Amneal Pharmaceuticals, Inc.

Good morning, and welcome to Amniel Pharmaceuticals' first quarter 2020 earnings conference call. Please note, today's call is being recorded. At this time, I'd like to turn the conference over to Tassos Kanadaris, Chief Financial Officer at Amniel. Please go ahead.

Good morning, everyone. Earlier this morning, we issued a press release reporting our quarterly results. The press release as well as the slides on this call are available on our website at www.mnel.com. We're conducting a live webcast of this call and the replay of it will be available on our website after its conclusion. Please note that today's call is copyrighted material of MNEL and cannot be rebroadcast without the company's express written consent. I would like to remind you that statements made during this call stating 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 entitled Questionary Statements on Forward-Looking Statements in our Earnings Release and Presentation, which applies to this goal. Our future performance may differ due to numerous factors, many of which are listed on our most recent annual report on Form 10-K, and are revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our website or on the SEC's website at sec.gov. We also discussed certain non-GAAP measures. You will find important information on our use of these measures and our reconciliations to U.S. GAAP in our earnings release. Included in the appendix of today's presentation, you will find U.S. GAAP financial statements that correspond to some of our non-U.S. GAAP measures we referenced throughout the presentation. On the call this morning are Shurak Patel and Chintu Patel, our co-CEOs. In addition, Andy Boyer, our Executive Vice President of Commercial Operations, Dota Disco, Senior Vice President of Specialty Commercial, and Steve Manzano, our General Counsel and Corporate Secretary, are on the line and will be available for the Q&A session. I would like to note that all of us are at different locations due to COVID-19, so please bear with us if there are any technical issues. And with that, I'd like to turn the call over to Chirag.

