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Good day, ladies and gentlemen, and welcome to the Amphastar Pharmaceuticals second quarter earnings conference call. [Operator Instructions] This conference call may contain forward-looking statements, including statements relating to Amphastar Pharmaceuticals. These statements are not historical facts, but rather based on Amphastar Pharmaceuticals' current expectations, estimates and projections regarding Amphastar Pharmaceuticals' business operations and other similar or related factors. Words such as may, will, could, would, should, anticipate, predict, potential, continue, expects, intends, plans, projects, believes, estimates and other similar or related expressions are used to identify these forward-looking statements. These statements are only predictions and, as such, are not guarantees of future performance. And they involve risks, uncertainties and assumptions that are difficult or impossible to predict. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including these described from time to time in Amphastar Pharmaceuticals' filing in the SEC. I would now like to turn the conference over to Mr. Jason Shandell, President of Amphastar.
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 increased 9% to $71 million from $65.2 million in the previous year's period. The biggest driver of the increase in the finished pharmaceutical products segment was medroxyprogesterone acetate, which was launched in the first quarter of 2018 and recorded sales of $6.4 million. Naloxone, which was this quarter's biggest-selling product, saw sales increase to $11.1 million from $10.3 million on higher unit volumes. Sales of enoxaparin increased to $8.7 million from $8.3 million due to higher unit volumes as we were able to fill most of the back-order which had led to lower sales of this product in the first quarter of 2018. Sales of our epinephrine declined to $3.7 million from $10.6 million due to the discontinuation of our epinephrine vial in the second quarter of 2017 after the FDA requested that we discontinue selling the product under a grandfather exception. Our insulin API business had sales of $7.8 million, which were up from $1.4 million last year as MannKind began placing orders under our amended 2016 supply agreement. Cost of revenues increased to $44.9 million from $38.4 million, and gross margins decreased to 37% of revenues from 41% of revenues in the second quarter of last year. The contraction of gross margins was related to increased costs for heparin, which is used to make enoxaparin API, and increased labor costs due to the implementation of new quality standards recently required by USP and higher minimum wage requirements in California. Also, the decline in sales of high-margin products, like the epinephrine vials, was only partially offset by new product launches of higher-margin products such as the medroxyprogesterone acetate. Selling, distribution and marketing expenses increased due to expenses at our Amphastar Nanjing Pharmaceuticals subsidiary as well as higher freight costs. General and administrative spending decreased, primarily because of lower legal expenses. Research and development expenditures increased 44% to $15.5 million from $10.7 million, as we increased expenditures on materials needed for our pipeline, including the purchase of reference listed drugs ahead of planned clinical trials later -- for later this year. Additionally, we made several batches of Primatene Mist, which were expensed to R&D as pre-launch inventory since we have not received approval for this product yet. Looking ahead, please remember that I'd previously mentioned that R&D spending will increase each quarter this year. The company reported a net loss of $2.8 million or $0.06 per share versus a net income of $2 million or $0.04 per share in the second quarter of last year. The company reported adjusted net income of $1.2 million or $0.03 per share compared to adjusted net income of $5.4 million or $0.11 per share in the second quarter of last year. Adjusted earnings excludes amortization, equity compensation and impairment of long-lived assets. In the second quarter, cash flow from operations was approximately $4.5 million and was positive for the 17th quarter in a row. During the quarter, we used a portion of our cash to buy back approximately $7.2 million in stock. I will now turn the call back over to Jason.
