Q2 Fiscal 2018 Earnings Conference Call

Q2 Fiscal 2018 Earnings Conference Call Thursday, February 8, 2018, 4:30 PM Eastern CORPORATE PARTICIPANTS - Chairman, Chief Executive Officer Bill Cavanagh - Chief Operating Officer, Chief Scientific Officer Mike Krachon - Vice President, Sales and Marketing Stephanie Prince Managing Director, PCG Advisory Group

1 PRESENTATION Good afternoon and welcome to the IsoRay s Second Quarter Fiscal 2018 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today s presentation there will be an opportunity to ask questions. To ask a question, you may press *, then 1 on your telephone keypad. Please note, this event is being recorded. I would now like to turn the conference over to Stephanie Prince of PCG. Please go ahead. Stephanie Prince Thank you, Chad. Good afternoon everyone and welcome to the IsoRay Second Quarter Fiscal 2018 Earnings Conference Call. With me on the call today are, Chairman and CEO; Bill Cavanagh, COO and Chief Scientific Officer; and Mike Krachon, VP of Sales and Marketing. IsoRay issued its second quarter earnings press release at 4:05 PM today after the market closed. For those of you who have not yet seen the release, it is available on the investor relations section of the company s website at isoray.com. Before turning the call to management, I would like to remind you that today s call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These words include: such as, believe, expect, anticipate, plans, project, seeks, and other similar expressions and involve numerous risks and uncertainties. The company s actual results could differ materially from those anticipated or implied as a result of certain factors set forth in the company s filings with the SEC. The company undertakes no obligation to update any forward-looking statements. With that, I d now like to turn the call over to. Tom. Thank you, Stephanie, and good afternoon everyone. Welcome to IsoRay s Second Quarter Earnings Conference Call. I will begin the call with an overview of our second quarter results and discuss some developments that occurred during the quarter. I will then turn the call over to Michael Krachon, our VP of Sales and Marketing. Mike will talk about the drivers of our sales gains and the increasing traction of our new sales and marketing initiatives. I will end the call with a discussion of our second quarter results, operating initiatives, and guidance before opening it up for questions. IsoRay had a great second quarter. Revenues were up 50% over last year's second quarter and 27% over the first quarter. This is the fourth consecutive quarter of increasing year-overyear sales and we believe it confirms our upward trend. Second quarter revenue of $1.54 million follows revenue of $1.2 million in the first quarter and $1.28 million and $1.37 million in the third and fourth quarters of fiscal 2017, respectively. Twelve months trailing revenue is now $5.4 million. This is the first time we've crossed the $5 million mark since 2012.

2 Sales were driven by expanding usage of Cesium-131 by existing and returning physicians. We've also been adding new doctors to our customer list as they go through the process of training and licensing of new facilities. Mike is going to go into more details in a few minutes, but we are pleased with the progress we've made over the last 18 months through focused execution of our two-pronged growth strategy. Our strategy is focused on revitalizing the prostate brachytherapy market through investment and support for the industry and promoting development of our new surgical applications. As a reminder, IsoRay is the exclusive producer of Cesium-131, which we believe is the next generation brachytherapy isotope. In its simplest form Cesium-131 provides faster delivery of its radiation dose than other existing permanently implanted isotopes, while providing a broader distribution of the energy. This delivers what we consider the Goldilocks effect for treatment delivery: Quick energy with even dose across a very targeted area. We see Cesium-131 as a potentially disruptive alternative to the global radiation therapy market, which is projected to reach $9.3 billion by the year 2024. Two recent publications in particular highlight the long-term efficacy and safety of the procedure. These include the Chicago Prostate data, demonstrating long-term nine-year outcomes with comparative disease control for Cesium-131 and Iodine-125. And the Benoit data from the University of Pittsburgh Medical Center, or UPMC, showing the positive side effect profile following implant with Cesium-131, including a rapid recovery and sustained quality of life. The UPMC study was published in the International Journal of Radiation Oncology, also known as the Red Journal, which is the definitive journal for radiation oncologists. Last spring there were two other studies published in the Red Journal that highlighted the unique qualities and positive outcomes from the use of Cesium-131. This includes a study done by Dr. Jonathan Feddock at the University of Kentucky, demonstrating positive results from a gynecological procedure that for the first time provides a viable alternative to complete exoneration, or removal, of all pelvic organs. Also published was a study conducted by Weill Cornell with long-term data on large brain metastases using Cesium-131 that demonstrated high rates of tumor control. Cesium-131 s unique ability to deliver a highly targeted dose of intense radiation therapy, while limiting the radiation exposure to surrounding tissue is well suited for brain cancer therapy. A lot of progress has been made in this area with the Weill Cornell method, as well as the GammaTile approach As you may remember, we have a collaborative development agreement with GammaTile, who have IP in place and has made multiple poster presentations on their alternative method and delivery system for utilizing Cesium-131 to treat brain tumors. The GammaTile system uses FDA-approved collagen tiles and embeds them with Cesium-131 seeds. Over a hundred patients have already been treated as part of an IRB study at the Barrow's Neurological Institute.

