Amphastar Pharmaceuticals, Inc. (AMPH) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Amphastar Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call maybe recorded. This conference call may contain forward-looking statements, including statements relating to Amphastar Pharmaceuticals. These statements are not historical facts but rather based on Amphastar Pharmaceuticals’ current expectations, estimates and projections regarding Amphastar Pharmaceuticals’ business, operations and other similar or related factors. Words such as, may, will, could, would, should, anticipate, predict, potential, continue, expects, intends, plans, projects, believes, estimates, and other similar or related expressions are used to identify these forward-looking statements. These statements are only predictions and such are not guarantees of future performance and they involve risks, uncertainties and assumptions that are difficult or impossible to predict. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time-to-time in Amphastar Pharmaceuticals’ filings with the SEC. I would now like to introduce your host for today’s conference, President, Jason Shandell. Sir, you may begin.

Thank you, operator. Good afternoon and welcome to Amphastar Pharmaceuticals’ second quarter earnings call. My name is Jason Shandell, President of Amphastar. I’m joined today with my colleague, Bill Peters, CFO of Amphastar. We appreciate you joining us on the call today and look forward to speaking with you and answering any questions you may have. I will now turn the call over to Bill, to discuss second quarter financials.

Thank you, Jason. Sales for the second quarter increased 10% to $53.9 million from $49 million in the previous year’s period. Sales of enoxaparin declined to $19.5 million from $27.2 million, due to a lower average selling price, particularly on the retail side of the business. However, unit sales of enoxaparin were up for the quarter. Our insulin API business that we acquired in April last year, generated sales of $3.8 million in the quarter, up from $100,000 in the same period last year. Other finished pharmaceutical product sales increased 41% to $30.5 million from $21.7 million in the second quarter last year, as increased sales of products including Lidocaine and naloxone more than offset lower sales of Cortrosyn. Cost of sales increased to $40.5 million from $34 million in the previous year’s period, primarily due to costs associated with our insulin API business and increased unit sales. As a percentage of sales, cost of sales increased to 75% from 69% last year, primarily due to lower pricing on the retail side of our enoxaparin business. For the GPO portion of our business where we retained 100% of the profit, we did experienced price decline, but these were not as significant as on the retail side. Selling, distribution and marketing expenses increased slightly to $1.5 million from $1.4 million in the previous year’s period, primarily due to increase in units shipped. General and administrative spending increased to $11.3 from $8.6 million due to increased compensation expense, expenses for compliance with Sarbanes-Oxley 404 and expenses associated with our insulin business in France. Research and development expenditures increased to $10.7 million from $6 million, primarily due to clinical trial expenses, and manufacturing and testing expenses related to our naloxone nasal product and spending on several of our generic pipeline products. The company reported a net loss for the quarter of $6.6 million or $0.15 per share compared to last year’s second quarter net loss of $1.2 million or $0.03 per share. The company reported an adjusted net loss of approximately $3.9 million or $0.09 per share compared to an adjusted net income of approximately $800,000 or $0.02 per fully diluted share in the second quarter of last year. Adjusted earnings exclude amortization, non-cash equity compensation and impairment. On June 30, 2015, the company had approximately $74.5 million of cash and cash equivalents and $1.3 million of restricted cash and cash equivalents. In the second quarter, cash from operations was approximately $2.5 million and was positive for the fourth quarter in a row. I want to take some time now to update some of the financial assumptions we discussed on our previous earnings calls. As we previously indicated, our pricing on enoxaparin is expected to decline but it has declined faster than we originally anticipated. We also indicated that price increases from other products would offset most of this decline. This is still likely to be true even with further price declines of enoxaparin because we implemented another round of price increases on several of our prefilled syringe product as of July 1, 2015. Due to customer fees on notice period, we will not likely see the positive impact of these price increases until our fourth quarter. I will now turn the call back over to Jason.

