Amphastar Pharmaceuticals, Inc. ($AMPH)

Going here with our next company presenter at the BofA Annual Healthcare Conference. My name is Jason Gerberry. I cover pharma and biotech at BofA, and I'm pleased to be introducing Amphastar Pharmaceuticals. And joining us from Amphastar we have Bill Peters, CFO; and Tony Marrs, Executive Vice President, Clinical and Regulatory. So gentlemen, thanks for joining us.

Thanks for having us. .

So maybe let's -- where do we start? Coming out of the first -- our first quarter of the year, maybe what's surprised you with the performance of the business relative to the start of the year outlook? And the good and the bad, and then we can kind of dig in from there.

Yes. So when we take a look at where we thought we'd be at the beginning of the year versus where we end up at the end of the first quarter, I think the biggest surprise was the impact of the double discounting that we had from the 340B programs on BAQSIMI. As we mentioned on our conference call, that's something where people are buying the drug at the mandated lowest price for the 340B hospitals and then still collecting a rebate when they issue it to someone who is -- has insurance coverage. So they're not really supposed to be doing that. So that was the biggest change that reduced the BAQSIMI sales significantly from where we thought they would be in the quarter. But we've taken some steps to alleviate that pressure, beginning -- at the beginning of May, we engaged an external firm to adjudicate those claims and to validate them so that we believe that will take most of those claims away that were not appropriate. Additionally, on May 1, we also -- we implemented a 3% price increase on BAQSIMI. So that would also alleviate some of that pricing pressure as well.

Okay. So on some of the BAQSIMI dynamics, can you just unpack a little bit how much of that is just kind of near-term structural dynamics, timing on when do you think that -- those operational issues can get sorted out. I think maybe you mentioned somewhere in the 6- to 12-month time frame. Is that a good assumption?

Yes. So we think that some of these items, we think should be alleviated very quickly because of this adjudication process. They might not all happen overnight, and we're not sure that we stop 100% of them, but we do think that we get most of them taken care of. And remember, this is a problem that's across the industry. So this is something that's not just happening to us, but has happened to other players, but it just started happening to us, and that's why we are taking the actions now. But on the positive side, we did see script growth in the quarter, strong script growth, and we had an 8% increase in units. So we believe that if we can stop this pricing behavior then we can return to growth for the product for the rest of the year. And that inflection point really, like I said, happens around May 1. So the second quarter will still have some of the problems that we had, but we believe that within a couple of quarters, we should be back to where we were on -- or most of the way to where we were on the pricing.

When you do get resolution on this front, like what gives you confidence going in, like, say, 2027 that this sort of action wouldn't be repeated on the part of these 340B institutions that the mitigation steps that you're taking will infect kind of normal behavior on a go-forward basis, say, 2027 plus.

Well, because we're engaging a third party to adjudicate and validate the claims, and we're going to continue to engage that firm on an ongoing basis. So we do have a small increase in G&A costs because of that, because of this behavior. So we'll have to take that -- we'll partially offset the sales. But we believe that with that firm in place, they can stop most of the bad behavior. So we think that we will be able to return the product to growth next year.

I see. And so really, we should expect kind of normal volume trends in terms of tracking this. It's just more when we get to kind of the quarterly updates over time, there's more normalization in the revenue recognition.

That's right. And you're right there and also to unpack that a little bit, there is a revenue recognition issue because when we take a look at the end of the quarter, we're assuming a certain amount of inventory in the channels, and we have to accrue for the expected rebates and discounts that we're going to have on those. So when we take a look at the timing of that and understanding that we've had to increase that level of accrual that we've had each of the last 3 quarters. So if this reverses, then at some point in the future, we would be able to start bringing that back down.

Okay. And can you just talk about, since you got the asset from Lilly, your OUS footprint and the efforts that you're taking to maybe narrow where you're promoting the drug OUS and profitability?

