Jason Shandell - President Bill Peters - Chief Financial Officer.

David Maris - Wells Fargo Elliot Wilbur - Raymond James Gary Nachman - BMO Capital Markets David Steinberg - Jefferies Sameer Kandola - Piper Jaffray.

Good day, ladies and gentlemen, and thank you for standing-by. Welcome to the Amphastar's Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time.

All statements in this conference call 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, acquisitions and other matters related to its pipeline of product candidates, the timing for completion of construction at the company’s IMS facility its share buyback program and other future events.

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. You can locate these reports through the company's website at www.amphastar.com and on the SEC's website at www.sec.gov.

Amphastar undertakes no obligation to revise or update information in this conference call to reflect events or circumstances in the future, even if new information becomes available or if subsequent events cause the company's expectations to change. And now it’s my pleasure to welcome and turn the call to Mr. Jason Shandell, Amphastar’s President.

Please go ahead..

Thank you, operator. Good afternoon, and welcome to Amphastar Pharmaceuticals' second 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 second quarter financials..

Thank you, Jason. Sales for the second quarter decreased 4% to $65.2 million from $68 million in the previous year's period. Sales of enoxaparin declined to $8.3 million from $17.3 million, due to both lower volumes and lower average selling prices.

Naloxone sales declined to $10.3 million from $15.6 million on lower unit volumes at lower average selling prices. Sales of our epinephrine vial totaled $9.9 million in the second quarter and were the main reason why our total epinephrine sales increased to $10.6 million from $5.3 million.

However, we discontinued selling epinephrine vials in May as requested by the FDA. Our other finished pharmaceutical products had volume increases as we were able to significantly reduce our back orders, which we had going into the second quarter.

As we have previously disclosed, these back orders were a result of our International Medication Systems facility shutdown of two months as we upgraded our quality systems, built the new filling room and installed new equipment.

These improvements significantly increased our capacity and they are scheduled to complete the validation process and be ready to manufacture in early 2018. Turning to our insulin API business, sales declined to $1.4 million from $4.3 million as we had no shipments to Mankind in the current quarter.

Cost of revenues increased to $38.4 million from $36.3 million. Gross margins declined to 41% of revenues from 47% of revenues in the previous year's period, primarily due to lower margins for enoxaparin.

Additionally, we increased our inventory reserves, including an increase to our enoxaparin inventory reserve of $2.9 million, due to a revised forecast of average selling prices. Selling, distribution and marketing expenses increased to $1.6 million from $1.3 million in the previous year's period.

General and administrative spending increased to $12.2 million from $9.5 million, primarily due to increased legal expenses related to the preparation for the patent trial against Momenta and Sandoz.

Research and development expenditures increased slightly to $10.7 million from $10.6 million as increased expenditures for clinical trials and active pharmaceutical ingredients offset a decrease in FDA fees, which were elevated last year due to our NDA filing fee for intranasal naloxone.

The company reported a profitable quarter with net income of approximately $2 million or $0.04 per share, compared to last year's second quarter net income of $6.9 million or $0.15 per share.

The company reported an adjusted net income of $5.4 million or $0.11 per share, compared to adjusted net income of $10.3 million or $0.23 per share in the second quarter of last year. Adjusted earnings exclude amortization, non-cash equity compensation, and impairments.

On June 30, 2017, the company had approximately $87.4 million of cash, cash equivalents, short-term investments and restricted short-term investments. In the second quarter, cash flow from operations was approximately $4.6 million and was positive for the 13th quarter in a row.

We also announced today that the company increased its share buyback program by another $20 million. The primary reason for the buyback program is to partially offset dilution from the company’s equity compensation program, but this increase also represents the company’s long term faith in the fundamentals of the company.

The timing of the increase is because the company significantly increased it share repurchases this year after the pull back in price. As of today we have repurchased over $19 million of our stock this year. I will now turn the call back over to Jason..

Thanks Bill. I’d like to begin by discussing a major milestone for the company, which was our great victory in the patent infringement lawsuit against Momenta and Sandoz. We are extremely pleased by the unanimous jury verdict holding that Momenta’s patent is both invalid as a matter of law and unenforceable as a matter of equity.

This outcome is exactly what we expected from the beginning of the case. It should be noted that there were three issues that the jury decided, non-infringement, invalidity and enforceability.

Although the jury found that Amphastar's test infringed the patent by performing general well-known USP test procedures, the jury went on to find that the patent was invalid on two grounds; lack of enablement, and lack of written description.

