Sagent Pharmaceuticals' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.11.14 | About: Sagent Pharmaceuticals (SGNT)

Call End:

Sagent Pharmaceuticals Inc. (NASDAQ:SGNT)

Q4 2013 Results Earnings Conference Call

February 11, 2014 9:00 a.m. ET

Executives

Jeffrey M. Yordon – Chairman & Chief Executive Officer

Jonathon M. Singer – Chief Financial Officer & Executive Vice President

Jim Polson – Investor Relations

Analysts

Gregg Gilbert – Bank of America Merrill Lynch

David Amsellem - Piper Jaffray & Co.

Elliot Wilbur – Needham & Company

Steve Beuchaw – Morgan Stanley

Randall Stanicky – RBC capital markets

Operator

Good day, ladies and gentlemen and welcome to the Sagent Pharmaceuticals Q4 and Full Year 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I’d now like to turn the call over to your host for today, Mr. Jim Polson, Investor Relations. Sir, you may begin.

Jim Polson

Good morning. On behalf of Sagent Pharmaceuticals, I’m pleased to welcome everyone to the fourth quarter and fiscal 2013 earnings conference call. I’m Jim Polson, Sagent’s Investor Relations Advisor. Joining me on the call this morning are Jeff Yordon, Sagent’s Chairman and Chief Executive Officer; as well as Jonathon Singer, Sagent’s CFO. Jeff will start with an overview of Sagent in our recent progress and strategic initiatives and Jon will follow with a discussion of our 2013 fourth quarter and yearend financial results and our 2014 fiscal year guidance. We will then open the call for Q&A.

Before we begin, we would note that this call may include forward-looking statements which are subject to risks, uncertainties and other factors which may cause actual results to differ materially from those discussed. Although Sagent believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained. Please refer to the complete Safe Harbor statements within the press release. More information on these factors is included in the Risk Factors in the MD&A section of Sagent’s Form 10-Q filed with the SEC on August 6, 2013. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. We would also note that some of our prepared remarks this morning will refer to non-GAAP financial measures. You can find the reconciliation of these non-GAAP measures to the most closely comparable GAAP measures within the earnings release issued earlier today.

With that, I’d like to turn the call over to Jeff.

Jeffrey Yordon

Thanks, Jim, and good morning everyone. I’m very pleased to welcome you to Sagent’s fourth quarter and fiscal 2013 earnings call. We appreciate your time, your interest and participation in this event.

The fourth quarter was a strong end to a great year that included many important accomplishments from the Sagent team. We produced record fourth quarter revenue and full year earnings and cash flow that exceeded our updated guidance for the year. Our strong performance was driven by several key products that were launched in 2013. We made several important long term strategic moves during the year as we augmented our vertical integration capabilities by acquiring a 50% interest of our joint venture partner in SCP, our state of the art Chinese manufacturing facility and fostered several new partner relationships. In September, we completed our secondary offering of 3.5 million new shares of common stock, receiving $70.7 million of net proceeds which will support SCP, investing in our new product pipeline and business development activity.

As reported this morning, revenues for the quarter were a record $64.1 million, which is a 20% increase over the prior year period. Also, we reported our fourth straight quarter of profitability, which contributed to a full year earnings of $29.6 million or $0.99 per fully diluted share. Jon will provide additional detail on the results during the financial review portion of the call.

As in the past years, 2013 was a year of continued growth and expansion of both our marketed portfolio and our development pipeline. We launched 12 new products, bringing our total to 53 marketed products in 144 different presentations. Key launches include Zoledronic acid at market formation, Docetaxel and Propofol. Each of these launches demonstrates the different strength of our business model. A key contributor to our strong financial performance in 2013 was the launch of Zoledronic acid vials at market formation and the subsequent launch of our 4 milligram premix bag 505(b)(2) NDA for a generic version of ZOMETA and our 5 milligram premix bag for a generic version of RECLAST. Having multiple presentations has enabled us to enhance our market position and potentially and partially offset the accelerating pricing pressure on the product.

Our strategy of developing various Zoledronic acid presentations has worked exceptionally well and we continue to expect to see contributions well into 2014, albeit at decreased margin levels. Our ability to develop and launch diverse presentations of a single product demonstrates the value of our partnership network and our lack or reliance on a single manufacturing competency.

