Q4 2012 Earnings Call Transcript
Transcript Call Date 03/21/2013

Operator: Good day, ladies and gentlemen, and welcome to the Par Pharmaceutical Companies, Inc. Earnings Conference Call. My name is Kasiv, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

I would like to turn the call over to Michael Tropiano, Chief Financial Officer. Please proceed, sir.

Michael A. Tropiano - EVP and CFO: Good morning, and welcome to Par Pharmaceutical's review of our full year 2012 financial results. I'm Mike Tropiano, CFO of Par and today I'm joined by Paul Campanelli, Par's Chief Executive Officer, Tom Haughey, our President and Barry Gilman, Par's General Counsel. After a few comments, we will open it up to questions.

I need to remind you that certain comments made during this call may constitute forward looking statements. Such forward looking statements are subject to both known and unknown risk and uncertainties that could cause actual results to differ materially from such statements. Those risk and uncertainties are described in Item 1A Risk Factor of our Annual Report on Form 10-K for the year ended December 31, 2011 and in the reporting packages for the third quarter 2012 and the year ended December 31, 2012 posted on the secured portion of our website as well as other SEC filings and postings we have made or may make in the future. We do not undertake any obligation to update these forward-looking statements.

Also during the call today we may be discussing adjusted EBITDA which is a non-GAAP financial measure, please see our reporting package for reconciliation to net income to most directly comparable GAAP measure.

The acquisition of Par by investment funds affiliated with TPG was completed on September 28, 2012 and the third quarter financials we posted subsequently did not include purchase accounting adjustments or give effect to the transactions relating to the closing of the acquisition. These events are now recorded in the 2012 annual report we released last evening.

Our 2012 results show a GAAP determined net loss of $11.4 million on revenues of $1.1 billion after taking the DOJ settlement transaction costs we incurred during the course of the year and took business development into account our 2012 net income adjust to positive $67 million.

The adjusted gross margin generated by our product portfolio for 2012 reached $460.9 million a strong increase of 15.3% as compared to 2011.

Moving over to our cash flow statement you will see that our cash generated from operations was $153.8 million for the predecessor period, which covers the beginning of 2012 through the TPG Par transaction closing. This metric then turns to negative $28.6 million for the period of September through December 31, 2012.

It is important to note that this successor period contains a number of one-time items including $36 million in transaction related cost $10 million business development transaction as well as yearend compensation cost. After giving effect to these items, operational cash flow for this period was positive $29 million.

I'll now direct you to our non-GAAP EBITDA reconciliation posted yesterday as Exhibit A. You can see that we produced $68.9 million of adjusted EBITDA in the fourth quarter 2012, and that for the full year we achieved adjusted EBITDA of $330.9 million.

Much of our operational success during 2012 was attributable to our April launch of high-margin Modafinil which accounted for $105.8 million of revenue during 2012. Although Modafinil now has significant market competition, it is still an important product for Par. We've also had a number of recent product launches which are already helping us in 2013. These include; arthrite generics, Rizatriptan ODT and Rizatriptan tablets as well as Lamotrigine ER and Fluvoxamine ER a product we launched last week.

That concludes my comments and our team will now take your questions. Thank you.

Transcript Call Date 03/21/2013

Operator: (Henry Oka, Deutsche Bank).

Henry Oka - Deutsche Bank: Just a few questions. First I guess on the – just on the pipeline of new products that you guys have. You mentioned a few that you have and I think last quarter I had asked if you guys could give us a breakout of what you anticipate. Is there any kind of a schedule that you can provide or that you provided that I missed that contains sort of the drugs that are going to be coming out your pipeline of drugs that you currently have?

Paul V. Campanelli - CEO: This is Paul Campanelli. So, what we did was back four weeks ago at the Goldman Sachs Leveraged Finance Healthcare Conference, we had provided a little bit of an overview about the number of ANDAs in the pipeline. We did not disclose specifically the products and what we're trying to do is we apologize for not commenting on the invasive, but we don't want to put ourselves at a competitive disadvantage by actually listing out the products. What we are saying is for 2013 that we're anticipating about 12 to 15 potential launches for the year. So, while I can't put myself or the Company really at risk from product specific standpoint, we're very excited about outlook is. The pipeline is healthy and I see no reason why we can't hit this 12 to 15 for the whole of 2013.

