Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Akorn, Inc. (NASDAQ:AKRX)

Q1 2008 Earnings Call

May 12, 2008 5:00 pm ET

Executives

Arthur S. Przybyl – President, Chief Executive Officer and Director

Jeffrey A. Whitnell – Chief Financial Officer, Senior Vice President, Secretary and Treasurer

Analysts

Scott Hirsch – Credit Suisse

Noelle Tune – Soleil Securities

Doug [Dieter] – Broadpoint Capital

[Boris Becker] – Cowen and Company

Paulina Noweabonska – Sectoral

Operator

Welcome to the Akorn, Inc. conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to the president and CEO, Arthur Przybyl.

Arthur S. Przybyl

Welcome to Akorn’s conference call. My name is Art Przybyl and presenting our financial position today is Jeff Whitnell, our Chief Financial Officer. We will hold a brief question and answer period at the end of the presentation.

Before I begin I would just like to read a brief forward-looking statement comment. Statements presented in this overview which are not historical facts are forward-looking statements which involve 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 the company’s Security & Exchange Commission filings.

The results of our first quarter are indicative of our improving business model. We are encouraged by our growth in all four of our business unit’s ophthalmic, hospital drugs and injectable, vaccines and contract pharma manufacturing. Whether apparent or reported revenue increases or not so apparent but nonetheless significant market share gains and/or development in manufacturing contracts, we are excited about our opportunities for the remainder of 2008. We believe this will be a great year for us.

In the first quarter revenues increased by 24% over the prior year period to $14.5 million. Ophthalmic revenues recorded a strong increase of 41% to $6 million believed by IC-Green revenues that now reflect our historical run rate. Initial shipments of Ketotifen began and we recently received two FDA NDA approvals for both Ofloxacin and Diclofenac Ophthalmic Solution. These products will add to our ophthalmic revenue base in the third and second quarters respectively.

More importantly, we are now within 30 days our Akten PDUFA date of June 2, 2008. We anticipate approval on this date. Our conversations with FDA reflect this confidence and we expect to launch Akten in the second quarter. Akten is a topical gel anesthetic whose indication is broad; any ocular procedure that requires a topical anesthetic. This includes cataract and other anterior segment procedures, refractive surgery, intravitreal injections, laser procedures and minor diagnostic surgical office space procedures.

When approved Akten will possess the highest concentration of topical ophthalmic anesthetic available, be delivered by an ophthalmic dropper in a unit of use preservative free format, have a rapid onset with extended duration anesthetic affect and have an outstanding ocular and systemic safety profile. Akten is viscous making for easier administration and has no stinging effect. The potential market for Akten is approximately 11 million procedures annual. Two million in anterior segment surgery, one million in refractive surgery, one million intravitreal injections, three million laser procedures and four million minor office base diagnostic and surgical procedures example of which include foreign body removal, suture removal and placement and minor eyelid procedures.

Currently the only other FDA approved ophthalmic topical anesthetic is Proparacaine drops 5% and they contend to have a limited duration of anesthesia, they are not preservative free and corneal opacification and toxicity can occur as a complication. Our Akten NDA is a 505B2 filling whereby we are pursuing a new indication for an established approved chemical compound.

The market for Akten can be split simply into hospitals and office based physician surgy centers that perform ophthalmic surgical procedures. Our initial marketing targets will be our current customers. We estimate that approximately one million of our two million units sold of this chemical compound are being used off label in hospitals for ophthalmic surgical procedures. We believe that legitimizing ophthalmic use of this product will be of significant importance to hospitals.

Secondly, we currently market Proparacaine as well and will target these customers to switch to Akten. We have filed two US patents in order to protect and secure our intellectual property and extend our three year exclusivity. It has been approximately 25 years since a new approval for an ophthalmic ocular anesthetic has occurred and we believe there will be a significant opportunity for Akten. As an example of Akten’s potential, sales of one million annual units would equal to $25 million in revenue and a gross profit of 93% for the company. We look forward to launching Akten in June.

Hospital drugs and injectables revenues increased by 21% to $5 million. This increase was primarily driven through greater group purchasing organization contract compliancy in large part due to the expansion of our hospital sales team. We did not launch any new hospital drugs in the first quarter but rather extended our market share gains on products such as HYDASE that in March achieved 25% pro forma annual market share.

