T hank you all for being here today. Really appreciate it. This is the Fireside Chat with Amphastar Pharmaceuticals. My name is Jason Ellis. I'm a Managing Director in the Healthcare Investment Banking team at Wells Fargo. And I have here with me today Bill Peters , the Chief Financial Officer, and Tony Marrs, the EVP of Regulatory Affairs and Clinical Operations at Amphastar. T hank you all for being with us. Really appreciate it. A little bit of noise. Is that coming from next door?
I don't know if that's next door or what.
Oh, is that me? Sorry, that was my phone.
Yep.
Great. Why don't we go ahead and jump into it? I'd like to start off a little bit talking about, k ind of the overall strategy of the business. You built an impressive portfolio with different attributes among the different parts, and we can kind of break those up between the proprietary branded part, complex generics, and then kind of a little bit about the pipeline. Could you just talk to us a second about, t he different attributes and kind of how they all play together, and how you see that kind of really forming from a basis for the strategy of the overall business?
Yeah, T o understand that is to kind of get into the story of Amphastar. One of the things that we first started doing when we were working on new drugs was just developing generic products, and we knew early on that science is the basis for us to really have our niche. As the founders of our company are both PhDs in chemistry, and they felt science is something that is a great strength for them, so we started developing these complex generic products. One of the first we developed was enoxaparin, and we went through the whole legal process of that, but even characterizing something like that and working with the FDA to develop techniques to do that.
As we were going through the review process with the agency, one of the things that they wanted, which was a new item, was immunogenicity. Something we hadn't done before, something that the agency hadn't put as an expectation on a generic product, and so we had to learn how to do that. And so we had the option, as we often do when we're developing products: Do we do it in-house or do we outsource it? In looking to outsource it, you're talking large capital and lots of time, and so our strategy was to do it in-house, and then a clinical trial, just a simple PK trial, was required, and so we had realized that we didn't have a lot of experience doing trials, so let's do some clinical trials.
And so we developed techniques for doing that, and again, brought that technology in-house, those skills in-house to be able to do. And as we received approval for those for that product and subsequent products, we realized that we have a lot of technology, a lot of skills, that allow us to branch out. Rather than outsource something, throughout the process, our approach is to do it ourself and learn how to do it ourself. And after doing that for about 10 years, we realized we have a toolbox of all these skills that allow us to expand into other products.
We know how to do clinical trials, and so we'll get into products that are branded products, like Primatene Mist, that are going to require clinical trials, not just a simple PK study or a PD study, but phase I to phase III trials. We're doing trials all across the U.S., hundreds of people, dosing every day throughout the day, diaries, check-in at clinics and hospitals. Pretty extensive type of work there. We're able, with these, to develop branded products for that, using the 505(b)(2) process. Then, as we're developing more of these, we realize, w e can do biologics. Some of the products that we were developing, even as generic products, were technically biologics.
At the time, they were drugs, but the FDA in 2020 converted some of them over to be biologics, and it was just coincidentally that we're working on these products that were so complex that the FDA did that. Having all these tools in our toolbox really allowed us to expand into more complex generics like biosimilar. So if we have our insulin products that we're developing now, and then into more branded products, where we have the technology to not only develop them, but also to all the skills necessary to develop them. You could look at our naloxone product. Intranasal naloxone is another example. So for that product, the FDA has approved our product as a branded product using our own proprietary, in-house developed intranasal delivery device.
Another skill that we acquired: How do you go through the process of approving that? O ur strategy of having all these tools has allowed us to expand into these products, to where our focus now is going more into branded products of our own, as well as more biologically based products.
It sounds like a really rich history and the ability to kind of do research, kind of go through clinical trials, and also a deep CMC expertise as well. It's kind of really differentiated the business, which is fantastic. Maybe just to set the stage, it'd be great to go in a little more depth around t he branded product portfolio and how it's performed over the first half, and then kind of the expectations for the second half. Baqsimi really strong quarter, 1 0% growth in the Q2. W e understand that there was maybe more or less than 10%, but there was a little bit of s ome volume, some price that may have offset the volume a little bit.
