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Albany Molecular Research, Inc. (NASDAQ:AMRI)

Q3 2008 Earnings Call Transcript

November 6, 2008, 10:00 am ET

Executives

Thomas D'Ambra – Chairman, CEO & President

Mark Frost – Chief Financial Officer

Analysts

David Windley – Jefferies & Co.

Greg Bolan – Wachovia Capital

Russ Silvestri – SKIRITAI Capital

Michael Gregory [ph] – Cummings Bay Capital

Operator

Good day and welcome to the Albany Molecular Research Incorporated Third Quarter Earnings Conference Release. Today's conference is being recorded. At this time I would like to turn the conference over to Dr. Thomas D'Ambra, Chairman, President and CEO. Please go ahead, sir.

Thomas D’Ambra

Thank you, Yolanda. Good morning ladies and gentlemen, welcome to the conference call segment of AMRI's 2008 third quarter earnings announcement. This call is a follow up to our press release issued yesterday evening on Business Wire. With me is Mark Frost, AMRI's Chief Financial Officer.

We are pleased to report strong results for AMRI for the third quarter of 2008 and reiterate our guidance for a strong full year. The third quarter of 2008 demonstrated our ability to execute against the targeted strategic plan for the continued growth of the AMRI brand in global contract services as well as generating value from our internal R&D investments.

I'm going to turn the call over to Mark for his comments after which I will have additional remarks. Mark?

Mark Frost

Thank you, Tom. Before we begin I'd like to note that much of our discussion today might be termed forward-looking, other than historical facts or statements may contain projections, estimates and other forward-looking statements that involve a number of risks and uncertainties including those discussed in the Company's Annual Report on Form 10-K for the year-ended December 31, 2007 as filed with the Securities and Exchange Commission on March 17, 2008 and the Company's other SEC filings.

While these statements represent management's counter judgment on the future direction of the Company's business such risks and uncertainties could cause actual results to differ material from any future performance suggested herein. The Company undertakes no obligations to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date here.

I'm now going to present financial results for the third quarter along with contract revenue and earnings guidance for the remainder of the year. Further details are included in our press release issued last night.

AMRI delivered another quarter of strong earnings growth. Earnings were driven by revenue growth in all three components of our contract business. Our large scale business in particular demonstrated strong gross margin improvement and expectation we've been communicating over the past few quarters.

Key highlights for the quarter and other recent events include an increase in total revenue including 30% growth in Contract revenue, over 25% Contract revenue growth in our large scale business segment.

Our operating income increased four-fold from $2.1 million in Q3 2007 to $8.7 million in Q3 2008. Adjusted net income was $5.8 million, a year-over-year increase of just under 200%. Continued improvement in Contract services gross margin year-over-year.

Turning to financial results for the third quarter 2008 all comparisons are on a year-over-year basis. Total revenue was $61.4 million, an increase of 29% compared to $47.6 million in 2007. Total contract revenue was $54.1 million, an increase of 30% compared to $41.6 million in 2007. Total contract revenue encompasses revenue from AMRI's Discovery Services, Development Small Scale Manufacturing and Large Scale Manufacturing Business Components.

Contract revenue from Discovery Services was $16.4 million, an increase of 57% from $10.5 million in 2007. In this component we experienced growth both in the U.S. and international businesses. Natural product collaborations also contributed to the increase due primarily to the recognition of upfront fees upon the completion of screening projects. One major screening project finished slightly earlier than we expected which accelerated revenue to the third quarter from the fourth quarter.

Contract revenue from the Development Small Scale Manufacturing was $14.5 million, an increase of 11% compared to $13.1 million in 2007. The increase results from continued demand for development analytical services from emerging pharma and biotech customers in the U.S. as well as growing demand for our Development Small Scale services in India.

Contract revenue from Large Scale Manufacturing was $23.2 million, an increase of 29% compared to $17.9 million in 2007. As communicated in a prior earnings call, revenue increased because of higher GE shipments and a new commercial customer. Our expectations were exceeded in part as GE requested some shipments be pulled into the third quarter from the fourth quarter.

We earned a $1.5 million milestone payment from Bristol-Myers Squibb for the nomination of a second AMRI compound for preclinical development. Recurring royalties from Allegra were $5.7 million, a decrease of 4% from 2007.

Net income under U.S. GAAP was $7 million or $0.22 per diluted share compared to net income of $2 million or $0.06 per diluted share in 2007. Excluding an income tax adjustment for research and development benefits of $1.2 million, adjusted net income was $5.8 million or $0.18 per diluted share compared to net income of $2 million or $0.06 per diluted share in 2007.

Now I'm going to turn to year-to-date results. Total revenue for the first nine months of 2008 was $172.9 million, an increase of 19% compared to $145.3 million in 2007. Total Contract and milestone revenue was $151.3 million, an increase of 22% compared to the prior year. Total Contract revenue was $145.8 million, an increase of 19% compared to $122.7 million in 2007.

