Amneal Pharmaceuticals, Inc. (AMRX) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is Arnica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Impax Laboratories Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mark Donohue, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining us. Welcome to Impax's fourth quarter and full-year 2016 earnings conference call. A copy of the slides that will be presented on this call are available in the Investor Relations section of Impax’s website and impaxlabs.com. Our discussion today may include certain forward-looking statements, and actual results may differ from those presented here. 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 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 the GAAP to non-GAAP measure is available in our fourth quarter 2016 earnings release and in today's slide presentation, both of which can be found in Company’s website. Agenda this morning will include Kevin Buchi, our Interim President and Chief Executive Officer for providing some remarks on 2016 results and the business update; Bryan Reasons, our Chief Financial Officer, will provide details on the fourth quarter results and our 2017 financial guidance. We'll then open the lines up for question-and-answer session. Also joining us for the Q&A session is Doug Boothe, President of the Generics Division; and Michael Nestor, President of the Specialty Pharma Division. And with that, I'll turn the call over to Kevin.

Good morning, everyone. Our results in 2016, much like those sector-wide, reflect headwinds that significantly impacted our Generic business. Specifically, our business was impacted by new and aggressive competition on several of our generic products as the FDA accelerated the rate of ANDA approvals. Additionally, the effects of the consolidation of payers and customers put pressure on our results. As a result, total company revenues declined 4% to $824 million. Generic sales declined 15% in 2016 compared to the prior year, principally driven by significant pricing erosion of 22%, which was partly offset by 7% increase in volumes. We experienced positive momentum in the Specialty Pharma division which delivered the 46% increase in 2016 revenues compared to the prior year. This was due to growth across the portfolio. Despite the recent challenges on the generic side of the business, several products in the portfolio delivered strong growth. In 2016, we invested to expand the supply and build awareness around our epinephrine auto-injector so that we could provide a low cost option to patients with life threatening allergies. We work behind the scenes, building awareness of our product as the go-to choice with physicians, pharmacists and patients, and saw good traction with these efforts. In addition, we made great strides in expanding access to Medicaid patients and are now listed in every state that maintains a formulary. These efforts help to more than double our market share from 4% to 10% and drive 139% increase in sales in 2016. In addition, earlier this year we made a strategic decision to increase volume at the expense of price. We partnered with CVS as an opportunity to provide greater access to our low cost epinephrine product across their entire store network which has resulted in dramatic market share growth. [Indiscernible] from ER. In the second quarter of 2016, we move swiftly following the departure of a competing generic from the market to capture additional share. As a result, our market share grew by more than 10% and sales increased 23% compared to 2015. As I mentioned on the specialty pharma side, we delivered solid growth across the portfolio in 2016. Rytary sales grew 74% compared to the prior year almost all of which was due to volume increases. In 2016, we continue to invest in the future success of Rytary. We expanded the size of the sales force to increase frequency of calls on key positions. We clarified and simplified our marketing messages and launched the third-party patient support program called myRytary. Since August of last year when these changes were put in place, we see an increase in prescription among patients referred primarily from the general neurology community. Fourth quarter 2016, saw a 12% growth in prescriptions relative to the third quarter. We are optimistic that our simplified marketing and dosing messages will continue to drive prescription growth amongst general neurologists. Sales of Zomig nasal spray grew 9% over 2015. This in spite of our moving into a second position detail behind Rytary. We continue to seek solid growth from general neurologists, headache specialists and pediatricians. Within our parasitic worm franchise, sales of Albenza grew 43% compared to the prior year. In late March we launched Emverm, the only FDA approved prescription drug for pinworm. We have experienced a slower shift from Albenza to Emverm and anticipate that we continue to do targeted non-personal promotion programs to increase awareness of Emverm. Turning to our pipeline, which we believe offers a solid platform for growth. During 2016, we received six Adderall approvals and three tentative approvals. Impact was to build a diversified generic pipeline and solid oral and alternative dose for products. Generic application is pending at the FDA includes 23 products with a third of this pipeline being a potential first-to-file or first-to-market opportunity. Our R&D group has another 20 products under development, 17% or 85% of which we believe have the potential to be first-to-file or first-to-market. We developed a number of attractive future opportunities including the generics Welchol, Renvela, Vytorin and Concerta. While we continue to see the laser approval generic Welchol and Renvela both products continue to be soft R&D priorities. Within the Specialty Pharma pipeline, our lead product is IPX203, our next-generation of Rytary. We are enrolling patients in the Phase 2b multi-dose study and currently expect to complete this study in mid-2017. In order to continue to generate growth and create value, we need to focus on our strengths as an organization. We must continue to focus on sustainable quality in compliance to ensure we remain a reliable suppliers to all customers. We need to continue to select the right products of both our internal and our partnership R&D programs. We need to maximize new opportunities by developing, filing and launching new products on time as well as capitalizing on market opportunities within the current portfolio of products. We need to ensure we are being effective in capturing new business across our generic and specialty portfolio. We need to reinvest in R&D on the generic side of the business and generate more ANDA and we need to expand our brand pipeline. We need to diversify via select partnering and business development activities in both brand and generic businesses, having more short-term goal will help to offset an unexpected downside on the particular product, strengthen our portfolio and create long-term stockholder value. And finally, we need to continue to operate efficiently. Over the past couple of years, we've taken steps to reduce costs and improve efficiencies which we expect to produce estimated annual savings of between $40 million and $50 million by 2018. We've also undertaken a thorough review of our product portfolio and cost structure that will enable us to identify incremental operational improvements and allow us to reduce our debt and invest in growth initiatives. Now, I will turn it over to Bryan to provide more details on the financial results.

