Good morning and welcome to the Aquestive Therapeutics Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Stephanie Carrington, Westwicke, Investor Relations. You may begin.

Thank you, Operator. Good morning, and welcome to today's call to review Aquestive Therapeutics' results for the first quarter of 2020 and business highlights. On today's call I am joined by Keith Kendall, President and Chief Executive Officer, and John Maxwell, Chief Financial Officer, who are going to provide an overview of the recent business developments and performance in the second quarter. Additional members of our leadership team will be available for Q&A. In total, we expect today's call to last approximately 60 minutes. As a reminder, the company's remarks today correspond with the earnings release that was issued after market close yesterday. In addition, the recording of today's call will be made available on Aquestive Therapeutics' website within the Investors section shortly following the conclusion of this call. To remind you, the Aquestive team will be discussing some non-GAAP financial measures this morning as part of its review of second quarter 2020 results. A description of these measures along with a reconciliation to GAAP can be found in the earnings release we issued yesterday, which is posted in the Investor Relations section of Aquestive Therapeutics website. During the call, the company will be making forward-looking statements. We remind you of the company's Safe Harbor language as outlined in yesterday's release, as well as the risks and uncertainties affecting the company as described in the Risk Factors section included in the company's annual report on Form 10-K filed with the SEC on March 11, 2020, and in our quarterly reports on Form 10-Q. As with any pharmaceutical company with product candidates under development and products being commercialized, there are significant risks and uncertainties with respect to the company's business and the development, regulatory approval and commercialization of our products and other matters related to operations. The impact of the ongoing COVID-19 pandemic is highly uncertain and cannot be predicted with certainty or clarity. Given these uncertainties, you should not place undue reliance on these forward-looking statements which speak only as of the date made. Actual results may differ materially from these statements. All forward-looking statements attributed to Aquestive Therapeutics or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement and the cautionary statements contained in the earnings release issued yesterday. The company assumes no obligation to update its forward-looking statements after the date of this conference call whether as a result of new information, future events or otherwise, except as required under applicable law. With that, I'll turn over the line to Keith.

Thank you, Stephanie. And thank you to everyone on the call for joining us this morning. In our remarks today, John and I will provide an update on our business for the second quarter. And as always, we will be joined by additional members of the Aquestive leadership team during the Q&A session afterward. Our key priorities as a company always start with the safety of our colleagues, the people we do business with, and the patients and caregivers who interact with our products. During this extraordinary period, as leaders and managers of our business, we have a responsibility to ensure that, to the best of our ability, while taking all steps to keep people safe, we continued to advance the important work of the company. We've carefully managed our business to be sure that our colleagues are safe and healthy, that all key elements of our business continue, including continuing to access the market for Sympazan, progressing key R&D initiatives, supporting the various FP&A review processes we are involved in and continuing product manufacturing. The company's manufacturing facility continues to produce needed chronic use medicines for patients, including the company's proprietary product, Sympazan, and the company's licensee products such as Suboxone. Our sales team has continued to access prescribers, the majority of the time virtually, and where possible face to face. And therefore, Sympazan has continued to be prescribed to these patients during this period. We continue to make significant progress as it relates to the key areas of focus for our company. First, Aquestive is continuing to market Sympazan to the same prescriber base that are potential prescribers of our product candidate, Libervant. Sympazan continued to make progress in the second quarter in all the measurement areas we view as important. Next, in late June, we filed the…

Thank you, Keith. Good morning, everyone. As you know, we filed our 10-Q and issued our earnings release yesterday afternoon. As we typically do, we will tackle most of the discussion related to the second quarter of 2020 results in our Q&A. And in my comments, I will highlight some of the points that are important in order for you to understand our full-year 2020 financial guidance and our progress towards it. In terms of our capital horizon, we have worked diligently to manage our current cash position before considering any potential non-dilutive capital from a possible KYNMOBI monetization. This was done by focusing our investments and spending on our key initiatives. Our second quarter 2020 revenue included $12 million of revenue tied to the approval of KYNMOBI in May. Breaking the KYNMOBI revenue down into its pieces, $4 million of this revenue is for the approval milestone and will be collected as expected by the fourth quarter. The remaining $8 million of non-cash revenue recognizes minimum royalties under the license agreement, which will be paid in future periods. For these minimum royalties, our performance obligations have been met and current accounting rules require that the revenue be recognized at this point. This minimum royalty revenue does not impact cash flow in the 2020 year. Suboxone production was over 43 million doses in the second quarter of 2020, comparable to the first quarter and down year-over-year as a result of generic erosion. We expect that Suboxone in the US market, combined with non-US markets, including the EU, which recently approved, will continue to be a meaningful part of our revenue base, while our proprietary business continues to grow. While the non-US revenue from Suboxone manufacturing is expected to rise over a period of time, our revenue in the US from…

