Amphastar Pharmaceuticals Inc (AMPH) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Amphastar Second Quarter Earnings Call.

At this time all participants will be in a listen-only mode. But later there will be a chance to ask questions and instructions will be given at that time.

(Operator Instructions).

So before we begin today, I'd like to go through a few forward-looking statements.

This conference call may contain forward-looking statements including statements relating to Amphastar Pharmaceuticals. These statements are not historical facts, but rather are based on Amphastar Pharmaceutical's current expectations, estimates and projections regarding Amphastar Pharmaceuticals' business, operations and other similar or related factors.

Words such as may, will, could, would, should, anticipate, predict, potential, continue, expects, intends, plans, projects, believes, estimates and other similar or related expressions are used to identify these forward-looking statements.

These statements are only predictions and are such are not guarantees of future performance. And they involve risks, uncertainties and assumptions that are difficult or impossible to predict. Actual results may differ materially from those in the forward-looking statements. As a result of a number of factors including these described from time to time in Amphastar Pharmaceuticals' filings with the SEC.

And now, I would like to turn the program over to your host, Jason Shandell, President of Amphastar.

Thank you. Good afternoon and welcome to Amphastar Pharmaceuticals first 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.

Given that this is our first earnings call, I'd like to start by providing a high-level overview of the company. Amphastar is a specialty pharmaceutical company that primarily develops, manufactures, markets and sells generic and proprietary injectable and inhalation products, with a focus on products with high technical barriers to market entry.

Most of the company's products are used in hospital or urgent care clinical settings and are primarily contracted and distributed through group purchasing organizations and drug wholesalers.

Amphastar was founded in 1996 and our headquarters is located in Rancho Cucamonga, California which is approximately 40 miles east of Los Angeles.

We have a strong base business of 17 commercial products in total. These products include Enoxaparin, Cortrosyn, Lidocaine Jelly, Naloxone, and many critical care drugs that are listed in the FDA's drug shortage database.

Collectively, these products generated approximately $230 million in revenues and $87 million in gross profits in 2013.

It should be noted that the majority of this revenue was generated from Enoxaparin, the generic form of Lovenox. Enoxaparin is a difficult-to-manufacture injectable form of low molecular weight heparin which is used as an anti-coagulant and is indicated from multiple indications including the prevention and treatment of deep vein thrombosis.

I will now discuss our pipeline. We have a robust pipeline of 20-product candidates in attractive markets. Of these 25 candidates, seven are proprietary and 13 are generic. These product candidates generally relate to the therapeutic areas of endocrinology, hematology, respiratory and the reproductive system. Our pipeline is focused on product candidates that require advanced technical capabilities and multiple delivery technologies.

We are also focused on developing product candidates by leveraging our biosimilar capabilities including our capabilities in the areas of immunogenicity, characterization of complex molecules and analysis of proteins and peptides.

We have three ANDAs and two NDAs currently pending with the FDA. The three ANDAs pending at the FDA have a total market value of over $500 million. This is based on IMS data for the 12 months ended June 30, 2014.

Our two NDAs pending at the FDA are for Primatene and Amphadase. Prior to removal from the market for environmental reasons related to the CFC propellant, Primatene Mist had full year sales of $65 million in 2010. Prior to removal from the market due to lack of API, Amphadase had full year sales of $4.4 million in 2008.

In addition to the three ANDAs currently pending with the FDA, we have 10 generic products in development that have an aggregate market value of over $14 billion based on IMS data for the 12 months ended June 30, 2014.

Four of the products in development are injectables with a total market value of over $5 billion. And six of the products are inhalation products either metered dose inhalers or dry powder inhalers with a total market value of over $9 billion.

In addition to Primatene and Amphadase, which are currently pending with the FDA, the company's pipeline also includes five other proprietary drugs in development including injectables, inhalation products and other dosage forms such as transdermal.

Two of the five proprietary products in development are new chemical entities, the other three are existing molecules that may be filed under the 505(b)(2) regulatory pathway.

Our strategic focus with respect to our pipeline is to make substantial research and development investments to expand our product portfolio and grow our business by leveraging our technical capabilities as well as identifying and developing high margin opportunities.

We believe our emphasis and investment in research and development differentiates us from competitors, given our focus on the long-term growth of our company.

