Good morning, everyone, and welcome to ANI Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call may be recorded. It is now my pleasure to turn today’s program over to Mr. Arthur Przybyl. Please go ahead.

Good morning, everyone. Welcome to ANI’s earnings conference call for the second quarter 2018. My name is Art Przybyl, I am the CEO; with me today is Stephen Carey, our Chief Financial Officer. Before we begin, I want to refer everyone to the forward-looking statements language in this morning’s press release and ask each of you to review it carefully as important context for this conference call. Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures can be found in our earnings release dated today. Today, we reported our second quarter results. Net revenues of $47.3 million, adjusted non-GAAP EBITDA of $19 million and adjusted non-GAAP diluted earnings per share of $1.13; increases of 6%, 0% and 15%, respectively as compared to the prior year quarter. Our six months results generated revenues of $93.8 million, adjusted non-GAAP EBITDA of $40.8 million and adjusted non-GAAP diluted earnings per share of $ 2.45; increases of 15%, 21% and 42%, respectively as compared to the prior year six month period. We updated our guidance for the second half of the year, in order to better reflect our revolving business model. The midpoint of our guidance forecast annual revenues of $200 million, adjusted non-GAAP EBITDA of $85 million and adjusted non-GAAP earnings per share of $5.04. These numbers represent increases of 13%, 15% and 29% over the prior year. Steve will provide you with our detailed financial highlights during his presentation. In the second quarter, we continued to successfully execute on our strategy to grow our generic and brand business platforms and to advance our key pipeline assets. In generics, we completed two transactions. We acquired a basket of 23 generic products from IDT and we acquired a portfolio…

Thank you, Art. Good morning to everyone on the line, and thank you for joining the call to discuss ANI’s second quarter of 2018. For the three months ended June 30, 2018, ANI posted net revenues of $47.3 million, non-GAAP adjusted EBITDA of $19 million and non-GAAP EPS of $1.13 per diluted share. These results are below our expectations principally due to a shift in customer mix of our Inderal LA franchise towards 340B customers, leading to a lower average selling price. In addition, we are revising our guidance this morning as a direct result of this shift in mix. Net revenue for the three months ended June 30, 2018, was $47.3 million, up $2.5 million or 6% versus prior year, as modest declines in our generic and branded products were more than offset by revenue from royalties. Revenues of our generic pharmaceutical products declined 4% from prior year to $30.2 million, driven by declines in lower margin products such as fenofibrate and propranolol ER. These declines were tempered by the impact of our four product launches during the quarter, including solid contributions from Ezetimibe-Simvastatin, which was acquired in May, as well as a full quarter of sales of our Diphenoxylate-Atropine product, which launched late in the second quarter of 2017. Branded pharmaceutical revenues were $10.5 million in the quarter, a decrease of 10%. Prior year comparisons are primarily due to a decrease in unit sales of Inderal LA tempered by the impact of the February 2018 relaunch of InnoPran XL and Inderal XL in the ANI label. Royalty income was $4.9 million for the quarter, driven by $4 million related to our profit from the sale of our four brand products, they were purchased in December 2017 from AstraZeneca of Arimidex, Atacand, Atacand HCT and Casodex. As highlighted on…

Thank you, Steve. Moderator, we will now open the conference call to questions.

Thank you. [Operator Instructions] Your first question comes from the line of Dewey Steadman of Canaccord Genuity.

Hi, guys. Thanks for taking the question. I guess, on WellSpring, it seems like pretty interesting acquisition. Can you just elaborate a bit on the capabilities that WellSpring has that Baudette currently does not? And then any impact to the – to see the contract manufacturing margin from this WellSpring business and then also longer term is it possible to leverage those development teams at WellSpring into build out a – I guess it’s self-funded pipeline of future ANDA product. Thanks.

Good morning, Dewey. Let me take the latter part of your question first. And that is can we leverage from the WellSpring transaction, the ability to – begin to develop more of an internally developed ANDA pipeline at the company. My reaction to that is no. The company still does not have an adequate amount of formulation capabilities in order to advance its own internally developed ANDA pipeline. So that is a remaining piece of the puzzle lead ANI that we are very well aware of. And we continue to explore and investigate opportunities to add that piece to our puzzle. Now doing that could be us hiring an individual and starting out something from scratch in terms of more of a product development formulation house, the center for excellence, if you will or that could be acquiring one. And we’re looking at both possibilities in order to advance, what we believe it will be important to the business model for the future, which would be to create greater formulation capabilities internally for the company and certainly to establish the center for excellence for an ANDA pipeline. In regards to WellSpring, beginning of your question – in regards to WellSpring and its capabilities versus Baudette, they’re actually very synonymous. The capabilities here at WellSpring resemble the capabilities of Baudette and vice versa. And so one of the synergies that we recognize here besides expanding our CDMO business is to allow us to take products from Baudette and move them into a tech transfer opportunity here at the WellSpring site. That’s important to us. We have significant capacity at Baudette, but Baudette tends to be remote. And so it’s somewhat more of a human resource issue, hiring people, and they are technically capable that can work for us in really remote…

