Cambrex Corporation Q3 2008 Earnings Call Transcript

Executives

Gregory Sargen – VP and CFO

Steven Klosk – President and CEO

Analysts

Michael Sison – KeyBanc Capital Markets

Jonathan Grassi – Longbow Research

Dan Leonard – First Analysis Securities

Ted Hillenmeyer – Northstar Partners

Cambrex Corporation (CBM) Q3 2008 Earnings Call Transcript November 5, 2008 8:30 AM ET

Operator

Good morning. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome you to the Cambrex Third Quarter Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions).

Mr. Sargen, you may begin your conference.

Gregory Sargen

Thank you, Janice, and good morning, everybody. Welcome to Cambrex's Third Quarter 2008 Earnings Conference Call. My name is Greg Sargen, and I am the CFO of Cambrex.

Before we begin I will provide the following customary Safe Harbor comments regarding forward-looking statements. Today's discussion will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and Rule 3B6 under the Securities Exchange Act of 1934.

These statements may be identified by the words such as “expects,” “anticipates,” “intends,” “estimates,” “believes,” or similar expressions are used in connection with any discussion of future financial and operating performance. These statements are based on Cambrex's current plans and expectations, and involve risks and uncertainties that could cause actual outcomes and results to materially differ from those included in the forward-looking statements.

For further information please refer to our reports and filings with the SEC. Yesterday's release includes tables reconciling non-GAAP amount to GAAP amounts. Management believes that the adjusted amounts provide a more meaningful representation of the company's operating results for the periods due to the magnitude and nature of certain expenses recorded.

This conference call will last approximately 45 minutes. A replay of the call will be available shortly after we end today through next Wednesday, November 12th, by calling 1-800-642-1687 domestically and 706-645-9291 internationally. Please use the conference ID number reference 68710081 to access the replay. A webcast will also be available on the Investor Relations section of the Cambrex Web site, located at www.cambrex.com and can be accessed for approximately a month following the call.

Today's call will begin with a business review by Steve Klosk, our President and CEO. I will follow Steve with a few comments on our third quarter and full year guidance, before opening up the call for Q&A.

With that, it is my pleasure to introduce Steve Klosk. Steve?

Steven Klosk

Thank you, Greg. And good morning ladies and gentlemen. I will begin today's call with an overview of our third quarter 2008 performance, followed by commentary on key aspects of our business looking forward.

Our reported sales increased 3.2% compared to the third quarter last year. And we are down 1.7% after adjusting for the effects of foreign currency. The currency adjusted decrease was mainly due to lower sales in our custom development projects, and lower volumes of certain proprietary products, both likely impacted by recent market conditions.

We also continue to experience the impact of a contractual price decline on our largest API, and lower sales in our feed additives business due to our decision about a year ago to exit that business. Partially offsetting these declines were continued strong sales of DEA-controlled substances, one of our key focus areas, and increases in other generic API.

Gross margins for the quarter were 29% versus 34% in the third quarter of 2007. Currency favorably impacted gross margins by 2.9 percentage points. The decrease was due to lower pricing on our largest API, negative mix, higher costs as a result of the validation of our new facility near Milan, and higher raw material costs. Increased sales of higher margin controlled substances in the United States partially offset the decline.

The increased validation costs in Milan will continue into the fourth quarter, but will taper off as the year comes to a close. Higher worldwide commodity prices have steadily driven raw material costs up throughout 2008. If there is an upside to the economic downturn, it will hopefully be that cost pressures due to rising commodity prices abate.

Adjusted EBITDA increased to $11.4 million versus $9.7 million in the same quarter last year. Driven by reductions in selling, general and administrative expenses, research and development efficiencies gained from the consolidation of our New Jersey Technical Center into our Iowa facility and corporate spending reductions.

Adjusted EBITDA before corporate expenses was $13.7 million flat compared to the same quarter last year. As Greg mentioned earlier, there is a table at the end of yesterday's release that reconciles non-GAAP amounts back to reported results.

Corporate spending for the quarter before certain expenses identified in the tables in yesterday's release was $2.3 million, compared to $4 million for the third quarter last year. The reduction in corporate expenses is due to benefits from our recent corporate restructuring, tight controls over discretionary spending, and reductions in bonus accruals.

Greg will discuss later some initiatives that we are putting in place to continue to aggressively reduce costs, and to improve cash flows throughout our business.

