Amphastar Pharmaceuticals - Q3 2023

Transcript

Operator (participant)

Greetings, and welcome to the Amphastar Pharmaceuticals third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that certain statements made during this call regarding matters that are not historical facts, including but not limited to management's outlook or predictions for future periods, are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the section entitled "Forward-Looking Statements" in the press release issued today and the presentation on the company's website. Also, please refer to our SEC filings, which can be found on our website and the SEC's website for a discussion of numerous factors that may impact our future performance.

We will also discuss certain non-GAAP measures. Important information on our use of these measures and reconciliations to U.S. GAAP may be found in our earnings release. Please note, this conference call is being recorded. Our speakers today are Mr. Bill Peters, CFO, Mr. Dan Dischner, Senior Vice President of Corporate Communications, and Mr. Tony Marrs, Executive Vice President of Regulatory, Regulatory Affairs and Clinical Operations. I will now turn the conference over to your host, Mr. Dan Dischner, Senior Vice President of Corporate Communications. Dan, you may begin.

Dan Dischner (SVP of Corporate Communications)

Thank you, Paul. Good afternoon, and thank you all for joining us today on our third quarter earnings call of 2023. Joining me today will be Bill Peters, CFO and Executive Vice President of Finance, and Tony Marrs, Executive Vice President of Regulatory Affairs and Clinical Operations. 2023 has been characterized by maintaining the momentum of our key high-margin products by fulfilling our commitment by advancing our portfolio's proprietary, biosimilar, and complex product segments. In terms of sales, the third quarter ended with $180.5 million in revenue, representing a 50% increase on an annualized basis, with the added net sales of our recently acquired proprietary product, BAQSIMI, and the continued strength of our core products, specifically Glucagon, Primatene Mist, and Epinephrine. Since we closed the BAQSIMI acquisition on June 30, we've been working hard, transferring operations in 27 countries worldwide.

On October first, we began marketing the product in the United States using a contract sales force combined with our internal sales team. Around the world, we have signed agreements with third-party logistics and local companies to help us set up the needed distribution networks. We have already transferred the NDA in the United States to Amphastar, and we are working on transferring the marketing authorizations in other countries as quickly as possible. We plan to transfer distribution in the United States in the first quarter of next year and other countries as soon as possible after that. BAQSIMI recorded its highest sales ever this quarter, continuing a growth trend we expected. Due to the seasonality of the product, the third quarter represents approximately 31% of the annual sales.

In addition to the commentary on our Glucagon and Primatene Mist offerings, the sustained performance of these products from the previous financial quarters is notable. Specifically Glucagon, which generated $29.5 million in revenue, marking a substantial 107% increase over the same period last year. However, we note that Glucagon sales peak in the third quarter was due to the increased back-to-school demand and will typically normalize after the seasonal period. As for Primatene Mist, the product realized an impressive $24.8 million in sales in the third quarter. This represents a noteworthy 35% increase compared to the corresponding period in the previous year, primarily due to restocking by retailers.

We continue to see unit retail growth in the 5%-6% range and still project that Primatene Mist will reach the milestone of $100 million in sales by the end of 2024. Regarding our epinephrine and other finished pharmaceutical products, once again, we have been able to capitalize on competitor supply shortages, specifically epinephrine, which achieved a notable 19% increase in sales over the prior quarter and a 4% increase annually, amounting to $20.2 million in sales. Our lidocaine product also saw sales growth within our injectable products and shortage, registering a 10% increase over the last quarter. This performance reflects our agile response to market dynamics and the strategic positioning of our products to serve unmet market needs effectively.

Our commitment to providing continuity of supply during periods of competitor shortage exemplifies our role as a reliable provider in the pharmaceutical landscape and supports our projection for sustained performance. As we address our adaptive response to evolving market conditions, the launch of Rextovy, our proprietary naloxone nasal spray, is now scheduled for release in the first quarter of 2024 due to production needs for shortage products. Furthermore, due to the API supplier for our MPA injection having discontinued manufacturing this API, we will have minimal to no sales of MPA over the ensuing quarters. We plan to resume manufacturing MPA following the anticipated FDA approval for qualification of the new API, which will be produced at our ANP facility. The FDA authorization will enable us to leverage our in-house production capabilities, ensuring a steady supply to meet market demand.

