Mark J. Donohue - Impax Laboratories, Inc. George Frederick Wilkinson - Impax Laboratories, Inc. Bryan M. Reasons - Impax Laboratories, Inc. Douglas S. Boothe - Impax Laboratories, Inc. Michael J. Nestor - Impax Laboratories, Inc..

David A. Amsellem - Piper Jaffray & Co. Louise Chen - Guggenheim Securities LLC Gary Nachman - BMO Capital Markets (United States) Randall S. Stanicky - RBC Capital Markets LLC Gregg Gilbert - Deutsche Bank Securities, Inc. Elliot Wilbur - Raymond James & Associates, Inc.

Andrew Finkelstein - Susquehanna Financial Group LLLP Jason Gerberry, JD - Leerink Partners LLC Dana C. Flanders - JPMorgan Securities LLC Tyler Van Buren - Cowen & Co. LLC Steven Dingju Chen - Bank of America Merrill Lynch Timothy Chiang - BTIG LLC Marc Goodman - UBS Securities LLC.

Ladies and gentlemen, thank you for standing-by and welcome to the Impax Third Quarter 2016 Financial Results 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. Thank you. I would now like to turn the conference over to Mr. Mark Donohue.

You may begin your conference..

Thank you. Good morning, everyone. Welcome to Impax's third quarter 2016 financial results conference call. Copy of the press release issued this morning as well as a copy of the slide presentation are available on the Investor Relations section of our website, www.impaxlabs.com. Also, a link to a webcast of this call is available on our website.

Our discussion today may include certain forward-looking statements, and actual results may differ from those presented here. Factors that could cause such a difference are outlined in our SEC filings and on our website. Our discussion today includes certain non-GAAP measures as defined by the SEC.

Management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the company's operations and better understand its business.

Further, management believes the inclusion of non-GAAP financial measures provide meaningful supplementary information to, and facilitates analysis by, investors in evaluating the company's financial performance, results of operations and trends.

A reconciliation of the GAAP to non-GAAP measure is available in our third quarter 2016 earnings release and in today's slide presentation, both of which can be found on the website.

Agenda this morning will include our President and Chief Executive Officer, Fred Wilkinson, providing an overview of the third quarter results and a business update; and Bryan Reasons, our Chief Financial Officer, will provide additional details on the financial results and our updated full-year 2016 financial guidance.

We'll then open the line up for questions and answer. Also joining us for the Q&A session is Doug Boothe, the President of the Generics Division; and Michael Nestor, the President of the Specialty Pharma Division. And with that, I'll turn the call over to Fred..

Thank you, Mark, and good morning to everyone. Thanks for joining us. As is evidenced by the quarter's earnings season, it's clearly been a very difficult and challenging year for most of the pharmaceutical segment and, obviously, Impax was not immune to this. The impact of pricing activities is being felt up and down the entire distribution channel.

For us, it started earlier this year as we encountered aggressive competition and lower pricing on a couple of limited competition generic products. Very recently, this has spread further into our portfolio, in particular impacting several key products acquired in the Teva transaction.

While we have battled to defend share, our revised guidance for the full-year 2016 reflects this increase in competition and the resulting customer pricing activities.

While these recent developments are disappointing, we've delivered positive progress on several generic opportunities, including our epinephrine auto-injector, where share has more than doubled since the beginning of the year.

We've also recently recaptured a piece of business from a significant customer on generic Adderall XR, although that was at lower pricing. We have successfully launched three new generic products during the third quarter in line with our expectations.

And we have held our share position across the majority of our generic portfolio and we expect to see effective lower pricing affecting our fourth quarter top and bottom line.

This morning, we announced the changes in expected cash flows from the impact of lower pricing projections, resulting in an impairment assessment of the product portfolio acquired in the Teva transaction. Accordingly, we recorded an impairment charge in the third quarter, which Bryan will cover in detail during his remarks.

Let me just go ahead and start with pricing and turn to slide 6. The top two charts are an update from last call and provide a snapshot of the year-over-year quarterly change in generic volume and price since third quarter 2015.

New competitors on products where there was limited competition has resulted in a larger price degradation, as was the case in the first half of 2016 with generics of Solaraze and Skelaxin.

Excluding both of these products, the decline in pricing within our base Generics business has been between 3% and 6% during the same time period and in line with our expectations. Both analyses show a solid growth in overall volume in third quarter and a good recovery from last quarter.

The recent competitor and customer pricing activities became more evident following the close of the Teva transaction. In order to maintain our share position, significant price concessions were necessary on certain products in order to retain the business with a few of our key customers.

While we're currently defending the majority of our product share as seen in the weekly IMS data, this 35% decline in price will have an unfavorable impact on our fourth quarter revenue and profitability. With this new reality, we are even more aggressively pursuing opportunities to grow our position across the entire portfolio.

Moving to our segment result, revenue results for third quarter 2016 shown in slide 7, we managed through pricing pressures that impact our Generic results and finished essentially in line with our expectations for the quarter. Total revenues for the company increased $7 million during the quarter or up 3% over third quarter 2015.

While Generic division revenues were down $5 million overall, we continue to see positive growth from our epinephrine auto-injector and oxymorphone product compared to last year. We remain focused on expanding our share within these key product markets as we are exclusive generics with both.

Our Generic revenues in the current period also include seven weeks of revenue from the acquired Teva products, although their contribution was less than previously expected. More than offsetting some of the positive growth was a 62% year-over-year decline in sales of generics Solaraze, Skelaxin, and Adderall XR.

Looking at the Specialty Pharma division, third quarter revenues increased $12 million, up 30% compared to third quarter 2015. Rytary and Zomig grew 52% and 68% respectively over the same period last year.

Year-to-date, total company sales were up 8% with our Specialty division up 69% and our Generics down only 3% compared to the same time period last year. As I mentioned in my opening remarks, it has been a challenging year as seen by the sequential revenue results across our two business divisions.

The volatility in our quarterly results outlined on slide 8 is apparent as our third quarter total company revenues rebounded and increased $55 million or 32% compared to our second quarter 2016. The Generic division choppiness was primarily due to shifts in generics Solaraze and Skelaxin markets.