Now I would like to talk about a few of our key operating initiatives. I would first like to discuss our custom development pipeline, which we define as clinical and preclinical phase projects. We generated revenue from over 80 distinct projects in 2007 and expect to work on a similar number of projects in 2008.

During the first half of 2008, we received a record number of requests for proposals in the United States, and had seen a decline in proposals from our key accounts in Europe. The current feedback from our sales teams and their recent meetings with numerous current and potential customers, and public comments that our competitors are currently making, confirm that the market for early stage clinical development projects is softening. This is especially true of emerging biotech companies and our large pharma customers in Europe.

For big pharma, this is due to cost containment programs and a continuous review of their R&D pipeline. The smaller companies appear to be to focusing on fewer projects, often their lead compounds in late-stage clinical trials, in order to preserve funds in a tight capital market. As a result, there are fewer new projects coming into the market, and in some cases, delays or deferrals of existing projects, both of which impacted our third quarter results.

These early stage projects are labor-intensive and highly competitive. And as such they tend to have low margins, since much of our cost structure is fixed in any short time period, we will closely monitor our incoming business levels, in order to better manage resource levels as we assess the extent and duration of the current market slowdown.

Our pipeline of 15 Phase III projects remains firm, and we continue to expect a number of these products to be approved, and result in long-term commercial supply agreements for Cambrex.

We believe a few of these products, if approved, will eventually result in between $5 million and $10 million in annual revenues per product, and in some cases potentially larger amounts. In addition, we are focusing on developing more efficient processes for several late-stage and commercial products. Utilizing proprietary process chemistry to gain a supply position where Cambrex is not already a supplier.

In these instances we have an existing relationship with the customer that enables us to review our process chemistry improvements with them, and potentially gain a position as a new supplier. Consistent with this approach, our strategic positioning going forward with respect to custom development projects will be to focus on later stage projects to which we can apply specific know-how or patented intellectual property to develop superior synthetic chemical routes and processes, that are not easily replicated by our competitors. This will improve our success rate, and minimize time spent on smaller, less profitable projects, and create greater value for our customers and Cambrex.

Just as importantly, building out our custom development pipeline, and successfully completing numerous projects over the past years, has led to the development of capabilities and competencies that we are utilizing in the development of our portfolio of proprietary products.

We are continually identifying and pursuing the development of new proprietary technologies to build on our existing platforms in the areas of high potency compounds, controlled substances, enzymes and biocatalysis, continuous process manufacturing, polymeric drug delivery and taste masking.

Next I would like to talk about our generic API and controlled substances products. Our approach to the generic API market continues to be one focused on niche products that take advantage of our multi-purpose rapid turnaround flexible manufacturing capabilities.

Our generics business had a good third quarter, helped by continued expansion into new geographic markets and product supplements for customers where we previously had no supply position.

We continue to focus on finishing the validation of our new facility near Milan, Italy, and have already received regulatory approval to begin manufacturing certain product in the plant. We are now focused on increasing volumes within the new capacity. Our global sales forces, including those focused on innovator companies are being utilized to fill this new capacity.

The continued increase in generic prescriptions in the United States, Europe, and emerging markets and the continued governmental emphasis on reducing healthcare costs should help grow this business along with planned new product launches.

Our new product development pipeline is significant with over a dozen products planned for launch. The first in 2009 and ramping up in 2010, 2011, and beyond.

Closely tied to our generic API business, but a separate initiatives in and of itself, due to what we believe are compelling market dynamics is our strong and growing franchise in DEA-controlled substances. The controlled substances market in the United States is far and away the most significant controlled substance market in the world.

It is dominated by a small handful of domestic players that have been licensed by the DEA to produce or sell these substances and whom have little or no competition from foreign manufacturers, due to DEA requirements.

Cambrex is one of the few companies approved to produce a wide range of APIs for sale to end marketers. Last year we sold approximately $12 million worth of controlled substances and we expect to sell over $19 million this year.

Our current products are focused on the attention deficit and hyperactivity disorder market and pain management. Pain management is a key therapeutic growth area and we are developing more products into the market.

As our recently hired global business champion oversees the development of new targeted compounds, and coordinates activities with our drug delivery and generic API teams, we will gain more insight into the timelines by which we think we can generate more significant growth in this area. And we will keep you appraised of our progress.