Finally with respect to the third element, enforceability, the jury determined that Amphastar's test comply with the USP 207.

Therefore given that momentum was on the USP panel, but failed to disclose its pending patent and violation of the conflicts of interest policy of USP, the jury found that Amphastar proved by clear and convincing evidence that Momenta and Santos waived their rights to recover from Amphastar for infringement, and an Amphastar approved by preponderance of the evidence that Momenta and Santos are stopped from enforcing their patent against Amphastar.

We are pleased that the jury determined that a US company can freely use USP method in the United States. It should be noted that the third element, enforceability, was an advisory verdict since it is an equitable defense as opposed to a legal defense.

Therefore, the clerk will take the equitable defenses, but not the legal and validity defenses under advisement and will determine whether a reasonable jury could have reached such a verdict based on the evidence presented at trial.

Post trial briefing on this third actable defense will begin on September 20 and conclude on October 25, after which the court will issue a final judgment. Once we receive a final judgment from the court, we intend to pursue compensation for our damages, including enforcement of the $100 million bonds from Momenta and Santos.

We also intend to vigorously pursue our anti-trust case against Momenta and Sandoz, which is currently set for trial on April 1, 2019, but the court has indicated a willingness to have the trial earlier.

We hope this explanation clarifies the legal issues as we are extremely pleased that this baseless patent laws suit is finally behind us, and we can now move on to focus on science and our pipeline development, which is our company's core competency.

We have always maintained that the facts and the law do not support the plaintiff's baseless allegations. Both the judge and jury did a great job at assessing the case and it was a pleasure to see our justice system at work and that the truth ultimately prevailed.

Now, turning to FDA matters, I would like to report that we had two good meetings with the agency just last week, which is the reason that we pushed our earnings call back to today. First, we had a follow-up meeting with the agency regarding our CRL for Primatene Mist.

In this meeting we presented an updated risk analysis, which supports approval based on the existing data from our human factor studies. We believe that it was a very productive meeting and the agency is currently assessing our risk analysis and indicated that it would like to schedule a teleconference call this month.

We were encouraged by the tone of the meeting and we remain committed to re-launching the product in the OTC market. The second meeting we had with the FDA last week was a listening meeting regarding drug shortages since many of our critical care drugs are on the FDA drug shortage list.

The agency emphasized its commitment to supporting this important public health issue, including prioritizing the inspection of our new additional production line at our IMS facility where we manufactured drugs that are currently in shortage.

We expect to finalize the validation of this new production line, which will double IMS' production capacity by early next year. We thank the FDA for its support and we emphasized our commitment to the drug shortage issues.

With respect to our CRL for intranasal naloxone, we had a meeting with the FDA in the second quarter to discuss the issues that need to be resolved in order to receive approval. It was a helpful meeting and we are currently assessing next steps.

Finally, with respect to the pre-GDUFA ANDA, for which we have been expecting approval, we’d like to add some color to our previous statements. This ANDA had a target action Day in the first quarter of 2017. We did not previously disclose this date since the agency made clear that unlike a GDUFA date this date is only a target and could change.

In fact that is what happened and the target action date was changed to the beginning of the third quarter of 2017. Although the FDA did not make a decision by the target action date, there are no outstanding questions and we remain optimistic for an approval this year. With that update, I will now turn the call over to the operator to begin Q&A..

Thank you. [Operator Instructions] And our first question is from the line of David Maris with Wells Fargo. Your line is open..

Hi. A few questions, so first congratulations on the court win.

If you were, I mean, have you given any thought to - if you do get damages in excess of $100 million or $75 million, what would be the primary use of that? Would it be to buy back more stock, would it be for business development, are there other R&D programs that you are holding back on? So maybe just some clarification on what that might be if it turns out to be something more than just a settlement and a $10 million payment to you.

Separately, can you talk about the pipeline the GDUFA, not a GDUFA but the target date that was the start of this quarter that’s passed, ordinarily is there a dialogue that goes on around that as like, hey we were expecting you to send us a note, but haven't heard, what’s going on or do you - is it just a wait-and-see approach at this point? Thank you..

Yes, David for the first question, if we have got a significant amount of cash in, we have had discussions with that and actually we would discuss that at our Board meeting this week and there are a lot of things that we could do, so there has been no final decisions have been made, but I will say that the board as we just increased our buyback by $20 million, the board is very much in favor of that.

