Amneal Pharmaceuticals, Inc. (AMRX) Q2 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Impax Laboratories Second Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you. It is my pleasure to turn the conference call over to Michael (sic) [Mark] Donohue, Head of Investor Relations and Corporate Communications. Sir, you may begin.

Thank you, and it's Mark Donohue. Good morning, everyone. Welcome to our second quarter 2014 financial results conference call. We issued our earnings release this morning, and a copy of the press release and a link to the webcast of this call are available on the company's website at www.impaxlabs.com. Today, our President and Chief Executive Officer, Fred Wilkinson, will provide an overview of the second quarter; then Bryan Reasons, our Chief Financial Officer, will provide additional details of the financial results. Also joining us for the question-and-answer session, Dr. Calvin Neiman, President of the Generic Division; and Michael Nestor, President of the Brand Division. 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 the disclosed non-GAAP financial measures internally to evaluate and manage the company's operations and to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provide 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 second quarter 2014 earnings release, which can be found on the company's website. With that, I will turn the call over to Fred.

Thank you, Mark, and good morning, everyone. Thanks for joining us this morning, and we're pleased to announce that we delivered another strong quarter, as we made the most of our current product portfolio. We continue to benefit from the outstanding work of our commercial teams as they focused on both revenue and contribution growth. The generics division delivered an excellent quarter with revenues increasing 88% or $82 million over last year's second quarter. In 2Q, we successfully launched the authorized generic of RENVELA, which contributed to both our revenue and margin improvement. On the brand side, we continue to experience volume and sales growth on Zomig nasal spray. Our second quarter net revenue increased 45% to $188 million. This strong performance resulted in non-GAAP earnings of $0.60 per diluted share, almost tripling our results from second quarter 2013. The positive second quarter results in the quarter resulted in $23 million expansion of our cash and cash equivalents, ending the quarter with $413 million in financial resources. We continue to be well positioned to invest both internally and externally to drive future growth. So today marks my 100th day at Impax. And while the past week or so has been challenging due to the recent FDA inspection observations, I remain excited about Impax's future. I strongly believe that we have the right strategies in place and are heading in the right direction. On my first earnings call in May, I discussed 4 areas I plan to focus my attention. While we have made progress in all these areas, there remains more to do. First, I spend a significant percentage of my time since arrival with my quality teams to ensure that we're focusing on -- focusing our resources on the appropriate area. While I would like to have received no observations in the recent inspection in Hayward and in Taiwan, I believe we are making progress. We will continue to commit the necessary resources to address this top priority. As we have already communicated, responses to both Form 483s are being prepared and will be submitted to the FDA within the 15-day statutory period. Information we have already provided today at FDA actually addressed many of the observations we received in the Form 483. This week, I will, again, be spending time with our internal quality teams and the external consultants to again challenge our process and ensure that we're focusing on addressing open items, identifying any additional gaps and allocating resources to complete quality improvement items. Our goal is to be completely prepared for pre-approvals inspections for the number of generic products that are tied to the Hayward facility. Now as for Taiwan, our pending NDA and our pending NDA on RYTARY, we intend to continue to pursue all strategies and tactics towards the ultimate approval of this application. Our formal response will address the recent observations, after which we will contact the FDA seeking feedback. Progress related to these important activities will be communicated once we have clarity. In the meantime, we continue to manufacture and ship products from both the Hayward and the Taiwan facilities. My second area of focus is to optimize the strategies related to the brand and the generic businesses. Successful commercialization of new and existing products is an area where we have done very well, as evidenced by the second quarter and year-to-date results being presented today. We successfully launched our authorized generic RENVELA tablets and our current estimates -- our current estimation is that we will reach the high end of our gross profit forecast on RENVELA of $50 million to $70 million in 2014. Beyond RENVELA, our generic team continues to show growth on the majority of our key generic products. The brand commercial team delivered strong growth on Zomig nasal spray as a result of promotional activities to our target audience. The third area is working with our leadership team, I dug deep into our internal generic and brand pipeline of products and have begun to identify opportunities for improvement in both businesses. We intend to have this work completed in the third quarter and will share our plans with you then. I believe the continuous strengthening and prioritization of the internal pipeline will set the foundation for both short- and long-term growth. And the fourth area of focus is on expanding our product offerings and portfolios with strategic business development projects. In early July, we acquired 2 products from Actavis. We launched generic Ursodiol several weeks ago, and we are preparing for the launch of Lamotrigine OTD tablets before the end of the year. We're spending significant time on larger business development M&A opportunities and the landscape continues -- contains a large number of attractive and accretive opportunities. While I can't comment on the status of these discussions, I remain confident that we will announce a deal in the near future. With cash to net wide, we remain excited about the possible accretive and strategic deals that would sit nicely into our existing portfolio, both in generics and brands. With more than $400 million in cash and cash equivalents, as well as the ability to lever up our balance sheet, we're well positioned to execute on a number of transactions. I'm enthusiastic about our future and look forward to sharing with you our progress as we look to build a stronger -- long, stronger position for the company. Thank you. And if I could turn it over to Bryan to go through detail on the financial results.

