Eton Pharmaceuticals (NASDAQ:ETON) Q1 2020 Earnings Call

0:00 Good afternoon, and welcome to Eaton Pharmaceuticals' first quarter 2020 financial and operating results conference call. At this time, all participants are on a listen-only mode. Following the formal remarks, we will open the call 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 the call over to David Krempa, Vice President of Business Development at Eaton Pharmaceuticals. Please proceed.

0:24 Thank you, Operator. Good afternoon, everyone, and welcome to Eaton's first quarter 2020 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, EatonPharma.com. Joining me on our call today are Sean Brynjelsen, our CEO, Wilson Troutman, our CFO, and Paul Stickler, our Senior Vice President of Sales and Marketing. 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 our company's filings with the SEC.

1:09 Now, I will turn the call over to our CEO, Sean Brynjelsen.

1:13 Thank you, David. Thank you, everyone, for joining us today. We are looking forward to providing you with an update on our first quarter results and our expectations for 2020 and beyond. First off, I'd like to start with the Biorphin commercial launch, which unfortunately has been negatively impacted by COVID-19. As many of you know, we launched Biorphin in December 2019 and signed a co-promotion deal arrangement with Accelia in January of 2020. We were just beginning to roll out our full commercial launch activities and gain traction with customers when COVID-19 disrupted the elective surgery market. This unprecedented decline in surgical procedures at hospitals across the country has resulted in a meaningful decline in demand for injectable phenylephrine in general.

1:59 Moreover, getting hospitals to change their current operating norms in the midst of a crisis is not optimal for any new product launch. Secondly, the COVID crisis has interrupted our sales and promotional plans for biorphine. For example, hospitals across the country have enacted policies limiting in-person visits by sales reps. This has clearly hindered our ability to get the face-to-face meetings of the key decision makers that would drive hospitals to switch to BioOrphan. We had also planned to introduce BioOrphan to pharmacists and doctors at important industry conferences throughout 2020. These conferences have been canceled due to COVID-19, which has also eliminated one of the most efficient ways for us to drive promotion and awareness of the product. However, in response to these challenges, we have launched targeted digital promotional campaigns which we expect to drive awareness of the product on our vesting in a vial format which is also preferred by most caregivers.

2:54 I would add that we remain very optimistic that the surgical volumes will start to normalize in the near term and our sales teams will be able to have onsite visits soon. We know this crisis will pass and Eaton remains excited about BioOrphan's long-term prospects and our targeting of achieving four million units annually. The market is there, the need is there, The timing, unfortunately, was not optimal for us to launch in Q1, but we do believe that the uptake and the adoption of BioOrphan has value to the community and to the hospitals and to the patients, and we remain committed to the product and to driving the sales. Turning now to our newest addition to our portfolio, Alkindi Sprinkle. In March, we are very excited to announce the acquisition of U.S.

3:41 marketing rights to Alkindi Sprinkle. We view this acquisition as transformative for our company and we believe Alkindi Sprinkle has the potential to be the highest revenue product in our portfolio. Alkindi Sprinkle is an orphan drug currently under review with the FDA as a replacement therapy for adrenal insufficiency in pediatric patients. Our partner, Durinal Group, has already launched the product in Europe and has seen strong sales and rates of adoption. We are very optimistic about its potential in the U.S. market and have conducted detailed marketing studies to support this enthusiasm. Eaton is also working hard to prepare for launch activities and we believe will be in a good position to launch the product in the fourth quarter of this year that's approved on its PDUFA date of September 29th, which we fully expect.

4:30 To further support the launch, I announced last week Paul Stickler has joined the company as our Senior Vice President of Sales and Marketing. Paul joins us from Recordati Rare Diseases where he successfully commercialized a number of orphan drug products. He brings the ideal experience to launch a pediatric orphan product like L-Kindy Sprinkle and is very excited about leading this effort. The rest of our pipeline has also continued to progress nicely. Most notably in the quarter, we announced that our cysteine hydrochloride ANDA has been accepted for review by the FDA. and has been confirmed to be the first Paragraph 4 challenge against the Innovator product. Our development partner has been selling the product in the current form since at least 1990, so we are very confident that we will be able to overturn the Innovator's patents, which could allow for us to launch the product as early as next year.

5:22 We provided additional detailed project updates in the press release, so I won't go into project by project detail on all of the projects, but in summary, We have four additional new drug applications submitted this year. We expect to have four additional new drug applications submitted this year, and at least two product approvals in the second half of the year. As you can see, we are expecting 2020 to be a big year for our pipeline, and I continue to believe we will have one of the strongest and most attractive pipelines in the pharmaceutical industry. With that, I would like to turn it over to our CFO, Wilson Trautman, to discuss the financial results. Thank you, Wilson.

