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AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG)

Morgan Stanley Healthcare Conference

September 10, 2012 11:45 am ET

Executives

Bill Heiden - President and CEO

Frank Thomas - Chief Operating Officer

Analysts

David Friedman - Morgan Stanley

David Friedman - Morgan Stanley

Thanks very much everyone for coming. I think, we'll get started David Friedman, Biotech Analyst. Just before we start, in terms of the disclosures, I think, everyone has been saying the same thing, personal and Morgan Stanley Holdings disclosures are available morganstanley.com/researchdisclosures, so anyway, more saving things.

We have gentlemen from AMAG Pharmaceuticals. On far side, Frank Thomas, Chief Operating Officer. In the near side, Bill Heiden, President and CEO, and we'd love this to be as interactive as possible, so anyone feel free to ask any questions at point, just raise your hand and we'll make sure we try and calling you or not just make some noise and we'll definitely find you, so thanks again for joining us.

Maybe if we can just start for those who aren't familiar or not up-to-date, if you can just give a couple-minute overview of the company, your guys' focus and where you see things headed?

Bill Heiden

Great, so I should also say that in terms of disclaimers we will be making forward-looking statements in our full disclaimers located on our website as well. I have joined AMAG about three months ago, and what I found is the company that has an asset that's best-in-class compound of product called Feraheme, which is for the treatment of IDA and chronic kidney disease, and we have the largest share of voice last couple of quarters. Very, very strong growth in terms of grams per quarter versus quarter a year ago or prior quarter, so we are seeing nice volume growth.

We've had historically a decline price due to discounting, but I am happy to report that we took our first price increase every on May 1, so in Q3, we expect to see net price program starting to turn around and begin to grow, and so we'll have a nice multiplicative effect on our Feraheme sales, and so Feraheme is our flagship brand. We've got about 70 people across the U.S. who are selling Feraheme.

We've also have announced some recent approvals internationally in Europe, Canada and just last week in Switzerland, and so we will be seeing launches in double-digit royalties and milestones flowing to AMAG on the international basis. On top of that, we are building a company focused on the oncology/hematology in hospital space, which is where call on today in order to promote Feraheme, so we are looking to build out the portfolio with the purchaser in-licensing of commercial assets to leverage those call points.

The company on a whole will breakeven in 2012. For the first time, we will breakeven primarily or at least partially due to $33 million in milestones, so as we go forward and look to 2013, there's a $33 million GAAP if you like, but with sales continuing to grow, operating expenses continuing to decline, we like the idea of adding in an additional marketed asset or two in order to leverage the existence of this high-powered commercial team that we have out there and make the crossover into profitability, so that's really what we are focused on.

Feraheme is number one priority. It's continuing to grow. Feraheme in terms of grams and into profitability, so that's really what we are focused at Feraheme is number one priority. It's continuing to grow Feraheme in terms of grams, and that selling price and second is the successful business development initiative to identify commercial assets with strong IP and preferably in in-office injectable, so that we can leverage our current sales force and cross-over into profitability.

David Friedman - Morgan Stanley

Great. Thanks. Maybe if we can just start with one broader question, which is you guys have made fairly significant headway in rightsizing your business versus your current opportunity, and it's something that I think a lot of small and midcap biotech companies struggle to do, and frankly don't do very well, so can you maybe just briefly touch on the changes that you've made within the organization 12 months back and any changes that are coming in the next 12 months in terms of you guys have had manufacturing changes, sales force changes, and just talk a little bit about how you've set the organization up for this next leg, because again it is fairly unique among a lot of single-product companies right now.

Bill Heiden

Let me just mention broadly, and then I'll ask Frank to go through a bit more detail. I think one of the overriding goals of some of the changes we have made is to form ourselves into a true specialty pharma company, where we have flexibility, so on the development side historically; the company had a large development organization.

Going forward, we are going to have a small flexible team that can flex by external partners and also take in development when we need to and then to remain small and lean during times when we are not doing development.

