Cambrex's (CBM) CEO Steve Klosk on Q4 2015 Results - Earnings Call Transcript

| About: Cambrex Corporation (CBM)

Cambrex Corporation (NYSE:CBM)

Q4 2015 Earnings Conference Call

February 09, 2016 08:30 A.M. ET

Executives

Gregory P. Sargen - EVP and CFO

Steven M. Klosk – President and CEO

Analysts

Matt Tiampo - Craig-Hallum

Drew Jones - Stephens Incorporated

David Maris - Wells Fargo Securities

Unidentified Analyst - Longbow Research

Lisa Springer - Singular Research

Steven Schwartz - First Analysis Securities

Unidentified Analyst -

Operator

Good day, and welcome to the Cambrex's Fourth Quarter and Year-End 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Sargen. Please go ahead.

Gregory P. Sargen

Thank you and good morning everybody. Welcome to Cambrex's fourth quarter 2015 earnings conference call. Today's discussion will contain forward-looking statements regarding expected operational and financial performance and these statements may occur during our prepared remarks or during the question-and-answer session. These statements are based on Cambrex's current expectations and involve risks and uncertainties that could cause actual outcomes and results to materially differ from those included in the forward-looking statements.

For further information regarding such risks and uncertainties, please refer to the risk factors in forward-looking statements portions of our 2015 Form 10-K filed earlier this morning as well as the forward-looking statements section in our earnings release issued this morning.

During this conference call, in order to provide greater transparency regarding Cambrex's operating performance, we refer to certain non-GAAP financial measures that are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings press release issued this morning and available on our website at Cambrex.com. A replay of the call will be available shortly after we end today through next Tuesday, February 16, and will also be available on the Investors section of our website.

Today's call will begin with a business review by Steve Klosk, our President and CEO. I'll follow Steve with comments on our financial results before opening up the call for questions and answers. With that, it's my pleasure to introduce Steve Klosk. Steve?

Steven M. Klosk

Thank you, Greg and good morning ladies and gentlemen. We are very pleased with our strong fourth quarter and full year 2015 results and confident in our guidance for 2016 which projects continued strong growth.

Sales in the fourth quarter were a record $157 million compared to $129 million during the fourth quarter last year, a 25% increase on a constant currency basis. Adjusted EBITDA in the fourth quarter was $52.4 million, an increase of $18 million or 52% compared to the same period last year.

Full year 2015 sales increased 21.4% excluding currency impacts and full year adjusted EBITDA increased 57% to $128.6 million. Fourth quarter revenue growth was driven by strong results in our innovator and generics product categories. Profit margins continued to be strong in the fourth quarter helped by higher volumes, favorable mix, and to a lesser degree foreign exchange.

For 2016 we anticipate another year of strong organic growth, our sixth in a row. We expect full year 2016 sales to grow between 8% and 12% on a constant currency basis. Our accumulative annual growth rates excluding the impact of currency for the five year period from 2010 through 2015 was 15%, with virtually all of the growth being organic. We expect full year 2016 EBITDA to be between $142 million and $148 million, a 13% improvement over 2015 at the midpoint.

We invested just over $60 million in capital projects during 2015, representing an aggressive investment in our future growth. Some spending on a few of our larger investments that began in 2015 including the expansion at our Iowa facility will continue into 2016. We expect to invest $70 million to $75 million in capital projects during 2016 in order to ensure that we are able to meet the continuing strong demand for western cGMP manufacturing capacity.

The Charles City expansion project which has been described on prior calls includes an initial build out called Pharma III that we continue to expect to be validated by the end of the first quarter of this year. We expect Pharma III to support approximately $40m to $60 million in annual revenues at full capacity. And our production plan for 2016 includes a ramp up in the utilization of this asset throughout the year.

The expansion also includes a shell with necessary infrastructure but no manufacturing equipment which we will call Pharma IV. When we decide to build out Pharma IV having the existing shell and infrastructure in place will shorten the lead time to bring the facility online and substantially lower the remaining investment versus a typical new manufacturing facility build out. We would expect Pharma IV to support another $40 million to $60 million in revenue when fully utilized.

