Amphastar Pharmaceuticals, Inc. (AMPH) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Amphastar First 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] 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 are such 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 Jason Shandell, President of Amphastar. Sir please begin.

Thank you, Operator. Good afternoon and welcome to Amphastar Pharmaceuticals’ first 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 our CFO, Bill Peters, to discuss the first quarter financials.

Thank you Jason. Sales for the first quarter increased 4% to $59.4 million from $56.9 million in the previous years’ period. Sales of Enoxaparin declined to $18.4 million from$23.8 million due to lower average selling prices. Unit sales of Enoxaparin continue to hold up, as we continue to maintain our market share. Other finished pharmaceutical product sales increased 49% to $40.2 million. This increase was primarily due to increased sales of Lidocaine, Naloxone and Phytonadione. Pricing of Naloxone was down in the first quarter of 2016, compared to the fourth quarter of 2015, as the company increased discounting and rebates. Our Insulin API business generated sales of $800,000, a significant decrease from the $6 million in the first quarter of 2015, because we did not ship any product (inaudible). Cost of revenues decline in dollar terms to $34.5 million, more importantly we saw a gross margin improvement to 42% of revenues from 23% of revenues in the previous years’ period. Improved pricing was the main driver for this increase in gross margin, so we have also lowered our cost of goods on Enoxaparin, which partially offset the pricing declines there. Also influencing the margin trend was an increase in the unit volume of both marketed and research and development projects manufactured at our Emphastar facility, which increased our overhead absorption. Selling, distribution and marketing expenses decreased slightly to $1.4 million from $1.5 million in the previous years’ period. General and administrative spending decreased to $10.9 million from $12.5 million, primarily because there was a $3.3 million accrual for illegal settlement in the first quarter of 2015. Research and development expenditures increased to $8.4 million from $6.6 million, primarily due to expenses related to our Tromethamine and intranasal Naloxone product candidates, as well as our portfolio of generic product candidates. The company reported another profitable quarter with net income of $2.5 million or $0.05 per share compared with last year’s first quarter net loss of $700,000 or $0.01 per share. The company reported an adjusted net income of $5.5 million or $0.12 per share compared to an adjusted net loss of approximately $400,000 or $0.01 per share in the first quarter of last year. Adjusted earnings exclude amortization, non-cash equity compensation, and impairments. On March 31, 2016, the company had approximately $64.6 million in cash, cash equivalents and restricted cash. In the first quarter, cash flow from operations was approximately $13.9 million and was positive for the eight quarter in a row. Remember that in the quarter, we used $4 million in cash to purchase 14 ANDAs for Hikma and $800,000 to purchase Letop, which is now subsidiary of Amphastar Nanjing Pharmaceuticals. We reviewed our financial assumptions for the year on the last call, and they have not changed. We mentioned that we have several projects which will increase capital spending, and we received a lot of questions on this spending. To give some more clarity on that, we are now disclosing that the largest project is that our Amphastar France Pharmaceutical facility where we are beginning to transfer the process of manufacturing inclusion bodies which are the starting material for our recombinant human insulin API from Merck to AFP. We expect to spend $20 million over the next two years on this project. I would also like to focus on the R&D spend, because we expect an increase in the spending rate from the first quarter. One reason is FDA filing fees. For example, we paid a $2.4 million filing fee for intranasal Naloxone filing in April of 2016. We also expect an increase in the clinical trial expense over the remainder of the year. I will now turn the call back over to Jason.

Thanks Bill. We’ve made a lot of progress since our last earnings in March and are happy to report another profitable quarter. In addition, cash flow from operations was positive which now marks eight quarters in a row. In April, we filed our NDA intranasal Naloxone, which continues to have a fast track designation with the FDA. With respect to Primatene we have completed what we believe to be our final human factor study. Based on our preliminary analysis, we believe that the data addresses the concerns raised in the FDA’s complete response letter and we continue to target responding to the CRL this quarter. Finally, we continue to await approval of our semi-purified heparin out of ANP our China facility. I’m happy report that the FDA conducted a general GMP inspection at the facility during the week of April 21, which resulted in 0483. This marks the second FDA inspection of the facility and demonstrates that our vertical integration strategy is making good progress. With that update, I will now turn the call over to the operator to begin Q&A.