Sure. So we sell BAQSIMI in approximately 25 countries around the world, the largest in the United States. So 80% of our revenues for BAQSIMI come from the United States. The other 20 are -- the other 20-some countries around the world. Now we've taken -- when we took on BAQSIMI, we made a commitment to Lilly that -- who we purchased the product from that we would continue to sell the product in every market where they sold it for a minimum of 3 years, and that 3 years is up in June. So we took a look at the different countries around the world and determined that there was about a handful of countries where we were actually losing money on the product and that we decided that at that point, we don't want to keep losing money for those countries. So we're going to discontinue that. And what we updated on this quarterly call was that, that discontinuation will begin in July. However, it's not going to be hard fast July 1, we stopped selling to those countries. So there's going to be a little bit of a gradually reduction for those countries because we'll have inventory for several of those countries, and we want to keep selling the inventory since we have it. And in one country's case, we had to give a 1-year notice period. So we'll be selling to that country until the first quarter of next year. So the idea, though, is that none of these countries are really that meaningful or material to our top line, and they're all negative to the bottom line. So by reducing our footprint, we're actually going to have while we'll have a reduction in sales of BAQSIMI, we'll have an increase in profitability.

Understood. Okay. Was there a thought initially that these could be more promising end markets and just how things have evolved like that just did...

No. We knew from the beginning that most of these countries were really not strong markets for us or for the product. However, the product had been launched there. So -- and in some cases, it's partially the selling price, but sometimes it's a regulatory burden and only have one product in a country that has a relatively high regulatory burden. We don't have any economies of scale to do that. So the regulatory cost might be high for us to operate in that country.

Okay. Longer term, do you have the, I think, what peak target of $250 million to $275 million on BAQSIMI. What are kind of the key levers that get you drive that growth? Is it compliance expansion? Is it just more about more share gains for this approach within the broader space?

So the main thing there is compliance and making sure that people comply and they fill their script for a glucagon product. So when the ADA recommends that everyone who's on insulin gets a script filled with glucagon because it's an emergency rescue product that could have to be used if a person has too much insulin in their body. So -- and they go into hypoglycemia. So it's recommended that everybody has them. When we purchased BAQSIMI, only 10% of the insulin users were actually filling an annual script for glucagon. That's now up to 12%. So why is that? So some people just aren't doing it because they maybe got it the first time they got insulin and maybe they didn't after that because they didn't need -- this is a rescue product. But we want to get people in the habit of filling that every time and also having everybody fill it every time. So we think there's a significant upside to that. And our forecast really only has us have to get to that 15%, 16% level of compliance for us to get to that sales forecast. So we don't think it's an unreasonable target to get there.

Maybe would just shift gears to the base business and margin dynamics for that business -- you have some ongoing pressures, the glucagon, epinephrine and a few other legacy products. How should we think about the floor on those products and when those might stabilize?

So glucagon, we've seen several new competitors come out over the last 1.5 years. So we believe that we're almost at the floor, but not quite there yet, but we think the rate of decline has softened significantly now. So while this -- the upcoming quarters might be below where we were in the first quarter, that's not going to be a significant quarter-over-quarter decline that we've seen in the past couple of quarters. As far as epinephrine goes, remember, we've got a couple of different products, epinephrine. We've got the epinephrine multi-dose vials. And that's where the pricing pressure and the competition has come in. So that's a product where at one point, it was a very high-priced product, a very high-margin product. We've had multiple players come into that. So we went from a 2-player market to a 3-player market to a 4 and then 5-player market. So now with that extra competition, the price keeps dropping with every new entrants and then as does our share. So we've seen on a year-over-year basis, we still will see some additional reductions of that price. But for the most part, that one, we also think is kind of at the end of its downward slope and should start to level off soon. But then also in epinephrine, we sell the prefilled syringe product as well. And with the prefilled syringe product, right now, we are -- last year, there were 2 suppliers of that product. We and another party that other party is not shipping right now. So in the first quarter, we saw an uptick in sales of that product on a year-over-year basis. And as of today, they're still not shipping that product. So we believe that we can have the growth of that product could offset some of the decline in the other epinephrine product.

Okay. So on margins, when we think about product mix, cost inflation, just API sales mix, which of these are more transient or which of these are maybe structural issues?