Thank you. Thank you, Tasos, and good morning, everyone. Tasos joined MNIL as a CFO in March, and we are pleased to have him on our team. I'll begin by addressing our response to COVID-19. First, I want to acknowledge the difficult environment we are all navigating as individuals, as a company, and in our communities around the world. Our thoughts go out to those impacted by this global pandemic, and we hope all of you are healthy and safe. We are deeply proud of how MNIL has and continue to respond to the COVID-19 crisis. We were proactive, and mobilize quickly to evolve our business to protect the health of our colleagues and communities while sustaining the supply of medicines for patients. We established a strategic task force made up of top leaders across all business functions to ensure our preparedness, oversee our response, and enable mitigation and continuity across our business operations. I want to recognize the exceptional efforts of our employees. Our operational teams have kept our facilities running to ensure our products get across the finish line. We have also ramped up production in certain areas to help meet new demand. Our distribution teams have done a terrific job getting our products out to our customers. In addition, our sales and marketing teams have been innovative and productive as they work remotely. For example, they have created new procedures and automated processes to deliver samples to physicians and launched virtual lunch and learns to continue physician engagement. Importantly, our supply chain also continued to perform well. Our procurement teams have done a great job of sourcing and receiving the active pharmaceutical ingredients needed to keep our manufacturing and production operations running as smoothly as possible. As we continue strengthening our supply chain, we are pleased with how we operated during the quarter and confident in our ability to continue procuring materials and delivering finished products. Given the nature of our business and MNIL's commitment to patient access, we believe it is our responsibility to help combat the global COVID-19 pandemic. We quickly accelerated production of hydroxychloroquine sulfate to move beyond our traditional 4% market share, which helped us meet demand from states and government agencies and continue supplying this medication to lupus and RA patients. While we have seen some disruptions as a result of this pandemic, our teams have done an incredible job minimizing the impact to patients, customers, and MNEO. With our diversified supply chain, substantial US manufacturing footprint, and track record of quality, we are well in position for unique challenges of COVID-19. That said, this crisis is shining a spotlight on the dependency of the American pharmaceutical supply chain on foreign manufacturing. The US is almost completely reliant on other countries' supply chains, and manufacturing for the production of APIs and key starting materials to produce finished drugs. It is more apparent than ever there is a need for more drug manufacturing to be in the United States. We want to ensure that when another global emergency comes along, we are ready and able to ramp up production and manufacture lifesaving medicines. We know there is a bipartisan support around this issue, and people on both sides of the aisle understand its importance for national security. As the largest U.S. domicile-generated drug manufacturer, we believe MNIL is uniquely positioned to be a key part of the solution. We look forward to participating in the dialogue. Now let me review the first quarter. We are pleased with our operational and financial performance. which demonstrates continued progress in our efforts to build MNIL 2.0. We are focused as ever on improving our operational execution by strengthening our supply chain, increasing plant utilization, reducing costs, and addressing inefficiencies. All of this is expanding our margins. We have also continued to execute against the strategic priorities we laid out last quarter. These include revitalizing our generic business, growing our specialty franchise, and diversifying the business intelligently. We remain focused on these initiatives even as we navigate the challenges created by COVID-19 and believe we will continue building our momentum in 2020 and beyond. Let me now provide an update on our business segments. Generics had a solid start to the year. It notably achieved 42% adjusted gross margin during the quarter, which is ahead of a long-term goal of 40%. We have two main priorities in this business, strengthen the base business and drive new product launches with enhanced preparedness and execution. We have continued building on our large portfolio of products and remain on track in terms of new product launches. We are growing our market share as we continue shifting our focus to developing and commercializing more complex, high-value products. Last August, we set out to launch at least 15 high-value generics products by August 2021, and we have already launched five, including most recently generic Butrans transdermal system. Our two recent first-to-market launches of generic versions of NuvoRing and TerraFit are up and running and we are pleased with the results to date. Chintu will provide more details on our R&D pipeline and what we are coming up in generics. In specialty, we are continuing to grow our franchise. We outperform expectations on almost all our products during the first quarter. Looking at some highlights, Rytory saw year-over-year revenue and TRX growth of approximately 31% and 17% respectively. driven by continued traction in our marketing initiatives. Unitroid revenues and prescription also increased year-over-year by 33% and 18%, respectively. This reflects continued success of our existing marketing programs and favorable comparison to prior year. Through the week ended May 1st, we have seen a minimal negative impact from COVID-19 on all major specialty products. Prescription refills have remained strong, while new patient starts have dipped slightly. Post-COVID-19, we expect new patient starts to resume growth at the same rate we experienced in the first quarter. Turning now to our efforts to diversify the business intelligently through new distribution channels, we completed our acquisition of a majority stake in Avcare on January 31st. As planned, It is operating as an independent subsidiary, and we have essentially completed the integration. With this differentiated platform, we are identifying new opportunities to better serve government agencies, and our strategy of selling more unit-dose products, which is a niche business, continues to be a part of our strategy for our EVCAT platform. We will continue to evaluate opportunities for value-creating partnerships, and smart, accretive M&A transactions. We believe there will be exciting inorganic growth opportunities as a result of recent dislocation in the market. MNIL remains opportunistic and disciplined, which we believe positions us for continued growth, be it through new distribution channels, new geographies, or complementary additions to our specialty business. As we look ahead to the rest of the year, there's no question COVID-19 has added complexity and a degree of uncertainty to our business and our industry overall. For example, in the second quarter, social distancing and the reduction in physician visits and elective surgeries may impact volumes of certain products across both specialty and genetics. Importantly, however, we have a diverse business and our solid first quarter results demonstrate that our strategy to revitalize this business is working. We are confident that the strength and resilience of our team and our focus on execution will enable us to achieve our operating and financial goals. With that, I'll now turn the call over to Chintu.