Thanks, Kevin. Good morning, everyone. I will briefly touch on our adjusted results for the fourth quarter of 2016 compared to last year; cover the impairment charges and the segment results then conclude with our 2017 outlook. Moving to Slide 11, total consolidated revenues for the fourth quarter declined 30% to $198 million. This decrease is primarily attributable to an $88 million or 39% decline in our Generic Division sales partially offset by 7% increase in our Specialty Pharma Division sales. Our GAAP gross profit and gross margins for the fourth quarter were negative due to a $231 million non-cash impairment charge. On an adjusted basis, gross profit margin declined as a result of lower sales of higher margin products. Adjusted earnings per share declined $0.16 in the fourth quarter compared to $0.52 last year due principally to lower generic sales. Moving to Slide 12, during the fourth quarter we recorded intangible assets, impairment charge totaling $254 million of which $231 million was recognized in cost of revenues and $23 million in R&D. The impairments resulted from continued pricing erosion increased competition and delays in expected product launches as well as product discontinuations. Over half of the $231 million impairment charge was far epinephrine auto-injector which was acquired as part of the Teva transaction in March of 2015. The charge was triggered by current and projected price degradation as a result of unexpected changes in the pricing environment and additional competition as compared to our acquisition model assumptions. Additionally, we experienced further price reductions on certain other products acquired in the Teva transactions during the fourth quarter which resulted in $57 million of the impairment charge. Moving to our fourth quarter 2016 segment results on an adjusted basis starting with the Generics division, revenues declined $88 million to $139 million driven primarily by $80 million decrease in sales of diclofenac gel due to a significant increase in competition. In addition increased competition and/or pricing lower pricing led to lower sales of metaxalone, fenofibrate and amphetamine salts ER. Quarterly pricing in the Generic division including a 73% decrease in average net selling price of diclofenac gel declined 29% in the fourth quarter. Those declines were partially offset by volume growth from epinephrine auto-injector and oxymorphone ER as well as from new product launches and the addition of the products from the Teva acquisition. Adjusted gross margin of 33% in the fourth quarter of 2016 was down from the same period last year as a result of lower sales of higher margin products. Moving to Slide 14, the Specialty division results, revenues increased 7% in the fourth quarter driven primarily by 38% increase in sales of Rytary, a 13% increase in sales Albenza and the addition of sales from the March 2016 launch of Emverm. Adjusted gross margin of 79% was down to product sales mix. Turning to Slide 15, and a look at our capital structure at the end of 2016. Our net debt was $815 million and our leverage ratio of net debt to adjusted EBITDA was approximately four times. Earlier this week we elected $50 million voluntary payment toward the outstanding term loan. This reduced term loan balance to approximately $345 million. We expect to continue to meet our contractual payment obligations and opportunistically use excess free cash flows to further reduce our debt. Moving now to our 2017 financial guidance which is based on our current expectations, actual results may differ materially. Moving to Slide 2017, as we mentioned over the past year our Generic business has been affected by competition and pricing pressures as a result of consolidation of our customer base. We expect the competitive environment to remain challenging in 2017 as price of erosion will likely remain in the high single to low double-digit range. These pressures will continue to weigh on our generic revenues and could result in continued volatility a product sales and profitability. In addition, uncertainty around the timing of market dynamics a several of our key launches adds to this expected volatility. In light of this any accordance with company practices prior to 2016 we’re not providing revenue and EPS guidance. We provided other guidance metrics in this morning's earnings release. That said, I'll share some general thoughts on the Generic and Specialty portfolios. The margin guidance provided for 2017 included minimal contributions of several approved generic products that we currently expect to launch in 2017. Additionally, our outlook includes the launch of generic Vytorin with tentative approval and currently believe we could receive final approval when the patent expires in late April, we are planning for launch, but expect at least three other generic competitors. Regarding generic Renvela and Welchol pending ANDAs, they continue to go through an extensive review by the FDA. These potential first market opportunities continue to be a top priority for our R&D team. We currently don't expect approval of either of these products until late 2017 at the earliest, approval maybe delayed until 2018. Given the continued impact of competition and pricing, the uncertainty regarding product approvals and significantly lower sales by diclofenac gel compared to the strong sales of this product in the first quarter of 2016, we expect our total generic sales decline in 2017 versus 2016. Within the Specialty division, as Kevin stated, we are currently seeing growth in my Rytary scripts as we begin to see the effect of the larger sales force, simplified marketing and dosing messages and the myRytary patient support program. We remain optimistic that this growth trend will continue in 2017. We currently anticipated Zomig nasal spray will continue with modest growth trend this year. On Albenza, we're closely monitoring the potential generic competition and applying to launch an authorized generic – if our generics were approved. Turning to the next Slide, total Company gross margin as a percentage of revenue is expected to be in the range of 47% to 49%. Our margin is expected benefit from the closing of the Middlesex manufacturing facility and the second half of 2017 and from projected growth of Rytary and Zomig offset by continued generic price erosion. Turning to R&D guidance, which includes patent litigation expense, we expect it to be approximately $90 million to $95 million across the Generic and Specialty Pharma division. This represents a modest increase over 2016. For SG&A spending, we are assuming roughly $190 million to $195 million for 2017. This increase over the last year reflects the full-year impact of the expanded Specialty Pharma sales force, which was completed in July of 2016. Adjusted interest expense is expected to be around $30 million. The increased over 2016 is due to the interest on our $400 million term-loan. To reiterate Kevin’s comment, we are undergoing thorough review our operations in cost structures in an effort to further improve efficiency and free up resources to reduce our debt and invest in growth opportunities. We look forward to sharing the outcome in the coming quarters. I’ll now turn the call back to the operator for Q&A.