Thanks, Fred. I'm pleased to report we had a very good second quarter with outstanding results in our generic products division. Let me begin by providing a few highlights on the quarter compared to last year, as well as talk about the second half 2014 assumptions. Total company revenues increased $58 million to $188 million. This increase was primarily attributable to sales of our authorized generic RENVELA launched in mid-April and our authorized generic TRILIPIX launched in July of last year. We also benefited from sales of our generic Solaraze launched last November. These 3 products alone contributed over $61 million to our second quarter revenues. Excluding new product launches, the continued positive impact of marketing initiatives can be seen in the sequential improvement of our global product sales. Our existing generic portfolio of global products increased almost $13 million or 14% in the second quarter. Our second quarter 2014 generic revenues also benefited from the receipt of $9 million from various partners, which won't recur in the third quarter. They included $3.7 million of profit share from Teva as a result of an annual true-up calculation; $3.3 million received from Parlodel under our agreement related to the launch of generic Astepro. Perrigo and Impax settled the litigation with the brand company and the case was dismissed in June. Based on our settlement, we are not currently selling generic Astepro, but intend to relaunch the product on a future date. We also received a $2 million milestone payment from third-party partner. We continue to be pleased with the commercial performance of Zomig nasal spray as volume in sales continue to increase in the second quarter. Our share of the triptan nasal prescriptions is currently 26%, which represents more than a 23% increase in total prescriptions versus last year. While this is good news, the nasal spray can't make up for the decline in sales of Zomig tablets and ODT due to the loss of exclusivity in May of 2013. For the second quarter of 2014, brand division sales declined $24 million. Total company adjusted gross profit margins increased to 64% from 56%. This is primarily due to favorable product contribution from higher-margin generic products, and to a lesser extent, the previously discussed $9 million received from various partners. The adjusted gross margin of 64% excludes the following items: Hayward facility remediation cost of $8.7 million and amortization and acquisition-related cost of $2.6 million resulting from our agreements with TOLMAR, AstraZeneca and Perrigo. As a result of the strong second quarter performance, we've revised our adjusted full year gross margin guidance to be in the upper 50% range from the mid-50% range. While our adjusted gross margin for the first half of 2014 is 63%, we currently expect our gross margin to decline during the second half of the year. This is primarily due to the lower sales of authorized generic RENVELA, as we believe that all of our remaining allotment of product will be sold through the channel by mid-September. Total adjusted expenses in the second quarter increased approximately $8 million to $56 million. This was due to increased R&D and SG&A expenses, partially offset by lower patent litigation expenses. Total adjusted R&D increased almost $6 million in the second quarter, primarily due to the timing of generic brands and brand projects. Total adjusted SG&A increased approximately $5 million. This was due to: the inclusion of executive management transition expenses and higher expenses for incentive compensation, prior corporate litigation expenses and higher generic selling and marketing expenses primarily from the launch of authorized generic RENVELA. Partially offsetting these increases was a $2.5 million decline in patent litigation expense as a result of a reduced level of legal activity. We ended the second quarter with $413 million in cash and short-term investments. This represents an increase of approximately $23 million from the first quarter of 2014, driven by higher sales. We remain well positioned from both a cash and balance sheet flexibility position to invest in our facilities, continue to fund R&D and pursue strategic business development and M&A opportunities. Thanks for your attention. And I'll now turn the call back to Raquel for questions.

[Operator Instructions] Your first question comes from the line of Randall Stanicky with RBC Capital Markets.

The first one, Fred or maybe Carole, Welchol -- generic Welchol is an attractive opportunity first to file for you guys next year. Do you have a supply agreement similar to what you had on RENVELA in the case that we don't have the warning letter dealt with by that time? And then I have a follow-up.

Randall, so obviously, we haven't disclosed the terms about the settlement agreement, except that we do have a date certain in January. We anticipate having the 3 months of exclusivity. We are pursuing our own application aggressively and hopefully we'll have approval and be able to launch that product.

Okay. Well, I guess, as a follow up to that, maybe for you, Fred. What are the scenarios that can play out with respect to the warning letter right now? Do you need at this point to be reinspected? What's the timeline that you think could be best case? And then, how do you think this plays out from here?

