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Akorn, Inc. (NASDAQ:AKRX)

Q2 2012 Earnings Call

August 7, 2012, 10:00 a.m. ET

Executives

Raj Rai – CEO

Timothy Dick – CFO

Bruce Kutinsky – COO

Dinesh Dua – CEO, Managing Director Akorn India Pvt. Ltd.

Jeff Whitnell – CFO, SVP, Treasurer and Secretary

Analysts

Steven Crowley – Craig Hallum Capital Group

David Amsellem – Piper Jaffray

Elliot Wilbur – Needham and Company

Michael Higgins – Benson Paxton Securities

Paul Nouri – Noble Equity Fund

David Steinberg – Deutsche Bank

Operator

Good morning and thank you for joining Akorn Incorporated 2012 second quarter conference call. If you have not yet had a chance to read the earnings release, you may access it through the investor relations section at Akorn’s website. Raj Rai, Chief Executive Officer, Tim Dick, Chief Financial Officer and Bruce Kutinsky, the newly-appointed Chief Operating Officer, will host this morning’s call. The call is expected to last 30 minutes and may be accessed through our website at Akorn.com. A replay of the conference call will be available shortly after the filing of the transcript of this call with the U.S. Securities and Exchange Commission, under rule 14-A through 12 of the Securities and Exchange Act of 1934, as amended. Interested parties can access the replay by dialing 888-203-1112 in the United States, or 719-457-0820 internationally, and entering the access code 4125361.

Before we get started, I’d like to remind everyone that any statements made on the conference call today or on our press release that express a belief, expectation, anticipation or intent, as well as those that are historical fact, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Akorn today, and we assume no obligation to update these statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties, which may cause the company’s results to differ materially from such statements. Forward-looking statements are qualified by the inherent risks and uncertainties surrounding future expectations, generally, and may materially differ from the actual future experience. Risks and uncertainties could affect forward-looking statement, including the failure to gain new product approvals and lines of new products. Such risks are described from time to time in Akorn’s reports filed with the SEC, including Akorn’s annual report on form 10-K for the year ended December 31st, 2011, and the subsequent quarterly reports on form 10-Q. Also, the company urges caution in considering any trends or guidance that may be discussed on the conference call. In addition, as required by regulation, reconciliation of non-GAAP financial measures mentioned on our call today, to the most comparable GAAP financial measures, can be found in our press release. Thank you, and now I’d like to turn the call over to Raj Rai.

Raj Rai

Thank you. Good morning, everyone, and thank you for joining our second quarter conference call. Before we discuss the operational and financial highlights for the quarter, we would first like to discuss an important matter.

After an extensive and further review of our first quarter financials, we determined that the purchase accounting relating to the acquisition of Certain Assets of Kilitch Drugs, that were acquired earlier this year, was incorrect, and required another set of review. We plan to reflect the corrected accounting in the amended 10-Q for the first quarter shortly. As a result, we are reporting preliminary results for the second quarter, and have preliminarily restated the earlier results with the estimated impact of the corrected purchase accounting. The final numbers will be reflected in the 10-Q to be filed later. We sincerely apologize for the error. However, the good news is that it does not affect our ongoing sales and ongoing operating results. I will let Tim discuss this in detail, and we’ll come back on the call to discuss the second quarter highlights. Tim?

Timothy Dick

Thank you, Raj. We released today a separate press release and 8-K announcing that on August 3rd, 2012 the audit committee of Akorn’s board of directors, on the recommendation of management, concluded that the previously-issued financial statements contained in Akorn Inc.’s quarterly report on form 10-Q for the fiscal quarter ended March 31, 2012, should not be relied upon because of errors in those financial statements, and those financial statements would be restated to make the necessary accounting adjustments.

The previously disclosed 66.7 million purchase price for the acquisition of Kilitch Drug India Ltd. was originally recorded in the first quarter of 2012. Here in the second quarter of 2012, the company determined that its preliminary accounting for the acquisition of Kilitch Drugs India Limited, needed to be corrected, as certain items that had been previously capitalized as purchase price, needed to be either – needed to be expensed as either compensation earned from the achievement of acquisition related milestones, or other acquisition cost.

