Good afternoon and welcome to the Eton Pharmaceuticals First Quarter 2019 Financial and Operating Results Conference Call. At this time, all participants are in a listen only mode. Following the formal remarks, we will open the call up for your questions. Please be advised that this call is being recorded at the Company's request.

At this time, I'd like to turn it over to David Krempa, Vice President of Business Development at Eton pharmaceuticals. Please proceed..

Thank you operator. Good afternoon and welcome to Eton's first quarter 2019 financial and operating results conference call. This afternoon we issued a press release that outlines the topics we plan to discuss today. The release is available on our website, etonpharma.com.

Today on our call, Sean Brynjelsen, our CEO will review the Company’s strategy, our first quarter highlights and our 2019 outlook. Then Wilson Troutman our CFO will review the financial results.

Before we begin, I would like to remind everyone that statements made during this call may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements.

Please see the forward-looking statements disclaimer in our earnings release and the risk factors in the Company's filings with the SEC. Now it's my pleasure to pass the call over to CEO Sean Brynjelsen..

Thank you David and good afternoon everyone. Thank you for joining our first earnings conference call as a public company.

Many of you who are familiar with our company have been loyal investors since our formation, but for the new investors Eton is a specialty pharmaceutical company focusing on developing, acquiring and commercializing innovative branded products.

Our mission is to advance healthcare through the introduction of innovative medicines that are both affordable and available to all patients. The Company, focuses on low risk or high reward product candidates that can utilize the FDA’s 505(b)(2) pathway.

And the pathway allows us to improve existing molecules, officially bringing new branded products to the market to better treat unmet patient needs.

This also includes developing new and unique formulations of existing medicines to improve safety and efficacy such as our preservative-free ophthalmic product EM-100 and our ready-to-use injectable products ET-202 and ET-203. Our developing products the new dosage forms to address unmet needs is the key focus such as our oral liquid.

These product candidate provide the solution to patients that are unable to swallow or new precision dosing. And additionally, we work to seek formal approval of products that are used off-label or as unapproved medicines. The Company's philosophy is to pursue a large number of products that we perceived to be low risk but high value.

We're not a one product company and we've built a diversified portfolio of product candidates where no individual product will be responsible for making or breaking our company.

When we started the company less than two years ago, we had four early stage products in our pipeline and since then we have held 14 FDA meetings using opportunistic business development, expand our pipeline to 12 product candidates today.

In fact, for these 12 product candidates have already been filed with the FDA with three additional product candidates expected to be filed before the end of 2019. We also believe that few of any of our pharmaceutical peers have a pipeline, as many near term NDA candidates as we do, we're proud of the pipeline we've built but we're not done yet.

Eton plans to continue our active approach to business development and add additional late stage candidates to our pipeline in the future. The long-term goal I set for our company is to file at least three NDA products per year. That's a minimum goal from my perspective.

And ultimately this translates into three new branded product launches year over year. We will exceed this goal and I'm confident that as long as we successfully launch and file three high value products per year, over the next few years, we'll build an extremely profitable and valuable company with a long runway for growth.

2019 is set to be a transformational year for Eton. And as we tend to become a commercial revenue generating company and our strong first quarter has set the groundwork to achieve that goal. I'd like to take a moment to share some of the most important achievements from this past quarter.

First off, in January, we licensed ET-104 an innovative patent pending oral liquid product candidate. We expect to initiate a bio-equivalency study in the second quarter. And if successful, we expect to file the product by the end of the year. In February we acquired marketing rights to two late stage ready-to-use injectable product candidates.

ET-202 and ET-203. ET-202’s NDA has already been filed with the FDA and ET-203 is expected to be filed later this year. I'll actually be discussing ET-202 in more detail as well as our launch plans later on in the call. In February, we announced a partnership with Bausch Health for the commercialization of EM-100.

EM-100 is our innovative ophthalmic solution, which has been filed with the FDA. And if approved, we expect in EM-100 to be the first preservative free ophthalmic product for the treatment of allergic conjunctivitis.