Similar on the manufacturing side, we didn't feel it made sense for us any longer as a one-product company or even a two or three-product Company to have our own manufacturing. Outsourcing manufacturing gives us tremendous flexibility as a specialty pharma company. Lastly, I will just mention we have right-sized the commercial organization. It was much larger in the past, but we did some very, very detailed analytics looking at the opportunity that we have in the IV iron market and now have right-sized our commercial organization to 43 sales territories and a total of about 70 people in the field and we think that's right-sized.

In terms of the rest of the organization, I'll ask Frank to talk about that.

Frank Thomas

Well, let me just start by saying, in addition to the commercial infrastructure and commercial product that we have, one of the other great assets this company has is a pretty healthy balance sheet with over $200 million in cash. We wanted to make sure that that cash was put to use not only investments in Feraheme, but also business development opportunities, so we made changes really up and down the P&L to really rationalize the business model for today's opportunity and then we'll find opportunities to invest the cash in going forward.

In terms of specifics, on the cost of good line, we previously have had our internal manufacturing site. We made a decision and announced it earlier this year to move to an outsourced model, so we had a duel supply chain. We're now going to move to an entirely outsourced manufacturing model. That's going to have about 5% to 7% positive impact on cost of goods going forward, so pretty substantial. It removes the fixed cost that we had for maintaining our own manufacturing site.

As Bill mentioned, we've also right-sized the commercial organization, we think, to take advantage of the opportunity today. Then finally on the R&D side, where we've seen probably the most substantial decline in operating expenses, it's been a combination of the completion of our Phase III program that we have been running to broaden our label to include all patients with iron deficiency anemia, so that's the cost and investment that we made over the past couple of years that we are now starting to see the end to and therefore decline in the OpEx line. We also have internal cost associated with that program that wasn't able to right-size.

Overall, if you look at the OpEx line last year at $135 million, this year we guided to, what, $90 to $95 in OpEx, and next year we expect that number to come down even further as a result of the completion of the IDA program, so you can see some pretty disciplined organization.

I think in our industry, you tend to see companies do downsizings when they start to run out of cash or they run into a stumble in the marketplace, and we've actually downsized during a period of incredible strength. We reduced operating expenses; we didn't do it because we are running out of money. We've got over $200 million in the bank, but I think that just goes to show how disciplined we are trying to run the company.

David Friedman - Morgan Stanley

It's great. Maybe just jumping into a couple of questions on Feraheme. The target market for that drug has evolved over time, and so maybe if you can just touch on the one or two segments of the CKD market that you guys are most invested in right now in terms of focus and time how those segments make up a certain part of the market and what's the plan over the next 12 to 24 months to further those segments?

Bill Heiden

Great. The IV iron market for iron deficiency anemia and CKD is divided up. You've got a significant portion in the Dialysis segment, and originally the company was focused on dialysis. For a variety of reasons, that segment became fairly unattractive and we have shifted over to focus on the Oncology, Hematology segments as well as the Hospital Outpatient segment, where the reimbursement dynamics really favor a best-in-class compound like Feraheme.

Today, our commercial team spends about 50% of its time in Oncology/Hematology, 40% of the time in the Hospital segment and about 10% of the time in Nephrology. Nephrology is still an important group. They do use iron, but also they tend to be opinion leaders in local communities, and so it's important that they embrace Feraheme, so that's how we are spending our time.

Gram growth is occurring in both segments, both, Oncology/Hematology, where we have about a 25% share, as well as the Hospital segment, which is relatively new for us. In the last year or so, we've got about 7% share, and that's also growing in fact growing a little bit faster than the Oncology/Hematology segment.

David Friedman - Morgan Stanley

The Hospital segment has some different dynamics than HemOnc and nephrology, so maybe if you can just touch on what some of the key differences that you guys have learned both, from a protocol and marketing standpoint for the hospital segment in specific, and what your plan is to continue to work through those differences?

Bill Heiden

The Hospital segment does tend to take a little bit longer than some other segments. You do have formulary reviews in in-hospital, so they do take a little bit longer. For Feraheme, I think the dynamic is particular, because we tend to do best in the hospital outpatient setting versus the in-patient setting and that has to do with reimbursement dynamics in the hospital setting.

