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Akorn, Inc. (NASDAQ:AKRX)

Q1 2014 Earnings Conference Call

May 6, 2014 10:00 AM ET

Executives

Raj Rai – CEO

Timothy Dick – CFO

Analysts

Matthew Hewitt – Craig-Hallum Capital Group LLC

Louise A. Chen – Guggenheim Securities LLC

David Amsellem – Piper Jaffray

Randall Stanicky – RBC Capital Markets

Elliot Wilbur – Needham & Company

David Steinberg – Jefferies & Co.

Operator

Good morning and thank you for joining Akorn Inc.’s 2014 First Quarter Conference Call. If you have not yet had a chance to read the earnings release, you may access it through the Investor Relations section at Akorn’s web site. Raj Rai, Chief Executive Officer; and Tim Dick, Chief Financial Officer will host this morning’s call.

The call is expected to last about 30 minutes and may be accessed through our web site at Akorn.com. A replay of the conference call will be available shortly after this call. Interested parties can access the replay by dialing 888-203-1112 in the United States or 719-457-0820 internationally and entering the access code 5699967.

Before we get started, I’I like to remind everyone that any statements made on the conference call today that express a belief, expectation, anticipation or intent as well as those that are historical facts are considered forward-looking statements and are projected under the Safe Harbor of the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to Akorn today and except as required by applicable law, we disclaim any obligation to update any forward-looking statement in this document, whether as a result of changes in underlying factors, new information, future events or otherwise.

These forward-looking statements may involve a number of risks and uncertainties, which may cause the Company’s results to differ materially from such statements. Forward looking statements are qualified by the inherent risk and uncertainties surrounding future expectations generally and may materially differ from the actual future experience.

Risks and uncertainties could affect forward-looking statements including future performance or results of an internally developed and acquired assets, success of our sales efforts, the outcome of contingency such as legal proceeding and success in obtaining new product approvals or launching new products, success of the integrating acquired assets and achieving projected series, our ability to obtain additional financing to grow our business, the effects of Federal State and other governmental regulation on our business and increased competition from other pharmaceutical companies.

Akorn provides an additional information about these and other factors in the reports filed with the Securities and Exchange Commission including Akorn’s latest Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. In addition, as required by Regulation G, reconciliation of non-GAAP financial measures mentioned during our call today to the most comparable GAAP financial measures can be found in our press release.

Thank you, and now I would now like to turn the call over to Mr. Raj Rai. Please go ahead sir.

Raj Rai

Thank you. Good morning everyone and thank you for joining our 2014 first quarter conference call. On today’s call, I’ll summarize key business highlights for the quarter and an update on our key objectives for 2014, while Tim will discuss the financial results and the updated guidance in detail. We’re off to a good start for the year with nearly 91 million in sales in the first quarter, up 23% from the same quarter last year.

The growth was driven by the recently acquired branded ophthalmic as well as marketed share gains in our base business. I’m also pleased to announce the acquisition of the marketing rights Zioptan from Merck last month and the corresponding licensing rights from Santen Pharmaceuticals. The addition of Zioptan further strengthens our branded ophthalmic portfolio products. In addition to Betimol and Cosopt, Zioptan is the third branded ophthalmology product used to treat ocular hypotension. Our sales force is actively promoting Zioptan along with the products launched in the first quarter.

Let me give you a quick update on the key strategic and operational initiatives for 2014. We completed the launch of the recently acquired branded ophthalmic products through a newly expanded sales infrastructure and capabilities. We closed the acquisition of Hi-Tech and have initiated the integration process with the objective to complete the integration of critical functional areas by the end of this year.

We expect to realize a run rate of 20 million in synergies by the end of 2014. We also filed two ANDA’s in the first quarter and plan to file around 11 ANDA’s in the second quarter. This includes three filings from Akorn India. In addition, we responded to six Complete Response Letters and received four new ones. We have now 73 ANDA’s on file with the FDA and expect to receive approvals on four to five ANDA’s in the second half of this year. We have a robust and growing pipeline of products given the addition of Hi-Tech’s in process R&I projects.

One of the initiatives at Akorn India, we have triggered the process for the U.S. FDA visit. We expect the inspection to occur in the next couple of months. We have also begun the modernization and expansion projects in India. In addition to the focus on U.S. FDA preparedness, we are also actively registering products in other parts of the world. We’re on track to file 40 to 50 dossiers in 20 countries by the end of 2014.

As discussed in our previous calls, we expect to transition our platform in India to a global injectable player in the next couple of years from domestic contract manufacturing enterprise. And finally, we are actively evaluating and pursuing a number of strategic acquisitions as well as licensing opportunities of high value products in development that will further enhance the product portfolio as well as strengthen our pipeline.

In conclusion, we’re on track with our key initiatives while growth remains a top priority both organically and through acquisitions we remain focused on completing the integration of Hi-Tech, making strategic investments and infrastructure improvements for both modernization and expansion as well in our R&I initiatives. I remain excited about the near term and long-term growth opportunities for our company.

I’ll now turn the call over to Tim for his remarks, Tim?

Timothy Dick

Thank you, Raj and good morning. We achieved a record consolidated revenue for the first quarter of 2014 totaling 90.6 million, which is up 23% over the comparable prior year quarter consolidated revenue of 73.9 million. By the newly acquired branded ophthalmic products, Azasite, Cosopt, CosoptPF and Betimol. Revenue increases also came from organic growth in the sales of existing products and from new product introductions.

First quarter 2014 hospital drug and injectable segment revenue was 45 million versus 40.4 million in the prior-year quarter, an increase of 11%. Hospital drug and injectable segment revenue growth came primarily from organic growth with new products accounting for the remainder.

First quarter 2014 ophthalmic segment revenue was 41.9 million, versus 25.7 million in the prior year quarter, an increase of 63%. Year-over-year growth was driven largely by the recent acquisitions of branded ophthalmic products followed by organic growth in existing products as well as growth in our private label OTC business.

First quarter 2014 contract services segment revenue was 3.8 million, compared with 7.7 million in the prior year quarter. The reduction in the sales was a result of eliminating unprofitable contract business out of Akorn India Private Limited as well as exiting one U.S. contract manufacturing relationship.

Consolidated gross margin for the first quarter of 2014 was 54.8%, compared to 53% in the comparable prior year period. The increase was driven primarily by the acquisition of the four previously mentioned branded ophthalmic products, which occurred late in 2013 and early in this quarter.

First quarter 2014 gross margin by segment were as follows: Hospital drug and injectables, 55%; ophthalmic, 59%; and contract services, 12%. Contract services margins remain low as result of Akron Indian, we where we’ve increased cost in preparation for FDA inspection and we’ve also been impacted by government pricing control enacted in India in 2013 which resulted in us exiting some unprofitable contract business there.

Selling, general and administrative expenses were 16.6 million in the first quarter of 2014 compared to 12.3 million in the first quarter of 2013. The year-over-year increase was principally due to increases in the sales and marketing employee cost, consulting and other costs related to supporting our new branded ophthalmic portfolio as well as higher legal cost and FDA fees.

Research and development expense for the quarter was 4.4 million, compared with 6 million in the prior year quarter. The year-over-year decrease was primarily due the timing of development projects and milestone payments which resulted in lower spend in the first quarter of 2014. R&D expenses are prone to variability quarter-to-quarter related to the timing of certain internal development activities as well as the achievement of external development milestones and quarter-to-quarter R&D expenses can vary materially depending on the timing of these items.

Net income for the first quarter of 2014 was 9.8 million or $0.08 per diluted share, compared to net income of 10.8 million or $0.10 per diluted share comparable to prior year quarter. The first year – the first quarter of 2014 net income included 6.4 million of acquisition related expenses, the largest component of which were fees incurred pre-close on the Hi-Tech term loan commitments.

Non-GAAP adjusted net income for the first quarter of 2014 was 18.4 million or $0.16 per diluted share, compared to non-GAAP adjusted net income of 14.4 million or $0.13 per diluted share in the comparable prior year quarter. First quarter 2014 non-GAAP adjusted EBITDA was 31.8 million, compared to 24.5 million in the comparable prior year quarter. Adjusted EBITDA and other non-GAAP financial measures are defined further in today’s earnings release under non-GAAP financial measures.