Of course the timing of the ramp up and the mix and number of products that are eventually produced in both Pharma III and Pharma IV are highly variable and may result in higher or lower sales levels. Let me now move to review of each of our product categories. I’ll start with the Innovator our largest and currently our fastest growing category.

Innovator revenues were $116 million in the fourth quarter, a 27% reported increase and a 30% increase excluding the impact of foreign currency versus the same period last year. Consistent with recent quarters strong sales of certain commercial APIs primarily drove the increase. For the full year revenues in the Innovator category were $278 million, an increase of 30% excluding currency impacts and 25% on a reported basis.

Our primary strategy to grow sales within the Innovator product category is to win later stage clinical projects. We currently expect a significant increase in revenues from clinical stage projects in 2016, and our site teams will therefore operate under tight production schedules for much of 2016 in order to meet customer delivery timelines.

As such our business development teams are primarily focused on selling capacity for the later part of 2016 and early 2017. We currently have 16 active late stage clinical projects after one product moved into commercial phase during the fourth quarter of 2015. If these late stage therapeutics are approved for commercial sale, we expect to negotiate supply agreements to provide commercial volumes.

Our expectations of revenue potential to Cambrex at maturity for these 16 active late stage products are as follows. Three products have the potential to generate over $10 million in annual API revenues for Cambrex at maturity. 10 products could generate between 5 million and 10 million and three products less than 5 million. Of course future Cambrex revenues from these products will depend on each products regulatory approval, success in the market, and the share of commercial supply that we secure among other variables.

During 2016 we expect between two and four of our current late stage products to move to commercial status. For the sake of clarity we consider a product to be in commercial status when it has been approved by the relevant regulatory authority for commercial sale and we have completed validation batches for our customer. In either case, the revenues for both clinical phase and commercial phase products are included within our Innovator product category.

The U.S. Innovator market continues to be characterized by a deep clinical development pipeline, robust funding of clinical stage projects, and positive recent trends in FDA and EMA approval levels. Innovators continue to have a strong preference for experienced western suppliers like Cambrex, with strong regulatory records and world class quality systems. Pharmaceutical companies are continuing to reduce their small molecule manufacturing footprint and there is limited large scale GM capacity in the U.S. and anecdotal comments from customers suggest that capacity utilization in Europe is beginning to exhibit similar characteristics. We believe our strategy remains aligned with these positive market dynamics.

As we reported last quarter we recently renewed a five-year supply agreement through 2020 with Gilead for our largest product. We continue to work on a portfolio of projects across multiple sites and expect to have an ongoing strategic relationship with Gilead. We expect 2016 revenue growth in the Innovator product category to be between 12% and 15% compared to last year.

I will now move to our generic API category. Fourth quarter sales of generic APIs were $30 million, an increase of 27% on a constant currency basis compared to the same quarter last year. Sales were 19% higher on a reported basis. Full year sales of generic APIs increased 8% on a constant currency basis with reported sales declining 1.5%. Developing and launching new products is one of the key drivers of continued growth of this product category.

In 2015 we completed the development of three generic APIs and three controlled substances and now have 15 generic APIs and one controlled substance in later stages of development. We have several more generic APIs that are in earlier stages of development. For 2016 we expect revenues from generic APIs to increase low to mid-single digits.

Sales of controlled substances which we define as those classified as Schedule II products by the DEA were $11 million in the fourth quarter, 10% lower than the fourth quarter last year. Full year 2015 controlled substance revenues increased to $59 million, a 12% increase over 2014 where we saw a 40% growth versus 2013. We completed the development of two new opiates during 2015 and began sampling them to potential customers during the second half of the year.

We recently began development of a third opiate that we expect to begin sampling in 2017. We also completed the development of an ADHD product and shipped validation batches to our customer during 2015. We expect to sell commercial volumes of this product when our customer receives FDA approval, currently estimated for 2018. We expect sales of controlled substances to increase by mid single-digit percentage points in 2016.

