Aytu BioPharma, Inc. (AYTU) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and thank you for joining us for the Aytu BioScience Second Quarter Fiscal 2021 Business Update Call for the Quarter Ended December 31, 2020. With me this afternoon are Aytu's Chairman and Chief Executive Officer, Josh Disbrow; and Chief Financial Officer, Dave Green. Aytu BioScience issued a press release earlier this afternoon with the details of the company's operational and financial results for the fiscal second quarter. A copy of the press release is available on the News page of the company's website at aytubio.com. 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. In addition, a webcast will be accessible live and archived on Aytu's website within the Investors section under Events & Presentations at aytubio.com.
Joshua Disbrow: Thanks, Omar. Good afternoon. Thanks for joining today's call. I'm excited to be speaking with you today as we report the highest revenue quarter in Aytu's history. We posted over $15.1 million in net revenue, which is up over our previous 2 quarters and up 377% over the same quarter last year. In Q2, Aytu strategic transformation continued, and the progress we have made over the past four quarters has been exceptional. I'll remind you that Q2 represents just the third full quarter of integrating the Innovus Consumer Health business and the Cerecor prescription pediatric assets. And while we spent the last 3-plus quarters integrating and growing those businesses, in parallel, we continue to identify additional growth drivers and target acquisitions, that culminated in late Q2 with the signing of our definitive merger agreement Neos Therapeutics, a specialty pharmaceutical company focused on commercializing ADHD brands. This merger expected to close by the second calendar quarter of 2021, will create a specialty pharmaceutical company with pro forma annual revenue of over $100 million and a portfolio of unique Rx and consumer health brands. I'm happy to say that we're making very good progress towards the closing of the merger. In fact, just yesterday morning, we announced that the meeting date for the special shareholders meeting for both companies is March 18. So if both companies receive the requisite shareholder votes to approve the merger on March 18, we'd expect to close shortly thereafter. We remain on track with our original time line.
David Green: Thank you, Josh, and thank you all for joining us. Overall, as Josh previewed, we reported a robust second quarter. Top line net revenue for Q2 was $15.1 million, representing an increase of 377% over the $3.2 million of net revenue reported for Q2 last year, and 12% sequential quarterly growth over Q1 of this fiscal year. Also, as important as top line growth, we continue to make progress toward profitability. During the second quarter, our adjusted EBITDA loss was approximately $1.8 million, more than $1 million improvement compared to last year's Q2 adjusted EBITDA loss of $2.9 million. Q2 gross profit was $9.1 million compared to $2.6 million in the year ago quarter. Q2 gross profit margin was approximately 60% compared to 81% for Q2 last year. The lower-than-normal gross profit margin was driven by COVID-19 test kit sales, which generated lower margins than in prior quarters. But while test kits lowered overall gross margin, the test kit business requires little operating resource and contributed nearly $900,000 of positive cash flow. Total operating expense, excluding cost of sales for Q2 was $14.7 million compared to $7.5 million last year for Q2. The higher level of operating expense supported a multiple of incremental top line revenue. To make this point more clear, while operating expenses increased less than 2x over Q2 last year, net revenue was nearly 5x greater compared to Q2 last year. We also recognized approximately $1.2 million of transaction expenses and operating expense, that was associated with the Neos merger and is nonrecurring. Without these transaction-related expenses, the revenue-to-operating expense ratio would be further improved.
Joshua Disbrow: Thanks, Dave. Focusing now on our operational performance, I'm happy to share some highlights from Q2. Since acquiring the Innovus Consumer Health business, the team there has done an excellent job growing sales while gaining efficiencies to narrow the division's cash burn. Sales growth across a diverse range of consumer health products has been the key.
Operator: . And our first question comes from Vernon Bernardino with H.C. Wainwright.
Vernon Bernardino: Josh, congratulations on the record revenue and the exciting new merger acquisition. Really -- it sounds like you're putting together really a nice company here. And these days, with all our assets, it's still hard to find quality combinations and looks like you're on your way to getting some really good synergies.
Joshua Disbrow: Yes. Thanks, Vernon. I appreciate the question, and thanks for joining. I would say, yes, we certainly do expect continuing growth. And when we identified the Cerecor pediatric assets a little over a year ago, and subsequently closed that deal, we felt like, to some degree, we'd come home. Some of the core principles here at Aytu and the management team started in pediatrics, and we certainly know and understand that market very well. So obviously, with the Neos transaction, that enables us to parlay that experience in the pediatric portfolio brought over from Cerecor to enable some real synergies on the product line. When you think about the call point in pediatrician offices as well as in some family practice offices that see children, there's going to be very good overlap. So we'll look to take advantage of that. That having been said, we certainly expect growth across the portfolio, Natesto, Tuzistra and ZolpiMist continue to be key contributors for the company. And of course, it's the diversity of the portfolio that we think is a strength. So we'll continue to move those products forward as well. But certainly, the Neos transaction enables us to really entrench in pediatrics.
