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Akorn, Inc. (NASDAQ:AKRX)

Q3 2007 Earnings Call

November 1, 2007 5:00 pm ET

Executives

Arthur Przybyl - Chief Executive Officer

Jeffrey Whitnell - Chief Financial Officer

Abu Alam - Senior Vice President, New Business and ProductDevelopment

Doug Pinnell - Vice President, Vaccine Sales

Analysts

Noelle Tune - Soleil Securities

Robert Uhl - Friedman, Billings, Ramsey

Doug Dudar - Bank of New York

Operator

Ladies and gentlemen, thank you for standing by. Good day,and welcome to the Akorn, Incorporated Conference Call. Today's call is beingrecorded. Now, at this time for opening remarks and introductions, I'd like toturn the call over to the President and CEO, Mr. Arthur Przybyl. Please goahead, sir.

Arthur Przybyl

Thank you very much. Good afternoon everybody, ladies andgentlemen and welcome to Akorn's third quarter conference call. With me todayin the room is our Jeff Whitnell, our Chief Financial Officer, as well as ourSenior Vice President of New Business Development Dr. Abu Alam and our SeniorVice President of Vaccine Sales Dough Pinnell. After my brief openingstatement, Jeff will provide you with an update on our financial statements.

Before I being, I'd like to read a Safe Harbor statement,please. Statements presented in this overview, which are not historical facts,are forward-looking statements, that involved risks and uncertainties thatcould cause actual results to differ from projected results.

Factors that could cause actual results to differ materiallyare detailed in Company's Securities and Exchange Commission filing and this ofcourse a statement is nearly a summary and you should read the completeforward-looking statement disclosure and the earnings release.

After our presentation today, Jeff and I will answer anyquestions you might have as well as Abu and Dough -- if you have the questionsin their respective areas.

In the third quarter, our product development effortscontinued in earnest (inaudible) and partnerships for two ANDA, one ANDA fromorgan transplant rejection drug and the other ANDA were drug in field ofwomen's healthcares. We also announced two new partnerships with Haemoneticsand Hyaluron where three premix drug products and two injectable ANDAsuspension drug products.

We will continue to seek partnerships that provide us eithervertical integration into the active pharmaceutical ingredient and ourmanufacturing; we finished dosage forms that we do not have the capabilities tomanufacture ourselves.

Product of interest to Akorn today have to be representativeof a high barrier to entry and/or represent the opportunity where Akorn to befirst the market. While we certainly --we announced our new partnership commercialized Serum Institute of India forvaccine products in the Untied States.

We believe this partnership will help to expand our existingvaccine business and create long-term sustained value for the company, based onthe DOA (ph) approval if necessary, in order to commercialize these vaccineproducts in the U.S.

Serum remains our most important partner and as a reminderwe have several generic anti-cancer injectable products, the first filing beginin the fourth quarter 2007, underdevelopment into the manufactured at thefacility Decatur govern by Serum, as well as a way these monoclonal antibodyDOA under development at Serum.

In the third quarter, we launched our multi-dose tetanusdiphtheria vaccine and sold approximately $4.7 worth of the vaccine. Althoughour initial gross margins were less than projected due to distributorsexhausting their expiring stocks of multiple dose tetanus diphtheria vaccine,we expect our gross margins for this vaccine to stabilize at approximately 20%by the end of first quarter of 2008.

More importantly, we continue to guide to the first quarterof 2008 introduction of the new unit dose preservative free tetanus diphtheriavaccine. With refill will provide us was a competitive position that will allowus to increase our market share in the hospital market share in the hospitalmarket, while at the same time increasing our gross margins approximately 25%to 30%.

As soon as the unit dose preservative free tetanusdiphtheria vaccine is launched, manufacture of the multi dose vaccine will bediscontinued. We managed to re-launch IC-GREEN after the FDA approval isgranted for an alternate manufacturing side.

Of the approximate $3.1 million in back orders that existsfor the product, we shipped approximately $1.8 million in the third quarter andexpect the rest of the back orders to be full filled in the fourth quarter2007.

We also received approval for our first joint ventureproduct with Strides, Ketorolac injection, and for our own ANDA an atomicsolution, Ketotifen. We expect to launch these products soon.

Our final approval for Diclofenac, which we received and hadapproval on and expected to launch on October the 4, has been delayed becauseof our last minute statistic petition by Novartis. However, we still to launchand ship this atomic solution in the fourth quarter 2007.

