Teligent's (TLGT) CEO Jason Grenfell-Gardner on Q4 2015 Results - Earnings Call Transcript

| About: Teligent, Inc. (TLGT)

Teligent Incorporated (NASDAQ:TLGT)

Q4 2015 Earnings Conference Call

March 09, 2016 04:30 PM ET

Executives

Jason Grenfell-Gardner - President and CEO

Jenniffer Collins - CFO

Analysts

Scott Henry - ROTH Capital Markets

Dillon Hoover - Craig Hallum

Rohit Vanjani - Oppenheimer

Greg Fraser - Deutsche Bank

Donald Ellis - JMP Securities

Operator

Good afternoon, and welcome to the Teligent Inc. Fourth Quarter and Yearend 2015 Results Conference Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded.

Except for historical facts, the statements in this presentation as well as oral statements and other written statements made or to be made by Teligent Inc. are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. For example, statements about the Company's anticipated growth and future operations, the current or expected market size for its products, the success of current or future product offerings, the research and development efforts, and the Company's ability to file for and obtain U.S. Food and Drug Administration approvals for future products are forward-looking statements.

Forward-looking statements are merely the Company's current predictions of future events. The statements are inherently uncertain and actual results could differ materially from the statements made herein. There is no assurance that the Company will achieve the sales levels that will make its operations profitable or that FDA filings and approvals will be completed and obtained as anticipated.

For a description of additional risks and uncertainties, please refer to the Company's filings with the Securities and Exchange Commission, including its latest Annual Report on Form 10-K and its latest Quarterly Report on Form 10-Q. The Company assumes no obligation to update its forward-looking statements to reflect new information and developments.

I would now like to turn the conference call over to Jason Grenfell-Gardner, President and CEO. Sir, please go ahead.

Jason Grenfell-Gardner

Thank you, Jamie and good afternoon ladies and gentlemen. Welcome to the Teligent business update covering the fourth quarter and full year of 2015. I'm Jason Grenfell-Gardner the President and CEO of Teligent and I'm joined today by Jenniffer Collins our Chief Financial Officer. Thank you for joining us today.

What an amazing year 2015 has been for Teligent, a year that we described at the beginning as one of building our foundation. Today I'd like to discuss some of the key elements of the solid foundation as we built in 2015 and give you an update on our future strategy. Then Jennifer will review the financial results for the fourth quarter of 2015, finally I’d like to share with you our expectations for 2016.

As we set out to continue to build the foundations of our business in 2015 we have outlined some key priorities, drive revenue growth, invest in R&D and maintaining profitability. While the early turbulence that we saw in the year could have knocked us off track, the team did an amazing job of managing the challenges in the market and delivering on our strategy. We finished 2015 with revenue up over 31% to 44.25 million notching up just over 13 million in the fourth quarter alone, we also maintained gross margin relatively stable at 48% for the year despite channel charges and step up in inventory related to our acquisitions. We scaled R&D as our business evolved throughout the year hitting our target of 30% of revenues invested in R&D and even after investing $13 million in R&D we still delivered a positive adjusted EBITDA of $2.7 million.

To my mind these results are evidence of the incredible team that we have here at Teligent, a team squarely focused on execution. In the last quarter through this execution we made significant strides in improving the diversification of the business and delivering on our strategic priorities. First we acquired our Canadian injectable platform Alveda Pharma which provides Teligent an exciting launch-pad for a broader injectable strategy. We also acquired the injectable assets in the U.S. of Concordia Pharmaceuticals related to the branded generic prototypes, Fortaz, Zinacef and Zantac. Finally we added some great talent. We welcomed our new CSO Steve Richardson, our General Manager for Canada Mike Bethell and in the past few weeks our General Manager for Estonia Anneli Simm.

In December we were pleased to announce the FDA approval of our supplemental NDA for cefotetan injection. This was the first of the AstraZeneca products that we acquired that we brought back into active regulatory status and which will be launched in the United States market this month. For those of you who are more familiar with the FDA what our team was able to do with this product was incredible bringing a product on drug shortage back to life in 13 months. We also made great strides in our physical plant development finalizing planning permission and approval for the expansion of our facility in South Jersey. As we broke ground earlier this year on the first stage of the demolition and renovation we see the tangible results of a year's worth of planning to ensure that we can execute on our pipeline.

Over the course of 2016 we anticipate significant progress towards plant completion in 2017. Finally at the end of October we made a couple of major changes, first we retired our previous name and became Teligent. This new look and feel is reflective of the organization that we've become over the past few years and embodies our hope and enthusiasm about the future and the people who are building it. We also changed our listing venue to NASDAQ in October which was a great day for the entire team.

So let me now turn to our TICO strategy and give you an update on the progress we have made starting with our topical business. In Q4, we filed six ANDAs and as of today we have 31 ANDAs on file with the FDA with a total addressable market of $1.4 billion per IMS Health Data as of January 2016. We've seen remarkable with the review of our pending applications over the course of the past year and have built an organization internally that is capable of responding in a timely manner to the FDA as it applies its GDUFA commitments.