Thanks Bill. We had a productive second quarter. We continue to be in active communication with the FDA regarding our pipeline, and sales remains strong. In fact, even with the significant decline in the price of enoxaparin, the company’s sales increased 10% in Q2 2015 as compared to Q2 2014. Excluding enoxaparin our sales increased 58% in the second quarter as compared to the prior year period, which demonstrates our pricing power and market demand for the majority of our products. With our recent price increase on July 1st, we expect this sales growth to continue and margins to gradually improve. Furthermore, as Bill reported, this is the fourth quarter in a row that we generated positive cash flow from operations. Although we reported a loss for the quarter, a large component of this was related to an increase in R&D spending which as we’ve stated in the past, should be considered a positive sign as it indicates that we’re making good progress on the pipeline. In that regard, you may have noticed from our press release that the number of ANDAs in the pipeline has increased from 13 to 15, which now represents a total market of greater than $17 billion. With respect to the pipeline, I’m happy to report that the FDA granted approval of our NDA supplement for Amphadase on June 19th. This marked the first FDA approved starting material from the company’s subsidiary ANP located in Nanjing, China and signifies that ANP’s cGMP status is acceptable to FDA. Amphadase will compete in hyaluronidase market which had annual sales of approximately $23 million. We plan to re-launch Amphadase in the fourth quarter of this year. In addition to its monitory value, this approval represents an important milestone for the company as it further strengthens our vertical integration strategy, given that ANP will provide critical APIs and materials for the pipeline. It should be noted that ANP has multiple technical platforms for various types of APIs and five DMFs have been filed including heparin. Turning to our intranasal naloxone product candidate, I’m happy to report the study so far have been very successful and we remain on track to file the NDA this year. Although there are two filers ahead of us, it should be noted that we currently sell the only naloxone product that can be effectively used off label for intranasal delivery. Therefore first responders around the country have been using our product for years to successfully reverse thousands of opioid overdoses and its widespread use can be compared to a long term actually use trial. Thus we believe that the robust data that we received from the states which shows extremely high reversal rates provides us with a competitive advantage in terms of demonstrating safety and efficacy. We continue to have discussions with potential marketing partners and are excited by the prospect of retail sales of this new product. Given the fast-track status designation for this product candidate, we believe that it will be approve in the first half of 2016 and will help support the continued growth of the company. With respect to Primatene, we are currently awaiting review comments from the FDA. We believe that once we receive the FDA’s comments, we should be able to.re-file the NDA approximately two months thereafter with an expectation of approval in 2016. The last full year sales of Primatene were $65 million in 2010. We believe that with some marketing efforts to inform consumers of its re-launch, we can see annual sales of Primatene eventually surpassing this number. We are still in the process of drafting a Phase 1/2 report for our Albuterol dry powder product candidate. We plan to file this report with the FDA in approximately two months and are currently working on proposed protocol for the Phase 3 study. In the litigation against Momenta and Sandoz, the Solicitor General submitted its amicus brief to the Federal Circuit on July 13th. We filed a responsive brief on July 24th and Momenta filed responsive brief on August 4th. Although the SC’s amicus brief concluded that we should not be immunized by the Safe Harbor, we explained to the court in our responsive brief why such conclusion is flood and why certain arguments of the SC actually supported our case. At this stage, the Federal Circuit will consider all the parties’ arguments and we believe the decision will be made by the end of the year. We remain confident that we will prevail in this litigation and believe that the various scenarios going forward will mainly affect the timing of when we can proceed to seek full recovery of the $100 million bond, plus interest for the years this case has been pending. With respect to our False Claims lawsuit on behalf of the government, the district court issued an order on July 13, holding that we are not the original source. We believe that this holding was incorrect as a matter of law and filed a notice of appeal on July 20th. We were happy to see that a briefing schedule has already been issued by the Ninth Circuit Court of Appeals and we are scheduled to file our opening brief to the court by December 28 of this year. In terms of business development, we continue to seek acquisitions of products with high barriers to entry and currently have several ongoing discussions. With that update, I’ll now turn the call to the operator to begin Q&A.

Thank you. [Operator Instructions] Our first question comes from David Marris from BMO Capital Markets. Your line is open.

A couple of questions, first, on the pipeline; I don’t know if you’ve thought of it this way, so it might not be a number that you have off hand. But when we think about the number of products you will have filed by the end of 2016, do you have that number off hand and how that would look branded versus generics?

Sure. So, as you know, right now, we’ve got three ANDAs on file and we also have in terms of NDAs, let’s say Primatene and we’ll assume for this year intranasal naloxone. So, for this year you can have three ANDAs and two NDAs. We’re still on track -- we said two to three more ANDAs this year; I feel comfortable with two. So, we can say that we will add this year to the three ANDAs, so by end of the year we should have five.

And we haven’t really disclosed next year, but I think we have said that we expect to start ramping it up a little faster than this year and we’ll be able to give a number for next year or later this year when determine exactly how many file this year.

