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Albany Molecular Research, Inc. (NASDAQ:AMRI)

Q2 2008 Earnings Call Transcript

August 6, 2008 10:00 am ET

Executives

Thomas D'Ambra – Chairman, CEO & President

Mark Frost – CFO

Analysts

Russell Silverstri – SKIRITAI Capital

Andrew Weinberger – Galleon Capital Management

Tim Evans – Jefferies & Co.

Operator

Good day, everyone. And welcome to the AMRI Second Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Dr. Thomas D'Ambra. Please go ahead, sir.

Tom D'Ambra

Thank you, Abe [ph]. Good morning, ladies and gentlemen. Welcome to the conference call segment of the Albany Molecular Research 2008 Q2 earnings announcement. This call is a follow up to our press release issued this morning on business wire.

With me is Mark Frost, AMRI's Chief Financial Officer. The second quarter 2008 was a continuation from the first quarter of the solid growth in contract business, along with an important milestone and resulting payment from BMS for the following of the Canadian equivalent of an IMD. Given these results and as we've indicated in the press release, we are raising guidance for the full year on both contract revenue and earnings.

I'm going to turn the call over to Mark for his comments, after which I will have some additional remarks. Mark?

Mark Frost

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

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

Now I'm going to present financial results for the second quarter along with contract revenue and earnings guidance for the Q3 and full-year 2008. Further details are included in the press release issued earlier today.

AMRI delivered another quarter of strong earnings growth. Growth was fueled by strength in discovery services and development and small scale contract service areas, both of which delivered 40% plus revenue growth for the quarter. Large scale margins were up on a quarter-over-quarter basis on lower revenue due primarily to improved overhead absorption.

Operating highlights and key metrics on a year-over-year basis include adjusted diluted EPS of $0.24 compared to $0.14 on adjusted basis in Q2 2007. 54% contract revenue growth and discovery services, 43% contract revenue growth in small-scale development. $4 million in milestone revenue from Bristol-Myers Squibb as a result of their filing of the Canadian equivalent of an IMD. A 45% improvement in EBITDA from $10.7 million to $15.5 million.

Operating income for our core contract business increased by 91% to $3.2 million. Included in our Q2 GAAP results, is $2 million in charges related to the restructuring of our European operation, which Tom will provide more color on later in the call. During Q2 2008 our phase one, phase two customer pipeline increased by 10% from 50 compounds to 55 compounds.

Now, I'm going to turn to financial results for the Q2. All comparisons on a year-over-year basis. Total revenue was $57.9 million, an increase of 17% compared to $49.4 million in 2007. Total contract revenue was $46.4 million, an increase of 16% compared to 39.9 million in 2007. Total contract revenue encompasses revenue for AMRI's discovery services, development and small scale manufacturing and large scale manufacturing business components.

Contract revenue from discovery services was $14.8 million, an increase of 54% over $9.7 million in 2007. Growth drivers were the US and Singapore as well as our natural product deals. Contract revenue from the development and small scale manufacturing was $15.2 million, an increase of 43% compared to $10.6 million in 2007.

Continued organic demand from specialty pharma, biotech customers in the US was the primary driver of revenue growth as well as our Hyderabad, Indian operation started to make a contribution. Contract revenue from large scale manufacturing was $16.3 million, a decrease of 17% compared to $19.6 million in 2007. The decrease results primarily from lower GE Healthcare shipments and reduced shipments of other commercial products including Vyvanse where there were no shipments in the quarter. We are expecting our next shipments of Vyvanse to be in Q1 next year.

We earned $4 million in milestones from the filing by BMS of the equivalent of an IMD in Canada related to our 2005 licensing agreement. This compares with $1.6 million in milestones in the prior year.

Recurring royalties from Allegra in Q2 2008 were $7.6 million, a decrease of 3% from 2007. AMRI earns royalties from worldwide sales of nonsedating antihistamine Allegra, as well as the authorized generics for patents relating to the active ingredient.