The launch of Docetaxel mid-year demonstrates the strength of our relationships across the supply chain and with the regulators. As we discussed on earlier calls, our relationships among API suppliers had indicated the potential for a shortage due to a limited supply of the starting material needed to formulate the API. In recognition of the strength of our supply chain and demonstrated ability to help the market address market shortages on key products, we obtained an approval and launched Docetaxel well ahead of our initial plans for the product. Although we haven’t seen a significant shortage on the product, we were able to drive attractive market penetration and finish the year with Docetaxel being a top 10 revenue contributor for Sagent.

Finally, the launch of Propofol late in the fourth quarter demonstrates the strength of our business development capabilities and the recognized leadership of our sales and marketing organization. One of our competitors had been marketing this product, but was not satisfied with their market position. We were able to identify this as an opportunity in which our sales and marketing organization could increase the market penetration. Through business development relationships, we were able to develop the marketing plan, negotiate the distribution relationships and re-launch Propofol through the Sagent sales organization, all in approximately 90 days. Given the timing of the launch, this was not a significant contributor to 2013, but we believe Propofol will be a solid product for us going forward.

Our ability to launch 12 products in 2013 given the current regulatory environment is a testament to the depth of our product development pipeline and our knowledge and experience in the regulatory arena, which allows us to adapt and meet constantly changing regulatory deadlines. With the implementation of GDUFA, ANDA approval timelines have increased significantly and visibility to the status of an application has decreased significantly. When we formed Sagent in 2006, we anticipated ANDA approval timelines of 12 to 18 months. The current average is in excess of 34 months. In addition, we used to get interim indication on the status of our filing through feedback from individual reviewers. Today we need to wait for a single complete response letter to gain insight into the status of an approval. Lack of visibility creates challenges on several levels. For instance we can’t proactively address deficiencies in an application to expedite overall response times without visibility to specific status of the review cycle.

More importantly, we can’t plan manufacturing of the product until we get final approval. In past years we could manufacture at risk in advance of final approval based upon interim feedback. Today, given product dating, this practice has been reduced. An example of this impact is our recent approval of Ketorolac. We were pleasantly surprised to receive an approval in late 2013 for this product that we had projected for approval in late 2014. Despite the early approval, we won’t be able to obtain API and commodities and schedule manufacturing until late in the second quarter of this year. The lack of advanced communication from the FDA reduces our response time to approvals and signals our competitors of our approvals before we’re prepared to launch.

Without the visibility that we’ve had in the past, it makes sense to take a more conservative view of approval times and launch dates, which will be reflected in a broad revenue range in our guidance, which Jon will review at the end of the call. Also, it should be noted that we have been surprised by several products that received early approvals in 2013 and it’s logical to believe that there may be accelerated approvals in some cases will offset delays in other product approvals. Also we believe that approvals for shortage products will still be handled at an exception basis and these products will continue to be approved well in advance of non-shortage products.

Our ongoing opportunity around shortage products underscores another important facet of our business. While we were operating in a less transparent regulatory setting, we’re confident that our unique model allows us to be more nimble and more responsive than our competitors as we adapt to this new regulatory environment. One product that we do not anticipate receiving approval in 2014 is iron sucrose. We did receive the complete response letter late last year and have evaluated the requirements for a reply. We anticipate that it will take until midyear to run the exhibit batches and perform the analytical work being requested by the FDA. Given the timing of our response, it is unlikely we’ll be in a position to launch this product this year.

On a more positive note, based upon communication with the FDA, we believe we’ll be in a position to launch pentobarbital, the generic form of Nembutal in the second half of the year. We believe will be the first generic with an estimated market opportunity of approximately $30 million. Including pentobarbital, we believe we will have between10 to 15 launches in 2014. The new products will be spread across various therapeutic categories, expanding the diversity of our product portfolio and contributing to our continued growth.

In addition to these exciting product launches, we continued to invest resources to accelerate the expansion of our product pipeline and our overall footprint with a focus on the following objectives; seeking niche proprietary injectable products of interest to our customers; working on the reformulation of existing, high volume generic injectables that will provide our customers with significant advantages and provide Sagent with the manufacturing cost advantage and evaluating product opportunities that leverage our vertical integration capabilities for either the U.S or the Chinese markets.

Our focus on long term strategic initiatives and a commitment to internal investment in product development will continue to expand our product offerings, diversify our product portfolio and continue to build a long term, profitable business for our shareholders. One of the most significant investments we’ve made to support long term growth and profitability was the agreement we announced during the first quarter to acquire the remaining 50% interest of our joint venture partner in Kanghong Sagent Chengdu Pharmaceutical Company Ltd. The transaction was successfully completed as planned in June and we have already reached several significant milestones. The facility is fully operational as it was inspected by the FDA in 2012 and received an establishment inspection report or EIR in May of 2013, leading to the approval and launch of our first product, Carboplatin during the fourth quarter. Carboplatin is the first in a long list of products that we look forward to supplying from this facility.