Henry Oka - Deutsche Bank: Could you give us any scale on the that pipeline, how big any particular launch might particularly be on average, so you can kind of have a gauge in some way of what's coming?

Paul V. Campanelli - CEO: Again, I'm going to apologize, we do have some (stealth) launches here that it really would put us at disadvantage, so I do apologize. I think right now the best interest of our Company, we're just going to have to stick to the (indiscernible) number.

Henry Oka - Deutsche Bank: I guess then, I think you had said at the time of the transaction that quarter-to-quarter there may be some volatility, but on a year-over-year basis, EBITDA would be kind of up year-over-year. Is that still your belief?

Michael A. Tropiano - EVP and CFO: I think – the volatility is simply caused by the fact that the launches are not even, and not of value, so that will cause some choppiness in our year-over-year. As you go, if you take a look at the 2012 Exhibit A that we attached yesterday you'll notice when you look at the four quarters of '12 that’s kind of an indicator what our business looks like, you see the choppiness and really that’s driven (CQ2) is a large number that’s the quarter that we launched with Modafinil and I think you'll see similar but you can see we are on good track and I purposely mentioned the fact that we've had a bunch of launches just in recent weeks actually so we are off to a good start.

Paul V. Campanelli - CEO: Maybe we should just point out in the case to Mike's point we did launch Luvox last week and there was no compensation so I think it's big high level product very exciting and we are single source. So should be a nice contributor to 2013. I think the sales on that product essentially were about $100 million so just to give you an indication. Little more a specificity on that one particular product.

Henry Oka - Deutsche Bank: But then on a year-over-year basis if you are (330) now we should think it should be up from that, this coming year?

Michael A. Tropiano - EVP and CFO: Now that I can't comment, I would you lead you back to something we put out during 2012 during the financing period. I remind you that the number one swing from '12 to '13 is going to be factor when Modafinil was launched during 2012 for a significant value. You saw we put the $100 million in sales. Modafinil was now in decline due to competition. So the non-replication of Modafinil is going to close down where pressure on '13 relative to '12.

Henry Oka - Deutsche Bank: So just and then if I could just, the drugs that you listed as the top 5 if we could kind of go through them, Toprol I guess that’s a slow decline it had a little drop this quarter. We should continue to see that declining I think that’s what you said in the past?

Paul V. Campanelli - CEO: Again Toprol is a part that’s very extraordinary portfolio. So the decline would be modest. I think for the most part we've seen it.

Henry Oka - Deutsche Bank: Budesonide basically pretty much continues on as it is. Is that a good assumption?

Paul V. Campanelli - CEO: Yeah, Budesonide is a two player market. I think it's a very healthy two-player market, it's from Mylan and I think you just kind of have to look at that as a standard balance two-player market. And at this point in time, I don't see or know whether competitors coming in.

Henry Oka - Deutsche Bank: Modafinil down to 16 this quarter, 16-17, does that follow (ASA), in half or is that – or you are at a situation where you are going to retain a certain amount of market share?

Paul V. Campanelli - CEO: Again, it's a little hard to say. We know that there's a lot of applicants out there that are not approved. I think we probably outperformed a little bit better than we had anticipated due to the slow approval process, but I think what we can say this certainly is a healthy number of applications out there and if they all get approved you will see aggressive erosion. At this point in time, it continues to be a good product, but I can't control or really predict with certainty when the FDA is going to approve the follow on competitors.

Henry Oka - Deutsche Bank: Propafenone?

Paul V. Campanelli - CEO: Propafenone?

Henry Oka - Deutsche Bank: Propafenone, I guess it's – I think that's supposed to be fairly stable as well, is that correct?

Paul V. Campanelli - CEO: Yeah, I think that's the way we are looking at Propafenone throughout 2013.

Henry Oka - Deutsche Bank: Hydrocodone, I guess the branded, I had thought that was going to go down. I actually thought that – I actually saw that go off this particular quarter?

Paul V. Campanelli - CEO: I think the case in the Hydrocodone I think you are referring to the Hydrocodone in combination with Chlorpheniramine that's Tussionex product?