[Operator Instructions] Your first question comes from Gregory Fraser with Deutsche Bank.

Good morning, guys. Thanks for taking the questions. This is Greg Fraser on for Gregg Gilbert. Question on epinephrine and whether you can help with the revenue contribution in Q4 and how we should think about that franchise 2017?

Yes, [Bryan] will join on to that question.

Yes, certainly our epinephrine product – it’s a seasonal item with Q3 being the most strongest – sales in the quarter. Also in the fourth quarter, image prices were coming down as a great amount of market uncertainty regarding Mylan authorized generic launch and we were certainly active with our expanded production and planning core key retailer players, which of course we announced in early January with CBS as well as others on that item.

If prescriptions share remains in the mid-20s, will you have any difficulty in supply in the market?

We believe we are poised to support that level of market share throughout the course of 2017 and continue to invest and additional capacity of course we have many, many customers who are eager to take our product in light of the success we've seen in CVS program.

Got it. And then on your expectations for high single-digit to low double-digit price erosion to 2017, does that reflect lower erosion for a large part of the portfolio and higher erosion for certain products? Or are you generally anticipating erosion of that magnitude across the portfolio?

Yes. I think you got it right. I mean certainly in 2016, we experienced really dramatic pricing erosion with diclofenac item. Of course, we have some new launch items that will contribute revenue and we have across the portfolio we've seen the continued pressure across the big consortiums, but we certainly also are driving for targeted market share expansion and of course with the epinephrine and much higher volumes on what is a lower [indiscernible] price.

