Q2 2019 Earnings Call

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It is now my pleasure to turn today's program over to Mr. Mr. Arthur Przybyl. Please go ahead.

Good morning, everyone welcome to your nice.

Earnings Conference call for the second quarter 2019.

My name is art Przybyl I'm, the CEO and joining me today is Stephen Carey, our Chief Financial Officer.

Before we begin I want to refer everyone to the forward looking statements language in this mornings press release that each of you.

To review 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 principles.

Reconciliation of those non-GAAP financial measures.

Can be found in our earnings release dated today.

[laughter] today, and I reported second quarter 2019 results.

For the second quarter, we reported net revenues of 54.4 million, an increase of 15% and record adjusted non-GAAP EBITDA of 23.7 million.

An increase of 24% over the prior year period.

Adjusted non-GAAP EBITDA was 44% of net revenues.

First quarter generic product revenues increased by 20%.

The 36.3 million as compared to the prior year period, a direct result.

Several generic product launches over the last several months.

During the second quarter, we received FDA approval for our vancomycin oral solution products and we anticipate a September launch.

This product will enter Banco mice in market that we believe exceeds $450 million in the United States.

Not including a substantial market for compounded product.

Our excitement for the launch is based on the strength of our uniquely convenient single bottle presentation.

Available in three sizes.

Our belief that this dosage form can take substantial share of a molecule that is chronically on the drug shortage list.

And an ongoing industry wide shift from the use of compound it product when an Rx alternative is available.

Finally, we will leverage our existing virtual marketing infrastructure to drive product awareness at launch.

Throughout the quarter, we continued our process validation effort for core Tropin gel.

As described in the press release today, we intend to complete both raw material and finished drug product process validation by the end of August .

After the required 180 days stability timeline is complete for all three batches of raw material and drug product.

We intend to file the supplemental and D.A. for core Tropin gel in March 2020.

After the filing we expect to be assigned a four month PDUFA date.

As per producer guidelines for supplemental new drug application.

In today's press release, we updated our 2019 revenue guidance to be in the range of 220 to 226 million.

Which represents 9% to 12% growth over 2018.

We reduced our revenue guidance due to the competitive landscape for methylphenidate extended release tablets.

We reaffirmed our guidance for adjusted non-GAAP , EBITDA and diluted earnings per share due to continued favorable product mix and gross profit trends.

We currently have over $100 million available to continue to acquire assets that represent both immediate and future revenue and cash flow opportunities and I.

During the second quarter, we signed one new distribution agreement and acquired seven development stage generic products.

That expanded our pipeline of injectable drugs to six.

Expanding our injectable drug pipeline is an important objective for us and we intend to continue to invest in that business platform.

You know it has grown its revenue and non-GAAP EBITDA annually since becoming a public company in 2013.

We expect that trend to continue in 2019.

In an increasingly competitive generic industry.

We remain well positioned for future growth.

Our balance sheet is not overly burdened by debt, we're levered less than two times.

And our cash flow from operations remains robust.

We are not party to the two macro issues that plague the generic industry.

The department of Justice price collusion lawsuit.

And any of the opioid lawsuits and their potential adverse related cash settlements.

We have a near term opportunity for transformational blockbuster drug quarter open gel.

That upon FDA approval and launch can significantly benefit and ice shareholders.

And I was launch of course, Tropin gel will break a longstanding them off.

Since we believe the drug cannot be genericized.

Upon launch our anticipated market price for quarter broken gel is intended to save patients providers and the United States healthcare system hundreds of millions of dollars.

We remain committed to that effort.

I will now turn the conference call over to our CFO , Steve Cary, who will provide you with more details on our financial results.

Thank you art good morning to everyone on the line and thank you for joining the call to discuss a nice second quarter 2019 financial results.

And I continued to post strong results in the second quarter of 2019.

Hosting 15% year over year net revenue growth.

And record quarterly adjusted net GAAP EBITDA of $23.7 million.

Corresponding adjusted non-GAAP EPS was a record one dollar and 44 cents per diluted share.

At 54.4 million net revenue for the three months ended June Thirtyth, 2019 was up 7.1 million or 15% versus prior year.

