Sagent Pharmaceuticals' (SGNT) CEO Allan Oberman on Q4 2015 Results - Earnings Call Transcript

| About: Sagent Pharmaceuticals (SGNT)

Sagent Pharmaceuticals (NASDAQ:SGNT)

Q4 2015 Earnings Conference Call

February 16, 2015 9:00 AM ET


Jim Polson - Senior Director-Strategic Communications

Allan Oberman - Chief Executive Officer

Jon Singer - Chief Financial Officer and Executive Vice President


Randall Stanicky - RBC Capital Markets

Gregg Gilbert - Deutsche Bank

Elliot Wilbur - Raymond James

David Amsellem - Piper Jaffray

Dana Flanders - JP Morgan

Sumant Kulkarni - Bank of America/Merrill Lynch

Brandon Folkes - Guggenheim Securities

Serge Belanger - Needham and Company


Good day, ladies and gentlemen. And welcome to the Sagent Pharmaceuticals' Fourth Quarter Full Year 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call will be recorded.

I would now like to introduce your host for today’s conference Mr. Jim Polson, Investor Relations. Please go ahead.

Jim Polson

Thank you and good morning. On behalf of Sagent Pharmaceuticals, I’m pleased to welcome everyone to the fourth quarter and fiscal 2015 earnings conference call. I’m Jim Polson, Sagent’s Investor Relations Advisor.

Joining me on the call this morning are Allan Oberman, Sagent’s Chief Executive Officer, and Jonathon Singer, Sagent’s CFO. Allan will start with an overview of Sagent's recent performance and strategic outlook. And Jon will follow with a discussion of our 2015 fourth quarter and yearend financial results as well as our 2016 fiscal year guidance. We will then open the call for Q&A.

Before we begin, we would note that this call may include forward-looking statements, which are subject to risks, uncertainties and other factors which may cause actual results to differ materially from those discussed. Although Sagent believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained.

Please refer to the complete Safe Harbor statements within the press release. More information on these factors is included in the Risk Factors and MD&A section of Sagent’s Form 10-K filed with the SEC on March 16, 2015. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

We would also note that some of our prepared remarks this morning will refer to non-GAAP financial measures. You can find the reconciliation of these non-GAAP measures to the most closely comparable GAAP measures within the earnings release issued earlier today.

With that I would like to turn the call over to Allan.

Allan Oberman

Thank you, Jim. And good morning, everyone. I’m pleased to welcome you to Sagent’s fourth quarter and full year fiscal 2015 earnings call. We appreciate your interest in Sagent. The fourth quarter was a strong and transition year for Sagent. A year in which we've now laid the foundation for a future period and accelerated growth and profitability. Throughout the fourth quarter of last year, we made very good progress. We completed the development of a long-term growth strategy which we shared with many of you earlier in January in San Francisco. We described our growth strategy as a Triple E strategy, more of which I will elaborate on in today's call.

Just last week we entered into an agreement with one of our longstanding partners in China to sell our ownership of SCP, and thus reducing our cost structure by approximately $10 million per year while guarantying continued supply from China, an important region of our partnership network. And this morning we reported financial results of a solid fourth quarter with revenue of approximately $83 million contributing to revenue growth for the full year of 2015 of 10%. We also reported fourth quarter adjusted EBITDA of $5.1 million, contributing to a full year fiscal 2015 adjusted EBITDA of $29.1 million which was at the high end of our annual 2015 guidance range.

We are very pleased with these accomplishments and I'd like to thank everyone on the Sagent team whose dedication, hard work and expertise enabled us to achieve these results. Jon will provide additional detail on the financials during his review portion of the call. Allow me to first elaborate on last week's announcement regarding SCP, followed by further commentary on our Triple E strategic direction.

To further support one of our Triple E strategic objectives, enhance operational performance, last week we entered into an agreement with NKF for the sale of SCP. At the same time, we also established a long-term development and supply agreement with NKF for future new generic injectables. These agreements contribute to our positioning towards accelerated growth and profitability with continued development and supply from this important region of the world. The consummation of this transaction will deliver several benefits to Sagent. It strengthens our relationship with a longstanding, high quality partner, guarantees consistency of supply of products manufactured at SCP and targets multiple new products for development and future launch. From a financial perspective, we will eliminate approximately $10 million of annual cost. We'll recognize a $30 million tax and we will eliminate our need for capital investments in SCP, all contributing to cash savings of between $60 million $80 million over the next three years. This capital can now be reinvested into the business to support continued expansion of the portfolio and investment in vertical integration in our Canadian manufacturing site and beyond.