As we ramp production and development at SCP, we will incur approximately $12 million to $16 million of annual costs. Approximately $8 million of the costs will be absorbed cost of goods – unabsorbed, I’m sorry, which will dilute our consolidated margins in the short term. The balance will be evenly split between product development and SG&A. The unabsorbed overhead costs will continue through the end of 2015 as we ramp production with a goal of having the incremental cost fully absorbed in 2016.

To support the development of the product pipeline to be supplied out of SCP, we recently opened our national research center in Chengdu Biotechnology Park near our manufacturing facility. The center will focus on process and method development of technically challenging specialty injectable pharmaceuticals. The development of a research competency was always part of the strategic evolution for Sagent China Pharmaceuticals. By placing the center in the biotechnology park, we were able to obtain finished lab space with state of the art equipment and attract global experts in injectable development. Not only does the center enable Sagent to develop our own products, but also allows us to offer development services to other companies seeking this valuable capability.

In addition, we are in the final assessment of the second manufacturing line that we anticipate will cost approximately $30 million over the next several years. The new line will continue to utilize isolator technology. However, we anticipate the new line will have approximately four times the capacity and higher throughput than our existing line. We’ve been working with a group of consultants that had deep isolator experience. Our first line was focused on manufacturing oncology and highly toxic drugs. The new line will be configured based upon our development pipeline and will be designed with broader capabilities that match the specific requirements of some of our highest value opportunities.

There’s no doubt that the purchase of our partner’s share in SCP, the establishment of the national research center and the investment in additional manufacturing capacity represent a significant financial commitment. The addition of a wholly owned facility over time will provide increased control over our supply chain, improve the ability to respond to shortages in the market, reduce costs on selected products and improve flexibility on product placement and development. In addition, our direct manufacturing presence in mainland China provides a foundation for evaluating the significant opportunities that we believe will ultimately be available in the domestic Chinese market.

We are confident our investment in our own manufacturing facility will pay significant dividends for Sagent. We will return to gross margins in the mid-30s and EBITDA margins in the range of 20% to 25%, back to the current period of investment in the ramp up of the facility. The investment in SCP represents an evolution and not exchange in our business model. Even when running at full capacity, SCP will only provide about 25% of our needed units. Our partnering model remains a true competitive advantage for precision and will continue to provide the bulk of our units going forward.

In addition to the investment in SCP, we continued to focus on the development of our product pipeline. Organically growing our pipeline remains a key component of our growth strategy and something we’re poised to continue building upon moving forward. With the continued consolidation in the generic market, we are seeing significant additional interest from new and existing partners that want to collaborate with us. Today, there are fewer paths available to API suppliers and contract manufacturers to get their products to the domestic market. The demonstrated strength of our sales and marketing organization and our contracting expertise is raising our profile as the partner of choice in creating important, long term opportunities for us. This has been demonstrated recently when Sagent executed an agreement with a Chinese finished product company that will allow us to launch at least three products in 2014.

Given the continued consolidation in the industry, we’ve been asked about our appetite for an M&A transaction. As we’ve discussed in the past, we believe it would be difficult to build a $1 billion generic injectable company without an M&A transaction and we continue to actively evaluate multiple alternatives at any point in time. We believe we have the management strength and financing flexibility to execute against the right transaction. It has been and will continue to be an important part of our growth strategy.

In the meantime, we will continue to invest in internal development to accelerate the growth of our product pipeline. Although internal development has immediate hit to the P&L, while most of the costs of an M&A transaction doesn’t, they’re both targeted at the same objective of long term growth and diversification of our product portfolio. In 2013 we filed 13 new ANDA applications. We now have 39 products represented by 69 ANDAs either pending launch or awaiting approval with the FDA, certainly one of the strongest pipelines in the injectable industry.

To conclude, 2013 was a very important year for Sagent. Our financial performance reinforced the strength and flexibility of our business model. As we moved into the second half of the fiscal year, our financial metrics exceeded our stated long term goals and aligned with our desired margin profile. With the investment in vertical integration and continued expansion of our development pipeline, we’re building the foundation we believe will deliver those metrics on a consistent and permanent basis.

With that, I will turn the call over to Jon for his commentary on our financial performance and to provide guidance for 2014.