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

Just a couple of quick financial questions for Bill; first, with respect to R&D spending in the quarter and then going back to your prior commentary at the year end. Obviously the numbers continue to trickle down over the last four quarters, but I guess the expectation was that it would ramp significantly with the balance of year. Is that still accurate at this point?

Yes, and one of the reasons why I call it out is, first of all we did have the filings in April which is in our second quarter for the intranasal Naloxone. So that’s a big chunk of money right there for us. But also when I take a look at the average of the consensus analyst spending on the R&D, I get to a number that’s below where I think we’re going to be for the year. So it’s probably the only area where I think, maybe our message on the increased spending isn’t getting across.

Maybe we are all operating with the same assumptions. What is the average consensus that you guys are looking at?

So right now, we’ll say that almost everybody is below where is we think we’re going to be by the end of the year and our spending should increase sequentially in every quarter. So the second quarter should be above the first, third should be above the second, and fourth should be above the third. And so just to give you an idea of the spending; in the second we’ll also include a $2.4 million filing fee that’s a good place to start from the first quarter.

And then on gross margin levels, obviously the pricing actions of last year continue to have a very favorable effect on the number. I can understand why there might be a lot variability in that going forward. But based on everything that we see at this point, it seems like a 40% plus margin level over the next couple of quarters. Could be sustainable unless something completely totally happens on the pricing front. Just want to get some --.

Sure, there’s a couple of things that are going really have some - cause some variability there, and a few other things that are going to just have some impacts but not as large. First on the smaller side, we do see the price of Enoxaparin coming down. We’ve seen the product price of Naloxone coming down on average due to discount and rebating. So those are two small trends. What could happen as far as gross margin goes is that we had very little sales of our recombinant human insulin API this quarter and that’s a very low margin business. If you remember last year, it was a negative margin business until we sold a lot of product in the fourth quarter and we had a significant uptick in the manufacturing of that product in the second half of the year. So we’re in the process now ramping back down some of the production there, due to our partners desire to get the product for Mankind. So when we do have insulin sales, which should be greater in the rest of the years than they, were this quarter on average, those could be and probably will be at a negative gross margin. So we could add $5 million on sales some quarter at a negative gross margin which will greatly impact the average gross margin for the company for that quarter.

And then you’ve mentioned Enoxaparin pricing and the negative year-over-year comps. How much of that is contract specific, meaning you’re locked in this certain term versus reflecting current market dynamics, because it looks to us like Sanofi, Winthrop and their distributor after driving price down for a long period of time actually has started to move price back up in the last three or four months. So I don’t know if you’re seeing similar dynamics and you’re just not yet reaping the benefit, but just wondering what your thinking is around a potential inflexion point to the positive.

From where we were a year ago were still down. I will say a year ago the price was coming down pretty quickly whereas right now it’s fairly flat, and we’re talking a very small decline, with a contract here, contract there, with everything else being flat. Majority of contracts in any quarter are flat right now over the past nine months.

And just one question for Jason as well, if you mentioned in your prepared comments I didn’t catch it. But what is the high month status in terms of refilling the NDA for Primatene.

Yes. We are still on target for this quarter.

Okay and that you had communication from FDA in terms of feedback on the most recent human factor study --.

Correct. So we comfortable, so just like I said last quarter, we do maintain that belief that the final study after going through the data, we’ve reviewed it and we believe it addresses all of the concerns and we’ll be filing that this quarter. That remains our goal and we believe that it’s very doable.

Our next question comes from the line of David Maris from Wells Fargo. Your line is open.

A few question, so I was trying to compare this quarters’ press release with the previous sequential quarter, and it might just be schematic. In that press release both say that you had four products at the FDA, should the four now read five or was there a product approved for this in between --.

It will be the four ANDAs. So we now have filed our intranasal Naloxone as an NDA. So when we talk about the four, of course we’ve got Primatene, we’ve got Naloxone. But four generic products are with the FDA.

But five in total now, and then one of the other --.

Well I’d say six with Primatene.

Well that’s soon to be file, right?

We resubmitted. We sort of consider or responded to because again the CRL had a very specific questions around the comprehension, so we sort of, I believe the technical term is we will be resubmitting.

One of the big difference though, here you say that you have three biosimilars in development targeting $15 billion in sales. I imagine that one is the insulin that you were discussing is that correct.

That’s correct. We haven’t got in in to details of those three products, but you can ascertain that these do relate to insulin, and there are various forms of insulin. In the last 10-Q we did finally publicly disclose that we are working on insulin finished product. So we consider that a biosimilar.