As a result of the restatement, Akorn will re-characterize approximately 8.3 million of originally recorded purchase price as additional expense for the quarter ended March 31, 2012.

In addition to the company’s consolidated statement of cash flow for the three months ended March 31, 2012, and March 31, 2011 have been adjusted to correct a classification error. The error resulted in an understatement of net cash provided by operating activities of 1.4 million, with a corresponding understatement of net cash used in investing activities for the three months ended March 31, 2012, and an overstatement of net cash provided by operating activities of $500,000 for the corresponding overstatement of net cash used in investing activities for the three month period ended March 31, 2011.

To address these matters, Akorn expects to file an amendment to its quarterly report on form 10-Q for the fiscal quarter ended March 31, 2012 to reflect the corrections, and accordingly, the referenced financial statements should not be relied upon until such time as the company files its restated financial statements.

It’s important to note that all payments or continued payments related to the Kilitch transaction were previously disclosed, and that total cash payments and milestone payments are consistent with the value Akorn arrived at for the business acquired. We have introduced a new line in our consolidated statements of comprehensive income, or “acquisition-related costs,” to better highlight these expenses for the readers of our financials. Our calculation of non-GAAP measures such as adjusted EBITDA and adjusted net income per share exclude these Kilitch acquisition-related expenses. As a result, these changes are not expected to affect our previously-reported Q-1 adjusted EBITDA and adjusted net income per share.

As Raj mentioned, we are reporting today preliminary financials, which reflect the expected impact of the restatements in our year-to-date figures. These financials are subject to further review by the company and our auditors. We’ll report our final numbers when we file our second quarter 2012 10-Q. We do anticipate requesting a five-day extension on our second quarter 10-Q filing deadline to allow time to fully resolve the restatement of our first quarter.

I’ll now turn the call over to Raj for his prepared remarks on the second quarter.

Raj Rai

Thanks, Tim. We had another quarter of solid topline growth and earnings. The second quarter revenue grew 97% over the second quarter of last year. Sequentially, we grew over 20% over Q1, as the growth was fueled by the Akorn India acquisition and the launch of oral Vancomycin. Our gross margins continue to be strong, despite the acquisition of a lower-margin contract sales business in India. Let me walk you through some of the key highlights for the quarter, and an update on strategic initiatives now.

The base business before the impact of acquisitions grew 37% over last year. The results reflect strong growth from product arrivals, and the recent launch of oral Vancomycin. In the second quarter, we filed three new internally developed ANDAs and completed the development of an additional 12 ANDAs, with a combined annual market size of 1.6 billion, as suggested by the IMS data.

We also re-launched two drug-shooted injectables, fentanyl citrate and Midazolam Hydrochloride. Akorn India performed above expectations, despite a 20% negative impact due to the decline in local currency against [inaudible] from the time of our original guidance. Our OTC business is up nearly 20% on a run-rate basis, as a result of the launch of three private label SKUs and the launch of the branded eye itch product which hit the shelves of major retailers at the end of the second quarter.

Let me now give you an update on the key strategic initiatives for 2012, as I outlined during our conference call in March. First, we have completed the recruiting of another shift in our [inaudible]. We are now live in the production mode, and expect to [inaudible] the existing backorders and catch up with the expected growth in the second half of this year. Second, we have substantially completed the expansion and modernization projects in our facility in Somerset, and expect to go live sometime in the fourth quarter. Third, we have essentially completed the revival project of re-launching about 20 hospital injectables as well as ophthalmics that were approved but not marketed. All such products are in demand due to drug shortages and changes in market conditions. In addition, we are on track to launch three acquired [inaudible] license for Rx this quarter. Fourth, the integration of our India business is well underway. We are on track to hire a management team and establish a corporate office this year. With the new management in place, we will accelerate the installation of our quality systems and kick up the planned expansion projects this year. We should be on track to start filing products with the U.S. FDA early next year. Fifth, we are on track to file nearly 25 ANDAs this year, as well as complete the construction of our new R&D facility by the end of this year, which will fully increase our capacity to file 35 to 40 ANDAs a year. Sixth, we are on track to launch 10 private label SKUs in the next 12 months. And finally, we expect to complete the hiring of our hospital sales force by the end of this quarter.

