Greetings. Welcome to the Aytu BioPharma Fiscal 2023 Q3 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the conference over to your host, Roger Weiss. You may begin.

Good afternoon, everyone, and thank you for joining us for the Aytu BioPharma's third quarter fiscal year 2023 financial results conference call for the period ending March 31, 2023. Joining us on today's 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 to the customary Safe Harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future potential operating results of Aytu 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 being said, I'd like to turn the event over to Josh Disbrow, Chief Executive Officer of Aytu BioPharma. Josh, please proceed.

Thank you, Roger, and welcome, everyone. Thanks for joining the call. Our core prescription segment continues to perform at a high-level with record total prescriptions of more than 153,000 during the third fiscal quarter. Our ADHD scripts were up 27%, while our pediatric scripts were up 55% compared to the year ago period. The combined 32% growth in total prescriptions is a testament to the continued strong execution of our commercial team, along with the unique capabilities of the Aytu RxConnect platform. Further to that, we've done an exceptional job maximizing the opportunity presented by the ongoing ADHD market supply disruptions, most notably the Adderall XR, generic shortages and more recently, the methylphenidate disruptions. But as you likely saw in the press release, there's a little bit of a disconnect between the prescription growth especially within our ADHD portfolio, and net revenue reported this quarter. Let me dive in for some details. To be responsive to market dynamics and to keep up with rising costs, we implemented a price increase for ADHD products effective April 1. As a result, we recorded a onetime channel adjustment which resulted in a reduction of revenue of $1.2 million during the third quarter. Excluding this adjustment, Rx segment net revenue would have increased 8% year-over-year. The remaining difference relates to payer changes in the resetting of the underlying patient insurance deductibles at the beginning of each calendar year that impact our patient savings offers and gross to nets this time of year. Absent these items, the reception to our ADHD products continues to be robust against a market backdrop that continues to provide tailwinds for the company. On the pediatric side, our portfolio continues to perform at a high-level with prescriptions at 55% compared to the year ago quarter and net revenue up 81%…

Thank you, Josh, and welcome to everyone joining us on this call. Let me build upon comments Josh has already provided, starting with revenue. Net revenue for the fiscal '23 third quarter was $22.7 million compared to $24.2 million for the fiscal 2022 third quarter. Looking at the component parts, net revenue from prescription product sales in the fiscal 2023 third quarter was $13.8 million, compared to $13.9 million in the same quarter last year. As Josh noted, ADHD experienced a 21% reduction in net revenue to $8.3 million in the fiscal 2023 third quarter against $10.4 million in the fiscal 2022 third quarter. The ADHD net revenue decline occurred as quarterly ADHD filled prescriptions were up almost 27%. The net revenue decline resulted from three factors. First, we enacted a planned price increase effective April 1, 2023 that resulted in additional gross to net accruals of $1.2 million for future returns, rebates and discounts related to the channel inventory. This adjustment will not be repeated in the fourth quarter and will result in higher per unit net sales. The second item impacting ADHD net revenue involves the dynamics of our Aytu RxConnect program. As we've discussed, the program provides patients comfort that they will not pay more than a fixed out of pocket per prescription price. Even if they have not satisfied the prescription drug plans deductible, our third quarter is the first calendar quarter and the period when many insurance plans reset deductibles. This is the quarter when we historically incur additional saving offers to fulfill our Aytu RxConnect price promise. The third impact to this quarter's lower gross to net was PBMs pushing, more prescription drug costs down to the consumer level. Even when those products are covered by a rebate agreement with the manufacturer. The prescription…