I would also add, we’re very excited to be partnering with one of the premiere global ophthalmic company to help bring this product to patients given Bausch’s existing presence and brand recognition and over-the-counter ophthalmic channel.

We find it strategically and financially beneficial to partner with them rather than invest our own resources and capital to build out the infrastructure ourselves. In addition to the milestone payments, we will receive a royalty on net sales of the product.

Lastly, in March we announced the submission of our NDA for DS-200 due to the critical unmet need in the market. The FDA granted our product both fast track designation as well as eye rolling review of the NDA.

This is the second product in our portfolio that has been granted fast track designation and highlights Eton’s focus on addressing unmet patient needs. I couldn't be happier with the accomplishments of our team in the first quarter, which has provided us with a great start to what we expect to be a transformational year at Eton.

We now have four products submitted to the FDA, which we believe have an opportunity to be approved and launched within the next 12 months. Today I want to focus on ET-202 as we are disclosing the molecule for the first time. ET-202 is our ready-to-use injectable formulation of phenylephrine.

Currently phenylephrine is only FDA approved in a highly concentrated formulation that must be diluted prior to administration to patients. As a result, most hospitals are currently buying unapproved ready-to-use products from compounding pharmacies.

Just last year the FDA released guidance restricting the use of compounded drugs whenever an FDA approved drug is available. Based on these guidelines, we believe compounders will no longer be able to sell ready-to-use phenylephrine once ET-202 is approved. And we intend to pursue all available options to ensure that these FDA guidelines are followed.

ET-202 was designed to provide clinicians with a ready-to-use standardized injectable formulation of phenylephrine that aligns with ASHP’s recommendations for reducing medication errors in the hospital and improving patient safety.

We believe ET-202 has the potential to provide compelling benefits to hospitals, physicians, and patients, including the following, potentially reducing risk of medication errors by eliminating the need for manual dilution and calculations.

According to stat pros, phenylephrine can account for an estimated 10% of all medication errors in the perioperative setting. Also improved shelf-life. Our product is expected to have a two-year shelf life versus just 30 to 60 days for compounded products. And compounded products will, it may have 24 hours for products that are compounded in house.

Third. Thirdly it reduced labor costs associated to the compounding and monitoring of the compounded product on the hospital floor. I'd also add that wastage is a consideration, a compounded product is frequently discarded when it's not used at the time versus our product – as a product that can go back on the shelf.

ET-202 will be addressing a very large market opportunity based on IQVIA data, some of you may know that as IMS data more than 7 million vials of concentrated phenylephrine are sold annually. Once concentrated vial is compounded into multiple ready-to-use doses we believe the market opportunity for ET-202 may be even larger.

The vasopressor market is estimated to be more than 25 million vials and $650 million in sales annually. We've kicked off internal launch planning for ET-202 and we intend to be in a position to successfully launch the product in the fourth quarter if approved on its PDUFA date of October 21.

With this launch, we expect to build out our hospital sales force which will support the ET-202 as well as many other hospital candidates in our pipeline including DS-300 and DS-200. As we look ahead to the rest of 2019, we are very excited by the prospects of filing additional NDAs and seeing our first products gain FDA approval and launch.

Going commercial in such a short time since the formation of our company will be a major achievement for our team will bring us one-step closer to our long-term goal of building Eton into an industry leading specialty pharmaceutical company. With that said, I’d like to hand this off to Wilson, our CFO to discuss our financial results.

Wilson?.

Thanks Sean. For a complete review of our first quarter financial results, please consult the press release we issued this afternoon or our Form 10-Q filed with the SEC. Eton reported 500,000 of revenue in the first quarter of 2019. Which came from the upfront fee associated with our EM-100 asset sale transaction Bausch Health.

We did not have any revenue in the prior year first quarter. Our R&D expenses for the first quarter of 2019 we're $6.5 million as compared to $1.3 million for the same period in 2018. The increase in our R&D expenses was primarily driven by $3.4 million of licensing payments to acquire the rights ET-104, ET-202 and ET-203.

In addition, Eton recognized a $1.5 million milestone expense associated with our DS-200 NDA filing in March and incurred increased headcount and operating costs related to the startup of our research and development laboratory.