Recently, we've been able to offset some of the decline with growth in epinephrine, oxymorphone and generic Adderall XR. Within the Specialty division, results were more stable, but below our growth expectations.

This sequential growth in the third quarter was negatively impacted by a back order issue in September on Albenza, which was due to an equipment failure at our third-party manufacturer. Most of you were able to see the resulting drop in scripts later that month and now the rebound in first quarter of October.

The issue resulted in $8.5 million of sales not being recorded in the quarter. Moving to slide 9, epinephrine auto-injector is one of our outstanding wins of this year. In 2015, we started to invest in additional manufacturing capacity and marketing programs and set a goal to grow our share position by around 1% per quarter during the year 2016.

We successfully managed our product supply through a strong third quarter seasonal period, which is heavily influenced by back-to-school programs. We are currently exceeding this set goal as our share is now over 9% as reported by IMS.

As you know, there was considerable publicity involving our competitor's epinephrine product during the third quarter. In response, we accelerated our efforts to build greater awareness of our product as the go-to choice providing patients with a lower-cost treatment option.

Awareness of our product has been highlighted on numerous national and local TV news networks, through social media and print, and general TV interest shows, including a segment on The Dr. Oz Show, which you can view online. We're also doing a lot of work behind the scene that's driving greater awareness with physicians and pharmacists.

As an example, this week, we have a booth at the ACAAI Conference in San Francisco, where there will be an opportunity to interact and educate physicians about our epinephrine auto-injector product. We are continuing this for all opportunities to further expand our position in this market.

Behind the scenes, we've intensified our activities related to supply, that being within our current supply chain and are expected to be in a position to satisfy our current customers' expanded demand and to take on new customers.

By continuing these improvements in manufacturing capacity, our short-term goal is to minimize any supply constraints and focus on maximizing our revenues from increased awareness and marketing programs. Regarding oxymorphone and generic Adderall XR, slide 10 shows recent share growth.

On oxymorphone, we successfully captured the share position when another generic left the market in 2Q of this year. Additionally, you can see the reversal of our generic Adderall XR position as we acquired a piece of business from a significant customer.

We currently expect our share to recover to the low-double-digit levels, and we are exploring opportunities to further increase this position. Let's turn to slide 11, which is an update of our 2016 generic launches. Through the first nine months of the year, we launched six generic products listed in the first table.

We currently expect to launch up to four more products in fourth quarter, two of which are already approved and two of which are pending an FDA. We now anticipate launching up to 10 generic products this year compared to the previous goal of 12 to 14.

This change is due to either a negative change in the market dynamics or delay in timing of approval by FDA. Second table also highlights the seven ANDA tentative or final approvals that have been attained so far this year. Slide 12 provides an updated look at our generic pipeline, which includes 40 products with current U.S.

brand and generic market sales per IMS reports of approximately $20 billion. We have 20 generic files that are in some form of active review at FDA. And in third quarter, we received three approvals on pending applications and filed three new ANDAs.

Listed on the right side of this slide are the potential high-value generics pending at FDA that we have disclosed, including Welchol, Renvela and Vytorin, which are potential first-to-market opportunities, as well as generic Concerta.

As previously stated, we have target action dates from FDA on Welchol and Renvela, and are continuing to prepare for successful launches, if approved. Regarding Vytorin, we are currently one of two companies with a tentative approval and have a date certain launch in April of 2017.

We view generic Concerta as an increasingly valuable potential opportunity, because FDA has issued a target action date on our file. We have a settlement with JNJ which will allow us to market prior to patent expirations, if approved. And as a result of the Teva transaction, we currently expect improved economics, if launched.

20 additional products are in active development with high percentage of first-to-file or first-to-market potential and, if successful, would be submitted to the Agency over the next few years. Now, let's move over to our Specialty Pharma division.

And starting with Rytary, although we have seen positive Rx trends, it is fair to say that we have not seen the expected impact from the sales force expansion from 77 to 116 that was completed in second quarter.

We continue to see increased prescribing activity from the movement disorder specialists that's in line with our expectation, but have not seen the adoption from the general neurologists that was expected from the increased number of calls on them.

Based on the current script trends, we still believe that we will reach our stated sales goal for this product of over $275 million, but have pushed that date out by 18 to 24 months.

We continue to expect promotional efforts on – expand promotional efforts on Rytary with greater emphasis on coverage of all key personnel within the targeted movement disorder centers as well as further increases in frequency of calls on our office-based neurologists.

The focus for the rest of the year will be on improving the understanding of the dosage conversion from the immediate-release carbidopa-levodopa to Rytary, to providing tools for improving the administrative aspects of this conversion and supporting the patient through this process through increased educational materials.

To that end, we launched the myRytary program, a free, personalized patient support program run by a third-party and designed to help the patient start Rytary. This was launched in mid-September. Each patient that enrolls is assigned a dedicated case manager who will assist them throughout this process.

The manager is providing enhanced education and assisting the eligible patients with navigating the payer review process. The program is also helping those eligible patients with affordability support through co-pay assistance, voucher support and other financial assistance programs.

We've seen strong enrollment over the first six weeks, primarily among patients referred from the general neurologist community, which is the target audience for this program.

We are optimistic that this program will allow the simplified dosing suggestions and will help the general neurologists to become more comfortable with prescribing Rytary and help further the growth of this product. Turning to slide 15. Zomig has shown consistent performance in the second detailing position.

We've had solid growth across our entire target audience with our share of the Nasal Triptan segment continues to hover in the high 30% range. I mentioned earlier in my remarks the impact of September back order on Albenza. This chart on slide 16 shows a short-term decline in scripts in September and our recovery since restocking our customers.

We continue to see a slower shift from Albenza to Emverm since launching this product in late March, counterbalanced by the overall stronger utilization of Albenza. We have shifted efforts behind the positioning of Emverm to targeted non-personal programs and increased managed care contracting.

And we'll continue to explore other opportunities to accelerate growth of Emverm. And finally, in August, we announced the positive results of Phase 2a study for IPX203, the next-generation of Rytary, and list these results again on slide 17.

This week, by way of update, we enrolled our first patients in the Phase 2b multi-dose study for IPX203 in patients with advanced Parkinson's disease. And now, expect to complete this study at the end of second quarter 2017.

