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Albany Molecular Research, Inc. (NASDAQ:AMRI)

Q1 2013 Earnings Call

May 7, 2013 10:00 AM ET

Executives

Thomas D’Ambra – Chairman, CEO and President

Mike Nolan – VP, CFO and Treasurer

Analysts

Paul Nouri – Noble Equity Fund

Shibani Malhotra – RBC Capital

Andrew Weinberger – Private Investor

Operator

Good day, ladies and gentlemen and welcome to the AMRI First Quarter Earnings Release Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to your host, Dr. Thomas D’Ambra, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thomas D’Ambra

Thank you, Lisa. Good morning, ladies and gentlemen. Welcome to the conference call segment of AMRI’s 2013 first quarter announcement. This call is a follow-up to our press release issued earlier this morning over PR Newswire.

With me on the call today is Michael Nolan, AMRI’s Chief Financial Officer, Vice President, and Treasurer. We are pleased to report positive year-over-year gains in revenue and earnings per share with improvement delivered by all segments of the business. Although AMRI’s Large Scale business delivered a record fourth quarter and full year performance in 2012, this continues to lead the pack and delivered another positive quarter.

While Discovery and Early Development continued to be impacted by a soft marketplace, we are seeing signs of slowly improving business climate for these services and remain bullish on future prospects. Cash positions that were implemented over the past couple of years have right-sized our cost structure and as a result we are seeing high margin pull-through to the bottom line as contract revenue growth. I am going to stop here and turn the phone over to Mike Nolan for his comments after which I will have additional remarks. Go ahead, Mike?

Mike Nolan

Thank you, Tom. Good morning everyone. Before we begin, I would like to note that much of our discussion today might be termed forward-looking. Other than historical facts, our 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, 2012 as filed with the Securities and Exchange Commission on March 18, 2013 and the company’s other SEC filings.

While these statements represent management’s current judgment on the future direction of the company’s business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. The company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date here. I am now going to present financial results for the first quarter and financial guidance for the second quarter and full year 2013. Further details are included in our press release issued this morning over PR Newswire.

I’d like to underscore some highlights on a year-over-year basis for first quarter 2013. These include contract revenue growth of 9% and adjusted EPS of $0.23, which represents an improvement over 2012 of $0.21. Royalties for the first quarter of $12.9 million were in line with the top end of our guidance and were above last year principally driven our new royalty stream from Actavis which were $1.8 million in the first quarter. Our continued focus – our continued cost focus is contributed to a strong earnings pull-through on the incremental revenue above our first quarter 2013 guidance, with overall contract margins of 19% above the top end of our guidance of 14.5%.

SG&A was $9.5 million in the first quarter at the low end of our guidance and below first quarter 2012 of $9.8 million. With regard to our cost actions, the closure of our Bothell operations which was previously communicated is on track and operations are terminated at the end of first quarter 2013. And finally, operating cash in the first quarter was $7.1 million, which was slightly ahead of our expectation for the quarter.

Turning to the financial details for the first quarter 2013, all comparisons are on a year-over-year basis. To begin with adjusted operating income in the first quarter excluding impairment and restructuring charges was $10.8 million. This compares to $2.7 million in the first quarter of the prior year with a strong pull-through on our increased contract revenue. Excluding royalties and milestones, adjusted operating income increased $6.2 million, an incremental contract revenue of $3.8 million reflecting the favorable impact of improved mix and lower cost as a result of previous restructuring actions.

Total revenue was $59.4 million, up 11%. Total contract revenue was $46.5 million, an increase of 9.5%. Total contract revenue encompasses revenue from AMRI’s Discovery Services, Development and Small Scale Manufacturing and Large Scale Manufacturing business components. Contract revenue from Discovery Services was $11 million, an increase of 13%. The increase reflects growth in our Medicinal Chemistry Medicinal Chemistry including a full quarter of insourcing business with Lilly offset with lower biology revenues associated with the ramp down of our Bothell operations transitioning to Singapore and Albany.

It’s important to note our Biology revenue and the shutdown of our Bothell operations was on track with our plans for the first quarter. Contract revenue from Development and Small Scale Manufacturing, consistent with our expectation was $9.1 million, a decrease of 7%. I communicated during our fourth quarter 2012 call that we anticipated a difficult comparison in the first quarter for our Development and Small Scale segment due to particularly strong first quarter 2012 as a result of some rollover of planned 2011 revenues into first quarter 2012.