As many of you know last month this resulted in our first GDUFA Year 3 approval precisely on its GDUFA goal date in a successful first cycle review. I have to say that for me this is again evidence of the quality of the team and the efforts they have put into ensuring the Teligent is delivering on its pipeline. We believe GDUFA is working and we believe that Teligent is well positioned to benefit from its implementation. Of our 31 pending ANDAs 18 are GDUFA Year 3 or 4 applications representing 74% of the value of the total addressable market, we have received action dates or GDUFA goal dates for all of our applications and we have a further 15 action or goal dates remaining in 2016. We continue to invest in this topical pipeline and anticipate maintaining our cadence of submissions in 2016.

On the injectable front, we're incredibly excited about this year. The Concordia products that we acquired in 2015 allowed us to jumpstart the commercial channels required for our future injectable pipeline drugs, including the CEFOTAN launch this month, but we're also eager to grow our pipeline in Canada. Drug shortages which has impacted the U.S. market have had similar and sometimes more severe impacts in the Canadian market. We look forward to working with our manufacturing partners to add incremental submissions to our Canadian pipeline to do our part to help alleviate some of these challenges in the market and to provide a reliable source of supply.

We are also continuing to work through the opportunities in the AZ portfolio with further submissions anticipated in 2016 to support these products, while we scale back some of this re-launch work in 2015 as a result of the rate of the underlying growth in our business, we believe we have prioritized the stronger parts of the portfolio for action and will retain some of these products for re-launch from the Teligent injectable site went online in 2017. Finally, our internal development program for injectables has started and we're looking forward to getting some of these additional products on stability in 2016.

Although topical injectables will be the core of our 2016 execution plan, we're still moving forward with our projects in the complex and ophthalmic side and continue to anticipate submitting our first ophthalmic supplements towards the middle of this year. As ever there's a lot going on in Teligent, we have diversified our business over the past year, increased our injectable capabilities, delivered on our R&D submissions and approvals and have built the foundation for the amazing growth that we see coming. That's why for us 2016 is the year where we're ready for launch.

But before I set out the specific objectives for the year to come, let me turn the call over Jenniffer to discuss the numbers for the fourth quarter of 2015, Jenniffer?

Jenniffer Collins

Thanks, Jason. Good afternoon everyone, and again thanks for joining us today. Our total revenue in the fourth quarter of 2015 was 13.1 million, an increase of 13% over the third quarter of 2015 and a decline of 5% as compared to the same quarter last year. Revenue for the fourth quarter of ’15 included 8.1 million of net revenues from the sale of our own products, compared to 10.5 million in the same period last year. Revenue from Econazole represented 29% of our total revenue in the fourth quarter, compared to 62% in the same quarter last year. The decline in overall revenue was attributed to those volume and price declines in the Econazole Nitrate Cream compared to last year.

As we discussed on the third quarter call back in October, our total revenue in the third quarter of ’15 was higher than originally anticipated due to higher than expected volumes for this product with one customer during that quarter. And you’ll remember we had indicated in October that we have seen that trend return to our expected levels for that customer in early October. We've also said that there was a forth company with an approval for Econazole and we did see some additional pricing pressure at the end of fourth quarter on the same product which we believe was created by the new competition. We have however been able to maintain our market share.

This pricing pressure caused our charge backs, rebates and other allowances to increase as a percentage of gross revenue as compared to the third quarter of this year. We believe we may see additional pricing pressure on this product from additional competition in 2016. As always we'll continue monitor our existing and future markets to understand any changes in the competitive environment.

Product sales from our contract services business was 4.8 million in Q4 of ’15 compared to 3.1 million in the same quarter last year and 2.7 million in the third quarter of this year. We were fortunate enough to secure orders from two new customers in the fourth quarter of 2015 while we did see orders from these customers continue in the first quarter of ’16 it is quite possible we will not see those trends continue throughout ’16. These orders are high margin contract customers and helped to offset some of the pricing pressure I discussed earlier.

Contract manufacturing and formulation services revenues from our pharmaceutical customers represented 91% of fourth quarter revenue as compared to 79% in Q4 last year. Sales of OTC and cosmetic products were 9% in the fourth quarter of ’15 compared to 21% last year. As we’ve discussed our contract manufacturing businesses make the order, there may be some variability in our percentage of contract sales that come from pharmaceutical customers quarter-to-quarter. However, we’ve been very successful in driving year-over-year transition to increase the number of pharmaceutical customers in our customer base.

Now let me turn to gross margin. Gross margin in the fourth quarter was 45% compared to 61% in the same quarter last year. The margin decline over last year was a direct result of the changes in revenue, I discussed earlier caused by pricing increases for Econazole September 2014 and compared to price declines throughout 2015 for the same product. As we’ve talked about in the past, our strategy is to build a diversified portfolio of Teligent products in the U.S. and now Canada as well, so that we’re able to compete in favorable trends on all individual products. Our diversified portfolio will protect us from the dependence on one or two products in the future.