I’m pleased with the progress we have made in the first half of this year. I’m also excited about the opportunities in the second half of this year, given new contract wins with major DPOs, the launch of acquired an in-license products, increased sales compliance from the launch of oral Vancomycin and the ability to scale up production to meet increase in demand.

I’m also pleased to announce the appointments of Bruce Kutinsky to the newly-created position of Chief Operating Officer for our U.S. operations, and Dinesh Dua to the position of Chief Executive Officer of our subsidiary Akorn India. Both Bruce and Dinesh have excellent backgrounds to support me to take Akorn to the next level. I’m glad to have them both in these roles, as it will give me more time to focus on strategy and new business development while they focus on day-to-day operations. I will now turn the call over to Tim for his prepared remarks.

Timothy Dick

Thank you, Raj. This was the 12th consecutive quarter of core revenue growth for Akorn. As Raj had mentioned, consolidated revenue for the second quarter of 2012 was 63.3 million, up 97% over the comparable prior year quarter consolidated revenue of 32.1, and up 37% excluding the impact of acquisitions.

Organic growth came from market share gains and established products, the launch of oral Vancomycin, injectable drug shortages and the re-launch of certain injectable and ophthalmic products, which was partially offset by decreases in our U.S. contract services revenue. Additional year-over-year growth came from the acquisitions of AVR, Lundbeck Products and Certain Assets of Kilitch Drugs India Ltd.

Second quarter 2012 ophthalmic segment revenue was 25.2 million, versus 18.2 million in the prior year quarter. Year-over-year growth was driven by the AVR acquisition, organic growth of established products and the re-launch of previously marketed products.

quarter 2012 hospital drug and injectables segment revenue was 30.3 million, versus 11.7 million in the prior year quarter. Second quarter 2012 sales benefited from the Lundbeck product sales, the approval and launch of oral Vancomycin within the quarter, sales of injectable products on drug shortage and organic growth of established products.

Second quarter 2012 contract services segment revenue was 7.9 million, compared with 2.2 million in the prior year quarter. Second quarter 2012 contract sales included the first full quarter of sales from Akorn India. Akorn India contributed sales in the quarter of 5.7 million. We were impacted by an unfavorable rupee-dollar exchange rate in the quarter compared with our expected exchange rate when we last provided guidance. This currency fluctuation reduced sales by over 1 million in the quarter. U.S. contract sales continue to be down year-over-year, as a result of a deliberate de-emphasis. We continue to focus on driving sales of Akorn-labeled products through our two domestic manufacturing locations.

Consolidated gross margin for the second quarter of 2012 was 56.5%, compared to 55.6% in the comparable prior year period. Gross margin for the second quarter of 2012, excluding the impact of Akorn India, was 60.1%. The same improvements in gross margin are the results of favorable product mix, the acquisition of higher-margin products from Lundbeck and higher utilization of plant capacities, offset in part by lower margins on our Akorn India [inaudible] business, as well as oral Vancomycin, which includes a 50% gross profit split with our manufacturing partner.

Second quarter 2012 gross margin by segment were as follows: ophthalmic 58%; hospital drug and injectables 62%; and contract services 31%.

Selling, general and administrative expenses, including acquisition-related costs, totaled 11.1 million in the second quarter of 2012, compared with 8.1 million in the prior year quarter. This year-over-year increase can be attributed to the previously announced expansion of our field sales force, the addition of AVR SG&A which closed in May, 2011 and the increase in deal-related amortization and other deal-related expenses associated with our M&A activities.

Research and development expense was 4.1 million in the second quarter 2012, compared with 2.8 million in the prior year quarter, and up sequentially from 2.8 million in Q1 of 2012. The increase reflects greater activity within the quarter, and a continuation of our previously-announced plans to expand our R&D capacity. Quarter-to-quarter R&D expenses can vary materially depending on the timing of development batches, as well as the achievement of development milestones.

Moving to income. Net income for the second quarter of 2012 was 10.6 million, or $.10 per diluted share, compared to net income of 17.9 million, or $.17 per diluted share, in the comparable prior-year quarter. Net income for the second quarter of 2011 included a $.13 per diluted share gain on the sale of the Akorn-Strides LLC joint venture product portfolio to Pfizer. Also impacting the year-over-year comparison is our federal income tax provision and interest expense related to the company’s convertible debt. The company did not record a federal income tax provision in the second quarter of 2011, and issued convertible debt in June of 2011.