In our first developed product with Sofgen, we completed ourbioequivalence trial and announced our ANDA submission for the drug. Intotality, we have 41 products under review with FDA and expect to receiveapproval for these products within the next two years taking into account anaverage 18 months review time.

In sales and marketing, we continue to expand our sales teamas we anticipate the launch of Oral Vancomycin and the unit dose preservativefree tetanus diphtheria vaccine. Our hospital sales team now includes 18representatives and we hired seven representatives that are the beginnings ofour vaccine sales team.

Our target objective for both sales teams is 21 reps for atotal 40 by the end of the first quarter 2008. We take the first launch ingeneric Oral Vancomycin; our target market share objective remains the same,18% share, less than increase two weeks.

And our objective for the unit dose preservative freetetanus diphtheria vaccine generates $65 million in 2008 revenues and $100million by 2009 representative of approximately 15% of this market.

Financially in the third quarter, our revenues increased 36%sequentially over the second quarter, due to the launch of the tetanusdiphtheria vaccine and re-launch IC-GREEN. And recently, we announced thatSerum has agreed to invest in an additional 1 million shares of Akorn’s commonstock at market price. We expect to close this transaction within 30 days.

Jeff will now update you further on our financialstatements.

Jeffrey Whitnell

Thank you, Art. Good afternoon ladies and gentlemen.Consolidated net revenues totaled $15.8 million in Q3 '07 as compared to $14.5million for Q3 '06. The quarter-over-quarter increase in net revenue isprimarily due to the product launch of our tetanus diphtheria vaccine. But werealize approximately $4.7 million of net sales.

In our other business segments, ophthalmic net revenues were$5 million versus $6.1 million for Q3 '06 and reflect the re-launch of ourdiagnostic product IC-GREEN back into marketplace. Our hospital drugs andinjectables business segment net revenues were $4.6 million, versus $6 millionfor Q3 '06, which includes the impact of the Bal-in-Oil product re-launch.

The contract services business segment net revenues were$1.5 million, versus $2.3 million in the comparative prior year period andreflect delayed product shipments for one of our customers. Gross profit for Q3’07 totaled $3 million, versus $6 million in Q3 ’06.

As we stated in our press release we aggregate the client inthird quarter 2007 gross profit, versus the comparative prior year period dueto the sales mix of significantly higher margin products in the comparativeprior year period primarily attributed to the re-launch of Bal-in-Oil.

Further, the current year period was impacted byintroductory pricing levels for the multi-dose Tetanus Diphtheria vaccinenecessary to compete with distributors who are exhausting their on-handinventories prior to product expirations. Finally, both of our manufacturingfacilities incurred production shutdowns in the third quarter 2007.

Total operating expense for Q3 ’07 is $7.8 million, versus$7.2 million for Q3 ’06. Embedded within Q3 ’07 total operating expenses areapproximately $1.7 million of non-cash expenses, versus $1.3 million for thecomparative prior year period, which include depreciation, amortization, PhaseI-23 stock option expense and restrictive stock expense.

Within total operating expenses SG&A expenses increasedby approximately $1.1 million, versus comparative prior year period, thisincrease is due primarily to the addition of 19 new fields and vaccine saleswere up including Doug Pinnell, our VP of vaccine sales.

Other year-over-year increases in SG&A expense include anon-cash charge for employee and Board of Directors stock options grand and FDAestablishment fees attributable to DTPA. Also within total operating expenses,R&D expense decreased by approximately $500, 000, versus the comparativeprior year period.

This decrease is due to lower spending for validationefforts in our lyopholization facility with list of sterile capabilities werefaced in the service at the beginning of this year. Non-operating income wasapproximately $140,000 in Q3 ‘07; versus $202,000 in ’06 reflecting lowerinterest income earned and also cash reserve.

Net loss available to common stockholders for the thirdquarter 2007 was approximately $4.7 million or $0.05 per share calculated on afully diluted basis, versus a net loss of $1.2 million or $0.02 per share inthe comparative prior year period.

I’d now like to draw your attention to the balance sheet. Weended the third quarter 2007 with $10.3 million in cash and cash equivalent.There is no outstanding borrowing against line of credit as of September 30,2007.