H as the transition from Eli Lilly, since you bought that product, been as efficient as you would have hoped? Or, do you think there's kind of more upside to come now what's been in your hands for a little while longer?
B aqsimi's been doing great for us. It's moving right along the plan that we expected, so we're very happy with the performance. And the transition from Lilly to Amphastar has worked very well. So we have a transition service agreement with them. In October of last year, we took over selling in the United States, so we have a contract sales force that's detailing that product to endocrinologists around the country, and that's going very well. We're seeing the sales growth that we expected out of that. And additionally, we've begun taking over the distribution in the United States and three other countries in Europe, in the Q1 of this year. So that, a couple things, one, it moved it into our hands, but it also changes the way we recognize revenue as well.
Now we're recognizing it as a normal product would, versus when Lilly sells the product, we recognize revenue as the net economic benefit or the sales less all of the costs. So now we're getting the full benefit from most of the sales. Right now, it's the Q3, and we're expecting to convert another 19 countries to our distribution this quarter, so primarily in Europe. So that process is underway right now, and some of those happened in August.
Several more are going to happen in September. So that's going to leave only three countries that Lilly will still be selling the product for us, remaining at the end of the quarter. So we expect those three countries to convert at the end of the year, so when the transition services agreement ends. T o summarize what your question was, the transition's been doing really well, now right on expectations, and we're really happy with it.
Great. Y ou mentioned the contract sales force and the distribution agreements abroad, k ind of what does that look like as you go forward? Do you think, is that kind of your plan, to have maybe either contract or m ore in-house capabilities, only in the U.S., though, and distribution? Or do you see yourself maybe having some capabilities to sell outside the United States? Or kind of talk to us about what the more sustainable part of that looks like.
I'll start with the United States piece. So right now, we have a contract sales force that's detailing our product, solely, Baqsimi. So it's not that they're detailing one product for one company and another product for us, they're just focused on Baqsimi. T hat's a dedicated sales force. The other thing is that we're ramping up that sales force right now as sales go up. So one of the things that we wanted to do when we bought this product was make sure that we continued the profitability of the product, 'cause it was a nice profit margin for Lilly. We expect it to be a nice profit margin for us.
We're managing the sales expenses to grow with the sales expectations, so we can make sure that we have profitable growth and a lot of that sales expense is in the United States. So we have expanded the sales force this quarter, so we do expect to see that ramp up, but just more in line with sales. Externally, outside the United States, we're taking a look at mostly using these distribution agreements with third parties and relatively little expense associated with that.
W e think that that model is going to work well for us with having only one product in most of those countries. However, what it does is it gives us a base that we are currently operating out of. I f we have another product that we want to bring into that organization, we can do so pretty easily at this point, because those contracts are all set up.
Got it. I t sounds like you kind of have the ability to kind of build on that i n terms of the scale you've already put in place, and that should hopefully prove out in the margins as you go forward.
Exactly.
A bsolutely, and as you think about the glucagon market, I believe there's been the expectation that the space is underpenetrated and potentially with more attention and promotion being brought to that, you could see that space even grow a little bit better. Based on what you're hearing and seeing so far, a re you seeing that part of the story kind of play out?
Yeah, we are. W hen we bought Baqsimi, only 10% of people who were on insulin were actually getting a glucagon script filled. And it's recommended by doctors and endocrinologists that everyone who gets an insulin script should also get a glucagon script filled. So what we have seen, we've seen a small uptick. Now it's 11%. Yo u'd say, "Oh, it's only one percentage point," but really it's a 10% growth from 10% to 11%.
W e're really happy with that, that penetration, and we expect that to continue, and that's one of the things that the sales force is focusing on. Because when you get a product like Baqsimi, that's a nasal spray, easy to carry around, it's a lot easier to maintain compliance and get the refills, and it's a lot easier to carry around with you. P eople will be more likely to maintain compliance and keep getting those scripts refilled throughout their lifetime.
Do you have an expectation that h ow penetrated that, i s it ever 100%, or do you think it gets to 50%?
I doubt it ever gets to 100%. W hat we've said is that t he sales last year were about $150 million, a little over $150 million worldwide. We've said that we're gonna get to between $250 million and 275 million at some point in the future. So that's clearly not at 100% penetration, but i f we can get that penetration up just a little bit more, then W e're meeting our goals.