Right. So while the margins are lower, net-net, Dewey, we think it’s a trade-off that we’re willing to make in terms of the stability of the dollarized margins that a CDMO business generates. And so I think about it very much in terms of balanced and continued diversification of the ANI revenue base. You’ve seen us over the past two years start to diversify our business, both through the expansion of generics towards tail brand products. And this is just a continued journey on that quest for balance and diversification in terms of our overall revenue and gross margin base. And so the CDMO business is quite sticky in terms of sale and margin generation, and so that’s a trade-off that we’ll take and welcome into our overall spending portfolio.

Great. Thanks. And then just quickly on Vanco. For the oral solution, what’s the ideal patient? And if approved, how will the product be promoted? And how should we think about margins for that product? Thanks.

That product will be promoted as a brand. So my reaction to that is branded margins associated with that product. The ideal patient would be both one that’s potentially in an institution, in a hospital environment, as well as outpatient that would benefit from, obviously, a liquid version and absorption of such. How we market that, I’m going to defer that until we get further down the road. It’s premature for me to speak to that. And whether we treat this as more of a specialty product than have a tiny branded sales force, I’m going to defer that until after we get closer to launch of that product.

Thanks for taking the question.

Your next question comes from the line of Elliot Wilbur of Raymond James.

Thanks, good morning. Just wanted to touch base on the methylphenidate opportunity maybe outside of your timing expectations here. Obviously, the markets come under a little bit of pressure. Teva talked about it on their call. It looks like Trigen’s been pretty aggressive in terms of price to grab share. But even after all of that, it still looks to me like this is going to be at least kind of a $500 million generic market opportunity at the time of entry based on the update provided today. I’m just wondering if that set of assumptions is consistent with what you’re seeing.

I think so, Elliot. I mean, for us, we didn’t announce this date until after we signed our agreement with Halo, who is the company that is validating the approved ANDA for us that we acquired in the Amneal/Impax transaction. And we look at this product – yes, it’s a large market. It’s potentially smaller margins. But for us, we look at this as a significant return considering we paid, in aggregate, for those six products from Amneal/Impax, $2.3 million, it’s obviously costing us, sake of argument, a little over $1 million to advance this to launch. But we have nowhere to go but up in terms of revenue and margin generation on this product. And so we think this is a very important product in our portfolio, or I can assure you, we would not call out a product like this in the body of our press release. We have many generic products that we’re advancing to the finish line, but we call out these three because we think these three have – or are potential significant catalysts for earnings and revenue growth. So we still see the opportunity as one that can provide us with significant return to our stakeholders and the company.

Okay, thanks Art. And a question for yourself and for Steve as well. A lot of inquiries this morning just kind of on trends in the brand business. And that revenue line, I guess, has been kind of in the $15 million to $16 million range the last three to four quarters. And just sort of looking into the results this morning and looking at some of your commentary, I’m not sure I have a full understanding of kind of what happened there. So maybe you guys could just talk about that in a little bit more detail in terms of the sequential trends there, pricing, customer mix, whether this is a new base level that we should kind of think about numbers moving up off of. Just not sure I really have a good handle on the progression of the business there.

Yes, sure, Elliot. It’s Steve. Really, the most dramatic impact sequentially in our brands business was, as stated, a very dramatic shift in the customer utilization for our Inderal LA franchise. So as you can imagine, as we’re accounting for the business, we are looking at recent trends in terms of customer mix that can be very dramatic for these admittedly low volume tail brand products. And throughout the course of 2017 and certainly, through the first quarter of 2018, the 340B mix for the Inderal LA franchise was trending downward. And so we were getting, I would say, very favorable pricing in terms of our average selling price for the franchise. That trend changed quite dramatically in the second quarter of 2018. And so it was really just purely a mix change on utilization. And so in the second quarter, honestly, it’s a little bit of a double whammy because we had to account for both the impact of second quarter utilization and also the impact which we assumed that, that new mix will remain for the remainder of 2018 and beyond. And so we’re kind of resetting our balance sheet a little bit for that product in the second quarter. So a little bit of a double whammy in the second quarter, for sure. And quite honestly, we will have to see how that trend plays out moving forward. In terms of the guidance reset that we took this morning, that is fully reflective of the second quarter reality of Inderal LA mix, and so we fully have recognized that pricing change and pricing differential in our revised guidance this morning.

