Impax Laboratories' (IPXL) CEO Fred Wilkinson on Q4 2015 Results - Earnings Call Transcript

| About: Impax Laboratories, (IPXL)

Impax Laboratories, Inc. (NASDAQ:IPXL)

Q4 2015 Results Earnings Conference Call

February 22, 2016 08:30 AM ET


Mark Donohue - IR and Corporate Communications

Fred Wilkinson - President and CEO

Bryan Reasons - CFO

Michael Nestor - President, Brand Division


David Amsellem - Piper Jaffray

Andrew Finkelstein - Susquehanna Financial Group

Ami Fadia - UBS

Jason Gerberry - Leerink

Elliot Wilbur - Raymond James

Louise Chen - Guggenheim

Dana Flanders - JP Morgan

Tim Chiang - BTIG

Austin Nelson - Nomura Securities


Good morning. My name is Tabitha, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Impax Laboratories’ Fourth Quarter and Full Year 2015 Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Donahue, please go ahead.

Mark Donohue

Good morning. Welcome to Impax’s fourth quarter and full year 2015 financial results conference call. A copy of the press release issued this morning, as well as the copy of the slide presentation, are available on the Investor Relations section of the Impax’s website, Also, a link to a webcast of this call is available on our website.

Our discussion today may include certain forward-looking statements and actual results may differ from those presented here. Factors that could cause such a difference are outlined in our SEC filings and on our website. Our discussion today includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the Company’s operations and to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information to, and facilitates analysis by investors in evaluating the Company’s financial performance, results of operations and trends. A reconciliation of GAAP to non-GAAP measures is available in our fourth quarter 2015 earnings release and today’s slide presentation, both of which can be found on the Company’s website.

The agenda this morning will include our President and Chief Executive Officer, Fred Wilkinson, providing an overview of the fourth quarter highlights and an update on our four key areas of focus and Bryan Reasons, the Chief Financial Officer, will provide additional details on the financial results and discuss our 2016 financial guidance. We will then open the lines up for questions and answers. Also joining us for the Q&A session is Michael Nestor, President of the Brand Division.

With that, I’ll turn the call over to Fred.

Fred Wilkinson

Good morning, everybody. And thanks for joining the fourth quarter and year-end conference call. It was clearly an exciting quarter for us and a momentous year at Impax, as we made significant progress across our four key strategic focus areas. We’re also as excited about how 2016 is starting off as with -- as evidenced by two approvals, last week’s Adderall XR and then January, the approval of EMVERM. And we’ll still speak about that in a little bit, as they start to shape our year for us.

2016 is shaping up to be another solid year, as we expect double-digit revenue growth or at least 15%, and EPS growth of at least 10%, which will provide plenty of cash for us to continue to invest growth initiatives. And Bryan will have more to say that on our 2016 guidance near the end of this call.

Turning to slide five, we outlined our highlights. Obviously very strong quarter, highlighted by continued demand of our diclofenac sodium gel product. As a reminder, we’re the sole supplier of this product as all competition left the market and we experienced increase in demand with the scripts increasing over 60% from third quarter 2015 to fourth quarter 2015, according to the IMS Health audits. The Generic team was also very active, launching seven products during fourth quarter alone and that same time, the Specialty Pharma team continued to generate growth across all of our brand products.

Additionally, we benefitted from the acquisition of Tower, as we focused on expanding the market with the key generic and brand products that came from the successful integration. And with more than $340 million in cash, no outstanding senior secured debt, we ended up 2015 with one of the most flexible balance sheets in the specialty pharma industry.

Slide six is kind of our brag sheet; it really is a scorecard of the achievements that we accomplished in 2015. And it was really everything that we set out to do as we started the year. We’ve outlined the four strategic pillars that we’ve been following. And now, I’d like to focus a little attention on some of these areas. It all starts with quality, and the big event here was the resolution of our warning letter in Hayward during the third quarter. This allowed us to establish a positive compliance position across all of our global networks. Additionally, we improved our supply chain efficiencies -- started to improve our supply chain efficiencies with the transferring of our packaging for the Philadelphia location and our distribution capabilities to UPS. We continue to focus on quality initiatives while advancing our commitment to maintain a world-class manufacturing and operational program.

Turning to maximization of our portfolio, on the Generic side, 2015 was a great year, as we achieved our goal of launching successfully 14 products and expanding our share on the other key areas. The Specialty Pharma commercial team also had a big year in 2015, as we successfully launched Rytary and further expanded the Zomig nasal spray market. We optimized our R&D portfolio with 11 generic product approvals across our internal and external networks. We also had a few brand products approved including Rytary.