We continue to pursue new products and opportunities in the over-the-counter, generic, and prescription drug market segments, utilizing our proprietary polymeric drug delivery technology, which encompasses taste masking, modification of drug release profiles, and improved drug stability. Sales of some of these products were down in the quarter compared to last year.

Certain products, primarily our smoking cessation products are down year-over-year, which may be due to softer consumer demand, while another key product line was negatively impacted by heightened FDA regulation of certain over-the-counter pediatric products.

Our technology platform is suitable for oral dissolving tablets, oral thin film, gums, and liquid suspension, and it is compatible with a large number of APIs. Our focus is on expanding the base of products and revenues within the segment of our business, which should provide the critical mass necessary to offset volatility in any one or two products.

Our pipeline of new products continues to look strong with over a dozen new technology enhanced APIs in our development pipeline. The pipeline of new products consists of a mix of customer-driven initiatives, involving new drug formulation and lifecycle extensions as well as Cambrex proprietary R&D for new drug delivery systems.

We remain optimistic that we will be able to introduce at least three new commercial products in the next 12 months to 18 months, with two of these products already in the process of being qualified by one of our large customers.

Two of these new products have the potential to generate a significant increase in revenues for our drug delivery business and to create a geographic expansion of this strategic initiative beyond our currently served markets.

I would like to close with a few comments on capital. We expect to begin the initial qualification of our new mid-scale manufacturing facility in Karlskoga, Sweden in the first quarter of 2009, followed by qualifying the first API soon thereafter. This facility will be used to produce a number of the Phase III products that we hope will be approved in 2009 and beyond.

We are now fully operational on our new high potency development center in Charles City, Iowa, where we have built additional laboratories to handle highly potent compounds, requiring specialized containment. This investment supports the growing demand for APIs for new oncologics and other cytotoxic compounds.

Cambrex has spent a considerable amount of capital in the past three years to expand our capabilities and capacity, to accommodate the growth of our small molecule businesses. We are focused on filling this capacity and expect to significantly reduce the rate of capital spend going forward, which will positively impact our cash generation.

In conclusion, I am very optimistic about our ability to grow our business in each of our key strategic initiatives. I look forward to discussing our progress in future calls.

I will now turn the call over to Greg.

Gregory Sargen

Thanks, Steve. I would like to add a few comments on the third quarter financial performance. I will then briefly comment on 2008 guidance, and then open we'll open it up to questions.

I would first like to briefly describe the restructuring expenses and strategic alternative cost lines in our income statement. Restructuring expenses in the third quarter of 2008 consisted of a charge for the lease, and other costs associated with the consolidation of our New Jersey Technical Center activities into our Charles City, Iowa facility, and the resulting shutdown of the New Jersey facility, and some remaining charges related to our corporate restructuring.

We are attempting to sublease the New Jersey facility, for which we have 2.25 years remaining on the lease, at an expense of approximately $1.4 million per year. Depending on the success of our subleasing efforts, additional lease expense may be recognized as restructuring expense in future periods.

Strategic alternative costs in the third quarter consisted primarily of external advisory expenses related to a project to streamline our legal entity structure pursuant to the sale of the bio businesses in 2007. We completed this project during the third quarter.

This new structure will result in annual cost savings of approximately $300,000 per year and will reduce tax expense in 2008 by approximately $1 million. Unfortunately, the Swedish tax authorities recently implemented a measure that eliminates most of the previously anticipated tax savings beyond 2008.

The company ended the quarter with debt net of cash of $92 million, an increase of $500,000 from the last quarter. Net of the impact of a stronger dollar on foreign cash balances, debt net of cash would have improved by $2.6 million. We continue to expect debt net of cash to be between $95 million and $100 million at the end of the year.

Given the current economic conditions and the general uncertainty as to how long the credit markets will remain tight, we are fortunate to have significant capital projects behind us, and to have almost 3.5 years remaining on credit facility, which along with cash flows from operations, should provide ample access to capital to execute our strategy. We expect to have between $70 million and $80 million of availability on our credit line at the end of 2008.

Cambrex had net interest expense of $1 million for the quarter versus $1.1 million in the same quarter last year. The company capitalized $500,000 of interest into long-term capital projects during the third quarter and $1.8 million year-to-date. Income tax expense for the third quarter of 2008 was $300,000, resulting in an effective rate of 10% for the quarter.

