Executives
Paul Campanelli - Chief Executive Officer
Tom Haughey - President
Barry Gilman - General Counsel
Mike Tropiano - EVP and Chief Financial Officer
Analysts
Tom O'Shea - Castle Hill Asset Management
Erin Blum - Goldman Sachs
Par Pharmaceutical Companies, Inc. (PRX) 2Q 2013 Results - Earnings Call Transcript August 15, 2013 10:00 AM ET
Operator
Ladies and gentlemen and welcome to the Par Pharmaceutical Companies Incorporated second quarter 2013 earnings conference call. My name is Shaquana and I will be your coordinator for today.
At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)
I would now like to turn the presentation over to your host for today’s call. Mr. Paul Campanelli, CEO. Please proceed, sir.
Paul Campanelli
Thank you, Shaquana and good morning everyone. I would like to welcome you to the Par Pharmaceutical second quarter 2013, lenders conference call. With us on today’s call is Tom Haughey, our President, Barry Gilman, our General Counsel and Mike Tropiano, Par's Chief Financial Officer.
Mike will be providing us with a brief overview of Par's second quarter and first six months results but first, permit me to note that certain comments made during this call may constitute forward-looking statements. Such forward-looking statements are subject to both known and unknown risks and uncertainties including those described in our quarterly and annual reports that could cause actual results to differ material from such statements.
That said, this week we posted our second quarter financial results for our lenders. We're pleased to report Par had another solid quarter with revenues of $234 million. For the first half of 2013, we achieved $154 million of adjusted EBITDA.
At this time, I would like to point out several first half highlights. During the month of January, we executed on a launch of Lamotrigine extended-release tablets, the generic version of GSK’s Lamictal XR tablets. Although expected to be introduced in to a crowded field of competitors, Par was one of only two entrants and we continue to command a significant share of the market.
Two months later we followed with a successful launch of Fluvoxamine extended-release tablets out of our Irvine site. Fluvoxamine extended release tablets is the controlled release generic version of Jazz Pharmaceuticals' Luvox.
Par is currently enjoying a 180 days of Hatch/Waxman marketing exclusively on the 150 milligram strength. In addition to Lamotrigine and Fluvoxamine, we bought five other products to the market this year and we filed 10 ANDAs with the FDA.
During the second half of 2013, we expect a number of additional filings and product launches. These launches combined with our current expectations for a number of our existing products gives us an optimistic outlook for the balance of 2013.
With that I am going to pass the call off to Mike who is going to review our Q2 financial highlights. After Mike’s comments we’ll be happy to take any questions. Mike?
Mike Tropiano
Thank you, Paul. Just a brief reminder that during this call we’ll be discussing adjusted EBITDA which is a non-GAAP financial measure, our Q2 reporting package contains a reconciliation of adjusted EBITDA to net income to the most directly comparable GAAP measure. I think where 2012 results show a GAAP determined net loss of $21.8 million on revenues of $233.7 million, I'll now direct you to our non-GAAP EBITDA reconciliation posted as exhibit A to our reporting package, you can see that after adding back customary non-cash items and certain other adjustments we produced $72.6 million of adjusted EBITDA in the quarter.
Below that you will find our adjusted EBITDA for the trailing 12 months ending June 30, 2013 which stands at $310 million. The Q2 adjusted EBITDA $72.6 million was generated by strong results from Lamotrigine ER and Fluvoxamine ER as discussed by Paul.
The quarter also benefit from higher than expected sales of our Budesonide [or through] our generic product. There are two primary drivers to reconcile our first quarter adjusted EBITDA of $81.8 million and the lower Q2 result of $72.6 million. Our Modafinil product which was a significant contributor to Q1 moved to a fully competitive market as expected.
Secondly, as we discussed last quarter our research and development expenditures, which lagged in Q1 caught up in Q2 to bring us in line with our year to date expectations. We have included an add back of $9.7 million this quarter relating to an upfront cost incurred in connection with price increase of one of our commercial generic products.
The price increase is expected to represent an incremental earnings opportunity for Par commencing in Q3. moving to our GAAP basis cash flow statement, Par has generated just over $20 million of cash flow from operations to-date, however as we discussed last quarter we have fully settled our Megace ES Department of Justice matter for $46.1 million, which has been recorded as an operating item. This brings normalized operation cash flow to $66.3 million for the first half of 2013.
