Cambrex Corporation (NYSE:CBM)
Baird 2016 Global Healthcare Conference
September 08, 2016, 02:00 PM ET
Steven Klosk - President and CEO
Eric Coldwell - Senior Research Analyst at Robert W. Baird
Okay, good afternoon, everyone. My name is Eric Coldwell. I cover pharmaceutical services and healthcare supply chain equities with Baird. And this afternoon, it’s our pleasure to introduce Steve Klosk, President and CEO of Cambrex. We are obviously very excited at Cambrex with us. We don’t have formal coverage of the name, but it’s an industry that I’ve known for many years, and Steve and I’ve been meeting and talking over the last eight years or so -- sorry we’ve been tracking sort of quietly on the side and we are excited to have him here.
For those of you who don’t Cambrex is one of the clear leaders and what’s probably the point is the under development manufacturing organisation space or CMO space. Company focuses on active pharmaceutical ingredients and intermediates for the production of brand and generic pharmaceuticals and is a very well known for its contract manufacturing capabilities. He is going to do a couple of minutes or probably more like 15 minutes of presentation, give or take and then we are going to jump into Q&A. Please feel free to send any questions my way as well. Thanks very much.
Thanks, Eric. Everybody hear me okay. While I was just wander around, rather than go to the podium. Before I begin, I’ll give the regulatory statements and some of the things I’ll talk about maybe considering forward-looking statements under the 1934 [ph] Act.
So Cambrex, as Eric said is focussed on the development and manufacture of small molecule APIs for both innovator and generic pharmaceutical markets. We have an extensive portfolio of products in three categories to our Innovator pharmaceutical customers we do customer development work which is clinical phase work.
We do Custom Manufacturing for products that are already approved therapeutics. We have a large portfolio of generic APIs and we have produced a number of controlled substances that DEA is scheduled II products.
We’ve produced over a 100 APIs and intermediates and sold those annually to leading pharmaceutical companies. We’ve had strong year-over-year growth which you can see our sales increase 16% from $434 million in 2015 and EBITDA grew over 50% to $129 million.
Our current guidance is to grow adjusted sales growth another 10% to 13% this year and EBITDA of $144 million to $149 million, which is 14% increase in the middle of [Indiscernible]. We are a global company; we have six operating sites within the U.S., Europe and India. We have flexible, large-scale manufacturing. The third is we are known for our world-class quality systems and excellent regulatory record with all of the major agencies that you could think of.
We have a large range of capabilities in Chemistry, including polymeric drug delivery taste-masking. We do some biocatalysis, we have a number of proprietary enzymes, we can do high potency work and as I indicated before we -- I recollect had a nice business in controlled substances.
We see a number of growth drivers for the business in terms of what’s going on in the market seems very positive and very positive for the last several years and we expect that to continue. Continued world-wide growth in API volumes and we are seeing and expect to continue to see increased outsourcing by large innovators, and there is a limited API manufacturing capacity especially in the U.S. where we were beginning to see the same in Europe and here I am talking about primarily large scale manufacturing capacity.
There is a preference for reliable high quality U.S. and European suppliers like Cambrex, a well advertised, regulatory issue coming out of India and other locations. There has been strong FDA and EMA small molecule approval rates for new drugs. Phase II and Phase III molecule in the United States grew about 8% in 2015.
And there is of course increasing global use of generic with additional opportunities for increased penetration we believe in developing markets.
For Cambrex to meet those key growth drivers we have a strong pipeline of late phase clinical projects which I’ll talk about, a growing pipeline of new generic APIs and development and a very strong position in the growing U.S. controlled substances market.
This chart shows a strong revenue and profit growth that Cambrex has had since 2010 and they project to the middle of our range for 2016. Sales have grown at a 14% compounded annual growth rate; EBITDA has grown 24% during that period of time. And our 2016 guidance again is the growth 10% to 13% and EBTIDA between 12% and 16% versus prior year.
This chart shows where Cambrex participates in the typical supply chain for a small molecule organic chemistry. You can see if you start all the way to the left, it starts with raw material all the way to the right where it’s the finished territory for one drug product we focus primarily on GMP intermediates and APIs that would require a high level of quality and regulatory compliance, so the orange section of the continues and that reduces the number of viable competitors with a lot more competitors working on early on in the process.
And this would be a product life cycle. Again, we like to focus on later stage, on Phase II on and Phase III in registration and commercial and then of course as it shows generic and we focus on the late stage because they are obviously higher FDA approval rates driving higher probability of the product becoming commercial and therefore higher asset utilization for Cambrex we have large sales GMP plants and again fewer competitors that are able to do a large scale later stage.
If you view a product mix snapshot for 2015 sales you could see almost two thirds of our sales were to innovator markets. It is a large market which I’ll talk about, largely fragmented, our guidance is to grow this area 15% to 18% in 2016.