Even though we determined the best course of action for SCP was a sale, we are highly confident in the benefits that will accrue to Sagent as a result of our vertical integration strategy for both our customers and our shareholders. We are well on our way with a construction of our new manufacturing facility in Montreal. Once completed the site will be capable of producing 30 million vials for both the Canadian and US market. As we've previously stated we are investing approximately $30 million into this project. As part of our strategic objective to enhance operational performance, we've allocated two thirds of this volume to the US market and one third to the Canadian market. The facility will be handed over to our manufacturing team in Canada early next year and should be producing products for the Canadian market by the end of next year.

Products will begin to flow into the US market in early 2019. Through this investment in Omega and continued advancement of our vertical integration strategy, we believe approximately 20% to 30% of our total future product needs could be manufactured in our own facilities. The disposition of SCP and the investment in vertical integration in Omega represent initial progress towards several aspects of our recently discussed Triple E strategy. The three components of this strategy include expand our product offerings; enhance our operational performance in order to increase our overall margins. And execute upon business development and M&A.

As most of you are aware we market and sell 55 products comprised of 181 SKUs and market valued at little over $2 billion supporting our current revenue. What's compelling for a company our size is that we are number one or number two with 30% of our product offerings? If one were to look at the number one through number four market positions, almost 60% of our product offerings reached this level. We believe that these market positions are representative of the exceptional capabilities of our commercial team in this all important hospital and clinic channel.

Now the goal is to expand our product offerings and get more products enhanced of this talented, highly focused commercial team. So the first step to expand our product offerings is to unlock the value of our active pipeline. We've an active pipeline of 98 products that will compete in a market of approximately $13 billion as measured by IMS. Within that active pipeline of 98 products, we have 67 products that are with the FDA awaiting review and ultimate approval with an average time at the FDA of 3.2 years.

In addition, we have 31 products in active development with our R&D partnership organization that we anticipate submitting over the next couple of years. So in total combining our 55 in-market products and our total active pipeline of over 150 products, we have the potential to compete in a $15 billion IMS measured market. Now the final component of the product strategy is to expand the portfolio that we now have put in place and focused on creating additional growth beyond these products. To do so we've identified an additional potential of roughly a 150 more products.

As one looks across the strategic horizon, we see the potential to go from selling 55 products in a market of just over $2 billion today, to selling over 300 products in a market valued by IMS somewhere between $35 billion and $40 billion. I view this as one heck a long runway of potential growth opportunity. From an investor perspective how will you best measure our progress against this objective? Product launches and product placements will be two key measure of the continued growth of our product pipeline. Our 2016 guidance anticipates five to eight product launches primarily in the second half of the year, accelerating to approximately twice that number in 2017 and 2018.

As we see the acceleration of product launches, we will also accelerate our product placements such that our active pipeline will continue to grow toward achieving our goal of selling over 300 products in the hospital and clinic channel. Supporting our goal to expand our portfolio is the second component of our Triple E strategy, enhanced our operational performance. As I've communicated in various settings, we've tremendous core pillars of strength at Sagent. However, to increase the business five fold on the top line and even more on the bottom line we need augment our capabilities in three specific areas. Manufacturing and supply chain, product development and business development.

I'm pleased to report that we've interviewed a number of very strong candidates for each of these roles. I anticipate that I'll have an announcement on a new Executive Vice President of global operation at Sagent by the end of the month. Furthermore, I am targeting an announcement regarding Sagent's corporate development and M&A leadership enhancement by the end of the quarter. In the interim however we haven't been sitting still. We've been working closely with our partners in the development of our pipeline under the increased FDA requirements of GDUFA. We are now bringing stronger science and early regulatory input into the product development cycle. At the same time, as discussed earlier, we are making tremendous progress in the construction of our new plant in Canada.

We've also taken active steps to improve service levels to our customers through forecasting improvements and investments in our supply chain, building inventory to the right levels to support current customer demand and to position us well to capture opportunities stemming from future potential market shortages. While there is much more to do, we are off to a great start and continue to accelerate the pace of improvement while enhancing our operational performance.

Finally, our third E is to execute on growth opportunities and accelerate product licenses, product acquisitions and M&A. Business development in our business means working closely with our development partners and our manufacturing partners which is core to what we do. This we do very well. We'll now begin to expand and accelerate upon that. We've identified over 150 products that represent our future strategy pipeline and we are now beginning to look at all possible ways to get these products including developing them, acquiring them, licensing them in, in any combination of these in order to accelerate the speed at which we would bring the pipeline into our business. Our pipeline has been designed to leverage the strength we have in the hospital and clinic channel and to further leverage our call point and sharpen our elbows against our competition. As we look to the future, we will offer our customers broader basis of doing business with us than most of our other competitors.

To our M&A initiatives, we've begun to look for additional vial manufacturing capability to further compliment our growth while continuing to develop our partnership model. Simply said another Omega type acquisition would be great for Sagent.