Okay. Steve, I just want to follow up with you there because I think it’s important to understand. So I guess if I think about the potential impact of a mix change there, if it’s a new 340B customer, it should still be incremental revenue, although, perhaps, the margin would be lower. If it’s a change in the status of existing customers, then I guess that would sort of make sense in terms of some of the commentary. And I don’t know if you can provide any specific color on sort of those two observations there, but…

Yes, sure. Sure, I’ll try. So in terms of our direct customers, there’s been no change in terms of our direct customers for the brand business. It’s all an impact of what happens downstream from our big three wholesalers on the brand side. And so that’s why, quite honestly, just in the reality of accounting for the franchise, you get a little bit of a delay in terms of that feedback loops because it’s really impacts that come through indirect sales and then indirect utilization of the product downstream. And so it’s not really a new customer, but it’s a shift in mix. And your point to would there be incremental revenues associated, albeit at a lower gross margin, the reality is for mature brands that have been marketed for many, many years, the pricing on 340B and on a lot of government utilization is extremely low. And so that’s why it can have such a dramatic impact as we experienced in the second quarter of this year.

Okay. Thank you. I appreciate the clarification. Could you just talk a little bit as well about expense trends in the quarter? Obviously, the incremental investment R&D makes, hence, SG&A maybe a little bit ahead of expectations. But how should we think about those line items kind of trending out from current run rate?

Sure. So on the R&D side, as we’ve discussed, this year is our – what we perceive to be our bulk year in terms of the Cortrophin investment. And so you see that start to kick in here in the second quarter, and that’s a trend we’ll anticipate to continue in the third and fourth quarter. The second quarter number does have a GAAP accounting item in it since we accounted for asset acquisition of the Impax/Amneal products that I called out in the script at $1.3 million. If we just think about – if you strip that item out, I think when we initially went out with guidance this year back in February, while we didn’t put it in our guidance chart, we did talk to, we think, organic R&D will be between $14 million and $16 million this year. We continue to believe that’s the right range, although I would say we’re on track to go towards the high end of that range. So I would expect the number somewhere around $16 million excluding that GAAP accounting item that was recorded this year. And on SG&A, I would tell you that ex-integration costs for WellSpring, the number that was posted in the second quarter is representative of what we anticipate in the third and fourth quarter. And again, it’s really two-pronged. One is just increased costs as we continue to grow out our business and the support that’s needed to support a growing business and needs and then, quite honestly, coupled with increasing regulatory costs in our business, and we called that out for the first time here as it relates to the second quarter. And so the fact of the matter is that our already-complex regulatory environment continues to get more complex, and it does have an impact on our cost structure.

Okay. Thanks. Just one last question for Art. Can you just talk a little bit about the relationship with ClarusOne or the new relationship? I’m assuming it’s new and not just an enhanced one, obviously, a big name with lots of market power. And maybe just give a little bit of color in terms of what you think the opportunities will be there, whether it’s just kind of one product at a time and sort of modest incremental or if you think that there’s potential for sort of an immediate kind of across-the-board increase in the current generic run rate. Thanks.

Sure. Sure, Elliot. So if you recall, I think it was about a year ago last June, the last of the three consortiums came into play with the formation of ClarusOne. ClarusOne is combination of McKesson’s OneStop program, sake of argument, half of Rite Aid stores and Walmart and some other assorted groups. At the time that they came into the fore, we recognized that to enter that agreement and that program, to be frank, like many of these consortiums that came together, they were actually looking to extract a fair amount of dollars to enter into that agreement. And we decided, at the time, to take a couple of different steps. One, we said no to the consortium and the dollars that they wanted, and two, we shifted a significant portion of our business to other – the two other consortiums in Red Oak and WBAD. And so you never really saw a blip or downward trend in our generic revenues because of the fact that we were not doing business with ClarusOne. We lost our business with ClarusOne. So that could be perceived as a negative. Now – but that’s behind us. So we have an agreement with ClarusOne, and this gives us, obviously, the runway to potentially add a generic portfolio of products to ClarusOne, compete effectively for that business without this large upfront payment that they were looking to extract from us. And so we view this as upside. And so our national account folks, who have always maintained, obviously, a relationship with ClarusOne, at least from a communications standpoint, will be looking to add products to that newly formed agreement and, hopefully, advancing and increasing our generic product revenues. And so that’s really the effect of the agreement that we signed, I believe, in July with ClarusOne.