Net income in the Q2 2008 on adjusted basis was $7.7 million or $0.24 per diluted share compared to $4.6 million or $0.14 per diluted share in 2007. Net income in the Q2 of 2008 includes $2 million of charges or $0.06 per diluted share related to the structuring of our European operations.

Turning to liquidity, I would like to highlight our strong cash flow situation for the quarter. Cash flow from operations was $13.8 million, versus negative $2 million in Q1. The increase is primarily attributable to higher earnings and lower working capital build in the quarter. We were able to improve our days payable by 11 days and DSO by two days. Cash flow is down from prior year by $4 million, because of higher receivables from revenue growth in the quarter.

Let's turn to year-to-date results. Total revenue for the first half of 2008 was $111.5 million, an increase of 14% compared to total revenue of $97.7 million in the first six months of 2007. Total contract revenue was $91.7 million, an increase of 13% compared to $81.2 million in 2007. Contract revenue for discovery services was $28.2 million, an increase of 44% from $19.6 million in 2007. Contract revenue for development and small scale manufacturing was $28.5 million, an increase of 36% from $20.9 million in 2007.

Finally, contract revenue for large scale manufacturing was $35 million, a decrease of 14% compared to $40.7 million in 2006. Recurring royalties from Allegra for the first half of 2008 were $15.8 million, an increase of 6% from 2007.

Net income under US GAAP was $10.4 million or $0.33 per diluted share, compared to net income of $7.8 million or $0.24 per diluted share of 2007. Excluding the European restructuring charge of $2 million and a tax benefit related to the resolution of an outstanding income tax examination of $1.6 million or $0.05 per diluted share, net income for the first six months of 2008 on an adjusted basis was $10.8 million or $0.34 per diluted share.

Excluding large scale restructuring charges of $185,000, net of taxes net income for the first six months of 2007 on an adjusted basis was $8 million or $0.25 per diluted share. Year-to-date we have generated about $11.8 million in cash from operations.

Now I'm going to spend a little time both on our current quarter margins and projections for the remainder of the year. Overall gross margin on our contract services business improved from 25% to 28% in the Q2 as we continue to gain margin leverage from the fixed cost in our US lab business and a scale benefit in international lab operations.

Large scale margin decreased from set Q2 2007 levels, on lower revenues for our rental air plan. However, we did improve margins from Q1 '08 by 10% to 13% in the quarter as a result of improved efficiency absorption in the US plant as well as better pricing on our India generic API's.

In the second half of 2008, we expect large scale gross margins to increase from first half levels of 8%, resulting from revenue increases with a completion of shipment of a larger number of commercial orders, new commercial launch quantities and development of projects.

Turning to our discovery and development segment, gross margin in the Q2 increased to 36% from 26% last year driven primarily by the strength of our US business. Note that this quarter also includes recognition of upfront fees on a large screening project which increased margins by approximately 2%. This will reoccur in the third quarter, but not in the fourth quarter. We expect overall DDS gross margins for the second half to be slightly below first half results.

And an important trend which reemerged this quarter was that our contract services business reached a key milestone being earnings positive, when you exclude milestones, recurring royalties and R&D expenses and this is even after charging all of our SG&A to the contract side.

Earnings before interest, taxes, depreciation, amortization, EBITDA, in the second quarter was $15.5 million or 27% of total revenue. EBITDA in the second quarter for just a contract services business excluding milestone, royalty revenue and R&D expenses was $7.3 million or 13% return on contract revenue.

I'm going to move from results and turn to our financial guidance, first for the third quarter. In the third quarter, we expect contract revenue to range from $47 million to $49 million, an increase of up to 18% from last year. Continued strong demand for discovery services and development and small scale manufacturing expected to contribute to the growth in contract revenue in the Q3.

To get to the range of $47 million to $49 million, we project discovery services revenue to range from $14 million to $15 million, increase of up to 43% over 2007's level. We anticipate development and small scale revenue to range from $14 million to $15 million, an increase of up to 14% from 2007.

