Good afternoon, and welcome to the Eton Pharmaceuticals Fourth Quarter 2019 Financial and Operating Results Conference Call. [Operator Instructions]. At this time, I would like to turn it over to David Krempa, Vice President of Business Development at Eton Pharmaceuticals. Please proceed.

Thank you, Operator. Good afternoon, everyone, and welcome to Eton's Fourth Quarter 2019 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; and Wilson Troutman, our CFO. 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 CEO, Sean Brynjelsen.

Thank you, David, and thank you, everyone, for joining us today. The fourth quarter was an extremely important quarter for the company. And today, I'm excited to share with you an update on Biorphen as well as some of our other important milestones achieved with our pipeline products. After that, our CFO, Wilson Troutman, will then discuss our financial performance, and we'll close with a Q&A session. So starting off with Biorphen. As most of you know, Biorphen was approved in the fourth quarter and was commercially launched in December. This was a critical milestone for our company, and I'm very proud of the team's hard work to achieve our first product launch in just 2.5 years after inception. As the first and only ready-to-use formulation of injectable phenylephrine, Biorphen fulfills a critical unmet need within hospitals. Before its approval, hospitals had to manually dilute a concentrated formula in order to use it. This was both time-consuming and also introduced risk due to potential calculation and dilution errors. In order to offset this risk, some hospitals would purchase unapproved phenylephrine from compounding facilities. However, in reality, this amounted to just a transfer of risk rather than a true risk reduction in most cases. With the introduction of Biorphen, we have now provided a cost savings to hospitals, longer shelf life and, most importantly, an FDA-approved product for patients. In January, we announced a partnership with Xellia for the co-promotion of Biorphen. Xellia's existing U.S. hospital-based sales force will promote Biorphen to certain customer segments. This approach has several advantages for Eton: first, it will save us a significant amount of money in SG&A; and more importantly, it should lead to faster adoption of Biorphen due to Xellia's existing relationships with hospitals that have adopted ready-to-use products in the past. Xellia's…

Thank you, Sean. Revenue for the fourth quarter of 2019 was $0.5 million from Biorphen stocking orders by wholesalers during the quarter. Our full year 2019 revenue was $1.0 million and consisted of $0.5 million milestone payment received from Bausch Health for the acquisition of EM-100 marketing rights as well as initial Biorphen sales. Cost of sales for the fourth quarter of 2019 and also the full year 2019 was $0.5 million, which consisted primarily of the profit share costs due to Eton's licensing partner for Biorphen. Under terms of the licensing agreement, our partner was entitled to receive the first $0.5 million of profit from commercialization of Biorphen. There was no cost of sales associated with the $0.5 million milestone payment received from Bausch Health for EM-100. Research and development expenses for the fourth quarter of 2019 totaled $0.2 million compared to $1.1 million for the fourth quarter of 2018. R&D expenses in the fourth quarter of 2019 were reduced by $1.0 million due to Eton receiving a refund credit of its original licensing payment for ET-203. The $1.0 million licensing payment had originally been expensed in the first quarter of 2019. The refund from Sintetica was recorded as a component of prepaid and other current assets at year-end and was utilized in the first quarter of 2020. For the full year 2019, R&D expenses were $11.6 million compared to $5.6 million for the full year 2018. The increase was primarily driven by $4.0 million of total expenses for initial licensing payments for Biorphen and also ET-105 as well as increased head count and operations costs associated with the company's research and development lab that was opened in late 2018. Selling, general and administrative expenses for the fourth quarter of 2019 were $2.4 million compared to $1.2 million in…

[Operator Instructions]. And our first question comes from the line of Andrew D'Silva with B. Riley.

So just right out of the gate, with that approval that you obtained, did you have to also pay an approval milestone during the quarter? And was that recognized in R&D? I just -- I'm trying to extrapolate what a normalized run rate should look like.

Yes. There was a $750,000 payment, but that is capitalized because it was tied to the approval of the product. So that's on the balance sheet and being amortized over a five year period.