So transient, we believe, is the biggest thing there is the BAQSIMI issue being transient because we believe that we can get around that with the actions that we've taken. So we think that, that comes back. Glucagon, that's something that's more structural and that stays that way. We've had some pricing increases from some of our suppliers that we think that that's hopefully, that's settled down and it won't continue to happen, but -- or at least in the level that we've seen over the last year. But the other thing is that when we launch new products like Ipratropium, which we launched in April of this year, those tend to be higher-margin products. So when we see that, we see something where we are selling more of a higher-margin product, and that's going to be the biggest growth driver this year. So that's going to help margins for the rest of the year. And then two other dynamics that we have this year is that we do have mentioned that we will be selling some APIs out of our China facility. Those tend to be lower-margin products. So those will result in higher sales, but at a lower margin than we have. But then when we look to next year and launching insulin, while overall, it's going to be a relatively probably on its own, it might seem to be a slightly below average margin product, but it's going to significantly increase the utilization of our factory, both in the United States where we make the finished product and in China, where we'll make the API. So the factory utilization should balance some of that lower margin off. And so I think it will be something that's pretty close to our corporate average.

Which is 40%?

It was 41% in the first quarter, but we think that, that was a temporary low point, and we think that, that comes back, and that's the low point for the year.

Is there a threshold on the low end where you say we're not going to participate if gross margins drop below x.

That would be on a product-by-product basis. And in most cases, we would actually sell product at a negative gross margin because of the -- any fixed cost that would consume. So for example, enoxaparin is a product where right now, for the last couple of years, we've sold it at a slightly negative margin. However, we cover all the variable costs and some fixed costs. And so therefore, we would -- even though it's negative margin, it's something where we continue to sell it because it does absorb a lot of overhead.

I see. Okay. I guess longer term, though, BAQSIMI mix improvement is, I imagine, a tailwind for gross margin?

For this year, yes.

But I mean beyond this year?

I mean...

I think it flows through at almost 2x probably what the corporate average is.

Not 2x, but it is much higher and should remain higher once we get these pricing issues behind us. So -- and we do anticipate growth in that product over the long term, especially with our goal of $250 million to $275 million in sales.

So how do you -- how should investors think about maybe more steady-state gross margins for the business?

We haven't given long-term goals forecast for that, but I will say that we -- like I said a minute ago, I think right now in the first quarter, that is the low point that we anticipate for the year and for a long time. So we expect it to come back significantly and that most of the products that we plan to launch in the future will have higher than average gross profits and then also the growth of products like BAQSIMI and Primatene MIST are -- will be at gross margins that are higher than the corporate average as well. .

Okay. So I guess another growth lever here is AMP-007 in 2026. I'm just trying to get a sense of how much visibility you ultimately have into how that product can ramp? Can that kind of flow through at a healthy gross margin relative to the rest of the business?

Yes. So we do have some visibility. We launched that mid-April, and we've been able to see some strong factory sales so far. And also, as we've said on our last conference call, it's -- right now, we are the only generic on the market. So when we gave our forecast at the beginning of the year, we were assuming that it was -- that we did have -- that there would be one generic competitor for the year. And so far, there's not. We have Hatch-Waxman 6-month exclusivity until mid-October. So there won't be another generic unless there's an authorized generic launched until then. So the margin on that product is going to be relatively high compared to the rest of our business. And also the sales are going to be stronger than we thought that they would be when we gave our guidance at the beginning of the year, which is one of the reasons why on the last call, we mentioned that we were keeping our revenue guidance the same for this year, even though we had the lower sales than expected of BAQSIMI. And just to reiterate that revenue guidance, we're saying that this year, revenues will increase in mid- to high single digits.

Okay. Is this a product that could rise to the top of your top product disclosure.

It's one that we probably will have -- we will break out because the sales will be meaningful enough for us.

And I guess if there is no AG launch, the things are quite hard to answer, but it's a niche year brand, right? I think it was like sub $200 million it's an inhalation product. So you guys have played in these spaces before. Do you think this is unlikely that we're going to see some generic competition if an AG never surfaces?

You never know because it's something where we think it's not as obvious a target as other products -- but it is something that still could be meaningful. So if there is competition, and we don't expect a lot of competition, -- but -- so it's always possible. And so our assumption is always that there's going to be some competition in that way, if we have a surprise and it's on the upside.

Yes. Okay. How do you see the appetite for risk evolving in your pipeline right now, be it either specialty brand, biosimilar complex generic across the spectrum or even Paragraph IV and litigation.

