Amneal Pharmaceuticals, Inc.
Q2 2016 Earnings Call Transcript

Published: 9 Aug 2016

[Operator:]

Good morning. My name is Melissa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Impax Laboratories Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Mark Donohue, you may begin your conference.

[Mark J. Donohue:]

Thank you. Good morning. Welcome to Impax's second quarter 2016 financial results conference call. A 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 Impax's website at www.impaxlabs.com. Also, a link to the 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 to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provides 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 financial measures is available on our second quarter earnings release and in today's slide presentation, both of which can be found on the company's website. The agenda this morning will include our President and Chief Executive Officer, Fred Wilkinson providing an overview of the second quarter results and then 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 lines up for questions and answers. Also, joining us for the Q&A session is Michael Nestor, President of the Specialty Pharma Division; and Doug Boothe, President of the Generics Division. Request that you please limit yourself to a maximum of two questions so that everyone has a chance to participate, feel free to put yourself back in the queue and we will try to get through as many questions as possible. And with that, I'll turn the call over to Fred.

[George Frederick Wilkinson:]

Thank you, Mark, and good morning. Thanks for joining. Before I get started with my prepared remarks, I would like to welcome Doug Boothe to the executive team at Impax. He is joining as our President of the Generics Division. As many of you may know Doug, he is a seasoned industry executive with extensive generic pharmaceutical leadership and business development experience and he will be instrumental in growing our Generic business as we go forward. He also joins actually in a very important time for us as we focus on the integration of the Teva-acquired products, maximizing the opportunities from our 2016 launches, continuing to build a world-class R&D operation and obviously evaluating new external opportunities, so please join us in welcoming Doug to the team. This morning, we reported our second quarter results which reflected a very challenging quarter for our Generics division, only partially offset by growth in our Specialty Pharma division. Total revenues for the company decreased $42 million during the quarter or down 19% over 2Q 2015. Generic division revenues were down $53 million, almost exclusively due to three products, generic Solaraze, Skelaxin and Adderall XR. As we've previously highlighted, potential weakness in generic Solaraze and Skelaxin market is a result of decline in price and volume due to new competition. But since that time, the market erosion on Solaraze has been much more pronounced. In particular, the aggressive change in generic Solaraze market resulted in a quarter-end shelf-stock adjustment of approximately $4.5 million. Also impacting second quarter results are lower sales of generic Adderall as our initiatives to reacquire share have not yet materialized. Our IMS – reported share position is currently approximately 6%, down from over 10% same time period last year. On a more positive note, epinephrine auto-injector and oxymorphone revenue grew approximately 112% since last year's second quarter. We continue to pursue the opportunities to expand our market share within these key products as we are exclusive generics on both. Year-to-date, the Generic division revenues were down 4% compared to same time period last year. Looking at the Specialty Pharma division, second quarter revenues increased $11 million, up 29% compared to Q2 2015 and first half revenues almost doubled from first half 2015. Most of this was driven by double-digit revenue across the entire portfolio. In late March, we launched Emverm, which helped contribute to a 48% growth in revenues in the anti-hermetic franchise. By June, we had completed the expansion of our CNS sales force from 77 to 116 reps. Their primary focus was on driving further revenue growth of Rytary and Zomig, which increased 27% and 15%, respectively, compared to last year's quarter and they also launched Emverm. The positive revenue growth in the Specialty Pharma division in second quarter resulted in adjusted operating income increasing 40% compared to the same period last year. In mid-June, we announced that we had entered into agreement to acquire a group of generic products from Teva and its affiliates and revised our full-year 2016 financial guidance based on an assumed June 30 closing date. Unfortunately, a few things have changed since that, resulting in the need to readjust our guidance. We lost approximately five weeks of the economics from the acquired Teva product due to delay in closing of the acquisition. We have experienced further deterioration in generic Solaraze, which I'll cover in greater detail in a moment. We're also expecting a delay in supply of a third-party generic product that will affect the full-year results and we have some deferred timings of a few of our 2016 targeted generic launches. For generic Adderall XR, we received approval of our ANDA in mid-February and started transitioning from the authorized generic version to supply it from our own ANDA. We completed this switch during the second quarter. However, the opportunities to secure additional customers and grow our share have taken longer than we expected. In addition, we've experienced a slightly slower shift from Albenza to Emverm as we launched this product. We're obviously disappointed in these events, but are taking the steps to ensure that we achieve solid growth during the second half of 2016. These include

[Bryan M. Reasons:]

