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Executives

Thomas D'Ambra - Chairman, President and CEO

Mark Frost - CEO

Albany Molecular Research Inc. (AMRI) Q1 2008 Earnings Call May 5, 2008 10:00 AM ET

Operator

Good day everyone, and welcome to the AMRI first quarter 2008 earnings release. As a reminder, today's conference is being recorded. For opening remarks and introductions I will now turn the call over to Dr Thomas D'Ambra Chairman, President and Chief Executive Officer. Please go ahead sir.

Thomas D'Ambra

Thank you, Tamara. Good morning ladies and gentlemen, welcome to the conference call segment of AMRI's first quarter 2007 earnings announcement. This call is a follow-up to our press release issued earlier this morning on Business Wire.

With me is Mark Frost, AMRI's Chief Financial Officer. Mark will discuss financial results and guidance, I would then provide additional comments. Mark?

Mark Frost

Thank you, Tom. Before we begin, I would like to note that much of our discussion today might be termed forward-looking other than historical facts our statements may contain projections, estimates and other forward-looking statements that involve a number of risk and uncertainties including those discussed in the company's annual report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on March 17, 2008 and the company's other SEC Filings.

While these statements represent managements current judgment on the future direction of the company's business. Such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. The company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date here.

I am now going to present financial results for the first quarter, an updated financial guidance for the second quarter and full year 2008. Further details are included in our press release issued earlier today over Business Wire.

We delivered a very positive quarter with improved profitability in our core contract services business. I'd like to underscore some operating highlights and key metrics on a year-over-year basis. These include over 30% contract revenue growth in our Discovery/ Development/Small Scale Lab business. Strong improvement in DDS gross margin sequentially by 400 basis points to 32%, compared with 28% in quarter four 2007 and an improvement of 500 basis points compared with 27% reported in quarter one 2007.

In addition, despite a soft production quarter at our US large scale manufacturing, improvement in DDS and strong Allegra sales enabled us to match our prior year performance and AMRI delivered adjusted EPS of $0.10.

Turning to the financial results for the first quarter of 2008, all comparisons are on a year-over-year basis. Total revenue was $53.6 million, an increase of 11% compared to $48.4 million in 2007. Total contract revenue was $45.3 million, an increase of 10%, compared to $41.2 million in 2007. Total contracts revenue encompasses revenue from AMRI’s Discovery Services, Development/Small Scale Manufacturing, and Large Scale Manufacturing business components.

Contract revenue from Discovery Services was $13.3 million, an increase of 34% from $9.9 million in 2007. Growth in this area was driven by all demand in all of our Discovery Services facilities including the US, Europe and Singapore. In particular, we saw a return of large pharmas utilizing our US medicinal chemistry service, as well as we realized further traction in selling the capabilities of our Singapore research center.

Contract revenue from Development/Small Scale Manufacturing was $13.2 million, an increase of 29% compared to $10.3 million in 2007. Most of the growth came from continued organic demand from specialty pharma biotech customers in the US, as well as the growing acceptance of our new research center in Hyderabad, India, which is now beginning to book additional work from US and European customers.

Contract revenue for Large Scale Manufacturing was $18.7 million, a decrease of 11% compared to $21 million in 2007. As discussed on our quarter four 2007 earnings call, a few items contributed to this decrease. First as expected, our other legacy commercial products did not experience reorders, which contributed $5 million of quarter one 2007 revenues. Also the DEA quota issue we previous discussed related to Vyvanse continued in quarter one 2008, as we had expected.

As we have stated in the past, customer delivery patterns cause greater volatility in revenue for this business segment.

With 16 customer compounds in late stage clinical trials, including one of these compounds undergoing validation production runs in 2008, and another readying for a possible commercial launch in late 2008, or early 2009, we remain optimistic about the long-term potential for our manufacturing capabilities and capacity. As the market continues to look for high quality and consistent manufacturers with global capabilities, we remain confident we can secure further commercial supply agreements, as some of these products transition into commercial production.

Recurring royalties from Allegra were $8.2 million, which is up 15% from $7.1 million in 2007. AMRI earns royalties from worldwide sales of the non-sedating antihistamine Allegra, as well as the authorized generic for patents relating to the active ingredient. The Allegra product experienced strong growth in international markets, which contributed to the overall positive royalty performance versus 2007.

Adjusted net income in the first quarter of 2008, which excludes the $1.6 million or $0.05 per diluted share adjustment to decrease income tax expense, due to the resolution of an outstanding income tax examination was $3.1 or $0.10 per diluted share, compared to net income $3.2 million or $0.10 per diluted share in 2007.

A few words on margins. Overall gross margin was 20% compared to 21% in quarter one 2007. DDS margins increased to 32% from 27%, and large scale margins decreased to 3% from 14%. The margin decrease on large scale was driven primarily by decreased plant utilization on lower revenue. We expect the trend of lower comparable margins to continue in quarter two 2008 and reverse in the second half of 2008.