That concludes my prepared comments our team will now take your questions.
Question-And-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Thomas O'Shea representing Castle Hill.
Tom O'Shea - Castle Hill Asset Management
Could you also talk about, I guess, Q2’s EBITDA 72 versus the year ago 111, obviously some of the launches had an effect a year ago, and maybe talk about what we should expect the run rate going forward, is it around $70 million, is that $80 million, is it $111 million, it seems to be moving around a lot obviously (inaudible)?
Mike Tropiano
Tom, this is Mike. I'll answer your second question first. The run rate that you see right now is clearly representative of where our company is right now, all right, and I don’t see a lot of variability as we go into this quarter. Most of the products that contributed to this quarter are still contributing. Your reference to the second quarter of 2012 is really driven by a single product, Modafinil.
As you recall in that quarter in April of 2012 we have launched the Modafinil product. Modafinil became much larger than we expected to be because we went into a non-competed market and we had exclusive position. And that was a gigantic contributor, altogether contributed actually $100 million to us during the course of 2012.
So we saw it is coming, I mean that was the blip quarter in 2012. So when you take the 2012 of Q2 and then you move into Q2 of 2013, you really get that relation. That already is out to one product Modafinil.
Tom O'Shea - Castle Hill Asset Management
Okay. And then just maybe first start again Q sequential from sort of $80 million to $70 million Q1 and Q2 that is just R&D and Modafinil was still?
Mike Tropiano
That is correct. Yes, as I stated, it's R&D and Modafinil had its last quarter with us with the larger market share in the first quarter of this year, so we got the benefit there. And our R&D as we talk about was running low just on timing in Q1 and we made a backup in Q2, where it should be now.
Tom O'Shea - Castle Hill Asset Management
Okay. And then it seems like you were basically cash flow neutral in Q2, is that fair?
Mike Tropiano
Well, no from operations we…
Tom O'Shea - Castle Hill Asset Management
No, cash flows from, are you sure? Because it looks like your net debt basically stayed the same, isn't that right? More or less something it was like your cash was around $53 million in Q1, you are down.
Mike Tropiano
Yes, our balance sheet, our balance was is [$80 million], neutral, yes.
Tom O'Shea - Castle Hill Asset Management
No, I'm saying your cash flow more or less neutral in Q2, you generated that $20 million of cash more in Q1, right, six months number that you said your year-to-date cash flow was $20 million that was all basically in Q1.
Mike Tropiano
Yeah. We had operational, from operations about $15 million during the quarter.
Tom O'Shea - Castle Hill Asset Management
Okay. And so for the rest of the year, would you think you'll generate cash?
Mike Tropiano
Well, certainly, and as I pointed out the one pardon me we have to look at in the first half of the year is the fact that we settled the DOJ, that's nonrecurring, even though we charge at the operations for that purpose, that's not going to happen again in the second half of the year or so. So we should have a good, a nice pathway to cash, to cash generation in the second half of the year, yes.
Tom O'Shea - Castle Hill Asset Management
Okay. And again we should think something like in the 70s for run rate EBITDA?
Mike Tropiano
I think where do you see us now is a good indicator, yes.
Operator
Your next question comes from the line of Erin Blum representing Goldman Sachs.
Erin Blum - Goldman Sachs
Can you explain in more detail what was that upfront cost related to the price increase?
Mike Tropiano
Erin, this is Mike. So we have a product where we moved in to ability to take a larger market share because of the market dynamics of another player in the market and the price for the product was increased in the marketplace and we’re able to increase as well. Under our contractual obligations, with our customers, we're required to make them whole or a portion of the price increase.
And because the price increase incur was occurred before the end of the quarter, under our GAAP accounting rules we're required to record it immediately. The benefit of the price increase because of our revenue recognition occurs post the June 26 period and therefore does not find its way in to Q2. We will derive that benefit on our Q3.
Erin Blum - Goldman Sachs
And so does the benefit come because the requirement to May call the customers is just for a certain time period or because it only applies to certain customers and not all?
Mike Tropiano
No, it's the timing, okay. The May call is immediate and the benefit comes later.
