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Executives

Raj Rai - Chief Executive Officer

Tim Dick - Chief Financial Officer

Analysts

Steven Crowley - Craig-Hallum Capital Group

David Amsellem - Piper Jaffray

Elliott Wilbur - Needham & Company

Sumant Kulkarni - Bank of America-Merrill Lynch

Jason Gerberry - Leerink Swann

David Steinberg - Deutsche Bank

Michael Higgins - Brinson Patrick Securities

Akorn, Inc. (AKRX) Q3 2012 Results Earnings Call November 6, 2012 10:00 AM ET

Operator

Please standby, we are about to begin. Good morning. And thank you for joining Akorn Incorporated 2012 Third 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; and Tim Dick, Chief Financial Officer will host this morning’s call.

The call is expected to last about 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 14a-12 of the Securities and Exchange Act of the 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 9897443.

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 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 31, 2011, and the subsequent quarterly reports on Form 10-Q. Also, the company urges caution in considering any trends or guidance that maybe discussed on the conference call.

In addition, as required by Regulation G, reconciliation of the non-GAAP financial measures mentioned during 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 call. After my prepared remarks and discussion on key operational highlights, Tim will discuss the quarterly financials and details.

We had a strong third quarter with nearly $70 million in revenues or a 90% growth over the same quarter in 2011. The growth primarily was driven by acquisitions, launch of new products, revival products or products reintroduced as a result of favorable market dynamics such as drug shortages.

In addition to the robust topline growth we had solid gross margins and had outstanding cash flow from operations. As mentioned in the press release on this morning, due to the Superstorm Sandy, our plant in Somerset, New Jersey, which manufactures our key ophthalmic products, was out of commission last week due to power outages in the region.

Due to the week long shutdown, we have to take steps to re-qualify our plant, which are critical and essential to resume production. We expect the entire re-qualification process will take until the end of this week and thereafter, we anticipate being in full production mode.

This will also impact the completion of our Phase 1 capacity expansion and modernization project by couple of weeks, which we plan to wrap up in this quarter. Given the loss of productivity at the plant, we expect our revenues for the year to be approximately in the middle of our guidance of $248 million to $258 million.

Let me now provide you with a quick business and strategic initiative update before turning the call over to Tim.

First, new products, during the third quarter, we launched two new ophthalmic products, the most notable being Latanoprost, the generic version of Xalatan. The current estimated market size for Latanoprost is approximately $150 million before usual and customary discounts for the IMS and with seven generic approvals of which five are actively marketing the product. This product was acquired last year.

We also received the approval of Progesterone Capsules, the generic for Prometrium in the third quarter. We are currently in the middle of the launch process, though we began shipping the product towards the end of last month. We expect full quarter sales in the first quarter of 2013.

Second, R&D initiatives, during the third quarter we filed five ANDAs with the FDA, three injectables and two ophthalmic products. We are on track to file nine to 10 additional ANDAs in the fourth quarter. This would bring our total filings to 25 ANDAs for 2012, a record for the company.

In addition, our new R&D facility is under construction and is expected to be fully operational in the first quarter of 2013. We are adding new capabilities in the new facility to match our newly acquired manufacturing capabilities in India.

The added capacities and capabilities would support the filing of 35 to 40 ANDAs a year. We now have 45 ANDAs on file with the FDA, which include nine ANDAs that have been on file for over 24 months with an estimated market size of about $1.5 billion.

Third, we have completed the deployment of the fifth shift in our injectable plant in Decatur, Illinois, relieving us of capacity challenges that we faced in the first eight months of this year.

Fourth, sales force expansion, we’ve also completed the hiring of our hospital sales force. We now employ 52 field sales representatives, 19 acute care and 32 ophthalmic. We’ve essentially doubled our field sales presence since the beginning of this year.

Fifth, Akorn India, we have completed the hiring of our key management team in the areas of operations, quality, sales and regulatory affairs, and have also setup our corporate office. The management team is working with the sellers of the facilities on a smooth transition, which is expected to be completed in the next 60 to 90 days.

We now have four facilities that are fully operational. Our management team in India is finalizing plans to complete the construction of the fifth facility, which will be dedicated for oncolytics and certain expansion projects underway. We are on track to file two regulatory filings for U.S. FDA approval in two of the four functional facilities some time in the first quarter of 2013.