We’ve started this already. For example, in the fourth quarter of 2015, sales of injectable products represented 15% of total revenue as compared to 0 in the third quarter of 2015. We expect to continue to demonstrate this strategy in 2016 as we launch more Teligent products. As part of the accounting for the Alveda purchase based on the value of the inventory we acquired we recorded a step up in inventory on the acquisition date. Our fourth quarter results included 318,000 of the write off of the inventory step up which is included in cost of goods. At December 31, 2015, there was another $0.5 million remaining in the inventory step up that will be included in cost of goods sold in 2016. This will have temporary impacts on margins in the fourth quarter of ’15 and the first quarter of ’16 for our Canadian products.

SG&A in the fourth quarter of ’15 was 4.9 million. This included 2.3 million of acquisition costs related to our purchase of Alveda Pharmaceuticals in November of 2015. SG&A not including acquisition costs as a percentage of sales in the fourth quarter of ’15 was 20% compared to 14% in the same quarter last year. SG&A expenses as a percentage of revenue declined in the fourth quarter of ’15 compared to 21% in the third quarter of ’15.

We do plan to make additional investments in the corporate services group that will support the growth of our business in 2016 and beyond. And we expect SG&A as a percentage of revenue to be flat to down depending on the range of revenue in 2016. Consistent with our TICO strategy and our dedication to building a foundation to extend our product portfolio, we continued to significantly invest in R&D last year. We invested 3.9 million in the fourth quarter alone as compared to 1.9 million of R&D in the same quarter last year.

We filed 15 ANDAs in 2015 compared to 11 last year. We expect to file at least 15 ANDAs in 2016 in the U.S. and eight more abbreviated new drug submissions in Canada. As Jason talked about our strategy is built upon our ability to outpace the industry in building a robust pipeline through high quality submissions and thoughtful and timely responses to the regulatory agencies. We will continue to increase our R&D spending in 2016 as compared to ’15 as we focus on expanding our portfolio of generic topical pharmaceutical products added to the 31 submissions we have on file in the U.S. today and the four in Canada.

As Jason discussed at the end of ’15, we received our first approval of one of our injectable products. In 2016, we expect to be working on our first organic injectable submissions by the end of the year; and therefore, total R&D in ’16 will be between 28% to 32% of total revenue. We understand it is time for our industry but based on the opportunities we see in our core markets as well as the increased case of responses from the FDA, we think it's necessary to continue to make these investments quickly as possible.

For the year-ended December 31, 2015, net cash used in operations was 15.5 million which included 13.2 million of R&D expenses. In November of 2015 in connection with the closing of our purchase of Alveda Pharmaceuticals, we paid $5 million related to a tax filing in Canada that we expect to be fully refunded in the first half of ’16. Also related to the acquisition and inclusion in our SG&A costs in the fourth quarter of ’15, we paid approximately $2.3 million including fees to our investment banks and other professional services.

We paid interest related to our convertible debt offering in the amounts of 5.5 million. We also paid 6 million in the third quarter relating to our commitments under our contract with AstraZeneca after the first regulatory filing with the FDA related to the portfolio of injectable and as in ANDAs we purchased for them in ’14. And finally we purchased approximately 1.3 million in inventory in connection with our acquisition of the three injectable products from Concordia which enabled us to sell products into the market immediately.

For the year ended December 31, 2015 cash used in investing activities was 53.1 million primarily related to 35.4 million we paid in considerations of the purchase of the Alveda assets. We paid 10.1 million in cash for the three products from Concordia in October of 2015 in addition to approximately another 1.3 of the inventory I spoke of earlier. We also paid 6 million in capital expenditures which included the upgrade of equipment used in our topical manufacturing operations and costs related to the design of initial phases of our planned site expansion which included the purchase in August of 2015 of the adjacent building to our facility which we have been leasing prior to that.

Renovation of this building began in the first quarter of this year. What we refer to as 101 Lincoln will be the new home of our expanding Teligent product development team and will bring our growing topical and sterile formulation, analytical development and regulatory teams together, as well as our supply chain and logistics and administration team members. We are far along in the design process for the expansion of our existing topical manufacturing plant to include the start of our injectable manufacturing and R&D capabilities where initially we will have the capacity to manufacture close to 4 million vials per year.

We have submitted the order for the long lead time equipment in 2015, and some of this equipment including the isolators and filling lines will take over a year before it will be ready for installation. We expect the final budget for the facility expansion including necessary equipment and controls for sterile manufacturing to be close to 45 million. And we'll continue to update you on our progress on this front throughout 2016. As you've heard from Jason we hope to have this expansion completed before the end of 2017.

