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Akorn, Inc. (NASDAQ:AKRX)

Q2 2014 Earnings Conference Call

August 5, 2014 10:00 AM ET

Executives

Raj Rai - CEO

Tim Dick - CFO

Analysts

Randall Stanicky - RBC Capital Markets

Traver Davis - Piper Jaffray

David Krempa - Morningstar

Jason Gerberry - Leerink Partners

Sumant Kulkarni - Bank of America Merrill Lynch

Elliot Wilbur - Needham & Company

Matt Hewitt - Craig-Hallum

Gary Nachman - Goldman Sachs

Greg Gilbert - Deutsche Bank

Operator

Good morning and thank you for joining Akorn, Inc.’s 2014 Second 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 on our web site at Akorn.com. 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. An online replay of the conference call will be available shortly after this call.

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 on 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 the forward-looking statements including future performance of intentionally developed and acquired products; success of our sales efforts; the outcome of contingency such as legal proceeding; success in obtaining new product approvals or launching new products; success in acquiring and trading these assets and achieving projected synergies; ability to obtain additional financings 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 additional information about these and other factors in 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 second quarter conference call. On today’s call, I’ll summarize the key business highlights for the quarter and update on our key objectives for 2014, while Tim will discuss the financial results and the updated guidance in detail.

We had a great quarter with strong financial results. We achieved record sales of $151 million in the second quarter or approximately 95% increase from the second quarter of 2013. The adjusted EPS grew to $0.25 a share or an increase of nearly 79% from the same time period in 2013. Our results reflect an outstanding performance all across the board from our base business and the recent acquisition the branded ophthalmic products and Hi-Tech.

I am also pleased to announce that we have received FDC clearance of the pending VersaPharm acquisition. We expect to close the transaction within a week or so. We will provide an update on the integration plan in our next conference call but we can anticipate completing the integration of VersaPharm by the end of this year. I stated before the combination of the acquired product portfolio through VersaPharm along with the Hi-Tech platform creates a strategic and solid growth platform for our company.

Let me now provide you with an update on the key strategic and operational initiatives for 2014. First and foremost, let me give you an update on the Hi-Tech integration and other Hi-Tech related developments. We are on track with our plans to fully integrate the business by the end of this year and on track to realize about 20 million in cost synergies by the end of this year which are at the higher end of our initial expectations.

The transition has gone smoothly and I am pleased to report that Hi-Tech’s financial performance since closing and through transition has exceeded our initial estimates. The customers have embraced our two combined companies and we are seeing new growth opportunities as a result of cross selling synergies. We’re also experiencing positive pricing trends and general market dynamics on certain products that Hi-Tech markets, in particular reversal (Ph).

As a result we expect to see a significant increase in volumes and sales of this product, in the middle of the third quarter due to new contract wins. However, the net gain or benefit from this development will be realized in the fourth quarter. In addition, after careful deliberations, we’ve decided to divest Hi-Tech’s branded subsidiary, ECR Pharmaceuticals to Valeant in the second quarter for 45 million in cash in assumption of certain liabilities.

The products promoted by ECR were primarily promoted to primary care physicians and had no call point synergies with our existing sales force who call on ophthalmologists and hospital pharmacies. Furthermore, GSK recently announced the approval for Flonase for allergy relief as a new drug application for the over-the-counter use with an added ocular indication for watery and itchy eyes.

This represents a partial switch to a deceit (Ph) and the original Flonase. NDA was approved for the management of both allergic and non-allergic rhinitis. At this point, we do not know yet the exclusivity and the patent status for the drug and we will only be able to confirm sometimes in mid-August when the Orange Book is updated.

The big question is what implications does this approval have on the existing ANDA holders?

As of now, our view is that we would continue selling the generic fluticasone under the auspices of our existing NDA and file a new NDA against the new NDA to seek approval for the OTC version. We will keep you posted on any new developments.

On the new product approvals front, we are excited to report that we have received five approvals from the U.S. FDA so far this year. These include four ANDAs and one NDA. We expect to receive approvals for another three ANDAs by the end of this year. A few of the approvals are for products that we filed from contract manufacture side and require longer lead time for supply chain planning. As a result we expect to commercialize 10 products over the next six months. These introductions also include two relaunches of products that were previously discontinued as well as expected approvals for the remainder of this year. We estimate all such launches are expected to contribute 70 million to 90 million in aggregate annual sales.