And last week, the FDA confirmed our request for an end of Phase 2 meeting in February, where we plan to seek agreement on a Phase 3 clinical program for this important product. With that, I'll turn the call over to Bryan to provide a greater depth on the financials..

Thanks, Fred. Turning to slide 19, since Fred gave an update on the Teva-acquired asset, I'll begin by providing some detail around the impairment charges in the quarter. Upon closing of the Teva transaction on August 3, we initiated a process of securing Teva and Allergan's customers.

Prior to close, as part of our expectations, we assumed that certain price concessions would occur following the closing. However, the company elected to take additional price reductions to retain key customers.

These concessions on certain of the acquired products resulted in a significant reduction to the cash flows expected to be realized, triggering impairment assessment. We recognized a pre-tax impairment charge of $251 million, which primarily represents a partial impairment of the portfolio of 15 currently marketed products acquired.

The impairment charge was driven by higher value applied to a few of the large revenue products such as budesonide inhalation suspension and propranolol tablets.

In addition to the impairment charge related to the Teva-acquired products, we recognized a $25.7 million impairment charge in research and development expenses, of which $13.2 million was in the Specialty division and $12.5 million in the Generics division.

The charges related to two of the company's in-process R&D product rights acquired from the Tower acquisition due to delays in the expected start of commercialization and lower pricing amid highly competitive market conditions, resulting in lower expected future cash flows.

We also recognized the charge of $8.5 million in cost of revenues attributable to the full impairment of three marketed products and one third-party partner product where we received revenues. The affected products were manufactured at our Middlesex, New Jersey facility, which as previously communicated we're in the process of closing.

The products were discontinued for several reasons, including assessment of the technical transfer cost to move to another manufacturing site, limited ongoing API sourcing options and diminished projected sales activities.

Turning to slide 20, since Fred covered the main drivers of third quarter revenue, I'll focus my remarks on other areas of the business and our adjusted results for the quarter compared to last year.

Starting with the Generic division, the adjusted gross margin in the third quarter improved to 44% or 100 basis points due to increased sales of higher margin epinephrine, oxymorphone ER and the Teva-acquired products. Adjusted SG&A expense increased by $1 million due to higher personnel costs and marketing expenses.

Adjusted R&D expense also increased approximately $1 million, primarily due to increased R&D activity. Adjusted operating income in the Generic division declined 4% as a result of the 3% decline in revenue and slightly higher expenses.

Moving to slide 21 and Specialty division results, the adjusted gross margin declined to 73% from 84%, primarily due to higher inventory reserves for short-dated products and higher sales of lower margin Zomig.

Adjusted SG&A expense increased $5 million, primarily attributable to the sales force expansion and higher advertising and promotional activities to support the sales and marketing of Rytary. Adjusted R&D expenses were up slightly in the third quarter due to increased activity for IPX203.

Patent litigation expense increased $2.5 million as a result of higher spending on legal activity related to patent matters for both Rytary and Zomig. Accordingly, adjusted operating income in the Specialty division declined approximately 20%, primarily a result of increased investments in supporting Rytary.

Moving to slide 22 and the third quarter consolidated results. In summary, our third quarter consolidated results were essentially in line with expectations with the exception of the back order on Albenza in September and the lower contributions from the Teva-acquired generic products.

The total company's revenue was up 3%, offset by higher expenses as a result of investments in R&D and the sales force expansion. Our adjusted EPS of $0.37 in the third quarter of 2016 declined $0.03 compared to last year's third quarter. Slide 23 provides a comparison of our current revised forecast to our prior outlook.

We revised our total company full-year revenue forecast to a range of $840 million to $855 million. This is primarily due to the effects of lower pricing and competition across a number of generic products. As a result, we expect to reduce revenue contributions primarily from Teva-acquired products and several other legacy products in the portfolio.

We've lowered our full-year gross margin assumption to be between 48% and 50%. The decline is primarily a result of the reduction in expected contribution from the high margin acquired products and lower sales of a few legacy products as previously noted.

Turning to R&D, which includes patent litigation expense, we now expect total company expenditures to be in the range of $90 million to $95 million. The reduction is primarily due to the timing of several development projects.

Our SG&A spend range has been further reduced to between $185 million and $190 million, driven by cost savings being implemented across the company. We have continued to identify additional efficiencies as we align our spending with our near-term top-line assumptions.

Our fourth quarter 2016 earnings will be impacted by the lower profit contribution as previously noted, resulting in an expected sequential decline in our quarterly EPS compared to the third quarter. Based on our revised assumptions, we currently expect full-year 2016 adjusted EPS to land in the range of $1.10 to $1.20 per diluted share.

Thanks for your attention. I'll now turn the call back to Fred for some closing remarks..

Yeah. Thank you, Bryan. So, as we proceeds through the remainder of the year, we'll continue to focus on our four strategic pillars and the underlying priorities with quality always being our primary focus.

Over the past two years, we've implemented a number of efficiency improvements, including the closing of our packaging operation in Philly, the outsourcing of distribution functions and the closing of our warehouse.

We also realigned our R&D operation and are currently in the process of closing of Middlesex manufacturing operation and converting a portion of that site to an R&D pilot brand.

With the new realities of increased competition and continued pricing pressures, we're accelerating our efforts in these areas and are implementing further company-wide cost reduction programs. We will continue to pursue further expense savings across the company to ensure that our costs are in line with our performance and our growth assumptions.

We believe that we still offer a compelling value proposition and opportunity for growth in the future. Despite the current challenges, we continue to invest in R&D to fuel organic growth and aggressively explore efficiency opportunities that can strengthen our business and create long-term shareholder value.

And so with that, I'll turn it back over to Mark to guide the Q&A session..

Thanks, Fred. And so, we would ask everyone to please keep their questions to just a couple as we've got a number of people in the queue and we'd like to get everyone's questions this morning. So, with that, I'll turn it over to Veena and we can open up the call..

Our first question comes from the line of David Amsellem with Piper Jaffray..

Good morning..