5:59 Thank you, Sean. Revenue was $0.1 million for the first quarter of 2020, which resulted from sales of Biorphin. Eaton records sales for Biorphin when the product is shipped to wholesalers and distributors. As a result, reported revenue is not always aligned with end-user demand within a given period due to changes in inventory in this distribution channel. Customer demand for Biorphin exceeded Eaton's reported sales in the first quarter of 2020 due to large stocking orders placed by wholesalers in the fourth quarter of 2019. As previously discussed, BioOrphan's sales volume was also adversely impacted by the COVID-19 pandemic. Eaton's revenue of $0.5 million in the first quarter of 2019 resulted from the upfront payment associated with its EM-100 asset sale to Bosch Health in February 2019.

6:49 Research and development expenses were $6.3 million for the first quarter of 2020, compared to $6.5 million for the same period in 2019. R&D spending for the first quarter of 2020 included $4.8 million of one-time licensing payments to acquire the U.S. marketing rights to Elkendi Sprinkle. The first quarter of 2019 R&D spending included $3.4 million of licensing payments to acquire the rights of BioOrphan, ET-203, and ET-104. General innovative expenses were $2.6 million for the first quarter of 2020 compared to $1.6 million for the same period of 2019. The increase was primarily driven by higher marketing and distribution costs for biorphine commercialization, legal expenses associated with Eaton's patent challenge against Accela PharmaScience's ELSIS product, and higher employee compensation costs.

7:44 Eaton reported a net loss for the first quarter of 2020 of $9.0 million compared to a net loss of $7.4 million for the same period of 2019. As of March 31, 2020, Eton reported cash and cash equivalents of $12.3 million. In March, Eton announced a private placement of $7.8 million of common stock in conjunction with the Alkindi-Sprinkle acquisition. $7.5 million of the stock proceeds were received in the first quarter. However, $0.3 million was received on April 2nd and was not included in the first quarter cash balance. Additionally, in May, The company received $0.4 million of proceeds from a loan through the Paycheck Protection Program under the Federal Coronavirus Aid, Relief, and Economic Security Act.

8:33 Eaton currently has $2.0 million of available liquidity undrawn from its credit agreement and will be entitled to an additional $3.0 million of capacity upon the approvals of EM-100 and Elkendi Sprinkle. We would now like to open up the call for your questions. Operator? Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. If your question has been answered and you wish to move yourself in the queue, please press the pound key. Please stand by while we . Our first question comes from Andrew DeSilva of B Raleigh FDR. Your line is open.

9:09 Thank you very much for taking my questions, and I'm very glad to hear everybody sounds healthy. So just to start off with Alkindi Sprinkle, You mentioned being likely the largest offering that you have in your pipeline. Can you help me understand how you get there? Just comparing it to the European sales thus far and then looking over the revenue covenant that you have with your co-marketing partnership for BioOrphan, it seems like... There's maybe some back-of-the-envelope math that just needs a little bit of explaining so I can better understand the trajectory there.

9:53 Sure. I'll start off with the Biorphin question, and then I'll turn over the Alkindi question to Paul. So with Biorphin, it is really a matter of having our ability to launch the product, which we're hampered at the moment. We cannot. So in one sense, yes, they're not in compliance with the covenant. But it's also not necessarily attributable to their performance. Part of that transaction was to have Accelia do the selling and promotion of the product. Currently, we are not able to get into the hospital. We're not able to detail the product, nor are we able to attend the conference trade shows. The product is the only ready-to-use phenylephrine in the United States. We know the market is there. We know it's strong.

10:45 and we know that hospitals would adopt the product, especially if we can have the freedom to actually promote it. In the meantime, hospitals are sampling, they are buying, we are seeing an uptick in terms of the total number of hospitals, but I think we'll be able to get greater traction on that over the next three to four months.

11:10 I'm sorry, I think you may have, what I was just saying was the expectation that you have for BioRFIN when examining the covenant is that it would be a very large market and so I was actually saying how does Alkindi Sprinkle get to more than that when just the co-marketing agreement has a covenant that's so high and I'm assuming that's an expectation that you would have that you would like to hit just with the partner. So basically, I was just trying to figure out, Alkindi Sprinkle, how does it get to being more than BioOrphan when we know just with your co-marketing partner, you have a $42 million? Oh, I understand what you're saying.

11:52 I'm sorry. I thought you were asking about BioOrphan. Okay, so with Alkindi Sprinkle, we have a royalty agreement with Durandal. We do the sales and the promotion aspect of it. We will be putting in place our own sales team. In fact, I'll let Paul go ahead and elaborate on your question.

