Jason Shandell - President and Director Bill Peters - Chief Financial Officer, Treasurer, and Senior Vice President of Finance.

Elliot Wilbur - Raymond James David Morris - Wells Fargo David Steinberg - Jefferies Serge Belanger - Needham & Company, LLC.

Good day, ladies and gentlemen, and welcome to the Amphastar Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] This conference call may contain forward-looking statements, including statements relating to Amphastar Pharmaceuticals.

These statements are not historical facts, but rather based on Amphastar Pharmaceuticals’ current expectations, estimates and projections regarding Amphastar Pharmaceuticals’ business, operations and other similar or related factors.

Words such as may, will, could, would, should, anticipate, predict, potential, continue, expects, intends, plans, projects, believes, estimates, and other similar or related expressions are used to identify these forward-looking statements.

These statements are only predictions and are such not guarantees of future performance and they will involve risks, uncertainties and assumptions that are difficult or impossible to predict.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Amphastar Pharmaceuticals’ filings with the SEC. I would now like to introduce your host for today’s conference, Mr. Jason Shandell, President of Amphastar. Please go ahead..

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.

I will now turn the call over to our CFO, Bill Peters, to discuss the fourth quarter financials..

Thank you, Jason. Sales for the fourth quarter increased 38% to $76.9 million from $55.9 million in the previous year’s period. Sales of enoxaparin declined to $19.9 million from $22.1 million, due to a lower average selling price. Unit sales of enoxaparin continued to hold up as we maintained our market share.

Other finished pharmaceutical products sales increased 66% to $46.2 million. This increase was spread across multiple products and occurred due to multiple reasons, including pricing and market demand.

We increased the prices of seven products in July, which had a modest impact to sales in the third quarter as we also incurred standard wholesaler fees associated with raising prices. The full impact of this pricing increase was seen here in our fourth quarter.

Our Insulin API business generated sales of $10.8 million, a significant increase from the $5.9 million we reported in the fourth quarter of 2014. Cost of revenues remained relatively unchanged in dollar terms at $43.7 million. More importantly, we saw a gross margin improvement to 43% of revenues from 21% of revenues in the previous year.

Improved pricing was the main driver, but we’ve also lowered our cost of goods on enoxaparin which partially offset the pricing declines there. Additionally, our API facility in France was running close to capacity, which turned what was a negative margin business for the first three quarters of the year into a positive margin business.

Selling, distribution and marketing expenses decreased slightly to $1.3 million from $1.5 million in the previous year’s period. General and administrative spending also decreased slightly to $8.7 million from $9.8 million, primarily due to reduced corporate compensation expenses.

Research and development expenditures increased to $8.7 million from $7.6 million primarily due to expenses related to our intranasal naloxone product and our generic development portfolio.

The company reported its first profitable quarter since 2013 with a profit of $7.5 million or $0.16 per share compared to last year’s fourth quarter’s net loss of $2.5 million or $0.06 per share.

The company reported an adjusted net profit of approximately $9.1 million or $0.19 per share compared with an adjusted net loss of approximately $1.5 million or $0.03 per share in the fourth quarter of last year. Adjusted earnings exclude amortization, non-cash equity compensation and impairments.

On December 31, 2015, the company had approximately $67.4 million of cash, cash equivalents and restricted cash. In the fourth quarter, cash flows from operations were approximately $3 million and this was positive for the sixth quarter in a row. Let me review a few of the financial assumptions we are using as we look to 2016.

On the revenue line, we expect to see continued pricing pressure on enoxaparin. Other finished pharmaceutical products will continue to be strong. However, the fourth quarter sales benefited from a higher than typical unit volume as we worked off a backlog of orders we had received in the quarter previously, the third quarter.

We expect shipments of RHI API to decrease in 2016 due to decreased demand from MannKind. In 2015, our sales to MannKind were approximately $20 million. As of today, we do not have any shipments to MannKind planned for our first quarter.

We expect gross margins in the coming quarters to improve over 2015, but they will not be as high as they were in the fourth quarter. Enoxaparin pricing declines continue, but we believe that by the end of 2016, our China facility should be approved to make semi-purified heparin which will be used for the starting material for enoxaparin.

This will allow us to reduce our input costs. Price increases on other finished pharmaceutical products will provide a benefit as well. For most of 2015, our gross margin on RHI API was negative, because our factory was not running at capacity. In the fourth quarter, we hit our capacity as we produced significant amounts for MannKind.

Due to an uncertain future demand from MannKind, we have now reduced our production which will lead to negative margins in the short-term. We expect G&A spending to increase for two reasons. First, we’ll be beefing up our accounting and internal controls function as we focus to comply with Sarbanes-Oxley Regulations.

