Impax Laboratories (IPXL) Presents at Morgan Stanley 15th Annual Global Healthcare Conference (Transcript)

Impax Laboratories, Inc. (IPXL) Morgan Stanley 15th Annual Global Healthcare Conference September 12, 2017 10:35 AM ET

Executives

Paul Bisaro – Chief Executive Officer

Bryan Reasons – Chief Financial Officer

Analysts

David Risinger – Morgan Stanley

David Risinger

So thanks everybody for joining us for the Impax Lab session. It's very much my pleasure to welcome the CEO and CFO. I just need to refer you to disclaimers at www.morganstanley.com/researchdisclosures.

Many of you know Paul Bisaro, he has over 25 years of pharmaceutical industry experience.

Paul Bisaro

Number is long, big number.

David Risinger

And we're pleased to have him join us today. And Bryan Reasons is the CFO. He served as CFO since December of 2012 prior to joining Impax, he served as Vice President of Finance at Cephalon. So he has several years of experience in the pharmaceutical industry as well.

I thought it would make sense to start with a high-level question, Paul. You're keeping everybody on their toes. I don’t think it's been too long since you joined as CEO and there have been a number of developments at Impax and for the industry as well. So it would be great for you to frame your vision for Impax. Well, update us on what's happened briefly and then frame your vision for Impax going forward.

Paul Bisaro

Sure. First of all, David thanks for having us, we really appreciate you taking the time with us and we’re looking forward to meeting many of you in the breakout sessions as well.

I think I've been in Impax now about six or seven months. It seems like a long time but time has been going very quickly. I think, the first thing we try to do is assess the situation, understand what we could do in the short-term. What the medium-term situation look like and then think about longer term opportunities.

In the short-term, we wanted to stabilize the business. We move very aggressively on a cost containment program. We announced that in our first earnings call, and we talked about additional $85 million of cost savings. We’re – I would say well under way of capturing that. We expect to capture the bulk of that within the next 12 to 18 months. And I think that will help us continue to show bottom line growth through that period.

In addition, we are now focused on sort of the mid-term issues. And that's stabilizing our generic portfolio and increasing our R&D effort. We've consolidated R&D in California now. We're spending a little bit more on the generic side than we did before. We’ll continue to do that, we're looking for obviously unique opportunities much like the EpiPen situation that we have going at our own auto-injector product that we have. As well as the oxymorphone product that we have extended-release product that's really going to – I think help us in the long-term since we've sort of converted that now into a longer term asset.

And then sort of as we think about the mid-term to long-term, we'll continue to look for M&A opportunities. We know, we're a bit undersized in both our generics business as well as our specialty franchise and we're going to continue to look for opportunities to deploy not just our capital but also I would say creative opportunities to improve our position in both of those spaces. So a lot to do but the team is engaged, and things are moving I’d say very rapidly in the right direction.

David Risinger

Excellent. And maybe we should stay at a high-level and talk about some of the comments that you’ve made recently in response to buying group pressures. I think you've suggested that there are opportunities to potentially pursue alternative channels to maneuver around the buying groups. Could you expand on that notion, please?

Paul Bisaro

Sure, I think it starts from the premise that any time, any industry is faced with a situation where the number of purchasers consolidates itself to three effectively. There are going to be people who are left out of the equation. Certainly, the FDA in approving all the applications or approving is sort of good news and bad news and it’s a good news and that we're all getting additional approvals. The bad news is there's three customers to sell to instead of when I started in the industry, the 60 plus customers we used to sell to.

In that environment where there's three major purchasers, people will be left out. And when that occurs, I think industries generally look for new ways to find outlets for their products if it only makes sense.

It is something that had been discussed in the industry for a very long time. Alternate distribution means, I'm talking about. And I think we're now going to start seeing because of just the sheer pressure of the fact that the consortiums are only buying three or four customers or manufacturers product for any particular molecule. All the people on the other side are going to start looking for alternate distribution mechanisms.

And we now live in an environment where – in a time where companies like Amazon and Federal Express and UPS and others who have direct access to consumers will find a way to participate in the channel. And I think the manufacturers by and large will be more supportive of that than they were in the past because in the past, they didn't really have to be supported by them. Now they sort of do. So, I think we’re at the cusp of a time when we’ll start seeing new distribution channels coming to fruition because of just the dynamics of the industry.

David Risinger

That’s helpful. And maybe you could just speak to on the other side of it. So the pharmacies and/or the consumers, who on the other side is interested in going around these large buyers and distributors that exist today?

Paul Bisaro

Yes, I think, really the question becomes who is the customer, right. If you're thinking about some of the PBMs of the world their customers, I'm sure they would disagree with this comment, is not necessarily the patient. Their customer is the corporation that buys the services that they provide. And what I think manufacturers have been saying for a long-time is our customers used to be the wholesalers and the retailers and the independent pharmacies and it's to some degree the mail orders and some of the like. Because we're being disintermediated from them, we have to find a new customer and our customer should be and probably maybe should have always been the actual patient.

