Arthur Przybyl - CEO Charlotte Arnold - CFO.

Louise Chen - Guggenheim Scott Henry - ROTH Capital Rohit Vanjani - Oppenheimer.

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ANI Q3 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] CEO, Arthur Przybyl, you may begin your conference..

Good morning, everyone. And welcome to ANI’s earnings conference call for the third quarter 2015. My name is Art Przybyl, I am the CEO. And with me today is Charlotte Arnold, our Chief Financial Officer.

Before we begin, I want to refer everyone to the forward-looking statements language in this morning’s press release and ask each of you to review it carefully as important context to this conference call. Discussions will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles.

Reconciliation of those non-GAAP financial measures can be found in our earnings release dated today. I am pleased to report another strong profitable quarter for ANI. ANI’s third quarter and nine months 2015 revenues of $20 million and $58 million, represent increases of 15% and 67%, respectively, over the prior year periods.

Our third quarter and nine months 2015 adjusted non-GAAP EBITDA of $11.6 million and $34 million represent increases of 15% and 133%, respectively, over the prior year periods. For the quarter, our adjusted non-GAAP income per diluted share was $0.80.

Generic product revenues increased by 48% to $15 million, over the prior year period and by 78% to $41 million, over the prior nine-month period. Specifically, EEMT third quarter revenues were $11.1 million, as compared to $9.8 million and $8.9 million in the second and first quarter 2015.

The EEMT revenue increase is due to new sales contracts signed earlier in the year. It has come to our attention that our current competitor has acquired some additional raw material. We do not know if this material will find its way to the marketplace, but we feel it is prudent for us to adjust our guidance to reflect that potential.

This development does not change our overall view that our EEMT market share will increase as our competitor’s raw material supply is exhausted. Generic product revenues also increased due to new product launches within the past year, namely Methazolamide, Propafenone and Etodolac.

Recently, we announced two new product launches Oxycodone solution and Vancomycin capsules, which represent a combined IMS Health market size of $143 million. We remain on track to launch two additional generic products before the end of the year, Nimodipine capsules and Flecainide.

After these launches, we continue to forecast eight additional product launches throughout 2016 with particular emphasis on two that have the most significant profit potential to ANI, an anti-cancer product that requires an ANDA FDA approval and has a target action date of February 26, 2016; and anti-infective product that is a tech transfer and requires a CBE-30 filing.

If market conditions for these two products continue to exist at their time of launch, namely pricing and no new additional competitors, then these two products are estimated to annually generate in excess of $20 million in additional EBITDA for ANI.

We will continue to publish a table of our anticipated generic product launches in our earnings press release. Our branded pharmaceutical product revenues decreased by 53% to $2.3 million over the prior year period and have increased by 41% to $8.7 million over the prior nine-month period.

Third quarter decrease primarily resulted from increased Medicaid utilization for Lithobid and the loss of government sales to Reglan. We continue to realize positive cash flows from our mature brands and as such we’ll continue to explore additional acquisition opportunities.

Mature brands remain an important part of our strategy as they provide us with cash flows that help to offset longer ANDA approval timelines, allow us to utilize existing manufacturing capacity, and enable us to launch our own generic versions as in the recent launch of our Vancomycin generic capsules.

In the third quarter, our business development activities included several announcements. On July 13th, we acquired 22 generic drug products for $25 million. In this basket is the anti-infective drug product that we have applied our focused efforts on launching in 2016.

On October 12th, we announced the new agreement with IDT Australia to commercialize 18 previously approved generic drugs. This agreement served to increase our product pipeline to 85 drugs that represent over $4.6 billion in annual IMS sales.

For comparison, at the end of 2014, our product pipeline consisted of 46 products that represented approximately $3 billion in annual IMS sales. And on September 21st, we announced that we had agreed to acquire two NDAs from Merck for Corticotropin and Corticotropin-zinc for $75 million.

The transaction for these two NDAs is on track to close in early January. When we close, these NDAs will provide us with an opportunity to re-launch these products into an existing $1 billion market.