Jonathon Singer

Thank you, Jeff. I’ll walk through the 2013 fourth quarter and year-end results, provide some information on the balance sheet and close with a review of our guidance for 2014.

Net revenue for the three months ended December 31, 2013 totaled $64.1 million, an increase of $10.9 million or 20% as compared to $53.2 million for the three months ended December 31, 2012. The increase was driven primarily by the launch of 12 products since December 31, 2012 which contributed $13.6 million. This was offset by approximately a $3 million decline in net revenue for products launched prior to December 31, 2012 due primarily to lower volumes of certain products driven by reductions in demand as a result of the abatement of market shortages and increased competitive pricing pressures.

Revenue by therapeutic class for the fourth quarter of 2013 was 38% anti-infective, 27% critical care and 35% oncology. The comparable amounts for the fourth quarter of 2012 were, 34% anti-infective, 46% critical care and 20% oncology.

Gross profit as a percentage of net revenue was 26.9% for the three months ended December 31, 2013 compared to 21.8% for the three months ended December 31, 2012. Adjusted gross profit as a percentage of net revenue was 28.2% for the three months ended December 31, 2013 and 24.6% for the comparable prior year period. The improvement in adjusted gross profit is driven by improved average margin for the products launched over the last 12 months which have an average in excess of 55%. Both gross profit and adjusted gross profit are inclusive of approximately $2.2 million of incremental expense due to unabsorbed manufacturing costs at our SCP facility.

Adjusted EBITDA for the three months ended December 31, 2013, totaled $7.1 million, an increase of $4.4 million compared to $2.7 million in the fourth quarter of 2012. The increase is driven predominantly by an increase in adjusted gross profit.

Equity earnings for the three months ended December 31, 2013 totaled $2.5 million, an increase of $1.8 million compared to $0.7 million in the fourth quarter of 2012. The increase was driven primarily by a non-cash gain from our acquisition of the rights to two products from the JV. This is an impact that only students of GAAP truly understand.

Including the impact of interest and other non-operating expenses, the net income for the three months ended December 31, 2013 improved to $3.6 million or $0.11 per fully diluted share, compared to approximately breakeven performance for the fourth quarter of 2012. Included in net income for the three months ended December 31, 2013 is approximately $0.9 million in income tax expense which is the impact of the alternative minimum tax that cannot be offset by our NOLs.

Turning to the full year, for the fiscal year ended December 31, 2013, net revenue totaled $244.8 million, an increase of $61.1 million or 33% as compared to $183.6 million for the fiscal ended December 31, 2012. Product launches since December 2012 contributed $50.3 million of net revenue increase. Net revenues for products launched prior to December 31, 2012 increased $10.4 million or 6% primarily due to volume increases, partially offset by pricing declines.

Revenue by therapeutic class for the full year 2013 was 37% anti-infective, 27% critical care and 36% oncology. The comparable amounts for 2012 were 45% anti-infective, 39% critical care and 16% oncology.

Gross profit as a percentage of net revenue was 31.7% for the fiscal year ended December 31, 2013, compared to 16.9% in 2012. Adjusted gross profit as a percentage of net revenue was 32.8% for the fiscal year ended December 31, 2013 and 20% for the prior fiscal year.

Adjusted EBITDA for the fiscal year ended December 31, 2013 totaled (inaudible) million, an increase of $41.4 million compared to negative $0.6 million in fiscal 2012. The improvement in adjusted EBITDA is driven predominantly by the increased cash earnings of the business in the year ended December 31, but our adjusted gross profit increased by $43.5 million during the period, demonstrating the incredible leverage of our business model.

Termination fee for 2013 represents the $5 million one-time fee received in connection with the amendment of the company’s Manufacturing and Supply Agreement with Actavis. With the completion of the acquisition of our joint venture partner’s 50% interest in SCP, our existing equity interest was re-measured to fair value, resulting in a non-cash accounting gain of $2.9 million, reported a gain on previously held equity interest. Including the impact of interest and other non-operating expenses, the net income for the fiscal year ended December 31, 2013 improved to $29.6 million or $0.99 per diluted share compared to a net loss for 2012 $16.8 million or $0.60 per fully diluted share.

Turning to the balance sheet, at December 31, 2013 we had $156.1 million of cash and short-term investments, with no outstanding borrowings against our $40 million revolver and $10.3 million of debt in China which we retired on January 2, 2014. We generated $47.9 million in cash flow from operations during fiscal 2013. It is important to note that we are confident that we have sufficient capital resources to support the investment in SCP and continued investment in the product development pipeline anticipated in 2014 and beyond. We do not anticipate we’ll be required to access additional financing alternatives to support our current strategic priorities.

