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Edited Transcript of AMRX.N earnings conference call or presentation 26-Feb-20 1:30pm GMT

Q4 2019 Amneal Pharmaceuticals Inc Earnings Call

Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Amneal Pharmaceuticals Inc earnings conference call or presentation Wednesday, February 26, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chintu Patel

Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO & Director

* Chirag K. Patel

Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director

* Joseph Todisco

Amneal Pharmaceuticals, Inc. - SVP of Specialty Commercial

* Stephen J. Manzano

Amneal Pharmaceuticals, Inc. - Senior VP, General Counsel & Corporate Secretary

* Todd P. Branning

Amneal Pharmaceuticals, Inc. - CFO & Senior VP

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Conference Call Participants

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* Balaji V. Prasad

Barclays Bank PLC, Research Division - Director

* Christopher Thomas Schott

JP Morgan Chase & Co, Research Division - Senior Analyst

* Dana Carver Flanders

Guggenheim Securities, LLC, Research Division - Senior Analyst

* David A. Amsellem

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Elliot Henry Wilbur

Raymond James & Associates, Inc., Research Division - Senior Research Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Gregory B. Gilbert

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Randall S. Stanicky

RBC Capital Markets, Research Division - MD of Global Equity Research & Lead Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Amneal Pharmaceuticals Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Todd Branning, CFO. Please go ahead.

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Todd P. Branning, Amneal Pharmaceuticals, Inc. - CFO & Senior VP [2]

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Thank you, and good morning, everyone. Welcome to Amneal's Fourth Quarter 2019 Earnings Call. Earlier this morning, we issued a press release reporting our quarterly results. The press release as well as the slides that will be presented on this call are available on our website at www.amneal.com. We're conducting a live webcast of this call, a replay of which will also be available on our website after its conclusion. Please note that today's call is copyrighted material of Amneal and cannot be rebroadcast without the company's expressed written consent.

I'd also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the company. It's important to note that such statements about estimated or anticipated Amneal results, prospects or other nonhistorical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today's date. Amneal disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Actual results may differ materially from current expectations and projections depending on a number of factors affecting the Amneal business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including, but not limited to, the Amneal Pharmaceuticals, Inc. Form 10-K.

Our discussion today also includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and discloses non-GAAP financial measures internally to evaluate and manage the company's operations and to better understand the business. Further, management believes the inclusion on non-GAAP financial measures provides meaningful supplementary information to and facilitates analysis by investors in evaluating the company's financial performance, results of operations and trends. A reconciliation of GAAP to non-GAAP measures is available in this morning's press release and in the appendix of today's presentation.

Joining me on the call this morning are Chirag Patel and Chintu Patel, our Co-CEOs. Following the prepared remarks, we will hold a Q&A session. Also on the call and available for Q&A are Andy Boyer, our Executive Vice President of Commercial Operations; Joe Todisco, Senior Vice President of Specialty Commercial; and Steve Manzano, our General Counsel and Corporate Secretary.

For our agenda today, Chirag and Chintu will begin with a discussion on our strategic direction. I will then review detailed financial results. Finally, we will have a question-and-answer session following the prepared remarks. And with that, I'd like to turn the call over to Chirag.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [3]

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Thank you, Todd. Good morning, everyone, and thank you for joining us today to review Amneal's fourth quarter and full year results.

When Chintu and I joined Amneal as Co-CEOs in August, we laid out our plan to put the company back on track and lead it in its next phase of growth. We told you that we would revitalize our Generics business, continue to grow the Specialty franchise and improve our margins and cash flow, expand into international markets and evaluate strategic M&A. And in the last 7 months, we have taken steps to do just that.

We have launched 15 new generic products, including high-value, first-to-market ones like NuvaRing and Carafate; have won new awards for our base business. We have seen continued script growth for key specialty products, Rytary and Unithroid. We have already increased our Generics gross margin by 350 basis points from Q3 to Q4 2019 and continue to make progress.

We have entered into a collaboration with Fosun Pharma to enter Chinese market with certain products from our product portfolio. And we have executed on the acquisition of a majority stake in AvKARE, which diversifies our channel mix and provides an attractive durable revenue stream.