In the fourth quarter of 2015 we recorded net loss of 6.4 million compared to net income of 5.6 million in the same quarter last year. The decline in net income compared to last year includes a few components. As you may recall we issued 143 million, 3.75% convertible senior notes in December of 2014. Our net income in the fourth quarter of '14 included a non-cash gain of 2.3 million relating to the accounting of the mark to market of a derivative liability. Due to the timing of the debt issuance interest expense in the fourth quarter of '15 was 3.1 million higher than the fourth quarter of '14. The net loss in the fourth quarter of 2015 included the 2.3 million of acquisition cost I spoke of earlier. And finally we increased R&D spend by 2 million compared to last year to support our strategic growth. The remaining decrease in net income resulted from favourable pricing in the fourth quarter of 2014 and the pricing pressure we saw in the fourth quarter of 2015 I spoke about earlier.

Our financial guidance for operating income for next year is between 1 million and 2 million which is after we spend 28% to 32% of our top line on R&D. In relations to derivative liability we recorded a non-cash gain for the full year of 23.1 million we're no longer required to mark to market this liability it's now a part of equity and we'll only record the future amortization of the original issuer-discount. This OID amounted to 37 million at the end of the year our net income in '15 has been reduced by 6.7 million as a result of the amortization of this discount. The remaining liability will continues to be amortized over the five year term of the note. We believe it's helpful for investors to review our adjusted EBITDA earnings before interest, taxes and depreciation and amortization as well as adjusted net income. We've included non-GAAP disclosures in our press release. As to how we calculate EBITDA, adjusted EBITDA and adjusted net income, we'll continue to provide this information as long as we determine it will be helpful for investors to monitor the operations of our business.

Our adjusted EBITDA in the fourth quarter of 2015 was 900,000 which was after our R&D spend of 3.9 in the quarter. Jason and I have dedicated a lot of time to the investment committee and we will continue to do so. Jason was able to meet with investors last week at the Deutsche Bank Healthcare Conference out in Denver and we look forward to seeing some of you when we present at the ROTH Capital Conference next week. Our presentation will be webcast at teligent.com for those of you unable to attend it. Jason and I are grateful for your participation today and look forward to updating you soon, and hopefully seeing you at the upcoming conference.

I'll now turn the call back to Jason for his closing remarks.

Jason Grenfell-Gardner

Thanks Jenniffer. As you just heard Teligent delivered a strong quarter and fantastic growth in 2015. As we look ahead we know that we have a great development team, an amazing regulatory group and a fantastic organization across geographies. Ladies and gentlemen at Teligent we are ready to launch. So let me breakdown what this means for 2016, as Jenniffer said first we anticipate growing our revenues between $60 million and $70 million. That represents fundamental growth of between 35% and 57% compared to 2015, with a significantly more diversified business. Our pipeline execution, approvals and product launches should help us achieve sequential growth in our business as long as FDA productivity under the GDUFA continues.

Second while growing revenue we will expand gross margins between 400 and 700 basis points to between 52% and 55% for the full year 2016. Third because we believe in the GDUFA and in the timely rate of review at Health Canada, we will continue to invest between 28% and 32% of our revenue in R&D to allow us to support 15 filings in the U.S. pipeline and 8 ANDAs in Canada as well as to support our work with CMOs for the AstraZeneca portfolio and the work on the complex ophthalmic products.

Finally although we're making these significant investments in R&D we will still generate positive operating income at, at least $1 million to $2 million for the year. We're focused on executing the entire plan to achieve these launch year results, launching new products, delivering strong growth and maintaining and improving profitability.

With that let me pause here and open this up for some questions. Jamie?

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Scott Henry from ROTH Capital. Please go ahead with your question.

Scott Henry

I guess starting with Econazole Nitrate looks like it was about 3.8 million in the quarter, how do you feel about that number going forward into 2016, just trying to get a sense of that number and how representative is it with the new environment?

Jenniffer Collins

I think as I mentioned on the call in Q4 we continued to see some additional pricing pressure on that product. I think as that -- as we have talked about in the past Sandoz who always had approval in this product and it looks like they're going to be coming back to market in 2016. So we have anticipated in 2016 for us that that would continue to have a little pressure on price as well as potentially we have to give us some volumes to them in 2016 at some point, so then the combination of those things would you are just going to be have Econazole for us down again in 2016. Thanks.

Scott Henry

But on a tone it was a representative quarter meaning there wasn't any different change in order patterns so 3.8 million would be the base to have that decline on?

Jenniffer Collins

There was no change than ordering patterns we did have changes in prices so our market share remains relatively steady in terms of volume in Q4.

Scott Henry

Okay. And a couple just quick technical questions, first the shares outstanding 53 million now will that jump up on profitability or is the debt being treated differently now based on the share price just if you could give me an update on the accounting treatment that goes into the shares outstanding?