Good morning, everyone. Thank you, Chirag. I would also like to acknowledge the tremendous efforts of our team during the COVID-19 pandemic. We have taken a number of actions to help mitigate the impact of the crisis on our company and stakeholders and to provide support to the industry and government where we can. This includes strengthening our own supply chain and working closely with federal and local agencies to avoid shortages of essential drugs. At our core, we have always been a mission-driven organization, and our culture of making healthy possible has never been more important than today. As you can see from our first quarter results, our focus on operational excellence is bearing fruit. We have strengthened our supply chain and improved the processes and systems by which our products come to market. We have managed inventory more efficiently, and worked with customers and suppliers to manage volume forecasts. While these efforts are not done, we are proud of our progress to date. Our generic business is firing on all cylinders, and we have seen very strong results in both our base business and recent launches. We have worked aggressively to expand sales in the base business, where we have approximately 250 products currently marketed. We continue to work closely with our customers and analyze opportunities to grow market share. At the same time, we remain hyper-focused on new launches. Over the last six months, we have launched 16 products, including multiple high-value complex generics. These efforts have substantially improved our gross margin. Finally, as the current crisis has demonstrated, in-house manufacturing and quality infrastructure are more important than ever. Our ability to develop and manufacture products in-house positions us to take advantage of changes in the market very swiftly. As a result, in the last few months, we have been able to address numerous product shortages resulting from the pandemic. On the R&D front, our genetics pipeline is progressing nicely. Earlier this year, we filed our first inhalation product which is the drug-device combination. We have procured exclusive first-to-file status for this product, and it is just the latest example of our commitment to develop, procure regulatory approval, and launch complex, high-value products that have high barriers to entry and offer more attractive margins. Moreover, we are on track to meet our target filing of 20 to 25 products in 2020, and many of these are potential first-to-market opportunities. We currently have 95 products in the pipeline awaiting FDA approval and approximately 94 products in development. Our ability to develop these many new and high-value products reflects the strength and breadth of our R&D organization. Our decentralized R&D model allows us to take advantage of Dogeform specialization and create multiple centers of excellence across the globe. For instance, our sterile injectable focused R&D and manufacturing center has already successfully developed and launched multiple products since its inception a few years ago. As a result, we have a growing injectable business that gives us access to attractive institutional and hospital-based end markets. Importantly, we are actively working to increase our injectables manufacturing capacity in both the US and India as part of our longer-term growth plans to become a key player in the US market. We expect this will be a significant growth driver over the coming years. Finally, we continue to evaluate opportunity to utilize our R&D and regulatory infrastructure to pursue opportunities outside the U.S. While COVID-19 has impacted those efforts to an extent this quarter, the process of expanding geographically still starts with R&D. As a reminder, last year we entered into a partnership with Fosun, which will help us grow our international presence. We expect to file our first product in the coming weeks, coming weeks with more to follow. I will now touch on our specialty business, which continues to grow substantially and where we will continue to allocate more of our R&D budget. We are focused on a strategic selection of products and leveraging our strong infrastructure as well as opportunities to selectively in-license products from external partners and acquire businesses that would be accretive to ours and make strategic sense. One of our key pipeline assets is the IPX203 development program. Though we have slowed patient enrollment in our phase three study in response to COVID-19, we still expect top line data in the second half of 2021. We remain excited about this product's potential and expect commercialization in 2023. As we announced last quarter, our agreement with Khashi Biosciences has expanded our CNS pipeline into neuromuscular disorder. We now have the exclusive rights to the new drug application and commercialization of K127 for the treatment of myasthenia gravis, which we expect to file by the fourth quarter of 2021. With respect to biosimilars, we are advancing three candidates in our pipeline, biosimilar versions of Nupogen, Nulasca, and Avastin, and are actively working to add additional products. This is an exciting area for growth, and we are pushing forward to become one of the key biosimilar players in the United States market. Our goal is to allocate capital towards mid- and late-stage assets, through partnerships and not to spend significant sums on early stage development and manufacturing risk. In summary, we remain passionate about our specialty business and look forward to leveraging our commercial operations as we continue to grow. I want to again thank our dedicated employees for everything they have done to support our business as we work to confront this crisis. I also thank our customers and suppliers for their continued partnership. We are all soldiers in the same fight. Together, as a company, an industry, and as Americans, we are going to overcome this pandemic. Now let me turn the call over to Tasos to discuss our financial results for the quarter. Tasos?

