Adicet Bio, Inc. (ACET) Q2 2015 Earnings Report, Transcript and Summary

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.

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.

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 classified as a wholesale drug category SIC 5122, which is Wholesale-Drugs, Proprietaries and Druggists' Sundries. Taking a look at the individual segments. Sales in our Human Health segment grew by 39% in the quarter to $55.5 million. That reflects the addition of PACK Pharmaceuticals as well as gains from new generic drugs and Rising launched in fiscal '14. We've essentially completed the integration of PACK into Rising, and the generic business is performing well. Gross profit for the segment grew by 25% to $16.3 million in the quarter, and so we're pleased with the evolution of Rising and Human Health. As we previously indicated will be the case, Rising sales and profits were impacted this quarter by price protection obligations that were related to price increases we put through in the quarter. That said, we expect the positive effect of those price increases to ramp up and benefit us over the balance of this fiscal year and beyond. At Rising, we now currently have 97 portfolio projects in our pipeline, including 52 ANDAs that are on file with the FDA right now, and four which are currently approved for launch. Of these, 24 ANDAs, they have total current IMS estimated market value of $1.5 billion and have been on file with the FDA for over 24months. Like the rest of our industry, we have been experiencing a slowdown though in the time for approvals of our new generic products, which has made the timing of our forecast of product launches lesser. And in light of this uncertainty and consistent with what we're seeing for industry report and practices, going forward we've decided to update you on the aging of our applications on a quarterly basis, rather than on numbers, number-wise, so we expect to launch during the fiscal year. That said though, although the timing has generally been pushed out, we still do continue to forecast eight new drug launches this year. With respect to R&D spent, as many of you know, most of our expenditure are milestone based and milestones reached during the first half of this year were fewer than originally expected, which suppresses the R&D spend for the first half of the year. We do expect the level of milestone progress, therefore the rate of spend to increase in the second half of the year. And as a result, our current forecast for our 2015 R&D spend is now approximately $7 million, which is about $2 million higher than last year and about $2 million less than what we previously thought. In Nutritional products, which is also a part of our Human Health segment, that business has continued to be soft for us. In the first quarter, we noted that it was soft and we thought it would pick up fairly soon, but it has continued to be soft, both in the U.S. and internationally. We do continue to push for new business in Nutritionals, and do expect to see some improvement, as the year progresses. But I would say that the slow down has been greater than we previously thought. Turning to Pharma Ingredients, sales in that segment were $32.5 million for the quarter. That's a year-over-year decrease of 13%. The decline in sales in that segment reflects a drop in reorders, particularly of 3 APIs, one of which, as we've discussed previously, is our high margin API that was associated with the product that one of our customers launched back in the fiscal third quarter of 2013. I will take this time to remind you that for the year, we do expect a sizable drop in our Pharma Ingredients segment due to lower reorders of that high-margin API. In Performance Chem, sales declined by 8.8% to a level of $36 million. That decline is primarily due to less sales of a lower margin insecticide within ag protection products. The segment though on a gross profit basis increased by 9.5% to $6.8 million in the quarter, reflecting the more favorable product mix. Gross margins were up by almost 300 basis points versus the same time last year, so we're pleased with that. For the full year 2015, we do continue to expect to see a stronger second half of the year compared to the first half. We expect to achieve revenue and profit increases in the second half, primarily as a result of the incremental revenue associated with PACK as well as new generic product launches and price gains at Rising. As mentioned in last quarter's call, these gains are expected to mitigate certain margin pressure that we've seen on existing products are related to a consolidation that's taken place in the generic drug industry's distribution channels as well as offset some increased competition that we've seen on certain generic drug products. In terms of outlook, we are moderating our growth expectations for the fiscal year, in particular due to the drop in our Nutritionals business, which as I mentioned is greater than we previously thought. Also Dough will talk about this a little bit later on, but we are seeing an impact and in particular on topline due to foreign exchange. Dough will get into that. So therefore we are now expecting both sales and earnings growth for the full year to be in the mid-to-high single-digit range. Our long-term strategy for growing towards Human Health continues on track. We do expect significant earnings growth in our Human Health segment this year. With that, I'll now turn the call over to Doug.

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 a smaller reorder for a certain high margin API product than last year. Again, that was all per our expectation. Gross profit was $6.9 million, a decrease of almost of 11% compared to $7.8 million for the second quarter of fiscal 2014. Gross margin for the second quarter increased to 21.3% compared to 20.7% in the prior year. Performance Chemicals segment was $35.8 million, a decrease of close to 9%, compared to the second quarter of fiscal 2014. The decrease is primarily due to lower sales of an insecticide in the agricultural protection segment. Gross profit was $6.8 million, an increase of over 9%, compared to last year, due to a more favorable product mix. Gross margin also expanded and was 18.9% for the second quarter compared to 15.8% in the prior year. Our total SG&A was $19 million, up $3.9 million or 25.9% over last year, of which $3.1 million was related to the addition of PACK. Included in the increase we had amortization expense associated with the PACK acquisition of intangible assets amounted to $1.2 million. Our research and development expense were $400,000 compared to $1.2 million in the prior-year period. The majority of R&D expenses are milestone based and will fluctuate quarterly. Our operating income was just under $11 million, even with the second quarter of fiscal 2014. Interest expense increased to $1 million compared to $400,000 last year, reflecting higher borrowing, primarily to fund the purchase of PACK. During the quarter, we recorded a net loss on foreign exchange of $400,000 compared to a net loss of $200,000 last year. Our net income was $6.6 million or $0.23 per diluted share compared to $6.8 million or $0.24 per diluted share for the second quarter of fiscal 2014. Our non-GAAP adjusted net income was $8.2 million in the second quarter compared to $7.8 million in the prior period, an increase of over 5%. Non-GAAP adjusted earnings per diluted share were $0.28 compared to $0.27 in the year ago second quarter, again an increase of close to 4%. Our EBITDA for the second quarter was $14.4 million, an increase of $1.5 million over last year or 11%. Now, turning to our balance sheet. At December 31, our cash and cash equivalents, short-term investments were $39 million. We had working capital of a $165 million and shareholder equity of $239 million. Our bank debt was $108 million at quarter end. We believe that our capital resources continue to provide ample liquidity to fund our future growth plans. Now, before I turn the call over for questions, I want to make a few comments on a hot topic, namely the recent pronounced weakening of the euro and its impact on our financial plan. Our six month financial results included $900,000 charge for net foreign exchange loss, mainly as a result of a mark-to-market valuation of our FX future contracts. The blended euro rate used for the first six months of the fiscal year has not had a significant impact on our net sales and net income as compared to plan. However, if the current euro rates are sustained for the balance of the fiscal year, sales would be affected by approximately 3% or 4% versus our plan and our net income would be lower by $0.01 or $0.02 per diluted share. Therefore to be prudent, our recent forecast assuming the current rate hold for the second quarter of the year. As Sal mentioned earlier, our FX headwinds is one of the reasons we have trimmed our outlook for topline and bottomline growth for fiscal 2016. Now, I'd like to open up the call for questions.

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

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?

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.

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

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.

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?

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

But you still have the same margin characteristics, correct?

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.

From Morgan Stanley, we have Steve Howard online.

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?

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.

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?

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.

And we have Steve Howard back online.

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

Yes.

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?

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.

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.

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

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.

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