Albany Molecular Research's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Albany Molecular (AMRI)

Albany Molecular Research, Inc. (NASDAQ:AMRI)

Q2 2013 Earnings Call

August 6, 2013 10:00 AM ET


Thomas D’Ambra – President and CEO

Mike Nolan – VP, CFO and Treasurer


Greg Bolan – Sterne Agee

Andrew Weinberger


Please standby. Good day, ladies and gentlemen and welcome to the AMRI Second 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.

Thomas D’Ambra

Thank you, Lisa. Good morning, ladies and gentlemen. Welcome to the conference call segment of AMRI’s 2013 second 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 another quarter of positive year-over-year gains in revenue and adjusted earnings per share with improvement delivered by all segments of our contract business. Performance was led by AMRI’s Large Scale business with continued strong results from AMRI’s Rensselaer Operations, and contract revenue growth from Burlington.

Discovery Services, also delivered a strong quarter benefiting from the ramp to full staffing of the Lilly In-sourcing relationship and the NIH contract over the course of last year.

Prior restructuring, leading to the closure of former hungry environment locations in addition to other cost actions are contributing to an improving bottom line reflected in improving overall contract margin and adjusted EPS performance, finishing at the top end of our guidance with the second quarter, in spite of high margin royalty revenues coming in at the mid-point of our expectations.

While, our Discovery and Early Development businesses overall continued to be impacted by a soft marketplace, we are however seeing signs of a slowly improving business climate for these services and remain bullish on future prospects for all segments of our business.

We also are pleased to acknowledge the long-awaited FDA re-inspection of AMRI’s Burlington operations, which occurred in early to mid-July as we announced at that time.

Although three specific limited scope observations were noted in a Form-43 issued at the conclusion of this inspection. No observations pertain to action taken to remediate a prior 2011 Form-43 or the warning letter received in August of 2010.

We believe this inspection confirms that our actions and investments in Burlington, would be deemed satisfactory to the FDA, and look forward to Burlington in achieving its potential and delivering positive growth as we transition to a new operating era at this location.

I’m 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’d 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 arriving after the date here.

I’m now going to present financial results for the second quarter and financial guidance for the third 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 second quarter 2013. These include contract revenue growth of 20% and adjusted EPS of $0.12, which represents an improvement over 2012 of 100%. Royalties for the second quarter of $8.5 million were at the mid-point of our guidance, and were above last year principally driven by our new royalty stream from Actavis which was $2.8 million in the second quarter and $1.1 million up from first quarter 2013.

We are pleased with our adjusted EPS performance finishing at the top end of our guidance for the second quarter, even with mid-point royalty results, demonstrated continued improvement in our contract manufacturing business.

Our continued cost focus is contributed to a strong earnings pull-through on the incremental revenue above our second quarter 2013 guidance, with overall contract margins of 16.4%, above the top end of our guidance of 15.8%.

And finally, operating cash generated in the second quarter was $12.4 million with a strong quarter of cash collections, and now has an unrestricted cash of $38 million.

Turning to the financial details for the second quarter 2013, all comparisons are on a year-over-year basis. To begin, with adjusted operating income in the second quarter excluding several one-time items $6 million, this compares to $2.9 million in the second quarter of the prior year with a strong pull-through on our increased contract revenue. Excluding royalties and milestones, adjusted operating income increased $1.8 million, on incremental contract revenue of $8.4 million.

Total revenue was $59.3 million, up 19%. Total contract revenue was $50.8 million, an increase of 20%. 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 $10.8 million, an increase of 26%. The increase reflects growth in our Medicinal Chemistry Medicinal Chemistry including a full quarter of in-sourcing business with Lilly somewhat offset with lower biology revenues associated with the ramp down and transitioning of our Bothell operations to Singapore and Albany.