Great. Let's shift a little bit to Primatene Mist. 38% growth in Q2. Some of that may have been a little bit outside due to some inventory drawdowns the prior year. We didn't hear as much about that on the earnings call. Is it your view that the market's just growing really well, or you're taking share? Is it price? Can you kind of give us some of the dynamics that are going on in that market?
Y ou're right about the 38% growth. It was great growth, but going back to the quarter before, there was destocking at a lot of the retailers at that point, as they were controlling, post-COVID, during COVID, they had built up some inventories, and W ith supply chain problems around the world, people were keeping higher levels of inventory. Last Q2, we saw a big contraction of that, back down to a normalized level of inventory. So we think that that's all worked itself out, so we didn't see that large growth this year. But we have seen in the United States continued mid-single digit growth. So we're seeing that 5-6% year-over-year growth on average.
We, with our advertising campaign that we have out there on TV and through websites, we think we can continue that trend for some time. Now, that is lower than the growth we were getting a few years ago, but it's still nice growth for us, and that's all unit growth this year. So, we haven't had a pricing increase since last year. W e should certainly consider one in the future, but our goal is to increase the size t he penetration into that market increase t he number of people that are using it. So we don't wanna focus too much on the price increases. We still wanna focus on getting more people to buy Primatene Mist.
Got it. Yeah. And, and then we talked a little about some albuterol shortages in other parts of the world. H ow much of an effect do you think that's having on Primatene Mist, if at all?
We did see, in the past couple of years, we've seen some shortages, in Canada from time to time, and we did have a program where we shipped some to Canada on an emergency use basis, but I wouldn't expect that to continue in the long term. Tony, any thoughts on that?
Yeah, W e're poised to take advantage of those opportunities, but we haven't seen any calls for that. Generally, when that happens, we'll get a phone call from a hospital organization or the government of that country asking us about that, and we're ready to do it if we need to, but we haven't seen that yet.
On a similar note, w e are going to begin selling it through a partner in China, so that will help us out. We'll see how that goes. It's mostly gonna be a cash pay, t argeted to the higher-end consumer s trategy there.
L et's move on to a little bit to the complex generics portfolio. So Epi has been a really bright spot with a competitor having shortages, and you've moved quickly to increase capacity of production with some efficiencies on packaging. So when competitors eventually do come back into that market, do you expect there's gonna be an ability to benefit from the fact that you guys have been the consistent s upplier in that space? Or d o things kinda just go back to the way they were before, and you kinda go back to your level, more regular level of volumes?
W ith epinephrine, we've been a consistent supplier, d ecade after decade with that product. O ur customers know us, they like us, they, they're very happy that we've been a very good, consistent supplier over that period of time. W e do expect, o ur competitors to come back to the market and to t ake back some of their market share. But we expect that, we can continue to, I'll say, to have a larger share of that market than, than our competitors do, mostly because of our reliability.
The other thing that, I've said on our conference calls, and I'll say again, is that i 've been the CFO of the company for over 10 years now, and that every single quarter that I've been there, there has been a shortage of one kind or another from these competitors that have had these problems, and we're always there to take advantage of that situation, and we've done a lot of things so that we'd be prepared to do so. In 2019, we doubled the capacity of our prefilled syringe lines at our International Medication Systems plant to take advantage of some of those.
R ecently, what we've been doing is we've been taking a look at our packaging situation and our other manufacturing areas there, to eke out a little bit more product in every batch that we can and every day that we produce. Just, can we get 5% more units out of this batch and 5% more units out of that batch? T ry to make it so that we can become more efficient over time. W e've been able to meet a larger share of the market than we ever could have in the past. And we've produced, 10% more units out of that factory than we have just last year, with no significant capital investment.
That's great. And as it relates to some of those efficiencies, are there other things you can see going forward? Are there areas that you've already targeted, saying, "You know, this could really help us increase capacity in case there's a shortage in other places in that complex generics portfolio?