Generics was 22% of our business last year, again a large market and our guidance this year is to be relatively flat in that market. In controlled substances segment, we have made -- the balance of our sales our guidance is to grow between the high single to low double digit which is increasing our guidance.
Let’s talk about the innovator markets. Again, here we are doing customer development and customer manufacturing for NDA for innovator pharmaceutical customer.
The innovator market is characterised by being a large fragmented growing outsourcing market. This critical phase which we call customer developer for most new innovative drugs continue to originate in both the United States and Europe.
Innovator Pharmaceutical customers have experimented with what we describe as low cost suppliers over the last decade or so but are migrating back to Western providers for clinical products developers.
Regulatory approvals are at the highest levels since the year 2000 and Phase II and Phase III clinical projects require GMP facilities or inspected facilities like Cambrex has.
For commercial products which we call custom manufacturing it is an ongoing rationalization of big pharma manufacturing capacity is due to mergers and cost reduction. There is an increased outsourcing of intermediates and APIs for western-based CMOs like Cambrex again because of quality issues and warning letters that are being issued.
Periodic shortages particularly in the U.S. of CMO capacity, Cambrex is investing heavily over the last few years to meet that rising demand and in fact we believe wasn’t any of our other competitors.
There are only a small number of global players with world-class quality systems and the ability to scale through the commercial quantities and that’s what focuses Cambrex’s business model.
For a clinical phase project for these sort of therapeutics, NDAs that have not been approved yet. Our goal here is to generate a broad pipeline of commercial products for custom manufacturing, the one in our class.
Cambrex is one of the leaders in providing a range of services for clinical phase projects, which means we are doing process and analytical chemistry. We are developing, optimizing and scaling up the manufacturing process along with our customer, we are supplying GMP material for clinical trial. We are doing a process validation that were required to support our customers new drug application approval and we develop and supply with you know there’s a CMC data or the chemical manufacturing and control data for our customers NDA filing.
All of that ends with a successful pre-approval inspection or a PAI to support NDA approval. Without that successful PAI, our customers were unable to launch their therapeutics.
And here we have a highly selective targeting of late-stage clinical projects that matches our large scale assets, it matches our capability and it provides a pipeline for custom manufacturing.
Currently we have 15 active late stage projects and here we are focussing on the larger clinical projects that we can find with [Indiscernible]
In custom manufacturing we have a number of growth initiatives. We currently produce 30-35 products under medium-to-long term supply agreements that’s typically three to five years we actually have one that is in excess of 15 years. And here our growth initiative is to focus on increasing those late stage custom development projects, again to serve as a pipeline to grow our custom manufacturing business and generate supply agreements.
We focus on the large and more profitable late-stage clinical projects that have a higher likelihood of approval. We also do some proprietary work where we have a dedicated group that works on new cost-effective routes for all the approved innovator therapeutics so we can create value for the customers by changing deposits.
The generic market is also a large fragmented, growing outsourcing markets. World-wide trends continue to increase with generic penetration. It was relatively low usage still in many sizeable markets, including for example Japan.
Generic drug marketers outsource most of their API volume but we believe that API volumes will continue to increase; we expect that that will be partially offset by price erosion with a net global growth projected will be something in the order of mid-single digit.
There has been a high level of FDA violation related to quality or regulatory issues. For the most part in plants in low cost locations although a number of well advertised ones in the United States and there has been recent GDUFA legislation where which should augment FDA inspections of foreign pharma facilities especially in emerging markets. I have been asked what does that mean, do you think it will get better or worse if there is an increase inspections and my personal theory is that it will get worse. We hope it’s better for those low cost locations.
GDUFA is also expected to accelerate FDA approval of ANDAs which will get to our customers and obviously get to us.
Our generic API model is far different than our our innovator. Remember on the innovator market we are looking for changes as large R&D products as we can possibly find and to put in our large scale asset.
For our generic business, we are focused on niche markets. One of the world’s largest producers of generic API we have a very flexible manufacturing facility that allow us to efficiently produce greater than 55 different APIs annually which makes it one of the biggest and we focus on niche markets which tend to be more in the directed [ph] by potential competitors.
If you look at the pie chart, you will see for 2016 about 62% of our products are generic APIs had sales of less than $5 million. For the small products, they are profitable products because there is less competition.
We have a number of growth initiatives in generic APIs of course we want to increase our share of our existing product portfolio which are still using up 65-70 products, but the name of the game in growing in the generic business is reduced to aggressively develop new products
We have 12 APIs in development. We are always looking at several more that are on the technical and economic and market review. Our goal is to target, to ramp up the 10 new product launches annually. Last year we introduced three new ones.