Henry Oka - Deutsche Bank: Yes, Tussionex.

Paul V. Campanelli - CEO: I don't know how you want to say this, it was a positive flu season, and I apologize positive for meaning that there were – it was an aggressive flu season, so with that comes our unit sold, so, I mean that's the uptick that you are seeing in that particular product. It's seasonal.

Henry Oka - Deutsche Bank: Just the seasonal uptick?

Paul V. Campanelli - CEO: It's seasonal, but it was a bad flu season, so with that comes the additional units.

Henry Oka - Deutsche Bank: then I guess you took a litigation charge, Zegerid litigation charge and can wrap that $9 million. Is there any – I think that's going to go on for a while, does that kind of cover what you think your expenses are at this point?

Barry Gilman - General Counsel: This is Barry Gillman, that's our best estimate at year end for purposes of our financial statements and otherwise we are continuing to defend the case and we don't otherwise really comment on pending litigations.

Operator: Erin Blum, Goldman Sachs.

Erin Blum - Goldman Sachs: On the products that you acquired from Actavis, can you explain how that manufacturing agreement works and is there any reason for you guys to take over the manufacturing prior to the expiration? Do you have the capacity ready to do that?

Paul V. Campanelli - CEO: So, Erin, this is Paul. The way the agreement works is we negotiated supply agreement with at the time Watson, so we have a good run rate for supply. And then also as a part of the acquisition process, we want to control the manufacturing ourselves, so we are working with I guess the now Actavis team to do tech transfers on these products that are commercial into our facilities. Keep in mind we've got three facilities so they may either be in Spring Valley or Irvine or Chennai, so we have a good tech transfer team that works with Actavis, so I feel really good about that process.

Erin Blum - Goldman Sachs: Is there additional CapEx that we should expect to be associated with that?

Michael A. Tropiano - EVP and CFO: It's small, I mean at the end of the day by definition we'll call it CapEx but it's small it's not for material dollars.

Paul V. Campanelli - CEO: Also we have ample capacity for any such type of transaction.

Erin Blum - Goldman Sachs: Then I had one more on the Strativa restructuring. What was it that, precipitated the decision to do that and how should we think about the potential cost savings?

Michael A. Tropiano - EVP and CFO: At high level I think everybody knows that we entered into a CIA agreement with the DOJ and I think simply put we are looking at our ability on how we can compensate our reps for Megace and lack thereof, because of that we simply looked at our team and we restructured accordingly to ensure profitability. So I think the key here is that we need to ensure EBITDA contribution coming out of the Strativa payment and then our profitability and that’s all there is to it.

Erin Blum - Goldman Sachs: Then just generally speaking for our sales rep what serve your annual expense all-in for sales reps?

Michael A. Tropiano - EVP and CFO: We really don’t – we don’t really…

Paul V. Campanelli - CEO: Standard for formula – I don’t think there is any material that would be out of the normal.

Operator: Sir, you have no more questions at this time. (Steve, Simco)

Steve - Simco: I just wondered if you had a comparable EBITDA number from the fourth quarter of 2011 or maybe a mid-size thing.

Michael A. Tropiano - EVP and CFO: Especially comparable to this EBITDA I would say. No, we don't. We're on it (indiscernible) base. You got to remember we ran a EPS roll back then and we – that's not something that we look at.

Barry Gilman - General Counsel: Let me just say, if you pick up our old financials you can kind of do your own math. Obviously the depreciation, interest, taxes are all there for you. So, we don't have it on us, sorry about that.

Michael A. Tropiano - EVP and CFO: It's a very specific basis that we reporting here right in conjunction with the agreements.

Steve - Simco: Obviously I can do that. Were there any unusual items that you would recall from the fourth quarter 2011 that I should think about or was it just pretty standard quarter?

Michael A. Tropiano - EVP and CFO: Your best place to go, as you just reminded me is to pull out our 2011 fourth quarter press release which would come out around later on March 1, 2012 and there is a whole recon there actually from GAAP to non-GAAP as well.

Barry Gilman - General Counsel: And we highlight for any changes in the products in that press release.

Operator: Thank you for your questions and thank you for joining today's conference. This concludes the presentation. You can now disconnect and have a good day.