Thank you, Chandu. Let me just dive straight into the results. From a top-line perspective, net revenue in the first quarter of 2020 was $499 million, up 12% compared to Q1 2019 and up 25% sequentially. This growth was driven by the acquisition of Avcare and the growth of new generic products and specialty brands which offset generic competition and the sale of our international business last year. Hydrochloroquine sales were not a meaningful factor in the quarter as we mostly donated our production. Our net revenue was slightly ahead of our expectations, mostly at UpGear, and it reflects strong execution by our commercial and supply chain teams in meeting substantial volatility of customer needs. Wholesaler inventory levels for our products were at normal levels at the end of Q1 2020, but there may have been some early fills of prescriptions due to customer supply concerns with COVID-19. Adjusted gross profit of 225 million was up 5% compared to Q1 2019 and 30% sequentially driven by the top line growth. The first quarter 2020 margin of 45% was down from Q1 2019 as higher profitability of our new products and higher manufacturing absorption rates partially offset price erosion and the inclusion of AdCare, who has a lower margin profile. The sequential margin expansion reflects favorable product mix, partially offset by the addition of AdCare. Moving on to operating expenses. R&D of $35 million an SG&A of 69 million declined in the first quarter due to our efforts to reduce unproductive activities and focus our R&D spend. R&D expense was slightly lower due to COVID-19 disruption and timing of project spend has been geared more towards the latter part of the year. Adjusted EBITDA of 134 million is up from $112 million in Q1 of 2019 and the $81 million of the fourth quarter last year. This growth reflects the positive revenue trajectory, our focus on operating expenses, and up care, which contributed $7 million in the quarter. Adjusted diluted EPS of 20 cents is up substantially from Q1 and Q4 of 2019 where we delivered 14 cents and eight cents respectively. Finally, we're pleased with our operating cost flow of 49 million, a substantial improvement to prior periods. This reflects favorable comparison to Q1 2019, along with top line growth and lower restructuring integration expenses. In summary, this was a very good start of the year reflecting our sound strategy and solid execution. Let me now move to our segment results, starting with generics, where net revenue of 353 million was down 30 million from Q1 2019, but up 53 million sequentially. The prior year decline primarily reflects three dynamics. First, a 29 million reduction due to the divestment of our international operations and shifting of oxymorphone to the specialty segment last year. Second, cells increased from the launch of generic versions of Novarine and Carafate, which offset lower cells of levothyroxide sodium and diclofenac gel due to competition that emerged late last year. Adjusted gross margin of 42.1% was stable relative to Q1 of 2019 and substantially ahead of Q4. The growth compared to Q4 of last year was driven by new product launches, tire manufacturing absorption, and operational efficiencies. As we have discussed, we're targeting 40% plus long-term growth, long-term gross margin for the generic business. And while we're pleased with the first quarter, there is more to be done before we achieve 40% plus in a sustainable way. Finally, Adjusted operating income of $103 million reflects our top-line growth, favorable product mix, focused investments, and some favorable expense timing. Let me now turn to our specialty segment with net revenue of $88 million in the quarter, up 38% compared to Q1 2019. Adjusting for the classification of oxymorphone, Net revenues grew 14% driven by Rytory and Unithroid. This performance reflects the ability of our sales and marketing teams to stay productive while working remotely and shift activities such as sampling and training to a virtual basis. The decline from the prior quarter was expected and reflects seasonal factors. Adjusted gross margin of 74.6% was in line with our expectations. and the unfavorable variance to prior year is driven by the reclassification of oxymorphone, which has a lower margin profile. Finally, operating income of $39 million reflects upline growth, tight management of expenses, and seasonality compared to prior quarter. Let me now move on to Upcare, with $58 million in net revenue in the quarter. This new segment only reflects third-party product sales, which account for approximately 80% of Avcare's total sales. The MNL products sold via this channel are reported in the generic segment consistent with prior years. As you may recall, we closed this acquisition on January 31st. While this period includes just two months of sales, we believe the business benefited by strong demand by the Department of Defense and the VA to build inventory in anticipation of COVID-19 supply challenges. Let me now turn to our cash flow, balance sheet, and also discuss two discrete events in the quarter. First, as you can see, we ended Q1 with $407 million of cash. This reflects solid operational performance and temporarily borrowing $300 million from our $500 million ABL facility. This temporary volume was driven by an abundance of caution as COVID-19 led to substantial disruption in the financial markets. As markets improved, we returned $200 million and expect to return the remaining $100 million in the next few months, provided markets continue to function properly. The second discrete event relates to a $110 million cash tax refund we expect to receive in the second half of 2020. This is driven by new legislation and IRS guidance, which allows companies to carry back net operating losses to offset taxable income and taxes paid over the last five years. Consequently, we plan to utilize approximately 330 million of existing net operating losses in support of this tax refund. Considering the discrete nature of this event, we have taken the prudent step to exclude it from our operating cash flow guidance. Moving on to our balance sheet, as you can see, we have substantial financial liquidity in excess of 600 million and no near-term debt maturities. In addition, continued strong financial performance and smart uses of cash will provide a natural reduction of leverage over time. Looking ahead, who remain comfortable with the financial guidance we provided in February, and it may be helpful to provide some insight to our thinking. First, we have a broad, generic product portfolio that is not overly concentrated in one or two products and a robust supply chain. Having said that, we have assumed a slowdown in the second quarter as patients may postpone preventive care or healthcare visits due to COVID-19. Second, We are not overly reliant on pharmaceuticals administered within hospitals, and our commercial teams plan to be opportunistic in pursuing new business and leverage new product introductions. Third, Avcare provides a stable platform for growth with long-term contracts and good visibility. Contracts in this business are typically five years, and we can increase volumes over time. Finally, we continue to be focused on improving our efficiency and operating expenses. With that, Let me turn the phone over to Chirag.

Thank you, Tasos. Before we open the floor to Q&A, I want to emphasize that we are relentlessly focused on reinvigorating the company and building MNIL 2.0. Despite the added complexity and uncertainty created by COVID-19, we delivered a strong quarter. And thanks to the hard work and resiliency of our team, we are positioned to achieve our goals and to drive growth in 2020 and beyond. Thank you. With that, I'll turn the call to the operator to open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To answer your question, please press star, then 2. Please limit yourself to one question and one follow-up. If you have any further questions, you may re-enter the question queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Greg Gilbert from SunTrust. Please go ahead.