And by using an Amazon model or a direct-to-patient model, we can sell our product at probably the same margin or maybe even at slightly higher margin because we are now cutting our way around all the people who had to take a piece of the pie. And we can go directly to the consumer, end-market. It's not easy, I'm not suggesting it is easy. I'm not suggesting it is going to happen overnight but it just sort of makes sense that it's a natural evolution of the system.

Particularly, when you get into this weird situation where we are today, where some products that we manufacture and our industry manufacturers it would actually be cheaper for a patient to buy, pay cash for the product directly from the manufacturer than it would be to pay the co-pay that they're paying through their pharmacy benefit. So that, it leads to different kinds of results in those situations occur.

David Risinger

Yes, so that makes me think of Walmart. So Walmart recognized this several years ago and began to sell select generics at $4 to patients. So that sort of made a big splash, but it wasn't clear to me, I guess beyond making a big PR Splash when that happened three to four years ago. How that’s really evolved and whether that really helped the generic manufacturers meaning I don't know if the generic manufacturers get to sell at a higher price to Walmart directly for those generics than they would have to – I don’t know Cardinal or McKesson.

But maybe you could just shine some light and provide some perspective on that Walmart situation because my guess is if somehow some way Walmart makes a meaningful acquisition to enter the pharmaceutical supply chain and act as a pharmacy, they would love to copy that type of Walmart $4 offering for select generics that are commoditized.

Paul Bisaro

I think the difference is the time. And who – like I said at the beginning is four and five years ago, there were multiple players that manufacturers could sell to. There were still wholesalers who bought on their own, there were still retailers who bought on their own. Now that the big change is the consolidation of the purchasing to three groups and those three groups buy, in some strange sort of way we don't even really tell the wholesalers anymore that that's not our customer anymore. Our customer is really the three buying groups in many ways.

When you change the dynamic that way those kinds of programs, the Walmart programs become much more attractive, particularly if you're a company that is not in one of the three, you were unable to place your product for whatever reason in one of those three situations. You're much more inclined to participate in a $5, $4, $9 program than you would have been five years ago.

David Risinger

Got it. And then just one final question, it seems like the biggest opportunity is to leverage certain limited competition products not to get a higher price on commodity generics from some small buyers or initial buyers that try form to build around the buying groups or something like that. In the sense that, if you have a limited competition product or many of them, it might make more sense to be more selective about what you do with your supply rather than leave it exposed to significant price pressure from the three large buying groups. Could you comment on that?

Paul Bisaro

I think you are spot on. And I think that's exactly the issue, and you will hear every generic manufacturer talk about trying to get the first to market opportunities, the higher value market opportunities that hasn't changed in the 20 years I've been doing this, that we've always talked about that and that's always been the case.

And once you have those opportunities and when you have those opportunities, you need to be thoughtful about how you approach the price volume ratio. I think there are times when and in the recent past I think it's fair to say that some of the companies perhaps lost sight of that and got more concerned about volume for whatever reason and lost sight of the price volume ratio that matters.

Now of course, some of that had to do with the changes in the industry, the consolidation that was taking place. And the commitment that people have made to their investors about what volume they were going to achieve. So, as things start to settle down hopefully people will come back to the idea of thinking about price volume as a standard approach.

But having said all that, it is still true and it has been for – again for 20 years that you can sort of chop-up your portfolio into three groups. Your lower margin products that you're trying to drive through your facilities to take your overall cost of production down, the products that are sort of in the mid-tier that you can make a decent margin on but you're not going to knock-out of the park.

And then those select products where you have a situation where you're alone or one of two or one of three that are the higher margin products that drive your profitability. So that hasn't really changed in the more opportunities in the generic industry you have at achieving that opportunities for those top third products, the better off your company has progressed.

David Risinger

That's very helpful. And Bryan, maybe you could just talk about the revenue growth prospects for Impax. Just remind us about your guidance have been sort of provide some color longer term as well.

Bryan Reasons

So when you look at our portfolio and our currently marketed items, yes, we're fortunate to have some products that have some good stability, oxymorphone, epinephrine auto-injector, budesonide. So we have some that have like oxymorphone, some long-term stability and the other ones have at least some medium-term stability as far as pricing and volume.

Near-term pipeline opportunities, WELCHOL and Renvela are two that we've been talking about for a while, but we do feel like they're near-term. As far as our guidance goes, the range of our guidance the low-end includes no revenues from those opportunities. The high-end has some risk adjusted launch quantities in there.