On the business development front, we completed the acquisition and the integration of Tower. This transaction enhanced and diversified our generic and specialty product portfolio as well as our R&D pipeline. In 2015, we completed three additional transactions involving the divestiture of certain products, which resulted in approximately $60 million of proceeds. And lastly, we improved our capital structure by repaying a higher interest term loan with the proceeds received from the convertible note offering. This preserved significant borrowing capacity to execute on additional business development and M&A activities. All-in-all, we think it was a very-very impressive year. And I’d like to thank the entire team at Impax for the hard work that they did in achieving these results.

By successfully delivering on multiple objectives across our four focused areas of 2015, we believe we’re well-positioned for further organic growth in 2016.

As you can see on slide seven, based on our estimates, we are currently targeting approximately 12 to 14 potential launches in 2016. We have one approved already that being Adderall XR, and this was an important one. This approval will extend one of our key franchise. And after converting over to our manufactured product, will also provide the opportunity to pursue growth with this important product segment. Our generic launch program includes six products already approved as well as between six and eight pending approvals where we have clear visibility on their approvals. We currently have target action dates on more than 50% of filed products and there is list of those products that we’ve disclosed on one of our backup slides, in this deck.

Let’s turn to slide eight and talk about the specialty business. Based on prescription trends, we continue to believe that Rytary growth is on track to our plan. As you can see by the prescriptions laid out in this graph, we have got a good, solid, steady growth trend going on month to month basis with market share actually exceeding that. We remain focused on communicating the most efficient strategy for conversion from immediate release carbidopa to Rytary, in order to make sure that we maximize the opportunity for each patient that is converted. The expansion of our sales force coupled with our strong position with managed care should support our Rytary growth in 2016 and beyond.

And Zomig nasal spray continues to perform well in the second position, which as I have said many times, is the real commercial for the ability of our sales force and our selling programs. We have increased our share of National Triptan market sales segment from 30% to 32% by the end of the year.

Regarding Albenza, we accomplished exactly what we wanted, which is the prescription trends holding with virtually no promotion. While we continue to pursue the approval of other next generations for this product area, we are preparing for the next phase of our anthelmintic franchise with the approval of EMVERM, as outlined in the next slide.

So in January, we received the approval of EMVERM, which is the new prescription product for the treatment of pinworm and certain worm infections. Actually it’s mebendazole being reintroduced. And mebendazole has been the gold standard in this area. This is one of the key elements of our lifecycle plan to enhance our anthelmintic franchise started by the commercialization of our Albenza. As I stated here, pinworm is a highly contagious parasite that infects approximately 40 million people in the United States each year, one of the largest segments in this category. We plan to launch during second quarter and we will utilize primarily non-personal promotion and will couple that with targeted personal promotion from our specialty sales force as we establish EMVERM into geographic areas where pinworm is high.

Part of our growth strategy for Rytary in other the brand products includes two important stuffs, expansion of our sale force as well as the internalization of this sales force, as they become Impax employees. The sales force has previously been contract sales force and has been in that position since the launch of our branded division in 2006. As you remember, we increased our sales force to 77 reps last January, following the approval Rytary. And based on their earned success in 2015, we made the decision to increase the sales force to approximately 120, as we look forward to building greater scale and support continued growth of Rytary, Zomig, and support the launch of EMWARM. Although we can achieve slight increased reach, our primary goal will be the increase in frequency of visits to our key target audience. We initiated the recruitment process and expect to have the expanded sales force on-board by mid-March, just in time for the national sales meeting.

Now, let me turn to the R&D program. Throughout much of 2015, we focused most of our generic R&D capacity and staff on remediation PAI readiness, as we are coming out from under our regulatory hold.

About the middle of last year, we started converting our activities back to a full R&D program. The result of that is that we started to fill up our R&D portfolio with new projects. We have about 25 generic files that are in some form of active review by FDA. And as you remember from the previous slide, we’ve targeted up to 12 to 14 launches this year, so that’s the subsection of these files that are sitting in front of the FDA and anticipating approval.

We now have 18 additional products that are in development that will be submitted to the agency over the next couple of years. Not shown on this slide is our lead brand pipeline opportunity, which is IPX203 and that’s a follow on to Rytary. We kicked off Phase 2 clinical program, in the first patient, was enrolled in December 2015. You should have read out on the results sometime in the first half of 2016, which if successful, will allow us to plan for the Phase 3 program as we drive this file forward. So, a fairly active timeframe right now for both our brand in our generic R&D teams and one, we are excited about investing in.

We are also well-positioned with significant financial resources and balance sheet flexibility to support growth through M&A and are extremely active as we kick off 2016. Our balance sheet is very clean with approximately $340 million in cash and no outstanding senior secured debt. We’ve been very selective in picking the right opportunities but are excited about the prospects in front of us. Focus for now is on -- for generics is either doubling down on oral solid dose or seeking alternative dosage forms that we do not have the capacity for and capability for right now. While for the brand business, we plan to keep focusing on building out our CNS franchise and that’s taking most of our attention. We also continue to evaluate a few other specific areas whereby we can leverage our internal infrastructure.