Hi, good morning, guys, and welcome, Tassos. I wanted to start with you, Chirag, on your comments about a U.S.-centric supply chain. How feasible and practical is it to have a more U.S.-centric supply chain, and what do you plan to do as a company to make that happen in a bigger way than you already have? And my follow-up will be for Chintu, since you brought up the first-to-file opportunity. Is there anything more you can say about that inhaled product? Presumably you filed and were not sued. Can you give us any more color about that? Thank you.

Thank you, Greg, and good morning. The U.S.-centric supply chain took years to get to this level, this position where supply chain is highly reliant. And there are reasons, and you guys know the history for the last 50 years, how it moved overseas. Antibiotics in China, the concentrated there, and then a lot of finished goods production in India. Then Europe and US, we have not much of an API manufacturing. It is a long-term event. It is not going to happen overnight. But what we are hearing from the Congress and administration is that they do want to bring back certain essential medicines, such as not maybe 100% capacity, obviously, but let's say 30%, 40%, or 50%. So we can, in case of emergency, ramp up the production And we are not completely reliant on foreign sources. So the essential drug list would be probably, we don't know how big that could be, 50 products, 100 products. It would have to have incentives for the manufacturers to invest in the United States supply chain. And those cannot be temporary. It has to be long-term, permanent changes. We, as MNIL, are well positioned because we already have large production facilities here. We do not have API facility. We do have API facilities in India. And we would build those, whether it is in a fermentation site or on a small molecule. Again, it's a project that would have to start with the support of Congress and then it will continue on for three years certain productions and after that five years, seven years, ten years, but we believe that in that timeframe we can bring back certain capacity and capabilities as well because we need to train the people and bring the skill sets here as well. Chintu, you want to answer the FTF?

Sure. Hi, Greg. Good morning. As I mentioned in my opening remarks, we have procured the exclusive FTF on one of our first inhalation product. We have not been sued, as you can see from public events, so it is a potential launch and approval. We have beautiful infrastructure in Ireland, both for MD and DPI. And at right and appropriate time, we will disclose and do a press release on this product. But at this time, we are not disclosing the name of the product.

Should we think about this as a potential 2021 opportunity?

Yes.

Okay. Thanks, gentlemen. I'll get back in line. Thank you, Greg.

Thank you. The next question comes from Randall Sineke from RBC. Please go ahead.

Great. Thanks, guys. Hey, Chirag, I want to follow up on the last question. You called out annuals being one of the largest U.S. generic manufacturers. Is it your view that any economic incentives from the government could be limited to U.S. domiciled companies? So that's the first question. And then Tassos, on the generic gross margin coming in at 42%, can you get into some more detail on what you're expecting from around some of the puts and takes to that margin for this year. It sounds like you're still holding to that 40% target. What are the factors that could push that generic gross margin higher? Thanks.

So, Randall, good morning. The U.S. domicile, yes, we're the largest U.S. domicile company. I don't believe, yes, there will be certain incentives given to, and this is all work in progress. We are part of a dialogue. But it's going to need, obviously, more than U.S. domicile companies. It's going to need the companies that already have certain expertise and capabilities somewhere else to bring back production faster pace, at a faster pace rather than slower pace. And we need the entire industry to work together to make this happen. Tassos.

Hey, Randall. This is Tasos. So, a couple of things. So, as you said, Q1 generic adjusted gross margin was 42%. And just to kind of put it in context, that's essentially flat to same period last year. And the dynamic there is we had, you know, overall price pressures, as you know, that came in in the latter part of last year. We had some of our key products we launched last year, generic competition. And the offset to that was the launch of our new products, generic caraphate and sucraafate. So that's one driver. The second thing is in Q1 also we benefited for some favorable manufacturing absorption. So our manufacturing teams worked incredibly hard to keep up with the demand in the marketplace. So that kind of benefited us in Q1, and there may be a slight offset in Q2. So that's more of a time in Q1, Q2 on the generic gross margin. But kind of stepping back for a second is, you know, we feel great about the gross margins, you know, who are still targeting, you know, this year, making a meaningful contribution progress in terms of adjusted gross margin growth. Last year, as you know, we were at 35.5%. This year, we're looking for a meaningful increase towards that 40% plus. And the key driver to that, I think, is twofold. Number one is our ability to get new products to the market, so we feel good about that. That's what Cindy talked about, focus of the R&D to produce and get approvals of hard-to-make generic products, so we feel good about that. That's going to be a key driver. The second key driver, frankly, is we're hoping to see lower price erosion this year as what we had seen prior year. So it is a competitive marketplace. Our commercial teams are spending a lot of time bidding for new projects. So that's going to be the second driver is the price erosion in the marketplace. Now, It's one man's opinion, that's my opinion, which says, you know, this COVID-19 has put a premium on companies that have diversified supply chains. And at some point in time, that has to show up in the pricing of those products. So let me stop here, and hopefully that answered your question.