Non-GAAP adjusted net income for the second quarter of 2012 was 13.3 million, or $.12 per diluted share, compared to non-GAAP adjusted income of 9.2 million, or $.09 per diluted share, in the comparable prior-year quarter. The year-over-year comparison is impacted as well by the federal income tax provision, as well as cash interest expense related to the company’s convertible debt. The diluted share count for the second quarter 2012 was 110.5 million shares.

Second quarter 2012 non-GAAP adjusted EBITDA was 23.3 million, up 120% compared with 10.6 million in the comparable prior-year quarter. Non-GAAP financial measures are defined further in our press release under non-GAAP financial measures.

Cash flow and balance sheet. The company generated 3.2 million in positive cash flow from operating activities in the second quarter of 2012, and ended the quarter with 24.4 million in cash equivalents and full availability of our $20 million revolving line of credit. Operating cash flow in the quarter was impacted unfavorably by two federal income tax installments, a semiannual interest payment on our convertible debt and sales increases within the quarter, which increased accounts receivable at quarter-end.

Capital expenditures. For the second quarter 2012, capital expenditures were 6.9 million, up from 4.1 million in the prior quarter. Increased spending was focused on expanding our plant capacities and realizing manufacturing efficiencies at our two manufacturing locations, and particularly the expansion of our Somerset ophthalmic plant, which is nearing completion.

Finally, moving to 2012 outlook, the company is raising its 2012 outlook. This revised outlook includes the impact of Vancomycin hydrochloride capsules, but it excludes the impact of any new approvals after August 7th, 2012. Starting with revenue, 2012 revenue guidance is projected to be between 248 million and 258 million. 2012 gross margins are projected to be between 58% and 59%. 2012 SG&A expense is projected to be between 49 million and 51 million, and this projection excludes the impact of the Kilitch acquisition-related expenses that we expect to restate in Q1, so it should be seen as an adjusted SG&A expense. 2012 R&D expense is projected to be between 15 and 18 million. We expect our income tax rate for the year to be 37.4%. Adjusted net income is projected to be between 55 and 57 million. Adjusted EPS is projected between $.50 and $.52 per diluted share. 2012 adjusted EBITDA is projected to be between 97 million to 100 million. And finally, 2012 capital expenditures have been revised downward to between 20 and 25 million, from our previously guided 30 to 40 million for the year.

Thank you for your attention, and we’ll turn the call over to the operator to open the call up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions). And we’ll first here from Steven Crowley – Craig Hallum Capital Group.

Steven Crowley – Craig Hallum Capital Group

Good morning, gentlemen and congratulations on a nice quarter.

Timothy Dick

Thank you, Steven.

Steven Crowley – Craig Hallum Capital Group

In terms of the product revivals or relaunches that you mentioned, Raj you mentioned a pretty healthy number. But in the quarter you really just talked about two sterile injectable relaunches. And I think there was a pretty decent number in the broad middle part of the year. Is the implication that there’s quite a bit scheduled here in the beginning of Q3?

Raj Rai

No Steve, you know, we had heard last year that we had identified about 20 products that comprised of a combination of hospital injectables and of ophthalmics. That we are evaluation to launch or revive, because the changes in market dynamics, as well as the drug shortages. So the two products that we launched at the end of Q2 were part of the 20 products. Essentially what we have done now is in the last year or so we have revived about 19 products, we’ve got one more product to relaunch. So, essentially the product is complete.

Steven Crowley – Craig Hallum Capital Group

And you said you launched these two at the end of Q2, so you’re just rolling into those benefits?

Raj Rai

The third quarter we’ll start to see developments from those products.

Steven Crowley – Craig Hallum Capital Group

And then in terms of Vanco, it seems like the contribution in Q2 given some of the metrics you gave us, what’s probably relatively light compared to what expectations can be for the run-rate of the business going forward. Can you give us a little bit more collar there?

Raj Rai

Yes, so you know, we had a delay in the launch, as we had explained in our quarterly conference call. So we firstly launched the product towards the middle of May, no the approval came in in April. So, we did secure contracts, so we’re working our way up in terms of compliance against those contracts. It was not a significant contributor to sales, but it was a decent – we had a decent contribution in sales.

