Amphastar Pharmaceuticals Inc

NASDAQ:AMPH

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Amphastar second quarter earnings conference call. [Operator Instructions] As a reminder, this call may be recorded.

This conference call may contain forward-looking statements, including statements relating to Amphastar Pharmaceuticals. These statements are not historical facts, but rather based on Amphastar Pharmaceuticals' 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.

I would now like to introduce your host for today's conference, Mr. Jason Shandell, you may begin.

[Jason Shandell, executive]

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.

The company had a great second quarter with sales increasing 11% and gross profit increasing from 37% to 41% as compared to the second quarter in 2018. Additionally, on June 27, we received $59.9 million from Sandoz and Momenta to settle all outstanding litigation between the parties. This significantly strengthened our balance sheet with total net cash and short-term investments of $127.4 million as of June 30.

We plan to use the settlement funds to continue to invest in research and development, including clinical trials for our inhalation and insulin pipeline, and also to expand our capacity at Amphastar for future pipeline products. Furthermore, our legal expenses will be dramatically reduced going forward, allowing our management team to focus on growing our core business and further advancing our robust pipeline of product candidates, including complex peptides, complex proteins and combination inhalation products.

Our pipeline continues to make good progress. We currently have 4 ANDAs on file, targeting products with a market size of over $800 million; 3 biosimilar products in development, targeting products with a market size of approximately $14 billion; and 11 generic products in development, targeting products with a market size of approximately $14 billion. With respect to our proprietary pipeline, we have one NDA file and 3 other NDAs in development targeting significant markets. It should be noted that 4 of our ANDAs on file with the agency were granted competitive generic therapy designations, which could help speed the time to approval. 2 of the 4 ANDAs have been previously disclosed, one is vasopressin, which has a 30-month stay due to the Paragraph IV litigation, and the second is epinephrine in a 30 ml vial. We have GDUFA dates in the second half of this year for our epinephrine ANDA and another undisclosed complex injectable product.

We remain on track to file 2 to 3 ANDAs this year, which are all injectable products. With respect to our first inhalation ANDA, we have had continued discussions with the agency, which have helped us enhance our robust development strategy. As a result of these interactions, we have increased the number of subjects in our ongoing clinical trial in order to provide more confidence in meeting our endpoints. Therefore, that filing is now planned for 2020. As you may be aware, there has been no previously approved HFA metered dose inhalers under an ANDA. However, we believe that our discussions with the agency will lead to a successful trial for our first inhalation ANDA.

We are also making good progress on our insulin programs and are having active communications with the agency regarding the IND that we filed in the first quarter. These information exchanges have been positive as we further focus our development program and establish a relationship with the BLA team at the agency. This is particularly important as the agency transitions from considering insulin as a drug to a biologic. With respect to our intranasal naloxone NDA, we had previously received general advice letters from the agency and are continuing to improve the product based on the agency's advice. There continues to be strong interest by the agency in this product, and we believe that our improved product will address all of their concerns. We anticipate resubmitting the NDA in 2020.

With respect to Primatene Mist, we continue to see a positive trend in the retail store level with a 50% increase in unit sales from the first quarter to the second quarter. In July, we began running national television and radio commercials and also launched the product on walmart.com. We believe that our online presence on walmart.com will provide a smooth transition for a successful launch into Walmart stores in the fourth quarter. In addition to focusing on increasing consumer awareness and selling to the large retailers and pharmacies, we are also beginning to expand distribution of the product to more independent pharmacies and small retail chains. We remain very excited with the prospects for Primatene Mist, and we continue to forecast a return to peak sales of $65 million in the next 2 to 3 years.

Finally, we continue to believe in our disciplined management strategy and vertically integrated business model that has enabled us to rise above the risks posed by the current trade and political tensions, while focusing on complex, hard to produce quality products. We strive to achieve long-term sales and profit growth from our organic pipeline, which should help insulate us from legal and compliance risks stemming from the pursuit of short-term gains.

With that, I will turn the call over to Bill Peters, our CFO, to go through the second quarter financial results.

