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Adicet Bio, Inc. (ACET)

Q2 2015 Earnings Call· Fri, Feb 6, 2015

$7.79

-1.83%

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Transcript

Operator

Operator

Good morning and welcome to the Aceto fiscal 2015 second quarter financial results conference. My name is Brandon, and I will be your operator for today. [Operator Instructions] And I will now turn it over to Jody Burfening. You may begin, ma'am.

Jody Burfening

Analyst

Thank you, Brandon. Good morning, everyone, and welcome to Aceto Corporation's second quarter fiscal 2015 conference call. This is Jody Burfening of LHA. With me today are Sal Guccione, President and CEO; and Doug Roth, Chief Financial Officer. The company issued second quarter earnings press release yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investor Relations section of the company's website at www.aceto.com. Before starting the call, I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as believe, expect, anticipate, plans, projects, seeks and similar expressions involves numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied by these forward-looking statements, as a result of certain factors as set forth in the company's filings with the Securities and Exchange Commission. In addition, management will be referring to non-GAAP measures during today's conference call. Aceto defines adjusted net income and adjusted EPS as excluding total cost related to acquisitions, including amortization of intangibles. These measures allow investors to compare results of operations in the current period to prior periods based on the company's fundamental business performance. With those housekeeping items out of the way, I would now like to turn the call over to Sal. Good morning, Sal.

Salvatore Guccione

Analyst

Thanks, Jody. Good morning, everyone, and thanks for joining us on Aceto's second quarter fiscal 2015 earnings call. Overall, we're pleased with our second quarter results, and they trended pretty much as we had expected. In particular, we're very pleased with the continued growth and development of our finished dosage form business, Rising Pharmaceuticals, which I'll talk a little bit more about in a few minutes. But first, just from a total company perspective, sales increased by 6.2% to just about $124 million this quarter. Gross profit increased by 11% to $30 million. On a GAAP basis, earnings per share were $0.23 in this quarter that compares to $0.24 a share in the fiscal second quarter of 2014. Non-GAAP adjusted EPS was $0.28 a share versus $0.27 last year's quarter. Our growth this quarter was driven by gains in our Human Health segment. With PACK Pharmaceuticals now under our belt for about two-and-a-half quarters, our Human Health segment has grown to become Aceto's largest business segment, accounting for about 45% of our sales in the quarter and about 54% of our gross profit here in the second quarter. For the first half of the year, our Human Health and Pharma Ingredients business segments together accounted for 69% of our total sales and about three quarters over gross profit. So this increased mix of Human Health-oriented business allowed us during the quarter to apply for a change in our SIC code classification, which as many of you know, that code is not something we control, but instead is determined by the Securities and Exchange Commission. And we are very pleased to announce in December that the request for change was granted by the SEC. And we think it just better reflects our strategy and our results now going forward. We're now…

Douglas Roth

Analyst

Thank you, Sal, and good morning, everyone. I plan to walk you through our financial results for the second fiscal quarter. Starting with net sales, we grew net sales by 6.2% to $124 million compared to $116.5 million reported for the second quarter last year. Total company gross profit was $30 million, an increase of over 11% compared to $27 million in last year's second quarter. Our gross margin for the second quarter was 24.3% as compared to 23.2% in our prior-year period. On a reported segment basis, Human Health segment sales were $55.4 million, an increase of over 39% from the second quarter of fiscal 2014. As Sal mentioned, the sales increase was primarily due the increase in sales at Rising resulting from the acquisition of PACK Pharma in April 2014, as well as new drugs launched in fiscal 2014. Rising sales were adversely affected by $12.5 million, due to the price protection adjustments associated with the price increase we implemented during the quarter. Our Nutritional product sales, both in the U.S. and internationally were lower due to continued soft reorders resulting from high customer inventory levels. Nutritional sales results were also impacted by lower royalty income of $1.3 million on certain proprietary ingredients. Gross profit for the Human Health segment was $16.3 million, an increase of over 25% from the second quarter last year. Our gross margin for the second quarter was 29.5% compared to 32.7% in the second quarter of fiscal 2014. The decline in the gross margin was primarily due to the $9.2 million net impact associated with our price protection adjustments. Moving to our Pharmaceutical Ingredients segment, sales were $32.6 million or 13% below last year's second quarter. The decline in sales were due to a decline in reorders on two products, as well as…

Operator

Operator

[Operator Instructions] And from Sidoti & Company, we have Daniel Rizzo.

Daniel Rizzo

Analyst

In the past you mentioned that the two new products that are in the pipeline might be first to file. Is that still the case? I know, it was kind of unclear, but is that something you still hope for?

