Amphastar Pharmaceuticals - Earnings Call - Q1 2018

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Amphastar Q1 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require a break or assistance at any time, please press star, then zero on your touch-tone telephone. All statements in this conference call, that are not historical, are forward-looking statements, including, among other things, statements relating to the company's expectations regarding future financial performance, backlog, sales and marketing of its products, market size and growth, the timing of FDA filings or approvals, acquisitions, and other matters related to the pipeline of product candidates, the timing for completion of construction of the company's IMS facility, its share buyback programs, and other future events.

These statements are not historical facts but rather based on Amphastar's historical performance and current expectations, estimates, and projections regarding Amphastar's business operation and other similar or related factors. Words such as might, may, will, could, would, should, anticipate, predict, potential, continue, expect, intend, plan, project, believe, estimate, and other similar or related expressions are used to identify these forward-looking statements, although not all forward-looking statements can contain these words. You should not place undue reliance on forward-looking statements because they involve known and unknown uncertainties and assumptions that are difficult or impossible to predict, and in some cases, beyond Amphastar's control. As a result, they may differ materially from those in the forward-looking statements as a result of numbers of factors, including those described in Amphastar's filings with the Securities and Exchange Commission.

You can locate these reports through the company's website at https://ir.amphastar.com and on the SEC's website at www.sec.gov. Amphastar undertakes no obligation to revise or update information in this press release or the conference call referenced above to affect events or circumstances in the future, even if new information becomes available or if subsequent events cause the company's expectations to change. I would now like to turn the conference over to Jason Shandell, President. Sir, you may begin.

Jason Shandell (President)

Thank you, Operator. Good afternoon and welcome to Amphastar Pharmaceuticals' Q1 Earnings Call. My name is Jason Shandell, President of Amphastar. I'm joined today with my colleague, Bill Peters, CFO of Amphastar. We appreciate you joining us on the call today and look forward to speaking with you and answering any questions you may have. I will now turn the call over to our CFO, Bill Peters, to discuss the Q1 financials.

Bill Peters (EVP and CEO)

Thank you, Jason. I would like to start the financial portion of our earnings call by pointing out that our press release today has a slightly different format with more tables and bullet points. We've also included the balance sheet for the first time. I hope that these changes will help investors. With that out of the way, I'll get on to our normal business.

Sales for the quarter increased 3% to $58.4 million from $56.7 million in the previous year's period. Lidocaine, which was the quarter's biggest selling product, saw sales increase to $9.8 million from $8.3 million on higher unit volumes at higher average selling prices. Sales of enoxaparin declined to $7 million from $10.4 million due to both lower unit volumes and lower average selling prices.

Sales of epinephrine declined to $3.2 million from $9.6 million due to the discontinuation of our epinephrine vial in the Q2 of 2017 after the FDA requested that we discontinue selling the product under a grandfather exception. Naloxone sales declined to $8.9 million from $10.9 million on lower unit volumes. We launched medroxyprogesterone acetate in the quarter and sold $2.7 million worth of vials and prefilled syringes as we began ramping up sales of these newly approved products.

Our insulin API business had sales of $5.3 million, which was up from $700,000 last year, primarily due to the timing of purchases by certain customers. Cost of revenues increased to $41.3 million from $33.8 million, and gross margins decreased to 29% of revenues from 40% of revenues for several reasons. We began manufacturing our recently approved products in the quarter, which led to temporarily lower productivity at our Amphastar plant.

Additionally, we implemented new quality standards recently required by USP, which led to increased labor costs, while at the same time, we experienced rising labor costs due to higher minimum wage requirements in California. Selling, distribution, and marketing expenses increased due to expenses at our Amphastar Nanjing pharmaceutical subsidiary, as well as higher freight costs. General and administrative spending decreased primarily because of lower legal expenses.

Research and development expenditures increased to $14.3 million from $11.3 million as we increased expenditures on materials for our pipeline and paid an NDA filing fee for a product which we currently market under the grandfather exception. The company reported a net loss of $7.2 million or $0.16 per share versus a net profit of $900,000 or $0.02 per share in the Q1 of last year.