In the second quarter we filed 12 ANDAs and plan to file around eight to nine filings by the end of this year. We currently have 78 NDA filings with six tentative approvals. Of the 72 pending ANDAs we have received 25 complete response letters and of late 17 are pending to be responded. In the second quarter, we responded to four complete response letters and received 11 new ones. This is encouraging news, as all indications are pointing towards an improvement in the ANDA review process. Our pipeline continues to increase as we have over 50 active projects that are in various stages of development. This will further enhance with the acquisition of VersaPharm. As we bring all the acquisitions together, we plan to recalibrate our R&D priorities and resources.

On the branded ophthalmic platform, we continue to make good and steady progress. Our key products continue to show growth in total prescriptions and are on track with our expectations since the acquisition and relaunch. We have augmented our selling efforts with sampling and co-pay discount cards and hired a director of product marketing. We have also beefed up our efforts on managed care contracting. We are now actively looking to license new products to further strengthen our portfolio.

Let me now give you an update on Akorn India. In the late second quarter, we had our U.S. FDA inspection at our Akorn India facility. The inspection was triggered by the site transfer of an approved NDA product in one of our facilities. Subsequent to the site inspection, we responded to the observations received in the Form 483 and have confirmed with the agency of the review of our responses and corrective action plans. We expect to file additionally three ANDAs from our facilities by the end of this year. As a result of continued filings, we expect FDA to reinspect in early 2015 to verify our commitments and corrective actions. The timeline for site approvals remain unchanged from our original projections.

In the first half of 2014, we have made over 20 registrations in the Asia Pacific region and Africa and have received six approvals in three countries. We plan to continue to increase our filings globally from Akorn India. We have also taken steps to wind down the majority of the contract manufacturing business in India and to shift our focus on the U.S. and other international business. The expansion and modernization projects in India are also well underway and are expected to be substantially completed by the third quarter of next year.

On the business development front, we continue to evaluate new opportunities to further expand a product portfolio through acquisitions and licensing for in process development projects. Finally, we have signed a definitive agreement with Fareva, a global contract manufacturer of pharmaceuticals and cosmetics to acquire its U.S. FDA approved facility in Hedingen, Switzerland for approximately $24 million. This site currently manufactures one of our currently marketed products Zioptan. In addition, we have one pending ANDA filing from this facility.

This facility focuses exclusively on a tablet dosage forms such as solutions, ointments, gels and suspensions. The transaction is expected to close in the beginning of 2015. We plan to transfer a number of approved ophthalmic products into coming months from our sites in the U.S. with this facility to further expand our capacities here in the U.S. The acquired facility adds over 30 million to 35 million units in annual capacity and adds new capabilities to manufacture high value ophthalmic suspension products. Furthermore, with this acquisition, we would reach our goal of expanding capacities and capabilities that were originally planned in our Somerset, New Jersey facility in a cost effective and expeditious fashion.

Let me summarize by saying that overall we had a great second quarter with a lot of activity around our strategic initiatives and business objectives. Our base business remains stable and we have seen solid growth opportunities from the acquisitions and the recent product approvals. We are excited about VersaPharm coming on-board shortly which will further expand the portfolio and further add to the diversification into niche dosage forms.

I would also like to take this opportunity to congratulate the management team for their accomplishments. I will now turn the call to Tim to discuss the financial results for the second quarter. Tim?

Tim Dick

Thank you, Raj and good morning. We achieved record consolidated revenue in the second quarter of 2014 totaling to $150.7 million which is up 96% over the comparable prior year quarter consolidated revenue of $77 million. The increase in consolidated revenue was largely driven by the Hi-Tech acquisition which contributed $51.5 million in revenue for the partial quarter as well as by the addition of several branded ophthalmic products which were acquired in late 2013 and early 2014. Revenue increases also came from strong organic growth in the sales of existing products.

Note that the ECR Pharmaceuticals business we divested this quarter was not reflected in revenue. ECR’s net results are shown in discontinued operations. We are introducing a new segment start through this quarter to better align with our growing and more diverse product line as well as the operational structure of the business which has evolved over the course of several acquisitions. Going forward we will have two reporting segments, prescription pharmaceuticals or RX and consumer health.

RX will include the former hospital drug and injectables segment, the contract manufacturing segment and Hi-Tech’s generic segment and a portion of our ophthalmic segment. Consumer health will include the OTC portion of the ophthalmic segment, animal health sales and Hi-Tech HCP segment.