[Operator Instructions]. And our first question comes from the line of Gary Nachman with BMO Capital Markets. Your line is open.

Hey, good morning. It's Rafay on for Gary. I just wanted to touch on KYNMOBI. Wanted to confirm whether your thinking around the timing of a potential transaction has changed at all since your last update. And what kind of interest are you getting from potential buyers? Are you still confident in $50 million to $100 million of gross proceeds?

Rafay, so we are – at this time because of the fact that we're in the middle of our process, we're really not going to provide any additional comments on the monetization. We will update you once we're concluded on the process.

And then, for Libervant, have you had any labeling discussions with the FDA? And I'm curious whether those discussions provide you with any additional visibility on the potential to receive ODE?

Sure. Dan, you want to take that question?

This is Dan Barber. As you know, as part of the NDA submission, we did file our PI, which is the key labeling component. And we fully expect to receive comments from the FDA in the coming weeks. And as you know, labeling discussions typically happen about four weeks before PDUFA dates. We remain on schedule, and we look forward to the comments.

And then, for AQST-108, could you just remind us of the data that you've generated thus far? To what extent does that inform your level of confidence on potential success with the upcoming crossover trial? How many patients will you be enrolling in that trial and when would you expect to see data?

As we shared with you before – first, we remain excited about this program. As we shared with you before, we have done a previous proof of concept study in humans. And our formulation will be back in the clinic in the coming weeks. The study design is, it's a four period study and it also has 24 healthy volunteers in the study. And we would expect to have data from that later in the year. In terms of confidence, our proof of concept study did show very good results. And so, we have a high level of confidence that the upcoming study will have robust results that will help us with our interactions with the FDA.

And our next question from the line of Randall Stanicky with RBC Capital Markets.

This is [indiscernible] on for Randall Stanicky. My first question is on Libervant. Given the PDUFA is next month, can you update us on the discussions you're having with FDA on the back and forth and anything on what they've been asking for from the information requests? That'd be helpful. Thanks.

Dan, go ahead.

Sure. As Keith has shared with you over the last few calls, we have had an ongoing and proactive relationship with the FDA on this filing. They have asked the typical series of questions that any filing would receive from CMC to safety questions. We've been able to respond to all of them with what we believe are complete and thorough answers. And we do continue to discuss with them all of the elements of our NDA, including the orphan drug component.

And then, my next question on Libervant, assuming approval, how quickly do you think you can get to scale and how will the reps be split between Libervant and Sympazan? And how much of your target prescribers can you get with your sales force? And lastly, how will a virtual detailing play into this? Thank you.

That's a great question. Well, we're very happy with how we were able to adapt virtually over the last three or four months, given the COVID travel and social distancing restrictions and the limit on face to face meetings at doctor's offices and clinics. We've built this commercial footprint for this moment. And if it's approved as expected, we'll launch Libervant almost immediately with the group that we have. And we will then scale that group up to be probably three or four times the size of the current sales force over the last month of this year and the first couple of months of 2021. We think that the acceptance by prescribers, we think that the acceptance and the excitement in the advocacy community and the patient community is going to be very helpful to us. So, we look forward to capitalizing on the work we've done so far to position ourselves in the marketplace to allow us to launch Libervant very quickly and we think successfully because of that. I think the fact that we've been able to do Sympazan on a virtual basis since March bodes well for our ability to get prescribers to pay attention to Libervant, even if in some cases in some states we still don't have a face to face access.

And my last question is, R&D was down meaningfully in the quarter, although not surprising. How should we be thinking about normalized spend, including SG&A ex-Libervant heading through the second half of the year? Thanks.