Additionally, we expect legal expenses to increase as well. Research and development spending will increase in both dollar terms and as a percentage of sales as we are planning to begin several expensive clinical trials. Additionally, we plan for an increase in filing fees paid in 2016, including the PDUFA fee for our intranasal naloxone.

I’ll now turn the call back over to Jason..

Thanks, Bill. We’re very happy to have earned a profit in the fourth quarter. In addition, we had another quarter of positive cash flow from operations, which now marks six quarters in a row. As a result, our cash position is now at $67.4 million as of December 31, 2015.

For the full year 2015, we recognized net revenues of $251.5 million, which represents a 20% increase from 2014. We also recognized gross profit of $77.3 million for the full year 2015, which represents a 50% increase from the prior year’s period.

We continue to make good progress on our pipeline, and since our last earnings call, we filed one additional ANDA and are planning on filing our NDA for intranasal naloxone in early Q2 of this year.

We also plan to file another DMF for our China API facility in the near future, which will continue to support our pipeline and increase our vertical integration. With respect to Primatene, we have discussed in our last couple of earnings calls that we were waiting for comments from the FDA regarding our human factors studies.

Since our last earnings call, we had several communications with the Agency and recently received constructive comments from the FDA regarding our studies. Based on those comments, we updated our study protocol and we’re in the process of completing what we believe to be our final human factors study.

We expect to complete this study and fully respond to the FDA’s CRL in Q2 of this year. We had a telephone meeting with the FDA in Q1 of this year to discuss our clinical studies for our Albuterol dry powder inhaler candidate. The meeting was productive and based on some good suggestions from FDA, we plan on performing a small Phase 2b study.

We anticipate completing this study in the second half of this year. In terms of new product offerings, today, we launched Ketorolac, a generic injectable product for which we received FDA approval in 2004, but had not commercialized it due to competitive market pricing at the time.

Ketorolac was listed on the FDA’s drug shortage list for the majority of 2015 and involves a difficult manufacturing process. With respect to our insulin API business, by mutual agreement MannKind did not purchase the full contractually obligated amount of recombinant human insulin API in 2015.

And in October 2015, MannKind informed us that they were not going to exercise the option to purchase additional quantities of API for 2016. Furthermore, we are currently in discussions with MannKind regarding the timing of their future API purchases.

Regardless of the outcome of such discussions, it will in no way change our long-term plans for this facility. On the legal front, the patent case against Momenta and Sandoz was remanded back to the District Court on February 24 for further proceedings.

As I’ve stated on previous calls, we have numerous strong defenses, including non-infringement and invalidity of Momenta’s patents. Additionally, we plan to file a petition of [30RA] with the US Supreme Court which is due by May 17.

With respect to our antitrust case against Momenta and Sandoz, on January 26, the District Court of California granted to defend its motion to transfer the case to the District Court of Massachusetts, which had previously ordered the $100 million bond for Momenta and Sandoz and soon will be hearing our patent infringement defenses.

We believe that our antitrust allegations will help provide the District Court Judge with a full context of Momenta and Sandoz’s anti-competitive conduct, including the fact that they urged the United States Pharmacopeia to have Sanofi-Aventis, the innovator of enoxaparin, abandon its patent covering the proposed USP Method 207, which is the test method that is used by Amphastar.

Momenta and Sandoz contended that any one should be free to use a standardized USP test without facing the threat of patent litigation. However, they later sued Amphastar for using USP Method 207.

With respect to the false claims case against Sanofi-Aventis, our opening appeal brief for the Ninth Circuit Court of Appeals is due to be filed on March 28. In terms of business development, on March 4, we acquired 14 ANDAs, representing 11 different injectable chemical entities from Hikma Pharmaceuticals for $4 million.

The products are generic injectables and have an approximate total annual market size of $85 million according to data from IMS Health as of December 31, 2015. Amphastar plans to transfer the products to its facilities in California, which will require FDA approval before the products can be relaunched.

This acquisition will allow us to further expand and diversify our product offerings. In January 2016, the company’s subsidiary, ANP, acquired Nanjing Letop Medical Technology Company for $700,000. Letop had previously supplied ANP with intermediate materials used in making various active pharmaceutical ingredients.

This acquisition will continue to support our pipeline and increase our vertical integration. With that update, I’ll now turn the call over to the operator to begin Q&A..

[Operator Instructions] And our first question comes from Elliot Wilbur with Raymond James..

Just a couple of financial questions for you, Bill, initially.

With respect to the price increases that were taken, it wasn’t clear to me necessarily that the full impact was seen in 4Q?.

It was. The full impact of all the price increases hit the fourth quarter. But also as I mentioned in remarks looking forward to 2016, we also benefited from an increased volume due to fulfilling some orders that had been on our backlog at the end of the third quarter..

I think you mentioned for 2016 that the expectation is that you’ll continue to see pricing deterioration in enoxaparin, but I guess looking back over the last three quarters or so, it seems like there’s been stability in that market.