Good morning. Here's a couple of questions. So, first, I feel like I've asked this before, but you've known for, I guess, the bulk of the last few months that the competitive landscape, particularly for Solaraze and Skelaxin, was degrading rapidly and you've had competitor issues or pricing issues for the bulk of the business, albeit not as severe.

So, I guess, the question is, why not pre-announce or at least be more transparent about the deteriorating condition for parts of the business? And I guess, what do you think you need to do better going forward to be more transparent about that? So, that's number one.

The number two is on Adrenaclick, you talked about investing in manufacturing capacity and you said that that is a factor in your inability to grow volume share even more. So, when does that capacity come on line and when are you going to be able to take advantage of the additional capacity? Thanks..

Okay. Yeah. Thanks. Let me answer the first one, to go in order. If you look at our third quarter results, the third quarter results were not as dramatically impacted by price reductions. Solaraze – the generic Solaraze and Skelaxin was essentially washed through. It was a little bit lower than what we expected.

But the impact for third quarter was not necessarily as – wasn't really off from what our expectations were. What we saw as we closed third quarter, however, the pricing on the Teva products had made a substantive change. And that was happening through the late months of September and in October.

And it required us to take a look at what we think the fourth quarter outlook will be.

Most of the shift in this is a elimination of what we thought was going to be in a very heavy back-weighted fourth quarter where we would get advantage of increased sales of the Teva products and then a little further erosion on our generic pricing of our regular products. So, that's the general impact.

So, announcing it early doesn't really help us that much because it was not really in a third quarter event. It was more of a fourth quarter event. You see our sales were essentially in line, and had Albenza landed, we would have beat the Street estimates.

So, I'm going to Adrenaclick, I think it is important to recognize that we actually have supply position that put us in an opportunity to take advantage of the third quarter seasonal peak. And so, we had no stock-outs during the third quarter. We took on at least one major customer and are a full supplier to that customer now.

We have additional customers that are coming on line during this time. And as we see it now, we have inventory in hand and are available to sell to other customers as we go. This has been a shift that we have put a great deal of attention on starting in 2015 and have actually just recognized greater benefit from that throughout 2016.

Our estimation is that we will be able to grow by about 1% based on supply. And you can see that we are now fast approaching a 10% market share. So, I think from a perspective of how we look at it, we are hopeful that throughout rest of 2016 and going into 2017, that supply will not be part of the discussion.

It will just simply be a matter of how much share can we go and take from our competitors in the competitive environment..

Thanks..

Thanks, David..

And our next question comes from the line of Louise Chen with Guggenheim..

Hi. Thanks for taking my questions. So, my first question here is regarding the pricing pressure, more of just a broad question.

Are you seeing this as a result of the consortiums, the buyers here, or is it something else? And then when can we expect this to stabilize? And then secondly, on the target action dates for Concerta, Welchol and Renvela, I didn't see them in the presentation, but I might have missed it. So, I was wondering if you could provide those for us as well.

And then lastly, just on competition for EpiPen with your product. Are you working on a substitutable product to EpiPen? Just kind of curious on your thoughts there. Thank you..

Why doesn't Doug handle the first piece and then I'll come back and pick up the second and third question..

Yeah. So, Louise, regarding the consortiums and just the consolidation of purchasing power, I mean it's certainly been a trend that's been growing in the space for the last several years. And what we saw clearly with the Argentum Teva products is that customers are waiting for the deal to close.

And with that, they took the opportunity in these multi-source generic space to come after accounts for either volume or pricing activities, and we responded by maintaining the share we wanted to keep. So, that is an ongoing part of our business.

Certainly, where generic companies can overcome that is through new product approvals and by having unique products like the epinephrine auto-injector, and those are the areas that we have put the majority of our emphasis in the third quarter and our planning into 2017 on our business priorities and certainly addressing the consolidation of the purchasers in the space..

So, on TADs, we like everyone else are not announcing what those TADs are. I think most people can do the math on when, people were aware, we filed and approximate time that the FDA is taking to under the TAD arrangement. It is important to remember that these are TADs, so they are targets. They do move occasionally.

But on our critical products, we've seen a pretty good maintenance of those TAD dates and we're hopeful that we'll get the appropriate approvals on those timings. Regarding epi, so a short way of saying you didn't miss it, we didn't announce it.

On epi, we have had a series of conversations with the Agency and we have information and materials in front of them right now. We are working very aggressively towards a substitutable status for our product as we expect others are too, and are engaged in a good set of dialogs right now with the Agency.

And I think, for competitive reasons, this is probably as far as I'm going to go there..

Can I ask you quick just on that one? Given all the headline on EpiPen, do you feel the Agency has changed their stance or is moving faster to get substitute product to market?.

Hard to tell. I think, probably, our approach and the ability to show that our product is in constant supply with a good, solid safety database may have as much influence on anything else. Maybe we've just got our message and our strategy more appropriately honed, but we are in good discussions with the Agency..

Thanks, Louise..

Yeah. Thank you..

Question please..

And our next question comes from the line of Gary Nachman with BMO Capital Markets..

Hi. Good morning.

Fred, in light of the impairment charge on the recent Teva-Allergan deal, are you rethinking how you're evaluating transactions in the current environment, whether on the generic or the branded side? Does this throw a wrench into further M&A plans? And on the generic pipeline, why are there delays at FDA? Are you getting CRLs? Is that a staffing or priority issue? Just give us some more color there, because those seem to be getting pushed out consistently.

Thanks..

Yeah. Thank you. I think, across our sector, you're seeing a slowdown in M&A. I think about two things that there's – all of our valuations have changed. There seems to be a little bit of a retrenchment of the amount of activity that goes on.

But clearly, we are going to take a closer look at all aspects of our M&A activities and make sure that we now factor in a little bit more pricing aggressiveness.

My view on the Teva transaction is that the event of transitioning all these products from us, from Teva and/or Allergan to us actually created a market event that was greater than what we had anticipated. So, our competition took the opportunity to go in there and try to nibble away at share position.

We defended it, which I think is an important factor. You've seen that in the IMS data that there's been virtually no change in the share announced by or identified on these key products. It just forces you to defend a little bit. It's almost as if there was a new set of competitors coming into the marketplace.