Second quarter 2014 RX segment revenues were a $136.2 million versus $67.4 million in the prior year quarter, an increase of 102%. RX segment revenue growth came primarily from the Hi-Tech acquisition as well as acquired branded ophthalmic products and strong organic growth in the sale of existing products.

Second quarter 2014 consumer health segment revenue was $14.5 million versus $9.7 million in the prior year quarter, an increase of 50%. Year-on-year growth was driven largely by the Hi-Tech. Consolidated gross margin for the second of 2014 was 15.9% compared with 54.7% in the comparable prior year period.

Second quarter 2014 gross margin included $3.6 million in amortization of the step up of Hi-Tech’s acquired inventory. Excluding this impact, second quarter 2014 gross margin was 53.2%. Second quarter 2014 gross margins by segment were as follows: RX, 50% and consumer health, 60%.

The $3.6 million in amortization of the step-up of Hi-Tech’s required inventory was entirely in the RX pharmaceutical segment excluding this impact, second quarter RX segment gross margin was 52.5%.

It’s also worth nothing that while the ECR Pharmaceuticals business we divested was not particularly profitable. At the bottom line it did generate considerably higher gross margins at our overall footprint average which were not included in this quarter’s gross margin. So in general, administrative expenses were $22 million in the second quarter 2014 compared to 13.1 million in the second quarter of 2013. The year-over-year increase was principally due to the Hi-Tech acquisition as well as increases in the sales and marketing employee cost, consulting and other costs related to supporting our branded ophthalmic portfolio.

Acquisition related costs totaled $20.8 million, the largest components of which included golden parachutes and M&A advisory fees on our Hi-Tech acquisition. Research and development expenses was a $9.1 million in the second quarter 2014 compared to $5.1 million in the prior year quarter. The year-over-year increase was primarily attributable to the Hi-Tech acquisition. Our R&D expenses are prone to variability quarter-to-quarter relating to the timing of certain internal development activities as well as the achievement of external development milestones and may vary materially depending on the time to these items.

GAAP net income for the second quarter of 2014 was $8.5 million or $0.07 per diluted share compared to GAAP net income of $12.6 million or $0.11 per diluted share in the comparable prior year quarter. Second quarter 2014 net income included a number of items related to the Hi-Tech and VersaPharm acquisitions including acquisition related expenses, the 3.6 million of amortization of inventory step up I already mentioned, again from product divestitures, financing related fees on the Hi-Tech and VersaPharm term loan commitments and a loss from the discontinued operations for the ECR Pharmaceuticals divestiture.

Non-GAAP adjusted net income for the second quarter of 2014, excluding the impact of these items was 29.3 million or $0.25 per diluted share compared to the non-GAAP adjusted net income of 15.3 million or $0.14 per diluted share in the comparable prior year quarter. Second quarter 2014 non-GAAP adjusted EBITDA was $55.3 million, compared with $26.8 million in the prior year quarter. These non-GAAP financial measures are defined further in today’s earnings release under non-GAAP financial measures.

Operating cash flow for the quarter was a $3.6 million use of cash. It reflects the impact of acquisition-related cost as well as an acceleration of sales for both Akorn and Hi-Tech over the course of the second quarter. We ended the second quarter of 2014 with a $108 million in cash and cash equivalents and an undrawn $150 million revolving line of credit. Second quarter of 2014 capital expenditures were $6.7 million compared with $2.5 million in the prior year quarter and up sequentially from 5.2 million in the first quarter of this year. This ramp in spending is consistent with the increased capital spending we’ve guided to for 2014.

And finally on 2014 outlook, we are updating our annual guidance to adjusted for several developments including the divestiture of ECR Pharmaceuticals business and expected mid-August close for the VersaPharm acquisition, new product approvals and anticipated changes in price and demand on the remainder of the business. The updated revenue guidance range is now $580 million to $600 million, up from the previous range of $540 million to $560 million which included approximately $15 million of ECR sales. Gross margins are expected to be between 56% and 57% and the adjusted net income per diluted share guidance range is now $1 to a $1.05, up from $0.79 to $0.82. In terms of quarterly progression, we expect Q3 to be flat to Q2, both top-line and adjusted net income per diluted share as a result of fees associated with third quarter price increases.