And finally, our consumer business, our OTC and veterinary initiatives have performed exceptionally well. With the acquisition of AVR, we have established a strong presence in the OTC ophthalmic business with the retailers nationwide.

Since the acquisition we have introduced a new anti-allergy product, increased our national sales and have introduced multiple private label products. Similarly, our veterinarian initiatives have resulted in meaningful growth of our ophthalmology business.

In closing, I would like to say that we have made significant process -- progress throughout 2012. As we have successfully integrated the strategic acquisitions built a robust R&D pipeline, successfully launched new products and revived old products.

We also scaled up a manufacturing to expand capacity, invested in modernization of our plants and finally, expanded our field infrastructure.

We have suffered a small setback as a result of the Hurricane Sandy. We are confident that we will overcome this and bounce back in the first quarter of 2013. We also plan to provide the guidance for 2013 sometime in January of next year.

Now, I’ll turn the call over to Tim for his prepared remarks. Tim?

Tim Dick

Thank you, Raj, and good morning. This was the 13 consecutive quarter of core revenue growth for Akorn. Consolidated revenue for the third quarter of 2012 was $69.6 million, which is up 90% over the comparable prior year quarter consolidated revenue of $36.7 million.

This growth came from market share gains and established products, the launch of new products such as oral vancomycin, the relaunch of certain injectable and ophthalmic products, as well as the acquisitions of Lundbeck products and certain assets of Kilitch Drugs India Limited and these gains were partially offset by decreases in our U.S. contract services revenue.

Third quarter 2012 ophthalmic segment revenue was $28.2 million versus $19.7 million in the prior year quarter, year-over-year growth was driven by organic growth of established products, new product launches such as Latanoprost Ophthalmic Solution and the relaunch of previously marketed products.

Third quarter 2012 hospital drug and injectable segment revenue was $34.7 million versus $13.8 million in the prior year quarter. Third quarter 2012 sales benefited from the Lundbeck product sales, first full quarter sales of oral vancomycin, the launch of certain injectable products, I’m sorry, the relaunch of certain injectable products and organic growth of established products.

Third quarter 2012 contract services segment revenue was $6.8 million compared with $3.2 million in the prior year quarter. Akorn, India contributed sales in the quarter of $5.8 million. U.S. contract sales continue to be down year-over-year as a result of a deliberate deemphasis of this business through our two U.S. manufacturing locations. Total U.S. contract sales were $1 million, compared with $3.2 million in the prior year quarter.

Consolidated gross margins for the third quarter of 2012 was 57.6%, compared to 59.9% in the comparable prior year period. Gross margins for the third quarter of 2012, excluding the impact of Akorn, India was 61.8%.

Sustained improvements in gross margins are the result 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 book-of-business, as well as oral vancomycin, which includes a 50% gross profit split with our manufacturing partner.

Second quarter 2012 gross margins by segment were as follows, ophthalmic 59%, hospital drug and injectable 64%, and contract services 17%.

Selling, general and administrative expenses totaled $12.3 million in the third quarter of 2012, compared with $8.7 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 Akorn India and any accumulation of smaller spend items necessary to support the growth of the business.

Acquisition-related costs totaled just over $500,000 in the quarter -- in the third quarter of 2012 and the entire amount was an acquisition milestone in our purchase of certain assets of Kilitch Drugs India Limited.

Research and development expense was $2.9 million in the third quarter of 2012, compared with $3.1 million in the prior year quarter and down sequentially from $4.1 million in Q2 of this year.

The decrease reflects natural variability between quarters related to the timing of certain internal development activities, as well as the achievement of external development milestones, quarter-to-quarter R&D expenses can vary materially depending on the timing of these items.

Net income for the third quarter of 2012 was $13.8 million or $0.12 per diluted share, compared to net income of $13.5 million or $0.13 per diluted share in the comparable prior year quarter. Note that in third quarter of 2011, net income benefited from a $6.2 million credit to income tax or $0.06 per diluted share.

The credit resulted from the reversal of the reserve on the company’s deferred tax assets based on the determination that the company would generate earnings sufficient to realize the benefit of these assets. Third quarter of 2012 net income, as mentioned earlier, benefited from lower than anticipated R&D expense in the quarter as a result of the timing of certain milestones and internal development activities.