During the fourth quarter we continued to invest in the generic drug product that we are co-developing with a large global generic partner. In addition we selected several additional niche generic drug products for development. Some of the products we select will be natural extensions of our generic API platform and this may also work in reverse, allowing us to consider the opportunities in both generic API and finished dosage form generic drug product markets when selecting products for development.

We have identified formulation development and manufacturing partners and expect to work with generic marketing partners to sell these products. We anticipate filing one abbreviated new drug application or ANDA during the middle of this year and another towards the end of 2016 or early 2017. We expect additional ANDAs to be filed in 2017 and beyond as a development work and filings progress.

Some of these arrangements are co-development arrangements with eventual profit sharing and for some we are funding all of the development cost with no back-end profit sharing. We believe we can add value to our customer supply chain by providing finished dosage formed generic drug products in addition to leveraging our capabilities and developing and producing generic APIs. Greg will address development expenses related to this initiative shortly.

To sum up 2015 was a tremendous year for us with record constant currency sales growth of 21% and an unprecedented 57% increase in EBITDA. We expect 2016 to be another year of strong growth. We have high visibility for a large percentage of expected orders. And as such we are confident that we will achieve our financial guidance for 2016. That said we still have a very high capacity utilization rates in certain of our manufacturing assets, and as such we are relying on a high level of operational execution within our plans.

We have confidence in the teams at our sites to meet our customer's delivery schedules while making significant process improvements and capacity expansions at our facilities to allow for future growth. Our business development teams are focusing on winning new business for the latter part of 2016 and early 2017. We believe we are well positioned to benefit in 2016 from the positive momentum we developed in 2015.

I look forward to reporting our first quarter results and providing a business update in April. I'll now turn the call over to Greg.

Gregory P. Sargen

Thanks Steve. Steve generally covers sales performance but I do want to make one comment on sales before moving on to other financial statement items. Full year 2015 sales rose 21% or $80 million on a constant currency basis compared to 2014. Of this $80 million year-over-year increase, our largest product increased 54 million and other products for our largest customer increased 6 million as disclosed in our 10-K filed this morning. The remaining 20 million increase came from other Innovator products, generic APIs, and control substances.

Next I would like to comment on foreign exchange. The general strengthening of the dollar negatively affects our reported sales which lead to a reduction in fourth quarter revenues of 3% and full year revenues of 5%. By contrast, currency impacts on our operating profit generally have an opposite effect on that on sales. Consequently our fourth quarter 2015 operating profit benefitted from currency by about $1 million compared to the same quarter in the prior year and full year 2015 operating profits benefited by approximately $10 million versus the same period in the prior year.

Our profit guidance for 2016 assumes the currency rates, primarily the Swedish Krona and the Euro remain stable relative to each other. Current exchange rates are relatively close to the average rates for the full year 2015 and if they stayed where they are you would expect to see little year-over-year impact on our reported sales or profits. Obviously currency markets can be very volatile so at the beginning of each year we place forward contracts for the full year to lock in rates on a portion of our projected net non-dollar exposures and evaluate the need for additional hedges as the year progresses.

Next I’d like to comment on Zenara. As we described on last quarter's call and within our public filings we are running a process to sell our Zenara business located in Hyderabad, India. The sale process is ongoing and our fourth quarter results include a restructuring charge of $15.6 million included with an operating expenses, and a $1.5 million benefit to our provision for income tax. Our 10-K filed this morning includes more detailed information related to this charge.

Let me now comment on our financial results. Gross margin for the fourth quarter was 42% compared to 35% in the same quarter last year. Margins benefitted primarily from higher volumes and a positive sales mix. Foreign currency positively impacted gross margin by 1% compared to the same quarter in the prior year. Full year 2015 gross margin was 41% compared to 33% for the same period last year, the higher planned utilization levels and improved mix driving approximately two thirds of the increase and currency accounting for the rest.