Thanks, Fred. Good morning, everyone. Turning to slide 18, second quarter 2016 financial summary. Since Fred covered the drivers of the second quarter revenue, I'll focus my remarks on other areas of the business and results for the quarter compared to last year. Our adjusted gross margin increased to 53% or 300 basis points due to product mix. The primary driver was higher-sales Specialty Pharma products, partially offset by generic product mix and the impact of the $15 million shelf-stock adjustment as previously noted. Based upon competitive market conditions on diclofenac gel and metaxalone, we recorded a large shelf-stock adjustment at the end of the second quarter. This adjustment represents the difference between the sales price and the revised lower sales price, multiplied by an estimate of the number of units on hand at our customers. Moving on to operating expense, SG&A expenses decreased by approximately $4 million. On the Generic side, lower failure to supply claims and trade accounts receivable reserves decreased expenses by approximately $6 million. This was partially offset by an increase in Specialty Pharma expenses, driven by the sales force expansion to support Rytary. Research and development expenses increased approximately $5 million in the quarter, primarily due to an increase in project spend due to a ramp up of generic R&D portfolio for both internal and external development projects. The adjusted effective tax rate was 34%, down approximately 300 basis points from last year's rate of 37%. The decrease was primarily a result of a change in the timing of mix of U.S. and foreign income and the inclusion of the R&D tax credit which was permanently reinstated in the fourth quarter of last year. So in summary, the decline in revenue led to a $0.13 decrease in our adjusted EPS in the second quarter 2016 compared to last year's second quarter. Moving on to slide 19, our 2016 updated guidance. As Fred noted in his remarks, several things have changed over the last several weeks that are currently expected to negatively impact our 2016 revenue. Slide 19 provides a comparison of our current revised forecast to our prior outlooks. Due to the increased variability, we are currently – experienced on a few of our products – generic products, we have shifted to providing a range of estimates compared to our prior format. We revised our total company full-year revenue forecast to a range of $900 million to $940 million. This decrease is primarily driven by further estimated decline in diclofenac gel, the five-week delay in closing the Teva product acquisition, delay in recapturing generic Adderall XR share, delay in supply of an authorized generic product and deferred timing of 2016 targeted generic product launches. Based on the revenue contribution and timing of these events, our revenue in the fourth quarter is currently expected to increase sequentially over this year's third quarter. While we are lowering our revenue outlook, we currently continue to expect our gross margins for the year to be in the low 50% range due to favorable product mix. Turning to R&D expense, which includes patent litigation expense, we continue to expect this to be in the $100 million to $105 million range. Spending is expected to sequentially increase in the third quarter and fourth quarter as Generic R&D continues to ramp up after coming out of a Warning Letter less than a year ago and the Specialty R&D group continues its work on IPX203. Our SG&A spend range has been reduced by $10 million due to the sales force expansion not being completed until June, as well as identified cost-saving initiatives across the company. Spending is expected to sequentially increase in the third quarter and fourth quarter due to ramp up of several IT projects, the fully expanded sales force and the timing of several other internal projects. Total adjusted interest expense in 2016 is now expected to be approximately $18 million, down from $20 million due to the delayed close of the Teva acquisition and favorable financing terms compared to the original projection. Based on the adjustments to our financial model, we currently expect full-year 2016 adjusted EPS to land in the range of $1.57 to $1.70 per share. Moving to slide 20 and our capital structure, last week in conjunction with the close of the Teva product acquisition, we completed our financing for the transaction. We used approximately $196 million of our existing cash and borrowed $400 million via Term Loan A to fund the acquisition. Our net leverage ratio is approximately 2.4 times trailing 12-month pro forma adjusted EBITDA. The cash flow expected to be generated from the combination of this profitable portfolio of acquired products and our existing business could allow us the opportunity to delever quickly over the next 18 months to 24 months, while continuing to invest in both organic growth opportunities and the external growth opportunities, in addition, expansion of our revolving credit facility as to the available liquidity and financial flexibility. Moving to slide 21 and looking at our long-term growth. Over the past couple of years, we capitalized on several opportunities including the launch of authorized generic Renvela and last year's market disruption that lessons competition on diclofenac gel, generating significant cash to reinvest in the business. We've effectively utilized business development to expand and enhance our marketed Generic and Specialty portfolio as well as grow our R&D pipeline. We accomplished this without over-levering our balance sheet. One of our strengths continues to be our available financial flexibility and the flexibility of our balance sheet to support future growth opportunities. As a result of these actions we've taken over the past few years, we are a stronger and more diversified company today. Thanks for your attention. And I'll now turn the call back to Melissa for questions.

[Operator:]

Your first question comes from David Amsellem with Piper Jaffray.

[David A. Amsellem:]

Thanks. So, I just have a couple. So first, just on the guidance change, I mean, it – what's striking to me is that you already had guided on the announcement of the acquisition of the Teva assets; so – and that wasn't that long ago. So, I guess what changed and how do you get it so wrong? So that's first question. And then the second question is on the assets you did acquire, how much of the mix is Pulmicort, how big is that in terms of sales, the acquired sales and profits and what's your expectation for competition going forward on that asset? Thanks.

[George Frederick Wilkinson:]

Yes. So, obviously, we outlined many of the issues that have come to light either as we ended the quarter, I think probably the biggest issue hitting us was the continued degradation of the market for Solaraze. The natural flow that goes on when you lose about five weeks of the economics of transaction and we used the timeline that were, I think, were being announced by Teva and others in the process. And then I think we just had some issues in trying to regain share on Adderall that had caused a fairly substantial hole in the financials and we can run (27

[David A. Amsellem:]

And Fred, can you quantify what the percent share of the overall mix, either just the acquired sales or overall sales on budesonide?

[George Frederick Wilkinson:]

Yes, I think, as with everything else, we don't really talk about individual products as we go. I think the only product we've gotten in-depth on is Solaraze and that's primarily because you could see it in the Qs and Ks because of what we provide to TOLMAR and our royalty and also the impact that it had on 2Q. So you'll probably see a little bit on the valuation process when we announce the valuation of the deal. But that may not actually give you a great implication as to what percent share of the overall transaction this was.