To revise 2014 outlook factors in the following assumptions, it excludes the impact of any new product approvals after today. As previously mentioned it assumes the VersaPharm acquisition closes mid-august. It assumes no competing generic is launched for Nembutal. It assumes that cost synergies that result from the Hi-Tech acquisition are expected to be realized over the course of the year and accelerate as the year progresses. And we do anticipate ending the year at a 20 million annual run rate for synergies. Acquisition related costs have been updated to reflect the one-time expenses anticipated in order to realize the Hi-Tech synergies as well as close and integrate the VersaPharm acquisition.

These expenses are reflected in add 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 will now turn the call over to the operator to open the lineup for Q&A.

Question-and-Answer

Operator

(Operator Instructions). Our first question comes from the line of Randall Stanicky of RBC Capital Markets. Your line is now open.

Randall Stanicky - RBC Capital Markets

Raj, can you just go into a little bit more detail on the pricing increases on clobetasol. Are you seeing other opportunities across the portfolio, how much of an impact in terms of flow through from that increase are you going to see in the P&L and any pushback that you have heard around that, that would be helpful? Thank you.

Raj Rai

Randall, this is sort of a new development and with the price increase came some additional contracts and we are in the process of implementing those contracts. So, I think the situation is still little bit fluid and we will have more to discuss in our next conference call when we have fully implemented these new contracts. But the opportunity as it stands is real and it’s going to increase our sales substantially in the next quarter. I mean the process has already begun and as Tim mentioned that there are some costs associated with the price increases, so the third quarter would sort of be flat but I think we will start to see the benefit of the price increase and volumes coming through in the fourth quarter.

And the question on other products, yes I think there is a general, we are seeing lot of price increases that are happening in the generic space and it affect some of our products as well. So, I would say overall, there is a healthier pricing environment than it was there, I would say six to eight months ago.

Randall Stanicky - RBC Capital Markets

And can I just ask a follow-up, on Flonase or fluticasone, how are you thinking about the timing and then ultimately the opportunity I guess as you think about the market opportunity for you compared to dynamics and what you think you can pull through that? Thanks.

Raj Rai

So, I think as where we are seeing things is that there is a new NDA that has been approved for GSK and it has different indications than the original NDA, so I think what will happen is all generics there in my opinion will have to file an ANDA to get an approval. Now, we don’t know about any patent issues or any exclusive dishes but generally speaking for us to enter in the OTC market for their product, we will have to obtain an ANDA approval. As you know we have the store brand strategy, so I think we will be in pretty good position as and when we file and get an approval to launch the generic version. But it’s still bit premature to comment on that but I think what will happen is that there will be a new market that will be created on the OTC front as we will continue to promote and sell our generic version which is separate ANDA. So, I think the OTC would be a new opportunity and a new market in my opinion which will further expand the volumes for that product.

Operator

Thank you. Our next question comes from the line of Louise Chen of Guggenheim Securities. Your line is now open.

Louise Chen - Guggenheim Securities

So, first question I had was with respect to your ‘14 guidance raise, what are you assuming for volume and price for clobetasol here and how does this opportunity come about as well as some other ones we’ve seen in the industry and what is driving this opportunity. And then secondly for your guidance on over the kind of fluticasone what are you assuming for competition here or assuming that you are able to get a product on to the market this year. And then last question is on your use of cash given your two recent divestitures, ECR and rifampin, what do you expect to do with this additional cash?

Raj Rai

So let me try to address one half of your first question which is going on in the market with price changes especially around clobetasol obviously it started a few months ago with prices change from the brand and then followed by an increase by another generic competitor. To be honest with you, the products like clobetasol have the pricing has been so depressed in the past that they were selling for $1 or change like that. And I think you are seeing a little bit of an uprise in pricing as a result of the depressed margins on products like clobetasol. They have a huge amount of use and utilization in the market place. I think that’s what was probably driving the start of the price increase. It was the brand company that raised the price followed by the other generic competitor and then we followed it soon.

And then I think on the question around the revenue line is, perhaps Tim can add more color to it.

Tim Dick

So without getting into the specifics, I mean as I mentioned at the close of comments, I mean the Q2 to Q3 progression is flat as a result of some flat changed fees that will be assessed in the third quarter. So if you follow that progression and back into Q4, I mean you will see a meaningful step up in Q4 fluticasone is always clearly a contributor there as is the growth in the base business and the layering on a VersaPharm that will be the first full quarter with VersaPharm’s part of business as well.

Raj Rai

So Louise on your other question that was around fluticasone, can you clarify again now what the question was?