Okay. Great. Great. And going forward, as we think about some of these co-promotion and co-marketing partnerships with additional products once they're approved, should we expect that it's maybe a strategic shift from an OpEx standpoint and to look for maybe additional sales teams for different verticals to be a little bit smaller than we previously expected as you look to utilize that as a marketing tool?

This is Sean Brynjelsen. So we are very excited about doing the deal with Xellia for some of the reasons that were mentioned in our press release. Regarding the -- what we'll do as we get additional product launches, that will be determined on a case-by-case basis. In some instances, we will launch the product, especially if we have another hospital, probably start to build a hospital business, who knows what lies there? But this made the most sense on Biorphen for a couple of reasons. We still keep a channel for ourselves. It's still marketed under the Eton name, and we're doing the contracting. The benefit Xellia brings to the table is really the customer penetration, the uptake of the product. They were out in the field. They've got another product where they can add this easily into the bag. Now with regards to some of our upcoming launches, we'll look at opportunities, perhaps something that would be reversed where we have the sales team and we bring in other products that other companies have approved but don't want to launch their own sales team. This is a model that, I think, will become more and more popular with smaller companies where it doesn't necessarily make sense to have a sales team devoted to 1 product and that 2 smaller companies with products can work together and achieve an objective that benefits both sides.

No. That makes a lot of sense. And then as with regards to EM-100, I take it that the amendment that was filed ended up not being a minor amendment just based on the time line there. It was originally -- I think we were thinking about 3 months.

That is correct. They did not want to reclassify it as a minor amendment. They left it as a major -- we did not feel it was a major amendment, but who's to argue with the FDA. We do believe the response is complete, and I believe Bausch + Lomb has indicated a second half launch of the product. So what they asked us for, we gave them exactly what they asked us for.

Okay. Okay. And this is just more of a question -- over the next couple of years, you obviously have a very robust pipeline. But kind of looking back over the last, call it, 12, 18 months, you had a couple of products slip or get CRLs or timings fell off. Do you think maybe you're running a little bit too lean on the clinical side, and it might make sense to bring in additional help as it relates to managing the pipeline so that we can stay a little bit closer to the original timing from an approval standpoint?

Sure. It's a fair question. I think I'll answer that in a way that just reflects the reality of the situation. We've licensed products, 2 of those. The CRL, with regards to one of our products, was a partner's CRL. And the CRL with lamotrigine was also the partner that are handling the regulatory. We're there to support. But that -- in that case, we couldn't have done anything differently. In terms of how CRLs go with lamotrigine, that was -- yes, it was -- it provides clarity to us on a study that's relatively straightforward to do. That's why we still believe we'll have a launch or, say, approval later this year. And in terms of avoiding CRLs in the future, I can never say that, that would -- that's out of the question. But it's something that we balance against the opportunity. So a file -- the way to avoid all CRLs is to only license products that are perfect and have perfect files. But in that case, we would miss out on a lot of opportunities that we feel are value-enhancing to the company. When you're talking, in the grand scheme of things, of a delay of months, this is not a standard CRL that a big pharma would get. A large pharmaceutical company gets a CRL, and their stock gets crushed because their clinical trial failed or the FDA didn't like the clinical results. The types of CRLs we're getting are more like a deficiency than anything else. And it's really -- we want X, Y and Z in addition to what you've done. So they're not show-stopper CRLs unlike CRLs that -- I don't want to name names, but the larger companies would actually get.

And our next question comes from the line of Ram Selvaraju with H.C. Wainwright.

Can you hear me?

Yes, I can, Ram.

So first and foremost, I wanted to drill down a little bit on the prospects going forward for Biorphen based on the potential for aggressive enforcement action against compounding folks in the phenylephrine market. So I was wondering if you could maybe give us some additional context here regarding precedent cases where the FDA has been aggressive on enforcement with respect to compounding of other products that might be considered analogous to this situation. And then secondly, if you could maybe give us some scenario analysis. What happens if the FDA isn't as aggressive as you might hope they would be in cracking down on compounding of phenylephrine?