Yeah, are you guys seeing the ability to take price in this current market? Has COVID-19... maybe brought back some of the pricing power that Generic seemed to have lost over the last couple of years?

So, Randall, I'll take that one. So, I just want to reiterate the gross margin increase. As you know, we focused on increasing our base business since August of last year. That has now ramped up, and we'll continue to do that, along with new launches in fourth quarter, as well as first quarter, which we have higher utilizations at every plant. The price increase is not, obviously the market is still there. We are facing price increases from our API suppliers and freight costs, but we are not able to pass those increases to our customers. We are in a dialogue with them, and hopefully we will work to get that done. the industry still is highly concentrated from the buying power. So what we are not seeing is many challenges, which is good news. And that could be two reasons. One is that already prices are way down, rock bottom prices, so there's no more place to go down in most of the products or many products. And second reason is customers are now thinking more about securing the supply chain, reliable partners. So we're seeing more partnership to do that, and that may improve the pricing environment in genetics.

Got it. Thanks, Chas. The next question comes from Balaji Prasad from Barclays. Please go ahead.

Hi. Good morning, everyone. Thanks for the questions. Good to speak to you again, Charles. So a couple of questions on the generic side. Firstly, since you commented on the pricing erosion, I'll lead on from there. So what kind of erosion did you see on your existing products as it started to recede versus what you're seeing the last one or two years? And just on the question that Randall just asked now, are you seeing any fundamental dynamics change between the buyers and the relationships? And how should we think of this going forward? Lastly, can you also just comment on the What are your thoughts of competitive launches into the guidance, especially into nearing and care phase, and how it may impact the range you provided? Thanks.

Hi, Balaji. Good morning. So let me take your first question. The price erosions, as I said, we have seen less than the prior years, and we hope that we continue to see that trend because, frankly, there is, not any room left otherwise we would have to discontinue products and the fundamental change you talked about is is is happening i don't know is that which face it's going to go to but they're now evaluating all three big customers on their supply chain having more api having partnering for longer term so we don't need to worry about losing a product with them in six months so we can plan properly. So longer term contracts are in works as well. More diversified, so having alternate sources of API, having alternate sources of finished products. So all those questions are being asked where MNIL plays a real role. with the strength and obviously the quality track record because we have multiple products with dual API sources, dual manufacturing in India and U.S. So we are able to win business, more business than maybe our competitors. But I do believe that certain long-term fundamental changes are coming. as we focus more on securing the supply chain and partner with the reliable sources. Your third question on Newaring and Sucralfeit, we had a solid first quarter and continue to build on it. Sucralfeit, we already have a great market share, almost 60%. Newaring, we built the capacity to get up to 30%, which we'll start doing that now. We have the automated process approved by FDA and already producing more products. Thank you.

The next question comes from Ami Fadia from SVB Learneak. Please go ahead.

Hi, good morning. Thanks for my questions. Just with regards to bringing manufacturing back to the U.S., Can you talk about the – can you help to sort of quantify the increase in cost if manufacturing of certain products were to be brought to the U.S.? And what's the appetite either in the government or kind of the key buyers with regards to that increased cost? And with regards to just timelines, you mentioned that this is a long-term process. but is a meal positioned to respond faster on certain products or on certain fronts, given its existing manufacturing footprint in the U.S.? And then separately, you know, what are your current thoughts with regards to business development or partnerships, and where would you prioritize that? Would it be on the specialty side or generics, if you could sort of elaborate on that? Thank you.

