Amneal Pharmaceuticals, Inc. (AMRX) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to Impax Laboratories Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Mark Donohue. Sir, you may begin your conference.

Thank you. Good afternoon, everyone. Thanks for joining us. Welcome to our second quarter 2013 financial results conference call. We issued our second quarter 2013 earnings release today after the close of the U.S. financial markets. And a copy of the release and a link to the webcast of this call are available on our website. Today, Dr. Larry Hsu, our President and Chief Executive Officer, will make some brief remarks; and then Bryan Reasons, the Chief Financial Officer, will review the financial results and/or update 2013 financial guidance. Also on the call are Dr. Carole Ben-Maimon, President of Global Pharmaceuticals; and Michael Nestor, President of Impax Pharmaceuticals. All will be available to take any questions you may have. Our discussion today may include certain forward-looking statements, and actual results may differ from those presented here. The factors that could cause such a difference are outlined in our SEC filings and on our website. Our discussion today includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and a disclosed non-GAAP financial measures internally to evaluate and manage the company's operations and to better understand its business. Further, management believes the conclusion of non-GAAP financial measures provides meaningful supplementary information to and facilitates analysis by investors in evaluating the company's financial performance, results of operations and trends. A reconciliation of GAAP to non-GAAP measures is available in our first quarter -- I'm sorry, second quarter 2013 earnings release, which can be found within the Investors Relations section or in the homepage of our website. And with that, I'll turn the call over to Dr. Larry Hsu.

Thank you, Mark. Good afternoon, and thank you for joining us today. For the second quarter of 2013, we reported adjusted earnings per share of $0.23 on total revenue of $130 million. While we were profitable in this year's second quarter, our results were, unfortunately, lower than the prior year period. Last year's second quarter include a strong sales from several of our larger generic products before additional competition entered the market in the second half of 2012, including competition on Adderall and fenofibrate. Also, in the current quarter, branded Zomig tablet and ODT went generic. One outstanding warning letter has prevented us from receiving approval on a number of pending ANDAs. We have launched the 4 new generic products in 2013. Generic oxymorphone ER tablets, authorized generic Zomig tablet and the Zomig ODT and the recent launch of authorized generic TRILIPIX capsules. We have been successful in capturing sales and share with our non-AB rated oxymorphone ER. We are also competing for a larger slice of the generic TRILIPIX at the Zomig market. However, these opportunities are not expected to offset the impact of additional competition, price erosion and the delay in new product approval it's currently having on our existing revenue base. Resolving all of the observation in the most recent Form 483, calling out the warning letter and implementing quality improvement, remains the top priority for us. We continue to focus on fulfilling our commitment to the FDA. We'll continue to provide the FDA with a monthly update on our progress to the commitment we made in our original March 21 response. Also for today, we are waiting to hear from the FDA San Francisco District Office regarding our request for meeting to ensure that our plan and actions are aligned with the FDA's expectations. While we don't know when a meeting will be held, going forward, we will not be updating as to whether a meeting has been held, but rather we will discuss when we have obtained clear direction from the agency as to the form of Form 483 observations. In late June, I announced that I will be retiring as the president and CEO once a replacement is hired. A highly regarded executive search firm has been engaged and is working with the Board search committee. The committee is focused on finding a successor CEO that will lead Impax through its future growth. As a cofounder and a significant shareholder of the company, I have more than have a vested interest in the next phase of the growth for Impax. I'm extremely proud of the many accomplishment that we have realized, since the company's inception in 1995. While we've had a few obstacles over the years, our incredibly talented, focused and dedicated employees have been instrumental in building a great company. Over this period, we have received approval of 66 ANDAs. In addition, we currently have a 44 ANDAs pending at the FDA, and 1 pending NDA on our proprietary branded product for Parkinson's disease. These solid pipeline of opportunities, combined with our strong balance sheet, is why, I believe, Impax is well-positioned for even greater success in the future. I would also like to take this opportunity to thank our customers and investor for their support over the past 18 years in helping us -- helping me to realize the dream of building a highly profitable pharmaceutical company and making meaningful contribution that benefit patients. I intended to stay active with the company by my participation on the board. I will now turn this call over to Bryan, who will provide his comment on our financial results and other items. Bryan?