Selling, general, and administrative expenses for the fourth quarter were $16 million or 10% of sales compared to $14 million or 11% of sales in the same quarter last year. SG&A expenses for the full year of 2015 were $58 million or 13% of sales compared to $52 million or 14% of sales in the same period last year. Foreign currency favorably affected SG&A expense during the fourth quarter and full year periods by $1 million and $5 million respectively.

R&D expense on a constant-currency basis was up $700,000 for both the quarter and the full year compared to the respective periods last year. As Steve discussed we are continuing to invest and expand our small but growing finished-dosage-form generic drug product initiative. We increased spending during the fourth quarter on the generic drug product co-development arrangement that we entered into last year with a large global generic partner and also increased spending with partners on additional products. We expect development and related expenses for this initiative to be approximately $6 million in 2016, about $4 million more than in 2015.

Adjusted operating profit was $47 million in the fourth quarter, an increase of $18 million compared to adjusted operating profit during the same quarter last year. Adjusted EBITDA for the fourth quarter was $52 million compared to $34 million in the same quarter last year. Adjusted operating profit and adjusted EBITDA for the full year were $107 million and $129 million respectively compared to $58 million and $82 million respectively for the same period last year. This represents an 83% increase in full year adjusted operating profit and a 57% increase in adjusted EBITDA.

Fourth quarter 2015 effective tax rate excluding the impact of the Zenara charge was 33% and on a reported basis it was 44%. The full year effective rate excluding the Zenara charge was 32% and was 36% on a reported basis. We expect our 2016 effective tax rate to be between 32% and 34%. Of course geographic mix and the results of various global tax matters can cause substantial changes in reported effective tax rates.

Adjusted income from continuing operations is $1.01 per diluted share for the fourth quarter compared to $0.64 for the same period in the prior year. Adjusted income from continuing operations was $2.33 for the full year 2015 compared to $1.33 in 2014. The table at the back of this morning’s press release reconciles these amounts to GAAP results.

Capital expenditures were $16 million and depreciation was $6 million in the fourth quarter. Capital expenditures for the full year were $60 million and depreciation expense was $21 million. We expect full year 2016 capital spending to be between $70 million and $75 million. Approximately $25 million of projected 2016 capital spending is carried over from 2015 with much of the carry over related to the previously discussed capacity expansion at Charles City.

We ended 2015 with net cash of $14 million, a $16 million decrease in net cash during the quarter due primarily to working capital balances and higher outflows for capital expenditures. For the full year 2015, net cash improved $28 million. For 2016 we're expecting free cash flow, defined as the change in debt net of cash to be between $60 million and $70 million. We expect free cash flow for 2016 to benefit by approximately $28 million due to advanced payments related to supply agreements.

2016 sales are expected to increase between 8% and 12% on a constant-currency basis and we expect EBITDA to be between $142 million and $148 million. We expect adjusted earnings per share to be between $2.46 and $2.58 per share. Adjusted income and related earnings per share is computed in a manner consistent with the table at the end of this morning’s release. I would now like to open up the call for questions. Destiny.

Question-and-Answer Session

Operator

[Operator Instructions]. Looks like we’ll take our first question from Matt Tiampo from Craig-Hallum. Please go ahead.

Matt Tiampo

Good morning, gentlemen. Congrats on the strong finish to the year and what looks like a good start to 2016.

Gregory P. Sargen

Thank you.

Matt Tiampo

Maybe you can give us a little bit of a sense for what you expect from the cadence of the business throughout 2016, you’ve had some seasonality in the last couple of years or at least some pattern to your revenue flows throughout the year, but do you expect that to continue, maybe just help us out?

Gregory P. Sargen

Yes. In the last couple of years we've seen a tilt towards the back half and especially the fourth quarter. And this year I think we’ll see a little bit more balance but there will still be a bit of a tilt towards the back half of the year. It’s a little too early to tell on timings so at least that’s what it looks like right now. But it will be a little bit more balanced than recent years but still a little bit tilted towards the back half of the year.