Good morning, Ami. So back to the U.S., the manufacturing, as I said, it is certain capabilities and capacity needs to be built here. And Congress is exploring various bills. They may be putting their, as I said, work in progress, putting some task force with National Academies of Science and coming up with essential product list. As I said, it will involve the entire industry. It's a pretty large undertaking, but it is being considered seriously. Again, it's an early process. I don't know the timing. When they ask for our input, we provide our input. And the cost analysis would have to be undertaken. Basic material and raw material costs should be the same, whether it's in Europe, China, or U.S. The cost of operating would be higher here, and labor costs. So we haven't quantified that, how many products we need, the list of essential products, which one MNIL would be playing a role in it, and it will be a competitive process in the free enterprise world. MNIL would act fast because MNIL is solely focused on US market so everything we do is always geared toward United States market and we have a strong manufacturing position on a finished dosage form and we are known for our execution for this is how we built MNIL 1.0 and doing it again in MNIL 2.0 So we would act faster and participate in a competitive process. On the business development front, the specialty remains our focus. We're looking for complementary assets to a movement disorder franchise, as well as endocrinology. It would have to be accretive. Not looking for, again, I said it before, looking to hit still some singles and doubles and not going for a bigger transaction at this point. We already have so many assets that we can execute upon within our R&D, both on a genetics and specialty, so very focused there as well. Thank you, Amit.

The next question comes from Elliott Wilbur from Raymond James. Please go ahead.

Thanks. Good morning. Just wanted to ask a couple of questions around future pipeline opportunities and specifically thinking about potential disruption to ongoing review. Just wondering if you're noticing any impact in terms of FDA timelines, particularly with respect to Some of your higher barrier to entry or complex generic products certainly seems like the FDA continues to prove a lot of generics, but just wondering if you're seeing timelines maybe slow for review of some of the more complicated products considering issues such as inability to conduct inspections and the like. And then maybe just an update on some pipeline products that have talked about previously but maybe haven't been mentioned in the last couple of calls and specifically thinking about generic versions of Capaxone. restasis, whether or not you still see those as 2020 opportunities. Thanks.

Chintu, you want to? Hi, Elliot. Yeah, hi. Good morning, Elliot. Regarding your first questions, we have not seen any delays on our goal dates from FDA. As you see that it will be a company-specific and MNELANGER is a fantastic quality track record over the last 18 years, and I think That goes a long way. And whether it's a complex or regular product, we have not seen any shift in our goal dates. And FDA is working very diligently. And I really want to thank the agency for doing all the work they are doing in given circumstances and situations. So we remain positive on our new launches for the remainder of the year. Regarding your second question on Capaxone and Restoresis, Restoresis is kind of in a regulatory limbo. So I'm not in a position to say what way it's regarding the entire industry and whatever the decision comes out of agency would be applicable to everybody. So I don't have a timeline for this test. Capaxone is a 2021 launch for us.

The next question comes from David Amsalim from Piper Sandler. Please go ahead.

Thanks. So just expanding upon the theme of pipeline, you cited also a Durazol filing, which I believe is off patent. Do you expect that that's going to be a limited competition and potentially a nearer term launch? That's, I think, an interesting and unique product given its challenges. But what are your thoughts on potential a potential for that as an opportunity. And then secondly, in your injectable pipeline, thinking beyond Capaxone, what's your view on the extent to which you want to further build out a hospital injectable franchise and from a biz dev or internal development perspective, how big of a priority is hospital injectables in the context of your overall business. Thanks.

Yeah, hi, David. Good morning. Regarding Derozole, Derozole is a very complex product, and we don't see that much competition. It has many barriers of entry. We are tracking nicely with FDA, and we expect maybe late fourth quarter or next early 2021 launch. regarding our injectable pipeline as i mentioned we are building our injectable portfolio and we are excited about uh our pipeline uh we have uh different areas within injectables terrain we are working aggressively on certain depots to complex injectable in a suspension drug device combination products uh many ophthalmic products so we are focused including certain 505 B2 products in our injectable pipeline that open up many more hospital chains. So we are looking at all aspects. At the same time, we are also expanding our manufacturing in the U.S. and India for injectable pipeline. We already have about 30 to 40 products in pipeline for injectable portfolio. But it's going to be a very differentiated high-end injectable product that will bring certain key value to the patient and doctors.

Thank you. The next question comes from Gary Nachman from BMO Capital Markets. Please go ahead.

Thanks. Good morning. First, can you quantify how much COVID benefited in 1Q, how much stockpiling there was in the quarter, and how much could that reverse in the coming quarters? More color on that would be helpful. And now that you've owned AdCare for a few months, what are some of the opportunities you've identified for that business How much could you potentially drive incremental volume for MNILs-based business through AFCARE's network? Thank you.

Gerard, I'll take the COVID-19. Good morning. From a COVID-19 standpoint, it was no material impact to Q1. We were very socially responsible in the way we managed our inventory to try to avoid stockpiling. at the commercial marketplace. So there was no material impact in Q1 from COVID-19.

Tasos, you may want to give more color on the COVID-19 impact.