Therefore in summary if we execute well against the three objectives of our Triple E strategy, expand the pipeline, enhance operational performance to improve margins and execute on business development and M&A, we'll have a terrific runway of growth ahead of us. Our vision is to be a leading provider of affordable pharmaceuticals to the hospital and clinic market. This is a market where we have strong competitive advantages that we will continue to enhance. A market where we currently do well as we compete in a $2 billion IMS market segment with 55 products. Adding our active pipeline of 98 products and complimenting with our strategic pipeline of over 150 more product, will ultimately contribute to us having in excess of 300 products competing in nearly $40 billion of market potential. Further complimenting this activity with M&A, we are committed to a long-term strategy of developing a top line in excess of 20% compounded annual growth and becomes our very efficient cost structure; leverage affected the bottom line of a multiple greater than that. We expect our Triple E strategy will contribute to strong shareholder value creation.

Thank you for listening. And I'll now turn the call over to Jon to cover our recent financial performance and our guidance for 2016.

Jon Singer

Thank you, Allan. I’ll walk through the 2015 fourth quarter and full year results; provide some information on the balance sheet, then close with confirmation of our guidance for the remainder of 2015.

Net revenue for the three months ended December 31, 2015 totaled $83.1 million as compared to $83.6 million for the three months ended December 31, 2014. The change was primarily driven by contribution from Omega which had a revenue decline of $0.7 million to $7.8 million in the fourth quarter of 2015 due to the weakening of the Canadian Dollar. Omega's performance actually had approximately 8% growth without the currency impact.

Revenue by therapeutic class for the fourth quarter of 2015, inclusive of Omega, was 39% anti-infective, 41% critical care, and 20% oncology. The comparable amounts for the fourth quarter of 2014 were 33% anti-infective, 30% critical care, and 37% oncology.

Gross profit as a percentage of net revenue was 27.7% for the three months ended December 31, 2015, compared to 29.2% for the three months ended December 31, 2014. Adjusted gross profit as a percentage of net revenue was 29% for the three months ended December 31, 2015, compared to 32.5% for the three months ended December 31, 2014.

During the fourth quarter of 2015, Omega contributed $1.9 million of gross margin inclusive of $1 million amortization expense compared to negative gross profit of $253,000 in the fourth quarter, 2014 which was inclusive of $2.1 million of purchase accounting adjustments.

Adjusted EBITDA for the three months ended December 31, 2015 totaled $5.1 million compared to $7.3 million for the fourth quarter of 2014. The decline in adjusted EBITDA is primarily driven by the decline in adjusted gross profit.

Acquisition-related costs for the three months ended December 31, 2015 totaled $1 million, an increase of $0.8 million, as compared to $200,000 for the three months ended December 31, 2014. 2015 cost are primarily related to the disposition of SCP.

Management transition costs for the three months ended December 31, 2015 totaled $0.7 million. In conjunction with the decision to sell SCP, management determined the estimated fair value less cost to sell SCP is lower than its current carrying value which resulted in a non-cash impairment charge in the fourth quarter of 2015 of $45.2 million. This is partially offset by a related cash tax benefit of approximately $30.9 million.

Income taxes were $30 million benefit in the fourth quarter of 2015 compared to $23.7 million ($23.5 million, see press release) benefit in the fourth quarter of 2014. Those of you who are keen observers of our financial statements will note that the 2014 amount has been restated from the previously disclosed benefit. As mentioned earlier, with the sell of SCP, management implemented tax planning strategies that resulted in a $30.9 million benefit in the fourth quarter of 2015. As part of tax planning process we found an error in our previous tax filing position related to SCP during the time SCP was 50% owned by the company. The error resulted in us incorrectly claiming net operating loss carry forward benefits related to SCP resulting in over statement of the related deferred tax asset for which there was a full valuation allowance reserve.

In December of last year, we concluded that the valuation allowance against our deferred tax assets was no longer required. As a result, the Company released the allowance in full; including amounts related to net operating loss carry forward benefits recognized as a result of the incorrect SCP tax filing position, which resulted in the improper recognition of net income in 2014 of $2.6 million. This has been corrected in the release issued this morning and is fully outlined in 8-K filed with the SEC this morning.

Including the impact of interest and other non-operating expenses, the net loss for the three months ended December 31, 2015 was $17.9 million as compared to restated net income of $26.8 million for the three months ended December 31, 2014. Including $16.1 million and $21.7 million of net non operating impact of 2015 and 2014 respectively.

Briefly turning to the full year results, net revenue for the fiscal year ended December 31, 2015 totaled $318.3 million, an increase of $29.3 million, or 10%, compared to $289 million for the fiscal year ended December 31, 2014. The increase was primarily driven by $6.4 million of new product revenue and the increase in contribution from Omega of $22.1 million due to the full year contribution since the addition of Omega on October 1, 2014.