Thank you, Mark. So let me just conclude were I started. At a high-level, our core Rx segment continues to perform at a high-level with record total prescriptions showing combined 32% growth. The various factors we discussed particularly within our ADHD portfolio created some disconnect and some noise between script growth and net revenue, but we believe that will become more closely aligned in the go-forward quarters. As a whole, we remain highly focused on profitability. We had two consecutive positive EBITDA quarters during Q1 and Q2 of this year and the Rx segment is EBITDA positive through our first three quarters. Our Rx products have numerous tailwinds as I discussed. So with these trends, coupled with the actions we have taken to put us in a position to end the year on a high note with a return to those levels achieved in the first half of the year. And to reiterate, we are off to an excellent start this quarter based on both our quarter-to-date product shipments and our prescription trends with aggregate unit demand up 30% sequentially on the ADHD products and up 41% sequentially on the peds brands, we certainly have the wind at our back. We appreciate everyone's participation on the call today and will now be happy to answer any questions. Operator?

[Operator Instructions] Your first question for today is coming from Jennifer Kim with Cantor Fitzgerald.

Hi, thanks for taking my questions. As to hear, the first is taking the inventory pricing adjustment into account, I think that still translates to, like around a 9% decline. And I'm wondering how much of the impact outside of the pricing adjustment is expected to continue through the rest of the year? And how much does the price increase offset that. And then my second question is, could you give more color on what drove the increase in the selling and marketing costs? And is that expected to continue? Thanks.

Yes, thanks, Jennifer. Appreciate your questions. So first, first and foremost, we absolutely do expect improvement as the year goes on. The reduction in net selling price per unit, Jennifer is in large part attributable to the deductible resets and patients working their way through those deductibles this time of year, relatively customary is, in pharma, and really every company faces that this time of year. So as the year goes on, we certainly expect to see price per prescription improve, we're actually already seeing signs, signs of that in the data in relative real time. So we're encouraged by that. It was a $1.2 million hit, obviously, on the price -- the pricing piece, as you indicated, obviously, that's not going to be repeated in the -- immediate next quarters. So that'll obviously be out of the way. And look, there's always dynamics around payers in terms of how they are modifying formularies. And this is the time of year where some shifts do occur. We work every single day to find out how we maximize really value per prescription, obviously, because of the fact that we do underwrite these prescriptions. This quarter can be more pronounced just because we want to maintain that RxConnect promise, but fully expect gross to nets to improve as time goes on. On the second piece, maybe, Mark if you want to talk through the increase there and kind of what drove that?

Yes, there were some marketing programs. It also with the record scripts that we had, we had a little more competition to our sales force.

All right. Thanks.

Thank you.

Your next question for today is coming from Naz Rahman at Maxim Group.

Hi, guys. Thanks for taking my question. I was just getting curious on your consumer health OTC business, how do you see the margins for that is fine progressing through the course of the year? And is there any point here that you need to reduce I guess, associated marketing and promotional expenses, further down the line to potentially accelerate those margins?

So a couple of things that are at play. So one of the things that is occurring in real time as we're making the shift from the direct mail tactics to the OTC medicines and selling those OTCs through Amazon, you will see a decline in gross margin, just by virtue of these OTC medicines are slightly lower price points. So we are dealing with a GM sort of decrease in favor of a net contribution margin increase. And to get to your second question now is what really will drive that increase margin is it's a much more efficient sales and marketing spend. So those sales and marketing numbers will come down, really just by virtue of the fact that it is much more efficient. Direct mail is quite costly, it's difficult, frankly, to make a reasonable margin on that side of the business, which is why we're transitioning out of it. So we will begin to see that gross margin come down in favor of a higher contribution margin, and obviously, ultimately, in favor of getting to profitability in that segment, which of course is the express goal. And we're being much, much more focused around a core set of assets when we acquired a [indiscernible], a little over 3 years ago, now, there was an excess of 30 consumer health products. We over the last several years have scrutinized the profitability profile of every one of those and really determine that there's a core set of assets that we really need to focus on. And so that's what we're aiming to do, get squarely focused on the OTC channel, get squarely focused on driving profitability, and focusing on launching C'rcle Health and growing that within a in a real discipline controlled manner.

