Amphastar Pharmaceuticals Inc

NASDAQ:AMPH

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Amphastar First Quarter Earnings Conference Call. [Operator Instructions]

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 at the company's IMS facility, its share for 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, operations 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 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 http://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 reflect 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, executive]

Thank you, operator. Good afternoon, and welcome to Amphastar Pharmaceuticals First 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 first quarter financials.

[William Peters, executive]

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 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 second quarter of 2017 after the FDA requested that we discontinue selling the product under our 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 Pharmaceuticals 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 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 first quarter 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 first quarter of last year. Adjusted earnings exclude amortization, equity compensation and impairment of long-lived assets.

In the first quarter, 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 forecast. 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 2 of our ANDAs currently on file at the FDA.

I will now turn the call back over to Jason.

[Jason Shandell, executive]

Thanks, Bill. We made good progress on our pipeline in the first quarter, and I'm pleased to announce that we have resubmitted our NDA for Primatene Mist after receiving very good results from our recent human factor 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 used 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 filling volume, we plan to resubmit our NDA early next year.

Regarding our 5 grandfather drugs on the market, 3 applications are on file with the agency, and we plan on filing the remaining 2 applications this year. One of the applications is an NDA, which we filed in the first quarter.

We currently have 3 injectable ANDAs on file with the agency, targeting products with a market size of over $500 million. We have previously stated that 2 of the 3 ANDAs are significant markets. One of them has never had a generic approved and the other only has 1 generic approved.

As Bill mentioned today, we did receive 2 CRLs in the first quarter. 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 2 significant ANDAs that are on file with the agency. It should be noted that one of the products has 2 GDUFA dates, depending on whether a facility inspection will be needed.

Turning to new launches. During the first quarter, 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 third quarter of this year.

The litigation against Momenta and Sandoz is proceeding in normal course. On March 20, 2018, the U.S. District Court 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]

[Operator Instructions] And our first question comes from David Amsellem with Piper Jaffray.

[David Amsellem, analyst]

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 want? 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 the number one. And then number 2, just on the CRL you talked about, just wanted to be clear for the CRL that you termed minor and then on that refiling, is that the product that could be the first generic to market?

[William Peters, executive]

Yes, I'll take the first question on the NPA. The NPA -- 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 just from a manpower and from an API supply standpoint. So that's very positive. I don't want to talk about our exact market share, but as of today, we have achieved what we think is a pretty -- very good market share for it and kind of meeting our expectations. But as Jason mentioned, because, and 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 first quarter was really involved in the ramp up, as there were several customers who -- we're only -- we launched the vial in January, we launched prefilled syringe in February. There was 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 products. 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, executive]

And this is Jason. With respect to your question on the 2 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, 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, no CRL, is that right?

[Jason Shandell, executive]

That's correct. That's not one of the 2 that Bill referred to, received in the first quarter. But it is under a second cycle review from last year.

[Operator]

Our next question comes from David Maris with Wells Fargo.

[David Maris, analyst]

A few questions. So first on the components of the increased R&D expenses. Can you break that down a little bit more on how much were the increase like 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 should -- when you expect to get your cash?

[William Peters, executive]

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 was -- it's a 505(b)(2), where we did not have to run a clinical trial for the product, so that the fee there is only $1.2 million. So that was what that was. The other big uptick was the test -- when we filed the 10-Q either -- probably should be before the market opens tomorrow morning, you will also -- we'll 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 have -- where we put the reference list of drugs. So if we have to buy RLDs for clinical trial in the future, those show up in that line. So those are really the 2 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 or brand drugs that we'll be using in clinical trials later this year. Those were the really the big drivers of that increase. As far as the cash flow goes, we do expect that a 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, executive]

And this is Jason. With respect to the GDUFA dates, so yes, for 2 of our significant products, we have GDUFA dates. And as I was saying in my prepared remarks, one of them has actually 2 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.

Then on terms of -- I believe the next question was regarding Momenta, unless there was a third one, I think, for you.

[William Peters, executive]

I think, I already answered.

[Jason Shandell, executive]

Okay. Okay. So, yes, 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 have 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 the jury verdict, that we should move on to the bond motion. They've decided 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 is 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, that would delay it into next year, but I do not believe that's likely.

