Albany Molecular Research's Management Presents at UBS Global Healthcare Conference (Transcript)

| About: Albany Molecular (AMRI)

Albany Molecular Research (NASDAQ:AMRI)

UBS Global Healthcare Conference

May 22, 2013 09:00 AM ET


Michael Nolan – VP, CFO


Melanie Fan - UBS

Melanie Fan - UBS

Good morning everyone. Thank you for coming to the session. My name is Melanie Fan, happy to be your host. Our next presenter is Michael Nolan, VP, CFO and Treasurer of Albany Molecular Research. As a reminder there is going to be a breakout session in liberty 3 following this presentation. Thank you.

Michael Nolan

Thank you. Good morning, everybody. Feels like I have shown up to church midweek, but we will hopefully have a good discussion this morning with you. Thanks for UBS inviting us to the conference and also thanks for the people that have joined us here today. I appreciate you joining us, Tom D’Ambra, Dr. D’Ambra is actually out this week so unable to attend the conference, and he passes along his thanks as well. So let’s go ahead and get started, we have 30 minutes and the clock’s ticking.

I want to remind you that I may comment today on some forward-looking statements; it could be estimates and projections and such would remind you that you should not purely base your decisions on these comments; you should actually also read 10-K, 10-Q filing and such. So just reminding you that there is no guarantees in anything I say, what I am giving you is a perspective.

So who we are? So AMRI is a global service provider contract research and contract manufacturing particularly for outsource research in biology and chemistry. We have 1300 employees worldwide in our business. We also have a proprietary portfolio of compounds in various stages for drug discovery and we also have a global footprint and I’ll show you in few slides the operations we have around the world. We are what we think of as a leading contract manufacturer and organization and one of the only companies that provide a fully integrated offering from discovery through early development to commercial manufacturing.

This speaks to kind of the service offerings that we have if you think of everything from target discovery through commercial production, we actually support this value chain. We have operations in our discovery services. We also have early development, which includes scale up, manufacturing, and then contract manufacturing including principally small molecule pharmaceutical. We have some biologics or large molecule but it's really our aseptic fill/finish business which is actually more of a developmental site as opposed to a large-scale commercial facility.

Our footprint around the world is comprised of the following: we have a large-scale business that is principally centered in our Rensselaer facility in New York.

We also have an Aurangabad facility, Aurangabad, India a large-scale manufacturing facility and as well in Holywell, UK. Our Burlington, Massachusetts facility is also part of our large scale business; you will see in a few slides the make-up of our revenue. The Burlington business is our aseptic fill again it's a small development scale facility for biologics or aseptic fill/finish with lyophilization as well.

Our development and discovery part of the business is headquartered also in Albany. We have facilities in Syracuse, we have facilities in UK as well, Singapore and India. We’ve recently announced a closure of our facility in Bothell and I will speak to that in a moment.

Our value proposition, we have a strong intellectual capability in the organization, we actually - our roots were founded in drug discovery; we have a very large density of PhDs so everything from PhD down through a research scientist or associate. We have the depth and breadth of capability. You can see that we have delivered over 75 pre-clinical and clinical leads leading over 50 INDs in the last 10 years.

We also filed a 150 patents and have 400 peer reviews publicated and you can imagine that those are some of the results, and there's a lot of effort that goes into that particularly when you think of the number of patents, it's not typically usual what you would see in a CRO or a CMO and so what that brings in terms of a value proposition to our customers, our partners is a proven capability in their drug discovery process.

We’re also an integrated global chemistry and biology service provider. So we have both biology and chemistry, which in this industry is a very compelling value proposition as the two parts of the science speak together as you’re developing a compound.

We have a seamless technology transfer group and as well we have the scale up facility capability. So we work with our customers all along the value chain and right now we have roughly 51 Phase I and Phase II customer compounds in our portfolio. We have 22 Phase III customer compounds in our portfolio and then as well 36 commercial customer products within our portfolio again across the network that I’ve shared with you.

We also have continued to leverage our internal IP with some partnering programs that we do through an out licensing arrangement with various customers or partners and I’ll share those with you in a moment.