Got it. And then just last quick one, on Renvela and Welchol, have you still view those as potential first-to-market opportunities?

Absolutely, I mean these are two items that are very, very complicated ones that we've invested. But we've have a time resources and we are in very active discussions with the agency both ourselves with [indiscernible] as well as our DMS partner. As described in the announcements, we are devoting significant resources in getting those products over the finish line.

Thanks, Greg. Next question please.

Your next question comes from David Amsellem with Piper Jaffray.

Thanks. Just a couple, so first on Adrenaclick, just in light of the CVS arrangement, can you provide specifics on where gross margins could decline to as 2017 progresses? And then secondly, on Emverm you talked about some challenges in that market. Can you talk about the extent of over the counter competition and how much of the headwind that is just in the class. And then lastly what are your thoughts on the upcoming year panel, ER panel, what to make of that and risks around that your product specifically? Thanks.

Why don’t we start with Bryan on margins and go to Michael on Emverm and then back to Doug for [Opana]?

I won't give specific product level margins, but directionally we made the decision to lower price to grow market share, overall epinephrine auto-injector still has a higher margin than the overall company margins. And then I'll turn it to Doug for Opana question.

Yes, the question were up Opana, we are fully actively monitoring the upcoming adcom [indiscernible], were notified as for all players in the oxymorphone state. It’s not just related to Opana. It’s all earphone products, and while we’re not presenting, we will be actively following it, and some of these around the risk benefit of all OxyContin product as well as potentially for the Federal Registry notice. A part of the meeting will be to the criteria to claim reduced returns versus an item for the endo products. And again back to epinephrine auto-injector, regarding CVS partnership, first excellent example of 4P is in place, we had the right product at the right placement at the right price point and the right proposition and our item being not a AB rated substitute for EpiPen and the opportunity to get great distribution, great awareness and social media support for that item and we are seeing with our increased capacity and great interest in other players. And as Bryan mentioned it still is a very, very highly valuable item for us and we continued to perform well at the product.

And then Michael, I think the final question was on Emverm and the impact with the OTC product, competition from the OTC product.

Thanks Kevin. So David, that would be track, which is prescription rights from the standpoint of at least share that the OTC product had, it probably around about in total 8% to 10%. I think the larger influencing fact for us with managed Medicaid relative to Emverm. And what we know from having now promoted Emverm out this is physicians – for many physicians if the product is not on managed Medicaid it’s difficult for them to be able to write the product. So have some contracting work to do with payers specifically with the Managed Medicaid sector that remains a priority for us and we expect to see that activity come to light probably by mid this year.

Thank you, David. Next question please.

Your next question comes from Andrew Finkelstein with Susquehanna.

Good morning and thank you for taking the question. I was hoping you could talk a bit more about some of the upcoming patent litigation expectations for the Zomig decision and Rytary as well. If you could talk about how to think about the first quarter of the year for the brand business in terms of the impact of co-pay resets and how to think about the run rate for that business going from 4Q into 1Q? Thanks.

Yes. Michael, you want to take a shot at that one?

Sure. So let's kind of go through the patent aspects first, so for Rytary, fact discoveries proceeding and claim construction briefing has concluded in the case against activists and the trial is expected in the fall of this year, so probably September, October timeframe. On Zomig nasal spray, we had a trial in early September of last year, post trial briefing has been completed. Lynette has indicated that they will not sell their generic product to Zomig nasal spray, but prior to March 31 and the court has indicated it will render its decision on it before that date. So par has been stayed ending the district court decision in the Lynette case and we remain positive about the patents that we have relative to Zomig nasal spray. Relative to Q1 and the payer resets would expect a little bit of softening, and in fact we're seeing a little bit of softening in scripts in January, but we are starting to see prescriptions now climbing on a weekly basis and would anticipate relative to Q4 probably about the same or possibly even a little bit higher.

Thanks very much.

Your next question comes from Elliot Wilbur with Raymond James.

Thanks. Good morning. Caught me by surprise. First question is just around your gross margin outlook for 2017, appreciate given the volatility in generic business makes it difficult of course in providing revenue expectations, but obviously to provide gross margin guidance yet to have some idea of sort of what you're expecting the product mix to look like in 2017 I guess just sort of the rough math. I mean it assume to me you did anywhere from 200 to 500 basis point improvement in overall Generic segment gross margins versus a year in rate to kind of get to the full-year guidance range, so I’m just kind of curious, obviously new approvals would be a huge driver of that, but is there anything organically that we could think about maybe helping to kind of bridge the gap there that maybe is less appreciated and just some of the more high profile approvals.