Contract revenue for Large Scale Manufacturing was $26.4 million, an increase of 14%. This increase was primarily attributable to a strong API business particularly at our India and UK operations along with continued growth at our Rensselaer facility.

Our compounds in Phase 1 and Phase 2 development programs now stands at 51 as at the end of the first quarter 2013. The number of compounds in Phase 3 that we are working on with clients was 22 as of the end of the first quarter of 2013. Overall, royalties were $12.9 million, an increase of 17%. Royalty revenue for the first quarter of 2013 includes royalties from Allegra as well as $1.8 million earned by the company on net sales of generic product sold by Actavis for which the company also manufactures the active pharmaceutical ingredient at the Rensselaer, New York facility. The increase was primarily due to the addition of new royalties from Actavis.

R&D costs were down 300,000 from the prior year reflecting the company’s reduced internal R&D focus. Selling, general and administrative costs were down 3% reflecting our continued focus on cost management and results from previous restructuring activities.

Adjusted earnings per share in the first quarter of 2013 was $0.23 per diluted share compared to first quarter 2012, up $0.02 per diluted share. Adjusted earnings per share exclude cash and non-cash charges for the previously announced closure of our Bothell facility. Cash from operations was $7.1 million. Our cash, cash equivalents and restricted cash increased to $33.9 million by the end of Q1 2013 with CapEx for the quarter of $2.1 million.

I will now provide our full year and second quarter 2013 financial guidance. Looking at full year 2013 we are reconfirming the top end of our contract revenue guidance to $213 million, an increase of up to 12% from 2012. For second quarter 2013, we see this coming in around $47.5 million to $50 million, an increase of up to 18% over 2012. Breaking down revenue for the year, we are reconfirming for Discovery Services that up to 11%, Development and Small Scale up to 7% and large scale up to 14% versus 2012.

Turning to contract gross margins we are guiding to improve our contract margins from 12% in 2012 to a midpoint of 16% in 2013, slightly up from a previous mid-point of 15% for the year. A higher first quarter contract margin of 18.7% was the result of a stronger mix in the quarter than we anticipated in our full year outlook. We will also see some margin benefit resulting from the closure of our Bothell facility at the end of the first quarter. R&D investment is expected to remain roughly flat at around $1 million amount focused on improved process efficiencies and in the plants and also furthering our out licensing opportunities. We project SG&A cost to flat to slightly down versus 2012 based on ongoing cost savings offsetting inflation. As a percentage of sales, SG&A will approximate 18% which is down 3% versus 2012.

Pro forma SG&A for 2012 excludes the impact of one-time executive transition costs. As we have stated in our last call, and the last few announcements issued, we have undertaken cost steps to ensure we reach profitability excluding royalties by the end of 2013 on a run rate basis. The cost steps of realigning our Discovery Services as well as managing our SG&A and R&D spend will reduce our annual cost structure to improve our goal of being profitable excluding royalties and milestones. These actions along with our outlook for contract revenue should improve our profitability in 2013.

For royalties we are projecting a range of $35 million to $39 million including between $6 million and $8 million from Actavis royalties. I want to point out that 2012 Actavis royalties of $4.7 million was started in June of 2012 included large quantities. So, year-over-year comparison is not linear.

Also important to note is a 2% portion of the Allegra royalties for sales in the U.S. and in November 2013. To approximate 2014 revenues for Allegra, we estimate that these to be $17 million and for 2015 around $5 million. Given the range of revenue, royalties, and mix impact on our effective tax rate our guidance for earnings per share results in a wide range. Taking this into account and given the strong performance in the first quarter for the full year 2013 we expect an adjusted earnings per share range of $0.52 to $0.65, up from our previous guidance of $0.34 to $0.52. At the midpoint, our adjusted earnings per share guidance represents a 134% increase over our adjusted earnings per share of $0.25 in 2012.

Our adjusted earnings per share guidance for 2013 excludes impact of our previously announced closure and restructuring charges of our Bothell facility. As a result of our increased operating performance, ongoing working capital management and disciplined capital program, we predict a strong cash flow in 2013. Operating cash will range from $20 million to $25 million before CapEx between $12 million to $14 million.