Thank you, Larry. Hello, everyone. Thanks for joining us. I'll begin with an overview of our quarterly results and adjusted earnings, and then address our updated 2013 financial outlook. On a non-GAAP basis, our adjusted earnings per diluted share in the second quarter of 2013 were $0.23 compared to $0.61 last year. Total company revenue declined $37 million to $130 million compared to last year's second quarter. This decrease in revenue was due to a significant, but expected, decline in sales of our authorized generic Adderall XR due to the additional competition in late June 2012. Since the approval of another generic competitor, our market share has declined from the low 30% range to approximately 10%, since the beginning of 2013. This has led to a significant decline in our revenue. We continue to have adequate supply to service our customers, and we're exploring all opportunities to recapture share. We've experienced lower sales of our fenofibrate as a result of additional competition last October on the capsule product. Since introducing fenofibrate capsules in early 2006, we successfully grew prescriptions without a reference-listed brand drug. We'll fight to maintain our position in this market. Also, we felt the effects of a loss of $3.5 million of revenue earned under our co-promotion agreement with Pfizer for Lyrica, which ended on June 30 last year, and the loss of $4.4 million to deferred revenue recognized under our Valeant and GSK agreement. Partially offsetting the decline in generic Adderall and fenofibrate revenues was the growth in our generic non-AB rated oxymorphone ER products since our launch in early January of this year. Despite the lack of a reference-listed-brand drug, we've successfully grown generic prescriptions for this product. Our exclusivity for being first to file on this -- on 5 of the 7 dosage forms expired in early July, but we have not yet seen additional competition enter the marketplace. We'll continue to monitor the presence of additional competition. During the second quarter of 2013, the U.S. exclusivity on our Zomig tablet and oral disintegrating tablet products expired. While sales in the second quarter increased $7 million over the same period last year, 7 generic competitors introduced both tablet dosage form products in mid-May. In response, we launched an authorized generic on both the tablet and oral disintegrating tablet. However, this action won't be sufficient to offset declines in future sales of the branded product. We'll continue to promote Zomig nasal spray, which has patents that extend to 2021. Adjusted gross profit margin in the second quarter 2013 was almost 56%, in line with last year's second quarter. Gross margin was adjusted to exclude $13 million of charges for amortization and acquisition-related costs related to the Zomig and TOLMAR transactions, remediation costs at our Hayward facility and employee severance from the recently announced workforce reduction. In last year's second quarter, total remediations and amortization in acquisition-related costs totaled $15 million. Total R&D expense decreased just over $4 million compared to last year. This is due to the timing of completion of generic partner projects and a reduction in branded product initiatives related to the decision to terminate further development of IPX159 for primary Restless Leg Syndrome. During the second quarter 2013, we received $3 million in a litigation settlement, which covered the legal fees we incurred. This payment was recorded in other income and excluded from our calculation of adjusted net income. We ended the second quarter with $452 million in cash and cash equivalents. We're in a fortunate position of not having any debt and substantial financial resources to support both the ongoing internal improvement to our quality systems and execute on potential external growth opportunities. We continue to dedicate significant resources to remediate the 483 observations and are diligently working on our quality improvement program. This includes adding outside consultants, as well as redeploying highly qualified internal resources that focus on this critical effort. As a result, in this quarter, we recorded a charge of almost $4.6 million for remediation costs related to the outside consultants and $6.5 million for the first 6 months of 2013. For the full year 2013, we continue to estimate that external remediation costs will be approximately $10 million to $15 million. As a result of several events, we are likely to experience net operating losses in the second half of this year. We haven't received any new product approvals in more than 2 years due to the warning letter in Hayward. While we've launched a couple of generic products this year, including generic oxymorphone in early January and an authorized generic TRILIPIX several weeks ago, revenues and profits from our base generic business over the past 2 years have declined significantly due to price erosion and competition. Zomig revenues and profit contribution will also decline significantly, due to generic entry this past May, this impacts approximately 85% to 90% of our brand sales. We announced in May that we will be discontinuing certain mature, low-volume and lower-margin products. These products had annual sales in 2012 of approximately $14 million. We'll begin to see the impact on quarterly revenues from these discontinued products in the second half of this year. And lastly, during the first half of this year, net sales of our generic Adderall were favorably impacted by approximately $8 million due to lower-than-historical Medicaid utilization rates. This is not expected to continue in the second half of the year. Some of our declining revenue base will be offset by sales of our generic oxymorphone and authorized generic TRILIPIX and Zomig products. However, the impact these products will have depends on the activity of the currently approved generic competitors, as well as the potential approval of additional competitors. We increased our full year gross margin guidance to mid- to upper-40% from our prior guidance of mid-40%. This change is driven by higher sales of our oxymorphone product in the first half of this year and the recent launch of generic TRILIPIX. While our adjusted gross margin for the first 6 months of 2013 was just over 56%, our adjusted margin in the second half of this year is expected to be significantly lower, driven by lower sales of higher-margin Zomig brand products. We lowered our full year total R&D expense forecast to $80 million to $87 million from $87 million to $95 million. This reduction is driven by lower spending on clinical trials for several generic products, as well as utilizing some R&D personnel to remediation activities in Hayward. These internal costs associated with the remediation effort are reflected within cost of revenues and are not part of external remediation expenses incurred in 2013. The revised generic R&D expense forecast is now $45 million to $49 million and the brand R&D expense forecast is now $35 million to $38 million. Generic patent litigation expense for the first 6 months of this year were $8.6 million, running ahead of our full year forecast of $10 million to $12 million. Due to the increased legal activity, we increased our full year expense forecast to $12 million to $15 million. We also lowered our total SG&A expense forecast by $2 million as result of our decision to reduce our branded divisions contracted sales force by approximately 24 positions. This short-term action is due to the delay in approval of RYTARY. We'll utilize these -- we will realize these savings in the second half of this year. Our revised full year SG&A guidance is now $113 million to $118 million, down from $115 million to $120 million. We'll continue to monitor and aggressively manage our cost structure in order to be cost efficient in the near term and ensure our business is aligned with our strategic goals longer term. Despite recent challenges, we are positioned to create long-term value for shareholders. We have 44 pending ANDAs at the FDA, consisting of both oral solid and alternative dosage form products and a pending ANDA for RYTARY. We continue to invest in R&D, while we work through our quality issues and currently have 25 generic products under development and continue to work on developing several brand products within our pipeline. We have over $450 million in cash and no debt and continue to target external strategic growth opportunities to generate future growth. We believe the company's value proposition is intact and are excited about our future. Thanks for participating. I'll now turn the call back to Jessica for questions.