12:12 Yeah, good afternoon, Andy. This is Paul Stickler. In reference to the European experience, Diurnal has had some good experience thus far, and we've been really focused on the rate of adoption and the percentage of patients that have been taking Alkindi, and the adoption rates we've seen in Europe have actually been very encouraging. If you extrapolate those adoption rates to account for U.S. population size and expected pricing, the implied sales numbers are actually quite meaningful. Further, as we've stated before, or as the company stated before, we felt the market size is a little north of $100 million if you include all the diagnosed patients. As such, we believe that Alkindi will be in a strong position to achieve a significant portion of the market opportunity.

12:58 at this point. So we are very excited about the prospects for meaningful Alkindi sales.

13:05 Okay, great. Thank you for that. And then I was just curious, you mentioned as it relates to BioRfin, the number of surgeries declined. Obviously, that's true, particularly from an elective standpoint. But I thought... Phenolephrine was primarily used in C-sections, and I'm assuming that that- That is one of the uses, correct, but that's not the primary use.

13:33 Believe it or not, the primary use is in elective surgeries, because it's all elective surgeries. It could be knee operations, it could be a variety of things. Certainly, it can and is used in labor and delivery, and so that part of the market is still there. It's the conversion process of being able to get into the hospitals that has hampered us. When we have a small inside sales team calling on the hospitals to try to get that mass conversion is what the challenge is. And to tell you the truth, when we're in a crisis situation like we are, hospitals don't want to – they're focused on COVID. They're not focused on new products or enhancements at this point. We know that ultimately the conversion will occur. It's just the ramp rate on which that will occur.

14:27 Hospitals that have bought Biorphin, we're seeing reorders of that product from the majority of those who buy Biorphin will then reorder it. We would expect once we convert it from the AMP to the vial, that will significantly grow. We expect to have that filing in before the end of the year.

14:49 Okay, now that makes a lot of sense, actually. And I did a, you know, just a very quick channel check. It does seem like the compounded versions of phenylephrine are still being utilized. I understand COVID-19 obviously creates a lot of just logistical issues. But is there a way to expedite the restrictions from compounders since your product, you mentioned, meets that criteria? Or while this is going on with COVID-19, is it just too much of a disruption to health systems for it to be viable?

15:29 I think both points are valid. First point, we had a meeting with the agency, with the FDA. They fully agree that ready-to-use compounded copies of biorphin should not and are not allowed to be sold. That doesn't mean that they aren't. You've got doctors who really, many of them don't even know the difference between an FDA approved product and a compounded product. And what I mean by that is they don't always know when they receive the product whether it was compounded or FDA approved. I don't mean they don't know the difference. I mean when they receive it, they may not fully appreciate that it's a compounded product that they're using. So you need to identify that at the pharmacy level because the pharmacists are the ones that are doing the ordering.

16:14 And beyond that, you really should go to the administration of the hospital to communicate that there is an FDA-approved version of phenylephrine that, to make copies, is not in compliance with the regs and drive conversion not just from the pharmacy level but from the administration level. and we're doing both of those as well as working with the agency which fully supports our position. We're also monitoring the rate of enforcement that the agency is exercising. They're not exercising as much enforcement these days against compounders due to COVID but we would expect that situation to change.

16:58 Thank you, that's good color. Just one point I wanted to ask about your response. You said that The FDA would allow that kind of a cease and desist with the same formulation as a biorphine. Are there other phenylephrine formulations that are different than biorphine that are being created by compounders that are sold? And if so, would those fall outside of that exemption?

17:26 Well, that depends on who you ask. So if somebody is tweaking a formula so they can say it's different but doesn't really have a clinical difference, which they don't, then that's an issue. The rule is called the essential copy rule. They use the word essential in that it may not be an exact copy, but it's essentially a copy. So if you make a product that has a 10% less potency or 10% more potent, or you add and some sort of excipient in there. For all intents and purposes, it has the same clinical effect and therapeutic effect. You're making a copy of the product. It's really trying to game the system, which the agency is well aware that compounders utilize that tactic.

18:14 They've been sued by other companies as well, certainly about the vasopressing case, which was won by the pharmaceutical company against compounders. We don't really see this as any different. We think when companies are out there, compounders are out there making copies, they're bypassing the FDA approval process. They're undermining the approval process, and they're encouraging more of that type of behavior.

18:44 Okay. No, that's a great call. Thank you very much, and stay healthy, and best of luck going forward. Thanks a lot. Thank you. Our next question comes from Ram Selvaraju of HC Wainwright. Your line is open. Hello, this is Moz speaking on behalf of Ram Selvaraju. Most of our questions have been answered thus far. Just one outstanding question. Have you ascertained how much U.S. demand exists for the Alkindi sprinkle product? If so, could you provide some granularity and additional color on this?