W e always look as a corporation for efficiencies gained at one facility over the other, and we try to incorporate those lessons into it. I don't think there's much opportunity for immediate or midterm increase for our efficiencies there, only because we've been doing it for so many years that we feel that it's pretty close to optimized. But we'll learn, and I mean, technology is always evolving, and we certainly are following that and hope to take advantage of any of those opportunities.
Great. I understand there was some softness for some of the other products in the complex generic portfolio in Q2, but also saw increases in dextrose and sodium bicarbonate . Ar e there drivers here, mostly on volume or pricing? Can you talk to us a little bit about what you're seeing in more of the complex generics market?
Yeah. For those two products that you just mentioned, those are also products that are in shortage that we're trying to take advantage of this increased capacity that we're trying to do and take advantage of the shortage situations and then trying to make as much as we can.
D o you see that persisting into the second half of the year, or?
It's always hard to say. O ur competitors have said that they're gonna be back in the market, later on this year. L ike, as I said a few minutes ago, there's always a shortage somewhere, and what we plan to do is have, manufacturing, area that's variable and, and, flexible, so that we can make whatever product that is on shortage and, and ramp it up very quickly.
They've been having this shortage issue for generations. I mean, since Bill started, I know for sure they've been having it periodically there. People often ask why we don't have this issue, and i t's a quality system that comes from the top. Our CEO just instills a quality mentality on everything. And obviously, working in the pharmaceutical industry, you'd expect that, but his expectation it seems to be higher from my experience and my colleagues that I talk to. And he just insists upon it. The other part is the vertical integration that we have with that manufacturing line. So we produce the components that make the injectables and the stoppers in many cases.
We produce all of that in-house at our facility, so our personnel are making those parts that go into that product, in some cases, we're getting the API that we produce at one of our facilities. And we're filling it there, and we're packaging it there, and we're having it sterilized there. It's all done in-house. And that vertical integration is part of what differentiates us in some ways, but also lets us control it and maintain a steady supply.
Great. Appreciate that, Tony. Moving on to the pipeline. You mentioned three products having the potential to be approved in the second half, teriparatide, AMP-007, AMP-002. On AMP-002, you've mentioned you'll be somewhat capacity constrained for that market, at least initially. Is that something that you'll be able to adjust in the near term, or it's gonna happen over time? And is there significant investment you have to take to increase that?
I t's the first two. I nitially, it's a very complex product, but this one's unique in the way it's produced. And there are issues that we think efficiencies that we can tease out over time over producing it over a period of time. And that would be kind of a midterm, s ix months or to a year of being able to kinda optimize that. There's efficiencies to be gained there. And again, other things is I talked about just bringing in efficiencies from other of our facilities.
It's possible to kind of scale up in the long term, but those processes generally take a year or two, going through the stability process, and then the agency approval for those. So that possibility exists, but that's more in the kind of mid to long term.
Got it. I know you haven't exactly disclosed all of what e ach of these various products are for, for obvious reasons. You wanna maintain the competitiveness of it. But is there anything you can just tell us more about w hat makes you excited about maybe these products in particular and what t he strength of the opportunity set?
Yeah. I love the AMP-007 product. It's a Paragraph IV product, an MDI. We were not sued, so it's encouraging. There are no generic product currently on the market for that. We have two products at our facility here in Boston, in Canton, one of the suburbs here, and this would be a third. So from an operating cost perspective, we will have three as opposed to two products which is great for us because then you start looking at other shifts and being able to optimize some other processes. T hat's exciting. A MP-002 is also exciting. Again, it's another product that has no generic competition. It's been a long time for us to have that in the FDA's queue. We hope to resolve that soon.
There's some other players out there that have kind of gotten into the authorized generic space and really partnering with others and kind of leading with that. Is that something that you all have thought about or have been approached about doing, or how do you think about that?
I don't really think it fits well into our business model. W e wanna focus on the science and being first to market on generics if we can. And so, and those tend to be relatively low margin types of products. So we wanna focus on the products where the margins can be higher, and that there's a scientific advantage that we can take into the market.
Okay. Do you see those authorized generics-focused competitors? It sounds like they're operating in different spaces, so they're not-
T hey are in the same space, it's just that that's not where we wanna be.
Yeah.