Louise Chen - Guggenheim Securities

Yeah, I am just curious what you are assuming in your guidance in ’14 for OTC if you that on both on the competitor side and then for yourselves if you plan to be in the market with the product.

Raj Rai

Well, we have made no change to our estimation on the sales and the OTC the press release that came out from GSK, they planning to launch to the product some times in early 2015 and so we are not really changing anything based on those announcements. I think we will continue to promote our generic fluticasone.

Louise Chen - Guggenheim Securities

And then just a question on the divestitures and what you are planning to do with cash?

Raj Rai

Well, so we had one divestiture that was the ECR Pharmaceuticals. We will redeploy that cash to perhaps some other smaller tuck-in type of acquisition opportunity, product made at acquisition. So we have plans to reinvest the dollars back in the business.

Operator

Thank you. Our next question comes from the line of David Amsellem of Piper Jaffray. Your line is now open.

Traver Davis - Piper Jaffray

Hi, guys this is Traver Davis on for David. Thanks for taking the question. Just a couple of products specific question. On generic Dronabinol, what’s the size of this market and what kind of share is realistic here and also can you give us an update on the -- any of the dynamics for Zioptan and any expectations from competition? And then just switching gears on for the Somerset and the Decatur facility, can you tell us when the last time the FDA is going to be in these facilities or when you could expect them to be in these facilities? Thanks

Raj Rai

And so on your first question around Dronabinol I think if I am not mistaken, the market is over $150 million and four players including the brand. This is a product that we had filed for some time and it’s a partner product and it’s going to be manufactured in our partner’s facility overseas. We do plan to launch that product within the next six months. And the question around the FDA status on our two facilities in Somerset, we get inspected every year and we’ve gone through annual inspections and we just got our first product approved out of the Decatur. So we are in good standing.

Traver Davis - Piper Jaffray

And now just an update on generic development.

Raj Rai

The generic [indiscernible], there are multiple players for that product. The pricing has really come down over the years since its gone generic and we have a decent market share for the product and it continues to perform pretty well.

Operator

Thank you. Our next question comes from the line of David Krempa of Morningstar. Your line is now open.

David Krempa - Morningstar

Just two quick ones; first you talked about M&A, can you talk about your appetite, how big the deal you can do now, where you’d point your leverage ratio to go or if you would be willing to use equity for a deal. And then secondly, did you guys give an organic growth -- revenue growth number excluding the acquisitions and divestitures for the quarter?

Tim Dick

So let me take your last question. We didn’t provide that in my remarks. We are in the, I want to say it’s around 10% to 11%.

Raj Rai

And then on the M&A question upfront, we are looking at different opportunities, I think the question came from one of analyst before, what are we going to do with the cash that we got as a result of divesting ECR. So, that is a kind of size of deal that we probably are looking at, at the moment to reinvest that cash. Larger transactions at the moment obviously we are quite busy with the integration of Hi-Tech and now that we have got VersaPharm on-board within a week, so we are going to be tied up with that. So, at this point unless something is again changing event, we are going to focus on the integration aspect of the acquired businesses. But we will definitely open to looking at small acquisition opportunities, product related acquisitions or licensing opportunity. Did I answer your question?

Operator

Thank you. Our next question comes from the line of Jason Gerberry of Leerink Partners. Your line is now open.

Jason Gerberry - Leerink Partners

May be Raj, first, can you just provide a little bit of an update just in terms of the nature of 43 observations that you got it at the facility, just so if you can characterize those? And then for Tim, can you just disclose what were the hospital and injectable sales for the quarter just so we have a sense that how that business was performing? And then how to think about the gross margins for the two new segments going forward? It looks like for the guidance, I mean you have got a partial quarter of clobetasol pricing in there but I would assume that that gross margin number probably creeps up in ‘15 have you got a full year of that benefit? Thanks.

Raj Rai

So, Jason on the U.S. FDA inspection and observations in Akron India, the bulk of the observations are around documentation and records keeping and to some extent they were on validation. So, those were sort of the two broader categories of the observation that we got.

Tim Dick

And then Jason, I will answer the gross part of your question on the new segment. I expect them to be pretty close to each other, so we had a little bit of a lot of Rx gross margin this quarter. It was burdened by some of the purchase accounting impact on the inventory step-up from Hi-Tech. You stripped that out still lower but I think you have mentioned clobetasol, so there is no clobetasol impact in Q2 but as clobetasol starts to layer on you will see those margins move up and VersaPharm also layers on at a higher margin as well in that Rx segment and that will push those up closer to where we said the consumer health margins were this quarter. And I will have the follow-up on the hospital, drug and injectable segment as it was previously reported and the size of that.