Contract revenue from Development for Small Scale consistent with our expectation was $8.7 million, an increase of 7%. Contract and Revenue for Large Scale Manufacturing was $31.3 million, an increase of 22%. This increase was primarily attributable to a strong API business at our Rensselaer operations, along with continued growth at our Burlington facility.

Our compounds in Phase 1 and Phase 2 development programs now total 51 as at the end of the second quarter 2013. The number of compounds in Phase 3 in which we are working with clients was 22 as of the end of second quarter 2013.

Overall, royalties were $8.5 million, an increase of 13%. Royalty revenue for first quarter 2013 includes royalties from Allegra as well as $2.8 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 our Rensselaer, New York facility. The increase was primarily due to the addition of new royalties from Actavis offsetting lower royalties from Japan Allegra sales.

R&D costs were essentially flat with the prior year at $0.2 million reflecting the company’s reduced internal R&D focus. Selling, general and administrative costs excluding one-time charges for our U.S. litigation matter and executive transition costs were $10.1 million.

Adjusted earnings per share in the second quarter of 2013 were $0.12 per diluted share compared to second quarter of 2012, up $0.06 per diluted share. Adjusted earnings per share exclude a litigation settlement, executive transition cost , impairment and cash and non-cash restructuring charges primarily due to previously announced plans for our Bothell and Hungary operations.

Cash generated from operations was $12.4 million. Our cash, cash equivalents and restricted cash increased to approximately $42.8 million by the end of Q2 2013 with CapEx for the quarter of $2.4 million.

I will now provide our full year and third 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 and increasing the bottom end of the range to $209 million, reflecting our stronger first half 2013 results.

For third quarter 2013, we see this coming in around $51 million to $53 million, an increase of up to 16% over 2012. Breaking down revenue for the year at the top end, we are projecting Discovery Services to grow up 10%, Development and Small Scale to grow up 4% and large scale to grow up 15% versus 2012.

For contract gross margins, we are guiding to improve our contract margins from 11.5% in 2012 to a midpoint of 16.8% in 2013, slightly up from our previous mid-point of 16% for the year. We will also see some margin benefit resulting from the closure of our Bothell facility through the balance of the year along with increased volume leverage in the second half of 2013 compared with the first half.

R&D investment is expected to decrease slightly to approximate $1 million focused on improved process efficiencies in the plants and also furthering our out licensing opportunities. We project pro forma SG&A cost to be flat to slightly down versus 2012 based on ongoing cost savings offsetting inflation.

As a percentage of sales, pro forma SG&A will approximate 18% which is down 3% versus 2012. Pro forma SG&A excludes one-time litigation settlement charges, restructuring related and executive transition charges.

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 out our SG&A and R&D spend and reducing our annual cost structure to move us toward our goal of becoming profitable excluding royalties and milestones by the end of the year.

For royalties, we are projecting a range of $35 million to $37 million including between $8 million and $9 million from Actavis royalties. In the second quarter of 2013, we saw lower Allegra royalties from Japan, related to sales which will offset by higher Actavis royalties.

Our revised forecast for royalties for the year have taken into account continued weakness in the Japan portion of the Allegra royalties, offset partially by higher than previously anticipated Actavis royalties. The net result is an overall drop in royalties of $2 million for the year, however, due to the continued strength in our contract manufacturing business, we’re able to maintain the top-end of our adjusted EPS guidance.

Given the range of revenue, royalties, and mix on our effective tax rate our guidance for earnings per share results in a relatively wide range. However, given the strong performance in the first half, we are tightening our range of adjusted earnings per share for full year 2013 to between of $0.54 to $0.65, compared with our previous guidance of $0.52 to $0.65. At the midpoint of our adjusted earnings per share guidance represents a 138% increase over our adjusted earnings per share of $0.25 in 2012.

Our adjusted earnings per share guidance for 2013, excludes the impact of litigation settlement, executive transition, impairment and other previously announced closure and restructuring charges of our Bothell and Hungary operations.

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 of between $12 million to $14 million.