As far as delays, actually, I don't think there's anything new and different in this one. I think the TAD action date – the target action date process sets up for either approval, complete response, or information request.

On a couple of the products that we expected in the fourth quarter, we got some information requests that now just push it off a few months, in perspective, and they generally respond to those within two to four months, as is their timeline. So, that's not something that we feel is unusual for us. We think we're seeing this across the board.

And in fact, one or two or those products were with one of our partners..

Okay. Thanks..

And our next question comes from the line of Randall Stanicky with RBC Capital Markets..

Great. Thanks.

Fred, can we just go back to your initial commentary around the new realities for the sector? I mean, I guess the question stepping back is are these pressures cyclical or is this a new reality where, as we look forward, we have to factor in more aggressive bid consortium competitiveness, more competition coming in, more FDA approvals? And if that is the case and it is secular or a new reality, that's either going to bring down industry profitability or force more consolidation.

And so, when you step back and talk to the board about the Impax path over the next three to five years, how do you see that evolving?.

Yeah. So, I think it is a bit cyclical, although I think we are at the height of the cycle here.

The generic industry has, as we have greater competition with more products being approved and more people aggressively managing their approval and their introductions and any market events that there may be an opportunity of – the real moving opportunity – the tool is pricing.

And so, you've got to effect generally a gain in share or a steal of a customer through some kind of pricing process. With the size of the customers and some of the consolidation, that's also being forced a little deeper than it has in the past. So, I think we are at one of those cycles.

I would assume that if approvals continue at a faster pace, you might see even more aggressiveness on that. I can't imagine that our customers consolidate much more, but that's yet to be seen. I would expect that there would be some increased consolidation of the industry. I think it's difficult to view that with our current valuations..

Yeah. This is Doug. I mean, I think this is a continuation of the current reality. I mean, basically, it is a question of who's getting approvals on what items.

And with the consolidation of the customers, the market share can swing much more dramatically than it did several years ago, where you may be able to withstand some pricing pressure and maybe lose some smaller volume. But when you have three or four large purchasers and three or four suppliers, the math is pretty direct.

This is still an incredibly attractive market. And even with the pricing actions on the Teva portfolio that we brought on, our margins improved. So, there still is a lot of excitement and opportunity in the portfolio we have.

And of course, we've got some, we believe, near-term launch items that will accelerate our top line as well as our margin profile..

And at the end of the day, this business is built off of appropriate product selection, expeditious filing and adjudication of your ANDAs and then appropriately launching real valuable products into the marketplace. We happen to have four that we've outlined that we are looking forward to the opportunity on those.

We're taking clear advantage of our opportunity with oxymorphone and with the epinephrine auto-injector, as well as a few of the others that we've built a good share position around and are holding that.

And I think that it just forces the industry to get leaner and a little bit meaner and essentially manage your cost side of the equation a little more efficiently..

I mean, does it increase your appetite for longer-duration assets? I mean, epinephrine, Rytary, Emverm, these are products that have much more visibility as you think about the next couple of years? I mean, is there a need to have more visibility going forward?.

Sure. That's the perfect world, if you could get an exclusive and have it for a long period of time, those are the ideal products. Those are harder and harder to find, but there are those opportunities and you've seen us take advantage of those..

Okay. Great. Thanks, guys..

And our next question comes from the line of Gregg Gilbert with Deutsche Bank..

Yes. Hi. Question about gross margin. Bryan, the guidance implies, I think, low to mid-40s in the fourth quarter. Can you confirm that? And should we think of that as the new norm for the existing business or are there one-off factors that you're factoring into that lower fourth quarter level? Another question, perhaps for Fred.

Other than diclofenac and metaxalone, which other products were impacted by greater intensity of pricing? And lastly, the contribution for Actavis/Teva products in the third quarter, can you let us know what that was and how your sales expectations have changed for the second half? I think you had $80 million before. Thanks..

Bryan..

So, gross margin, yeah, it's been a little lumpy and there's some one-off things in there. So, I think longer term – and we're not going to give out-years guidance today, but longer term, I think we should stabilize and you should see it get back to more the company norms, which would be more into the 50s.

But there is some lumpiness in the business in Q4 as we see some of the pricing pressures and we bring the acquired products in..

So, on the second question you had, which was on pricing of our other line, you saw that our line went down about 3% on the non-Solaraze, non-generic Skelaxin.

There are a couple other areas where we saw some nibbling on price, was in our fenofibrate line and then a couple of the other smaller products, just kind of like some of the topicals, there was some additional price pressure there. But nothing momentous that really was large.

We do it – we have built into our fourth quarter that pricing will continue. So some price pressures will continue. As far as the Teva guidance, about 70% of the reduction of our guidance in fourth quarter is as a result of the reduction in the Teva line..

And then lastly on EpiPen, are you in a position yet to know to what degree the EpiPen or, for you, the epi opportunity has shrunk once we see the full impact of Mylan's AG in the marketplace which, I guess, isn't fully out there yet.

But do you see the size of the opportunity changing, whether it's net price-driven or otherwise or is that really not an impact for you given your small share? Thanks..

Again, this is Doug. I don't say our share is small. In fact, it's again over 9%. We're certainly anticipating the authorized generic launch, and we've heard from customers and all of the activity we've done in the September-October timeframe is to get additional distribution, additional support for pull-through.

In anticipation of the expected activity of the Mylan authorized generic, it's our position, we believe we'll consistently be a go-to choice, lower-cost alternative for that item, and that's something that's resonating quite well, both with our purchasers as well as really with the consumers.

I mean, one thing we've seen in this market is the flow of the social media. You've seen recent media activities, New York Times article talking about one woman who posted getting her product and had 150,000 responses to her tweet. So, that's something that's been quite advantageous.

And getting the word out that our product is the same dose, the same method of administration and FDA-approved, I think, has also informed a lot of people about the opportunity here. So, we see certainly a more challenging pricing environment, but certainly a much greater volume opportunity for us.

So, that's our intent is with the great work that our supply chain has done and with our external partner manufacturing partner to increase our output and our reliability, we think we're in a very, very strong position to both sustain the share that we have and to gain the share in the coming weeks, months and quarters as the market dynamics do evolve with potentially AUVI-Q activity or even the Teva rumored item coming to market, we believe we have both the cost position and a value proposition that will sustain our opportunity here..