General and administrative expenses were 1.6 million for the first quarter of 2019 as compared to 1.7 million for the same period in 2018. The slight decrease in G&A expenses were primarily driven by a decline in stock based compensation, partially offset by increased employee compensation costs for staff additions and public company expenses.

Our net loss of the first quarter of 2019 was $7.4 million as compared to a net loss of $3.0 million for the same period in 2018. The increase in our loss was primarily driven by the higher R&D expense level, partially offset by our 500,000 of revenue for the current quarter.

Our balance sheet remains at strong financial shape with $19.6 million in cash and cash equivalents as from March 31, 2019 compared to $26.7 million at December 31, 2018. With that, we would now like to open up the call for your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Andrew D'silva with B.Riley. Your line is now open..

Good afternoon. Thanks for taking my questions. Just a couple of quick ones on my end. First off, just related to your pipeline, it's expanded substantially since, you were doing your initial marketing for your IPO.

And as you mentioned, it's quite large, particularly for a company your size can you give a little color on how many more candidates you can realistically have in your pipeline under your current corporate infrastructure or are you pretty much at capacity at this point?.

Andrew, thanks for the question. Part of the Eton strategy is to grow through licensing M&A transactions. We really, virtually all of our candidates have been late stage. Our business model very much depends on our ability to go out and secure deals.

Any given week we're looking at let's say, at least two deals and over a year that's, it's more than a hundred transactions annually. In terms of what we convert, consider approximately 5% of those. So we would expect to do between three to five transactions a year.

To answer your question, we've done a couple of deals this year already, that's what's helped us to increase our pipeline. And especially if there's a product a 505(b)(2) that's already filed, we're going to go after it if it makes sense. So that, if it's creative, if we think that, this is a compelling value proposition.

So, with our cash on hand, our ability to do additional deals, really just depends on the deal structure. Many of our deals are milestone gated. So for the right deal, we'll find a way to do that. Having said that, we are more pretty picky about the types of deals we will take. We turned out a number of transactions..

Okay, great. Thanks for the color on that. That's a good segue into the next question I have. And it's, how should we think about the business from a commercialization standpoint with the [BNL] agreement that was established during the quarter.

Is that something we should consider more broadly across the total portfolio of candidates that you have at this time? Or should we expect that to be more of a one off and that's my final question..

Well, I think the answer is both. We really will look at licensing, if we can get a licensing deal that adds more value to the company than going it alone on a given product. Since our product is, we're not therapeutically focused. I'd say our primary presence will be in the hospital segment.

We have two senior guys in sales that have a ton of experience in that area. We feel very comfortable in that space and we'll feel comfortable putting a sales team to promote some of those products. For some of our retail products, we may choose to partner.

It really, whether we do that or not will depend on the type of deal structure and if it makes more sense to build it out ourselves, we'll do that. But, yes, it's not out of the question that we will partner additional products..

All right, great. Thank you for that color. Good luck..

Thanks a lot..

Thank you. And our next question comes from Ram Selvaraju with H.C. Wainwright. Your line is now open..

Hi, thanks very much for taking my questions. Just some detail items here.

Firstly, would it be possible for you to comment on the current status of the establishment of your sales and marketing infrastructure in anticipation of the 202 launch? And maybe you can give us a sense of how that's likely to progress over the course of the remainder of this year. Also wanted to ask about the patent pending situation on ET-104.

If you could maybe comment on what the nature of the patent protection would be if that patent is granted and when you expect office action on that patent estate.

And then lastly, if you had any color to offer us regarding a Bausch Health specific commercial plans in anticipation of the formal launch rollout of EM-100 and a if there's a specific milestone associated with the formal approval of EM-100, that would be payable to you from Bausch Health. Thanks..

Sure. I'll pick that last question first. We expect to have approval of EM-100 in the very near future. Our actual action date is in May, so this month I think we had stated elsewhere that if the FDA chooses to inspect the facility it could go to July. But our expectation would be, and our hope would be that we would have approval this month.