Jenniffer Collins

Yes, the 53 million is the actual shares, basic shares outstanding, the 67 million is still the same number it is roughly the same number for the fully diluted as converted shares. So when you have a lost position you're still using basic and you're still using the basic shares so as we go into 2016 we will go back to that calculation with the 67 million and the GAAP calculation for fully diluted.

Scott Henry

And then the definition of operating income of 1 million to 2 million is that effectively your adjusted cash net income that -- how you are defining operating income?

Jenniffer Collins

We're defining operating income actually on the P&L statement where it stayed so after it caused SG&S and R&D.

Scott Henry

Okay good to have as far as operating profit, is what we got okay that's helpful. Jason, you mentioned 15 action or goal dates in 2016, I don’t know are those all under the new GDUFA rules and I don’t know if you could just give me a little color on how I should think of the difference between an action or a goal date and kind of the spacing of those throughout the year?

Jason Grenfell-Gardner

Yes. Sure, so of the 15 that is there I would say six of these are post GDUFA Year 3 GDUFA goal dates and balance are pre GDUFA year 3 target action dates. As we think about the difference between these two things, we think about GDUFA goal dates really being best efforts to try to get something approved on that data and so we've seen in our interactions with the FDA the really some quick cycles of information requests these are directable deficiencies and a very responsive organization to try to hit those dates.

As we look at the target action dates, it's a little bit more removal feast, I would say that Rasulo gave in an update at the Generic Pharmaceutical Manufacturers Association Meeting a couple of weeks ago that presentation is available on the FDA's Web site but it seems that we're starting to get a little bit more specificity around what will happen as a result of an action on the target action date so if it is resulting in a major or minor deficiency, what that would mean to approval dates and how those would shift out overtime, so that's becoming a little bit clear. But as the target action dates are still a little bit less firm or less reliable in terms of trying to really get them to approval compared to a goal date. The number I gave you in terms of the balance of 74% of our total addressable market being post GDUFA Year 3 and beyond is pre-representative actually of the value of those 15 dates that we see in our 2016 pipeline as well.

Scott Henry

Final question if I could, Cefotetan, how we should think about as far as revenue contribution in 2016, I don't know how just trying to get an idea of what size product that could be?

Jason Grenfell-Gardner

Yes, I think we're all trying to get to the same point, I mean we're launching that product evidently I mean the product is now here in the United States and just going through the release process. The product has been in short supply and hasn't been really available so there has been a bit of therapeutic switching and changing going on at the pharmacy level. It will be sometime to regenerate market awareness, of the availability of the product. So, I think it's too early for us to be able to say for something that’s been in such a disruptive chain of supply to give you a firm steer on that, but it's getting into market and see how some of the early numbers look like and perhaps as we have the first quarter call here coming out relatively soon, we can revisit that together.

Operator

Our next question comes from Matt Hewitt from Craig Hallum. Please go ahead with your question.

Dillon Hoover

This is actually Dillon on for Matt. Congrats on the nice finish to the year guys.

Jason Grenfell-Gardner

Thanks Dillon.

Dillon Hoover

You’re welcome. So quickly last quarter Jason you had spoken to $130 million annual revenue run rate if all GDUFA year three applications were approved. I didn’t hear that in your prepared remarks. Has there been a change in the market dynamics, or can you reiterate that?

Jason Grenfell-Gardner

No, I think that we’re still on track for having the potential to accelerate really well out of 2016. The revenue guidance that we gave this year to us is relatively broad but it's relatively broad because of the potential that’s in our pipeline. We’ve had two approvals here in the past six weeks, three if you count the action and over the past two months if you count the action of Cefotetan. So we are starting to feel a little bit better that things are starting to accelerate. But that’s still a bit of early days. So we feel positive about that. I will again remind people that that $130 million number also included value from the paragraph four filing on 10-K and that is still something that’s being litigated by all the people or filers with the exception of those who have said it’ll depend horizon. So it's unlikely that that in itself would come out of the 2016 into ’17 pipeline. But the rest of it is still there and the value still looks pretty solid.

Dillon Hoover

And then sticking with the 2016 guidance, revenue guidance, in the past you guys have guided at least a moderate amount or minor amount to unapproved products. Is that the case for 2016? And can you guys give us a sense for the magnitude?

Jason Grenfell-Gardner

Yes, I mean, and I think that in terms of the magnitude is essentially the breadth of the range. I mean on the low end we’re executing what we have in hand, we’re executing the three product launches that we have right now, and trying to do them well on the upper end of the range really you’ve got the approvals coming through across the product. So I mean I think that’s what makes up our revenue range.

Dillon Hoover

And then really the technicality the four withdrawn applications in 2015, do the 15 planned in 2016? Is that inclusive of those four?

Jason Grenfell-Gardner

No.

Dillon Hoover

It is not?

Jason Grenfell-Gardner

We won’t recount them now.

Dillon Hoover

Okay. And can you guys give us an update with respect to those filings? Or, I mean is it essentially the goal line, or is there a lot of leg work that’s supposed to be done?