For the third quarter, we expect contract revenue to grow compared to prior year to range between 12% and 16%. Broken down by segment, third quarter contract revenue growth versus prior year is estimated as follows: $99.5 million for Discovery Services, up 7% at the top end; $8.5 million to $9 million for Development and Small Scale, up 22% at the top end; and $33.5 million to $34.5 million for Large Scale up 18% at the top end of the guidance.

We project total royalty revenue in third quarter to range from $7 million to $8 million, including $2 million to $2.5 million from Actavis royalties.

We expect contract gross margins in the third quarter of around 15% impacted by a weaker mix of business and representing the lowest margin for the year. SG&A and R&D for third quarter 2013 will approximate third quarter 2012. For the third quarter, we expect adjusted earnings per share to range from $0.09 to $0.12.

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

Thomas D’Ambra

Thank you, Mike. In early June, AMRI’s board of directors unanimously appointed William S. Marth, as Chairman of the Board, a post previously held by me. This change was made at my initiative and has my full support. I believe that obtaining Bill’s greater involvement in AMRI’s activities as Chairman of our Board, can only strengthen our organization.

Mr. Marth, formerly President and Chief Executive Officer of Teva Americas, retired from Teva in 2012. He was a member of Teva’s global executive management team, and Teva Americas’ Board of Directors since 2007. Mr. Marth played a significant role in establishing Teva as a leading specialty pharmaceutical company and being ultimately recognized as worldwide number one producer of generic drugs.

He brings to this role, a wealth of global experience on multiple fronts. Bill’s experience in relationships in the industry will be immensely valuable going forward, from leadership and operations to business developments to M&A. I am personally excited to be working with Bill, and as an AMRI shareholder, I’m equally excited to have him on our team.

Turning back to our financial results, as we have continued to note for some time, market demand for Discovery and early development has been somewhat soft since the financial crisis of 2008, as both small and large companies we served with focused R&D budgets to late-stage pipeline.

Nevertheless, AMRI’s Discovery revenues and profitability are benefiting this year from being a full-scale for both the Lilly In-sourcing and NIH contracts which ramped up over the course of 2012.

In addition, closing and consolidating operations from both Hungary and Bothell, into our Hyderabad and Singapore operations was effectively – has allowed us to retain capabilities in existing customer relationships, while eliminating excess capacity and therefore improving overall contract margins.

In terms of capabilities, in particular, our ability to create custom libraries of synthetic compounds in Hyderabad and our enhanced In-Vitro Biology operations in Singapore, have performed notably well, with early Singapore results ahead of expectations, and our Hyderabad colleagues successfully delivering difficult high-quality custom orders.

With both of these service offerings, now being performed under Asian cost structures, we believe they are poised at successfully compete as demand begins to return and grow for these high quality offerings.

Throughout the company, I believe we have the right mix of capability and cost structure in place, with existing facilities have in adequate capacity to meet our growth needs. Although that Discovery and early development demand continues to remain flat, encouraging signs during the second quarter are bullish to future growth opportunities. Most notable have been the reopening IPO window for new bio-techs and bio-pharmaceutical companies, with public financing and M&A activity, also ramping up to higher levels beginning last quarter. This is a significant and positive change from prior period.

As previously noted, the FDA approved 39 new entities in 2012 which was the most since 1996. Through the first half of 2013, there have been 19 novel approvals to date, suggesting that the FDA remains on pace for the last year. Through the first six months of 2012, the FDA had approved 16 novel agents. These approvals and the improving availability of capital in the financial markets, bode well for our customers and the availability of capital to reinvest in early R&D efforts is likely to improve.

We also believe that the top lessons in the recent past, in which the company has closed facilities and laid off thousands of scientists, suggest that increased R&D spend and is likely to mean a greater reliance on strategic outsourcing partnerships instead of a ramp up of hiring and investments in bricks and mortar.