Non-GAAP adjusted net income for the third quarter of 2012 was $16 million or $0.14 per diluted share, compared to non-GAAP adjusted net income of $9.2 million or $0.09 per diluted share in the comparable prior year quarter. Total diluted share count for the third quarter 2012 was 110.4 million shares.

Adjusted EBITDA for the third quarter 2012 was $27.9 million, up 135% compared with $11.9 million in the comparable prior year quarter. And this non-GAAP financial measure is defined further in our earnings release under non-GAAP financial measures.

Company generated record operating cash flow of $15 million in the third quarter 2012 and ended the quarter with $38.4 million in cash and cash equivalents, and full availability of our revolving line of credit.

Fourth quarter operating cash flows will be impacted by our semiannual interest payment on our convertible debt, as well as annual FDA fees and new generic drug filing fees expected to total $2.5 million.

Third quarter 2012 capital expenditures were $2.5 million, down from $6.9 million in the prior quarter. The decrease was a result of our nearing completion of the expansion of our Somerset ophthalmic plant.

And finally, 2012 outlook, as Raj mentioned, the company expects to lose two weeks of production from our Somerset, New Jersey ophthalmic plants as a result of Hurricane Sandy, which will impact both revenue and gross profit as a result of lost sales and lost manufacturing overhead absorption.

As a result, the company expects our fourth quarter 2012 revenue as a best case scenario to be flat to third quarter. The company anticipates the $2.5 million increase in R&D expense in the fourth quarter compared with third quarter, anticipated increase as a result of the expected achievement of external development milestones, as well as the implementation of the new FDA Generic Drug User Fee Act and the resulting ANDA backlog fees as well as fees unanticipated fourth quarter ANDA filings.

Factoring in the combined impact of Hurricane Sandy and the increased fourth quarter R&D expense, the company estimates 2012 non-GAAP adjusted net income per share to be consistent with our previously issued guidance of $0.50 to $0.52 per share.

2012 capital expenditures are expected to be approximately -- total approximately $20 million. And, finally, our 2012 outlook excludes the impact of any new approvals from today forward.

So, I thank you for your attention, and we’ll turn the call back over to the operator to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will come from Steven Crowley with Craig-Hallum Capital Group.

Steven Crowley - Craig-Hallum Capital Group

Good morning, gentlemen and congratulations on another good quarter.

Raj Rai

Thank you, Steve.

Steven Crowley - Craig-Hallum Capital Group

In terms of understanding, how you bounce back from the Sandy disruption, the business that you missed for this period of time with customers, can you recapture some of that or at least some of that market share as you get back up and running here? What’s the longer lived impact of this disruption?

Raj Rai

Well, let me answer your second question first, Steve. I think the -- I don’t really see that it’s going to have a long-term impact, but I think it’s a short-term blip. As you know, I mean, the entire Northeast, Mid-Atlantic area was affected with the storm.

So we know what we’re going to lose in terms of production. But downstream, with the customers, healthcare facilities that buy our products, physicians, they also are getting impacted by this. So, I think there is a -- we are estimating -- the worst case here is that we lose two weeks worth of sales.

Not knowing exactly what the downstream impact is, so that’s all we can project. But I don’t think, longer term, it has an issue. Going into the first quarter of 2013, I think, we’ll bounce back.

And to mitigate some of the lost production, we’re going to work, extend our production over the weekends and do whatever is necessary to get back on track by the end of the quarter.

Steven Crowley - Craig-Hallum Capital Group

Excellent. In terms of some of the new initiatives that relate to that facility, whether it’s private label or OTC or veterinary, you gave us a generally encouraging update on each of those efforts.

Can you help us think about where the greatest near-term impact is and maybe, where some of the longer fuses are and anything in terms of additional details about your traction with those efforts?

Raj Rai

Well, on the veterinary front, I mean, that business has more than doubled from last year, and predominantly in the ophthalmic area. On the private label, we have -- currently marketing seven products and we expect to add three more in the first quarter. So, we’ll have a portfolio of 10 products that will be available to the customers, and we are aggressively pursuing those opportunities.

And on the AVR front, I mean, the opportunities are really getting our existing product, reintroduce that and refresh the brand. And to do that, we’ve just hired a couple of individuals in our management team to -- one to replace Bruce’s position. And this gentleman comes from Bausch & Lomb where he was responsible for same kind of endeavors.