If you've seen one hospital, you've seen one hospital, because every hospital really is different. When I think about all the hospitals that I visited over the last few months, I think there are several different types that we see out there. There are hospitals large hospitals that use a lot of IV iron in the outpatient setting; those tend to be more sophisticated institutions that have both, outpatient and then a separate in-patient formulary. Feraheme does extremely well there.

Smaller hospitals that have a small infusion clinic and maybe only have one formulary. It's not a great focus for Feraheme. It's a small amount of business and we tend not to focus our energies there. There's also the mixed hospitals and several of them that we are trying to get them to initiate separate formularies for their in-patient and outpatient and trying to help them understand that it's actually to [ooze] them to have a different formulary in their hospital outpatient setting for IV iron, so we are making good progress there. It takes a little bit longer than the Oncology/Hematology setting, because of this formulary step. Again, we are seeing good growth, in fact, faster growth in the hospital setting than we are seeing in the oncology/hematology setting.

David Friedman - Morgan Stanley

Any questions? In terms of the hospital setting, are you tending to see growth from increased use within existing hospitals, or is it more the addition of hospitals that you previously had no formulary presence on that is giving you the growth?

Bill Heiden

It's a little bit of both. We're getting both, which is important. In fact, we track very aggressively the number of buyers in any given week, and so we've had a couple of thousand buyers over since launch discrete, but we actually look at the number of people that are buying on a weekly basis, and we see that there is not only gram growth, but we are also seeing an increase every single week of the number of buyers of Feraheme, and we most recently reported that we crossed over 750 buyers in a single week and that's a record for us, and so we are seeing not only gram growth by customer, but we are seeing increasing number of new customers. To your point, there are hospitals that are still in the queue, where we are awaiting formulary acceptance, and when those come true, those will be added to the new list of new customers.

David Friedman - Morgan Stanley

What's your strategy now to get on formularies where maybe there has been no awareness of the drug for the couple of years it's been on the market, but it just hasn't made it on. Are you finding that you need to find physicians within that hospital to push it through the different committees in the hospital? Is it a question of misperception, is there a pharmaco economic argument that you directly bring to the committees in the hospital? What's the approach for these sort of later hospital adopters?

Bill Heiden

The hospital sell tends to be a more complex sell than any other environment, because you've got a pharmacist, you've got logistics, you've got nurses, you've got physicians involved in those decisions.

Physicians are the main driver. Let's say the main point of our sells are clinical sell. Feraheme, my belief is that it's a best-in-class compound. I like to say that it's as easy as one, two, three. One gram of iron and two brief injections separated by three days. It's the simplest, most convenient iron out there. For a busy hospital that's seeing a lot of patients, the convenience, efficacy and safety story is very, very compelling and that's how we promote the product.

Question-and-Answer Session

Unidentified Analyst

(Inaudible).

David Friedman - Morgan Stanley

Sure. Maybe I'll just repeat for everyone. In terms of the safety of Feraheme, early in the launch, there were some questions raised around the safety profile, and the question now is that there has been much more experience with the drug. What's the adverse event profile looking like in the real world? How is it been reported back to you and have any issues been coming up more recently.

Bill Heiden

Yeah. Something that we take very seriously and I appreciate you bringing the question up. I would say currently there is increasing level of confidence with the use of Feraheme, and you can imagine whether it's an individual physician or more broadly across the nation. We now have over 500,000 uses of Feraheme across the U.S. and so I think there is growing comfort nationally, but also when I go out and talk to physicians now that they've used the drug for one or two years, they feel very comfortable that they understand the profile of Feraheme.

I wasn't here, but my sense is maybe expectations were a little optimistic initially. This is IV iron, and some patients react to iron regardless of which brand and so we continue to monitor. The safety profile looks good. I would say also, again as I speak to physicians across the U.S., now that they have their own experiences in their offices, they are gaining confidence, they are telling their colleagues that they have been using Feraheme comfortably, and I also believe that the class labeling which entails 30-minute post injection wait is appropriate. I think that's giving the community a lot of confidence that this is a drug that's given appropriately, administered appropriately and that patient care and safety is really the primary focus.

