ACRUX LIMITED — AGM Information 2019

Nov 27, 2019

Acrux Annual General Meeting Script – 28 November 2019

Slide 1 Header page

Slide 2 Ross Dobinson – Non-Executive Chairman Introduction

Good morning ladies and gentlemen. My name is Ross Dobinson, and I’m the Chairman of Acrux Limited. Before we commence proceedings could I ask that you turn off your mobile phones for the duration of the meeting.

It is my pleasure to welcome shareholders to Acrux’s 2019 Annual General Meeting. We would like to thank Pitcher Partners again for the use of their facilities for the AGM.

The time is now 10.00 am and as there is a quorum of members present, I formally declare the Meeting open.

I would like to introduce my colleagues:

My fellow Board members

• Our Chief Executive Officer and Managing Director Michael Kotsanis,

• Our Non-executive Directors: Geoff Brooke and Tim Oldham

and our CFO & Company Secretary – Deborah Ambrosini.

At last year’s Annual General Meeting I referenced the macro factors assessed in determining our corporate strategy and material developments since initiating that strategy in 2015. Our strategy remains valid and unchanged. Over the past year there have been FDA initiatives that reinforced our strategy moving forward and Michael will address these in more detail in his CEO and Managing Director’s report, so I will only reference the broader issues in my introduction.

The Company monitors topical drug market data for products that we are developing, particularly in relation to the competitive landscape and FDA guidance documents on issues which could impact Acrux’s position with these products. Relevant issues include changes to the FDA Product Specific Guidelines (PSG), which could present both opportunities and risks. Acrux has a strong focus on Competitive Generic Therapies (‘CGT’), i.e., products which the FDA define as currently having no generic competitors and which will be eligible to receive priority reviews from the FDA. As noted in previous guidance that Acrux has issued to shareholders, a key commercial objective in generics development is the introduction of products early to market in order to gain commercial advantages over competitors. For some products which are first to market, exclusivity is received from the regulators for the first six months of those products’ commercial lives.

The knowhow which has been developed by the Company over the last twenty years of operations provides sustainable competitive advantages. Acrux has specialised capabilities for in-vitro drug development including IVRT ( in-vitro release testing) and IVPT ( in-vitro permeation testing). For some products, the FDA has recently included the option to use in vitro testing (i.e., as an alternative development approach to expensive clinical endpoint studies) to demonstrate bioequivalence for topical generics. This enables Acrux to utilise its capabilities to develop eligible drugs efficiently and cost-effectively.

Commercial discussions with prospective licensees continue for a number of the products the Company has been developing. Our product pipeline will be covered in more detail in Michael’s CEO and Managing Director’s report and we are confident that we have the capacity to maintain a consistent number of products in development in our pipeline as earlier projects are completed and licensed out. To optimise shareholder value, our pipeline will be expanded gradually after initial licensing activity validates our business model.

I would like to again extend my personal thanks to the Board for their input over the last year, which has been a very productive one. I would also like to extend the Board’s appreciation to Michael and his team for their work over the last year, which has been extraordinarily demanding. The company has made substantial progress in the development of its product pipeline and we are expecting commercial outcomes in the next year.

This will demonstrate objective commercial progress. We look forward to providing shareholders with validation of the commercial potential of the Company’s development program.

Slide 3

Michael Kotsanis – Chief Executive Officer and Managing Director

Thanks Ross.

Good morning and thank you for attending this year’s Annual General Meeting and for your interest in Acrux.

Slide 4

This presentation contains forward-looking statements which are identified by words such as ‘may’, ‘could’, ‘believes’, ‘estimates’, ‘expects’, or ‘intends’ and other similar words that involve risks and uncertainties.

These statements are based on an assessment of present economic and operating conditions, and on a number of assumptions regarding future events and actions that, as at the date of this presentation, are expected to take place.