And then we’ve also hired a clinician that’s going to focus on driving the clinical message for our products. So, I think we are well positioned to take advantage of these opportunities.

Steven Crowley - Craig-Hallum Capital Group

Excellent. I’ll hop back in the queue. Thanks for taking my questions.

Operator

And next, we’ll hear from David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray

Thanks. Just on the gross margins, how sustainable do you think the gross margins are in the injectable business? And, specifically, do you see new launch opportunities that you think could have the kind of margins that you’ve seen historically for your other injectable generics?

Tim Dick

Yeah. David, this is Tim. As you’re probably aware, I mean, we’ve had a couple of products that we’ve layered on to the injectable segment -- oral vancomycin and Progesterone, both of which were partnered. So, I don’t think they give us good visibility into what margins we might expect out of the injectable products we have in the pipeline.

As you’re probably aware, the acquisition of some products from Lundbeck last year certainly helped with our margins in the injectable segment. As we add further products through the pipeline, it’s going to be exactly what you’re highlighting, what are the dynamics around each of those products individually?

We have a good portfolio of niche products that we think have higher margins like we see in our existing portfolio. We also have some more competitive products that we intend as a result to manufacture out of our Indian facility to take advantage of the lower cost of manufacturing there and, hopefully, replicate similar margins to what we see today.

Raj Rai

And to add further, David, I mean, we had a big push on ophthalmology products, which generally overall have higher margin than injectable. So, I think the composite margins as and when we get our ophthalmology products approved, we could offset some of the margin pressures that we may have by selling vancomycin and Progesterone for the moment as well as launching other injectable products. So, I think that there are opportunities to offset or mitigate through the launch of ophthalmology products in the future.

David Amsellem - Piper Jaffray

Okay. And then a couple of questions -- quick questions on the new launches on Prometrium and also on the generic Xalatan. Maybe give us a sense of what kind of volume share you think is realistic at peak on those two products? And then, specifically, on Prometrium, are you aware of other filers that are out there on the product?

Raj Rai

Let me answer your last question, first. No, we are not privy to that information if there is someone other than the existing approvals that are out there in terms of new filers. Prometrium, we are just launching the product, so we had our first shipment go out at the end of October.

So we are building up our book right now as we speak. And I think we will be able to give you more color on the process probably by the end of this year when we -- or the beginning of next year when we provide our guidance. And so just for competitive reasons at the moment I may not be able to share that information with you.

David Amsellem - Piper Jaffray

Okay. What about Xalatan?

Raj Rai

Xalatan, I would say the same thing. We launched the product at the end of Q3, and we are still in the process of building a book. So, again, for competitive reasons I think it’s little premature to give you color, but I think the sales are going pretty well.

David Amsellem - Piper Jaffray

Okay. All right. Thanks, guys.

Operator

From Needham & Company we’ll go to Elliott Wilbur.

Elliott Wilbur - Needham & Company

Thanks. Good morning. Raj, I apologize I’m going to ask you to repeat your commentary around the ANDA pipeline in terms of the relative seasoning of the some of the filings. I think you heard you say that you have nine ANDAs that have been pending for 24 months, I just wanted to confirm that?

Raj Rai

Yeah. That is correct. And out of the nine one is we have a tentative approval on it.

Elliott Wilbur - Needham & Company

Okay. And then…

Raj Rai

And the patent expires for that product early 2013.

Elliott Wilbur - Needham & Company

And then looking at that metric, I mean how should we be thinking about that progressing over the course of 2013? I guess my assumption is that, you’re going to have a good 15 to 20 products over the course of 2013 or kind of in that 24 to 30 month review horizon. I just wanted to make sure that in fact is accurate?

Raj Rai

That is accurate. And we have been saying a long back, I think towards the second half or towards the end of 2013, where we start to see new product approvals on a consistent basis and but the wildcard here is FDA, obviously, they are reorganizing as a results of the GDUFA Act.

So we will do our best in terms of resolving any deficiencies that we may get on the filings, but is accurate that towards the second half of 2013 we should start to see some product includes.

I mean, if you look at our little track record we got vancomycin approved though it took a very long time. We were a bit delayed on Progesterone also, though we had -- we felt that we were the first guy to file the product, the generic version. And so we have some challenges with those products. But I think we should start seeing some consistency in new product approvals in the second half of 2013.