And so, a lot of times the calls we've done through the last 2 weeks, we haven't really predicted what we think what will happen. I think we've just kind of laid out the optionality of what's in front of us and what we're preparing for. What we are preparing for is two things, the response to the Form 483s, so particularly as it relates to Hayward, those will go within the next week, 1.5 weeks. The goal of that -- those responses is hopefully to answer and satisfy the FDA's observations, and the result we hope for would be that they will start to prepare for PAIs. We don't think -- I think there's 2 fundamental processes in order to get approvals, it's PAI inspections. In order to get a warning letter officially lift, we believe, that it is a reinspection. And you could still get to VAI status while a warning letter is in place as evidenced by several other companies in the industry. That's our goal. That's what we're preparing for, and we just need a team to be ready to have a stellar PAI inspection on the next one when they come in.

Got it. And then last question, are you preparing for action on the October night PDUFA date for RYTARY at this point?

We are. As I mentioned in the remarks and also in some of the calls we've had, the response to the Taiwan 483 observations related to RENVELA will go in -- I'm sorry, RYTARY will go in. We anticipate that with that, we will then communicate with the FDA and to see whether Impax has to answer the questions and whether the information provided can be reviewed within the PDUFA timeframe. If it can, we may have all systems go. If it cannot, then I think there's probably a couple of approaches that could be taken such as negotiating extension of the PDUFA timeframe and/or responding to it, following the receipt of a second complete response.

Your next question comes from the line of Elliot Wilbur with Needham & Company. Elliot Wilbur - Needham & Company, LLC, Research Division: Just wanted to ask sort of general line of questioning around the recent inspections. Obviously, the FDA really hammered you guys the last 2 visits, and you certainly have spent a ton of money over the last couple of years. I mean, at least $70 million in terms of the QA and QI programs and also, I have kind of loss count in terms of the money spent on consultants. But Fred, I guess, after your initial observation coming in the company and talking to the folks internally, and then talking to consultants, I guess, when you see observation such as the buildings aren't maintained in a proper state, I mean, it's really hard to understand, frankly, how these things, I guess, can happen after so much investment and so much time has been spent. Either it seems like the FDA is just bound and determined to make your life difficult or your consultants are just not getting in front of the agency here in the mock inspections and whatnot just -- are not doing what they're supposed to do. So maybe you could just sort of comment on kind of that general observation.

Sure. I think it would be completely inappropriate to ever the blame the consultants for the process. We own this process, we use the consultants to help guide us. So this is responsibility of the company and the group that's managing that. That's the time we're spending is to exactly have those same conversations as how could some of the events that happen, happen, and make sure that they will never happen again. I think the FDA did a very fair inspection, it was very professional inspection in Hayward. I was a participant in almost every day of that inspection. I sat in on all but maybe 1 or 2 of the end -- of wrap-up sessions that's -- that they do at the end of each day and was here for the completion. The observations were the observations, of things that should never happen here. We've got to -- we're looking at the gap analysis as to why they did. And the key, as I sit in this chair, is to make sure that they just don't happen again and we put the proper resources behind it, not wasting money but spending money in an appropriate away. So I'm committed to do this right and make sure we get it done right and get ourselves on the right spot. I think the nature of these observations are all answerable, it's clear that we have some gaps that we still need to fill, that's also clear that we have an opportunity to show them just how good we can be and that's the goal. Elliot Wilbur - Needham & Company, LLC, Research Division: Okay. And then I have a follow-up question for yourself and Bryan as well. I mean, obviously, the expectation is that potential strategic activity is going to accelerate pretty dramatically with you on board here. I'm just sort of curious as you're out there thinking about transactions, obviously, you're looking in the range of financing alternatives and thinking about potentially levering the balance sheet here and taking advantage of the cash flow being generated from the generic business. What is -- what are the lenders saying about the current FDA status outside of the fact that obviously you're spending a lot of money, and that it reduces your leverage or EBITDA, but also sort of creates kind of a very unique risk that frankly most creditors aren't really accustomed to. So I'm just kind of curious what kind of feedback you're getting when you're looking into various financing alternatives.

That's a terrific question. We've obviously tested that continually because as we look at it, it doesn't make a lot of sense to spend a lot of time on that if we can't get the resources to complete the transaction. We don't see any softness in that at all. As we put up a business plan for what we think we'll look like throughout the rest of '14 on into '15 and into '16 with the current strategies in place. Obviously, there's a growth curve here that accelerates when FDA is done with us and is still is in existence with our current line of products over the products coming from partner relationships. So I think we're in great shape in that spot. The lenders seem very, very supportive. We've -- I think, probably gives you a little insight into the status. We are in very active discussions with the banks to make sure that, that will stay, and that will stay in place. Elliot Wilbur - Needham & Company, LLC, Research Division: Okay. And then just last quick question for Bryan. Were there any price protection reserves in the quarter on the generic side that you would call out as sort of above trend or unusual?

Not in this quarter.

Your next question comes from the line of Louise Chen with Guggenheim.