In addition to our strong product base and robust pipeline, we have a vertically integrated infrastructure and technical expertise which allows us to focus on products having high barriers to market entry.

Some examples of high barriers to entry for which we are very well suited to address in light of our technical expertise includes scarce API or raw materials that require unique synthetic capabilities, biochemical and other complex molecules needing characterization and immunogenicity studies, and manufacturing processes that are difficult or complex.

Our vertical integration reduces cost structure and improves our quality control. We're vertically integrated from research and development to clinical trials, manufacturing, marketing and distribution. In part, this is a result of our successful track record of company and product acquisition which I will now briefly describe.

Amphastar's first acquisition was its purchase of International Medication Systems or IMS in 1998. IMS is located in South El Monte, California and it manufactures 13 of our injectable products currently on the market, many of which are critical care drugs that are on the FDA's drug shortage list.

IMS also manufactures and supplies our Enoxaparin API.

In 2003, Amphastar acquired Armstrong Pharmaceuticals located in Boston, Massachusetts. Armstrong previously manufactured and marketed Albuterol CFC and Primatene Mist CFC, and it is the future site for the manufacturer of our inhalation pipeline products.

In 2009, Amphastar became an international company with the purchase of a facility in Nanjing, China which we have named Amphastar Nanjing Pharmaceuticals or ANP. Currently ANP is developing and being qualified to manufacture various APIs and starting materials that are difficult to secure. It is our goal that ANP eventually will provide 80% of the required starting material and API for our pipeline products.

More recently in April of this year, we acquired a facility in France from Merck which is now named Amphastar Pharmaceuticals France, or AFP. This facility manufactures and supplies insulin API and we recently entered into a materials supply agreement with MannKind Corporation to supply certain quantities of insulin API, which I will discuss further in the business update.

In the short term, we hope to support this facility by supplying insulin APIs to customers around the world. In the long term, we hope that AFP will help us achieve our vertical integration goals for our pipeline products.

In conclusion, each of our subsidiaries has key assets which allow for control over quality and compliance throughout the product development and manufacturing cycle of a product. We look to continue to maximize our current vertical integration as we continue to grow and further develop our vertically integrated infrastructure.

Let me now turn the call over to Bill to discuss Q2 financials.

Thank you, Jason.

Before I get into the financials, let me start by saying I'm very happy to be part of the Amphastar team and glad that we're able to complete our IPO process.

Sales for the quarter decreased 22% to $49 million from $62.5 million in the previous year's period, primarily due to a decrease in sales of Enoxaparin from $27.2 million from $41.3 million in the previous year's period. The decline in Enoxaparin was both due to lower unit sales and a lower average selling price.

Other product sales increased 3% to $21.8 million from $21.2 million. Included in this amount were our first $100,000 of insulin sales to a customer buying recombinant human insulin for R&D purposes.

Sales of Naloxone increased significantly but were partially offset by lower sales of other critical care drugs which had benefited in the prior year from the inability of a competitor to supply competing products.

Cost of sales declined to $34 million from $35 million on lower unit volume. Cost of goods increased as a percentage of sales to 69% from 56%. This trend was primarily caused by lower pricing for Enoxaparin.

Selling, distribution and marketing expenses grew to $1.4 million from $1.2 million.

General and administrative spending increased to $8.6 million from $6.5 million primarily due to higher compensation expenses including non-cash stock option expenses.

As most of you know, expenses related to the IPO which ran about $3.3 million over several quarters are not included in the income statement but are a reduction in the additional paid in capital line on the balance sheet.

The major contributors to the IPO expenses were our fees to lawyers, accountants and printers.

Research and development expenditures decreased to $6 million from $7.8 million. The biggest driver of this decrease was a reduction in pre-launched inventory expense. The company expenses inventory for products that do not have FDA approval yet. In the prior year period, the company expensed $1.4 million related to Primatene.

We anticipate R&D spending to increase in the third quarter due to spending on Primatene and other R&D projects.

The company reported a net loss for the second quarter of $1.2 million or $0.03 per share compared to the second quarter of last year's net income of $7.8 million or $0.20 per fully diluted share.

The company reported adjusted earnings of approximately $750,000 or $0.02 per fully diluted share compared to $8.9 million or $0.23 per fully diluted share in the second quarter of last year.