Got it. Finally [indiscernible]. Could you talk about a little bit about what are the costs associated with shipping your manufacturing process? And I guess like the facilities, I guess, long-term, what do you think the margins for ADHD portfolio could be?

I'll give you just generally speaking and Mark, you can kind of weigh in with specifics. We've said that we expect to improve the margins on Adzenys Cotempla in the neighborhood of 15%. Potentially more, and I'm optimistic that we may realize some upside to that, but generally speaking, I've said it's going to be about a 15% margin improvement and so Mark can give you a sense for what that improves them to. And then in terms of costs that really remain to get out of the facility, it's going to be relatively minimal in the scheme of things, because as you may have seen, last week or so, we announced that we have shifted -- that we've sublet about a third of our footprint in the Grand Prairie facility to a relatively new company called AMT. It's a contract manufacturer, and they over time expect to step into our space. And we -- it'll actually be at our option, how quickly we accelerate, enabling them to fully step in, I say that all to say, there were going to be some costs associated with taking. So the lease of the Grand Prairie facility expires at the end of 2024 calendar, and there was going to be a relatively substantial expense in taking that facility, not quite down to the studs, but really restoring it back to its relatively original state. With AMT now stepping in a lot of those costs, virtually all those costs go away. And so we're very excited about that, and how much -- what that means in the relative near-term to reduce some of our operating costs. But then really, when we think about the wind down costs associated with getting out of the facility, it'll be relatively de minimis at this point. There are some costs in scaling up the manufacturing to the new manufacturer. A lot of those have already been realized and recognized. But we'll have some of those costs as we scale up Adzenys Cotempla at that facility. And would you add anything to that, Mark?

Yes, just kind of in the ballpark, we would expect margins to get to the 65%, 75% mark, once we are fully integrated with our CMO. So we're excited about that future and are working hard to get there.

Thank you. Thanks for taking my questions.

Thank you.

[Operator Instructions]

Josh, while we're waiting to see if we have any more questions, you had indicated in your prepared comments that shipments in this current fourth fiscal quarter are fairly substantially both year-over-year and sequentially. Can you give us any additional product level color to the growth that you're seeing here in this quarter?

Yes, happy to. And we really are very encouraged by the momentum that's continued into the spring. And it's really encouraging to say the very least so. If you look, for example, at Adzenys, if you want to compare it to say, obviously, sequentially, it's up about 40% over just the last quarter. If you look at -- so that's our fiscal 'Q2. So our December quarter it's up, March was up literally 40%. If you compare March to last March Adzenys is up 91%, which is obviously a staggeringly big growth number. Poly-Vi-Flor, which is obviously a key product that we point to and really the lead product in the ped side is up sequentially 40% as well, but it is up 119% when you compare it to the same quarter last year. So really tremendous growth when you look at it. Now these are factory units, what I'm not -- what we don't have insight to is gross to nets of exactly where things are going to come in, because a lot of adjustments occur, they're really at the end of the quarter on the basis of rebating savings offers and so forth. But on aggregate gross demand, so to speak, we're literally up, almost 100% on incentives and over 100% on Poly-Vi-Flor, which are obviously key products. Cotempla is also up tremendously over the same period of time. And Karbinal just to give some perspective is up about 40% sequentially as well, that's a little bit of a seasonal effect, but nevertheless, so all our products are up sequentially. And all the Karbinal are up when you look at them year-over-year and Karbinal frankly, it's just a timing issue. So very encouraged by the -- and that's really kind of up to the minute, if you essentially look again through yesterday's shipments, you just see that tremendous growth quarter-over-quarter and then sequentially so very encouraging. And then with respect to prescriptions, as you might expect, prescriptions obviously keep company with factory units. Adzenys when you look at it compared to last April compared to this April, so we've just really gotten to kind of our preliminary April prescription numbers. Adzenys XR is up 40%, almost 49% over the same month last year. Poly-Vi-Flor, Tri-Vi-Flor combined, they're up almost 19% over April of last year. So we're just continuing the momentum we saw in that March quarter right through May, right through April into May where you're seeing kind of an uptick into May over April. So very, very encouraged by the growth.