Salvatore Guccione

Analyst

Again, we certainly try whatever possible to have first to file. We don't know until one gets FDA approval, if you are first-to-market actually. So the answer is, yes, the assumption still remains the same, but no, we don't know until the FDA gives the approvals.

Daniel Rizzo

Analyst

And again, this is just for a couple of the products, right?

Salvatore Guccione

Analyst

Yes. I don't have the exact numbers in front, but when you look at the entire portfolio, we try to make estimates as to where there are no existing generics and where we might be first-to-market, which again as we have the biggest bang for your buck. But by far and large, most of the approvals you get are not first-to-market.

Daniel Rizzo

Analyst

And then with Pharmaceutical Ingredients, the tough comp and the lack of re-up from that large order in the third quarter couple of years ago is closing down, but I thought that that order was coming back or they might reorder later in the year. Is that not the case anymore, is not expected anymore?

Salvatore Guccione

Analyst

No, we do expect reorders, just at substantially lower volumes than we've seen in the past.

Daniel Rizzo

Analyst

But you still have the same margin characteristics, correct?

Salvatore Guccione

Analyst

At this moment, they have similar margin characteristics, I would say over time, as competition comes in to our customers at market, their volume will go down and potentially the margin could come down a bit also.

Operator

Operator

From Morgan Stanley, we have Steve Howard online.

Steve Howard

Analyst

Quick question on first the Nutritional business. What do you think is driving the longer than expected weakness in that business? I think you said its competitive environment, but is it more granular than that, you can get into. And then recently you saw or we saw that supplement investigation. Is that an opportunity for you to go to a high-quality sourcer?

Salvatore Guccione

Analyst

On the second part, I'm not really sure that there is an opportunity there for us or not. Again, we're selling ingredients to the folks who then convert it to the finished dose on the Nutritionals. So I don't think there is any opportunity for us there, but to be honest I'm not really up to speed on that one. On the first part of your question, we're being told by our customers, and again we don't have visibility the same ways we would have on these finished dose, like with the IMS data that's out there. But that essentially their business has slow -- they've seen slowdown in their business. And hence they're in kind of a little bit overstock position, and therefore their orders are slowing to us. They don't think it's some long-term systematic change in their business. Yes, there is more competition, but things should pick up, it's just a question of timing. So right now at least it seems like maybe they got ahead of themselves in terms of their ordering or take a little bit for a breather.

Steve Howard

Analyst

And then my final one would be on the aging of the pipeline. Is there any, and this is my ignorance, but is there anything to be read into the fact that beyond a certain level, that some of the stuffs, that's 37 months of the stuff out, the stuff that's been waiting quite a while. That's all, looks like it has a generic competition already. Does that kind of decay your ability to monetize those products, because other people are more and more entrenched in those products?

Salvatore Guccione

Analyst

Yes, so theoretically the generic composition that comes in, the less off a piece of a pie that we're going to get, when we do get our approvals. But it does seem like this 37-plus months, and maybe its 42 months delays, it's the new kind of normal, at least for now, and it's supposed to get better. So I don't read anything kind of unusual into the fact that there are nine drugs in the 37-plus months. But certainly, if others get approvals before us, that makes it more difficult. But this to us seems kind of normal for what's happening in today's industry.

Operator

Operator

And we have Steve Howard back online.

Steve Howard

Analyst

In terms of the guidance being lower, that seems to be lowered in stepped, both topline and bottomline?

Salvatore Guccione

Analyst

Yes.

Steve Howard

Analyst

And given that your highest margin and growth year's business is still doing well, I would have suspect that you might have had a little bit more operating leverage in terms of, maybe the topline is coming down, but the bottomline would be preserved a little bit better. Can you get into that? Is it because FX is kind of pulling down equally and Nutritional is a smaller part of it?

Salvatore Guccione

Analyst

There's kind of two things. The FX is pulling the topline down more proportionately, but the Nutritionals business has got good gross margin, good profit margins also, so that's having a sizeable impact on the number.

Douglas Roth

Analyst

Especially as we mentioned the royalty income, because we're short on the first six months compared to last year in our plan and it appears it's going to be the same in the second half. But just one more word on, like Sal said for the foreign exchange, when I mentioned 3% or 4%, we have let's say, lower margin business across the Eurozone, so it will affect us by the 3% or 4%, and has a less of an impact on the bottomline.

Operator

Operator

It looks like we have no further questions. I will now turn it back to Sal for closing remarks. End of Q&A

Salvatore Guccione

Analyst

Thank you. Well, thanks everyone for dialing in. We will look forward to speaking with you in May and having the business continue to develop along the path that we've been pushing, which is all three segments, but again as I said, we expect the majority of the growth to be in the Human Health segment going forward. Thank you so much.

Operator

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.