Actual results could differ materially depending on factors such as the availability of resources, the results of non-clinical and clinical studies, the timing and effects of regulatory actions, the strength of competition, the outcome of legal proceedings and the effectiveness of patent protection.

Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of our Company, the Directors and our management.

We cannot and do not give any assurance that the results, performance or achievements expressed or implied by the forward-looking statements contained in this presentation will actually occur and investors are cautioned not to place undue reliance on these forwardlooking statements.

We have no intention to update or revise forward-looking statements, or to publish prospective financial information in the future, regardless of whether new information, future events or any other factors affect the information contained in this presentation, except where required by law and under our continuous disclosure obligations.

These forward looking statements are subject to various risk factors that could cause our actual results to differ materially from the results expressed or anticipated in these statements.

Slide 5

Acrux is an experienced and proven developer of topical drugs.

Our estradiol spray is commercialised by Gedeon Richter in 33 countries and by Perrigo in the United States. Acrux receives royalties on sales of the products. In financial year FY19, royalties on our estradiol product were $580,000 representing 77% growth over the prior year. We are seeing and expect continued growth in FY20 and estimate that royalties will exceed $800,00 this financial year.

We are at an exciting stage of the company’s transformation. With significant investment in our topical generic pipeline we now have 14 products in development and expect to conclude 1 to 3 product licensing deals in FY20 and 3 to 5 product licensing deals in FY21.

Slide 6

Acrux is a revenue generating pharmaceutical company with an advancing product pipeline of topical generic products nearing additional commercialisation and revenue milestones.

Our focus is on the topical generic market in the United States. We believe this market, with $20 billion in sales, can provide Acrux with attractive returns through relatively fast and low

risk product development. We have multiple licensing deals under negotiation for various products in our pipeline.

Our development and commercialisation strategy is to repeatably bring products to market. We have 25 extremely capable scientific staff who are working hard to bring our products through the development process to regulatory approval.

Since we started development on the first of our topical generic products in August 2015, we have submitted the first three to the FDA for review. As our products progress through the regulatory review process and licensing negotiations, our objective is to be cash flow positive by the end of 2021.

Slide 7

Our business model is summed up by this slide. We spend a significant amount of time evaluating different products as potential product development candidates. All the products we assess are topically applied prescription pharmaceutical products. Once we initially identify a product for development, we begin the analytical and formulation work that underpins our scientific development process. Once this analytical and formulation work is complete, we contract an FDA approved manufacturer to transfer our formulation in what we term a technology transfer. This is when we transfer our formulation and knowhow to our contract manufacturer. The data we generate from batches of our product that are manufactured at the contract manufacturer are then included with our analytical and formulation development reports and submitted to the FDA for review. We then negotiate licensing deals with generic companies in the United States for the rights to commercialise our product.

Slide 8

We believe that the topical market is substantially differentiated from the larger segments of the total US pharmaceutical market.

The total market in the United States generates over $460 billion in sales based on IQVIA data. The oral market for tablets and capsules forms the largest segment of the total market and generates over $200 billion in sales. 90% of prescriptions dispensed in the oral market are generated from generic products that are dispensed to patients. This contrasts with the smaller and less competitive topical market. The topical market generates $20 billion in sales but has a lower level of generic penetration than the oral market. Based on IQVIA data for the topical dermatology sector, only 47% of prescriptions dispensed in this market are generic.

What differentiates the oral market from the topical market is the overall size of the market, the relative size of individual products and the development process and methods for demonstrating bioequivalence of our product to the on-market brand.

The topical market can be characterised as having less competition based on its smaller size and more complex generic development than the oral generic sector of the market. This topical sector is the exclusive focus of Acrux.

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Slide 9

Generic product development carries substantially less development risk than novel drug development.

We screen the market for product development candidates based on a number of factors that include market size, competitive landscape, development complexity and the intellectual property or patents for the product.

Our development record to date shows that we have developed and submitted three products to the FDA since we started work on our generic topical pipeline in August 2015. This contrast with novel drug development where less than 12% of drugs successfully proceed from preclinical phase of development into Phase 1.