Closing with our guidance. For fiscal year 2014, consistent with previous years’ guidance, our outlook can be influenced by key variables such as product pricing, the pace of FDA approvals and associated product launches and the impact of market choices. Given our reduced visibility to the approval timeline, our guidance reflects a broad range of potential contributions from new product launches and the resulting and revenue impact. In addition, 2014 will be the first full year in which SCP will be fully consolidated. As Jeff noted above, this is a significant investment in the future of Sagent. It will have a short term impact on our margin and profitability, but a long term benefit to the performance of the business.

Sagent’s business plan for fiscal 2014 currently anticipates net revenue for the year to be in the range of $250 million to $290 million, driven by annualization of products launched in 2013 and 10 to 15 new product launches in 2014. Adjusted gross profit as a percentage of net revenue in the range of 24% to 28%, inclusive of approximately $8 million of incremental spend due to unabsorbed manufacturing costs at our SCP facility, product development expense in the range of $30 million to $36 million which is a $10 million to $15 million increase from 2013. The increase is driven by carryover spending from 2013, support for SCP development initiatives, potential support for P4 challenges and increased opportunities driven by market consolidation, and selling, general and administrative expenses in the range of $35 million to $40 million.

Based upon the above assumptions, the company anticipates reported net income for fiscal 2013 to be in the range of a $10 million loss to %10 million in earnings. Although our guidance is for the full year, given the breadth of our revenue range, it is beneficial to provide a commentary on the upcoming quarter. The current pace is running at approximately the Q4 run rate with some slight potential upside in the first quarter due to shortages in certain peppering codes and seasonal spikes in anti-infectives due to a strong flu season. We expect that margins will be slightly diluted based upon a product mix. Spending will include approximately $3 million to $4 million of incremental product development spending with SG&A approximately flat in the quarter compared with the fourth quarter of 2013.

Operator, we’ll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Gregg Gilbert of Bank of America. Your line is open. Please go ahead

Gregg Gilbert – Bank of America Merrill Lynch

A couple of questions. First, can you put a little more meat on the bones on the iron sucrose story. Jeff, what were the technical details that surprised the company between the direct guidance timeline and the FDA’s response letter. I assume there were some unexpected learnings there. And then how many products are held up at strides and what’s the latest on that situation? Thank you.

Jeffrey Yordon

Hi Gregg. We got the complete response letter on the iron sucrose. There were four issues. Two of the issues we had known about before and actually started the work and we think that work will be done -- it’s pretty simple stuff. That work will be done in time for us to probably submit midyear. And one of the things that we’re anticipating is that if it’s submitted in June, our experience with the FDA is even for that reason alone, we don’t think that there would be a response in a timely manner enough to get that launch this year. There were two other issues that we are trying to figure out the best way to deal with them because of the new veil of unavailability and those we’re still working on.

We’re still very confident that the drug will be approved and it makes much more sense prudently not to assume it’s going to be approved this year. In terms of strides, there were seven total products. Five of them are coming out of a facility that has had a warning letter. The approach that we’re taking on that is that since the facility will have to be inspected and we have no visibility to that, the best way for us to approach is that those five will not be launched this year. Certainly, Gregg, there’s a chance that they will be. I think it’s much more prudent for us to take the conservative approach.

Gregg Gilbert – Bank of America Merrill Lynch

Great and then one last follow-up if I could, Jeff. You talked about being open to transactions. But just wanted to take your temperature on how you see the opportunities out there from a company transaction standpoint. Do you see prices as too high and you’re better served to use your cash to fund pipeline expansion? Or do you think there are interesting deals that you could do over the next year or so and that you think would be in the best interest of Sagent based on where you sit today? Thanks.

Jeffrey Yordon

Yeah. I think that’s another very good question. We believe that at least three of the last transactions surprised us and our advisors how much more people are willing to pay for assets that we don’t believe necessarily reflect that kind of value. We just aren’t in a position to overpay by two or three or four times. We’re continuing to look. We’re really centered a lot on products now and we think that we’re much better served paying a fair price for products that we’ll be able to market in the foreseeable future than some of the -- what we consider pretty risky things that have been happening lately.

Operator

Our next question comes from the line of David Amsellem of Piper Jaffray. Your line is open. Please go ahead.