Erin Blum - Goldman Sachs
Okay, alright, got it. And then on Maxalt, so that dropped out of your top product that you separately disclosed, are you still producing an authorized generic there and what happens with that product?
Paul Campanelli
We want to get down. Ultimately, we have some contributions, but we took on additional competition and I think that product is probably viewed as behind us.
Erin Blum - Goldman Sachs
Okay. And then on the Supreme Court decision on pay-for-delay. Beyond AndroGel, do you have other litigation that had been stayed pending that decision that now will I guess go live again and is something we should be thinking about?
Barry Gilman
Erin, this is Barry Gilman. No, we don’t.
Erin Blum - Goldman Sachs
Okay. And then on AndroGel, can you give us any direction on how to think about what your potential liability there could be, I mean can we think about it relative to the
to the $60 million payment that you, I think it was $60 that you got from Solvay or is that an unrelated number, can you give us any direction on that?
Paul Campanelli
We really can’t, it really still very early in the case, because it had been dismissed at a very early stage. So there hasn’t been factual development discovery. So it just had to be picked up back at the district court level and we have to take it from there.
Erin Blum - Goldman Sachs
Okay. And then just one more which is on as non-tamper resistant Opana, I find your disclosure that Endo is doing over some patents and these are patents that I guess have been filed after they had settled. I guess I understood this settlement gave the generic company the right to market the product and not the right to use a certain patent, am I thinking about that wrong?
Paul Campanelli
I think this is a little bit of an outlier, I think that’s generally what we anticipate. As you know we acquired this product with the settlement in place so, it wasn’t one we were involved in from the beginning.
Erin Blum - Goldman Sachs
Okay. I understand, okay thank you very much. I appreciate it.
Operator
Your next question comes from the line of (inaudible) representing Deutsche Bank. Please proceed.
Unidentified Analyst
Good morning, thanks for taking my question. I guess the first one I had was the $9.7 million add back which you’ve already answered. So now I move on to your pipeline, so just want to get a sense from your end as to what area are you guys targeting, what therapeutic areas are you guys targeting for the launches for your new generic products?
Paul Campanelli
We don’t focus, as a generic company, we don’t on therapeutic classifications. We really focus on product opportunity. So when you look at Par we're, for the most, we finally create value on Paragraph IVs. So ultimately we are looking for products that we can either design around from a formulation standpoint or our legal team can find an opportunity whereby we can either validate or not infringe a patent.
So you're never going to see Par focused really on a therapeutic class, you're going to look at us on a product by product basis whereby we have success in bringing Paragraph IVs forward.
Unidentified Analyst
Okay. Thanks so much for that. Switching gears to your branded segment, which is Strativa, what kind of growth strategy do you guys have for that segment given the Megace ES is sort of like in a declining phase. If I get some color on that that will be great.
Paul Campanelli
Yeah I think from our standpoint I mean the Strativa division remains very important to us and strategic, but we’ve got to be judicious. Ultimately when you look at our portfolio of business and how we are driving our EBITDA, the vast majority is focused on the generic and that’s going to be continue to be the case.
That said, we still have both products are material to Par and we are putting a lot of effort behind the Nascobal opportunity. We have lifecycle management place on Nascobal, we have certain therapeutic initiatives in that particular area on the branded that we are focusing on, and if there is a product opportunity that we are able diligence and it makes sense for our sales team, we will bring it forward. But right it’s the greater majority of the focus is going to be driving the generic sales.
Operator
(Operator Instructions) you have a question from the line of [Nate Deco] representing [GSO] please proceed.
Unidentified Analyst
Good morning, just a quick follow up on the price protection payment adjustment. Is that an adjustment that we would expect to see in future quarters, not necessarily particular drug but to others?
Mike Tropiano
Nate this is Mike. I would say probably not because this was driven by timing okay. It just so happened that the price increase occurred right at the end of the quarter really on our last day of revenue recognition. So I would not anticipate this will happen again.
Operator
At this time there are no further audio questions. Thank you everyone for your participation in today’s call. You may now disconnect and have a great day.
Paul Campanelli
Yes, thank you very much everyone. We appreciate the support and have a great afternoon, thank you.
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