Thanks, Bill. On our last earnings call, we announced that we resubmitted our NDA for Primatene Mist but did not have a PDUFA date yet. Since then, we received a PDUFA date of November 7, 2018, and we produced inventory in preparation for a launch. We remain confident that we will receive approval of Primatene Mist this year given the very good results from our human factor study and the related bench studies that we provided in our resubmission. In terms of FDA approvals, we are happy to announce that our generic version of Isuprel was approved by the agency on June 18, 2018, which was 10 days in advance of our GDUFA date. Based on the minor CRL that we received in March of 2018, we were confident that we would receive approval of this product, and therefore, produced inventory in advance of the GDUFA date. This allowed us to launch the product in July. It is interesting to note that the brand Isuprel is an ampule, whereas our generic product is a vial. We believe that this gives us a competitive advantage, as hospitals typically prefer vials over ampules. To date, there have only been 2 other generic Isuprel products approved by the FDA, only one of which is a vial and the other being an ampule. In addition to the approval of generic Isuprel in the second quarter, we received FDA approval of our ANDA for calcium chloride injection on May 10, 2018. This was one of our unapproved products that we've been selling for many years, and it remains on the FDA's drug shortage list. We also received FDA approval of our ANDA supplement for the manufacture of semi-purified heparin at our ANP subsidiary and the manufacture of heparin sodium USP at our IMS subsidiary, which are starting materials for enoxaparin. Following our recent streak of approvals over the past year, we now have 2 injectable ANDAs on file with the agency, targeting products with a market size of over $350 million. One of these ANDAs makes up the majority of the $350 million, and due to its complexity, has never had a generic approved despite being off-patent for quite some time. We have 2 GDUFA dates in 2018 for this product depending on whether a facility inspection will be needed. We still remain on target to file 2 to 3 more injectable ANDAs this year and plan to file our first inhalation ANDA in the first half of next year. Our diabetes franchise is making great progress as we now have insulin APIs from both our AFP facility in France and our ANP facility in China. The regulatory environment may be changing in beneficial ways as we look to bring 3 finished insulin products to the market. R&D spending on these projects is ramping up and expected to grow as the year goes on. In July, we announced our business expansion plans for our subsidiary, Amphastar Nanjing Pharmaceuticals. ANP currently has 4 active pharmaceutical ingredients and starting materials for use in our FDA-approved products, including the API for our recently approved generic Isuprel product. ANP has 10 DMFs on file with the FDA and is developing 8 additional DMFs. To date, ANP has provided APIs and starting materials only to Amphastar, but will begin to sell APIs to third parties to increase its revenues. More importantly, ANP is expanding to manufacture and sell finished pharmaceutical products for distribution in China and in other markets globally. To help fund this expansion, ANP completed a private placement of its equity, raising approximately $57 million. Amphastar has retained approximately 58% of the equity interest of ANP. We believe that the expansion of ANP is the most effective way for us to leverage our existing assets on a global scale, and expect ANP to begin selling products externally in 2019. With regard to our recent product launches, we continue to ramp up our generic Depo-Provera product in both the vial and prefilled syringe. As we stated on the last call, we believe that we have achieved a strong market share, and that should be more fully reflected by the third quarter of this year. Our generic Isuprel vial product was just launched last month, and we are hopeful to achieve a strong market share given that there is only one other FDA-approved vial in the market. Finally, although the neostigmine market is more competitive, we are happy with the penetration that we have achieved. With that update, I will now turn the call over to the operator to begin Q&A.
[Operator Instructions] Our first question comes from Elliot Wilbur of Raymond James.
This is Lucas Lee on for Elliot. Could you provide some update on the status of returning epinephrine product to the market? Is it still expected during 2019?
First of all, I don't think we ever said it would happen in 2019, but we did file an NDA for the epinephrine prefilled syringe.
So yes, we have 2 -- historically, have had 2 epinephrine products, one is in a prefilled syringe and one is in a vial. And so when Bill was discussing the financials and one of the products that was unapproved and removed from the market, that was the vial. We continue to sell the prefilled syringe, as it remains on the drug shortage list. What is public is that the prefilled syringe, epinephrine, which is also an unapproved product, is now publicly known that it was filed as an NDA and that's a Paragraph IV, where we are currently in a lawsuit with the RLD, which is Belcher, and we recently filed a motion to dismiss in that case. And then with respect to the vial product, that would also be a Paragraph IV, but we have not publicly discussed that at this time.
And if I may ask one more question. So are you hearing any market chatter on potential new entrants in the medroxyprogesterone market?