The company generated record operating cash flow of 23.4 million in the first quarter of 2014 and ended the quarter with 45.6 million in cash and cash equivalents in full availability of our $16 million revolving line of credit. With the close of Hi-Tech, we now have over 50 million in cash and cash equivalents in a new undrawn $150 million revolving line of credit. First quarter 2014 capital expenditures were 5.2 million, compared with 2.7 million in the prior year quarter and up sequentially from 3.7 million in the fourth quarter of 2013 this ramp in spending is consistent with the increased capital spending we’ve guided too for 2014.

And finally looking at updated 2014 outlook. The company previously guided – the company’s previous guidance assumes that Akorn would acquire Hi-Tech effective April 1, 2014, however, the acquisition was not completed until April 17th. The updated outlook adjusts for this later Hi-Tech acquisition date as well as the addition of the branded ophthalmic products Zioptan, which company acquired in April.

The net effect was no change to our previously issued revenue guidance range of 540 million to 560 million. We are, however, taking our adjusted net income per diluted share guidance range up from $0.76 to $0.79 to a new range of $0.79 to $0.82 and this reflects the adjusted net income contribution from Zioptan for the year as compared to the adjusted net income loss due to the later Hi-Tech acquisition date.

The revised 2014 outlook factors in the following assumption: it excludes the impact of new product approvals; it assumes no generic launch for [inaudible]; cost synergies that result from Hi-Tech acquisition are expected to be realized throughout the year and will accelerate as year progresses. We continue to anticipate ending the year at a $20 million annual run rate for synergies; and finally, the company anticipates that will incur approximately 20 million to 22 million in one-time acquisition related expenses to close the Hi-Tech transaction and realized synergies.

The acquisition related expenses will be split between one-time operating expenses of approximately 14 million to 16 million and one-time financing fees incurred pre-close on the term loan commitments of approximately $6 million. These expenses are reflected as that backs to adjusted net income per diluted share in the GAAP to non-GAAP reconciliation in today’s earnings release.

That concludes our prepared remarks, so I’ll turn it over to the operator to open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll go first to the side of Matt Hewitt with Craig-Hallum Capital. Please go ahead. Your line is open.

Matthew Hewitt – Craig-Hallum Capital Group LLC

Good morning, gentlemen. Thank you for taking the questions. I guess the first thing, obviously you are seeing that there is going to be a pretty significant ramp up in your ANDA filings this quarter, is that ahead of or is that – is it your intention to get ahead of these new PDUFA changes that go in effect in June? And how should we be thinking about your progression of filings later in the year after those new fees going into place?

Raj Rai

Okay. Good morning, Matt, this is Raj. Some of it is, yes, definitely beating the clock for the new challenges that go effect in June and some filings were by design, we had slowed down the filings at the end of last year and we had said that those filings would – will happen or will be made in the first half of this year. So, some party was by design.

Matthew Hewitt – Craig-Hallum Capital Group LLC

Okay. And as far as the pipeline is concerned, you mentioned in the press release 73 current ANDAs on filed, that’s a touch below what we thought the number was going to be, was there some overlap of Hi-Tech that you may be are consolidating those applications or was there something else in the mix there?

Raj Rai

You’re absolutely right, it’s actually the overlapping pipeline products that we had with the Hi-Tech. So this is a consolidated net result of both the companies.

Matthew Hewitt – Craig-Hallum Capital Group LLC

Okay, great. And then maybe one more from me and I’ll hop back in the queue. As far as Zioptan is concerned, could you provide a market size for that drug?

Raj Rai

Yeah, so in the past, this product was doing approximately $20 million a year and when we acquired the product or when we were in the process of acquiring the product, the product had – sales had declined a bit as a result that it was not being promoted by Merck any longer. So we’re now sort – we are relaunching the product and hopefully bring the sales back up again throughout the year.