The quarter benefited from the favorable resolution of a couple of tax matters reducing the quarterly tax expense by approximately $1.5 million. The year-to-date rate is 40%, but excluding the impact of the year-to-date net benefit from favorable reserve adjustments, it would be 49%. As we do not recognize tax benefits for losses in jurisdictions, including the U.S., our effective tax rate has been and will continue to be volatile due to shifts in the geographic mix of income from one period to the next.

Now I would like to discuss guidance for 2008. Within our second quarter announcement we indicated that 2008 sales would likely be flat on a currency adjusted basis, and that we expected to finish the year at the low end of our full-year adjusted EBITDA guidance, which was $53 million at that time. After reviewing updated project timelines and expected shipments through the end of 2008 we now expect a sales decline of between 3% and 5% net of the impact of currency.

Given the recent volatility and currency exchange rates, we are not attempting to provide a range for reported sales. As Steve discussed earlier, we are seeing delays in certain development projects and reduced volumes for certain commercial products, including those in the smoking cessation and pediatric cough and cold markets.

Year-to-date net of the impact of currency, sales are 5.4% below the prior year. Due to this expected reduction in full-year revenues with a partial offset for expected lower operating expenses, we now expect adjusted EBITDA of $50 million to $53 million for 2008.

Restructuring and strategic alternative expenses are expected to be approximately $3.8 million for the full year, primarily related to the closure of a New Jersey R&D facility that we announced during the fourth quarter of 2007, and costs to complete the project to improve our legal entity structure.

The increase from prior guidance is related to higher than expected spending on the legal entity restructuring project and expected charges related to additional cost reductions at the corporate headquarters to be implemented during the fourth quarter. The tax benefits to 2008 from the legal entity project exceeded our expectations, such that the project will have paid for itself by the end of 2008.

For 2008, capital expenditures are expected to be $32 million to $34 million, a $1 million reduction from prior guidance due primarily to changes in currency exchange rates.

The company has recently kicked off a series of initiatives aimed at increasing our operating efficiency and optimizing costs. In addition to ongoing Six Sigma and continuous improvement programs at our manufacturing sites, which have resulted in a little over $3 million in cost improvements during 2008, we recently kicked off two initiatives aimed at better coordinating our worldwide sourcing activities and more effectively managing our working capital. We expect these programs to drive further cost reductions and better cash flow throughout our operations, while our key revenue generating initiatives gain traction.

I will wrap up with a few comments on corporate headquarter spending. Coming into the year we expected to spend a little over $16 million in 2008. We reduced this number as the year has progressed, and are now reducing our full year expectation to between $12 million and $13 million. Further cost reduction activities set in motion during October, reductions in full year 2008 bonus accruals, and tight controls over discretionary spending, combine to account for the expected approval [ph].

I would now like to open up the call for questions. Janice?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from the line of Mike Sison of Keybanc.

Michael Sison - KeyBanc Capital Markets

Hi, guys.

Gregory Sargen

Hi, Mike.

Michael Sison - KeyBanc Capital Markets

Nice quarter there in difficult times. Question on demand. You have talked about some of your customers early stage seeing some sluggish demand here. What tends to happen? It clearly looks like the U.S. and Europe are heading into recessionary conditions. Do you expect that part of the business to decline heading into 2009?

Steven Klosk

Mike, this is Steve. I think what we are seeing bolt-in big pharma, and what we would call small biotech as I indicated in my comments is a delay or deferring of early stage projects, sort of for different reasons. As we said, if you are relatively small biotech company, you are dealing perhaps with cash burn, you're looking at capital markets that are obviously tight. They're focusing – we're seeing them focus more on, and maybe even trying to accelerate those Phase III late clinical phase products. So that might be Phase II, IIb, Phase III. That's sort of the good news. The negative news is that they're saying we are going to put on hold for a bit preclinical work for Phase I. For us, we don't really do a lot, as you know, or even focus on preclinical work. I would describe that as CRO like work. But we did see, and we are seeing a slowdown in clinical Phase I, and as you know in clinical development pipelines, there are more compounds in Phase I than anything else. So that piece of the business I am going to guess is likely going to continue to decline in 2009 and there will be a greater priority on later stage projects to kind of make up for that.

Michael Sison - KeyBanc Capital Markets

Okay. Then you talked about the new projects actually coming on stream next year in controlled substances, good pipeline in generics. So when you think of customer development, I am sure you are working through your plans now, but is there enough in terms of new projects, maybe you have some business scaled up for the new capacity in Milan as well as Sweden to generate some growth heading into '09?