For Acrux, the development process from start to submission costs approximately A$3-4 million and will take 3-4 years. Our product submissions to the FDA are for Abbreviated New Drug Applications, called ANDAs. The process for developing an ANDA usually avoids large scale clinical trials and the associated expense and time. Contrast this with novel drug development for new chemical entities or new biological entities which usually takes 10+ years with multiple expensive long-term trials.

We believe that our topical generic drug development and portfolio strategy provides more certainty than novel drug development.

Slide 10

Our product development pipeline is directly targeting products with annual sales of $1.5 billion as measured by IQVIA in the 12 months to March 2019. The addressable market of $1.5 billion is defined as the sales value of existing in-market products which we are targeting with a directly substitutable product that we have developed. Our pipeline contains an attractive mix of products from a commercial perspective. You can see on this slide the green wedge of the pie chart which represents product brands that are on the market with no direct generic competitors based on March 2019 IQVIA sales data. This represents over half the addressable market for our entire product pipeline of $1.5 billion and is also over half of the number of products in our pipeline. I believe that fact alone makes our pipeline very attractive.

Slide 11

The Acrux senior management team that is guiding Acrux forward and executing the company’s strategy are highly experienced. All of us have substantial experience in the areas for which we are responsible.

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Slide 12

We have identified 176 drugs that are applied topically in the United States that generate over $10 million in sales. Of those we have initiated development on 14 products.

Three of these products that we have developed to date have been submitted to the FDA and accepted for review. The FDA have stated that they will review 90% of dossiers within 10 months of submission. During and at the end of that period the FDA may ask questions and once satisfied they will approve the product.

We anticipate that the progression of our pipeline will lead to 1-3 product licensing deals in the next calendar year with generic companies operating in the United States. These are the companies that will commercialise our product.

Slide 13

The milestones and objectives for our pipeline are described on this slide.

Today we have a total of 14 products in our pipeline with 11 products in active development and 3 submitted to the FDA for review.

In calendar year 2020 we expect to submit to the FDA another 4 products for review. As we submit products for review, our intention is to add additional products to the initial development stage at Acrux, maintaining 11 products in active development. The same numbers of 4 additional product submissions and 11 products in development are expected the following year 2021 as well.

These submissions are a trigger for licensing discussions with potential licensees and we expect 1-3 licensing deals to be executed in 2020 and 3-5 licensing deals to be executed in 2021.

Slide 14

Two case studies illustrate the development and commercialisation of topical generics in the United States market. This first case study is the development of tazarotene by a leading topical generic company called Taro.

Tazarotene cream was originally approved in 2000 and is marketed by Allergan as a branded prescription product for psoriasis and acne. The product generated US$51 million in the year ending March 2017 based on IQVIA data prior to the first generic to launch.

Patents in the FDA Orange Book for tazarotene expired in 2014. In April 2017, Taro received FDA approval and launched the first generic. As shown in the blue bar in the chart. Taro generated US$17 million in sales in the first 8 quarters of sales.

Slide 15

The second case study is for Acyclovir cream. Acyclovir cream is used for cold sores. The product generated US$89 million in the year ending March 2019 based on IQVIA data.

Sol-Gel developed the first generic in a co-development licensing deal with Perrigo. In February 2019, the generic was approved and launched. The profit share license with their commercial partner Perrigo generated $14.2 million in revenue for Sol-Gel in the first 2 calendar quarters after launch.

Both case studies are good examples of successful developments of topical generics of products in the United States. Both products were launched some years after patent expiry. Both products have shown strong commercial uptake soon after launch.

I will now hand over to Deborah Ambrosini to discuss the financials for FY19.

Slide 16

Financial Review

Deborah Ambrosini – CFO & Company Secretary

Thanks, Michael.

Good morning.