19:19 Sure, the patient population is, right now our estimate is 5,000 to 6,000 patients, and we know that that gets segmented, and so by that I mean those who are 17 years and younger, that would be approximately the range. It actually could be higher than that, so I'm just providing an estimate on it. We're going to be pricing it less than a lot of orphan drug products, but consistent in that range. So that's sort of how we come up with our market estimate. Thank you. Best of luck this year.

19:55 Sure. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touch-tone telephone. Our next question comes from Frank Takanan of Lake Street Capital Market. Your line is open.

20:09 Hey, guys. Thanks for taking my questions. Just a couple for you here today. I was hoping you could give us a little background and update around Paul, why don't you first address Alkindi and Lamotrigine as well as the neurology, overall the neurology franchise and what our plans are for that?

20:46 Sure, thanks, Sean. So with regards to Alkindi, what we're looking at working towards would be an organization, a small, efficient organization to support Alkindi sales dedicated to calling on pediatric endocrinologists. It's a relatively small group, less than 1,000 physicians we anticipate calling on. And we would anticipate somewhere between five and seven sales representatives. In addition to that, we have a pipeline that we will be preparing for early next year, and we anticipate a separate sales organization dedicated to calling on pediatric neurologists focusing on epilepsy.

21:33 Got it. And then just a little bit more color on the – I was hoping you could give us some different puts and takes you've seen in the European market that are going to either translate or not translate into the U.S. market in regards to the adoption curve, just trying to get a feel for how you feel about that market and how it's going to kind of draw an adoption curve for the U.S. market.

21:56 Sure. Let me take that, and then I'll turn it over to Paul for any additional commentary. So two points. We ran an initial marketing study before we did the transaction on Elkindi. That study gave us a certain number of results, and that study was actually largely run by Durandal, using a U.S. marketing company. Before we consummated that transaction, we separately got a different marketing company to run a study without any visibility to the first marketing study, and by and large, they came into the same results, which is A, The product is in demand. Physicians want the product. They can't understand why this product hasn't been on the market in the past.

22:41 B, the payers indicated the willingness to pay at the different price points that we were looking at. So it was also a payer study. And then C, just the whole patient benefit as well as the perspective from some of the, let's say, patients themselves. So that really confirmed some of our assumptions going into the deal. Now, looking at Europe, when the product launched, the rate of adoption, and especially the younger population, was extremely high. Well in excess of 50%, and you're talking about a few months into a launch, the docs converted to it quickly. In Europe, there are price controls. There's different mechanisms. So you can't really look at it from a dollar standpoint.

23:28 But when you look at the actual patient penetration rate, it was fast and it was quick. And we're seeing that same positive indication right now for the U.S. market. So I'm going to stop there and let Paul add any additional comments.

23:43 I think you're spot on, Sean. There seems to be consistent signals that have been received from both sides of the pond. both in terms of Diurnal's early response with the product in the market as well as market research that we've seen here in the U.S. and some initial outreach that's taken place on our two key constituents in the community at this point. So it seems pretty consistent in terms of the clinical need.

24:12 Got it. And then just last one from me. It's nice to see a cash balance hanging in there. Congrats on the raise and putting the money to work. Just hoping two parts. One, if you could talk about business development and if you've seen any impacts from COVID-19 presenting some more attractive opportunities. And then two, how you feel your $12 or so million cash balance looks as far as a cash runway. Thanks for taking the question.

24:39 Sure. So on the cash balance question, that should get us through the approval of Alkindi. that includes putting in the marketing team and the sales and promotional efforts. We also have several milestones that would result in, you know, we could draw on a credit line if we wanted to or chose to, as well as milestone monies coming in from our licensing deal with EM100. So there are no plans at the moment to do any additional raise. As we look at the Adoption and Rate of Sales of BioOrphan and the Initial Launch Sales of Alkindi will make a decision. Again, I typically would only do a raise, and we did a small raise recently to fund the Alkindi transaction, which we think is money and shares well spent.

25:32 We do have several deals that look attractive, and by that I mean our products which are either filed or can be filed in the next few months, all in the rare disease space. So I would expect to see us to do types of transactions in the rare disease space. Most of the focus will be in the pediatrics and neurology, endocrinology, and a lot of these disease states which have unmet needs. Got it. Thanks for taking my questions and congrats on all the progress.

26:09 Thank you. Our pleasure. Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Sean for any closing remarks.

26:17 Thank you. Thanks to everybody that joined us today. We're excited about the second half of 2020. We have several product launches coming up over the next few months and I look forward to our next call and providing additional updates. As always, please feel free to reach out and we As we expand our team, we'll have more news, and as we get deals on the table, we look forward to adding to our pipeline. Thanks again, and stay safe. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect. Have a great day.