Jason Grenfell-Gardner

There is still work to be done and we have still got to do some stability work, update the submission of the filings. But they’re sort of being prioritized together with everything else that’s in the pipeline as we allocate resources, so still working through them.

Dillon Hoover

And then lastly from me, Jason, if we could hear your thoughts on the number of CRLs that the FDA has been handing out with GDUFA year three applications? It looks like you guys were one of the very few to get that through on the first half, to get an approval on the first half. But the level of CRLs, it seems like it's a lot-lot higher than we were initially expecting. Just curious on your commentary and what the FDA is trying to do there?

Jason Grenfell-Gardner

I am not sure it's the FDA I think it -- in talking to our peers. I think it's actually industry. So, part of the challenge of GDUFA is being able to respond to the FDA’s requests in a timely manner. And think about this starting from October of this year GDUFA year five perceives a 10 year review cycle. And in order to hit that, the FDA needs industry to do its job. I mean, number one, filling the submissions and what we heard a couple of weeks ago is that industry is averaging a 30% refuse to receive rate which is just phenomenal. It's not something that would ever be acceptable I think in our organization to imagine that the 30% of our applications would be refused to be received.

Second, you’re seeing industry not necessarily able and not dedicating the resources to be able to respond within 30 days of information request or within seven days to an easily correctable deficiency. And I get it, I mean a lot of people are supporting broader installed pipelines and uninstalled products and people have disinvested in their R&D capabilities while the FDA was being less productive. But these times have changed. And the ability to respond quickly, completely, and accurately to the FDA’s request and at the same time repair and quality submissions at the beginning we believe that's what drives success so we are pretty excited for where we are positioned with respect to GDUFA moving forward.

Operator

Our next question comes from Rohit Vanjani from Oppenheimer. Please go ahead with your question.

Rohit Vanjani

Just on the guidance for 2016 and kind of looking over consensus and where you kind of fell out what would you think was the departure was it if you believe your aggressive on the pipeline or does the things changed on your end in terms of your expectations going forward?

Jason Grenfell-Gardner

So good question so first let’s level that you are having we have never given 2016 guidance. This is the first time we've given 2016 guidance and so while analysts of course have to forward forecast some of those were perhaps a bit of optimistic then what the reality was that we were executing and let's talk about that reality I mean first as Jenniffer alluded to I mean we've seen this erosion in the Econazole market that certainly has an impact in baseline revenue for 2016. We more than make that up through the product launches and the work that we are doing on the topical side and of course then we layer into this the injectable products that we have the injectable launches and the Canadian business.

As we saw that turbulence in 2015 related to Econazole pricing we consciously made the choice to trial the rate of our investment in the AZ portfolio because working with those CMOs is devilishly expensive. And while you were generating significant greater margins with some parts of the portfolio earlier as that dynamic started to change we had to be a bit more cautious about how aggressively we were going to be with that portfolio. I think some of the numbers that people have are looking at 2016 included more coming out of that portfolio than was able to be delivered as a result of that strategic choice, so that is what drives for us 2016 and we were excited about diversity of the business we’re excited about what's coming out in terms of launch and we think it's a stronger business than we were a year ago.

Rohit Vanjani

And then from the remaining AstraZeneca injectable I think only Tobramycin sulphate a multi vitamin are the ones left that are drug shortage products I mean first I was wondering if you can confirm that and secondly is that true is there a timeline on when those products might get out is that a 2016 event?

Jason Grenfell-Gardner

We don’t really talk about the individual products in that portfolio but certainly we prioritize them based on what we think has the best chance to review as well as the economic value that we can get out of them so we will do our diligence to make sure that we get the right ones out as quickly as we can.

Rohit Vanjani

And I guess do you anticipate more AstraZeneca products coming out in 2016 then, just broadly?

Jason Grenfell-Gardner

I think what we've seen in terms of our diligence is and as we've gone through I mean I think we've if I am not mistaken five active CMO projects ongoing to support that portfolio as well as the valium products that we acquired. There are some really interesting dynamics around that I mean we've got different product types you've got squaring liquids things that are ancillary we have got things that are currently sterilized things that are sceptic you've got peptides, you've got high potency products, you've got vitamins and the obliged products so it's required a multiplicity of skills to be able to actually manufacture these and so we've been building those our relationships with the CMOs over the course of the past year as we've been working through the pipeline.

The second challenge in some of these is really around the quality of the sources of API and sometimes those API sources haven’t been the caliber that we want them and in a couple of cases we are actually working with third parties to potentially sensitize new APIs so there is a number of different challenges I guess one of the last points whether to raise in this is what I mentioned about the expense. When you look at some of these products and they can be great products and I think that they are as a portfolio they are interesting and necessarily, but as we work with the CMOs that we have identified and we think about the quality of what we want from our suppliers some of these the site transfers will really only make sense when we’re able to do them in house and that's the balance that we are planning.