Evan, good question. So, the R&D timing – the R&D spend really is a reflection of the timing of project spend when things are occurring quarter to quarter. It will move around. We're going to continue to invest in our key priorities as we've talked about. Obviously, Libervant is coming to a conclusion from a clinical R&D perspective, but AQST-108 is beginning to increase. So, you'll see that shift. But from a dollars perspective, we don't guide quarter to quarter, but, overall, I think the trend lines that you've seen are probably – we will continue to see in the future. Otherwise across our business, whether it's in SG&A or in other categories, like the plant, we're going to make sure that we're rationalizing our spending, focusing on our top priorities, matching our volume of production and that sort of thing throughout the business.

And our next question comes from the line of Liana Moussatos with Wedbush.

Hi. This is Shveta for Liana. Thank you for taking my question. Can you go over some of the main reasons for Sympazan sales growth?

Sure. Look, I think that we had – prior to COVID, I think we had done a good job of penetrating the core prescriber group that we were targeting. In the absence of face to face meetings, I think that those relationships played a very important part in our folks being able to continue to connect with those prescribers and those clinics. I think, as we continue to grow our penetration in that core prescriber group, I think we also grow our saturation in those practices who have written for Sympazan at least once and we're getting multiple scripts from multiple patients in those locations. I think those are the things that have played an important part. I think we took some price support action for people who were affected by COVID economically to be sure they could still have access to the product. I think that probably helped a bit for some of the families a bit challenged economically by the COVID crisis. But I think you've got a good product with a good value proposition in a very difficult market and the relationships that our sales people had built showed to be strong and resilient during this period of time.

Our next question comes from the line of Jason Butler with JMP Securities.

Keith, you mentioned that there's two different groups, the orphan drug piece and the regular PDUFA review piece. I just wanted to clarify. Are you getting questions from and interacting with both of those groups or is it just with the PDUFA group now and then it will be the orphan drug group at some later time point?

Dan, you want to answer that?

As we progress through the discussions with the FDA, we have had a variety of conversations, as you can imagine. For a couple of reasons, we are not overly sharing what groups those are with. I would continue to point out to you that, in terms of the competitive landscape, we do believe that we have advantages over the other competitive products, including the fact that nasal sprays in general will have issues with seasonal allergies. And we think that's a key component of advantage for us as we go forward into the marketplace.

And then, just a couple on the commercial side. Can you maybe talk a little bit more detail about any learnings that you have in terms of reimbursement access that you secured for Sympazan and how that will read through to your strategy for Libervant? And then, I know you touched on this a little bit, but just in terms of – assuming Libervant approval, what kind of scale or magnitude of commercial build-out beyond what you have today would you expect?

Sure. Ken, do you want to respond to that?

Happy to. From a reimbursement learnings, I think we reaffirmed that when you come to market, while you're negotiating your contracts, you have to have a very robust support system that allows to buy down copays on the commercial side and facilitate movement quickly through any edits or prior authorizations. As Keith mentioned – and actually probably one of the most important metrics is how many of your prescriptions actually come out the door. And if you look at our Medicaid scripts, that's over 81%. And if you look at our commercial lives, it's over 70%. Those are both very good numbers. And I think we can replicate that with Libervant. Right now we're calling on around 4,500 key physicians that manage some of the most severely affected epilepsy patients and they are going to be the highest consumers of rescue medicines. We're doing that with Sympazan. So, we'll expand that slightly, probably in the range of 6,000 to 7000 physicians, and we'll adjust our footprint accordingly. But I think we'll be able to scale very quickly to cover those additional physicians and we're already very well entrenched in some of the most important physicians that will be writing Libervant.

Our next question comes from the line of Thomas Flaten with Lake Street Capital Markets.

Can you describe a little bit some of the efforts you've undertaken from either an unbranded commercial perspective or from a med ed perspective to kind of lay the groundwork for a potential Libervant approval?

Sure. Ken, do you want to respond to that?