With the high quality partner AMRI is well positioned to be a beneficiary of any ramp up in R&D efforts by our customers. And we will remain bullish about the future business client with AMRI Discovery and early development segments while noting that the current environment has yet to significantly improve.

Turning to our large scale business segment, AMRI’s Rensselaer Operations continues to deliver solid growth. Although year-over-year margins are impacted by the mix of products manufactured and delivered in the quarter, capacity utilization remains strong from Rensselaer, with excellent visibility for the full year.

Capital projects are under for Rensselaer in order to free up additional capacity for continued growth, while we also continue to consider opportunities to leverage our capacity in Holywell Wales, in the United Kingdom and Aurangabad India.

GMP upgrades of both Holywell and Aurangabad, should be completed by the end of this quarter, taking available large reactive capacitor of the UK, and purpose GMP facility in Aurangabad that when completed will meet U.S. FDA requirements.

We are pleased to note that AMRI’s Aurangabad facility received certification from the Central Drugs Standard Control Organization of the Government of India, related to the export of generic APIs made at the plant to Europe.

Earlier, this year, the UE authority that instituted the requirement of a GMP certification for every API imported into the EU starting from July of 2013, with a certification being issued by the confident authority of the exporting country. This new requirement raises the quality bar on importation of APIs and drug products into the EU. And it is expected that some suppliers will not make the cut.

AMRI’s receipt of the certification confirms that Aurangabad is in full compliance of EU, GMP guidelines for specific APIs, and represents a step forward in our quality upgrade to the Aurangabad site. Ongoing upgrades and investments in Aurangabad are targeted to meet U.S. FDA requirements when completed later this year.

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 has been fully functional in serving customers from around the world.

The pipeline of opportunities is stronger than any time since Burlington was acquired by AMRI, although we continue to experience some of the headwind of the FDA warning letter, which was received in August of 2010.

As mentioned at the beginning of this call and in the recent press release, we are pleased to report that during early to mid-July, the FDA initiated and completed a general inspection of our Burlington operations resulting in a Form-43 with three observations. I would like to take a few moments to share more information about this FDA inspection.

Specifically, two FDA inspectors audit this site from July 11 through July 18, and conducted a general systems inspection covering the period from June 2011, the date of the last inspection through the present time. All quality systems were also covered. The inspectors also performed a verification of AMRI’s 2011 Form-43, response commitment which were found to be acceptable with no observations noted.

This was positive, because you may recall that in September 2011, AMRI received a letter from the FDA stating that our actions that are then taken relative to the observations in the 2010 warning letter and the 2011 Form-43, were sufficient to address all items raised but would have to be verified in a subsequent audit. We believe these have now been verified with no observations made.

Result from this recent inspection is already noted with a Form-43 with three inspectional observations that were limited in scope and nature to specific items noted. Yesterday we submitted a written response to the New England district office of the FDA in which we responded fully to all items noted in the recent Form-43 and instituted and completed remediation where appropriate action was warranted.

In terms of next steps, inspectors who audited Burlington are required to submit their own report to the district office within 15 business days post inspection. The district office is expected to take about 15 working days to review our file, the audit report and AMRI’s response submitted yesterday. The district may accept the investigator’s recommendation and close out the warning letter.

More likely however, the district may choose to pass their recommendation to OMPQ, the Office of Manufacturing Product Quality under CEDAR based in Washington DC. In this case, it is expected that OMPQ could take about 30 working days to make a final determination on warning letter closure, but it could take longer or involve more steps including re-inspection.

In summary, a reasonable time-frame for AMRI to hear further for the FDA compliance manual is 60 to 75 days from FDA’s receipt of our response to the latest Form-43.

We believe the recent FDA inspection and audit of Burlington is a step forward for the site. We continue to operate without restriction and limitation in Burlington. There is no guarantee however that the FDA will choose to lift the warning letter, currently open for the site. If the FDA does close out the warning letter, it still may take three months or longer before we are notified of this action.