Full availability against the undrawn $10 million balanceand we are currently negotiating a $5 million increased towards creditfacility. In addition, we have a net operating loss carried forward ofapproximately $53 million to offset taxable income in future period.

Finally, as discussed earlier this week we announced thesigning of Memorandum of Understanding with the Serum Institute of India, whichprovides for the sale of $1 million shares of Akorn common stock priced atmarket.

This transaction will be completed within 30 days of the MOUsigning date, which was October 24, 2007. You will observe in the balance sheet increases in the trade accountsreceivable, inventories and trade accounts payable balances, which reflectsproduct launch of our multi dollars Tetanus Diphtheria vaccine.

We purchased approximately $7.9 million TD vaccines in thethird quarter 2007 and realized $4.7 million of net vaccine sales. Finally, I’dlike to briefly review the statement of cash flows. During the third quarter2007, we invested a total of $440,000 slightly below our historical run rate ofapproximately $500,000 in property plant and equipment.

The majority of this investment was the necessarymachineries and equipment upgrades and the furbishment indicator. However, wealso invested in new software and hardware to accommodate electronic FDAfilings by a corporate regulatory emperor’s group.

I want to thank you for your time and attention. And I willnow turn the teleconference back to Arth.

Arthur Przybyl

Thank you, Jeff. For the fourth quarter, we are focused ontwo primary objectives, receiving an ANDA approval for Oral Vancomycin, andsecuring an additional DTPA orders. We still remain confident on receiving atimely 2007 approval on the FDA based under expedited review of our ANDAsubmission for Oral Vancomycin.

In regards to DTPA is our belief that an additional orderexercising contract option units but before coming by yearend, in order toavoid an approximate 6% price increase that would occur based on our contractwith HHS in January of 2007.

We’ve guided towards the first quarter 2008 launch of ourunit dose preservative-free Tetanus Diphtheria vaccine. Our manufacturer feelscomfortable that they have passed their Pre-approval on inspection process andwe’ll able to provide this vaccine product in the first quarter.

Lastly for our internally developed NDA Akten indicated forany ophthalmic procedure that requires a topical anesthetic. We expect toreceive approval in the second quarter 2008 based on our producer date of May2nd. As we close our presentation and moderator we can now entertain anyquestions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first questionfrom Noelle Tune with Soleil Securities.

Noelle Tune - Soleil Securities

Good afternoon. I have four questions; I’ll ask some all atonce. First of how should we be thinking our Tetanus Diphtheria revenues in thefourth quarter of this year? You guys book 4.7 million in September; I amassuming that it’s not a monthly run rate.

And secondly DTP order that you’re looking for by yearend,can you give us any feel for the magnitude to the order that you’re expecting?And lastly contract revenues fell a bit in the quarter, understand and willgiven the challenges with indicator facility.

How should we be thinking about that particular segment ofyour business through yearend and the 2008? And then lastly are there anymeaningful updates on indicator? Thanks.

Arthur Przybyl

Okay. Let me take the last part of your question firstNoelle. Meaningful updates to indicator, the only I have to say that I couldprovide to you at this point in time is that our responses to their FDA 43filings and the inspection are under review with the Chicago district of FDAand then the Company intends to meet with the Chicago district in the latterpart of November in a face-to-face meeting, as we typically do in order todiscus our responses and to make sure that they are acceptable in their totalityfor this.

In regards to our contracts sales business, we believe thatour contract sales business will normalize to a certain extent to levels thatwe had hoped to achieve based on the launch of Ketotifen and our ability tocontract manufacture that product in summer state for several companies thathave an expansive interest in creating of land of those data with KetotifenFumarate.

The -- your question regarding DTPA sales, I am not willingto share our internal projections at this particular point in time. And do wehave some numbers from the government? We do. And the reason I am not willingto share these projections is simple one.

They don’t always stay fixed before the purchase ordersactually cut and because the orders have to go through the normal fundingchannels and helping numerous services and office and management and budget, Ithink it’s just prudent for us to look at it potentially as upside to ourbusiness that we could shift in the first quarter and potentially announce inthe fourth quarter.

And then your last -- beginning part of your question was --can you refresh my memory Noelle.

Noelle Tune - Soleil Securities

Sure, hi, the Tetanus diphtheria revenues for the fourthquarter.