Elliott Wilbur - Needham & Company

And I wanted to ask you a follow-up questions regarding the recent warning letter on Pilocarpine, if there is any update that you could provide there, I mean on the surface it doesn’t seem like anyway shape or form that should impact your business going forward given the unique circumstances of what’s taking place there but…

Raj Rai

Sure.

Elliott Wilbur - Needham & Company

… unfortunately investors have seen real life examples, where in fact this has negatively impact company’s business. So if there is anything you can tell us in terms of communication or?

Raj Rai

Sure. Sure. So, what we will provide you would be a fully transparent here. I mean we used to market this product in the past and we took a calculated risk in terms of launching it as grandfather, because simultaneously we were filing the ANDA that happened earlier this year.

And FDA had allowed us to import the raw materials towards the end of last year and so we did anything there was an issue until our second shipment of the API that was being delivered in the third quarter to find out that FDA had an issue with the sales of that product.

So, we cooperated with the FDA. The FDA provided us with guidance what to do and we have decided not to sell the product any more until we get the ANDA approved and we have an expedited -- we got an expedited review on the NDA filing which was filed in the second quarter of this year.

Elliott Wilbur - Needham & Company

Okay. And my last…

Raj Rai

So we got the warning letter was around the marketing of the grandfather products, so in no way shape it dates our GMP status, which is in pretty good shape with the FDA.

Elliott Wilbur - Needham & Company

Okay. And my last question for you, Raj, relates to the Kilitch facility. If you could just maybe provide a little reminder sort of the general order of magnitude that facility is going to provide in terms of production level increase versus your current capacity? If I remember correctly if something in kind of in the order of four to six folds?

Raj Rai

I actually, it is probably 10 folds from where we are right now for our injectable -- in our -- in our existing injectable plant. So we will have five facilities, one general injectable facility and then four dedicated facilities for cephalosporins, hormone products, carbapenem, oncolytics.

Elliott Wilbur - Needham & Company

Okay.

Raj Rai

So we’ll have tremendous capacity. Now, obviously, we have a bit patient here because one facility has to go -- have to be constructed, I mean it’s halfway constructed right now and we’ll start filing products shortly. So it will take some time. But I think once we get FDA approvals from all the facilities, we’ll be a meaningful injectable player in the U.S. market.

Elliott Wilbur - Needham & Company

Okay. The question that I really want to ask you around that is, how do you think about sort of the buy versus build decision in terms of optimizing that capacity. I mean that could obviously, it’s relatively low cost to file a bunch of ANDAs, but that’s going to take 36 to 48 months in terms of you can really sort of optimize the level of capacity you have versus making strategic acquisition and then potentially thinking about transferring a lot of the production into that facility. I’m just, kind of curious how you are sort of thinking about what is the better strategy for the company at this point in time in terms of really taking advantage of that capacity?

Raj Rai

Well, I think, we’ll go on parallel tracks. We will internally develop products that would be filed out of there and we will look at opportunities to buy injectable products that could be transferred over there that would sort of fast track the production for U.S. FDA. So I mean we’re going to take that approach.

Elliott Wilbur - Needham & Company

All right. Thank you.

Operator

And your next question will come from Sumant Kulkarni with Bank of America-Merrill Lynch.

Sumant Kulkarni - Bank of America-Merrill Lynch

Good morning. Thanks for taking my questions. My first one is on the production disruption. As a first part, I guess two weeks is a good assumption for sales lost. But are there any differentially important product that are manufactured there that could see longer lasting impact?

Raj Rai

No. We don’t see that. I mean, it’s pretty consistent what we mentioned before. The problem is that our ointment products that we make out of there. That’s where we have the capacity challenges and so those, we have minimal inventories both at our end, as well as at the customers end. So that’s where the challenge is and once we resolve the capacity issues, that problem should go away.

So we are working on doing that and best case, I think in first quarter, we should start see the impact of the expansion, and that would increase our backside producible product. So it will improve the productivity levels in the plant.

Sumant Kulkarni - Bank of America-Merrill Lynch

And on R&D expense, how much of the step up in the 3Q to 4Q R&D is related to milestones versus the FDA payments? And going forward, should we see a seasonal increase in 4Q R&D’s annually because of the fees coming due?