The company reported an adjusted net loss of $2.5 million or $0.05 per share compared to adjusted net income of $4.5 million or $0.09 per share in the Q1 of last year. Adjusted earnings exclude amortization, equity compensation, and impairment of long-lived assets. In the Q1, cash flow from operations was approximately $8.4 million and was positive for the 16th quarter in a row. During the quarter, we used a portion of our cash flow to buy back about $7.6 million of stock. Subsequent to the end of the quarter, we completed our previous buyback program, so the board authorized an additional $20 million program.

Turning to forecasts, our ability to meet analyst estimates for both sales and income depends on the timing of approvals for Primatene Mist and our ANDAs. As an update on this, since our last earnings call, we resubmitted our NDA for Primatene Mist but received CRLs for two of our ANDAs currently on file at the FDA. I will now turn the call back over to Jason.

Jason Shandell (President)

Thanks, Bill. We made good progress on our pipeline in the Q1, and I'm pleased to announce that we have resubmitted our NDA for Primatene Mist after receiving very good results from our recent human factors study. While we don't have a PDUFA date yet, we plan to begin producing inventory in preparation for a launch. With respect to our intranasal naloxone NDA, per the agency's recommendations, we collected actual use data from hospitals around the country to analyze the intranasal volumes that are typically used in pediatric populations down to birth.

The data that we collected strongly supports our proposed volume for our intranasal naloxone NDA. We recently filed a report to the FDA with the actual use data, and the agency has indicated that it will conduct a timely review. If they agree with our filing volume, we plan to resubmit our NDA early next year.

Regarding our five grandfather drugs on the market, three applications are on file with the agency, and we plan on filing the remaining two applications this year. One of the applications is an NDA, which we filed in the Q1. We currently have three injectable ANDAs on file with the agency targeting products with a market size of over $500 million. We have previously stated that two of the three ANDAs are significant markets.

One of them has never had a generic approved, and the other only has one generic approved. As Bill mentioned today, we did receive two CRLs in the Q1. One of the CRLs was minor, and we quickly responded and have already received another GDUFA date. We are in the process of responding to the other CRL, but that's for the product that is not very meaningful to sales.

Therefore, we now have GDUFA dates for the two significant ANDAs that are on file with the agency. It should be noted that one of the products has two GDUFA dates depending on whether a facility inspection will be needed. Turning to new launches, during the Q1, we began securing customer contracts and shipping our generic Depo-Provera product in both the vial and prefilled syringe.

We believe that we have achieved a strong market share, and that should be more fully reflected by the Q3 of this year. The litigation against Momenta and Sandoz is proceeding in normal course. On March 20, 2018, the U.S. District Court for the District of Massachusetts entered final judgment in our favor in the patent case and also denied Momenta's motion to dismiss our antitrust case.

Following the issuance of the court's final judgment in the patent case, we filed a motion to enforce our $100 million bond. In response, Momenta filed an emergency motion seeking to delay our bond motion pending their appeal. We have opposed their emergency motion, and the issue is currently under consideration with the court. We remain confident in the merits of both the patent and antitrust cases.

Finally, as Bill mentioned, the board has authorized another $20 million to buy back additional Amphastar stock. Our continued buyback program demonstrates the board's strong belief in the long-term value of the company. With that update, I will now turn the call over to the Operator to begin Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the one key on your touch-tone cell phone. If your question has been answered or you wish to move yourself on the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. One moment while we collect questions, and our first question comes from David Amsellem with Piper Jaffray. Your line is now open.

David Amsellem (Managing Director, Senior Research Analyst)

Thanks. Just a couple. So on Depo-Provera, can you just remind us how much of the market you can supply? And in terms of the ramp, just talk about business that you've won. Or maybe the best way to ask it is how much share do you think you can garner over the next few months? So that's number one. And then number two, just on the CRLs you talked about, just want to be clear. For the CRL that you termed a minor and then on that refiling, is that the product that could be the first generic to market? Thanks.

Bill Peters (EVP and CEO)

Yeah. I'll take the first question on the MPA. Now, the MPA, how much of the market could we supply? We could supply a very significant portion of the market if we were to add a second shift, which we have not yet at this facility. But so we could from a manpower and from an EPI supply standpoint. So that's very positive. I don't want to talk about our exact market share, but as of today, we've achieved what we think is a pretty very good market share and kind of meeting our expectations. But as Jason mentioned, because I'll say it's as of today, we've secured contracts. Some of those won't be really having significant purchases until maybe June or so. And so you really won't see our full uptick in sales reflected until the July, August, September quarter.

