AMRI turnaround at inflection point
AMRI (NASDAQ: AMRI), a leading global contract drug research and manufacturing organization, is at an inflection point in returning to profitability.
“We think that some of the concepts coming out of marketing our SMARTSOURCING program make us uniquely positioned to provide a wide variety of services as one of the only players to go from target drug validation to manufacturing of active pharmaceutical ingredients on a global basis,” Mark Frost, Senior VP of Administration and CFO, says in an interview with BioTuesdays.com.
“That differentiates us and allows us to provide strong options to our customers to manage their compounds,” he adds.
The SMARTSOURCING program is a series of strategic sourcing options to enable customers to reach more successful outcomes, combining high quality scientific performance and enhanced decision-making, with the accountability of delivering results in a cost-competitive manner.
As part of its turnaround, AMRI is also streamlining its operations to improve margins, enhancing its revenue growth and strategic relationships, and maximizing licensing and partnering of its in-house drug discovery compounds to deliver profitable operating performance in 2012.
Founded 21 years ago, AMRI’s services basically follow the life of a drug. It provides clients with a wide range of early services in two platforms – drug discovery, and development and small-scale manufacturing – before Phase 2 clinical testing. Its third platform – large-scale API manufacturing – covers client needs for Phase 2 and 3 clinical studies and commercial manufacturing that include sterile fill and finish, niche generics and formulation manufacturing, among others.
“Our focus is different than classical contract manufacturing, which involves sending out a bid after a successful Phase 3 trial,” Mr. Frost explains. “What we try to do is develop a relationship before preclinical, and if all goes well through clinical testing, we’ll be in a good position to get a primary or secondary manufacturing agreement.”
He says the strategy works. “All of our customers have found it valuable for us to have both capabilities: contract research and contract manufacturing.”
In the first quarter this year, AMRI posted a sequential improvement of $6.5 million in adjusted net income, even though revenue eased 6% to $53.7 million. First quarter results reflect the benefits of significant operational actions taken in 2011, combined with the early stages of revenue growth from a growing number of recent multiyear strategic relationships.
Mr. Frost explains that AMRI was hit hard by the liquidity crisis in 2009, which prompted many of its biotech customers to cut back on their drug development programs. The company’s revenue fell to $162 million in 2009 from $201 million in 2008. For 2012, AMRI is guiding to contract revenue of $181 million, up from $170 million in 2011.
Guidance for adjusted earnings per diluted share is in a range of 6 cents to 12 cents for all of 2012, he adds.
“We started making money again in the first quarter, and we think we’re back on a path to robust growth in the second half of the year,” he says. “We’ve been able to effectively manage through the downturn while a number of our competitors have not, thereby reducing the number of competitors in the marketplace going forward.”
Last November, analyst Greg Bolan of Sterne Agee & Leach initiated coverage of AMRI with a “buy” rating and $7 price target. The stock was quoted at $2.73 last week.
“Within the micro- to small-cap healthcare space, we view AMRI to be a compelling 2012 story, given our view that discovery contract services revenues (29% of contract services revenues) and profitability are primed to improve meaningfully,” he wrote.
AMRI’s customer base covers more than 300 clients. “One of the reasons we faced significant operational challenges in the last couple years was because about 75% of our business was with Small Biotech and Specialty Pharma,” Mr. Frost acknowledges. “We lost significant business when they lost funding and cut back their development activities. So, we’ve spent a lot of time since then driving a better mix of customers by focusing on Big Pharma relationships.”
Mr. Frost also notes that in addition to governments and non-profit organizations, AMRI is starting to see the academic world come into its world in terms of clinical support.
In 2011, for example, AMRI landed a $43 million, five-year contract with the NIH for the development of preclinical drug candidates to treat CNS diseases. “The ideas are sourced from top academic institutions, which are then supported by the NIH, and we’re contracted to do all the early discovery work for that academic institution,” Mr. Frost points out.
In addition, AMRI teamed up with a VC-backed organization called BioPontis Alliance in January. Under the accord, BioPontis finds drug development candidates in academic organizations.“We’re their preferred vender to do all the discovery work and hopefully development work, if an innovative idea gets into preclinical selection.”
AMRI attributes much of its success to providing “strong intellectual input for creative customer solutions,” Mr. Frost says, adding that the company has a higher ratio of Ph.D. to B.S. scientists than most of its competitors. As a result, it has delivered more than 75 preclinical and clinical candidates, resulting in over 50 IND filings in the past 10 years, and has filed 90 patents.
Fifty-three customer compounds are now in Phase 1 and 2 clinical trials, and 26 customer compounds are in Phase 3 studies. “And proof that the strategy works is that 75% to 80% of the Phase 3 compounds came from our early development work,” he notes. Three of the Phase 3 compounds have PDUFA dates from the FDA this year.
Reflecting changing market conditions after the liquidity crisis, AMRI restructured its U.S. operations to tap greater demand in Asia, and it closed its operations in Hungary last year as part of a plan to return to profitability. The company aims to reduce operating costs by $14 million to $17 million this year by streamlining operations to improve margins.
“We used to have our own biotech platform, and when we got into the business in 2004, the view was that we could leverage our discovery skills and get a licensing deal by Phase 1,” Mr. Frost recalls. “However, the market has now changed, and licensing deals now require proof-of-concept and very expensive Phase 2 trials. We never wanted to take that kind of risk. And that led to a decision last fall to stop funding our proprietary programs.”
AMRI has already licensed out three of its in-house proprietary programs in return for milestones and potential royalties, and is working on deals for the other four.
It has licensed its antibacterial program to Genentech; its biogenic amines for treating drug-resistant depression to Bristol Myers Squibb; and its tubulin inhibitor compound for the treatment of cancer to Bessor Pharma.
Still on the auction block is AMRI’s GLT-T compound for schizophrenia; 5-HT6 for obesity/cognition; MCH-1 for obesity; and 5-HT3 for irritable bowel syndrome.
“Hopefully, we can license out the obesity program in 2012,” Mr. Frost says, adding that MCH-1 is one of the first programs that takes a CNS approach to dealing with obesity. There were no safety issues in an earlier Phase 1 study with MCH-1.
However, the big inflection point for AMRI’s proprietary programs will be in 2013 when Bristol Myers is anticipated to complete a Phase 2 trial, he adds.
In addition, AMRI receives royalties on worldwide sales of the Allegra product line, via a long-standing patent licensing deal with Sanofi-Aventis. In the U.S., Sanofi launched an over-the-counter version of Allegra in March of 2011 to counter generic versions of the allergy drug. The OTC brand had sales of about $300 million last year.
AMRI’s patents on Allegra run out in 2015, and Mr. Frost says, “Our goal is to get our business profitable without Allegra.” AMRI’s royalties from Allegra have been running at about $35 million a year during the past three years.
In order to enhance its revenue profile, Mr. Frost says AMRI is making a big push to increase its multi-year strategic relationships. In addition to the preclinical contract with the NIH, the company has signed deals with Eli Lilly for in-sourcing its chemistry services and with Merck & Co. to provide drug discovery services in Singapore.
He says the company also is in talks to expand its current commercial manufacturing agreements with GE Healthcare and Shire, which represent its largest contracts. “Hopefully, we’ll have some news later in the year,” he adds.