[David A. Amsellem:]

Okay, thanks.

[Operator:]

Your next question is from Andrew Finkelstein with Susquehanna.

[Andrew Finkelstein:]

Good morning. Thanks very much for taking the question. I was hoping you could talk a bit more on the launches the rest of the year. Are there any gating factors, is it some are already approved and what are the factors needed to launch those and then your level of confidence in the pending approvals? And then if you could talk a bit more about what you're seeing with Rytary in the marketplace, the impact of the expanded sales force and congrats on the data for IPX203. But if you could talk about an update on where you stand with the Rytary patent litigation as we approach the Markman hearing? Thank you.

[George Frederick Wilkinson:]

Let's go to the generic launches first. This was pretty well back-end-weighted as we started the year. We had anticipated that we would put 12 to 14 products into the market out of our generic program. We've launched three. We've put those three up there in the chart, which were OxyContin, a generic of Adderall XR, which replaced the supply and then Glyburide, which we were approved last year and launched in June. And then you can see on the other chart – this is on slide 11, we have had five approvals since the beginning of this year, five additional approvals in 2016. Those will be the subject of our launches as we go through the rest of this year. Our four products in third quarter are secure as they are approved and we're just working through the mechanics of getting them into the marketplace. The fourth quarter, there are five to seven. You can see three to five of those are still waiting for approvals. All of them have TAD date or action dates that we're waiting on approvals on, it's just a matter of whether they officially come through FDA. Going to Rytary, I think it's fair to say that we actually have not seen the impact of the sales force since it's been expanded and that is disappointing to us. It's something we're spending a lot of time focusing on and making sure that we get the right drive and results from the expansion of 77 to 116. I think, as I've mentioned before, we may have caused a little more disruption than we would have wanted to cause with this expansion, as most of the territories did shift as you then make room for 116 territories out of the math coverage that was previously dealt with by 77. We had them also calling on – due to the initial launch of Emverm, we did initial promotion of Emverm as we prepared our non-personal programs, which was the intention all the way along. We're now going to get that out of the way and have them focus entirely on Rytary and make sure that we get the appropriate drive out of that. What we are seeing below the prescription line is good solid growth, on target with what we expected on the share gain from the movement disorder centers and from the neurologists within that environment. Where I think we're lagging behind, and this was where we expected to see the impact of the larger sales force, is with our general neurologists or the office-based neurologists. And this is where we're going to spend all of our time focusing on in the second half of 2016. And that really means the three things we mentioned

[Andrew Finkelstein:]

And on the Markman hearing?

[George Frederick Wilkinson:]

Markman hearing is later this year, well, obviously, we're preparing for that. Feel very good about our position on our patent defense. I think one of the indicators on this is that of all the companies out there that we know were working on this, only one has made an attempt in filing. So obviously, there is some blockade in what we've done. And also there's some difficulty in formulating this product to make it match.

[Andrew Finkelstein:]

Thanks very much.

[Operator:]

Your next question is from Tyler Van Buren with Cowen & Company.

[Tyler Van Buren:]

Hi. Good morning and thanks for taking my questions. I guess my first question would be regarding the base Generics business. When you said on the call that the market is still settling on Diclofenac gel, per IMS, it looks like there is about $15 million in gross sales in the latest month. Is there still room to fall on that product and maybe you could just help characterize what's going on there? And then, secondly, Fred, at what point do you consider potentially selling the business? Since you used to work for a very large generics player, why might they consider or why might it make strategic sense for a company like a Teva or a Mylan or a Sandoz to acquire Impax? Thanks.

[George Frederick Wilkinson:]

Thanks for the questions. Yes, I mean, Solaraze may be – the generic version of Solaraze or the generic market for Solaraze may be the sloppiest market I've seen in a long time because you had a very unusual situation where the brand and the generic fell out of bed because of supply situation. And then there was an approval in December, of which normally you might see a launch much more – at a much quicker rate than four to four and a half months later and that was the Allergan process. We also get our supply from a third party which made, in our customer interaction, some concerns as to whether we would be an efficient and appropriate supplier and there is always concerns when there's a massive disruption like happened in the second half of 2016 as to whether we're prepared to supply at all. So it was a very, I'll say it again, it was kind of a sloppy process of how product was sold into the marketplace, what the customers were doing and kind of the events that occurred in 2015 going into 2016. We had anticipated, as I mentioned, that Sandoz would reestablish itself. We're unsure as to how well they would do that. We had also anticipated Actavis would make it into the marketplace what they did. We did not see Teva and we did not see the compounder and this is a market where there is not insignificant amount of the product that's going into the secondary market of pharmacy compounders where they do – where they actually are altering their product and providing it to patients based on physician prescriptions. So I think it's still settling itself out, the compounding piece is kind of – still is a place that we're paying a lot of attention and it's a place where the newest competitor is actually participating. We think it looks like it is settling. It looks like market share is kind of establishing itself and our goal is obviously in a five-player market to hold on to the majority of the market share and to out-ride (37

[Tyler Van Buren:]

Thank you. It's very helpful. Thank you.