So first question I had was with respect to the warning letter, in 483s. So I was wondering if the tone of your communication with the FDA has changed at all there. Second question is, some of your competitors have been able to significantly raise prices for their generic drugs. I'm just wondering if Impax sees any opportunities here. And then last question is just on thinking about the third quarter sales and EPS. Obviously, a lot of moving parts with RENVELA, Adderalls, and some of these other products. I'm just wondering how we should think about it. Are there any sort of significant launches or meaningful launches in this back half of the year that we should be taking to account in our forecast.

Yes. Let me take the first part of that. I don't know what the tone was before, so it's hard for me to tell whether there's a change. All I know is that the right way to manage any relationship with a very important partner is to be forthright, honest, and be participative. And so that's the approach I've taken. I think people here joke that I probably know the FDA inspector better than I do the staff here at this point. So I spend a lot of time with them really listening to what they were saying as they were going through the process, making sure that our team was very appropriately responding, making sure that their inspection could go in a very appropriate manner. So that we're the data real time and give them access to everything and make sure that they didn't waste time waiting for us. I think we accomplished that. You never like the end result when a piece of paper looks like it did, but I think we accomplished what we wanted to do to make the inspection go in a manner that -- we hope they look at us as a very different firm than they may have looked at us before. So tone was -- the way the tone should be during the inspection, I think, we worked very, very professional and very participative in the way we responded to it and I hope they see that. Maybe on the next question on pricing.

Yes. So of course, we look at any opportunity to raise price when it's appropriate. I can't say that -- we didn't talk specifically about specific products here, but we look at our portfolio regularly, if not every single day and look for opportunities in the marketplace to take advantage of services or increased share or price. With regards to RENVELA and AXR in the second half of the year, as Bryan said, we expect to sell through the RENVELA. We have told you we have a fixed number of bottles and we expect that to sell through in mid-September. As of today, there are still no tentative approvals. I wouldn't expect that the FDA is going to issue a tentative approval. I would expect them on the 16th to issue final approval. It is a very challenging product, and we are pursuing our ANDAs and trying to get approval for that. But obviously, have to wait until there's a PAI and ultimately, that we get VAI status. So any of our approvals will be dependent on the resolution of the compliant issues. With regard to AXR, we also are pursuing our application there. As you know, the product agreement does end at the end of September. We do have significant stock in inventory, and we do expect to be able to continue to sell that through 2014, and we'll see how 2015 goes. But at least through 2014, assuming that our market share remains stable and nothing changes in the marketplace. With regard to other launches, I think again, most of those, depending out of Hayward or depending on the Hayward facility in resolution of the compliance issues. We do have some partner products, as Bryan alluded to, Astepro in a partnership with Perrigo. Perrigo is selling that product and its working on strategy to bring that back to market, I'm not going to comment on that because there are competitive reasons not to comment on it. But that would probably be the only launch outside of the [indiscernible] into our internal portfolio.

So look at -- it really has to be said often. So I mean, we focus the team with the strategy as I said, if you don't get launches, how do you maximize the opportunities of the things in your hands? And they did an exceptional job, both in the brand and the generic side are the same. If nothing new is coming, what do I do? And so digging in and maximizing both revenue and contribution are the assets that you have in your hand has been a very successful strategy for us to take. They've done a really marvelous job as a result to the show.

Your next question comes from the line of Shibani Malhotra with Sterne Agee. Shibani Malhotra - Sterne Agee & Leach Inc., Research Division: Just a couple. The first one, Fred, is for you. You sound, I would say, optimistic that the FDA will actually come back within a few weeks to do a PAI inspection. But if you look at the bigger picture in terms of Impax's manufacturing issues, the warning letter and the fact that they just did a 7-week inspection on Hayward, I guess, what gives you the confidence that they would be willing to come back in 8 weeks in time for a RENVELA inspection -- or a PAI inspection for RENVELA? And then, the second question is around capital deployment. How are you thinking about what you're focusing on and the capital deployment given that you still have to take into account the potential remediation cost and whether you go for a brand or generic depends very much on whether RYTARY is approvable or not. So can you just give us some more insight on that?

Sure. So those timings, I think, are yours. I have not put out any estimates on when FDA will be coming back. What I have said is that we just simply need to be ready because we have control of the things we can control and being ready for an inspection. PAI is what we hope will be the next step on this one, that's what I can control. So we just need to have ourselves prepared and ready for a PAI inspection. It's a national process they could take in order to come in and take another look at us, make sure that we really truly done the things that will be in our response to these 483s and make sure that the product itself is in good shape to go. So that we're planning for success, we're planning for those activities. If in fact, it's protracted, takes a longer period of time. Each week that they don't come in, we get better, and that's really the message. And the motivation beyond the team right now is to make sure that we are ready in the short term for any inspection, reinspection, whether that would be PAI or larger. And that we just continue to keep the pedal to the floor on this one, and make sure that we're ahead of the curve.