We project large scale revenue to range from $18 million to $19 million, an increase of up to 6% over last year. We expect royalty revenues to decrease by 5% from Q3 2007. We expect gross margin to be up 3 percentage points to 5 percentage points from Q3 2007 levels, because of the growth in discovery services and large scale revenue.

From a cost standpoint we project R&D to grow by up to 35% from Q3 2007 because of the timing of the IMD and we expect SG&A to increase by roughly 15%. We are estimating earnings per share for Q3 2008 to be from $0.08 to $0.10 per share, up from $0.06 in the Q3 2007.

Earnings per share will be lower than Q2 2008 because of the BMS milestone is not expected to repeat as well as seasonality in royalties. Q3 is usually our lowest quarter in the year for Allegra royalties as well as we expect higher R&D costs in the quarter. Again, our EPS estimate assumes there is no at risk launch of a generic version of Allegra-D.

Now turning to full year guidance, for the full year 2008, we are raising our estimated contract revenue to range from $186 million to $190 million, increase of up to 16% from 2007. To get to the range of $186 million to $190 million, we project discovery services revenue to range from $56 million to $57 million, an increase of 34% to 37% over 2007's level.

We expect increase demand for medicinal chemistry services both in the US and Asia as well as strong natural products and screening revenue from contracts which we signed in 2007. We anticipate development and small scale revenue to range from $53 million to 55 million, an increase of 18% to 22% from 2007. Finally, we continue to project large scale revenue range from $76 million to $77 million, an increase of up to 1% over last year.

Further point on the contract revenue guidance excludes any potential additional milestones revenues from AMRI's biogenic amine collaboration with Bristol-Myers Squibb or any other project. Moving from contract revenue, we expect royalty revenues to increase by 5% in the balance of 2008, based on growth overseas offset by continued erosion in the US Allegra market.

Turning to margins, we expect gross margins to increase 2% to 3% over 2007 levels. As we say the last quarter, our underlying gross margin improvement is higher but we have to offset the impact of the renegotiation of our largest commercial contract which resulted in a 2% full year hit to company's gross margins.

From a cost standpoint, we project R&D to grow by up to 8% to 10%, as we advance a tubulin inhibitor program in to phase one clinical trials in 2008 which was in our original plans and guidance communicated at the beginning of the year. We expect SG&A to increase by up to approximately 15%. We're estimating earnings per share for 2008 to range from $0.48 to $0.52 representing up to 86% growth. Our EPS estimates again assumes there is no at risk launch of a generic version of Allegra-D.

I will now turn the call over to Dr. D'Ambra who will continue with additional comments.

Tom D'Ambra

Thank you, Mark. I would first like to make a few comments about the different components of AMRI's contract services business. In the discovery services component, growth was led by both our US and Singapore units. Strong US discovery performance was driven primarily by renewal and/or expansion of current customer projects as well as the addition of new customers in the US and from Japan.

Revenue generated for discovery services in Singapore was also very good, supported by growth in emerging markets for AMRI including customers from Europe and Singapore. Responding to this demand as was recently announced we completed a 10,000 square foot expansion, doubling our capacity for drug discovery chemistry and added a invitro biology lab as a satellite of our larger invitro biology effort at our Baxter [ph] Washington lab.

The coupling of invitro biology with chemistry synthesis at our Singapore site, improves our ability to execute more complex integrated drug discovery SAR projects and continues our plan to provide customers a broad range of services, capabilities and geographic choices.

As highlighted in our release this morning we initiated a restructuring of our Hungarian operations during the second quarter. The actions taken were made after careful deliberation. We believe that this is now a better position for long-term financial growth as well as future expansion. We purchased Hungarian business with the intent of establishing a significant base of European operations, and remain committed to that purpose.

In support of that vision, besides adding Managing Director, Dr. Philip Small, AMRI signed a binding letter of intent to move to new facilities which will create an opportunity for further consolidation of multiple sites in and around Budapest and provide space for expansion of new capabilities in support of our global business model.