As you can see, our efforts are already bearing fruit. Our fourth quarter results build on the momentum from the third quarter and demonstrates that our strategies are working. And these results sets up nicely to enter 2020 with strong momentum.

Now let me turn to the specifics. When we founded Amneal, our goal was to provide access and affordability for prescription drugs. For nearly 2 decades, we have done just that, and today is no different. The industry is changing quickly and significantly. To continue to differentiate Amneal, we recognize that our playbook and strategy need to evolve as well. As a result, we have made a number of critical operational and strategic decisions that we are confident will keep us at the forefront of our industry.

Amneal is well capitalized, and this has enabled us to move swiftly and strategically as we build Amneal 2.0, which will position us for long-term growth regardless of the competitive landscape. The path to reinvigorating the business began last summer. Let's explore our progress on the core tenets of that program that I summarized earlier.

First and foremost, we are revitalizing our Generics business. We are committed to supporting both our retail and institutional customers, and we have been working closely with them to ensure we delivered a high-quality, affordable and complex products they need.

On this note, I would like to thank all our customers for their collaboration and support. Chintu will cover more of these in detail, but at a high level, we have already begun to better leverage our strong existing assets, ensuring new product launch preparedness and execution.

In the second half of 2019 alone, we won new awards of 30 base business products and have 30 additional product opportunities in works. We have launched 15 new products since returning as CEOs, including 2 first-to-market launches that I believe highlight Amneal's differentiated capabilities and underscore our ability to continue winning in the market.

Beyond the strength of our Generics business, we have a growing Specialty franchise that we believe will drive meaningful results in 2020 and beyond. We have a lot of exciting opportunities, including continuing to meaningfully grow Rytary, where 2019 year-over-year script growth was over 8%; Unithroid, where scripts grew by almost 20% in 2019; our IPX203 development program; our licensing agreement with Kashiv BioSciences for exclusive U.S. rights for development and commercialization of K127; a focus on adding assets to our existing neurology and endocrinology franchise through both M&A and in-licensing opportunities; and opportunistic expansion into other therapeutic areas, including additional biosimilars.

Importantly, we are also focused on diversifying the business intelligently. When I talk about diversification, we are focused in 2 main areas, channels and geographies. Let's talk about the channels first.

Through our acquisition of a majority stake in AvKARE, which closed on January 31 and operates as an independent subsidiary, we gained a differentiated platform that provides Amneal and other manufacturers a unique opportunity to diversify our business and open growth opportunities in the large, complex and growing federal health care market. This transaction makes particular sense given our large U.S. manufacturing footprint and recent court ruling regarding PAA compliance.

AvKARE has already won 34 national contracts, and we expect that number to grow. The AvKARE platform also provides us an opportunity to sell more unit dose products, which is a niche and a highly profitable business.

Next is our focus on geographic diversification. At the JPM -- JPMorgan Health care Conference in January 2020, I mentioned that we are -- we were looking at international expansion opportunities. In the late 2019, we entered into a license and supply agreement with Fosun Pharma, who is a leading player in pharmaceutical manufacturing and distribution in China. Our partnership with Fosun Pharma represents a significant opportunity for Amneal to leverage certain products from our U.S. portfolio and efficient manufacturing network. We are gaining access to a rapidly growing generics market as China transitions to competitive bidding for branded and generic pharmaceutical products.

Finally, we remain committed to best-in-class governance. We recently strengthened our Board of Directors with the additions of 3 new independent directors: Jeff George, who served as the CEO of Sandoz and Alcon; Shlomo Yanai, former CEO of Teva; John Kiely, a former Senior Assurance Partner at Pricewaterhouse Coopers, where he focused on the pharmaceutical, chemical and medical device sector. Our ability to attract leaders of this caliber to our Board is a terrific reflection of Amneal and our future prospects.

We have been relentless in our execution over the last several months. We are pleased that we began to see results in the fourth quarter and looking forward to building on our momentum in 2020 and beyond.

Let me now turn it over to Chintu.