3 As part of our agreement, we are equally sharing costs as we collaborate on refining GammaTile s manufacturing process. We are also working together to achieve 510(k) regulatory clearance and obtain reimbursement from the centers for Medicare and Medicaid Services, or CMS. During the quarter we signed a ten-year exclusive manufacturing agreement with GT Technologies, the producer of GammaTile, which is an important step on the path to commercialization. As we previously discussed, we project potential 510(k) clearance and reimbursement approval of the GammaTile product in mid-calendar 2018. Upon FDA clearance, this will be an important new treatment option for the over 50,000 patients with recurrent brain tumors, a large unmet clinical need. We are also excited about the results from the study published on January 16 th, in the open access journal, Cureus, comparing the use of Cesium-131 and Iodine-125 in the treatment of brain metastases. The authors from the University of California, San Francisco, show that the short half-life of Cesium-131, as compared to Iodine-125, has a beneficial impact on dosing the resection cavity left after surgery, basically because the surgical cavity is shrinking with time, so the faster you get that dose deposited, the better. To sum up before turning the call over to Mike, we are working to advance what we believe are significant opportunities in four major markets: prostate cancer, brain, gynecological and head and neck cancers. Together, these represent an annual addressable market for Cesium-131 of approximately $700 million. I'll now turn the call over to Mike to discuss our sales drivers. Mike? Mike Krachon Thank you, Tom. I am excited to share the progress that we have made in the last quarter as we continue to build and strengthen the foundation that will allow us to realize sustainable sales and revenue growth. Over the past quarter, we have continued to turn our trajectory, gaining traction with increased volumes in existing accounts and making continued progress in our account targeting in the development of new accounts. This progress comes within the framework of our two-pronged growth strategy. The first prong is focused on the prostate cancer market, which is the largest current outlet for permanent brachytherapy seeds and provides IsoRay Medical an opportunity to gain share and grow revenue. We estimate the potential of the prostate market at current domestic Cesium-131 market prices to be over $100 million. The second prong is to focus on developing the market and strengthening our primary relationships with key opinion leaders for the other surgical applications of Cesium-131, primarily brain, gynecological, and head and neck. We believe we are continuing to make progress in both of these areas.

4 I will now discuss these strategies and our progress in more detail. In the prostate cancer market, our revamped sales continue to gain traction with our existing and target customers. Over the recent quarter we continued to see the impact of the multiple positive studies on prostate brachytherapy and Cesium-131, as over 80% of existing customers showed year-overyear revenue growth. In addition, we have also seen results on the back-end of the sales cycle as we have gained a number of new customers. We are continuing to build our pipeline of new customers and explore ways to shorten the sales cycle. One of the key factors for the growth this past quarter was the volume growth in some of our key base accounts. We attribute this organic growth in base customers to both our increased presence in these accounts, as well as positive results of the ASCENDE-RT study published by Dr. Morris and his team this past year. As you may remember, this study demonstrated the beneficial impact on patients of using combination therapy, which includes brachytherapy and external radiation for higher-risk prostate cancer patients. We are working to share these beneficial outcomes for high risk patients to additional referring physicians, physicians who otherwise may not be aware of the data. Further, our awareness and social media efforts to share the benefits of brachytherapy and Cesium-131 are also beginning to make an impact. In the past year, our web traffic and social media footprint has expanded significantly leading to increased awareness of our therapies and of our products. In the coming months we expect to accelerate these efforts with a dedicated awareness campaign for the urology community. This group remains a gatekeeper for many prostate cancer patients, and in our experience, they ve had limited exposure to Cesium-131. We believe this next generation isotope, with the support of the ASCENDE-RT study and other clinical publications, will generate an opportunity for us to reengage with the urology community. In recent meetings we have been encouraged by the reception of urologists to brachytherapy, and specifically to Cesium-131, as a treatment option for high-risk patients, as well as, an alternative for patients seeking targeted therapy, an area where urologists have multiple treatment options available. Urologists are interested in the shorter half life of Cesium-131 and how it can positively impact their patients. We will continue to keep you informed as we work to implement these programs. With the second prong of our strategic plan, we have worked on the foundational relationships for using Cesium-131 for other cancers. To that end, we are working with key opinion leaders, or KOLs, about the use of Cesium-131 for these patients as they continue to publish and grow the literature surrounding these treatment options. We are using upcoming medical society meetings to bring these KOLs and a few targeted account opportunities together to help further their awareness of our product options and discuss the increased adoption of these procedures.