Vernon Bernardino: Perfect. That sounds like the combination is even more exciting. If I can ask a follow-up question or second question, that is, I wonder if you could talk a little bit more about the COVID-19 business in the sense that how much of your overall revenues is it now. And do you -- what kind of growth do you anticipate there? I realize that all depends on how much testing is done in the United States. But I was wondering if you could talk to perhaps supply that you might gain versus ability and capability and a vision down the road as to how many tests or test kits you'll be able to sell?
Joshua Disbrow: Yes. So the COVID market continues to be robust from a testing perspective. What I'll say is we were very opportunistic in acquiring an antigen test when we saw the need that arose for that as rapid antigen point-of-care testing became relevant. So we were able to source up an antigen test, that's got great performance and good market acceptance. And we certainly had a hard time keeping up with demand, quite frankly, last quarter. So without commenting specifically on the contribution from the test kits, I'll say it was meaningful. And in terms of what we expect going forward, it is going to depend on how the market continues to play. We see on a regular basis, demand is sort of changing back and forth between antigen and antibody. And I think the future is probably more oriented towards antibody testing. We would expect that market to continue to be robust. We've got good supply and the ability to continue to access supply as needed on both sides. So I don't want to give any guidance to give any false expectation in terms of what it could be, but we're going to continue to be opportunistic in the COVID market. We're not a COVID testing company per se. There's -- I dare say there's really not -- there's no such thing as one because if that's all you are, you won't be a company 2 years from now. But we will continue to be opportunistic as we bring in other product opportunities. And yes, we've been -- if nothing else, we've been very swift, very adept at identifying opportunities, and it's helped build the company over the last several quarters. We'll continue to look for ways to do that. With the Neos transaction, obviously, we're going to focus on the integration of that business. We're going to continue to focus on growing the consumer health care business and as that gains more scale and gets to profitability. So there's a whole heck of a lot more here than just COVID test kits, but they are meaningful now. And as we grow proportionally on the Rx side and the consumer health side, they will be proportionately less important, just by virtue of the fact that the rest of the portfolio, we expect to see big growth from. So hopefully, that gives you some insight to how we're thinking about it, but excited about the quarter that was, and certainly, we'll have the ability to continue to sell test kits, I think, as long as those are needed in the near-term and midterm.
Vernon Bernardino: That's extremely helpful. I do have another question, but I'll get back in the queue for now.
Joshua Disbrow: We may be able to actually take your question now, Vernon.
Vernon Bernardino: Okay. So David, you talked a little bit about the margins. Can you talk a little bit more about perhaps how the -- if the evolution of the gross margins would have been if you had not acquired Neos and what are your perhaps expectations now if you can see down -- that far down the road or actually provide -- I know it'd be guidance, but if you could just give like a little insight as to how we may look at it in the next 12 months?
David Green: Yes, certainly. The test kit margins are -- the market, as Josh described, is a little bit all over the place, and it's variable from quarter-to-quarter. The Rx business is pretty stable as well as the consumer health business is stable. Together, the ending gross profit margin with both of those business depends on the relative contribution. Last quarter, we reported 81% gross profit margin, probably on the higher side of what we expect going forward, but 70% to 80%, depending on the various aspects of contribution from the 2 main businesses is really where the expectation is. In the past, I've commented that 70% to 75% is a range that should be -- we should be able to hit going forward. So 70% to 80% is reasonable. There's a little bit of lumpiness in that we do use CMOs. And from time to time, there's larger acquisitions of product that sometimes you have to buy more than you can actually sell due to minimums imposed by the CMOs and such. And that drives a little bit of lumpiness. But outside of that, it's fairly stable and more or less depends on how much the consumer health segment contributes, which is a little bit lower relative to the Rx side of the business, which is a little bit stronger. So hopefully, that gives you some context to work with.
Vernon Bernardino: Definitely. It sounds like that's the way we would want to see it if you're integrating the businesses very well. That's all I had for now.
David Green: Okay. Thank you.
Joshua Disbrow: Thanks, Vernon.
Operator: . Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back over to Josh Disbrow for closing remarks.
Joshua Disbrow: Thanks, Omar, and thanks to Vernon for the question. Thanks to everyone for their time and attending today's call. We look forward to providing additional updates as more progress is made. But until then, thanks again, and have a good evening.
Operator: And this concludes today's meeting. You may hang up your phone lines now at this moment. Have a good evening, and thank you for your participation.