Elliot thanks for the question. It's a combination of some smaller approvals, the most significant which is Vytorin would drive slight margin, but really it's product mix and some of the products that we see more stability or the higher margin products like epinephrine auto-injector, oxymorphone, so it's really been driven – the couple 100 basis points improvement is driven by predominantly product mix. Doug?

We have the full-year impact of the Teva products we acquired like [indiscernible] lower revenue model still provide nice margin contribution.

And then on the cost side, we’ll start to see the impact of the Middlesex closure reducing our overall cost on the gross margin.

Okay. I have a follow-up please on couple of the more high profile ANDAs on file, specifically Renvela, Welchol, Concerta and not sure what the state of interaction is with the FDA on these products, but would you be willing to disclose or tell us if in fact you receive CRLs on any of those products at this point in time?

Mr. Wilbur, you may proceed with your question.

Yes. Did you guys hear my question or no?

Yes. You did such a great job of the question. I think you burn the phone line for it.

I thought I asked the wrong question, I got cut off.

No. I mean we haven't specifically disclosed the timing of our [indiscernible], but we have received response in all three of these applications and we are swiftly working to respond and maintain the cadence of the review Q on all three. As I mentioned both us with the ANDA holders as well as our DMF partner, a lot of work going on and I think great progress on very, very complicated products.

Okay. But just be perfectly clear because no doubt be asked, when you say you have received response as we are talking about officially CRLs, here not just sort of ongoing dialogue correct?

Correct, and again CRLs information requests, again the response cycle is dependent upon the type of response you get from the agency.

Got it. Just one last question for Kevin, could you just talk to us in kind of a 30,000 foot view on sort of your views on capital allocation opportunities going forward, obviously the Company has put a lot of money to work in the generic space and the time of some of these transactions, they look like very good deals and then we've seen a significant change in environment and they haven't look so good. But just think about going forward, you talk about investing in the specialty business in the press release just maybe just kind of rank order, so what you think the key near-term priorities should be in terms of deploying a discretionary capital? Thanks.

Look I think – thanks for the question. I think the highest priority at this point in time is honestly to improve our capital structure and pay down the debt. I think we need to get ourselves more financial flexibility to be able to do future transactions. We clearly need to build up both generic and our branded pipeline, both from an internal perspective. We need to generate more opportunities internally, but also from an external perspective. The R&D on our generic side, we invest more on that side internally when we do on the brand side internally and so we generate more opportunity. I think opportunities on the brand side; they are most likely going to come from business development types of activities. And I don't know how we prioritize honestly between the brands and the generic side. I think you need to be opportunistic and take advantage of the best opportunities that appear, but clearly paying down debt needs to be an opportunity or needs to be a priority in the near-term.

Thanks, Elliot. Next question please.

Your next question comes from Randall Stanicky with RBC Capital Markets.

Hi, good morning. Thanks for taking my questions. This is actually [indiscernible] for Randall. And just a few, so you mentioned that you can provide 2017 revenue or EPS guidance of ongoing volatility within the generic division. I guess just how confident do you feel in the pricing or is your commentary been around high single low double-digit range given that clearly the volatility in such that you are unable or perhaps unwilling to provide full guidance just that this ability around the business and if there is anything that could surprise? And then I have a follow-up.

Yes, so again I mean as we did our forecasting continue to our forecasting we're always looking at the market dynamics always looking at our positioning our market share of course where we are placed with certain accounts and of course the ongoing to cycles so that's all factored into our expectations that of course unexpected significant competitor on one of our items would effect that. But again look at our portfolio, the oxymorphone product, the epinephrine auto-injector some of the other products we designate all have limited competition and one as we expect to be in that situation for some near-term. So coursing opportunities to exceed it for example on Vytorin, there are four paragraph, four, five is only is two tens of approvals right now. So while we are anticipating expecting multiple approvals come April. The situation could be different of course operation concurrent to greater opportunity, but we are managing your expectations there.

Got it. And just a quick follow up on the pipeline. So other than generic Vytorin or any other updates certain opportunities that are set at this year?