Got it. And you had mentioned this a couple of times we've seen both in the just reported quarter and the numbers that you've just discussed. Just some impressive sales growth coming out of the prescription vitamin area and you discuss the enhanced formulation. And I was wondering, how do you think about this Group future growth and where it can ultimately go?

Yes, we're excited about both portfolios in the Rx side, Roger. Adzenys and Cotempla, obviously are growing off of a higher base of revenue and higher script count. And they are competing in larger categories, but the multivitamins they're really sleeper products in that. They -- I think they can go tremendously from here. These compete in a €200 plus million multivitamin category. Market share is still not that huge, all things considered. Still, many areas that are not fluoridated, were just given a relative size. We have not gotten to yet so a lot of land across this big country of ours, that we can still cover so we think there's more upside. I think that portfolio, it's basically analyzing a 20. I think we're just beginning to see what that portfolio can become. And as we bolster it with renewed IP around Arcofolin, which, if I didn't mention, I'll state the obvious we have an exclusive license to the Arcofolin ingredient, which is really exciting. We've got a long-term supply agreement with Merck and German Merck and their subsidiary in Switzerland. So we've bolstered the IP, we've lengthened the runway of exclusivity around that. We've improved the product profile by virtue of the fact that Arcofolin really is a better alternative. And it's really the best [indiscernible] out there. So I think there's a lot of headroom and a lot of rooms for growth on the multivitamin franchise.

Got it. And one thing that's been coming up, I guess, for at least two or three quarters now, if not more, has been the various drug supply issues that clearly have not abated, and in some cases have actually expanded and now we're hearing that penicillin is now scarce. Do you have any thoughts on how long the supply imbalance can last out there?

Yes, it's -- it's interesting, Roger, because we heard about this really in the late summer, early fall. And it really took until this calendar year and really into February and March before it started to get realized at the patient level to the point that they were literally not able to get their prescriptions. And we're now hearing and so that was of course, with Adderall XR generics primarily -- mostly it was a combination of issues, some of which was labor related, some of which was raw ingredients. The bottom line is because of the sort of the latency of that effect from essentially call it Labor Day to the springtime before it really got realized. It may take another several months to get it fully back up to the point that physicians feel comfortable. And we're hearing that in real time as we have conversations with thought leaders and clinicians that they're not entirely confident that it is out there and it remains spotty. Now we're hearing well, of course, we now know that J&J's [indiscernible] division discontinued the Concerta-authorized generic, and that creates disruption for numerous reasons. You've got a patient that's been on the AG, they have to get switched to the Concerta brand, many times the brand met is not covered. And so now you've created this huge issue for this patient, and they have to scramble and get something else. And the physicians just get fed up with it. So we think we really are at this perfect cross section of okay, when sort of one problem seems to abate the other than now the methylphenidate issue is coming on. And it's just creating this overarching concern of when is this going to happen again? And to what degree can I rely on…

Very good. Really appreciate the answers. I'm not seeing any additional questions out there. So I think it's time probably to wrap up.

Okay, that's great. Thanks, Roger. Well, thank you, Roger. Thanks, Naz. Thanks, Jennifer, for your questions. Thanks, everyone, for listening in to today's call. Appreciate your support, your -- and your interest. We are very enthusiastic about where we're positioned today, more enthusiastic about where we're headed. Future is bright, we have great products, we've got a great team that's working hard. We've got great initiatives underway to dramatically improve our margins as we move forward. A lot more to accomplish here between now and the end of the calendar year as we hopefully get the PAS for Cotempla approved. But we are confident that we are on the right track. A lot of the key initiatives that we had put in place over the last couple of years are starting to bear fruit. We're excited to see that. So my thanks to the team for all they're doing to enable that and thanks to all of you. With that, I'll close out and say thank you and have a great evening.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.