Breaking this down, Contract revenue for Discovery Services was $44.6 million, an increase of 48% from $30.1 million in 2007. Contract revenue for Development Small Scale Manufacturing was $43 million, an increase of 26% from $34 million in 2007. And Contract revenue for Large Scale Manufacturing was $58.2 million, a decrease of 1% compared to $58.6 million in 2007.

Milestone revenue, resulting mainly from our licensing agreement with Bristol-Myers Squibb was $5.5 million. Recurring royalties from Allegra for the first nine months of 2008 were $21.5 million, an increase of 3% compared to 2007.

Net income under U.S. GAAP was $17.4 million or $0.55 per diluted share compared to net income of $9.8 million or $0.30 per diluted share in 2007. Excluding European restructuring charges of $2 million, an income tax adjustment at $2.8 million, net income for the first nine months of 2008 on an adjusted basis was $16.6 million or $0.52 per diluted share. This compares to adjusted net income for the first nine months of 2007 of $10 million or $0.31 per diluted share.

I'm now going to transition to a discussion on our margins for both the current quarter and projections for the remainder of the year.

Overall gross margin in our Contract services business improved from 20% to 28% in the third quarter driven by margin improvements in both segments of our business. We saw continued improvement in U.S. Large Scale Manufacturing, where margins increased to 18% in the quarter, up from 9% from last year and 3% from the second quarter. Adding India manufacturing operations dropped the overall segment gross margin to 17%, but up from 6% in 2007 and 13% in the second quarter reflective of increased cost absorption at our Rensselaer plant.

As noted during our conference call last quarter, step up in Large Scale gross margin from the second quarter was primarily attributable to the timing benefit of shipping a greater percentage of higher margin commercial manufacturing revenue in the third quarter.

To reemphasize from last quarter's call we expect Large Scale gross margin return for the full year to be up one to two percentage points from our year-to-year 2008 results of 11%, representing slight improvement from 2007.

In our Discovery and Development segments gross margin in the third quarter increased year-on-year from 30% to 37% on the continued strength of U.S. Discovery Services. International operation margins did improve from prior year, but in total were a drag on our overall DDS Q3 margins.

As we pointed out last quarter our international expansion is still in an early phase and we do not have the necessary scale to make it additive to our margins. In fact, international today is a drag of about 5% on our Discovery development margins.

Also both in Q2 and Q3, U.S. margins benefited from upfront fees in our natural products collaborations which will cause margins in the segment in Q4 to decrease in overall full-year DDS gross margins to end 2% to 3% down from current year-to-date levels.

Our earnings before interest, taxes, depreciation, amortization, EBITDA in the third quarter was $13 million or 21% of total revenue, a doubling from 2007 levels. EBITDA in the third quarter for just the Contract services business, excluding milestone royalty revenue and R&D expenses was $9.6 million or 16% return on Contract revenue, a 150% increase from 2007.

Now I'm going to turn to our financial guidance. In the fourth quarter we expect Contract revenue to range from $47 million to $49 million, an increase of up to 21% from last year. Continued strong demand in all three business components are expected to contribute to the growth in Contract revenue in the fourth quarter.

To get to the range of $47 million to $49 million we project Discovery Services revenue to approximate $13 million, an increase of 13% over 2007 level. We anticipate Development Small Scale revenues to range from $12 million to $13 million, an increase of up to 14% from 2007. We project Large Scale revenue to range from $22 million to $23 million, an increase of up to 29% over last year.

New commercial demand and higher clinical supply are the expected key drivers to our Large Scale forecast. We expect royalty revenues to decrease by 5% from Q4 2007.

From a cost standpoint, we project R&D to grow by up to 30% from fourth quarter 2007 because of the timing of the IND. We also expect SG&A to continue to increase by about 15%.

We are estimating earnings per share for Q4 2008 to be from $0.03 to $0.05 per share, up from a loss of $0.03 per share in the fourth quarter of 2007. EPS will be lower than Q3 2008 because of the BMS milestone and upfront screening fees are not expected to repeat as well as higher R&D costs in the quarter improved in part by higher Large Scale margins.

Our EPS estimate assumes there is no at-risk launch of a generic version of Allegra-D. We will continue though to aggressively pursue litigation against all parties who infringe our intellectual property.

And finally, turning to full-year guidance, for the full-year 2008 we are raising our estimated Contract revenue to range from $193 million to $195 million, an increase of up to 19% from 2007. We are estimating earnings per share for 2008 to range from $0.55 to $0.57 representing up to 100% growth, which is an increase from our past guidance of $0.48 to $0.52.

