Arthur Przybyl - Chief Executive Officer
Jeffrey Whitnell - Chief Financial Officer
Abu Alam - Senior Vice President, New Business and Product Development
Doug Pinnell - Vice President, Vaccine Sales
Noelle Tune - Soleil Securities
Robert Uhl - Friedman, Billings, Ramsey
Doug Dudar - Bank of New York
Akorn, Inc. (AKRX) Q3 2007 Earnings Call November 1, 2007 5:00 PM ET
Ladies and gentlemen, thank you for standing by. Good day, and welcome to the Akorn, Incorporated Conference Call. Today's call is being recorded. Now, at this time for opening remarks and introductions, I'd like to turn the call over to the President and CEO, Mr. Arthur Przybyl. Please go ahead, sir.
Thank you very much. Good afternoon everybody, ladies and gentlemen and welcome to Akorn's third quarter conference call. With me today in the room is our Jeff Whitnell, our Chief Financial Officer, as well as our Senior Vice President of New Business Development Dr. Abu Alam and our Senior Vice President of Vaccine Sales Dough Pinnell. After my brief opening statement, 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 that could cause actual results to differ from projected results.
Factors that could cause actual results to differ materially are detailed in Company's Securities and Exchange Commission filing and this of course a statement is nearly a summary and you should read the complete forward-looking statement disclosure and the earnings release.
After our presentation today, Jeff and I will answer any questions you might have as well as Abu and Dough -- if you have the questions in their respective areas.
In the third quarter, our product development efforts continued in earnest (inaudible) and partnerships for two ANDA, one ANDA from organ transplant rejection drug and the other ANDA were drug in field of women's healthcares. We also announced two new partnerships with Haemonetics and Hyaluron where three premix drug products and two injectable ANDA suspension drug products.
We will continue to seek partnerships that provide us either vertical integration into the active pharmaceutical ingredient and our manufacturing; we finished dosage forms that we do not have the capabilities to manufacture ourselves.
Product of interest to Akorn today have to be representative of a high barrier to entry and/or represent the opportunity where Akorn to be first the market. While we certainly -- we announced our new partnership commercialized Serum Institute of India for vaccine products in the Untied States.
We believe this partnership will help to expand our existing vaccine business and create long-term sustained value for the company, based on the DOA (ph) approval if necessary, in order to commercialize these vaccine products in the U.S.
Serum remains our most important partner and as a reminder we have several generic anti-cancer injectable products, the first filing begin in the fourth quarter 2007, underdevelopment into the manufactured at the facility Decatur govern by Serum, as well as a way these monoclonal antibody DOA under development at Serum.
In the third quarter, we launched our multi-dose tetanus diphtheria vaccine and sold approximately $4.7 worth of the vaccine. Although our initial gross margins were less than projected due to distributors exhausting 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 quarter of 2008 introduction of the new unit dose preservative free tetanus diphtheria vaccine. With refill will provide us was a competitive position that will allow us to increase our market share in the hospital market share in the hospital market, while at the same time increasing our gross margins approximately 25% to 30%.
As soon as the unit dose preservative free tetanus diphtheria vaccine is launched, manufacture of the multi dose vaccine will be discontinued. We managed to re-launch IC-GREEN after the FDA approval is granted for an alternate manufacturing side.
Of the approximate $3.1 million in back orders that exists for the product, we shipped approximately $1.8 million in the third quarter and expect the rest of the back orders to be full filled in the fourth quarter 2007.
We also received approval for our first joint venture product with Strides, Ketorolac injection, and for our own ANDA an atomic solution, Ketotifen. We expect to launch these products soon.
Our final approval for Diclofenac, which we received and had approval on and expected to launch on October the 4, has been delayed because of our last minute statistic petition by Novartis. However, we still to launch and ship this atomic solution in the fourth quarter 2007.
In our first developed product with Sofgen, we completed our bioequivalence trial and announced our ANDA submission for the drug. In totality, we have 41 products under review with FDA and expect to receive approval for these products within the next two years taking into account an average 18 months review time.
In sales and marketing, we continue to expand our sales team as we anticipate the launch of Oral Vancomycin and the unit dose preservative free tetanus diphtheria vaccine. Our hospital sales team now includes 18 representatives and we hired seven representatives that are the beginnings of our vaccine sales team.