Now the Bausch’s plans for marketing that, I believe they would, really launch that product soon after approval. The allergy season is typically Q1, but that doesn't mean that, that wouldn't have an ability to start to penetrate the market sooner. So I can't, I don't really want to speak too much, to their marketing piece.

But I hope that gives you a little bit of an idea on that one.

Regarding your other question on building out our sales team for ET-202, that is we're going to wait as we get closer to approval, but we will be putting in a detailed sales team, both internal head count as well as what we call inside sales and as well as, in the field are reaching some of the major institutions.

We do have two Vice Presidents of sales and marketing, both of which have extensive experience in the hospital chain. We have several contractors that are helping us with the public, or I should say the branding and with the positioning of the product.

And we do expect to provide you with additional detail as we proceed towards launch of phenylephrine..

And the question regarding the ET-104 patent pending situation, the nature of the patent protection and in a general sense, if you could give us an idea of whether that's formulation based claims or method of use claims or a combination of both and when you expect office action..

Sure. So ET-104, patent was submitted recently and we would expect office action in let's say six months. That's just, my estimate, ET-104 is a formulation patent, although there are some claims surrounding the method of use and the manufacturing, it's primarily a formulation patent, so would be listable in the orange book..

Okay. Thank you very much..

You're welcome..

Thank you. Our next question comes from Eric Richardson with ER Capital Partners. Your line is now open..

Hey guys. Just a couple quick questions. One, if things go as you are anticipating, when do you think you'll be cash flow positive. And, two a little bit more clarity on your internal salesforce? If things go, how you anticipate and get the approvals you want, how many employees do you think that will add for next year? Thanks..

Sure. So we would anticipate starting with a salesforce of between 10 and 12 for the initial phenylephrine launch. This is a product that does not need to be heavily detailed. The product is used extensively throughout all hospitals today, except that it is sourced through compounders.

By us offering a ready-to-use version, it's really more of a conversion strategy. It wouldn't be the type of product where you need to go explain the molecule and explain the usage and then have repetitive visits. So we'd look at converting the hospitals, that sales team could grow as we launch additional products, but that would be a starting point.

So that could be approximately $2 million to $2.5 million spend a year-over-year. The cash flow question, I'll let Wilson answer that..

And the cash flow, again that'll be dependent on FDA approvals, which really is a little bit of a wild card in terms of timing. But, we anticipate that we could have revenue by late in the fourth quarter this year and if that happens then we should be cash flow positive towards the middle part of next year, 2020..

Great, thanks guys..

Welcome..

Thank you. And our next question comes from Brett Conrad with Longboard Capital. Your line is now open..

Hello.

Yes, I just wanted to kind of, if you could step through the anticipated launch of ET-202 just in terms of how quickly do you think, that will go and just how do you expect the revenues to ramp and do you kind of expect to get that entire market, over time? And how much time will that take?.

It’s a good question. Our marketing research has really identified two segments. One are hospitals that are currently ordering through third-party compounders. And then the other, which is about 40% who are in to compounding internally. We would expect to be able to convert the internal compounders fairly quickly.

That would be labor savings, cost savings at safety, reduces liability for hospitals. Those are a number of benefits. I think that's the low hanging fruit on that.

The challenge there, it's typically the smaller institutions, smaller hospitals, bed sizes less than let's say 200 beds, of the large institutions 500 beds and above are frequently ordering through a larger components because of the volumes.

So, we believe the market for this is more than 10 million units a year, we think that we would – pretty comfortable saying greater than 10% market share capture. And then the size of that mark would really just depend on where we decided to price the product..

Okay. Okay. Great. Thank you..

Sure..

Thank you. [Operator Instructions] Our next question comes from Robert London with London Family Trust. Your line is now open..

Yes, thank you. I'm interested in the earnings leverage in your business and business model.

If you had, just so I understand if you, let's just say you had 30 million of revenue next year, with should I assume by the 60% blending sort of gross margin for that and what would be the cost associated with revenue level at 39?.

Hi, Bob, this is David. The gross margin breakdown is very dependent on the product by product. Certain products we have profit shares, other ones we have very small royalties or small profit shares. So it's really going come down to a product by product basis. So, I can't give you a broad strokes answer to that.

