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Akorn, Inc. (NASDAQ:AKRX)

Q2 2008 Earnings Call Transcript

July 31, 2008 5:00 pm ET

Executives

Arthur Przybyl – President and CEO

Jeff Whitnell – SVP of Finance and CFO

Analysts

Noelle Tune – Soleil Securities

Scott Hirsch – Credit Suisse

Operator

Good day, everyone, and welcome to the Akorn, Incorporated conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the President and CEO, Mr. Arthur Przybyl. Please go ahead, sir.

Arthur Przybyl

Thank you. Good afternoon, ladies and gentlemen, and 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.

Our second quarter results met our expectations. We continue to demonstrate our improving business model. Total revenue for the second quarter was $21.2 million, an increase of approximately 82% over the prior year period. At the same time, gross profit for the quarter was $4.8 million, an increase of 67% over the prior year period. The increase in gross profit is due primarily to tetanus diphtheria vaccine sales, which contributed an incremental $1.8 million as compared to the prior year period. Not including vaccine, gross margin for our business improved from 24.8% to 27.1% as compared to the prior year period.

In our Ophthalmic business segment, revenues increased by 10% over the prior year period. Historically, since 2005, Ophthalmic business revenues have consistently generated approximately $20 million annually. Revenue growth in this segment is dependent on new product introductions and their FDA approval. Currently, we have 13 ophthalmic products under development. Of these, seven are on file with the FDA and six are under development.

Our most important ophthalmic product is our internally developed new drug application for a new ocular topical anesthetic, Akten. When approved, we believe Akten represents a $225 million market opportunity for us and a significant short-term revenue opportunity. Recently we received an approvable letter for Akten, and expect to launch Akten in the second half of 2008.

In our Hospital Drugs and Injectables business segment, revenues decreased by 6% as compared to the prior year period. Historically, since 2005, Hospital Drugs and Injectables business segment revenues, excluding DTPA sales to HHS, have grown from approximately $14 million in 2005 to $20 million in 2007. Revenue growth in this segment is also dependent on new product introductions and their FDA approval.

Currently, we have 32 Hospital Drugs and Injectables products under development. Of those, 10 are on file with the FDA and 22 are under development. In this business segment, there were three significant short-term catalysts for revenue growth in the second half of 2008. We are awaiting FDA approvals for an oral generic Vancomycin and an injectable Schedule II narcotic. We also continue to model the potential for a forward deployment sale to Health and Human Services for DTPA, our nuclear radiation anecdote.

In the second quarter, revenues from our Vaccine business segment begin to demonstrate why vaccines are an important strategic business segment for us. We generated $10 million in tetanus diphtheria sales in the second quarter, and we expect to exceed that revenue number in the third quarter. We announced the receipt of a contract award from Centers for Disease Control and Prevention, and renegotiated our exclusive distribution agreement for Td vaccines on favorable terms.

Recently, we received a large purchase order from the largest US vaccine distributor for our unit-dose Td vaccine. And as of the end of July, we will only be marketing the unit-dose Td vaccine. Our hospital market share for unit-dose Td vaccine continues to grow. Nearly 1,000 hospitals are buying our vaccine, representing approximately 20% hospital market share. We will launch our flu vaccine in the third quarter and expect to submit our pre-IND meeting request to CBER for our hepatitis B vaccine shortly. This will allow us to determine the bridging clinical trial requirements towards filing for a Biologic License Application or BLA.

Our Contract Pharmaceutical Manufacturing business segment revenues decreased by 20% over the prior year period due to customer ordering patterns. However, due to four new agreements with two ophthalmic and two injectable pharma companies, we continue to forecast improved revenue growth in the second half of 2008. Historically, since 2005, Contract Pharma business segment revenues have generated on average $8 million in annual revenues. With our new agreements, we expect to double revenues in 2009 and continue to increase our revenue base due to our investment in lyophilization manufacturing, which has passed an FDA pre-approval inspection.

Lastly, our Akorn-Strides joint venture launched its first commercialized product, Rifampin for Injection, in July. Several other JV products are scheduled for launch in the second half of 2008. And revenues for the joint venture will be realized in the third quarter of 2008.

In closing, our objective for the third quarter is for our business model to generate positive cash flow. I will now turn the conference call over to Jeff for an update on our financial position.

Jeff Whitnell

Thank you, Art. Good afternoon, ladies and gentlemen. Total revenue for the second quarter 2008 was $21.2 million versus $11.6 million in the second quarter 2007. The year-over-year increase in revenues is primarily due to improved product sales in our Ophthalmic and Vaccine business segments.

Ophthalmic business segment revenues increased by $400,000 or 10% versus the prior year comparative period, and Vaccine business segment revenues totaled $10 million. Our other two core business segments, Hospital Drugs and Injectables and Contract Pharmaceutical Manufacturing, contributed revenues of $4.9 million and $2.1 million respectively. Both of these business segment revenue totals approximate historical run rates.