Turning from discovery to development and small scale manufacturing performance in this component also remains strong with continued double-digit growth forecasted for the year. This component continues to be led by strong growth in our US operations. In addition, development business at our Hyderabad location is reaching critical mass experiencing strong growth in our new facility, which opened less than one year ago. A significant driver of the growth of our Hyderabad operations is a result of the continued ability to successfully market and deploy the company's hybrid services model.

The number of projects being bridged between the US and India continues to grow. The recent completed expansion (inaudible) chemistry services added in to Hyderabad has markedly increased the site's project capacity and capability as well.

Although the US operations of both our discovery and development and small scale components continues to lead the way our overseas operations at both Singapore and Hyderabad are beginning to become more prominent.

On the large scale front, US manufacturing revenues was down from a year ago. Quarterly fluctuations in revenue remain the pattern for this business, driven by customer orders product mix and timing and shipments which impact revenue recognition. On a positive note this component continues to make progress in improving productivity and absorption.

The full-year guidance that Mark provided a few moments ago for large scale represents identified orders. Regarding large scale and our Hyderabad, India, forward progress continues as we near completion of upgrades to infrastructure to meet standards acquired for US GMP compliant and the completion later in the Q3, of a newly constructed non-GMP pilot plant at our recently acquired former FineKem facility.

As an additional value-added service to our customers, AMRI's also invested in R&D in order to expand our contract services, and to identify novel early stage drug candidates with a goal to outlicense to a strategic partner. During the last quarter, the impact of these investments was significant.

From a research investment on our contract services, during the quarter, the discovery services business component recognized increasing revenue from several natural products R&D collaborations announced over the last 12 month to 18 months, where deal terms provide for upfront access fees and fee for service revenue. Consistent with a part of our strategy in creating higher value added capabilities through our R&D investments, 25% to 30% of discovery services contract revenue, is a direct result of prior period R&D investments.

In addition to validating in these prior investments to build out our discovery capabilities, this also illustrates how AMRI is differentiating itself in discovery by providing higher value added opportunities to work with customers on the new R&D initiatives.

Also as was announced in June AMRI became eligible for a $4 million milestone payment as a result of Bristol-Myers Squibb's filing with The Health Products and Food Branch of Health Canada to conduct phase one testing of an AMRI compound licensed exclusively by BMS. As previously stated, there is a potential for other candidates to be nominated for development from this collaboration which would result in additional milestone payments to AMRI.

In addition on July 11th, AMRI on its own filed an Investigational New Drug application with the US Food and Drug Administration. This IND application is to enable initiation of a phase one study on a compound from AMRI's proprietary oncology research program.

Subject to FDA approval we plan to begin enrolling patients and to commence trial as soon as we can get going. AMRI's compound is a novel analog of an established class of tubulin inhibitors, therefore unique but based on well-known mechanistic properties. Based on preclinical animal testing we believe our compound may represent a best-in-class molecule in a proven series of active drugs. The phase one study is scheduled to be initiated at four institutions will include up to 40 patients over a 9 month period to 12 month period.

Combined with a Bristol-Myers Squibb Canadian filing mentioned a few moments ago, this is a second AMRI compound submitted for phase one testing in the last couple of months, clearly demonstrating AMRI's ability to generate additional opportunities for future commercial potential.

For the CNS program, our collaboration partner, BMS, is responsible for the clinical trial and all associated costs. The IND studies for our anti-cancer compound are being funded out of our R&D budget. Any of which potential costs are fully built into our earnings guidance for the full year that Mark provided earlier.

In addition to these advanced program there are other programs at earlier stage that continue to show promise. Our strategy is to seek partnership opportunities for all our programs when possible. Efforts to identify additional strategic partners for all our R&D programs are underway, though there is no guarantee we would be successful in not licensing any of the other programs at this time or at any time.

Changing topics I would like to take a moment to address our views regarding the economic and business environments for AMRI and our customers. AMRI perform services for pharmaceutical biotech and related to healthcare research organizations. Our contract business is dependent upon the financial health of our customers and a strong outsourcing environment.