Matt Tiampo

Great, thanks very much.

Operator

We’ll take our next question from Drew Jones from Stephens Incorporated. Please go ahead.

Drew Jones

Thanks, good morning guys.

Steven M. Klosk

Good morning Drew.

Drew Jones

Greg, you touched a little bit on the revenue not tied -- with your largest customer not tied to the largest API. And that growth year-over-year I think you said $6 million to $7 million, can you tell us when did most of that growth occur?

Gregory P. Sargen

Yes, we won't get into sales of our largest product by quarter because it's really based on timing of shipments and so forth. I think if you look at -- one way to look at it is if you take that -- the largest product out we grew at about 7% and that’s really spread relatively evenly across non-largest product sales within Innovator generics and controlled substances. And I frankly don’t recall year-over-year exactly where each of the growth came. We had a lot of growth in generics in the fourth quarter, controlled substance tend to be towards the end of the year, and Innovator was probably spread out more evenly throughout the year.

Drew Jones

I am sorry, I didn’t phrase that very well but the revenue from the largest customer not tied to the largest API?

Gregory P. Sargen

I honestly don’t know the answer to that off the top of my head. We had a pretty back-end tilted last year and we had a fairly sizeable amount going out in the back-end of this year also. So it was probably timing wise or percentage wise of their products sold throughout the year not all that different from 2014.

Drew Jones

So, pretty heavy in the 4Q?

Gregory P. Sargen

Yes, yes.

Drew Jones

Later in the year. And then the CAPEX, that 75 million is a little bit higher than we thought it would be, does that, just to be clear, does that assume a phase four conversion at this point in 2016?

Gregory P. Sargen

Well, it maintains the possibility of some spending on that towards the back-end of the year depending on how things go this year. But I mean I think we really -- again we hadn't spoken about it publicly but we were probably looking at something if you were to ask me that question in mid 2015, we’d been looking at something like 75 million this year instead of 60 million and something more like 50 million to 60 million next year. As it turns out there is some spill over and that is where we see the spending coming in now. So it is really not a different view than we had albeit not a public view so it is in sync with where we had anticipated it to be.

Drew Jones

And then last one from me, I guess that the congressional hearing last week was pretty favorable for you guys given where you are going on your generic development efforts. Can you tell us what areas you’re looking, how many products you are looking to at least rollout here over the next few years?

Steven M. Klosk

So Drew I think you are right, we did follow the news on FDA attempts to move up response times and approval times and we do think eventually that will be helpful. We don’t want to say too much about the portfolio now other than to say we are building a portfolio. I think when we file ANDAs during our quarterly releases we will talk about when we file ANDAs, when we get them approved of course, we’ll talk about those approvals. We’re not particularly focused on a treatment area other than of course we like products that may marry up well with our strengthened APIs that might be controlled substances. Or other areas where we think we can add value because we have a platform in the API. So it is, I would characterize it in the early stage. It’s ramping up, it is a number of products, and we hope to be able to talk about it more as we make progress.

Drew Jones

Thanks guys.

Gregory P. Sargen

Thanks Drew.

Operator

We’ll take our next question from David Maris from Wells Fargo. Please go ahead.

David Maris

Good morning, a few questions and I’m sorry if you covered this on the call, I jumped on a little bit late. One of the things that you mentioned in the press releases, the positive industry trends and just wanted to see if you can be a little bit more specific on what trends those might be and then separately on the opiate and ADHD product developments, are there any -– is there anything special with these products, any drug delivery technologies or the opiates abuse deterrent which seems to be where the market is moving and when do you think you’ll have, if you could just reiterate, could you have already have partners for both of those programs or those are the two that you’re shopping among others? Thank you.

