AMRI edged back into the red during the fourth quarter of 2007 after stagnant sales growth and higher costs, a scenario that is expected to continue.
The company turned in a loss from operations of $1.3m and a pre-tax profit of $0.5m. Although these figures were a disappointment after the profit AMRI made in Q3 of 2007, they were at least an improvement year over year, with slightly larger losses of $2.5m and $1.5m respectively posted for the fourth quarter of 2006. "Unfortunately the fourth quarter fell below our expectations and overshadowed the solid first three quarters and the solid progress achieved on several fronts," AMRI Chairman, president and CEO Thomas D'Ambra said in an analyst call. Meanwhile, the firm's revenues were virtually flat at $47.2m, up only slightly from the $46.6m in the comparable 2006 quarter, as were total sales from the company's contract services businesses, which between them generated $41.1m up from the $40.3m brought in during last year's fourth quarter. Although sales remained stagnant, AMRI was hit by the higher cost of contract revenue, which rose by over $3m. The development/small scale manufacturing business again showed the most impressive rate of growth, with revenues 22 per cent up on Q4 2006 to reach $9.3m. Company chief financial officer Mark Frost said during the analyst call that the improvement was driven by continued demand for development of analytical services from emerging pharma and biotech customers in the US. D'Ambra added that the segment has experienced a steady increase in demand for three years in a row. "We believe this to be a positive indicator for the future, both for this segment as well as for our manufacturing business, anticipating that current small scale project have significant potential to generate future business as cost for compounds move through the clinical pipeline towards commercialisation", he said. The growth in this segment helped to mitigate the firm's under-performing discovery services and large scale manufacturing businesses, both which witnessed a decrease of 6 per cent in revenue over last year. Commenting on the discovery services unit, Frost said that "performance was mixed in this component as double digit growth in both the US and Singapore medicinal chemistry was offset by a difficult quarter in Europe". He added that "delays in the shipment of certain customer deliverables" was the primary driver for the decrease in large scale contract revenue. "Delays were caused weekly by an external logistics problem, as well as internal execution on development projects," said Frost. Moreover, during the quarter, AMRI was approached by GE Healthcare, the largest customer of its large-scale manufacturing business to re-negotiate its contract, which currently runs to 2010 with a request to provide discounted pricing for 2008. "In support of our long-term relationship and our desire to deepen and cement the relationship longer term post 2010, we agreed to a price reduction effective immediately. While this will result in an impact to profit margins at large scale that was unexpected, we believe our decision was in the best interest of the business," said D'Ambra. "Although, there is no guarantee that we'll be able to continue the relationship with GE Healthcare beyond 2010, we anticipate beginning discussions in 2008 to explore potential contractual relationship beyond the current term". Looking forward, Frost projected that contract revenue for the first quarter and full year of 2008 would remain stagnant again at between $38m to 42 million, an increase of around 2 per cent from the 2007 quarter. As part of this, he anticipates discovery services revenue to jump by 20 per cent and development and small scale revenue to rise 12 per cent, while large scale revenue is expected to decrease 14-32 per cent over last year. Aside from the GE price reduction, "there are number of reasons for our flat forecast," said D'Ambra. Firstly, regulatory restrictions from the Drug Enforcement Administration (DEA) are affecting the firm's ability to produce and shift certain controlled substances, "presenting a new challenge to revenue and margins in the large scale business", said Frost. In particular, it is impacting the company's ability to manufacture Shire's Vyvanse. "While we received firm orders for last year and have orders and forecast from Shire for 2008, we were impacted in late 2007 and have not received necessary DEA controlled substance approvals for all of Shire's anticipated 2008 demand". Under law, AMRI cannot start the manufacture until approval is received. "The impact of DEA's regulation on the production of the active pharmaceutical ingredient (API) for Vyvanse for product sales ramp up may cause some volatility for us during the year in terms of what we can manufacture, shift, and recognize revenue for," said Frost. In addition to Vyvanse, AMRI is also working on a second generic API which is regulated by the DEA, although no further details of the contract were disclosed. Frost indicated that in addition to the delays in DEA approval that they are experiencing with Vyvanse, the ability to manufacture the second API is also at the mercy of the DEA. "We have forecasted that our large scale business will be impacted by the inability to produce this second product during the year. We're in contact and working with the DEA on these quarter issues," Frost said. Meanwhile, Frost said that revenues going forward will also be impacted by the slowdown in product approvals by the Food and Drug Administration (FDA), which is meaning that it is taking longer for customers to move to commercial decisions points.
The third reason for the flat revenue projection relates to other legacy commercial products where reorders can happen every two years. "We are anticipating some products will not be reordered in 2008, which will drop $5m from our revenue. The impact of this will be felt in our first quarter. We are working to reverse this situation for the year, but we needed to be cautious", said Frost.