I will now turn over the call to Dr. D'Ambra, who will continue with additional comments.

Thomas D'Ambra

Thank you, Mark. Within AMRI's Contract services business, Discover Services segment generated another quarter of double-digit growth led by our locations in the U.S. and Singapore.

Our completed Medicinal Chemistry Lab expansion in Singapore ensures we will be able to meet increasing demand resulting from the continued success of our hybrid model in which we are able to resource projects from multiple geographic locations. We've recently hired two Assistant Scientific Directors in Singapore as well to ensure that our scientific expertise keeps pace with and supports our expansion.

Our European operations in Budapest, Hungary remain focused on transforming to a higher value Discovery Services business demonstrated by the formal signing of a lease for new and expanded laboratory space in Budapest. New building construction is now underway to consolidate multiple locations and equipment and the cost while increasing the proximity of scientific talent and opportunities for greater technical exchange.

We are pleased to announce the recent hire of Dr. Gergely Makara, Hungarian national whose Discovery science experience in both Hungary and the U.S. provides us enhanced ability to communicate and foster partnerships both the employees and customers of our AMRI Hungary organization. We believe there is a significant untapped market in Europe that this business unit has significant potential to serve.

Development in Small Scale Manufacturing continued to post steady positive growth. Small Scale GMP in particular stands to set a record year in revenue as a result of a strong pipeline of Phase I and Phase II customer compounds which increased from 55 to 59 in this segment.

Hyderabad also continued to see strong demand as customers utilized this location's quality and cost structure to manage a budget for drug discovery and development. Besides benefiting from the continued leverage of AMRI's hybrid services model, new business demand is being drawn in by the sites recently opened custom synthesis keel lab and the strong analytical chemistry capabilities and services now in place there.

On the Large Scale front AMRI's manufacturing business had a significantly improved quarter. U.S. operations strong third quarter was attributable to orders completed for a customer requesting launch quantities of a product awaiting FDA approval as well as increased demand from this businesses largest customer which was driven by delivery timing.

We've also recently announced continued activity in our India manufacturing business with a focus on establishing fully integrated scale up capabilities. As was recently announced we have completed construction of a non GMP multi purpose pilot plant facility, an expansion of already existing facilities in Aurangabad, India.

This multi purpose structure is able to complete custom synthesis up to 1,000 liter scale complementing the 100 liter keel lab capacity in Hyderabad. Besides customer supply the new reactors will be able to produce some starting materials for AMRI's U.S. manufacturing, providing cost savings by becoming an internal supplier.

Technical upgrades continue at other existing manufacturing facilities in Aurangabad as well. With the addition of a technical services lab and expanded analytical support, quality standards available for our India manufacturing will near that of our U.S. operations.

Overseeing development Small Scale manufacturing and Large Scale manufacturing is a new leadership team put into place in early September. We were able to tap our internal bench strength, appointing Dr. Steven Hagen as Vice President of Pharmaceutical Development and Manufacturing.

With over ten years of large pharmaceutical experience, in addition to three years of demonstrated improvement to efficiencies and financial results in his areas of responsibility to AMRI, we believe Dr. Hagen combines the best of both world as a leader with both big pharma perspective and a strong hands on knowledge of AMRI's capabilities, values and culture. To ensure Steve has the support needed to continue to succeed we are recruiting for additional technical and leadership expertise under him.

Another leader key to this new structure is AMRI veteran, Dr. Luckner Ulysse, Vice President of Chemical Development, whose AMRI experience is combined with proven problem solving and leadership skill serves well this important sector of our business.

Turning to our internal R&D investments we are pleased to acknowledge the contributions made in the third quarter. Past investments in acquiring, building and upgrading our natural products technologies, collections and capabilities were rewarded by several natural products contracts entered into over the past 12 months to 18 months. The impact of upfront payments and fee for service revenue was notable during the last quarter.

Also announced in the third quarter was Bristol-Myers Squibb's nomination of a second AMRI candidate from a license and research agreement with BMS for preclinical development. AMRI received a $1.5 million milestone payment, the third from this collaboration and second this year. For 2008, we have received total milestones from BMS of $5.5 million. The first AMRI compound identified and announced last year from this collaboration is now in Phase I study is being conducted by BMS in Canada.

In addition to these two compounds remains a potential for other candidates to be nominated for development resulting in further milestone payments to AMRI and potentially royalties on sales of any products that reach the market.

Our 2005 licensing deal with Bristol-Myers Squibb has so far provided an upfront payment of $8 million, total milestones to-date of $7 million and research funding of an additional $10 million over three years. We anticipate that additional value will be realized from this relationship.

At the same time we want to point out that in October, the three funded research portion of the contract has come to an end. This also added a period for amortization of the upfront $8 million payment received in October 2005. While we will continue working with BMS on the continued development of lead compounds as well as the potential selection of additional backup compounds, our relationship has entered a new phase with the completion of funded research.