Adjusted earnings exclude amortization, non-cash equity compensation and impairments.

On June 30th, 2014, the company had approximately $64.1 million of cash and cash equivalents and $1.5 million of restricted cash and cash equivalents as we received our IPO proceeds on June 30th.

I will now turn the call back over to Jason.

Thanks, Bill.

We have closed the number of key transactions over the past several months and we've achieved some important goals that have strengthened our growth outlook.

On April 30th, we completed our acquisition of Merck's API manufacturing business in France which manufactures insulin API.

In order to facilitate the acquisition, we established our subsidiary in France, AFP, and we will continue the current site activities at AFP which consists of the manufacturing and sale of insulin API.

As part of the transaction, we entered in a various additional agreements including various supply agreements, including an agreement to supply insulin API to Merck Animal Health. We also entered into a technology transfer agreement and had the assignment of patents that Merck was operating under at this facility.

In addition, certain existing customer agreements were assigned to AFP.

Next on May 12th, the US District Court for the Central District of California denied a motion for summary judgment by Aventis Pharma in our qui tam case on behalf of the government which alleges that Aventis overcharged the federal and state governments for Lovenox due to false and misleading statements to the US Patent and Trademark Office and the FDA.

This lawsuit was filed by Amphastar in 2009, January 2009, and overcoming Aventis' motion for summary judgment brings us one step closer to recovering what could amount to substantial damages on behalf of the government, of which we would be entitled to approximately 15% to 30%.

And evidentiary hearing in the qui tam lawsuit was held from July 7th to July 10th. The purpose of the hearing was to determine whether Amphastar qualifies as the original source.

The district court issued a formal post-hearing briefing schedule on August 6th, instructing that Amphastar file its brief by August 11th, which we did; Aventis file its brief by September 10th; and we file our reply brief by September 24th.

The district court also set a hearing for closing arguments on the original source issue for October 10th of this year. We hope to report positive developments in this case in our future earnings calls.

Next, on May 22nd, we received a complete response letter or CRL from the FDA for Primatene which requires additional non-clinical information, label revisions and follow up studies including label comprehension, behavioral and actual use studies to assess consumer's ability to use the device correctly to support approval of the product in the over-the-counter setting.

Additionally in the CRL, the FDA noted CGMP deficiencies in a recent inspection of our API supplier's manufacturing facility which produces Epinephrine and indicated that our NDA could not be approved until these issues were resolved.

Subsequent to the receipt of the CRL, the supplier notified us that the CGMP deficiencies were satisfactorily resolved, therefore this condition for approval has been satisfied.

We intend to generate the remaining data required by the CRL and submit an NDA amendment that we believe will address the FDA's concern and support approval of Primatene.

We're in active communication with the FDA and have already made changes to the label and have commenced our follow up studies.

On June 25th, we completed our IPO at an issuance price of $7 per share. In total, including exercise of the greenshoe, 5.84 million shares were issued by Amphastar. The net proceeds received by Amphastar were $38 million after payment of the underwriting fees. These proceeds will be used for general corporate purposes, capital expenditures and possibly for a future strategic acquisition.

On July 31st, MannKind Corporation and AFP entered into a supply agreement pursuant to which AFP will manufacture foreign supply to MannKind certain quantities of insulin APIs for use in MannKind's product Afrezza.

MannKind has agreed to purchase annual minimum quantities of insulin API. The five-year aggregate price of MannKind's commitment equates to EUR120.1 million, which is approximately $160 million based on current exchange rates.

MannKind may request to purchase additional quantities of insulin over such annual minimum quantities. Unless earlier terminated, the term of the agreement expires on December 31st, 2019, and can be renewed for additional successive two-year terms upon 12 months written notice given prior to the end of the initial term or any additional two-year term.

MannKind and Amphastar each have normal and customary termination rights provided, however, that if MannKind terminates the agreement without cause or due to regulatory issues, MannKind will have to pay the full amount of all unpaid purchase commitments due over the initial term.

We are very excited by this agreement which is an important first step in realizing our long-term goals for AFP. In fact, we have already received EUR11 million from MannKind as a deposit and a relationship is off to a very good start.

With that update, we will now turn the call over for Q&A.

(Operator Instructions).

We'll give it just one moment for attendees to queue up.

And we'll take our first question from David Morris from BMO Capital Markets. So David, please go ahead.