We launched HYDASE approximately nine months ago. More importantly, our complete product line wholesaler pass through sales have increased every month since January and recently reported April sales set a record. Our hospital sales through our wholesalers have increased 15% since January and are representative of our stronger increased percentage of hospital contract compliancy.

Revenues for the Akorn-Strides joint venture are expected to begin in 2008. The joint venture has placed purchased orders for five injectable products, three announced ANDA approvals, one for Fosphenytoin Sodium, two for Ondansetron Injection and two other as yet unannounced products. We expect these two ANDA approvals in the near future.

We continued to include oral generic vancomycin revenues in our 2008 model. Although we have not updated guidance towards an anticipated approval date. However, we remain firmly convinced that FDA is managing the situation and that the citizens petition will ultimately be denied and by doing so will bring an end to this costly non-patent protected monopoly that has some clinicians prescribing the injectable version because of the prohibitive cost of the current oral vancomycin product. We stand ready to capture the vast majority of this market when our generic ANDA application is approved in 2008.

We continue to meet with senior health and human service officials on the subject of forward deployment of DPTA and hope to be able to provide sustentative reports on future conference calls. The opportunity remains for a significant order for DPTA as the need for forward deployment remains an objective for HHS. There is no need to negotiate a new HHS contract since option units remain available on contract for this potential requirement.

Vaccine revenues generated $1.8 million in the first quarter. Vaccines were not launched until September, 2007 and hence no prior period revenues exist. Since our launch, vaccine revenues of approximately $9.5 million have been reported. Currently, vaccine revenue only includes unit dose and multiple dose versions of Td Tetanus Diphtheria vaccine. Flu vaccine revenues will begin in August, 2008.

Since our last conference call we began pre-booking flu for delivery beginning in August through our relationship with CSL for their Afluria products and since then we have expanded our flu offerings to include GSK FluLaval product and Novartis Fluvirin products. Through Friday May 9 flu pre-book sales exceed $7 million.

Vaccine revenues in the first quarter were primarily derived from the launch of our unit dose preservative free Tetanus Diphtheria vaccine and, our progress to date has met our expectations. Since launch, we have converted and sold unit dose Td vaccine to 574 hospitals. Our actual sales run rate in April exceeded the entire first quarter and is representative of an annual pro forma run rate of $9 million. We currently have converted an additional 123 hospitals committed to buy but who have not yet purchased representing an additional $3 million in annual sales.

A large hospital corporation has also committed to buy representing an additional $1.9 million or 108,000 doses and $1.9 million in annual sales. Based on this and at the rate we are closing hospital accounts, we expect our annual pro forma sales run rate to reach $16.8 million by June, 2008 for unit dose preservative free Tetanus Diphtheria hospital vaccine sales market share in excess of 20%.

Our multiple dose vial of Td vaccine is primarily sold to office based physicians, clinics and public health. Currently, distributors are our primary means of reaching this market and most every one of them now purchase this vaccine from us. Distributors continue to exhaust past inventories of this vaccine. Remaining significant inventories include expiration dates of June and July. We expect to see an increase in distributor orders in the second quarter.

Since the beginning of the second quarter we have received orders in excess of $2 million in multiple dose vial from distributors. On April 19 we submitted the Center for Disease Control bid for multiple dose vial Td vaccine. Last year approximately 1.2 million doses of Td vaccine were sold to state and county public health departments through this award. The award takes affect July 1. We expect to win the award because we are the only distributor that has an authorizing letter from our manufacturer and one year expiration dating, two necessary requirements to receive the reward from CDC. We will service this reward directly and not through distributors.

We still have approximately $13 million of multiple dose vial inventory, approximately 1.2 million doses from our initial $20 million inventory buy or two million doses but expect to liquidate and sell this inventory over the course of the year. At that time we will begin the transition to the unit dose preservative free Td vaccine for the office based physician market. Because of the higher gross margins for that product, this has always been our intent and strategy for this exclusive vaccine agreement.