Steven Crowley – Craig Hallum Capital Group

But it really is an indicative of the run-rate that you think you’ll see in the back half of the year. You know, we have to fold it into our models. I think directionally you’ve given us a good flavor, but this quarter isn’t a good reflection of the full year run-rate. Is that how we should think about it?

Raj Rai

Well, you know you always half the quarter. So, I mean that’s how you want to see it. We get the full quarter impact starting Q3. We will be working our way up to the 15% or so market share that we had indicated by Q4.

Steven Crowley – Craig Hallum Capital Group

Okay, one more for me. In terms of the launch of these three acquired and in licensed products coming up here. Can you give us a little bit more of a flavor for what you’re hoping to accomplish with that, and tell us what you can given competitive landscape for those products?

Raj Rai

We think these are, you know, it’s a combination of hospital injectables in ophthalmics, and we are launching them as we speak. Details from those numbers are based into our guidance, otherwise guidance for the year.

Steven Crowley – Craig Hallum Capital Group

Great, thanks for taking the questions.

Operator

Next we hear from David Amsellem – Pipper Jaffray.

David Amsellem – Pipper Jaffray

Hey, thanks. Just a couple. I want to start with the ophthalmic generic business. So, the volume growth, at least by third party audits look pretty strong for established ophthalmic generic products. I guess the question here is, how do you sustain that kind of double digit growth, can you sustain it for the established product portfolio in ophthalmics, or will more of the growth next year and beyond be driven mainly by new launches? Help us think about that, thanks.

Raj Rai

I think you have categorized it correctly. You know, we will see some growth from existing products, but I think the higher growth will come from the launching of new products. One of the products that we have lunched just in the third quarter is in ophthalmics, so you’ll start to see some growth coming from that product in a short order.

David Amsellem – Pipper Jaffray

Okay. Then switching gears to Vanco. On the guidance now including Vanco, are you assuming no other generic entrances as 2012 progresses. And if you’re not assuming any other entrance, what gives you confidence that we won’t see additional approval there? My understanding is, it’s a pretty crowded filing, so what can you say about that?

Raj Rai

Well you know, we have a smaller market share from the rest as compared to the rest of the group, so I’m hoping someone else gets an approval, you know. We will still be secured, and generally speaking the new approval probably would start going after probably someone with a higher market share. I can’t promise (inaudible) impacted, but I think we feel comfortable that we’ll continue to maintain our market share.

David Amsellem – Pipper Jaffray

Okay, but to be clear, the guidance does not reflect other entrance, or is a risk adjusted Vanco number?

Raj Rai

To some extent it is a risk adjusted Vanco number.

David Amsellem – Pipper Jaffray

Okay. And last question on the India facilities. I guess the question here is on inspections. When do you think is the earliest you’re going to be able to get the FDA in there? I think you talked about in the past trying to acquire products to make, then transfer and make out of India. Now it sounds like you’re going to be able to file products out of there next year. So, give us some collar how – what the plans are, are you going to try to see that facility with acquired products, or are you going to try to transfer existing products over there, and when we can see inspections? Thanks.

Raj Rai

So you know, we are still on the path of transferring a couple of products from here, and then looking for opportunities to acquire certain products that fit the capabilities of our facilities in India. So, I think that’s an ongoing process, and by first quarter we should be in a good position to have a few products flying out of those facilities. That’s number one.

Second: You talked about inspection, I mean that, I cannot make any promises exactly when that happens. You know, we can tell you or we can re-file the products which would prompt or trigger an inspection. We can’t predict exactly when (inaudible). But you know, it could take at least twelve months from the time we file the products.

David Amsellem – Pipper Jaffray

Thanks Raj.

Operator

Next we’ll hear from Elliot Wilbur – Needham and Company.

Elliot Wilbur – Needham and Company

Thanks, good morning. First question I guess is for Tim. Can you just talk a little bit about what lead to the reduction in your CapEx spending outlook for the year? Is that really just a change in level, or is it more a deferment of spending into future periods?

Timothy Dick

It’s more of a deferment into future periods. If you recall when we increased the guidance, it was really for the layering on of the CapEx teams for Akorn, India. Since we’re just in the process of compiling that management team, we chose to defer those expenditures until we have the team in place there.