We believe the results of the recent FDA inspection of Burlington demonstrates that our investments and actions taken at the site position Burlington at the leading edge of quality advancements in a difficult and challenging fill-finish market. We are already seeing an increase in request for proposals and new business for the location, as a result of numerous and successful customer quality audits of the site.

The potential of the warning letter being closed out would be another step forward in a positive catalyst for Burlington. I would like to take this opportunity to acknowledge the efforts and indemnification of our staff at Burlington into our colleagues who led unassisted with our quality remediation.

Burlington is one step close to being able to focus completely on its future as an important part of AMRI’s high quality global brand. With regard to our partnered programs, we have previously noted that our CNS program licensed to Bristol-Myers Squibb has a lead compound BMS-820836 that completed two phase 2 clinical trials during the first half of this year. The compound is being tested in man for treatment resisting depression. We continue to estimate that 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 continues to deliver significant growth and revenue and substantial improvement in financial performance in the second quarter and first half 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. These results are anchored by a number of long-term supply contracts and strategic relationships across our discovery and manufacturing business, and represent a long-term revenue base and backlog with visibility for the next several years.

Secondly, we continue to be proactive in strengthening our leadership team and strategic plan. The appointment of William Marth, as Chairman of the Board, and other leadership appointments and promotions, better position AMRI as a partner of choice to our customers around the world.

Third, the long awaited FDA re-inspection of Burlington was completed in mid-July, and with our complete response made yesterday, we are energized with the potential change this could bring for our business.

We remain committed on a global basis to highest standard of quality, safety, customer service and value regardless of where, when or who we might be interacting with. Our brand is well known and growing and AMRI SMARTSOURCING options provide the market with services and capabilities beyond what our competitors can offer.

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 Instructions). I’ll go first to Greg Bolan of Sterne Agee.

Greg Bolan – Sterne Agee

Hi, thanks guys and congrats on a fine quarter. Can you clarify Mike, what the DDS gross profit margin and the LSM profit margin for this quarter please?

Mike Nolan

Yeah, sure, Greg. And thanks for your question. And let me get that for you here. So, starting with Discovery, our margins were 21%, and Development and Small Scale, 12% and Large Scale was 18%.

Greg Bolan – Sterne Agee

So, Development and Small Scale 12% gross margin?

Mike Nolan

That’s right.

Greg Bolan – Sterne Agee

Okay. So, we were expecting breakeven, so and so, it’s clearly very strong quarter. Also, just wanted to clarify your guidance for the second quarter, had it in the total control gross margin was 15% to 16% and you guys did 16.4% I believe, is that correct?

Mike Nolan

That’s right, 18.

Greg Bolan – Sterne Agee

Okay, got it. And then, I wanted to just kind of, if we could just go right back through the revenue guidance for contract services for 2013. I think there might have been a little bit of confusion. Can we walk through each line please again, Mike, I know you already did, but just – Discovery Development Small Scale and then Large Scale please?

Mike Nolan

Greg, for the full year?

Greg Bolan – Sterne Agee

Yes, please, thank you.

Mike Nolan

So, the overall guidance is 209 to 213 starting with Discovery that’s $41 million to $42 million. Development Small Scale 36 to 37, and then Large Scale 132 to 134.

Greg Bolan – Sterne Agee

Okay. So, basically for Discovery, you’ve raised revenue guidance to 41 to 42 from 39 to 42. Development Small Scale, narrowed to 36 to 37 versus 35 to 38 prior. And Large Scale is now 132 to 134 versus previous guidance of 131 to 133, is that correct?

Mike Nolan


Greg Bolan – Sterne Agee

Okay, perfect. And then, royalty guidance is now, 35 to 37 versus 35 to 39, there it sounds like there might have some weakness in the Japanese market with Allegra. But and that’s kind of evolved for market. But specifically on the newer royalty Actavis, your previous guidance was $6 million to $8 million and now it is $8 million to $9 million, is that correct?