Our target objective for both sales teams is 21 reps for a total 40 by the end of the first quarter 2008. We take the first launch in generic 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 free tetanus diphtheria vaccine generates $65 million in 2008 revenues and $100 million 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 tetanus diphtheria vaccine and re-launch IC-GREEN. And recently, we announced that Serum has agreed to invest in an additional 1 million shares of Akorn’s common stock at market price. We expect to close this transaction within 30 days.
Jeff will now update you further on our financial statements.
Thank you, Art. Good afternoon ladies and gentlemen. Consolidated net revenues totaled $15.8 million in Q3 '07 as compared to $14.5 million for Q3 '06. The quarter-over-quarter increase in net revenue is primarily due to the product launch of our tetanus diphtheria vaccine. But we realize 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 our diagnostic product IC-GREEN back into marketplace. Our hospital drugs and injectables business segment net revenues were $4.6 million, versus $6 million for 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 and reflect 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 in third quarter 2007 gross profit, versus the comparative prior year period due to the sales mix of significantly higher margin products in the comparative prior year period primarily attributed to the re-launch of Bal-in-Oil.
Further, the current year period was impacted by introductory pricing levels for the multi-dose Tetanus Diphtheria vaccine necessary to compete with distributors who are exhausting their on-hand inventories prior to product expirations. Finally, both of our manufacturing facilities 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 are approximately $1.7 million of non-cash expenses, versus $1.3 million for the comparative prior year period, which include depreciation, amortization, Phase I-23 stock option expense and restrictive stock expense.
Within total operating expenses SG&A expenses increased by approximately $1.1 million, versus comparative prior year period, this increase is due primarily to the addition of 19 new fields and vaccine sales were up including Doug Pinnell, our VP of vaccine sales.
Other year-over-year increases in SG&A expense include a non-cash charge for employee and Board of Directors stock options grand and FDA establishment fees attributable to DTPA. Also within total operating expenses, R&D expense decreased by approximately $500, 000, versus the comparative prior year period.
This decrease is due to lower spending for validation efforts in our lyopholization facility with list of sterile capabilities were faced in the service at the beginning of this year. Non-operating income was approximately $140,000 in Q3 ‘07; versus $202,000 in ’06 reflecting lower interest income earned and also cash reserve.
Net loss available to common stockholders for the third quarter 2007 was approximately $4.7 million or $0.05 per share calculated on a fully diluted basis, versus a net loss of $1.2 million or $0.02 per share in the comparative prior year period.
I’d now like to draw your attention to the balance sheet. We ended 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 balance and we are currently negotiating a $5 million increased towards credit facility. In addition, we have a net operating loss carried forward of approximately $53 million to offset taxable income in future period.
Finally, as discussed earlier this week we announced the signing of Memorandum of Understanding with the Serum Institute of India, which provides for the sale of $1 million shares of Akorn common stock priced at market.
This transaction will be completed within 30 days of the MOU signing date, which was October 24, 2007. You will observe in the balance sheet increases in the trade accounts receivable, inventories and trade accounts payable balances, which reflects product launch of our multi dollars Tetanus Diphtheria vaccine.
We purchased approximately $7.9 million TD vaccines in the third quarter 2007 and realized $4.7 million of net vaccine sales. Finally, I’d like to briefly review the statement of cash flows. During the third quarter 2007, we invested a total of $440,000 slightly below our historical run rate of approximately $500,000 in property plant and equipment.
The majority of this investment was the necessary machineries and equipment upgrades and the furbishment indicator. However, we also invested in new software and hardware to accommodate electronic FDA filings by a corporate regulatory emperor’s group.
I want to thank you for your time and attention. And I will now turn the teleconference back to Arth.
Thank you, Jeff. For the fourth quarter, we are focused on two primary objectives, receiving an ANDA approval for Oral Vancomycin, and securing an additional DTPA orders. We still remain confident on receiving a timely 2007 approval on the FDA based under expedited review of our ANDA submission for Oral Vancomycin.
In regards to DTPA is our belief that an additional order exercising contract option units but before coming by yearend, in order to avoid an approximate 6% price increase that would occur based on our contract with HHS in January of 2007.
We’ve guided towards the first quarter 2008 launch of our unit dose preservative-free Tetanus Diphtheria vaccine. Our manufacturer feels comfortable that they have passed their Pre-approval on inspection process and we’ll able to provide this vaccine product in the first quarter.