[Operator]

Our next question comes from Gary Nachman with BMO Capital Markets.

[Gary Nachman, analyst]

Jason, first for you on Primatene. Could you review the results from the human factor 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 margins trend for the rest of the year, understanding there were some one-timers in the first quarter?

[Jason Shandell, executive]

Sure. So starting off 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 an extremely successful study, and that's why we're making inventory in preparation for launch. And secondly, in terms of the review time, we respectfully requested a priority review. As we know, there could be a 2-month or a 6-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. And 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 and so that all is being looked at again. So it's the same marketing plan that we had from a year ago. And 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 and there will be regional marketing at the retail level.

[William Peters, executive]

And as far as gross margin trends, I think this is the -- should be the low margin mark for the year as we did have some onetime 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 ended up not only having to scrap the batch, but we were 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 4 days in a row, which is unusual for us and for a nonplanned shutdown like that. So there is some onetime things like that in the quarter. Additionally, we will be -- as I mentioned before, our goal is to be selling higher levels of -- higher-margin products like NPA in later quarters. And for the new launches that we're expecting later this year are going to be at higher margins as well.

[Gary Nachman, 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. The last one...

[William Peters, executive]

No. There's no really stocking on the NPA because it's already out in the market as a generic. So really no stocking. So it goes -- it should go up from there. And as far as enoxaparin, back to the issue of some onetime hiccups. We actually had some labels that came in with the wrong -- 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 onetime things like that. We would've actually shipped out several hundred thousand dollars more product than we would have if it had been for that as well. So there is -- so I think it should tick up a little bit from that level.

[Operator]

[Operator Instructions] And our next question comes from David Steinberg with Jefferies.

[David Steinberg, analyst]

I have a couple of questions on Primatene. It's nice to see the progress with the filings, certainly a long time coming. And I just wanted to get a clarification. When you say after a priority review, is that similar to a Class 1 review where you expect a 2-month cycle or a 6-month cycle? And are you prepared to launch -- assuming you get the product approved in the second half of the year, are you prepared 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 the peak sales were in the range of $65 million and 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 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 will take a long time?

[Jason Shandell, executive]

Sure. See, on the first question, we sort of punted on the 2 or 6 months that was per advice of our consultants. Initially, we were going to suggest the 2-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 they do, as we called it, a priority review. But we feel that -- by that -- by doing that, we provide the FDA with flexibility. So it could be a 6-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 a 6-month, but we basically couched it as what we believed 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 3- to 4-week lag between approval and launch.

[William Peters, executive]

And so -- and 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 just the price factor, and we'll be selling at a little higher price than we had previously. The second factor is that because of the dose indicator, there was actually fewer doses per unit that we'll 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 2 major drugstore chains out there are very anxious to get this on their shelves. And so we think that the initial sales would be very quick. As far as ramping up from there, we do believe that it will require a marketing spend to do that. I mean, we have a multimillion dollar ad campaign planned for that, primarily using online tools, not really venturing much beyond on the online scope at this point. But we think it will 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 is some amount that will have to be spent to get us to that $65 million. I think that's probably a 2- to 3-year time line 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, 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're planning to pricing it at, post approval?

[William Peters, executive]

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

[Jason Shandell, executive]

And then, by time -- then, of course, there was the retail price, which was in the low 20s. We think we can take it up. One of the positives when I referenced 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.

[Operator]

And our next question comes Serge Belanger with Needham & Company.

[Serge Belanger, analyst]

Apologies if you've already covered this, but I 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 NDA or ANDA filing produced products in the past. Just wanted to know where you are with that and [indiscernible] for the rest of the year?

[Jason Shandell, executive]

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 7 to 5 unapproved products. So we're currently marketing 5 unapproved products. And as I was saying in my remarks, of those 5, we have 3 applications on file, and we'll get the other 2 on file this year. And Bill, can you speak to the review of those unapproved products?

[William Peters, executive]

Yes. So we have the 3 months, in the recent quarter, it was about $35 million from those -- from the unapproved products.

[Jason Shandell, executive]

From those 5 products.

[Operator]

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

[Jason Shandell, executive]

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

[Operator]

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.