For the second quarter, we expect contract revenue growth compared to prior year to range from 13% to 18%. Broken down by segment, second quarter contract revenue growth versus prior year is estimated as follows: $9 million to $12 million for Discovery Services, up 16% at the top end; $8 million to $9 million for Development and Small Scale, up 11% at the top end; and $30 million to $31 million for Large Scale up 20% at the top end.

As the year progresses, we anticipate higher growth in contract revenue through the middle of the year with a tougher comparable by the end of the year as a result of the strong fourth quarter in 2012. We project total royalty revenue in the second quarter to range from $8 million to $9 million including $1 million to $1.5 million from Actavis royalties.

We expect contract gross margins in the second quarter to range between 15% to 16%. SG&A and R&D for the second quarter 2013 will approximate second quarter 2012. For the second quarter, we expect adjusted earnings per share to range from $0.09 to $0.12. Adjusted earnings per share, exclude cash and non-cash restructuring charges from our previously announced closure of our Bothell facility.

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

Thomas D’Ambra

Thank you, Mike. As we have noted before, market demand for Discovery and early development has been somewhat soft for the past couple of years. As a majority of large pharmaceutical company has cut overall R&D spending from peak levels and focused in increasing slice of the budget for late-stage pipeline.

Smaller biotech and startups that have no revenue and need continued cash infusions to survive have had to endure a drought and venture funding, equity markets close to IPOs, and a tighter and tougher licensing environment for their programs. The venture capital industry turns in bleak numbers for biotech deal making in the first quarter of 2013 with first time deals for life scientists suffering a dramatic drop according to the venture industry declining 52% in dollars from the prior quarter and following to its lowest level in almost 18 years. These factors have contributed to the current soft demand levels for outsourcing of early stage research resulting in a more competitive environment in an excess of capacity in discovery and early development competing for fewer projects overall.

Although the prior couple of years does seem tight R&D budgets for the pharma customers we serve and the ability to raise capital or partner programs of the biopharmaceutical industry has been more difficult, several encouraging trends are continuing to suggest that the outlook for the future is improving.

The good news for the industry and patients is that pharma Phase 3 pipelines are strong overall and a number of potential new medicines are nearing completion of costly and likely clinical trial. As previously noted, the FDA approved 39 new entities in 2012 which was the most since 1996. Through the first quarter of 2013, 9 new molecular entities or NMEs were also approved which suggest that the approval phase of 2012 has not slowed. Several industry reports from early this year suggest that the high approval rate of 2012 is projected to continue at this level to 2015 or beyond. This bodes well for the industry and its stakeholders and the availability of capital through invest in early R&D efforts should improve.

Although, overall venture financing of early stage biotech has been soft to a significant and how high profile cash raises occurred in the last few weeks, the investment of $465 million by GSK to a joint venture without Avalon ventures to fuel new book companies and the closing by Third Rock Ventures on a new fund raising $516 million. Both of these initiatives are disclosed to be focused on new startups and suggest that the appetite for investing in new company startups is improving.

The market for public financing – financing the public biotechs and biopharmaceutical companies is active and a number of small companies are queuing up for IPOs in the coming month with six IPOs occurring during the first quarter. Overall, the forward trending environment for our customers in terms of available capital for R&D spending appears to be improving and we are seeing early signs in the marketplace of this positive improvement.

During the first quarter of 2013, the number of proposals submitted to customers for all of our services was up 18% over the first quarter of 2012 and up over 30% from the prior quarter. Although, a number of these proposals are for small fixed projects, importantly, the number and type of strategic opportunities is significant and represents a positive change from the past couple of years, which had been little opportunity for strategic long-term deals. While we cannot guarantee that any of these opportunities will be successfully concluded, we are bullish and optimistic about the change in business climate due to the range of breadth of potential deal flow.

As we’ve described in our last earnings call in early February, we are put in place in number of multi-year relationships for Discovery such as Lilly insourcing deal and the NIH blueprint translational research contract to new and extended long-term API supply agreements. These deals provide longer term visibility of revenue and provide a base on which to build new and recurring business across the organization. The combination of these multi-year deals and the strong pipeline of deal flow are the reasons that I am bullish on AMRI’s prospects in 2013 and beyond.