Thanks, Gregg..

Is that another way of saying you expect revenue to go up, Doug, or not necessarily?.

We haven't given 2017 guidance and don't have to do this at this point..

Okay..

We expect we'll finish the year strong on that front..

Thanks..

And our next question comes from the line of Elliot Wilbur with Raymond James..

Thanks. Good morning. Just a couple of quick ones upfront, and I've got a bigger picture question for you, Fred, and for Doug, since we have you both on the line. First, for Bryan, with respect to the impairment charges, there was an impairment charge in the Specialty division as well.

If you disclosed what that was related to, I didn't catch it, but just curious if that was tied to Emverm or another asset..

It was – sorry. Okay. Go ahead. Finish. Sorry..

Then just a question for Fred. I understand that – or I should say, when you come back to us and provide us with guidance for 2017, sounds like you're increasingly optimistic that a generic Concerta product will likely be included in some form or fashion in that guidance.

Just want to get a little bit more color around your confidence that that could happen before patent expiry, given that the market's opening up a little bit..

I'll answer the impairment question first and then turn it over to Fred. The impairment in the Specialty division was related to some of the work we're doing on the next-generation of Albenza. And it was related to about a, we estimate, 18-month delay on that product..

And that was due to an API supplier..

Yeah. API supplier..

And I don't think I'm going to go take the bait on the Concerta 2017 guidance, a fixed question at this particular point. I think anybody here can do the math. We filed it in the first half of 2017. We have a target action date on the product. So, we're working our way aggressively towards adjudicating that ANDA..

Got it. And then just I had one last kind of big picture question for you guys. Fred, early in your commentary, you mentioned something about the generic pricing cycle and you said you think we've reached the high. And I'm assuming you think we've reached the bottom of the current downdraft in pricing, but I just wanted to confirm that.

And the real question here is, obviously, the generic industry over the years and you guys are, of course, seasoned veterans of the generic wars from over the years. But has its ups and downs, and right now, if you look at price deflation for the industry, I mean, it's basically in line with the longer-term average.

And I guess, what we're seeing is maybe a little bit different this time is that the pricing declines and the adjustment in the past 18 months is having a much greater impact, there's much greater reverberation kind of throughout the entire channel, whether it'd be on the distribution side, Specialty Pharma side, even the insurer side.

So, it seems like there's a possibility that things could get a lot worse before they get better.

I'm just wondering at this point why you guys think that we shouldn't be thinking about the possibility of returning to kind of low-double digit to mid-teens deflation that we saw in 2008 and 2009?.

Yeah. So, let me do two corrections. I think I might have said that Concerta was filed in first quarter of 2017. That would be miraculous because that's still coming. So, we filed it in first quarter of 2016 or first half of 2016. So, the first correction. Second correction is I don't know that I've described that we are at the bottom of pricing.

I would anticipate that, as we look forward, we will probably increase our price degradation numbers in our modeling, because I think we probably have not seen the bottom of this. And I think it's also impacted by your base products. I mean, our chart kind of shows it.

Our base stable products or the products launched two, three, four, five years ago are not experienced the same set of pricing adjustments as are the newer products. So, every time there's a new product that comes out and then competition hits against it, you will have further price decline, and that means more approvals.

You have the more approval, you're just doing the math on it, as more approvals are going to create a high start point and then a greater price decline..

I mean, it's the leaky bucket nature of the generic space and, certainly, the company has not had a significant launch activity for a while and the Solaraze item certainly items drove a great revenue opportunities that we capitalize on, and given the supply uncertainty, that's come back.

And we are clearly coming through our remediation activities and investment in our internal portfolio with an expectation of some near-term launch items that will, we believe, accelerate and broaden our portfolio..

Okay. Thanks, Elliot.

Next question, please?.

Our next question comes from the line of Andrew Finkelstein with SFG..

Hi. Thanks very much for taking the question. I was hoping that you could talk a bit more about your views on the sustainability of the Albenza, Emverm franchise. You talked about there were some API challenges specifically with your follow-on, but in terms of potential competition to it.

And then also, something that's certainly been a concern, if you could address the DOJ issues with regard to generic pricing and whether your views on that have evolved since yesterday? Thanks very much..

Thank you. So, on Albenza, Emverm, our program is designed to convert to appropriate label. So, you've got Emverm indicated for one set of parasitic diseases and Albenza for another. Our goal is to get Emverm to grow in that area.

We think we've seen a bit of a slowdown due to some of the contracting issues within the states and some of the other third-party arrangements. You're six months out, that's generally when contracting really kicks in. That's what we're doing right now.

I think we saw that as a little harder headwind than what we thought originally, but we're now taking corrective actions in that area. The Albenza, we'd always assumed would be a smaller asset and we have life cycle management programs around Albenza. This is one of them and it's been delayed because of an API issue.

We don't think it substantively changes the portfolio value of that product. And then, the last question, the DOJ question, we've seen many people responding to this question. Obviously, this is – you've seen in our filings, we've disclosed what's gone on with the DOJ. This is more than two years old as far as the subpoena.

We've cooperated with the DOJ. And I think at this particular point, we're not in a position to either pontificate on when any kind of conclusion will happen and any impact on the business. I think we've got the information that's appropriate in our filings.

We do continue to work with the DOJ although not much conversation as of recent and we'll see where they go..

Okay.

Could you clarify what review you've done internally?.

I think we really don't want to comment on where we've gone. Obviously, we are taking our judicious efforts to make sure that we've done what we need to do appropriately, and put our filings out in front of the market in our filings..

Thanks very much..

And our next question comes from the line of Jason Gerberry with Leerink..

Hi. Good morning. Thanks for taking my question. Either for Fred or Doug, just curious, Mylan talked about lowering the net price from roughly $300 to $200 on EpiPen.

So, are you currently below that net price? I know that you're lower on list price, but curious if you're going to have to go to a lower net price move next year just to help us kind of forecast the price move this year to next year. And then, secondly, I guess I just wanted to confirm.