Our contract pharma manufacturing business segment generated revenues of $1.6 million and we expect this business segment to grow substantially over the next several quarters. The second quarter will see a moderate revenue increase over the first quarter. We expect Q2 revenues to be approximately $2 million. Since we began shipping our Ketotifen ANDA ophthalmic product under a branded label for another large pharma ophthalmic company.

The second half of the year is expected to generate sales that approximate a pro forma $14 million annual sales run rate primarily due to the launch of Advanced Vision Research TheraTears. More importantly three as of yet unannounced contract pharma business partnerships could serve to double revenues in 2009 bringing our total contract pharma business to over $20 million on an annual basis.

To that end, today we signed a development agreement in excess of $600,000 with one of these three companies to develop and commercialize two ophthalmic over the counter products. When commercialized in December, 2008 this relationship is expected to generate an additional $8.4 million in new annual contract pharma revenue. We continue to actively seek [lyopholize] business and are ready to both develop and fill finish [lyopholize] products for customers.

Before Jeff presents his financial presentation I would like to discuss several specific areas of our P&L statement. Gross margins improved by five points to 26% over the prior year period and gross profit dollars increased by 48% to $3.7 million. Several factors contributed to this: a favorable product mix and IC-Green revenues reflecting our historical run rate helped. Although vaccines typically have a lower gross margin percentage associated with their sale and will tend to lower our gross margin percentage as their sales grow, we believe gross margins in our two manufacturing plants are beginning to improve.

Our New Jersey facility is at capacity on a one shift basis. We are now at a point where we can shift our manufactured products to a higher gross margin mix with the addition of Ketotifen, Diclofenac and Akten. This will result in a standard margin improvement of 12 points from the first to the second quarter for this facility.

In our Illinois facility efficiency and cost cutting measures are in place although our Illinois plant still suffers from a lack of new product introductions. This is why our new contract pharma opportunities are important combined with the anticipated ANDA approval for a Schedule II narcotic in the second half of 2008. In the Illinois facility we will be able to adjust our product mix for ophthalmic production in the second half of 2008 just as we did in the New Jersey facility. Injectable production will be helped by additional narcotic production but will remain a challenge until new [lyopholization] business is developed.

SG&A expenses totaled $6.3 million and increased $1 million over the prior year period. We estimate that SG&A for the remainder of the year will be approximately $6 million per quarter. The increase over the prior year is due in large part to the expansion of our sales teams. We currently have 65 sales representatives. Our sales coverage overlaps in our business segments and provides us with 54 reps selling vaccines, 24 reps selling hospital drugs and injectables and 33 reps selling ophthalmic drugs. We also have two reps managing our contract pharma business unit. At this time and for the foreseeable future, our sales team expansion is complete.

Research and development expenses total $2.4 million in the first quarter. To better help you understand our true run rate quarterly in house R&D expenses are approximately $1.15 million. In the first quarter we wrote off two previously capitalized fees and paid for fees totaling $1.25 million reflecting the expenses associated with an FDA filing fee and a milestone licensing fee. For the second quarter our R&D expenses will approximately $1.5 million in total. $1.15 million of in house cost and $340,000 of expected partnership milestone fees.

I will now turn the presentation over to Jeff for a more detailed financial presentation.

Jeffrey A. Whitnell

Total revenue for the first quarter 2008 was $14.5 million versus $11.7 million in the first quarter 2007. The year-over-year increase is principally due to improved product sales in our ophthalmic and hospital drug and injectable business segments. During the first quarter 2008 ophthalmic and hospital drug and injectable business segment revenues excluding DTPA increased by approximately $1.7 million or 41% and $800,000 or 21% respectively versus the prior year comparative period.

In our ophthalmic business segment net revenues were $6 million versus $4.2 million for Q1 07 and reflect strong sales of our diagnostic products primarily IC-Green which now reflects its historical run rate. The hospital drugs and injectables segment net revenues were $5 million versus $4.2 million for Q1 07 led by greater hospital contract compliancy and increased sales of high margin anecdote sales.

