Good afternoon and welcome to the Eton Pharmaceuticals Second Quarter '22 Financial Results Conference Call. [Operator Instructions] Please be advised that this call is being recorded at the company's request.

At this time, I would like to turn it over to David Krempa, Senior Vice President of Business Development and Investor Relations at Eton Pharmaceuticals. Please proceed..

Thank you, operator. Good afternoon, everyone and welcome to Eton's second quarter 2022 conference call. This afternoon, we issued a press release that outlines the topics we plan to discuss on today's call. The release is available on our website, etonpharma.com. Joining me on our call today, we have Sean Brynjelsen, our CEO; and James Gruber, our CFO.

In addition to taking live questions on today's call, we will be answering questions that are e-mailed to us. Investors can send their questions to investorrelations@etonpharma.com.

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, I will turn the call over to our Chief Executive Officer, Sean Brynjelsen..

Thank you, David. Good afternoon, everyone and thank you for joining us. I'm excited to talk with all of you today about our strong second quarter performance and the significant progress we have made in advancing our mission to be a leading rare disease company.

I'd like to start today with our recent transaction to sell our hospital injectable products, including Biorphen, Rezipres and cysteine hydrochloride. This transaction, we sold these products to Dr. Reddy's Laboratories for payments that could total up to $50 million.

We received approximately $5 million at closing and could receive additional payments of up to $45 million based on the achievement of certain milestones.

While we have great confidence in the prospects for the Biorphen franchise, the launch of the vial and the bag products required a completely different sales force and commercial infrastructure than what we have in place, not to mention a significant financial investment.

This transaction allows us to benefit from the potential success of Biorphen through commercial milestone payments without having to use any of our resources to bring the full Biorphen portfolio to market. With the completion of this sale, we are now 100% focused on rare disease products, an area in which we see vast opportunities.

Rare disease products generally have higher revenue, higher margins and higher returns on investment. Eton is well capitalized to execute on this strategy and our team is energized and excited about the product opportunities we see in the space.

We are confident that Eton will be able to use these proceeds from this transaction to expand our rare disease portfolio. Turning now to our second quarter results. I am pleased to report that we delivered another strong quarter of revenue growth. This was our sixth straight quarter of sequential growth in product sales and royalty revenue.

We expect the streak to continue into the foreseeable future. We are also proud to report positive cash from operations of more than $2 million in the quarter. Our flagship product, ALKINDI SPRINKLE, is one factor driving this growth.

Second quarter sales of the product were up 293% over the year period -- the prior year period and up 34% from the prior quarter. ALKINDI is the first and only hydrocortisone treatment specifically designed to provide accurate dosing for newborns and children with adrenal insufficiency.

During the quarter, we attended a number of key industry conferences, participated in numerous patient advocacy group events and hosted an advisory board of key opinion leaders in the pediatric endocrinology community.

The feedback has been overwhelmingly positive as parents and physicians clearly understand the critical need for the low-dose treatment options that ALKINDI provides. While it is taking time to change some physician and parents' long-held habit of crushing or cutting tablets, we continue to see steady growth in new scripts.

Growth is coming from both -- I'm sorry, growth is coming from new prescribers that have been writing ALKINDI for the first time as well as existing prescribers, adding additional scripts for ALKINDI after seeing positive results from their patients.

We also have a number of new marketing initiatives that have recently been implemented or will be implemented later this year which we hope will further accelerate this growth. We still have only converted a small percentage of the addressable market and believe the product has a long runway to grow for many years to come.

Next, I will talk about carglumic acid tablets, the first FDA approved generic version of CARBAGLU. In the 6 months it's been on the market, we have been actively engaged with prescribers in the metabolic genetic specialty. They are excited about our product.

And in addition to the convenience of its room temperature stability, they are pleased to see a lower-cost treatment option. Eton is committed to providing physicians and patients the full level of support services customary in the rare disease space.

When we launched carglumic acid, we saw encouraging patient numbers right out of the gate, with the first quarter tracking ahead of expectations. During the second quarter, net patient adds came in below expectations and we believe there were several onetime issues weighing on conversion.

Based on acceleration of new patient adds in the third quarter, these onetime issues appear to be behind us. In fact, July was our highest month for new prescriptions to date.

So we remain confident about the product's prospects for the full year and beyond as well as in our ability to take a significant share of this market which we estimate to be greater than $50 million per year.