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Slide 17

I will now focus on providing more detail in relation to the performance for the financial-year ended 30 June 2019.

The results for the financial year are as follows:

• Revenue of $5.3 million, up 54.0%

• Research and Development Investment costs of $10.9 million, up 2.8%

• Net Loss After Tax (NPAT) of $8.3 million down 41.3%

• Basic and diluted loss per share was 5.00 cents

• Cash Reserves at the end of period $18.2 million down 36.2% from 30 June 2018

Total revenue increased in the financial year by $1.85 million. The Group received $2.057 million in relation to the R&D Tax Incentive Rebate from the Australian Taxation Office for the 2018 financial year. A further $2.015 million was accrued for the 2019 financial year which has now been received in full. These amounts have been recorded as grant revenue in the 2019 financial year.

Other income, comprised of interest earned on cash reserves invested and FX gain, contributed $0.6 million for the financial-year.

Royalty revenue declined in the 2019 financial year due to the absence of Axiron revenue, however as Michael stated previously royalty revenue from Lenzetto grew 77% to generate $580,000 in the 2019 financial year. This product continues to build market share in existing regions, specifically in key European markets and via launches in new countries and regions.

This underlying operational performance is reflective of the Group’s expenditure on its generic product pipeline.

Total expenses were comparable year on year, excluding the non-recurring, non-cash impairment cost of $5.6m in the prior year. Within this, the external R&D expenses increased $1m due to contract manufacturing and API procurement for the manufacture of exhibit batches. The increased R&D expenditure was partially offset by the decrease in non-recurring legal expenses associated with Axiron patent appeal litigation.

Slide 18

In relation to cash flow for the financial-year:

Cash received from product agreements was $0.58 million, down 92.7% on prior financialyear in line with expectations after the termination of the Axiron royalty agreement in the prior year.

The group paid $13.23 million to suppliers and employees in the current year reflecting the increased expenditure in the R&D pipeline.

The group received $2.057 million in relation to the R&D tax incentive rebate from the ATO for the 2017/2018 financial year.

As a result, cash reserves at the end of the financial-year were $18.2 million, down 36.2% or $10.3 million from 30 June 2018.

We are comfortable that the Group’s financial position at the end of the financial-year can provide the platform to support our pipeline expansion as we near commercialisation milestones in relation to our research development pipeline.

Now let me hand you back to Michael.

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Slide 19

Thanks Deborah.

Our future catalysts are shown on this slide.

We are approaching commercialisation events for our generic products. This is an exciting time for the company.

That will be characterised by commercial licensing agreements for products within our pipeline and by FDA approval and launches. Revenue for Acrux will be generated from licensing and profit share deals with our commercial partners.

In CY2020, we expect:

• Continued revenue growth of existing on market products

• 4 additional products submitted and accepted for review by the FDA

• Maintain 11 products in active development

• 1 – 3 product licensing deals executed

In CY2021, we expect

• Continued revenue growth of existing on market products

• Cash flow positive by the end of 2021

• Maintain 11 products in active development

• 3 – 7 products under FDA review

• 3 – 5 additional product licensing deals executed

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Slide 20

My final slide is an overview of the Pooled Development Fund and the potential benefits for Australian resident shareholders.

Companies with PDF status are taxed at 15% on their income and capital gains received from their investments.

Australian resident shareholders are exempt from capital gains tax after selling their shares.

Unfranked dividends received by an Australian resident shareholder from the Company will be exempt from tax in the hands of the shareholder.

Franked dividends will also be exempt from tax unless the shareholder elects to treat the franked dividend as taxable.

Shareholders should seek professional advice from their tax advisor regarding Pooled Development Funds and the benefits specifically available to their situation.

On a final note, I would like to thank the Board, the management and leadership team and all of our employees for their focus, effort, hard work and commitment. We have made a great deal of progress since we first started developing topical generics in late 2015 and have positioned the company well for a strong future.

I will now hand over to Ross for the formal part of the meeting.