Gregory Sargen

We sure hope so. We have the capacity there and that capacity in Europe is just recently starting to come on line, and the capacity in Sweden is really there designed to take the capacity that comes out of our Phase III pipeline and also to fill up – it was also designed to incorporate growth from our large neurological, which we know has had some setbacks. So we will do everything we can to kind of fill that gap. And as Steve said, our entire sales force is focused on filling capacity, irrespective of whether it's kind of in our traditional generic manufacturing facility or our innovator manufacturing facilities so.

Michael Sison - KeyBanc Capital Markets

If you think about that backlog, does it support a certain amount of growth irregardless of what else might happen in other areas of your business?

Gregory Sargen

Well, if you look at the backlog on the generic side, it's really kind of a 90-day to 120-day backlog at any point in time, because there are no long-term supply agreements there. It's all PO based. On the custom development side, which want to guess you can look at – depending on how far you go back to the pipeline if you look at proposals it's a matter of how many we win, what the size of those projects we win, and when you win a proposal, the immediate or near-term revenues tend not to be all that significant until you get into the later stages of clinical development. Steve talked about customers kind of delaying and being more selective about which molecules they choose to advance. We like to think and hope that those molecules that we have in Phase II or Phase III are the molecules that these guys push and that we continue to win business there, but I mean, it's kind of hard to say at this point.

Steven Klosk

Mike, the only thing I would add to your question is obviously, we are hoping for and planning on significant growth from that portfolio of Phase III compounds. So it's really going to come down to the timing of those. As you know, sort of after you have produced Phase III material, you are kind of in this waiting period as they have done their NDA filing, so it's when do they get approved, when do they start to want stock to deal with the launch, and so, that's really the timing issue, as you look at '09, '10.

Gregory Sargen

And which ones win. Which ones get the approval?

Steven Klosk

Of course, we discount, we don't expect all 15 to get approved. And I think everyone knows the statistics would say maybe approximately 70% of Phase III small molecule compounds will get approved. You've heard me say that Greg and I are pretty conservative and we are taking a look at saying let's say only 50% get approved. Of course, it's figuring out which of those 50% will happen, some of which we know would be larger supply agreements for us versus others.

Michael Sison - KeyBanc Capital Markets

Right. And then last question, Steve. When you take a look at the gross margin over the years, it sort of has been on a steady decline. What do you think needs to happen here to sort of at least stabilize the near-term, and potentially sort of move it back in the right direction?

Steven Klosk

Well, I mean, that's an area of the business that Greg and I are particularly focused on, because we are aware of that erosion over the last, let's say, three years to five years. So I think the sort of three things or four things that we see as giving us the possibility to kind of stabilize that and then looking over the longer term, start to see those margins go up. I mean, number one, we've had our largest API, which is gastrointestinal API, has hurt us, in terms of pricing over the last couple years. That's going to flatten out a bit as we go forward for the rest of that contract.

We do hope that our neurological API, when that gets back on track, will, in essence, offset kind of those declines, because, as you know, it uses our proprietary technology, it gives us a good margin, and we hope we will get large volumes out of that product as it comes back on to the market. Next, we are looking at mix, and I think the three areas that we see that will help mix will be the controlled substances, where we get high margins on most of those products. On our drug delivery products, where on certain segments of that business we get very high margins, and we need to grow both of those businesses.

And then frankly, on the Phase IIIs where we hope again we will enter into long-term supply agreements, we can kind of lock in that pricing, and then frankly work on Six Sigma and other things to reduce costs to enhance those gross margins. And generally, as you know, new product margins are better than older products that tend to erode.

The last piece, which has hurt us over the last few years, is sort of the erosion of margins in generic products. And there we are hoping that new products that we begin to launch in '09, '10, and '11 are going to at least cover what a sort of 2% to 3% steady decline in prices on older generic APIs. So that's kind of – as Greg and I step back and look at the business that's where we see momentum on gross margins.

Michael Sison - KeyBanc Capital Markets

Great. Thank you.

Gregory Sargen

Thanks Mike.

Operator

Your next question comes from the line of Dmitry Silversteyn of Longbow Research.

Steven Klosk

Hi, Dmitry.

Jonathan Grassi - Longbow Research

Hello, this is Jonathan Grassi, sitting in for Dmitry.

Steven Klosk

Hello, Jonathan.

