’re hearing from Dr. Ramasamy and his group in terms of how patients are progressing. Obviously, in my prepared remarks, we framed up where patients are. We do expect the study to wrap up this summer, June, July time frame to be specific. The timing of a specific readout is a little bit more difficult to pin down because this is an investigator-initiated study, meaning it’s a study really manned — dictated and driven by Dr. Ramasamy. He obviously has very high hopes and high expectations around this, such that we would expect him to target a high-impact location, a high-impact scientific conference to present the data and potentially follow that or precede that with a publication in a high-impact journal. So we’ll be a little bit removed in terms of the exact timing, but we’ll try our best to keep investors updated with respect to when the study completes. And if there’s a plan to submit it or present it, we’ll obviously try to keep folks apprised of that timing.

But generally speaking, June, July readout in terms of them having access to the final data and then a publication and/or presentation to follow shortly thereafter.

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Carl Edward Byrnes, Northland Capital Markets, Research Division – MD & Senior Research Analyst [13]

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Great. And congratulations on the progress.

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Operator [14]

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(Operator Instructions) And it looks like we have no further questions at this time. I’ll turn the conference back to management for any additional or closing remarks.

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Joshua R. Disbrow, Aytu BioScience, Inc. – Chairman & CEO [15]

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Great. Thank you, Jess. Thank you for the questions there, and thanks to all of you for listening to the call today. And thanks for those of you that joined via webcast. We’re pleased with our Q3 performance. And based on how this quarter — Q4 is already setting up, we’re looking forward to posting another positive quarter. We think doubling revenue from last year to this year would make for a very solid fiscal ’19 so there’s more to follow-on that front, and we’ll certainly provide complete details on our next update call. So until then, have a good day, and thanks again for listening.