Operator

Thank you. Our next question comes from the line of Sumant Kulkarni of Bank of America Merrill Lynch. Your line is now open.

Sumant Kulkarni - Bank of America Merrill Lynch

The first one is on the consumer health side; you have broken that out as a specific segment going forward. Could you provide some specifics on how you plan to go about your Flonase OTC store brand launch and would you be open to partnering the product if you like to gain scale there?

Raj Rai

Yes, so as you know Sumant, that ourselves have a store rent strategy, so we will be open to partnerships, go alone or combination thereof. We did have or Hi-Tech did have a relationship with a company that they have plans to work with them on promoting something similar to that, so we inherited that relationship. But the answer is that we will be open to both the avenues, doing it ourselves or we have got lot of enquiries that are coming in from the retailers and obviously we will have to wait to see what happens in the next few weeks before we decide what direction to go with.

Sumant Kulkarni - Bank of America Merrill Lynch

What would be earliest possible launch time be for that product given that you have to go through an ANDA process potentially?

Raj Rai

We are at the third year of the GDUFA act, so based on the commitments there if you were to file the product let’s say sometimes in October, there is a 60% of chance of getting the product approved within 15 months and if I go with that projection then you are talking about in the next, call it 18 to 19 months. But again, we don’t know from the patents standpoint and exclusivity standpoint, so it depends on that.

Sumant Kulkarni - Bank of America Merrill Lynch

And then moving on to VersaPharm, what are your expectations for competition around isotretinoin and what’s the potential for pricing in that market?

Raj Rai

I mean the pricing is pretty stable, the market had a little bit of our people with some shortages which VersaPharm was able to take advantage of. At the moment there are four players so we are not expecting at least what indications have been given the VersaPharm management that another entrant is eminent. So at this point we have no intelligence around it.

Sumant Kulkarni - Bank of America Merrill Lynch

And given that your liquid semi-solid ophthalmic products are contributing a very large chunk of your sales going forward. How do you think of hospital drugs and injectables in the large scheme of things, are they still core to your plan.

Raj Rai

Absolutely, as you know we are investing in our facility here in the U.S. and making investments in India, I mean that is going to be equal part of strategy to be a viable player in that space. So we’ve got a lot of products in developments that are all injectables and there are lot of number filings that we have are injectable filings. So, definitely, we have the commitment, we’ve made the commitment and that’s another big avenue for growth and the future growth.

Sumant Kulkarni - Bank of America Merrill Lynch

And could you remind us when the FDA was at the Hi-Tech facility?

Raj Rai

They came in I think probably prior to us acquiring them, so they visited let’s say over a year ago.

Sumant Kulkarni - Bank of America Merrill Lynch

Okay. And my last question is a bigger picture one for you. You mentioned the term game changing. At this point, what type of acquisition would Akorn consider to be game changing?

Raj Rai

The game changing would be something like a Hi-Tech or VersaPharm and combination thereof that would propel us to being a top-tier developer.

Sumant Kulkarni - Bank of America Merrill Lynch

And domicile in the U.S.?

Raj Rai

It could be outside, we don’t know.

Operator

Thank you. Our next question comes from the line of Elliot Wilbur of Needham & Company. Your line is now open.

Elliot Wilbur - Needham & Company

First question or Raj I guess just kind of a quarter under your belt, is it fair to say that you’ve seen initial revenue synergies from the addition of Hi-Tech portfolio to the just being Akorn book of business or do you think that there is still, it’s just still too early to sort of make the call that it’s been a kind of a net add at this point?

Raj Rai

If you were to look at the revenues that we got as a result of Hi-Tech the overall portfolio, I mean the synergy is maybe very small to talk about but I think as we move forward, there is a lot of discussion and people have are actually the end customer, the retailers and the wholesalers, they are really liking the combination of us and Hi-Tech and as we go through the bidding process, we will definitely have more opportunities to gain business either ways as a result of the combination.

Elliot Wilbur - Needham & Company

And then I want to ask you a couple of questions around fluticasone as well. You mentioned that Hi-Tech had a pretty existing relationship around the product but then also made it sound like you have many options open to you in terms of ultimately how are you going to pursue this. I guess my understanding was that was more tied to a potential NDA project and you still have all rights to anything that may occur going forward on the OTC side, is that correct?

Raj Rai

That is correct. On the private label and store brands.

Elliot Wilbur - Needham & Company

And then obviously as you went through the diligence around the Hi-Tech acquisition, you did a lot of scenario planning analysis around sort of what could happen with the fluticasone market and there is different examples out there and I guess maybe private segment [ph] markets are is sort of a positive example of what can happen when you have a combination of RX and OTC products. But just sort of stepping back and kind of big picture, I mean do you see this OTC opportunity and acknowledging the fact that the RX products will stay in the market as well. Do you see this as a winning scenario for the company in terms of unit volume?

Raj Rai

I think you’ve got -- you’re asking a very good question I think at this moment we don’t seen anything changing with our generic sales and as and when the OTC version is launched, we will see that opportunity kicks out. And regardless we will follow their opportunity if there is a big opportunity but obviously we will continue to promote what we have right now. And the example that you gave is a good example. And so we obviously want to benefit from the growth aspects of it whether we are selling the RX product, are we selling the OTC. So given that we have a strategy on the OTC front, I think it bodes really well for us.

Elliot Wilbur - Needham & Company

And additional question at least on the generic fluticasone market as it currently stands at roughly $3 to $4 a bottle or maybe less in many cases, do you think that’s a rationally priced product given the competitive dynamics in that marketplace?

Raj Rai

No, the pricing is very low. And so obviously a product like this obviously a better pricing than $3 to $4. So, I wish the pricing was higher but we have to live with it, I mean those are the competitive dynamics in the marketplace that drives that and it’s a descent product for us. We will continue to promote it. We will find ways to improve margins by lowering our supply chain cost but it’s a good product and it’s important product that we have.

Elliot Wilbur - Needham & Company

Okay, may be just last question for Tim, you hit on the notion of price protection reserves hitting the third quarter results and I understand you probably don’t want to get into specifics there but I am assuming that could be a fairly significant drag on the top-line. Is that an accurate assessment?

Tim Dick

Yes, our estimate is around 25 million, so that’s top-line in that straight, straight drop to the bottom-line as well.

Elliot Wilbur - Needham & Company

Okay. And in terms of sales in the fourth quarter, will majority of sales to be recognized at the new higher contract price or there is still additional unit volume that based on contracts and whatever just doesn’t adjust until…

Tim Dick

Should be a little bit of run out into the fourth quarter. We expect the majority of the sales would be at a higher price.

Operator

Thank you. Our next question comes from the line of Matt Hewitt of Craig-Hallum. Your line is now open.

Matt Hewitt - Craig-Hallum

Just so I am understanding this correctly from a modeling perspective Tim, so if we are flat in Q3 roughly $20 million to $30 million step up to Q4 primarily due to the approvals of clobetasol price increase. I would assume that that carries then into ‘15 or a number of us have started to lay out estimates for ‘15 and you may not be prepared to guide to it yet but just so we are all understanding, I mean is that $30 million give or take a good chunk of that from clobetasol and should we be factoring that into ‘15?

Tim Dick

Yes, I guess as Raj mentioned in his remarks earlier, I mean it’s still fairly early in the process, so I think talking about what it means for 2015 it’s probably little premature but surprised to say that we will be exiting the year based on what we have discussed today at that stepped up rate. Keep in mind that’s not entirely, clobetasol, it’s new product approvals, it’s the first full quarter of VersaPharm and as clobetasol. So, it’s the collective impact.

Matt Hewitt - Craig-Hallum

And then, Raj may be a little bit more of a strategic question for you, given the clobetasol price increase, the brand goes up and one of your competitors follow suit. What was your thought process when you saw those increases, how did you decide to match versus maybe coming in at a slightly lower price point in an attempt to pick share. I mean what is the thought process that went behind your essentially following the full price increase?

Raj Rai

We are not going to share our gold details of the strategy as to how we price product but you got to be competitive and you got to sometimes follow what the competitors are doing. So, that’s exactly what happened here, so I think I will just leave it to that.

Matt Hewitt - Craig-Hallum

Maybe a different way of asking it and one that you might be more comfortable answering. Was there a situation where you said, okay, if we don’t take our pricing to the full amount in a way to garner additional share but the reality is it’s going to take you an additional six to eight weeks may be to even be in a position to accommodate that additional share or was it purely a situation where in this case it made sense to follow?

