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Albany Molecular Research, Inc. (NASDAQ:AMRI)

Q1 2014 Results Earnings Conference Call

May 06, 2014, 10:00 AM ET

Executives

William S. Marth – President and CEO

Michael M. Nolan – VP, CFO and Treasurer

Analysts

Ricky Goldwasser - Morgan Stanley

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Tycho W. Peterson – JPMorgan Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the AMRI First Quarter Earnings Release Call. Today’s conference is being recorded. At this time I would like to turn the call over to your host Ms. [Patty Eisenhower]. Please go ahead.

Unidentified Corporate Participant

Thank you, Ryan. Good morning everyone. Thank you for joining us today to review AMRI’s results for the first quarter 2014. This call is a follow-up to the press release AMRI issued earlier this morning over PR Newswire, a copy of which is on AMRI’s website. Today’s call is also being broadcast live via webcast which will also be available on AMRI’s website for 90 days.

With us on the call today is William Marth, AMRI’s President and Chief Executive Officer and Michael Nolan, AMRI’s Chief Financial Officer, Senior Vice President and Treasurer.

Before we begin I would like to note that much of the 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 AMRI’s Annual Report on Form 10-K for the year-ended December 31, 2013 as filed with the Securities and Exchange Commission on March 17, 2014 and the company’s other SEC filings.

While these statements represent management's current judgment on the future direction of the company’s business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. The company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date here.

I would also like to remind you that AMRI’s reported non-GAAP operating results are adjusted from U.S. GAAP operating results for certain items that are described in our press release issued this morning. A reconciliation of our GAAP to non-GAAP results is included in the press release.

I'd like to now turn the call over to Bill.

William S. Marth

Thank you Patty. Welcome everyone and thank you for joining us today. It has been another busy quarter for AMRI and we have made great progress executing on our strategy. As we've said for many quarters we are looking to build a strong diversified service business that is less dependent on royalty revenue. Before I turn the call over to Mike to walk you through the financials I'd like to provide you with some operating highlights from the quarter within our core contract business.

With regard to our API large scale manufacturing and services division we are very pleased with the continued strong performance. API was particularly strong and we saw growth in both development work and increased capacity utilization out of our Rensselaer and UK facilities. At the end of the first quarter we were manufacturing 36 commercial APIs across our network, a number that will be updated in Q2 to reflect the addition of Cedarburg.

The acquisition of Cedarburg Pharmaceuticals was a key event for us in this quarter. We made it clear that acquiring additional capabilities and differentiating in complex API has been a clear goal of ours and the Cedarburg acquisition represents an important first step for us. We can now offer our customers additional capabilities in control substances and steroids among others and our reach will now extend further to include specialty generic APIs which will provide the potential for greater margins.

Complex generic APIs typically make up a greater portion of the cost of the final formulation. The integration of Cedarburg is well underway. The operational team is established, goals are being set and the execution timelines are being laid out. With Chuck Boland staying on from Cedarburg the leadership transition is relatively seamless and Cedarburg should be an excellent tuck-in acquisition for us.

With the Cedarburg addition we are seeing new opportunities in existing customer relationships. We have some customers in common, but each of us also brings new customers to the other, which creates opportunities to extend our services beyond API to other parts of our business. For example, we are seeing an increased interest by customers to extend their projects from API development and scale-up work into the finished dosage form.

Turning to our finished dose manufacturing business we are seeing increases in capacity utilization within our Burlington site. Following the lifting of the warning letter last quarter, we have seen an increase in the bid flow and our order book is firming up nicely. In fact demand for Burlington services is the highest we have seen and as we transition to new contracts over the year we anticipate sales and margins will continue to improve out of that facility.

Importantly, we recently had another routine FDA inspection that completed just last week, which resulted in no observations or 483. Given what we know about inspection rigor around sterile facilities we view this as a very big accomplishment for our team, validating our science-based approach to quality systems and operations.

In India the Aurangabad facility has been formally registered with the FDA and we will be looking for prior approval inspection by the end of the year as part of the customer's FDA product review. Within discovery and development, we continue to see a strong book of business and our development pipeline remains solid. Our compound in Phase I and Phase II development now stands at 56, up from 51 at the end of the first quarter. The number of compounds in Phase III that we are working on with clients is 23 up from 22 as of the end of the quarter.

Cedarburg brings an additional 10 late stage compounds in the development or pending approval. During the quarter we announced plans to transfer activities at our Syracuse sites or other sites within the AMRI network. This action is part of our ongoing work to consolidate our facility resources to more effectively utilize our discovery and development resource pool and to further reduce our facility cost structure.

The Syracuse transition is in place and underway and we are on track to close the facility at the end of June. We anticipate no disruption in customer projects .In fact we anticipate that we will be able to more efficiently support our customer needs while preserving the skills and capabilities that our customers demand as they return to greater utilization of their outsourcing partners.

Let me turn the call over to Mike for more details on our financial performance and our forecast. Go ahead Mike.

Michael M. Nolan

Thank you, Bill. I am now going to present the financial results for first quarter along with updated financial guidance for 2014. Further details are included in our press release issued this morning over PR Newswire.

I would like to underscore some highlights on a year-over-year basis for the first quarter. First, contract revenues were up 10% year-over-year at $51 million with the increase in contract revenue offsetting anticipated decline in Allegra royalties, resulting in an overall revenue flat for first quarter 2013.

Second, we finished the quarter at $0.16 a share for our adjusted and diluted EPS which compares to first quarter 2013 at $0.23. However this quarter’s EPS included an $0.08 decline in royalties.

Additionally our adjusted operating income for the first quarter was essentially breakeven at negative $318,000 excluding any royalties, driven by increased volume leverage and previous cost actions resulting in a strong margin pull-through.

And finally adjusted EBITDA for the quarter was $11.1 million at 19% of total revenue. We are pleased with the improving trend in our contract business and are poised to move forward a healthier business with a strong team and the resources to grow.

Turning to the financial details for the first quarter 2014, all comparisons are on a year-over-year basis. To begin with, adjusted operating income in the first quarter was $7.4 million. This compares to $10.8 million in the first quarter of the prior year. Excluding royalties and milestones, adjusted operating income increased $665,000, on incremental contract revenue of $4.5 million. Total revenue was $59.3 million essentially flat with first quarter 2013. Total contract revenue was $51 million, an increase of 10%.

Contract margins for the first quarter 2014 were 18.5% compared with first quarter of 2013 at 18.7% with a slightly weaker mix.

I’ll now provide a breakdown of contract revenue and contract margins to discovery services, development and small scale manufacturing and large scale manufacturing. Contract revenue from discovery services was $10.1 million in the first quarter, a decrease of 13%. The decrease is primarily driven by the shutdown of our U.S. biology business in the first quarter of 2013.

Contract revenue from development and small scale manufacturing in the first quarter was $9.4 million, an increase of 11% representing continued improvement in the pipeline. Contract margins for our discovery services and development small scale manufacturing segment were 16.5% in the first quarter, about even with the prior year period.

Contract revenue for our large scale manufacturing segment was $31.5 million, an increase of 19.5% with our Rennselaer UK and Burlington operations having a very strong quarter. Contract margins for large scale manufacturing were 19.7% in the first quarter down slightly from first quarter 2013 which were 21.3% reflecting slightly weaker mix of business.

Overall first quarter 2014 royalties were $8.3 million, down $4.6 million reflecting $5.2 million in lower Allegra royalties offset partially by increased Actavis royalties. Selling, general and administrative costs excluding one-time executive transition charges and business acquisition costs were $9.7 million in the first quarter of 2014 which are 19% of contract revenue which compares with 20.5% in the first quarter of 2013.

Adjusted earnings per share in the first quarter of 2014 were $0.16 per diluted share compared to first quarter 2013 of $0.23 per diluted share. Adjusted earnings per share excluding restructuring, executive transition cost as well as costs related to the Cedarburg acquisition, post-retirement benefit plan settlement gains and convertible debt interest and amortization charges and are detailed in our press release issued today.

Adjusted EBITDA for first quarter 2014 was $11.1 million or 19% of total revenue which compares with $15 million or 25% of total revenue in 2013. The decline in adjusted EBITDA margin was driven by lower Allegra royalties.

First quarter operating cash flow was negative $8.1 million due to the higher working capital driven by inventory built for future quarters and the timing of receivable collections around the end of the quarter. We expect Q2 operating cash flow to be around $15 million with AR collections driving most of this. Full year operating cash flow should remain on track with our previous guidance.