I would like to reiterate our appreciation now and thanks for the effort and investment that BMS has put into this program. And the strong spirit of cooperation that has ensued over the past three years. We remain excited about the potential for this program and look forward to sharing further progress and milestones over the coming quarters.

In addition to a compound from the BMS collaboration entering clinical trials in recent months we also announced late last quarter AMRI's R&D submission to the FDA for our tubulin inhibitor which has not been partnered as of today. We have subsequently commenced a Phase I clinical trial process.

The first human subject was dosed in September and patient enrolment and dosage escalation continue according to protocol. We're also working diligently and seeing progress made on other programs in the AMRI pipeline and to seek partnership opportunities for all of them at the appropriate space. Though there is no guarantee we will be successful with out licensing any of them we are optimistic because of the scientific progress that's continued to be made.

Another noteworthy event was the recent hire of Director of Development in Pharmacology, Dr. Nicholas Moore. Dr. Moore's responsibilities stand AMRI's internal research and development portfolio including the progression of the Discovery phase programs and the guidance of emerging candidates toward candidate and clinical goals. Nick brings over 27 years of industrial experience in experimental pharmacology and drug development from early discovery through late clinical phases from both Lundberg Research in the U.S. And before that at the Neuroscience Discovery Research Group at Lilly. Nick will be important to our strategy focused on the creation of partnerable compounds that ultimately return value to AMRI.

The last topic I would like to comment on is the economic environment and our experience to-date and views on the near-term future. AMRI delivered a strong quarter in what for others has become a challenging environment. As Mark has reported we remain confident in our guidance for the full year which has been slightly revised higher. With that comes the understanding that our business is dependent on the health of the companies we work with and a number of factors beyond our control are potential for concern.

The ability of bio techs to raise and sustain capital to advance their research programs, the ability of large pharmaceutical companies to sustain their R&D initiatives, the challenges of receiving USFDA approval for new drugs, the recent elections and the potential of new administration and Congress to change the US health tier paradigm and its effects on new drug R&D are some of the things that could influence our business.

While we remain optimistic for our future we acknowledge that our Contract business remains dependent on the financial health of our customers in a continued strong outsourcing environment. As we've always done we will not be giving guidance for the coming year, 2009, until early next year, in conjunction with our fourth quarter earnings call.

As of today, however, I believe that 2009 will represent another year of Contract revenue growth for AMRI's Services business. The magnitude of that growth is too early to predict. We continue to see strong demand and request for proposals and are on track for another year of record bid.

As one might expect we are currently experiencing a softening in order acceptance from certain customer segments, particularly, U.S. based small bio tech, but we also have a strong book of business already in place in several segments of our Contract business for 2009.

Our ability to serve a wide range of customer needs based on diverse product and service offerings in multiple geographic locations partnered with strong potential of our internal R&D investments continues to allow us to operate from a position of strength and to make proactive decisions in running our business. We look forward to sharing additional guidance for 2009 with you early next year.

As we look back at the first three quarters of the year we are pleased that AMRI's performance continues to exceed expectations set at the beginning of the year. We are also pleased we are raising our expectation for continued growth for the remainder of the year, particularly, during these challenging economic times.

Growth continues at all sectors of our Contract Services business. We are making significant milestones in R&D investment in R&D collaborations with external partners.

We remain diligent in our activities to increase the awareness of our brand through marketing and sales activities by leveraging our global platform and we strive to foster and develop a strong leadership team to ensure that we're able to maximize the efforts and contributions of our multiple locations and technologies as we stay focused on delivering the highest quality customer service and level of excellence across all segments of our business.

I'd like to conclude my remarks by extending my sincere thanks to our employees and my colleagues at AMRI. It is by their actions and dedication that AMRI continues to be successful today and setting the stage for continued growth and success in the months and years ahead. Thank you also for your interest in AMRI. At this point we'll be happy to answer any questions.

Question-and-Answer Session

Operator

(Operator instructions). We'll take our first question from Dave Windley with Jefferies.

David Windley – Jefferies & Co.

Hi, good morning. Thanks for taking the questions and congratulations on managing through tough environment here. Wondering on your BMS and access fee amortization and funded research, I guess, that early part of the program that you just described. As that goes away how much revenue does that represent? And as you look forward into 2009, are you in discussions with other parties that might come in to a deal like that that would help to replace that revenue?

Mark Frost

Sure, Dave, I'll take a shot at it. From a revenue contribution standpoint, it's not a material amount. It's probably 2% or 3%. From a margin standpoint, there is a bigger benefit than that, so it's more margin impact that we need to manage and are worrying about. So, revenue, we're not really worried that we're going to be able to replace that. As Tom mentioned, we're pretty encouraged, particularly, in a couple of our segments that will replace that revenue over time.