They’d also consider a special dividend. There are some R&D programs that we haven't started or that we’ve delayed pending either multiple product launches to increase our cash flow because we have been managing the R&D spend, so that our goal is to be profitable, and so we have delayed a couple of programs because of that.

So, like I said, nothing has been decided, but there are multiple uses for it. Business development is always the possibility, but right now that’s probably the lowest of those probabilities. We wouldn't allocate money just to do that. We would have to find the right opportunity there..

And then - this is Jason.

On the target date for the pre- GDUFA product, we’ve had very good communication over the past year on this product with the agency, and so when the first target date got moved, they basically said, look if you don't hear from us in a certain period of time reach out to us, but then we did hear from them and they give us the second target date and then as we came up to that, they did let us know that they would not make that date and they would not provide a new date.

The encouraging part was, there is no outstanding question and so at this point we’re just waiting..

And just to clarify there haven't been any outstanding question since last year..

Correct..

So, it’s not likely they’ve asked or something, we've responded it. They’ve had all the data that they’ve requested for quite some time..

That’s right. And as you know, we did have a preapproval inspection in March of this year, which we fully responded to on April 21. So, it’s been a little over three months, which is a normal timeframe and that’s why we are still optimistic for an approval this year..

And then just as a follow-up, I think I have asked you this before, but in the next 12-months, what do your - or maybe 18 months, how many products do you expect to have approved, new products approved?.

That’s always a difficult one. We expect this one product approved in any time and we do have five other GDUFA dates that are pending for either or later this year or early next year. However, all five of those are first cycle.

So it’s always hard to say whether, you know as I think the date, the GphA last year was that only 9% products were approved on the first cycle. So, while we are very happy with our filings, I think we have made very good filings, you just don't know with that..

I would just add that several of those are priorities for the agency's first generics and we have had what we would consider a lot more communication and then in the past on these products, so there are information requests coming through and we’re responding to them. So, we’re still hopeful, but to Bills point they are first cycle..

Great, thank you very much..

Thank you..

Thank you. And our next question comes from the line of Elliot Wilbur with Raymond James. Your line is open..

Good afternoon.

Just a follow-up on David's line of question, the products with the - filed under GDUFA and the GDUFA action dates this year, are there or have you received CRLs on any of those or are they all still pending?.

They are all still pending. So, yes none of the GDUFA dates have arrived yet. These were - a lot of these applications were filed late last year, and so we have not received any CRLs. We have received numerous information requests, which we have responded to..

Okay.

And then on the pre-GDUFA product sounds like everything that is within your control is going according to plan, but just curious if there were any other elements of supply chain where there may be a hold-up such as an API supply or anything and that’s maybe why the agency hasn’t responded?.

No, we’ve got a good API supplier. So that should not be the issue. Like you say, everything is sort of in control on our end. I think there was the pre-approval inspection, so we're just waiting on that, but in terms of API supply and other issues we don't think that would be an issue..

Okay.

Just turning to the base business for a couple of questions here, specifically on enoxaparin, could you just sort of high-level, just talk about your current thinking around that product, obviously it was a huge win for you guys when you've got it approved, and I think it just continues to seem to be kind of a very frustrating asset in terms of the revenue trajectory, and I’m not even sure at this point if the asset is really even profitable for you?.

No it’s not profitable. So, yes, so that’s why we had to take an inventory reserve and we took one at the end of the year as well. So, we are selling it from below our cost at the moment, but it is our biggest volume product out of our Amphastar facility. So, it’s an important product out of this facility.

So it makes sense to keep making it because we’d lose even more money if we weren’t making it. The revenue has fluctuated a little bit. If you take a look at the first six months of the year, it’s kind of the run rate that’s probably where we are.

I think we did a little over 10 in the first quarter and the second quarter, so you know it is that $8 million, $9 million, $10 million a quarter range. It’s probably the rate where we expect to be for a while..

Okay.

And then with regard to epinephrine you still have a PFS product in the market I believe?.

Correct..

I guess my understanding is that isn’t really, you don’t really think you can recapture a lot of the sales from the vial based on the PFS?.

No, I don't think that’s correct. We are committed to getting approval and returning the vial to the market hopefully next year..

The vial was one of seven products that began in the year that we were selling that were unapproved, four of those we’ve already have previously filed applications with the FDA for and we plan to file on the other one..