Steven M. Klosk

Alright David so let me answer you second question first on the opiates. So the APIs that we're making can be used in generic drug products and could also be used -– so that maybe immediate release, it may be controlled release, it could be abuse deterrent or otherwise, right, because they are generic APIs and they can be used in new delivery systems that you make reference to. So there are -– they are our DMFs and so they can be sold and we will attempt to sell them into any of those applications. We -– I think we said that we are already sampling customers and again, because they may be primarily generic customers that since many generic customers that we find who are interested in those generic APIs. I think I addressed it.

Gregory P. Sargen

Yes, just maybe I’ll just chime in real quickly. And you made reference to whether or not we were partnered with those. Our partnering comments were referring specifically to our generic drug product initiative not to our API development. So the opiates that we talked about over the past couple of quarters and recently have been, they’re API development so there are no partners there. It’s our API, our DMF and we’ll sell it to finished drug product generic marketers or Innovators for that matter if they have 505(b)(2) filings.

Steven M. Klosk

Alright, so let me address the positive market trends that I referred to and these trends are really consistent with the positive trends that we've seen for at least the last few years and have no reason to believe looking ahead that they’re going to change any time soon. There has been a steady increase in outsourcing by Big Pharma including reducing their manufacturing footprint every year. Seems like every year, even more often perhaps, we're learning about Big Pharma plants that are coming on the market or being shut down.

There has been an increase in regulatory approvals both in the United States and the EMEA. Most of those approvals are for small molecules and the trend has been positive. I think last year was probably the most in a decade for the FDA. We see a growing preference for western suppliers, everybody has been hearing about the quality and regulatory issues in certain low-cost areas of the world and we are definitely seeing, as I think the rest of the industry, is a preference for western suppliers with strong quality platforms that helps Cambrex. It helps us both in the United States and in Europe.

There's limited large scale GMP capacity in the United States. We are one of the few that has invested significantly to add capacity, and as we've said we're going to have new capacity coming online this year in 2016, which we need and which we expect to ramp up our capacity utilization there. I also said in my prepared remarks then anecdotally, we are hearing and we are feeling increased capacity utilization for large scale GMP assets in Europe now, which had been trailing the U.S.

I think funding still remains strong for late-stage clinical projects. That’s the area of the market that we particularly focus on. And probably last, there is a high barrier to entry in the business we're in. It’s not easy, takes a lot of capital to build large scale facilities, and the regulatory hurdles are significant if you're going to win business from pharmaceutical companies for their new molecules. I don’t think anyone wants to give a molecule to someone who has just built the plant and has had no approvals yet. So the trends are positive, we see them continuing. We think we're aligned properly with those trends and we're busy.

David Maris

Great, thank you very much.

Operator

We’ll take our next question from Dmitry Silversteyn from Longbow Research. Please go ahead.

Unidentified Analyst

Good morning. This is Matt Stromske [ph] on for Dmitry. You guys saw generic API revenue increase. Could you talk a little bit about the volume and pricing trends going on in that category and then what's going into your low single digit guide for the future?

Gregory P. Sargen

Yes, so the pricing was relatively flat for 2015. There is usually -- that’s a bit of an anomaly we’ve had lower than usual price decreases in the generic space for the past few years. We have seen 1% to 2% this past year was relatively flat and we don’t expect to see that going forward. We would expect some price erosion on an annual basis. With respect to your comment on the future, let's just define the future as 2016 that we are guiding to right now, low to mid single-digits is more or less where we see that business right now based on its trending. We have several new products that will start to generate revenue this year, it's just a lot of those products are in the sampling phase or in the very few products that are actually gone generic and entering but we call the market on phase. So their impact on the overall revenue portfolio is relatively low. As each year goes by we would expect them to have a bit more and more of an impact.

But as we’ve said over the past couple of years we expect this time period and probably going forward for another couple of years to be kind of mid single digitish growth year in and year out. Maybe we’ll have a high digit year and a low digit year back to back or so forth but it is in the realm of what we would expect and as soon we can get those new products on we will but unfortunately there is no real rushing the genericization of those products.

Unidentified Analyst

Perfect, thank you. And as far as Pharma III goes, do you guys have any guide for earnings dilution in the first quarter or beyond?