For 2016, we continue to focus on our -- we will continue to focus on our strategic pillars and build on the momentum we created in 2015. As previously mentioned, we currently expect it to be another double-digit revenue growth year with at least 15% top line growth. We expect that this will translate into double-digit EPS growth of at least 10%.

For 2016, we will continue to invest in our quality and our compliance programs, our R&D projects, and the expansion of our Specialty Pharma sales force, all intended to support strong organic growth. Cost efficiency programs are going to be the name of the day for us here in 2016, as we advance our effort to lower our conversion cost and drive future gross margin expansion.

In closing, I’d like to thank our entire employee base again and express how excited we are about 2016, as we are well-positioned for another positive year of growth.

So, with that, let me turn it over to Bryan to go into greater depth on the financials.

Bryan Reasons

Thanks, Fred. Good morning, everyone. Turning to slide 15, I’ll start with a discussion of our fourth quarter 2015 results compared to last year’s fourth quarter results. A Fred noted, we had a strong quarter. We delivered top line results up $282 million or 115% growth. We benefited from higher sales of several key generic products, including diclofenac gel, the addition of the Tower products and seven new product launches.

Product volumes including the Tower acquisition, increased revenues by approximately 99%. New product launches, including Rytary and a number of new generic products, increased revenues by approximately 21% while changes in price, decreased revenues by about 5%.

Our adjusted gross profit margin decreased 49%, or a couple of hundred basis points due to product mix. The primary drivers for the sales of diclofenac gel with which we share profit with our partner Tolmar, and the contributions of sales of lower margin products from the Tower acquisition.

Moving on to operating expenses, adjusted research and development expenses increased approximately 26%. This increase was the result of the addition of the Tower acquisition and an increase in investments in generic R&D, as we’ve refocused our attention on projects versus remediation work. Adjusted SG&A expense increased by approximately $17 million. This was primarily driven by expenses related to the Tower acquisition, higher technology costs, promotional spending to support Rytary, and share base compensation expense.

Adjusted EBITDA increased $51 million to $78 million due to the previously noted increase in revenues. The adjusted effective tax rate came in at 28%, down approximately 400 basis points from last year’s rate of 32%, as a result of the impact of the recently renewed R&D tax credit. We also benefitted from manufacturing deduction and a change in timing of mix of U.S. and foreign income.

So in summary, the strong top line performance drove a 288% or $0.46 improvement in our adjusted diluted EPS in the fourth quarter of 2015 compared to last year.

Now, let’s move to slide 16, for a brief review of our segment results, starting with the Generic division fourth quarter 2015 performance compared to last year’s fourth quarter. Generic division revenues were up 92%. The main drivers of the increase were the higher sales of diclofenac gel, the addition of the revenues from the Tower acquisition, and the launch of seven new generic products.

The decline in adjusted gross margin was primarily due to higher sales of lower margin products in this year’s fourth quarter. The strong top line results drove 38% improvement in adjusted operating income.

Moving to slide 17, within the Specialty Pharma division, we delivered strong fourth quarter 2015 performance compared to last year. Total revenues increased approximately $42 million, driven by the addition of revenues from the Tower acquisition, the launch of Rytary, and continued growth of Zomig nasal spray. Specialty Pharma adjusted gross margin increased 18% to approximately 84% compared to last year, driven by the addition of sales of Rytary and the Tower products.

The increase in Specialty Pharma drove a $37 million improvement in adjusted operating income compared to last year. In the second -- fourth quarter of 2015, we achieved profitability within this division and have delivered sequential improvement each subsequent quarter. This was a result of the successful launch of Rytary, the addition of the Tower branded products which added another therapeutic franchise and our revised R&D focus on more late stage projects that we think will be launchable and will have revenue opportunities in the next three to five years.

Moving on to the 2016 financial guidance, our comparisons are against our full year 2015 actual results. Our guidance is based on our current expectations, and actual results may differ materially.

Moving to slide 19 and our 2016 revenue guidance, we’re currently expecting at least 15% revenue growth, driven by new product launches in 2016; continued growth from product launches in 2015; and growth from several existing generic and brand products. We are targeting up to 12 to 14 generic launches which includes six products already approved and that we intend to launch, based on current market conditions. One of these products includes the authorized generic OxyContin to our settlement agreement with Purdue. The agreement allows us to launch a limited number of bottles; we’re currently targeting launch in late first quarter.

Among the 12 to 14 launches, we’re targeting six to eight new ANDA approvals among the 25 pending products at the FDA. As Fred mentioned, we received our first generic product approval last week of generic Adderall XR. Our revenue guidance excludes higher value pending ANDAs such as potential first to market generics Renvela and Welchol. Although to be clear, we are not suggesting that either of these products could not be approved in 2016. We continue to aggressively pursue approval of these ANDAs, also the potential market opportunities of these products are dependent on the timing and number of generic approvals that might occur.