And with regard to RENVELA and other pending applications, obviously, we continue -- when I say we to pursue them, they are under review at the center, whether or not -- whatever our complaint status is. So obviously, when I say that we're continuing to move those applications along so that when the time does come, they -- the PAI [indiscernible] has to be done. But I don't think we're making many predictions about timing and as -- and those are very challenging products, as we've seen without having any PAIs with the number of applications that are publicly available you know, or filed. Shibani Malhotra - Sterne Agee & Leach Inc., Research Division: Can I clarify on that just before you answer my second question. Would you say you're comfortable with your application and the quality of your application if the inspection goes successfully? I mean, is the inspection the gating factor, in your view for RENVELA?

We continue to work through with the center all in response to all the deficiencies on all of our applications. I'm comfortable with our applications, but there are always issues that you work through both from the API to manufacturing issues, to specifications, so we continue to respond to -- complete response as we get on all of our applications, including RENVELA.

And as far as capital deployment, obviously, we have a very inefficient balance sheet right now. We've got a lot of cash sitting there, so we would have the means and the wherewithal to just do about anything we needed to do on capital deployment within for remediation or anything else. We do have a budgeted amount that we have allocated towards this. There are many programs that are more long term than maybe 6-, 12-, 18-month in length and the capital -- and those programs are underway, so we've got the capital allocated for that. Whether we increase our level of spend during the second half of this year are part of the discussions that we're having here. If we do it, it will be -- funds will not be significant. It would be to do certain things that we identify that we should accelerate on programs that may have been allocated to do in the fourth quarter or first quarter of next year.

Your next question comes from the line of Sumant Kulkarni with Bank of America Merrill Lynch.

The first one is on the FDA issues. We know that you have to reply within the 15-day mandated timeframe, but how much time will it take for you to actually address these observations as a company? And are there any risk-limiting observations there that could take months for you to get the work done on?

Yes, and yes. So the majority of these things are product specific, very focused I think that we can answer and probably, have already formulated the answer and many of them we have actually provided the information as we're in discussions with them during the inspection. There are a few that -- would be things that we would want to make sure that we have looked backwards and identified anything that may be gaps in processes, so that we could assure with confidence that they will not happen on any other product than those identified. So there are things that may take more than just a 15-day timeframe, but in the response, you're essentially laying out your timeline. I think having said that, a continuous improvement program is just that, it's continuous. We're going to make sure that we're always trying to maximize the process that we use in implementing the quality approaches. We've got some system things that we still want to do, and help make sure that we may have automated some of the processes and get ourselves well ahead of the curve. So yes, it's going to be something that will be respondable in the 15-day letter, or 15-day response. Most of them are very specific and are well identified. Others will have timelines as to where we're going. And they'll match up with some of the timelines that the agencies have seen in our monthly reports.

And a clarification, has the RYTARY NDA been totally decoupled from Hayward?

It has. It was not -- and I think with this inspection, that was evident. The RYTARY observations were from Taiwan. They -- that's where the application sits right now, that's the sole manufacturer. We do not have dual manufacturing on this, everything right now is on Taiwan.

And just in case that I tell you timeline slips, how sustainable is the high spend level on the branded side, given that there's a single product that's being promoted right now?

So I mean, as you know, we have 60-some odd representatives, 64 representatives that are out selling Zomig there, getting effective growth out of, actually almost every single territory out there is doing a really nice job with that one. It's an appropriate size for a product in that category. We have pulled back on some of the nonpersonnel spend and some of the other things around it, and we have essentially stopped all the prep work for RYTARY in prelaunch mode until we get a better picture on this. All of those are easily turned back on, so at this particular time, I don't think we're spending inappropriate levels of sales and marketing side for the product that we have in our hands and the preparation for products as they come down the road.

And my last question for you, Fred, is in your prepared remarks, you said that you're looking internally at your generic and branded pipeline and there happen to be opportunities for improvement. We know that, that could be some kind of third quarter info for us. But if you could give us some sneak preview or could you provide any specific examples as to what you're doing there?

Yes. I mean, look, that's something I'm very passionate about. I do love setting up R&D portfolios and making sure that we can give a clear picture to you as to what we're working on, what the estimated timelines are and when we think that you can turn it from an R&D project into a commercializable asset. We are working hard to take many of the brand ideas and accelerate them, so that they get into a Phase III and/or fileable opportunity much sooner than I think is on the page right now. And we're going to prioritize some of those projects. On the generic side, what we're doing is to make sure that as the team was already doing, which is kind of reoriented the prioritization process, so that we're maximizing the opportunity of our R&D staff. That means it's a nice mix of products that are very difficult to do, and those that are less difficult and may have a little bit more efficient pathway towards approval, and then that's the plan, we're going to roll this out as soon as we are really locked and loaded it, so that you can now see where we're going with both pieces of businesses, and I think that's important for you to see.

Your next question comes from the line of David Amsellem with Piper Jaffray.