So I'll answer that and maybe Tony can add to that. And that's -- we see -- we have an increase in desire to participate in the proprietary space, biosimilar space and some of the other spaces where we haven't participated in the past where we're mostly an injectable player and a complex generic company. And I wouldn't say that, that's necessarily an increased risk appetite because we think it's an expansion of our business. So it's something that we can build upon a base business and expand to something that has potentially higher returns if they succeed. So to one extent, you might say, yes, we're taking some individual -- we recently in-licensed 4 products. Any one of those individually could be risky. We think that the group of them together is less risky. And also because we plan to focus more on these proprietary products, we think that has a portfolio of products that actually lessens the risk in the overall company because of the diversification away from some of the products where we see more competition potential in the future. Tony, do you want to add anything to that?

Yes. I'll say, in some ways, the more risk, the more reward. And as Bill mentioned, the natural progression for us to expand some of these areas to be able to develop products in some of these areas is a natural progression for us. And to think about it, maybe just set the context of the history of our development of some of these, the founders of our company, one of the first things they did was purchase an aseptic manufacturing facility. And they wanted to learn the business, learn the manufacturing and they did. And it was primarily manufacturing generic injectable products. And they learned that business. And then one of the first products they developed on their own was, at the time, a complex generic, it wasn't called that at the time, enoxaparin. And during the development process there, Paragraph IV that they were challenged and successful, -- but also during the development of that, we had to learn immunogenicity. The FDA came and said, for the first time on a generic, you had to do that. And rather than outsource it, we took it in, we learned it. We created a bio group that was able to internally perform those studies. And then with some other proprietary products that we purchased or developed, they were 505(b)(2) like we have our Primatene MIST. Again, we had to learn. We had to learn how to do clinical trials. So we ran clinical trials essentially internally. We ran them with our biostatisticians. We wrote the protocols. We performed them at sites, but we monitored it. We did it all internally. And so through years of doing that, progressively getting these new disciplines, these new tools, it's allowed us to be in a position where we can take the risk on some of these more complicated products like complex generics and even new proprietary products just from a new chemical.

On biosimilars, right, like there's a lot of flavors of biosimilars, right? There's a PD-1 -- or sorry, PD-1, right, that we don't know if 2028 is when the IP will run off or if there'll be IP that goes into the early to mid-2030s and there's follow-on subcutaneous offerings, right? So there's risk that what you're going after, will it be there when you think it will be there as an opportunity? And then a lot of biosimilars, I don't know if these metrics are dated, right, $100 million to $150 million of development costs, I imagine these aren't maybe the types of development programs that you're going after, but maybe if you can kind of like talk a little bit more. I know you have the -- or the rapid-acting insulin, right?

Yes. We have insulin as part that we're developing. And certainly, we've invested quite a lot into that. But one of the things when you look at the investment of that is the API. And we've looked at other companies that were developing biosimilars and the cost that they have to co-develop that with another API manufacturer, the cost that they have there sometimes are born later in the process. So we did that on our own. And that helped us to reduce the cost, not only upfront but also later on as we could control some of those -- and if we look at the market there, I mean, it's -- IQVIA is a $1 billion product. We think there's plenty of room for multiple players in that. We manufacture our finished product in the U.S. We think that there's a very big advantage to being able to do that. And so with the GLP-1, we -- when we look at this, we have a diabetes portfolio when we thought a GLP-1 would be kind of a natural fit for one of those. And so we developed that. And we never know what the market dynamic of the GLP-1 with the way it's evolving, we're not quite sure how it's going to end up. And we see that, that risk potentially the cards fall one direction and suddenly, there's a high demand for it. So I think we're willing to take a little bit of risk in some of these because we see a potential for it, and it also kind of adds to our portfolio.

And just to add on to that, when we take a look at the -- right now, we're working on 3 biosimilars, 2 of them are insulin. So I think we have expertise in that area. And the third one is one where we don't think we'll have to spend as much money as that -- the numbers you were throwing out there because we feel that we have a substantial advantage in the API manufacturing for that product. And based on some of the other things that we can manufacture at our facility where we plan to make it. So we think that it's something where if we have a competitive advantage, then that's something that we're willing to take. Are we willing to do -- we didn't go after most of the large biologics, where we thought they might be crowded where we didn't have a strategic advantage. We wanted to play on -- go after the ones where we thought we did have a strategic advantage. And so that's why we're only going after a handful right now.