W e want to focus on the science and where things are the most complex. A lot of our products will have an authorized generic. So that's something that we do expect competitors to have. W henever we enter a market, we're assuming that that's going to happen anyway. W e want to be in the products where we think that we can make an outsized margin on them. Yeah, we don't see us being effective as a contract manufacturer, which is essentially where we would be there, and them telling us how to produce it.
W e're not bringing much to the table, as far as offering them, other than just our facility capacity, which is useful. W e have, w ith our pipeline, we have a lot of utilization of that, and we would hope to use our capacity for new products that we're bringing in and have higher margins as opposed to contract manufacturing.
B efore we move on from the pipeline, s ome exciting things you guys are doing around insulin biosimilars. Anything you'd like to just comment on that in terms of r eally some of the exciting things headed into the next year?
Overall, that's an exciting area for us. Insulins, we read about it a lot, and from our perspective, a lot of the news is about the pricing. There's a lot of question marks about the pricing. But that aside, I mean, we're excited. We're bringing in new biologic lower-cost versions of some of these products, giving access to more people, and showcasing some of the technologies that we have. Our API is being made at a facility that we control, we own, and importing that and being involved in the process of developing these proteins. It's really an exciting thing to develop the proteins and have a facility to do that.
I'm personally happy to be involved in it, and I see the excitement of our employees and staff with what that brings. B ringing those to the market and showing, t he Street and everyone that these are something that's in our portfolio and our technology is something exciting for us.
Great. Moving on to the margin profile, as we think about the P&L a little bit. So naturally, there was some increased expenses with respect to Baqsimi in the quarter, as you continue to build out from a commercialization standpoint. Can you shed some light on kind of where you think you are in terms of the infrastructure that you need to support, a branded product base and h ow much more investment you'll need over time? Are you kind of 50% to 75% of the way there, or you think you're still in the early stages of really having the commercial support?
W e're much further along than that. We have most of the expense that we're going to have for Baqsimi is already factored into our financials in the Q2 . The sales force is on there. As I mentioned, we are gonna grow that, but we're gonna grow it in line with sales. So, as a percentage of sales, t hat we're already there, where we're gonna be. On the G&A side, we do have some, w e've increased a headcount by a small amount. There might be one or two more people that we have to add, but they're primarily there already. We're also taking a look at some new systems that help us account for this, for these products.
T hose are the only expenses that haven't come on board, but those are smaller in comparison to everything else. O ver 90% of the expense that we are gonna have for Baqsimi is already on our books.
Got it. And, as for Baqsimi, I understand there's some proprietary products in the pipeline, even the timing of that, we can talk about. But in terms of supporting those additionally [crossralk].
Yeah
Will there be some additional investment?
Yeah, there potentially could be, and/or we could also partner for some of those products as well. So we're considering that, when it's a little bit outside of our current scope. For example, things that are not in the endocrinology space, we might want a different sales force. So, we're taking a look at doing that in the future. So the expenses associated with selling those products are not on, w e're not incurring right now, but w e plan to once those are closer to launch.
Y ou've had a healthy stream of product launches, and things progressing through the R&D pipeline. Y ou also have the more proprietary products potentially coming into focus, versus just the complex generics in the pipeline. W hat's your sense of the efficiency of R&D spend? Do you expect that to become a little more challenging as you move to more proprietary products, or do you think you have a pretty efficient R&D operation that will continue to be so, in the near to intermediate future?
T hat's a tricky question to unpack, and O ne way to look at it is a lot of these tools we've acquired, and so if you want to do an immunogenicity study, you have to buy tanks, and you have to buy freezers, and there's a whole fixed cost that you have to invest. We've done that, and so to do things where we have to do an immunogenicity study in-house, you just rely on that, and you have the expense of maintaining those is all, so the cost is low. As we go into more biosimilars, some of the cost of developing those is more expensive. You have to do more batches. You have to do larger batches.
The cost of the API is more expensive. The cost of the components, generally, you have pens, are more expensive, and so we would expect to see the increase of those even in biosimilar products, and for branded, I mean, the trials are the trials. We feel that we're efficient in running our clinical trials. We don't use CROs to do our clinical trials. We do in-house monitoring ourselves. We have a staff of monitors that we use to oversee the trials. Now, of course, we just go to the doctors and the clinics, and we have them run the trial, but as far as the oversight of that, that's done in-house. So our costs are reduced that way.