Mike Nolan

That’s right, we’ve raised the Activas guidance based on some stronger performance in Q2.

Greg Bolan – Sterne Agee

Okay, that’s fantastic. Thank you. So, let’s also go through the guidance for gross margin and I’ll move on to some erythematic questions. But, total gross margin guidance previous to this call was mid-point of 16% and I think Mike, you just said, closer to 16.8% for the year, correct?

Mike Nolan

That’s correct. The new guidance is mid-point, 16.8% – between 16.3% and 17.3%.

Greg Bolan – Sterne Agee

Okay, all right, got it. That’s perfect. Thank you. And, okay, so just moving on here. So, Tom, you were discussed, we’ve obviously seen a nice surge in funding for the small to mid-sized biopharma companies. And I think you’ve kind of had made some comments around how that might be affecting RFP flows and maybe if you could – maybe talk a little bit more about what you’re seeing out there, are you starting to see actual order activity improve or is it just – are we just kind of at the stage now where inquiry levels are starting to re-integrate as of late?

Thomas D’Ambra

I think, it’s an interesting question Greg. And I think, it’s early days in terms of how this funding will lead to increased R&D. As I mentioned in my remarks, we’re still seeing some softness overall. And that’s kind of reflected in some companies having budgetary problems and maybe new deals are currently coming in. But we’re still – some deals are – some contracts are pending, because of budgetary reasons. So the net result is the modest growth we’re seeing.

I think as page picks up, we think we’ll see, as we have in the past, where lot of contracts will continue and then new business you’d bring in will be additive to that versus kind of a turn that you get in the current environment. We are seeing, I think increased interest in certain areas of our business, for example, custom libraries, services around early discovery efforts which have been really soft to very little in not too distant past. And I think the interest in wanting to talk more about those offerings and learn more about them, is a positive sign that money is starting to return to earlier R&D budgets.

I think, on the big pharma side, as we’ve mentioned before, these companies work on annual budgets and the message has still been the same that 2013 budgets was set and I don’t think you’re going to see a lot of change on the big pharma side. But the message has always been that as our number of compounds worked at ways through phase 3 clinical trials and that spending competes with new drugs get approved and get launched that our friends in big pharma believe that 2014 budgets will improve for earlier Discovery spending.

So, we think the second half of the year will be important as these companies begin to plan their initiatives for next year in terms of potential deal-flow and opportunities. So, as we said, the market continues to remain as it has been for some time, but there are some positive signs that suggest that a turning point maybe coming in the not too distant future.

Greg Bolan – Sterne Agee

And let me ask Mr. Mike, obviously we that Rensselaer is running at a very high utilization and specifically on the Large Scale side. But just kind of thinking about the margin opportunity for Discovery and Development Small Scale maybe isolated at Development Small Scale from right now. Mike, I mean, what kind of drop through margins do you think there are in that particular – in those particular – two particular lines on the gross margin line as an incremental dollar flows through. EBITDA is it $0.40 from a $1?

Mike Nolan

Yeah, so, so, are you talking specifically Development Small Scale or Discovery?

Greg Bolan – Sterne Agee

Yeah, let’s start – let’s get on with Small Scale first and then Discovery.

Mike Nolan

Yeah, so, Development Small Scale, are probably closer to 30% range fall-through on incremental margins, 30% to 40% type range. And then, your Discovery is considerably higher but for us, because we’ve got fixed cost facilities, idle capacities if you will. So, we tend to see very high pull-through, in some cases, it could be over 50% that we’re pulling through, because if we have idle capacity in our Discovery side.

Greg Bolan – Sterne Agee

Got it, got it. And so, I understand that it’s probably you guys probably haven’t sat down yet for budgeting stack for ‘14, but so, qualitatively, relative to the contract margins you guys are expecting this year, nearly 17%, is it fair to say if DDS continues, it does start to recover in a nice way and LSM kind of continues on, current trajectory, maybe a little bit slower that potentially, contract gross margins could expand next year, is it just too early to go that way?