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Chintu Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO & Director [4]

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Thank you, Chirag. I would like to start by reiterating my brother's enthusiasm about the direction of our business. We started to see improvements at the end of the year, and we are excited about the opportunities to grow and build on Amneal's strong foundation.

I will start by repeating a point we have made since August. Our Generic business is fundamentally strong. We have over 225 marketed products and a deep pipeline of filed products and ones we are still developing. We have worked hard to earn our reputation of producing high-quality products across a variety of complex dosage forms, including injectables, transdermals, topicals and liquids. And we are extremely proud of our impeccable track record in quality and customer service, which has always been a priority for us.

While the industry-wide headwinds of increased competition and concentration in buying power contributed to major gross margin declines across the industry over the last few years, the level of compression we saw at Amneal when we took over as Co-CEOs was unacceptable. We have been laser-focused in our efforts to improve our margin structure and ultimately reach our target of 40-plus percent gross margin in the Generics segment as soon as possible. We have already begun executing on these initiatives.

First, we have improved plant utilization across our manufacturing infrastructure. We oversaw the transfer of many lower-value oral solid products to our sites in India, which are more competitive cost structures. We have already increased volume for our complex products, including transdermals, liquids, rings and injectables, which has improved absorption at the plant level.

And as Chirag mentioned, we have proactively won additional incremental awards for base business products, 30 in the second half of last year alone, which will have a material impact on our utilization this year.

Second, we've taken steps to strengthen our supply chain and manage costs across the organization. We have addressed operational inefficiencies and are working diligently with our customers to ensure we are delivering the right mix of products to meet their needs, which we expect to lower our rates of inventory obsolescence, and we are already seeing results.

Our failure to [supply penalties] in quarter 4 were significantly lower than quarter 3. These efforts affects the entire supply chain and will help ensure our competitive position going forward.

Third, we continue to successfully get high-value, high-margin products approved and launched. We previously told you we would launch at least 15 high-value products over the next 18 to 24 months. Since rejoining in August, we have already launched 4, including generic version of NuvaRing and Carafate, which are first-to-market opportunities. As we launch more products with limited competition, our margins will naturally increase as well.

Finally, we have a renewed focus on operational excellence. When we previously ran Amneal, we had some of the highest gross margins in the industry. We accomplished this through a relentless pursuit of cost reduction in all areas of our business, including bringing manufacturing in-house and reducing reliance on CMOs. So far, we are pleased with the results, which include strengthening our forecasting, improving coordination across finance, operations, supply chain and our customers and also leveraging our scalability and network of reliable suppliers.

And this isn't an initiative with end date. It is a constant process and one we look forward to building upon. Since we took over in August and as a direct result of the 4 buckets I just outlined, we are pleased to have achieved Generic gross margin expansion of 350 basis points from quarter 3 to quarter 4 2019, and we believe this is just the beginning.

Now turning to R&D. As with any pharmaceutical company, this is the engine for our growth. And given the ever-changing landscape of the industry, we have to be especially thoughtful with our R&D spend. We acknowledge that the ROI for small molecule generic is not what it used to be. The focus needs to be on quality of pipeline, not quantity of products within it as well as the product selection and the ability to execute and successfully launch high-value generics.

We expect to file 20 to 25 products in 2020, and many of these are potential first-to-market opportunities as well. We have 97 products in the pipeline waiting for FDA approval and 80 products in the development pipeline. And unlike many of our competitors, we have expertise in both complex product development and manufacturing, which reduces our reliance on third parties and gives us better economics on high-value products.

And we have just begun to utilize excellent R&D and regulatory infrastructure to pursue ex U.S. opportunities. As you can imagine, a large hurdle of launching drugs internationally is getting the regulatory process right. We recognize that many of our products have a global opportunity, and the process of expanding geographically starts with R&D. We have already begun augmenting our existing team as we move forward with our collaboration with Fosun Pharma, and we will make sure we have the right people and resources to execute on this significant opportunity. Generic drug development may have changed, but we continue to see opportunity and high-ROI projects.