So you said about 30% of the guidance shortfall was Teva products, so that sort of implies – and I know that business is run rating at around $90 million versus $150 million at the time of deal announcement. So, curious if you can confirm that. Thanks..

Okay. Yeah. Let me kind of start. I'll turn it over to Doug on this one. I mean the whole discussion around epinephrine and pricing is we're actually talking with lack of information. I mean, they have described that they're coming to market with an AG. They've talked about it being an unprecedented event, and that's what ours is. Ours is an AG of a brand.

So, we're kind of in the same boat. And we've not seen any pricing or any customer conversations or anything along those lines. So, I think it's just way too early for us to talk about what kind of price impact and/or approach that they may take and/or supply position that they may use there. So, just don't know.

As far as the second question, what I stated was about 70% of our reduction of our guidance for full year and subsequently fourth quarter was related to Teva, not 30%..

Okay. Thank you..

Doug, do you want to add in on the epinephrine?.

Yes. Just going back to epi, I mean, certainly, we've heard all the same rumors. We've watched the testimony and read the transcripts and, of course, the five weeks is stretched out now towards – potentially towards the end of year, it could happen any day.

We're prepared for any day and our commitment to our customers, we spent time to get product placement so that we will maintain a very competitive offering and a value offering. So, it's a matter of reducing our price, we will be competitive when appropriate. Right now, we're chasing a ghost..

Got it. Thanks..

Thank you..

And our next question comes from the line of Dana Flanders with JPMorgan..

Thanks for the questions. Fred and Doug, both of you've worked at just larger generic organizations in the past.

So just a question in terms of the pressures you're seeing, I mean, how much of this impact across your customer base do you think would or could be alleviated if you had a larger portfolio or a greater scale, i.e., is this just normal course of business when you see competition or you think your customers are able to squeeze you more on pricing than maybe some of your larger peers? And I have a follow-up..

I think that that's – I've heard that question a lot over the years and it's, to me, less the size of the portfolio. It's what's in the portfolio; certainly, the uniqueness of what you have. And again, our company here, we've not had any really significant new launch activities for a while.

The Teva products were – as Fred described, it was a market event, but they were existing, known, established products. And of course, we got some pipeline items in that transaction as well, which we are pursuing going forward. Customers, really, at the end of the day, are valuing product by product.

And yes, there is a value in having a large overall book of business. The rebates and such are incentivized, but we're still seeing bids on a product-by-product, SKU-by-SKU level. And that comes down to whether or not you've got the offering, you've got the price and you're able to supply and meet the customer activity.

So, would I like to have a larger portfolio? Absolutely, and that's what we're trying to do, building both internally and through partnerships, to have more valued and differentiated products to bring the market.

But I think the results of the quarter also do demonstrate when we have a unique opportunity or we have some specific actions, we do implement on those. And we also defend, as everybody is defending, share with the consolidated number of customers..

Okay. And just my quick follow-up on Rytary. If you aren't seeing the return on the incremental sales force among the generalists, I mean at what point does it make sense to scale that back? Do you have certain return thresholds that you're looking at or is it just too early to make that type of decision? Thanks..

Well, it's a bit too early. I mean, we have the field force that is fully functional as of the end of 2Q. We've got a couple of good, solid support programs implemented in September. But we don't have a long runway.

I mean, we're going to take a very aggressive look at this and make sure we're seeing some under-the-line trends that are telling us that this is catching and that we see the growth opportunity for the investment that we're putting in. And Michael and I and the sales and commercial organization are watching this very closely.

They know what their mission, their goal is. It's making sure you continue the support of the growth from the movement disorder specialists, and that's really managing the whole office there.

And then secondly, going to the general neurologists with lots of communication and some of the support programs that we've put in place to help fill the void of the back office that they don't have. So, that's the sense of what we're working on.

But we are keeping a very close eye on it and we are analyzing whether we see the most recently introduced programs and the expanded sales force make a difference..

Thank you..

Yeah. And Dana, what Fred said is absolutely right.

Key for us is to see the impact of the recently introduced, if you will, simplified dosing guidance we provided to general neurologists to help them convert patients from IR to Rytary, and then, of course, the introduction of the myRytary support program with which we've seen pretty strong interest coming out of the general neurologists community at this point..

Thank you..

And our next question comes from the line of Tyler Van Buren with Cowen & Company..

Hi. Good morning. Thanks for taking my questions. The first question would be related to product launches. I believe, last quarter, you mentioned that it was taking a little bit longer than expected to shift some of the resources from the Hayward remediation over to the new product launches.

And I think we had five products approved as of last quarter's report, yet only three have been launched.

So, could you perhaps just describe changing those efforts there a little bit further for us? What has kind of been the issue and how can we get confidence or can you get confidence that we'll have the four products approved and launched in Q4? Thank you..

Yeah. Thanks. So, I mean, I think you can see at least one of them that we effectively got out the door pretty quickly, and that was our Metadate generic, was approved late July and introduced in early September.

That's the kind of timeline that we're actually trying to get more towards as opposed to the November 2014, Phenytoin, introduced in mid to late September. A couple of the products that were approved in 2016 have been delayed for actually market reasons.

We're not sure that the value of the product is still there and that the resources that we want to put on it would provide that return we want.

Right now, in our model, we've got, particularly, as we look at the ones that are most critical for you guys and for us, which is Renvela – generic of Renvela, generic of Welchol and generic of Vytorin and then, ultimately, generic of Concerta. We are getting ourselves ready for a day-one launch in a couple of weeks of time (1:01:22)..

Yeah, this is Doug. That's the organizational rallying cry is that we need to get back to being a day-one launch company. And so, some of the items that are on the list that were in the pipeline were held up from the warning letter and such, so over time, the market value was challenged.

Some of what we've opted to not to bring to market, but we are absolutely focusing the organization on going back to being a great generic executor, which is a day-one launch company..

Okay. That's helpful. And just a second question on capital deployment. Kind of given the decline in some of the fundamentals of the generic business, does your focus on branded assets increase significantly? And, also, some of your peers in the space have been announcing share repurchase plans.

Have you all given that consideration, given what's happened with your equity at these levels? Thank you..