In addition to the strong commercial execution in the second quarter, I have been pleased with the progress we have made on our late-stage pipeline programs, starting with our ZENEO hydrocortisone auto-injector program that is being developed for the treatment of adrenal crisis.

As I mentioned earlier, through our work on ALKINDI SPRINKLE, we have actively engaged with physicians, patient advocacy groups and parents in the endocrinology community. Through these interactions, it is clear that there is a huge need and great demand for ZENEO hydrocortisone autoinjector.

Many parents and caregivers are afraid to use the Solu-Cortef lyophilized kit that is the standard of care today. The complexity of the current treatment often limits the ability of children to participate in extracurricular activities when their parent or a trained health professional is not on site.

The availability of the autoinjector would provide a huge quality of life benefit to adrenal insufficiency patients and their parents. The autoinjector is currently in development with our partner, Crossject. We are working hard to bring this product to market and believe an NDA could be submitted as early as next year.

Recently, Crossject received a $60 million order from the U.S. government for a different molecule that is utilizing the same ZENEO device which we see as a strong vote of confidence for the technology overall. Eton is also making progress in our dehydrated alcohol injection product for the treatment of methanol poisoning.

While our NDA resubmission has taken longer than expected, we are in the process of fully addressing the FDA requests. We are nearly finished with the additional analytical testing required and expect to have the application resubmitted to the FDA shortly which should allow for an approval and launch next year.

We see a compelling opportunity for this product. The market has grown rapidly in recent quarters as the supply of the old grandfather products has finally expired. Based on the latest IQVIA data, the market has at an annual run rate of approximately $80 million and we expect it to continue to grow.

If approved, we would be 1 of only 2 suppliers in this market due to the orphan drug exclusivity protections. We also recently saw the approval of Zonisade or zonisamide oral suspension, the first and only FDA-approved oral liquid formulation of zonisamide which is used to treat patients with epilepsy.

We filed the product application with the FDA prior to our multiproduct partnership collaboration with Azurity Pharmaceuticals which we announced last year.

Under the terms of this agreement, Azurity will be responsible for commercializing Zonisade and Eton will be entitled to receive a $5 million payment upon product launch or 90 days after approval whichever occurs first. In addition, Eton will receive a royalty on commercial sales of the product.

These milestones -- these payments together are more than 17 million -- with our $17 million of cash on hand as of the end of the quarter and our growing product sales will enable us to finance our growth and continue investing in new, high-value rare disease products.

Since we have now established a strong presence and critical relationships with key opinion leaders in the specialties of pediatric endocrinology and metabolic genetics, we are actively looking at opportunities to acquire or develop more products in these specialties that would leverage our existing commercial presence and relationships.

To that point, we have initiated work on 2 additional product candidates that would address critical unmet needs in our specialties. We believe both products would have large market opportunities and relatively fast development time lines.

Because they would be developed internally, Eton would retain 100% ownership with no royalty or profit share obligations. We plan to hold meetings with the FDA in the coming months to confirm the clinical pathway and we hope to have additional details to share with investors later this year. Turning now to guidance.

Following the divestiture of our hospital business, we expect 2022 revenue between $20 million and $25 million, including licensing revenue of at least $10 million and product sales of $10 million to $15 million. The work we've done in the first half of the year puts us in a strong position for the second half of 2022 and beyond.

We're excited to be fully committed to the rare disease business. A couple of final points. Our 2 commercial products continue to grow rapidly and have a long runway. Our late-stage products are poised for product launches in 2023 and 2024.

And on top of all of this, we are looking at a variety of compelling, pipeline opportunities for both internal development and acquisition. We're excited for the road ahead and we look forward to sharing additional details on future calls. With that, I'll turn it over to James.

James?.

Thank you, Sean. Eton reported revenue of $7.4 million in the second quarter of 2022, representing growth of 139% over the prior year period. Revenue for the period included $5.0 million of licensing payments from the hospital products divestiture and the prior year period included $2.5 million of licensing payments related to the Azurity transaction.

Product sales and royalty revenue for the quarter was $2.4 million, representing our sixth straight quarter of sequential growth. Second quarter revenue was negatively impacted by a $200,000 inventory allowance related to the hospital products divestiture and our requirement to cease commercializing Rezipres ampules at the end of this year.