Gregory P. Sargen

Well no to beyond but I’ll comment I’ll give you some color commentary on that in a minute. The first quarter it will not be in use until the very end of the first quarter. So there is no dilution to the first quarter. After that we’ll start to depreciate it. Probably $2 million to $3 million of depreciation and a bunch of headcount which I am not going to try to specifically isolate to that facility because it has really been an increase across multiple facilities as we shift production around and validate existing products and growing products in that new facility. But we’ll ramp up the utilization of that facility as the year progresses and all that is embedded in our guidance.

Unidentified Analyst

Perfect, that is all the questions I had. Thank you.

Gregory P. Sargen

Thank you.

Operator

And we’ll take our next question from Lisa Springer from Singular Research. Please go ahead.

Lisa Springer

Thank you. Good morning and congratulations on a good year.

Gregory P. Sargen

Thank you.

Lisa Springer

My question concerns the co-development arrangements what are the advantages to Cambrex by entering into those arrangements and do you expect that to become an increasingly important part of your generic business?

Steven M. Klosk

Well we think the advantages are that we can add value to our generic customers by giving them more than just the APIs. The key to growth in the generic pharmaceutical business is more products and we have the ability because of our expertise and portfolio of generic APIs to extend that into a drug product for them. We’re entering it because we think the MPVs and the gross margins for those products eventually will be good, as we go through and either have a 100% of the end market products that are profit or we do co-development profit share. So we are doing it because we think it's going to be a good business, it's going to be an additional revenue stream for us, it’s a natural extension of our expertise in generic APIs.

Gregory P. Sargen

And let me just comment on specifically the co-development aspect of it. Sometimes our customers or generic marketers will come to us because they know of our participation in an API market or just because they need an API partner. And we’ll sometime offer the opportunity or we’ll suggest the opportunity to share in the development cost if you can share those backend profits where we think that product makes sense for us, so that’s one driver. And the other driver for instance, when those opportunities present themselves it is an ability for us to spread our risk on our own development portfolio by taking on partners in some cases in getting a higher number of products in that portfolio.

Lisa Springer

Okay, thank you.

Operator

[Operator Instructions]. We’ll take our next question from Steve Shwartz from First Analysis. Please go ahead.

Steven Schwartz

Good morning gentlemen.

Gregory P. Sargen

Steve. Good morning.

Steven Schwartz

If I could start with Greg, a response you gave to Matt’s question about Iowa, Charles City and the expansion there, how much of that capacity is getting filled with existing production versus growth in existing production versus completely new projects, works that’s coming through?

Steven M. Klosk

Alright, Steve, I’ll try to handle that one. So in Q1 we’ll be validating the facility with existing growing products where we needed also additional capacity in large scale. As we move out of Q1 and the plant is validated, we’ll continue to make those existing products but we’ll also then be producing new products where we already have high visibility for these projects, meaning it’s included in our guidance. So new business typically begins in small scale and it moves into the large scale so throughout the year we're going to be producing -– growing existing products, we're going to be producing new products and we're hopefully going to be, later in the year as we said, scaling up even newer products. The plant’s going to be busy. We're ramping up.

Steven Schwartz

Okay. And so by the end of 2016 what -– I know this is a difficult question to answer but by the end of 2016 from a capacity utilization standpoint, you expect it to be on par with the legacy Charles City -- in Sweden and in Milan?

Gregory P. Sargen

Well we say on par, I think if you refer to the rest of the facility or at least our large scale cGMP assets in Charles City, no, because those assets are relatively full and have been a bit fuller than we would be care for them to be for quite some time which is thus why we're building this facility and building in the flexibility to do Pharma IV. So I think, I'm not going to answer the question specifically as what kind of percentage utilization we expect in that facility but we’ll evaluate as the year progresses and then assess if and when we need to pull the trigger on adding additional capacity in Pharma IV.