CapEx was $3 million in the quarter which was in line with our annual guidance of $14 million to $16 million. We ended the quarter with $171 million of cash on hand and subsequently used $39.7 million for the Cedarburg acquisition leaving us with sufficient cash available for organic or inorganic growth opportunities.

I will now provide an update on our full year financial guidance for 2014. Full year contract revenue is expected to be between $243 million and 253 million, up 18% at the midpoint from 2013 and includes the impact of the Cedarburg acquisition. Full year royalty revenue is expected to be at the low end of our previous guidance at $25 million, which is down from the 2013 royalty revenue of $36.6 million, driven by reduced Allegra royalties. Actavis royalties are expected to be roughly flat with 2013 levels at approximately $9 million or roughly $2 million to $2.5 million per quarter.

For Allegra, we anticipate full year royalties of $15 million, of which we received $6 million in the first quarter. This leaves $9 million of Allegra royalties for the balance of the year with an anticipated $4 million in the second quarter and the balance split between Q3 and Q4 consistent with the timing of the patent expiration.

Breaking down contract revenue for the year, we are projecting the following: Discovery services revenue between $46 million and $48 million, up 5% at the midpoint. Development and small scale revenue between $37 million and 38 million, up 14% at the midpoint. Large scale manufacturing revenue of between $160 million and $167 million including the impact of Cedarburg acquisition, up 23% at the midpoint.

For contract gross margins we are guiding to improve our contract margins from 18% in 2013 to a midpoint of 24% in 2014. Increased margins are the result of the improved capacity utilization and ongoing cost management and stronger mix including the Cedarburg acquisition. We project adjusted SG&A cost for 2014 to approximate 18% of contract revenue, which is essentially flat with 2013. Adjusted SG&A for 2014 excludes one-time executive transition and business acquisition costs and includes the impact of the Cedarburg acquisition.

R&D investment is expected to increase slightly to around $1 million, focused on improved process efficiencies in the plant as well as development activity for generics and includes the impact of the Cedarburg acquisition. Adjusted earnings per share guidance for 2014 is between $0.78 and $0.84 representing an increase of 16% at the midpoint from 2013. Although we anticipate approximately $10 million to $12 million in lower royalty revenue from Allegra, we are still increasing our adjusted earnings per share guidance to reflect the addition of Cedarburg Pharmaceuticals and the ongoing growth of our contract business in 2014.

Our adjusted earnings per share guidance for 2014 excludes the impact of executive transition costs, any impairment and restructuring charges, acquisition and integration costs, post-retirement plan benefit settlement gains and an estimated $0.20 impact from the interest and amortization charges associated with the bond offering.

Adjusted EBITDA for 2014 is forecasted to be between $54 million and $60 million or 21% of revenue including the impact of Cedarburg acquisition. Operating cash flow is forecasted to be between $33 million and $37 million in 2014 before capital expenditures between $14 million and $16 million including the impact of the Cedarburg acquisition. Cash coupon interest on our $150 million bond will be $3.4 million in 2014.

Before I turn the call over to Bill I would like to emphasize how pleased we are with the operating performance of the business in a quarter where we also focused on the activities surrounding the Cedarburg acquisition. The outlook for 2014 remains strong with continued top line growth and increased margin performance helping us to halt the expected decline in Allegra royalties.

I will now turn the call over to Bill who will continue with concluding remarks.

William S. Marth

Thanks, Mike. So to summarize, all areas of our business continue to make good progress as we continue our transition from being largely dependent on royalties and based on our achievements to date, we are excited about our future prospects. Within DDS we have a strong book of business and the development pipeline in front of us is robust. So we feel confident in our near term outlook.

Longer term as represented by the Syracuse transition we continue to align our operations to more efficiently support our customer's needs yet preserving the skills and capabilities that our customers' demand. Despite the large amount of M&A and consolidation underway in the pharmaceutical industry, we don't believe the fundamentals of outsourcing R&D activities will diminish and the recent activity reinforces our thesis that pharma is looking to move away from large fixed cost as companies look to capture a greater amount of efficiencies and synergies in their businesses and keep their organizations flexible to capitalize on additional opportunities that may present themselves. Companies like AMRI can and do provide the needed scientific expertise and flexibility they are looking for during these periods of consolidation and integration.