Yes, we have one of tens approval that we believe would be subject to the 108 exclusivity, couple of additional strength in that opportunity.

Got it. Thank you.

Your next question comes from Sumant Kulkarni with Bank of America.

Good morning. Thanks for talking my questions. First one on epinephrine, is it fair to assume that you're selling every single capacity you can make right now and how could you expand capacity on that and by how much or what time could you expand that by. Second what gives you the confidence that you could be first to market on generic Renvela and Welchol given that others might be having similar discussions with the agency? And the third and last one is a bigger picture one do you think brands and generics belong together at impacts.

Maybe I will take the branded generics together. We are investigating kind of all possibilities with the future of business. We don't have a full time CEO in place, but we are doing the analysis that would support decision going forward as to how the business should be organized and we've made no decision as to whether or not to belong together or not. I think they can belong together as number of successful companies who have both branded generic divisions. Having said that, the two tend to operate in very different manners, and so I think you make arguments either way. On epinephrine I will turn it over to Doug Boothe.

Yes, certainly we against part of the tracking this product and having similarity over the years there is a seasonal curve we clearly capture that into our demand planning our forecasting and our market share aspirations both with TDS as well as other many other key retail partners on the side and also partners. So we believe we are well-positioned to both support the current run rate potentially some additional more and still maintain inventory to through the peak season, which support from our external partners they have been terrific on it. Third question Renvela…

Yes, is generic Welchol and Renvela what gives you confidence that you could still be first to market given that other applicants might also be having similar discussions with the agency?

Well I mean certainly are having similar discussions and we've been tracking those publicly stated their sort of commenting that similar timeline maybe even a little bit after these are two very, very complicated products since our filings back in 2009, the agency is repeatedly changed by equivalents guidance of which has been the things that challenges that we've been overcoming and we continue to press forward and we believe I've said before that we are close to the finish line on these items subject to once again getting the agency to do concur. These are products that are potentially high value both to us but more importantly high value to consumers to our customers and of course to the overall health resistance. So I think your incentive to find a path for in the challenging items ones, which are right in the in house impact the development strategy portfolio selection and once which we believe will be competitive yet have an opportunity of sustain value.

Thank you.

Your next question comes from Dana Flanders with JPMorgan.

Hi, thanks for the questions. My first just on the Teva acquired products, can you give us what the sales were for that that business of this quarter and just how they performed it sounded like there was some additional price erosion from those products. So was that Pulmicort or something else? And then in the press release, I notice call that competition in the fenofibrate market, which I believe is new. So can you talk a little bit more about what's going on there, and then I just have one quick follow-up after that.

Yes. Thanks, Dana. On the Teva, since we revised our model, last quarter we are generally on target, we took a little bit of pricing, we built a little more pricing degradation into our forward model, but it wasn't it significant, so I would say that is generally on target since our kind of revised model. And then I’ll turn it over to Doug on the fenofibrate.

Yes. On fenofibrate, we participate in three different versions of that and we did see an additional competitor on the tablet item which of course is effectively market share balance. One of the items, we are one of two players and in other items we were four now. So that has affected our overall market share in our pricing to maintain the volume that we have.

Okay, great. And my quick follow-up, I know you mentioned leverage - and that leverage was about four times, but now generics are declining in 2017. So just where do you expect leverage to go throughout the year and just comfort with your leverage position in 2017? Thank you.

We are not going to give projected covenants, but we don't expect to chip governance in 2017.

Thank you, Dana. Next question please.

Your next question comes from Louise Chen with Guggenheim.

Hi, this is [indiscernible] for Louise. Thanks for taking the question. Can you provide an update on your collaboration with Paragon, IGI, Banner Pharmacaps and Tolmar to bring additional dosage farms add to the market?

Sure. Again, as part of our overall development strategy we’ve open internal focus which is predominantly on extended release dose development which is our core competency as well as, we partnered with many select players such as Paragon and telaGen, IGI and Tolmar on alternative those items, and we actually continue to make progress, we had several filings in the last year with some of these partners and we actually have an expected filing later in this quarter which will be a high value potential first-to-market generic item with one of those partners which I think attached to the value of these partnerships.

Thanks.

Your next question comes from Marc Goodman with UBS.