Am I just – [the street] data that I’m looking at or has there been a change there recently?.

It’s been a slow decrease in price over the past several quarters. A year ago, it was falling pretty quickly, but over the last couple of quarters, it’s been stable, but with a slight downward trend..

And then you mentioned that G&A will increase year-over-year referring specifically to absolute terms?.

Yes, in dollar terms..

And then a question for Jason on this latest round of – the status quo around with the FDA on Primatene. So once you complete this most recent human factor study, you submit it to the FDA.

I guess the question is, then what? Is it just more waiting for the Agency to respond? I mean, is there any sort of timeline associated with this expected submission that – maybe give us a little bit more clarity in terms of when you can re-file the NDA?.

We believe that our full response to their complete response letter under PDUFA will be a six-month review. So that’s our anticipation that after we, some say re-file, we say respond to the complete response letter, we expect something, a full review within six months..

So you submit the second quarter, hopefully that triggers the statutory obligation review in six months?.

Yes, that’s our perspective..

And then just the last question is, is there anything that we should expect, anticipate to possibly enter the public domain with respect to the company’s development efforts on the respiratory front in 2016.

You talked a little bit about Albuterol, but also you’ve recently filed a DMF for salmeterol which one could make the obvious assumption that maybe positioning to eventually look at the possibility of an Advair filing, anything you can say about in the respiratory programs beyond Albuterol?.

So I talked about we’re going to do a small Phase 2b. The other inhalation products which were partnered on several of them, we’re making very good progress.

It will be unclear whether you will see that, however, anything public like a clinicaltrials.gov, these will be ANDAs and some of the ones – I can’t comment on all of them, we will not be seeing clinical trials on clinicaltrials.gov..

I will say though that, as I mentioned, we are expecting some increase in the R&D budget related to some of these, most of the increase is related to the inhalation pipeline..

Our next question comes from David Morris with Wells Fargo..

Couple of questions.

First, [indiscernible] that you’re looking at? And I don’t know if I missed it earlier in the call, but how many ANDAs you anticipate filing in 2016?.

Your first question was kind of blur, we couldn’t hear what you said exactly, so could you repeat your first question, please?.

Isuprel and Nitropress ANDAs, are those filings for this year?.

We have filed DMFs on those and we may or may not be working on the ANDAs, but you could make your assumptions on that based on our DMF filings. In order to file an ANDA, DMF has to be on file with your DMF supplier. So certainly, a DMF would come first and then an ANDA would come after that..

And my second question was how many ANDAs do you anticipate filing this year?.

We did not say earlier, but we did say that we’re going to increase our filing expense and part of that was PDUFA fee related to intranasal naloxone, which we will be filing in the near future. But we anticipate filing probably three or so ANDAs this year.

And just to reiterate that, we did mention in the press release today that we had four ANDAs on file now and at the time of the last conference call it was three. So in the intervening time, we did file one more..

And our next question comes from David Amsellem with Piper Jaffray..

This is [Michael] on for David. Just two quick ones.

First off, how are you thinking about new entrants in the enoxaparin market? I believe Sagent might have a filing, just how are you guys planning on maybe more competition materializing there? And just a second follow-up, how are you guys thinking about capital deployment these days? You’re building up some cash and just want to think about business development..

On enoxaparin, it’s always hard to say, with a generic product, there will still be other entrants. We are aware of Sagent’s filing. It is a very complicated molecule and that’s why to this day there have only been three generics approved. But we are always prepared for that.

As Bill said, we do continue to expect downward pressure on the pricing and that’s why we’re working hard on our vertical integration and hopefully our ANP facility will get approval soon for the semi-purified heparin which will help lower our cost structure further. So we are always prepared for additional competition..

As far as deploying capital, as Jason mentioned, we did spend $4 million this year on buying those 14 ANDAs that we hope to bring back to the market at some point in our future.

We also did a small acquisition in China which was just under $1 million that further supported our vertical integration strategy as well as they were a supplier to our company there. So that helped continue that strategy. And we continue to look at business development deals right now and are actively looking at a few.

So I would not be surprised if we continue to deploy cash in also these kind of follow-on small bite sized deals that we’ve done like these last two. In addition, we’d also be open to other bigger ideas if they were very much strategically oriented..

And our next question comes from David Steinberg with Jefferies..

I was wondering if you can give us a little more color on your $4 million acquisition of these 14 ANDAs. I wouldn’t usually ask a question about a $4 million transaction, but I know in the past you’ve turned that kind of acquisition into multiples of where you bought it from.

So when do you think these 14 ANDAs could get on to the market? And I think you said it was an $85 million market size combined.

Maybe you can give us some information on what the revenue run rate was before they took it off the market and then perhaps of this $85 million, what kind of share do you aspire to get?.