Sure. So I'll raise, really, 3 points in your question. The first part is what are we doing. I can assure you we're actively engaged on the topic. This is a rule that the FDA has, which is called the essential copy rule, which prohibits compounders from making essential copies of products, which are already approved. So Biorphen clearly is a product that would fall into that category where we have an approved product and compounders are making duplicates -- I don't want to call them generics because they're not even approved -- but making duplicate formulations, which do not have safety and efficacy review by the agency. And so there's no assurance of safety or efficacy. So it really poses a risk to the public. We have communicated to those compounders that are providing ready-to-use versions of phenylephrine, and by and large, all of them want to continue doing that. And so it really requires an action by the agency to prevent that. So we are in dialogues with the agency to make that happen. And I'll leave it at that, but it's active, it's ongoing and we expect action in the future. Secondly, examples. Probably the most recent is vasopressin. That was a product that received approval. There was a lawsuit between Endo and its agent, and Endo won that lawsuit. And I think the FDA was also involved in that where the agency supported Endo's position. So that product is ultimately -- the compounder product was removed from the market. So now today, if somebody wants to compound vasopressin, you have to buy it from the innovator. Thirdly, with regards to the agency exercising enforcement, the agency has exercised enforcement on grandfathered products, which are also not approved and not reviewed for safety and efficacy. These are products which are out in the market. But when someone receives approval, they normally have a year to get off the market. And the agency has exercised enforcement in the vast majority of those cases to remove the unauthorized product from the market. This is no different where you -- in fact, it's worse because it's not being made under GMP conditions in terms of a traditional FDA GMP site that makes finished dosage products, which get approved. These products are compounded products. And so we believe the agency will exercise enforcement against compounders with regards to products which are already approved. I think this is the type of case that they'd want us to win. If we were not successful, it would open up a Pandora's box of companies just going and compounding and picking the products they want and then launching them. There'd be no reason for any FDA review or any type of approval process for any product. There's probably more I could say on that, but for the sake of time, I'll kind of stop there.

Okay. No, that's very helpful context. I just wanted to clarify also with respect to ET-105, the refiling, would that be -- what do you expect that to be formally classified as: Class 1 or Class 2 resubmission?

We expect that to be a Class 2 resubmission because we believe it pertains to safety. Safety is a large bucket, but we believe that the agency has requested us to update labeling, for example, and to run a user study. User study is there to demonstrate that patients can safely administer the product. So we believe that falls under safety. Plus the study is really small, this isn't something that would take more than a relatively -- a day or 2 to take a look at the report, did it pass the validation requirements or didn't it. This isn't an exhaustive review. So we believe this would be Class 2. But even if it was -- I'm sorry, Class 1. Even if it was Class 2, we still would expect approval towards the end of the year. So you're looking at a two month time versus a 6-month time.

And you are going to announce when you refile, correct?

Yes, we will.

Okay. Just a couple of other very quick ones here. Can you just remind us what the background was to the ET-203 CRL, the reason behind that, why that happened? And then also, can you just clarify whether all of your licensing arrangements like -- that are like the one with Sintetica, have this clause in them whereby if the product gets a CRL, you get your original licensing fee back? Just to clarify more.

So in this case, the ET-203 had a refuse-to-file, but it's like a CRL. But in this case, yes, we did receive our initial licensing milestone back. We'll pay that once it's filed and submitted and accepted for review. I've been in the business a long time, so I know things can go different ways that don't -- that people can expect. So we try to incorporate some of the major pivot points that could occur on a project so that we protect ourselves. We are a small company. But we are committed to the relationship with Sintetica. We highly value it. The refuse-to-file of the product was based on, I'll say, a minor formulation. I'm going to call it minor because it is minor. So we have to update the formulation, which means updating the batch record, make some new batches, show the new formulation and then refile. We expect that to be refiled shortly. The rest of it, the important stuff, which is the safety, the efficacy, the rest of the aspects of the filing are in good order. So this is really a CMC, which, again, is not a showstopper. It's something that we will file, and we will get approval, and we will launch it next year.