Elliot Wilbur – Needham and Company

Okay. And then specifically looking at the ophthalmic segment performance and gross margin trends, I guess they’ve been down sequentially now for four quarters and I’m trying to get a sense if that’s just a simple function of product mix, or if it has something to do with the actual facility expansion itself, whereby they might be extra unabsorbed overhead and the like that’s just not being taken up by actual direct production at this point?

Timothy Dick

It’s somewhat a combination of both. We did increase capacity throughout an additional shifts of manufacturing personnel at our ophthalmic plant in Somerset to increase our production, particularly on the solution side. And that has given us some capacity that we need to grow into. And in growing into that, we’ve reintroduced some products that have historically been lower margin than the base that they’re being added to. So it’s really a combination of both of those factors.

Elliot Wilbur – Needham and Company

Okay. And then, Tim without dwelling on this excessively at the risk of boring everyone, but with respect to the restatement in the first quarter. I mean it sounds like it’s a combination of perhaps some items that could have run through in process R&D, but were originally capitalized. But then also the performance related milestones. I guess that’s the part that I find a little bit more difficult to understand than the former. So, maybe you could just kind of walk us through sort of what the (inaudible) what’s related to, I guess sort of the performance base issue, since I would assume those haven’t happened yet? Maybe it’s just an assumption.

Timothy Dick

Sure. And just to be clear, the changes almost entirely relate to performance based incidents. So there wasn’t any in-process or R&D related to that incident. There was $1.6 million that related to a transfer tax, a stamp due on the transfer of the land acquired. And we had initially capitalized that as far as the value of the assets acquired, concluded that that needed to be treated as an acquisition related cost. The remaining $6 million-plus related to contingent payments, earn outs and milestones. It was a very technical review, and it dealt with some very detailed criteria around determining whether those could truly be considered consideration, or whether they needed to be treated as compensation. And we ultimately concluded that the more appropriate treatment was as compensation.

Elliot Wilbur – Needham and Company

Okay. A question for Raj or yourself Tim. Just maybe specifically with respect to Nembutal performance in the quarter. I guess I’m looking at some of the third party data related to that product. I mean there’s been some concern about how there’s been a pretty significant decrease in reported units, and I don’t know it that’s just a function of the inaccuracy of that information, or if there’s been some change in distribution that may have some of the product not moving through the channels that it once did that was picked up by these services. And I guess the concern has been that there was more an inventory effect, you know, based on some leftover (inaudible) inventory in the channel when you bought the product. So, maybe you can just sort of talk about the performance of the product, and it there’s any say about the unity that we’re seeing from some of the third party services?

Raj Rai

You know you’re observation is correct. IMS or some other sources are probably reflecting the true tales of the product. But we haven’t seen a decline in the sales or the unit volumes, so you know, I’m not sure what – you know the extent of the discrepancy that you’re observing.

But I can tell you that some of the units that we sell are sold directly, so they bypass the wholesale channel. So they are not captured in the (inaudible) or any other source that you’re probably looking at. So, I can assure you our business is doing really fine with Nembutal.

Elliot Wilbur – Needham and Company

Okay. And just a last question. Since inspections have become almost as important as part of the investment landscape as focused on approvals and pricing and everything else. Raj, if there’s anything that you could share with us in regards to a recent FDA inspection activity at the Somerset indicator, and whether there’s anything new there to talk about?

Raj Rai

Sure. We went through a full physical exam for both the facilities recently, and no issues. So we got a clean bill of health from the FDA, so, so far so good.

Elliot Wilbur – Needham and Company

All right, thank you.

Operator

Next we'll hear from Michael Higgins of Benson Paxton Securities.

Michael Higgins – Benson Paxton Securities

Thanks, Operator. Good morning, Guys. Congrats on the quarter. Raj, in the press release, you mentioned Akorn expects a strong second half of the year due to new contract awards. I haven't heard contract awards in your remarks or the comments about the 20 launches, et cetera. Are you referring to Vancomycin here or are there other contract awards that you're looking at?