Turning to our individual business segments, AMRI’s first quarter of 2013 performance reflected improved operational performance across all of our sectors, (inaudible) we have reported in the recent past that our Large Scale Manufacturing operations with Rensselaer in New York API plant leading the team.

Rensselaer results reflect the stability of supporting the requirements of a number of multi-year commercial contracts and the continuing ramp-up of the marketplace of our customers new launches. In addition to supporting the long-term contracts of GE Healthcare, Shire, Actavis, Takeda. In early April AMRI entered into another long-term commercial supply agreement with a specialty pharmaceutical company to provide APIs on multiple products to support the late stage development and commercial launch of several oncology products they are developing. These customers requested its identity not to be disclosed at this time. This agreement is similar to another commercial supply agreement we entered into late in 2012 to provide the API for a customer whose oncology drug was approved by the FDA and launched in the U.S. market during 2012.

The number of commercial compounds we are supported – supporting by manufacturing the API or drug products during the first quarter of 2013 increased slightly from 35 to 36 entities. As Mike has already mentioned the number of Phase 3 compounds and Phase 1 and Phase 2 compounds are at 22 and 51 respectively. In addition to the strong and consistent performance of our Rensselaer large scale operations both our Wales and India large scale operations also delivered improved results from prior period. Importantly, U.S. FDA upgrades that both of these sites continue on plan with expected completion by mid to late-summer.

With the completion of these facility and quality upgrades in Wales and India, AMRI will be able to support the manufacture of active ingredients for our customers utilizing our global network of facilities. These investments are important and allowing our large scale operations to continue to support growing demand without excess or out of the norm capital spending. We remain committed to driving to full capacity utilization of the investments we have already made in manufacturing facilities with targeted capacity improvements and upgrades as needed.

It’s also noteworthy to point out the Rensselaer was honored once again during the first quarter as pointed out in the last call by the FDA, the audit occurred at the end of January in 2013. Consistent with the site’s history, the plant again received high marks for its quality systems performance and adherence to regulation.

Shifting focus to our Burlington, Massachusetts, perennial dosage form fill and finish operations, Burlington continues to make progress in growing its business and the pipeline of potential deal flow continues to build. This facility is fully functional in serving customers around the world. The pipeline of opportunities is stronger than any time since Burlington was acquired, but we continue to experience the headwind of the FDA warning letter, which was received in August of 2010. The FDA last inspected the Burlington operations in June of 2011, right after the site resumed production following closure to remediate the observations in the warning letter. We have continued to communicate with the FDA New England District Office and are expecting the FDA to audit Burlington in the near future. We continue to be in a state of readiness for this audit, while also seeking opportunities for continued improvement.

This is noteworthy that the Burlington site continues to be audited by perspective customers and was audited 13 times during 2012, including by two different large pharmaceutical companies and was approved as a supplier every time. One of these pharma companies re-inspected the site in the first quarter of 2013. And Burlington was re-approved as a supplier to this company. As a result, we remain optimistic that the headwinds and the warning letter can be turned to tailwinds with a successful FDA inspection.

In the meantime as I mentioned above, we are operating without restriction and supporting a number of customer programs by supplying drug product for clinical trials. It should be noted however, that we cannot guarantee that a follow-up FDA inspection will not uncover additional observations that could prevent the warning letter from being closed out. That being said a successful outcome will likely allow more potential customers to add AMRI Burlington to their list of preferred suppliers.

Turning to AMRI’s Discovery and Early Development Services, as noted these segments continued to experience soft demand. Nevertheless contract revenue for discovery grew 13% over the prior year period led by the ramp up of the full staffing of our Lily insourcing collaboration and the NIH contract.

We are also pleased to announce during the quarter the long-term agreement with Ono Pharmaceutical Company, which extends and expands our relationship for Discovery and Development Services. Ono projects are being supported by activities at multiple AMRI sites. AMRI is also beginning to realize the benefit from several prior cost actions and therefore Discovery revenue growth is leading to a larger than proportionate positive benefit on operating margin for this segment. During the first quarter of 2012, we had completed the winding up of activities of our Hungary subsidiary with a successful transition of Hungary’s technology platform and business relationships to our Hyderabad India operation.