Unidentified Analyst

It's actually a worldwide problem. The problem is cost delivery getting it to a patient, doing it properly and so forth, and you are in a sense hitting the more acute elements of the population, so I am trying to figure out whether you have to prove your case domestically before you can go the next level beyond this treating more broadly, or are you limited until you do that or even if you, would you want to anyway strategically?

Bill Heiden

I think we've proven our case. As I mentioned, we've seen now over 500,000 utilizations of Feraheme and it's been used safely after three years on the market. Coming on three years. I think, we've shown our case. We've seen approvals now across the EU, in Canada, in Switzerland, Takeda Pharmaceutical, our partner's launch is eminent. We expect those launches in the fall, and so the product will be coming to market, and I think the success that we've seen in the U.S. and then the nice safety profile that has developed now with use in the marketplace is certainly going to help our international partners as they launch and can talk about the experience in the U.S. that can do nothing but help them, but we don't intend to wait for these launches. These launches will be coming online as I said this fall.

Unidentified Analyst

(Inaudible).

Bill Heiden

Are you speaking about the broad IDA label?

Unidentified Analyst

Yes. I am talking about iron deficiency anemia is very broad worldwide. Now, you can't adjure cost setting and at the deliveries that you can't reach those kinds of markets, but what can you reach that goes beyond EU, Switzerland and places like that, because it's a much bigger problem than just the acute market.

Bill Heiden

Maybe I can touch on a few additional points, so one of the other efforts we have underway, in fact we just completed a Phase III program in more than 1,400 patients with iron deficiency anemia outside out chronic kidney disease, so these are women with abnormal uterine bleeding. These are GI bleeders. Chemotherapy induced anemia among others, so it's a much broader patient population, and of course many of these patients today are being treated with oral irons.

Well, some patients respond well to oral irons. We also know many of them are not. They don't tolerate it well, or they don't respond well, so our label expansion efforts are really focused on those types of patients to be able to go after a much broader if we're successful. Not just in the U.S., but abroad, and to look for patients who have now responded well, whose hemoglobin level still haven't reached their goal despite having been un-reliant. That is a big market, a huge market.

What's important for us is that many of those patients who don't respond end up into sites of care. Often make it referred to a hematology/oncology clinics or to hospital outpatient, which are the two sites of care where we are currently focused, so you can imagine that now there is much broader patient population that are being referred to the same sites that where our commercial organization is currently focused, so that's an opportunity that as we proceed with the regulatory process, we hope to get next year and then we expect to be able to do a lot more in the commercial side going after that broader population.

Unidentified Analyst

Maybe if you can touch last on price, because have taken your first price increase you've held a positive gross to net change out of that which reverses one of the sort of bigger problems with the market and how you guys were addressing volume growth, so what's the plan going forward. I mean, is this one price increase to stem the tide and try to hold the line or is there room over time for small incremental increases in the price and obviously with the idea that you probably end up getting some back.

Bill Heiden

I think more of a latter. I think this first price increase really demonstrates to us that there is some flexibility to take small price increases and there is no reason that on a go forward basis we can't continue to take small price increases ensuring that our customers aren't taken underwater by taking a large price increase, but I think there is clearly an opportunity for us to take small price increases on a go-forward basis.

David Friedman - Morgan Stanley

Maybe in the last couple of minutes, you guys have mentioned both, you've got a healthy cash balance and a desire to bring products onto your platform, so maybe if you can just talk a little bit about as you guys have some very specific criteria lined up for the types of things that you think would fit well and be worth doing a deal for, so if you could talk first about the process that you guys have set up both, with the way you are evaluating things and the way the board is involved with it and then the types of products that you think are obviously is without naming and there were specific ones the types that you think fit well with your strategy going forward?

Bill Heiden

Sure. We've touched on Feraheme, the opportunity there. We just touched on the broad IDA label opportunity which we are very enthusiastic about and are seeking approval in the fourth quarter and expect to have that later next year.

I should also mention that that development plan was developed in collaboration with the FDA. In fact, we recently had a pre-NDA meeting with the FDA to confirm that what we will be submitting is what they were looking for, for the broader IDA label, and then we think about what to do next.