These drugs can potentially provide an affordable, less-expensive alternative to an existing product that dominates the market, benefitting both patients and payers. Our cash flows and balance sheet remains strong.

We generated $12.6 million of positive cash flows from operations in the nine months ended September 2015 and ended the quarter with $151 million cash on hand. I will now turn the conference call over to our CFO, Charlotte Arnold who will provide you with more details on our financial results..

Thank you, Art. Good morning everyone and thank you for joining our conference call to discuss ANI’s third quarter financial results for 2015. We were very pleased to report ANI’s strong third quarter financial performance this morning.

Our revenues during the quarter grew by 15% over the prior year period, while our cost of sales decreased as a percentage of net sales from 18% to 16%, results which are directly attributable to the 48% increase in our generic product sales.

Also, our adjusted non-GAAP EBITDA for the three months ended September 30, 2015 increased by 15% versus the prior year period from $10.1 million to $11.6 million. And we generated adjusted non-GAAP net income per diluted share for the quarter of $0.80.

For the balance of my remarks this morning, I will refer to our non-GAAP financial measures as simply EBITDA for adjusted non-GAAP EBITDA; non-GAAP net income for our adjusted non-GAAP net income; and non-GAAP EPS for our adjusted non-GAAP net income per diluted share.

Our non-GAAP EPS, a measure which we reported for the first time in this morning’s press release, removes the impact of non-cash items such as stock-based compensation, certain interest expense, depreciation and amortization, and deferred taxes.

As our acquisition activity continues to grow and as a result, our amortization and other non-cash expenses increase, we believe that this non-GAAP measure will be an important financial indicator for investors and analysts.

As we also note in the press release, non-GAAP EPS should be considered in addition to but not in lieu of our earnings or loss per share, reported under GAAP.

Turning now to some of the details of our financial performance, net revenues in the third quarter were $15.1 million for our generic products and $2.3 million for our mature brands, an increase of 48% and a decrease of 53% respectively.

The primary reasons for the generic sales increase were increased sales from EEMT as well as sales from our Methazolamide, Etodolac and Propafenone products which we launched in the fourth quarter of 2014 and the first quarter of 2015.

The decrease in our mature brand sales were due primarily to increased Medicaid utilization of Lithobid, resulting in higher Medicaid rebates and reduced unit sales of our Reglan product.

Our contract sales, development services and royalty revenues increased by 28% from $1 million in the prior year period to $1.3 million in the third quarter of 2015, due primarily to royalties received on sales of the authorized generic of Vancocin.

Yesterday we announced the launch of our own authorized generic for Vancocin which replaces the authorized generic product currently on the market.

In our press release earlier this morning, we revised our financial guidance for 2015 to be between $75.5 million and $78.3 million in revenues, EBITA of between $43.3 million and $45.4 million, and non-GAAP EPS of between $2.83 and $2.96.

The updated financial guidance is based on our results in the first nine months of 2015 as well as our expectations for the fourth quarter. Importantly, our non-GAAP EPS guidance reflects a 20% current tax rate applied against our estimated non-GAAP net income as compared to our estimated effective tax rate to GAAP of 31.5%.

These rates differ because our estimated non-GAAP net income is significantly higher than our estimated GAAP net income, a direct result of adding back certain non-cash expenses.

Notably, the difference between our estimated 2015 tax provision for GAAP and the current portion of that provision which we use to calculate our non-GAAP EPS guidance is just $300,000.

As Art noted in his earlier remarks, we’ve reduced our remaining 2015 guidance to reflect the possibility of lingering competition in the fourth quarter from one of our existing EEMT competitors.

We’ve recently learned that this competitor acquired some additional raw material that could enable them to remain on the market for longer than we had previously anticipated. In addition, the range for our 2015 guidance reflects the possibility in the fourth quarter of a large order for Vancocin 125-milligram capsule for use in a clinical trial.

We received other orders in 2015 for clinical supplies of the product. However, the timing and value of those orders have varied. Our current estimate of the value of this order is approximately $1.25 million. Turning now to the balance sheet, we ended the third quarter with $150.9 million in unrestricted cash and cash equivalents.

