Amphastar Pharmaceuticals' (AMPH) Management on Q2 2016 Results - Earnings Call Transcript

| About: Amphastar (AMPH)

Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH)

Q2 2016 Results Earnings Conference Call

August 08, 2016, 05:00 PM ET

Executives

Jason Shandell - President

Bill Peters - CFO

Analysts

David Maris - Wells Fargo

David Amsellem - Piper Jaffray

Chris Wolpert - BMO Capital Markets

Serge Belanger - Needham & Company

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Amphastar Second Quarter Earnings Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time.

This conference call may contain forward-looking statements, including statements relating to Amphastar Pharmaceuticals. These statements are not historical facts, but rather based on Amphastar Pharmaceuticals’ current expectations, estimates, and projections regarding Amphastar Pharmaceuticals’ business, operations, and other similar or related factors.

Words such as may, will, could, would, should, anticipate, predict, potential, continue, expects, intends, plans, projects, believes, estimates, and other similar or related expressions are used to identify these forward-looking statements.

These statements are only predictions and as such not guarantees of future performance and they involve risks, uncertainties, and assumptions that are difficult or impossible to predict.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time-to-time in Amphastar Pharmaceuticals’ filings with the SEC.

Now, I would like to welcome and turn the call to Mr. Jason Shandell, President of Amphastar Pharmaceuticals. You may begin sir.

Jason Shandell

Thank you, operator. Good afternoon and welcome to Amphastar Pharmaceuticals’ second quarter earnings call. My name is Jason Shandell, President of Amphastar. I’m joined today with my colleague, Bill Peters, CFO of Amphastar. We appreciate you joining us on the call today and look forward to speaking with you and answering any questions you may have.

I will now turn the call over to our CFO, Bill Peters, to discuss the second quarter financials.

Bill Peters

Thank you, Jason. Sales for the second quarter increased 26% to $68 million from $53.9 million in the previous year's period. Sales of Enoxaparin declined to $17.3 million from$19.5 million due to lower average selling prices.

Unit sales of Enoxaparin continue to hold up as we maintain our market share during the second quarter. Other finished pharmaceutical product sales increased 52% to $46.2 million. This increase was primarily due to increased sales of Lidocaine, Naloxone, Epinephrine, and Phytonadione.

Naloxone sales increased to $15.6 million from $10.7 million on strong unit volume, but lower average pricing as the company increased discounting and rebates. Our Insulin API business generated sales of $4.3 million as Mankind purchased a portion of their unfulfilled 2015 commitment.

Cost of revenues decline in dollar terms to $36.3 million. More importantly, we saw a gross margin improvement to 47% of revenue from 25% of revenues in the previous year's period.

Improved pricing was the main driver for the increase in gross margin, but we have also lowered our cost of goods on Enoxaparin, which partially offset the pricing declines there. Also an increase in production levels at our French facility and at our IMS facility increased our overhead absorption.

Selling, distribution, and marketing expenses decreased slightly to $1.3 million from $1.5 million in the previous year's period. General and administrative spending decreased to $9.5 million from $11.3 million, primarily due to lower compensation expenses.

Research and development expenditures were down slightly to $10.5 million from $10.7 million in the previous year as the PDUFA fee for the intranasal Naloxone offset lower clinical trials spending. We expect an increase in clinical trial spending in the third and fourth quarter of this year.

The company reported another profitable quarter with net income of $6.9 million or $0.15 per share compared to last year's second quarter net loss of $6.6 million or $0.15 per share.

The company reported an adjusted net income of $10.3 million or $0.23 per share compared to an adjusted net loss of $3.9 million or $0.09 per share in the second quarter of last year. Adjusted earnings exclude amortization, non-cash equity compensation, and impairments.

On June 30th, 2016, the company had approximately $66.7 million of cash, cash equivalents and restricted cash. In the second quarter, cash flow from operations was approximately $9.3 million and was positive for the ninth quarter in a row.

Subsequent to the quarter end, we used $7.7 million of the cash on hand to purchase IMS UK from UCB which Jason will discuss further in detail. The cash expenditures for our CapEx project in France will ramp up significantly in the third and fourth quarter of this year.

We reviewed our financial assumptions on the -- for the model in the last call and the only changes related to a potential timing issue with our retail revenues of Enoxaparin. With the termination of our contract with Actavis, we may not be able to ship retail units from September until January, unless we partner that product and have shipments to that partner. Retail sales of this product have been running between $12 million and $13 million a quarter for the last few quarters.

I'll now turn the call back over to Jason.