We target products that can view some of our proprietary technology. For example, biocatalysis platform that I talked about, here we have over 400 proprietary enzymes and [Indiscernible] molecule may give us the opportunity to reduce cost to ourselves and to our customer be eliminating organics system in the route [ph].
And again we apply our other differentiated technologies and capabilities which we are developing a number of DEA controlled substances. We also work on high potency compounds which generally are for oncology [ph].
We also look to grow our supplements business, this is not nutritional, supplements what is what we refer to businesses for whatever reason we were not the primary or the first supplier through our generic pharmaceutical customer and they were looking to get a secondary supply position and of course try to get ourselves in the door to get a primary supply position.
A big portion of our focus is to expand geographically on a gross sales and certain high growth market where we already have a presence. There's a big business in Brazil. I mentioned Japan already and Eastern Europe and we continue to develop partners in other markets in the word including Russia, Mexico and in some Asian markets.
We like to controlled substances market for a number of reasons. In United States, it has limited competition and strong growth. It is a heavily regulated market with restricted competition by the FDA and the DEA. Market entry is controlled by the DEA through licenses. If you have not been granted the licenses then you cannot participate in the market. Oversight in terms of inspection in both the FDA and the DEA and includes a quota systems who have the license, the customer gets quota itself and then they are manufacturing a supply chain gets quota to produce.
Schedule to API require U.S. manufacture, domestic manufacture, so in this market there is no low-cost competition, only in the United States. Cambrex currently participates in the large pain and ADHD market, the Attention Deficit Hyperactivity Disorder market. We had significant revenue growth in recent years like focusing on this market. We have been our increasing our market share both with our existing product and with existing customers and then selling our portfolio to new customers.
Two opiates and one ADHD API with sampled customers in 2015 and we have one additional one in development this year. M&A, we have an active M&A strategy. We have net cash on our balance sheet. Our guidance is to generate $60 million to $70 million of free cash flow this year.
We have a large revolver with the impressive bank group, $500 million and so we have the capacity and the will to grow in organic sales as well. What we're looking for here is to add synergistic product, customer's technologies or capabilities. A perfect acquisition would be another API supplier perhaps they have a stronger position in one segment of the innovative market that has a portfolio of late stage projects that we're not working on and that has capacity available, because we have been rapidly increasing our capacity utilization.
We look for businesses that can provide R&D and manufacturing capabilities that will allow us to work on more late stage clinical projects or allow us to develop more generic API. They perhaps may give us an opportunity to serve in a high growth where we don't have a lot of market share and we're also look at opportunities that may give us the ability to get more of our customer's value chain downstream from API.
Snapshot of our operating financial from 2011 to 2016, you can see sales have grown from roughly $255 million to $434 million. Last year our guidance is 10% to 13%. Growth for the middle of the range is about $485 million. EBITDA has grown from $47 million to almost to $129 last year and will be between $144 and $149 million this year.
I would direct your attention to the bottom line which is capital expenditures, you remember I told you that we're investing heavily in capacity utilization to keep up with the very strong market demand particularly for large assets and you can see that we have spend a significant amount in the last five years to come up with a leadership position in this market.
Again some really positive market trends, high demand for outsourced development and manufacturing and its growing, preference for dependable U.S. and European suppliers. Cambrex has flexible large scale manufacturing in both the U.S. and Europe that plays well with lot of our customers and they want two sites.
We are known for world-class quality and regulatory compliance record. We have an excellent track record is one of the first things that customers look at when they come to Cambrex.
Worldwide generic prescription growth is continued as both governments and payers are driving down costs. We have a growing pipeline of new generic APIs and we're increasing our generic penetration in some key growing in growth markets.
And I already discussed the fact that there are strong growth rates for certain DEA scheduled II narcotic product we have the very significant share and excellent relationship with most of the marketers in these segments that we've participated.
So, just to close it out, Cambrex is one of the leading active pharmaceutical ingredient manufacturers which serve both the innovator and generic market that somewhat unusual. We have a large portfolio of products which means we are making over a 100 commercial products a year, that's one of the highest in the industry.
We are known, the brand is known for world-class quality. Sales grew significantly in 2015. They'll grow double digit again 2016. We believe that we have the strategic initiatives and back that up with the investment decision to match the key positive trends.
There are over 400 molecules in late-stage clinical trials that actually create more than 3000 API and advanced intermediate target for Cambrex. We have a very strong balance sheet gives us the financial capability continue to invest or participate in M&A. We have an experienced management team that's been together for a long time. We have a track record of success and have created significant shareholder value in 2010.
Q - Eric Coldwell
Thank you. Very quickly, that the GDUFA legislation or what could be happening there in terms of both ANDA approval acceleration is lowest, the likelihood I think I am more excited. Have you been able to quantify what that impact might be? And maybe an analogy you can draw forth is when I think I already had a issue with the plant in the past. How are you seeing share rise from that competitor out of those channels?