[Operator Instructions] And your first question comes from the line of Louise Chen.

I had a few. I'll just read them off to you. So first question I had was on your large cash balance. Just curious, what the priority for that is. And then just in the business development front, what you're targeting, what you're looking at? Second thing is on the CEO search. Just curious, what kind of candidate are you looking for? Timing around that. And then last thing is just on industry consolidation. Just your thoughts on where that's all going. There's been a lot of activity in the generic space, and just wanted to get your thoughts on what you think that might go over the second half of the year.

I'll take -- this is Bryan. I'll take the cash question. Obviously, remediation is a priority, and we're going to do everything we can around that effort. As long as -- along with our quality improvement, our QIP program. And we still believe that the best use of cash is to invest in our growth, and we haven't changed our strategy around BD and M&A. We're just looking for -- our first priority is currently marketed products that would be either immediately or near-term accretive and then on the generic side, product opportunities and growth that make strategic sense, both alternative dosage forms. And we're continuing to execute on our internal growth strategies and M&A and BD.

Well, as far as the new CEO search, we have engaged a well-known search firm to start the process. At this point, I don't have anything to update. We do not have a timetable as far as when we're going to get this new CEO employed. I think that the most important for us is really find the right person, which has been familiar with both generic and brand business, who will continue this company's future growth. The third question is on the...

Industry consolidation on the generic side. And so, yes, there's been a lot of consolidation, but quite honestly, generic companies buying brands, as we know, it's the other way around. So I think it's going to continue, Louise. I think that there's going to be continued consolidation as smaller companies really sort of struggle with the increased cost of generic R&D. And so, I think we will continue to see consolidation. And, actually, that's in line with what Bryan said about our strategy. On the generic side for -- we're looking at M&A, both company-wide and also strategic partnership to expand our portfolio of products into alternate dosage forms as well as expand our solid oral dosage line.