It's a very hard product to do. So Teva had just been out of the market for several years, even though they had an approval. And Sandoz has an approval, but they never launched it because of the difficulties around it. So we don't know of anybody offhand, but you never can count that out, but it is a hard product.
Yes. So just to echo Bill's point, it's extremely difficult to prove bioequivalence. It's a difficult product to get FDA generic approval. And then secondly, as Bill says, even with the approval, very difficult to manufacture as evidenced by the fact that Sandoz never even launched after approval.
Our next question comes from David Maris of Wells Fargo.
So I think the most exciting thing that happened during the quarter was the ANI development. Can you talk a little bit about how this impacts the financials and the cash flow going forward? You mentioned that you'll be selling into China. Can you tell us the plan? Is it to sell products that are already approved here in the U.S. or is it to get products just approved for the Chinese market? And the same with the API. Is it API for things that Amphastar plans to make? Or is it only noncompetitive API?
You want to start on the financial cash flow?
Yes. So starting with the financial cash flow, we raised about $57 million through this private placement. That's going to fund the expansion of the business, and most of that expansion is going to be -- most of that cash is going to be used for producing -- or buying equipment and producing facilities that are going to do finished product manufacturing so that we can get into that market. And one of benefits to the parent company is that we have been funding this business, and it's been a very big cash outflow from the business for several years now. And when we decided on this expansion because we think that there is a great opportunity, we thought that we didn't want to completely fund it from the United States. So this was a good way to free up the cash in the United States to focus on some more of the R&D projects here and get this outside cash to fund the expansion there. Going back to the financial question is it will be slightly accretive to earnings because of the agreements that we have between the companies. ANP and Amphastar parent company are changing slightly in a way that will benefit the parent company a little bit as far as the required profitability of the subsidiary. So there will be a lesser requirement to guarantee earnings of the China business.
And then with respect to your question about the finished products and APIs. So first, I agree with you. This is very exciting for the company. We have always talked about ANP as part of our vertical integration strategy and that's worked out very well. As I discussed in my prepared remarks, 4 of our FDA-approved products use either starting material or API from ANP. So but now, we are deviating because we want to not only supply just to Amphastar, but we want to supply globally, and especially with respect to the finished product, China is a very exciting market, pricing seems to be improving there. You've got a growing middle-class. And recently, there has been a big reorganization by the Chinese FDA. And one of the major issues for that country is the quality of the products that are sold over there. And so as part of this reorganization, they recently have cleared out the backlog of applications, and basically, got something like 90% of applicants in China to withdraw their applications because of the subpar quality. So what kind of products would we sell over there? I think that your question and your instinct is right on, that we would focus on products that are already approved by U.S. FDA for Amphastar here in the United States. And that's one of the things that the Chinese government has been saying to us, because they've been encouraging us not just to sell API, but finished product, to help with the quality issue over there. And our understanding is, if you have an FDA-approved product, that can sort of help expedite the approval in China. So we right now are exploring our products that we sell here and seeing what's on the market in China and sort of what could command the highest premium, where we do believe that when you look at products in China, we can actually sell for a higher price because of the better quality and the fact that it is FDA-approved as well. And with respect to both finished product and APIs, we will be selling the APIs globally. But we have agreements in place. These will also be, for the most part, APIs that we work on for Amphastar as well, but we have exclusivity for the United States and other territories that are important to Amphastar.
Our next question comes from David Amsellem of Piper Jaffray.
Just a couple. So first on Isuprel, I mean, this is a product that is historically a low-volume, but high-price product. So when you talk about market share for a low-volume market, can you elaborate on what that means, given that dynamic? I mean -- is that -- is it fair to say that you're going to account for, if not the lion's share of volumes, then maybe a significant chunk...
Well, first of all -- yes, so first of all -- that -- is that there is one generic already on the market plus the brand plus the second generic. The brand and one of the generics are ampules, and we think it's going to be very easy to compete against those products, but because there is one generic already on a vial, we'll definitely have to offer a lower price to get that. So there's really 4 players on the market. So getting a lion's share of the market is really not something that we would expect, but we would expect in this thing -- terms to get at least one of the largest customers -- one of the couple largest customers out there in order to consider getting the right amount of market share. So we look at in terms of specific customers and taking a look at individual customers and the amount of volume that they tell us that they do when we go to them with our bids.