Tim Dick

No. Sumant, so we had about $700,000 in backlog fees. That’s’ one-time. And then we will record as an expense our new filing fees with each filing in the quarter that it’s filed. So assuming we’re filing those consistently throughout the year, those will be spread evenly, it’s just Q4 is getting doubly hit by both the backlog fees and then it’s the first quarter we are being assessed fees on new filings, and it’s to the tune of about $1.3 million of the step up in R&D is related to those fees.

Sumant Kulkarni - Bank of America-Merrill Lynch

And in terms of the SG&A step up, is this a fully built up step up and is it a good run rate going forward?

Tim Dick

Yeah. It is -- it’s a fully built up number that we would expect to hold near there.

Sumant Kulkarni - Bank of America-Merrill Lynch

And my final one is, could you conceptually comment on some of the recent stock sales by insiders and what motivated them and how should we think about them as investors?

Raj Rai

Well, there was only one person who actually sold that was Tim, who exercised some of his options. There were no other insider sales.

Sumant Kulkarni - Bank of America-Merrill Lynch

Okay. Thank you.

Raj Rai

Tim, can probably best answer the question.

Tim Dick

Yeah. Sumant, I mean for me, it was just some basic diversification based on my personal concentration.

Sumant Kulkarni - Bank of America-Merrill Lynch

Thanks.

Operator

And next we’ll go to Jason Gerberry with Leerink Swann.

Jason Gerberry - Leerink Swann

Thanks for taking the questions. Just another follow-up on the Hurricane Sandy impact, Raj, can you comment at all, are some of the products that of capacity challenges, are your competitors capacity restrained as well, therefore hindering their ability to take share in that two-week period, specifically larger products like Erythromycin, I’m kind of curious is this an opportunity for your competitors or is the entire I guess this group capacity constrained there?

Raj Rai

Well, I think we are obviously going to get impacted, but we have -- we sell through contracts. So it gives again as I said, it’s a one-time blip. It’s not going to be recurring. The customer buy whatever product is available, first they go to the contract and if the contract product is not available then they will buy something else. So we’ll have to work through that, but I can’t comment on if the other competitors had the same problems.

Jason Gerberry - Leerink Swann

Okay. And if I could just follow-up. Hospira was supposedly stepping up manufacturing production at their largest facility this quarter. Just kind of curious you guys comment, is that impacting the business if at all? Thanks.

Raj Rai

Well, we have some overlap with Hospira on some of the drug shortage products and I’ve said that from the beginning of this year with the, our focused effort around the drug shortage products as we introduce some more products, we’ll go through -- the sales are going to be volatile.

So as the drug shortages are resolved, we may lose share because of pricing issues. But at the end of the day, I think we are seeing some products go up and some products go down. So we haven’t really seen anything different at the moment.

Jason Gerberry - Leerink Swann

Okay. Thanks.

Operator

(Operator Instructions) From Deutsche Bank we’ll go to David Steinberg.

David Steinberg - Deutsche Bank

Thanks and good morning. Raj, the company had identified about 20 products comprises hospital injectables and ophthalmics that you are going to revive due to the changes market dynamics and drug shortages. And I think last quarter you indicated that two additional products were launched, so 19 of the 20 products you had attended have been launched already. So wondering what the impact was in Q3 of these products? Can you quantify it and, if not, do they have a meaningful impact on your numbers?

Raj Rai

You know, the 20 products that we have planned to launch and you are correct, we launched 19. And there is one still left that needs to be launched. And then we launched one product because that was a grandfather product. So we really have 18 products, some of them were part of the drug shortage category and some were products that were ophthalmics that didn’t have a major meaningful impact.

Even the drug shortage products to, you know, it’s a small component of our total sales. It’s not a big number but it gives us a nice portfolio in front of the customers when we are going through the bidding process. So it’s not very meaningful to our numbers.

David Steinberg - Deutsche Bank

Okay. Thanks. And then the second question, so your biggest drug, I assume is still Nembutal and is off-patent and has been for a while. And I recall that you have an ability to call back certain amount of acquisition price in the advantage of generic comp. So you have some protection there.

But wondering what else you can do to protect yourself from generic competition? So, for example, would -- do you have a deal for an authorized generic and would you launch one or are there any opportunities to proactively defend against an inevitable generic entry by entering into longer-term contracts with your customers to give you some form of protection?