And your next question comes from the line of Elliot Wilbur. Elliot Wilbur - Needham & Company, LLC, Research Division: Just a couple of brief questions here. First, a couple of product questions. First, maybe can you just give us a little bit of color on current market conditions in the generic TRILIPIX market? Obviously, it looks like we're going to continue to see a staggering entry from some additional generics here, and I'm just sort of curious if pricing on that product today is more reflective of what the market may look like in the future, rather than reflecting the limited number of players in the market currently. And then maybe some additional color, commentary, around oxymorphone. Still relatively small share of that market, I think about 13%, as of the latest week. But we have seen some acceleration over the past couple of weeks. And I'm just curious if there's anything that you're doing on your end or plan to do on your end to really drive substitution to a much greater extent?

So TRILIPIX, obviously, is relatively new and fresh, so it's still quite dynamic. And being a staggered launch, I'm actually pretty optimistic that as we've grown share, we'll continue to keep share. And we've done -- the numbers are still out there and still coming in. Obviously, we only have 1 week's worth of data, but we're pretty optimistic and pretty happy with the way we've been doing. There are obviously, at least 2 other companies that we know of out there that are talking about the product, but they don't have approvals yet. And so price could be an issue as they start to enter the market. But it's a pretty big market, and it's pretty well flushed out. And right now, I think the 2 companies are really dominating the market are us and Mylan. With regard to oxy, a couple of things. So we -- there is a slow uptick in that market share, and I think you also have to recognize that the market is actually growing overall. You have to be, obviously, very careful. It's the branded market that's actually growing, and we are non-AB rated. But our product has been doing pretty nicely, I think, on its own. We are continuing to push that market and be strategic and aggressive in that marketplace to make sure that physicians are aware of the existence of the generic non-AB rated oxymorphone product. And I think that's what you're starting to see is that that's coming to light. You're starting to see the efforts of our strength to make sure that there's awareness out there that the generic product is available and the patients can get a cost-competitive product. Elliot Wilbur - Needham & Company, LLC, Research Division: Okay. And then if I can just ask one follow up on the oxy market as well. Roxane recently received approval, but they do not appear to have launched as of yet. I'm just wondering what your competitive intelligence sources are telling you in terms of their potential entrance here in the near term.

Yes. And I don't have any more information than you do. They, obviously, got an approval. We're not hearing a lot about them right now. Actavis, in contrast, has said that they're going to launch the end of the third quarter. They said that on their conference call, so we fully anticipate them coming into the market. But I don't know where Roxane is. The one other fact that's out there is that there is still some ongoing litigation, and both Actavis and Roxane are involved in that litigation. But I can't speak to the content of that, or what their thoughts are or anything. Nobody's really talking about it. Elliot Wilbur - Needham & Company, LLC, Research Division: Okay. And then I just have one question for Larry as well. You've talked in the recent past about your deal activity or your deal assessment activity maybe being a little bit more tilted towards the branded side of the spectrum. And I'm just wondering how that ties in with the board search for a new CEO candidate. I would imagine a wide variety of candidates from all sides of the pharmaceutical industry. And just, historically, it seems like generic guys can do really well with generic companies and generic companies have good brand products. But it's unusual to find a brand guy, who can come into a generic company and do really well over the long term. And, obviously, Impax, majority of the money has been made on the generic side of the business over the years, and probably will be for many years going forward. So I'm just wondering, how those dynamics may influence your preference for a candidate, whether it be brand or generic?

Well, let me put it this way. I think the ideal candidate, what we're looking for is someone with both generic and branded firm. Okay, now that may not always happen, then we have to look at the individual's exposure in certain area, okay. And to me, at this point, I think the committee on the board has not met a decision that we're going to focus on someone with only the generic experience or someone with only the brand experience. I do not want to correlate this to some of the earlier comments we may have on the M&A side more newer [ph] to the brand. It was more or less of [indiscernible], that if you look at today's market, if you're talking about the major M&A, it doesn't matter if it's company or product, there may be more available on the brand side than the generic side on that. Obviously, especially from the Impax, we're more focused on the product with the first to file, first to market opportunities. And the generic opportunity is hard to come by, from that point of view. But coming back to the search for the new CEO, I think the qualification, the ability to take a company to grow is the most important criteria we're looking for.