So one of the things that we have is difficult, Eric to sort of quantify it. A number of our generic APIs where we know no longer have the primary position and we had lost that primary position for lower cost manufacturers and marketers and indeed we now have customers coming back to us, but the reality is if there is an FDA warning letter than they are unable to shift that product into the United States.
We have old customers on some of our portfolio who are coming back to us and saying, could you produce more products for us. And of course we're happy to do that. We're actually asking for supply contract to do that because we want to make sure that we continue to see that primary supplier going...
Terms and conditions are pretty good I assume when they come to you? What kind of durations are you getting?
Generally three years from the generic side.
And on the brand side?
On the brand side, between 3 and 5, we have certain customers, a large customer enterprise.
Great. When you're talking about your supplements, there's a secondary supply. How many manufacturers still don't have a backup plan? And maybe you think about that on the generic side as well as on the brand side. It’s kind of shocking that they don't but..?
Yes. I mean, on the innovator side, I'll start with the innovator side for an NDA. If it is a very large molecule, a very large therapeutic and it is a large pharmaceutical company, they are pretty much conscious about their supply chain having less work [ph], you're generally going to see for a large class product usually is flat [ph]
On the other hand, for smaller pharmaceutical customers there is a very good chance that they are launching with Cambrex under a supply agreement with the exclusive supplier, and I think that is a product that grows, that get a sense as to whether or not they want to backup for it.
Is there a decision to have supplemental supply, because they typically came from the sales volume profitability of the drug, because of the drug or is this more cultural [ph] to the individual manufacturers?
But I think it’s a mix of thing. One, it can be a quality issue or reliability issue with the supplier. So we could win a new commercial product again where we warrant that primary supply or even a supplier as it became approved from an NDA, because it did not happen with this supply chain, or they want to add another supplier. Many a times we’ll replace if you will a supplier who really can go into Phase II or commercially, just don't have the assets, because they just don't have regulatory track record to make [Indiscernible].
When you talk about reasons behind a little bit less first on the generic side at times and any thoughts about that recently, since you perhaps [Indiscernible] is it because we've had or maybe a little bit of its shares and launches of product thing delayed? Is it more because had I included a voice on some of the generic that has come to market in the last year have actually penetrated less quickly than in the past? Is it consolidation in the generic [Indiscernible] exacerbates. I know there's a host of reasons that’s like, how would you rate this. I guess more importantly is, what should you be looking for to see that trend reverse and maybe see an acceleration in generic for..?
So, interestingly enough you know there's an tremendous consolidation in the generic pharmaceutical market, you know to chose these things to growth for our customers in generic pharma market to do product, new geographies and MNX [ph].
And so it’s interesting that when there are customers who do large consolidation yields and have to digest some products it seems to be this period of time where there's a bit of a lag. Why? Because you don't know what product you're keeping, which ones you aren't keeping, they both maybe have an ANDA and we maybe supplying both, or we may be supplying one or the other. And so I think that delays things a bit when that happens.
Okay. I have one from the audience. Sure, we can do that. And let me know how comfortable you are addressing questions in the audience, right? I mean I don't know how in-depth you go and [Indiscernible] that question. Well, it does mention a specific manufacturer, so why are certain investors worried about your exposure to Gilead?
And given that most manufacture contracts are longer term in nature, is there really risk of [Indiscernible] are down significantly in the second half of 2016. It is more – I think it's safe to say, you are biggest supplier and what are people worried about, where perhaps, so the people who might have been positive on the [Indiscernible]?
Sure. So I we had a good Q2. There were a number of very positive hopefully takeaways that investors and prospective investors should have from my comments. Number one, the increased guidance, like I said, there is something positive about how we feel about 2016. We only started up our large scale what we called Pharma 3 facility in Q2 and I've already said that's ramping up very quickly, but that would go into likely announced additional expansion. So those two plans can generate about $40 million to $60 million in sales. So obviously our outlook both for our existing business and our pipeline that is positive enough and we just started up a plan and we will be talking about how to invest and get another one.
And I guess, is it fair to ask, is that regardless of potential slowdown with European suppliers that everything else is doing so well or do you have a direct quarter-to-quarter parallel [ph] with their sales volume?
Well, I can't, you know, I don't talk much about the customers you can appreciate, but please don't think that -- want me to, but really it’s a five-year agreement that we designed at the end of 2015. It has certain minimum. When I look at our forecast going into the future at least the 2017 and 2018, I have those minimum volumes. So we're comfortable again in raising our sales and profit guidance and comfortable to invest it.
Great. Unfortunately I have several more questions, but we have run out of time. We're about a minute over, so we’ll have to -- we’ll have to call this one, but Steve, thank you so much. And everyone please join me and thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!