Hi, this is Christine Charette in for David.

In terms of the announcement of MannKind and Sanofi putting together the global licensing agreement and Sanofi working to get its own insulin approved, could you talk about the likelihood that Sanofi could become the supplier for Afrezza and how could this impact you in terms of sales and also capacity at your insulin facility?

Sure. Well first of all, I want to emphasize that the agreement that we signed with MannKind calls for minimum commitments. So if they were to terminate the agreement to go with Sanofi, they would still have to pay for the full five-year commitment which is EUR120.1 million, that's a minimum.

You know, we do expect like any company that they should qualify a second supplier. But as we know, that can take many years to qualify. So this is a great short-term strategy for the next five years. We're going to be supplying this and it is a minimum commitment.

Thank you.

Okay, thank you. And our next question comes from Elliot Wilbur from Needham & Company. So Elliot, please go ahead.

Thanks, good afternoon. First question is with respect to Primatene HFA. Obviously you have a lot of information and a complete response letter, it gives you a roadmap for what you need to do going forward. But just wondering, have you had additional follow up conversation with the FDA, is there a meeting plan at any point in time so that the path forward is perfectly clear, there's no ambiguities and you have in place everything that you need to have in place in order to ultimately get the product approved?

And is there anything that we kind of on the outside can look at in terms of trial progression or trial initiation that gives us some frame of reference in terms of how the program is progressing?

Thank you, that's a good question. We're in active communication with the FDA. We are scheduling a meeting for the fall to discuss where we're at. At this time, we have revised our label.

You know, a big part of this is related to an OTC setting. So unlike a prescription where you have a doctor or pharmacist who can explain how to use the product, here we must ensure that all consumers including low literacy consumers can adequately understand the label.

In the situation of Primatene, you know, Primatene Mist has been in the market for 50 years. However, that was a solution using the CFC propellant. And now we've taken that to make it work with HFA. It's become a suspension. So the differences with the suspension if the product sits on the shelf, the drug can sink to the bottom, so consumers must know to shake before use. Very straightforward but we need to emphasize that on the label.

We've actually done some pilot studies recently with low literacy populations which have been very helpful. Based on that feedback, we have already revised our label and we have commenced our studies. And we're looking to discuss the initial studies and the path forward with the FDA this coming fall.

And that said, I don't think there's going to be any public thing that you're going to be able to see at this time. You're going to have to just rely on our continued disclosures about this.

Correct.

Okay. And then I want to ask a follow-up question on a couple of the base products or just one base product, specifically Enoxaparin; you know, obviously has continued to decline on a year-over-year basis. But at least this quarter and, you know, it was flat with last quarter, and obviously given we have potentially a new entrant at some time before the end of the year, just kind of wondering how you're sort of thinking about that product going forward. You know, obviously some elements are outside your control, but it looks like at least in the near term, that product has kind of stabilized. So just, some color there.

And then just more broadly on the portfolio in general, I was just sort of looking at some of the historical trends for a lot of the products. A lot of these are very limited competition products, but it doesn't look like historically there's been a lot of price inflation on some of your core products. So I'm just, you know, wondering what you're kind of thinking about the current environment in terms of potentially having a little bit more price in leverage there than maybe you had historically.

Yes, a couple of things, first on the Enoxaparin question; we have seen some stability from last quarter compared to a year ago. We expect that stability to continue until Teva does launch their product. We don't know when they're launching so we don't exactly know what the timing of that is going to be, but we would expect them to take some market share and whenever a new entrant comes in, lower pricing is usually the norm, so that is probably to be expected at some point.

However, you know, we are at the lowest market share of any of the competitors out there right now and we have some, you know, some long-term GPO contracts to go out several years and we feel very comfortable with those.

Our GPO market -- remember that we have -- we keep 100% of our profits for those products, whereas on the retail side, we only, we share those with Actavis. So we would expect and anticipate that our GPO market share stays relatively flat given we're the -- by far the lowest in that area right now. So hope that answered that.

On the portfolio, other products, you know, we have actually increased the prices over the last five years by almost 100% on average for the IMS-type products. However, we're currently undergoing a review of the pricing on all the products in that portfolio of both critical care drugs and non-critical care drugs. And as we go through that, you're right, there are products with limited competition and we even saw a recent recall from one of our competitors in the last week or so on a product where just the two of us competing.