And so the Q1 was really involved in the ramp-up. There were several customers who we launched the vial in January. We launched prefilled syringe in February. There were several customers that didn't want to take a bid until we had both available. So it wasn't really until the beginning of March that some customers were even willing or suggested that we wait until March to even bid on the product. So the process was a little bit slower than we anticipated in the ramp-up, but as of today, we're pretty happy with the outcome.

Jason Shandell (President)

And this is Jason. With respect to your question on the two CRLs, the one being minor, and we've got a GDUFA date already, that's actually for the one where we'll be the second generic to market.

David Amsellem (Managing Director, Senior Research Analyst)

Okay. So just to be clear on the generic where you could be there at market formation, you have not received a CRL on that. In other words, you have a GDUFA and no CRL. Is that right?

Jason Shandell (President)

That's correct. That's not one of the two that Bill referred to receiving in the Q1, but it is under a second cycle review from last year.

David Amsellem (Managing Director, Senior Research Analyst)

Got it. Okay. Thanks.

Jason Shandell (President)

Sure.

Operator (participant)

Thank you. Our next question comes from David Maris with Wells Fargo. Your line is now open.

David Maris (Stock Analyst)

Good afternoon. A few questions. So first, on the components of the increased R&D expenses, can you break that down a little bit more? How much were the increase with the PDUFA fee and what other components increased? The other is, can you provide us with what those GDUFA dates are? And then, Bill, for the positive cash flow, do you think that's going to continue through the year? And then lastly, Jason, on the Momenta update, can you just give us an update on where that stands and when you expect to get your cash? Thank you.

Bill Peters (EVP and CEO)

All right. So I'll start with the R&D and then the cash flow question. So the PDUFA fee was actually a $1.2 million fee because it's a 505(b)(2) where we did not have to run a clinical trial for the product. So the fee there is only $1.2 million. So that was what that was. The other big uptick was the testing when we filed the 10-Q, which probably should be before the market opens tomorrow morning. You'll also have a table in the MD&A that you can see the breakout. But the testing, operating, and lab supplies line goes up by about $1 million. And the reason that goes up is that's where we put both the API that we purchase to make our R&D products and also where we put the reference listed drugs.

So if we have to buy RLDs for a clinical trial in the future, those show up in that line. So those are really the two types of material increases that we had in the quarter as we had some significant API, which we purchased from third parties as well as manufactured at our Amphastar Nanjing facility that drove those expenses higher.

And then we did purchase a significant amount of reference listed drugs, so brand drugs that we'll be using in clinical trials later this year. Those were really the big drivers of that increase. As far as the cash flow goes, we do expect continued positive cash flow throughout the year and in every quarter. And we anticipate that the results are kind of at a low watermark right now and that will be better each quarter throughout the year.

Jason Shandell (President)

And this is Jason. With respect to the GDUFA dates, so yes, for two of our significant products, we have GDUFA dates. And as I was saying in my prepared remarks, one of them has actually two dates depending on whether an inspection is necessary. However, we're not providing the specific dates at this time. Hopefully, we'll be issuing press releases upon approvals, but we're not providing those dates. And then in terms of the, I believe, the next question was regarding Momenta, unless there was a third one, I think, for you.

Bill Peters (EVP and CEO)

I think I already answered the answer.

Jason Shandell (President)

Okay. Okay. So yeah, with respect to the cash, the $100 million bond, the real gating item is with respect to whether or not the court accepts Momenta's motion to wait for their appeal. And I feel strongly on this, but it's currently pending with the court. Essentially, Momenta has asked the court to wait for them to appeal the jury verdict. And as we all know, a jury verdict is a very strong holding and very difficult to appeal.

They've asked for purposes of efficiency that the court wait until the appeal is completed. We have fully briefed this issue, and the case law, in my opinion, is really on our side, which shows that once you have a final judgment and a jury verdict, that we should move on to the bond motion. They've cited some case law.

However, it's involving, in many cases, interlocutory appeals or issues like the last time where it was a safe harbor and an unsettled aspect of the law. But here, the case is over. There was a final judgment. Their patent was found invalid. And so we believe it's time to move forward. If the judge agrees with our brief, then the next step would be for them to respond to our motion. And you would expect that money this year after several rounds of briefing. If the judge were to agree and wait for the appeal, that would delay it into next year. But I do not believe that's likely.