Jason Shandell

Thanks Bill. We've made a lot of progress since our last earnings call in May and are happy to report another profitable quarter. We had EBITDA of $13.6 million on $68 million in revenues. In addition cash flow from operations was $9.3 million, which as Bill said now marks nine quarters in a row of positive cash flow.

We continue to make good progress on our pipeline and remain on track to file an additional three ANDAs in 2016. We resubmitted our NDA for Primatene on June 28th, 2016. On July 28th, 2016, we received a letter from the FDA accepting our resubmission and stating that the agency considers the resubmission to be a complete class-two response to our May 22nd, 2014 action letter. Therefore, the FDA provided us with the PDUFA date of December 28th, 2016. We consider this a big milestone for the company and are hopeful that we can receive approval by the end of the year and launch the product back to the OTC market in the beginning of 2017.

We filed our NDA for intranasal Naloxone on April 19th, 2016. On June 29th, 2016, we received a letter from the FDA stating that the agency had completed its filing review and determined that our application is sufficiently complete to permit a substantive review. The review classification for this application is considered standard, therefore, the FDA provided us with the PDUFA date of February 19th, 2017.

As we have previously discussed, our Naloxone injection product has been successfully used for years by first responders who add a nasal adapter to administer the product to overdose victims. We believe that FDA approval of this life-saving product is an important step in fighting the opioid epidemic that is affecting our country.

We're encouraged by the State and Federal laws that are being enacted to allow greater access to Naloxone. As Bill discussed, pricing for our Naloxone injection product has decreased as we continue to offer discounts to customers and rebates to numerous states.

However, unit growth remains strong, partly due to the fact that our Naloxone syringes are now being sold by retailers in many states. We look forward to being able to market an intranasal version of the product, which can be more easily used by the general public.

On June 30th, 2016, we entered into a termination agreement with our partner Actavis regarding distribution of our Enoxaparin to the retail market. We believe this presents us with several positive opportunities including entering into a new partnership agreement or directly distributing our Enoxaparin to the retail market.

If we decide to sell directly to the retailers, as Bill said, there will likely be a reduction of sales in the fourth quarter, but thereafter, we would receive 100% of the retail profits.

Finally, in terms of business development, on August 1st, 2016, we acquired International Medication Systems UK Limited from UCB Pharma for $7.7 million, which included the marketing authorizations for 33 products in the U.K., Ireland, Australia, and New Zealand, representing 11 different injectable chemical entities.

The products are generic injectables, including Adrenaline, Atropine, Calcium Chloride, Lidocaine, Morphine, Naloxone, and Sodium Bicarbonate. This acquisition allows us to further expand into the international market and provides for great synergies given that we already make these products for the U.S. market.

We plan to transfer the products to our facilities in California, which will require U.K. regulatory agency approval before the products can be relaunched. We anticipate that such regulatory approval and launch will take approximately 12 to 18 months and expect peaks sales of $4 million to $5 million from these products in two to three years.

With that update, I will now turn the call over to the operator to begin Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

And our first question is from the line of David Maris with Wells Fargo.

David Maris

Good afternoon. I have a few questions. First, for -- on Naloxone, can you tell us a little bit about there, there are really three markets the hospital market, the first responder market, and the retail market, maybe what you're seeing growth-wise or market share wise in each of those, are you seeing any changes or any material competition? And then I have a follow-up.

Bill Peters

Sure. On the Naloxone, we've seen steady market share and steady unit volume in the hospital. In the first responder, some of that data we get -- we know clearly that it’s a first responder, but others we don't. So, we have to kind of guestimate a portion of it that's going to areas that where we don't know where it's going.

So, we're guessing that a significant portion of that's going to first responder. And we've seen that market continue to grow in double-digit rates over the course of the past couple of years.

And what's new this quarter is that we've actually begun some relationships with some actual retailers who are stocking it for the retail portion and are actually distributing the drug in local drug stores.

So, that's the new for us -- it is the first time we've ever sold to these people directly, that's not to say some of the retailers could have been purchasing our product through a wholesaler at the high price before, but now we actually have contracts with a couple different large retailers to stock the product. And they are stocking the injectable product with the Luer-Lock tip.

David Maris

And then my follow-up on the pipeline, what can you tell us about the near-term pipeline opportunities, like what categories -- are they late entrance to already competitive markets, are they -- if approved, would they be alone -- what therapeutic categories?

And then longer term, I know Amphastar has confirmed that it's working on Advair, but can you remind us what -- what the company's position is on -- what draft guidance currently says? And whether or not there would be an expectation that there will be several competitors that make it to the market first or where those guidelines might be tightened? Thank you.

