Albany Molecular Research, Inc. (NASDAQ:AMRI)
32nd Annual JPMorgan Healthcare Conference Call
January 16, 2014 10:30 AM ET
William S. Marth – President and Chief Executive Officer
Michael M. Nolan – Vice President, Chief Financial Officer and Treasurer
Tycho W. Peterson – JPMorgan Securities LLC
Tycho W. Peterson – JPMorgan Securities LLC
All right, we are going to go ahead and kick it off. I’m Tycho Peterson from the Life Science Tools & Diagnostics team. It’s my pleasure to introduce Albany Molecular. The breakout will be in the Georgian room across the hall and with that Bill, let me turn it over to Bill. Thanks.
William S. Marth
Thank you Tycho and thank you all for coming this morning, I know thanks for sticking around, and we appreciate we are going to take a few minutes and take you through the presentation. I like the fact that we don’t have the time, so we can make it a little more intimate and maybe get some Q&A and as well as have a discussion afterwards in the breakout.
I would be reminded of course to tell you about the forward-looking statement and let’s kind of jump in. I think in this presentation what I’d really like to accomplish is a couple of things, and first of all, for those of you who are not familiar with AMRI is to give you a little sense about what we do at AMRI, and how we do that. And then also give you a sense of what’s changed. What do we see is different? What’s changed for us and what’s changed in the market?
So under the bucket of what’s changed, I’m the new CEO of AMRI. I’ve taken over from Tom D'Ambra, who actually started the Company and has been here for 22 years under his leadership and he is off taking a well deserved vacation and he will be our Chairman of the Board and we are very pleased about that.
As far as my background, I come from a background where I spent my early years in manufacturing at Bristol-Myers Squibb, where I ended my relationship there as Head of Apothecon division, which was about a $760 million division that have both brands and generics in it.
In 1999 I had the absolute great fortune of joining a young company called Teva and at that time Teva was about $1.1 billion globally and about $400 million in the U.S. market, which is combination of brand and generic and at that time of course, the only brand we had was COPAXONE. And we were able over to the years to grow that business and when I left Teva as – was I left as President and CEO of the Americas at the end of 2012; I had about $12 billion under my purview.
Now that the U.S. had grown from about $400 million to $10.5 billion, so we had a profound impact on the growth trends and on the pharmaceutical industry itself. And I think one of the things I most proud of at my time at Teva was not only the people and the growth we have series of very strong deals that we were able to accomplish for all us.
I joined the AMRI board in 20 – I actually I joined about two years ago and Tom had asked me to join and I became Chairman this last year at June and of course, I’ve taken this role now, so there I’ve had some good familiarity with the team and we were pretty excited about where we are going.
So with that, I just want to take a moment and introduce to you some of the members of the team. Many of the members of the team are here either in the audience or up here on the stage, but what we have here is, what I think is a really dynamic seasoned team that’s ready to grow. And I think that what’s really important when you are looking for a good investment, when you are looking for a good company, you look to the management team and I won’t go through the entire group, but I will mention a few as we go along. I will mention the few that are sitting here Mike Nolan is our CFO as well as sitting up here is Dr. Michael Luther, who is our basic CSO and George Svokos, who runs our API division, who came to us recently from Teva.
So a little bit about AMRI for those of you, who are not as familiar with the Company. We are really a company that participates in three levels and Tom really started this company more around discovery and early development services. I think that was really the banner and what people I think often times loose sight of is really when you comes to chemistry in North America, AMRI is clearly seen as the leader and we do an absolutely fantastic job there. But the other parts of our business that Thomas purchased along the way are valuable in great parts of the business and we really wanted to grow these as well, we’ll talk a little bit about that as well.
The API manufacturing services division is an absolutely great division based in Rensselaer. We also have facilities in Holywell in the U.K. and India, but that division produces many of branded drugs that you know today. We are known for making Controlled Substances and we do things like Vyvanse for Shire. We do the Trius compound from Medivation. We do MDV3100 also know ZANTE. We make a number of branded products, very few generic products, but what we do is right now is mostly brand.