First of all, these are products that have all been off the market for several years because they were coming from a facility that had a warning letter so that they were pulled from the market. They haven’t had any sales for multiple years. So it’s really difficult to say.

But they were required to be divested because they were – or a fewer competitors in each of these products. But that said, with $2 million sales product for competitors is a lot.

So as we take a look at bringing these products back to the market, we’re going to have to source the API, do the work that we – do the stability work here on site and then file potentially a supplement or something with the FDA to bring these products back to the market in the correct regulatory timeframe. So that doesn’t happen overnight.

So that’s not – we’re not going to see any sales of these products in 2016, for sure. But it could be the following year. And our thoughts on this is we’ve got limited resources, so we can’t work on all 14 at once. But we will prioritize the ones that seem to be the most meaningful from a sales perspective..

And just two quick follow-ups. It looks like from your press release you had six proprietary drugs and now you have five. Was this due to the clinical trial fail or what are the reasons that you took that out of that pipeline? I mean, we have the [indiscernible]..

I’ll take a look at that. I think our number of – it also had to do with breaking out our biosimilars group. But we’ll take a look at that. There has been no failures and we’re still maintaining the same pipeline that we’ve talked about in the past. We’ll have to take a look at those numbers..

Last question, I know you had a relatively small buyback, it looks like you didn’t use it this quarter given your shares, any plans to actually purchase any shares this year?.

Actually that’s not true. We did repurchase shares this year. And as a matter of fact, you’ll be able to see that on the 10-K when it comes out tomorrow. We purchased over 300,000 shares in the fourth quarter and we actually increased the buying in the first quarter as the stock price fell.

So we completed, with the authorized two different $10 million authorizations, we completed the first $10 million and started buying in the second $10 million..

Any plans to increase the size given you’ve been active in the market place?.

Not at this size just because we have other things that we plan to use our cash for at this point..

[Operator Instructions] And we have a question from Serge Belanger with Needham..

Just a couple of questions.

You may have touched on this before, [indiscernible] naloxone, some of the change [indiscernible] how do you see that market for 2016? And once you have approval of your intranasal product, how will that change the opportunity for naloxone?.

We do think that there is a trend to really see this product go over the counter and we’ve seen that in several states or multiple states where it’s being sold in CVS, in Walgreens. Of course, there is an intranasal naloxone that received approval last November and they launched this quarter.

We believe we’re going to continue to see our hospital sales in a steady state. So as we’ve talked about on previous calls, it’s unclear how much of – from a dollar perspective, this will be in terms of a retail product. We’re being very conservative and not expecting that much of an increase from what we get in our hospitals sales.

But we do believe there is a potential upside with this trend in the opioid area.

And if there were ever any legislation that would require co-prescriptions, I know we talked about partnerships in the past, but there has been recent discussions where there is potential legislation that would require that, in which case it could be a large retail market.

But for now, we’re conservative and we’re not anticipating any large increase as compared to last year’s sales..

And I think you talked a little bit about ANDAs filing cadence, I think you mentioned [indiscernible] plan going forward beyond 2016 [indiscernible] for the Chinese facility, is there a good cadence for a filing?.

With respect to the ANDAs, [indiscernible] that’s an approximate number. We’ll strive to even do more than that. But on a steady state going into 2017 and then 2018, we intend to gradually increase the number of filings each year. And so our hope is that we would have filed on probably close to 20 products in the next three to four years..

And we have a follow-up from Elliot Wilbur with Raymond James..

A follow-up for you, I want to go back to the earlier question regarding the 14 acquired products to make sure I have this done correctly.

So there are equivalents on the market to all of these products, correct?.

Correct..

But the entity that you’ve acquired them from has not been selling them for several years, is that’s what….

Correct..

And then you’ve generated positive cash flow from operations in the last six quarters in a row, anything that you can at this point in terms of 2016 outlook and whether there is any unusual items that might result from significant variation or deviation around that trend?.

Not from the continuation of our positive cash flow from operations.

However, we do see an increase in the capital expenditures coming up, both in France and in China in particular, so especially in France as we transfer the upstream ID process from Merck [indiscernible] to our facility in France that’s undertaking some pretty significant CapEx there and also for the expansion of our facility in China.

And then some upgrades to our facilities both in South El Monte and here at Amphastar in Rancho Cucamonga.

We have some pretty significant building going on in both places to build out our infrastructure, primarily to make sure – in this facility here for our several products that we have in our pipeline to make sure that we are able to manufacture them at this facility and then in South El Monte it’s a matter of – the facility there is fairly much at capacity.

So we have some planned improvements there as we increase the capacity of that facility. So overall, the CapEx goes up from what it was this year about $14 million and that will take a definite step up next year..

There are no further questions in the queue. I’d like to turn it back to management for any closing remarks..

Thank you very much, operator. This concludes our call for today. Thanks again for participating. Have a great rest of the day..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day..