The company recorded DTPA product revenues of $1.2 million in the first quarter 2007 and negligible DTPA product revenues in the first quarter 2008. The company also recorded vaccine revenues of approximately $1.8 million in the first quarter 2008 which reflects the launch of our unit dose preservative free Tetanus Diphtheria vaccine to the hospital market. The contract services business segment net revenues were $1.6 million versus $2.1 million in the comparative prior year period, a decline of $400,000.

Gross profits for the first quarter 2007 were $3.7 million as compared to $2.5 million in the first quarter 2007. The aggregate increase in first quarter 2008 gross profit of approximately $1.2 million versus the comparative prior year period was due to a favorable product mix of ophthalmic and hospital drug and injectables. Sequentially, first quarter 2008 gross margin improved to 25.9% versus the fourth quarter 2007 gross margin of 22.3%. Lower contract services business segment volumes resulted in reduced revenues albeit at higher margins. However, manufacturing yields at our Decatur, Illinois manufacturing facility improved year-over-year which resulted in a lower plant variance.

Selling, general and administrative expenses totaled $6.3 million in the first quarter 2008, an increase of $1 million over the comparative prior year period. This increase is primarily due to the expansion of our sales team from 30 to 65 representatives. The expansion of our sales team was necessary for the launch of our two vaccine products Tetanus Diphtheria and Flu and our anticipated product approvals and subsequent launches of our ophthalmic NDA Akten and our ANDA for generic vancomycin capsules.

Research and development expenses were $2.4 million in the first quarter 2008 versus $2 million in the comparative prior year period an increase due to the expensing of a previously capitalized and paid for licensing fee and FDA filing fee. The net loss for the first quarter 2008 was $5.5 million or $0.06 per fully diluted share versus $4.8 million in the first quarter 2007 or $0.05 per fully diluted share. The March 31, 2008 fully diluted share count for the company is 94.2 million which assumes stock options and warrants are outstanding for the full year rather than on a weighted average basis.

I would now like to draw your attention to the balance sheet. As of March 31, 2008 the company had cash and cash equivalents equal to $3.4 million plus approximately $3.7 million of undrawn upon availability under our credit agreement with our commercial banker, The Bank of America, formerly The LaSalle Bank. We also have restrictive cash account balance of $3.3 million. Our relationship with The Bank of America can be best characterized as excellent and supportive. We are in full compliance with all of our financial covenants as of March 31, 2008. To date we have used our revolver with The Bank of America to fund our investment in Td vaccines. As of March 31, 2008 our carrying value on the balance sheet for both the Unit dose and the multi-dose TD vaccine total approximately $19 million.

However we expect vaccine shipments to accelerate in the second quarter 2008 for two reasons. Number one, Akorn is the only multi-dose vaccine supplier of Td vaccines in the marketplace with products dating greater than 12 months. Number two, distributors will be exhausting their on-hand multi-dose vaccine inventories in the short term. We believe that as vaccine inventories turn over we will be cash flow positive in the second half of 2008 and will have sufficient working capital to meet our business requirements this year.

Finally I would like to briefly review the statement of cash flows. During the first quarter 2008 we invested a total of $269,000 in machinery and equipment for our Somerset, New Jersey manufacturing facility and our Center for Excellence located in Gurnee, Illinois and for validation efforts associated with our Decatur, Illinois [lyopholization] facility.

We are also pleased to announce that our 2008 Annual Meetings of Shareholders for Akorn, Inc. will be held at 10:00 am local time on May 22, 2008 at the Arizona Biltmore Resort located in Phoenix, Arizona.

Thank you for your time and attention. I will now turn the teleconference back to Art.

Arthur S. Przybyl

We will open the conference to any questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Hirsch – Credit Suisse.

Scott Hirsch – Credit Suisse

Just a few questions for you, one I know you gave us some of the run rates for vaccines, could you give us a little more color on what’s going on with the market share shift in the market with respect to the Td vaccines and maybe, if you can, a little color as to how you go from where we are today to where you previously guided for vaccines?