During the nine months ended September 30, 2015, we generated $12.6 million in positive cash flow from operations which was net of a $6.2 million increase in our inventory and a $4.3 million in our accounts receivable. In addition, in April, we acquired an ANDA, Flecainide for $4.5 million which we expect to launch in the fourth quarter.

In July, we acquired 22 previously approved generic drug products for $25 million. In August, we paid $1 million to IDT Australia for the exclusive rights to commercialize 18 previously approved generic drug products in the United States.

And in September, we announced the pending acquisition of two NDAs from Merck for purified Corticotropin gel and Corticotropin-zinc Hydroxide for total of $75 million. All of these transactions were or will be funded from our cash on hand. Two years ago, EEMT comprised 54% of our annualized revenue, based on the fourth quarter of 2013.

Today, EEMT represents approximately the same percentage, despite the product’s significant revenue growth. Our multi-pronged business strategy, illustrated in part by the acquisitions and collaborations we have completed in 2015, has enabled us to maximize the value of EEMT and at the same time, increase revenues across our entire product portfolio.

And we believe that we can continue to diversify and grow our revenues and earnings as we move forward into 2016 and beyond.

Just as a reminder, in my remarks, I referred to our non-GAAP financial measures as EBITDA for adjusted non-GAAP EBITDA; non-GAAP net income for our adjusted non-GAAP net income; and non-GAAP EPS for our adjusted non-GAAP net income per diluted share.

Please see our press release this morning for definitions of those terms and reconciliations to their most directly comparable GAAP financial measures. In conclusion, we are very pleased with our results for the first nine months of 2015 and look forward to the balance of the year.

We will report our fourth quarter results and our full year financial performance in February 2016. At this point, I will turn the call back to our President and CEO, Art Przybyl..

Thank you, Charlotte. In closing, we are focused on growing our generic base business, launching two important generic products next year, while continuing to diversify our EEMT revenue concentration.

We are focused on the execution of the transactions we have announced while continuing to pursue opportunities to grow our generic and mature brand business via acquisitions. We have a solid EBITDA foundation in place and continuing to pursue our goal of 100 million in annualized EBITDA. We will now open the conference call to any questions.

Moderator?.

[Operator Instructions] Your first question comes from the line of Louise Chen with Guggenheim. Your line is open..

Hi. Thanks for taking my questions, I had a few here. So first question I had kind of follows up on a point what you talked about, Charlotte, on diversification of revenue.

And I wanted to know if you could review or update please, your pipeline and new product launches, outside of the ones that you mentioned in ‘16 that are meaningful to you that we should be focused on and maybe have to think about the sales opportunity there and how you’ll grow yourselves over the next few years? And then secondly, we do get a lot of questions on EEMT.

So, I just want to address this.

How hard would it be for somebody else to come in and enter the market, a new player outside of the existing player that maybe had a little bit more supply than expected; how should we think about that? And then the last thing, I am not sure how much you can answer here, but just interested in any updated thoughts on the Corticotropin opportunity for you, the timing of the manufacturing, pricing et cetera? Thanks..

Art, I will turn those questions over to you..

So, Louise, we are going to continue to provide in our press release -- the first part of your question, product launches that we think are relevant to verbalize and also demonstrate to the marketplace that we think we’re going to launch over the next several quarters. And as we move forward, that table of product launches will sort of roll.

What we will do in terms of sales opportunities as we provide the table in the press release is to continue to call out sort of the aggregate total annual market size opportunities for IMS Health.

And with relevant products such as our anti-cancer and anti-infective, as we launch those, we’ll provide a more detailed guidance associated with revenues and EBITDA contributions, as we see it upon the launch of those products. And so obviously in the table today, you see for our anti-cancer that we do not disclose in the annual market size.

We just do that for reasons of wanting to avoid any potential for as citizen’s petition associated with that expedited review that’s going on with the agency today. That’s important to us.