David Maris (Stock Analyst)

Great. Thank you very much.

Bill Peters (EVP and CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from Gary Nachman with BMO Capital Markets. Your line is now open.

Gary Nachman (Senior Research Analyst)

Hi. Jason, first for you on Primatene. Could you review the results from the human factors study? How confident are you that this is sufficient for FDA? And what type of review are you guys thinking at this point? And also, what type of commercial preparations will you be doing for the launch? And then for Bill, how will gross margin trend for the rest of the year, understanding there were some one-timers in the Q1?

Jason Shandell (President)

Sure. So starting out with Primatene, we feel the results are very good. As I've talked about in the past, this was much more qualitative than quantitative. But almost 50% of the participants were low literacy, and they all found the label very easy to understand. And so we had very minor issues. I would consider it an extremely successful study, and that's why we're making inventory and preparation for launch. And secondly, in terms of the review time, we respectfully requested a priority review. As we know, there could be a two-month or a six-month. We left it to the FDA. We did, in our cover letter, explain that we believe it's an important product that has an unmet medical need in the OTC setting. So we've asked for a fast review, but we leave that in the FDA's capable hands.

Finally, in terms of the preparation, we did a lot of preparation last year. Actually, I guess it would be at the end of 2016 leading up to the CRL where we engaged a marketing firm. That all is being looked at again. It's the same marketing plan that we had from a year ago. As we've always said, the retailers are very excited by this product. It does bring in a lot of foot traffic, and so they also are prepared to help with the marketing aspect. There'll be regional marketing at the retail level.

Bill Peters (EVP and CEO)

And as far as gross margin trends, I think this should be the low margin mark for the year as we did have some one-time things and some ramp-up costs. And we also had a couple of things that just went wrong that weren't expected. For example, there was one day we were in the middle of making a batch, and the whole power went out in the area. We had to end up not only having to scrap the batch, but we actually had to reclean the room. So we spent a lot of money recleaning and revalidating the room, and we were out of production for about four days in a row, which is unusual for us and for a non-planned shutdown like that. So there were some one-time things like that in the quarter.

Additionally, we will be, as I mentioned before, our goal is to be selling higher levels of the higher margin products like MPA in later quarters. Also, the new launches that we're expecting in later this year are going to be at higher margins as well.

Gary Nachman (Senior Research Analyst)

Okay. If I could just squeeze in quick follow-up, a couple of product-specific questions. Just Lovenox at $7 million, is that sort of the new run rate? Medroxy, the $2.7 million, I'm assuming a lot of that was stocking in the Q1?

Bill Peters (EVP and CEO)

Yeah. Really no stocking on the MPA because it was already out in the market as a generic. So really no stocking. So it should go up from there. And as far as the Enoxaparin, back to the issue of some one-time hiccups, we actually had some labels that came in which were wrong, and we were unable to ship a few, unable to finish packaging some of our batches and ended up with a significant amount of unlabeled product at the end of the quarter that we were unable to ship because a vendor sent us a label with a mistake on it. So there's some other one-time things like that. We've actually shipped out $several hundred thousand more product than we would have if it hadn't been for that as well. So I think it should tick up a little bit from that level.

Gary Nachman (Senior Research Analyst)

Okay. Perfect. Thanks.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star, then the one key on your touch-tone cell phone. And our next question comes from David Steinberg with Jefferies. Your line is now open.

David Steinberg (Managing Director and Senior Analyst)

Thank you. I have a couple of questions on Primatene. It's nice to see the progress with the filing, certainly a long time coming. And I just wanted to get a clarification. When you say you asked for a priority review, is that similar to a class one review where you expect a two-month cycle or a six-month cycle? And are you prepared, assuming you get the product approved in the second half of the year, to launch it right away, or will there be a lag? And finally, I think you said in the past that at peak, when it was a CFC and not an HFA product, that peak sales were in the range of $65 million. And I just wanted to clarify that you think you could reach that or more in peak sales.

And then the final point is, what sort of ramp would you expect? It's obviously very different from a generic product. Could you help us with how you see the annual progression? Could you get to peak sales in a few years, or do you think it'll take a long time? Thanks.