Jeffrey A. Whitnell

Market share shift is best described as in the hospital market [Santa Fe] maintained the monopoly because of their Unit dose presentation. The opportunity in the hospital market for the Unit dose is approximately $80 million in total of the aggregate $225 million Td market. What we’re looking to accomplish by June is to basically penetrate that market of $80 million to the tune of a little North of 20%. Our overall objective is to have a run rate in the hospital market of approximately 50% or $40 million. In the office space physician market, including public health and clinics, the market is larger than the hospital market and primarily dominated by the multiple dose vaccine. In fact we have found in both markets, Scott, that the multiple dose vaccine and the unit dose preservative free vaccine are price sensitive, that both hospitals are looking to save money and physicians use a multiple dose vial vaccine as compared to a Unit dose presentation because of the fact that it’s cheaper and they save money as well.

The historical market share for MBL’s product in the office space physician market was approximately 30% of the overall market. So that opportunity from our perspective will become our market share as old existing inventories of previously distributed MBL vaccine are exhausted. And one of the big stepping stones for us, in terms of the ability to capture market share in that market, is the awarding of the CVC contract for us on July 1st which represents what we feel to be somewhere between 1 million and 1.2 million doses purchased on an annual basis.

Additionally you’ll see sales ramp faster as distributors have to buy from Akorn the multiple dose vial product in larger numbers, again as their previous inventories go out of date. We still see the Td market as $100 million opportunity for us and what we try to calculate and extrapolate is how fast we can get to that opportunity. We think that that opportunity actually will increase when the multiple dose vial market is completely exhausted and that should occur sometime in the first or the second quarter of 2009. We think the transition to Unit dose Preservative Free at a higher revenue and a higher margin will begin in the latter part of 2008 but obviously there is no more further production of multiple dose vials and so the last expiration dating of that product realistically is sometime in the beginning part of the third quarter of 2009. So you can factor a few months before that when you begin to see a much larger transition.

Scott Hirsch – Credit Suisse

Can you also update us on the Schedule II narcotic?

Arthur S. Przybyl

I think the best update I can give you is that we expect approval in the second half of the year. We also expect a contract manufacturing pharma arrangement for a Schedule II narcotic as well with the agreement for that product to be signed by the second quarter and I think the best guidance that we could provide for our own Schedule II narcotic is sometime in the second half of the year.

Scott Hirsch – Credit Suisse

Lastly, just to clarify on the inventory side, you have how much in inventory on the balance sheet and the rest you leveraged up your revolver to do that, correct?

Arthur S. Przybyl

That is a correct statement and I think Jeff mentioned that our total vaccine inventory right now is in the neighborhood of about $19 million and there will actually be a reduction of approximately $2 million of that inventory within 24 hours. In other words, we have an order in house for that amount.

Operator

Your next question comes from Noelle Tune – Soleil Securities.

Noelle Tune – Soleil Securities

I just want to continue on trying to get a little more clarity around the Td vaccine, are you willing to comment on what your expectations are for full year 08 sales?

Arthur S. Przybyl

No, I’m not only because it’s really based on the ability for us to capture share as quickly as possible against our hospital group purchasing organization contracts and we can extrapolate that out. We look at that share base, as I mentioned, by the end of June to be at approximately a little North of 20% market share or I believe it was $16.8 million on a pro forma annual basis. And frankly I think that although we track pretty closely in the office space physician market remaining inventories from prior distributor relationship with MBL, it’s not always easy for us to extrapolate their ordering patterns. So I would prefer not to provide guidance at this moment associated with what we think our annual sales will be for Td vaccine in 2008. I think by the end of the second quarter we’ll have a much better responsible analysis that will allow us to predict a number.

Noelle Tune – Soleil Securities

Is it safe though to assume, I understand the Unit dose, the market share assumptions there, and the math associated with that, is it fair,

Arthur S. Przybyl

The unit dose is tracked, Noelle, on a weekly basis. These are accurate numbers that are reported to us by an EDI system from our three main wholesalers, McKesson, Amerisource Bergen and Cardinal Health, to service our hospital GPO contracts. So they come through on what’s called a charge back and we can track actual sales and then we can also track people who have said they will be compliant with the contract and when they actually buy the product through these electronic sale processing. The numbers that we provide you with there are up to the minute in terms of accuracy.

Noelle Tune – Soleil Securities

In terms of the multiple dose vials, you have $13 million in inventory. Do you expect to sell by the end of 08? Did I write that correctly?

