Amphastar Pharmaceuticals Inc (AMPH) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Amphastar Second Quarter 2017 Earnings Call. (Operator Instructions)

All statements in this conference call 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 its pipeline of product candidates, the timing for completion of construction at the company's IMS facility, its share buyback program and other future events. These statements are not historical facts but rather are based on Amphastar's historical performance and its current expectations, estimates and projections regarding Amphastar's business, operations and other similar or related factors. Words such as may, might, 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 contain these words. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and assumptions that are difficult or impossible to predict, and in some cases beyond Amphastar's control. Actual results may differ materially from those in the forward-looking statements as a result of a number 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 www.amphastar.com and on the SEC's website at www.sec.gov. Amphastar undertakes no obligation to revise or update information in this conference call to reflect events or circumstances in the future, even if new information becomes available or if subsequent events cause the company's expectations to change.

And now it's my pleasure to welcome and turn the call to Mr. Jason Shandell, Amphastar's President. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Amphastar Pharmaceuticals Second Quarter 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 second quarter financials.

Thank you, Jason. Sales for the second quarter decreased 4% to $65.2 million from $68 million in the previous year's period. Sales of enoxaparin declined to $8.3 million from $17.3 million due to both lower volumes and lower average selling prices. Naloxone sales declined to $10.3 million from $15.6 million on lower unit volumes at lower average selling prices. Sales of our epinephrine vial totaled $9.9 million in the second quarter and were the main reason why our total epinephrine sales increased to $10.6 million from $5.3 million. However, we discontinued selling epinephrine vials in May as requested by the FDA. Our other finished pharmaceutical products had volume increases as we were able to significantly reduce our back orders which we had going into the second quarter. As we have previously disclosed, these back orders were a result of our International Medication Systems facility shutdown of 2 months as we upgraded our quality systems, built a new filling room and installed new equipment. These improvements significantly increased our capacity, and they are scheduled to complete the validation process and be ready to manufacture in early 2018.

Turning to our insulin API business. Sales declined to $1.4 million from $4.3 million as we had no shipments to MannKind in the current quarter. Cost of revenues increased to $38.4 million from $36.3 million. Gross margins declined to 41% of revenues from 47% of revenues in the previous year's period, primarily due to lower margins for enoxaparin. Additionally, we increased our inventory reserves, including an increase to our enoxaparin inventory reserve of $2.9 million, due to a revised forecast of average selling prices.

Selling, distribution and marketing expenses increased to $1.6 million from $1.3 million in the previous year's period. General and administrative spending increased to $12.2 million from $9.5 million, primarily due to increased legal expenses related to the preparation for the patent trial against Momenta and Sandoz.

Research and development expenditures increased slightly to $10.7 million from $10.6 million as increased expenditures for clinical trials and active pharmaceutical ingredients offset a decrease in FDA fees, which were elevated last year due to our NDA filing fee for intranasal naloxone.

The company reported a profitable quarter, with net income of approximately $2 million or $0.04 per share compared to last year's second quarter net income of $6.9 million or $0.15 per share. The company reported an adjusted net income of $5.4 million or $0.11 per share compared to adjusted net income of $10.3 million or $0.23 per share in the second quarter of last year. Adjusted earnings exclude amortization, noncash equity compensation and impairments.

On June 30, 2017, the company had approximately $87.4 million of cash, cash equivalents, short-term investments and restricted short-term investments. In the second quarter, cash flow from operations was approximately $4.6 million and was positive for the 13th quarter in a row.

We also announced today that the company increased its share buyback program by another $20 million. The primary reason for the buyback program is to partially offset dilution from the company's equity compensation program, but this increase also represents the company's long-term faith in the fundamentals of the company. The timing of the increase is because the company significantly increased its share repurchases this year after the pullback in price. As of today, we have repurchased over $19 million of our stock this year.

I will now turn the call back over to Jason.

Thanks, Bill. I'd like to begin by discussing a major milestone for the company, which was our great victory in the patent infringement lawsuit against Momenta and Sandoz. We are extremely pleased by the unanimous jury verdict, holding that Momenta's patent is both invalid as a matter of law and unenforceable as a matter of equity. This outcome is exactly what we expected from the beginning of the case.