We see this industry in a favorable way; positive long-term drivers really are encouraging. Large pharma and the R&D restructuring that’s been going on for the past several years we see as positive momentum in the industry, the reduction in internal R&D resources and also the generic competition is really driving an increasing use of strategic outsourcing. Not only is it reducing costs for the pharmaceutical or biotech industry it's also creating can do or capable outsourced operations like AMRI to be able to advance compounds through the drug discovery process.

We've also seen more stringent regulatory environment and that’s been ever increasing and we continue to expect that that will increase in the future, and this requires a level of service with strong intellectual capacity and high quality standards and again given our roots in drug discovery and the amount of intellectual property and filings and articles and publications that we’ve done in the PhD density. We feel very confident that we’re well positioned opposite the regulatory environment.

We have a globalized R&D footprint and so therefore we offer our customers seeking various alternatives whether it be low cost or differentiated offerings, whether it be biology or chemistry. We have that in the Americas, Europe and Asia as well.

We also see the biotech funding environment, picking up a little bit. It's been difficult if you have been in the biotech space getting money. We’re starting to see that change and the momentum shifting ideally in the outsourced provider’s favor and why we believe that is we expect that the biotech funding is really focused on the novel aspects of what the biotech industry is about not so much around the chemistry or the biology that goes into advancing their work and so that’s what we see outsourcing playing a key role in the biotech industry.

And as well the emergence of the academic institutions and the partnerships that we’re seeing now with some of the biotech and also CRO/CMO industry type players is actually playing in our favor. There is a lot of novel opportunities inside academic that we can imagine partnering with and you’re seeing a lot of that now in the industry, where you're having the CROs and CMOs partnering with academic institutions. So again overall we see some positive long-term trends in the industry that positions AMRI very well.

And to speak to that really we kind of line up on the left-hand side this chart kind of some of those macro trends everything from cost focus to an aging population, highly fragmented CRO and lack of differentiation in the industry as well as some emerging economies and then flexibility and outsourcing. If you look at all those drivers on the left-hand side which play off of the previous slide I shared with you on the right-hand side why we feel AMRI is well positioned is spoken to there. So again a lot of the macro trends in our favor and as well we feel very well positioned opposite those macro trends to be successful in the future.

As you know the market’s quite large. It's roughly a $17 billion market separated into three principal buckets, the discovery services is roughly a $2 billion market with early development of 1 billion and then of course the contract manufacturing the largest component, and we play in a material way but not obviously a hugely significant opposite the overall market. So what we feel is there is a lot of penetration opportunity in these spaces, so whether it be early development discovery or a contract manufacturing. There is still a lot of opportunity to penetrate these markets. They are very fragmented and there's a lot of lack of differentiation going on that we feel being able to compete in all three places positions us well with a lot of our customers because we can work with them in any part of the value proposition.

About a year ago we launched an AMRI Smartsourcing initiative that really focused our intellectual capability and knowledge base with our customers, or partners to really advance kind of the offering that we have beyond just a commodity outsource shop. So really what Smartsourcing is about is helping our customers think through their problems, and really bringing solutions to them as cliché as that sounds but it's really working on outcomes and not just working on lowering their cost. While lowering their cost is an important part of the outsourced work that we do, given our global footprint in India and Singapore as an example we actually fundamentally believe that the Smartsourcing logo or franchise or approach is really around proving outcomes for our customers.

So looking at 2013 so bringing it in terms of near-term perspectives, there is a couple of initiatives that we’re quite focused on. Certainly we’re focusing on enhancing our revenue growth and mix, increasing our multi-relationships as an example the one we have with NIH, and also with Lilly, the insourcing relationship there. Those are in our discovery services business. We also want to strengthen our aseptic fill and finish business that’s business in Burlington, Massachusetts. Business was acquired in 2010 and shortly thereafter was put under a warning letter from the FDA, and since then it has been working its way back to its prominence where it was a $16 million revenue business and for us right now is only a $5 million revenue business. So really it's strengthening that business for our portfolio.

Driving the Smartsourcing as I spoke to in the last slide this is a key part of our offering to our customers it's again working with them strategically to solve their problems and actually work on outcomes and not just really be a cheap low-cost commodity outsource provider, whilst we can offer low-cost services, it's really important that we think about what they are trying to accomplish in terms of the value chain with drug discovery.

