Q4 2019 Earnings Call
[music].
Good morning, everyone and welcome to undeniable fourth quarter, two dolphin 19 earnings call.
At this time all participants are any listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session.
Registered to ask a question that anytime by pressing the star and one on your Touchtone phone if he would like to withdraw your question. Please press the pound key on your Touchtone phone. Please note. This call may be recorded and it's now my pleasure to turn todays program over to Mr. Arthur Press felt please go ahead Sir.
Thank you Laurie good morning, everyone welcome to analyze earnings conference call for the full year in fourth quarter 2019.
So my Name's arc was born to see no. Joining me today is Stephen carry our Chief Financial Officer.
Before we begin I want to refer everyone to the forward looking statements language in this mornings press release, and that's contributing to it carefully as important context for this conference call.
Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principle.
Reconciliation of those non-GAAP financial measures can be found earnings release dated today.
And I reported 40, or 2019 net revenues of 206 and a half million dollar.
Adjusted non-GAAP gross profit of $146.9 million were 71% in that revenues and adjusted non-GAAP EBITDA up $83.2 million worth 40% of net revenue.
Our 2019 net revenues increased by 2.5%.
Gross profit dollars increased by 9% and focus our record amounts for at night.
Our net revenues and gross profit on three of our generic products were significantly impacted by competitive price erosion in the third and fourth quarter of 2019.
The resulting impact was an annual estimate a decline of $21.7 million revenues.
Annual estimate a decline of $21 million in gross profit.
In 2020, we expect to offset the impact of these declines through the recent launch of vancomycin oral solution and the subsequent January 2020 acquisition of a marriage and marketed products and pipeline.
For 2020, we're providing good point that revenue guidance of $218 million, an increase of 6% and.
Adjusted non-GAAP EBITDA guidance of $83 million, the same number as compared to 2019.
Our 2020 guidance does not include any effect from additional acquisitions.
And does not include any stuck on the potential lots of controls in jail.
Steve will provide you with additional commentary on our financial results.
Much of an ice growth has been and we'll continue to be achieved through acquisitions.
Recently acquired a marriage into U.S. assets for 52, and a half million dollars, which we funded entirely from cash on hand.
Acquisition included 23 generic products 12 products are currently commercialized and 11 products or pipeline drops.
The acquisition was immediately accretive to revenues and gross profit and assist expanded our commercial generic drug portfolio to 47 products.
Our generic pipeline now includes 118 products with a combined annual market size, a 7 billion based on data from Iraq War.
Over the last several years, we have completed 15 generic drugs deals for a total of $135 million.
In 2019 alone these deals contributed $96 million in generic drug revenue.
Additionally.
Most of our branded revenues have been acquired in eight deals for a total of $181 billion not including the 75 million for core Tropin gel, our largest pipeline opportunity, which is rapidly approaching is targeted regulatory filing date.
In 2015 to 2019, the cumulative branded revenues from these deals has been approximately $260 million, yielding gross margins are better than 90% with minimal SGN a expense.
As an important part of our strategy and I could intends to continue to acquire assets from time to time.
However, the current environment for generic drugs, such as solid oral drugs that are sold through in Threeq consortium to control, 90% market share remains highly volatile.
In addition to simply having too many generic manufacturers chasing too few customers. The industry is littered with companies that are overlap where did undercapitalized.
Leading to desperation in the marketplace, the unduly pressures generic profit margins more than ever before.
Holidays and within a generic drug business must happen before we don't pricing stability can be achieved amongst those companies doing business with the three consortium.
And I will continue to explore tuck in acquisition opportunities in this space that meet our strategic evaluation criteria.
Nonetheless, as a result at the highly competitive generic market created by this week consortiums and I also intends to pivot and explore acquisition opportunities in areas, such as Injectables and specialty drugs that can provide Roe.
Both gross opportunities and risk diversification, where our business model.
In other words drug products that are not sold through these three consortium.
You have seen us pursued a strategy over the past year as we have expanded our injectable pipeline.
Launched vancomycin oral solution, a long term care at hospital product and launch, particularly Im injection a critical hospital drug.
Our biggest opportunity in this effort is of course quarter off in jail.
We are now approximately 30 days away from filing the supplemental and yet.
No one is a prior approval supplement or p. or yes for our core trough in jail drug product.
This has been our targeted filing date for sometime now all activities continue to advance as planned.
Recall that core trough in jail isn't already approved and D.A. last marketed and 19 nineties.
Requires a prior approval supplement body F.D.A. in order to be commercialized the drug.