Bill Peters

Sure. So, let's start out with the short-term pipeline, so with respect to the four injectable ANDAs that are currently on file with the FDA, we anticipate approval and launch of one of our pre-GDUFA filings by 2017. We've had good communications with the FDA to give us that opinion and there's no generic with respect to this injectable product.

Although, for competitive reasons, we have not stated what the therapeutic area or what the product is, but it is a significant product. As we've talked about the four ANDAs on file represent over $500 million in market opportunity based on IMS data and this is, by far, the largest of those four products and makes up a significant portion of that $500 million. And so that's -- in the short-term, we believe that we could get approval and launch in 2017 and that's generic injectable with no generic competition.

As I stated in my prepared remarks, on the new drug side, we are expecting or hoping with the PDUFA date of December 28th for Primatene and then the PDUFA date of February 19th for intranasal Naloxone to get those done in the short-term.

With respect to your second question regarding Advair, you're correct; we've never confirmed or denied whether we're working on that. You have actually done a good job at looking at our DMF filings, and -- so we did read an analyst report that surmised that that may be a product in our pipeline and we have talked about the guidance before. We do believe that the guidance has currently drafted is not as tight or as stringent as we believe it ultimately will be.

Recently we did see a study that was conducted which indicates that bioequivalence could be difficult. And we don't typically talk about competition, but we do realize that there is one company that has confirmed that they actually have an ANDA on file, but the others, we believe at least with respect to one would be a 505(b)(2).

So, we think regardless of the timing, if we were to work on such a product and such a large product that there would be great opportunity and products like those are the type of products that Amphastar likes to focus on because of the technical barriers to entry.

David Maris

All right. Thank you very much.

Bill Peters

Sure.

Operator

And our next question is from the line of Elliot Wilbur with Raymond James.

Unidentified Analyst

Hi, this is David on for Elliot. Thanks for taking the question and congratulations on the quarter.

Bill Peters

Thank you.

Unidentified Analyst

Maybe just a question on Primatene, so assuming the approval, how quickly do you think you'd be in position to launch the product and is the plan is to launch yourself or would you maybe consider potential partnership options there?

Bill Peters

So, first, we would launch our self. We do have the relationships with the retailers and although it's been off the market for quite a bit of time, we still get inquiries from these retailers on a periodic basis. It's always sold well; don't have the pay for shelf space. We -- with the PDUFA date of December 28th, we're hopeful to get that approval by the end of the year and we would be prepared to launch at the beginning of 2017.

We do think it will take some sales -- some marketing and some advertising to let people know that it's back and it could take a while to get back to those peak sales of $65 million, but we're confident that we can get back to that and even higher.

Unidentified Analyst

Got it. Thank you.

Bill Peters

Thank you.

Operator

And our next question is from the line of David Amsellem with Piper Jaffray.

David Amsellem

Thanks. Just a couple quick ones. So, -- and I hopped on late, so I apologize if you've already covered this. Just on Primatene, could you just remind us how big that market was before the CFC products were pulled? And what's your best guess for -- how the product could ramp and could get to in terms of peak once you bring it back to market with the HFA product?

And secondly, talking about the products that are in development, particularly, the ANDAs, can you give us some more visibility on the pace of filings in the second half of 2016 and then how many you expect to put into the queue with the FDA in 2017? Thanks.

Bill Peters

Sure. So, to start out with Primatene, we discontinued it due to the environmental revision of the CFC in 2011. So, I pulled that out of the data set. But for 2009, 2010, we did $65 million in revenues. So, those are the peak revenues that I was referring to and we believe that we can get back to the $65 million and ultimately, exceed the $65 million just based on the fact that this has been off the market for five years. We think we can take some inflationary pricing.

Not to mention that we do believe it's an improved product, the old product was in a glass container. This one is aluminum and this one now also has a dose indicator. So, that $65 million is what we're looking at and hoping to ultimately go beyond that with some marketing.

With respect to the ANDAs, we're on track to file another three in the second half of this year and then for 2017, we're looking to keep a steady pace, but probably realistically four in 2017 and this is with respect to ANDAs.

David Amsellem

Hey thanks.

Bill Peters

Sure.

Operator

And our next question is from the line of Gary Nachman with BMO Capital.

Chris Wolpert

Hi, this is actually Chris on for Gary. I just -- if you could just give us a little bit of an understanding of the gross margins trajectories for the year. I mean you had a really healthy number this quarter and if you could just talk about how that looks for the rest of the year?