Turning now to our Specialty franchise. We have a solid, scalable foundation and infrastructure in Specialty and see significant opportunities for value creation and gross margin across the segment. It is a meaningful part of our business. And going forward, we expect to allocate a significant amount of our R&D budget to specialty. As we grow this business, we will continue to be very thoughtful about product selection and leveraging our existing infrastructure. We continue to invest selectively in several key pipeline assets. Our IPX203 development program continues to move forward, and we expect top line data from our pivotal Phase III study in the first half of 2021. We recently presented data from our previous Phase IIa and IIb studies, which showed statistically significant improvement versus immediate release Carbidopa-Levodopa combination for key end points. We are excited about the potential for this product and what it could do to improve the lives of Parkinson's disease patients beyond what we have done with Rytary. Our current expectation is to begin commercialization no later than 2023.

As Chirag alluded earlier, we also entered into a licensing agreement with Kashiv BioSciences in November, which expands our CNS pipeline into neuromuscular disorder. As part of this agreement, Amneal now has exclusive rights within the U.S. to the new drug application and commercialization of K127 for the treatment of Myasthenia Gravis. We expect to file these by end of 2021.

For biosimilars, we have 3 candidates currently in the pipeline: biosimilar version of Neupogen, Neulasta and Avastin, and are actively working to add additional products. Our current focus is oncology. And at the time of commercialization, we plan to supplement our existing managed care and commercial operations with new oncology-focused resources in sales and marketing. While it's early days, we fully expect to become one of the key biosimilar players in the U.S. market.

In summary, we look forward to adding more specialty assets where we can leverage our existing development and commercialization capabilities. Before I turn the call over to Todd, I want to thank all employees, customer and suppliers for their continued support. Todd?

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Todd P. Branning, Amneal Pharmaceuticals, Inc. - CFO & Senior VP [5]

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Thanks, Chintu. Good morning, everyone. Before I dive into our results from the fourth quarter, I would like to express my enthusiasm at the positive trends we are seeing as we move into 2020. We continue to face a challenging generics marketplace, but the work we have done to address internal inefficiencies and better position Amneal to capitalize on growth opportunities has already had a positive impact on our financial results. We believe we are well positioned to build on this momentum through 2020 and beyond.

Now turning to the results. Total net revenue in the fourth quarter was $397 million compared to $378 million in this year's third quarter, a 5% sequential increase driven by sales from new products launched in the fourth quarter, including in December the first generic versions of NuvaRing and Carafate.

Gross margin in the fourth quarter improved to 43%, an increase of 350 basis points from the third quarter of 2019 due to favorable volume and mix, new product launches and lower inventory obsolescence charges, which more than offset price erosion. We are continuing to actively manage operating expenses across the organization.

In the fourth quarter 2019, adjusted R&D and SG&A expenses were $43 million and $64 million, respectively, broadly in line with our current run rate levels for these expenditures. Adjusted EBITDA and adjusted diluted earnings per share for the fourth quarter 2019 were $81 million and $0.08, respectively, both sequential improvements as a result of higher revenues and better gross margins compared to the third quarter of 2019.

Moving to a review of our Generic segment results compared to the third quarter of 2019. Net revenues grew 3% driven primarily by the launches of generic NuvaRing and generic Carafate. We were pleased to see the expansion of our Generics gross margin from the 30% we delivered in the third quarter of 2019 to 33% in the fourth quarter. The fourth quarter gross margin was driven by favorable volume and mix, new product launches and lower inventory obsolescence charges as compared to the third quarter. Our work is not done, however, and we'll continue to move aggressively to drive our Generics gross margins to our long-term goal of 40%plus, but we believe we're trending in the right direction.

Adjusted operating income in the fourth quarter was $49 million, a sequential increase of $9 million compared to the third quarter of 2019. Higher revenue and gross margin expansion drove the sequential increase in adjusted operating income.

Turning now to our Specialty segment results. On a year-over-year basis, net revenue increased 11% to $97 million driven by higher sales of Unithroid and the reclassification of oxymorphone HCI from the Generics segment. On a sequential basis, net revenue in the fourth quarter also increased 11% due to higher sales of Rytary, Unithroid and Zomig nasal spray compared to this year's third quarter.