Moving to slide 20, drawing down into some of our key generic and brand product assumptions. Diclofenac gel experienced significant growth in 2015 with demand increasing throughout 2015 due to competition leaving the market. We are aware of the generic approval in late 2015 and expect to see that competitor enter the market in the first half of 2016. We also expect that the brand will reestablish itself during the year. We’re only expecting modest growth in 2016 compared to 2015 due to this additional competition and plan to defend our market position.

With the approval of our generic Adderall XR, we’re now in a position to provide our customers continuity and supply, as we transition from our current inventory of authorized generic version to supply from our ANDA product. We currently anticipate, we’ll complete this transition during the second quarter and will then take the opportunity to maximize the value from this important product. On the epinephrine auto-injector, we continue to work on improving our supply chain with the goal in 2016 to capture 1% segment share per quarter.

Concerning oxymorphone ER, we are still awaiting on a decision from the court that previously had ordered that the only other competitor off the market. At this time we’re assuming that current market conditions continue through 2016. For the generic base business, we are currently expecting modest negative revenue impact from competition, which should be more than offset by the increases we expect from new product launches and growth from several key products we previously noted.

For specialty products, we’re investing in the expansion of our sales force to drive organic growth. We expect that Rytary will continue to track toward our peak target range of $275 million to $350 million in 2019. On Zomig nasal spray, we currently expect modest volume growth in 2016. We’re planning to launch EMVERM during the second quarter with promotional and sales force efforts with heavy concentration of activity in areas where pinworm incidence is high.

Let’s move to slide 21. Our gross margin guidance of approximately 50% total revenues is a slight improvement over 2015. Our guidance includes the product launches I previously highlighted as well as the impact of the growth from our branded product portfolio. We currently expect that the positive revenue contribution from the generic partnered products will continue to pressure our margins. Similar to our revenue guidance, our gross margin guidance excludes the benefit of certain high-value pending ANDAs. Also impacting our margins is our ongoing investment in our global quality and compliance systems.

We have initiated programs on cost efficiencies to drive future gross margin expansion by improving our manufacturing conversion cost. We believe these programs should positively impact our 2017 margins.

Turing to slide 22, our R&D expense guidance; we expense to be approximately $100 million to $105 million across the Generic and Specialty Pharma divisions. This estimate includes patent litigation expense. While total R&D expenses are expected to increase in 2016, it is below or in line with spending, as a percentage of revenue in prior years. After coming out of the warning letter last September, we’re refocusing our Hayward R&D team on product development and investing in R&D as pursue organic growth opportunities. We’ll continue to focus on obtaining approval of the 25 pending ANDAs currently filed with the FDA as well as developing the 18 opportunities currently in our generic pipeline. Additionally our Specialty Pharma R&D group will continue to work on IPX203 clinical program and support the U.S. launch of Rytary.

Moving to slide 23, for SG&A spending, we are assuming roughly $200 million to $210 million for 2016. As a percentage of revenue, this should be approximately 20% to 21% of our current revenue guidance, in line with prior years. As previously communicated at the JP Morgan conference in early January, we’ll be investing to support organic growth across our Specialty Pharma division. We’re expanding the sales force by approximately 43 reps; this is expected to provide increased frequency of calls on our target audience.

Moving to slide 24, before closing, a couple of additional guidance times that we announced today. Adjusted interest expense is expected to be around $12 million. Our GAAP tax rate is expected to be approximately 34% to 36%, in line with our 2015 results. We continue to pursue opportunities to lower our effective tax rate. Based on our forecasted top line double-digit revenue growth of at least 15%, approximately 50% margin and investment in R&D and SG&A, our adjusted diluted EPS is currently forecasted to increase at least 10% over the full year 2015.

In closing, 2016 is off to a great start, as we’ve made progress by executing on the market opportunities before us. We remain well-positioned with the solid pipeline of pending ANDAs and a strong balance sheet whereby we continue to target invest, both internally and externally in sustainable generic and branded specialized markets that can drive growth.

Thanks for your attention. I’ll now turn the call back to Tabitha for questions.

Question-and-Answer Session


[Operator Instructions] First question will come from the line of David Amsellem with Piper Jaffray.

David Amsellem

Thanks, just a couple. So, can you just talk about any new color, if you can, on the progress towards an approval of the Welchol and Renvela generics, and how do you see those in terms of being potential first to market opportunities? And then secondly, what gives you confidence that you’re going to be able to stay on the oxymorphone market in 2016? And maybe just give us some color there, surrounding ANDA’s efforts to remove generics. Thanks.