Clearly, as we look at the state of the US economy in the business environment for our US based customers, a number of factors cause concern. The ability of small and start up companies to raise capital in the US is more difficult than in recent years. The challenges and difficulties of the pharmaceutical industry and the ability to bring new drugs through the US FDA approval with a prospect of (inaudible) are well documented.

AMRI is doing well in challenging times, they attribute to the strength of the global platform we have strategically pursued. We are confident in our guidance for revenue and earnings for the full year. While it's appropriate to remain somewhat cautious about the future, AMRI is positioned and focused to capture more business from customers and markets outside the US.

Furthermore, evidence from other CROs and industry reports indicate outsourcing trends from large pharmaceutical companies will continue to accelerate as they move to more flexible cost models.

Our ability to create unique partnerships based on a broad spectrum of services, products and geographic locations as well as the potential to capitalize further on our own R&D investments uniquely positions AMRI to capitalize on a growing outsourcing market for drug discovery, research and development and API manufacturing.

As we look back over the first half of 2008, we are pleased at the AMRI's performance exceeded expectations at the beginning of the year. As we look forward to the second half of 2008, we are pleased to be raising our expectation for continued strong growth, particularly during a challenging US economic environment.

Laboratory operations in the US and abroad continue to experience strong demand. Our large scale business margins are moving in the right direction. We are taking steps to realign European operations with our global business model and our investments and R&D are providing further returns to shareholders.

As we communicate and reflect upon our performance we acknowledge that we must continue to stay focused on delivering AMRI's brand of the highest quality customer service and level of excellence across all of our business segments and locations. We are committed to continuous improvement in all aspects of our business. I look forward to sharing that progress with you in the coming quarters.

I would like to conclude my remarks by extending my sincere thanks to our employees and my colleagues at AMRI. It’s by their actions and dedication that AMRI continues to be successful today and setting the stage for continued growth and success in the months and years ahead. Thank you all for your interest in AMRI. At this point we are happy to answer questions.

Question-and-Answer Session

Operator

(Operator instructions) We will go first to Russ Silvestri and SKIRITAI Capital.

Russ Silverstri -- SKIRITAI Capital

Hi, congratulations. Actually I have four questions. One is Vyvanse being second sourced by anyone?

Mark Frost

Yes, this is Mark Frost, we are the primary company on the sourcing of Vyvanse, but there is a secondary supply contract.

Russ Silverstri -- SKIRITAI Capital

Is that the reason for the -- I perceive to be a slowdown from there.

Mark Frost

Actually, we do not believe that is the reason. The issue as we discussed on our last conference call is that what has come out with Shire is that more inventory was built last year than was needed. And they have come in at the lower end of their expectations for the launch of Vyvanse which put us in a situation, where we expect likely suffice to restart Q1 next year, there is an outside chance Q4, there could be supplies but we have not built that in to any of our guidance.

Russ Silverstri -- SKIRITAI Capital

And then also I think in the past you've given us a total number of customers that you have. I was wondering if you could give me the totals and maybe just the quarterly growth in new customers --

Mark Frost

Sure. I look at it. On a year-to-date basis, we're roughly handling about 200 customers, close to 600 projects and that is increased roughly about 15% to 20% on the prior quarter.

Russ Silverstri -- SKIRITAI Capital

I guess all those customers are in the developmental and small scale.

Mark Frost

Small scale tends to be the larger portion of our customers, yes, and projects.

Russ Silverstri -- SKIRITAI Capital

And then when you look at the Hungarian business, I didn't know you may have broken it out in the press release, but I haven't got to it in detail yet, but what were the costs associated with that reconfiguration and then with that, is there any endemic situation that causes that to not be as successful as India. Obviously, India and Singapore, you made nice investments there and they worked. The Hungarian seemed like it started okay and then it's not met your expectations or I guess -- anyone's expectations. Is there a problem there? Is there something that the Europeans won't do that they are doing somewhere else?

Tom D'Ambra

I'll let Mark say some about the costs and then I will come back to you for the second.

