Cambrex Corporation Q1 2010 Earnings Call Transcript

Cambrex Corporation Q1 2010 Earnings Call Transcript
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Cambrex Corporation (CYNO)

Q1 2010 Earnings Call

May 4, 2010 8:30 a.m. ET

Executives

Greg Sargen - VP and CFO

Steve Klosk - President and CEO

Analysts

Dan Leonard - First Analysis

Presentation

Operator

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Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cambrex first quarter conference call. (Operator Instructions)

Mr. Greg Sargen, Cambrex's Vice President and CFO, you may begin your conference.

Greg Sargen

Thank you, Ashley, and good morning everybody. Welcome to Cambrex's first quarter 2010 earnings conference call. My name is Greg Sargen and I am the CFO of Cambrex.

Before we begin, I'll first provide the following customary Safe Harbor comments regarding forward-looking statements. Today's discussion will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities and Exchange Act of 1934.

These statements may be identified by the fact that words such as expects, anticipates, intends, estimates, believes, or similar expressions are used in connection with any discussion in the future financial on operating performance. These statements are based on Cambrex's current plans and expectations, and involve risks and uncertainties that could cause actual outcomes and results to materially differ from those included in the forward-looking statements.

For further information, please refer to our reports and filings with the SEC.

A replay of the call will be available shortly after we end today till next Wednesday, May 12, by calling 1800-642-1687 domestically, and 706-645-9291 internationally. Please use the conference ID number reference 71160398 to access the replay.

A webcast will also be available on the Investor Relations section of the Cambrex website located at cambrex.com and can be accessed for approximately a month following the call.

Today's call will begin with a business review by Steve Klosk, our President and CEO. I'll follow Steve with a few comments on our first quarter results of 2010 guidance, before opening up the call for Q&A.

With that, it's my pleasure to introduce Steve Klosk. Steve.

Steve Klosk

Thank you Greg, and good morning ladies and gentlemen. I would like to provide a few comments on our first quarter results followed by a brief description of our first quarter acquisition of IEP that we're very excited about. And finally, I will comment on the status of each of our key product categories.

First quarter financial results primarily reflect the impact of lower sales of three of our larger custom manufacturing products. For two of them, the impact is due to the timing of orders relative to last year, and the results for the third product reflect a disruption to our customers' supply chain that will likely result in little to no shipments through the first three quarters of 2010.

We expect our customer to rebuild their inventory levels beginning in late 2010 into 2011. In addition, there were no sales of an animal feed additives product that we exited.

Revenues from clinical phase projects which we call custom development were up slightly over last year, and our DEA controlled substances business continues to grow nicely. Sales of generic APIs were relatively flat year-over-year.

Excluding the impact of foreign currency, gross margins were down 1.5% compared to last year, largely driven by a price decline resulting from the extension of a contract to supply a product utilizing our drug delivery technology, and to a lesser degree, price declines on certain generic APIs.

We remain vigilant in our cost reduction efforts, with operating expenses down $800,000 during the quarter prior to the impact of foreign currency and expenses related to our acquisition of IEP.

Operating profits were down $4.6 million compared to last year, with roughly half of the decline being driven by the impact of foreign currency, and the other half coming from lower sales levels.

Now I'd like to make a few comments about our acquisition of IEP, a biocatalysis business based outside of Frankfurt, Germany. As indicated in yesterday's release, IEP has a large portfolio of proprietary enzymes, which it licenses and sells, often in conjunction with proprietary processes that enable our customers to perform chemical synthesis more efficiently.

IEP has many attributes that we find desirable; it gives our manufacturing teams' access to a valuable tool to potentially improve our production cost. This same capability is available to our customers through the licensing and sale of enzymes. And the business is IP based, (meaning) we believe we can build defendable and sustainable revenue streams based on this technology platform.

The platform consists of highly efficient enzymes, and as such there can be significant cost leverage in utilizing the technology to produce high volume products. While this business is relatively small today, with sales in the mid-single digit millions, we are excited about the opportunities and believe it has considerable upside potential.

We expect the business to generate both positive EBITDA and cash flow in 2010.

Now I'd like to provide a brief update on each of our product categories. First, I'd like to discuss our custom development business, where we provide products and services to our customers with pre-clinical and clinical stage drug development projects. We have commented several times that the funding environment for emerging biopharma companies has been difficult over the last two years, and this has negatively impacted the market for outsourced custom development projects.

For the first time in several quarters, we saw an increase in both the number and size of requests for proposals during the quarter. We are primarily focused on later stage molecules, and we were pleased to be able to bid on several promising late stage projects and commercial products within the quarter. We are hopeful this trend will continue and we will update accordingly as the year progresses. We have 12 products for which we expect to provide phase III materials in 2010.

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