Thomas D’Ambra

Yeah, with the growth that we see here, anticipate for 2014 consistent with kind of our investor presentation towards 2015, right. We’ve given kind of that trajectory.

Greg Bolan – Sterne Agee


Thomas D’Ambra

We do see expansion in our contract margins. Because again, most of it is fixed cost, and it’s like holding fixed cost fixed and then utilizing idle capacity that you’re seeing pretty good pull-through on that incremental revenue.

Greg Bolan – Sterne Agee

Okay, thanks there. And then, just moving on to the investments that you guys have made in Hyderabad and as well as Singapore, how would you kind of characterize the marketplace right now. Is it, are we seeing kind of continued evidence that there might be some repatriation of work from Asia to let’s say India are staying in age, I mean, China towards to the A-Pac regions like India and Singapore and maybe over to North America, because it seems that there were some quality issues at least among one of your peers in China and I just wanted to kind of get an update there, as it relates to, like for example, your in-sourcing deal with Lilly?

Thomas D’Ambra

Sure, Greg. It’s a good question and it’s a little bit difficult to answer because our customers are global. And I think you got to look at different regions of the world when you think about the answer – how to answer that because here clearly, companies that are – customers that are based in that part of the world may have issues. But they’re I think more likely to stay in age, I think Japan has been traditionally a little bit behind the U.S. in terms of their embrace of Asian outsource.

And so, whereas the U.S. – maybe many U.S. companies have begun to look at higher quality offerings back in the West. Japan is still at early stages of that sort of that outsourcing curve. So, there are trends where some companies are pulling back to higher quality, there will always be – cost will always be important and there is a part of during Discovery process that is more commoditized and others.

I think the important point in this whole equation is that innovation is not a commodity. And I think as these companies begin to pick-up their Discovery and early development spend again, and look to use outsourcing more strategically in that – there is a potential for higher quality partners to benefit more so than the commodity providers. And that’s how we’ve tried to position ourselves even with our Asian offerings that we’re trying to differentiate ourselves in a very competitive marketplace.

Right now, as we’ve talked about the outsourcing environment a bit soft, but we think we’re well positioned as that environment begins to change for the better to really benefit from flight to quality.

Greg Bolan – Sterne Agee

Got it, going back to another mulling question. My cash flow is quite a bit stronger than our estimates for the quarter. Is the guidance still $20 million to $25 million for cash flow from operations?

Mike Nolan

That’s right. We had a strong collection over our quarter in Q2, particularly some of the royalties that we’ve collected. So that’s for the overall year, we don’t see a real aggregate change to our previous cash flow guidance.

Greg Bolan – Sterne Agee

Okay, got it. And CapEx is still guided to be $12 million to $14 million?

Mike Nolan

That’s right.

Greg Bolan – Sterne Agee

Okay. Okay, that’s all I got. Thanks guys.

Thomas D’Ambra

Thanks Greg.


We’ll go next to Andrew Weinberger.

Thomas D’Ambra

Good morning, Andrew.

Andrew Weinberger

Yeah, hi, quick question for you. Could you please just sort of go over the relationship with Bristol-Myers on Phase 2? Do you have – can you give us any more color other than sort of late 2013, do you have a particular conference date or conference topic that where you think this data will be released, are you sort of in the dark on that?

Thomas D’Ambra

No, that’s a good question, Andrew. And I believe there is a conference in some time, in early to mid-December. I don’t – off the top of my head I can’t recall what that is. But I believe there is a potential conference that they could be presenting results out.

Andrew Weinberger

Okay, perfect. I think Greg, pretty much asked the vast majority of my questions. If I come up with any other, I’ll jump back in the queue. Thanks so much.

Thomas D’Ambra

Thanks, Andrew.


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 second quarter earnings call. Thank you again for your interest in the company.


That does conclude today’s conference. Thank you for your participation.

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