Raj Rai

I said in my prepared remarks, Mike, that we had some new contract wins. And part of the new contract wins are actually, those are the products that were added to the contracts, so they're more tied together. And again, based into our guidance for the second half of the year. So we should start seeing accruals coming from those contracts in the future.

Michael Higgins – Benson Paxton Securities

Okay, can you try to quantify for us within your guidance going forward or in addition to the guidance going forward, how much we may see from these new contract awards?

Timothy Dick

We've separately identified that. I mean it's what we consider part of the organic world frayness. We've had a nice several year run of increasing market share of a number of products. This is just a furtherance of that. So we've not quantified that separately.

Michael Higgins – Benson Paxton Securities

All right, for the gross margin, I believe it was $56.5, $60.1 without Akorn India. Of the roughly $2.3 million for Akorn India, is that a decent number to monitor going forward? Do you look for some one-time upfront costs that are lower as quarters go by or how should we model that?

Timothy Dick

Akorn India has margins, if you're asking what their margins are relative to the remaining business, their margins are in the 20% to 25% range. And when we acquired the business, we said they were on about a $20 million run rate. That was backed with a 45 rupee to the dollar exchange rate. Now it's about 55 to the dollar. With that said, they had a nice Q2. There is some seasonality into the business. So based into our remainder of the year guidance is a step down into the softer quarters of the year for that business.

Michael Higgins – Benson Paxton Securities

Okay, that's helpful. In the hiring of the reps we can see listed on the job sites, but if you could just walk us through the numbers of reps that you're going from and to again. It sounds like you're on track to close in Q3. How many internal versus external in their focus?

Raj Rai

So we are adding from a risk perspective, we are adding about 28 new reps. If you were to combine to look at [inaudible], then we had about 25 people at the end of 2011. And then by the third quarter of 2012, we would have added another 28.

Michael Higgins – Benson Paxton Securities

And those are all the external? Does that including the internal as well?

Raj Rai

No, these are all external.

Michael Higgins – Benson Paxton Securities

Okay, guys, appreciate it. I'll step back in the queue.

Raj Rai

Just to add, we go from 25 to 53 reps.

Operator

Next we'll hear from Paul Nouri of Noble Equity Fund.

Paul Nouri – Noble Equity Fund

Morning. Tim, on the income statement below the diluted shares, it talks about the foreign currency translation laws and the comprehensive income. Can you explain that out to me a little bit and why that's not above the line?

Timothy Dick

Yes, this is the GAAP, appropriated GAAP presentations. I guess that’s the most correct answer I can give you. But in terms of it's applying the foreign currency changes to the acquired balance sheet quarter-to-quarter. Does that make sense?

Paul Nouri – Noble Equity Fund

Is it from the acquisitions recently?

Timothy Dick

It's from the India transaction solely.

Paul Nouri – Noble Equity Fund

Okay, thank you.

Timothy Dick

Sure.

Operator

Next we'll hear from David Steinberg of Deutsche Bank.

David Steinberg – Deutsche Bank

Thanks, I have three questions. First is a housekeeping type question. And going forward, you're going to have more approvals as you continue to fill your pipeline. So I was wondering if you could bracket for us what is an announceable NDA approval and what is something we'll find out when you release you quarterly results? For example, this year you've announced one or two approvals, but most have been disclosed on a quarterly call. So would you give us a metrics and what is announceable rate away? Would it related to revenue impact or EPS impact? And what type of FDA approval would not be announceable?

Raj Rai

David, this is Raj. I mean an India approval becomes public knowledge on the FDA's website. So as we get an approval, it's disclosable. And from a guidance perspective, obviously our guidance lacks the approval. So once we get the approval, then we will give – if it's a meaningful product that we've got to prove, then we'll obviously bake it into guidance.

So just like Vancomycin, we got the approval. We launched it. We did not give the guidance. And so we gave the guidance now. So with the meaningful product line like Vancomycin, so you would expect to see the same treatment as you did with Vancomycin. So does that answer your question?

David Steinberg – Deutsche Bank

Yes, that's fair. And then secondly, just following up on Elliott's question on Nembutal, it's become one of your biggest products, high gross margin, et cetera, et cetera. Do you expect any additional competition in the next year or two? And if so, why not?