Within API and finished dose manufacturing, we are seeing increased capacity utilization at all our sites and the addition of Cedarburg further strengthens the business with added capabilities and enhanced margins.

Looking forward the addition of Cedarburg and our conviction on the strength and the near term outlook of our contract business has let us to increase our forecast for 2014. As evidenced by our action thus far in 2014 we are looking to grow our top line by double-digits and will continue our cost management efforts to maintain a profitable and growing contract business excluding royalties.

And finally, we finished the quarter with $171 million of cash on hand and subsequently used $40 million of cash for the Cedarburg acquisition leaving us sufficient capacity to do additional transitions with cash on hand, as we continue to look for additional growth opportunity.

Thanks. And I will now turn the call back over the operator so we can take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first quarter from Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

Good morning and thank you for taking my question here. So a couple of questions, first of all Bill can you provide us some color around like API pricing, are price increases sticking and how should we think about that opportunity and what percent of the portfolio can see improved pricing going forward?

William S. Marth

Yeah, that's a great question, Rick. The API pricing is -- it's a different game in our business. When you are looking at the generic areas which -- areas which haven't been focus for AMRI you know the actual pricing potential can be 20% or more before we formulate the price but our strategy has been to stick in areas that are a bit more focused, a bit more niche if you will.

So when we think about API we are fundamentally sticking to control substances, steroids, complex molecules, protein peptide, those types of areas where there are a little bit more close systems or clubby in nature and price flexibility from our side is much greater. We recently took price increases in [Paradine] and a number of products and we have no issue with those. It's just the basics of those market when you have barriers to entry that lead to a lower level of competition you can raise those prices.

We do want to avoid the areas of pure white where there -- where it's a commodity where there are 15 or 16 DMS filed and so those are the types of areas we are sticking to and so that's worked very well for us. It will mean that our API business won't be as big as others but it should mean greater returns for our shareholders. So that's really where you know where we placed our API balance sheet.

And just to add that, that doesn't mean by the way we are going to continue to do the branded API business which is a wonderful cost plus model and bring great returns to us as well but that will be part of our business, we will continue that as well as really spending more and more time and resource on generic.

Ricky Goldwasser - Morgan Stanley

So when you think the price increases that you recently took, is that something that we already saw reflected in the numbers in the first quarter? Or should we think about the -- when you model kind of -- that's kind of like part of the sequential increase for the remainder of the year?

William S. Marth

Yeah, the things that you noticed in our business in the first quarter as we get organized, George coming on, VJ coming on more efforts for us to just contain cost within our system, new deal to be done you don't see any of that reflected in the first quarter, those things are almost back-half loaded. Our business in general by the way is -- reflects most of pharma which is more back-half loaded then this front-half but all of those improvements enhancements changes to our business are more reflected in the -- a little bit in the second but more in the third and the fourth quarters.

Ricky Goldwasser - Morgan Stanley

Okay, and then secondly just on the M&A pipeline, obviously M&A is core to your strategy. So could you just give us a little bit color on the pipeline and robustness of the pipeline and how should we think about timing?

William S. Marth

Yeah, the M&A pipeline has been -- it's really robust. To say frankly it's amazing how many opportunities there are out there. Now we have a pretty clear strategy as I talked about in API, so that is a lot we can screen out, but surprisingly there are a number of moderate size API companies that are owned by sponsors and so we are digging through, there's lots and lots of material to dig through, we are really excited about it, but that doesn't mean by the way that they aren't more on the CMO side as well, when we are looking at more technology areas.

We are really pleased with the progress of our Burlington fill and finish business, the steroid side. And that's a great facility for Phase I, Phase II, some Phase III and some of them in commercial. We have about three commercials products in there today. However what we really need to do is get a full Phase III and a full commercial facility or build that. So that's an area that's an early opportunity for us to go after. So we are pretty excited about that and by the way that doesn't -- again I don't want to leave discovery unmentioned, there are a number of opportunities in discovery and there is some new things that we are looking at there. But the first thing we need to do on the discovery side is to fully implement our buffalo strategy with State of New York.

Unidentified Corporate Participant

Ryan, we'll take our next question.