So the language change from the 12 generics targeting 17 billion to the 10 generics targeting 10 billion plus three targeting greater than 15 billion that’s just moving a couple of these products from one category to another, is that correct?

That’s what most of it is, but we also did add a product to the generic ANDA list as well, which had some meaningful sales. So we have added to the pipeline since the last conference call.

Great, and then just as a follow-up, you mentioned that you’re going to file three by the end of the year, if I’m reading this correctly. Any idea of how many next year might target for filing?

We do, and we’re very aggressive internally. For purposes of this call, we definitely intended to be greater than the number in 2016. So at this point, I would say four to five to be conservative.

Our next question will come from the line of David Amsellem from Piper Jaffray. Your line is open.

You had purchased those 14 ANDAs from Hikma, do you have a sense now that the pipeline is larger any updated thoughts on the pace of approvals in the back-half of this year and particularly 2017, maybe just give us some color on the extent to which some of these filings have CRLs or have targeted action dates.

So we have seen recently with GDUFA more responsiveness from the FDA. One of the four ANDAs that we reference in our filings has been with the FDA for quite some time. We did receive some comments and we’re in the process of responding to those. So we’re hopeful that in 2017, we could see that ANDA approved. And when we talk about four ANDAs on file with sales of over 500 million, that one ANDA that I’m referring to is significant. So it makes up a significant portion of that 500 million. So we are expecting approval on that one ANDA next year.

Is that at a product launch market formation or is there already a --.

Good question. So I would like to add to that, what we’ve been hearing from the FDA is that they will put a greater focus on generic applications where there is no generic on the market. So this is such a case where there actually are no generics of this product that are commercial.

Okay, that’s helpful, and lastly if you can, of those four can you say what kind of dosage forms they are?

So actually all four that are on file are injectables.

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

Most my questions have been answered, but I guess if you could talk a little about your insulin business, obviously revenues are down because of the Mankind issues, but what do you expect for that line of revenue for the rest of the year, and then you mentioned this large ongoing project your thoughts on what you expect over the next couple of years out of that facility.

Sure. Excluding the Mankind sales, annualized last 18 months of sales that we’ve had at that business annualizes to between $6 million and $8 million a year in sales, and so we had less than 1 million in the first quarter. We are in talks with Mankind, we continue to discuss this with them and there is a chance that we will ship them some product this year. But I won’t say that that’s certain at this point yet. So there is some possibility that we will, but we have not yet to date. As far as the facility goes, as we’ve been discussing recently, the main reason we bought that isn’t to get in to the API business, but to get in to the insulin finished product business. And in keeping with that, we have begun the process of the construction to modify the facility and bring in equipment so that we can manufacture the inclusion bodies which is the starting material for the (RHI) API that’s made there. And this is about $20 million spend on the CapEx line there that we’re undertaking over the next two years. A very small portion of that 20 million was spent in March of this year. So that will grow pretty significantly over the next couple of quarters.

Our next question will come from the line of David Maris from Wells Fargo. Your line is open.

Good cash generation, which leads in to the question of business development. It’s not been the strategy of the company to do any big company acquisitions. Is that still fair to say, if that’s the case that - are you still looking at things with the market down so much or what’s the environment, maybe those of you can talk about like company’s appetite but also the environment.

Sure. Right now we still would like to purchase things that makes sense for the company and that are easily integrated in to the company without a lot of efforts. The Hikma acquisition of 14 ANDAs is an example. We are looking at other projects that are similar to that, that we could spend more money on, but we’re really not looking at game changing acquisitions at this time, nothing that would surprise people if we did it. I would say why they do that. So things that makes sense for the company. As far as pricing goes, we haven’t really seen a whole enough deals to make a comment on whether the prices of the things that we’re looking at have really come down or not. And we’ve actually seen maybe a pullback of things that are on the market maybe that represents people not wanting to sell things at the current pricing levels. So I know at this time last year we were looking at a handful or more of different opportunities that we were considering bidding on or actually bidding on, and at this point the number of things that we’re looking at is much smaller. So I don’t know if that helps.

[Operator Instructions] Thank you. At this time I’m showing no further questions. I’d like to turn the call back over to Jason Shandell, President of Amphastar for any closing remarks.

Thank you, Operator. This concludes our call for today. I want to thank again everybody for participating, and I wish everybody a great rest of the day.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.