Mark Frost

Yes. The costs were basically taking a $2 million charge, the benefits on a run rate base will be about $1.1 million. So the pay backs unless than two years on what we've done.

Russ Silverstri -- SKIRITAI Capital

And there will be any -- you don't expect to have any more costs associated with this?

Mark Frost

No, we not at this point in time.

Tom D'Ambra

Russ, this is Tom back. On the second part of your question in terms of, the difference in our Hungarian operations, and India and Singapore in part, today are sort of the area of support they focused on. Hungarian operation was a library company making custom libraries and selling off the shelf orders, and had some government contracts. We -- inheriting that business is our stated intent was always to use that as a (inaudible) in Europe to build in other services. The business we acquired was running a little bit under $10 million in annual revenue, it's been flat and slightly down, and we had some issues in some of the projects with existing European customer base ending in part because of some of the mergers over there and other reasons they have begun to build in new orders from US and Japanese customers as well.

Taking us a little longer to get the business growing but I think we found that in all of our locations, things have taken a little bit of time to get established and growing. The unique situation in Hungary as well, that was an existing business versus the other locations which were start up and we could build our culture from scratch. Part of the structuring is to realign the business for some of the new work that's coming in as well as the continuing to build a higher caliber or capability there, to support some of the new work that we believe is going to be heading that way. We've also made significant investment in our sales force and we are continuing to add additional sales personnel in Europe. So we think it's just a matter of time for that to get on track and restructuring is really to help align the operations for what it's going to become.

Russ Silverstri -- SKIRITAI Capital

Those operations will do small scale and discovery development as well?

Tom D'Ambra

That is the long-term intent. We take it first getting into more med chem SAR discovery programs like we are doing in Singapore. And then we are also looking at putting some level of small scale in Europe and that could be in Hungary.

Russ Silverstri -- SKIRITAI Capital

Just one last follow up on that, in terms of the penetration of the large scale pharma, Pfizer, Bristol-Myers, of those large scale pharmas, how many of those companies have you penetrated today when you look at the market is available for the outsourcing?

Tom D'Ambra

I think you have to look at each business segment, and today, over the years we have essentially worked with all of them, and it goes up and down over time. I think today we don't have a lot of penetration in to the large companies, we are starting to see some evidence of a return to some of the higher value outsourcing projects particularly in discovery from some of the big pharmas, we also note that there is continuing layoffs going on and at this time that the big pharmas now started look at outsourcing, even more of their early stage stuff. We think that -- we don't have a lot of penetration, that's really an opportunity for some of the high value outsourcing opportunities where we positioned ourselves.

Russ Silverstri -- SKIRITAI Capital

And my last question is, your expectations that you set, I appreciate you doing that for the remainder of the year. Where do you see the risk in terms of expectations, seems like you've taken large scale down or that in the past has been able to bite us, where do you see the risk today in you're achieving your goals for the second half?

Tom D'Ambra

I think our risk is in execution. As I mentioned on large scale, we have visible orders for the forecast. We are confident in making those numbers. The risk would be that something doesn't happen or -- obviously there could be potential for products to be pulled. But right now we are very confident in those numbers.

Russ Silverstri -- SKIRITAI Capital

Thank you very much.

Tom D'Ambra

Thanks, Russ.

Operator

(Operator instructions) We'll go next to Andrew Weinberger of Galleon Capital Management. Please go ahead.

Andrew Weinberger -- Galleon Capital Management

Congrats on a solid quarter. Just had a quick question with regard to the start up or I guess the acceleration -- or eventual acceleration in some of your eastern European operations, is this sort of a market share gain, gain besides just sort of an overall growth market. Do you expect to take market share from competitors once those operations are fully running? Do you have any potential early small projects that could lead to bigger projects to try to fill capacity there and through market share gains or is it solely just everybody keeping their own market share and just the overall business growing over there?