Operator

(Operator Instructions). We'll take our next question from Greg Bolan with Sterne Agee.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Hey, sorry, little late your call doing with some craziness in the market right now, but let's start with DDS gross margins Mike as well as LSM, what were they for the quarter?

Michael M. Nolan

Yeah. So if you look at our gross margin profile Greg, so in terms of gross margins for total discovery developments in the 16.5% range and for our large scale business it was 19.7%.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Okay, so now I think Bill you had mentioned that there are some seasonality in the business I guess more back half loaded. But if I go back to 2004, I mean obviously last year you guys obviously were kind of coming out of the doldrums and performed quite well in contract services EBITDA, but there really hasn't been any backend weighted trajectory in CS EBITDA. So what am I missing or did -- I am just making sure I understood your comments correctly?

William S. Marth

Yeah, I just want to make sure you are trying the transition from 2012 to 2013 because you said 2004 and I am sure you didn't mean that.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Yeah. 2013 is obviously back half was better than the first half in terms of the CS EBITDA, but if I go back to 2004, there really hasn't been any kind of back half loaded type trajectory in CS EBITDA. And I just wanted to make sure I think you had just said just a minute ago that your witness is a little bit back half loaded, I just want to make sure we are on the same page?

William S. Marth

Yeah, our business is definitely a little bit more back end loaded, the pharma business always has been total reflective of where AMRI is. As we put AMRI more squarely in the world of pharma, that's the way we are going to be. A lot of it depends on things like with respect to when -- solves the timing of -- we can produce it, but we can't necessarily ship it until our customers get the quota. So we have issues along with that if there is lacking, if they are lacking quota, they get more quota as the year goes on. So our ability to ship that is greater. And then what happens in the first quarter, if I don't have a lot of MDV 3100 that I need to deliver yet because I don't have the full visibility of the forecast, we will end up shipping more of the GE material on that. So it's a little bit lower margin.

So but at the end of the day, our confidence that our margins are solid and they will continue to grow and especially with by the way with all the activities we've had with George coming on board price increases, new contracts coming on the generic side.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

So on GE, I think the ABA contract or the contract for long term relationship or for ABA production is in the December 2016, are you guys kind of preparing to I mean obviously it's a little ways away but is there any focus on kind of preparing to get in front of them and ensure that you guys are still going to be the lead manufacture for ABA?

Michael M. Nolan

Yeah, Greg it's Mike thanks for the question. so, GE is a great customer for us and you know we have a very good working relationship with them and we have steady supply chain for them It's you know an important product for their portfolio and we continue to see a bad relationship going I mean it's just one of the things where the switching cause as an example to move ABA to something else would be expensive and risky right so, why do that when they have got a solid supplier with us in that place.

William S. Marth

And sure would be something Greg that we like to try to get more margin out of but we have to see how the negations go at that point in time. You know with but it points out you know the beauty have ABA and that is today it really helps fill up rent for you and if you look at the story of the quarter the story of AMI as we move forward it's about what Michael has called the pull through, as we began the raise the capacity more and more drops to the bottom-line. So you notice in this quarter for instance how we were actually making money. The strategy of us being able to increase production on rental and then some of that to ease to push over to Holly Well helps us out a lot. And over time the need for large contract like ABA I believe will be less but we loved that relationship and want to continue.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

And what, what -- I mean what once upon ABA was around 20% of contract revenue where is that I'm assuming it's lower now where is it today?

William S. Marth

Yeah, so, if you think of our overall contract business the way we issued the guidance then the ABA part of that Greg I mean we report the ABA contract as far the deal contract so, should be in our 2013 filing. So, I will just pull a rate there and think of the low 20's if I am not mistaken.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Okay, all right.

William S. Marth

So, it ends up being, if you do the math you know it's upper teens in terms of percent of our mix.

Michael M. Nolan

And that would be before the addition of Cedarburg which then will bring it down more.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Yeah. So now questions on Cedarburg actually. So is it safe to say and I apologize if I missed this I was a little late for the call but is it safe to assume the acquisition will contribute about $14 million revenues this year?

Michael M. Nolan

Yeah between $13 million and $14 million consistent with I believe our release that we sent out you know earlier this quarter.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Yeah, and we also were still thinking the same thing.