From a licensing standpoint, we do have interest in a number of our compounds and are hopeful that at some point, in the next three to nine months, we will get some place and get to a deal which will help us replace it. We do have continued interest in our natural product collaborations and are hopeful that we'll get some new deals in the next year, but there is no guarantees at this point. And we'll have a lot more color on that, Dave, when we get to our next call in the beginning of February.

David Windley – Jefferies & Co.

Right. Again a follow up on that. On licensing deals would you expect that those would include an upfront license fee as well as them retaining your scientists to help with development of the licensed compounds or is that not necessarily part of a potential deal?

Thomas D'Ambra

Let me jump in, Dave. It depends on the program. We've stated always that our intent is to partner all of our programs so, we continue to be out there in the marketplace. And, as Mark mentioned, there is some interest in some of the programs, that doesn't mean that we'll be able to partner any. I just want to reiterate some of the comments that Mark made. When we give our guidance next year we will not put a partnering deal in our guidance because there is no guarantee. But we're optimistic that sometime next year or shortly after that some of these programs will be at a stage where we can do that. In terms of many of the programs they could be structured similar to the BMS deal. The compound that's – the cancer compound that's in clinical trials that might just be for that compound.

Dave Windley – Jefferies & Co.

Okay. And then could you help me understand where – perhaps maybe where your revenue breakout is, I apologize, if you said this, and I missed it, but geographically, how much revenue is coming from outside the U.S.? And then how does that match capacity, which is to say, I guess, what are your relative utilization rates domestically versus outside the U.S.?

Mark Frost

Sure. I'll take a shot at that. We continue to grow international. Last year, international was probably 6%, 7% of our revenue. We are now in a range, its 10% to 15% of our revenue. From a capacity standpoint we just doubled our capacity in Singapore, so we have a lot of room. Hyderabad is getting closer to utilization, so, we have capacity expansions that we are looking at right now in Hyderabad. Hungary, Tom talked about, we just announced that we have undertaken an expansion in Hungary, which will probably go live second quarter next year.

And in India, on the manufacturing side, we are – we just opened up new capacity on a pilot plant level. So, that's added a whole bunch of capacity and we are also in the process of undertaking an expansion of our Large Scale Manufacturing capacity as well. So, we are anticipating, Dave, significant for the demand in international, so we have a number of projects now underway to add further capacity to all our locations around the world.

David Windley – Jefferies & Co.

Okay. I'll drop out and come back in later. Thank you.

Operator

(Operator instructions). We'll take our next question from Greg Bolan with Wachovia Capital.

Greg Bolan – Wachovia Capital

Hi, thanks for taking the questions. So – Mark, can you first just, please I've missed this, repeat your expectations for gross margins for the different segments of Contract services please?

Mark Frost

Sure. So on the Large Scale side we expect to continue to improve margins and are looking at ending the year probably a couple of points above where we are right now year-to-date which is at a 11% which would then translate into some slight improvement overall. Clearly, the second half we're going to have a stronger half than the first half, which is driving that, and that's being driven by an increase in commercial, where we did get some time and benefit – GE though as both Tom and I mentioned, we do now a new commercial customer and are billing some of the pre-launch quantities which is benefiting our margins there.

On the Development Small Scale, Discovery Development Small Scale side, we did have some timing benefits in Q3 where we finished the screening early. We have the BMS, the amortization, which has run its course. So, we're expecting full-year to go backwards on a full year basis from year-to-date numbers where we're around 35% by a point or two, maybe three for the full year.

Greg Bolan – Wachovia Capital

Okay. That's very helpful. Thanks. And then, remind me, I think this is last year, but at that time you had renegotiated the terms of the contract that you have with GE. What does the timing look like for the next contract negotiation with GE? Is that next year?

Mark Frost

Go ahead, Tom.

Thomas D'Ambra

Our current contract runs through 2010. Obviously we are, I think, our interest will be extending that so there could be discussions on that, but right now we have two years left on the agreement.

Greg Bolan – Wachovia Capital

And as far as you are concerned, within the contract, is that fairly iron clad just in terms of volumes and pricing?

Thomas D'Ambra

With the current contract, yes. If we do negotiate an extension there could be some changes to that. Potential increase volume in exchange for price, but it's too early to comment on that.

Greg Bolan – Wachovia Capital

Okay. Understood. And then – and then moving forward, just in terms of the accelerated orders from GE, in 3Q, Mark, can you quantify what that incremental impact would have been to late stage – excuse me, Large Scale manufacturing revenue?

Mark Frost

Sure. It probably added about 5%, 6% growth in the quarter and a cent, maybe a cent and a half to earnings in the Q3.