Jeffrey Whitnell

Yeah. We have a necessary requirement as part of ouragreement to sell 2 million doses of the multiple-dose vaccine, prior to thelaunch of the unit dose preservative-free vaccine. So, we are diligently tryingto sell those doses as quickly as possible.

The 4.7 million in sales were represented above 20 --approximately 25% of those 2 million doses in September. And we have ininternal objectives, in terms of sales in the fourth quarter, obviouslySeptember sales represents somewhat a wide -- of a load into our distributors thatwe’ll be utilizing for the multiple-dose vaccine as well as the unit doespreservative-free vaccine.

But I think, we would expect to somewhere in the -- and hopeto see somewhere in the neighborhood, approximately the same amount of sales inthe fourth quarter as we did for the month September where multiple-dose vial.

Noelle Tune - Soleil Securities

Great. Thanks so much.

Arthur Przybyl

You’re welcome.

Operator

And we’ll take our next question from Robert Uhl, Friedman,Billings, Ramsey.

Robert Uhl - Friedman, Billings, Ramsey

Thank you. Just to clarify a little on the DTPA, there’s youmight get an order, but it sounds like it probably would not ship in 4Q why?

Arthur Przybyl

Yes. Robert, there is absolutely no way that we would beable to ship an order DTPA in the fourth quarter, simply because we do notstockpile the products here on an inventory basis. We -- our manufacturingpartner Hyaluron, makes it as per orders received.

Robert Uhl - Friedman, Billings, Ramsey

Okay. And then just, you know looking at the Ophthalmicproduct business sales were 5 million. I think you said 1.8 of it of IC-Green,so that lose your 3.2 for the rest of the business, which you know has shown asequential decline every quarter so far this year. So, what’s going on in thatbusiness that makes the sales tricky each quarter it seems?

Jeffrey Whitnell

I think some of it just wholesaler ordering patterns. Ithink some of it has been a lack of new product introductions. We have notlaunched Ketotifen and Diclofenac and says we really wouldn’t do that untilfourth quarter and I think its somewhat resembling a an older more matureproduct line that undergoes price erosion on year-to-year basis based oncontracting activities with wholesaler resource programs ophthalmicdistributors and hospital GPOs.

But primarily I believe that our core business as a companyis somewhere arrange with our $45 million.

Robert Uhl - Friedman, Billings, Ramsey

Thank You.

Arthur Przybyl

You’re welcome.

Operator

(Operator Instructions). And we go to Doug Dudar (ph) withBank of New York, Capital Market.

Doug Dudar

Good afternoon. I just have several questions. I guess thefirst question (inaudible) you commented that your 41 drugs or 41 filing withthe FDA and expect approval of those with continue period. How many of 41, doyou anticipate within a 12-year period -- sorry, 12 months period and how manyadditional filings do you expect in the next 12 months?

Arthur Przybyl

That’s an excellent question. We expect four filings in thefourth quarter and Doug, I am going to have to -- I've to get back to you withpotentially our expectations for product improvement within the next 12 months.

Doug Dudar

Okay.

Arthur Przybyl

I don’t have that information in front of me, I apologize.

Doug Dudar

Okay. I guess next question I’d have would be in this pressrelease for the first time I’ve seen you comment on importing the sales forcefor Vanco. So obviously, you know, you are -- you’ve got great deal ofconviction of the fourth quarter Vanco approval. Can Doug talk a little bitabout once you get the approval kind of you know what your rollout strategy forVanco?

Doug Pinnell

Yes, I think that I can speak to that. Doug is primarily ourVPO back scene sells. We’ve always had a hospital sells team but a smaller onein size, about eight to ten over the last couple of years were hire into thatgroup to help generated much GPO compliance to our contractors as possible.

We’ve gone to twenty because I’ve always believe and beingin the business for many years that this is representative of a good number ofreps in order to establish GPO compliance with major hospitals and we canafford to do so with the product Vancomycin being a launched.

Our strategy for Vancomycin is not we intending view actually one is very simple. 50% ofthe product is sold to in the retail sector to change an wholesalers sourceprogram and for our national account group headed by John Sabat and hisex-folks in his department attempt to secure contracts in that area with largerretail customers. In the hospital area where 50% of the product is also sold.

We will contract with all of the major GPOs that is PremierInnovation primarily, (inaudible) supply schedule, Minnesota multi-stage. I amprobably forgetting some others, I am sure that are representative of largepurchasing groups that represent hospitals that were prove their resources inorder to buy pharmaceutical products and other medical devices as better.

