Jason Shandell - President and Director Bill Peters - CFO, Treasurer and SVP of Finance.

David Amsellem - Piper Jaffray Katie Brennan - BMO Capital Markets David Steinberg - Jefferies.

Good day, ladies and gentlemen, and welcome to the Amphastar Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jason Shandell, President of Amphastar Pharmaceuticals. Please go ahead, sir..

Thank you. Good afternoon and welcome to Amphastar Pharmaceuticals' fourth quarter earnings call. My name is Jason Shandell, President of Amphastar. I'm joined today with my colleague Bill Peters, CFO of Amphastar. We appreciate you joining us on the call today and look forward to speaking with you and answering any questions you may have.

Prior to giving you a general business update, I will turn the call over to Bill to discuss the fourth quarter financials..

Thank you, Jason. Sales for the fourth quarter increased 2% to $55.9 million from $54.9 million in the previous year's period. Sales of enoxaparin declined to $22.1 million from $34.6 million, primarily due to a lower average selling price, particularly on the retail side of the business.

Unit sales to Actavis decreased in the fourth quarter, partially due to the timing of shipments as we had higher than typical sales in the third quarter. AFP, our insulin API business in France, that we acquired last year, generated sales of $5.9 million in the fourth quarter.

Other finished pharmaceutical products sales increased 37% to $27.9 million from $20.3 million in the previous year's period, as increased sales of our critical care products offset lower sales in Cortrosyn.

Cost of sales increased to $43.9 million from $35.2 million in the previous year's period, primarily due to costs associated with our AFP insulin business. Cost of sales increased as a percentage of sales to 79% from 64% for a variety of factors.

Long-term trends of lower enoxaparin pricing were the primary factor as the profit share we receive from Actavis declined significantly. However, as we have mentioned previously, the GPO portion of our business, where we retain 100% of the profits, has more stable pricing. Our insulin API sales also negatively impacted gross margin percentages.

We ramped up hiring in France in order to meet the insulin demand for MannKind, but the production levels have not yet matched the increased expenditures. We expect that as we increase production at AFP, our gross margins will improve.

Selling, distribution, and marketing expenses increased slightly to $1.5 million from $1.3 million in the previous year's period, primarily due to costs at AFP.

General and administrative spending increased to $9.8 million from $8 million as we have incurred additional G&A expenses as a result of the AFP acquisition and increased compensation expenses. Research and development expenditures increased to $7.6 million from $7.3 million on increased clinical trial expenses.

The Company reported a net loss for the fourth quarter of $2.5 million or $0.06 per share, compared to last year's fourth quarter net income of $1.8 million or $0.05 per share.

The Company reported an adjusted net loss of approximately $2.5 million or $0.03 per share, compared to adjusted net income of $3.3 million or $0.08 per fully diluted share in the fourth quarter of last year. Adjusted earnings excludes amortization, non-cash equity compensation, and impairments.

On December 31, 2014, the Company had approximately $67.8 million of cash and cash equivalents and $1.5 million of restricted cash and cash equivalents. The decrease in cash from the previous quarter was primarily due to a scheduled payment to Merck of approximately EUR5 million or $6 million.

While earnings were lower than last year, the cash flow from operations was over $12 million for the quarter as the Company decreased its receivables and inventory levels by a combined $8 million. I will now go over a couple of financial assumptions which investors should use as they model our 2015 income statement.

We anticipate that sales of enoxaparin will decline in both terms of units and in terms of average price per unit, with the drop in pricing being larger in the retail market where we share the profits with our partner Actavis. We've already had to reduce the transfer price that Actavis pays for enoxaparin in both January and March of 2015.

Pricing increases on other injectable products will partially offset the enoxaparin sales declines. Our list price increases went into effect in October 2014, however, we did not see an increase in net revenues in the fourth quarter as fees paid to wholesalers offset what increases we did have. Additionally, many customers have notice periods.

Most of those notice periods ended in January, but one lasts until the second quarter. Also we will see sales increases on our insulin API business due to our sales to MannKind.