5 Overall, we are very excited about the progress that we have made over the last quarter, but recognize we have to continue to stay focused on our strategies and our customers. We believe the outlook for the prostate cancer market is improving. Brachytherapy continues to demonstrate valuable clinical benefit to patients, which in combination with the established cost effective position of brachytherapy, is increasing its visibility as a treatment for localized prostate cancer. In other markets we are just beginning to create awareness about the clinical benefits of Cesium-131.Medical centers who have experience with the product are expanding their utilization (Non-prostate applications grew at the same rate as prostate applications this past quarter). And we are working to expand the number of centers with experience. All of this is supported by a strong series of articles and peer-reviewed journals that enable the sales team to increase their value conversations with our customers. As we mentioned last quarter, the sales cycle for brachytherapy therapy is long, six to twelve months in some cases. With our sales team tenure maturing, we are in a position where we expect to increasingly realize the impact from their efforts in the coming months. I look forward to sharing more exciting news about our successes in future calls. Thank you. I now like to turn the call back to Tom. Tom? Alright thanks, Mike. I would now like to provide a little more color on our financial results. As I mentioned earlier, we reported sales of $1.54 million for the second quarter, a 50% increase and the fourth consecutive quarter of year-over-year revenue increases, which we believe confirms the upward trend. Prostate brachytherapy represented 86% of the total revenue for both second quarter periods. In the context of the 50% revenue increase, as Mike noted, this means that revenue from the other cancer treatment areas also increased 50% in the quarter. Gross profit continues to benefit from the automation and operating efficiencies we've introduced. For the quarter, gross profit reached $0.53 million compared to a small loss a year ago and about double the first quarter gross profit. The gross profit percentage was 35% for the second quarter. These automation and efficiency programs are ongoing and we expect additional, sustainable improvements going forward on our gross profit margins. Since becoming CEO approximately two years ago, we've invested an additional $2 million in sales and marketing and research and development, including the collaborative development agreement with GT Technologies. We see these investments as the key to our future success and we believe that we are just beginning to realize returns on these investments. Operating costs for the second quarter were $2 million and included increases of 127% in R&D and 36% in sales and marketing, reflecting our ongoing investment in these areas. The large sales increase also triggered higher share-based compensation and bonus expense, contributing to the 12% rise in G&A expenses.

6 At December 31 st, IsoRay had cash on hand of approximately $6 million and stockholder equity of $7.9 million. We are reviewing our long-term sources of capital and we believe we have several options for raising capital going forward. We do expect our financial results to continue to improve and our outlook for fiscal 2018 ending next June 30, remains the same. We expect revenue growth of at least 20%, which is approximately $5.8 million for the full twelve months of fiscal 2018. We expect revenue to progressively accelerate through the balance of the year as current accounts continue to grow and we add new accounts. Supported by the operating efficiencies I mentioned, we will look for increased operating leverage from this expanding sales base. In closing, over the last 18 months IsoRay has reversed its revenue trend, contained its manufacturing costs and has put in place a strong foundation and infrastructure to support the growth we foresee. We remain committed to our two-pronged strategy focused on growing the prostate business, the most established and largest market for Cesium-131, and investing in the development of new applications in areas such as brain, gynecological, and head and neck cancers. Cesium- 131 s unique qualities have begun to be recognized. And with multiple studies in process on multiple cancers, we're confident about IsoRay s outlook for future growth. Thank you for joining us today. I'd now like to open the call for questions. QUESTION AND ANWSER Thank you. We will now begin the question-and-answer session. To ask a question you may press *, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys, to withdraw your question please press *, then 2. At this time we will pause momentarily to assemble our roster. The first question will come from Jason Kolbert with Maxim Group. Please go ahead. Jason McCarthy Hi guys, it s Jason McCarthy for Jason Kolbert. Congratulations on a great quarter and all the growth. A couple of questions, first in the prostate market, you had mentioned that some returning or maybe the majority of returning physicians are using brachytherapy combined with external beam radiation therapy. Can you discuss how much Cesium-131 is going towards that type of indication versus your standard brachytherapy implantable seed? And which arm, if you would, would you expect to grow more as we head through 2018? Hi Jason. The combination therapy in the ASCENDE-RT trial is primarily targeting the intermediate-to-high-risk patient pool. We estimate that that target is about 15% to 20% of prostate cancer treatment in the market. In general, brachytherapy accounts for about 25% of the United States market or about 25,000 patients, and it's really pretty much been distributed across most of the risk groups. So when looking forward, as the ASCENDE trial gains more traction and as the industry accepts its data, we expect that the high-risk patient pool could amount to somewhere between 15,000 and 20,000 patients a year. And that patient pool could