We’re also quite focused on cost with the ramp down at the Allegra patent royalties for us. We're very mindful of we need to be a standalone contract manufacturing business that’s profitable excluding any milestones or royalties and we’re working against that. So since 2011 we have reduced 18 million of cost which has dropped right to the bottom line. We’re also executing our biology strategy, which is to align our biology business that used to be involved with our chemistry business in Singapore and also Albany to create a more compelling value proposition, because again biology and chemistry speak quite a bit on an ongoing basis, and the time delay with having facilities in multiple places is not helping our customers advance the molecules as fast as they could, as effectively as they could.

And then finally we’re also going to continue to maximize our intellectual property through outsourcing or in licensing, if you will, our proprietary compounds and I will speak to a couple that we have in our pipeline.

Our revenue profile the first thing that - our first objective to drive growth is to enhance relationships that we have like with Lilly as an example. So we’re in discussions with a lot of customers, strategic accounts to continue the insource type of relationship that we have like we do with Lilly in Indianapolis. Also the NIH multiyear contract is another one we’re looking to build on and continue to grow that side of the business. Merck we have a very large relationship with Merck in Singapore for chemistry services and we continue to look to expand our relationship with Merck, a key account, and then we just recently announced a collaboration with Ono for development discovery services, and I mentioned previously also we’re driving our aseptic fill and finish business whilst we’re still under FDA warning letter that facility has actually undergone 13 audits in Q4 that were all passed successfully, two more audits were done in Q1 of this year and passed successfully as well. So that business continues to perform even under the FDA warning letter and we’re optimistic that that will soon be lifted when the FDA comes back.

We’re also looking to expand our commercial business, and we have some very large multiyear agreements with our commercial API business and a couple we announced in Q4. We also announced another one in Q1 some of our customers don’t let us announce their name but we did announce there was another commercial agreement there. We also have been benefiting from royalties from Actavis which is a compound that we’ve made for them since 2005 I should say, and we actually had a collaboration agreement with them and so we’re not only making their API we’re collecting royalties from the product that they are selling which is five-year royalty agreement.

We continue to have a strong customer pipeline and so we have 51 again Phase I and II compounds and 22 in Phase III. We have seven other compounds that are in late stage four of which are within the next 12 months expecting PDUFA disclosures and then in the next 24 months of the three remaining we would expect some feedback.

Pretty diverse portfolio, if you think of our revenue profile we don't have kind of all our eggs in one basket, we’re across the large pharma biotech, the biotech specialty pharma and other as well our large contract with GE which is publically disclosed is part of that large orange slice of the pie there so that’s we would describe other for the imaging business.

I commented on 18 million of costs reduction since 2011, here is really how we break those down. We entered our R&D development inside the company roughly $7 million of reduction since 2011, we previously worked on our own compounds to move those forward into later stage opportunities. We’ve since stopped doing that but we’ve continued to focus our R&D efforts to protect the intellectual property there and as well work on collaboration agreements with some of our partners and I will again mention those in a few slides.

We right size our U.S. operations both in discovery and development as the markets came down and we have taken our Bothell facility - in Q1 we shut our Bothell facility down, which was all in all a $5 million reduction for 2011 since 2011 for our US operations and the Bothell capabilities particularly the high throughput screening we maintained by moving that to Singapore to partner with our chemistry side and in fact some of the customers that we had in Bothell most of the customers we had in Bothell moved with us and one of them in fact has expanded their relationship both in India and Singapore with us. So it has actually been a very good transition for us.

Our discovery biology I mentioned earlier was the Bothell business principally where we have a lot of capability unfortunately was underutilized and part of that was the fact that it was standalone biology facility made it very difficult for our customers to see that as a truly compelling value proposition. So by moving it to both Albany as well as Singapore we’re able to leverage the chemistry and biology activity together to offer something more compelling to our customer. So again that’s a very advanced biology business but now it's also partnered with our chemistry business.