Michael M. Nolan

Yeah, 13, 14 and -- yes.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

And then $0.07 acceleration are they about…?

Michael M. Nolan

Yeah, $0.06 to $0.07.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Okay.

Michael M. Nolan

Adjusted diluted EPS, that's right.

William S. Marth

And the beauty of that, Greg is that you know overtime the things that we can bring to that business, synergies we can bring, some of the precursors that can be made for -- know that we can actually produce in-house and expands our margin, things they couldn't do you know, capital expenditures that they needed to do really to move their business forward in Cedarburg we now don't have to do because we can do some of those things, of those steps here in Rensselaer. So, you get greater utilization in Rensselaer as well as in Cedarburg. So it's a nice acquisition we'd like to find more like that.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Yeah so, I mean I guess organically I am just trying to understand the kind of message here so, are you still as confident with the underlying organic business then when you issue 2014 guidance because I know it looks like they are little bit towards the low end, I apologize if I missed and you guys addressed this. Are you still feeling as confident about the core contract services business as you were when you issued 2014 guidance?

Michael M. Nolan

Sure, and that's why we have actually taken the bottom off the guidance right and we raise the -- pulled the bottom up to 78 and we leave the top -- the top is at 84 if you back out that royalty and then add to it $0.06 to $0.07 from Cedarburg it's tightening up the range and increasing the range. So we are very confidence in the contract business. The story Greg really is about three things with AMRI and that's really improvement of our contract business, continued diligence on our cost and then wise acquisitions and that's what we want to do and we believe we can do that and we can do it effectively.

Greg T. Bolan - Sterne, Agee & Leach, Inc.

Okay, that's all, thanks guys.

Michael M. Nolan

Thanks.

William S. Marth

Thanks Greg.

Operator

And we'll take our next question from Tycho Peterson with JP Morgan.

Tycho W. Peterson – JPMorgan Securities LLC

Hey guys. Thanks. Bill I actually want to expand on that last point you just made on M&A. Can you maybe just talk to where multiples are in the market? We have obviously seen a fair amount of M&A amongst your peer group. And then secondly, how much of this is being driven on the M&A front by a desire to diversify the portfolio versus maybe add additional capacity and go deeper in some vertical?

William S. Marth

Yeah. Those are really great questions. Let me take the last one first. It's really the M&A is focused around our strategy right of really building a preeminent API business that is focused around very tight areas which is controlled substances, steroids, protein peptide, cytotoxic and complex molecules. Sticking around that why because those are more profitable than your plain white powder because the barriers to entry are higher, they are just more nasty materials and those are the materials we think we're very good with and by the way often very high science and chemistry and that's what AMRI has been known for.

So those are the areas around API. Similar strategy on our CMO side right. So rather than just compressing white tablets, which is a great business but we really want to build that business around things that are differentiated, liquids creams and ointments, patches, inhalation, steroid, we really love the steroid market today. If you do it well, it's -- pharma is looking for places in the United States to put their steroid product and we've got a lot of demand for our facilities.

So we believe by adding more Phase III and full commercial we can really add to that. So those are the areas we are really looking at as well as opportunities to improve our DDS business. Those are the acquisitions we are looking at and I think that there is plenty of potential for that. So we see a lot of them. When you think about many more customers, many more opportunities then I imagine the moment you of course you got money, a lot of people come to you and then there is a tremendous amount of these that are around.

We are avoiding a large public options, right. We are not, I am not saying we wouldn't buy a public company, but we would try to avoid that type of area, we really want to buy something from a sponsor, where the competition for that asset is more limited.

When you think about the multiples we would love to buy everything at the same kind of multiple that we bought Cedarburg. We certainly want to endeavor to buy things that the multiple is less than our multiple. So we don't want to dilute our multiple. That said, if you want a very precious type of technology you are going to probably pay more. In the [inaudible] area, we probably pay a higher multiple than we would obviously for API or any other chemical production type of facility. If we were to buy innovation you would probably pay higher multiple for sure.

So we would like to keep our multiples around seven but we know that would likely expand. And if you got lucky and found an inversion which by the way we are not going to chase if we see an inversion that actually lines up with our business strategy that would be great, but that's not we are going first on the strategy and not the inversion. So if you were to find that, obviously you are going to pay a much higher multiple, look what Charles River paid for Galapagos and that was a 12 multiple and there was no, there absolutely was no inversion potential there.