This is Traver Davis on for David. So just a quick couple. Given that it appears that the manufacturing issues both of Hayward and Taiwan appear to be systematic, do you think it's time to consider pursuing a strategic buyer? And just any general thoughts around that strategy or better maximizing near-term shareholder value?

Yes. No, I do not think it is. I think we're not in the mode right now of putting a process together, putting a -- and trying to find a strategic bio for the company. We think this company has tremendous assets that need -- kind of released and the ability to maximize those. I think our manufacturing process is something that we can resolve and when we do, I think we can release for tremendous potential and shareholder value, so we think that this is the time to make sure that we finish what we started here and get the manufacturing process done, get this turned over to the commercial team that has shown that capability of commercializing projects, and then continue to invest in the quality programs so that we stay ahead of the curve.

Yes, that's helpful. And then just lastly, if I missed this, I apologize. Partnered products that are not -- that are filed out of Hayward and Taiwan, how many of these do you have? How many of these are opportunities. I know you mentioned the one with Perrigo, but are there others that are in the pipeline that we could see launches of in the next 6 to 12 months?

No, we haven't disclosed how many. But we have disclosed that we have another product with Perrigo. Actually, we have a couple products with Perrigo. We have a couple of products with other partners, including [indiscernible], which we've released. And then, obviously, our strategic relationship with TOLMAR. They can continue to submit applications. So those are not in 2014, but they will continue -- we will begin getting some approvals hopefully in 2015 as the review process goes through. And we continue to pursue other partnerships and look at other partners. We see that as not only an opportunity because of the warning letter in Hayward but just because it's a very good way to expand our portfolio, to move in to alternate dosage form without having to do it ourselves because you can't do everything. And so we do continue to look at opportunities for partners and we do have a significant number of our sub filings that are filed.

Your next question comes from the line of Jason Gerberry with Leerink partners.

First a question just on the Hayward front. If we're to incorporate the more conservative set of assumptions regarding Hayward, and by that, I mean, if it's going to 12 to 18 months to get the FDA back to inspect, then you need to get the warning letter closed out then you need product specific PAIs. I'm just wondering if you can quantify the percent of your business that goes away in the next 6 months due to contractual agreements. So I mean, in 2Q, RENVELA and AXR were about 45% of your IMS sales and those obviously, we know about, but just curious if you can quantify if there are any other products where there are contracts where you need to get your own ANDA approved.

Nothing that I can think of it as we're sitting here. But look, I think let me talk to the timeline a little bit. I mean, I think you do have to think in the process of does a warning letter need to be released to get product approval, that's not generally within the process that the agency has utilized. PAIs and inspections can happen with the warning letter in place. What we do have to do is move from OAI status to VAI status, so that's the voluntary and that, that particular point of warning letter can still be hanging over your head to make sure that you are staying well ahead of all the quality issues. That does take a reinspection to be released, but during that time as we've seen with many other companies, VAI status gets you a position where prior approval inspections can occur and products can be improved. So the pessimistic view of 18 months is possible, really, I mean, we could be on that spot. But we are working towards -- planning for the success and preparing ourselves so that PAI inspections could occur, products could be released, and we could be, whether slowly or more rapidly, starting to introduce some of the key products that we have in our portfolio.

And so only to speak to the global business, in general. So first of all, we have told you that RENVELA was a fixed number of all those rising to your assumptions are reasonable. On AXR, however, we have said that we have a base supplier agreement that will end, but we do have an inventory and we will continue to sell, and we haven't said, for example, how long that is, and I don't think that we're in a position right now, but at least through 2014, we believe it's a stable product, I mean, and that could go through further. In addition to that, we have an application in the license and we're pursuing that application and there are all kinds of things that you can do to move products around [indiscernible] and so we are continuing to pursue that approval. Our base business continues to be very effective. We've seen in the industry that there are opportunities for growth as people they drop out of a product in places -- or opportunities to raise price and we continue, as Fred said, to really look at the opportunities within our base business to grow it and to maximize in those opportunities. And so I don't think that we see our business going away just because we can't get approval at Hayward. That said, there are a couple of big products that we'll disclose, Welchol is one, methylphenidate generic is another [indiscernible], that we do hope to monetize, so we do have applications that are dependent on the Hayward facility, and those we're working through. And then finally, the opportunities for M&A are out there up and partnerships. And so we're aggressively looking at ways to diversify our portfolio, so that we are not dependent on our current facilities and we can grow our business. I think there's still a lot of opportunities out there for us to see growth in the global business.

Your next question comes from the line of Marc Goodman with UBS.

Fred, can you give us an update on R&D, where you're spending your dollars, both on the brand side and the generics side, in the pipeline looks like?