Lastly for our internally developed NDA Akten indicated for any ophthalmic procedure that requires a topical anesthetic. We expect to receive approval in the second quarter 2008 based on our producer date of May 2nd. As we close our presentation and moderator we can now entertain any questions.
(Operator Instructions) And we’ll take our first question from Noelle Tune with Soleil Securities.
Noelle Tune - Soleil Securities
Good afternoon. I have four questions; I’ll ask some all at once. First of how should we be thinking our Tetanus Diphtheria revenues in the fourth quarter of this year? You guys book 4.7 million in September; I am assuming 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 will given the challenges with indicator facility.
How should we be thinking about that particular segment of your business through yearend and the 2008? And then lastly are there any meaningful updates on indicator? Thanks.
Okay. Let me take the last part of your question first Noelle. Meaningful updates to indicator, the only I have to say that I could provide to you at this point in time is that our responses to their FDA 43 filings and the inspection are under review with the Chicago district of FDA and then the Company intends to meet with the Chicago district in the latter part of November in a face-to-face meeting, as we typically do in order to discus our responses and to make sure that they are acceptable in their totality for this.
In regards to our contracts sales business, we believe that our contract sales business will normalize to a certain extent to levels that we had hoped to achieve based on the launch of Ketotifen and our ability to contract manufacture that product in summer state for several companies that have an expansive interest in creating of land of those data with Ketotifen Fumarate.
The -- your question regarding DTPA sales, I am not willing to share our internal projections at this particular point in time. And do we have some numbers from the government? We do. And the reason I am not willing to share these projections is simple one.
They don’t always stay fixed before the purchase orders actually cut and because the orders have to go through the normal funding channels and helping numerous services and office and management and budget, I think it’s just prudent for us to look at it potentially as upside to our business that we could shift in the first quarter and potentially announce in the 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 fourth quarter.
Yeah. We have a necessary requirement as part of our agreement to sell 2 million doses of the multiple-dose vaccine, prior to the launch of the unit dose preservative-free vaccine. So, we are diligently trying to 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 in internal objectives, in terms of sales in the fourth quarter, obviously September sales represents somewhat a wide -- of a load into our distributors that we’ll be utilizing for the multiple-dose vaccine as well as the unit does preservative-free vaccine.
But I think, we would expect to somewhere in the -- and hope to see somewhere in the neighborhood, approximately the same amount of sales in the fourth quarter as we did for the month September where multiple-dose vial.
Noelle Tune - Soleil Securities
Great. Thanks so much.
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 you might get an order, but it sounds like it probably would not ship in 4Q why?
Yes. Robert, there is absolutely no way that we would be able to ship an order DTPA in the fourth quarter, simply because we do not stockpile the products here on an inventory basis. We -- our manufacturing partner Hyaluron, makes it as per orders received.
Robert Uhl - Friedman, Billings, Ramsey
Okay. And then just, you know looking at the Ophthalmic product 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 a sequential decline every quarter so far this year. So, what’s going on in that business that makes the sales tricky each quarter it seems?
I think some of it just wholesaler ordering patterns. I think some of it has been a lack of new product introductions. We have not launched Ketotifen and Diclofenac and says we really wouldn’t do that until fourth quarter and I think its somewhat resembling a an older more mature product line that undergoes price erosion on year-to-year basis based on contracting activities with wholesaler resource programs ophthalmic distributors and hospital GPOs.
But primarily I believe that our core business as a company is somewhere arrange with our $45 million.
Robert Uhl - Friedman, Billings, Ramsey
(Operator Instructions). And we go to Doug Dudar (ph) with Bank of New York, Capital Market.
Good afternoon. I just have several questions. I guess the first question (inaudible) you commented that your 41 drugs or 41 filing with the FDA and expect approval of those with continue period. How many of 41, do you anticipate within a 12-year period -- sorry, 12 months period and how many additional filings do you expect in the next 12 months?
That’s an excellent question. We expect four filings in the fourth quarter and Doug, I am going to have to -- I've to get back to you with potentially our expectations for product improvement within the next 12 months.
I don’t have that information in front of me, I apologize.
Okay. I guess next question I’d have would be in this press release for the first time I’ve seen you comment on importing the sales force for Vanco. So obviously, you know, you are -- you’ve got great deal of conviction of the fourth quarter Vanco approval. Can Doug talk a little bit about once you get the approval kind of you know what your rollout strategy for Vanco?