Tycho W. Peterson – JPMorgan Securities LLC.

And I mean that's a good segue just on the tax side of things, obviously inversion would change dramatically, but can you maybe just talk about tax planning in general, is there an opportunity beyond inversion to bring down the rate?

William S. Marth

I think Mike is better at that so I'll let him talk about that, but yes I think there are opportunities if we structure the company right.

Michael M. Nolan

Yeah. Tycho that's a great question, so absolutely right. We were kind of in the low 30s for tax rate right at the company because most of our income is coming from onshore. The bond that we put in place in fact helped reduce our tax rate, because the bond hedge itself has tax advantages in terms of how it impacts the tax rate. So we were able to even between 2013 and 2014 materially move our tax rate lower in the 30% range than it was in 2013, all because of the mechanics of bond hedge and we are starting to see profitability in places like the UK where we have some NOLs, in Singapore where we don't pay tax and places like that.

So yes we will continue to look at opportunities from a supply chain point of view, as we do in contracts with customer as George comes in and brings in new opportunities we are looking for the most efficient way to structure those arrangements. So at the end of the day whether it's commercial API or milestone payments or some other of arrangement we are not burdened with the 35% U.S. corporate tax rate.

Tycho W. Peterson – JPMorgan Securities LLC

Okay. A couple of other just very quick ones. You know as we think about the first quarter can you maybe just talk about how to track your internal expectation on the contract revenues business?

William S. Marth

Very similar to what you are seeing. I mean as I mentioned in script that we are very pleased with operating performance in Q1 of the business. We had a strong Q4 so, sequentially we knew that we would not have the same quarter but that's okay we see that often right, if you go back and look Q4 '12 to Q1 '13 the same thing. So we are pleased. We brought on new people George came in, VJ [inaudible] came in, Dr. Luther you know had a quarter under his belt. So he's been able to as you see already look at the DDS business and reorganize there around the --. So for us there is a lot of things that happened in Q1 that we are very pleased with and the operating performance of the business kept going.

Tycho W. Peterson – JPMorgan Securities LLC

And then you know on discovering the relevance, just given everything that's going in pharma, can you maybe talk to whether the nature of your discussion is evolving here and becoming more strategic another services they are asking you for that you are not currently providing?

William S. Marth

Excellent question. So, a couple of answers to that one. First of all the answer is yes. So bringing Dr. Michael Luther on and his extensive relationships with the industry has been absolutely invaluable to us. So he is in with our business development team in regular conversations in fact he is on the road as we speak with some of our business development people working on some additional strategic relationships. So that's the first thing.

The second thing is with regards to our Buffalo expansion and what that brings in terms of capabilities for biology you know Michael or Dr. Luther's is squarely all over that if fact he from a pharmacology point of view understands that. That's kind of right up his let's say capabilities if you will. And so he is you know looking to leverage what's being build out in Buffalo with regards to our biology growth expectations and we are seeing already good traction in those discussion with some of our key collaborators.

Michael M. Nolan

Yeah, I think we would add that you know we have even seen the building isn't ready yet in Buffalo but the business has already began to come in. So we have to put in temporary facility so we are pleased with that. But that said we know that there is room for improvement in our DDS business. We know we are strong in chemistry, we know we are strong in the U.S. We know that we are not as strong in biology and Buffalo is a great fix for us there and Dr. Luther will help us shape to what that business should look with the assistance of New York State.

As well as we know our business is not as strong with European partners. We are doing better with our Japanese colleagues, we are doing well in North America. We are not doing as well in Europe and we have to come up with a way to let's say augment that business and by the way that's where Dr. Luther is this week in Europe.

Tycho W. Peterson – JPMorgan Securities LLC

Great, that's really helpful. Thanks for the color guys.

Operator

(Operator Instructions). And we have no further questions in queue at this time. I would like to turn the call back over to the presenters for any additional or closing remarks.

Unidentified Corporate Participant

Thank you Ryan and thank you everyone for joining us today and feel free to follow-up with either Mike or Bill directly if you have any further questions. Take care.

Operator

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

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Source: Albany Molecular's (AMRI) CEO William Marth on Q1 2014 Results - Earnings Call Transcript
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