I would now like to shift our dialogue on the progress within our pipeline and the regulatory endeavors related to our proprietary biosimilar and complex generic products. Regarding the regulatory progress of AMP-002, we acknowledge the delay beyond its initial GDUFA goal date. We are currently engaged in discussions with the agency. The agency remains committed to moving the application forward in the regulatory review process as quickly as possible. There remains a significant market demand for this product, which would represent itself as the first generic in the market niche, exceeding $600 million, according to IQVIA. Recognizing the need for generic options, we are dedicated to advancing our dialogue with the FDA. For our Teriparatide ANDA, referenced as AMP-015, as previously stated, we have responded to the CRL. We have a goal date in the first quarter of 2024.

This date adheres to the conventional schedule, allowing for an additional quarter's extension should a pre-approval inspection be necessary. In reference to our AMP-008 inhalation ANDA, which received priority review status, we believe we have addressed the issues identified in the minor CRL. As a result, we have a GDUFA goal date set for the fourth quarter of this year. Concurrently, our AMP-007 application is progressing as planned and is scheduled for submission by the end of this year. Regarding our proprietary product, intranasal epinephrine, identified as AMP-019, we are diligently advancing through the clinical development phases in collaboration with the FDA. In alignment with our strategic objectives for our biosimilars, I am pleased to report today steady progress with AMP-004, our insulin aspart biosimilar candidate.

We are on track to submit the BLA for this product by the end of this year, with the intent of securing interchangeable status. In summary, the solid performance and strategic advancements detailed today underscore the strength and adaptability of our product portfolio in response to the competitive and regulatory environments we operate within. Our strong sales growth, strategic pipeline advancements, and regulatory foresight align with our company's sustained growth and value creation vision. We remain dedicated to advancing unmet medical needs as we continue to invest in our high-margin products and innovate in proprietary, biosimilar, and complex products. We are confident in our ability to capitalize on market opportunities and navigate industry challenges strategically. I would now like to turn the call over to our CFO and Executive Vice President of Finance, Bill Peters, to discuss the third quarter's financial results.

Bill Peters (CFO and EVP of Finance)

Thank you, Dan. Revenues for the third quarter increased 50% to $180.6 million from $120.1 million in the previous year's period. Glucagon sales increased 107% to $29.5 million from $14.2 million, as two suppliers left the market, and we experienced seasonally strong back-to-school sales. Primatene Mist sales grew to a new record of $24.8 million in the third quarter, which represents a sales growth of 35% from sales of $18.4 million in the third quarter of last year, as retailers replenished their inventories. Lidocaine sales increased to $15.5 million from $12.6 million due to higher unit volumes as a result of continued supplier shortages during the quarter.

Phenylephrine saw increased competition, as sales decreased 47% to $7.4 million from $14 million. Other finished pharmaceutical product sales increased $14.1 million to $37.7 million on increased sales of legacy products such as Dextrose, Atropine, Calcium Chloride, and Sodium Bicarbonate, and on sales of newer launches, including Regadenoson, Ganirelix, and Vasopressin. This marks the first quarter of revenues from BAQSIMI. We recorded net revenues of $28.7 million, which corresponds to Amphastar's net economic benefit from BAQSIMI. This net economic benefit was calculated based on Eli Lilly's sales of $48.7 million, less their expenses of $20 million, which included cost of goods, selling expenses, and research and development expenses. We will continue to book revenues on a net basis until we begin distributing BAQSIMI in 2024.

This change will occur on a country-by-country basis. Our insulin API business had sales of $4.2 million, up from $1.2 million last year, primarily due to the timing of orders. Cost of revenues increased to $72.2 million from $61.6 million. Gross margins improved to 60% of revenues from 49% on increased sales of higher-margin products such as Glucagon, Primatene Mist, Ganirelix, and Vasopressin. Additionally, revenues from BAQSIMI are reported net of related expenses. Selling, distribution, and marketing expenses increased 34% to $6.4 million from $4.8 million in the previous year's period due to sales force expansion expenses related to BAQSIMI and increased advertising expenses for Primatene Mist.