Tom D'Ambra

That's a good question, Andrew. Our goal is to put the same AMRI brand in to Europe performance and expectations that we have in the US. In that concept, we have a very strong reputation on the US and I think we're very competitive, and we believe that will be also -- be the case in Europe. I think one comment I would note is that some of our European competitors are struggling, if you look at their announcements, they are losing money, in an attempt, short-term attempt to retain market share, there has been some discounting. We went through that in the early 2000s in the US as well, there was a market shake out, and I think history has shown that we are still here and we are strong, I think long-term our prospect in Europe, we are very confident that it will get to where we want to go.

Andrew Weinberger -- Galleon Capital Management

And then do you say what's the price differential between eastern Europe and Asia, can eastern Europe be competitive with some of the lower cost facilities in Asia or is the price differential too big there?

Mark Frost

The costs in our Budapest operations are comparable to our Singapore side. And as we have shown Singapore is holding its own even though it's not as cheap as India or China because of the mix of types of products exporting [ph] in there. You also have to look at sort of the inflation and the rising costs of the so-called low cost countries any way. But we always try -- our goal has not been to compete for the lowest price, but really to define a higher value resource that's going to drive long-term relationships for us.

Andrew Weinberger -- Galleon Capital Management

You see the price GAAP narrowing between sort of Singapore and India and China as you have wage inflation, and sort of the lower costs inflation and then you're opening -- I don't want to put words in your mouth -- are you hoping your quality benefit will drive the ultimate decision over time?

Mark Frost

It’s hard to predict where costs are going to go. But our plan has always been to provide geographic location to be close to the customers and a lower cost environment, not necessarily the lowest cost environment although India clearly -- our Indian operations are very competitive there on cost as well.

Andrew Weinberger -- Galleon Capital Management

Thanks a lot.

Operator

We will go next to Tim Evans at Jefferies and Company. Please go ahead.

Tim Evans -- Jefferies & Co.

Hi, this is Tim Evans on behalf of Dave Windley. I wonder if you cold give us a color on the mix of business between large pharma and small bio pharma?

Mark Frost

Sure. Tom mentioned a little bit on the call it depends by component. If you look at our discovery business Tom was talking about we've seen an increase in our large pharma, but right now roughly 40% of discovery business is coming now from large pharma about a similar amount from the smaller biotech especially pharma players. We actually have a growing amount of our revenue coming from -- what we call the foundations and so forth, which are now getting in to drug discovery, that sort of a new trend that we have been absorbing for a while. If you go to the other pieces of our business, the development business is close to 85% of it is we have the smaller players, the small bio techs, especially pharmas, very small portion of our development business comes from large pharma. And then if you look at large pharma, notwithstanding if you take out the GE Healthcare contract again, most of our business is with the small bio tech specialty pharmas. We have very little penetration with large. So as Tom mentioned from an environment standpoint as we see large pharma start to outsource more, this becomes a bigger and bigger opportunity for us, because we have pretty limited penetration on both the small scale and large scale side.

Tim Evans -- Jefferies & Co.

Great, and with regards to your comments on the US macro environment, what percent of revenue comes from clients that are dependent on outside funding and do you have any bad debt concerns around that?

Mark Frost

The numbers I talked about, you have to take some of the international out of that, about a little over 10%, about 10%, 15% of revenue is international. So that obviously is not as risk, and if I walk through the percentage, those amounts with a smaller bio techs, you would say potentially if you look in to the future you might have challenges with it. Bad debt we haven't really seen big issues with that. I think the one thing I will talk about is what you tend to see though with the bio tech specialty pharmas -- it's not a question of just running out of money, it's a question of where they are going to put their money. I think they are all thinking through do they put more their money into their development candidates that are more advanced or they put in discovery. I think that's a trend we still haven't sorted out what's happening with our customers what they are going to do. Certainly, if you look at our CRO numbers, doesn't seem to be slowing down much on their side.