Raj Rai

When we acquired the product, we did say that the potential for another NDA to come on board, but in the next couple of years. So I mean that was the anticipation that we had would be from the accident. The way the transaction and the way the transaction is structured, it gives us an ability to claw back a certain amount of the acquisition price in the event the generic comes in. And in the aggregate, we do not realize a certain amount of sales. So that was already factored into our plan. And at the moment, that is not proved, so we’ll enjoy the sales by ourselves.

David Steinberg – Deutsche Bank

Fair enough. And then the final question, now that you have a quarter or two under your belt, the Kilitch acquisition, is there anything you're particularly pleased with that you didn’t know about prior to the acquisition where there could be some outside issues that you're surprised about on the negative side? And then in terms of the team you have on the ground, the product profile, and the facilities, is there anything you need to change? And then part C of the question is, now that you have had it for a few quarters, any change in your thoughts on the timing of first NDA approvals by the FDA?

Raj Rai

David, let me just clarify I think from your question. We've had a little over one quarter's worth of supervision of the acquisition. We closed the deal at the end of Q1. And so I just wanted to clarify that.

No, the answer is no. I mean we are not surprised. It's just that doing business in India is a little bit more difficult than doing business here in the U.S. So we're getting used to that. But we are happy to have our new CEO there. He's a seasoned veteran in the pharmaceutical industry. So having one on board is definitely a big relief having your local management that can drive the business.

So going back to your question, no, we were not surprised. But we have our team. We also hired a CFO in India. And now we're in the process of hiring a couple more key management people, which should happen in the next few weeks. And then we have a core team in place to get things done as we have anticipated.

From an FDA approval standpoint, I said earlier that Q1 would be the time we would start filing products, which would promptly trigger U.S. FDA inspection. The wait for the inspection is unknown. So perhaps it could be a year. So I think we'll be close to 2014 before we get U.S. FDA approval of a [inaudible].

David Steinberg – Deutsche Bank

Okay, fair enough. Thanks a lot.

Timothy Dick

Thank you.

Operator

(Operator Instructions).

And we'll take a follow-up from Steven Crowley of Craig Hallum Capital Group.

Steven Crowley – Craig Hallum Capital Group

Yes, two quick follow-ups. You mentioned a number of progress areas related to the new business, AVR private label OTC. I'm wondering what your latest temperature check is on the veterinary opportunity and how you're going about pursuing that.

Raj Rai

I'm glad you brought that up. In fact, it's going really well. We did get one FDA approval on a product recently, which actually is for human use. But we think there is more usage in the vet market. So we are working on launching that product as well.

And then we are on track to file maybe three to four applications with the FDA for vet products by the end of this year.

Steven Crowley – Craig Hallum Capital Group

And as it relates to Akorn India, Tim, you mentioned the top line hit from the currency situation. I'm wondering, intuitively you have a natural hedge there with your expenses and operations. What was the operating income hit from the decline on the rupee and how we should we think about that going forward?

Timothy Dick

It's not as pronounced on the bottom line simply because their margins are in the, gross margins are in the 20%, 25% range. And then you've got some SG&A below that. So I don’t want to leave the impression that the currency translation has been a significant impact on earnings that we're consolidating from that operations, but it has added significant impact on the top line.

Steven Crowley – Craig Hallum Capital Group

And you talked about the local market opportunity for Akorn India and then bringing it into the U.S., is there some intermediate opportunity in other international markets that you can pursue in between?

Raj Rai

Yes, so that's really the plan, Steve, that we are going to concentrate our efforts while maintaining our business in India to look more outside India to grow the business. We have a number of pending registrations in various markets.

I mean currently, Akorn India is selling into about 12 markets. And the number of markets is potentially going to double in the next year or so given the pending registrations. So that is sort of our next phase of growth in India is going to come from other international markets.

Steven Crowley – Craig Hallum Capital Group

Great, thanks for taking the follow-up.

Operator

And it appears there are no further questions at this time. (Operator Instructions).

And at this time, I would like to turn the conference back over to our presenters for any additional or closing comments.

Raj Rai

Thank you. Thanks for taking the time today. And I know we had some explaining to do about the restatement. We will shortly get back to you with the correction. And again, thanks for the patience and the support. We'll look forward to speaking to you soon. Thank you.

Operator

That does conclude today's conference. Thank you all for your participation.

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