[Operator:]

Your next question is from Randall Stanicky with RBC Capital Markets.

[Randall S. Stanicky:]

Great. Thanks for the question. Just on the guidance, if we take the second quarter revenue and annualize that for the back half and added roughly $75 million for the Teva products that you brought in, we get roughly $420 million. And if I look at the midpoint of guidance, it seems to imply, if my math is right, close to $520 million. So, I guess, Fred or Bryan, what are the bigger swing factors in the back half as you think about that ramp in revenue with respect to that new guidance range? And then I have a follow-up on the brand side.

[George Frederick Wilkinson:]

Sure. Let me start and Bryan will add in. I mean, I think we've walked through what we think will be the contributors. You are correct, we do have a ramp going on in second half of the year. The majority of our product launches will occur in the second half of the year. Rytary growth needs to occur in second half of the year. Conversion to Emverm needs to occur in the second half of the year. And then – obviously, Adderall share gain – regain needs to be occurring. So we're going to treat the Teva products as new launches. We're going to add that to our new launch program and we believe we are at the final stage of acquiring share from a fairly large customer on Adderall, which puts us back into appropriate share position on that product. It is a growth position in, in the second half as you'd properly identify. But I think that's the way the model drives and I think that we've got plenty of assets and plenty of opportunities to be able to get us there.

[Randall S. Stanicky:]

Okay.

[Bryan M. Reasons:]

I think the only other two growth great drivers, epinephrine auto-injector and then oxymorphone ER.

[Randall S. Stanicky:]

Got it. Okay. Thanks. And Fred, you and I had talked about this before, but on the brand side, it feels like your focus is going to shift towards BD on that front. And as you think about Impax and how you want to participate as a Phase II company focusing on R&D and progressing the pipeline forward, bringing in late-stage Phase III assets, or doing more Zomig assets that may have high return but perhaps less growth. I guess, two-part question, where is your interest and where are you seeing most of the opportunity on – between those three areas?

[George Frederick Wilkinson:]

I think we have struggled to find the perfect specialty company to buy. And I think as we've talked about this, the real issue you have is most of them will have near-term assets or currently marketed assets that everybody can get an appropriate valuation around; it's the valuation of the early-stage product we seem to cap on. So we've struggled over the last couple of years since my joining to find out right company and to be able to bring it across the transom. Our focus have – more recently and I think probably in the last year, year and a half, has been on asset purchases. Those take a little longer to do and they're fairly competitive, but we are aiming ourselves at two or three ideas right now that are very late-stage that it could bring us – it could bring across the transom that will be focused just in that area. Phase II and beyond is the right aim for us because the clinical team can carry the ball and finish the products and anything that's commercialized would still have plenty of room in fact to be able to market those so long as they stay near or on top of our call point.

[Randall S. Stanicky:]

But you're willing to take on some clinical risk it sounds like?

[George Frederick Wilkinson:]

Absolutely. I think our clinical and regulatory team has shown themselves well. We've got a Phase II program that's driving nicely. We actually ended it a little bit earlier and going to drive to Phase IIb. Main purpose of that is to make sure that we've got the dosing regimen well defined in our Phase II program as we enter into Phase III. Lesson learned from Rytary.

[Randall S. Stanicky:]

Got it. Great. Thanks guys.

[Operator:]

Your next question is from Dana Flanders with JPMorgan.

[Dana C. Flanders:]

Hi. Thanks for the questions. My first one, just on epinephrine, a very strong product for you this quarter and the past couple quarters, can you just comment on the outlook for growth for that product and where you think the potential is? And just my second one here on Rytary, obviously a very solid launch and driving good overall growth. But it looks like you need a significant ramp in sales to achieve your longer-term 2019 peak sales target. So is that still achievable in your view? And I know you gave it a while ago, so wondering if you could just update how you think Rytary can progress there. Thanks.

[George Frederick Wilkinson:]

Let me start with Rytary – I'll go backwards on this one. Yes, we still believe in the guidance of $275 million to $350 million in 2019. We do need to see a ramp and we do need to see more productivity out of the sales force for that to occur. We do see the issues that we're facing on the product and are making sure that we're focusing our attention on it. And as I mentioned, it's the general neurologists that are key and it's about simplifying the message and making this product so that it's a little more user-friendly and a little easier for them to navigate in their busy practices. So that is the focus. We're going to get some of the noise out of the way that we put there through the Emverm launch and through the disruption that we may have caused in sales force conversion. But everybody is in place now. They've been through the territory several times. They know their physician base and so now it's time to see some results from them and that's going to be the emphasis. The ramp is not outrageous to get there. I mean it's a very manageable ramp, it's not a giant hockey stick as you sometimes see in some of these processes. But the critical piece is to see some growth in the second half of 2016. As far as epinephrine, I mean, this is our backwards product. This is a product that we believe that there's a bit of an unlimited marketplace out there and really have not seen the avenue for slowing our growth opportunity. this one is totally controlled by our supply physician. And we've got several initiatives underway, many of which have been produced more availability of product than what we had originally anticipated at the beginning of 2016 in our current supply position and our current supply chain process. I also remind the group that we have initiated a project to fully automate the epinephrine auto-injector manufacturing process – a project that will take 12 months to 15 months and is well underway, we started late, late last year. So we're limited by supply. We keep getting more supply and as we bring it to market, we seem to find a home for it. So I think it's been a nice opportunity. We'll continue to grow it and we'll continue to highlight as we make kind of evolutions in both customer acceptance and secondly and more importantly in our supply position.