Yeah. Yeah. So I'll just reiterate what Andy said. So just kind of provide a little bit more color on some of the puts and takes. So number one is we do get the same wholesaler inventory data out in the trade, and there was nothing abnormal in terms of total companies. So weeks on hand actually declined at the end of Q1 versus the end of the year, which is typical because the end of the year they typically order an extra week. So there was nothing abnormal there, number one. Number two, internally, you know, because of the discrepancy, the impact to the business, we had a number of open positions that we did not fill. However, we had substantial more overtime in the manufacturing plants. So the substantial overtime in the manufacturing plants offset some operating expense favorability related to headcount related costs. We also had incremental, substantial incremental costs regarding freight, which I think every company was impacted by that. You know, the final thing is we saw our R&D expenses were slightly favorable in the quarter, and that's because we couldn't get as much active material that we wanted for some of the trials and some of the projects. So overall, I would say the impact to the quarter was non-material, and there is nothing in our heads that says that that will be reversing in Q2.

Does this help, Greg? Yes. Thank you, Taso. Gary, I just want to add that, yes, that's a good question. The first quarter performance is solely is MNIL's performance, is what we've been doing since last August. As I reiterated, that increasing base business, launching new products, higher efficiencies, All these have a super performance-wise specialty with their marketing initiatives. And Avcare, which adds excellent add-on to MNIL, very complimentary. Carafate is not being sold yet by Avcare, but Carafate has increased demand due to, as you know, the Renitidine product Zentec was pulled out of market. and that has diverted more demand to carafate. Hopefully this answers your question, Gary.

Yeah, and just a little more on Aptar going forward. Is there anything more you could do with that business to drive more growth than what it was seeing previously? Just how we should think about that trajectory for that business.

Yeah, so that is one of our strategic initiatives along with growth in generics and growth in specialty. Avcare, they're very well set in government to sell generics product, but now they're looking at selling more of it or getting in long-term contracts with biosimilar products and specialty products as well. And then there is other initiatives that BARDA has used up its stockpile or is concerned about any future or current demand through the pandemic. So they're looking to stockpile more products as well. So all these are opportunities for healthcare. And the unit dose business is small at this point, but we are putting up a liquid infrastructure which will then take the unit-dose liquid business by – the growth will come by probably next year in unit-dose liquid business. Multiple avenues to grow healthcare.

Okay. Thank you. Thanks. The next question comes from Chris Schott from J.P. Morgan. Please go ahead.

Great. Thanks so much for the questions. Just two for me. First, you mentioned some share recapture on the base business is helping with generic results. Can you just elaborate a bit more on the trends you're seeing there? And probably more importantly, is there more opportunity going forward to further improve share on the existing portfolio? And then my second question was on biosimilars, and I think you referenced a desire to pursue licensing deals or partnership deals here. Just a little bit more color there. Should we think about these as near-term product launches or longer-term opportunities? And should we think about the company targeting assets that have already completed clinical programs? Or conceptually, could these deals result in a step-up in R&D spend as we think about the go-forward business? Thanks so much.

Good morning, Chris. Your first question on base business. The trend continues as MNIL has a diversified supply chain and with COVID-19, actually, customers are looking to diversify. So if they're buying 100% of their products from India or Europe or vice versa, they want to diversify. And if you have U.S.-based manufacturing, they're looking to add certain percentages of their business in U.S. as well. So trend is very positive as we have a very large portfolio of 250-plus products and keep launching new products. A very strong generic business and we continue to win new businesses. And our quality track record also comes in handy because of the reliability of our products as well. Biosimilars, we have three products in the pipeline. We expect launches 2021-22 for those products. And we are carefully adding products as we are learning more and more about the market and how it behaves. It's quasi, I call it quasi-branded market. So you need lots of effort. So it focuses more on oncology where we would have started building some small infrastructure and we will add on to, we already have a very nice specialty branded infrastructure. So we'll leverage that as well without adding any further costs there. So our goal is to in-license the products where we are, and this is 10 years view, we are always, we build company over a long time, that we would in-license products which were potentially we could be, first is going to be hard at this point, but let's say second, third, fourth, we do not want to be after that. So because it becomes very competitive beyond So that is what we are looking to build, oncology pipeline going forward or any other interesting IP-driven opportunistic pipeline as well. Thank you, Chris.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Tassos Kanadaris for any closing remarks.

I really want to thank, number one, our team for doing an incredible job in Q1 and staying focused on the business for the rest of the year. And I really want to thank our investors for being with us and our customers that rely on our products and services. Thank you, and have a great night. Bye-bye.

Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.