During the first quarter of 2013, we similarly completed the windup of customer operations in Bothell and the concomitant transfer of equipment capabilities in multiple important customer relationships to our Singapore operations. This has been successfully completed and we are pleased to report that important customer contracts have now been put in place with our Singapore biology operations for the remainder of 2013. Importantly because of the expanding capabilities of our Singapore Biology offering, we have secured additional biology business from Singapore giving visibility for the full year for Singapore biology ahead of plan. We believe the collocation of Discovery Biology and Chemistry within our Singapore operations will position this site for greater opportunities at the marketplace keeps integrated strategic discovery relationships. As already stated multiple cost actions that the company has taken over the last 18 months or so has reduced our expense footprint more than $18 million over 2011.

Our global footprint and SG&A spend are leaner and as our revenue growth continues, we expect to realize an increased benefit to our bottom line from these actions. With regard to our partnered R&D programs, the first quarter was quiet with no public announcements. Nevertheless, we believe that 2013 could be an important year for AMRI’s CNS Program that was licensed to Bristol-Myers Squibb in late 2005. The lead compound from our collaboration for this advanced BMS-820836 is currently in two Phase 2 clinical studies for treatment resisting depression. Both studies have projected end points during the first half of 2013. We estimate BMS will disclose results of these studies in late 2013.

As I wrap up my prepared remarks this morning, I would like to summarize several points that we want to leave with you today. First and foremost AMRI continued to deliver significant growth and revenue and substantial improvement in financial performance in the first quarter of 2013 relative to the year ago period. These results reflect an improvement business driven by all of our contract operations and importantly also reflect the cost actions we have taken in prior periods. Secondly, as we progress through 2013 the actions that we have taken during the past 18 – 12 to 18 months particularly with our SMARTSOURCING approach are setting the stage for continued growth and financial improvement over 2012 and put us on the path to meet the stated objectives to make our operating businesses profitable on a run rate basis in the second half of the year without considering the impact of the additional royalty stream. Third I referenced to fast and more long-term strategic relationships and manufacturing supply agreements are building the base of consistent and high quality revenue visibility upon which future deals will lead the continued long-term growth. As the market steadily improves in 2013 AMRI is positioned to benefit and I believe is emerging from the pack of competition.

We remain committed on a global basis the highest standard of quality of safety customer service and value regardless of where, when or who we might be interacting with. We continue to implement best in class practices, services and technologies and we remain committed to making AMRI a premier provider across the range of technologies and services of our business. As always I would like to thank my colleagues at AMRI for their dedication and significant contributions. Thank you also for your interest in AMRI. At this point we’ll be happy to answer any questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Paul Nouri with Noble Equity Fund. Please go ahead sir.

Paul Nouri – Noble Equity Fund

Hey good morning.

Thomas D’Ambra

Good morning, Paul.

Paul Nouri – Noble Equity Fund

Just one quick question what capacity utilization are you running at right now with Actavis?

Mike Nolan

Yeah, so it’s Mike Nolan. Thanks for the question and being on the call today. So, capacity utilization varies I mean because Rensselaer is an example would be probably our highest utilization rate, now we would typically see that in the 80% to 90% range and again it depends on the mix, so it’s not just the straightforward linear kind of equation. If you then move into some of our other Large Scale businesses the capacity utilization is quite a bit lower than that and it’s certainly with Burlington including a large scale we’re probably a third of capacity.

Thomas D’Ambra

I would add, Paul, this is Tom, that Rensselaer is fairly tight, but there are sections of the plan that have capacity I think there are certain bottlenecks for example when you are making an API the final step has to go through what we call finishing suites that have (inaudible) control, high containments suites. And so those can become bottleneck suite we’re making targeted investments on average of bottleneck to increase our capacity or pull through at the site. There were also right now parts of the plan are operating 5/24, so there is the ability to increase capacity just by adding additional work shifts and very importantly I have mentioned on my remarks that we’re making FDA upgrades to our Wales and India sites, so with the goal to allow us to potentially transition some of the work at Rensselaer to these other sites there were free-up additional capacity, but also allow both Wales and India to take on some of these projects as well. Importantly Wales has some very large tanks that when the FDA upgrades are complete will give us significant expansion capacity. So, we are tight in Rensselaer, Rensselaer is doing very well, but there is a lot of room to grow without major capital investments.