We also have a formulation business that Tom acquired a few years ago, which is Fill & Finish and that’s in Burlington, Massachusetts, an excellent place for us to be, great business unfortunately had a warning letter up until a little while ago and that warning letter was lifted in November, and that business is really beginning to grow, and that’s an area we would like to expand, we’ll talk a little bit more about that later.
Where this company has gone really is becoming I think more known more less as the gold standard for chemistry and development services for the U.S. and to allow us to grow that business and extend our selves more into biology and use that deep scientific knowledge, which really has accounted for 75 candidates that move through preclinical and clinical, which lead to about 50 INDs being filed in the last 10 years and that’s pretty productive with over 150 patents and over 400 peer review articles. We are a company that is known very much for its deep science and under the leadership now of Dr. Michael Luther, we believe that that business will be able to grow far beyond what it is today and extend ourselves more into pharmacology and biology as well.
When you think about the roots of AMRI well, that’s right, we are wonderful at chemistry. We do a good job in discovery. We do a good job in API. Well, why is it important today? Well, I think it’s really important and I have some other growth numbers for you today is really where pharma is. And where pharma is today is moving away from large fixed costs. When you look at what they have done today the years of building factory after factory and then being attacked by generic competition, and having to close down factories, it is really not productive. It is far more productive for pharma to work with us and for us to either take that large fixed facility and spread it over five or six companies or to share in some way the R&D services that we can provide.
Areas in the day that goes by that we don’t see another announcement of a move from spending $5.4 billion on R&D to $4.8 billion on R&D. But the pharma company that made that announcement is not looking to do that in a fashion to loose productivity instead they are looking to gain productivity. And they are doing that by working with people like AMRI and others.
We have a variety of services that work for people both insourcing and outsourcing and our insourcing arrangement is something that’s quite interesting and we expect that model to grow, where we place our scientists within that pharma’s companies R&D labs and they work for that company, but yet they are employees of our company and they are self directed. We have other models that are more outsourced traditional where we have entire labs that are dedicated to a pharma company.
So there is a lot of models for us to grow it’s still a great business. But when you look at the base of that business, we think we can do much more with the other divisions as well and grow beyond. When you think about our API business, which has been largely dedicated to the pharma world, we can take that business and direct it more towards the generic markets as well. Now we are not saying we are doing a student body right moving to the generic worlds, but when you think about this $14 billion addressable market in APIs and we today have approximately $127 million of it, how can we leverage our capabilities in Rensselaer, Holywell and in India both organically or inorganically to capture more event market.
Well, what I would tell you is our plan and George Svokos has come to us from Teva to help us lead that charge as well as some other, I think key hires such as Vijay Batra, who came also from Teva and is a resident out of India are here to design that platform. We’ve looked at a variety of areas in APIs that we think we can excel in, cytotoxic, steroid, peptides, controlled substances. These are areas that we will look to focus on probably on in both an organic and inorganic basis.
The other part of our business is the drug product group, up until recently as we told you we had a warning letter at our Burlington facility. The demand for Fill & Finish is really tremendous now in the United States; it was unfortunate that we had a warning letter. Although most other manufacturers of Fill & Finish in the U.S. also had warning letters, it’s been a very, very tough time, since we’ve had that warning letter lifted the demand for our product in Burlington has gone – has grown at a great rate.
The issue we have in Burlington is that facility is good for Phase I, Phase II some Phase III material and small commercial. But what we need to do is to grow both our Phase III capability as well as our commercial capability in order to mature that site. So we will be looking to grow that both in a organic and inorganic basis.
But the reason we really want to do this is not just Fill & Finish, it’s about all forms of drug product. As pharma beings to look out more and more at outsourcing, we believe we can extend that business both into patches, potentially DPIs, some oral solid dose other areas. Now we are not looking necessarily to go head-to-head against the Catalent, head-to-head against Patheon. But what we think we can do is add our CMO business on the higher value high technology products.