David Amsellem - Piper Jaffray & Co.

Thanks. Just a couple. I wanted to drill down on Nembutal and get a sense of what you think the hang-ups are, if any. And then, secondly, just a couple of questions on specific products, contributors in the fourth quarter, just give us a sense of where gross margins are on Zomeda and where you feel the trajectory of Docetaxel will be going into 1Q and beyond. Thanks.

Jeffrey Yordon

Thanks for the question, David. I’ll answer the first question. The status of Nembutal is we received the complete response letter. We are highly confident that the drug has no more hurdles, no more obstacles. The drug will be definitely approved this year. Again because of the lack of visibility, we have decided that it's much better to predict that to happen later in the year than earlier. And Jon will answer your second question.

Jonathon Singer

Yeah. ZA was an important contributor to 2013. For the full year it represented a little -- just right around 15% of revenue. But as you look at the impact of the price declines, that was down below 9% in the fourth quarter. And that really, David is all margin because we are continuing to hold or even gain share from a volume perspective. So it continues to be a good margin contributor given that the cost is relatively low. It's well above the 55% average that I referenced for the products launched this year. But coming down and will probably be closer to the 50s in the current year. Docetaxel, did not -- we did not see a shortage, but despite that we’ve got great relationships in the oncology supply chain. And so we were able to leverage those effectively. It was a top 10 product from a revenue perspective despite being launched midyear. And the margin continues to be pretty darn good. So we were -- you never wish for a market shortage, but it would have been nice to have the experience of that given our supply situation but despite that we think we really performed well with that product.

David Amsellem - Piper Jaffray & Co.

Thanks. And one last one if I could fit one in is on generic Azacitidine. Any new color you can add on that and when you feel that could be a contributor or how crowded that market may be? Just wanted to get a better sense of how you feel about that.

Jeffrey Yordon

Yeah, very, very difficult product to formulate and manufacture. I think as a result of that, David, you can anticipate there’ll be fewer competitors than what is normal on a big oncology product. As we have stated in the past, we think that we have not only the manufacturing expertise, but the development expertise to be a player in that and you’ll hear more about that as we move along.

Operator

Our next question comes from the line of Elliot Wilbur of Needham & Company. Your line is open. Please go ahead

Elliot Wilbur – Needham & Company

First question for, I guess, starting with Jon and Jeff as well, on guidance parameters for 2014, specifically thinking about the top line. Despite the fact that you had the strong first half contribution from ZA, and obviously it ramped down in the second half, numbers continued to move higher sequentially, again referring to sales. And just thinking about back half of the year or even fourth quarter, if you were to annualize that, you’d certainly be looking at a number that’s above the low end of 2014 guidance. And with Propofol and Docetaxel, I would think that you would have some growth momentum off the base headed into 2014. So I'm trying to figure out what could go so horribly wrong that would you be coming in towards the low end of guidance. What are some of the pushes and pulls in terms of thinking about just the base itself? And then I have a follow-up as well, maybe hit that question first.

Jonathon Singer

A couple of pushes and pulls that we’re looking at that we believe that we’re managing, but also wanted to be accurate in our reflection of what could occur this year. The fourth quarter did have a little bit of contribution from some shortages on products like (inaudible) and Heparin. So as you look at a $64 million base, there is a little bit of a shortage contribution and as you recall, our practice is not to guide with shortages in the base. So that’s one factor. The second factor that we’re looking at is there’s a couple of significant GPO bids this year. They’re not the largest GPOs, but they’re the next three and four largest GPOs. And there’s been pretty good price stability in the marketplace over the last several quarters, particularly on the core products. But we don’t know. There are some new competitors that are going to be competing on some of the key products. And what generally happens on these bids is win or lose, the price at which these bids hit the market tend to reset the price structure.

So we think that there’s potentially some exposure, again some of our larger product families. And then the final factor is a couple of our key products that have been pretty steady contributors. There are a couple of new competitors and even though we think that we’ve done a pretty good job of wrapping up our contractual positioning, protecting our base volume, there could be some price pressure on that. So those are all of the things that we’re looking at on the downside. As you indicated, we’ve continued to successfully offset the revenue impact of this client ZA with new product launches. We have three or four products that we’ve already have approved that we’ve got planned for launch this year that we think should be continued positive contributors. So we’re optimistic that given a reasonable range we’re driving towards the upper end as opposed to lower end of that range.