Raj Rai

Well, David, unfortunately, if I did tell you all these strategies that could be deployed, I would be showing our hand to a potential filer. So I’d rather not comment on those kind of strategies but be assured that we are doing what we can to protect our interests, our revenues, and we have taken some steps that could help us maintain a lion share of the market in the event that generic comes in the picture.

David Steinberg - Deutsche Bank

Fair enough. Thanks, Raj.

Operator

From Brinson Patrick Securities we’ll go to Michael Higgins.

Michael Higgins - Brinson Patrick Securities

Good morning. Hi, guys. How are you?

Raj Rai

Good.

Tim Dick

Hey, Michael.

Michael Higgins - Brinson Patrick Securities

Two quick questions for you. If I can revisit Somerset briefly, any API loss, any damage to ready-for-sale items, any machines damaged, anything that would affect your ability to get up and going? It doesn’t sound like it, I just want to confirm, but it seems more so of a shift in production. A bit surprised that there is somewhat of a pullback in revenue guidance stemming from it.

Are you -- as the earlier question came in suggesting there would be some loss to competitors, is the chain that tight that a supply disruption would affect, in terms of shift, a loss in revenues?

Raj Rai

To answer your first question, we had -- we have several road damages from the hurricane and even the loss of power as a result of that. Second, there are two dynamics here. One is the loss of productivity, where we’re not able to make product for a couple of weeks. The second dynamic is the end user or the customer and that’s something that we’re not sure about as yet as to what the impact is.

So, given the uncertainty, we were -- we’re being cautious about what our revenues are going to be, because it does have a downstream impact. The whole hurricane had the downstream impact. So we haven’t really felt that as yet. The only thing that we see is the loss of production for two weeks.

Michael Higgins - Brinson Patrick Securities

Okay. I agree, it seems to be more of a one-time potential impact on cash more so and you’re not valued and driven by cash at this point. But something a bit more long term that can affect ‘13 and forward is vancomycin. Any potential for contracting changes in ‘13 that would change the trajectories of vanco’s sales revenues?

Raj Rai

Well, we’ve just finished doing some contract. So we’re not really seeing any changes in the contract. And even in our core business, injectables, we have gone through -- and in ophthalmic, we’ve gone through maybe contracting in the third quarter and the fourth quarter. So we feel pretty comfortable with the revenue trajectory that we have right now.

Michael Higgins - Brinson Patrick Securities

Okay. So you’re thinking vanco stays on the relative same trend line that it’s been on?

Raj Rai

That is correct, at the moment.

Michael Higgins - Brinson Patrick Securities

All right. I’ll jump back in queue. I appreciate it. Thanks, guys.

Raj Rai

Thank you.

Operator

From Craig-Hallum Capital Group we’ll go to Steven Crowley.

Steven Crowley - Craig-Hallum Capital Group

Hey, guys. Just a couple of follow-ups. First of all, on Akorn, India, I’m wondering your plans to expand the International business of Akorn, India beyond India, where are you and what are the prospects there?

Raj Rai

Sure. We have right now over 150 registrations in about 30 countries pending. So that -- that will take some time to shake loose before we start to see the impact of it. And we have hired -- the new people, the new management team that we hire, they are working on filing additional product registrations in other countries as well.

So the goal is to expand the base of number of products and, second, number of countries. So that is being worked on right now so they will unleash their plan in 2013. And so we should start to see the impact of that coming into 2014.

Steven Crowley - Craig-Hallum Capital Group

Okay. And then in terms of the sales force expansion in their productivity what kind of early signs do you have as to calibrating how productive your new people are going to be. Is it looking at how well they’re doing with your GPO contract expansions and compliance. What are the key metrics you’re looking at and how does it look and feel to you right now?

Raj Rai

I think you said it correctly. I think the contract compliance is the number one gauge as to how well we’re performing with -- with the sales. So we just launched some new agreements and the sales force has been fully trained now and they’re making the calls. So we should start to see the impact of that sometime in the first quarter.

Steven Crowley - Craig-Hallum Capital Group

Great. Thank you.

Operator

We’ll go to Elliott Wilbur with Needham & Company.