Okay, and then just last question for Jason, going back to your comments around Primatene, so what should we kind of on the outside expect to hear from you guys on that asset going forward, anything before next conference call or [indiscernible]?.

Potentially, so right now we are actually expecting a follow-up meeting via teleconference this month to discuss our risk analysis, which further supports the current data. What we’re trying to do here although, doing a study as we’ve talked about is not difficult, but we don't want to spin our wheels.

So, right now what we’re trying to do is sort of nail down the exact concerns of the agency and that’s what we did with our first meeting that we had following the CRL.

Now that we understand what their issue is, we’ve done a reanalysis based on the three critical steps that were required to show the understanding of the label, and we’ve actually categorized those three steps with shaking being the most critical.

So, based on a more thorough risk analysis, we’re looking at this again with the agency and we should actually on this point sort of in the next 1 to 2 months have a better understanding of whether they will accept that analysis or if we want to move forward and do another study..

Okay. Those were all of my questions. Thank you..

Great, thank you..

Thank you. And our next question comes from the line of Gary Nachman with BMO Capital Markets. Your line is open..

Hi guys, depending on how Primatene and naloxone play out, if there was a positive outcome on those, would you be ready to launch them immediately? What would need to happen at your end internally to prepare for that? And I think it’s safe to say that you would have to refile for both of those in a good outcome; I just wanted to confirm that?.

Well first on the Primatene, we had made products going into the PDUFA date last year, it was unlabeled. So, we were just hoping to get approval and then just make some final adjustments on the label. So, we do have some bright stock that theoretically could be used.

As time goes on though the log rate it sits there, the less likely we will be able to use them; we would have to start manufacturing again. However, we do have all of the components and supplies that we need other than the labels and the boxes.

So we just need to - the wording, the exact wording on the boxes and the labels and the insert in order to do that. So, we could make the - we could launch Primatene relatively quickly after approval. The naloxone intranasal product we do not have the materials on hand right now. So that’s not something that we would be able to launch..

And then with respect to your question on responding to the CRL, on Primatene if they were to accept the reanalysis without any additional new data, theoretically that could be approved without a response, but that would be a reconsideration, if there is new data needed or another study than we need to submit that new data to the NDA as a response to the CRL, and then the bigger, there is just the one issue on Primatene, which is the human factor studies.

We view that as most straightforward. On naloxone, as I’ve said on prior calls, there are more significant issues including the volume and the device itself. So there it’s much more certain that we would have to do a resubmission..

Okay, and then just a couple more for Bill, how will gross margin trend for the rest of the year, whether the big swing factors given a bunch of moving parts? And where there any big contributors in other finished products that helped in the quarter aside from what you guys break out, it’s hard for me to reconcile what’s going on with the other products, and as such just wanted to be clear that $10 million from the epinephrine vials in 2Q, so that just completely goes away in the third quarter.

Thanks..

Yes, so the gross margin, the first part of that was actually related to the last part of that, the $10 million off the epinephrine vial was a very high margin product for us. So that does go away and that was a very high margin. So, our expectation is that the margin comes down off of that. The second part was your other pharmaceutical products.

As I mentioned in my call, we had a large back order at the end of the first quarter and we were able to fill that back order and it was a variety of products, primarily from our IMS facility.

So it included sodium bicarbonate, calcium chloride, dextrose, couple other products as well, but those were the main ones that have been some back order situations that we were filling in the quarter. So it was a variety of those products..

Okay.

So is that a run rate now for those other products from the back order or…?.

Partially we were filing the back order..

Okay. So, it will come down a little bit..

That comes down a little bit in the third quarter..

Okay.

And can you just give us a range for where the gross margins might go with the epinephrine vials?.

You know I would rather not do that at this time because we are going to have a couple of moving parts as well. We are looking at a couple of small price increases on a couple of those products as well that could have an impact by the end of the quarter..

Okay, right. Thank you..

Thank you. And our next question comes from the line of David Steinberg with Jefferies. Your line is open..

Thanks very much and good afternoon.

I just wanted to get some clarification Jason, some of your comments about your conference call with the FDA; did you say something like it was good to hear what the real issues are? I mean, I guess my thought is where there some issues that came up that you hadn't heard before? And if so, this give you more or less confidence that you get approval, and I know I have asked this before, but at this point are you wondering if the FDA is ever going to approve this product, I mean it was on market for decades and it was used by millions of Americans.