Driven by gains in our generic pharmaceutical products and contract manufacturing categories.

Revenues of our generic pharmaceutical products increased 20% from prior year to 36.3 million driven by is that a mindset of the stat in E at Kansas Star in and other recently launched products as well as the incremental unit sales of bank and niacin.

These gains were tempered by lower sales of E.M.T. di Fanatically, atropine and I lead in mind.

Branded pharmaceutical revenues were 14 million in the quarter, an increase of 33% primarily due to sales of a remote access and Keith index, which were launched in the Eni label in July of 2018.

And add the canned and added canned HCT.

Which were launched in the Eni legal in October of 2018.

In addition, we achieved sales gains in inderal la.

Gains in these products were tempered by lower unit sales of bank isn't an old friend XL.

Revenues for our contract manufacturing services more than doubled the 3.7 million.

Principally due to the impact of an eye Pharmaceuticals, Canada, which was acquired in August of 2018.

Royalty and other of 419000 in the quarter declined 4.4 million driven by the after mentioned launch of add to cans out of Candy HCT, a remedy Max and Keith for that in the end I label in the second half of 2018.

Revenue from these products was initially recorded as royalty income. However is now included in the net sales of branded pharmaceuticals product line.

This decline was somewhat tempered by product development and laboratory services revenue from a in Canada.

Cost of sales in the current period was 15.6 million or 29% of net revenues as compared to 16.6 million or 35% of net revenues in the prior year period.

The approximate six point year over year improvement in gross margin is principally due to lower royalty expense, resulting from a royalty buy out completed in the first quarter of 2019.

As well as favorable mix.

Selling general and administrative expenses were $14.2 million as compared to 10 million in the prior year.

Driven by costs related to our new and I, Canada subsidiary.

Increased U.S. space head count and pharmacovigilance costs.

Higher good do foot and produce a user fees paid to the U.S.F.D.A. higher legal fees and increased sales and marketing related costs.

Research and development costs totaled $5.8 million in the quarter and include a $2.3 million in process R&D charge recorded in conjunction with our previously announced acquisition.

Of seven development stage generic products from co up this pharmaceuticals.

This charge was added back for purposes of our non-GAAP EBITDA and EPS calculation.

Organic R&D spend continues to be driven by investment behind our core Trofim re commercialization program and work related to our underlying generic pipeline.

As it relates to taxes during the quarter, we recognize the net 653000 dollar tax benefit driven by the recognition of tax assets that were previously reserved for purpose of GAAP accounting upon implementation of our Eni, Canada transfer pricing agreement.

This one time benefit was excluded for the purpose of calculating adjusted non-GAAP diluted earnings per share for the quarter.

Our consolidated effective tax rate exclusive of discrete items approximates 21% to 22%.

On a GAAP basis fully diluted earnings per share more than doubled to 53 cents per share as compared to 23 cents per share in the year ago period.

This is the first quarterly period in which the calculation of our GAAP EPS includes the diluted effect of our convertible debt.

Most importantly from an economic perspective, our shareholders are protected from equity dilution up to a share price of $96.21 due to the hedging program that the company put in place in 2014.

GAAP accounting, however requires that our diluted weighted average shares outstanding include the theoretical dilution that would occur at share prices above the $69.48 conversion price on the face of our convertible debt.

The inclusion of these theoretical shares negatively impacted GAAP EPS by one cents in the quarter.

Our adjusted non-GAAP diluted earnings per share excludes these impacts and was one dollar and 44 cents per diluted share.

31 cents or 27% from prior year.

On a year to date basis, we have generated 107.2 million of net revenues.

46 million of adjusted non-GAAP , EBITDA and $2.75 of adjusted non-GAAP diluted earnings per share.

Representing year over year gains of 14%, 13% and 12% respectively.

From a balance sheet perspective, we had unrestricted cash and cash equivalents of $40.6 billion as of June Thirtyth 2019.

This balance is reflective of $19 million of year to date cash flow from operation.

And is net of 20.8 million of cash utilized for business development activities. During the first half of the year.