It should be noted that there were 3 issues that the jury decided: non-infringement, invalidity and enforceability. Although the jury found that Amphastar's test infringed the patent by performing general, well-known USP test procedures, the jury went on to find that the patent was invalid on 2 grounds: lack of enablement and lack of written description. Finally, with respect to the third element, enforceability, the jury determined that Amphastar's test complied with USP 207. Therefore, given that Momenta was on the USP panel but failed to disclose its pending patent, in violation of the conflicts of interest policy of USP, the jury found that Amphastar proved by clear and convincing evidence that Momenta and Sandoz waived their right to recover from Amphastar for infringement and that Amphastar proved by a preponderance of the evidence that Momenta and Sandoz are stopped from enforcing their patent against Amphastar. We are pleased that the jury determined that a U.S. company can freely use USP methods in the United States.

It should be noted that the third element, enforceability, was an advisory verdict since it is an equitable defense as opposed to a legal defense. Therefore, the court will take the equitable defenses but not the legal invalidity defenses under advisement and will determine whether a reasonable jury could have reached such a verdict based on the evidence presented at trial. Posttrial briefing on this third equitable defense will begin on September 20 and conclude on October 25, after which the court will issue a final judgment. Once we receive a final judgment from the court, we intend to pursue compensation for our damages, including enforcement of the $100 million bond from Momenta-Sandoz. We also intend to vigorously pursue our antitrust case against Momenta and Sandoz, which is currently set for trial on April 1, 2019, but the court has indicated a willingness to have the trial earlier.

We hope this explanation clarifies the legal issues as we are extremely pleased that this baseless patent lawsuit is finally behind us, and we can now move on to focus on science and our pipeline development, which is our company's core competency. We have always maintained that the facts and the law do not support the plaintiff's baseless allegations. Both the judge and jury did a great job at assessing the case, and it was a pleasure to see our justice system at work, and that the truth ultimately prevailed.

Now turning to FDA matters. I would like to report that we had 2 good meetings with the agency just last week, which is the reason that we pushed our earnings call back to today. First, we had a follow-up meeting with the agency regarding our CRL for Primatene mist. In this meeting, we presented an updated risk analysis, which supports approval based on the existing data from our human factor studies. We believe that it was a very productive meeting, and the agency is currently assessing our risk analysis and indicated that it would like to schedule a teleconference call this month. We're encouraged by the tone of the meeting, and we remain committed to relaunching the product in the OTC market.

The second meeting that we had with the FDA last week was a listening meeting regarding drug shortages since many of our critical care drugs are on the FDA drug shortage list. The agency emphasized its commitment to supporting this important public health issue, including prioritizing the inspection of our new additional production line at our IMS facility, where we manufacture drugs that are currently in shortage. We expect to finalize the validation of this new production line, which will double IMS' production capacity, by early next year. We thanked the FDA for its support, and we reemphasized our commitment to the drug shortage issues.

With respect to our CRL for intranasal naloxone, we had a meeting with the FDA in the second quarter to discuss the issues that need to be resolved in order to receive approval. It was a helpful meeting, and we are currently assessing next steps.

Finally, with respect to the pre-GDUFA ANDA for which we have been expecting approval, we'd like to add some color to our previous statements. This ANDA had a target action date in the first quarter of 2017. We did not previously disclose this date since the agency made clear that, unlike a GDUFA date, this date is only a target and could change. In fact, that is what happened. And the target action date was changed to the beginning of the third quarter of 2017. Although the FDA did not make a decision by the target action date, there are no outstanding questions, and we remain optimistic for an approval this year.

With that update, I will now turn the call over to the operator to begin Q&A.

(Operator Instructions) And our first question is from the line of David Maris with Wells Fargo.

A few questions. So first, congratulations on the court win. And if you were -- I mean, have you given any thought to -- if you do get damages in excess of $100 million or $75 million, what would be the primary use of that? Would it be to buy back more stock? Would it be for business development? Are there other R&D programs that you're holding back on? So maybe just some clarification on what that might be if it turns out to be something more than just a settlement and a $10 million payment to you. Separately, can you talk about the pipeline, the GDUFA -- not a GDUFA, but the target date that was the start of this quarter that's passed? Ordinarily, is there a dialogue that goes on around that, that was like, "Hey, we were expecting you to send us a note but haven't heard. What's going on?" Or do you -- is it just a wait-and-see approach at this point?

Yes. David, for the first question, if we get a significant number -- amount of cash in, we have had discussions with that. And actually, it was discussed at our board meeting this week and there are a lot of things that we could do, so there's been no final decisions that have been made. But I will say that the Board is -- as we just increased our buyback by $20 million, the Board is very much in favor of that. They'd also consider a special dividend. They've -- there are some R&D programs that we haven't started or that we've delayed, pending either multiple product launches to increase our cash flow because we have been managing the R&D spend so that our goal is to be profitable. And so we have delayed a couple of programs because of that. So like I said, nothing has been decided, but there are multiple uses for it. Business development is always a possibility. But right now, that's probably the lowest of those probabilities. We wouldn't allocate money just to do that. We'd have to find the right opportunity there.

And then -- this is Jason. On the target date for the pre-GDUFA product, we've had very good communication over the past year on this product with the agency. And so when the first target date got moved, they basically said, "Look, if you don't hear from us in a certain period of time, reach out to us." But then we did hear from them, and they gave us the second target date. And then as we came up to that, they did let us know that they would not make that date, and they would not provide a new date. The encouraging part was there's no outstanding questions. And so at this point, we're just waiting.

And just to clarify, there haven't been any outstanding questions since last year.

Correct.

So it's not like they've asked for something and we've responded. It's -- they've had all the data that they've requested for quite some time.

That's right. And as you know, we did have a pre-approval inspection in March of this year, which we fully responded to on April 21. So it's been a little over 3 months, which is a normal time frame. And that's why we are still optimistic for an approval this year.

And then just as a follow-up. The -- I think I've asked you this before. But in the next 12 months, what do you -- or maybe 18 months, how many products do you expect to have approved, new products approved?

That's always a difficult one. We expect this one product approved at any time, and we do have 5 other GDUFA dates that are pending for either later this year or early next year. However, all 5 of those are first cycle. So it's always hard to say whether -- I think the data, the GphA last year was that only 9% products were approved on the first cycle. So while we're very happy with our filings and think we've made very good filings, you just don't know with that.

And I would just add that several of those are priorities for the agency. First, generics. And we have had what we would consider a lot more communication than in the past on these products. So there are information requests coming through, and we're responding to them. So we're still hopeful. But to Bill's point, they are first cycle.

And our next question comes from the line of Elliot Wilbur with Raymond James.

Just a follow-up on David's line of questioning. So the products with the -- filed under GDUFA and the GDUFA action dates this year, are there -- or have you received CRLs on any of those? Or are they all still pending?

They are all still pending. So yes, so none of the GDUFA dates have arrived yet. These were -- a lot of these applications were filed late last year, and so we have not received any CRLs. We've received numerous information requests, which we've responded to.

Okay. And then on the pre-GDUFA product. Sounds like everything that is within your control is going according to plan. But just curious if there are any other elements of the supply chain where there may be a holdup such as an API supplier or anything and that's maybe why the agency hasn't responded.

No, no. We've got a good API supplier, so that should not be the issue. Like you say, everything is sort of in control on our end. I think there was the pre-approval inspection, so we're just waiting on that. But yes, in terms of API supply, other issues, we don't think that would be an issue.

Okay. Just turning to the base business for a couple of questions here. Specifically on enoxaparin, can you just sort of -- high level just kind of talk about your current thinking around that product? Obviously it was a huge win for you guys when you got it approved. And I think it just continues to seem to be kind of a very frustrating asset in terms of the revenue trajectory. And I'm not even sure at this point if the asset's really even profitable for you...

No, it's not profitable. So yes. So yes, that's why we had to take an inventory reserve, and we took one at the end of the year as well. So I mean, so we are selling it for below our cost at the moment. But it is our biggest volume product out of our Amphastar facility, so it's an important product out of this facility. So it makes sense to keep making it because we'd lose even more money if we weren't making it. The revenue has fluctuated a little bit. If you take a look at the first 6 months of the year, at kind of the run rate, that's probably where we are. I think we did a little over $10 million the first quarter, $8 million in the second quarter. So it's that $9 million, $10 million -- $8 million, $9 million, $10 million a quarter range is probably the right -- where we expect to be for a while.

Okay. And then with regards to epinephrine, you still have a PFS product in the market, I believe.

Correct, yes.

And I guess my understanding is that, that isn't really -- you don't really think you can recapture a lot of the sales from the vial based on the PFS...

No. I don't think that, that (inaudible)

Correct. But we are committed to getting approval and returning the vial to the market hopefully next year.