And then generic Concerta is also a near-term and we have approval there, we're preparing for launch. On WELCHOL and Renvela we're ready to launch those products. So those are kind of, I'd say the opportunities that will kind of drive growth over the next 12 months to 18 months.

David Risinger

And what’s the timing on the Concerta?

Bryan Reasons

Concerta, we've said anywhere depending on obtaining quota and preparing launch quantities anywhere from as early as fourth quarter, late in the fourth quarter to in the first quarter.

David Risinger

Okay, let me pause there and see if there are questions from the audience. Okay. Maybe we could just transition to specialty brands. If you could just talk about that business in your strategic agenda for that business?

Paul Bisaro

Sure, look I think we've got a very nice franchise with Rytary and Zomig, we are looking for opportunities to potentially add additional products to that portfolio working on some aggressively in-licensing some opportunities there. We have a pipeline product 203, we're waiting for the data, the 2b data for the readout, we expect to do that relatively soon – get that data relatively soon and get that out to everyone. The 2a data I think most people know if they followed us they know that that did show some very nice results. And we're evaluating the 203 2b data and then we'll move into Phase 3. If we do that – if we do move into Phase 3, we probably move in Phase 3 in the first quarter of next year.

The franchise I think Rytary is a great product, I have talked to a lot of the patients who are on it, we are – they’re find it very useful it’s increases the on-time for the Parkinson's patients, which is a very good thing, quality of life is improved and that's a very high and very important thing.

As we think about the future of the portfolio, we want to make sure that we're continually working on sort of new and improved ideas. So we're taking a hard look at 203, we are looking at other things we've been working on over the time to try to decide whether they make sense ultimately moving forward.

Having said all that, we also know that the CNS franchise itself is for a company our size is a bit of a difficult area to be in because the projects are always very expensive. They're also often challenging to get the right data. So we are also looking at additional opportunities to try to work in maybe some specialty areas that sort of big pharma, more well-funded pharma is not really participating in. That has been a strategy we've followed in the past and has worked quite well.

And again, we would even be willing to be creative around our CNS franchise to try to figure out whether it's best in our hands going forward and maybe its best in someone else's hands if we can replace that specialty franchise with something else. Today it's best in our hands and we're going to continue to drive it and try to find ways to drive our Rytary sales.

We’ve started in my Rytary program, we're continuing to look at the benefit of that, we will increase our sales force to about 120 representatives that are on the ground, we're watching them to making sure that we're getting the most value there, they’re working very hard and looking forward to them to continue to drive sales. But I think we're open to a lot of different opportunities in the specialty side, we do want to be in it. We just want to make sure we're in the right space.

David Risinger

That’s very helpful. Bryan, maybe you could just remind us about the state of the balance sheet and your cash flow outlook?

Bryan Reasons

Yes. Sure. We’re at about $770 million of net debt right now. So around, depending on how you calculate it over four times, we delevered quite a bit this year and we plan to continue to invest in growth but also delever as much as we can. We’d like to get down to more around three in the intermediate and we are generating strong cash flows from operations and expect to continue till that we don't guide cash flows from operations.

David Risinger

Okay. And so maybe Paul, you could talk about M&A from a financing standpoint. So obviously if there is an intention to get the leverage down from four times, you can't really be issuing debt to pursue meaningful M&A. So could you talk about that and the scale and timing of opportunities that you're assessing?

Paul Bisaro

Sure. Well, you're quite right. It's not likely we're going to be able to go out and raise a substantial sum of money and buy a company. So we would be looking to use our equity at this point to potentially grow either or both our businesses. Obviously we’d have to be strategic, obviously we’d have to be accretive, relatively quickly. And hopefully, if we did it right we would also lower our leverage. So that those are the kinds of things we're thinking about today and we're looking at a lot of different opportunities there's a number of companies that in both generics and the brand space that have, are attractive to us.

But like every other deal it's always trying to find a marriage and we've got to find a willing partner. So that effort takes time and we're continuing to look at anything that comes forward and we’ve spent a lot of time doing that right now.

David Risinger

And with respect to your tax rate, could you just remind us about your current tax structure.

Paul Bisaro

We're hoping for tax reform mode at the moment, that our tax reform is I guess the U.S. based.

Bryan Reasons

We have done certain planning over the years, opened up an Irish subsidiary and sold certain IP into that jurisdiction. But when you're a 100% U.S. based business unfortunately you have to pretty much pay the U.S. statutory rate but we plan wherever we can and obviously I still think it's attractive to potentially re-domicile in a transaction if you could, obviously we wouldn't pay a premium for that aspect of it. And the transaction would have to make strong strategic sense from a business perspective as well.

David Risinger

And just remind us about the current rules regarding inversions, what’s your up against there?