Gross margins in our Discovery and Development segment continue their progress with a further 5% improvement increasing from 27% to 32%. The key driver for improvement was the volume benefit from growth in Discovery Services worldwide. It's important to note that margins in the US portion of our DDS business have improved to reach the lower end of historical levels we have discussed with many of you.

As our hybrid model continues to drive revenue through all of our facilities, we continue to believe we can achieve our goal to move to the upper end of our historical range. I am also happy to report that with a strong revenue growth experienced at our Singapore work facility, it has now achieved profitability.

I would like to take a moment to discuss the tax item from the quarter. As we mentioned in our release, we are able to reach clarity in a few outstanding tax matters during the quarter, which resulted in a 1.6 million reduction in our accrued tax liability. This benefited EPS by about $0.05 for the quarter. Due to the nature of these items however, as well as tax law changes that were implemented in certain jurisdictions we do not expect our overall tax rate to change from recent levels, and it should approximate 35% to 36% for 2008.

Before we review our revised guidance, I would like to update you on the progress of the share repurchase program announced in February. Through April 30, we repurchased 1.4 million shares at a total cost of 15.7 million. We expect this will reduce our weighted average shares outstanding to about 31.5 million shares by the end of 2008.

Now, I am going to turn to our financial guidance for quarter two. In the second quarter, we expect contract revenue to range from $43 to $46 million, an increase of up to 15% from last year. Increased demand for Discovery Services, and continued strong demand for Development/Small Scale Manufacturing, are all expected to contribute to the growth in contract revenue in the second quarter. To get to the range of $43 to $46 million, we project Discovery Services revenue to range from $13 to $14 million, an increase of up to 45% over 2007 level. We anticipate Development/Small Scale revenue to range from $13 to $14 million, an increase of up to 32% from 2007.

We project large scale revenue to range from $17 million to $18 million, a decrease of 8% to 13% over year. This decrease is primarily due to shifts in customer delivery patterns. In addition, the DEA quota restriction will continue to have a negative impact on our ability to manufacture and shift the active ingredients for Vyvanse. We expect royalty revenues to decrease by 5% from quarter two 2007.

We expect gross margin to be flat with the second quarter 2000 levels because of the lower revenue in Large Scale, off set by the recognition of a portion of the upfront fee from our CFF screening deals.

From a cost standpoint, we project R&D to grow by 5% to 10% from second quarter 2007 and SG&A to increase by 15% to 20%. Two items working against us for quarter two, and likely the balance of 2008, are the lower interest rate environment versus 2007, as well as a weak US dollar, particularly relative to the Hungarian Forint, which has experienced strong appreciation recently.

We're estimating earnings per share for quarter two 2008 to be $0.08 to $0.11 per share, down from $0.14 per share in the second quarter of 2007. Again, our EPS estimates assumes there is no at-risk launch of a generic version of Allegra D.

Now, I am going to turn to full year guidance, for the full year 2008, we are raising our estimate contract revenue to range from a $181 million to $185 million, an increase of up to 13% from 2007. To get to the range of a $181 million to $185 million, we project Discovery Services revenue to range from $54 million to $56 million, an increase of 30% to 35% over 2007's level.

We expect increased demand for our medicinal chemistry services both in the US and Asia, as well as strong Natural products and screen revenue from contracts, which we signed in 2007.

We anticipate Development/Small Scale revenue to range from $51 million to $52 million, an increase of 12% to 15% from 2007. We continue to project Large Scale revenue to range from $76 million to $ 77 million, an increase of up to 1% over last year.

A further point on our contract revenue guidance, is it excludes any potential milestone from AMRI's biogenic amine's collaboration with Bristol-Myers Squibb or any other project.

Moving away from contract revenue, we expect royalty revenues to decrease by 5% for the balance of 2008, based on growth overseas offset by continued erosion in the US Allegra market.

Turning to margins, we expect gross margin to increase 2% to 3%. As we stated in last quarter, our gross margin improvement is higher, we have to offset the impact of the renegotiation of our largest commercial contract, which resulted in a 2% hit to company gross margins.

From a cost standpoint, we project R&D to grow by 10%, as we advance our $2 billion inhibitor program into Phase I clinical trials in 2008 and SG&A to increase up to 15%.

We are estimating earnings per share for 2008 to range from $0.38 to $0.42, representing up to 50% growth. Our EPS estimate assumes there is at-risk launch generic version of Allegra D.

At this point Dr. D' Ambra will continue with additional comments.

Thomas D'Ambra

Thank you, Mark. We had a good first quarter as has been described. Backing up the tax benefit and the better than expected Allegra Royalties, our lab contract business shows strong growth.

Discovery services as Mark just shared had a very strong first quarter by exceeding expectations in all locations, with results from the US and Singapore being particularly noteworthy, setting the tone for the remainder of 2008.

Performance in our Development/ Small Scale Service sector continues to remain positive with every business unit exceeding first quarter revenue targets. This area encompasses our analytical and chemical development services, as well as Small Scale cGMP synthesis of early clinical batches.

