Amphastar Pharmaceuticals, Inc. Q2 FY2020 Earnings Call

Welcome to Amphastar's second quarter earnings call. My name is Anna, and I will be your operator for today's call. All statements in the conference call that are not historical are forward-looking statements, including, among other things, statements relating to the company's expectations regarding future financial performance; backlog; sales and marketing of its products; market size and growth; the timing of FDA filings or approvals, including the DMF of ANP; the timing of product launches; acquisitions and other matters related to its pipeline of product candidates; its share buyback program and other future events, such as the impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our operations and personnel and on our commercial activity and demand across our business operations and results of operations. These statements are not historical facts, but rather are based on Amphastar's historical performance and its current expectations, estimates, and projections regarding Amphastar's business operations and other similar or related factors. Words such as may, might, will, could, would, should, anticipate, predict, potential, continue, expect, intend, plan, project, believe, estimate, and other similar or related expressions are used to identify these forward-looking statements, although not all forward-looking statements contain these words. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and assumptions that are difficult or impossible to predict and, in some cases, beyond Amphastar's control. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in Amphastar's filings with the Securities and Exchange Commission, including in the annual report on Form 10-K for the year 2020 for the year ended December 31, 2019, filed with the SEC on March 16, 2020. In particular, the extent of COVID-19's impact on our business will depend on several factors, including the severity, duration, and extent of the pandemic as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. You can locate these reports through the company's website at ir.amphastar.com and on the SEC's website at www.sec.gov. The forward-looking statements in this release speak only as of the date of the release. Amphastar undertakes no obligation to revise or update information in this press release or the conference call referenced above to reflect events or circumstances in the future, even if the new information becomes available or if subsequent events cause Amphastar's expectations to change. I will now turn the call over to Dan Dischner, Vice President of Human Resources and Corporate Communications. Dan, you may begin.

Thank you, Anna. Good afternoon, everyone, and thank you for taking the time to join in on Amphastar Pharmaceuticals' second quarter earnings call. My name is Dan Dischner, VP of Corporate Communications. Joining me on the call are Bill Peters, CFO; and Tony Marrs, Senior Vice President of Regulatory Affairs and Clinical Operations. We appreciate you joining us today, and we look forward to sharing our latest updates. I first want to take some time to personally recognize and thank everyone at Amphastar as we continue to maintain our safety and well-being amidst the pandemic. We strive to ensure that each employee can work safely and confidently to supply our nation's critical care injectable products so that these products remain in a reliable and safe supply. Our management team has worked very hard to create and implement measures to maintain a safe work environment. And thanks to the help of our employees, we believe we have been successful. As a result of this, I'm happy to report that there have been minimal impacts on our workforce or operations as a result of COVID-19. Moving on to business. As per our guidance, based on previous calls, I'd like to characterize the second quarter at Amphastar as reaching closer to our catalyst-rich second half of 2020. Amphastar continues to demonstrate resiliency and growth. Our second quarter saw sales growth of 9% compared to the same period in 2019. Net revenues in Q2 compared to the prior quarter saw a marginal increase of 1%. We attribute this to COVID-19's impact on patient access to healthcare providers resulting in a decrease in demand for our products, such as lidocaine and Cortrosyn, primarily used in elective procedures. Regarding Primatene Mist, we continue to see growth as a result of the success of our nationwide TV, radio, and digital marketing campaigns. We continue to see Primatene Mist sales growth remain uncapped and tremendous opportunities as we continue advertising to build up the brand's product. As a result, we maintain our guidance of reaching our prior peak sales of $65 million in annualized sales next year, potentially growing even greater as our marketing spend becomes a lower percent of sales that self feeds into a continuous growth cycle. On a further note with Primatene Mist, I'm pleased to announce that we continue to execute on our strategy of expanding the Primatene Mist brand and that we'll be launching the product into Kroger store shelves beginning in the third quarter of this year. We expect this launch to add an additional layer to the product's gaining momentum as Kroger currently encompasses over 2,700 stores. By Q3, our presence will be in the Kroger and its broad family of stores; Walmart; the major retail pharmacies, including Walgreens, CVS, and Rite Aid, as well as Amazon.com. As such, we will continue to seek further launches while reinforcing this effort with an advertising spend increase starting in the third quarter of this year. Turning to our newly launched epinephrine multidose vial product. Q2 has demonstrated that the product benefits from its 180 days of market exclusivity as this affords Amphastar with the time needed to penetrate this market with a reasonable share and without severely disrupting the market. As such, we continue to make traction in gaining market share. On the matter of our AMP 001 product, we maintain our guidance issued on the last quarter's call where we anticipate a GDUFA target action date for the third quarter of this year and subsequently, the fourth quarter if another pre-approval inspection is needed. With AMP 001, we remain excited about the product's potential as it continues on the path of becoming the first generic. We remain very excited about AMP 002's prospects. Based on our complex submission package, which included a significant amount of scientific studies, and the positive response of the agency during our mid-cycle review meeting, we are confident that the agency will find AMP 002 to be therapeutically equivalent. This is consistent with our prior achievements in characterizing complex molecules. So therefore, we expect this will be an area of little challenge. Concerning our facility in China, AMP continues to play an essential role in helping bridge the gap from facing common supply disruptions. AMP continues to be a reliable provider supplying the hard-to-source API and starting material, which are further synthesized into API for producing many of our finished products here in our U.S. facilities. As described in previous calls, our development projects for our insulin programs are continuing, and we believe our insulin biosimilar products have a clear path forward. Finally, I would like to end by highlighting Amphastar's continued success towards advancing our pipeline for further portfolio diversification and what it has achieved so far. Since our IPO in 2014, we have grown from relying on our enoxaparin product, which contributed to 51% of our revenue, to now just being 13% of revenue amongst our more diverse portfolio. This diversification has been essential to the success of our business these last many months. Our commercial portfolio includes branded and generic products from a wide range of therapeutic areas, which are intended for a broad range of uses, some in emergency use settings, others for elective procedures. With this diverse coverage, we can remain stable when there are disruptions to one or more of those areas. This in conjunction with our enthusiasm in Primatene Mist trajectory, which we expect to be a great vehicle in moving Amphastar forward into the future growth. Primatene Mist, coupled with our strong pipeline, supplying hard-to-source API, which is realized by our facility, our AMP facility, to produce difficult, high barriers to entry, validates our business model. This time, the challenge has been with COVID-19 where none of our products has faced a supply chain issue. At the same time, our diverse portfolio and the potential delivered by Primatene Mist affords resilience to the company to propel us further into a catalyst build second half of the year. I will now turn the call over to our CFO, Bill Peters, to discuss the second quarter's financials.

Thank you, Dan. Sales for the second quarter increased 9% to $85.8 million from $79 million in the previous year's period. Primatene Mist once again showed strong growth compared to the second quarter last year with sales up nearly 400% to $12.5 million from $2.5 million. Epinephrine sales grew 122% to $7 million from $3.1 million as we launched the multidose vials in May and had strong demand for our prefilled syringe product. Enoxaparin saw sales increase to $10.2 million from $9.8 million in the prior year primarily due to a change in customer mix. Naloxone sales increased to $8.7 million from $7.8 million on higher unit volumes. Sodium bicarbonate also saw sales increases as we were able to utilize our new capacity to satisfy market demands. As Dan mentioned, we saw a trend this quarter of lower sales for products which are frequently used in elective surgery, including certain lidocaine products and Cortrosyn. Phytonadione also saw sales declines from $12.4 to $10.7 million. Our insulin API business had sales of $4.9 million, down from $5.3 million in the prior year primarily due to the timing of shipments. Gross margins declined to 39% of sales from 41% of sales due to reserves for commitments and purchases of raw materials used in enoxaparin, which are made to help strengthen our supply chain. Selling, distribution and marketing expenses increased to $4 million from $3 million primarily due to marketing costs associated with our national television and radio ads, which began airing last July. General and administrative spending increased to $15.9 million from $12.4 million primarily because of one-time expenses associated with the separation agreement with a former executive. Research and development expenditures increased slightly to $16.1 million from $16 million due to the expansion of our R&D program at our Chinese subsidiary, Amphastar Nanjing Pharmaceuticals. As we've previously publicly stated, some of our clinical trials did experience minor delays in the second quarter due to precautions concerning the COVID-19 pandemic. We anticipate that these expenses will increase in the upcoming quarters as our clinical trial program returns to normal. Other income declined due to the $59.9 million settlement related to our long-standing legal case with Momenta and Sandoz, which was booked to other income in the second quarter of 2019. The company reported a net loss attributed to Amphastar shareholders of $200,000 or $0.00 per share on the second quarter compared to a net profit of $47.8 million or $0.96 per share in the second quarter of 2019. The company reported an adjusted net income of $7.6 million or $0.16 per share compared to an adjusted net income of $4.1 million or $0.08 per share in the second quarter of last year. Adjusted earnings exclude amortization, equity compensation, impairments of long-lived assets, and one-time events. In the second quarter, cash flow from operations was $30.1 million, which is Amphastar's highest quarterly amount ever other than last year when we had a one-time $59.9 million payment from Momenta and Sandoz. During the quarter, we repurchased $5.8 million of stock leaving $5.1 million remaining on our buyback authorization. Today, we announced that the Board authorized an additional $20 million program, which we plan to utilize in the future. I will now turn the call back over to the operator to begin Q&A.

Hi, thanks. Maybe you could talk a little bit about just how the epinephrine vials, how the uptake of that product is doing. Obviously, you guys are the first generic in that market. And how are the GPOs sort of receiving the multidose vial at this point?

Thanks for the question. We've kind of all along said that we're not out to destroy the market. We're looking to get a reasonable share of the market. We are working with the GPOs. We do feel like this will take some time to penetrate and gain market share. But we feel like we're making traction, and we're progressing in that front today.

And maybe just one follow-up. AMP 001, I guess that's an FDA approval decision that could be coming sometime in the second half of the year. Is there a hard date in terms of when you expect an FDA decision?

Yes. We've said the third quarter of this year. And it is – we're waiting for the agency. That's the action date that they've provided to us.

I see. And then just maybe one last question, which is Primatene Mist. It seems like the sales were around $12.5 to $13 million a quarter. But you do expect that product to get to around $65 million on an annualized basis next year. What sort of are the drivers to get you from what your annualized run rate is currently to the $65 million annual target?

Sure. So as we said, we're going to increase our advertising spend. We feel like our advertising and our digital advertising with TV and radio has been really successful, and also launching into the Kroger family, which is a large network of 2,700 outlets. We still have other opportunities that we think are catalysts that will help expand this market as well. But the first phase of our marketing strategy is building brand awareness. We feel like we're really making headway there. And we continue to expand it into more outlets, so we're really comfortable with that $65 million. We actually really believe that we can push it even further than that over time.

Thanks. You had alluded to in the past some impact from shortage products, and that was tied into your expanded capacity. I think sodium bicarbonate is one of those products where you stood to benefit. Can you just remind us what the dollar impact of that is going to be this year in terms of the expanded capacity/benefit from taking advantage of these market shortage products?

Sure, David. What we had said previously was that having this additional capacity was a $20 million opportunity just for the products that we currently sell on the market and could sell in the future now that we had this higher level of capacity. So we did take advantage of that opportunity this quarter. Sodium bicarbonate sales were up by several million dollars in particular this quarter. And some of the other prefilled syringes that we make out of that facility in South El Monte were also up. Unfortunately, at the same time, we did have the offsetting things that both Dan and I had mentioned about those products that are used for more elective surgeries that were down, which caused some of the weakness in that area.

Sure. Okay. That's helpful. And then just toggling back to epinephrine, and I'm sorry if I missed any color here. What's your take over the long term of how much of that market you can capture? How much of that market can you supply with your existing capacity?

Yes. So let me take the second half of that question first. So when we were in this market previously, we had about 80% market share, and we were not at our full capacity. So we have the capacity to take 100% of the market. But we're clearly not going to be – we're not going to do that. What we've been describing is what we say a reasonable share and a reasonable share for second entrants should be. And I think that's all we really want to say publicly at this time on that.

Okay. And then last question is on the rest of the inhalation pipeline. Can you just give us some more color on expected filings over the next sort of 12 to 18 months?

Yes. David, this is Tony Marrs. We've disclosed that we have one filing that we'll be submitting at the end of this year. And moving forward, we have several other products that are in our pipeline that will be coming shortly thereafter.

Great, thanks. It's Rafay on for Gary. So for Primatene, could you comment on the most recent weekly trends that you're observing? And then I think you had previously talked about mid- to high single-digit marketing spend this year behind the product. Is that still the right level to think about? Or are you planning to exceed that with the step-up in the third quarter?

Sure. So the trend is still – the trajectory that we see with the trend in the in-store sales is still on a similar path of increasing. As we said, we do plan to increase our advertising spend in the second half of this year, probably around 20% or so. So that's kind of what you can see there.

Yes. So it's certainly something that we are considering. Right now, we believe we have enough capacity at that facility to handle the market that we see for all of those products. But as we look to the future, we are considering adding more capacity at our Amphastar facility for future products. So when we take a look at our CapEx in the long term, maybe medium term, three to five years, definitely, we'll have a spend here in this facility for increased capacity for our prefilled syringes, vials. And as we've mentioned recently, we've also already spent the money to do the pen syringes here for the insulin products in the future. So we do have a long-term plan to add capacity, but probably not as much on the IMS side as at the Amphastar side.

Thanks, good afternoon. First question, just want to confirm the timeline for 002. Is that still a late-2020 potential approval?

Yes, that's correct. Our action date is the fourth quarter of this year or the first quarter depending on whether an inspection would be required, which we don't anticipate but is a possibility. Nothing's changed from that perspective.

Okay. And then with respect to Primatene, obviously, upward momentum continues. You launched into Walmart late last year, Amazon earlier in the year. Maybe just a quick update in terms of how the products are performing in some of the newer outlets. And then I don't know if you have the stats in front of you, but if you could give us a sense in terms of how many stores of your total number of targets you're actually on the shelves at?

Sure. We did update the slide in our investor presentation. It's available on the IR section of our website. So there's a chart that I think a lot of investors have found very helpful that shows the weekly sales at the total aggregate from each store that includes Walgreens, CVS, Rite Aid, Walmart and now includes Amazon.com as well. And to your question, what we've seen on the more recent ads, like Amazon in particular, we've seen faster growth from those outlets, but they were starting at a lower base. So we're happy with the performance in all the areas. Really, all of the stores have been performing well. And we are in all of the locations for all of those stores that I mentioned other than Walmart. They had a group called the neighborhood market, which is really just a grocery store. So we're not in the Walmart that's only a grocery store, but we're in every other Walmart out there. And we've been very happy with the performance. And we had been a little concerned that there might be some cannibalization from the existing stores as we continue to add new locations, but that has really not been a trend. And we've continued to see increasing sales from all of the retailers that carry the products. And we've been very happy about that.

Okay. And Bill, earlier, you had talked about capacity expansion and capabilities with respect to the injectable portfolio. But maybe just a quick update in terms of where you guys currently stand with respect to inhalation capacity, especially considering the strong trend in Primatene. Is that an area where you're going to make an additional investment spend in the next couple of years to support for the Primatene volumes or not?

Yes. So we have enough capacity, we believe, for Primatene for some time. However, with the other ANDAs that we have in our portfolio that are using similar technology, the MDIs, we are adding more filling capacity at our Armstrong facility. And so that's not online yet. That's really in the – it's been ordered. And so we're in the process of doubling the capacity, basically going from one line to two lines there in the not-too-distant future. So we're optimistic about that whole inhalation market. So we think the time is right to spend the money now before we need the capacity. Yes. We have no comments on that. As you know, we're the third filer, and we think it's a great product overall. It's a little bit crowded, but we're happy with where we are in the product development, and we really don't want to comment on the litigation.

Okay. So we want to thank everybody for joining us today on our second quarter 2020 earnings call. We hope that everybody stays safe, and we look forward to catching up with everyone in our next quarter. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.