And as far as NDAs go, we would expect that by the end of ‘16, both the Primatene and intranasal marks, somewhat would have already been approved. So, I’m not sure if we have NDAs filed at that time or not.

Okay great. That was the really -- the genesis of the question was the ramp up in R&D spending and how that’s going follow through new products?

A significant portion of the R&D ramp up that was on naloxone which will be filed this year, because we had to make multiple batches and did a lot of testing and had a lot of manufacturing expense around the creations of certain Naloxone batches and certain different tests that we were doing with that in production and some study batches as well for the intranasal product as well as the clinical trials. Additionally we had some pretty significant spend around two of our ANDA candidates.

Okay. And then just on the Naloxone, to me it seems like a no brainer to file a Citizen’s Petition, given that you have a safety concern with -- you were better than peer bioavailability and having the data to support that. Is that something that company’s going pursue or when we would find out whether or not you decided to pursue that?

So, we agree with you. Obviously our product has been on the market for years and used in thousands of cases. And so both the formulation and the device itself has essentially been validated, as I said in my remarks, we sort of compare this to an actual use study. And although we don’t typically talk about our competition, and we were aware that there was a meeting at FDA at which some of the competitors discussed details of their products, so that’s where you were going with the bioavailability. And we do believe that we have a much better product and it’s been proven in the real world. And when it comes to something like this product where it’s an emergency situation and a matter of minutes can be the difference between life and death, we do believe that the FDA is aware of that and will hold all companies to the high standards of efficacy and safety that the FDA does. There is obviously an urgent need for intranasal naloxone and we know this is a priority for FDA. We need to be careful in terms of whether or not we were to file a Citizen’s Petition; we don’t want to be viewed as somehow impacting the need for intranasal naloxone. That being said, we will have these discussions directly with FDA in our pre-NDA meeting and we’ll make the case for certain factors that should be present before an approval should be made. We don’t want this to be seen as in any way delaying a very needed medication, but at the same time you don’t want something on the market that is lesser than another product and could due to the bioavailability or other issues, not have the same efficacy which in my mind the efficacy of this product does relate to safety as well. So, it’s a long of saying we completely understand your point and we think it make sense, but we do need to also look at it within the realm of what’s going on in the United States as an epidemic and don’t want to be seen as filing Citizen’s Petition just for purposes of delaying competition. However, we do believe that FDA is aware of these issues, whether or not we were to file a petition.

[Operator Instructions] Our next question comes from Elliot Wilbur of Raymond James. Your line is open.

Just want to ask a couple lines of question around enoxaparin, specifically on performance trend in the quarter. Obviously the product continues to tick down on a sequential basis and you alluded to changes with ASPs on a year-over-year basis. But was curious as to how ASPs have trended over the just reported quarter and specifically looking as to whether or not we’ve actually hit some sort of stability in terms of whether the exit rate ASP was roughly similar to the rate that was in the place at the beginning of the quarter?

The price did trend down over the course of the quarter. However, I’ll say it’s more stable this quarter than it was last quarter. Last quarter we had multiple -- in the first quarter, we had a pretty significant trend, downward trend, but this quarter was not so much and -- pure customer because it’s more -- as an average selling price I would say the trend line was flatter but still slightly negative; fewer customers got price reduction this quarter than last.

And more of a general question on other base products and perhaps enoxaparin as well. Any changes in portfolio coming out of recent GPO contracting process, any particular wins that you could talk about?

No, nothing [ph] about most of our GPO contracts because we have many of our products are limited in competition, most of ours are dual sourced. So other than for the enoxaparin, most of our other products are dual sourced with us and one other players in general. So, there is very little turnover in there, unless somebody was to get an approval on one of those products. So, there is really little to talk about from that standpoint; it’s pretty consistent. We did have the full impact of the pricing increase from last October; it’s baked into this quarter. So you see that for the first time where every customer for the entire quarter had the new higher prices that we had put in place at that point. So that trend is now there and so far those pricing increases have stuck. And seeing pricing increases, as I mentioned, we did take several products up on July 1st as well. So that will give us some impact in our fourth quarter of this year.

And would you be willing to, Bill, disclose what the negative impact was this quarter related to those pricing actions?