I think as we mentioned, we are in a stage of reprioritizing the projects, we're going to probably come out with that sometime within the next month, 1.5 months so you'll have a clear picture of what particularly is in the brand side. On the generic side, generally you don't announce what you have in your R&D portfolio, you just describe to understand the type of products that's due to competitive nature of what will be exposed or that we can sit on, or that there's some full announcement around. Suffice it to say, we are reorganizing things a bit, so we make sure that we optimize the activities that we have in R&D. I think the emphasis is to make sure a bit more near-term opportunities on the brand side and that we have a strong mix between those that are difficult to make on the generic side, and those that are not as difficult to make so that you have a good flow of products.

So how many ANDAs are at the FDA right now?

Carole, you want to do that?

Yes, there are 34 ANDAs right now at FDA.

And then just back on the brand side, Fred --I'm sorry, what you're saying?

That's a moving target, as we file things, it goes up and down, but it's at 34 right now.

And Fred, just back on the brand side, I mean, as you do this and, obviously, you're going to roll it out for the next month or so, but are you considering new therapeutic categories? I mean how are you thinking about this right now?

Yes, I think the franchise that they've been working on in the CNS area is a good area, I think focusing it on the neurology side of CNS I think is a nice tight audience that can be handled by our group. We have Zomig in our hands right now, still preparing for RYTARY to come, so that's Parkinson's and migraine, those are 2 great categories to participate in. I think there may be some very closely associated therapeutic areas or disease states that we may connect with as we end this thing, we're not expanding out into any new disease area.

Your next question comes from the line of Gary Nachman with Goldman Sachs.

Fred, on business development, it sounds like you're getting a lot closer to inking a deal. So what types of transactions have you been focused on? In the past, you said, you were seeing more opportunities on the generic side, is that the case? And then would you still consider doing an inversion given all the noise on that in Washington? And how important is it for you to try and acquire another manufacturing facility that is GMP approved?

Yes, so I think diversification is going to be a central theme of almost everything we do. I think you do that do that whether you've got FDA issues or not. I think the opportunity to have a company that you may connect with that has manufacturing capabilities will be important, they would have to be high-quality manufacturing, for the ones that go forward not backwards on things like that. I don't think we've ruled out anything, and we publically have not stated that we'd ruled out anything, including the opportunity for inversion. There's a lot of noise around inversions that everybody is paying a lot of attention to, but there's still I think an open window to participate in that category. You really don't have to make that decision until you've got one in front of you that you're ready to ink, but we have not taken that off the table.

Okay. And then on the 483 stuff, you said you clearly take ownership of the remediation process. Since those letters, can you characterize what type of internal discussions you've been having to determine accountability? And do you expect any major changes moving forward on the manufacturing side?

I -- they've been very interesting discussions, they've been very direct discussions. I think creating a more, a culture that -- where we have full accountability for everything we're doing is absolutely critical. So I think everybody can just imagine what kind of conversations have been going around in the pipeline. I am looking at gaps of growing, maybe we need to do some improvements in people and in processes. Obviously, that's important. We need to make sure that all the folks involved in this and all of the consultants involved in this are aiming at the right things. That's absolutely critical. And I think my goal is actually trying to accelerate some of things that were theoretically planned for fourth quarter end of this year and first quarter of next year. We've just got to get our processes all honed down and completely intact, so that any observation that anybody would make, whether it be ourselves, whether it be a market section by consultants or whether it be full inspection by FDA come out without any observations.

Okay. And then lastly, Fred, do you think there's a real risk to getting a consent to create Hayward? And if you do, just explain to us how that may change anything, both from an operational standpoint, and then just in terms of how much capital you might need to deploy that could be separate from a warning letter?

Yes. So we have not done any postulation as to what could happen on these things, we're just simply preparing for success. I think, you've seen this take every different direction, and so we're preparing for anything negative that would occur but we are clearly planning for and spending most of our time to make sure that we're moving forward and fixing things. That's how you stay out any kind of -- bad situation, and just making sure that constantly getting better and that you're preparing for anything that was observed here, as well as anything that could -- that we may be observing ourselves and want to be working on more aggressively.

Your next question comes from the line of Michael Faerm with Wells Fargo.

I have 2. The first one is, could you just clarify regarding your comments about the RYTARY approval and Hayward being decoupled? What gives you confidence in that? Have there been any specific comments made by FDA or decisions to that effect, or is it just a lack of observations that lead you think that? And then I have one follow up.

So the NDA document itself was your manufacturing site, manufacturing site in there right now is Taiwan. Since Taiwan is where this product is being manufactured, there were things that were done in Hayward that have been shifted. And so as the inspection happens, which the inspection in Taiwan was a general GMP and a PAI for RYTARY, that took place in Taiwan, not in Hayward. So I think just a simple FDA process that, that's what they do. It's the right thing to that following the application, so I think the approval and the decisions made on RYTARY will be made based on the application itself, which focuses everything in Taiwan.