We have a business development internally. We've also hired a boutique bank to help us identify commercial assets. We also in the last several months have added a couple of new board members that have significant experience in business development. Rajiv De Silva, who is the Chief Operating Officer of Valeant has joined our board as well as Gino Santin who was formally Head of Business Development at the Eli Lilly, so across the company both, in terms of management but also at the board level, we've got people with significant experience in doing deals. So what are we looking for?

We've thrown the net wide, but also fairly focused the call points that we have today, which is oncology/hematology as well as hospital and to a lesser degree nephrology. We feel so the company really has an expertise in in-office injectables. In terms of size, we are looking at products anywhere from, say, $10 million to $50 million. They could be slightly smaller, they could be slightly larger, but that's the window in terms of the filter that we have established.

We are looking for products that have an intellectual property and we are looking for products that are transactable. I can tell you, we've identified some assets that are sitting in big pharma that are withering in big pharma, but they won't let them go and so we simply don't spend time on those. We spend time on transactions that we think can be concluded.

We have a lot of flexibility in terms of deal structure. Because of our balance sheet, we can do an all cash purchase, we can do a licensing agreement, and so it allows us to be fairly flexible with business partners in terms of the structure of the deal.

From a company point of view, we are really [unaccustomed] of profitability, and so a product which would be small in other peoples' hands, but could be meaningful for us could take the company over into profitability. I mentioned intellectual property. We are also looking for products that have growth potential.

They don't have to be able to realize a 10x, but I think a product that we could double in terms of sales over the next few years would be something that would be very, very interesting and very appealing, and we are always considering the fact that we've got a commercial team, which is focused on Feraheme and needs to continue to be focused on Feraheme going forward especially with the broad IDA label, and so we want to ensure that we bring in a product which is perhaps equally smaller sized than Feraheme, so that we can dedicate the appropriate effort to continue to grow Feraheme.

Unidentified Analyst

Regarding the Atlas deal that didn't go through, it sounded like that product was in this sort of ballpark you are describing, looking back do you think that you are still unhappy that you didn't get to do that deal, or you think that's not maybe such a great deal after all, and do you think Wall Street appreciate the potential attribute to that deal?

Bill Heiden

Frank, why don't you tell us the story in its perspective?

Frank Thomas

Well, as I joined the company about a year ago, we were going through and meeting with a lot of our shareholders about the Atlas deal. Ultimately, the deal was voted down and the feedback from our shareholders, there were several reasons why that deal was voted down. Some were specific to the product and the merger itself, some were specific to the structure of the day and in fact that we used stock in the transaction.

There were questions about whether the right leadership team was in place to run a multi-product commercial organization. There were very few criticisms of the strategy itself. I think we all know in this industry it's a highly regulated industry, and having one product in a public company infrastructure is inefficient, so as we think about we've certainly learned some things from that process and got a lot of good feedback from our shareholders and I think we'll take all of that feedback into any transaction that we do going forward.

We have a nice balance sheet and I think what we are looking for is, to delivery on a couple of nice singles going forward, build the company and continue to execute the strategy.

David Friedman - Morgan Stanley

Any comments on timelines for this type of process? A lot of companies have sort of open-ended, well, we'll be opportunistic, but years go by. I mean, how sort of committed are you to this as a key part of the strategy and are there any sort of broad timelines that you feel comfortable putting around this?

Bill Heiden

We are absolutely committed. If it were up to me, I would have done the deal done by Friday. We have incredible flexibility and total commitment from the management team, our board and our key investors. It takes two to tango, and it's always the other side of the table I think that tends to be the governor on speed.

I mentioned we are dealing with a European company that took the summer off, so we lost a couple of months there. Could we get a deal done by the end of the year? I think, we could get a deal done by the end of the year, but I can't commit, because I am not in control, but this is certainly a very, very high priority.

There's two priorities in the company. That's Feraheme and a successful business development and that's where we are focused on.

David Friedman - Morgan Stanley

Great. I think, we are out of time, so thank you both for coming. Thanks, everyone, for joining us.

Bill Heiden

Thank you.

Frank Thomas

Thank you.

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