In the US we continue to experience strong growth rates in all areas of this business with another quarter of 20% plus organic revenue growth. This segment also includes our Hyderabad India lab, which completed a record first quarter of revenue.

This is a result of a combination of efforts on behalf of AMRI's focused sales efforts, word of mouth and repeat business from customers using our Hyderabad services and the visibility being gained by the continued marketing and successful deployment of AMRI's hybrid model. Like Singapore, we believe our Hyderabad operations have turned the corner and the first quarter set the stage for what we believe should be a good year for both.

Turning to Large Scale, although down from a strong first quarter in 2007, our large scale manufacturing operations in the US met guidance for the first quarter. Mark, has already shared some of the details around the lumpiness of quarterly revenues in the sector, in part due to timing of customer shipments, which impacts revenue recognition.

As a follow-up to prior comments about DEA quota limiting our ability to manufacture the active ingredients for Vyvanse, we believe that our sales of this API will come in lower for the year than we had originally envisioned. There could be some upside here if the sales of Vyvanse pick up particularly since Shire recently received approval for the adult indication for ADHD. Please note that since Shire rightfully carries an inventory of products, plus having DEA quota's in the middle, it is not appropriate to draw any conclusions regarding our sales of the API with end sales for Vyvanse.

In addition, we affirmed our forecasts in orders up to three additional late stage developmental APIs that we are making for three new innovative drugs, which should more than fill in any gaps. Of the three new products, all are at late stage Phase III clinical are pending FDA approvals. A successful development of these new products bodes well for our commercial API pipeline for 2009 and beyond if these products are ultimately approved.

We are currently at various stages of negotiating the commercial manufacturing agreements for each of these new products, while we continue to manufacture Phase III in pre-launch quantities for these separate customers.

Our Indian large scale operations resulting from purchases completed in 2007, continues to require investment and time to get to where it needs to be. Factors complicating the integration are price increases on raw materials over the last year, as well as the weakening dollar.

In line with our plan, several plant upgrades have been instituted and continue to be made to our large scale manufacturing facilities in Aurangabad, India. A plant expansion is also underway at the recently purchased FineKem facility. This includes support infrastructure as well as construction to increase our capacity to conduct non-cGMP pilot scale work on that side. We believe there is significant demand waiting for these new facilities to be completed.

We have invested significant resources in our overseas expansion on multiple fronts, including Singapore, Hungary, and several locations in India. Just as we believe, we have turned the corner in Singapore and Hyderabad, we believe that our Large Scale operations in India and our Lab Services in Hungary will follow in due course.

We remain on track to complete a previously announced expansion in Singapore with inVitro biology and additional chemistry labs scheduled to open on or about the end of the second quarter.

Shifting gears, I would like to share a few comments regarding our R&D programs. Although, there were no announcements during the quarter, we continued to have significant activity.

Our CNS collaboration with Bristol-Myers Squibb continues to progress to lead candidates towards a clinic for our next generation anti-depressant indication. Advanced preclinical testing continues with results still indicating the potential for a Phase 1 clinical study on this compound Inman, commencing in 2008, which would result in an additional milestone payment to AMRI, currently not factored into our guidance.

As we previously stated there is the potential for other candidates to be nominated for development from this collaboration, which also would result in another milestone payment for AMRI.

Progress also continues to be made on our oncology program, which currently has not been partnered. We expect to file an IND for this compound, and commence the Phase 1 study during the third quarter this year. Of note, is that the continued evaluation of our compound in preclinical models is indicating that it may be even more effective than previously thought, increasing our confidence for this program.

Of our several other R&D programs as described in our website, AMRI program for obesity, in Irritable Bowel Syndrome or IBSD are being very promising. We continue to support the possibility of the designation of additional preclinical candidates before year end in both.

As we look back on the first quarter of 2008, we are pleased to report that AMRI's performance came in better than we anticipated and sets an upbeat tone for the remaining quarters to follow.

Our US lab operations continue to experience strong demand. We continue to focus on executions against plan to fully realize the potential of our overseas and R&D investment. Although significant progress has been made, we are still in early stages of reaping the true value of these investments. Even as we reflect on the accomplishment of several initiatives, we remain focused on improving our performance across all of our business segments and locations. We remain enthusiastic about the potential for a strong year for AMRI.

I would like to conclude by extending my sincere thanks to our employees and my colleagues at AMRI. Their dedication and contributions are the reason that AMRI is successful today and in position to have a great future.

Thank you also for your interest AMRI. At this point, we will be happy to answer any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And at this point Dr. D'Ambra, we have no questions.

Thomas D'Ambra

Thank you, Tamara. This concludes our conference call session for this morning. Thank you again, for your interest in AMRI.

Operator

And ladies and gentlemen that does conclude today's conference. We thank you for your participation. You may now disconnect.

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Source: Albany Molecular Research Inc. Q1 2008 Earnings Call Transcript
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