And Michael, that's also -- that's very consistent with the communication we got from the FDA when they indicated that we adequately addressed the issue side and then the complete response letter that we had previously received, and, therefore, we could resubmit the updated NDA for RYTARY. And they also indicated that they would have to do an evaluation of the manufacturing facility, so further to Fred's point, the inspection relative to Taiwan has occurred.

Great. And my follow up is if you were to acquire an asset that came with a GMP-compliant manufacturing facility, what's involved in terms of time and money to move some of your pipeline products there, relative to the potential timeline of continuing down the path of trying to resolve things and inspections and potential further 483? I know it's very product specific, but just a general sense of the relative difference between those 2 pathways would be helpful.

Yes. So to be clear, I think if we did anything along those lines, this is all speculative discussion, which we probably not go very far with. But we're committed to making sure Hayward is a high-quality manufacturing facility. This is where we are in Taiwan. So anything we would do would be to diversify the opportunities and actually give our operations team a little better footprint as to where they could allocate resources and where products would come from. They needed a little expanded supply chain matrix so that they can say Product A comes from Plant B and C, and what not, so they're moving around. We are committed to make sure Hayward gets into the appropriate status with Hayward, and then we'll continue to get products approved and manufacturing through those facilities whether we buy a company that's got a manufacturing facility or not.

Your next question comes from the line of Greg Gilbert with Deutsche Bank.

I have 2. First, on business development for Fred and Bryan, and maybe Michael could weigh in, regardless of diversification goals or things that would ensure survivability of the enterprise. Is it safe to assume that any deal you would do would offer a significantly better return than share buyback, sort of trying to get at your return-based criteria, not just sort of the qualitative what you could do to improve the company? And my second one is for Carole, is there any evidence that the increasing size and power of generic buyers for the U.S. market is doing anything to make life harder for generic manufacturers?

So we deal on the on the BDA and M&A front, we do have internal rate of return hurdles, and we do believe they're higher than the return on a share buyback.

And in regard to the consolidation of the customer base, we totally believe that we can play in the market and its product-specific, and we haven't had any real problems or issues with the customers.

Your next question comes from the line of David Buck with Buckingham.

I'll try to be short. For Carole, can you talk a little bit about what role pricing had in the quarter? For Fred, if we look at -- you talked about using the balance sheet and a couple of different options. We've seen some players Endo, Par, Akorn and Sun essentially start to become a roll up vehicle for some of the smaller generic companies. Is that what we should be expecting from Impax given your significant cash resources? And then for the branded business, Fred, if you look at RYTARY, obviously that's the pending NDA of note, but do you have enough value-creating brands, in other words, that will be formulary approved and not be subject to prior authorization given some of the changes in formularies we've seen highlighted recently?

So on pricing, obviously, we don't comment on specific products or what's going on in the market. There are opportunities and we continue to evaluate our portfolio and take advantage where we can.

Yes, and I think on the business development front, I mean, most of the transactions happen when 2 parties get together. I think our objective is potentially not to be considered to be a roll up company, but a company that's doing strategic transactions that are accretive that they would then end our strategic processes and our strategic goals. But our intention is to continue to get larger on the generic side through acquisitions and through internal growth and to continue to get larger on the brand side through products coming through the R&D portfolio and through potential strategic relationships. So I think equating us and comparing us to companies that I think everybody can look alike or everybody can look different, but I think our approach is going to be very strategic in nature.

And David, relative to the managed care positioning, in fact, what we have seen with Zomig is we've actually been able to improve and increase our managed care position as opposed to being disadvantaged, and we expect that would occur also with RYTARY.

Your final question comes from the line of Ken Cacciatore with Cowen and Company.

Fred, this is more of a human nature question. I'm just trying to understand that all of the personnel that's been there for a few years and the consultants you spent millions of dollars on, I just still don't understand how you have any faith in what they're telling you. So I'm just wondering, do you have someone external that you can bounce off of what these folks that have been part of this issue for a long time are telling you to kind of give you more faith in what it is you're trying to convey to us?

Sure. I mean, obviously, there's -- I've been doing this for 30-somewhat years, I've been running into a lot of people that have helped guide me in different parts of your life. So I've taken a lot of advice and guidance from friends and some people I know in the industry. But the confidence I get is from being around inside the shop here. What I do know many of the people here. I've also witnessed the -- a very light inspection and how the team responded to the activities that they needed to respond to. They were very, very good at what they did there. There were some things that were identified that were -- should not have happened and I think everybody recognizes that. I think sometimes you get consultants' fatigue, and we'll probably adjust some of the activities there, but the key here is we've got a progression curve that's going, it's going in the right direction, may not be going as fast as everyone would want it to go, but in the 12 weeks I've been here, I've gained confidence, and I lost confidence in our ability to come through this process.

Thanks, everyone, for joining us this morning. If you have any questions, please feel free to give me a call at my office at (215) 558-4526. Thank you, and enjoy your rest of your day.

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