General and administrative spending increased 6% to $12.7 million from $12 million, due to increased compensation and expenses related to BAQSIMI, which were partially offset by lower legal expenses. Research and development expenditures decreased 10% to $16.7 million from $18.5 million, due to the timing of clinical trials and material expenses related to our insulin and inhalation pipeline products. Our non-operating expense of $9 million compared to a non-operating expense last year of $600,000, primarily due to interest expense and costs incurred for the term loan we entered into to complete the BAQSIMI acquisition and convertible debt issued this quarter. These expenses were partially offset by mark-to-market adjustments related to our interest rate swaps.

Net income increased over 200% to $49.2 million, or $0.91 per share in the third quarter, from $15.9 million, or $0.30 per share in the third quarter of 2022. Adjusted net income also increased significantly to $61.9 million or $1.15 per share, compared to an adjusted net income of $20.2 million or $0.38 per share in the third quarter of last year. Adjusted earnings excludes amortization, equity compensation, impairment of long-lived assets, and one-time events. In the quarter, we had cash flow from operations of approximately $64.3 million.

We issued $345 million of convertible notes in September and used $200 million of the proceeds to concurrently pay down our term loan and $50 million to buy back approximately 1.1 million shares of our common stock. Subsequent to the end of the quarter, we paid down an additional $50 million of our term loan. When we entered into the term loan, we hedged $250 million of the loan by swapping into a fixed rate for five years. At this point, we do not have any more floating rate debt, which will enable us to lower our interest expense in the coming years. I'll now turn the call back over to Dan.

Dan Dischner (SVP of Corporate Communications)

Thank you, Bill, for the updates. With that, we'll now take your questions. Operator, please open the line for Q&A.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Glenn Santangelo with Jefferies. Please proceed with your question.

Glen Santangelo (Managing Director and Senior Equity Research Analyst)

Oh, yeah. Thanks, guys. Thanks for taking my question. Hey, Bill, I wanted to start out talking about BAQSIMI, because obviously, I think this is a bigger result than most of all of us were expecting. You know, when you look at the sales generated, you know, by literally $48 million-$49 million, I mean, I thought, you know, at least in your most recent sort of marketing deck, we were talking about, you know, closing out this year at $145 million-$155 million annualized, you know, with the potential to get to peak sales of $250-$275. I mean, how do you think about those targets that you had previously laid out relative to, you know, the fact that Lilly almost did $49 million in revs this quarter?

Bill Peters (CFO and EVP of Finance)

Well, two things. One, first of all, thanks for noticing, the projections and, and seeing the updated slide deck because, we did update the projections from a previous, number to, increase that slightly. And the, the big thing about this is that this is a back-to-school quarter, so the third quarter has historically, been the high point of the year. So, we expect sales will drop going into the fourth quarter, and that's just been the, the trend. If you take a look at the graph of the, the script, IQVIA script data, you see it really does have a big peak in the August-September time frame.

So we expect it to decrease, but that said, the $250 million-$275 million is still just a forecast that we have at this point, and we think we have a very good plan to get to that. Could we beat that forecast? I think we possibly could. So it's just right now, certainly something that we could do, and we didn't want to set a forecast that was something that we'd ever have to lower. So I'm glad to say that we did increase it once already.

Glen Santangelo (Managing Director and Senior Equity Research Analyst)

All right. That's helpful. I appreciate that. Maybe I should ask one other quick question, maybe a high-level question. You know, the quarter, you know, there, it, it always benefits to some extent from shortages in one product or another, and it's always, you know, hard sitting in our seats to sort of, you know, forecast which ones. You know, is there anything specifically you'd call out going on in the market this quarter? Like, you know, obviously, Lidocaine benefited again, Epinephrine benefited, nitroglycerin, obviously, was the opposite. And, you know, we know that, that Pfizer had some manufacturing issues, some unfortunate issues.

But is there anything specifically this quarter that you may call out that may have a little bit more sustained impact or something, you know, to the opposite might have a little bit of a shorter duration to it?

Bill Peters (CFO and EVP of Finance)

Yeah. So, you did mention the lidocaine. One of our lidocaine SKUs is on shortage, and we're producing as much of that as possible. But the other, there's three right now where we're the only one in the country making them, and that's dextrose, sodium bicarbonate, and also the epi syringe, prefilled syringe that's used in emergency rooms. So those three things, we're just making as much of those things as we can. And we don't know when our competition will be back on the market, but it looks like that's gonna at least go into at least the second quarter of next year from what we understand for those products. So, that's what we can garner out of that.

And, you know, I think we mentioned, and also as in the presentation, because of our attempt to take care of the market for these shortages, we've had to delay once again the launch of our intranasal naloxone because it runs on the same equipment at our IMS facility. So, you know, we had the opportunity to launch that or satisfy some of the demand for these shortage products. We decided it was more prudent to make more of the shortage products to try to help the market out of the situation that it's in right now.

Glen Santangelo (Managing Director and Senior Equity Research Analyst)

Perfect. Thanks for the update. Appreciate it.

Operator (participant)

Thank you. Our next question is from Tim Chiang with Capital One. Please proceed with your question.

Tim Chiang (Senior Research Analyst)

Hi. Thanks, Bill. Good quarter. Maybe you could talk just a little bit about the rebound in Primatene Mist sales, you know, how that might have contributed to your higher gross margins this quarter as well?

Bill Peters (CFO and EVP of Finance)

Yeah. So, two things. One, really the biggest thing to the gross margin is the fact that BAQSIMI is on a net basis, so it's a 100% margin product right now. So, all the expenses are taken out before we book that revenue because of the accounting guidance that we have, we have to follow. So that's really the big driver to get us to get to that 60%. But as far as Primatene Mist goes, it's basically what we've been saying the last two quarters is, you know, it was growing at the retail level in the first quarter, but our sales were down. It was growing at the retail level in the second quarter, but our sales were down.

That indicated to us that there was a contraction in the level of inventory at retailers. It reversed this quarter. The growth has actually been relatively steady at about 5% or 6% a quarter this year, 5% or 6% every quarter this year. And but you've seen this big fluctuation in, in our volumes, and that's just really has to do with the inventory. So this is, we believe, an inventory stocking ahead of what's usually the biggest two quarters of the year for Primatene Mist, are usually the fourth quarter and the first quarter. So I think we got a little bit of that carry over into the first quarter because the retailers had lowered their inventory levels, going into this quarter.

Tim Chiang (Senior Research Analyst)

Got it. I guess with BAQSIMI, you're still gonna report net economic benefit from BAQSIMI in the fourth quarter, but obviously, that number probably will be less, right? Because the third quarter obviously was the strongest quarter for the year. Is that right?

Bill Peters (CFO and EVP of Finance)

That's correct. The other thing... Well, the, there's gonna be a couple forces that kind of go in different directions for that, because, starting in the fourth quarter, we are doing our own marketing, our own selling for that. So that's going- where the expense for that will now be on our selling line, and it will not be borne by Lilly. So they will have a lower expense that's used to deduct that. So there, you know, as we saw, the Lilly sales were, you know, close to $49 million. So we expect that their top-line number to decrease. And as Dan had mentioned, it's, you know, historically been about 31% of the annual sales in the third quarter, so it's definitely higher than the other quarters. But the deductions will be a little bit lower as well.

So the selling expense that they deduct will not be as high. So we'll still have their cost of goods, their distribution expenses, and a little bit of R&D work that as they continue out, a couple of the R&D studies that were ongoing. So, those expenses will still be borne in that gross spend number. I know it's a little bit confusing and, but, you know, it's a moving piece. And as you know, and we've mentioned, we're gonna—we plan to take over distribution in the United States in the first quarter of next year. So, and then the rest of the world will follow, depending on the timing of signing of certain contracts and also the transfer of the marketing authorizations in various locales.

Tim Chiang (Senior Research Analyst)

Okay, just one last question then, Bill. Is the 60% gross margin sort of your new going forward type of run rate now that you have BAQSIMI?

Bill Peters (CFO and EVP of Finance)

No, because remember, 'cause BAQSIMI, we had our net economic benefit was at a 100% margin. So the net economic benefit that we get next quarter will also be at a 100% margin. But as we move forward, we will, you know, we will have to - we'll start incurring the revenues and the cost of goods. So in the future, our revenue number goes up, but our cost of goods number goes up as well. So instead of BAQSIMI being a 100% margin product, it's going to be something that's well above our corporate average, but it will still have a cost associated with it once we begin distributing in locales around the world. And I know that's a little bit complicated and a little bit, it's gonna be country-by-country basis, so it's not all, it doesn't all happen at once.

Tim Chiang (Senior Research Analyst)

Right. Got it. I think historically, what U.S. BAQSIMI sales had made up about, what, 80% of the total BAQSIMI pie?

Bill Peters (CFO and EVP of Finance)

That's correct.

Tim Chiang (Senior Research Analyst)

Okay.

Operator (participant)

Thank you. Our next question is from David Amsellem with Piper Sandler. Please proceed with your question.

Speaker 5

Hey, this is Tim on for David. Thanks for taking the questions. A few from us, and apologies if there's a little overlap here. So on BAQSIMI, I guess stepping back, what's your overall view on the glucagon rescue market growth, both near term and longer term? And with respect to your sales force, what are you thinking in terms of sizing? Is that gonna be a contract sales organization or will it be internal? And when do you expect for them to hit the field? And then second, on the glucagon injection generic, could you speak to how penetrated you are in the institutional setting, and the extent to which you've been able to leverage your expanded manufacturing capacity? And over time, how big do you think the opportunity is in that setting? And then last, on the shortage products-...

Can you talk to the extent to which you'll continue to benefit from shortages in 2024? I know you called out those three products that the competitors aren't making right now, but beyond that, what is the impact of the shortages gonna look like next year relative to this year? Thanks.

Bill Peters (CFO and EVP of Finance)

Okay. So the first one I got was-

Dan Dischner (SVP of Corporate Communications)

Overall glucagon.

Bill Peters (CFO and EVP of Finance)

Overall glucagon growth. So, you know, as we've said, we think that BAQSIMI is gonna grow for us, gonna be somewhere in the $250 million-$275 million revenue range, product for us at peak. So that's a really strong growth from where we are today, which is somewhere annualizing around $150 million in revenues. We do think that some of that market share comes out of the traditional glucagon, the generic glucagon that we're selling today. However, our current glucagon generic is also used as a diagnostic aid, and because it's used as a diagnostic aid, that doesn't go away with the conversion to BAQSIMI, because it's the BAQSIMI is not indicated for that.

On the sales force, we haven't said how many sales people we have, but we do have said that we have a contract sales force that we did engage. They began selling on October first, so they're out there right now marketing the product. So we'll have that expense in our P&L and in the selling expense line from now on. We've also, you know, repurposed some of our internal sales force to be BAQSIMI salespeople as well, so they're also on the job. But they're already doing this. You know, they trained all of these people were trained during the third quarter and ready to hit the ground running at the beginning of the fourth quarter. So that's definitely something that's ongoing.

Dan Dischner (SVP of Corporate Communications)

On the glucagon injection, the segmented. I think, the glucagon injection sales are about 31% in the retail space and about 69% in the non-retail space. So that's the different breakup there. And then what was the last question? The shortage on the shortage products. You know, we see shortage products every single quarter for as long as we've been reporting our sales. So, you know, somewhere, some product somehow is always in need. Currently, because of certain issues, we have a little more shortage products, and we're just happy that we planned accordingly and are able to meet those needs at this time.

Bill Peters (CFO and EVP of Finance)

Yeah, and then just going back to, you know, to elaborate on what Dan said. You know, I've, I've been at the company now 9.5 years, and every quarter we've had some benefit from other competitors having shortage problems. And it's frequently the Dextrose and the Sodium Bicarbonate, sometimes it's Epinephrine, sometimes it's physostigmine, sometimes it's Lidocaine, sometimes it's Atropine or Calcium Chloride. But there's always something that's going on in the market, and because we've, you know, we built that extra capacity about three to four years ago, we've been able to capitalize it, on it over the last several years. And it's something that, you know, we, we did as a strategic decision, and, you know, it's working out well for us.

Speaker 5

Great. Thanks for taking the questions.

Operator (participant)

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Dan Dischner for any closing comments.

Dan Dischner (SVP of Corporate Communications)

I wanna thank everyone for joining us today. We would like to characterize 2023 as a year of execution amongst our key high-margin products and the further enhancement of our company portfolio within the proprietary product segment, especially with BAQSIMI. We look forward to updating you all again. Have a great day.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.