Paul Bisaro

Well, there’s been several proposed new rules none of them have really been enacted or tested, so the rules still allow you to re-domicile in a transaction. There are restrictions now about immediately putting in your company leverage on the books and shifting all the profits offshore. So there is limitations around that. Overall it's unfortunate without tax reform certainly the U.S. tax rates and tax rules are not very competitive.

David Risinger

Makes sense. Yes. Okay. Maybe we could just go back to sort of a high level probably helpful for you to frame Econdisc merging with Walgreens purchasing and how do you see that end up playing out? How much incremental pricing pressure in your base business we should be considering?

Paul Bisaro

Yes. I am happy to. For us, as a company, it's not that big of an issue, we're not overly indexed in Econdisc but it does present an opportunity for potential price deflation at that time. Now I think there will be some, probably, in that some displacement and some price deflation from that move. But I think in this particular incident it will be of significantly different than what happened with the ClarusONE situation that we just went through there was a sort of a perfect storm with ClarusONE, they were consolidating right at the same time to have an activist where had just sent their products out and divested products with part of that merger.

And so you had disruption of ownership of applications, you had consolidation of customer and people sort of buying for what was a very limited number of opportunities and again, that perfect storm led to perhaps people moving away from that price volume, make sure I was talking about to more about volume and there was some desperation, I hate to use that word, but felt like there was some desperation sort of in play. I don't think that will happen here because that's it's not that big of a move. We don't have the displacements of products being moved around at that same time. So it's not quite the same number of factors coming to bear.

Having said that, no matter what happens every time there's a bid cycle, there will be some price deflation. That will move people out of the market. That will create situations where people say I'm not to make any – manufacture the product anymore over the long-term that leads to price stabilization because those people walk away from products. There is fewer and fewer competitors and so you find yourself back in a situation where a product that may on paper have 12 approvals but only two people manufacturing it. And that will ultimately change the dynamics.

David Risinger

What’s the timing for Econdisc creating new contracts with Walgreens?

Paul Bisaro

I don’t think they have given that timing. I think they're kind of still up in the air a little bit on that.

David Risinger

Okay. Thank you.

Paul Bisaro

I would expect not this year though.

David Risinger

Okay. That’s helpful. Any questions from the audience before I continue. Okay. And so how should we think about the FDA clearing its backlog? So obviously the glass is half full, view is that there'll be more limited competition approvals for companies to capitalize on the glass is half-empty view is that the FDA will further commoditize the U.S. generics industry and bring margins closer to where they are ex-U.S.?

Paul Bisaro

Well, that's a possibility. I mean both situations should occur. The risk is that the agency gets the latter correct and doesn't get the former done. And that's the real risk of the industry because…

David Risinger

And that’s what happened to-date?

Paul Bisaro

To-date – that has definitely what’s happened to-date. Also I think it's important for the agency to focus on fundamental fairness when they’re doing this. Having been around for a while, I remember the times when there was selective approvals of high-value products to companies and people couldn’t quite understand why one company was giving an approval and others weren’t, that can lead to a very bad situation.

So I think the agency in their efforts to commoditize products and get lower prices is laudable but they need to be focused on fairness and how the review process is being done. Having said that, they also need to focus on the products that are the high-value ones. I mean giving the 30th approval of Prozac is not going to move the needle and nine times out of 10, that product is never even going to launch. So if you want to focus your efforts then we will be seeing the Commissioner. The Commissioner is coming to the AAM meeting I think at the end of the month. That will certainly be a point I will make both of those points to him when I will get a chance to talk to him.

David Risinger

And so it seems like to-date, the FDA at a high-level has been focused on hitting its metrics and its targets for clearing the backlog, Gottlieb has already said, that he wants the FDA to start to prioritize approving generics for which there are only three or fewer generics approved today. So I'm guessing that’s what he'll recapitulate. Is that the right way to think about it that he will be moving in that direction soon.

Paul Bisaro

If he truly wants to make the impact that he was talking about that's kind of what he has to do. The question is can he move the establishment to that? The challenge has been on the high value or difficult products, is what standard of approval are they going to apply. And often times I don't believe this is changed, the agency has to work as one agency to achieve that objective. In other words, it's not just the generic division that has to focus its efforts, they need help from the other divisions to be able to get the right scientific input to lead to a natural approval and he is going to have to drive the whole agency that way not just the generic division.

As I'm certain the generic division has been trying to do this for many, many years. They often have to reach over to the new drug division for consoles and efforts. And the new drug division is focused on their PDUFA date, not the GDUFA date. So he has got to figure out a way to deal with that problem – internal problem and if he does, and creates a more balanced approach, then our industry, generic industry, will be a better off because we will get higher value opportunities presented.

David Risinger

That's very helpful. Well, I could continue but I am already over time. I enjoyed the discussion. Thanks so much for joining us. I really appreciate it. Thank you.

Paul Bisaro

Thank you.

Bryan Reasons

Thank you.

Question-and-Answer Session

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