Bill Peters

Sure. A couple of things were really driving it this quarter and some of those were the of the product mix that we had in the quarter lending itself to some higher margin sales there. And also because of our factory utilization in France and then IMS, we manufactured more units than we have on average over the past few quarters, which led to a higher overhead absorption in the quarter.

Some of those trends may or may not continue, especially offset [ph]. In France, there's a good chance that that manufacturing ramps down a little bit, depending on the sales that were going to or -- going to do for the next six to 12 months there. So, that might not continue.

Chris Wolpert

Okay. Was that attributed to a new customer in this quarter?

Bill Peters

No, it was just the timing of certain activities that we had in the plant. Earlier this year, we had an FDA inspection and we're kind of concentrating on that -- and kind of ramps back up this quarter and make up for lost time last quarter.

Chris Wolpert

Okay, excellent. Thank you so much.

Operator

And our next question is from the line of Serge Belanger with Needham & Company. Please go ahead.

Serge Belanger

Good afternoon guys. Just a couple questions. I guess on the tough revenue line, just wanted to know what we should think about for the second half of the year. Clearly, it's been driven by Naloxone and some Lidocaine growth. Just wanted to know if those were sustainable going forward?

And again -- sorry go ahead.

Bill Peters

Yeah. A couple of things there. So, on Naloxone, there was -- we did have high -- as I mentioned, this is the first time we began shipping into the retail sector of that market. So, I don't know if that's sustainable or not because we've had some initial shipments there, but have not seen the reorders coming out of there yet. So, that may not be a repeatable number.

And then as I mentioned in my comments, in the fourth quarter, we might have a timing issue with Enoxaparin sales in the retail market, which have been running $12 million to $13 million. If we do not partner with another company on that then we would not have those sales in the fourth quarter.

Serge Belanger

Okay. And in terms of the pricing environment on Enoxaparin and Naloxone, are these stabilized for the rest of the year?

Bill Peters

Yes, so both of those are trending down, both Naloxone and Enoxaparin. And -- so I would continue to expect to see pricing decreases on those products. Although, there are fairly -- we're talking about single-digit declines not big declines and but then partially offsetting that is that we are bringing down the cost of Enoxaparin as we have brought down the raw material costs and then there's also the possibility that we could get approval ourselves on the heparin, which goes into Enoxaparin. So, if we can potentially bring that cost down a little bit more of that as well. So, there's some opportunities on the cost side as well.

Jason Shandell

And I'd just like to add on Naloxone, the pricing is coming down. A lot of that has to do with the discounts that we've been offering to the various states around the country and we -- one; we want offer those discounts, so that's affordable for the government. Two, we think that helps us keep our market share with first responders ever since Adapt got their approval of intranasal Naloxone.

The good thing is we continue to offer rebates to the states and they're trained on our product and like our product. So, I think that's a good opportunity to keep that business and even grow it.

Serge Belanger

Okay. And I guess review for us your manufacturing capacity and more specifically, your California plant. I know you're transferring a couple of the Hikma products as well as your IMS UK acquisition. So, just wanted to know where--

Bill Peters

Yes, good question. So, with the two plants here, one is our IMS plant in South El Monte and that -- this -- in the last quarter that ran pretty much at capacity as far as manufacturing went and really can't get any more units out of there.

However, we are in the middle of an $11 million CapEx improvement at that plant where will be increase the capacity for our prefilled injectors out of that plant hopefully by the end of next year.

And we are bringing a certain products essentially from the Hikma products and also all of the IMS product -- IMS UK product to that facility. However, on the IMS UK, we have to be inspected first by the U.K. authority there. And we will not be able to sell until we get that approval. So, we will not be making those products until we get that that authorization approved.

And then at our Amphastar plants, we -- 95% of our production is Enoxaparin, so there's potential that we will ramp that down a little bit in the coming quarter. However, right now, this plant is running at about 50% capacity.

However, a significant portion of our pipeline will be manufactured at this plant and we're making -- we do have multiple R&D batches of different products set to be made in the second half of the year here.

Serge Belanger

Okay. Thank you.

Bill Peters

Sure.

Operator

And I'm not showing any further questions in the queue. I would like to turn the call to Mr. Jason Shandell for any final remarks.

Jason Shandell

Thank you very much operator. This concludes our call for today. Thanks again for participating and have a great rest of the day.

Operator

Ladies and gentlemen, this concludes the program. You may all disconnect. Have a wonderful day.

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