Total net debt as of the balance sheet, the approximated 149 million.

Representing under 1.7 times net leverage on a trailing 12 month basis.

And approximately 1.5 turns when utilizing the midpoint of our full year 2019 guidance.

Please recall the as previously announced and discussed we have fully committed financing in place to refinance the upcoming December onest maturity of our $118.750 million of convertible debt.

In the form of our $265 million senior secured credit facility.

In addition, the $75 million revolving portion of this facility remains undrawn and coupled with our existing cash and cash flow from operations continues to provide us with flexibility in pursuing further business development transactions.

In summary, we are pleased with our second quarter and first half results, which reflect continued execution by the United team of our business plan for 2019.

In the second half of the year, we look forward to a successful vancomycin oral solution launch and continued success in meeting stated goals and milestones for our core truth and re commercialization program.

We have a healthy balance sheet strong cash flow access to fully committed capital, which allows us flexibility as we continue to search for business development opportunities.

As always we look forward to continuing to drive long term value for our stakeholders.

With this I will turn the call back to our president and CEO our principal.

Thank you Steve.

Moderator, we will now open the.

Conference call to questions.

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And your first question comes from Elliot Wilbur with Raymond James.

Thanks, Good morning.

Morning.

First question for yourself, Bart and Steve as well, it's just <unk>.

Hit the subject of a guidance, obviously methylphenidate market I remember a time when.

Generics took 10 years to get to market now seems like even I could get an approval in that and that product so not surprising I guess that hasn't.

It's not going to <unk>.

Meet your revenue expectations, but the fact that took topline guidance down a little bit and have reiterated bottom line. Adjusted EBITDA guidance suggests there's over performance on the rest of the portfolio. So maybe you could just talk about some of the key items that are driving that that relative over performance.

Yes, yes, we can you know first of all you know.

We admittedly a forecasted poorly for revenue guidance associated with that product.

And that was just on the basis of the fact that there are far more competitors eight or nine competitors in that market today than what we anticipated at this particular point in time.

Our mix is far better I can tell you that.

Our profit margins on some of our generics with.

On certain products and.

Inside of a one consortium in particular.

Is far greater than we anticipated and so.

Even though we had to guide down on.

Our revenue numbers for methylphenidate and the gross and the related gross profit.

We obviously are over achieving even with the lower revenue base in the first half of the year honor EBITDA number or gross profit number and so our mix is much better and and we've been able to absorb the.

The loss of revenues anticipated revenues forecasted revenues for methylphenidate because of that better mix and and so that's worked out very well for us.

Okay. Thanks, and then a follow up question for you.

It is well you are a a master of the injectable world, though based on your.

Past experience and endeavors, and obviously you've communicated they tend to move more aggressively into that market and of course, just recently brought in a bunch of assets, but can you talk to us a little bit about that strategy and sort of what you think near term kind of presents the best opportunity for you whether it be.

Pipeline Andas approved products, there's capacity out there with the companies that you know maybe don't have the ability to to optimize it that might be dilutive, but could be relatively inexpensive and then couple those thoughts on the generic side with you.

The thoughts of potentially utilizing the injectable effort and incorporating more of a five or five b to cause a branded strategy.

Right. Okay. So that's why.

A pivot to but we're not a pivot why the expansion of you know our business platforms into Injectables.

A long time ago.

When I was a young [laughter].

You know I carried a bag and I sold many injectables said in a range of five to $10.

And many of those same products today are selling into range of 50 to $100.

This was in large part due to the compliance he purge of many manufacturing facilities I think when Elizabeth Homburg was after the commissioner.

And sort of set the that market on its head.

So there's certainly margin opportunities in Injectables, I think did a far greater than in sake of argument oral solids.

So that becomes an attractive space for US now you obviously, our first injectable product is we'll probably be.

Our largest the next quarter open gel and we feel that that's on.

No, we we think thats.

Getting closer without a doubt and and so.

It's a natural pivot for us too.

Potentially invest in injectable pipeline products and that's what we're doing now.

You know we have the experience in that in that marketplace in that marketplace. Also is from a from a contracting perspective, its certainly competitive but doesnt in my opinion have the same level of competitiveness.