So as I think about 2016 what I'm most concerned about is let's get to few more of these anti-veil get them on stability and that is happening given them to the FDA and in some cases the prioritized products are going to be new submissions as opposed to CB-30 the prior supplements it just won't make sense economically but we will do the right thing to get the right value back as quickly as we can.

Rohit Vanjani

And when you submit those are these subject to a 12 month's timeline then right?

Jason Grenfell-Gardner

If they are submitted in GDUFA year five they would be subject to a 10 month timeline.

Rohit Vanjani

10 month okay, so then you still have a kind of well I guess you are going back and forth on when you are going to submit them. And then the Alveda products, is there any update on moving those products to the U.S.?

Jason Grenfell-Gardner

And the Alveda strategy wasn’t really about moving the Alveda products to the U.S. it was maybe using some of our U.S. products eventually in Canada and we are working with some of those suppliers to look at some opportunities for future U.S. products but it's not really driving candidates to U.S. it's really the other way around.

Rohit Vanjani

And then you mentioned the 15 action dates for 2016, I think you've got six pre-GDUFA Year 3, I know that have been sitting at the FDA for 36 months or longer and you've got three post GDUFA Year 3 and that have been at the agency for 15 months within that target date, sorry the action date, are those nine that have been sitting there for 36 months or 15 months part of the 15 and for the post GDUFA Year 3 ones that ones that have been sitting for 15, have you've gotten a goal date for those?

Jason Grenfell-Gardner

So we have goal dates and target actions dates for all of our products that are at the FDA. In terms of the census things that have been there for more than 36 months, there are a few of those where the target action dates are certainly in 2016, I haven't compared them in my charts to when they were originally submitted. But I think you actually conventionally raised a really interesting point which is that this concept to the NDA aging and particularly for the pre-GDUFA Year 3 applications, I think is longer relevant. We have things that have been at the FDA for let's say 10 months prior to the GDUFA Year 3 that are moving more quickly than things that have been at the FDA for longer. That doesn't seem to be the driver anymore and trying to looking to be the driver of where in Q doesn't seem to be the driver of approval, and so I caution as you look at this industry and not just our portfolio, those pre-GDUFA Year 3 files age really isn't the defining characteristics it's the quality of the file, the deficiencies of the information responses that you are getting and your ability to respond to them.

In the post GDUDF Year 3 applications there are a couple that are going to hit their 15 year date where I know that we're not going to hit them and that’s simply because they're relying on an API supplier that requires inspection which is fine. But I think everything else that we've done is timely, but the balance of them I think we feel that we're moving them forward pretty well. Ultimately it is going to take them until we get to that goal date sometimes to know how successful you've been, but as we get more mature we'll continue update you.

Rohit Vanjani

And then the last one for me is the Medicaid, rebate of the Medicaid CPI penalty, will that impact your revenues at all in 2016?

Jason Grenfell-Gardner

So we look at that as I was proposed in the Bipartisan Budget Act and we looked at the overall impact it would have to our business. Frankly the larger impact of that would have come from a product like Econazole because of Econazole pricing is dynamic. Its impact to us is relatively minor and de minimis.

Operator

Our next question comes from Greg Fraser of Deutsche Bank. Please go ahead with your question.

Greg Fraser

Thanks, this is Greg Fraser for Gregg Gilbert. Good afternoon folks. Can you give us a sense of how much of the 60 million to 70 million revenue target is product sales versus contract manufacturing revenue? Can you also help us understand roughly how much revenue contribution you factored into the guidance range from new launches?

Jenniffer Collins

So the reason we've established this 60 million to 70 million is really that's the range in terms of what we think we can do with future approvals in the portfolio, so the low end of the range is intended to be our execution of what we have on hand including like Jason referred to earlier the three approvals that we have and products that we plan to launch in the next couple of months. So that would get us to the low end of the range assuming that we execute well in that piece of the business. The upside to that low end of the range is based on kind of how many approvals and when, a lot of the approvals are in the back half of the year, so on a run rate basis you're only going to get a few months of revenue for some of those approvals that we have and kind of get you from that 60 million to 70 million, but that's how we tend to look at the business.

I think I talked a little bit on the call about two contract manufacturer customers that we had in the fourth quarter of ’15 that we had orders from it is pretty high margin business that we have seen continue in the first quarter. So while that will help to increase contract manufacturing revenue slightly over 2015 and 2016, we're not anticipating that trend with those two customers would continue throughout the year, so while Q1 is going to be probably high as in historical reach for contract manufacturing that's not a trend that you should expect for the rest of the year after we report the first quarter.

Greg Fraser

Okay. This sounds like full year, full year contract services sales could be a bit higher than 2015?

Jenniffer Collins

I think that's correct.

Greg Fraser

Okay. On gross margin, is the 52% to 55% target is that on an adjusted basis excluding I guess amortization and the other, the remaining inventory step up that you mentioned or is it a GAAP range?