[Dana C. Flanders:]

Thanks.

[Operator:]

Your next question is from Elliot Wilbur with Raymond James.

[Elliot Wilbur:]

Thanks. Good morning. Just perhaps a couple of quick financial questions for Bryan, initially. I guess, thanks for the clarification on price, volume trends with respect to the Generic business over the last year and a half or so. But going back to commentary from first quarter conference call, I thought the negative impact of pricing was roughly 10% – around 10.5% and I don't know if – I'm just -- you had framed it differently or had excluded something there or just trying to reconcile the difference between that number and what we see in the table.

[Bryan M. Reasons:]

Yeah. I think the – kind of the mid-single digit that we've been saying is pulling out the effect of where competition comes in, so kind of the normal – our normal price degradation. We've always said, at least over the last year and a half, kind of, the mid-single digits around 5%. I'd have to go back to what we said in Q1. But we've been forecasting price degradation of around 5%.

[Elliot Wilbur:]

Yeah. Fair. That number seems to be consistent, I guess, it's just sort of all-inclusive number that seems to be a little bit different, but I can follow up with you on that. Then the second question for you as well, Bryan, is in thinking about sort of the $15 million shelf-stock adjustment and obviously the bulk of that is related to diclofenac. But even if I – given the trajectory of the product, even if I were to assume that maybe pricing unexpectedly changed 50% or 60% on you – in a short period of time, I mean that would suggest that there was maybe $25 million to $30 million of inventory in the channel which seems like, kind of, a high number sort of given the dynamics of what was happening to that product. So I want to confirm them. Am I thinking about that correctly? And then maybe you could just sort of address the overall business in terms of channel inventory and kind of where things stand.

[Bryan M. Reasons:]

Yeah. That's a good question and I'll start and then Fred will probably give a couple comments as well. So you have to remember, Solaraze, we went from being completely alone and supplying the entire market to getting quite a bit of competition. So very quickly what used to be – projected to be just a few weeks of inventory in the channel gets to be longer, so overall, and so that's kind of unusual dynamics with Solaraze – market dynamics. Overall, the amount of our inventory in the channel – we're under agreements with almost all our customers and I'm very comfortable that we ship based on orders.

[George Frederick Wilkinson:]

Yeah. Let me add one other comment to what the dynamics on that one is. We did see the customers acquiring product because they were unsure of supply. And I think that's their process that they generally do when they look at marketplaces that have been fairly turbulent, so – and making sure that they've supply for the customers is a critical piece. The compounding pharmacy aspect was also kind of a new piece or something different that we don't generally experience. And with one of the compounders now providing that market segment, what we found as we got to the end of Q2 is that the wholesaler pull-out reduced dramatically because they were supplying that and also now is being supplied by – directly by a third party. So that actually caused and contributed to the process that inventory tugged (49

[Elliot Wilbur:]

Okay. Thanks. And then Fred, I just want to ask a couple questions of your sales as well. Just maybe following up on sort of the capital allocation process and preference really. Obviously, you've kind of talked about looking for branded assets and especially assets for some time. And obviously those are not easy to come by. But if you look at the generic space and this probably applies to you somewhat as well, it seems like there's been – obviously, it's always an environment where there's acquisition activity – and it seems like there's been a tremendous amount of capital spent in the last couple of years by a variety of companies and ultimately the end result is basically these companies are essentially kind of left standing still. And if you look your EBITDA levels today, they're kind of what they were back in 2014 and understand that you would probably buy portfolios of products every chance you'd get. But now you're looking at debt to EBITDA of around 2.5 times. Maybe you could spend another couple hundred million dollars on generic assets and that might kind of bring you up to that 4X level. So I'm just wondering if you've – if you're – sort of looking at the bigger picture here and now thinking that maybe we need to really kind of like look more intently for kind of longer duration assets versus what seems to be an increasingly short duration dynamic with a lot of these acquired generic products.

[George Frederick Wilkinson:]

Yeah. Those are the wrestling matches we have all the time here within the company. I think you're right on target with that. Obviously for us, with no approvals occurring while we're under the Warning Letter, we had to go by our growth assets. And we really didn't have much opportunity for that and we did that diversification through acquisition of Tower, acquisition of the – we started with the acquisition of the Teva process before the Warning Letter was lifted and obviously then partnering up on R&D projects such as the TOLMAR relationship. So we were looking outside the company for what would be our current and near-term future growth. With the R&D program and – with the Warning Letter lifted now, the R&D program can be productive and should result in approvals from our own group. And you're seeing that shift – you're seeing that shift in what we're spending on our own R&D. I think you'll probably see that shift in where we allocate capital to next acquisitions. So generic acquisitions are opportunistic, brand acquisitions, in my opinion, are very, very strategic and a little bit long term. So I think we're going to participate in both of them. It's been my experience over way too many years that if you say, I'm shifting fully to brand, then the next acquisition would be a generic because that would be the one that would come along and vice versa. So we're leaving ourselves open for both of those, but I think do recognize the opportunity that brand processes do give you a little more long-term revenue and earnings growth.

[Operator:]

Your next question is from Louise Chen with Guggenheim.

[Unknown Speaker:]

Hi. This is Ana (53

[George Frederick Wilkinson:]

Yes, besides 2Q, this may be the more disappointing communication that we have on almost all the calls here, so we have not found a partner or, perhaps, partner to bring across the transom on NUMIENT, which is the name of Rytary outside the United States. That's almost exclusively driven by the pricing pressure that the European marketplace would put on a carbidopa-levodopa-containing product. So it's a difficult sell for anybody to make. And it only would fit if somebody had an existing portfolio of products and needed an add-on into their mix. We clearly have no lack of effort in this area. We do have a couple of partners that we still are in discussions with and are not kind of expanding ourselves out to looking at some of the other geographies beyond mainland Europe and believe we still will bring one across the transom, but this has been a disappointment. We have an approval and have not found a partner and that's something that we still continue to work on. But it clearly won't be a large dollar contributor or revenue generator for us. I think the goal is to find a home for it so it can be appropriately available for patients outside the United States.

[Unknown Speaker:]

Thank you.

[Operator:]

Your next question is from Jason Gerberry with Leerink Partners.

[Jason M. Gerberry:]

Hi, good morning and thanks for taking my question. Just two for me, first actually for Doug, I wonder if you can comment on sort of what attracted you to the position at Impax and do you sort of still bring your macro view of extended topicals and 505(b)(2) products as growth drivers as you think about the Impax portfolio? And then my second question on the Adderall XR situation, what specifically has been kind of driving the delay? Is it DEA quota issues, supply issues? And this customer win that you've got, is it reasonable to think that you can get back to like a 20% share threshold? Thanks.

[Douglas S. Boothe:]

Hey, Jason, good morning. Yeah, despite a challenging second quarter which we've announced here today, it's absolutely exciting times for Impax. The near-term catalysts for the Teva/Allergan divested assets certainly provide an opportunity for our team to expand our growth and our presence in the marketplace. Also certainly very promising near-term launch pipeline, both of approved products as well ones that we're working very actively towards final approval, provide opportunity for growth for the business. A lot of pent-up ANDAs, if you will, over the years with the Warning Letter situation, as well as really yield from our internal and third-party R&D activities as well, as Fred described, the recently acquired products are effectively new launches for us. So we're looking at commercial opportunities for those, as well as certainly the reinitiation of the R&D activities. You looked at portfolio – we're certainly looking towards extended value generics, which, of course, everybody is as well and that includes both extended-release solid oral dose as well as alternative dose forms. We have several partnerships as well, as well as look at our own internal possibilities for capabilities expansion there. And last one is both the success of the brand as well as success of several of our high-value generics is providing opportunity for increased investment, which you see in our R&D activities, our partnership activities and our continued targeted M&A activities. So certainly, again, challenging times coming in, but I was well aware of that, if you will. But certainly looking forward, working with the team to broaden and expand our capabilities and our market presence. Regarding Adderall, I think a lot of that – if you look at the players in the market, were really consumed in the Teva/Allergan divestiture process. Those are two of the larger players, so I think probably great customers as well. We're trying to wait for the timing, so which is why we've been very active. And with some of the recent activities, you should see our share increase there. It's not really a quota issue at this point.

[Jason M. Gerberry:]

Okay. Thanks.

[Operator:]

Your next question is from Marc Goodman with UBS.

[Ami Fadia:]

Hi. This is Ami on for Marc. A couple of questions, first of all, could you give us a little bit more detail around what the hurdle around Rytary with respect to gaining more adoption and also the expanded sales force, are they all going to focus just on Rytary going forward or are they going to switch back to the other franchise? And I'll come back with some more questions.

[George Frederick Wilkinson:]

Yeah. Michael, do you want to handle this?

[Michael J. Nestor:]

Yes. So, relative to some of the obstacles that we're dealing with, the dosing regimen for Rytary relative to conversion from immediate-release carbidopa/levodopa is a little more complex. It's not second nature, if you will, to the general neurologist community. So we're working to simplify that dosing regimen. The issue of co-pays, so as Fred indicated earlier, about 88% of prescriptions written for Rytary are approved by both Medicare Part D as well as the commercial managed care sector. But the co-pay that patients have to pay are higher than what you get in essentially a genericized immediate-release carbidopa/levodopa marketplace. So we're working to help patients better be able to equalize, if you will, the co-pay differential. And the reality of smaller offices dealing with some of the prior approval documents that have to be filed for managed care, plus medical exception forms, the degree to which we can help offices be able to navigate that process, is what we're also turning our attention to. And relative to the refocusing of the sales force on Rytary from Emverm, it will be both to Rytary and Zomig. Very clearly first priority will be Rytary for the sales force followed by Zomig, where it's appropriate, depending on the target physician.

[Ami Fadia:]

Got it, thank you. Then I think the next question sort of related to this is the IPX023 (sic) [IPX203] sort of in the context of what you've seen play out with Rytary, where do you see the value proposition of 023 (sic) [IPX203] and do you think that the incremental on-time provides some sort of, say, a commercial hope for the product. And then I have a last question.

[George Frederick Wilkinson:]

Michael, do you want to do that?

[Michael J. Nestor:]

Sure. So relative to IPX203, relative to the preliminary results from the Phase 2a trial, we're very excited about them in the sense that we've seen an increase in on-time and this is good on-time without dyskinesia over immediate-release carbidopa/levodopa between two hours and three hours and an hour over Rytary. So this is, in our view, based on the study data that we have at this point, a very significant accomplishment because we're actually getting to the point where we will be able to extend the time between doses for patients and still enable them to have control over their motor symptom issues. So we're very much looking forward to getting into the Phase 2b, which is a multi-dose trial in advanced Parkinson's patients. And I should note that the results that we saw with the Phase 2a were with advanced Parkinson's patients. They were not in healthy subjects, so that also makes us quite excited.

[George Frederick Wilkinson:]

Yes. And then maybe let me add on and simplify the value proposition. The goal here would be if the PK program that we did on a – and the results from the single-dose tell us what the curve looks like with single administration, that we need to go on and do multiple administrations and see if we can achieve a large percentage of the patients at either BID or TID dosing. If you get there, now you have the simplified dosage regimen, you have a fairly easy and simple conversion process and you go back into a normal dosing regimen that most pharmaceutical products utilize. That's the proposition; that's what we need to prove out in the Phase 2b and that will be the foundation for the dosing regimen in the Phase 3 program if we're able to achieve that.

[Ami Fadia:]

Thank you.

[Operator:]

Your next question is from Sumant Kulkarni with Bank of America-Merrill Lynch.

[Sumant S. Kulkarni:]

Good morning. Thanks for taking my questions. I have three fairly quick ones. First, on the generic side, assuming you have the revenue outlook range right now, how de-risked (1

[George Frederick Wilkinson:]

Yeah. Great question. Obviously, that's that mix between share and price that you always evaluate as you entertain opportunities with the customers. We believe that both of those products have significant room to be able to absorb any kind of price alteration and adjustments. It was built into our model as we did the acquisition – final acquisition process from Teva. It's always been built into our model on Adderall because we knew Sandoz was coming sometime in June; there was a date certain. So this has been one of the easier ones to model as far as what it should look like. It's been just a little bit harder for us to gain the share back as – than we anticipated. And that felt like it was – where it's kind of hanging behind all the activities going on with the Teva transaction.

[Sumant S. Kulkarni:]

Second on the brand side, you have a fairly disparate collection of assets right now. At what point would you say that you have a progress report that is good enough for you to figure out whether you are on track to achieve the Rytary sales guidance longer term or would you consider culling some of the products in the brand to get more focus?

[George Frederick Wilkinson:]

Yeah. So we are focusing. I think you caught on exactly to where we're going. We launched the Emverm product in the back half of the bag using the expanded sales force because the non-personnel programs were not ready and were not available to go out into the marketplace. So we created the awareness that we were hoping to create by just people – by those feet on the ground and going into those offices. The non-personnel programs will be much more efficient on driving message and the targeted strategy to the key audience that prescribes this. So that gets that noise out of the backend of the bag. And now the sales force who has made their rounds through the – their target audience, should have better access to and better knowledge of what they need to do to drive share with their neurology targets. The key for us is getting growth out of the general neurologists. We're getting good take and good share growth out of the specialists. Actually it's the reports that you all see and do market research on where they are saying this is a good product and is positioned well. It's the general neurologists that we need to grab a hold on because they've been lagging behind what our expectations are. And I think part of that is the complications of the message on dosing which we're simplifying. I think a lot of it is base time in front of the doctor, so that's why the additional representatives spending more time there. And also they don't have the back-end office staff that assists in many of the processes of getting patients onto brand products in a heavily genericized marketplace. So those are the approaches we're taking. We need to see a rampant third quarter and fourth quarter and we would expect that. If we don't see that, we'll be making a shift at the end of the year. If we do, then we'll sitting right on top of where we are.

[Sumant S. Kulkarni:]

Thanks. And last one for Bryan. Sorry if I missed this, but could you comment on the normalized cash flow generation capability of the business?

[Bryan M. Reasons:]

Not – we typically don't give projected operating cash flows. But clearly, the – bringing the Teva products in really helps not only the margin, but the operating cash flows as well.

[Sumant S. Kulkarni:]

Thank you.

[Operator:]

Your next question is from Gregory Fraser with Deutsche Bank.

[Gregory D. Fraser:]

Thank you. This is Gregg Fraser on for Gregg Gilbert. And I know it's probably too early to talk specifics for 2017, but are there any qualitative comments that you can make on how you're thinking about top-line growth potential for the base business in 2017 excluding the Teva products?

[George Frederick Wilkinson:]

I think you started with the right statement, that it's a little early to start to talk about 2017. But I will point you to the R&D chart because that really is the key to the future growth of the organization, is looking at the opportunity for a Welchol, a Renvela, a Vytorin which is date-certain and now generic Concerta as well as Aggrenox. Those are some pretty good launches that will land – that we've guided out to 2017. And so hopefully, those – if those are fruition, they'd clearly replace any decline in revenue that's going on due to new competition on our existing line.

[Gregory D. Fraser:]

Got it. And on epinephrine, how much share of the market can you support with your current capacity and what do you expect that to go to once the manufacturing expansion is completed?

[George Frederick Wilkinson:]

We do keep testing ourselves on that one. I think we've guided at the beginning of the year that we hope to gain about one share point per quarter. That looked like what our supply position would be able to provide us. And I think at that time, we might have been at 3.5% to 4% market share. When we bought the product back through the Tower transaction, it was just on – just about 2%-2.5%. They have done a very nice job of creating some better efficiencies within the process and greater output from our existing manufacturing process, which is a bit cumbersome. And we actually have got ourselves up to over a 7 share, which means that we've been growing at more like 2, 2.5 share points per quarter. We continue to test that and we continue to push it. So we think there's probably an opportunity to approach double digits somewhere near the end of the year, beginning of next year. As far as the new supply chain position, again, that's – we think we can gain probably a 5X on our supply based on the fact that this will be a fully automated position and will be end-to-end capability of producing, the pens, the components and the active product.

[Gregory D. Fraser:]

Thank you.

[Operator:]

Your next question is from David Buck with Northland Securities.

[George Frederick Wilkinson:]

Can you repeat that please?

[Operator:]

It's from David Buck with Northland Securities.

[Unknown Speaker:]

Hi. This is Mike (1

[George Frederick Wilkinson:]

Yes. Let me kind of address that and then maybe you can do a follow-up. Yes, obviously, well, these are our high focus products for us. We do spend as much time and as much opportunity as the agency will give us in discussions. The pads on those products, we've not mentioned where they are, but we have guided both of those not in 2016 and moved out into 2017. We're very aggressively working them. We are building supply for launch of both of those so that we can narrow that gap between approval and efficient launch and very bullish on the opportunities for both of these products.

[Unknown Speaker:]

Got you. And then you've mentioned some of the key generic pricing impacts. Can you just talk about, like the overall company, the pricing environment for the remainder of 2016 and into 2017?

[George Frederick Wilkinson:]

I think we've kind of gone through most of those. We expect Solaraze to settle, generic Solaraze to settle. We do expect probably a little pressure on Adderall XR, as Sandoz makes its way into the marketplace and as we work hard to reacquire share. Our anticipation is that we don't expect any price pressures on either epinephrine or oxymorphone is really the only product out there. And I think the rest of them, we're just seeing a little nibs and drabs of on this as market share shifts occur and as people defend and try to acquire share and that goes to kind of the mid-single-digit price erosion that you're seeing across most of the generic industry.

[Operator:]

And your final question is from Gary Nachman with BMO.

[Gary Nachman:]

Hi, Fred. I jumped on late, so if you addressed this, I apologize. But on the generic pipeline, could you identify or quantify the magnitude of the delays there for 2016. And I'm curious how many target action dates you guys have. If that number has been increasing? And then if there is continued pressure on the top line in generics, would you guys consider some sort of restructuring at some point on the cost side?

[George Frederick Wilkinson:]

Obviously, we are always evaluating cost – I would like to do the last one first. We're always evaluating cost efficiencies. You've seen us do some of that in some of the announcements, the close of – the plant close of Middlesex manufacturing facility, the close – previous close of our packaging and outsourcing of packaging, all are designed to get greater efficiencies in process. The only probably area where we are spending more money than we've spent before is in our generic R&D, because those affect (1

[Gary Nachman:]

Yeah. If you identified or quantified the magnitude of the delays. For 2016, there was some stuff that was deferred?

[George Frederick Wilkinson:]

Yeah, we haven't. There's two issues that are facing there. We are not getting a product that's coming from a third-party manufacturer, that was originally baked into our guidance and that's the simple supply issue for the third party. The rest of the delays are essentially a bit self-inflicted in that this is too great a gap between the time of approval and the time that we launch. We're working on that as we go forward. It's really part of the drive to make sure that we're ready with generic Welchol and with generic Renvela. I think it's really a side effect of having existed under a Warning Letter and not preparing for launches as they come to fruition and not doing some of the at-risk investment that you might do normally. So we're taking that under advisement. I know that Doug has this clearness sites and will be focusing on making sure that approvals will create launches; that's the critical piece. We've had a few delays. It's not a large number, but it does move things out of it.

[Gary Nachman:]

Okay. And what about the target action dates? Is that something where you've seen some movement at the FDA? If that number has been increasing you?

[George Frederick Wilkinson:]

Actually, we've been very pleased actually with the responses that we're getting. Almost all of our files right now, we've been getting responses prior to target action dates and whether that means approvals and/or IRs. They seem to be coming a little bit sooner than the – on the actual target action date and then obviously reestablish an action date if it's an IR as we go back in. A little bit greater than 50% of our products do have target action dates. The mix keeps moving, as we have files going in, acquired products being brought into the mix and all that. And we'll give greater polarity on that as we get closer to the end of the year.

[Mark J. Donohue:]

Thank you, Gary. And that includes our call for today. If you have any follow-up questions, Investor Relations will be available to take those. Thank you again and we'll speak to you soon.

[Operator:]

This concludes today's conference call. You may now disconnect.