[William Peters, executive]

Thank you, Jason. Sales for the second quarter increased 11% to $79 million from $71 million in the previous year's period. Phytonadione was our biggest selling product in the quarter with sales of $12.4 million, up from $10.8 million, primarily due to higher average selling prices. Lidocaine had a small sales increase to $10.1 million from $10 million. Enoxaparin saw a sales increase to $9.8 million from $8.7 million in the year prior as higher average selling prices more than offset unit declines.

Naloxone sales declined to $7.8 million from $11.1 million on lower unit volumes at lower average selling prices. Medroxyprogesterone sales increased to $6.7 million from $6.4 million.

Sales from Primatene Mist totaled $2.5 million as we began loading the product into wholesalers as part of our marketing plan to target independent drug stores and smaller chains. Higher sales of Cortrosyn, dextrose, calcium chloride, sodium bicarbonate and other products due to market shortages and higher sales of Isoproterenol, which was launched in the third quarter of 2018, also contributed to increased sales for our other finished pharmaceutical products.

Our insulin API business had sales of $5.3 million, down from $7.8 million in the prior year primarily due to the timing of shipments.

Gross margins increased to 41% of sales from 37% of sales as we had increased sales of high-margin products, like Medroxyprogesterone, Primatene Mist, Cortrosyn and Isoproterenol. Selling, distribution and marketing expenses increased to $3 million from $1.9 million primarily due to marketing costs associated with the launch of Primatene Mist. These expenditures were for our digital marketing campaign and the development of our television ads, which began airing in July.

General and administrative spending increased slightly to $12.4 million from $11.7 million primarily because of higher legal expenses related to the antitrust case against Momenta and Sandoz. However, this amount was significantly lower than the first quarter spending of $16.4 million as we settled the case in the quarter and were able to decrease spending.

Research and development expenditures increased to $16 million from $15.5 million for 2 reasons: one, the expansion of our R&D team at our China subsidiary, Amphastar Nanjing Pharmaceuticals due to the expansion of both pipeline projects and establish finished products for the Chinese market; two, to increase clinical trial expenses for our first planned inhalation ANDA. These increases were partially offset by lower expenses related to prelaunch inventory.

We usually don't mention other income on our earnings call because it is usually not material. However, this quarter, we settled our long-standing case with Momenta and Sandoz and received a $59.9 million settlement, which was booked to other income. I want to note that while this -- while the booked taxes for this payment will be at our normal rate for U.S. federal and state taxes of about 25%, or an amount close to $15 million, we are planning to use a significant portion of our deferred tax assets, including a small amount of net operating loss carryforwards and a larger amount of research and development tax credits, both at the federal level and for the state of California. This will bring the actual cash tax paid for this settlement to an amount closer to $2 million. So we will net about $58 million in cash from the settlement.

The company reported net income attributable to Amphastar shareholders of $47.8 million or $0.96 per share in the second quarter compared to a loss of $2.9 million or $0.06 per share in the second quarter of 2019. The company reported an adjusted net income of $4.1 million or $0.08 per share compared to an adjusted net income of $1.2 million or $0.02 per share in the second quarter of last year. Adjusted earnings exclude amortization, equity compensation, impairments of long-lived assets and legal settlements.

In the second quarter, cash flow provided by operations was approximately $51.7 million. Total equity increased to $364 million at the end -- from $364 million at the end of 2018 to $432 million at the end of June 30, 2019, an increase of 18.6%. And during the quarter, we repurchased $1.1 million of stock, which completed the buyback program authorized in 2018. As we mentioned on the last call, the Board authorized an additional $20 million buyback program, which we plan to utilize in the future.

I will now turn the call back over to the operator to begin Q&A.

[Operator]

[Operator Instructions] Our first question comes from David Maris with Wells Fargo.

[David Maris, analyst]

First, I noticed that you filed a DMF for teriparatide during the quarter. So a few questions. When would you expect to file Forteo? Secondly, will this be a product for the U.S. and international markets, since Forteo sells a lot outside the U.S.? Or is it just intended for the U.S.? And then I have another question.

[Jason Shandell, executive]

Sure. Yes. Definitely, always good to look at our DMF filings. Our Chinese subsidiary has been very active, currently have 12 drug master files and we're developing 6 additional. And with respect to your question, we do ultimately intend to sell both U.S. and internationally.

[David Maris, analyst]

And then just as a follow-up. What's the usual time line from filing a DMF to filing a product? Is there a good rule of thumb?

[Jason Shandell, executive]

I don't think there's a good rule of thumb. It really depends on the complexity of the product and, yes, discussions with the agency. We definitely focus on the more difficult to produce. So I wouldn't say there's a rule of thumb. It's going to be several years until we launch.

[David Maris, analyst]

And then, Bill, you mentioned the other finished pharmaceutical products that did very well, but you ran through kind of the components of what that benefit was at least too quickly for my typing. Can you just describe those again and whether or not those are -- if you had to characterize them, are those more onetime in nature? Or is that something like shortages that should continue for a while? Or is it a large enough number of products, where maybe some do and some don't, but this level of sales should be expected going forward, since it was a big step-up, sequentially?

[William Peters, executive]

So specifically, I mentioned the 4 products that had the highest sales increases due to shortages, and those were Cortrosyn, dextrose, calcium chloride and sodium bicarbonate. But there was also a few other products that also had some shortages, including one of the SKUs of Lidocaine and I'm trying to -- there's at least one of them. I'm not thinking about it right now.

Some of those products are still experiencing market shortages. However, we are shipping out as much as we can due to the capacity constraint that we have for most of those products because they're sold out of our IMS facility in South El Monte. The Cortrosyn sold out of the Amphastar. We do have some capacity here, so we are fully able to satisfy that. But on things like the sodium bicarbonate, we can't really even meet up -- keep up with the demand of that product still. But these products have had a history of having a shortage for a few quarters and then coming back and then a different mix of products. It just happened that this quarter was a little bit different in that the Cortrosyn, which is at a higher price level and a higher-margin level is also experiencing shortages, while the critical care products are -- were also experiencing shortages. And just another word on that is that as we've been telling people, we've built extra capacity at that factory recently and we're still in the process of validating that. We hope to have that factory online by the end of the year.

[Operator]

[Operator Instructions] Our next question comes from Gary Nachman with BMO Capital Markets.

[Gary Nachman, analyst]

Primatene sales stalled a bit in Q2 relative to 1Q and 4Q. So how much was additional stocking in the quarter versus reorders that are coming through? And are you still expecting to get into Walmart? When will that be, did you say that would be in the fourth quarter?

And then what sort of impact do you expect that TV and radio ads will have? You just started them in July. I know it's early. But just give us a sense of the magnitude and when we could see an impact from that. And then I have a follow up after.

[Jason Shandell, executive]

Sure. So let me begin. This is Jason. So I'll start with the Walmart question and the advertising question, and then I'll turn over the stocking question to Bill. So with respect to Walmart. Yes, we're set to launch in the fourth quarter. So yes, we're very excited about that. They intend to place the product in all Walmart stores, and we think that's going to be a really good increase in sales for the company.

I've said in the previous call that historically, the CFC version of Primatene, Walmart made up 35% of sales. So we're excited. They seem excited by the product, and there should be some good promotion, both in store, and we may even ramp up some of our ads because we are -- it is early to your point, but we're seeing very good indication that the ads are working.

We saw a very big surge in sales with the -- so we get lagging data from the major retailers. In one of the major retailers, we saw the highest weekly sales since launching at the major retailer following the advertisement. We've also seen a significant increase in traffic to our website. So we do believe that the ads are working and we're getting more consumer awareness.

[William Peters, executive]

And to your question on stocking. If I had to characterize, the fourth quarter sales were entirely stocking, first quarter sales were primarily stocking with a little bit of reorders and this quarter was a little bit of stocking, but it was primarily reorders.

[Gary Nachman, analyst]

Okay. And then for enox. So is this the normalized run rate now going forward? It was down significantly from 1Q. So did you lose share? Or did the price contract? And then G&A was a lot lighter, like you said than 1Q. So I just want to get a sense if that's a new run rate now that you have some of the litigation spend out of the way?

[William Peters, executive]

So first of all, on the enoxaparin. We did -- there is increased competition in the market now. So that took a toll and will continue to take a toll on both the number of units we sell-in and the pricing, so that did come down over the course of the quarter. So there's that.

On the G&A, our legal expenses will come down pretty significantly from where they were, especially in the first quarter where they're very high. But we do have some increased spending on some compliance costs as well, and that will ramp up a little bit more and offset part of that in the second quarter.

[Operator]

The next question comes from David Steinberg with Jefferies.

[David Steinberg, analyst]

I have a couple of questions. First, on business development. I know that you have been acquiring in the past, but you typically have not used debt thankfully and equity, but instead, you've used cash. So now you've just got, I think, $50 million in cash. And most of your transactions have been relatively small. So does this increase the likelihood of something near term? Did it increase your appetite?

And if you are in fact looking for assets, what sort of pricing have you been seeing if the valuations still high? And then just to clarify what Gary had asked before on Primatene regarding Walmart. You said the launch would be in Q4. Does that mean the load will also be in Q4? Or would the pipeline still be in Q3 for the Walmart Primatene?

[Jason Shandell, executive]

Sure. Yes. So with respect to business development, we do have a strong balance sheet now. And it does increase our appetite. We are seeing better valuation. We're very disciplined. When we do an acquisition, it has to be very synergistic. There are some opportunities out there. It's just a matter of valuation. So we're continuing to look and we'll provide updates as we go.

For now, though, obviously, our core competence is organic growth. And we do have some expensive clinical trials. So we'll put some of the money towards that. But yes, we definitely have increased our appetite for some business development at the right price and the right products that would be synergistic.

[William Peters, executive]

And just to clarify, it was really closer to $60 million because we're utilizing those tax credits. We really did have a nice -- we'll have a nice cash flow in from that settlement. And as far as the load into Walmart goes, it's probably going to be a fourth quarter event.

[David Steinberg, analyst]

Okay. Just a couple of quick follow-ups. So on your gross margin, it looked like it was a decent clip, weaker than, perhaps, what we'd expect. Any reason for that? And secondly, you mentioned the GDUFA in the second half of the year for that large undisclosed product. So just to ask you about that. Could you clarify the timing in the second half of the year? It's a big window. And secondly, in the past, you've described it, I think, as close to a $300 million product, off-patent for a while, no generics. Has anything changed either in terms of has there been a generic approved? Or is the sales size still about $300 million?

[Jason Shandell, executive]

Sure. Yes. So that -- we have 2 GDUFAs in the second half of this year. The one is for the epinephrine, the other is for this large undisclosed product. We'd rather just keep it general, since at this point, it's August, so we have 4 months remaining. But in the next 4 months, we will have 2 GDUFA dates, and we're excited by the possibility and perhaps the probability of getting both of these approved. So those could be drivers. We're confident in the approval. So we're trying to see if we could launch soon thereafter. And then we can get sales for the fourth quarter, which would be great. And then with respect to the next question, I'll turn that back to Bill.

[William Peters, executive]

Gross margins, yes. So on the gross margin, it is higher than we had been experiencing. So we did have higher sales of products that were higher-margin products like the Primatene and isoproterenol and medroxyprogesterone. But then we did have a little bit more weakness on enoxaparin this quarter with that price coming down and also the naloxone price coming down a little bit. So there's definitely some offsets there.

But just as we take a look at the drivers of growth for the rest of this year and the quarters to come, we expect Primatene Mist to keep ramping up, and that's a very high gross margin product. And we expect that the new products that we hope to launch the 2 products that have GDUFA date later this year, we would expect to have both of those to have very high gross margins as well. So we think that, that gross margin trend continues to go up as we go on.

[Operator]

Our next question comes from David Amsellem with Piper Jaffray.

[David Amsellem, analyst]

So I joined late, so you might have addressed this already. But just an update on the specific inhalation products in the pipeline and your thoughts on filings for later this year. And just thinking higher level, this is more beyond this year, just how we should think about the pace of filings or the advancement of inhalation products. I mean you have Primatene with -- how should we think about the longer-term expansion of the inhalation portfolio? Last question on Depo-Provera, the generic, just any color on the competitive dynamics there. And where you think that product will trend back half of the year and into next year?

[Jason Shandell, executive]

Sure. Yes. I was wondering if anyone would pick up on actually what was the new disclosure related to our first inhalation ANDA. For competitive reasons, we've always been pretty close to the vest on that and have never disclosed whether it's a dry powder or a metered-dose inhaler. So today in my prepared remarks, I did say that it will be an HFA metered-dose inhaler. So that's -- as everyone knows, that's an area of expertise for Amphastar. We've got a lot of expertise with Primatene in terms of reformulating the CFC to HFA. And so that is something new that we've disclosed that it is an HFA MDI.

Now on the last call, we had discussed filing it late this year, but in my prepared remarks, I was discussing that we have an ongoing clinical trial. And after further discussions with the FDA, we decided to increase the number of subjects in order to provide more confidence in meeting the endpoints. So now we're making good progress. But we are now forecasting to file that ANDA in 2020 as opposed to the end of 2019.

And then, let's see. In terms of the sort of the future of the pipeline. We want to keep a similar cadence to what we've had over the last couple of years. So what we're seeing is about 3 approvals. Our hope is to get 2 to 3 approvals on an annual basis. And then we're looking to file on an annual basis, approximately 3 products every year. And we think for a company of our size, given the complexity and the large markets that these products are focusing on, it will be very large opportunities for a company with our market cap. And then finally -- yes?

[David Amsellem, analyst]

Specifically on inhalation, though. On inhalation, is that going to be more of the filing mix from this year?

[Jason Shandell, executive]

Yes. Yes. So we are focused right now. I talked a lot about this one MDI that has got ongoing right now in the clinical trial, targeting filing that next year. There's another inhalation product that we're working on in parallel, so that will be part of the mix as well. But as you know, we've got a large number of inhalation, and you'll see more of those coming into the mix next year and 2021.

And then the generic Depo-Provera, there is some more competition in the market. But we've always felt this is a great product to produce because it's so difficult to manufacture, and so we think we have a really good process in place that will allow us to produce quality product for many years to come. So we do expect as a generic company, to see more competition, but we think we can strongly compete, especially with respect to this product.

[Operator]

Our next question comes from Serge Belanger with Needham.

[Tian Sun, analyst]

This is Tian on for Serge. So besides Walmart, which you secured for the fourth quarter, is there any other retailers that you're looking at, big discount retailers or even supermarkets that you're looking for? And then in terms of the independent pharmacies and the smaller chain pharmacies, how big are these markets relative to the big 3 pharmacies like CVS, Walgreens and Rite Aid? And then lastly, I think you mentioned about online sales of Primatene. So do you have any breakdown in terms of sales of in-store versus online that you're expecting to reach in the near future?

[Jason Shandell, executive]

Sure. Yes. So we're really excited by Walmart. I mean as I said earlier, that made up 35% historically of our sales. And so when it comes to independent pharmacies, we're exploring all avenues. We want to get this out across the board, online, independent pharmacies.

We are in discussions with other large retailers and groceries, but really we see it as like the 80-20 rule. You get Walmart, CVS, Walgreens, and that's a huge percentage of the market. But we are exploring all opportunities including in the long run, Amazon as well. So we see this as a very exciting product and are very encouraged by the upcoming launch to Walmart.

[Operator]

At this time, I'm showing no further questions. I'd like to turn the call back over to Jason for any closing remarks.

[Jason Shandell, executive]

Thank you, operator. I want to thank everyone again for joining us today. We are pleased with the progress that we've recently made and remain confident in achieving our long-term goals and enhancing shareholder value. We look forward to talking with you in the future, and hope everyone has a great day.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.