Matthew Hewitt – Craig-Hallum Capital Group LLC

Great, thank you very much.

Operator

We will take our next question from Jason Gerberry from Leerink Partners. Please go ahead.

Unidentified Analyst

Hi guys, it’s Chris Killian for Jason. Thanks for taking my questions. So I guess first, broadly speaking, could you give us a sense or maybe some color around how you are thinking about pipeline timing? It sounds like the average time might be lengthening for review, could you just give a sense of how many ANDAs fall into that post 36 month bucket maybe versus the 24 to 36 months? And then I just have a quick follow up after that.

Raj Rai

So now that we had explained in our last conference call about the complete response letters and sort of that being an indicator of how the review is going with the FDA on any given filing. We had about 15 complete response letters at the end of 2013 and the answered back on [inaudible] and then we got four new, so we feel that now I think there is some traction and movement with the review and there is definitely some hope in getting the new products approved in the near future. So, we are anticipating about four to five new ANDAs to get approved in the second half of the year given what we see in terms of the complete response letters’ language.

Unidentified Analyst

Okay, thanks. And then just in terms of the pricing outlook, any color on the pricing within your base business would be very helpful? Thanks.

Raj Rai

Pricing is pretty stable all across. We aren’t seeing any disruption there.

Unidentified Analyst

Great, thank you.

Operator

And we’ll take our next question from Louise Chen from Guggenheim Securities. Please go ahead, your line is open.

Louise A. Chen – Guggenheim Securities LLC

Hi, thanks for taking my questions, I had a few. So first question I had was on the four to five ANDA approval as you expect in second half ‘14, I assume those are in your guidance and I am curious if any of those you think might be meaningful products? And then second question I had was on some updates on your key generic opportunities like tobramycin, restasis, precedex and asacol?

And then in the past you’ve stated goal to be the number one generic ophthalmic company in the U.S. and I know that you’ve bought some brand products as well. So I’m just kind of curious where you stand there in total our market share and where you want to be over the next several years? Thanks.

Raj Rai

Sure. So I think let me just address your first question which was – the context was around the size of the approval. So I think the combination of the four to five products that I referenced are all decent size products and I would hope that with less competition going forward. So the opportunity would be pretty good for those four, five products in my opinion. As you know that we don’t really give specifics on products, but we think that those products are pretty decent in size and giving us a good growth opportunity in the future.

The second question was again addressing specifics around few products, again we don’t really talk about the individual products. Precedex which is out in the public domain, that is yet to be determined. We think that the pending of court ruling which will determine if the product will continue to be main branded till the end of this year before Sandoz I believe, which has the settlement with Hospira would be the first to launch and then it would take us about six months or so after that. So to get our product approved and launched. So we are talking about mid-2015.

Your third question was around ophthalmology, yes, it is our goal to in the next three to four years, to become the largest generic ophthalmology player which we are well on our way. As far as the branded products these are – these are some good products to have and there is definitely a longer-term plan with the branded ophthalmic portfolio as we get sort of used to selling branded products with our newly built infrastructure. Our hope is to – in the future to acquire or license other branded ophthalmics, that would fit pretty well with our – the sales and distribution and hopefully we can grow that side of the business as well.

Operator

All right, we will take our next question from the side of David Amsellem from Piper Jaffray, please go ahead.

David Amsellem – Piper Jaffray

Thanks. So, on Zioptan, what’s the extent to which you think there is pricing power there given that it’s a deep niche product? And can you also talk about what the managed care landscape for that product is? Then secondly on the [inaudible] area can you give us some thoughts on the competitive landscape, should we expect further pressure on that product and are you expecting new entrance? And then on the Somerset facility, can you just give us color on phase II of the expansion and specifically how much more solution capacity could come online and when? Thanks.

Raj Rai

Okay, so David on your first question around Zioptan, we obviously just recently launched the product and what we have to do is we have to build some managed case, especially managed Medicare coverage on that product. In the past when the product was launched, it had limited coverage in that particular area. So we will have to wait for the next cycle which happens in – sometimes in 2015 before we can get on to some of the formularies. The pricing is as competitive as competitive as other products in the category. So, perhaps there is some room to increase the price, but at this point, we are not in a position to do anything like that.