Yes. And of -- the vial was 1 of 7 products at the beginning of the year that we were selling that were unapproved. 4 of those, we already had previously filed applications at the FDA for, and we plan to file on the other ones. So...

Okay. And then just last question for Jason. Go back to your comments around Primatene. So what do we -- what should we, kind of on the outside, expect to hear from you guys on that as a going forward? Anything before next conference call or get a little bit -- get a little bit of info after?

Potentially. So right now, we are actually expecting a follow-up meeting via teleconference this month to discuss our risk analysis where -- which further supports the current data because what we're trying to do here -- although doing a study, as we've talked about, is not difficult, but we don't want to spin our wheels. So right now, what we're trying to do is sort of nail down the exact concerns of the agency. And that's what we did with our first meeting that we had following the CRL. Now that we understand what their issue is, we've done a reanalysis based on the 3 critical steps that were required to show the understanding of the label. And we've actually categorized those 3 steps with shaking being the most critical. So based on a more thorough risk analysis, we're looking at this again with the agency. And we should actually, on this point, sort of in the next 1 to 2 months, have a better understanding of whether they will accept that analysis or if we want to move forward and do another study.

And our next question comes from the line of Gary Nachman with BMO Capital Markets.

Depending on how Primatene and naloxone play out, if there was a positive outcome on those, would you be ready to launch them immediately? What would need to happen at your end internally to prepare for that? And I think it's safe to say that you would have to refile for both of those in a good outcome. I just wanted to confirm that.

Well, first, on the Primatene, we had made products going into the PDUFA date last year. It was unlabeled, so we were just hoping to get approval and then just make some final adjustments on the label. So we do have some bright stock that, theoretically, could be used. As time goes on, though, the longer it sits there, the less likely we will be able to use that; we'd have to start manufacturing again. However, we do have all of the components and supplies that we need, other than the labels and the boxes. So we just -- we need the wording, the exact wording on the boxes and the labels and the insert in order to do that. So we could make the -- we could launch Primatene relatively quickly after approval. The naloxone nasal spray intranasal product, we do not have the materials on hand right now. So that's not something that we would be able to launch.

And then with respect to your question on responding to the CRL. On Primatene, if they were to accept the reanalysis without any additional new data, theoretically, that could be approved without a response, but that would be a reconsideration. If there's new data needed or another study, then we need to submit that new data to the NDA as a response to the CRL. And then the bigger -- there's just the one issue on Primatene, which is the human factor studies. We view that as more straightforward. On naloxone, as I've said on prior calls, there are more significant issues, including the volume and the device itself. So there, it's much more certain that we would have to do a resubmission.

Okay. And then just a couple more for Bill. How will gross margin trend for the rest of the year? What are the big swing factors, given a bunch of moving parts? And were there any other big contributors and other finished products that helped in the quarter, aside from what you guys break out? It's hard for me to reconcile what's going on with the other products. And I also just want to be clear that $10 million from the epinephrine vials in 2Q, so that just completely goes away in the third quarter.

Yes. So the gross margin, the first part of that was actually -- really, that's the last part of that. The $10 million of the epinephrine vial was a very high-margin product for us. So that does go away, and that was very high margin. So our expectation is that the margin comes down off of that. The second part was your other pharmaceutical products. As I mentioned in my call, we had a large back order at the end of the first quarter, and we were able to fill that back order. And it was a variety of products, primarily from our IMS facility. So it included sodium bicarbonate, calcium chloride, dextrose, a couple other products as well. So -- but those were the main ones that had been in some back order situations that, yes, we were filling in the quarter. So it was a variety of those products.

Okay. So is that a run rate now for those other products for the back order or...

Partially, we were filling the back order. So...

Okay, so it will come down a little bit.

That comes down a little bit in the third quarter.

Okay. And can you just give us a range for where the gross margins might go with the epinephrine vials out?

I'd rather not do that at this time because we are going to have a couple of moving parts as well. We are looking at a couple of small price increases on a couple of those products as well that could have an impact by the end of the quarter.

And our next question comes from the line of David Steinberg with Jefferies.

Yes. I just wanted to get some clarification, Jason, from your comments about your conference call with the FDA. Did you say something like it was good to hear what the real issues are? I mean, I guess my thought is were there some issues that came up that you hadn't heard before? And if so, does this give you more or less confidence that you'll get approval? And I guess -- and I know I've asked this before. But at this point, are you wondering if the FDA is ever going to approve this product? I mean, it was on the market for decades and it was used by millions of Americans. And then the other question is on the share buyback. Does this -- you're allocating more funds for it; does this mean that you're seeing less attractive opportunities to buy, now that you made a number of acquisitions over the years and you've generally used cash to buy them?