Arthur S. Przybyl

Yes. We expect to liquidate that over the course of this year and that $13 million in inventory I believe translates to about $16.5 million in revenues if I remember correctly.

Noelle Tune – Soleil Securities

On top of that potentially the 30% of the market that MBL previously had a portion of that market return to you over the course of the second half of year. Is that fair or is that overestimating?

Arthur S. Przybyl

I think that’s fair. MBL had previous relationships with Henry Schein and a one year relationship with ASD and the ASD inventory has completely exited the marketplace but there is still some Henry Schein inventory that’s out there. But we’ve seen all distributors, except for Henry Schein, turn to Akorn to purchase product. There are very few that have not purchased product from us and we expect obviously those purchases to accelerate again as they exhaust remaining inventories from previous distributors.

Noelle Tune – Soleil Securities

But it sounds like it might be too aggressive to think about you taking a full 30% of the overall Td market for six months?

Arthur S. Przybyl

I think what’s going to help us come July 1st is the CDC contract because public health and state and county public health departments really accounts for a large percentage and to be very frank with you, I can’t answer your question whether 30% is too aggressive or not. I need to do some, it’s a great question and I will speak to you privately about that if you just give me an opportunity to do some math.

Noelle Tune – Soleil Securities

A couple of hopefully easier ones, Jeff, you might have given us the fully diluted share count with the warrants and all, I think I missed it, something in the 92.5 million range I assume.

Arthur S. Przybyl

Right, let me re-read that statement. The net loss for the first quarter was $5.5 million or $0.06 per fully diluted share versus $4.8 million in the first quarter 2007 or $0.06 per fully diluted share. Then the fully diluted share count we use, Noelle, is 94.2 million, again that assumes stock options and warrants are outstanding for the full year rather than the GAAP definition of weighted average.

Noelle Tune – Soleil Securities

In terms of the ophthalmic business, the $6 million in the first quarter, that’s the basically March the 3rd straight quarter of growth? Is that a good run rate going forward or should we assume some stocking in that number?

Arthur S. Przybyl

I think that’s a pretty good run rate, Noelle, and we certainly hope to see it go north of that with the introduction of Akten and Diclofenac this quarter and then followed on by the introduction of Ofloxacin in the third quarter. The question for us with Akten is how fast, again, can we ramp sales. We’re not introducing a new chemical entity, we are introducing an existing chemical compound that has been used in off label use in ophthalmology. We’ve got customer bases that we can approach that potentially will be very interested in buying this product and we certainly see it as an opportunity to convert off label use of 1 million units in hospitals that we currently sell to the Akten product at a higher margin but obviously providing a greater coverage associated with liability from an indicated use of a product as compared to off label use. We would certainly hope that that $6 million ophthalmic number continues to grow.

Noelle Tune – Soleil Securities

Is that even if you exclude Akten, should we still expect to see some organic, so to speak, growth?

Arthur S. Przybyl

Yes, but that is really more dependent upon new product introductions.

Operator

Your next question comes from Doug [Dieter] – Broadpoint Capital.

Doug [Dieter] – Broadpoint Capital

Just a few quick questions, can you give us a ballpark number of the startup costs, building inventory for Akten? Have you begun stocking that for launch?

Arthur S. Przybyl

We’re going to be building inventory, or in essence validating three commercial lots. I don’t know if we’ve actually begun to fill the first. We’ll keep in bright stock because we’ll be getting labeling from FDA the week of the 19th but the cost of these three commercial lots is not a significant number.

Doug [Dieter] – Broadpoint Capital

Regarding your liquidity, just a few questions,

Arthur S. Przybyl

If I may, we’ll have approximately 50,000 units available for sale in the second quarter and an additional 12,500 units available for sampling through our sample program in the second quarter as well.

Doug [Dieter] – Broadpoint Capital

Regarding your liquidity, just a few quick questions there, what was your credit agreement EBITDA for the quarter? And then with your cash eroding here slightly in tapping into the revolver, can we assume, I know you commented that you’d be profitable at year end, can we assume we’ve hit a bottom of the trough in terms of tapping the revolver and cash or should we expect another cash burn moving into the next quarter? As a follow up to liquidity, should we have any concerns that you may have to do another equity raise or offering or something along those lines?