Elliot Wilbur – Needham & Company

Okay. And then my follow-up question for both of you as well, I guess. In terms of thinking about building out your guidance parameters for 2014, obviously the context of a significant diminishment in regulatory visibility, at least in the short term, did you essentially just narrow the range or cut down the number of launches that you expected in terms of what’s embedded in your guidance or did you actually just dramatically reduce the overall probability waiting. And I guess the reason I ask the question is if it's just a matter of dramatically reducing probabilities, maybe there’s a lot higher degree of optionality in the pipeline here in the short term than what people expect. So maybe just get some color on that line of questioning. Thanks.

Jeffrey Yordon

Elliot, I think the best way to look at it is given this incredible lack of visibility, we have to take the more prudent, conservative approach. So I think you’re right that in most cases it’s simply based on the fact that we are not going to have the same kind of information we had in the past. I will say that the exception to that rule will probably remain that if it’s a critical shortage product, I am quite sure that the FDA will change their process and will interact with us more. We might be able to leverage that to a certain extent. So I think that your point is well taken. We are taking a much more conservative approach, there’s no doubt. Jon has talked about some of the things that could happen on the down side. Obviously a lot of things could happen in the upside, and that’s reflected in the broadness of the range that we’ve given you. And as Jon said, I couldn’t say it any better, we’re certainly -- our shareholders know that we have never been a company to say that we’re going to be someplace between one and 50 and we come in one consistently. We certainly are going to be trying for the upper ends of those ranges. And given the lack of visibility, we think that it’s just a much more prudent approach to take the conservative approach.

Operator

Our next question comes from the line of Louise Chen of Guggenheim. Your line is open. Please go ahead.

Unidentified Analyst

Hi. This is (inaudible) in for Miss. Louise. I just actually had one question. What are your thoughts on the upcoming GPO contract discussions with the big players in 2014 and 2015? If you can give us any color on that respect, that would be great. Thank you.

Jeffrey Yordon

Sure. As Jon said actually group number 4, group number 5 will be bidding. We have a much stronger relationship with both of them than we did last time that we bid these. Relationships don’t mean a whole lot. What’s more important is your ability to differentiate will help a great deal. We think a lot of our key products are differentiated enough that we might be able to have some advantages without having to win strictly on price. The real test again as Jon said will be the pricing has been relatively stable for some time. This will be a real test of how stable it will continue to be as we move forward. We anticipate that we will get a very nice award from both of those groups and again have reflected that to a certain extent on how that will influence 2014. Next question please.

Operator

Our next question comes from the line of David Lewis of Morgan Stanley. Your line is open. Please go ahead.

Steve Beuchaw – Morgan Stanley

It’s Steve Beuchaw here for David. Jeff, I wonder if I could ask you to pull out your crystal ball and use it on a couple of topics. First of all on the outlook for the market for iron sucrose, now that we’re thinking about a 2015 launch, can you speak to how you see the competitive dynamics playing out there over the next one to two years? And second on GDUFA, one could argue that the net impact of the change to policies and practices might be somewhat more disruptive than some expected. Is there a path for resolution such that we might get back to a little bit more free flow of dialog or is this simply the new normal? Thanks.

Jeffrey Yordon

Okay. So I’ve just found my crystal ball for the iron sucrose and the crystal ball is saying pretty much what we said before. We think we are significantly ahead of everybody. We believe that when we get the approval next year, we will be probably alone and continue to believe that we’ll be alone for a reasonable period of time, which for a company like us is a phenomenal opportunity. I think one thing for sure is that we have become better and better experts at this product. We have a bunch of consultants working for us on this. So we’re confident that we’ll get to the finish line and the finish line will be very rewarding. Your second question is a very good question and already there has been some articles that the FDA is taking some steps back, realizing that if they don’t begin to adjust what they have just put into play, it’s going to be very, very difficult.

And one of the things that they’re interested in doing is reducing costs. They’re going to lose a great deal of that, putting us in a situation. We can’t take risk of building inventory until we find out what the approvals really are going to be. Jon gave you a couple of examples of a couple of products that normally we would have launched the products on the day of approval and now we’re going to launch the products four or five months later. That’s how much work has to be done on these products. So I actually believe that through some of the shortage opportunities that we’ll have, we can leverage that. But I also believe that the FDA will be forced to open up a little bit more as we get into the third and fourth quarters of this year.

Operator

(Operator Instructions). Our next question comes from the line of Randall Stanicky of RBC. Your line is open. Please go ahead.