Okay. All right. That's helpful. And then just turning to the pipeline. In terms of the 2 to 3 additional injectables that you're going to file on later this year, do you have some metrics around that? Any of them potentially could be first to market or be at market -- be there at market formation, among the first wave of generics? And maybe what the underlying dollar value of these markets are in the aggregate, that would be helpful.
Sure. So yes, there is actually one product that will be quite exciting. It's a large market, and it would be the first generic. And then the other 2 are also large markets. But the -- 1 of the 3 is a very exciting product with no generic approval.
And in terms of the market size of those products, in total, the 3 should be well over $350 million to $400 million. So I'm trying to remember offhand, I got -- I think it's actually over about $0.5 billion.
$0.5 billion.
Yes, so it should be over -- the 3 of them combined should be about $0.5 billion.
Our next question comes from Gary Nachman of BMO Capital Markets.
First on Primatene. Describe, again, why you're confident in approval with the data that you submitted? And how much prelaunch inventory are you building before the PDUFA? And what other premarket activities are you doing to prepare for that launch? And then, also, what's the status of intranasal naloxone, Jason? You didn't mention that.
Sure, sure. So let's start out with why we're confident regarding Primatene, and I did discuss this on the last call as well. Basically, we had a lot more dialogue since the last CRL with FDA. Multiple phone calls, an in-person meeting and really feel we got on the right page with them. And as I've discussed in the past, the previous human factor studies were very quantitative-driven and very statistical with a cumulative analysis where we were looking at 3 factors: shaking, re-priming, cleaning. If you fail to clean, that was a fail across the board. It was very numbers-driven. In our discussions over a course of the year with the FDA, we put together a risk analysis for them. In that risk analysis, we included bench studies, which, for instance, showed that there is only 1 critical task, that's the shaking, which I think is the most straightforward for a consumer to understand. They thought it was very interesting data. One example is cleaning. I think there's always been a preconception that HFA is sticky and it clogs the inhaler, and that's been the agency's experience with albuterol. But when we discussed the bench data, we showed that this is a different product, much less alcohol, less residue, larger orifice. So many reasons why it's not apples and apples. They were intrigued by the data. So they said, please submit the bench studies in the resubmission, and it would be a review issue. So we view that almost like an insurance policy because: one, the more qualitative human factor study that we conducted based on substantial input from the FDA, including a great suggestion to not only have the instructions for use, but actually have a wraparound label on the inhaler itself with just 3 clear instructions. So with their input, we went through multiple iterations. We really feel the label is about as simple as it can be now. And so the results of the study were great. You really don't even need to look at the bench data because we think we can get approval just based on the study data. But if there were any questions regarding the study data, we feel that the backup with the risk analysis and the bench studies is an added assurance. So we feel that, overall, this is a much better filing at this point. It's taken a while to get here, but with FDA's assistance, we think we have a really great label that's very easy to understand. And Bill can discuss the inventory.
Yes. So we made batches for a couple reasons. One reason was that we had certain components that were going to expire if we didn't make inventory at this time. So we decided that -- we were planning to make inventory ahead of the PDUFA date anyway, so we decided that we would start doing that this quarter. We made several batches, and we had to book an expense of about $0.5 million. Yes. So that's in the R&D line.
And then, finally, the third one was what we're doing in preparation for the launch. And for that one, we have discussed in the past that we definitely are going to do some marketing to let consumers know that this has been returned to the market. So we've met with a number of ad agencies. And at this point, we have a very good ad plan. We're looking to spend -- multimillion-dollar ad campaign. But when we say multimillion, it's high single-digit millions. It, mostly, will be a digital campaign to reach the end users. In addition to the money we're spending on our ad campaign, we've discussed how this is a very important product for the retailers. It definitely brings in foot traffic, which is something they need in this day and age, especially with Amazon. And so they've been excited by it. One of the retailers discussed having it in 3 sections of the store: essentially, cough and cold, allergy, behind-the-counter. So they'll be also doing their own promotions. So between our ad campaign and the retailers, we think it could be a really good launch, and it'll get out to the vast majority of people that need it.