So looking forward out through this year we’re projecting revenue at the midpoint of 209 million, this is just contract revenue, it does not include our royalties which I will speak to in a moment. You can see that we have experienced roughly a 14% compound annual growth rate. We also see going forward, the industry is principally in the low teens from a contract manufacturing growth rate, we see this because we anticipate various sources, we’re anticipating a higher penetration of R&D outsourced demand and also we see the industry growing as late stage compounds that are moving off of Phase III and into commercial products we saw 39 of those in 2012 get approved. We anticipate the funding in the R&D environment for Pharma and Biotech to improve and we also see higher penetration, so we expect a low teen growth rate going forward in this industry.

I look at to 2015 what does that mean? That means roughly 265 million of revenue for the portfolio of which a 165 is in our large-scale business and 100 million is in our development discovery. So we’re still seeing that trough effect, you can see in the green shaded bars where we used to have a 114 million in development discovery when the pharma and biotech industry hunkered down on some of its R&D spending you saw that industry soften a little bit and we’re starting to see it come back and we don't see by 2015 getting back to the days that we’re at in 2008 but we do anticipate that continue to grow at a pretty good pace after 2015.

And you can see our contract margins roughly getting up to 23% by 2015 as well. And again, none of this includes royalties.

So the royalties I will just comment on briefly here, we have the intellectual property for the Allegra product and so we have been collecting royalties for quite some time and you can see here the patents will start to expire at the end of this year. So a portion of our royalties will start to decline by November and so what we’re doing and then there will be some that will come off June of next year and then the final batch will be in 2015. So what we’re doing here is projecting out based on the lifecycle of these patents, what we anticipate the royalty stream to look like for just Allegra and again in addition to this we’re roughly experiencing 60 million per year of royalties from Actavis on the commercial agreement we have with them where we also manufacture the API for that product.

So that’s a five-year royalty stream, which principally started in November of 2012 and that will continue for five years. So in addition to these Allegra royalties there’s 6 million to 8 million for five year starting in the end of 2012 through 2017.

We do have partnering programs so I mentioned that we spent in the early years, considerable amount of resources and effort in developing compounds through various stages. You can see it’s across many different therapeutic areas, the principal one here is our program with BMS in the CNS space and that’s currently in a Phase II study and in fact starting to be completed by mid-year and as well we would expect to see the results of that Phase II study by the end of the year and that will decide whether or not they are moving into Phase III, very impressive program for us. We've received significant milestones and R&D funding of $39 million roughly since the inception of this program with BMS, if this actually becomes a commercial product in CNS space which is principally a triple reuptake inhibitor, it's essentially looking to target depression resistant symptoms for people that are already on existing regimes for depression that are out there. This one is a novel compound that’s targeting that space particularly 30% of the people who don't respond to the drugs that are already in the space. So again very impressive opportunity for us would be a high single-digit royalty stream for us in the future potentially.

So for 2013 really our priorities are to again solidify our profitability on our contract business, again that’s the stated proposition for the company is to be really the royalties and milestones just become additional profit to us beyond the contract profit. We’re going continue to optimize our operating structure and cost position, so it's really implementing or executing the decisions we have made and really sticking to those, it's nothing new if you will and also continue to enhance our quality profile. We know the flight to quality is an important aspect of this industry, we’re seeing it with some of our customers who have relationships where they have moved overseas for cost reasons are now starting to repatriate back into or out of Asia.

One in particular Lilly they announced previously that they were closing their relationship with ShangPharma in China. They had previously announced they are closing their relationship with Jubilant in India and moving that work back. Again so flight for quality is really what they're looking for and that’s exactly serving us quite well in our growth potential.

We’re going to strengthen our position of service offering so similar to partnering our biology business with our chemistry businesses it was really creating a value proposition for our customers and making sure that we’re – that AMRI is the CRO, CMO of choice because we also offer everything from discovery, development, all the way through API manufacturing including some amount of biologics in terms of aseptic fill/finish business.

And then we will continue to really look to out -license some of those programs I showed you three partnered programs that we have across some of the space in terms of our intellectual property that we have already developed.

So that really concludes my presentation or my comments. I gather there is a breakout session now in Liberty 3. So I will be happy to meet anybody there and take your questions. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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