7 be a significant number using brachytherapy. Looking forward, we expect a good amount of growth to come from this intermediate to high-risk patient because of that new clinical activity. Jason McCarthy Okay, great. And just on GammaTile, can you give us a little bit more color on what, if any, steps remain for the 510(k) clearance, the expected timing of commercial launch, I heard some time in 2018. Maybe you can just give a little bit more clarity on what we could expect from that product? Yes, we've stated that we have to go through additional testing before being granted 510(k) clearance. The FDA has required us to conduct bio-compatibility testing and the testing of animals. We started those tests in November and expect they will take three-to-four months to complete. Final results will start coming out in April and May and will be sent to the FDA in that timeframe. The expectation is that we ll receive notice from the FDA in the first half of 2018, or soon after in the summer. We're also working at the same time on reimbursement with CMS through an NTAP application. So the timing of both - reimbursement and FDA clearance - are expected in mid-2018. If both of those of objectives are achieved, we expect commercial launch to happen pretty quickly thereafter, or in the last half of calendar 2018, which is mid-fiscal 2019 for IsoRay. Jason McCarthy Okay. And just a follow-up for GammaTile in brain cancer setting, have sales have some of the salesforce been contacting physicians who are using something like the collagen wafer or who are familiar with this type of technology, that would be key to get KOLs to adopt GammaTile once it s approved. We actually have had patients using Cesium-131 through the Cornell method for the last eight or ten years. Cornell uses a sutured seed to apply Cesium in the brain cavity. Over the last five or six years, we have been working with our sales team and contacting a number of KOLs on the treatment of brain cancer, so we feel that we already have a pretty good sized customer base that utilizes Cesium-131 in the brain. Now with GammaTile, what that product does is improve the process. The Cornell method takes somewhere between 30 minutes and 45 minutes to apply at the end of surgery. The GammaTile method using the collagen tile embedded with Cesium-131 is actually done in approximately ten minutes. The collagen tile provides structure, spacing, and shielding. The uniqueness of GammaTile is that it takes the other process, improves it, and makes it faster. And again, the GammaTile guys have three or four years of clinical activity now and they've presented multiple times. I believe that we've done a nice job already in getting to a number of the top KOLs in the neurological space, so we believe that the launch should be well accepted. Jason McCarthy Great, thank you for taking my questions guys. Okay.

8 Again, if you would like to ask a question, please press *, then 1. The next question comes from Tony Carrom, a Private Investor. Please go ahead. Tony Carrom Hi gentleman, great results on the quarter. It s good to see the growth. Basically my question is a financial question. With roughly $6 million left for operations, when do you anticipate making a decision on what we are going to do to gain capital for future operations? Tony, our anticipation, and we've stated this in our releases, is that in the next three-to-six months, we will be looking at potentially all of our capital raising options. So we will make a decision at some point in the next three to six months on that. Tony Carrom Okay, great. One follow-up question as well, any opportunity to partner up with GammaTile almost like a type of merger or anything like, is that something that's a possibility? You know, that's probably something that we can t make a comment on right now. Our current relationship is we have a collaborative agreement with them sharing the development of FDA 510(k) clearance and reimbursement. We just signed a ten-year exclusive manufacturing agreement. Also the GammaTile, or GT Technologies Group, actually has actually just gone through a capital raise and they are hiring staff. They've raised $2 million in the private market and are looking at increasing their staffing in clinical activity. Tony Carrom Excellent. Thanks, guys. Once again, if you would like to ask a question, please press *, then 1. A final reminder, if you would like to ask a question, please press *, then 1. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to for any closing remarks. CONCLUSION Thank you for joining us on our second quarter conference call. We are very excited about the changes that we have brought to IsoRay over the last 18 months. And we believe we are on a path that will result in continued growth and success. We look forward to speaking with you again for our third quarterly conference call in May. Have a good night and thank you very much. Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.