Those are the areas we can excel and use the other benefit that we have which is our discovery and development. Our discovery and development that we talked about earlier really provides for us what we call, I guess the sticky customer, for lack of a better term. The sticky customer really is once we begin to work with a company whoever that company maybe it could be a GSK, it could a Pfizer it could be a medium or small pharma.
Once we begin to work with that company the desire to work with us becomes greater and greater, and what they want is less changeover and less handoffs. And so for us to be able to bring someone in and begin on a synthesis and do that from hit to lead and then take that hit to lead, and then eventually turn that into an API, and then from that API manufacture that and be able to take that right into dosage form that’s the place we want to be. Those are the capabilities we would like to have.
So that’s just a little bit of a story about where we are today. I’m going to turn it over to my CFO, Mike Nolan allow him to kind of round out some of the numbers for you. Thank you.
Michael M. Nolan
Thanks Bill and good morning everybody. So as Bill mentioned we are in a very attractive industry. In the last 22 years we’ve been able to grow on a compound annual growth rate of 14%. You can also see we’ve transformed the Company already from what was discovery development in the early days to a company that’s more balanced into the API business as well.
Also on the top left you can see this company is diversified. Bill spoke to the large pharma customer, one thing we also like is that we participate in an industry where there is a lot of adjacent opportunities with non-pharma customers or specialty pharma customers so it gives us a nice balanced portfolio.
If you segment our two businesses into Discovery Development and then I’ll show you the next slide our Large Scale business. What you’ve seen here in the past few years is a very difficult outsourcing CRO industry and that’s – you can see the growth rates. They are negative 2% over the last few years. The good news here is that even in these tough economic environments for the outsourced industry you can see that the performance of the Company has turned around, and we’ve actually brought the EBITDA up in a period when the revenue has gone down. So the EBITDA margin in the high teens now is where we are participating in this industry. And we feel very confident as Bill said this industry is at a bottom and is working its way out of we thought as difficult economic time.
If you think in a Large Scale Manufacturing business, this is all about leverage. This is actually the acquisitions that we have made, particularly around Rensselaer as well now Burlington is going to be a story about leveraging an asset we’ve acquired and we will continue to grow and not at fixed cost. And you can see here with the revenue improvement, we’ve grown at industry that’s not grown at 19%, but we’ve grown at 19%, so it’s almost 2x the industry growth rate.
And the same time, we’ve actually leveraged that to improve the EBITDA margins quite considerably. And as Bill mentioned we now have the great opportunity with our Aseptic Fill & Finish business without the warning letter to grow that business to become what it used to be prior to the acquisition.
The other thing I wanted to point is that in November we actually issued a bond, a convertible bond. We went out to the market for $100 million. We actually had huge demand for that bond. It came in at $400 million demand and it was very attractive opportunity for us to create cash for the Company for optionality and growth.
You can see here, if you look at the nine months closing just before the bond offering in November, we already had $40 million roughly of cash available to us. So wasn’t in a situation of us needing cash to run the company. What we are looking to do is to create an opportunity, get cash at very attractive rates, so that we could provide our shareholders an opportunity to see our company grow beyond the industry growth rates that Bill shared with you this morning.
Little bit about the bond; again the very attractive rates, 2.25% on $115 million. What we thought we were going to yield in terms of $100 million roughly of cash, we ended up yielding $135 million of cash and the reason we use some of the cash to put a bond hedge in place was to protect our shareholders. So the bond actually strike at $11.84, our share price and there will not be any shares issued to the bondholders until the shares go up to $18.94.
So we feel this is a very good use of proceeds to spend 7% yield on a bond hedge to protect our shareholders and feel that they’d be very happy if our share price actually went up to $19 from the current $11. So again, liquidity option for us just to create an opportunity for growth in the future.
Just to summarize and a few fast slides here. AMRI is really on a path to continuing to take advantage of the returns that are in the industry. We have a disciplined approach to evaluating and managing our assets. We’ve shown a track record of being able to optimize our operations. Unfortunately, we had to close some facilities. We shut our biology operations down in Bothell and move that to Singapore and retain the customers and in fact, grew some of our customer base with that transition.