Okay. Can you -- Tony, can you talk a little bit about insulin, why it's been so hard for generics to crack this nut. I mean I'm thinking of basal insulin and pricing came down a lot before generic entries, and it's a scale game, and there's a lot of investment that needs to be made. And so what makes you guys think you can win in a space like this high volume? I imagine that the pricing has come down.

Yes. The way I look at it is you have biotech firms that can manufacture these biosimilar products. And then you have generic firms that are used to generics and are starting to get into complex generics. And I think insulin is kind of a middle ground. I think insulin is kind of a middle ground where it's not quite complicated enough to go after -- for the biotech firms to go after it. There are other fish for them to go after. And for the generic, I think most of them struggle with it. It's a biologic product, and there's a lot to go with the biologic product. For us, when we produce glucagon, we learned quite a lot. Glucagon is a peptide. It acts very similar to a protein like insulin. The receptor, the cell receptors are critical in the way that plays, and it's very difficult to understand that, to categorize that so that you can characterize it properly with the FDA. So I think it's quite in the middle, insulin is right in the middle between the generic and the biotech companies where they haven't quite found that spot. And for us, because of the history that I explained a little bit, it's put us in a position to naturally progress towards that.

And Bill, do you think the pricing still attractive enough for you as you look ahead?

Yes, for insulin. Well, for insulin, certainly lower than the assumption that we had when we started these programs. So it is not as attractive as it was, but it's something where we've already put in a significant CapEx to build both the API facility and the finished product line. So we've already made that investment. So the incremental investment we have is not big. So while it might be something that's either at or slightly below our corporate average. And we think it's the incremental spending that we have from now to get these things over the launch. The finish line is not that great.

And on the inhalation side, is the thinking there that, that could be a meaningful part of your pipeline strategy or even leverage the in-house expertise to develop specialty brands.

Yes. So we definitely -- when we take a look at specialty brands, that is something that we are certainly considering in the inhalation. And when you take a look at Primatene MIST, that is a brand, but we also are working on a next-generation Primatene MIST with a new green propellant that not as a disadvantageous to the ozone layer. So it's -- it's something we have worked on and we are considering working on others as well. So it is certainly a key technology that we can do.

Yes. And I think with inhalation products, we have a manufacturing facility in the Boston area that has plenty of capacity, plenty of room for expansion. So we're committed to the inhalation products. We know while it's a technology we understand quite well from developing new products for it. So we're committed to this on that category.

How should I take the commentary earlier about GLP-1s and look, semaglutide in 2031 is like the big thing that everybody would focus on in the U.S. is an opportunity. A lot of investors on the brand side envision there's going to be some generics available in 2031 for the injectable semaglutide. Is it that the -- it's worth taking some of the risk in developing this? Or do you go all in? And is that going to be a high upfront cost?

So our thought on that one is that it's going to be a pretty crowded market. So we're -- we won't say that we are not playing on it, but our assumption going into whatever we might spend on products that are that far out is that, that's going to be cryo market. We have decided that we, again, do have some capabilities on the API side so that we're going to be selling at least 2 different APIs this year that are GLP-1s that out of the China facility that we have. So -- and one of those products is going to be a proprietary product or selling it to a company selling this product to the proprietary product. And the other one is going to be more of a generic API.

Lastly, just on capital allocation and deployment. How are you thinking about buybacks versus BD and CapEx?

So our first thing is that we always want to make sure that we cover our R&D program. Our R&D program is growing this year and will continue to grow into the future. So that's the first thing. We can completely do that with the cash that we're generating. So that's the first thing. Second thing, we do have some CapEx we're taking care of and that's easily covered. So the next thing is business development. If we have some business development, that would be a priority for us. However, recently, the stock has been lower than we would normally think it should be, and we think it's an attractive value right now. So we have -- as you saw from the first quarter, we accelerated our buying into the first quarter. We spent nearly $30 million buying back shares that accounted for almost 3% of the outstanding shares. And so with the stock price in a similar position right now from where it was in March, you would expect that we would also accelerate that share repurchase at this time.

Okay. Well, we're out of time. So gentlemen, thanks so much for joining us. .

Great. Thanks for having us again.