Hi. This is [indiscernible] on for Marc. On the topic of pricing could you give us a sense of whether there's been further deterioration and how you would think about the pricing dynamics in the last couple of months? And also if you could talk to how the consortiums have been impacting that outlook? And have you already started to see any impact from the McKesson consortiums and then there's a Claris 1 coming in later in the year. How have you incorporated the impact from those into your guidance? Thanks and I might have another one.

Yes. Well, again certainly as part of our forecasting into this year, we looked at the impact of the consortiums and the certainly the most recent one will be in the Claris 1, McKesson and Wal-Mart. Actually guys ongoing where this cycle goes live in April and of course we are reviewing the proposed terms of the agreement. Again, I always bid cycles with both opportunities and challenges. Of course, we have a portfolio, here we have some items where we believe we are well represented other ones we opportunities for targeted share expansion at giving the right price in contribution margins, so we are doing all of this and trying to find a way to secure and maintain the business we have is valuable and we try to find opportunities to offset any of the pricing challenges which are natural on our ongoing bid cycle.

But just as a follow-up, could you give us a sense of what type of – or how much of an impact is that 2% or 3%, 5% from the McKesson, Barleans consortiums and do you expect another couple of percentage points from the Claris 1?

I really don’t speculate on that, we are going into the cycle, we do look at our business across all of the channel mix we have and we are aware of the consolidation, it certainly is something that we do factor in holistically, but of course as I say, we look at every bid as both an opportunity and challenge. It depends on what products we have at which counts and of course what the competitive dynamics are. We think we are well-positioned on several of our high value limited competition generics and we try to find a way for maintain that presence in a way that contributes meaningfully to business.

Got it. And then just another question, you talked about the $40 million to $50 million cost savings, could you remind us how much of it was realized by 2016 if any? And then maybe any color on how much you've baked into for 2017? Thanks.

The large majority of that is, it's really starting in 2017. A lot of it's related to the Middlesex closure, which should be completed mid-year.

Thank you.

Your next question comes from Tim Chiang with BTIG.

Hi, thanks. Just a couple questions, I mean I think firstly, what do you guys think you'll have an announcement for permanent CEO I know that you guys haven't said, but just given the volatility you guys are experiencing in your generic business. I would think that the sooner you decide that the better for the Company first of all? And then secondly, what is your capacity utilization right now across your manufacturing plan?

All right, I agree with you. I think we need to – obviously we need to make a decision on the full-time CEO rapidly. Having said that, we need to be careful as well to pick the right candidate, the board has an ongoing search. They've retained executive search from – I believe they have a list of candidates that they're reviewing, doing interviews and so I think the process is moving forward well. Well, I can't give you specific timing, I hope that we would have an announcement in relatively near-term. But agree that is an important one. In terms of capacity utilization, we have two manufacturing sites that we will continue operating one in Hayward, California, one in Taiwan. Our overall capacity utilization within the network of those two facilities is actually relatively low that is one of the challenges we face going forward. We’re a high cost manufacturer and deposit as a result of low utilization, more than half of our products and certainly the lion’s share of almost successful products and manufactured by contract manufacturing organizations.

I mean is I know that regionally the plan was to move a lot of the contract manufacturing over to your own in-house internal manufacturing is that still the case?

There were some products that we could move. Our internal manufacturing is pretty much all solid oral dose, so I think like epinephrine auto-injector those types of products really cannot be moved internally. Other products, we will certainly review and we’re reviewing the overall utilization within our network to see if there additional efficiencies we can get out of our manufacturing operation. But you’re right there is a key area of focus for is going forward.

So when you look at the whole supply chain and we said this previously, we're closing Middlesex or moving some of those products to either Taiwan or Hayward. So we're taking capacity out of the supply chain, moving it and so we're in a more efficient utilize those two plans. We’re also as part of the Teva acquisition over the next couple years will be moving some of those in house as well. So all this will help from those utilization and then of course as we both said in our prepared remarks, we're going to continue to look at what the optimum structure and where we can continue to become more efficient.

Okay, great. Thank you.

Your next question comes from Gary Nachman with BMO Capital Markets.

Hi, good morning. Kevin, can you give us a little more and some of your takeaway so far from the portfolio review that you mention at a high level a fair a good number of generic products that you would expect to discontinue at some point? And then I have a follow-up.