Okay. And then just a quick question for Wilson. Can you just give us a sense of what you expect the annualized running costs of the R&D lab and the head count associated with that lab to be?

Well, we have 10 people at the lab. We don't normally call out individual items for our operating expenses for segments like that. But there is some degree of detail that we show in our 10-K that sort of points to that. So we don't normally call out the lab separately, individually. We have 10 people in total devoted to the R&D function.

And our next question comes from the line of Frank Takkinen with Lake Street Capital.

Just a couple for you here today. Hoping to hear a little bit more about the Biorphen launch so far, if you're starting to see any repeat orders come through in the first quarter here and kind of how you're thinking about the personnel you guys have in place with Xellia, 15-person or so sales force, and then if you guys are going to put some people behind that, if that's going to be a sufficient coverage for the 4 million units that you guys are targeting on a longer-term basis.

Yes. So a couple of points. One, we are -- I guess, right off the bat, we are getting reorders, so that's good. That's a good sign. Two, we grow the institutions, the number of customers every week, it's been going up. Three, in terms of the sales team, we have confidence in Xellia to do and to handle that piece of it. I think the key levers that will go forward -- and by the way, we are -- the smaller institutions, we're finding much easier to convert. They're fast conversions. Some of the larger institutions, which is really where the big volumes are, just have a process in place. And so that can be a couple of months before you start to really see the pull-through coming through the large institutions. But we're confident it will happen. We already have a few large institutions, but we're going to add more. And -- with our life cycle management of later introducing the vial, which we expect to have within the next, let's say, 12 months, we're getting a lot of -- we think we'll get a lot of traction on that. I think the key lever, which will certainly grow sales beyond our expectations, will be really moving the compounders off of this market, which they shouldn't be anyways.

Got it. And then for EM-100, I believe there was a $1.5 million milestone fee associated with that upon approval. Is that still at play with this delay? And is that expected on approval, puts that PDUFA date, if it is -- or GDUFA date, I guess, you call it, for August?

Yes. So it's still $1.5 million milestone upon launch of the product.

Congrats on your first commercial sales.

Thanks a lot.

And our next question comes from the line of Michael Brcic with National Securities.

Just want to dig in a little bit deeper on this Biorphen situation. You've got two things. One is the FDA and, obviously, possible enforcement down the road. And then I think you mentioned that the compounders -- or the major compounders come out of that because of supply or whatever. Is that business going mostly to other compounders? Or is that coming straight to you?

Well, I think it's too early to tell on that one. The compounders are a stubborn bunch. They really want to just do what they want to do. The agency's been trying to deal with them. And it's not -- it's really about safety for patients, and there's really no reason where you're manually diluting and making products to be which are prone to errors versus a product that has been reviewed and -- for safety and efficacy by the agency. So you saw PharMEDium shut down. It's one of the largest compounders out there. I can tell you that a common theme from the hospitals and from the customers is they're frustrated with supply disruptions. So that is a selling point with regards to our product. We -- another big selling point is our 3-year shelf life. They like the -- even if they continue to buy from compounders for whatever reason, they like the concept of a stocking order where they can put our product in the hospital, and they know they've got it there for 3 years and can use it as needed. So otherwise, they're having to make orders for phenylephrine like every other week, which is just a logistics nightmare versus just making an order once a year or however many times they need. So the appeal of the product drives sales, first and foremost; two, the life cycle management where we'll launch the vial and the syringe in the near future will drive additional sales and convert -- that should convert people off of the compounded product. Even if the compounders didn't want to leave, we believe -- and we've been told by hospitals they will convert based on that alone because we're keeping our price points similar. There's really no cost savings to try and use a compounder. In fact, they're opening themselves up to tremendous liability by customers who are affected by it. It only takes 1 customer to get the wrong dose, and the FDA's own reports have shown that 30% of compounding products have the wrong potency. So yes, there's potential legal issues there involved for hospitals even if they are trying to offload that risk by buying from third parties. So there's a lot of sales drivers on the product just by the quality of the product itself. But in conjunction, we're doing our part on the regulatory and the legal side to convert even a greater number of sales. Our goal, assuming that we don't -- we're not able to or the FDA doesn't exercise enforcement, is still to hit 4 million units of the 20 million unit market. We think that's achievable, just all things staying more or less as they are with a little bit of life cycle management. We think that probably it could go much higher with the enforcement.