We’ve also consolidated our library operation from Hungary into India and continue to grow that business there, and we look at vertical integration options with our India intermediate capabilities to move product into Rensselaer and be more productive and capture margin.
We’ve also eliminated our internal drug development programs, but continued to look for ways to partner the assets that we have there and create value for our shareholders. We have rationalized G&A to the point where we made sure that we are spending G&A dollars in the right places and supporting our sales organization.
And finally, overall, we have reduced the cost base by $18 million and dropped that to the bottom line over the last few years. Whilst at the same time experiencing double-digit growth for the Company, so we’ve been able to make sure we right size, but the same time participating the growth and in fact grow better than the industry in a lot of cases. So the actions taken as long that we’ve taken have really strengthen our financial position and put us in a good place and we are on the path to really driving improved margins better than the industry.
What I want to say here is with the capital raise and the new leadership that we have in place, we feel very confident, we’ve got what it takes to improve shareholder value. We are evaluating organic and inorganic opportunities, we see investment priorities. We’ll continue to investment in our core areas to fuel growth and our discovery and our development and manufacturing certainly, we can see this through expanding our API capabilities particular at Rensselaer in India.
We also see opportunities to improve our Large Scale Manufacturing capabilities in Burlington, which is currently really through a Phase III small commercial type facility looking to expand that to be a little bit larger commercial capability. We also feel this ways to get add capabilities to complement our existing core areas.
Again, API we want to leverage our expertise in Controlled Substances and have a more global footprint and participate in the industry globally. We also feel there is a lot of opportunity in drug product, you saw that the market is roughly $15 billion, we participate in a very small way but the Aseptic like Fill & Finish business. There is opportunities of all solid dosage for instance in different applications of drug that we feel that we can participate in.
And then finally our investment criteria, when you look at us, we are going to use ROIC as to weigh the cost of investing against its contribution to growth. I’m going to make sure that as we invest either organically or inorganically we’re going to be doing that looking at margins in accretion to our ultimate value per shareholders. We are going to prioritize these opportunities because we can’t do a lot at the same time. But we got to prioritize to ensure that we are profitably growing the business in excess of our current growth rates, which you see is recently been 14% to this point. So we are looking at several organic and inorganic opportunities again using this stringent criteria.
So finally, I’d like to say that AMRI is strategically well positioned to capitalize on a macro trends in the industry. We operate in very attractive markets both in the research and the manufacturing side. We have broad range of skills across our development discovery capabilities and platform, certainly and our API take care of the Controlled Substance and DEA in high-potency materials. And in the drug product we also feel that we’ve got core capabilities there to leverage and actually grow that business quite successfully.
We have a diversified portfolio of customers over 300 plus from large pharma biotech, specialty as well as adjacent spaces. We have good visibility to some of these contracts. A large portion of our customers are under contract. So it gives us a lot of backlog and ability to see what’s coming, and as well we have exposure to a growing customer base even with the right sizing or downsizing an R&D programs in large pharma, we feel it’s the right opportunity for us to help them be more productive.
We have a global footprint, which offers us timely and cost effective solutions for our customers. We also have a demonstrated track record of operational performance. You can see in the recent slides that I share with you the operating EBITDA that’s improved, even at a period where revenue for instance in the CRO industry has gone down. We also have now secured ourselves in terms of the excellence recruiting position. We have capital to grow as well as capital to run our operations. So again a very strong footing to start and grow beyond industry growth rates that we shared with you today. So the bottom line for us is, AMRI is really well positioned to capture, what we think are attractive growth opportunities in a market that continues to be a space that that we feel this is the right place to be.
Tycho W. Peterson – JPMorgan Securities LLC
Okay, thank you very much now, that leaves us hopefully about two minutes for someone to ask a question for those who can’t make it to the breakout. So if we time this right, if we got a question here, we’ll take it otherwise we’ll be able to take questions in the breakout. Any questions? Okay. We’ll then move to the breakout. Thank you very much.
[No Q&A session for this event]
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