Yes. Thanks, David. So actually, I was thinking of you specifically, even while I was sitting in this meeting. It was an in-person meeting at FDA last week, and they brought up an interesting point. They said this is a controversial product. But they went on to say that they are committed to approving it over the counter. And therefore, they've got to get it right, and we've got to get it right. And so one of the real issues, which I think we helped clarify was on the first call that we had with them following the CRL, one person made a comment regarding it being an acute rescue medication. And we really wanted to clarify that this is essentially for mild symptoms of intermittent asthma. An analogy being that you can have a drug like Nasacort, which is for allergies, but somebody who's going into anaphylactic shock for eating peanuts is not going to misunderstand that and try to use it instead of an EpiPen. So we really wanted to sort of break it down to the fundamental of the human factor study. And whether or not -- if somebody failed to clean the inhaler, if there really was a major risk of not getting the dosage and then what that risk actually means. And ultimately, our new risk analysis really shows that shaking is the true critical factor. And the other factors such as cleaning and the initial prime are less risky with respect to getting your dosage. So when I say the real issue, I think it's more about just sort of narrowing down the issues to the real core point. And I think one of the concerns is that people may try to use this in place of something like Albuterol and someone who really has life-threatening asthma, and we don't believe that's the case. It was over-the-counter for 50 years. And typically, people with severe asthma know they're in that category. And we're making it clear in our label that this is for mild symptoms. It's for intermittent asthma. And really, if you're having an asthma attack, you should call 911 or use your albuterol inhaler.

Yes. And your second question on the share buyback. There's a couple of things going on here. One, we have actually had a buildup of some cash over time as we've been able to generate cash from the business. And we have not seen acquisitions that are that attractive that we're really interested in, so that is definitely the case. But we also are very positive about our pipeline and about where the company is going. And because of that, we see the share price where it is now as a very attractive opportunity. And so we'd rather put the money that way. And Jack and Mary, being the largest shareholders of the company, don't want to see their shares diluted by the equity compensation program. So they want to keep their share of the company as high as possible. So that's a very significant influence to that decision.

Okay. And just one quick follow-up. Just philosophically, you've been -- in the past, you've been working on really hard to do products, high barriers to entry. And typically, you'd have a higher failure rate. But once the products reach the market, they would have a long tail and significant cash flow characters. So I was just wondering if instead of always going for triples and home runs that, perhaps, you would do some investing in products that have a higher chance of reaching the market where the investment dollars aren't that high, lower barriers and would, perhaps, give you some more consistency in your revenue stream. Any thoughts to doing that sort of approach, along with what you're currently doing?

Yes. Good question. And I always think of it in terms of home runs, triples, doubles, since we've had many conversations on this topic. And actually, we've gone back to management, and we have decided to go after some doubles. And we'll be looking to file those early next year. And so, yes, we continue to go after the high barriers that we always talk about, and we want those home runs. But we have started development on some doubles.

And our next question is from the line of David Amsellem with Piper Jaffray.

This is Sameer Kandola on for David. And I apologize, I joined a bit late, so I don't know if I missed it or not. But could you just provide some more color on the mix of injectables and inhalables within the ANDA pipeline and the development pipeline?

Yes. So far, we don't have any of the inhalation products filed, but we do have 6 in the pipeline. And we've mentioned previously that 1 of the next 2 filings we have should be an inhalation product.

Okay, got it. And then any early thoughts on how many ANDAs you expect to submit in 2018 and the dosage form mix amongst those future ANDAs?

Yes. We -- at this point, we were just focused on up to Q1 of next year. So by Q1 of '18, between now and then, we're looking to file 2 products.

Okay, got it. And then just one final one. Are you going to try to bring your epinephrine injectable product back to market via the conventional approval process? Or are you planning to just move on given that Endo has a patent listed in the Orange Book?

Yes. So we will continue via the conventional approval process.

And I'm not showing any further questions in the queue. I would like to turn the call back to Jason Shandell for his final remarks.

Thank you very much, operator. This concludes our call. Have a great day.

And ladies and gentlemen, we thank you for participating in today's conference. This concludes the program. You may all disconnect. Have a wonderful day.