Your next question comes from the line of Brandon Folkes of Cantor Fitzgerald.

Hi, thanks for taking my question. I just want to go back to the guidance. I know we talked in depth on Inderal LA. But what are the dynamics you’re seeing in the market that may drive you to lower guidance? And what may be some of the pushes and pulls in achieving guidance, reset guidance in the second half of the year? And following on from that, what level of new launches are in that guidance? Thank you.

Sure. Yes, Brandon, it’s Steve. In terms of the other pieces of our business, as mentioned in our prepared comments, the other components of our business are strong. They’re largely operating as expected. There’s always pushes and pulls on various different products as the year goes on in terms of product mix and composition, particularly in the – on the generics side of the business. But net-net, our business is largely performing as anticipated. We’re very happy with the health of the underlying business. As we talked about a moment ago, the Inderal LA pricing was absolutely a curveball to the second quarter, and again, it’s one that we’ve embedded now into our second half guidance. And it has very significant ramifications for our overall numbers. The revenues and gross margins generated from that franchise are significant for us. So we’ve reset that. And quite honestly, in terms of making the second half, I think there’s a few key catalysts, and they’re principally related around the relaunch of the – for AstraZeneca products in the ANI label. We’ve already accomplished the relaunch of two of those products in July. As of July 1, we relaunched Arimidex and Casodex in the ANI label, and we’re currently on track to operationalizing the relaunch of Atacand and Atacand HCT in October of this year. So that, coupled with execution on the generic side of our recently acquired products, particularly from Impax/Amneal, is – will be key to the second quarter. And then less so in terms of the number generation or the financial results, but obviously, the team will be very focused on integrating WellSpring. As of this morning, we have roughly 100 new employees, new capabilities to integrate into the ANI family. In terms of WellSpring, you got to realize that this transaction closed yesterday. And so from a guidance perspective, we are including a very modest amount of five months of WellSpring revenues in our top line, but it’s a very small amount for the back half of this year. And as Art had mentioned in his prepared comments, we would expect WellSpring to be accretive or become accretive to our overall results in 2019. So those are some of the main factors that we’re dealing with in the second half.

Okay, great. And then, perhaps, on Corticotropin – thanks very much for providing the additional color today. So do you expect a normal review time line for this product? I mean, second, could you just discuss any rate-limiting steps between now and that filing?

Sure. So the normal review time line upon filing is a PDUFA date of four months. I can’t handicap FDA’s response to our filing and whether we’re going to receive an approval in four months time. I think that certainly, they would want to inspect the contract facilities that we use for both the raw material manufacturing and finished dosage form manufacturing of the product. But I certainly can envision an expedited process. I think that after discussions with the agency, after discussions with some of our lawmakers in Washington, D.C., I think everybody understands the importance of a drug that can break a monopoly of $1.2 billion that is costing the U.S. taxpayer significant amounts of money associated with Medicaid reimbursement on the product. But it’s not for me to handicap FDA’s course of action on an approval date after filing. So what has to happen between now and then? We basically – we need to successfully scale up amounts of raw material manufacturing, which will go into the registration batches of Cortrophin gel that we put on 180 days stability. And so you could see from the timetable in the chart at the back of our press release some of those activities that still has to occur. But from the development work that we’ve done surrounding the modernization of the chemistry as well as the bridge or comparators to the analytics of the old product, we feel pretty good about where we’re at or we would not announce this filing date in today’s press release if we’ve held off announcing this until our initial development work and our conversations with the FDA had been completed and so that – we feel confident in meeting this target date. So I hope that answers your question.

Thanks very much.

And there are no other audio questions at this time. I would like to turn the floor back over to management for any closing or additional comments.

We just like to thank everybody for attending ANI’s earnings conference call, and have a nice afternoon. Thank you, everybody. Bye-bye.

Thank you.

Thank you. This concludes ANI’s second quarter 2018 earnings Call. You may now disconnect your lines at this time, and have a wonderful day.