There really wasn’t -- there was just some very minor accruals for some of the pricing increases and the impacts, based on the wholesale or inventories. But I’ll say it was very, very small because of the price increases, the most significant were once where we were back ordered for some of the products because we have had some significant increases over a couple of them. So, last quarter’s impact, the impact on the second quarter was almost non-existent. In the third quarter, we will have a negative impact which will be of these and wholesaler costs, but that should be offset by the upward trend that we’re getting to the end customer. So, like I said, the fourth quarter is when we really realize most of that price increase.

And then my last question again relates to enoxaparin, in a very recent development, they could have some pretty significant implications for you guys and that of course is the announced Teva acquisition of Allergan. I would assume at some point Teva will be forced to do that’s one of their products. And I would assume that they would keep their own, since it’s likely to have a higher margin. Maybe you can just sort of at this very early stage talk to us in terms of some of the potential scenarios or at least help us think about the situation and…

Yes, so right now, we’ve actually talked to Teva briefly about this. And we’re not really sure which way this is going to go at this time. But you’re right, there is multiple scenarios and the FTC might now make them the best of product and that way they’d be our partners as well as our competitor, which could be an interesting situation. Also they could divest it and we might be able to get the product back for ourselves. And if that were the case, so that’s also a potential or they could also divest it to a third party, in which case we’d be working with the third party. It’s hard to say on that last option whether that’s good or bad for us, we’ve had Allergan/Actavis/Watson as a partner for many years, and they’ve always been a good partner and able to get some pretty good market share. As you know, we have about a third of that market right now, so pretty happy with their performance over time. So we have to really judge what happens to that product, based on the multiple different scenarios.

On that last scenario, do you have any control or input into.

Yes. So, in terms of the contractual agreement, it sort of follows the standard contract where whether the change of control, it can be divested without our okay. So, there is that possibility. However we also feel that there may be other possibilities with that acquisition for products, so maybe we can work out some deal to prevent that last possibility.

Our next question comes from Serge Belanger of Needham and Company. Your line is open.

First question on the ASP insulin business, just I guess wanted an update. And I believe this quarter’s revenue contribution was I guess the lowest since going back to last year. I just wanted to know what we should think about for the second half of this year for that revenue line.

So, right now, as you know, our biggest customer there is MannKind and they’re purchasing insulin for their Afrezza product. Now, they have an annual commitment. So, it’s not a quarterly commitment. And if you took their annual commitment and divided by four, you get something pretty close to that $5 million or so, a quarter that we had from them in the first quarter. However, they purchased less than that this quarter. And some of the timing of some of those sales are somewhat based on us, somewhat on their needs. So, but I will say that because they did purchase less in the first half of the year or less than half of their annual commitment, then they will be purchasing more than half the commitment in the second half of the year. The timing of that is not -- there is no contractual obligation for them to take it, half of that remaining thing in the third and half and the fourth. So, the timing is variable. It could come in the third or the fourth. Mostly like it will not be all one quarter or the other quarter; most likely we will be shipping to them in both quarters. However it’s probably more likely that amount that was short in this quarter is more likely to be made up in the fourth quarter than the third quarter.

Moving on to the Chinese facility, you mentioned in your prepared remarks that five DMFs have been filed and I’m sure you expect to file additional ones. How many of these you think could be approved at the end of this year or when you think of 2016, how many products or APIs could be coming out of the facility?

Sure. So obviously, for Amphadase that was the first -- that was the starting material. And the heparin also is technically a starting material. We filed that couple of years ago, quite a while ago. So, I would expect and I would hope that heparin would be the next approval out of that facility. And it’s always hard to say timing; it’s been on file for a while. I do believe that now that the CGMP is acceptable and we’re already selling -- or we will be selling the Amphadase and the starting material becoming out of there, I think the logical next step is to see the heparin. And I would hope to see that this year. And as we have said before that’s an important starting material for us because heparin makes up the majority of the cost of Enoxaparin. So with the price coming down, getting that source approved can really help at least offset some of that pricing decline. So, I would think that would be the next one. Several others of them are more further out, 2016 and beyond but I would expect heparin to be the next one.

And not all of them are API as Jason mentioned, in fact one of that we filed is actually not actually an active ingredient but an ingredient that needs to be used in some of the formulations that we have that does require a DMF.

Correct. But that being said, ANP is a key facility for us. And they will be providing a large portion of the APIs that will go into our pipeline. And the term we use is critical because some of our larger products will be relying on ANP for API.

Thank you. I’m showing no further questions. I would like to turn the call back to Jason Shandell for closing remarks.

Thank you, operator. And I appreciate everybody joining us on the call today. Thank you for your time and have a great day.