Fred Wilkinson

Sure. Thank you. So that was good. Starting off with Welchol and Renvela that we anticipated that. So, look we have -- we’ve answered all the questions that the agency has asked on these two products. Both of them -- the FDA has what they need for driving forward the approval. As you know, these have been two products that new guidance have been issued several times during the transition process, both of them we had exclusivity at one period of time and have had to kind of drive past that. But I don’t think anybody expected that we’d be sitting in 2016 with the opportunity to be still first to market with the products. We are confident with our files; we are confident that we have answered everything that the agency has asked to-date. And we very much look forward to adjudicating these ANDAs in the very near future. So, I think you’ve seen a lot of guidance out there from other players on particularly Welchol. We’ve not provided that granularity and don’t intend to, but are working very judiciously with the agency to try to make sure that these products get approved as soon as possible. At the same time, we’re also building up our ability to supply, so confident enough in them that we are proactively preparing manufacturing activities for the brands.

On oxymorphone, we have heard and watched all the activities that have gone on regarding the defense of the so called abuse deterrent. We’re actually first waiting for the judge to act on the initial order which would be removing the only other competitor from the marketplace and are right now building small share gains on the product, but hoping that in fact the judge will follow through with the original order and that at some point here we may be the only one in the marketplace.


Your next question will come from the line of Andrew Finkelstein of Susquehanna Financial Group.

Andrew Finkelstein

Good morning and thanks for taking the question. Maybe you could talk a bit more about the investments you’re making in the business, first on the gross margin side, the outlook for this year a bit below what we’ve been looking for. And I know the brand business should be increasing its contribution. So, how much of that is a function of the product mix, including upside on products like generics Solaraze and is there any impact from pricing pressure that you are needing to offset? And with the investments in the marketing and on the pipeline, any thoughts on what the timeline and returns on those could be?

Fred Wilkinson

Great, thanks. Great observation; obviously 2016 is a year of investments for us. I think if you walk through the two, three different areas, it’s a slightly different story. On the gross margin front, obviously we are spending a lot of time on initiating and actually did that during the second half of last year, initiating several programs that will improve our supply chain efficiency. It is difficult to work on supply chain efficiency when your entire focus is on quality initiative. That’s what the first half of 2015 and previous years were all about. So, as we now come out of our warning letter, still stay very focused on the quality initiatives, which does still involve some investment. We are starting to transition our thinking little bit on trying to get some greater efficiencies out of our supply chain and more to come on that one. We do expect there will be improvements in that. And as Bryan mentioned, most of those programs, because they are in your operational area, take 9, 12 months to fully effect. So, we expect those to be more evident in the 2017 timeframe.

Our gross margin in 2015 had declines to it primarily because of the strong sales of our partnered products and with the primary emphasis on Solaraze. As I think we have announced, Solaraze, we have a 50-50 profits with Tolmar. And so, as our product has accelerated in its growth, that does take the gross margin down. The mix then of our newly introduced generic products, which carry higher gross margin compared to our previously marketed generic products with many of them were lower margin, we are still early on those marketing efforts. And so that conversion that didn’t happen as efficiently as one would have wanted in 2015. We do expect with the launch of products in ‘16 and the continued growth of our launched products in ‘15, we will have improvements in gross margin and are focusing most of our attention in the early part of this year on those initiatives.

At the same time, we are spending more on R&D and more on sales on marketing. And we think we -- you probably want us to do that. With the success that we are having with Rytary, Zomig and the launch of EMVERM, we clearly want to be accelerating some of the activities in the sales and marketing group, on the specialty side, the decision to take us from 77 to 120 was based on the mapping and the opportunities that we have there. We do still believe this puts us inside the range of our 275 to 350 on Rytary, but with just some acceleration we may -- you may see us changing that guidance over time. But we think this is a good, solid investment in the future that is necessary to build out that specialty business.

And then in R&D, it’s just as simple as moving folks from working on PAI readiness and compliance programs over truly looking on R&D activities, which includes a lot more out of composite expenses, the addition of couple dozen -- or a dozen products this summer into our R&D portfolio. We have another dozen we have identified we’d like to put in there and are stretching the capacity of the group a little bit. But we expect that this spend should land in that 200 to 210 range and should then accelerate our filing process for ANDAs.

All of these investments are critical for the long term growth of the Company and all of those we would -- I think you would anticipate…


The next question comes from Marc Goodman with UBS.

Ami Fadia

Hi good morning. This is Ami Fadia on behalf of Marc. Two questions from me. The first one on the branded side, could you give us little bit of color on the contribution of some of the key products to your revenues, also specifically Rytary? And as we think about the year-over-year sales growth from ‘15 to ‘16, your guidance suggests about a $130 million of year-over-year growth, at least; could you tell us what are the top drivers of that sales growth? And then, my second question, I will follow up after you answer the first one.