Tom D'Ambra

The other thing I will add, something that, Tim, is again when you look at different business components, as Mark described, discovery is about one to one mix between big pharma and a smaller companies. Discovery also tends to be longer-term relationships, we have these longer term FTE deal and the fact that we have a larger pharma mix there is actually a positive, and we think that the trend could lead to larger outsourcing as they consolidate and cut their internal costs. On the development side which is a much bigger exposure to the smaller companies, these are typically shorter term projects where we are working on, supporting them getting their compound in the clinical or making their materials they can run their clinical trials. And that's a key part of their existence. They need to be running the clinical trials and focusing on those to get future funding and we saw that in the past when funding was tight the smaller companies maybe contract a little bit on the discovery part, but they actually increased our outsourcing and development. I think and that also spills over into large scale as well as things move further along in clinical trials. So I think the macro environment, actually it's something we are cautious about -- when you look at the state of the economy you have to be cautious. But we think some of these trends actually could work in our favor.

Tim Evans -- Jefferies & Co.

All right. Can you provide any additional information on the GE Healthcare, product (inaudible) scheduled in the second half of '08?

Mark Frost

Sure. It's going to be consistent with prior year, which we said. I think it's been more equally weighted through the quarters. Our sense is GE is doing more proactive balance sheet management of all their vendors around the world. You probably heard of the GE Healthcare issues, so they have been more aggressive which is actually time for us it makes our revenue as little more less lumpy. So basically they are equally weighted through the quarters is what we are seeing now.

Tim Evans -- Jefferies & Co.

Okay. And finally in the percentage of business outside the US, what extent do you have capacity to capture outsourcing shares -- growing offshore?

Mark Frost

Sure. As Tom talked about in Hyderabad, we just launched nine months ago a new facility, demand is growing there, we are now looking at options and we can move pretty quickly. And to add for the capacity we need to next year there. Singapore, we just doubled the capacity, just went online at the end of -- the beginning of third quarter and Hungary, we will have further capacity probably by first, second quarter next year in that location to deal with increased demand. So we are pretty well situated we think as international demand grows.

Tim Evans -- Jefferies & Co.

Thank you so much and congratulations.

Mark Frost

Thank you.

Operator

(Operator instructions) We do have a follow up question from Ms. Russ Silverstri. Please go ahead.

Russ Silverstri -- SKIRITAI Capital

Thank you. In the past you have also told us how many drugs you had in phase three and when you think they might go into FDA, curious on that?.

Tom D'Ambra

Yes, that number as we discussed our phase one and phase two number increased again by 10%, it's off roughly about 50% from a year ago. On the phase three, we basically remain constant at the 16 number -- we'd some come in, some come out, it's maintain basically at that level of about 16 compounds that are running through.

Russ Silverstri -- SKIRITAI Capital

And I think you were expecting in the past to have two or maybe three drugs to go to FDA by year end. Is that still the case?

Tom D'Ambra

Yes, one of them was submitted in the first half and we are hoping a couple of more may be, one will be submitted in the second half and maybe one in the first half next year. So we continue to make progress there on looking to diversify our commercial. In fact, actually, we've signed another commercial contract which we weren't able to disclose, in the second quarter and a couple others are pending. The challenge as we discussed at our health care conferences and other calls is the ability to get them through phase three through the FDA. That continues to be a challenge for us. But the potential for anyone of those 16 can range from a couple of million a year to $15 million to $20 million a year for any individual compound. So that gives us a lot of confidence that it's just a question of time to reap the potential of those.

Russ Silverstri -- SKIRITAI Capital

And then lastly, on the commercial contract that was signed, did you generate any revenue in the current quarter from that contract?

Mark Frost

A little bit. That will be more in the second half.

Russ Silverstri -- SKIRITAI Capital

Thank you.

Operator

(Operator instructions) With that Dr. D'Ambra, we have no other questions at this time. So I would like to turn the call back to you for any closing comments.

Tom D'Ambra

Thank you, Abe. This concludes AMRI's 2008 Q2 earnings announcement call. Thank you again for your interest in AMRI.

Operator

That does conclude the call. You may now disconnect. Thank you.

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Source: Albany Molecular Research, Inc. Q2 2008 Earnings Call Transcript

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