Yes, I think that I can speak to that. Doug is primarily our VPO back scene sells. We’ve always had a hospital sells team but a smaller one in size, about eight to ten over the last couple of years were hire into that group to help generated much GPO compliance to our contractors as possible.
We’ve gone to twenty because I’ve always believe and being in the business for many years that this is representative of a good number of reps in order to establish GPO compliance with major hospitals and we can afford 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% of the product is sold to in the retail sector to change an wholesalers source program and for our national account group headed by John Sabat and his ex-folks in his department attempt to secure contracts in that area with larger retail customers. In the hospital area where 50% of the product is also sold.
We will contract with all of the major GPOs that is Premier Innovation primarily, (inaudible) supply schedule, Minnesota multi-stage. I am probably forgetting some others, I am sure that are representative of large purchasing groups that represent hospitals that were prove their resources in order to buy pharmaceutical products and other medical devices as better.
And so that approach is coupled with a compliancy approach that our hospital sales reps, they comply themselves to actually call on directors of pharmacy or the pharmacy buyer with armed with intelligence before they walk into and count based on a simple program and derivative (ph) all that we have, that allow them to recognize any hospital that is not complying to awarded Akorn contract then achieve GPO contract.
So, our extension of in addition to sale force just leveraged 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 you can laver all those products up to the GPO contract organizations national count as well as and use your hospital reps as a compliancy monitor to alert hospital for not buying your products that are contracted for with the net specific group purchasing organization.
So I just -- there is a follow-up here on that. The first question that be would be are you already go on that front what you have subscribe and the second would be are you currently manufacturing Vanco in preparation for launch?
We are ready to go and we will be able to sale products on day one of approval.
Okay. I guessed couple other quick questions. When are you going to start giving guidance? I mean are you going to give 2008 guidance point or is your intention in sub point to start giving that in giving guidance.
And I guess the next question would be just the quick one for Jeff, which is the (inaudible) what are the payments and what are the timing of the payment this year regarding the licenses?
Okay. In regards to guidance I am not a big believer in guidance. And certainly as a development stage company today or what we certainly have a core revenue base. I think, if we gave guidance, to be quite warranty, which is probably fluctuate on it. We provide, we certainly have our own internal model record company. That goes out in a five-year time frame.
And we communicate with our analyst for the time to time to take a look at their models, looking out specially after set of our anticipated large product approval to Vanco license for act in and for this unit those preservative free vaccine so we have clearly, telegraph some guidance on some of those products.
But I can’t tell you, I certainly cannot reticulate as the where there is a company we will provide guidance down the road. And for the simple fact that, we are not mature company.
I think is lot tough for a company like us to provide more accurate guidance as compared to one that is more a newly based perhaps like a general 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 business model than we are at this point in time.
Doug, you had a question about Serum. We filed an 8K that described the number of understanding with Serum as well as both company’s obligations. And as you’ll observe, we have several agreements within the next 60 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 the signing of a contract, the filing of an ANDA submission or and in this case of BLA license, approval of the product for instance. So, I would expect this to be downstream payments primarily because of the timeframe involved with securing of BLA license.
If I may add in the case of this number of understanding, there is a fee for exclusive marketing rates and…
Well, and that what I was talking.
Oh, yes and so, that fee which is nominal for the market opportunities for each product is not being disclosed. But that fee is not payable until Akorn decides, if they want to proceed, the clinical trials in order to secure the BLA approval.
And the reason for that is, if in pre IND meetings for any of these vaccines it is seen by Akorn that the cost to conduct the clinical which prohibitive, we have the opportunity not to pay that exclusive licensing fee and walk away from the opportunity of that specific vaccine product. We have an opt out clause.
Okay. Thank very much.
If they have no questions we just.
And Mr. Przybyl, seeing no further questions at this time. I’ll turn the conference back to you for any closing or additional remarks.
I just like to thank everybody for participating in the conference call, for their continued support as an investor in the company. We certainly look forward to our near term product approvals. We anticipated an earnest with Vancomycin, our vaccine product and accent and for the results in better areas after the launch of those products. Thank you very much. Bye, bye.
Ladies and gentlemen that thus concludes today’s conference. We thank you for your participation. Hope, you have a great day. You may now disconnect.
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