Yeah. I think our interest in brand assets has always been high. I mean, we have tried to stay focused in the CNS space so that we can add products into our existing call point. And we continue to chase after things in that area.

I think shifting from generic to brand has never been a move, although I think you're seeing a lot less opportunities in the generic space at this particular point. So, we're going to evaluate each project as they come along without a differential towards brand or generic.

I would say that the key on all of these has always been trying to get long-term assets. So, that does lean you towards brands a little bit further. And as far as share repurchasing, actually, we talk about that quite a bit.

We usually have evaluated share repurchasing against use of cash for other purposes to where the return is better for us to do investment in the business, investment in the basic business, investment in third-party activities or a share repurchasing. And we'll revisit that on a routine basis..

All right. Thanks again..

And our next question comes from the line of Steve Chen with Bank of America..

Hey, guys. Thanks for taking my question. This is Steve Chen on for Sumant Kulkarni. First, I've a bigger picture type of question. Clearly, the one-off exclusive of first of market launches remain important due to better economics.

But how does the company think about Impax's positioning in the generics market, given that it seems like the consistent stream of new product launches is increasingly important to offset any erosion? Do you think you guys need a significant increase in generic R&D spend to become more competitive and gain scale in your portfolio and pipeline? And I just have one follow-up..

Yeah. Certainly, I mean, the success model, of course, is great product selection and, of course, an execution, both in terms of getting the products submitted and getting products approved into market. So, that's certainly where we are putting the investment.

The resources in the R&D organization that have been doing remediation have now been turned back on to doing R&D development internally.

As well as, again, with the expectation of the revenue growth, we are investing forward in terms of book, again, partnerships and internal expansion of our R&D activities to provide the opportunity for sustained value of generics. So, right, the 180-day products are excellent, but of course they don't sustain.

And we have certainly in our pipeline and in our near-term launch model products that have been available for generics for some time that folks have not cracked the code on. So, we believe there's an opportunity for sustained value on several of the high profile items we've discussed..

Okay. Thanks. And then, just a follow-up.

Can you give us a little more color on what's driving the sequential downtick in branded gross margin from 2Q to 3Q? How much of this was driven by the loss of sales of Albenza in the quarter? And given your commentary in this morning's press release, any color on gross margins of the Zomig franchise would be appreciated. Thanks..

So, it was impacted some by the Albenza stock out. It was also impacted by – we recorded some reserves for some short-dated inventory. So, that's higher COGS expense. And then some mix. Zomig is lower margin than Rytary and so that kind of had a little bit of mix in there as well. So, all of that kind of drove the overall branded margins down.

The short date reserves is kind of a unusual item. So, we'd expect that to trend back up and not see that in the fourth quarter..

Okay. Thank you..

And our next question comes from the line of Tim Chiang with BTIG..

Hi. Thanks. Fred, how much flexibility do you guys have in sort of reducing your operating cost structure at this point? I mean, certainly, you guys are facing numerous headwinds on the top line.

And I'm sort of wondering, do you have more flexibility to lower your SG&A cost at this point?.

Yeah, we do. I mean, obviously, you've seen us kind of sequentially put some programs in place to improve the efficiencies and reduce some of the costs. We're going to take a deeper look at that and it will involve the use of our facilities. We'll look at API purchasing. We'll look across the board and look a little deeper at this particular point.

So, yeah, there is still room. Obviously, we're part of the way through the Middlesex transition. We're going to be looking at the rest of our supply network to make sure we use it efficiently.

And then obviously, all of the internal expenses related to pretty much every piece of business that we operate and we're going to take a little bit closer look at. So, there's some room..

Yeah. And Fred, just one follow-up.

Just on the Teva products, was it all 15 products that you took out, that prices came down on or was it very heavily concentrated on a handful of those 15?.

Yeah. Heavily concentrated on a handful. It was not all 15. Some of these are small and very tired and they just need to be divested. And we took them on and expected to transition over, and they did. I think it was really focused on budesonide, which had a new competitor.

And if you've watched almost all of the competitors in there, share has not shifted. So, we did not give up much to the new competitor, but all of us had to defend with price. And so, that was just happening to us at the time that the product was acquired.

Secondly, propranolol had some pressures and those happened to be the two largest products in the portfolio..

Okay. Thanks..

And our final question comes from the line of Marc Goodman with UBS..

Fred, just on Rytary again, the $275 million goal, what year are you expecting that again and why are you still keeping that goal out there? Why is that still realistic to you? I heard your answer to the previous question on this, but how much longer are you going to give it with respect to spending levels that you're doing? Is this another six months or so? Just curious about your thought process there and how tight a leash you have on that situation.

And then, just secondarily question, just given the difficulties in branded business, in general, and given the difficulties in pricing and the difficulties you're having with this product, I'm curious why you're developing a next-generation product that's kind of in the same place.

I mean, why not cut that product loose and reinvest in the Generics business, which is your core and heart and soul? Thanks..

All good questions. All questions that we discuss internally. Look, at the end of the day, I think the $275 million, first of all, is pushed from 2019 to 2021. And we have a runway to get there, so we're reasonably confident.

And actually, that's built off of a continued solid growth of your movement disorder specialist environment, you can kind of get there that way, as well as some of the trickle down that could happen. So, you can see there's a series of alternative approaches that could be taken around marketing this product.

We think it's way too early to say that general neurologists can't adopt this product. And we think with some of the programs that have been implemented over the last four to six months by Michael's team and the intensified effort that we're putting on Rytary with that group, we think that there's a good outcome to that.

And we're watching it closely and we're going to evaluate that on a continual basis. As far as 203, 203 is a substantially – appears to be a substantially better product than Rytary. And one of the things around 203 development plan will be a simplified dosing program in our clinical program so that that is more easily transferrable.

And that's the critical reason for that. As we look at it and if we can't see that that value can be transposed over to the customers, so they can utilize it easier, we may make another decision on that. But we think it's too early. We think going down to the Agency and discussing our Phase 3 program is the next step on this one.

And the spend that we're putting on 203 right now is de minimis..

Thanks, Marc. So, that concludes our call for today. Thank you all for joining us. If you have any follow-up questions, please reach out to Investor Relations. Thank you, again..

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect your lines..