Paul Nouri – Noble Equity Fund

Do you have an estimate for the capital expenditures this year?

Mike Nolan

Yeah, the guidance we have provided is between $12 million and $14 million is consistent with what we said at the – during our Q4 call.

Paul Nouri – Noble Equity Fund

Alright, thanks.

Mike Nolan

You’re welcome.

Operator

(Operator Instructions). Our next question comes from Shibani Malhotra with RBC Capital.

Shibani Malhotra – RBC Capital

Hi, thanks for taking my question and they are a bit specialty pharma focused, that’s my space. But I guess I have a few one, as we see the economy improving and companies, smaller companies getting more access to cash are you seeing an increase in contracts in terms of your R&D. Second is on your follow on for – with Bristol-Myers I guess how are you thinking keeping that product versus potentially monetizing that, in front of the Phase 3 data? And then finally a question on if you can answer, we noticed you have a DMF filing and I was just wondering if you are working on a generic or if it’s something to do with your chemical studies beyond that?

Thomas D’Ambra

Thanks Shibani. Let me try to answer the question, but first I had to do with the specialty pharma deal for our opportunity with the improving climate. We are seeing more opportunities in our pipeline in particular as I mentioned the number of proposals is up substantially this quarter over the prior quarter and over the year ago period. So, we are optimistic that if things are slowly beginning to improve with our customers and that will lead to continue grow and we are – as Mike has mentioned we have reaffirmed our guidance for the full year and we are optimistic with an improving climate that ultimately that’s going to lead to continued growth for our business. I hope that answered that question on the…

Shibani Malhotra – RBC Capital

Yeah.

Thomas D’Ambra

The second question on the BMS compound we have – there are two Phase 2 studies that we will be finishing up in the first half of this year. We have had some discussions about what we might do with those assets at the moment we have not disclosed anything, but that’s something that obviously we will continue to discuss at the board level. And then the third question I am not familiar with that BMF, but I will say that often we – when we are working different customers we may have a contract for a product which in order that relationship we may file around DMF which the company would say I think that’s probably a routine customer relationship not something, I don’t think it’s not a generic that we are developing on our own.

Shibani Malhotra – RBC Capital

Okay and if I may follow up just on a broader question, obviously the company is going through a turnaround phase, and I guess the question I have is at this stage what do you think investors are still missing about the company and the prospects over the next 2 to 5 years in terms of where you can take this?

Thomas D’Ambra

Well I think in my view that with the turnaround in our company that I think the turnaround in the industry it has been a lot of particularly in big pharma there has been a lot of valuation on their R&D strategies their pipelines and that led to a lot of facility closured tens of thousands of scientists have been laid off. There is – the good news is the pipeline, laid pipelines are doing very well which is going to lead to new approvals and the same thing with the smaller companies. The funding environment has been tight, but there is evidence that renewed availability of capital is coming. And I don’t think these companies are going to pursue the strategies they had in the past. I don’t envision Pharma is going to be build new buildings and hire thousands of scientists again I think you’re seeing more of an acknowledgement of the value of variable resources to support their efforts. Not only because of the variable costs, but I think there is an accountability from an external relationship that these companies may not have had internally.

And the same thing with the smaller companies with the – maybe the ability to raise more capital there is not as much available they have been in the past. And I think as a result most of the companies, small companies in the past would build large internal discovery capabilities and outsource all their development. And I think you’re going to see more variable, more virtual companies result as well. So, outsourcing in the early Discovery – early development our view is the outsourcing penetrate (Technical Difficulty) which had probably close to 50% of clinical budgets. And so I think the opportunity for outsourcing companies like AMRI is tremendous. And at the same time with the days a lot of new startups is over. So, the industry is really going to be controlled by the companies that exist today and the opportunities I think are much greater than the market is getting quite for today. And I think that our early success and a slowly evolving marketplace was evidence of that and also return to quality.

Shibani Malhotra – RBC Capital

Thank you very much. I appreciate it.

Thomas D’Ambra

Thank you.

Operator

We’ll take our next question from Andrew Weinberger, Private Investor.

Andrew Weinberger – Private Investor

Hi, congrats on the emerging expansion this quarter. Just had a question I think you put a slide now working for sort of roughly 20% or 21% contract margins in 2015. And I’m just sort of working revenue basis supposed to be significantly higher and then also you could do about 19% contract margins this quarter. So, can you help me understand what drove the accessibly high contract margins this quarter and why do we take a step back potentially from this quarter as you will look at 2014 and then sort of growth in the 2015?

Mike Nolan

Yeah and good morning, thanks for being here Andy. It’s Mike, to answer that, so we had a strong mix in Q1 and even within let’s say our Rensselaer business the mix of products that we have ranges in terms of margin. So, any given quarter could be very different which is why we have guided the margins to be below our Q1 overall margin. That said, we did increase by 100 basis points our overall contract margins for the year versus previous guidance. So, we have stepped it up a little bit contemplating some stronger results overall and what we believe to be an improved mix versus our original outlook for the year. As you think about stepping from front of the year to the back of the year like I say it’s just a mix issue and that was like from the overall 2013 view through to the 2015 view that’s in our investor presentation you are referring to. You could say that’s a relatively conservative step up, but certainly it’s one that we had for a period of time now. It’s not just this year’s presentation financial this one that’s there. So, we will continue to look at that and as we get closer certainly to 2014 we will provide guidance for ‘14 for sure and then as well ‘15 as well.

Andrew Weinberger – Private Investor

I guess – it looks like over the last couple of quarters on a rolling basis the core business has been above breakeven. Can you how do you again understand what the incremental contract margin pull through is, what’s just talk about I guess large scale for now and then I guess as the others become more profitable we can talk about those in subsequent quarters?

Mike Nolan

Yeah. Good follow-on question I mean we finished Q1 on a contract basis or excluding milestone and royalties, we were just slightly negative $946,000 pretax. And what you’re starting to see and we seen this in the last few quarters where margins have expanded and we are seeing EBITDA or margin expansion quite a few basis points, 100s of basis point and that’s really the pull through that Tom and I spoke to you in our script of just the incremental revenue is now pulling through higher because the previous cost actions Tom quoted $18 million since 2011. So, if you look at on a quarterly basis what’s come out, that’s part of the reason why we are seeing stronger pull through, but specifically to your question on large scale, as we see the large scale business grow if you will on a percent basis, it’s not an unusual to see in excess of 30% in our gross margins pull through to the bottom.

Thomas D’Ambra

Particularly if you look at the Burlington facility for example where there is a lot of capacity we can utilize which will have a high margin pull through.

Mike Nolan

Yeah, that will be in fact higher than the 30% I quoted, I was speaking to Rensselaer, I think Andy was asking on Rensselaer, but you are absolutely right for places like Burlington where we have like I say we are probably at may be a third of the capacity if you look at full year 2012 revenues, so certainly any incremental revenue closer to very high margin.

Andrew Weinberger – Private Investor

Okay. And then last question just as you talked about your revenue guidance for each of your businesses throughout the remainder of the year you just recheck sort of paying the people sort of where at the top end of the range is. And I was wondering based on the slight over performance in the first quarter, I mean are you trying to in anyway signal sort of more comfort with the upper half of the range than may be you were when you first gave guidance or is that just a normal practice?

Thomas D’Ambra

Yeah, certainly in large scale, I feel more confident at the upper end of the range. What I would say and the reason why we haven’t changed the overall annual outlook here it’s more of a we had additional shipments in Q1 that really pulled forward from Q2 particularly on our large scale business, so that’s why we are – excuse me on a large – strong large scale business in Q1 versus our previous guidance. So, that’s really what’s going on as there is few orders that shipped earlier in the year than we had anticipated originally. And with our visibility I feel as I say confident at the top end of the range for Large Scale.

Andrew Weinberger – Private Investor

Okay, perfect, thanks so much.

Thomas D’Ambra

You’re welcome. Thanks for joining today Andy.

Operator

And there are no further questions at this time. I would like to turn the conference back over to our presenters for any additional or closing remarks.

Thomas D’Ambra

Thank you, Lisa. This concludes AMRI’s first quarter 2013 earnings call. Thank you again for your interest and participation.

Operator

And that concludes today’s teleconference. Thank you for your participation.

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