And so we have blinded as much as we possibly can all information associated with that product outside of the target action date and the category-- a therapeutic category, the broad category of it being an anti-cancer product. And so, we don’t foresee when that product is launch, generic competition on that product from additional ANDAs.

We think that that one might be outstanding brand for some period of time. And it’s debatable as to whether the brand would will launch and authorize generic or not, although we model that in. You asked about a new player for EEMT.

So, one of the things that the FDA set up, I believe back in late 2013 around October, was a guidance document associated with DESI drugs. And so that guidance document pointed out the potential payrolls to anybody launching a DESI drug after revised guidance.

And so I think probably the regulatory effect, in other words, the FDA can exercise absolutely no discretion associated with the launch of the DESI drug after revised guidance and could use it as unapproved drug product and could remove it from the marketplace immediately, remains today.

And so, that is probably the most serious consideration for any company that is looking to launch an unapproved drug product into the marketplace today. You also spoke about Corticotropin. We have no further comments at this point in time associated with the acquisition of those two NDAs besides what I mentioned in my narrative earlier on.

We do expect to, as I mentioned closer transaction in January. And as we -- let’s say build the foundation for re-launch of those NDAs; we’ll have more to speak publicly about that..

Your next question comes from the line of Scott Henry with ROTH Capital. Your line is open..

I guess starting on the EEMT conversation; I guess I am wondering can you give any color on how you would expect this to play out.

I mean should -- do you think this additional supply -- and I guess it’s just a guessing game, but similar to the first batch of supply that came out, should we think about this being a 2016 effect and then wiping out for 2017, just any color how we should think about that?.

So, we know the exact quantity; it’s 4.94 active kilograms of open drum material that Lynnette [ph] sold to -- we’re not sure who they sold it to, but let’s just say that it is in the hands of Seton, we know this for fact.

We think that the overall market for EEMT or Esterified Estrogen for the product is approximately 28 to 30 active kilograms per year, so let’s just put the material in a range of maybe 16% to 20%. And so, yes, we think that this is a 2016 event. But we don’t want to forecast.

We just thought -- the forecast to model that we put forth that is driving the revised guidance for us is representative of about 50% market-share for the product.

And I think -- and again we just felt that that was the prudent thing to do in light of the fact that we don’t know quite frankly when this material might be launched, we don’t know how it will resonate in the marketplace with customers. Obviously they sell their product at a lower price than we do.

And for all those reasons, for all those unknowns, that’s we revised our guidance..

And then the branded business has been kind of impaired for a couple of quarters now.

Is the third quarter rate for the branded business -- is that kind of a good go forward number? I guess with the exception, it sounds like there’s a bolus of Vanco coming in fourth quarter ‘15?.

Yes. I would say yes, that the third quarter rate is stable with one caveat or we do not control the Medicaid rates or the Medicaid utilization rates.

So, if those rates increase, we saw an increase in Lithobid of 10 basis points from the -- say the second quarter to the third quarter, if those rates increase that means we’re selling more products let’s say through the charity hospitals, Medicare qualified institutions and patients; we’re selling that product essentially at a penny.

So, the mix I’m trying to say is we sell more product under [ph] a penny than we do at our branded price. So, the question really is has that stabilized? I would like to think it has but that’s something that we don’t control. And so that’s a little bit tougher for us to forecast.

On the other hand, we do get these bolus events sometimes that occur with some of our mature brands like Vancomycin. And so, if that does come true in the fourth quarter then you’ll see a higher number for our mature brand revenues obviously in the fourth quarter..

And then, just for clarification, you mentioned the anti-cancer and anti-infective compounds that will be launched in 2016, I thought -- I heard you say there is $20 million in EBITDA potential there.

Is that kind of the total market size, or is that what you think you can do?.

That’s a number that I felt comfortable putting out at this point in time. Obviously the anti-cancer product only has a brand that’s selling in the marketplace today. So, if we are -- when we launched that product, if we’re competing it just against a brand and perhaps their authorized generic, that numbers is reflective of that opportunity.

In regards to the anti-infective, that market size -- again that is a product that only has one player in the marketplace today. We recently have seen that market increase because of a price increase to -- in the neighborhood of $75 million to $80 million market size.