I simply want to stress, and Larry mentioned this, our strategy and our effort around BD and M&A has not changed.

[Operator Instructions] And we do have a question from the line of David Amsellem.

This is Trevor Davis on for David. So sort of -- I have a few here. So just looking at operating expenses, how should we think about the trajectory of R&D spend going into next year, given the absence of approvals and the backlog of filed products waiting on approvals at the FDA? It just seems that there's lot of room for expense savings, both for generic and brand R&D. So beyond the adjustments to the guidance you outlined, is there any room, say, next year for additional cost savings?

This is Bryan. So, obviously, we said we're going to continue to invest in R&D. In the -- on the generic side, we're going to continue to go after getting ANDAs approved, and we're going to continue to work just how we have. That said, we are very cost conscious, and we'll look to save wherever we can. On the branded side, we're committed to an R&D -- developing an R&D pipeline and you do need to look on the brand side. R&D is a -- it's just a long-term investment.

And I think as Bryan said, obviously, we're going to be as aggressive as we can to save and control expenses. But we also want to make sure that were poised for growth as we get out from the quality issues and warning letter, and the future of the company is R&D. So I think we'll be as efficient as we possibly can and as selective as we possibly can and as smart as we possibly can. But we're not going to sell our future by stopping all investments and stopping activities in R&D that we think are going to be valuable, in say -- off in the long run.

Okay. And then, I guess, just switching gears on the other side of the coin, in terms of SG&A spend. So, I mean, how much of what you are guiding to is related to specifically the brand business? And considering that your spend here is still quite a bit higher than where it was before, you had prelaunched spend on RYTARY and then added Zomig. So, I guess, the question is, is there significant further room for savings on SG&A?

On the sales and marketing side, on the branded side, we're maintaining a sales force and an infrastructure to support the anticipated launch of RYTARY. And we, obviously, have hopefully, good news coming up in the future from the FDA, and we'll be poised to launch that product. And in the meantime, we're out promoting Zomig nasal and are looking on the BD front very hard. But right now, the plan is to maintain that infrastructure, so we're prepared to successfully launch RYTARY.

Great. Just one last one. Beyond RYTARY, actually -- no, I'm going to switch gears. So beyond the CEO change, can you talk about what personnel changes you have made in Hayward recently?

Well, this is Bryan. I think we said before, obviously, over the last 2 years, Larry's brought in a new head of operations, a new head of quality and has replaced, over the last 2 years, over 75% of kind of those 2 groups' management teams. So that's, I think, really some significant changes that we've made in the last couple of years.

If your question was specific to this period, the transition period, I don't think that we've planned to have any significant change in the organization during this transition period.

And your next question comes from the line of Sumant Kulkarni.

The first one is that given that you're not going to be providing any interim update from the FDA, what are we going to hear next and in what form will that be? Will that be a company release? Or could we just see something on the FDA website?

Well, as I mentioned, as soon as there is something significant, we will share with all the investor and all shareholder. At this point, we haven't had meeting with the FDA, so there's really nothing we can share about at this point. I do want to emphasize, it does not mean we are not talking to the FDA. As I pointed out in my script, we continue to provide the FDA on the update on all the activities, all around the [indiscernible], the 483 commitment, as well as the voluntary, the so-called quality improvement program, at this point. But we are sitting here very anxious. We want to hear the feedback from FDA.

Sure. And from an inside the company point of view, how long do you think the remediation is going to continue at Hayward?

Well, I think it is important to know that as far as the full flow of the commitment to the FDA in our 483 response, it's final, okay? In other words, we know exactly when we're going to finish that. However, the other important part of the whole activity is the execution on the quality improvement program. That's been going on for quite a while. Obviously, we'll prioritize it, so most of the work can be done really quickly. But it's an ongoing process and most of the company is taking the same position. We're going to continue maintain the quality of the company by continue to improve the system we have, the facility we have and the people we have.