Greg Bolan – Wachovia Capital

Okay. Understood. And then, last question if I think about your Development Small Scale business and then on a go forward basis clearly that particular segment is very much exposed to the smaller players, that small bio techs. How – is that where you're starting to see some – I guess you had mentioned, I believe, Tom, that there might have been a slowdown in terms of orders. Is that the area that we should really be thinking about as potentially a source of, I guess not so much ultimate weakness, but slight weakness as we look at our '09 expectations, and what we should be thinking about for '09?

Thomas D'Ambra

Yes, Greg, that part of our business as we said before, I think, in recent years, about 80% of the revenues come from these smaller companies. That being said, we're seeing a – right now a current softening of orders but the request for proposals and bids going out is still running at record numbers. There's a sense that, over the last few weeks, with the uncertainty in the economic environment that some companies might have been holding on purchasing decisions. So we think that, that area has a potential – we're not losing bids because they're going somewhere else or the orders, the requests are being cut back. It's really I think an environment within companies feeling comfortable to start spending again. And we're starting to see, even earlier this week, that starting to open up a little bit. So we're optimistic.

And as we look at next year, as I said earlier in my remarks, we expect to grow next year. It's just the magnitude of that growth that we'll be able to come back and give guidance on early next year will probably depend on the environment over the next couple of months as we see the year-end unfold. But again, as I mentioned also, we have a very strong order book in a couple of our other segments already for 2009. So we're pretty optimistic, we're having a great year, and we think that's going to continue, but obviously there are factors beyond our control.

Mark Frost

Just to build, Greg, to build on Tom's magnitude quest, the last four years, we've been running high 20s, 30s, that had been our growth rate in the first half. If you notice the numbers we grew in the mid double-digits and that's what we're looking at for fourth quarter. So it is a matter of magnitude. I don't think we're going to grow at 30% but double-digits, along those lines, that's what we're continuing to hope for. To Tom's point, we'll have a lot more color, for the full year, when we get to the next call.

Greg Bolan – Wachovia Capital

Fair enough and I also reiterate Dave's congratulations in holding up in this tough environment. And then I guess my last question is with regards to cash. And so you now sit on about $91 million cash and obviously, used some of that earlier in the year for a stock buyback, but beyond potentially buying back stock, as I think about just the devaluation or potentially the hit that some of these, I suppose, assets may be taking throughout the U.S. or potentially ex-US in terms of potential acquisition candidates that you may have been monitoring. Is there any thought there to potentially deploy some of that cash to take advantage of presumably a reduction in the values of those targets, those assets?

Mark Frost

Sure, Greg, that's a great question. I think strategically we've always been looking to accelerate our growth through potential M&A. And with this environment, and our cash position, that's clearly a possibility. We are seeing a number of things starting to come across our desk, but we've always been looking and will continue to look with the same criteria we have in the past. But in this environment, that may make those opportunities more attractive. So that could be a possibility.

Thomas D'Ambra

And building on that, our balance sheet also positions us well with our customers, because we compete against a lot of mom and pop entities. And customers clearly look at that, and will look at the strength of them. So this is a strength of ours as we talk to our customers that we've been in business a long time. And we got a balance sheet that's going to be able to move us forward for a long time.

Greg Bolan – Wachovia Capital

Absolutely. Alright. Thanks.

Mark Frost

Thanks, Greg.

Operator

We'll take our next question from Russ Silvestri with SKIRITAI Capital.

Russ Silvestri – SKIRITAI Capital

Good morning.

Mark Frost

Good morning, Russ

Russ Silvestri – SKIRITAI Capital

Congratulations. Nice job. Couple of questions, first of all, you talked about a new commercial customer. I was wondering if you could give up the name on that? And also why you think they chose you? And also in that Large Scale business, I was curious how much Vyvanse represented and I have couple others after that?

Thomas D'Ambra

I'll take the first half of the question and then let Mark talk about Vyvanse. But obviously if we haven't announced it, there's reasons why. So, we're not in a position to announce that. The why they came to us, it speaks to our strategy again that having a very strong small scale development analytical development group, that project came to us at a very early stage. And it stayed with us into shifting into plant for larger quantities and it's now turned into a potential commercial product, so, when this gets through FDA approval, this is – this follows on the back of Vyvanse which came to us the same way. Started early on in our labs and we've been able to keep it all the way through. And it's a great example of our strategy and our strength in capturing business.

Mark Frost

Yes, on Vyvanse, we talked about the last couple of calls that there was a challenge on Vyvanse that as it turned out, Shire's orders turned out to be almost two years of supply in the end in 2007. So we took Vyvanse starting with our – couple of forecasts ago, out of our numbers for 2008. We view that now as an upside starting in 2009 if they'll start ordering again. And that we'll have revenue from that starting likely in first quarter 2009.

Russ Silvestri – SKIRITAI Capital

And then I guess, my next question is, when you look at how many other drugs do you have, if you look at Phase III, Phase II, Phase I at this point in time?

Mark Frost

Sure. And we continue to make progress there. If you caught what Tom said, our Phase I, II pipeline increased by another 10%, it's now up 50% in the last year. We've gone from 40 compounds, close to 60 now. Phase III continues to run at 15 compounds to 16 compounds. We have two go out, two go in. So, we continue to have a strong pipeline. One of those Phase IIIs, as we said, we had the pre-launch quantities which we just talked about. And two more of those, we are expecting them to file with the FDA, in the next three months to four months. So hopefully in 2009, we may have pre-launch quantities from those as well.

Russ Silvestri – SKIRITAI Capital

Okay. And last question, I mean, are you still losing money then in the Hungary operation?

Mark Frost

We continue to have challenges there. I think the restructuring has put us in a much stronger position. But that's going to be more 2009 story, I guess, is what I'd say to you.

Russ Silvestri – SKIRITAI Capital

So, we'll lose money there still?

Mark Frost

Pretty excited about what's going on in Hungary that change has been made the new leadership. The orders are starting to come in. But clearly, it's not a short-term, these are longer-term contracts. So as we look at 2009, we're pretty optimistic that Hungary is going to come the way of Singapore and Hyderabad.

Russ Silvestri – SKIRITAI Capital

Is there anyway you can quantify just the drag that Hungary may have dragged down the operations in terms of profitability?

Thomas D’Ambra

We're not getting into that level of detail. But clearly all of our investments overseas have taken time to achieve profitability. And it's taken longer to get that critical mass, but it's truly additive. But they are heading in that direction and we're pretty excited about where we are.

Russ Silvestri – SKIRITAI Capital

Right. Well, as a shareholder for, I don't know how many years now, but I just wanted to congratulate you guys in having the vision and the ability to execute on your vision. Congratulations.

Mark Frost

Thanks, Russ.

Operator

We'll take our next question from Michael Gregory [ph] with Cummings Bay Capital.

Michael Gregory – Cummings Bay Capital

Thanks for taking the questions. The first is in an attempt to understand service offering differentiation, large competitor, this morning, in a business that mirrors the DDS segment, decreased fourth quarter sales guidance to negative 3% to 1% growth. And I was hoping you can elaborate a bit on how your business for research-based CRO may differ from some of the competitors in the field who have cited that demand is softening fairly precipitously? And they're seeing an unusually severe decline on a worldwide basis.

Mark Frost

I think you're referring to Charles River?

Michael Gregory – Cummings Bay Capital

Correct.

Thomas D'Ambra

Our business – there's not a lot of overlap in what they do and what we do. I don't totally understand everything that Charles River does. A lot of the work they do is supporting, doing the pre-clinical events, development in animal studies, and possibly even supporting the clinical trials at various stages through assays and potentially conducting those. Our business from our discovery component, we're really working in providing lab services and capabilities.

And then more than just a commodity level, we're really helping companies develop, discover and do the early stage optimization of potential new drugs of the future. Then our development to small scale and large scale manufacturing is focused on working with companies to take their potential new drugs, get them in a position where they can file an NDA and as we talked about, on some of the earlier questions, our large scale manufacturing, we can provide the API once things launched.

So, a lot of projects are short-term and focused on discovery and development. But then the commercial ability to supply – lot of companies that provide the clinical trial services, they get all their revenue in conducting the clinical trials. We get some revenue from that, but it's – make a – a batch of API, and then wait for the next order or the next need. And then once these things go commercial, that's when we get the recurring annual orders, such as with Vyvanse and some of the other commercial things that are in our pipelines.

So – we, right now, I think because of our – nature of our business and diversification of services, we are – we continue to see strong demand. And as I said, we're on track for another record year of requests and bid outs. So, it is a little bit different than other companies out there. And we are cautious of that environment. But right now, we're continuing to be optimistic about our business in next year.

Mark Frost

I'll build on a little bit, I mean, Greg, touched on this. We have seen a softening in development, small scale revenue, but it's been from a 30% level to a 10% to 15% level. And that speaks to we further diversify that offering and the globalization. We're doing very well in India which is offsetting some of the softening in the U.S. This has been our strategy and it seems to be paying off.

Michael Gregory – Cummings Bay Capital

Okay. That's very helpful. And secondly, a question on capacity and operating expenditure flexibility. As per the 10-K, which is my best resource, it appears that your capacity has increased about 28% in the past 24 months. And that likely does not include the recent capacity adjustment that you mentioned this quarter. But in the event that, that softening does continue in development small scale and other segments given some of the restructuring ongoing in large cap biotech and pharmaceuticals, what type of capacity flexibility do you have? Is there any intention to scale back on some of the expansion plans? Or is there a potential to renegotiate some of the leases should the conditions worsen?

Thomas D'Ambra

We're not in that. We're actually looking at how – what our growth is going to be. We expect to be hiring next year. We have capacity to take on that new hiring. And lot of the softening you talked about, we're not exposed to that, because we didn't have a lot of big pharma, large contracts, with the big bio techs. So our business has been pretty much immune to a lot of the layoffs and things that are going on there. We actually see that as an opportunity for the growth because we think that the economic environment, the political and regulatory climate is ultimately going to lead to more outsourcing. And we're very well-positioned with that.

I'll reiterate what Mark said that where companies are – maybe have budgets that are tight, India and some of our other offshore locations are becoming more attractive to them. But, clearly our U.S. Services business had very strong growth this year. It's continuing to grow and we're just, right now, where we sit today, we're just looking at what the magnitude of that growth is going to be next year, not falling backwards in any of our segments.

Michael Gregory – Cummings Bay Capital

Okay. That's great. And one last question if you may allow me. I'm new to the story, so I'm not clear what your policy is on commenting on Allegra-D. But from past reference of Allegra formulation in '05 when Barr, Teva launched, the sales went down approximately 42% year-over-year in '05, '06. And from the FDA Web site, it appears that there have been filers on the Allegra-D formulation for the high dose [ph], yet certainly no launch. Wondering if you could help us to understand what your expectations are for sales, sensibility of the products in light of a generic competitor, and what your expectations are on timing for a launch or subsequent filings on Allegra-D?

Mark Frost

Sure. I'll talk to it. I said it in the call that we continue to vigorously and aggressively prosecute against any parties that fringe against us. On Allegra-D, Barr has had the ability to do an at-risk launch for three years. They have not done that unlike on Allegra. Clearly with Barr – Teva coming into the picture in the acquisition which is pending, that risk probably does go up. And the question next year – it'll be a question next year, would they launch at-risk on the product? If that happens, you would have an impact. We can't talk to current Allegra-D numbers, but 2005 was in the $300 million to $350 million number.

And if you look at what happened in the U.S. Allegra market, in the end, when you add back the authorized generic that Sanofi has ready to go, it's about a 70% reduction in the market. And that would be the impact in our Allegra-D sales which are about 3% of that market, would be what we would be hit by. So, in our view, it would be a one-time hit. Obviously, we wouldn't be excited about it. But we continue to believe we have a strong case. We're fighting that case. And we'll continue to fight that case.

Michael Gregory – Cummings Bay Capital

Okay. Thank you gentlemen, and congratulations on a good third quarter.

Mark Frost

Thank you.

Operator

(Operator instructions). We'll take a follow-up from Dave Windley with Jefferies.

David Windley – Jefferies & Co.

Hi, I just wanted to ask one or two quick ones here. With some of the advances in your pipeline, Mark, what's the R&D trajectory going to look like?

Thomas D'Ambra

Dave, this is, Tom. As we look at our budget process for next year, as we said all along, we're planning to keep our R&D spend relatively constant, consistent with what it's been the last few years. And for 2009, that's probably that where we're looking at it as well.

David Windley – Jefferies & Co.

Okay. And is that constant as a percentage of revenue or constant –it's in dollar amount or?

Thomas D'Ambra

We're looking at dollars and it's going to be in the ballpark of what 2008 number was, which as you know, what we've been running in the last two years is 5% to 10% up, Dave. That's what we probably anticipate is, what we continue at.

David Windley – Jefferies & Co.

Right. Okay. And then, I think, Greg may have asked this question, but in terms of customers that you – for whom you are doing Phase III work or have now filed what is that number of potential conversions into commercial opportunity? And you mentioned the one where you did some ramp – excuse me, some launch quantities, I think in the third quarter.

Thomas D'Ambra

Yes.

David Windley – Jefferies & Co.

How many more are being reviewed by the FDA currently?

Thomas D'Ambra

Two more are about, we believe, to be filed in the next three months to four months, which would probably then hopefully lead to pre-launch quantities next year in 2009?

David Windley – Jefferies & Co.

Okay. So two more to be filed, and then behind that kind of your Phase III – the next Phase back?

Thomas D'Ambra

Yes, and you're probably then a year away from another couple. That potentially at the end of 2009, beginning of 2010 could be filed.

David Windley – Jefferies & Co.

Okay. Alright. Thank you.

Operator

(Operator instructions). And Dr. D'Ambra, there appear to be no further questions at this time.

Thomas D'Ambra

Thanks, Yolanda. This concludes the AMRI's Q3 Earnings Call. Thank you again for your interest in AMRI.

Operator

Again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation and have a wonderful day.

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Source: Albany Molecular Research, Inc. Q3 2008 Earnings Call Transcript
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