The second question was around the Somerset capacity. We are still evaluating our plans for phase II and we have not really pulled the trigger on it. So, we are currently sufficiently capitalized there with our capacities and as you know that we acquired Hi-Tech and Hi-Tech also has – brings an additional incremental capacity to both the solutions as well as the ointments.

David Amsellem – Piper Jaffray

And then the question on Flonase on the competitive landscape and potential for more pressure on that product?

Raj Rai

No, I think you asked a question on, do we expect more entrance and I’m not sure if I can answer that question because I don’t know. From a pricing perspective, I think Hi-Tech had some challenges and had some lost business. So, I think that’s also sort of factored into our guidance for 2014.

David Amsellem – Piper Jaffray

Okay, and just on Flonase, do you think that there is anything that you can be better regarding customer wins versus Hi-Tech or is that a product franchise you expect will continue to see pressure?

Raj Rai

Well, as you know Hi-Tech was one of the first entrants for the products, so they enjoyed a nice market share and as new entrants came in, it was expected that they would lose some business and the prices will come down. So I think the product is now stable and there is definitely an opportunity to drive some revenue synergies as we combine our two assets and have a larger portfolio product offering to the customers. So we would definitely anticipate to see some opportunities to drive growth.

David Amsellem – Piper Jaffray

Thank you.

Operator

And we will take our next question from Randall Stanicky from RBC Capital Markets. Please go ahead.

Randall Stanicky – RBC Capital Markets

Great, thanks guys. Raj, just going back to the four to five approvals for this year, are those largely coming from the six CRLs that you responded to last year and where I am going with this is it sounds like you’ve had 19, if my math is correct, CRL is kindly early where you have responded to some and I’m just trying to get a sense if that’s sort of the timeframe should we expecting a wave of opportunities to come through in 2015 from the current CRLs you are sitting on? And then I have a couple of follow ups.

Raj Rai

Sure. So, Randall I think the four to five products that I talked about are some of that we have visibility on they were bag our four challenges that these are Hi-Tech and what we had. So we are right at the tail end of all our responses and for couple of them, there are no further questions.

And so those are the kind of products that we think are ready for approval. As well as the longer term view, the complete response that is a true indicator as to how long it will take for us to get an approval. So, I think that the intensity is increasing, so there is more traction and we think that 2015 should be a turning point in terms of getting more approvals.

Randall Stanicky – RBC Capital Markets

Is it realistic, Raj, to think that the majority of those there are or a good number of those at least come through next year just given the length of time it takes you to respond but also FDA to come back and approve?

Raj Rai

Yes.

Randall Stanicky – RBC Capital Markets

Okay. And then a follow up on – particularly on Flonase. Have you heard anything that channel around movement towards OTC at this point?

Raj Rai

Well there is especially with Nasacort [inaudible] OTC, I think this product is, Flonase is probably the next one and that is the anticipation. And we will be ready to deal with that as and when the product goes OTC, because we have a private label strategy ourselves and we have opportunities to partner on the brand side as well to self-promote the product.

Randall Stanicky – RBC Capital Markets

But nothing that you’ve heard thus far that suggests that something formally is in the works?

Raj Rai

There is some talk because of Nasacort I think, but we don’t have visibility as to when the product may go OTC at this point.

Randall Stanicky – RBC Capital Markets

Got it. And Tim, last one for you, you guys talked about some opportunities that you’re looking at or several I think you talked about in the prepared comments actively. Can you just help us understand how big I mean you’ve done some large transactions in the past, you guys got a lot of smaller business development type deals. How big are these opportunities and could we see something more sizable of Akorn over the next 6 to 12 months? And I guess is there a deal capacity that we should be thinking about in terms of what you guys are looking at? Thanks.

Timothy Dick

So Randall we’ve got readily available our revolving line of credit, so which we recently expanded to a 150 million. As the business grows we have the ability to – that up to 200 million and then we also have the ability to take on some incremental term loan debt under our existing term loan structure up to 150 million and subject to some incurrence leverage tests take on some additional layer. So those would be the first two places we keep goals and I will give a relative size range at the upper limit based on capital we have readily available.

Randall Stanicky – RBC Capital Markets

And that’s consistent with what you guys are looking at right now?

Raj Rai

Yeah, so we have a variety of deal prospects from small to large. And so depending on what comes first, we’d be able to handle the financial part of it.

Randall Stanicky – RBC Capital Markets

Okay great, thanks guys.

Operator

We’ll take our next question from the side of Elliot Wilbur from Needham & Company. Please go ahead. Your line is open.

Elliot Wilbur – Needham & Company

Thanks. First I have just two quick questions for Tim. With the closing of the Hi-Tech acquisition obviously most of those products don’t fall into the hospital drug and injectable category I’m just wondering if you’re contemplating any change in the reporting the segments? And then also looking at your adjusted EPS guidance, I don’t specifically see any call out or it doesn’t look like you’ve backed out any potential charges for inventory step up and I’m just wondering if that in fact is the case, what that amounts may be?

Timothy Dick

I’m sorry, your first question again?

Elliot Wilbur – Needham & Company

Segment changes.

Timothy Dick

Segment change, yeah, so – yeah, so in order to accommodate the growing and more diverse business we have right now, there will be a need to address segments that’s something that’s our belief in Q2, I can’t give you a definitive answer on the exact structure, we’re working through that right now, but safe to say there will be some restructuring in our existing segments.

Elliot Wilbur – Needham & Company

Okay, then the inventory step up?

Timothy Dick

And in terms of inventory step up, I have to come back to you on that as the exact guide and all the – our estimates around that and how we’ve captured that in the guidance.

Elliot Wilbur – Needham & Company

Okay. Next question is on Ziopatan. It certainly looks like a relatively meaningful product released to the size of your existing branded ophthalmic effort, and at some point in time, someone is going to ask a question of with the addition of this asset, why there hasn’t been any movement in top line guidance and I’m not sure if this is something that was just contemplated at the time you issued guidance and you just hadn’t finalized the deal or maybe there is just a lot of movement in terms of some of the managed care contract and stuff that you just described earlier that has just led you to just not adjust numbers for this particular product, but just sort of wondering what’s your thoughts on that subject?

Raj Rai

So earlier the timing was coincidental with the closing of – with Hi-Tech. And as you may recall we had issued a guidance earlier this year with the assumption that Hi-Tech would be closed by April 1st. Unfortunately that didn’t happened and the closing occurred on the 17th of April. And while that was happening, we required this product. So essentially what we’ve said this morning in our guidance is that the gain in sales from Zioptan would wash out any loss of sales in a guidance from Hi-Tech. So –

Elliot Wilbur – Needham & Company

And then just Raj, two quick questions for you as well. I guess given the kind of build out in the branded ophthalmic business, can you just maybe update us on the current sales force count and then just maybe a little bit of color on how exactly they are spending their time in terms of what products are being promoted? And sort of given that you have pretty decent mix now branded ophthalmics is kind of what do you think the potential was to add additional assets without actually expanding the sales force? And then I have one follow up question as well.

Raj Rai

Sure. So sort of the first phase of building out the sales force, we have about over 40 sales people throughout the country promoting much of these products, that includes Zioptan, Cosopt, Azasite. We have three regional sales directors managing – 40 odd sales people. And these sales people have obviously in their calls, they have – they do a rotation, a call rotation in terms of which products they promote first but our top products being Zioptan, Azasite and Cosopt that’s what they are promoting along with they are also promoting TheraTears, which is our flagship product for dry eyes, which is sold over-the-counter. And so they’re promoting that product as well.

And as we see the need, we obviously get more traction and get more understanding of this business. We may add more sales people in certain geographies that I’d not cover at the moment.

Elliot Wilbur – Needham & Company

Okay. And the last question for you Raj has to do with the close up the PF had a nice run with the product based on recent RX trajectory and just what you also acquired the legacy asset Cosopt.