[noise] the supplemental N D. A regulatory filing is the result of approximately four years of development and an investment of over $100 million 75 million to acquire the N.D.A. and over 25 million to advance the drug to filing.
The result of our development effort. Its appeal. This filing that includes 36 analytical methods.
The characterize commercial scale batches of core Charleston.
The pharmaceutical ingredient.
Several methods where validated from the approved then D.A.
The new methods were employed as part of the modernization process to demonstrate an unparalleled in depth understanding the quality impurity europeanized corticotropin active pharmaceutical ingredient.
Another major component of the modernization effort was viral clearance validation.
Which was not required when this product was originally approved.
And ice corticotropin <unk> manufacturing process has successfully completed viral viral clearance validation.
[noise] quoted corticotropin active pharmaceutical ingredient is known to be a complex mixture of peptides, primarily H.C.G.H. one to 39.
And I has completed peptide mapping to identify the related peptides presents a greater than 0.1% in all process validation batches.
The results demonstrate consistent peptide levels in all three commercial scale process validation batches and indicate a manufacturing process that is well controlled and consistent.
All commercial scale batches of corticotropin Apiay consistently met both to historical M.D.A. specifications and also the new modernized apiay specifications.
Results from these methods for all commercial scale H.T.I. batches had been assemble the comprehensive apiay characterization package.
And I intends to file with the PPA, yes.
The supply chain for quota for could Tropin shell from the slaughterhouse harvesting the pit pituitary.
In a manufacturer of active pharmaceutical ingredient and finished dosage form products.
It entirely based in the United States.
An intentional an integral part of our development effort.
We have successfully manufactured threeq commercial scale process validation batches of finished dosage form quarter open Joe.
All commercial scale batches of quarter, often gel have consistently met both historical and do they specifications and also the new modernized drug product specifications two of the commercial scale batches are stable at six months real time stability would have been analytically consistent with regards to quality in yield.
I have met all release specifications.
Batch stability pool is today and we expect this batch to yield results consistent with the other two that says.
Additionally, we have validated commercial drug product manufacturing by bracketing, two batch sizes to facilitate flexibility in order to conserve a P. I need to manufacture only what is needed to be market demand.
Filter validation and media fill simulation have also been successfully completed.
We remain on target to file the P. S. In March 2020, and to address and meet the F.D. briefing book comments from our types.
After the meeting.
Commercial launch activities for quarter, often gel have already begun.
In the third and fourth quarter of 2019, we began building inventory of both pick pituitary is an active pharmaceutical ingredient and we invested $6.7 million against that.
We will continue to invest in commercial launch inventory, an estimate spending an additional 11 and a half million dollars and 2020, but big pituitary. They PCI and finished dosage form could trough in jail.
This inventory investment will allow us the opportunity to effectively compete for 50% marketshare upon launch.
Our commercial launch strategy and business model for core Tropin gel were being placed unimplemented before and at the time of FTC approval competitive reasons, we do not intend to publicly describe our launch plan, but continued to be on record and I will offer substantial discount.
Core Tropin show as compared to XR gel market pricing.
We strongly believe that the economics of drug pricing is an important dynamic that's helped drive utilization and market share in today's pharmaceutical markets.
As such we continued to see the public outcry or where the price of drugs and more specifically axoguard shell.
As recently as February 2020 complaint was filed by Marietta, Georgia used to work exorbitant unconscionable to describe outdoors price and even went so far is to accuse mallinckrodt the legal kickbacks to doctors.
Whether true or not just complaint is representative of continued public step towards drug pricing and in this instance, XR gel.
In the past, we have heard that synthetic corticotropin products potentially compete against our core Charleston gel.
We now know that the two companies who are advancing synthetic versions have a band it their development efforts in a recent a serial press release recall they acquired the Synthetics and act and product from Mallinckrodt NFCC action, They announced they were abandoning their snacks in development effort.
This effectively leaves and I would see only near term opportunity to compete against Mallinckrodt XR gel as the drug did successfully back in the 19 nineties.
Very nice quarter, often gel remains a transformational opportunity.
Not only can we potentially save health care hundreds of billions of dollars, but quarter often gel can also potentially provide outside returns to our shareholders and help advance our business model.
We believe that one's commercial quarter open gel has the potential to provide annuity like revenue stream and night, because we believe that is highly unlikely that a competitor could successfully commercialize a generic version.
I've described protropin jealous of potential 200 million dollar free cash flow opportunities for Indiana.