Jenniffer Collins

No that's the GAAP number, the remaining step up for albeit is going about $500,000 so while it has some impact it should be short-term in nature and hopefully it will be done before the end of the first quarter.

Greg Fraser

And intangible amortization is that part of the cost?

Jenniffer Collins

It is not.

Greg Fraser

Okay that's already spate. Are there any important factors to consider as we think about revenue and expenses sort of quarter-to-quarter you mentioned launches are going to be more back half weighted, but if any other things to keep in mind as we think about how you’ll be spending during the year?

Jenniffer Collins

On the expense side?

Greg Fraser

Yes.

Jenniffer Collins

I think on the R&D section you’d see that in the first half of the year we’ll spend more than in the back half because some of those when you talk about 15 filings for this year getting some of this outside testing done and all the things that need to be required and a lot of these have -- they were prescription studies for 2016 so that will increase R&D cost in the first-half of the year as compared to last half of the year if you are trying to put that number on a quarterly scale.

Greg Fraser

Okay.

Jenniffer Collins

Everything else there is not too much I can think of that would change anything else on a quarter-over-quarter basis. Cost is always going to be a little bit dependent on product mix so depending on the things that we talked about that’s really going to be the only driver there. SG&A costs should be relatively consistent as we go out through the year growing into the back half of the year and actually dollars but not as a percentage of revenue.

Greg Fraser

And last question, can you just give us an update on your NOLs and when you’d expect to start paying taxes?

Jenniffer Collins

So, in 2016 on a pro forma basis we, in the U.S. just because of the interest, we would still -- we still would not be paying taxes in 2016 in the U.S. So after 2016 it is kind of is depending on how quickly you ramp-up revenue. I mean you would anticipate that if you continue to do that then you would be coming in a taxing position in 2017 as you are eyes on ’16. We will have taxes that we’ll pay in Canada but there will be much less than the historical Alveda business due to the Estonian instructions that we put in place. The Estonian entity won’t monitor and manage these all of the supply chain as well as the contract manufacturers that make those Canadian products.

Operator

[Operator Instructions] Our next question comes from Donald Ellis from JMP Securities. Please go ahead with your question.

Donald Ellis

I have one just one remaining question and that’s with respect to the sterile products manufacturing plant that you’re building. You had mentioned Jason that this should be completed around 2017. Is that completed at defined bio-graded the manufactured drug or completed as defined bio-graded for FDA inspection and certification? And then if it's the former, what kind of vial capacity you think you’d have by that time? Thanks.

Jason Grenfell-Gardner

So, I think well of course I would love to have it overnight. I think what team is telling us is that by somewhere in the second quarter of 2017, we should have everything in validated and ready to go. From that we will manufacture our first -- we’ll do our media bills and then we’ll do our first exhibit batches. And probably working through site transferring one of our NDAs that we own to trigger the inspection, so we would anticipate being able to do that at some point probably in the third to early fourth quarter of 2017 the goal to having this ready to roll by the end of 2017. That will give us 4 million vials or ampoules of capacity in that site with space remaining in build out for higher speed selling line support broader capacity but that would be a future investment in 2018 or into ’19. But for right now that’s the final we have.

Operator

And our next question is a follow up from Matt Hewitt from Craig Hallum. Please go ahead with your follow up.

Dillon Hoover

Just follow up on the previous question, the $45 million in CapEx for the expansion facility, how do you expect that to fall out between 2016 and 2017? Thanks.

Jenniffer Collins

So in 2016 and depending on the timing of the process as we’ve talked about the expansion is about 45 million in total. We spent couple of million of that in 2015 at the end of the year that project will continue into early 2017. It's going to be a little bit depended on timing. So I’d say that the majority of that spend would happen in ’16 and then the remainder in the first part of ’17. But it could be $35 million to $40 million in 2016 assuming that all goes well with the construction I’d rather spend more of it in ’16 because that means it's all on track.

Operator

Our next question is also a follow up from Rohit Vanjani from Oppenheimer. Please go ahead with your follow up.

Rohit Vanjani

Just on -- you may have said this in the press release if I missed it but for lidocaine ointment 5% in desoximetasone. Are those both launched, or are they planning to be launched in 1Q16?

Jason Grenfell-Gardner

Yes, so the lidocaine we anticipate launching here at the end of March and the desoximetasone that we will launch in the second quarter.

Operator

And ladies and gentlemen, at this time, I am showing no additional questions. I’d like to turn the conference call back over to Jason Grenfell Gardner for any closing remarks.

Jason Grenfell-Gardner

All right, thanks Jamie. 2016 it's going to be an exciting time for us at Teligent as we launch as always we set out some pretty ambitious goals, but by now I think you know that your team here at Teligent is one of the best and we're ready to go. We're looking forward to updating you on our progress throughout the year and to seeing many of you at some of these upcoming conferences. Thanks for joining us this afternoon and for your continued support. Have a great evening.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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