Adjusted gross margin for the fourth quarter was 75%, broadly in line with our third quarter adjusted gross margin. On a year-over-year basis, fourth quarter 2019 adjusted operating income declined by $5 million primarily due to higher managed care rebates and Medicare coverage gap liability. On a sequential basis, adjusted operating income for the fourth quarter increased $5 million to $46 million. This increase was primarily due to product mix, partially offset by higher rebates and coverage gap liability for timing of claims.

Now for a review of our cash flow and balance sheet information. We ended the fourth quarter with $153 million in cash, down $64 million compared to the third quarter of 2019. Our cash flow from operations in the fourth quarter 2019 was negative $51 million. As I mentioned during our last earnings call, we expected a step down in cash in the fourth quarter due to factors that resulted in a higher cash balance at the end of the third quarter. These included the timing of customer chargeback deductions and expenditure disbursements, both of which came in at the beginning of the fourth quarter rather than at the end of the third quarter as we had expected.

In the fourth quarter 2019, we had shelf stock adjustments and an acceleration of customer credits. These contributed to lower cash collections in the quarter, but we believe these will normalize in 2020. We also believe the pricing actions we took will benefit our gross to net conversion ratio in future periods.

As we look ahead to our full year 2020 financial outlook, we previously expressed our expectation that 2020 would be a growth year for Amneal. That is still our expectation.

We also closed the AvKARE transaction at the end of January, and the expected contribution from that business for the balance of the year is reflected in our outlook.

In terms of the numbers, we expect annual revenues of between $1.88 billion and $1.98 billion driven primarily by growth in our Generics segment and the additional revenues from AvKARE. We expect adjusted gross margin between 44% and 46%, EBITDA in the range of $400 million to $450 million and adjusted diluted earnings per share of $0.45 per share to $0.60 per share based on weighted average diluted shares outstanding of approximately 300 million shares.

I would note that we will include 100% of the AvKARE EBITDA in our reported adjusted EBITDA figures since noncontrol interest is calculated based on net income, not EBITDA. Our adjusted diluted earnings per share calculations will, of course, account for the 35% noncontrolling interest ownership in AvKARE.

Finally, we anticipate 2020 operating cash flow of between $150 million and $200 million, and capital expenditures in the range of $60 million to $70 million. With that, I'll now turn the call back over to Chirag.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [6]

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Thank you, Todd. While we are proud to be -- have seen improvements this quarter, we are aware that we still have a long way to go to reach our goals. We expect the trends we are seeing to continue as we work aggressively to improve operations and gain greater efficiencies, drive gross margin expansion and generate growth in 2020 and beyond.

As we look through challenging market conditions and internal changes, we continue to operate in a solid financial position with no near-term debt maturities or covenant compliance concerns. We are excited to reinvest in the business in the coming quarters and years and rebuild Amneal into the leader we know it can be.

Thank you. With that, I'll turn the call back to Todd.

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Todd P. Branning, Amneal Pharmaceuticals, Inc. - CFO & Senior VP [7]

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Thank you, Chirag. (Operator Instructions) So with that, I'll turn the call back to the operator to open it up for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Elliot Wilbur of Raymond James.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [2]

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Just a quick couple of questions around the AvKARE business. At the time of acquisition, I think you reported that EBITDA was right over -- just over $60 million. Just want to get a sense of if that's a reasonable run rate to expect for full year 2020? And then also wondering if you get maybe a top line contribution? Just really trying to understand sort of how that business impacts overall margins. I assume that that is going to be or actually, I don't know the answer to this, is that going to be reported as a separate segment? Or is that going to be consolidated into Generic results, but just trying to get a sense of how that business impacts the overall margin profile? And then just as a follow-up, just a macro question. Hearing a lot of noise out of China with respect to the impact of Coronavirus and how that could impact the generic supply chain. It seems like companies that are closest to the API world are suggesting there could be issues relatively near term. Others are indicating they've got plenty of safety stock on hand, and there shouldn't be issues for a couple of quarters. Just wondering what your perspective is on that issue, whether if there's any Amneal-specific risks and what you may be hearing from the overall competitive environment in terms of whether or not there will be a potential negative impact on shortages.