Fred Wilkinson

Okay. So, let me start and then Michael can join me. And obviously, we are not providing any individual product revenue guidance in our ‘16 guidance. We did lay out the growth curve that we expect to have for the product. And I think over the last two JP Morgan meetings and all our investor conferences we’ve given pretty much, enough information for everybody to build the model on Rytary. If you take our -- the prescription growth times, the average price of the product, you can a land a number that’s probably very reasonably to where we were in 2015. And then, you take a straight line run on this and it’s going to drive you right into the 275 to 350 range. The additional growth that we expect to get is off the Zomig because that is still a growing product and off of EMVERM/Albenza, which is the nice franchise for us to have. I think the introduction of EMVERM will be a meaningful introduction and one that we expect will also drive our revenue position there.

And with that Michael, if there is anything you want to add?

Michael Nestor

Yes, I think relative to driving growth of Rytary, obviously the expansion of our sales force is a key part of that being able to get to more physicians, more importantly being able to get more frequently, as a key part of our expansion of Rytary for 2016 keying off where we see the utilization for the product coming out of 2015 and then the overall promotional program and sampling efforts that we continue to undertake within the overall promotional program for Rytary.

Ami Fadia

Thanks. Maybe a quick follow-up on this. Are you thinking about the EMVERM and Albenza franchise to jointly grow or are you looking at that as a switch from Albenza to EMVERM?

Michael Nestor

I think one of the things that you need to consider is the fact that currently Albenza is used off label for pinworm. We don’t promote albendazole at all. It’s indication of tapeworm. Mebendazole however is indicated for pinworm, has a 95% efficacy rate. So, what we see is mebendazole reestablishing itself within that pinworm marketplace and Albenza establishing itself as the indicated product for tapeworm.

Ami Fadia

So, maybe just separate question on the pipeline. Your pipeline suggests that there are about 6 to 7 foster files have been in there. Could you give us a sense of timing over the next, maybe three to five years around when you will see those?

Fred Wilkinson

Actually, I think the only things we can comment on those are that are disclosed in the back of the presentation. Those are where we have been sued on. And so, the disclosure is out there. Obviously one of the products that we’re -- marketplace is OxyContin which will launch at the end of this quarter but beyond that it’s up to those that are described in on that slide; we’ve not given any greater color.


Your next question comes from line of Jason Gerberry with Leerink.

Jason Gerberry

Good morning. Thanks for taking my question, just two from me. Can you quantify the impacts, in 2016, to gross margins from the supply chain efficiency measures; just kind of curious, as we sort of model out 2017 and beyond, when those costs are to fall out, how that could affect the margin profile? And then my second question is just on generic Adderall XR. I think historically you had a certain limited market share and sort of curious how selling your own products can you get more share as opposed to the quantities that you are allotted under the Shire agreement, and just sort of your thoughts in terms of what the competitive marketplace will look like and whether Teva and Allergan would have to divest one of their two products? Thanks.

Fred Wilkinson

Let’s do Adderall first because I think there is a little more clarity to that one. So, if you’ve noticed in ‘14 and as we entered into ‘15, we had somewhere between that 10 and 12 share position in the market. As we’ve announced during the year last year, we started controlling our supply a bit, so that we could feather ourselves through this process of weaning ourselves off of the supply that we have and moving over to the supply that will come from an ANDA, all needed the approval of the ANDA that we’ve just got.

We think that with the advent of our own supply, the ability to do then - which should be unencumbered, the ability then to go back out to the marketplace, we think that it’s reasonable to assume that we could regain share that we had before. And then with the handcuffs off, we’ll just continually test in the market to see what opportunities there are to maximize the value from this important product.

As you know Sandoz is anticipated to come in July, I think there is there settlement date. We’ll see how they come to the marketplace and what they do. But right now, it’s still been a fairly efficient marketplace and one that we participated well and look forward to really get into position where we’re not managing supply as much but managing interest of our customers.

As far as impact on supply chain, I think it’s hard to quantify the impact last year. I will put our commercial out there that we did guide everyone to the low 50s in our gross margins for 2015 and did not guide that there would be an improvement in 2016. So, many of the models didn’t take that into account. We do believe that supply chain improvements could have a fairly significant improvement but the biggest improvement we’ll have will be the launch of some very meaningful new products. And those right now are not into our guidance.


Your next question comes from the line of Elliot Wilbur with Raymond James.

Elliot Wilbur

My first question is directed to Michael actually and going back to the decision to expand sales force coverage around Rytary, based on our calculations; it looks like Rytary is doing about $650,000 per rep, based on the current sales force size. And just thinking about the project trajectory longer term and sort of what you have targeted in terms of what you believe there’s a five year out sales number, trying to gauge sort of what do you think the necessary additional resources maybe in order to get there. And I’m just wondering the ball park class spec-pharm [ph] number of around a $1 million per rep is appropriate in terms of what you think is probably running at sort of at peak versus basically as you approach like kind of five year out right run rate that you talk about?

Michael Nestor

It’s actually at this point it’s four years out and we don’t go into kind of that much detail relative to our prognostications per sale rep. What I will say is that we think that a 120 rep is the right number for us to be able to take Rytary forward to meet the sales projections that we’ve previously outlined.