Revenue by therapeutic class for fiscal year 2015 inclusive of Omega was 40% anti-infective, 38% critical care, and 22% oncology. The comparable amounts for 2014 were 35% anti-infective, 30% critical care, and 35% oncology.

Gross profit as a percentage of revenue was 27.6% for the fiscal year ended December 31, 2015, compared to 29.8% for the fiscal year ended December 31, 2014. Adjusted gross profit as a percentage of revenue was 28.6% and 31.6% respectively. For the full year Omega contributed $7.4 million of gross profit in 2015, inclusive of $4.3 million of purchase accounting revaluation of inventory and amortization expense due to other purchase accounting adjustments.

Adjusted EBITDA for the fiscal year ended December 31, 2015 totaled $29.1 million, compared to $32.3 million for fiscal year ended December 31, 2014. I'll stop at adjusted EBITDA for the full year given this was our initial guidance measure of profitability and confirm we did finish 2015 at the high end of our original adjusted EBITDA guidance range.

We ended 2015 with $46 million of cash and short-term investments with no outstanding borrowings against our $80 million revolver and $1.6 million of debt in Canada. Before I turned to guidance I'd like to make a couple comments regarding the sale of SCP. As referenced in our press release and 8-K filed earlier this month, we've signed an agreement to sell SCP to NKF. The transaction needs to be approved by the Chinese regulators which we believe should occur by the end of this quarter. We had initially anticipated that we would be treating SCP as a discontinued operation in our financial reporting. However, based upon our detailed assessment of the accounting standard, we determined the appropriate treatment would be to continue accounting for SCP in continuing operations through the close of the transaction.

In 2015, we had $4.6 million of unabsorbed costs from COGS and $3.5 million of cost in operating expense with SCP. The comparable amounts for 2014 were $5 million in cost of good sold and $4.9 million in SG&A. During 2016, we anticipate approximately one quarter of operating cost and some additional transaction related cost to support the consumption of the transaction. These amounts were not considered in our initial guidance and will likely be added back in our adjusted EBITDA calculations for 2016.

Closing with our guidance. For fiscal year 2016 consistent with our recent guidance closures, our growth outlook is influenced primarily by the timing of new product launches which we anticipate to accelerate in the second half of the year and the timing of funding of government contracts primarily for CIPROFLOXACIN. Sagent's business plan for fiscal 2016 currently anticipates net revenue for the year to be in the range of $325 million to $365 million, adjusted gross profit as a percentage of net revenue in the range of 27% to 30% and operating expenses in the range of $70 million to $80 million.

Based upon the above assumption, the company anticipate adjusted EBITDA in the range of $35 million to $50 million. The focus on adjusted EBITDA correlated to our cash earnings, a reconciliation of adjusted EBITDA to net income is provided in the details of our press release.

Although our guidance is for the full year, given the breadth of our revenue range, it is beneficial to provide some commentary on the upcoming quarter. We anticipate Q1 will be sequentially down from Q1, 2015 driven by several factors. Our strong finish to 2015 included approximately $2 million to $3 million of sales; they got pulled into 2015 from Q1, 2016 due to the timing of yearend. The continued weakening of the Canadian Dollar will result in a currency translation decline of approximately $1 million to $2 million. The late funding for awarded government contracts for stockpiled anti-effectives, primarily ciprofloxacin has shifted our expectation to revenue in the second through fourth quarter. And finally the annualization of pricing decline on certain products family without the benefit of new product launches until second half of the year will result in approximately $1 million to $2 million of net revenue impact in the first quarter of 2016.

When we accumulate these various impacts we currently anticipate revenue in the range of $72 million to $75 million for the first quarter of 2016. Based on our expectations for government funding in new product launches we believe we'll have sequential revenue growth each of the quarter this year and should exit 2016 with strong double digit revenue growth over the comparable quarter in support of our revenue range outlined above.

Operator, we will now open the call to questions.

Question-and-Answer Session


[Operator Instructions]

Our first question comes from Randall Stanicky with RBC Capital Markets. Your line is open.

Rob Stanicky

Great. Thanks guys. I just have two, one for Allan and one for Jon. First, Allan Sagent's core competency is, it's clearly the infrastructure and connectivity to the GPO and the hospital network. So now that you are past your 100 days at Sagent, how do you best leverage that from an M&A perspective and why isn't this a case where maybe you have more to offer, somebody with a larger platform than you yourself trying to build that out deal by deal. And then I have quick follow up.

Allan Oberman

Okay. So, Randall, first of all good morning and thank you for the question. We've identified a number of core competences not just the one in our terrific commercial capabilities in the channel and our focus in the channel. But our partnership network, our vertical integration and our ability to really capture a broad breadth of products for the channel. As we think of M&A, we've now done our work, we've done our homework and we know the breadth of products that we believe are value added to us and make an important difference in this channel. And our focus now is to go and get those products and get those products in anyway possible including M&A. So M&A will play a part of the strategy as I said earlier execute on M&A in order to drive the fulfillment of that pipeline going forward in order to accelerate as fast as we can, the growth within that channel. Now strategy did confirm that there was tremendous opportunity in the channel and first and foremost as we look to 2016, we wanted to execute well and enhance our capabilities to serve this channel. As we look beyond that, certainly there are further opportunities for expansion through other types of M&A that you've alluded to, but for the immediate we want to stay very focused on what our strategies have outlined.

Rob Stanicky

And so you talked in your prepared comments about us measuring you guys on that 150 targeted, are those 150 targeted products if we just add up what you are targeting to get approved that your pipeline for the next couple of years through 2018, it numbers just over 30 so as you think about the other 120 products how do we think about the timing of those and are these going to be BD deals? Are they largely predominately going to be corporate acquisitions? How do we think about that?

Allan Oberman

So first Randall the products that are sitting with the FDA, they are 67 with the FDA. You right, the number that you calculated is roughly half of them. I am hoping that the results will be better than the guidance that we've laid out but as we all know that hinges clearly on the FDA and the timing of the FDA. We are very confident around the filings that we have with them and we can delve into detail at the appropriate time. Relative to the 150 products that have been identified in our strategic portfolio, clearly those are ones that we would be going after through a combination of development strategies, licensing strategies and acquisition strategies. Some of them have been identified to potentially fill in what I would call an earlier portfolio. So in the shorter term and of course many of them have been identified in order to capture value creation through first mover capabilities as one looks out over the longer term.

Rob Stanicky

Got it. Thanks. And a quick one for Jon on bivalirudin. Hospira is still in the market. There's an authorized generic via Sandoz, and Eagle is likely to launch on March 19. How are you guys thinking about that opportunity? It doesn't get talked about a lot. And when do you expect to get color? Thanks.

Jon Singer

Yes. So as we indicated when the court decided to rehear the case that delayed a view on our ability to get their product across the finished line probably until about September of this year. And so I think we'll have to just watch how -- there continues to be some legal issues on Eagle's product and so it's difficult to really get a clear assessment of what the competitive landscape is going to look like over the next nine months. It's in the five to eight products that would -- bivalirudin launch would be at the high end of that expectation. And I'd tell you we don't have significant expectations for that in the guidance range. And I think as we get closer we are going to just -- just like every other product that you are launching at market formation we'll get a better assessment of what the competitive environment going to look like.


Thank you. Our next question comes from Gregg Gilbert with Deutsche Bank. Your line is open.

Gregg Gilbert

Yes. I have a few. My first one, for Allan is whether or not the Board is considering potential sale of the company in parallel with the strategy that you outlined?

Allan Oberman

So Gregg, good morning and thank you for the question. Management and -- first of all, clearly we don't comment on rumors. But management and the Board are clearly aligned behind the strategy that I articulated in January that I reinforced today and to the growth and development of this business on a go forward basis.

Gregg Gilbert

All right. My another question is a couple part question about partnership given how important they've been historically. So and I know it's hard to paint all the partners with the same brush, Allan. But can you talk about how the partnerships are going with your current partners and offer any updates on the regulatory issues that some of your partners have. Thanks.

Allan Oberman

Sure. So again the transition that we went through last year, we spent a great deal of time working with and talking with our partners and making sure that they are aligned and focused in support of our business going forward. And things are going very well with them. We have active development projects in place with many of them. And as I said in my prepared remarks we stepped up our gain relatively helping, working with them on the scientific and regulatory aspects of, and ensuring that we are developing to the future new standards as opposed to the historical standards. So they are very supportive of us and we are very supportive of them. And clearly we have strong economic connections between our two businesses which go beyond simply -- let's call the personal company to company relationship. Relative to compliance, Mylan is one of our partners. Clearly a joint venture and they are caught up in some compliance challenges and more recently Cadila Zydus is caught up in a warning letter that was issued at the end of last year in a facility that is primarily an oral solid dose facility but a facility where we do manufacture some generic injectable products. And therefore, we're caught in under the EIR relative to that facility not being issued. So we are working through that with them, and ensuring ongoing supply of products that had and continue to be made and trying to do whatever we can to be supportive of them to get beyond that so that new future new product launches can come out of that facility.

Gregg Gilbert

And lastly, can you provide any detailed updates at all on iron sucrose and pentobarbital? Thanks.

Allan Oberman

Sure. Let Jon take that one.

Jon Singer

Yes. So as we indicated on pentobarbital, we got CRL in December on our most recent filing and we continue to trouble with change in the guidance particularly around the BE study and so at the end of the day we are stepping back on that product as currently filed with the FDA, we don't believe that it will be approved and so we are working with our partners to assess their product but really at this point in time, it's thrown with the rest of the opportunities that we anticipate. On pento, as we guided it's in our range of five to eight products and we anticipate approval mid year and we anticipate that we will be launching that product in 2016.