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Todd P. Branning, Amneal Pharmaceuticals, Inc. - CFO & Senior VP [3]

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This is Todd. Thank you for your questions. I'll take the first couple you asked in respect to the AvKARE and then ask Chirag and Chintu to answer the last question as it relates to supply chain. So the adjusted EBITDA amount that we disclosed when we announced the AvKARE transaction of a little over $60 million is a reasonable run rate for a full year. Of course, that will be a little less contribution to us in 2020 simply because we closed the transaction at the end of January. And so we'll only get 11 months' contribution this year, but you can work still with that figure as an approximate run rate of EBITDA for the business for this year.

In terms of the top line contribution, we're not going to disclose that the revenue estimate for AvKARE today. It will be reported as a separate segment in our results apart from the Generics segment and the Specialty segment. So when we report the first quarter, it will be included for a couple of months, and there'll be some additional visibility into the financial profile of that business at that time.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [4]

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So far, our exposure to -- due to Coronavirus is limited. We expect one product to be impacted over the next 3 months, and other products could be in a single-digit kind of way 6 months plus since we have stock. And proactively, we are working with our API suppliers in India and other parts of the world, Europe, to have alternate key starting materials.

So we don't, at this point, see any impact at all.

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Chintu Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO & Director [5]

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And just to add one point, most of our APIs are coming out of India, Europe and U.S. We only have single-digit API coming from China. And as Chirag said, we have taken proactive measures to protect our supply chain, and we don't, at this point, anticipate issues over the near term.

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Operator [6]

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The next question today comes from David Amsellem of Piper Sandler.

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David A. Amsellem, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [7]

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So I wanted to focus on your 2 newest generics, NuvaRing and Carafate. So on NuvaRing, can you just talk about how much of the market you can supply? And I believe that you have or will file a CBE-30 for a more automated manufacturing process. Can you talk about what that means in terms of your ability to supply more of the market? And then in terms of competition on NuvaRing, what are your expectations regarding competitors specifically, Teva and Reddy's or even anyone else, down the road? And then I guess, the same question for Carafate. How should we think about competitive expectations for that product?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [8]

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Thank you, David. On NuvaRing, we have approximately 16% market share. We're CBE-30 for the automated machine. Fully automated machine has been approved, and we are ramping up our production. As we stated earlier, our goal is to get 25% to 30% market share.

Competition, we expect in the first half mainly from Teva. And even with the competition on authorized generics, we should be able to keep our market share of 25%, 30%. We do not expect other competitors, maybe in the late in the year, but not throughout early part of the year.

Moving to Carafate. We have almost 60% market share as AG has its launch in January, and we do not expect any competition this year.

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Operator [9]

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Next question comes from Gregg Gilbert of SunTrust.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [10]

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Just a follow-up, first on AvKARE. I was curious if you're seeing any customer concerns or questions for AvKARE now that Amneal is the majority owner. It sounds like you're not expecting any financial disruption, but just wanted to see if you have any qualitative comments on how that hand off and the ownership stake has changed anything, if at all?

And then my follow-up is for Chirag and Chintu. Curious what your appetite is as well as your flexibility to pursue additional transactions in the relative near term that can materially diversify the business such as AvKARE, something of that size or larger?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [11]

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Thank you, Greg. AvKARE actually runs as an independent company, and we have a tremendous support. As you know, the founders have 35% stake there on the company, and they treat every manufacturing partners equally. We have 100 manufacturing partners, tremendous support from the big manufacturers as this is a highly profitable channel for them to sell their products, and AvKARE does a great job of customer service, relationship with manufacturers. So we're actually very excited to grow that business.

On the appetite and flexibility on the new transaction, as we have stated, we are in the game to hit the singles and doubles. And now we have turned our focus on to specialty, and we're looking at a number of potential transaction that can fit real nicely with our neurology, basically, in CNS fill or endocrinology. So we are very excited to work on those. And we could hit singles and doubles. We do have flexibility to do so.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [12]

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If I could interject, just a single or a double as AvKARE in that realm? Or is AvKARE going to triple?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [13]

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No, no. That's single and double, yes.