Elliot Wilbur

Then just want to ask a follow up question for Fred around a couple of the key generics, first typically on Solaraze. Obviously, it was a strong contributor in the quarter and you look at the script trends being very strong additional uptick of that product over the past couple of quarters. But it seems like there’s more to that market than being reflected in prescription trends, just wondering of short comment in terms of utilization of the product within channels and markets that may not be captured by script, just seems like underlying demand, if you look at pharmacy purchases, it was exceptionally strong in the fourth quarter. And I’m not sure kind of what you think is the sustainability of that uptick but maybe some commentary on some additional dynamics there? And then on Adderall XR, could you give us some sense as to what the product contribution was relatively in the first -- excuse me, in the fourth quarter versus perhaps earlier in the year, just trying to get sort of a ballpark estimate of what the ramp down was over the course of the year?

Fred Wilkinson

Let me do Adderall first, because that’s probably the easiest one. We started the year around between 10% and 12% share according to IMS; we ended the year around 7 share, so we gave out probably three or four share points, all planned, all by design, all designs have managed our inventory through the introduction from our ANDA supply product. So, we believe now we’re unencumbered. We’ve got supply of both the Shire supply product and our own, and we should be able to further this nicely during 2Q.

As far as Solaraze, I mean it’s been a very, very strong marketplace. It’s probably one of those marketplaces that gets made slightly different than just a pure brand marketplace when there’s a generic marketplace out there. So, the reduction in price that evolves from the generic market versus brand market has encouraged increased utilization of the product across the myriad of different chain -- channels. We’ve seen this in both the compounding pharmacy as well as in just general retail pharmacy. So, we expect that growth to be maintained. We expect that there will be a competitor in, in sometime in the first half of 2016 as there is one ANDA that’s been approved and good competitor. And we are watching to see what the brand will do, see if they make it back into the marketplace or not. They’ve had a fairly sustained out of stock position and so we’ll -- we’ve been watching it closely, but do anticipate that they’ll be coming back.

Our goal is to hold on to the share position we have. I mean I think we like the growth of this product, we like the contribution that it’s provided, albeit that has been part of the driver down on our gross margin because it is a 50-50 share.

And I think one last thing for Michael, I mean you asked Michael to answer the question but I can’t let him do all the work here. The decision to expand the sales force was based on hitting some clearly defined metrics, and some internal metrics of how productive that sales organization was; where they were tracking on Rytary; where they are tracking on Zomig? And they exceeded all those numbers. And so that allowed us to put in place the planned expansion of our sales force. We remapped and remodeled and decided that instead going to where I think some people thought we are going to go was about a 100 reps, we elected to take it in one sales whoop and go to 120. That prepares us for any other product that may come into the bag as well as to optimize the opportunities with Zomig and the launch of EMVERM.

So, this was -- I consider this is success story, as they’ve really driven us to the right internal metrics to allow us to say it’s time to go invest in that sales force a little bit more.


Your next question comes from the line of Louise Chen with Guggenheim.

Louise Chen

Fred, first question I had was with respect to M&A and business development. Do you look more favorably upon brand or generic deals, bolt-ons or larger deals and why? And then secondly, some of your competitors have talked about pricing pressure for generic drugs increasing, curious if you saw this and even if you have it, what might be causing it?

Fred Wilkinson

So, M&A obviously, the answer to that is yes, yes, yes and yes. We’ve been very active on the M&A front but actually since last summer, probably increased the level of scrutiny and judiciousness that we’ve gone at this process. We really have not set a marker to say do brand or do generic; we are looking at both of them and have about the equal number of shots on goal in each category. As we mentioned during the presentation, our focus on brands is CNS, although we have explored a couple of other therapeutic areas. But, I’d really like to build out that CNS franchise, so you could see further expansion of both marketed products and near-term R&D opportunities. And then, on the generics side, we’ve evaluated a couple of opportunities that would allow us to double down on all solid dose and we’ve also looked at some opportunities and are looking at opportunities that would take us into some alternative dosage forms that we currently have the expertise on.

Market’s a little frothy, so I think we’re being very, very careful as to where we go with some of our transactional work. We think also that some values for some companies that are out there have not possibly adjusted to the values that all of us see from the -- that are tested daily that are in the public marketplace. But we think our balance sheet provides us a huge opportunity to go do a transaction that would be transformative as well as some good tuck-ins. And we’ll stay active and when we announce this when we announce the next deal.

On pricing, we’ve heard all the noise. I mean at JP Morgan was pretty noisy there about people prognosticating some price declines. We’ve really seen nothing out of the ordinary on our product portfolio. And our product portfolio is as you know, we would not last until ‘14 and ‘15 with no introductions and so we’ve managed our portfolio fairly efficiently without reduction in price and then many cases some improvement in our share position.