Thank you. Our next question comes from Elliot Wilbur with Raymond James. Your line is open.

Elliot Wilbur

Thanks. Good morning. Just a couple of quick follow ups for Jon and then one for Allan as well. Jon I guess with respect to iron, there has been limited visibility or competitive intelligence as who maybe in the marketplace and I am wondering just based on what's happen with your filing and if is there anything new that you guys can say in terms of the competitive landscape. Whether you think that any or all competitors are equally impacted by the BA issues, BE issues or is that something company specific or frankly just impossible to say at the juncture?

Jon Singer

It's anything I say would just be speculation. So I'll default to impossible stay at this point in time.

Elliot Wilbur

Okay. And then thanks for the comments with respect to revenue cadence through the year. Let say anything you can say with respect to expense timing and EBITDA cadence throughout the course of 2016? Is it likely to just simply mirror revenue progress or is there something different in terms of timing of R&D expenses that could push things closer to first half and second?

Jon Singer

Yes. I think if you look the primary driver of our adjusted EBITDA is generally are adjusted gross margin which is driven by the revenue. As of right now our SG&A is pretty, quarterly it doesn't have a lot of variance and then product development as we look across the year it's currently budged to be relatively evenly spread. But that changes over time. But I think for modeling purposes yes I would anticipate that the expense side of the equation is not the key driver of adjusted EBITDA cadence, it's more driven by the revenue and the adjusted gross profit.

Elliot Wilbur

Okay. Then last question for you Jon. You mentioned I think $1 million or $2 million of net erosion 1Q, 2016 versus the prior year. Wasn't sure if that was specifically just referring to the base in general or if that was a price impact alone. And I was really looking for just sort of commentary on base pricing trends? Seems like injectable faces kind of the one spot of the generic world that's holing up relatively well although you can hear rumblings of more intensified price pressure across the industries. Just commentary on current observations around pricing trends and the current portfolio.

Jon Singer

Yes. So if you look at the guidance and you look at this year, when we brought down guidance in Q2 and you had the miss it was a function of -- I would call market repricing on several of our key products more or less tied to the GPO renewal cycle. And so the impact that we are seeing in Q1 is just when you look at the sequential comparison to last year, we are getting the annualization of that pricing impact. Overall, your observation is directionally correct that pricing is relatively steady in the base business. When you make an overall assessment obviously when you look at individual products depending upon where they are in their lifecycle or introduction of new competitors you may have a slightly different picture, but as we've always said depending upon timing and the year you got exposure about 5% to 10% price decline in your base business at any point in time. I think given the maturity of our portfolio today, as I look out over the next 12 months we don't anticipate another year in which we have any material impact of pricing.

Elliot Wilbur

Okay. Thanks. Then one question for Allan is well I mean it's pretty clear that your articulated growth strategy really involves much more of a channel leverage approach rather than simply just focusing exclusively on dosage form and injectable generic. Just sort of curious if at this point it's fair to say that message is getting out, and you are starting to get more inbound in terms of companies contacting you with respect to potentially leveraging your expertise in the channel to assist them. And as I think about the addition of 150 products or potentially more to your portfolio. How many of those or sort of what is the constitution that in terms of just traditional injectable versus dosage forms and products that typically we may not necessarily associate with that the Sagent evolves. Thanks.

Allan Oberman

Thanks, Elliot. Great question. And let me just take a step back for a moment and just build on that. Indeed our strategy is a channel leverage strategy and it expands us beyond generic injectables into other higher, high barrier generic dosage forms that are important to the channel. Approximately in our 150 products approximately 60% of the products are still generic injectable products that we've identified and 40% of them are other dosage forms. And we continue to study that area and believe there will be even more opportunity in the alternate dosage forms as we continue to look at other technologies. And that is a core part of our strategy definitely. With regards inbound, the message is starting to get out, we indeed had a number of meetings with future potential partners that are beyond the generic injectable space that would be interested in replicating what's agent is crated, which is partnership relative to us representing the business in the North American channel and them being able to leverage their capabilities of development and manufacturing either in the North America where they may not have a presence in the channel or other parts of the world where they certainly are not present within North America. So definitely starting to get a lot more inbound interest in the broader expansion of the portfolio beyond generic injectables. I'll simply close with generic injectables are still very important to our business. And still represent a significant portion of our growth. And we will continue to aggressively develop licensing acquire and anyway possible expand that portfolio.


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

David Amsellem

Thanks. Just a couple. So one for Allan, what are your thoughts on the quality beyond of the ANDAs that are pending now at the FDA. You had an opportunity to go through the filed pipeline in detail, there are probably were some that got jammed into queue before GDUFA.