And I guess what I would say to you Scott is that again we --- putting on a number that’s reflective of the fact that perhaps no additional ANDAs will be approved, prior to us launching into that marketplace. That’s a very important product for us we’ve acquired in the last tub of basket as you know.

And the importance of that is exacerbated by the fact that it is – change is being effected in 30 days filing for us.

So just as you have seen the timeline for us to launch Flecainide, and the time of acquisition to our expected launch which would be somewhere around December 28th or 29th of this year, you should view that that is a potential timeline to -- for us to launch our EES product -- our anti-infective product as well..

And final question for Charlotte, the tax rate gets down in the third quarter, should I expect that to go back towards 37% number or how should I think about that?.

No, you should not expect that to go back up. And thank you for asking that question. So, our GAAP effective tax rate, as you correctly pointed out, was more in the arena of 37% and declined in third quarter. The effective rate in the third quarter was actually sub 20 but for the assumption of the effective tax rate for all of 2015 is 31.5%.

And the reason for the decline is because we were able to capture an additional tax credit on our 2014 returns, the domestic production credit that resulted in the lowering of our 2014 rate and we were able to roll that forward.

When you do the essentially the reconciliation in the third quarter, you capture that benefit and you also capture the benefit for the -- for all of 2015 as well. So blended altogether, the effective tax rate for GAAP that will offer that we’ll have going forward is assumption of 31.5%.

What I wanted to point out though, in terms of calculating the -- essentially figuring out tax rate which to apply to our non-GAAP EPS is because the [Technical Difficult] third quarter is fairly small [Technical Difficult] income that’s where you come up with the assumption of the 20% cash tax rate..

You broke up a little bit or my line did, but one of the lines did.

But say, will the 31.5% GAAP, will that continue into ‘16 and ‘17?.

Yes, it will..

[Operator Instructions] Your next question comes from the line of Rohit Vanjani with Oppenheimer. Your line is open..

So, I just want to confirm and I think you said it, but the guidance reduction is strictly due to your changing thoughts in the EEMT, right, there is nothing else in there?.

Yes, the vast majority is taking down the market-share potential on that product, that’s correct..

And then if you are able to confirm that when that is out of that material, any more material to sell as well?.

So, my reaction to that is yes, because we knew that this was the -- we’ve come to find out subsequent to the transaction if this was there sort of open drum material, it married up to what several months ago when they did their first buy from them. We thought that they actually had bought this material at the same time, but apparently they have not.

And so my answer to your question is yes, without Lynette [ph] obviously verifying cost directly, but that is indeed the case..

And so, I mean how do these contract work, but because picking up contracts, you picked up a contract in the second quarter and then the third quarter? Can they -- if Seton -- Amneal or Seton product becomes available, can they do spot buys from Seton or do you have….

I think that remains to be seen, but I mean I think to be practical about this; the fact of the matter is the lower price drugs resonate with customers. And we know that Seton sells their product at a lower price than we do. And so there certainly will be people interested in lower priced product. And that’s our expectation..

And then I think before last quarter you said you were on track to capture 80% of that market or better as you move into 4Q, so I mean do you just view it as a delay, maybe a slight blip and then you still plan to get to that 80% once they enter and exit the market?.

That’s certainly our longer term objective on the product. Yes..

And on the Corticotropin product, am I remembering that right that there was a meeting scheduled with the FDA in January, I mean is that when you’ll see….

There is no scheduled meeting with the FDA at this particular point in time, Rohit. But there is a contemplating meeting with the FDA to begin discussions on our regulatory strategy to re-launch the products and eventually file an sNDA..

And that would be after the close?.

That would definitely be after the closing, yes..

And then the last one for me is the IDT product, I thought there was -- there is going to be filing at CBE-30 for that product in 4Q ‘15; is that the on time?.

Yes, my -- yes, I agree with that statement..

There are no further questions in queue at this time..

Then, I would like to thank everybody for joining our third quarter conference call today. Have a nice day. Thank you. Bye, bye..

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect..