Amphastar Pharmaceuticals, Inc. (AMPH) Earnings Call Transcript & Summary

Greetings, and welcome to the Amphastar Pharmaceuticals Inc. Business Update. [Operator Instructions] Please note that certain statements made during this call regarding matters that are not historical facts including, but not limited to, management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the section titled Forward-Looking Statements in the press release issued today in the presentation on the company's website. Also, please refer to our SEC filings, which can be found on our website and the SEC's website for a discussion of numerous factors that may impact our future performance. We will also discuss certain non-GAAP measures and important information on our use of these measures and reconciliations to U.S. GAAP may be found in our earnings release. Please note that this conference is being recorded. Our speakers today are Mr. Bill Peters, CFO; Mr. Jacob Liawatidewi, EVP of Corporate Administration Center; Mr. Dan Dischner, SVP of Corporate Communications; and Mr. Tony Marrs, EVP of Regulatory Affairs and Clinical Operations. I will now turn the conference over to your host, Mr. Dan Dischner, SVP of Corporate Communications. Dan, you may begin.

Thank you, Daryl. Good morning and thank you all for joining us. Today, we are excited to announce that Amphastar has entered into an agreement with Eli Lilly and Company to acquire BAQSIMI, the first and only commercial intranasal glucagon approved to treat low blood sugar emergencies in people with diabetes ages 4 years and above. This acquisition aligns well with our core strategic vision of strengthening the portfolio of our proprietary product offerings and enhancing our diabetes portfolio. Amphastar has always taken a disciplined approach when looking at potential acquisitions. We seek to develop or acquire assets with potential for growth that complement our key focus areas. With that said, BAQSIMI aligns well with our corporate strategy as it further enhances our diabetes proprietary and intranasal categories of our portfolio. Based on [ Equivia ] estimates, approximately 7 million people are treated with insulin, and only about 10% of these patients currently utilize glucagon. We are optimistic about BAQSIMI's strong growth potential and are confident this product will create significant shareholder value. Equally important, we are excited for BAQSIMI as our corporate footprint will expand into 26 countries. This acquisition will allow us to form a branded product commercial team, which will be used for future proprietary products. Amphastar expects this dedicated commercial investment to enable more people on insulin to be prepared with a glucagon rescue treatment for severe hypoglycemia. We believe that acquiring BAQSIMI will accelerate our strategic focus on diabetes care, proprietary products and alternative delivery systems. With that, it is my pleasure to turn the call over to our CFO and Executive Vice President of Finance, Bill Peters; our Executive Vice President of Corporate Administration and Marketing, Jacob Liawatidewi; and Tony Marrs, the Executive Vice President of Regulatory Affairs and Clinical Operations, to discuss further the details of the transaction.

Thank you, Dan. Yes. We're very excited about this transaction today. So we wanted to walk through a few slides that we have on the investor site with you this morning. So first of all, the terms of the agreement, we are going to be paying $500 million for this product in cash at closing plus another $125 million in cash 12 months after the deal is closed. Additionally, we have contingent cash payments of up to $450 million that are going to be based on sales milestones. There'll be one $100 million payment if the annual sales reach $175 million and up to 2 $100 million payments for each year in which the net sales reached $200 million in the first 5 years of the deal. Additionally, there will be one $150 million payment if the total net sales in the first 5 years following the closing reached $950 million. Additionally, Amphastar is going to assume certain liabilities from a party that literally purchased this product from in the past. We think it's unlikely that we will hit those milestones, but there's potentially up to $125 million in payments if net sales reached certain thresholds.

This transaction fits well into our corporate strategy. With BAQSIMI, we expand our commercial proprietary product offering. BAQSIMI is the first and only approved intranasal glucagon with IP protection. It has growing sales and strong gross margins. It expands our diabetes portfolio, which is one of our strategic therapeutic focus, expands our commercial internasal portfolio, which we believe it's one of the important route of administration for patients' well-being. With this transaction, we'll expand our international footprint in 26 countries. We will form a commercial sales team dedicated to BAQSIMI, which will provide a base for our future branded products. With this transaction, Amphastar will receive a BAQSIMI approved U.S. NDA for U.S. distribution. BAQSIMI approved marketing authorization in 26 international markets, which include Canada, Germany, France, Italy and Japan. Intellectual properties, which will include Orange Book-listed patents, trademarks and domain registration. And we will also receive manufacturing equipment. We'd like to talk about the patient impact with this transaction. We believe glucagon used for treatment of severe hypoglycemia is still underutilized even with the recent growth of glucagon use. The American Diabetes Association recommend that patients at increased risk for Level 2 hypoglycemia to have glucagon available. We will focus on BAQSIMI by having a dedicated commercial team to enable more patients that have increased risk to be prepared with having glucagon on hand. Approximately 7 million people in the U.S. are treated with insulin and only about 10% of these patients utilize glucagon. BAQSIMI is currently the category leader for ease in patient use for glucagon. It is the only non-injectable glucagon, passively absorbed in the nose, which provide lower barrier for administration than in injection. BAQSIMI is ready to use with no reconstitution required or priming. Portability. BAQSIMI is smaller product size than other glucagon products, with wider temperature storage than other glucagon products. BAQSIMI is an antihyperglycemic agent indicated for treatment of severe hypoglycemia in patients with diabetes ages 4 years and above. In a simple nasal administration, no inhalation required. It's a single fixed 3-milligram dose. This is just a quick overview of the novel glucagon product landscape besides BAQSIMI. The other offerings are in injection form such as Gvoke and Zegalogue.

One of the reasons why we like BAQSIMI is that it has strong and growing sales since it was launched. As you can see from this chart, sales in 2020 were at $76 million worldwide and has grown until they were hit $139 million last year in 2022. We believe that this growth trajectory will continue this year as well. In fact, we have a projection that sales will reach $145 million to $155 million on an annualized basis in 2023. We believe that peak sales will reach $225 million to $250 million. We also want to add what we believe that this will earnings for Amphastar. On an adjusted basis, we believe that we will increase our EPS this year by $0.25 to $0.35 on an annualized adjusted basis or -- and what I mean by annualized is that if we have this for 6 months of the year, it will be about half of that amount. At a peak, we believe this product will add $2 to $2.50 to our adjusted EPS, giving us strong sales and strong EPS growth for the company is one of the reasons we decided to do this transaction. Turning to financing and timelines. We are going to be using a $500 million loan and a $150 million line of credit to help finance the transaction. We have committed financing that was arranged by Wells Fargo Bank, Capital One, JPMorgan Chase Bank, Fifth Third Bank, East West Bank, Cathay Bank and CIBC Bank. It's a very strong lineup of banks that are very committed and very capable of lending us the full amount of money that we need. We're going to be paying an interest rate based on SOFR, with the spread based on net leverage margin. So if we're able to reduce our debt during the time that we're holding this, our interest rate will drop. Additionally, we're going to be using cash on hand to retire our existing term loan that's out there right now. As far as the timeline goes, we believe that this transaction could close in the second quarter or third quarter of this year, subject to customary closing conditions, including antitrust regulatory approval, which we believe will be the thing that impacts the timeline of this transaction the most. That said, that ends our formal presentation. We're going to take some questions and answers now from anybody that has them. So Daryl, we're ready to deal with that.

[Operator Instructions] Our first questions come from the line of Elliot Wilbur with Raymond James.

Congratulations on what is certainly the most significant transaction in the company's history. First question, just for Bill, more specifically on the numbers. With respect to the peak sales projections that you've provided, are those just Lilly internal forecast that you guys have adjusted based on your chance to look through the numbers and some of your own assumptions, are those external numbers? They're reasonably consistent with [indiscernible] expectations, I guess, is sort of why I'm asking. And then, can you just walk me through the adjusted EPS impact that you're expecting from the product at peak? If I think about $2 in incremental EPS, that's about a little over $100 million in net income, which will be about $140 million in pretax income, which translates into about a 70% contribution margin, which seems very high. So I'm not sure if I'm missing something in those numbers or if you're, in fact, excluding the incremental interest associated with financing the product, but just maybe help me a little bit on the math there. Then I do have a follow-up, and maybe I'll stop there.

Yes. So based on the peak sales, we have taken their estimates and then we run our own estimates on that based on what we believe we can grow the product at. And I will say that we had slightly different opinions on what the product would do than they had based on their confidential information memorandum that they put out. So we were -- these are based on our forecast. As far as the peak EPS goes, just to walk through the adjustments. So we're going to be excluding the amortization. So that's the real adjustment there. We are taking into account the interest payments on this, but we believe that by the time this deal is at that peak sales, that we'll have earned enough cash flow from this to pay down the debt. So there's no more interest at that point when we're hitting that peak EPS number. So that's based on the fact that we'll pay down the debt by then.

Okay. And just the follow-up, just from a high level, help us think about your confidence in and just your assessment of the regulatory risk associated with the transaction. Obviously, you will have a significant share of the glucagon market post the close of this deal, something close to 65% or even greater. Different products, different formulations probably appropriate for different patients. But obviously, that's a fairly high degree of concentration. And despite the fact that you've been a consistent supplier in a market that's losing supply, always seems like the regulators would like more players in the market rather than less. So just help us, from a high level, think about how you guys -- or your level of comfort, I guess, in terms of not encountering significant regulatory hurdles in terms of closing the deal.

Yes. We view our current glucagon injection and BAQSIMI is in total 2 different markets. So our current glucagon injection, while it's also marketed for hypoglycemia, a lot of primary use right now is in the hospital/clinics market, where it's being used for a diagnostic aid. And we do not currently market our glucagon injection into the HCP calling points. Versus BAQSIMI it's -- the only indication it has is for hypoglycemia. And it has 2 other novel glucagon competitor as we provide in the slide, which is Gvoke and Zegalogue. So there are still multiple players. And for the glucagon injection itself, there's also multiple players, namely Fresenius and Novo Nordisk for the legacy glucagon injection. So that's the way we see the market there, multiple players still in the market even with this transaction.

Our next question is come from the line of David Amsellem with Piper Sandler.

So just had a couple. Number one is, as you think about the legacy injectable product, is it fair to say that you're mainly going to be focused on the institutional setting? In other words, distribution of the product as a diagnostic age. And as the corollary to that, how do you think about that the use of that additional capacity that you built out for injectable glucagon? And then secondly, maybe I missed this, but can you just talk about BAQSIMI manufacturing and the extent to which you're going to bring that under your umbrella and the extent to which potentially you could see margin efficiencies from doing so over time?

Yes. So I'll take the first question. So yes, for our glucagon injection since it was launched back in February 2021, we always have been marketing it as a generic products. So the way we basically position the product, it is a generic glucagon injection. So we put in the contracts with the regular institutional, with the retail pharmacy as a generic glucagon. So with the current glucagon injection, market changes with Boehringer Ingelheim leaving the market. So we view that products will continue to grow in the institutional side. So that's where we position our glucagon injection. And Bill will answer the second one.

Yes. As far as -- I'll first talk about the capacity that we have internally for making injectable and that, yes, we doubled our capacity at the end of the first quarter this year. So we're making a [indiscernible] glucagon and seen a definite increase in the advance of that. But on the BAQSIMI product right now, it's manufactured by a contract manufacturer, and it's packaged by Lilly. At this point, we are not going to manufacture the product ourselves. We would plan to keep it at the existing contract manufacturer who's doing a great job with it. And we're evaluating the packaging function to bring that, so we could have that done by the third party as well.

Okay. If I may sneak in a follow-up, just with this kind of transaction, I mean, now that you have commercial capabilities or building commercial capabilities focused on, I guess, primarily endocrinologists, do you start to think more broadly about building out an endocrinology therapeutic vertical? Just what's the kind of strategic thinking here going forward?

Yes. No, absolutely, Dave. That is our plan. So basically, we plan to build a brand-new commercial team that focus on endocrinologists and pediatric endocrinologists. And just to add, with our -- this transaction doesn't really impact our glucagon injection. We are continuing basically selling that products with no change.

And does -- player into the commercial organization?

Sorry, could you repeat that? I missed that.

Yes. Does that mean that you're looking to layer in additional endocrinology-focused product into that commercial organization? That's what I was kind of getting at.

Yes. Yes. No. Definitely, I think diabetes therapeutic has been our focus, I think, in the past couple of years with our several insulin portfolio. Even though those -- our focus has always been interchangeable, but this commercial team, definitely will be helpful on that.

Our next question is coming from the line of Serge Belanger with Needham & Company.

I'd like to also offer my congrats. I guess the first one, can you break down the sales of BAQSIMI between ex-U.S. and U.S.? And secondly, on the commercial...

About 80% U.S, 20% ex-U.S.

And on the commercial front, maybe highlight what kind of effort Lilly had behind this product and what you envision your commercial footprint to look like?

Yes, we cannot really talk about what Lilly does on their side. Obviously, they have multiple insulin products, so this will fit well into their current commercial team. But one thing to note, this product was launched around July 2019, right before the COVID hit. But then obviously, COVID hits, there's no one can go into the office, but we are very excited even with those restrictions during that time. As you see the product sales continue to grow year-to-year. From our side, our commercial team will focus just on BAQSIMI. So that's why we believe this will help with the patient's utilization, because we'll be very focused on this product.

Our next questions come from the line of Tim Chiang with Capital One.

Maybe you could talk a little bit about timing as to when you'd be able to transfer manufacturing from the [ CRO ] to your own facilities? I mean, is that a 2-year type of timeline or longer? And then, could you talk a little bit about what the gross margins on BAQSIMI are at this point?

As far as transferring the manufacturing, we're not planning to manufacture, it's going to stay at the existing [ CMO ]. We're just going to evaluate the packaging, though, whether that will be brought in-house or whether that will also be done by a third party as well. So we're -- I'm taking a look at that. We haven't specifically said what the gross margins for BAQSIMI are. It is a relatively expensive product making that. It's a dry powder products, so it's a little bit more complicated than most products. And also the device is very specific for this. And it's -- the device is definitely one of the things that -- and we also have an exclusive license to that device right now. So we're paying a little bit extra to get that exclusivity for that. So the gross margins are branded-level gross margins. They are well above what our corporate gross margins are today, but they're not as high as a branded pill might make, kind of frame it within that context.

And maybe just one follow-up. I think the guidance you guys gave for BAQSIMI sales this year, $145 million to $155 million, I guess that reflects what, 4% to 12% year-over-year growth. I mean, 3 years, this product has been on the market, do you think you can turbo-boost that growth like in '24, '25? Like what do you see really the long-term growth rates for a product like BAQSIMI?

So yes, for year-over-year growth, there's multiple factors to it, right? Basically, I don't think we provide guidance on what's the growth year-over-year.

Yes, we'll get back to you into it. So we do believe it's going to be in that range. And we're pretty comfortable -- we're very comfortable in that range. And part of it has to do is the transition this year, but then we'll have our focus back on it. But we do believe we will grow this product. And it's just -- it's not going to be continue, I'll say, long into the future with a double-digit growth rate, but it's something that we do think that we can have a double-digit growth rate at some point on this product.

And maybe just one last question. It seemed like when you guys had launched the injectable glucagon a couple of years back, Lilly was losing a lot of share on their brand, and then they started to promote BAQSIMI as sort of their brand. And now you guys are acquiring BAQSIMI. So I'm sort of wondering, will there be some cannibalization that might happen just because you're selling your own injectable glucagon? I know you guys have kind of commented that you're really focused on 2 different markets, but I just wanted to get clarification on that.

Yes. Cannibalization of the legacy glucagon injection will happen either way with the 3 novel glucagon right now in the market, BAQSIMI, Gvoke, Zegalogue. So that's something that is going to happen either way. And for us, we'll just continue focusing on our own glucagon injection into what we could control, mainly the institutional market with diagnostic aid.

Okay. Great. Congrats on the deal.

Our next questions come from the line of Elliot Wilbur with Raymond James.

Just a couple of quick follow-ups here. First, for Bill. When you were discussing the contingent milestone payments, I believe you suggested that the $125 million potentially payable to a third party was unlikely to be hit. But in looking at the contingent payments as part of what could be due, Lilly, those look like there's a reasonably high probability that those, in fact, will occur, at least based on the peak numbers that you've provided. So I just want to make sure and confirm that when you said it was unlikely that the payment will be hit, that in fact, referred to the third-party payment. Second question, can you just talk a little bit about the IP estate here? There's IP, looks like there's 3 Orange-Book listed patents 2036 through 2039. I have strong suspicion, you guys probably looked at this from a generic angle at some point in time. And obviously came to conclusion that you wouldn't be paid $1 billion for the asset if you thought there was a pathway to market in the next 3 to 5 years. But how are you thinking about sort of the defensibility of that 2036 patent, and just sort of a likelihood, at least from your perspective, that somebody could at least emerge with a filing in a Paragraph IV challenge sometime during your ownership of the asset?

Yes. As part of our due diligence, we looked at the Orange-Book listed patents. As you mentioned, the 2036 expirations, that is the formulation patent. So we feel confident that we'll be able to defense that against a generic entry or Paragraph IV certification. So I'm not sure we could discuss.

I'd say -- the other thing I would like to add that tails into this, is that we -- when we saw this product come out, we did think it was a very complex product, and we thought it would be very difficult to genericize. So this is a product where there's always a chance that someone is going to come out with the Paragraph IV filing. We don't know if they will or they won't, but when we took a look at the science behind this and what you needed to do to get this product made and the technology needed to manufacture it, the device, everything together, we thought as something with -- that would be very hard for people to genericize. And we're in the business of -- right now, we have been genericizing some of the most complex products out there, and we thought this was very hard. So this is one of those things where we think that it's likely that this product will have a very long life to it, and that's one of the reasons why we like it. We don't think it's a 5-year product, we think it's a very long-life product for us.

Okay. One last question, if I may. Do you -- have you had a chance to really kind of dig into sort of the source of Rx volume for the product? And I'm just trying to get my arms around how often, in fact, glucagon is actually utilized as a rescue medication. I know with EPIPEN, it's prescribed, it's carried around, but no one ever really uses it. There's never really any refills kind of within that 2-year expiry period. And I'm just wondering on this product, it seems like there is more actual use of it. And I'm just wondering how successful Lilly has been in terms of getting patients after the expiration of the initial script to actually refill versus the product just actually being utilized as a rescue agent.

We don't really have a concrete data on that, but our understanding is the product is being used by patients, and then they refill the products. I think that's one of the key for these products is the ease of use where the barrier is a lot lower compared to injection where you actually have to perform the injection versus this is a passive administration that can be performed either by the patient or the family members of the patient.

That said, there is a large seasonality to this product and similar to EPIPEN and that you see back-to-school timeframe has a big surge when sales are made. So you'll see the -- they pick up a lot in the August/September timeframe. So there's definitely that component of people going back to school, their product -- something did expire, they get the new script for it. So there are -- there is that component to it.

There are no further questions at this time. I would now like to hand the call back over to Dan Dischner for any closing remarks.

I want to thank everybody for joining us today. We look forward to updating you on the performance of this product and all of our other products in our upcoming earnings call. Have a nice day.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.