That has happened in oral solids do too far greater.

Generic approvals for the increased competition and and the fact that there's in essence.

Oh, sorry.

Consortium cartel, if you want to call it that.

Associated with the contracting for oral solid and liquid products and so the hospital market is still.

Maybe not as.

Finite in terms of in terms of the way the contracts of their business than.

It's been the current oral solid market. So that is a second reason as to why this is obviously attractive now your third points as well as well put it.

And that is you know.

Ultimately, we like to own brick and mortars, you know Steve didn't mention we never really talk about the difference in our margins between products that we manufacture ourselves and products that we have manufactured for us.

But but that difference in gross profit dollars is almost representative of 100% in some cases a year, we get twice as much twice as much gross profit dollars for every product we manufacture ourselves than have somebody else do it for us.

So that leads us to the fact that you know with the money we have available to us as we move into the injectable platform, we will be looking for opportunities potentially to.

By brick and mortars are buying an injectable facility.

We think it's important to be.

You know integrated.

At least into manufacturing associated with the supply chain.

In that business platform and in all our business platforms, which is why you saw US also go out by Canada for our existing generic products and we're transferring many of our products that are manufactured in blood debt into Canada to free up capacity for so for those that don't know we were now recruiting for a third shift in our.

In our budget estimate Minnesota facilities.

Because of our increased unit volumes and so I hope that answers your questions as to why you know we like Injectables, we see it as a potential for obviously.

Extending gross profit dollars for us in our in our business model and we think we can be successful and we think there are substantial opportunities still available to companies like ourselves in the space and obviously, it's an it's a.

Intended byproduct of the first injectable product, we think we'll launch.

Which will be a quarter open Joe.

Oh, Thanks, good color and then one final question actually went through a bit of a.

Well here on the quarter open but.

I know you'll be able to give a terrific.

<unk> response, so some recent developments in the a the market itself where the the.

The branded product XR.

Owner that.

Product is about to lose what looks like a 120 500 million $50 million book of business because they were second we have to show in the Medicaid program at eight A. loss.

You're not encumbered by some of the structural issues that are resulting in that outcome for them seems like it could be a really easy win for you guys kind of out of the gate have you sort of thought about a strategy to kind of really go after that piece of business or sort of accelerate.

Entry into.

Just pick up that.

Medicaid business right out of the gate.

Well, we think about that Uh huh.

We think about our launch per quarter open all the time.

We feel very good about the science and analytics.

In our filing that's about to occur.

In March of next year. So we definitely think about the launch it hearkens back to the comments I made that were committed to saving the U.S. health care industry hundreds of millions of dollars.

On an annualized basis.

It's interesting you know the the competitor obviously that the market's acts are you know I think I read recently, where they're guiding to less than $1 billion now in revenues for that product.

Our price point. The question always is with our price point that we think will enter the market with will that drive increased usage, because it will certainly be lower than.

The price point for the product today.

And so that that will be an interesting dynamic and how that plays well with payers and obviously the Medicare system.

And then it remains to be seen but for us it is a.

Uh huh.

You know, we talked we call it a blockbuster drug for us a transformational drugs for a number of reasons I you know, we think the drug and we still stand by the fact, we think the drug could potentially drive 200 million in free cash flow for us per year, you could take a smaller number it's still is a tremendous blockbuster for us and even reduce levels from that if if if if one wanted to forecast something less we also have a slightly different investment in the product as compared to.

Our potential competitor they bought it for you know with a b at the end of it.

Billions at the end of it and our investment in drug is gonna total our acquisition price of 75 million and sick of argument hundred million all in.

To get it to filing.

So were very different position and were a much smaller company and you know well.

Cash flows like that are incredibly meaningful to a company like us and certainly open up additional opportunities.

To continue to grow through heightened.

Transactions, we've done a lot over the years.

And so we like our position and we believe that.

Economics will continue to rule the day once we enter the marketplace.

For that drug and we certainly think that.

It will not go unnoticed, when we file our supplemental NDS with the FDA.

With some of the folks within that agency and and so.