Gross profit for the second quarter 2008 was $4.8 million as compared to $2.9 million in the second quarter 2007. The aggregate increase in second quarter 2008 gross profit of approximately $1.9 million versus the comparative prior year period is due to unit-dose and multi-dose tetanus diphtheria vaccine sales, which contributed approximately $1.8 million.

Gross margin for the second quarter 2008 was 22.7% versus 24.8% in the prior year period, and reflects the impact of lower margin, multi-dose Td vaccine sales. Not including vaccine sales, gross margin for our business improved to 27.1% from 24.8% as compared to the prior year period.

Selling, general, and administrative expenses totaled $5.9 million in the second quarter 2008, an increase of $700,000 over the comparative prior year period. This increase is primarily due to the expansion of our sales team from 30 to 65 representatives, which was completed in the first quarter 2008.

Research and development expenses were $1.2 million in the second quarter 2008 versus $2.2 million in the comparative prior year period and reflect lower milestone payments for our new product development activity.

The net loss for the second quarter 2008 was $2.8 million, or $0.03 per fully diluted share, versus the net loss of $4.6 million in the second quarter 2007, or $0.05 per fully diluted share. The June 30, 2008 fully diluted share count for the company is 94.3 million, which assumes stock options and stock 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 today, the company has cash and restricted cash equal to $3.3 million plus approximately $4.5 million of undrawn upon availability under our credit agreement. To date, we have used our revolver to fund our investment in Td vaccine.

As of June 30, 2008, our carrying value on the balance sheet for both the unit-dose and the multi-dose Td vaccine was approximately $11 million, a reduction of approximately $8 million that was realized during the second quarter. This reduction in Td inventory enabled us to level load our working capital and convert inventory into collectible accounts receivable. As expected, vaccine shipments accelerated in the second quarter 2008 for two reasons; number one, increased unit-dose Td vaccine sales to US hospitals; number two, accelerated sales of multi-dose Td vaccines to distributors.

We believe that as our presence in the hospital market and the office-based physician market for vaccines continues to increase, we will be cash flow positive in the second half of 2008 and have sufficient working capital to meet our business requirements.

Finally, I would like to briefly review the statement of cash flow. During the second quarter 2008, we invested a total of $1.2 million, primarily for the leasehold improvements and equipment for our new distribution facility and corporate headquarters located in Gurnee, Illinois and Lake Forest, Illinois respectively. Also during the second quarter, we retired our mortgage agreement for our manufacturing facility located in Decatur, Illinois.

I'd like to thank you for your time and attention, and I will now turn this teleconference back to Art.

Arthur Przybyl

Thank you, Jeff. And moderator, we will open up the conference to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll go to Noelle Tune with Soleil Securities.

Noelle Tune – Soleil Securities

Good afternoon, guys, and congratulations on a nice quarter.

Arthur Przybyl

Thank you, Noelle.

Noelle Tune – Soleil Securities

Appreciate all the transparency in the prepared remarks. You eliminated at least half of my questions, but – on the Akten approval timeline, can you give us a little more granularity there in terms of if we assume that you responded within ten days, are we looking at a 60-day clock at FDA?

Arthur Przybyl

No, I think I prefer to wait until we have FDA approval for the product, Noelle, and make the announcement at that time rather than to forecast FDA approval timeline for the product.

Noelle Tune – Soleil Securities

Okay, fair enough. Turning to the tetanus diphtheria sales levels and going forward on gross in the third quarters and the fourth quarters, can you give us any more color on this for the quarter?

Arthur Przybyl

No, I'm not going to forecast any revenue projections for Td vaccines except to say that we expect the third quarter to exceed the second quarter revenue run rate.

Noelle Tune – Soleil Securities

Okay. And that's tetanus vaccine only?

Arthur Przybyl

It's only tetanus diphtheria vaccine, that's correct.

Noelle Tune – Soleil Securities

Perfect, okay. A couple of modeling questions. In terms of the R&D for the balance of 2008, are you looking for it to be consistent with the first half, or should we see some increases versus the first half?

Arthur Przybyl

Good question. And certainly we are level loaded in terms of personnel and R&D. And I think Jeff right now is looking at what some of our milestone payments will be for the second half. But I think in general, you'll see the same level of spending, including milestone payments, for the second half of the year, as you did for the first half of the year. Is that correct, Jeff?

Jeff Whitnell

I would model it comparable with the second quarter actual.

Noelle Tune – Soleil Securities

Okay. So the second quarter actual is a good run rate?

Arthur Przybyl

I'm sorry, Noelle?

Noelle Tune – Soleil Securities

I said the second quarter actual is a good run rate for third quarter and fourth quarter?

Arthur Przybyl

That's what Jeff is saying, yes.