Sure. One of the most important things that you do leading up to the launch of a product are start to move your clinical literature into the public domain. So, we've just recently had an unmet needs article published that talks about what's currently – the current state of affairs in the management of breakthrough seizures and seizure emergencies. Three very prominent physicians authored that. It's getting a lot of visibility and it starts to shape the needs that you'll play into. The second paper that we have in late stage review with epilepsy outlines our long-term safety study, which clearly focuses on the safety of the brand. But it's going to give an awful lot of insight in the efficacy in a real world situation. the feasibility of placing. If you look at our placement rates, when you see that paper, you're going to see virtually everyone has success in placing our script on first attempt. And then, probably, the key safety metric, 1,100 uses in that study with no negative interactions in the mouse and no biting, which I know is going to be a question and it's something that I've been asked a few times. So, those are two of the most important things. We're heavily engaged with advocacy right now, building relationships, talking to their constituents, and that's going to create a very nice forum to announce the introduction of a new important medicine. And we're building out all of our materials. So, we come out of the gate quick. That'll complement those and – and actually, starting to train our sales team.

And I just wanted to reconcile. Ken, you had mentioned you would go from something around 4,500 docs to somewhere upwards of 7,000. And maybe I misheard it. Keith, in an earlier response, you said that you might scale three to four times the current commercial footprint. I'm having a little trouble reconciling that. But perhaps I misheard those numbers. I just want to make sure I understood from an actual rep perspective, how much bigger do you think you'll get over the six to nine months out post-launch?

Yeah, we're still working through the actual size. Keith, do you want me to take that or do you want to…?

Go right ahead, Ken.

We're working through the final size and structure. Those are the approximate numbers. One of the things that you'll see us do is dial up the frequency. So, the current rate ratio that you look at, Sympazan to our current footprint, is going to be slightly different when you get to Libervant. It's a little bit of a different sell. So, we would look for a higher frequency, which will mean we'll need a few more representatives for the increased number of docs.

And then, just one final one for John. John, have you made any decisions about tapping into additional debt capacity in the event that KYNMOBI gets delayed? Or you have some challenges with getting Libervant on to the market or how should we think about them?

Yeah. So, our debt capacity, as you know, we have a $100 million facility, $30 million of reopeners. There are two reopeners. $10 million upon Libervant filing, which we've completed, but we did not access, and $20 million would be upon Libervant approval. So, upon Libervant approval, we'll make that decision. It is part of our tool chest of capital options, but at this time, we don't have any plans to take that debt down.

[Operator Instructions]. Our next question comes from the line of Ram Selvaraju with HC Wainwright.

Hi. This is Blair Cohen on for Ram. Just a couple questions for me. I'm just curious. For the PK trial that you have coming up for 108, have you incorporated any elements of the trial designed to accommodate for the COVID environment, the difficulties you may encounter with enrollment?

Dan, you want to take that?

Sure. Yes. COVID-19 obviously is not only affected us, but everyone in our industry. So, we have chosen a site for this particular study that we feel is at low risk of disruption from COVID-19. So, we believe – we have high confidence that our study will start on time and complete on time.

And then, as far as face to face interaction with your sales force, can you give us an idea of how much you're doing face to face versus virtually and how you expect that to change in the ongoing months and with the potential launch of Libervant? Thank you.

Sure. Ken, do you want to take that?

Sure, Keith. If you look at the start of this pandemic, exiting March, into April, we went to about 95% virtual, as did most all of the industry. And as you moved into May, you saw a slight softening in that number, but still pretty dominant in terms of virtual. As we went into June, you saw a reversion back, so about 60/40, and in some of the key states maybe even 50/50 as some of the states moved into phase two. And then, as you moved into now July, you're seeing it flat at around that number. We've got the tools in place now to work very effectively in a virtual environment. So, we're, I think, managing through that pretty well. The biggest challenge in all of this are actually the offices and their ability to adapt to a virtual environment. Some have done a lot better than others. And the ones that have effectively developed that skill, it's very easy to communicate with and it'll remain a core piece of our reach into those offices. And for those that look to be struggling, we'll be looking to really ramp up face to face as they allow it.

Thank you. And I'm not showing any further questions. I'll turn the call back over to Keith Kendall for closing remarks.

Sure. Okay. Thank you, everyone, for joining us today. We appreciate your time. We will continue as always to update you as our business progresses. We look forward to providing a further update when we do our third quarter earnings later on this year. So, thank you all for joining us this morning and have a great rest of the day.

Ladies and gentlemen, this does conclude the program. You may now disconnect.