Arthur S. Przybyl

Let me answer the first part of your question. Could you repeat it one more time?

Doug [Dieter] – Broadpoint Capital

What was your credit agreement EBITDA?

Arthur S. Przybyl

Our credit agreement EBITDA for the first quarter was a -$2.8 million and without the R&D write off, the company, and it’s a non-GAAP calculation obviously and we don’t report it but the company was at a -$2.3 million EBITDA. If you read our Q you’ll see that LaSalle Bank provided a carve out to our covenant for this non-cash charge that we took from the balance sheet, the P&L statement.

Doug [Dieter] – Broadpoint Capital

It was $2.4 million right?

Jeffrey A. Whitnell

Correct.

Doug [Dieter] – Broadpoint Capital

Can you address the second part of that which was, I’m a little concerned about your potentially having to do an equity offering or something like that, in terms of your cash position and liquidity, can you give me some comfort that we’ve hit the bottom of cash burned? Can you give us some color there?

Jeffrey A. Whitnell

I think that Art teed up very ably the fact that as we turn our inventory primarily the vaccine inventory that will be providing the cash that we need to sustain operations. Essentially we’re cash flow neutral right now with the investment in vaccines on our balance sheet just waiting for the CDC contract to come through as well as continued transition of hospitals over to the unit dose vaccines, it’s our expectation and belief that as the vaccine inventories turn over that will be the cash replenishment for us. We are not contemplating a working capital raise at this particular point in time. I should also mention there was a $200,000 charge in a non-recurring activity on our first quarter P&L. This relates to a potential acquisition attempt by the company but I should make it very clear to everybody that the company is at this point in time not involved with or interested in any discussions associated with strategic acquisitions.

Arthur S. Przybyl

That’s a good point because our bank covenant does have a calculation for EBITDA that starts with net income and moves up. So it picks non-op charges and the $201,000 non-op charge that you saw again was a prior year paid for expenditure that was cleared from the balance sheet to the P&L in Q1.

Doug [Dieter] – Broadpoint Capital

Art, how many NDNAs do you have queued up here for the remainder of the year and expectations for, ballpark number of approvals being announced and filings?

Arthur S. Przybyl

Approximately 14.

Doug [Dieter] – Broadpoint Capital

That’s approvals or that’s filings?

Arthur S. Przybyl

That’s approvals. Filing numbers I do not have, I don’t have the filing number at the tip of my tongue right now.

Operator

Your next question comes from [Boris Becker] – Cowen and Company.

[Boris Becker] – Cowen and Company

Quick Q related questions on oral vancomycin, how much do you have built into your 08 sales estimates and when should we expect an update on the timing since it’s in your 08 guidance?

Arthur S. Przybyl

We won’t be updating our guidance. We put out guidance at the end of last year that we had hoped for an approval. So at this point in time we don’t feel it behooves us to put out additional guidance. As I mentioned, I believe FDA is on top of the situation managing the response to the CP and we’ll respond accordingly when appropriate. In regards to guidance for vancomycin, we have not put out a number associated with 2008 guidance for vancomycin. We just make the general statement that we are prepared to capture a significant share upon approval of the ANDA.

[Boris Becker] – Cowen and Company

Are there any outside things that you can monitor, looking at the FDA to get a sense of how this citizen’s petition is being accepted or progressing through or is really like black box?

Arthur S. Przybyl

I wouldn’t call it a black box, I think everybody has their way of trying to channel an understanding of where any approval within either the Office of Generic Drugs or the NDA division, it’s a lot different with NDAs because you pay for a filing fee and you speak to the folks. At Office of Generic Drugs certainly conversations occur, but they’re far different as compared to an NDA process. So we have a hired lobbyist through Akin Gump and from my perspective he keeps us pretty well informed in regards to progress on the CP as well as obviously we can track our own progress on the ANDA, CMC and [inaudible] portions of that.

[Boris Becker] – Cowen and Company

But we don’t expect any announcements from the NDA?