And on Hayward, specifically, after the recent steps you've taken at that facility, if there were some approvals to come up, let's say, tomorrow, if everything is solved, is there anything that -- any opportunity that cannot be capitalized upon because you decided to do the things you did recently?

If I understand your question correctly, Sumant, it's that you're asking whether because of the improvements we've had to make or the things -- or the -- some pending applications that we can't get approved, is that the question?

Yes. The question is, let's say, just for hypothetical purposes, if everything is cleared tomorrow, because of the steps you've taken at Hayward recently, is there a constraint in manufacturing or anything like that or stuff cannot be moved to Taiwan quick enough to manufacture it?

So the products that are being moved to Taiwan are only the immediate release products. And clearly, we're preparing as best we can for launches, so that we'll be prepared when the product -- when we can get approval. Obviously, we're going to have to prioritize those, because they'll be coming out -- we have a lot of pending products, that have, obviously, been going through the review cycle since the center doesn't stop reviewing products, and it'll be over time. Also, let's not forget that some of these products will have more competition than we anticipated, because we'll be late to some of these markets, and so we'll be managing the business. As we get a better understanding of the timing when the warning letter is lifted, we'll be managing the business and making sure that we prioritize the more valuable launches over the products that are -- that may have lost some value. And we'll be launching things as we get them approved.

And Sumant, RYTARY will be manufactured in Taiwan, so that's -- Haywood is not even a consideration relative to RYTARY.

And clearly, lot of that work has already been accomplished.

That's correct.

And do you still anticipate RYTARY launch in the first quarter of 2014?

Well, I think that with that would be our fondest hope, but the reality of it is, I think, is that will depend on the discussions we have with the FDA. As Larry indicated, we're still waiting to be able to meet with the agency to get their feedback relative to the responses that we submitted to the 483 that we got back in January, February. We'll just have to see when we're able to have that meeting and to understand what, if any, comments, they have relative to those responses. So while it would be my fondest hope, it's not something that I think I could sit here today and say that we would expect to be able to. It's just going to depend on what we hear from the agency at this stage.

Sure. This is a question for Carole. On your pending ANDAs, how many of those would be controlled or extended release? And what will the logistics be for moving them from Haywood to Taiwan, in terms of moving the application?

So I can't give you the exact percentage quite honestly, Sumant. Obviously, one of the big ones is nephylcenidate [ph], which is an extended release, but -- and the other one that we've released that you know about is RENVELA, which is not immediate release. And for the extended release, it is quite an intense process, as you have to make batches, do stability, but most importantly, you have to repeat biostudies. And so I don't -- we haven't disclosed what our plans are and if we're going to be able to, or if we've been planning to move these products. We may very well be planning to launch them out of the Hayward facility because we have to get approval out of the Hayward facility anyway. The ABS, obviously, are not tied to the facility. We don't make those here, and we've partnered most of those, as well as you know that we've talked about Solaraze, which comes from TOLMAR and it's under final review and we're waiting for them to, hopefully, get an approval relatively soon.

Sure. And in terms of the new CEO. So if there were a BD opportunity to come along in the next, let's say, couple of weeks just to throw it out there, would the company have to wait to get a new CEO on board? Or would you go ahead with the BD opportunity?

Absolutely not. As we emphasized, the company is not changing the strategy at this point. So we're going to continue looking at all the BD activities. So if there is a deal possibility in the next few weeks or month, before the new CEO is on board, we will execute it. And the most important is, obviously, all will be involved heavily on this to maintain the continuity on this.

Sure. And after a new CEO comes on board, are all options on the table for him or her in terms of maybe streamlining processes and divisions of the business?

Well, I guess, obviously, the new CEO come on board and may have his or her own thought about running the business. But as I emphasized, the board has been involved pretty heavily on the company's strategy. Therefore, it is, at this point -- I think, unless there's very good reason, otherwise the company should maintain its current strategy.

And that concludes our call for today. Thanks, and if you have any other questions, please contact Investor Relations. Thank you.

Thank you.

This does concludes today's conference call. You may now disconnect.