Raj Rai

Right.

Elliot Wilbur – Needham & Company

And just trying to get your thoughts around the possibility of a so called hard switch. I mean it looks like Cosopt volume is about 10% of PF, but I would imagine a tremendous number of the script that are actually written for Cosopt of course are filled generically, I just want to get your thoughts potentially about withdrawing the prior version and just going with the PF formulation?

Raj Rai

So Elliot, I mean the CosoptPF has certain kind of patient population that it serves people who cannot tolerate preservatives. So it’s a different market than with the traditional Cosopt product. So we’re not actively promoting Cosopt, but there is a need for that product in the market because there are lot of prescribers who prefer to prescribe branded ophthalmic products given that they think that they are more efficacious, so we will continue to sell that product, I mean there are no plans to sort of remove them from the market.

While we continue to sell the generic at the same time, but so I think there is a value to the legacy product as well and that’s something that we’re not actively promoting, but we have it in our sales force’s bag to talk to the physicians. So it is not our intention to stop promoting their product.

Elliot Wilbur – Needham & Company

All right, thank you.

Operator

(Operator Instructions). We’ll go next to the side of David Steinberg with Jefferies. Please go ahead.

David Steinberg – Jefferies & Co.

Thanks. I have a couple of questions, first is the follow up on Zioptan. So IMF sales indicates it’s about $18.5 million product at least last year and then the Santen press release indicates that you would pay the amount in royalty. I was just curious with rebates and discounts et cetera how profitable this product is, would you say this is at your corporate gross margin level or higher or lower? And secondly, the press release also says the patent expires on February 17th, I was wondering you thought there’s any ways to extend that?

Timothy Dick

David, this is Tim. I’ll answer the first question, from a margin standpoint there is a royalty on it but the margins are still significantly higher than our corporate average, so it does layer on nicely and bolsters margins. In terms of net of rebates managed care fees, channel fees that 18 million run rate you’re looking at is, in our expectation, it’s more like a $12 million book of business [inaudible] gate, but it’s obviously one of the focus products of our sales team and we will be looking to grow that as they get familiar with the product and start detailing in.

Raj Rai

And I think David, this is Raj, you asked the question on patent. Yes the patent goes through end of 2017 and we have filed for an extension that would take us to 2022.

David Steinberg – Jefferies & Co.

Okay. And then I have to ask you about this because everyone else is seriously talking about which is inversions and as you know you have one of the highest tax rates in this sector, so better for worst. So just curious there is a body of thought that some companies are indicating if you like the need to pursue an inversion by the end of this year, because there maybe changes in Washington D. C. And I just want to get your latest thoughts on inversions for Akorn?

Raj Rai

Yes, we have high tax rate David and that’s just the nature of the business. Are we actively pursuing any inversions? The answer is no, but if there is a strategic opportunity, that presents an inversions opportunity, we may look at it, but that’s not really our focus that to scout for inversion opportunities at the moment.

David Steinberg – Jefferies & Co.

Okay. And just one more question strategically, Raj. So you have injectables, you have ophthalmic; you have liquids and some topicals, so you have very nice portfolio, the niche generic technologies and products. Any other areas you’re thinking about perhaps adjacent categories you’re thinking about adding to your portfolio?

Raj Rai

Not really at the moment unless something comes up, but at the moment I think we are more focused in these three different area or four different areas. I like the topical areas a lot. With the acquisition of Hi-Tech, we are also going to be in this unit dose business of the liquids, which I think is pretty exciting and we definitely have an opportunity to promote more of those products given our presence in the acute care, where the bulk of these products are used and so I think the focus is going to be around these areas at the moment, if there are opportunities that are presented, that again have that niche focus, I think we’ll definitely look at that.

David Steinberg – Jefferies & Co.

Okay. Thanks very much.

Operator

And at this time we have no further questions. I’d like to turn it over to our speakers for any closing remarks.

Raj Rai

Thanks once again everybody for joining the call and we look forward and speaking with you soon. Thank you once again.

Operator

Thank you for participation in today’s conference call. Please feel free to disconnect at any time.

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