As you know, we have a contract with MannKind where we will supply them with insulin for their Afrezza product, and that contract has minimum purchase quantities at fixed prices. The majority of our insulin sales in the fourth quarter were to MannKind, and it should be noted that these sales in 2014 count toward their 2015 minimum.

Remember that the MannKind contract, like most of our insulin contracts, are denominated in euros because nearly all of our expenses for that business are also euro-based, as are the payments that we make to Merck as part of the purchase price for that business.

We had previously estimated that we would see approximately $32 million in sales per year for MannKind, but due to the declining dollar versus the euro, the dollar value of sales has declined closer to $25 million per year. Likewise, our expenses and payment obligations to Merck have declined by the same percentage.

Additionally, costs at our AFP facility are expected to increase this year as we begin transferring the upstream inclusion by the manufacturing process from Merck to AFP. We anticipate that R&D expenses will increase both in dollar terms and as a percentage of sales.

G&A expenses will increase on an annualized basis as we have a full year of these expenses associated with AFP. Additionally, we will incur expenses related to the work that we have to perform this year in order to comply with Sarbanes-Oxley Section 404. I will now turn the call back over to Jason..

Thanks, Bill. I'm happy to report that we had a very productive fourth quarter. Sales of the majority of our products remained strong, and we continue to make good progress with the pipeline.

As Bill reported, enoxaparin pricing continued to decline; however, we expect this decline to be more than offset by strong growth of our other products and our insulin sales to MannKind. In the fourth quarter, we scaled up production at our French subsidiary, AFP, to meet MannKind's demand for recombinant human insulin API.

I'm happy to report that we're now selling such API to MannKind, and although the value of the euro has declined since signing the agreement with MannKind, all of our costs at AFP are in euros, as well as our payment obligations to Merck. Therefore, as Bill discussed, we have a natural currency hedge in place.

Additionally, in January 2015, we entered into a supply option agreement with MannKind, pursuant to which MannKind will have the option to purchase recombinant human insulin API in addition to the amounts specified in the July 2014 supply agreement.

Under the option agreement, MannKind has the option to purchase additional insulin API in calendar years 2016 through 2019. In the event MannKind elects not to exercise its minimum annual purchase option for any year, they will pay us a capacity cancellation fee.

On the legal front, we continue to await a decision from the Federal District Court regarding whether we qualify as the original source in our qui tam action on behalf of the government against Sanofi-Aventis.

In parallel, Sanofi-Aventis appealed the District Court's denial of their summary judgment regarding the sufficiency of Amphastar's original notice letter to the government. The issue of the government notice letter remains before the 9th Circuit Court of Appeals.

Briefing on the appeal has been completed and we await a date for oral arguments to be set by the 9th Circuit. In our litigation against Momento and Sandoz, the appeal briefing has been completed and the Federal Circuit has set the date of May 4th for oral arguments.

Nothing has really changed on the record from the time of the last appeal, and we are confident that the Federal Circuit will maintain the status quo and uphold their previous safe harbor ruling.

Once that happens, we intend to return to the District Court in Boston to seek full recovery of our $100 million bond plus interest for the years this case has been pending. As I've previously discussed, our China subsidiary, ANP, was inspected by the FDA last April. The infection included a pre-approval inspection for hyaluronidase starting material.

And we expect the green light from the FDA at any time. Therefore, we are planning to re-launch the brand Amphadase later this year. Now turning to our clinical programs. I'm happy to report that we completed the Phase 2 clinical trial for albuterol dried powder inhalation, and we are in the process of preparing the Phase 1/2 report for the FDA.

Subject to discussions with the FDA, we plan to commence the Phase 3 trial later this year. With respect to Primatene, we continue to have active dialogue with the FDA and we are targeting the middle of this year to refile the NDA, with an expectation of an approval in 2016.

With respect to upcoming FDA applications, we plan to file one NDA and two ANDAs this year, which would bring the total to two NDAs and five ANDAs on file with the agency. As a reminder, Amphastar's business model is to focus on large markets with high technical barriers to entry.

Therefore, although the number of filings may be low, the market opportunities are significant. Finally, we are actively engaged in business development discussions, both with respect to our pipeline products as well as potential product acquisitions. We hope to provide updates in these areas later in the year.

With that business update, I will now turn the call over to the operator to begin Q&A..

[Operator Instructions] The first question comes from David Amsellem from Piper Jaffray..

Thanks. Just a couple.

First, can you give us any new color on how you're thinking about biz dev and M&A? And I guess the question here is, you know, what's your level of urgency given that the pipeline is a little bit of aways away from really bearing fruit? And then secondly, regarding pricing for key injectables, last quarter you talked about taking up price.

Can you talk about the potential for more pricing power for the base business? And then lastly, just on Teva and their entry into the enoxaparin market, what can you tell us in terms of what kind of traction that they're getting or not getting, and what kind of contribution or share you think they'll make -- they'll garner in that market going forward? Thanks..

Yes, thank you. This is Jason. I'll start off with the business development question. First of all, no urgency, you know, in terms of our core products, those are remaining strong and our pipeline is progressing very well. So, we are anticipating re-launching Amphadase this year and we're targeting Primatene for next year.

That being said, we are on active look right now mostly for product acquisition. We have done a lot to absorb AFP into the Amphastar brand and that's progressing really well, but it does take a lot of resources. So now we are looking specifically for a product. Obviously, a lot of companies are looking for that.

But something that, you know, obviously ideally would be accretive to earnings and that would build a nice bridge to Primatene which would hopefully be next year. Also, although we're not discussing the details, we are in, currently, in discussion on a partnership with respect to our pipeline products.

And those sort of partnerships could see upfront payments, but it's still too early to discuss that..

And I think your second question was on the pricing. Just to confirm, we did increase the prices on many of our existing injectable products as of October 1, as I mentioned in the call.

We really didn't get any revenue benefit in the fourth quarter from that because, for the customers that did get pricing increases, that was offset by wholesaler fees that were used to raise prices.

We will see a benefit from that in the first quarter and even more of a benefit from that in the second quarter as the last of the notice periods ends for our customers.

As far as more pricing upward pressure could be, there are probably two to three products where we could increase price potentially, because I believe the market would allow us to do that. And so we're certainly considering that.

But I would say that the pricing increases for those products would not have as much of effect as the pricing increase that we just took across a wide range of products. Moving on to your enoxaparin question and Teva, so far I think that they've been a pretty rational competitor.

We expect that over time, over the course of the year, I would guess, that they'd probably get their fair share on the market. But so far I think that they've been pretty rational in their launch.

Next question?.

Your next question comes from David Marris from BMO Capital Markets..

Hi, it's Katie Brennan in for David Marris. Thanks for taking the question. If I can touch a bit on the enoxaparin market as well.

How kind of has Teva's entry differed at all from what you expected, or has it not? And also on Amphadase, can you talk a little bit as to how much of a ramp-up we might see in SG&A due to kind of preparing for the re-launch? And when you think that that might -- if you can give us any more details on when you think that might happen, that'd be great.

Thank you..

Sure. As far as the Teva question, I don't think anything they've done is unexpected, it's pretty typical. And on the Amphadase, there's really not any significant G&A ramp for that product, only just some minor costs associated with that, that are really not material.

And remember, this product was only $4 million, $5 million a year sales product in its peak. So it's not a big product for us. And theoretically, we could get it approved at any time, but we really don't have any indication that the FDA is close on that either. So I wouldn't say that it's, you know, going to happen tomorrow.

But we believe that we've satisfied all of the conditions that need to be done and done everything that we need to do. So at this time, it's just a matter of waiting for the FDA to work their way through the process..

Thank you..

Your next question comes from David Steinberg from Jefferies..

Thanks very much. A couple of questions. First, you pressed on your outstanding legal activities. And I was just curious on the qui tam original source situation. What are the impediments for the judge to make a final decision? I had thought we were fairly close.

And any thoughts on timing? And then secondly, on the price increases, particularly on naloxone, could you talk about how sustainable you think that price increase is over the medium term?.

Yeah, thanks, David. This is Jason. I'll start out on the qui tam. So first, as you know, we completed briefing in the summer of 2014 and had oral arguments before the District Court in October 2014.

I also thought, given the judge's knowledge of the case, the full briefing, the oral arguments, I was expecting something end of the year or sometime at the beginning of this year. This is really reading tea leaves because obviously legal cases grind slowly.

But one thing that I raised in my commentary was the fact that there is a parallel appeal from Sanofi in the 9th Circuit. And so, Sanofi had filed a summary judgment seeking the case be thrown out. It was served on a procedural issue regarding our notice letter to the government.

The notice letter must contain "the information" to put the government on notice of the case. We did provide the information. Their argument was we didn't provide enough detailed information. And so this was certified as a question for appeal as a matter of law. I believe that the spirit of the law is to put the government on notice, which we did.

And now we're arguing over how much detail should be there. So the real crux in my mind is the original source issue which we had oral arguments in October. One thought, although we can't say it for sure, is perhaps the judge is waiting on the appeal to make his decision on the original source.

If that were the case, that makes me optimistic because I would think, if he found that we were not the original source, he could make that decision now and essentially the case would go away.

But knowing that this 9th Circuit issue is something else that really could stop the case, perhaps he's waiting, if Sanofi were to win on the 9th Circuit issue, then it really would not be such a big issue on the original source.

Should we prevail on the appeal issue, which I feel confident about, then I think we would see his decision on the original source soon thereafter. That's just reading the tea leaves though. At this point, any day we could have a decision from the District Court. But my guess is perhaps they're waiting to see what happens on the appeal..

And your second question was on the nolaxone pricing. And we don't really see any reason why it's not sustainable. When we take a look at the nolaxone market, even after our fairly significant price increase, we're still the lowest-priced nolaxone product on the market when you take a look at it per milligram of nolaxone that's dosed to the patient.

So we think that our price is fair, sustainable and already the lowest. There has been -- we do have had -- we have had some rebate agreements with certain government entities and that will lessen the impact of the price increase. But right now those are not a significant percentage of nolaxone sales.

So, and nolaxone, if you remember, it's -- while it's a pretty meaningful part of our business, you know, it was less than 10% of our business last year. I'm not sure if that answers all your questions..

Yeah. And just two quick housekeeping follow-ups.

So, can you remind us if you are the original source and either the government wins the case or there's a settlement, what share of the payments you're entitled to, assuming you're the original source?.

Sure..

And then secondly, curious, are you guys going to give annual or quarterly guidance going forward? All I know is you haven't so far..

Yeah, let me start out on the legal question. So, typically in these cases, if we're -- first of all, if we're determined the original source, it's not the end of the case, but I think it pushes it closer to settlement. After that, the only gating item would be an issue of damages. And so I believe discovery would begin on damages.

That being said, we've always maintained that we're open to settlement. Of course, it is the government's case. Whether it was a settlement or an ultimate finding of damages, the way qui tam cases work is the original source or the relater is entitled to 15% to 30% of what the government recovers.

And typically it's based on the amount of effort that the relater put into the case. As I've discussed before, this case, we really are running this case and the government supports us from behind the scenes, but this really is our case, our lawyers, our arguments.

So I would anticipate, should the government recover, that we would get closer to the 30%..

And as it goes to the question on guidance, we're not planning any official annual and certainly not any quarterly guidance. Just the comments that I had earlier in my scripted portion of the call, you know, kind of to guide you on the right direction on each of the different line items in the income statement..

Fair enough. Thanks, Bill..

All right. Thanks, David..

I am showing no further questions. I would now like to turn the call back over to Jason Shandell..

Thank you very much, operator. This concludes our call for today. Thanks again for taking the time to listen in. Have a great rest of the day..

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a good day..