So I wanted to get your thoughts on how you were thinking about the quality of these shots on goal. And then just on the guidance, just a couple clarification questions. One, I just want to make sure I didn't miss this -- but is bivalirudin in or not in the five to eight launches that you are guiding to later this year? And then secondly, beyond that product and Nembutal are there any other products that are in your guidance, new launches that will be launching in market formation? Thanks.

Allan Oberman

So thanks David. Let me start with the first question, 67 products that are pending with the FDA. We've done a review of all of them relative to where they sit with the FDA. So couple of statistics about half of them we've received target action dates and about a third of them, we have referred to, tomorrow we've received either CRLs or ECDs or some formal communication that we know where they are within the process. So we are feeling pretty good about our understanding of where it sits with the FDA and assuming the FDA maintains performance against the dates that they are offering, we are feeling pretty good about it. With regards to the question about the quality of ANDAs. Our initial pass left me a positive with what I saw but I am the first to admit that I don't have the deep scientific experience. I've recently added someone to the team. If go back to my prepared remarks, we talked about scientific and product development capabilities. I've recently added someone to my team who is going through the process with more of a scientific eye with the support of the balance of our organization looking at the quality of those files. All I'll say is we met as late as 6 O' Clock last night and early indications are positive but beyond that I don't want to go too much further out until we completed a deep review. With regards to bivalirudin, I think Jon said what he did say is if we are able to get through legal hurdles of bivalirudin, it would be in our upper end limit of the five to eight relative to the number of launches but we have attributed very, very little value in the sale guidance range that we've given to it because of the uncertainty of being able to -- be able to launch that because of the legal conditions this year.

Jon Singer

And I think the other question that was embedded in that is, are there any other products that we anticipate launching in market formation? Within the five to eight products there is one product for which the market will form this year. And depending upon the timing of the FDA and certain legal issues through the course of the year, we will determine where we are relative to formation but we do anticipate launching this year.


Thank you. Our next question comes from Dana Flanders with JP Morgan. Your line is open.

Dana Flanders

Hi. Thank you for the question. I have a two-parter on M&A. Just first, can you talk about some of the really important return metrics and characteristics you look at when you evaluate potential deals? And then as you look out at the space, have asset prices come down with valuations now? Or are you still seeing prices where they were six to nine months ago? Thank you.

Allan Oberman

Yes. I'll take the second one. I'll let Jon take the financial metrics one. When we -- we had this conversation in January. I would say we hadn't yet begun to see any moderation of expectations. I'd say now the middle of February we haven't seen tremendous modification of expectations but I do believe we are beginning to see that. And I think it's going to take a number of months still before there is a real realignment of buyer and seller expectations. So the simple answer not a lot but beginning and my expectation is over the ensuing months there will be more of an adjustment relative to the alignment of buyer and seller expectations.

Jon Singer

And then on the financial metrics, we are pretty traditional in our thought process. We use a combination of net present value, internal rate of return, accretion dilution and at the end of the day gut feel on whether the business is going to be able to make a positive contribution and based upon where we see the ability to create value within the overall strategy of the business. And if you use -- we will make an acquisition as an example, base business performance gave us a solid return in line with our cost to capital. And then with the incremental volume that we are going to get through the vertical integration we saw tremendous opportunity over the long run to create value. And so we look at both what's the business that we are acquiring and what's the value that we think we can create for our shareholders through the acquisition.


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

Sumant Kulkarni

Good morning. Thanks for taking my question. I have two. First one is a strategic one for Allan. Given that partnership appeared to still be a part of the core of Sagent, what are the typical gross margins of profits that you are assuming on products that are out there to be partnered today? And second for Jon would you need any new launches to get at to the low end of your top line outlook or from the existing base of products get you there?

Allan Oberman

Jon maybe you can take both of those.

Jon Singer

Yes. All I take both of them. So look as we look at the products that we are targeting for launch as we've said really over the past 18 to 24 months is the new product in the pipeline tend to have margins that are higher than the current corporate average and in many instances are averaging between 45% to 50%. Every deal is slightly different so as you can imagine Sumant with the partners that we had at historical profits put relationship that forms the basis for the economics of that relationship. But as we look at new opportunities, we've taken the opportunity to rethink how we want to work with our partners and even looking at things where we go with pure contract manufacturing relationships. On the guidance range there are a number of the approvals that we are fairly confidence that we will get this year, that are required to hit the low end of the guidance range as well as the financial support on government contracts. And so we've won long-term contract for stockpile products primarily anti-ineffective and so we won that contract towards the end of last year. And so over the long run we are confident in the commitment for these products and the government. It's just a matter of the short-term funding which we are waiting -- with the delay in the budget cycle and then some changes within the contracting structure of the entity that we won the contract with, we are waiting for the timing of that but both of those are required for us to hit the low end of the guidance range.