Noelle Tune – Soleil Securities

Okay. And then one last one on the margins. Should we assume that the higher margins that you'll be getting on the unit-dose tetanus vaccine are enough to offset the flu margins, which I believe are around what, 15%?

Jeff Whitnell

Yes, the flu margins are 15%. I would just look at flu as leveraging up the sales teams that are selling vaccines in both hospitals and office-based physicians. So we still figure volume of [ph] $5 million worth of flu. You have an incremental 15% margin or $750,000 built into the gross profit dollars of the company and its result. Certainly the lower margin percentage would drag down the overall gross margin percentage because of flu. And you might have some offset, obviously, from the higher margins with unit-dose vaccines, Td vaccines. But we don't really look at it that way. I think we're looking more at aggregate gross profit dollars and using those flu gross profit dollars to, again, leverage up our sales team.

Noelle Tune – Soleil Securities

Right. And any color on where you are for pre-book for the flu vaccine?

Arthur Przybyl

I think we're getting very close to launching the product now in August and September as we get our first shipment. So, at this point in time, I'm going to report on flu vaccine sales when we report our recorded revenues for the third quarter associated with that vaccine.

Noelle Tune – Soleil Securities

Great. And then just last question. Can you give us just the running tally of the number of FDA approvals to date and the remaining expected by year-end?

Jeff Whitnell

Yes, I can. Just bear with me for one second. Hold on one second. We've had 12 ANDA approvals year-to-date. Many of those are inclusive of the joint venture as well, Noelle. We expect 13 more in the second half of 2008, including the joint venture.

Noelle Tune – Soleil Securities

Great. Thanks so much.

Jeff Whitnell

You're welcome.

Operator

We'll go next to Scott Hirsch with Credit Suisse.

Scott Hirsch – Credit Suisse

Hi, guys.

Arthur Przybyl

Hey, Scott, how are you?

Scott Hirsch – Credit Suisse

Good. I think a lot of these things have been addressed, but I just want to go over a few things. First, if I remember correctly, the CDC contract is about 1 million to 1.2 million units and originally kind of worked around 15 million. Was any of that in this quarter or is that all left for second half?

Arthur Przybyl

It's all left for second half. And remember, that's an annual number you're talking about.

Scott Hirsch – Credit Suisse

Right, right. Half of which would be–

Arthur Przybyl

And the contract did not begin until July 1. So our first orders came in right on or right after July 1 from that agreement.

Scott Hirsch – Credit Suisse

Okay. So, everything from that is left for this year. With respect to flu, have you guys kind of gotten any update as to how much you pre-booked?

Arthur Przybyl

We have and we – I think at this point in time, we're going wait to report what our actual revenues are for the third quarter when we start selling the product or filling the purchase orders that we have, as I mentioned to Noelle.

Scott Hirsch – Credit Suisse

All right, fair enough. And I presume kind of not much to update on the ANDAs, but with respect to DTPA, is there any insight with HHS?

Arthur Przybyl

We continue to have meetings. One as recently as I believe last week or two weeks ago Jeff was saying [ph], with senior HHS officials. We obviously continue to model it and talk about it for the back half of 2008. And we feel encouraged by the dialogue that we have with HHS in regards to forward deployment of DTPA.

Scott Hirsch – Credit Suisse

Okay. And then just lastly, can you kind of give us some – just kind of qualitative view on the BLA for Hep B? Maybe – do you have any insight as to what kind of bridging clinicals you need to do? What do you need to do for the unit-dose if that's a good comparator? What are you guys kind of thinking about as for the requirements for the BLA here?

Arthur Przybyl

Just to be clear, it was our manufacturer that filed for the supplemental BLA for unit-dose tetanus diphtheria. So we had nothing to do with that application. With the application involving serum hepatitis B, it is still too early to tell. We have engaged two consultants, Dr. Mitterand [ph] and Dr. Egan, former ex-CBER officials, to help guide us in this process. So it is still too early for us, certainly until we meet with FDA in the IND meeting in order to determine the requirements for a bridging clinical, to discuss them at this time. And I think we'll give more color on this after that meeting with FDA, with CBER officials.

Scott Hirsch – Credit Suisse

Great. Thanks very much.

Arthur Przybyl

You're welcome, Scott.

Operator

Having no further questions, I'd like to turn the conference over to Arthur Przybyl for any additional or closing comments.

Arthur Przybyl

Well, I'd just like to say thanks to everybody for attending this afternoon. This is our last earnings conference call from this conference room. We'll be moving to our new corporate headquarters August 15th. I invite all of our shareholders to please come visit with us. That is a state-of-the-art facility, and I think you'll be dually impressed when you see it. So, thanks again. Have a good afternoon, everybody. Bye-bye.

Operator

This does conclude today's conference. Thank you for your participation. You may now disconnect.

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