Despite this adjustment, product sales and royalty revenues still grew 316% over the prior year period. Gross profit for the quarter was $4.6 million compared with $2.9 million in the prior year period. Gross profit was negatively impacted by $1.8 million of noncash expenses related to the Dr. Reddy's transaction.

General and administrative expenses for the quarter were $5.3 million compared with $3.2 million in the prior year period. Cash G&A expenses for the quarter were $3.9 million compared with $2.9 million in the prior year period.

The increase in G&A expenses was primarily driven by increased employee expenses and sales and marketing expenses to support the growth of our commercial products. R&D expenses for the quarter were $0.7 million compared with $2.0 million in the prior year period.

This reduction is due to lower R&D activities as a number of our products that incurred expenses in 2021 have now been approved and a $500,000 onetime licensing payment for the ZENEO autoinjector in the prior year period.

The divestiture of our hospital products is expected to reduce our R&D spending by multiple millions of dollars over the next 18 months. Net income for the quarter was a loss of $1.6 million or a negative $0.06 per share. Onetime noncash expenses tied to the Dr.

Reddy's transaction negatively impacted GAAP net income by $1.8 million in the quarter and we reported positive cash flow from operations of $2.5 million in the quarter. Eton finished the second quarter with $17 million of cash on hand.

In addition, we expect to receive a $5 million milestone payment upon the launch of the recently approved Zonisade product before the end of this year.

We are confident that our cash on hand, licensing payments and royalty income gives us the flexibility to continue to invest in new product opportunities and support our ongoing commercial product growth. That concludes our remarks on second quarter results. Now we'll open it up for Q&A.

Operator?.

[Operator Instructions] Our first question comes from Ram Selvaraju with H.C. Wainwright..

So firstly, I just wanted to ask about marketing strategies for ALKINDI SPRINKLE.

And what specifically you are seeing resonate most in the marketplace? And how you expect to be able to kind of integrate that information into your future strategy from a commercialization standpoint with this product?.

Great question. So I can't share everything that we are doing. Some of it hasn't been made public yet but we are working on, let's say, another version of ALKINDI. The current product is great and physicians are taking that. But we're taking some of the feedback they're providing us and so we're trying to ultimately bring that into another offering.

What I can say though is for the foreseeable future, we're getting a constant update and increasing patients on a week-by-week basis. The main challenge has been with some of the kids, the granules which are taste masked, especially for the young ones. You have to give it to them a few times before they're used to taking the product.

And if you have a mom that gives the child the drug one time and the child spits it out or something like that, then you have to work hard to get that parent to try the product again. So a couple of things we're doing is through the marketing efforts and educational efforts, we're demonstrating how the product should be administered.

So it goes under the tongue, for example and then young children typically will swallow it and take their medicine as they need to without losing any potency. We have also increased our sales team. So we're adding additional sales reps internally as well as with our partnership with Tolmar.

They are bringing their sales team fully up to speed that will be dedicated in the pediatric endocrinology space. And I'll also say that one-on-ones with doctors and raising awareness of the product has continued to increase.

And we're seeing that doctors that were prescribing the product now are adding more patients to it, meaning they've had a good experience. So typically, the doctor will maybe prescribe it to 1 or 2 of their patients, see how it goes and then add more. So we are seeing that happening as well as adding new prescribers..

Okay. And then just a few detailed related queries for me also.

With respect to the temperature shelf-stable formulation of carglumic acid, can you just quantify for us how significant commercial advantage this is, to what degree it resonates and with whom it resonates most?.

So with carglumic acid, we saw a number of patients right out of the gate. So the doctors that were open to the generic were prescribing that. And so we ended up with, let's say, fast ramp initially and then that slowed down a little bit. We know it's positive. It's hard for me to quantitate how important room temperature is to patients.

Certainly, if you have to travel, you would want a room temperature product, for example and I'm sure these patients travel just like everyone else. Having to keep it refrigerated is a bit of a burden. So as long as the patients are informed of that, we see that as certainly a point in our direction.

I think that more importantly is demonstrating health care savings costs to doctors as well as the other advantages which is the longer -- I think it's probably more important. And once you open it, it's -- the shelf life is 90 days. That's also a key advantage of the product.