Gregory Sargen

Hi, Jonathan

Jonathan Grassi - Longbow Research

I guess just look at FX that – can you comment on what FX – telling you see from FX so far in 2008, what type of impact it's had on your operating profitability? And looking out to 4Q and 2009, are you expecting any significant change in revenue mix that would increase or decrease the impact on FX on the operating profitability?

Gregory Sargen

The year-to-date impact on OP has been about 900,000 favorable all in. So it's not a huge effect year-to-date. And that's both kind of the impact of the contracts we put into hedge and the actual translation impact. About two-thirds of our business is overseas. We tend not to end up with large FX impacts at the operating profit level in terms of dollars, because of the nature of the mix of those revenues about half of our – the primary facilities are in Italy and Sweden, and the Italian entity has all of its expenses in euros, and half of its revenues in dollars, and the Swedish entity has half of its revenues in euros, and half of its revenue in SEC. And when we translate all that and put kind of hedging position in place, more often than not any gains or losses from one entity versus the other, and the dollar strengthening or weakening, tend not to be all that significant. One tends to offset the other.

So I don't see any dramatic impacts of FX going forward. Obviously, if historical connectivity between euro, Swedish krona, and dollars kind of disconnect, and things go in directions that we haven't seen in the past, then maybe that equation changes. So the long answer to your short question is we will see a lot of impact at the sales line. Obviously, we translate all of our local sales back into dollars, and if the dollar is strengthening significantly as it has over the past 60 days or 90 days, you will see a significant reduction in our top line and a reported basis, but not necessarily a significant reduction, maybe even no reduction at all at our operating profit level.

Jonathan Grassi - Longbow Research

Okay. Thank you. And then you discussed – you mentioned some raw material impact in the quarter. Looking back, it was looks like this is the first time you specifically mentioned that raw materials had impacted the gross margin line. Can you provide a little bit more detail?

Gregory Sargen

Sure. We've seen about little over $2 million, maybe $2.5 million of raw material price increases over what we experienced in 2007. Some of that had been anticipated, and much of it has not, and the Q3 we saw the biggest impact, almost half of that $2.5 million hit us in 2000 – hit us in the third quarter based on our sites estimates. So the third quarter that had a couple of point impact on our overall gross margin, about 2%, so it was a more significant impact in Q3. Again as Steve mentioned in his comments, if there is a silver lining here, hopefully, it's that a lot of those pressures that were driving up the commodity prices, that we use as a lot of our starting materials, if those pressures abate, then hopefully we see those prices tend to go in the opposite direction, heading into '09.

Jonathan Grassi - Longbow Research

Can you provide us any detail on which commodities in particular?

Gregory Sargen

Well, the solvents are a big piece of our starting materials, and so when we look at getting out just for conversation sake, a kilogram of material – there may be hundreds of gallons of solvents going into reactors, so the raw materials can have a pretty significant impact on the cost, especially, when those raw materials are going up 10%, 20%, 30%, 40% in some cases, if not higher, in certain instances than the prior year. So solvents is the big one. I don't know, Steve, if you want to add to that. Energy costs obviously, electricity, gas, propane, to run the factories is up. Something that's happening to everybody, but it certainly impacted us also.

Steven Klosk

Greg kind of nailed the two biggest areas are definitely energy costs, fuel oil, and typical solvents, acetone, ethanol, methanol, as Greg said, that are used in almost every chemical process.

Gregory Sargen

It's kind of hard to get an exact number as you look out, because we have staggered contracts for these. We sometimes enter short-term arrangements to get supply for the next three months, and sometimes we have year long arrangements to get supply of certain of these contracts, so it varies by site. It's kind of a moving number, as these prices move up and down.

Jonathan Grassi - Longbow Research

Alright, thank you. And just finally, I am not sure if I missed this, but can you provide a price volume breakdown?

Gregory Sargen

I didn't, but – the biggest impact on margins for the quarter was price. We sold disproportionately higher amount of our largest gastrointestinal API, where we have spoken in the past about a substantial contractual price decline that we negotiated last year and that had a pretty large impact. So of the decline in margins, net of currency, about 70% of it was due to price, and a big chunk of that was due to that one API, and then a little bit in the kind of standard year-over-year price erosion on our generic side. So not a big impact on volume.

Jonathan Grassi - Longbow Research

Okay. Thank you.

Gregory Sargen

Yep.

Operator

Your next question comes from the line of Dan Leonard of First Analysis.