Steven Schwartz

Okay. And Steve, in your prepared remarks you talked a little bit about the flow of the Innovator project pipeline. So you're at 16 now, you expect two to four to go commercial in 2016. I suspect that there are projects that will backfill what goes to commercial. But, and can you please confirm that for me, but also, does the expansion at Charles City allow you to take on more projects or is there some other factor that keeps you from maybe up to 20 active projects, can you talk a little bit about that?

Steven M. Klosk

Okay. Let me try to answer kind of all the pieces of that question. So yes, you know that we're constantly and our business development team is constantly working on sort of replenishing that pipeline because I did say that we expect perhaps two to four of the existing 16 to move into commercial phase, which is great because that’s what we hoped for the business and we hoped for and expect to enter supply contracts to produce those. The business in clinical phase projects, we expect to be up substantially in 2016 and a lot of that is because of the visibility that we have on orders for the existing portfolio. And it may be winning project extensions for existing products, it may be higher volume demand that our customer is asking us for. And then last, we are chasing a number of Phase IIIs and commercial opportunities. And the ability to win those and produce those and meet customer time lines is highly dependent on that additional capacity that we're building. And as Greg said, we’ll have to look throughout the year and later in the year and determine really based on the growth of the existing products and what we see with our sales team on opportunities for additional late stage or commercial, what we need to do when on Pharma IV.

Steven Schwartz

Okay. And then my last question, Greg, in the K it doesn’t look like you guys provided quantitative figures for volume and price in 2015, you have in the past. Are those numbers that you can give us here on the call?

Gregory P. Sargen

Yes. I would think that’s in the K, but if you say it is not I’ll figure the face value, the price was negligible this year. I don’t recall the exact number but it was a millionish dollars slightly negative I believe for the full year. So in the grand scheme of things less than a percent but and it was virtually all then a combination of volume mix currency, operating expenses and so forth. So price and volume it’s almost all volume.

Steven Schwartz

Okay, alright, that sounds good. Thank you both.

Steven M. Klosk

Thank you.

Gregory P. Sargen

Thank you. Stephanie we’ll take one more question if we have one in the queue.

Operator

[Operator Instructions]. We’ll take our final question from Brian Roth [ph].

Unidentified Analyst

Hey guys, thanks for taking my question. Just in the press release I saw that there was mention of the SG&A being higher tied to due diligence for acquisition opportunities. So, sort of can you comment what your team from M&A front how close maybe to pulling the trigger on something and if your don’t pull it, execute it transaction in 2016 what might be the preferred use of the free cash flow that you are guiding things?

Steven M. Klosk

Brian I’ll take some of that, its Steve and then let Greg jump in. So obviously we have been seeing opportunities, we have spent both time and resources on specific M&A targets and opportunities. We are seeing a number of them at any given time so we are always looking at 2, 3, 4. Some of them are moving into what I will call the hot stage, others are and what we would call the developing the relationship stage. So I would expect and frankly I hope that we’ll see more activity in that area particularly as values become perhaps better or more positive in that regard. But we can’t forecast and we don’t forecast what any external growth would be from M&A but we are active.

Gregory P. Sargen

This is Greg, I’ll just chime in on two things there. With respect to what we’re looking at, we’re looking at horizontal opportunities always meaning in or around the API space and then anything that we think would support our generic drug product initiative including finished dosage form capabilities. So anything in those areas and obviously any tuck in acquisitions around specific capabilities or niche skill sets or specialties would be something we always look at also. With respect to what we’ll do with the free cash flow right now, our mandate from the Board is to continue to grow the business organically, investing organically and looking for M&A opportunities to bolster it. We have regular conversations with the Board about the status of that and at some point if that perspective changes and there is going to be something else done with that free cash flow we will be sure to communicate externally accordingly.

Unidentified Analyst

Okay.

Operator

And I’d like to turn the program back over to the speakers for any closing remarks.

Gregory P. Sargen

Great, thank you everybody for your time. And have a wonderful day. And we’ll talk to you next quarter. Thanks.

Operator

And this does conclude your teleconference for today. Thank you for your participation. You may disconnect at any time.

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