So some doctors might try one of their patients -- try patients on it for a period of time, test their blood levels, make sure that the product works as they intended. So that's kind of the process but we did see a record number of carglumic acid patients last month. So I think that we're going in the right direction on it.

And our goal is to have more than 20 people on the product before the end of the year which I think we will be able to achieve..

Great. Three very minor quick things. Firstly, can you clarify approximately when you would expect to receive the $5 million milestone. I understand what it’s tied to.

But if you expect it to be booked this quarter or not? Secondly, if you know at this juncture, what classification the FDA would give to the dehydrated alcohol product, the resubmission that’s going to be classified as Class I or Class II resubmission? And then lastly, if you could run us through the gating items for the ZENEO submission that’s slated to take place next year..

Yes, absolutely.

First, James, why don't you take the first part of the question?.

Sure. Yes, timing of the Zonisade royalty payment we expect in Q4 of this year..

But the recognition of that was this quarter, wasn't it? Because it's 90 days? Or are we -- is that -- it will be recognized in the fourth quarter..

Expected to be recognized and received in Q4..

Okay, there you go. So there's that -- it's been earned because the approval has occurred. So I guess that's -- there's obviously a contractual language but it's fully expected to occur in the fourth quarter. And the second part of the question, I think, was with the dehydrated alcohol. We -- will this be a major reminder that is a good question.

I am anticipating it will be a minor perhaps that's why we've been a little vague on the exact month. We've said sort of the middle of next year is when we would see approval. I think it will be a four to six month review process. We would expect to submit that next month. So we're very close.

There was a lot of analytical questions were asked and so that takes time. Most of those, if not all of them, have been resolved and we're in the midst of just finalizing the resubmission.

And what was the last part of your question?.

I just wanted to run through of the gating items before you will be in a position to submit the ZENEO autoinjector for approval?.

Yes. So the autoinjector is expected to be submitted towards the end of next year. There are registration batches which have to be made in the fourth quarter of this year. And so the main gating is collecting that 12 months of data. And at that point, we would be able to submit. There's ongoing conversations between the agency and our licensing partner.

So that's -- so that's probably about as much detail as I can give you. But the gating item is the 12 months of stability. We've made already, what we call, our pilot batches.

So we've gone through produced batches showing that everything looks as we wanted it to look and now we need to make the larger scale batches, those get put up on 12-month stability..

And can you just remind us, once this is submitted, do you expect a 10-month review?.

Yes, I'd expect a 10-month review -- 9-month or 10-month review. I don’t see any – it’s a critical item. It’s a critical need in the marketplace. The technology, the autoinjector is already submitted on a different product. So a lot of the, let’s say, details or questions will come up on that other review.

Ours will likely not have to be as scrutinized as perhaps the first submission for that autoinjector..

And we have no further phone questions at this time. I'd like to turn the call back to our presenters to address e-mailed questions..

Thank you, operator. We do have a couple of questions that weren’t addressed already.

One of them is, what is your cash burn? And how do you feel about your current cash position?.

Sure. Our ongoing cash expenses are approximately $5 million a quarter. We do have an increasing run rate of gross margin coming in between a range of $2 million to $3 million that's obviously excluding any milestone revenue or R&D milestone payments. So that puts us at around $2 million to $3 million of a quarterly burn rate.

We feel good about our cash position. We ended Q2 at $17 million. So with continued growth of ALKINDI and carglumic acid and a $5 million milestone expected to be received before the end of the year related to the Zonisade launch, we expect to have slightly more cash on hand by the end of the year. So we feel like we're in good shape..

Last question is how is the current business development environment? How do you like your potential to get deals done in the near term?.

So on that note, good question. We have -- we believe we will have a product deal done before the end of the year, shortly, I would imagine and that will be a rare disease product. It's something that fits within our current infrastructure and our sales team. It can be detailed without necessarily having to duplicate sales teams; so that's one.

We have looked at a number of licensing opportunities that we've passed on, either they were too early or there was too much risk associated with them. So when we do add a product, say, a commercial product, we expect it to be accretive to our earnings. We'll continue to look.

We do have -- I mentioned in the opening that we have 2 products internally being developed which we're really excited about. And I think you'll see more news on that to come. One of them we're hoping to file next year. So these will be products that are significant value drivers for the company..

That’s the end of our e-mailed questions. Thank you, everyone, for joining us today..

And this does conclude today's conference call. You may now disconnect..