And so that approach is coupled with a compliancy approachthat our hospital sales reps, they comply themselves to actually call ondirectors of pharmacy or the pharmacy buyer with armed with intelligence beforethey walk into and count based on a simple program and derivative (ph) all thatwe have, that allow them to recognize any hospital that is not complying toawarded Akorn contract then achieve GPO contract.

So, our extension of in addition to sale force justleveraged up a new product like Vancomycin, but visional to add is for(inaudible) in 10 hospital 10 products to hospital why not 10,000 because youcan laver all those products up to the GPO contract organizations nationalcount as well as and use your hospital reps as a compliancy monitor to alerthospital for not buying your products that are contracted for with the netspecific group purchasing organization.

Doug Dudar

So I just -- there is a follow-up here on that. The firstquestion that be would be are you already go on that front what you havesubscribe and the second would be are you currently manufacturing Vanco inpreparation for launch?

Arthur Przybyl

We are ready to go and we will be able to sale products onday one of approval.

Doug Dudar

Okay. I guessed couple other quick questions. When are yougoing to start giving guidance? I mean are you going to give 2008 guidancepoint or is your intention in sub point to start giving that in givingguidance.

And I guess the next question would be just the quick onefor Jeff, which is the (inaudible) what are the payments and what are thetiming of the payment this year regarding the licenses?

Arthur Przybyl

Okay. In regards to guidance I am not a big believer inguidance. And certainly as a development stage company today or what wecertainly have a core revenue base. I think, if we gave guidance, to be quitewarranty, which is probably fluctuate on it. We provide, we certainly have ourown internal model record company. That goes out in a five-year time frame.

And we communicate with our analyst for the time to time totake a look at their models, looking out specially after set of our anticipatedlarge product approval to Vanco license for act in and for this unit thosepreservative free vaccine so we have clearly, telegraph some guidance on someof those products.

But I can’t tell you, I certainly cannot reticulate as thewhere there is a company we will provide guidance down the road. And for thesimple fact that, we are not mature company.

I think is lot tough for a company like us to provide moreaccurate guidance as compared to one that is more a newly based perhaps like ageneral lecture and I am sure we loved to have their resources and their sales,but fact that the matter is I think they are better predictor of their businessmodel than we are at this point in time.

Abu Alam

Doug, you had a question about Serum. We filed an 8K thatdescribed the number of understanding with Serum as well as both company’sobligations. And as you’ll observe, we have several agreements within the next60 days, that we need to finalize with them including a supply agreement,development agreement and that will define the payments schedule with Serum.

But typically, our milestone payments are based on thesigning of a contract, the filing of an ANDA submission or and in this case ofBLA license, approval of the product for instance. So, I would expect this tobe downstream payments primarily because of the timeframe involved withsecuring of BLA license.

Arthur Przybyl

If I may add in the case of this number of understanding,there is a fee for exclusive marketing rates and…

Abu Alam

Well, and that what I was talking.

Arthur Przybyl

Oh, yes and so, that fee which is nominal for the marketopportunities for each product is not being disclosed. But that fee is notpayable until Akorn decides, if they want to proceed, the clinical trials inorder to secure the BLA approval.

And the reason for that is, if in pre IND meetings for anyof these vaccines it is seen by Akorn that the cost to conduct the clinicalwhich prohibitive, we have the opportunity not to pay that exclusive licensingfee and walk away from the opportunity of that specific vaccine product. Wehave an opt out clause.

Doug Dudar

Okay. Thank very much.

Arthur Przybyl

You’re welcome.

Operator

(Operator Instructions)

Arthur Przybyl

Okay, operator?

Operator

(Operator Instructions)

Arthur Przybyl

If they have no questions we just.

Operator

And Mr. Przybyl, seeing no further questions at this time.I’ll turn the conference back to you for any closing or additional remarks.

Arthur Przybyl

I just like to thank everybody for participating in theconference call, for their continued support as an investor in the company. Wecertainly look forward to our near term product approvals. We anticipated anearnest with Vancomycin, our vaccine product and accent and for the results inbetter areas after the launch of those products. Thank you very much. Bye, bye.

Operator

Ladies and gentlemen that thus concludes today’s conference.We thank you for your participation. Hope, you have a great day. You may nowdisconnect.

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