Elliott Wilbur - Needham & Company

Two quick follow-ups, first for Raj. How do you think about potential strategic moves in some -- relatively ancillary lines of production or complementary capabilities, I guess, in terms of things -- thinking about things like adding blow-fill seal capacity, which may enable you to enter the nasal market or moving into bag production and prefilled syringes? How do you view those opportunities relative to some of the other growth avenues that you have.

And then question for Tim, with respect to the converts that you have in place now, I mean, obviously, they’re dilutive, the current interest rate doesn’t look like it’s frankly any less favorable than you would achieve with fixed costs financing, assuming you were to replace them.

But I think the requirements of prepayment were hit some time in the second quarter. And, obviously, I guess, given to cash balance, it continues to build in the balance sheet, it look relatively expensive. So just wondering if there is anything you can say about how those may play out over the course of 2013. Thanks.

Raj Rai

Let me answer your first question. All the things that you highlight in terms of the niche areas, they’re all on the table right now. In fact, the blow-fill seal, we are -- our flagship product for AVR third tiers that comes in single dose and requires blow-fill seal manufacturing.

So we are considering that as part of our expansion in India to add that capability. And the few other things that you mentioned, which would help us to get into the nasal inhalation products as well. And the other areas of manufacture are also quite appealing, and we’re actually looking at those opportunities as well if we can make or buy.

Tim Dick

Yeah. And on your second question, Elliott, I think, our desire is certainly to remain nimble as it relates to how we use our free cash flow and use that in more business development growth avenues rather than as a takeout to the existing convert that’s out there.

I understand fully your comments. It would require -- the balance were not callable. So it would require a sweetener in order to entice somebody to early convert and all in would be somewhat expensive and would require some use of available leverage we would have in order to take that out and would limit our flexibility to do something more strategic with that available leverage.

Are you there?

Raj Rai

Hello?

Operator

Mr. Wilbur, your line is still open. And moving on, with one question left in the queue. (Operator Instructions) We’ll go to David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray

Yeah. Just a quick follow-up on one of the Lundbeck brands that you acquired, Sodium Diuril. What are your plans on potentially launching your own generic of that product? I believe there is one generic on the market for that. I think APP has it and I believe they do about 60 million of selling -- sales maybe less than that. But is there opportunity for you to hold your volume share in that market via either building the brand or launching a generic, what are your related thoughts there?

Raj Rai

Those are exactly our thoughts right now. We are in the process of launching the generic version of that product. So we’re hoping -- we’ll start getting their product on contract with our existing customer. So we are going to the process of getting it as we speak and so that’s a good opportunity. And by the way there are two generic players in that for that product.

David Amsellem - Piper Jaffray

Okay. It’s APP and Decatur if I’m not mistaken?

Raj Rai

Sun.

Tim Dick

Sun Pharmaceuticals.

David Amsellem - Piper Jaffray

Okay. Okay.

Raj Rai

Great.

Operator

And gentlemen, there appear to be no other further questions. I would like -- actually we just had one appeal. We’ll go back to Sumant Kulkarni with Bank of America-Merrill Lynch.

Sumant Kulkarni - Bank of America-Merrill Lynch

Thanks for the follow-up. This is a bigger picture question. Some of your largest generic competitors have mentioned that they would potentially consider the ophthalmic space to get into as an extension of their capabilities. Have you seen anything or do you see anything imminent or how are you insulating yourself from potential competition from the larger players there?

Raj Rai

We haven’t really seen any big new entrance in the marketplace. I mean some guys come in. They may have a partnership with the smaller company to launch an ophthalmic product here and there.

Besides that we haven’t really seen anything. Our biggest -- there are two or four major players in the ophthalmology space. And outside those three or four players, we don’t really see much competition coming at the moment. And then, from an installation standpoint, we have our own manufacturing capabilities. We’re deeply entrenched with the customers, with the relationships. So that helps.

Sumant Kulkarni - Bank of America-Merrill Lynch

Thanks.

Raj Rai

And then let me add one more thing. Obviously, our goal is to have the -- a very wide portfolio of ophthalmic products. So I think, at the end of the day, we’ll be one of the top generic ophthalmology houses in the country.

Sumant Kulkarni - Bank of America-Merrill Lynch

Thank you.

Operator

And there are no further questions at this time.

Raj Rai

I’d like to thank everybody for their time today. We look forward and speak with you when we announce our year end results. Thanks, again, for your patience.

Operator

And, ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.

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