Yes, I don't think I would look to little bit discontinue generic products. I think its more, more competition comes in against particular generic. As we mentioned earlier, we tend to be a relatively high cost manufacturer. So it never going to be the person that's going to be able to compete in a heavily genericized market against the Indian manufacturer, who's got conversion across $10 and something like that. I think we got a good portfolio of near-term launches on the generic side. I think Welchol and Renvela, Concerta can all be very, very interesting opportunity source. I think we need to strengthen the pipeline for launches in 2018, 2019 timeframe, we are working on that. I think the branded products are doing well, I think Rytary is a nice growth opportunity, it continues to grow well. I think the increase in the size of the sales force last year was a good move. I think we'll see traction from that. I think we need additional products in the pipeline for the branded products as well. IPX203 is an interesting opportunity. It's a good follow on molecule, but in many ways it's simply going to cannibalize Rytary to a certain extent, right. So it’s not really a - it's not going to provide a huge amount of future growth in that market to protect the franchisee. We need to look for additional opportunities there as well and I said we clearly need to work on our cost structure and make ourselves more efficient.

Okay. And then when you say generic revenue will decline in 2017, I know you are not being specific, but should we think of the order of magnitude in the high single-digits or low double-digit range consistent with the price erosion you're expecting or will there be a lot more share loss on top of that?

I'm not going to kind of get into that level of detail. I mean the reason that we didn't want to provide revenue guidance in 2017 is both because of – there is a lot of unknowns in generic side of the business. We don't really know with any certainty when a new entrant may appear against one of our products, which would result in price erosion maybe market share erosion. And on the policy side, we're not exactly sure when Concerta, Renvela and Welchol would be approved and launched. There is both upside and downside on the generic side which are relatively unpredictable at this point in time. Hence I decided to – obviously, not to pin down, but maybe that's an accurate description right. There is so much uncertainty and so much volatility that we didn't think it was productive to hanging our hats on the narrow range of potential outcomes.

Okay. Are you comfortable giving rough contribution from new approvals just order of magnitude tens of millions?

You’ve cut out for a second, but I think you asked me impact of new approvals. So we excluded – our margin excludes the big opportunities Welchol and Concerta. It includes Vytorin and then the rest of the items in there are very minimal contribution.

Okay. All right. Thanks.

Your next question comes from Elliot Wilbur with Raymond James.

Thanks. Just a quick follow-up, but I haven't heard this asked yet, for Michael. Just want to sort of get your perspective now on the recent sales force expansion. I think basically increased the number of reps by about 50%, myRytary scripts moved up roughly maybe 10% from the baseline prior to that increase and obviously not expecting it to move up in lockstep, but just wondering if from your vantage point if you're getting the leverage out of that expansion at this point in time that you had hoped for.

Well thanks for the question, Elliot. So relative to the baseline or what we're looking at during Q3 and Q4 was up 12% in terms of prescriptions. I think what we're starting to say now is the sales force if you will kind of [indiscernible] knowledge of their positions, territory start to kick in, yes I would expect us to see increasing leverage of that sales force as we go forward.

Thank you, Elliot. Next question please.

Your final question comes from [indiscernible].

Thanks. Just wanted to circle back to the discussion on oxymorphone, I think you alluded to this in some of the other commentary, but could you give us a sense as to the margin contribution from the product especially given the commentary about competitor exiting and picking up some share as a result?

We're not going to give specific product level margin, but that is another product that has been very stable and has very attractive margins.

I think that was it part of the group that you suggested had higher margins and the overall corporate margins as opposed to just been higher than the generics side?

Correct.

Okay. And then final question just on the impairment charges. I know you gave some details about some of those. Could you give some additional detail with regard to the branded side I notice that part of that impairment charge was factored into the Specialty business?

I’ll cover that. Part of the charge was we decided not to move forward with 400 milligram that was in process R&D. The last quarter we talked about the initiatives with the ATI and that has been delayed and that kind of led to the fourth quarter decision to discontinue that. We've also written down the assets related to Emverm as a result of kind of a slower than expected conversion from Emverm. Those are the two major components for bringing impairments.

Okay. Thank you very much.

You are welcome. End of Q&A

Thank you. That concludes our call for today. Thank you all for joining us. We’ll be presenting at several upcoming conferences in the next couple of weeks and look forward to speaking to you. Take care.

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