Randall Stanicky – RBC capital markets

Just a couple of follow up, first, Jon, I just want to make sure we’re thinking about the new launches for this year correctly. So the five Agila source launches are not in the 10 to 15, iron sucrose isn’t but Nembutal is. Is that correct?

Jeffrey Yordon

Right.

Randall Stanicky – RBC capital markets

And then within -- how do we think about the market opportunity? Should we think about that as a traditional type of opportunity? Or given some of the logistics there, is that something that we should think about being much more backend weighted?

Jeffrey Yordon

Let me make sure you’re talking about Nembutal?

Randall Stanicky – RBC capital markets

Yes.

Jeffrey Yordon

Yeah. It’s a little different than a traditional product. But I would say that we have done some homework and we’ve enlisted some cohorts so to speak to help us market that. So I think that most of the things that we’ve talked about in the past will hold true. I think we’ll be very successful on the launch and plan to be very, very strategic in terms of there’s no reason to significantly drop the price on a product like that.

Randall Stanicky – RBC capital markets

Got it. You’d expect to be able to break into some of those GPO contracts without being too aggressive on pricing?

Jeffrey Yordon

Yes.

Randall Stanicky – RBC capital markets

And then final question is on M&A, just a follow up there. Can you talk about some of the assets that you might be looking at? Should we thinking about product opportunities? And then how big of a potential transaction would you look at? Thanks.

Jeffrey Yordon

I think the best way to answer that question is that we are constantly looking at products that would be extremely helpful to move us forward. On the screen right now are probably five or six different opportunities. It’s way too early and not strategically sound to give much more information than that.

Operator

(Operator Instructions). Our next question is a follow up question from the line of Elliot Wilbur of Needham & Company. Your line is open. Please go ahead.

Elliot Wilbur – Needham & Company

Two questions around the R&D line, I guess specifically with respect to guidance for the current year and even outside of some of the costs related to SCP, it’s still a mega leap in terms of year-over-year spend. And I guess the trend has been -- the pipeline has been building over time. Obviously a number of filings have gone way down. So this implies some rather significant change in strategy approach for the product development front. And maybe could you guys just comment on that observation. And then following that up with a question on SCP, Jeff, I think you mentioned something around $4 million or $5 million or incremental R&D expense would be tied to that facility. And I’m just wondering, is that actually going to be related to product development activities coming out of that plan or is it more just infrastructure spend where there’s not going to be necessarily any near term revenue potential associated with the investment. Thanks.

Jonathon Singer

I’ll take both those. I’ll start with the SCP investment. Part of the benefit of establishing the NRC is we were able to do it very cost effectively. We had negotiated an attractive lease on finished space that’s well equipped from an equipment perspective. So we’ll be able to hit the ground running. And so most of the incremental spending that we’re going to be seeing there is directly related to product development, both from a filing perspective as well as a transfer perspective. So we anticipate solid yield on that investment. You said short term benefit. If we file today, the timeline is 34 months. So we filed two products out of that facility last year and we’re continuing to develop across the pipeline inclusive of products for that facility. Overall when you look at the R&D pipeline, there’s a couple of things that are contributing to the increase.

One is just timing. We have carryover from 2013. As we dedicated the incremental $5 million from the Actavis settlement to product development, we didn’t get that all spent in 2013. So we’ll spend some of that in 2014. The second factor that I think everybody is aware of but in the second half of the year the number of exhibit batches and the period of stability data that you need to support a filing goes up significantly. So that’s going to hit us from a spending perspective two ways. One is we’re accelerating some activity in the first half of the year. You get everything in prior to June 30 and then after June 30 it will be more expensive because of the three versus one exhibit batches and then the six months of stability. We do have some P4 challenges that we’ve budgeted. So on top of the development cost you’ve got legal cost.

We’ve got 505(b)(2) which cost between $750,000 and $1 million for regulatory fees versus less than $100,000 on your typical product. And then we’ve got some pretty cool products that are a little bit more expensive, but they’re addressing generic markets that continue to be $1 billion plus in structure. So as we look at some of these more complicated or larger opportunities, they naturally cost more. And so we look at all this and flat that as we build the company for the long run and try to find the more valuable products that are going to provide the contribution economically similar to what we saw from Zoledronic acid, it’s going to require some investment and that’s what we’ve done.

Operator

With no further questions in queue, I’d like to turn the conference back over to Mr. Jim Polson for any closing remarks.

Jim Polson

We’d like to thank everyone for their time and interest in Sagent Pharmaceuticals and we look forward to speaking with you next on our first quarter 2014 earnings. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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