You know, we're very transparent in regards to our game plan will it will it benefit and I shareholders and invest absolutely it will.

But we would also benefit the United States Health care system and serve to lower the health care costs and break that monopoly it definitely will.

And so we like where we're at this where we're well under five yard line were going in.

And you know this has been the end of Uh huh.

You know many quarters and certainly several years of development activities associated with this drug and you know our excitement level.

You know just couldn't couldn't be higher at this point in time.

Alright, thank you.

You're welcome.

Your next question comes from the line of Brandon Folkes with Cantor Fitzgerald.

Hi, Thanks for taking my questions and.

Firstly I know you talked about positive margin due to mix, but one or the other generics players earlier in the week.

Actually called out pricing pressure again in a quarter. So I was just wondering in terms of your guidance. How do you think about pricing for the rest of the year.

[noise] well we factor in.

You know what we think.

Is adequate price erosion.

And we do that really at the beginning of the year.

Yeah, Steve does that in his in his model when you forecast, where we think we'll end up in the guidance that we want to set up and that's a combination of puts and takes.

And so.

You know typically we like to think we get that right.

Admittedly with a product like methylphenidate, we did not there are more competitors in the market than we anticipated.

Going forward the rest of the year, we think we're in good shape otherwise, we do an analysis of where we are at the end of every quarter.

And that that is why we're either to affirm update or whatever we do with our guidance numbers, it's based on that analysis.

So we see our pricing.

For our generic products for the rest of the year to be accommodative of the fact that we can hit the guidance that we just put out in today's press release for the back half of the year.

Okay, and maybe just one follow up on guidance and.

You called out the methylphenidate opportunity, but when you first gave guidance for 2019, I think the and generic ethylene oxide opportunity was around 178 million the market had a target market now I see it come down to just over 100 million.

Have you made any changes around your assumptions for that product this year.

Steve you want to you want to address that although I said I think we did the revenue I know others say brand and the revenue guidance. We took down today is directly refer reflective of the changes in assumptions, we made but.

Oh sure I don't want to wind and good morning, Brandon.

Right. So our largest spoke of the fact that we do a very detailed the essentially a bottoms up process.

Certainly for revenues and gross margin on a quarterly basis, you know looking out for the remainder of the year and so so our guidance reflects our updated expectations across the entire portfolio and so obviously, there's puts and takes across.

Various products, but you know it's reflective of our expectation so I don't know a product by product basis.

And obviously, we don't speak to a two part you know particular.

You know sales and margin expectations at that level, but you can be assured that.

It reflects an updated expectation.

For all product.

Okay. Thank you very much that's very helpful and then.

Last thing just on Cotwo, and Joe and Tautona, you talked about economics, winning and at the end of the day, just how should we think about the launch in terms of the investment needed behind it and obviously you know there is a lot of.

Commercial infrastructure behind Act so.

Yeah, how do you think about that is it just a pricing play or would you put an element of commission investment behind it and then any color in terms of how are you viewing the launch in terms of how should we think about it in terms of he generic launch Biosimilar, who alternative brand as you know the product will be thank you.

Well your the second part of your question is it's an alternative brand not a generic.

Plain and simple.

You know this up this is a natural substance pick the two a carry drug as I mentioned, we feel cannot be genericized and certainly has not been.

To date.

Very very difficult to match.

It would be very difficult to get a a reading on the generic rating on the product and matched the chromatographs with a natural substance to it Terry product like this one is.

We will definitely make investment behind the marketing effort.

And so just from a macro answer today, we will have boots on the ground will have a say on specialized sales team et cetera.

And that's a good question for me.

When we file the product and and at that point in time.

We'll be more prepared to talk specifically about some of our thoughts and plans associated with the overall marketing program for the drug.

Great. Thanks very much.

You're welcome.

[noise].

I would now like to turn the call over back over to Arthur principal for any closing remarks.

Hi, Thanks, I'd like to thank everybody for attending our earnings conference call today I wish you all good day, we'll speak to you next quarter Bye bye.

Thank you.

This concludes and <unk> second quarter 2019 earnings call. You May now disconnect. Your lines at this time and have a wonderful day.