Our anticipation is always that new competition will drive reduction in price. And that if the FDA continues on their efficiency mode and continues to approve more ANDAs, that will put more pricing pressure on those products where competition can be driven. But we don’t see any external factor that should have a fundamental shift in pricing in generics. It’s primarily just the traditional competition that comes and the need to then decide whether you’re going to meet competition by reducing price or give up the share.


The next question is from Dana Flanders with JP Morgan.

Dana Flanders

Hi, thanks for the questions. Just two quick ones from me, first one on longer term growth; is the cost structure that you have in place now and are planning for 2016, is that a good base to support the future growth of the company? And I’m just looking out to 2017 and 2018 and just trying to get a sense of your ability to grow earnings faster than revenue. And then secondly on the tax rate, any -- or just how important is addressing that in 2016, any changes on how you’re viewing that? Thank you.

Fred Wilkinson

I’ll do the tax and that’ll put a bur in Bryan a little bit. Obviously we’re constantly working on tax structure. We’re the proud owner of over 36% tax rate, one of the few still left out here with that and really need to do some things to adjust that. There are programs in place that will nominally move tax rates down, nothing that fundamentally does, unless there’s a transaction that has an inversion element to it. And we are still evaluating that opportunity, still think that there’s a chance to do that during 2016. As far as looking at the structure, we are constantly evaluating our structure. I think we’ve probably done -- completed two or three restructuring programs, since I arrived; most of them were aimed at gaining efficiency in R&D and in some of the operational areas. But 2016 will be a year where we need to look at our supply chain and our supply chain and manage ourselves a little bit more efficiently in that area while still staying very, very focused on the investments that we’re making in the quality side.

As you know, we want to make sure that we’ve got ourselves on the right side of the ledger; we’re going to stay there. So., I think you will see some evolution to structure but I don’t think it’d be dramatic.


Your next question comes from the line of Tim Chiang with BTIG.

Tim Chiang

Hi Fred, I had a question on Adderall XR. Do you need to get additional DEA quota to increase your share back to let’s say 10-12% or do you have enough DEA quota to get yourself there without requesting more?

Fred Wilkinson

Quota is not rate limiting step for us. We are living off of the ability to supply in the market share as we have in the past as far as our ordering of -- request for our quota. We don’t see that as a rate limiting step at all.

Tim Chiang

And then just one follow-up on some of the more sizeable opportunities like Renvela and Welchol, you do have target action dates for these two products?

Fred Wilkinson

We do.

Tim Chiang

And I guess I know that you guys excluded those two product opportunities from your guidance. And certainly I look at consensus and consensus is north of $2. How do you think we as analysts should sort of gauge the profitability that you could have success or getting approved on one of those two products here?

Fred Wilkinson

Well, I mean I think the reason you give guidance is this is the view that the company has right now. I think to step outside that and say probability at Adderall or Welchol and Renvela just doesn’t fit into that same process. So, you’ve seen other people give some greater color on both of those products and you’ve also seen the agency make multiple requests on both of those products. For years, this Company has been saying that this is a -- both of these are very, very difficult products and it’s proving to beat true. We have also -- I think in our mind proven the ability to get approval on very difficult products, so as Adderall XR being one of those and several others that we put in the marketplaces last year. So, we are confident in our capability and our ability to bring them. We are confident in our file based on what the agency has requested to-date and we are confident enough that we are starting the manufacturing process; whether that lands in ‘16 or ‘17, you are going to have to make your own call.


Your next question comes from the line Shibani Malhotra with Nomura Securities.

Austin Nelson

Hi, this is Austin Nelson on for Shibani. Thanks for taking my question and congratulations on the quarter. Really just wanted to go back to some of the comments you made about business development. And your private market values may not necessary reflect what’s going on in the public to date, including despite a lot of positive news that’s happened to you, in past years as well. So, wondering willingness to use Impax stock to do a larger deal perhaps in the public market or from a divestiture as opposed to another private market deal outside of an inversion transaction which would require stock?

Fred Wilkinson

So, we have been not been nervous about using stock, obviously the ability to evaluate inversion will require stock. So, we have been well schooled on the opportunities and the issues related to using stock in a transaction. Right now, we do feel like we have got the capacity to be able to go do this with a reasonably simple debt deal. But we’ve explored things that would exceed that opportunity and are not nervous at all about using shares. Again, if the right deal came along with a right accretive position to it and the right long term growth parameters established themselves. It’s a time actually that I think everybody is doing it is to be cautious, judicious and stick with the strategy and that’s really the way we expect the business development.


And at this time, I’ll turn the call over to Mark Donohue for closing remarks.

Mark Donohue

Thank you very much everyone for joining us this morning. If you have any follow-up questions, Investor Relations is available all day to take your calls. Thank you again. Speak to you soon.


Thank you. That does conclude today’s conference call. You may now disconnect.

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