Let's examine the effect of half that number 100 million, which would approximate 20% to 25% market share after an ice ascribed discounted market price.
In addition to more than doubling our current free cash flow and likely our equity value incremental cash flow could be deployed an additional product development and business development activities to further broaden our commercial portfolio and leverage.
And I was brand and generic infrastructure.
Not too many pharmaceutical companies with an ice current size and scale had been near term opportunity like quarter open Joe.
This is why we continue to describe our quarter open gel opportunity as transformation.
Lastly.
Well deserved hearty congratulations to our dedicated core Tropin gel development and regulatory individuals for all their efforts and helping to advance this important drug back to the health care market.
What a great job.
I will now turn the conference call over to our CFO, Steven Carrie will provide you with more details on our financial.
Thank you are and good morning to everyone on the line this morning.
For the year ended December 31st 2019, and I posted record net revenues adjusted non-GAAP gross profit and adjusted gross margin.
Annual net revenues were 206.5 million up 5 million or 2.5% from prior year.
Adjusted non-GAAP gross profit reached 146.9 million up 12.7 million or 9%.
And adjusted non-GAAP gross margins were over 71%.
We generated 45.6 million of cash from operation and importantly continued to invest significant levels of cash back into the business, while maintaining financial and balance sheet discipline.
Adjusted non-GAAP EBITDA was off 1.2 million from prior year levels at 83.2 million well adjusted EPS was down one cents at $5.06 per diluted share.
As of the December 3rd 31st balance sheet date, we had 62.3 million avant restricted cash up 19.3 million from prior year and up to 2.6 million from September.
This balances net of 20.9 million of business development close during the year in support of expanding our future pipeline opportunities.
6.6 million of capital expenditures made in support of advancing the capabilities of our three manufacturing plant.
On December 1st we successfully refinanced the majority of our 118.75 million dollar convertible debt.
By exercising our option to borrow $118 million pursuant to the delayed draw term loan feature in our 265 million dollar senior secured credit facility.
The company experience no equity dilution related to the maturity of the convertible notes.
Total net debt as of the balance sheet. They was reduced to 125.2 million, representing 1.5 times net leverage and 2.3 times gross leverage on a trailing 12 month basis.
Looking forward, we expect to continue to reinvest our cash flow from operation in business development opportunities.
In January of 2020, we used 52 and a half million of cash from the balance sheet to acquire 12 currently commercialized and 11 pipeline opportunities from American.
In addition, the 75 million dollar revolver portion of our credit facility remains Undrawn and provides us with flexibility in continuing to pursue further business development transactions in 2020.
During 2019, we invested approximately 10 in half million in court Tropin related research and development as we continue to progress towards our March 2020, supplemental and E filing.
In addition, we invested 6.7 million in prelaunch raw material and <unk> inventory in order to ensure that we are ready to launch for trokendi into the market. Shortly after after the approval of our filing.
We currently anticipate investing upwards of 11 in half million behind the additional pre launch inventory and 2020.
Please recall as discussed on our third quarter earnings call that these pre launch inventories represent good that will be utilized in saleable commercial commercial batches upon FDA approval.
Ordinarily materials purchase for commercial sale would be capitalized as inventory. However, since we are dealing with a novel product they must cleared the supplemental and be a regulatory pathway with the FDA gap dictates that such expenditures cannot be capitalized and must be expense when purchase.
In order to said transparency on the physical build of core Tropin inventory, we have broken this activity out on a separate line item on the P. now and disclosed further information in footnote number 13 to our financial statements.
In addition to these core tropin related activities. During 2019, we invested 9.2 million in generic research and development.
We also continued to invest behind and integrate our a Eni, Canada subsidiary and manufacturing facility.
Completing three tech transfers are they in I'd product into the plant with a force nearing completion.
Recently, securing new third party business for our contract manufacturing capability.
These annual figures that accomplishments were achieved despite weathering significant fourth quarter competition against one of our most important generic franchises.
During the fourth quarter, we took significant price reductions and shelf stock adjustment in order to defend our share of yes.
Against two competitors that launched within days of one another in early November.
These actions coupled with continued volume declines in M.T. and enroll L.A. led net revenue for the three months ended December 31st 2019.
To be down 9.2 million or 16% from prior year to 48 million.
Resulting gross profit declined let the fourth quarter adjusted non-GAAP EBITDA of 17.4 million <unk>.
<unk> down 4.8 million from prior year, and adjusted non-GAAP EPS of one dollar an eight cents per diluted share down 24 cents from prior year.
In addition, during the fourth quarter, we decided to exit the methylphenidate E. R market driven by the fact that this market has become highly commoditized needing to on attractive price dynamic.
In addition, we voluntarily exited the generic remedied market due to industry wide F.D.A. investigations of the N.B.M.A. impurities.
And in the vast majority of drug product for this compound.
In conjunction with these actions we recognize the 3.5 million dollar PML charge reserved for all remaining inventory related to these products.
We have added this back for the purposes of our non-GAAP measures.
Excluding this charge our fourth quarter cost of goods sold was 14.3 million or 30% of that revenues.
As compared to 20.1 million or 35% of revenues in the prior year period.
These challenges occurred during a period in which we are building momentum behind our September 2019 launch of bank of Myos, an oral solution.
This product provides an F.D.A. approves the alternative to market. It is largely served by compounding pharmacies.
It is not a typical AG related generic launch and therefore, we currently anticipate revenues to ramp up overtime as we build market awareness and product adoption through our virtual marketing and awareness campaign.
In addition in December we launched for two Liam possibly injection, our first marketed injectable product, which is used in emergency room setting.
In conjunction with this product we launched a campaign to reintroduce this lifesaving therapy to health care providers and hospital formulary decision makers.
These products are prime examples of our increasingly diverse commercial product offering.
Turning our attention to 2020 guidance.
It is important to note that our guidance is exclusive of core tropin revenues and prelaunch sales and marketing expenses.
Well, we firmly believe that quite tropin has the potential to be the most meaningful product and the company's history.
The timing of that FDA approval and uptake of demand is inherently uncertain.
As such 2020 guidance as presented today only reflects the remaining anticipated residual R&D spend and the costs. They continue to build prelaunch commercial inventories.
We will continue to add back the build of commercial inventories and we will begin to add back pre launch sales and marketing expenses in our 2020 actual non-GAAP results.
Our 2020 net revenue guidance reflects the annualization of negative competitive impacts against three of our largest generic franchises.
First the loss of volume from a key customer of is that in my sentiments that and which began around mid year 2019 and will annualize in 2020.
Secondly, the Asher mentioned significant price reductions for the E.S. franchise, which occurred in the fourth quarter of 2019.
And third recent competitive challenges the E M T, which have resulted in the reduction of average price beginning in January of 2020.
These declines as well as normal course annual volume declines at our brand business are expected to be more than offset by the addition of generic products acquired from the marriage and in January.
Continued uptake in the demand for vancomycin oral solution and brick till Liam.
Inorganic generic pipeline launches.
Given these factors. We currently project net revenues to be between 213, and 223 million, representing a 3% to 8% increase over 2019.
Adjusted non-GAAP EBITDA, it's projected to be between 80, and 86 million or essentially flat as compared to the 83.2 million posted in 2019.
Inherent in this guidance or the following.
And then in anticipation that non-GAAP gross margins will contract by approximately five to seven point.
From the 71% achieved in 2019.
Principally resulting from lower price and on favorable product mix.
A reduction in research and development spending driven by the wind down of activity in our core job core Tropin gel re commercialization program.
A portion of this reduction is anticipated to be reallocated toward generic pipeline opportunity.
And finally moderation of the growth in non controlled tend to be they did SDMA expense.
[laughter] resulted adjusted non-GAAP diluted earnings per share is projected to be between $4.46 and $4 in 86 cents per diluted share and reflects an anticipated effective income tax rate of 24% and approximately.
12.1 million shares outstanding.
Note that the year over year changes for our non-GAAP EPS metrics.
Include the impact of additional cash interest, resulting from the December 1st refinancing of our convertible debt, which carried to 3% cash coupon to bank debt for which we currently anticipate and all in rate of approximately 4.6%.
This change is worth approximately $1.9 million after tax or roughly 16 cents to the P.S. calculation.
The longer term benefit of this change in debt structure is to protect their shareholders from future potential equity dilution and team Boyd hi, upfront costs associated with convertible debt.
The cost of which are not reflected in the coupon rate.
In addition, our guidance ranges include a street, 24% effective income tax expense rate, that's compared to an actual tax benefit recorded in the 2019 actual results.
When taking these two factors in combination with one another.
It accounts for over 50 cent per share a bridge to the D.S. calculation.
In summary, we exited 2019 with a focus on maximizing near term vancomycin, unless and until we opportunities.
Leveraging the recently acquired a marriage and generic portfolio.
Continuing to diversify our product offerings ongoing business development.
Expanding the potential for our CMO business, and they and I Pharmaceuticals, Canada.
And most importantly, gaining F.D.A. approval for cultural thing.
With this I will turn the call back to our president and CEO Arcturus fall.
Thank you for that Steve.
Lori maybe we'll now open the.
The conference call two questions.
Thank you as a reminder, if you'd like to ask your question. Please press Star then the number one on your telephone keypad. Your first question comes from the line of Dana Flanders Guggenheim.
Hi, Thank you very much for a the questions I just had a couple of quick ones. If I could first could you provide kinda relative contribution of the American portfolio to guidance. This year any context would be helpful and kind of what the what the growth outlook for that portfolio is going forward.
Number two just how do we how should we think about just the gross margin sustainability I know its ticking down this year to the mid 60% range, that's still a relatively attractive margin profile versus generic Paris or just curious.
If the bases down enough and you're launching enough valuable products that you can sustain that mid 60% gross margins and just the third one I may have missed this but how much inventory build are you planning for control and this year I understand you're not including any revenue in guidance, but just curious you know how much demand you can meet if you are approved four months after.
Filing thank you.
So let me let me take the last question first the inventory deals.
Okay.
Again spending another 11, a half million this year on top of the 6.7 last year.
So the most important part of the.
Inventories for quick folks and this is really the.
Stockpile, a pig pituitary and more importantly than that the stockpile of active pharmaceutical ingredient.
We will have a stockpile of active pharmaceutical ingredient after the invest that total investment.
That is very very close to 50% of the market. If your it. It's we're estimating that the market is a 30000 vials.
Going to be very close to being able to from our apiay stockpile generate a almost 15000 vials of finished dosage form.
Your your second question.
The gross margin sustainability in 16.
You know, we think that's an accurate reflection of where our businesses at this moment in time, we no longer have really.
I'll say top heavy.
You know generic product contributors after the after the hits we took on those three products recently and so we feel that that's really an accurate reflection of oh of where the businesses today.
Ex any additional acquisitions et cetera.
And the last question, maybe on the portfolio for marriage and Steve could you could you address a address that please.
Yes sure good good morning, Jane and thanks for the questions. Yeah, we were not going to speak to the particular numbers for the marriage and portfolio in in the guidance.
Then I think that would be a typical approach right. I mean, we're we do anticipate a significant contribution from the marriage and portfolio and I would say qualitatively a that that contribution is very much in keeping with what our expectations for the port.
Folio, where when we purchased it I'm all of the transition plans to move the the volume as it stood in the hands of a marriage in over to and I contracts.
And customer contracts has gone very smoothly a and so we're we're quite pleased that is lucky so our expectations for that portfolio.
Okay. Thank you very much.
You're welcome Dan.
Your next question comes from the line of Elliot Wilbur of Raymond James.
Thanks. Good morning first question for yourself art regarding the upcoming corticotropin filing will likely be the last time, we hear from you before you actually submit the application. So just a couple points of of clarification when you're actually filed do you do they notified you have a official except.
Stinson is that a 30 day timeline and if so is that something that you would.
Press release second part of the question do you think the filing toward or should qualify for.
Potentially expedited review and last part here is these types of applications generally seem to move for the agency much more smoothly efficiency.
Currently in expeditiously when they have attention from folks kind of outside the review division and other than the individual reviewer themselves. So maybe could you describe if there were any activities taking place that might become visible to us.
Post that filing are ahead of the filing that suggest that a you know this is gonna be a high priority endeavor for FDA.
Yeah. Thank you really good morning, well take the last part of your question first.
We will that be activities outside of the filing yes, there will be I think experience at your points is very well taken.
It's very important that.
Several the government officials are both in the Senate and house of Representatives as well as HHS F.D.A.
Our cognizant of the fact that we have filed our supplemental to our approved a quarter often gel drug there's obviously.
Over the years, a significant amount of noise associated with the monopolistic approach and pricing approach of XR gel and so I think we would certainly.
Provide notification to these government officials that you know that there's an important filing.
In a in the F.D.A.N. gay division associated with our product and and why it's Ah why it's important. So we certainly will have a a letter writing campaign to respected officials that we think.
Cannot influence approval, but nevertheless, you don't have an understanding this is arrived on their desk.
After four years.
You asked a little bit about you know the ex expedited review. This this product is not eligible for an expedited review what's already approved. This is this is why we will we would receive a on the data filing.
The four months produced a date and so in theory.
The product itself could be the supplemental could be approved.
Within four months were not handicapping that but but that is certainly a potential possibility.
And and as but as such as not you know eligible for expedited review. However, we you know it's very important to point out that were in India Division, It's not a bio similar were not office a generic drugs.
And typically.
My read my perspective is at the end <unk> vision is a more expeditious division and.
Maybe the office the generic drugs for some of these a complex type products.
So I hopefully that.
The answer to the extent of your questions if I Miss something no let me know.
Sure No just just one followed point here is is there is actually a post submission notification that the supplement deceleration for its very I I forgot they're very good point. So yes, there will be a a notification approximately within 30 days that they had accepted or.
Filing you know we see this is kind of de rigueur and and and we see no reason why they wouldn't.
With the finally that were submitting whether or not we this is sort of second nature, whether or not we issued a press release associated with the fact that they've accepted our filing.
It is debatable if you know I think will internalized that if we feel it that is important to do so we certainly will but.
Again, you know we.
Expect 100% that they will accept to spark.
Okay, and just a couple of financial questions for Stephen and yourself as well our I'm just thinking about numbers change over the balance over the course of the year would expect obviously, a second half to be stronger than the first half, but maybe more specifically what do you think that by the time, we get to the second half of the year D.
Incremental contribution from the marriage and portfolio the ramp in baking my son or a solution and also the incremental benefit of Trillium is effectively offsetting the negative impact that you've experienced on both E.M.T. and yes.
Well, we certainly anticipate that the effect of a marriage and.
On our business is.
You know sick of argument instantaneous so on the day, we bought it we picked up their revenues and gross profit now we have subsequently launched some additional products from that marriage and Ah portfolio and obviously, we didn't acquire a marriage and on January 1st, but but that's there's an immediate effect from American bankers.
My son in particularly image I think both Steve and I.
Spoke too is a constant built.
And so you know from Banco from Vancomycin oral solution and I'll give me the importance of that for vancomycin oral solution, we see a steady bill of ER scripts overtime.
And so you know we feel very good we sort of extrapolated out what that means we feel very good about the forecasted.
Annualized revenue number for that product.
For British Liam petroleum is going to take a little bit longer because.
The Chilean spin off the market for some time.
We certainly believed that this is a critical care drug that should be on.
Crash carts as it was in the past.
For all hospitals and you know emergency services, we have a a opinion paper that will be oh that was authored actually buy.
In quotes the father or tell him that that it will be coming out shortly and that will help.
You know guide hospitals, and and <unk> committees.
To.
Understand the continued significant super telling him, but that was going to take a little bit longer and so we have a quite frankly, a slower ramp on that product and Steve is there anything you'd like to add to that at all.
No I think I think that's I think that's spot on our and and your and Elliott to the leading up to your question I'd say also spot on the we currently anticipate you know the comps for the first and second quarter, obviously more difficult a and then when you you bake in the factors being described.
Here are we would anticipate the third and fourth quarter.
To be reflection of of growth.
Okay, two quick financial a follow up and Steve with respect to adjusted EBITDA guidance. Obviously, most corticotropin expenses are excluded from that but I wasn't sure. If in fact that excluded all potential expenses related to launch including from a potential shows marketing activities in the a and the in the back.
Half of the a year and maybe just if you could provide a little bit of color in terms of what's happening in the branded business the branded portfolio in the softness in a couple will be.
More stably brand lines as an incremental generic competition customer mix, just what the dynamics, there or any kind of why you're seeing a little bit more pressure at the margin.
Yes, sure, let me or so unless you first and I'll, let you take the first okay shifting.
Our brand so elevating our brand says no primarily been acquired.
And they have great margins in great cash flow.
Overtime the decline there mature brands there have been generic.
Versions of these drugs and many times, leaving launch an authorized generic ourselves against the brand so.
You know our brands have sick of argument, you know, 1% or less market share. So over time, you will see our brands decline.
And it and so you might not have seen that in the past, but that is because we've done a branded acquisitions you know that that's sort of cover up or the declines on the existing brands sales, okay and those declines are driven by just you know more and more people going to generics or maybe more and more pay.
There's no continuing to refer.
Reefer pharmacies are too obviously, the fact that there's a generic version available Nevertheless grants for us still represent against significant revenues and margins and cash flows and really from an S. DNA perspective cost us nothing to service, it's very diminimus amount. So we are still active.
In.
Attempting to acquire mature brands, where we can and and and so those opportunities pop off from time to time and as you know route is no rush represent on on top of on those opportunities when they present themselves. Okay seems maybe you want it.
Tackle the the quarter open question.
Yes sure thing. So I think we can think of the court trophy and expenses Elliott probably in the three buckets. So the first is on the R&D expense side. So what we anticipate there is certainly on an annual basis, a significant decline year.
Year over year.
In the R&D spend you call it somewhere around the six six plus million of by annualized decline.
And from a calendars east in the remaining spend that we anticipate will occur you know principally in the call. It the first quarter of this year and so that'll that'll be a little bit of uplift in the back half of the year from an expense perspective.
About half of those declines a reduction in spend we currently anticipate a reallocating towards the generic programs that were running.
The second main bucket would be the prelaunch inventories that we spoke about in the prepared comments and so we do project <unk> or call it low $11 million to $12 million of pre launch inventory build in 2020 as compared to the fixed.
Seven spend this year and and those expenditures, we are adding back or non-GAAP purposes.
Obviously under the premise that you know once this product is approved those are.
But that would be inventory write and typically would.
Hitting our pmall.
And then lastly is on the sales and marketing side and a deep the guidance figures. We gave this morning do not include a any significant sales and marketing spend in those numbers I'm kind of under the premise that <unk>, we're not putting in sales figure.
Years, we're not putting in the the sales and marketing spend the either and so.
You should expect to see that as an add back to our non-GAAP figures until we reach the the point of of launching the product.
Okay. One last question for arch strategic question on the company's done a very very good job over the years in terms of building a business through opportunistic acquisitions, both branded and generic products taking advantage of the.
The distraction misery and the in the in the space one of the areas you've talked about though for some time in terms of having a strong interest in his injectables.
But sort of listening to the rhetoric from around the industry. That's also an area where quite a few companies still see that is a growth opportunity or growth sector and are actively looking for assets in the space I'm. Just wondering you know how what do you think or what would you want.
Sort of.
Hi, light or characterize as the.
Opportunities for it and I within the context of you'll industry, that's still sort of views injectables as an attractive or attractive area.
So this is a good question Elliot I mean, you for us it's sort of a natural.
Natural segue since obviously, you know quarter, often Joe will be our [laughter], probably for maybe <unk> for a long long time to come our largest injectable product as we anticipated as we talk about annuity like revenues on the product.
Our injectable opportunities you know so far have been more related EM.
A product development areas. So you know we did a deal was collected some ticked up.
Several injectable opportunities or.
If you know again, but as you mentioned because maybe the didn't need on the part of the seller for capital et cetera, and and I think we we see.
There are certainly opportunities out there for injectable some commercialized development.
And yes, we are very well aware that a lot of folks are.
Chasing some of those opportunities some of those opportunities are [laughter].
I've been actually created by the government to be Frank on fiber, if I'd be twos and.
And the like and I think you've seen some of them on you know products like calcium glutamate that Fresenius has let me just to.
Absolutely ridiculous price associated with a product that is a you know the cost nothing to make and and so you know those opportunities are are still out there.
I think L. One way to look at US is to say, Okay. You know we've always been up.
Sort of a nuts and bolts company, we've been very careful how we've built out the business model in generics and mature brands with the very careful how we spend their money with very careful on our debt levels and leverage.
What's the same time the company took a significant high risk high reward.
Opportunity and we Plunked down you know 75 million for a bunch of papers.
But those papers are now coming to fruition for us.
And and and a and I think you know I think you know we are incredibly bullish on a core trough in general or what it can do for the company and then find our investors in the short term and then obviously longer term into the future.
My point that I'm trying to make is we have to find additional high risk, but high reward opportunities.
Our pipeline.
And you know knowing that we can fund them keep all I rather levels.
Where they are a we're going to look for those and they're out there.
And we're certainly having discussions on some of them as we speak.
And and so we want because we want to have our pipeline.
I'll have some additional high risk Concord opportunities alongside all of what we call you know more of our tuck in opportunities. Okay that you know sort of fuel our that is fueled our growth from the time with the public said time today.
And so that's the way we're we know we're looking at some of these.
[noise] or somebody scenarios going forward, okay, what's going to replace quarter open.
Now the data Douglas.
And ER and obviously called Tropin.
Ah revenues and cash flow gives us the opportunity to add a you know some of those as as I, just said high risk Ivory board opportunities to our business model and I think a you know and I think it's very important for a company like us.
No. We're not really you know were described Elliott as a generic pharmaceutical company, what generic pharmaceutical company out there today.
As you know margins of 65% to 70% and throws 40% of its revenues down to its EBITDA line and has a available cash flow and credit lines that are drawn.
Available to them I.
I think you'd be hard pressed to find one.
And and and so you know we want to continue to apply the same disciplines that we have over the last several years.
Forward looking opportunities needless to say.
And that's our intent and so you know Rob is out there with his team everyday looking for those things and what will find a I've I feel I have a high degree of confidence from our precedent transactions that are future run ones will also continue to bring.
[noise] value to our shareholder base.
Thanks.
Thank you Kelly.
Your next question comes from the line up Brendan It's all of Cantor Fitzgerald.
Hi, Thanks for taking my question and maybe just following on that part you mentioned that you think you believed that the generics industry need to continue to consolidate swapped pivoting towards the injectable drug and specialty drugs [noise].
If the opportunity presents itself would just still grow your generics business through consolidation or should we think of and business development going forward really focused on sort of the injectable and specialty.
All right.
Brandon Thanks for that question I I think that.
You know we mentioned that we certainly will continue to look for tuck in acquisitions, Okay and you know.
I think the key you know kind of the key numbers in regards to our.
In regards to our generic.
Acquisitions that we've done is that you know we've done 15 for a total of 135 million and from those transactions. It just didn't they in 2019 those transaction contributed $26 million. It in revenues at obviously, you know very nice margins.
And so we wouldn't stop with that okay.
But you know we've always been a value type a buyer and todays.
Marketplace for these.
These acquisitions.
At least it's still vibrant made their adjust them there are so many.
There's so many companies that are strive for cash.
There are many companies. The you know generics has always been entrepreneurial type business at 14 and 15, when the generic market was flying high and people thought prices.
However, you know a lot of smaller entrepreneurial companies cropped up and started and people you know entrepreneur doors did development on products that traditional ways.
And now they're getting approvals, but they're a little bit short on cash to launch some of these drugs, we see it all the time.
And it costs just as much money, if not more to launch drugs.
Inventory builds and and ER and obviously waiting for your receivable dollars from wholesalers. A then it does maybe then to develop the drug.
And so that's where some of her opportunities lie.
So we will certainly we won't turned a blind die too.
Hey, good value are good acquisition opportunity for our shareholders.
Which is why I mentioned that you know we still look for these tuck in opportunities.
However, it is very important for US too you know without question diversify away from just doing the primary bulk of our business with the three consortiums don't going to do that obviously to courtroom Jo.
And the three consortiums are not going to have the same level of.
You know of of Oh purchasing power over our business model than the than they do today.
Okay because of that lunch rock.
But we sent more and more drugs need to contribute to that effect as well, we just need to be board have a greater diversified platform because the one thing we can't I was talking to Investor earlier this morning.
And you know they were they were dismayed they they thought that we were just going to buy the a marriage and products added to our ascribed EBITDA run rate and that would be our do run rate essentially for the new year, well you know sorted week.
And by that I mean, we never know.
In the oral solid space went to three consortiums, where competition is coming from.
And when it hits it hits hard so if you all the southern have a very nicely running gross margin product like we did it yes for three years and you get to competitors price drops 50% overnight.
And there's nothing you can do to backstop that but an attempt to maintain your market share and drop your price and have enough products launched offset that.
Okay, and we were fortunate we've been able to do that so that you know our EBITDA run rate certainly.
Right, where it was last year is still representative of throwing off 40%.
From a revenue line.
That's powerful and and so that's it's great for us and these acquisition in a lot to us, but the fact is.
We just don't know where competition is coming from.
At any point in time, so diversification across different business platforms within the generic industry is important to us and you know in solar opportunities like five or five btwos et cetera. So you know where we're at a scale now's a company and the fact that we've spent our money sick of argument.
Body in core Tropin development that allows us.
To pivot to some of these other areas as well.
And Fortunately, we've got the cash flow and the liquidity.
To allow us to do so that's why I think we're in a excellent shape.
These types of a a quarter's their moments in time for 90 days integration, but do not represent the long term potential for our business and so we are you know, we we as a management team.
Feel very confident and you know our approach to this marketplace.
Going forward obviously.
Great. Thanks very much.
Hmm moderator, if there's no other questions.
I just like to thank everybody for attending and eyes are 2019.
Conference call.
And Oh wish you all have a good afternoon. Thank you very much.
Thank you that's concludes and eyes fourth quarter 2019 earnings call. You May now disconnect. Your lines at this time and have a wonderful day.