Arthur S. Przybyl

We will not be providing any type of guidance based on anticipated approval dates for vancomycin except to say that we anticipate approval in 2008 and we model revenues for the product in 2008.

Operator

Your next question comes from Paulina Noweabonska – Sectoral.

Paulina Noweabonska – Sectoral

Quick clarification on the potential CDC contract, I think you said you have 1.2 million doses of the multi-dose in inventory and the contract could be for 1.2 million. Does that basically mean they could take all of your inventory off your hands?

Arthur S. Przybyl

That is why we are very confident that we will sell out our multiple dose vial inventory over the course of the remainder of 2008.

Paulina Noweabonska – Sectoral

It would basically be over the year, if you get the contract, that that would happen?

Arthur S. Przybyl

Yes, they would take it over the year and then once it expires, then we will obviously present them with the unit dose Preservative Free opportunity.

Operator

You last question is a follow-up question from Noelle Tune – Soleil Securities.

Noelle Tune – Soleil Securities

I just want to make sure I understand if the CDC order does come through the entirety of it would be booked in 2008?

Arthur S. Przybyl

No, no. Let me clarify. The CDC is a solicitation from Centers for Disease Control to Akorn. We bid on this solicitation. We will automatically win it because of the two reasons I mentioned in my narrative. Then all the state and county public health departments across the country avail themselves of this award in order to purchase many vaccines not just necessarily multiple dose vial Td vaccine. But they’ll be buying from us directly and we service and do business directly with those public health departments. The Centers for Disease Control is responsible for the coordination of the award and the bid process, but they do not actually do any of the purchasing.

Noelle Tune – Soleil Securities

Should we assume that half of that gets shipped in 08 and the remaining half in 09?

Arthur S. Przybyl

I think that would be a fair assumption, yes.

Noelle Tune – Soleil Securities

In terms of pricing, are you willing to say if you’re giving them a discount?

Arthur S. Przybyl

We are still in negotiations with CDC. The award is public knowledge as of July 1st and I would just prefer to wait until the time of award, Noelle.

Noelle Tune – Soleil Securities

One point of clarity, you just had a lot of commentary on your gross margins. Can you give us some idea of how they look for the remainder of the year? I know Art you said they would improve at the New Jersey facility, but what’s the overall gross margin outlook?

Arthur S. Przybyl

We’re speaking to, Noelle, gross margins at our operating plant because clearly when we sell or ship our Flu pre-book orders, remember Flu is at a margin of 15% to 20%, and multiple dose vial vaccine is at a margin of 10% but unit dose preservative free vaccine is at a margin of 25%. My commentary was directed strictly to the products that we manufacture at our manufacturing plan.

Jeffrey A. Whitnell

Decatur and Somerset, particularly with Somerset at capacity and Decatur are generating favorable yields. That’s the improvement that we’re talking towards, Noelle.

Arthur S. Przybyl

Noelle, we’d have to speak to you and carve out the vaccines and then give you a better indication as to what our manufactured core gross margins will be.

Noelle Tune – Soleil Securities

I was wondering if you could give us an update on where you stand in your discussions with FDA on the pathway for the next generation vaccines, the ones partnering with Serum.

Arthur S. Przybyl

We will be submitting our first vaccine in May to CBER and hope to meet with them 60 days later. We have hired Dr. Bill Egan, the former vaccine director at CBER who now works for PharmaNet. He’s our engaged consultant. PharmaNet is the same CRO firm that did our 200+ face and clinical for Akten and I believe that that data analysis is done. The statistical significant clinical protocols are completed and we are reviewing that data response to CBER and we certainly hope within 60 days to have an understanding or an agreement with CBER on how many patients it will be required for both adult and pediatric clinical bridging studies for Hepatitis-B vaccine which is the first vaccine that we are submitting serums to CBER. Additionally our contract with Serum will likely be finalized within the next couple of weeks and you’ll probably see an announcement. But we’re operating under a Memorandum of Understanding at this point in time until that contract is formalized.

Operator

There appear to be no further questions at this time.

Arthur S. Przybyl

I’d just like to thank everybody who’s participated on the call this afternoon. The questions were great and we look forward to an excellent year here at Akorn. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Akorn, Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts