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Par Pharmaceutical Companies (NYSE:PRX)

Q4 2012 Earnings Call

March 21, 2013 10:00 am ET

Executives

Michael A. Tropiano - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Paul V. Campanelli - Chief Executive Officer and Director

Barry J. Gilman - Secretary

Thomas J. Haughey - President and Director

Analysts

Henry Reukauf - Deutsche Bank AG, Research Division

Erin Blum - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Par Pharmaceutical Companies Inc. Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] I would like to turn the call over to Michael Tropiano, Chief Financial Officer. Please proceed, sir.

Michael A. Tropiano

Good morning, and welcome to Par Pharmaceutical's review of our full year 2012 financial results. I'm Mike Tropiano, CFO of Par. And today, I'm joined by Paul Campanelli, Par's Chief Executive Officer; Tom Haughey, our President; and Barry Gilman, Par's General Counsel. After a few comments, we will open it up to questions.

I need to remind you that certain comments made during this call may constitute forward-looking statements. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in Item 1a Risk Factors of our annual report on Form 10-K for the year ended December 31, 2011, and in the reporting packages for the third quarter 2012 and year ended December 31, 2012, posted on the secured portion of our website. As for those other SEC filings and postings we have made or may make in the future, we do not undertake any obligation to update these forward-looking statements.

Also, during the call today, we may be discussing adjusted EBITDA, which is a non-GAAP financial measure. Please see our reporting package for a reconciliation to net income to most directly comparable GAAP measure. The acquisition of Par by investment funds affiliated with TPG was completed on September 28, 2012, and the third quarter financials we posted subsequently did not include purchase accounting adjustments, or give effect to the transactions related to the closing of the acquisition. These events are now recorded in the 2012 annual report we released last evening.

Our 2012 results show a GAAP determined net loss of $11.4 million on revenues of $1.1 billion. After taking the DOJ settlement, transaction costs we incurred during the course of the year and some business development into account, our 2012 net income adjust to positive $67 million. The adjusted gross margin generated by our product portfolio for 2012 reached $460.9 million, a strong increase of 15.3% as compared to 2011.

Moving over to our cash flow statement, you will see that our cash generated from operations was $153.8 million for the predecessor period, which covers the beginning of 2012 through the TPG-Par transaction closing. This metric then turns to negative $28.6 million for the period September 29 through December 31, 2012. It's important to note that this successor period contains a number of onetime items, including $36 million in transaction-related costs, $10 million business development transaction as well as year-end compensation costs. After giving effect to these items, operational cash flow for this period was positive $29 million.

I'll now direct you to our non-GAAP EBITDA reconciliation posted yesterday as Exhibit A. You can see that we produced $68.9 million of adjusted EBITDA in the fourth quarter of 2012 and that for the full year, we achieved adjusted EBITDA of $330.9 million.

Much of our operational success during 2012 was attributable to our April launch of high-margin modafinil, which accounted for $105.8 million of revenue during 2012. Although modafinil now has significant market competition, it is still an important product for Par. We've also had a number of recent product launches, which are already helping us in 2013. These include the authorized generics rizatriptan ODT and rizatriptan tablets as well lamotrigine ER and fluvoxamine ER, a product we launched last week.

That concludes my comments and our team will now take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Please standby for your first question, which is from the line of Henry Reukauf from Deutsche Bank.

Henry Reukauf - Deutsche Bank AG, Research Division

Just a few questions. First, I guess, just on the pipeline of new products that you guys have. You mentioned a few that you have, can -- and I think last quarter, I was -- I'd asked if you guys could give us a breakout of what you anticipated. Is there any kind of a schedule that you can provide or that you provided that I missed that contains sort of your -- sort of the drugs that are going to be coming out -- your pipeline of drugs that you currently have?

Paul V. Campanelli

Yes, this is Paul. So what we did was back a couple weeks ago at the Goldman Sachs Leveraged Finance Healthcare Conference, we had provided a little bit of an overview about the number of ANDAs in the pipeline. We did not disclose specifically the products. And what we're trying to do is -- we apologize, we're not trying to be evasive but we don't want to put ourselves at a competitive disadvantage by actually listing out the products. What we are saying is for 2013 that we're anticipating about 12 to 15 potential launches during the year. So while I can't put myself or the company really at risk from a product-specific standpoint, we're very excited about what the outlook is. The pipeline is healthy, and I see no reason why we can't hit this 12 to 15 for the total of 2012 -- of '13...

Henry Reukauf - Deutsche Bank AG, Research Division

Can you give us any scale on that pipeline, how big any particular launch might particular be on average, so we kind of have a gauge in a certain way of what's coming?

Paul V. Campanelli

Yes. Again, I'm going to apologize, we do have some self launches here that it really would put us at a disadvantage. So I do apologize -- I think right now, the best interest of our company, we're just going to have the stick to the total number.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. I guess then, I think you'd said at the time of the transaction that quarter-to-quarter, there may be some volatility, but on a year-over-year basis, EBITDA would be kind of up year-over-year. Is that still your belief?

Michael A. Tropiano

Yes. I think the volatility is simply caused by the fact that the launches are not even and they're not a big value. So that will cost some choppiness in our year-to-year. If you go -- if you take a look at the 2012 Exhibit A that we attached yesterday, you'll notice, when you look at the 4 quarters of '12, that's kind of an indicator what our business looks like. You see the choppiness. And really that's driven -- you can see Q2 as a large number. That's the quarter that we launched modafinil. And I think you'll see similar -- but you can see we're on a good track. And I purposely mentioned the fact that we've had a bunch of launches just in recent weeks actually. So we're off to a good start.

Paul V. Campanelli

Maybe what we should just point out is that, in the case of Mike's point, we did launch fluvoxamine last week and there was no competition. So I think it's maybe a high-level of product, the -- it's very exciting, and we are single source. So it should be a nice contributor to 2013. I think the brand sales on that product were -- I think they were about $100 million. So just to give you an indication. With a little more specificity on that one as you get the product.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. But then on a year-over-year basis, if you're at $330 million now, we should think that you'd be up from that this coming year?

Michael A. Tropiano

No. That I can't comment. I would lead you back to some of the stuff we put out there in 2012 during the financing period. I'll remind you that the #1 swing from '12 to '13 is going to be a fact that modafinil was launched during 2012 for a significant value. You saw we put $100 million in sales. Modafinil is now in decline due to competition. So the non-replication of modafinil is going to cause downward pressure on '13 relative to '12.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. So just -- and then if I could, just the drugs that you listed as the top 5, if we can kind of go through them. Metropolol (sic) [Metoprolol], I guess, that's a slow decline. It had a little drop this quarter. We should continue to see that declining. I think that's what you'd said in the past.

Paul V. Campanelli

Yes. Again, metoprolol is a product that's very mature on the portfolio, so the decline would be modest at most. I think we -- for the most part, we've seen it.

Henry Reukauf - Deutsche Bank AG, Research Division

Budesonide basically pretty much continues on as it is. Is that a good assumption?

Michael A. Tropiano

No, no.

Paul V. Campanelli

Yes. If Budesonide's a 2-player market, I think it's a very healthy 2-player market. It's part of Mylan, and I think you just kind of have to look at that as a standard, balanced 2-player market. And at this point in time, I don't see or know of other competitors coming in.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. Modafinil, down to 16 this quarter, 16, 17. Does that fall away, say, in 1/2 or is that -- or are you at a situation where you're going to retain a certain amount of market share?

Paul V. Campanelli

Again, it's a little hard to say. We know that there's a lot of applicants out there that are not approved. I think we probably outperformed a little bit better than we had anticipated due to the slow approval process. But I think all we can say is there certainly is a healthy number of applications out there, and if they all get approved, you'll see aggressive erosion. At this point in time, it continues to be a good product, but I can't control or really predict with certainty when the FDA is going to approve the follow-on competitors.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. Propafone (sic) [propafenone].

Paul V. Campanelli

Propafenone?

Henry Reukauf - Deutsche Bank AG, Research Division

Propafenone, I guess it's -- I think that's supposed to be fairly stable as well. Is that correct?

Paul V. Campanelli

Yes. I think that's the way we're looking at propafenone throughout 2013.

Henry Reukauf - Deutsche Bank AG, Research Division

And hydrocodone, I guess the branded, that is -- I thought that was going to go down. I actually thought that -- I actually saw that go up this particular quarter.

Paul V. Campanelli

I think the case in the hydrocodone, I think you're referring to the hydrocodone in combination with chlorpheniramine, the Tussionex product?

Henry Reukauf - Deutsche Bank AG, Research Division

Yes, Tussionex.

Paul V. Campanelli

And how I -- how do you want me to say this? It was a positive flu season -- I apologize, the positive for Par, meaning that it were -- there were -- it was an aggressive flu season, so with that comes higher units sold. So I think that's the uptick that you're seeing in that particular product. It's seasonal.

Henry Reukauf - Deutsche Bank AG, Research Division

It's just a seasonal uptick? Okay.

Paul V. Campanelli

It's seasonal, but it was a bad flu season, so with that comes the additional units.

Henry Reukauf - Deutsche Bank AG, Research Division

And then I guess you took a litigation charge, the Zegerid litigation charge, thinking out about $9 million? Is there any -- I think that's going to go on for a while. Does that kind of cover what you think your expenses are at this point?

Barry J. Gilman

Yes, this is Barry Gilman. That's our best estimate at year end for purposes of our financial statements. And otherwise, we are continuing to defend the case and we don't, otherwise, really comment on any litigations.

Operator

The next question comes from the line of Erin Blum from Goldman Sachs.

Erin Blum - Goldman Sachs Group Inc., Research Division

On the product that you acquired from Actavis, can you explain how that manufacturing agreement works? And is there any reason for you guys to take over the manufacturing prior to the expiration? Do you have the capacity already to do that?

Paul V. Campanelli

Yes, so -- Erin, this is Paul. The way the agreement works is we negotiated supply agreements with, at the time, Watson. So we have a good runway for supply. And then also, as part of the acquisition process, we want to control the manufacturing ourselves, so we are working with, I guess, the now Actavis team to do tech transfers on these products that aren't commercial into our facilities. Keep in mind, we've got 3 facilities, so they may either be in Spring Valley, Irvine or Chennai. So we have a good tech transfer team that works with Actavis, so I feel real good about that process.

Erin Blum - Goldman Sachs Group Inc., Research Division

And is there additional CapEx that we should expect to be associated with that?

Paul V. Campanelli

It's small. I mean, at the end of the day, by definition, we'll call it CapEx, but it's small. It's not I would call material dollars.

Unknown Executive

That's right.

Michael A. Tropiano

Yes, that's right. And then also, we have ample capacity for any such tech transfers.

Erin Blum - Goldman Sachs Group Inc., Research Division

Okay. And then I have one more. On the Strativa restructuring, what was it that precipitated the decision to do that and how should we think about the cost savings?

Paul V. Campanelli

In a real -- at high level, I think everybody knows that we entered into a CIA agreement with the DOJ. And I think simply put, we're looking at our ability to how we can compensate our reps for Megace and the lack thereof. And because of that, we simply looked at our team and we structured accordingly to ensure profitability. So I think the key here is that we need to ensure an EBITDA contribution coming out of the Strativa team and then our profitability, and I think there's all there is to it.

Erin Blum - Goldman Sachs Group Inc., Research Division

Okay. And then this -- generally speaking, for a sales rep, what's sort of annual expense all in for a sales rep?

Paul V. Campanelli

If we get that detail -- I mean, we don't -- we really don't...

Michael A. Tropiano

No.

Paul V. Campanelli

We don't really raise the standard for -- and it is supposed to be part of the limit. I don't think there's anything we could add at the moment.

Operator

Sir, you have no more questions at this time. [Operator Instructions] The next question is from the line of Steve [indiscernible] from Simco [ph].

Unknown Analyst

I'm just wondering if you had a comparable EBITDA number from the fourth quarter of 2011 or maybe I missed that?

Michael A. Tropiano

Especially comparable to this EBITDA, I would say no. No, we don't. We're on a different basis. You got to remember, we were in a EPS world back then and we -- that's not something that we look at, okay?

Paul V. Campanelli

Yes. But if you -- yes. I'm just going to say, if you pick up our old financings...

Michael A. Tropiano

Yes. You can generate it.

Paul V. Campanelli

You can get -- do your own math because the -- obviously, the depreciation interest, taxes are all there for you. So we don't have it on us though, so sorry about that.

Michael A. Tropiano

There's a very specific basis that we're reporting here, right, in conjunction with agreements.

Unknown Analyst

Yes. Obviously, I can do that. Were there any unusual items that you would recall from the fourth quarter 2011 that I should think about, or was it a pretty standard quarter?

Michael A. Tropiano

Yes. Your best place to go, as Steve just reminded me, is to pull out our 2011 fourth quarter press release, which would come around -- right around March 1 of '12, and there's a whole reckon there actually from GAAP to non-GAAP as well.

Thomas J. Haughey

And we would highlight for any changes in the product in that press release.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and have a good day.

Paul V. Campanelli

Thank you.

Michael A. Tropiano

Thank you all.

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