A s we get into more of these branded products, we're gonna expect to see higher R&D costs, largely associated with the components, and then also the clinical trial costs.
Got it. We have a few minutes left, so I'm gonna check first. Any questions from the audience? Can you speak to the whole process to buy Lilly assets?
Sure. W e don't do many acquisitions at Amphastar. We're very targeted and very strategic when we do those. It was really a product that checked all the boxes that we were looking for. We are shifting more towards branded products that have l ives that are a little bit clearer to us and to investors, so it was a branded product. We are one of the larger makers of glucagon right now in the country, and it was a glucagon product. It's in the endocrinology space, that for serving diabetics, so it's something that we're already working on with our current glucagon, with our insulin pipeline. Additionally, it was a nasal delivery, which is a technology we really like.
As, as we've mentioned, we're working on some other nasal delivery products as well. Having already approved the naloxone, we're working on epinephrine and potentially some other ones as well. W e really like that delivery system, and we thought it was a very complex formulation and complex manufacturing process, so we thought it would be extremely difficult to genericize. T he other thing that, as part of the transaction, we also got an exclusivity period on the device, so the device can't be used for a generic of this for a period of time. I n locking up that exclusivity, i t keeps generics off or makes it harder for generics to come to market. W e think it's highly unlikely that there'll be a generic in the near future for this product.
W e see it continuing to grow unimpeded for a good period of time. W e also think, because of that lack of that difficulty, it's gonna have a very long tail to the life to it. W hen we took a look at this, it met all the strategic boxes, and then we ran a lot of different valuations on the product too. And, and almost every valuation, it was a very positive NPV project. As I mentioned before, when Jason asked the question, i t's meeting our goals. But by that, I mean, it's meeting the forecast that we use to get it approved by the board of directors. W e're doing exactly what we said we would do and what we told the board we're gonna do, so it's meeting all of those things.
I can add to some things that I'll see from my perspective, too. A Salesforce that is established, that Lilly had developed and set up, and now, of course, we're contracting that. But the footprint of the marketing plan from Lilly is there that they transitioned to us. They want it to be a successful product. They view it as an important product to them. As developers of it, they, the people that were involved in the process, it's a product that's dear to them, and they want to see it successful. And in Europe, we have now transferred the product to us. W e have already had Lilly go through the process of getting it approved. We just transferred it.
W e have this great product in all these countries in Europe, and now we have distribution and logistics in Europe, in all of these countries. N ow, if we want to bring another product, say, into Europe, we've got the infrastructure for that. We have the regulatory contacts for distributing it to all the countries, importing it, testing it. All that network is set up for us in the future, should we choose to develop other products for it. T hose are something that for me, from a regulatory, is very important.
Yeah, t he option value that Tony talked about, these future products, it really didn't even go into our equation of the value of the project, but it was something that was an intangible that we knew that was gonna be on top of this. W hen we took a look at the value from an NPV basis, the product alone gave us what we needed to get to. And this option value of future products and European products and expanding globally, really was something that we thought would give us extra value on top of that, that's ha rd to quantify at that point. Yeah.
You mentioned several different things that the Baqsimi acquisition checked: difficult to genericize, intranasal, w hether it's injectable. This one happened to be in endocrinology, which is a space you knew. H ow would you force rank those as you think about different opportunities to acquire things out there? Is it kind of needs to check all those boxes, or are there some that you think are n eeds to be in the therapeutic area, or it needs to be kind of just more complex than-
T he more boxes it checks, the more likely we are to do it. W e've had these conversations, w e really do like the endocrinology space, so that's an area that we're, r eally focused on. But then the products that are intranasal, injectable, or inhalable, those are the three things that we have resources and we have abilities to do right now. T hose are the things that those are the areas we'd most likely be working in as well.
Great. Unless there's no other questions from the audience, I want to thank you, Bill, Tony, for being here and for sharing more about the Amphastar story.
Great. Thank you.
Thanks, Jason.
Thank you.