We expect all of our products to be very high margin. We've said over 80% gross margin before profit shares, but some of them have a 50% profit share, some have a 20. In terms of the operating costs of the business, we don't, we think there is significant operating leverage in the business.

We wouldn't need to take on a really much additional overhead at all to ramp up sales. As Sean mentioned, we'll put in force put in place the salesforce, but that's one of the small incremental expense we expect to take on once we start bringing in revenue next year, later this year and next year, first full year of revenue..

Can you give us an idea of what the revenue would be on a quarterly basis for breakeven?.

No, we're not giving any guidance on that at this time..

Okay, thank you..

Thank you..

And our next question comes from Ram Selvaraju with H.C. Wainwright. Your line is now open..

Hi, thanks for taking the follow-up. I just had a general question about opportunities that you're seeing emerging in the specialty generic space, particularly in the hospital sector. Given all of the discombobulation that's been occurring over the past few months.

For example, with this price collusion situation, that may in fact wind up hurting a number of the more established players. And if you think that that might potentially, reveal or create some emergent opportunities for you guys to capitalize on going forward..

Sure. That's actually a good question. That's kind of a unfortunate situation in the industry. I will say that we're in the right space. The 505(b)(2) space is the hot space. Most of the price, pricing controversies have come through the generic space that has, that's really more on the collusion side.

That's been as you've read in the news, on the branded side, it's really more around egregious pricing. I think read today, there's a new product that was just approved. It's a $2 million a year therapy for muscular wasting. But we're neither of those.

We really are the – kind of in between the old molecule new product where we add value to the customer. Our mission is to deliver innovative products that are both affordable and available to all patients. That's what we intend to do.

We have satisfaction in launching products that are profitable and allows us to obviously develop and continue our business model, but not so much that we're taking advantage of patients or caregivers or insurance companies. That's not our style. It's not my style. So I think that the space is strong, the markets we're going into are well defined.

They're already being served and I think well-served. That's really where we're adding the value. And, I would expect it to be well received even on ET-202 we've done an extensive marketing study with various hospitals. We've given them some price points that we're looking at, which have also, we've not really had any objections to.

So we're coming in there in a way that doesn't, it's not going to surprise anybody. And we're not going to, try to take advantage of a position, but we are there is a lot of interest in what we do. There's very few companies filing the clip of 505(b)(2) that we're filing. So we will definitely be looking at creating shareholder value..

Thank you very much..

Sure..

Thank you. And our next question comes from Eric Richardson with ER Capital Partners. Your line is now open..

Hey guys, just one more quick question. Can you clarify a little bit on the two products that you have enrolling with you and how those differ from the other filings that you have and the timing on approvals because it's not definite..

Sure. So you're referring to DS-300 and DS-200. These are both a desi products. They've been sold in the market for 20 plus years. I consider these shorter runway products less durable and some of our other products, so like, some of our oral solutions have more durability, but they represent great near-term revenue generating opportunities.

So, we're still anticipating approval of DS-300 later this year, for DS-200, we filed and received a fast track designation. The filing is we believe fairly complete. And we've received already questions from the FDA that we're responding to, so the timing on that.

I guess I'll officially say, the first half of next year, but it could be much sooner than that depending on how fast the FDA moves..

Awesome. Thanks..

Welcome..

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Sean Brynjelsen for any further remarks..

Great. Well thank you everyone for joining today. I really want to extend thanks to the Eton team and all of their efforts. Cannot be more proud of the work that everyone has done to bring us to this point.

It's really quite amazing and in under two years to be sitting on not just a pipeline, but a large number of filings and a large number of near-term filings. I'd like to thank our shareholders for their support. Me being one. So my interests are the same as your interests, so we're in full alignment on that.

And then lastly, I'd like to thank our strategic partners, like Bausch and Synthetica, we really appreciate your support and we look forward to expanding that. And we have more good stuff to come. I'm always available and if – we'll be looking forward to sharing more information in the near future. Thank you everyone..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day..