Right. The 4 million, what does that convert to in revenue, roughly?

Well, I mean roughly, if you're -- right now, our price is about $10 an ampule, $100 a box. There's 10 ampules in a box. So you're looking at top line, I guess, it would be $40 million. There's obviously a gross to net, and there's some fees and things like that, but that's just sort of the easy math.

Now does the FDA enforcement, what sort of teeth does it have? Does it -- do they fine them? Do they -- what do they do? And if there is a fine, does that money go to them or to you? How does that work?

No. It's not so much a fine. It's typically -- this is, I'll say, my interpretation of it -- but it's also my experience, it's not just my interpretation, is they would receive a warning letter about ceasing to compound. And if they continue to do that, they could be a subject of a consent decree. And there's other actions, but they're not nice. They could shut down the compounders. The FDA is a government agency, so good luck trying to fight the U.S. government, which their charter is safety of Americans. Their charter is to ensure that the drug supply is there to treat patients and to do so in a safe manner. Certainly, when you look at what happened in the New England compounding situation, people have died because of receiving nonsterile and highly contaminated products. You can look at case studies out there on phenylephrine where there have been serious adverse events, and that's -- it's obvious, the evidence abounds if one looks.

Okay. This is probably the final part of it, but you mentioned you're informing the compounders and all that sort of thing of the FDA rule, et cetera. Is there an attempt to inform the buyers as opposed to the suppliers? And does the FDA also go to the hospitals or whatever and say, "Hey, you're not supposed to be doing this stuff," or how does that work?

Yes. So that's a good question. So we have primarily focused our communications to the suppliers, the compounders and to the FDA. We will go to the customer, and we will state that we have approval. We will state that the pros of our product versus the compounded product, which are -- we have a longer shelf life, where we've been reviewed for safety and efficacy. When you go to the customers, you're restricted in a way on what you can communicate, so you have to be careful on how you frame that. But ultimately, yes, the customer will receive communications, but we would prereview whatever we communicate to the customer with the agency to make sure we're in full alignment.

[Operator Instructions]. And our next question comes from the line of Keith Gil with Carter, Terry & Company.

Yes. I have two questions. First would be, with ET-105, for the PDUFA date of March 17, will the FDA make a ruling on the drug itself, approval or nonapproval?

Yes. Well, they've -- I mean we had a previous press release, which stated the FDA has asked us to complete a study, a human factors study. And so we had indicated in our press release that we cannot complete that study in the next 2 weeks here. So we are going to receive a CRL, a communication from the agency, do the study and make these other changes to the labeling that we've been asked. The labeling is quick. That's easy to do the study. We'll have -- we'll commence it. We'll submit the protocol probably in the next week or two. We have a validation protocol going to them. After they've reviewed it, we'll execute study and then resubmit. So then we'll -- it'll be, we believe, a Class 1 resubmission, which is a two month review time, which could give us approval in, let's say, the -- I'll just say the fourth quarter.

And how long would the study take?

It takes a week. The long part is not the study. In fact, it's less than a week. The long part is the FDA takes 60 days to review the protocol. Once we get that, then we execute the study. A study might have maybe two weeks for the report. We resubmit it, and then they start their two month clock.

And I'm showing no further questions at this time. I will now turn the call back over to the CEO, Sean Brynjelsen, for closing remarks.

Thanks, Andrew. Lastly, I'd like to thank everybody for joining the call today. I say we remain very excited about 2020. This is a breakout and a big year for us. We look to achieving our goal of advancing health care through the introduction of innovative medicines that are both affordable and available to all patients. It's an important mission to us. We also appreciate everyone's support, and I will be providing further updates in the near future as we close any new deals and hit new milestones. So thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.