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

Brandon Folkes

Hi, it's Brandon Folkes on for Louise. We just would like to get your latest thoughts on international expansion? Thank you.

Allan Oberman

So thank you Brandon for the question. At this particular point in time our strategy is focused on North America. We see tremendous potential within North America and that's where we are focusing our time and energy relative to portfolio, expanding the portfolio, enhancing our operational capabilities and executing on M&A. That said I won't -- we won't discount international and international will -- it comes under our view primarily relative to executing our strategy and the opportunity to look outside the US for a combination of both geographic expansion and enhancing capabilities for vertical integration to supply the North American and primarily the US market given we already have a site in Canada. So as we are looking at M&A, we are looking opportunities relative to companies that are outside the US but they have been focused on the ability to develop and produce products for an FDA regulated market. And if they have that and as good market position in their home country, we definitely keep them on our list of potential M&A targets.


Thank you. Our next question comes from Serge Belanger with Needham and Company. Your line is open.

Serge Belanger

Hi, good morning. I have a couple questions. The first one on Omega. I think Jon mentioned that revenue grew about 8% in 2015 ex currency changes. Is this growth rate sustainable in 2016 and forward?

Jon Singer

Yes. It grew 8% in Canadian Dollars in the fourth quarter and that's really the annualization or the first quarter year-over-year in which certain of the tenders that they won in October last year kicked in. We anticipate kind of low single digit growth out of that facility in 2016 and 2017. At the end of 2017 there is a new tender cycle in which we got a number of filings as well as the new plant should be ready to go to support the growth in the Canadian market. And so that's when we see an acceleration of the growth out of their in Canadian Dollar so we are this year going to deal each quarter with the continuation of headwinds if the weakness of the Canadian Dollar against US Dollar continues as it's currently performing.

Serge Belanger

Okay. And one question for Allan. You've kind of mapped out pipeline, additional pipeline of maybe 150 products and talked about improving your scientific capabilities. Just trying to get an idea of what I guess ANDA filing cadence you can target once these are all integrated.

Allan Oberman

So when we -- in my prepared remarks I talked about how I think you can measure us. And certainly the approvals are one and ultimately as our filings expand; you will see a growth in the overall call active pipeline as strategic products move into the active pipeline. We've not stopped the development. We have 31 products in active development as we speak. We've not stopped the development of them. We've just been enhancing the oversight and our efforts with our partners in working with them. And finally I conclude while we guided five to eight launches this year, we guided or we at least talked about in our strategy double that amount in 2017 and 2018. So when you think about filings, our filings are going to need to in excess of that in order to come out at the other end of the pipeline with five to eight -- 10 to 16 on annual basis. Our filings will have to be certainly at the high end of that or outpace that range in order to allow that to happen. So that's how we are thinking about future development of the pipeline.


[Operator Instructions] And we have a follow up from Elliot Wilbur with Raymond James. Your line is open.

Elliot Wilbur

Thanks. Just following up on your commentary on I guess going to the numbers which suggest you guys anticipate somewhere in the order of 30 to 40 approvals over the next three years. Obviously for various reason certain products like iron sucrose and bivalirudin and pentobarbital have made into the public domain and have kind of been fixation for investors for many, many years but I guess given the progression of time and potential changes kind of under the surface in terms of prioritization where do those products kind of rank out in terms of what you guys think or the top five or top seven potential approval sort of within this three year time period.

Allan Oberman

So first of all thank you for the question. Let me just clarify on the range of approvals. We are thinking, you said 30 to 40 over the next three years. If you include this year that's probably a good number but as we look to the future, we are hoping on an annual basis in 2016 and 2017, going back to the range I guided double what we are doing this year. And then hopefully expanding upon that especially GDUFA, finishes GDUFA I and we get into GDUFA II and we have a more reliable expectation of when products are going to be picked up, addressed and ultimately dealt with and approved. With respect to product specific, we don't really divulge product specifics other than those that might be out in the public domain through -- as a result of our legal strategy. But I would say the following. As I have looked at the overall products, we now have a broad basket of products relative to 30 to 40 that you have identified. There is no one single product that necessarily is the key driver of the value creation on a go forward basis. So we have a good overall basket of spreading, the value that can come out of the basket of products. And we will continue to drive for maximizing the value that comes from those, at the same looking for first mover advantage in our development pipeline and as a result of driving for first mover advantage as we look to the future, those products will become disclosed in due course.


Thank you. I am showing no further question at this time. I'd like to turn the call back to Mr. Polson for any closing remarks.

Jim Polson

Thank you, operator. We would like to thank everyone for their time this morning. And for your continued interest in Sagent. We look forward to speaking with you all again on our first quarter call this spring. Good day.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today's program and you may all disconnect. Everyone have a great day.

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