Raj Rai

I mean what you see in the public domain pricing is not what actually you get from the end customers, so keep that in mind plus as these prices increases were happening which obviously was done by the brand and the other generic competitor, we were approached by customers. And so obviously there was a pent-up demand for our product as a result of that and so all I can say again is that we price our product competitively.

Operator

Thank you. Our next question comes from the line of Gary Nachman of Goldman Sachs. Your line is now open.

Gary Nachman - Goldman Sachs

Raj, on the pipeline of the 12 new ANDAs you filed and I think you said another eight, nine expected later this year. Are they all sort of singles and doubles, is there anything really meaningful in there and you said you expect three approvals this year. What’s your reasonable expectation for approvals for next year?

Raj Rai

So, to answer your first question, yes, we look for singles and doubles and there are may be few products that are of larger size but that’s been sort of a whole strategy and has worked out very well. As I mentioned in my prepared remarks that we are seeing an increase number of complete response letters coming our way which is an indication that definitely there is an improvement in the review process. And so as and when we respond to complete response letter and we are still building history around it, we think that there should be a quick feedback from the FDA as a second round of as many questions as they may have, but we should start to see products getting approved relatively quickly now. And the three products that you mentioned -- that I mentioned, it is our expectation that we should be able to get them approved and launch by the end of this year.

Gary Nachman - Goldman Sachs

And just to describe a little bit about the observations in India, but just give us your level of confidence that these could get resolved in a timely fashion and just what the plans are as far as new approvals coming out of that facility in particular. And I know you were looking also to get inspected at additional facilities though the timeline there.

Raj Rai

Right. So when we made a filing, the filing was for one product and FDA came sooner than we had anticipated. So there were other filings that have gone in effect but post FDA’s visit. So other sites were not inspected. But I think I am comfortable that given what we have received from the FDA, we should be in a position as we have projected in our time line, we are still looking out to make 2015 approval for the sites as we are filing more products there. So I think I am comfortable at this moment that we will still hit our targets of middle of next year for site approval. Now as far as the products are concerned, we still expect that to go through the regular review cycle which could take two to three years to get the products approved.

Gary Nachman - Goldman Sachs

And then the last question, just give us a little bit more on the branded ophthalmic products? How they are doing? Do you feel like you will be able to get a lot more traction going forward? And you said you are looking for bolt-ons. I mean how aggressive are you going to be to add products to the bag for the branded business? How important do you think it is in order to leverage that infrastructure better?

Raj Rai

Sure. So right now, we’ve got four products that we are actively promoting, there are in the sale persons’ bag. So as we get more products we will obviously have to expand our sales team. And we are really looking at the moment at opportunities that are a little bit early in terms of development perhaps Phase II, Phase II type of products that we would want to work with other companies who are in the development mode to launch the products in the future. But what these products when we acquired them was with an intention to so learn how to promote branded products and I think the team has done a pretty good job in the last I would say five months to re-launch these products, because most of these products that we acquired were not being actively promoted, one was off market and the team has done a good job and I think we are getting back to sort of the base level of sales that was there prior to than either going off market or not being promoted.

Operator

Thank you. And we have time for one more question. Our last question comes from the line of Greg Gilbert of Deutsche Bank. Your line is now open.

Greg Gilbert - Deutsche Bank

Raj, did I hear you correctly that you had positive things to say about how ANDAs are being reviewed at the FDA or did I mishear you on that? Because it might be the first company to say such a thing, I’d to love to hear a little color. Thanks

Raj Rai

Greg, good to hear from you. What I was alluding to was that we have started seeing light at the end of the tunnel here because we have started to see more complete response letters coming our way. And it’s really up to us to take advantage of it and file our responses as soon as possible. So what little experience we have now with the complete response letters is that, once you file that letter, in short of period of time you will get a second response which could be a quick clarification or an update that we may have to do. But as long as the filings are in good standing that we have properly done a work, I think we should start seeing now the products coming through quickly.

Operator

Thank you. And I’d like to hand the call back over to Mr. Raj Rai for any closing remarks.

Raj Rai

Once again I’d like to thank you for your participation, and we look forward to our next conference call to give you more update. Once again, thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s call. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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Source: Akorn's (AKRX) CEO Raj Rai on Q2 2014 Results - Earnings Call Transcript

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