Okay. Just to follow-up on it, have you decided pricing yet, where it's going to be, similar to where it was when it was previously in the market?
Yes. It's going to be priced higher than it was previously. So we know that because it's a better product than it was, and it's inflation as well. So it's definitely higher than it was, but the exact price is yet to be determined. And then in some ways, it'll be a little bit based on some negotiations with the drugstores, and also have to do with maybe some of the -- we might have some initial discounting just to get it out there, couponing, that sort of thing, but -- which will affect the net price. But it -- overall, we expect this to be higher priced. And also remember that there are fewer uses per container as well. So if someone was using this on a semi-regular basis, then the annualized cost would be higher for that as well.
Okay. Will it be a higher-margin product, I'm assuming, than the rest of your business right now?
Yes. It will be higher margin than the rest of the business. And the other thing you have to remember is that, right now, we have about $0.5 million a quarter going to the COGS line from that factory. So the incremental costs associated with the cost of goods of that product are just the variable costs at this point. So it should be -- especially, initially, it should be a very profitable product for us incrementally and gives us a lot of operating leverage.
Okay. And then the last question was intranasal naloxone, Jason?
Oh, yes. So I didn't have an update at this time. On the last call, we had mentioned the major issue at this point, we're in agreement with the FDA on all the points of their CRL, except the volume issue. And so on the last call, I announced that we had submitted actual use data to the agency to support the volume that we're proposing, because that was their request, that if we could show data -- actual use -- pediatric use that shows that our proposed volume does not have any significant adverse events, then they would consider the volume and our program could be back on track. The data was very compelling. We've submitted that to the agency. I believe it was several weeks before our call in May. So we were expecting a response either in July or August. So we will provide an update. Hopefully, by the next call, we'll have a response and a path forward.
Our next question is from David Steinberg of Jefferies.
Couple questions. Just want to follow up first on Gary's question about Primatene, since it's had such a tortured history and had way too many CRLs. I know that since the last call, you actually had a PDUFA date, and during that period, did you actually have further discussions with the FDA, which gives you more confidence in the positive outcome in early November? And then related to that, back in the day when it was a well-known brand, there was a lot of creative TV ads that helped make it so, and I was just wondering what sort of advertising, either on TV or print media or other types of media, are you planning? And then secondly, on this large undisclosed generic you're hoping to get approval on later this year. How many years has this been generic, has it been off-patent? And is the product still growing?
Sure. So starting with Primatene, it's definitely been a saga, and we do believe that the label has really been revised to a point that it's so simple, and I think in this environment, right now, it's a good time to see OTC approvals and will help with drug pricing. In terms of communications with the agency, we are still in communication. They've had some questions, asked for some samples, had -- but no major issues at this point. So at this stage, we consider no news good news, but we are still in communication, but no major information requests at this stage. And then in terms of TV ads. So when we met with the ad agency, it's a really reputable agency. They've done some really great commercials. I was interested in what the cost of that would be, but it's prohibitive, to say the least. So that's why we will be focused mostly on digital, but, of course, in those digital, there are the old TV commercials on YouTube and -- but this will be very much digitally driven in the day and age of Google, where you can pay for a click if somebody puts in asthma and we want Primatene to be at the top of the list. So this will be a digital campaign, for the most part. And then finally, with regard to the GDUFA, the large undisclosed product, it's been off-patent for quite a while. We won't go into the specific details as -- for competitive reasons. We really don't want to reveal what the product is, but it's been off-patent for quite some time and the market remains strong.
I'm showing no further questions at this time. I'd like to turn the conference back over to Jason Shandell for any closing remarks.
Thank you very much, operator. This concludes our call. Hope everyone has a great day.
Ladies and gentlemen, this does conclude our conference. Thank you for your participation. Have a wonderful day. You may all disconnect.