And then the other question is, on the share buyback, does this allocate more funds or does this mean that you are seeing less attractive opportunities to buy, that you have made a number of acquisitions over the years and you generally use cash to buy them? Thanks..

Yes thanks David, so actually I was thinking of you specifically even while I was sitting in this meeting it was an in person meeting at FDA last week, and they brought up an interesting point.

They said, this was a controversial product, but they went on to say that they are committed to approving it over-the-counter, and therefore they’ve got to get it right and we've got to get it right. And so, one of the real issues, which I think we helped clarify was on the first call that we had with them following the CRL.

One person made a comment regarding it being a cute rescue medication, and we really wanted to clarify that this is essentially for mild symptoms of intermittent asthma.

You know an analogy being that you can have a drug like Nasacort, which is for allergies, but somebody who is going into anaphylactic shock for eating peanuts is not going to misunderstand that and try to use it instead of an said instead of an EpiPen.

So we really wanted to sort of break it down to the fundamental of the human factors study and whether or not if somebody failed to clean the inhaler, if there really was a major risk of not getting the dosage and then what that risk actually means and ultimately our new risk analysis really shows that shaking is the true critical factor and the other factors such as cleaning and the initial prime are less risky with respect to getting your dosage.

So, when I say the real issue, I think it’s more about just sort of narrowing down the issues to the real core point and I think one of the concerns is that people may try to use this in place of something like Albuterol and someone who clearly has life-threatening asthma. And we don't believe that’s the case.

It was over-the-counter for 50 years, and typically people with severe Asthma know that they are in that category and we’re making it clear in our label that this is for mild symptoms, it’s for intermittent asthma, and really if you’re having an asthma attack you should call 911 or use your Albuterol inhaler..

And your second question on the share buyback, there is couple of things going on here, one, we have actually had a buildup of some cash over time as we’ve been able to generate cash from the business and we have not seen acquisitions that are that are attractive that we’re really interested in it.

So that is definitely the case, but we also very positive about our pipeline and about where the company is going and because of that we see the share price where it is now as a very attractive opportunity, and so we’d rather put the money that way and Jack and Mary, being the largest shareholders of the company don't want to see their shares diluted by the equity compensation programs.

So they want to keep their share of the company as high as possible. So that’s a very significant influence to that decision..

Okay, just one quick follow-up, just philosophically, you have been, in the past you’ve been working really hard to do product high barriers to entry and typically you have a higher failure rate, but once the products reach the market they will have a long tail and significant cash flow characters, so I'm just wondering if, instead of always going for triples and home runs, perhaps you would do some investing in products that have a higher chance of reaching the market where the investment dollars aren’t that high, lower barriers and would perhaps give you some more consistency in your revenue stream.

Any thought to doing that sort of an approach along with what you are currently doing? Thanks..

Yes, good question and I always think of it in terms of home runs, triples, doubles since we've had many conversations on this topic.

And actually we’ve gone back to management and we have decided to go after some doubles and we will be looking to file those early next year, and so yes we continue to go after the high barriers that we always talk about and we want those home runs, but we have started development on some doubles..

Great thanks..

Sure..

Thank you. And our next question is from the line of David Amsellem with Piper Jaffray. Your line is open..

Hi this is Sameer Kandola on for David.

And I apologize I joined a bit late, so I don't know if I missed this or not, but could you just provide some more color on the mix of injectables and inhalables within the ANDA pipeline and the development pipeline?.

Yes, so far we don't have any of the inhalation products filed, but we do have six in the pipeline and we’ve mentioned previously that one of the next two filings we have should be in inhalation product..

Okay, got it.

And then any early thoughts on how many ANDAs you expect to submit in 2018 and the dosage form mixed amongst those future ANDAs?.

At this point we were just focused on up to Q1 of next year, so by Q1 of 2018, between now and then we are looking to file two products..

Okay, got it.

And then just one final one, are you going to try to bring your epinephrine injectable product back to market via the conventional approval process or are you planning to just move on given that Endo has a patent listed in the Orange book?.

Yes, so we will continue via the conventional approval process..

Okay, thank you..

Sure..

And I’m not showing any further questions in the queue. I will like to turn the call back to Jason Shandell for his final remarks..

Thank you very much operator. This concludes our call. Have a great day..

And ladies and gentlemen, we thank you for participating in today's conference. This concludes the program, you may all disconnect. Have a wonderful day..