So there potentially is room for some increase there and we hope to address that. But I'm not sure of the timing or the scope of that at this point, but this is something that we're looking very closely at and intend to act on it at some point in the not too distant future.

Okay. And just one last question -- recently, appeared on ClinicalTrials.gov that you're conducting a dose-ranging study for a product known as A006 which is a DPI formulation of Albuterol. I'm assuming that that is intended to be a branded product, 505(b)(2). I guess it would be theoretically possible to obtain bioequivalence to some of the HFA products that are out there. But I just want to confirm that that in fact is a 505(b)(2) versus potentially an ANDA program.

Correct, yes. So, no, that's progressing nicely. We're in phase 2. That will be a dry powder inhalation and will be under 505(b)(2).

All right, thanks, guys.

Thank you.

Thank you. (Operator Instructions)

And we'll take our next question from David Amsellem from Piper Jaffray. David, please go ahead.

Thanks. Just a couple -- so, wanted to get your thoughts on business developments and in particular, you know, what other kinds of capabilities do you think would be an attractive addition to your existing businesses. That's my first question and then I have a follow up.

As far as capabilities and acquisitions, there's a lot of -- we're very focused on I'll say the long-term strategy of the company. That said, we also are very focused on things that are scientifically complex and difficult to achieve because we are very confident in our science here.

So we're actively looking at other areas in both the injectable and inhalation space and other types of products and delivery systems that have high technical hurdles that would tend to lead you to believe that there would be limited competition in the future.

Yes, so to supplement that, you know, we do have some very advanced technology, as you can see by the approval of Enoxaparin, including characterization of complex molecules and the immunogenicity studies. Many of these, you know, will be used in the future of biosimilar products.

That being said, you know, many exciting products currently on the market, you know, Bill alluded in Naloxone, you know, obviously we sell Epinephrine injection. There's a lot of potential to actually have increased indication of some of our other products that are existing and even utilize different delivery systems.

So in addition to our pipeline, we can explore some opportunities for other delivery methods of our existing products that have very large markets.

Okay, that's helpful. And then another question just on the opportunities for Primatene HFA, assuming it bears fruit, can you just give us a sense or remind us what the incremental spend would be to support that product?

And then also in terms of some of your ANDA and 505(b)(2) shots on goal that would be distributed or dispensed in retail pharmacies, can you give us a sense of the extent to which you would need to partner some of those opportunities, any of those or none of those, if that is the case? Thanks.

Yes, first of all we're -- you know, we haven't disclosed what our budgets in -- are for the 505(b)(2) products. However, they are significant in some cases with, you know, large scale clinical trials.

To the extent we think that we might need to partner some of these products in the future, we will do so. And that would be both for reasons of significant budget spend on the R&D side and the [late scale] trials, but also on the marketing side if we felt that we needed a marketing partner because we don't have a branded sales force here that you might need for some of these products, so we would certainly consider partnering some of those products.

Also though on the generic side, we have partnered three of our inhalation products already. And we have not disclosed who that partner is. But the way that partnership works is that we're going to be doing the R&D and the science, and our partner is going to be handling the Paragraph 4 litigation cost for those products, because they're Paragraph 4s, and they'll also be handling the marketing.

That said, on the generic side, it doesn't take a large scale marketing for us to get into the retail market. So as we move forward down the road, we certainly can develop that capability in-house without a lot of work. So there's really be no need to partner on generic products other than for the Paragraph 4 costs to help defray some of the expense and also defray some of the risk associated with that.

And just to clarify on the partnership for our generic inhalation, we have six generic inhalation products in the pipeline. As Bill stated, we have a partnership with a very large generic pharmaceutical company on three of the six. They do have an option on a fourth product of those six as well.

That's very helpful, thank you.

Okay, thank you. So that does conclude our Q&A session for today. I would now like to turn the conference back to your host for any concluding remarks.

Thank you. So overall, we're very excited to have this as the first earnings call and to be a public company. We look forward to giving you updates as we continue to hit our successes in both our short-term and long-term goals. And always happy to answer questions going forward.

Thanks for everybody and we'll talk to you soon.

Okay, ladies and gentlemen, this does conclude your conference. You may now all disconnect and have a great day.