Jason Shandell (President)

Sure. So yeah, the first question, we sort of punted on the two or six months. That was per advice of our consultants. Initially, we were going to suggest the two-month review, but it really didn't fit into any of the specific categories under the guidance. So we sort of just left it at we hope that they do, as we called it, a priority review. But we feel that by doing that, we provide the FDA with flexibility. So it could be a six-month review or perhaps sooner. So it really didn't fall into a specific category per se.

I think under standard guidance, it may be six months, but we basically couched it as what we believe to be a true fact is that you've got a lot of these nebulizers on the market, and there really is a need for a metered dose inhaler for asthma over the counter. So we've just respectfully requested that they review it as fast as possible. Secondly, in terms of the preparation for launch, we are making inventory right now. But what will happen is we'll have to wait, obviously, for the label when we finally get approved. So there'll probably be about a three- to four-week lag between approval and launch.

Bill Peters (EVP and CEO)

Yeah, so as far as the ramp-up goes, you're right. $65 million was the peak sales that we had. And we've said before that we believe we could surpass that amount because of several reasons. One is that there's just the price factor. We'll be selling at a higher price than we had previously. The second factor is that because of the dose indicator, there's actually fewer doses per unit that will sell. So anybody that uses on a more regular basis will have to purchase more units over the course of the year. We think that the initial sales will be strong to get the load in into the channels because the two major drugstore chains out there are very anxious to get this on their shelves. And so we think that the initial sales will be very quick.

As far as ramping up from there, we do believe that it will require a marketing spend to do that. We have a multi-million-dollar ad campaign plan for that, primarily using online tools, not really venturing much beyond on the online scope at this point, but we think it'll be required in order to get the sales moving. And potentially, some percentage of sales will have to be spent to keep going to get to that $65 million level. I'm not sure if that's initially maybe 20% of sales ramping down to 10% or 5%, but there's some amount that will have to be spent to get us to that 65. I think that's probably a two- to three-year timeline to get to that on an annualized run rate, but depending on the customer acceptance, it could be at the short end of that.

David Steinberg (Managing Director and Senior Analyst)

Okay. And just a quick follow-up. You mentioned that the price point will be higher than the CFC when it was on the market. Could you give us a sense, either price per dose or price per unit, what the original or last price before the product was removed and what you are planning to price it at post-approval?

Bill Peters (EVP and CEO)

I believe that our price was around $14 or $15 a unit.

Jason Shandell (President)

And then by the time, of course, there was the retail price, which was in the low $20s. We think we can take it up. One of the positives of when I reference these nebulizers, which really don't work very well, they're not FDA approved. They're through the Monograph. If you look at the retail prices on some of these products, they're quite expensive. And so even if we come out under those, it'll be much higher than what it was as the CFC version.

David Steinberg (Managing Director and Senior Analyst)

Okay. Thanks for the color.

Jason Shandell (President)

Sure.

Operator (participant)

Thank you. And our next question comes from Serge Belanger with Needham & Company. Your line is now open.

Serge Belanger (Senior Analyst)

Hi. Good afternoon. Apologies if you've already covered this, but wanted to know how many products are still marketed under the grandfather exception and what kind of revenues they represent, and I believe there was a couple NDAs or ANDA filings for these products in the past. Just wanted to know where you are with that and revenue for the rest of the year?

Jason Shandell (President)

I'll let Bill speak to the revenues. But in terms of what's still out there, we got the Sodium bicarbonate approved, so that's an approved product. And then, of course, the Enoxaparin vial went off. So that took it from seven to five unapproved products. So we're currently marketing five unapproved products. And as I was saying in my remarks, of those five, we have three applications on file, and we'll get the other two on file this year. And Bill, can you speak to the revenue of those unapproved products?

Bill Peters (EVP and CEO)

Yes, so we have the three months. In the recent quarter, it was about $35 million from the unapproved products.

Jason Shandell (President)

From those five products.

Serge Belanger (Senior Analyst)

All right. Thank you.

Jason Shandell (President)

Sure.

Operator (participant)

Thank you. At this time, I'm not showing any further questions. I'd like to turn the call back to Jason Shandell, President, for any further remarks.

Jason Shandell (President)

Thank you very much, Operator. This concludes our call, and just hope everyone has a great day. Thank you.

Operator (participant)

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