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Operator [14]

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The next question comes from Chris Schott of JPMorgan.

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Christopher Thomas Schott, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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Just the first one here was on the biosimilars. Can you just elaborate a little bit more about the oncology infrastructure you expect you'll need to build out to compete in these markets? And maybe more just strategically, it seems like at least on some of these initial products, you're going to be entering the market after a number of competitors have already launched. How does the company differentiates itself given that dynamic?

And then just a very quick one, just coming back to the guidance and a bit more on gross margins. That 44% to 46%, can you just give us a little more color of how that breaks down by division just given the AvKARE inclusion in the P&L? I'm just trying to get a sense of how we think about kind of Generics versus Specialty versus AvKARE as we construct the -- to get that 44% to 46%.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [16]

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Thank you, Chris. Biosimilar, as you are well aware how it's shaping up, it's more of a -- I call it a quasi-branded business. So we have put that business in our Specialty division under the leadership of Joe Todisco, who has done a marvelous job leading our oncology and neurology franchise. We are already using our market access team, marketing team, customer support team to get ready for our oncology launches. The present force would be added as we get closer to the launches, and we plan to add more oncology assets as well.

Your question on a late entry is absolutely a valid one. As we had a late start on biosimilars, we don't expect to jump right into a big market share. So if we are fourth or fifth, we expect 8%, 10% market share, unlike the Generics business. But the next version of biosimilars, we intend to be first or second or third to move up the value chain there as we see this business as over 10 years or 15 years. And we're always here to stay. As I said earlier, we build the business over time. So we'll patiently will come from behind, just like Generics, and we'll be one of the key players in biosimilar business. On a question of gross margin, I will turn it over to Todd. The 44% to 46% includes all 3 segments: Specialty, Generics and AvKARE distribution business. Please, Todd.

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Todd P. Branning, Amneal Pharmaceuticals, Inc. - CFO & Senior VP [17]

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Chris, it's Todd. Thanks for the question. So as we look at 2020 for each of the segments. Starting with Generics, we ended the year of roughly mid-30s gross margin, adjusted gross margin. That's how we're starting out 2020. We think that will improve to probably the upper 30s over the course of 2020 for reasons we've talked about on the call: reduction of manufacturing inefficiencies, launch of new products, improvement in product mix. So that's where we see that segment coming in, in our guidance range of 44% to 46%.

Specialty is right around 75% right now. That's stable, and we expect that stability will continue in 2020. AvKARE, I'm not going to mention that the gross margin we have built in to our numbers this morning. It's obviously a bit lower than the Generics business given its predominance in distribution, but the blended average of everything I just outlined is what puts us in the range of 44% to 46% for the guidance.

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Operator [18]

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The next question comes from Balaji Prasad of Barclays.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [19]

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Congratulations on the results. So I wanted to explore a bit more -- a bit further on your comments on biosimilars, Chirag. So is it fair to assume that your next couple of years, next 2 to 3 years, will be focused on the 3 products that you disclosed? And what would do -- how can I anticipate the evolution of your biosimilar strategy, the pipeline and the time line? And what kind of capital would you deploy behind this? And do you have any partners on any of these products?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [20]

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Thank you, Balaji. So biosimilars is one of our specialty segment piece of business, along with generics and Injectable. The evolution we'll have is, obviously, the first 3 products we expect to get approval and launch in the next 1, 2, 3 years. We will add on to our biosimilar pipeline by key partnership. Today, we have a partnership with Kashiv BioSciences and mAbxience from Spain. We will add more partnership as we go along.

Our focus, as I mentioned last time, has been on a regulatory and commercial. There's plenty of manufacturing capacity. People have built an R&D capacity, which we'll utilize with partners and continue on to evolve our biosimilars, which would be we'll build up the pipeline. And as you know, oncology could have 10 products, 15 products, and that's only what we are focusing today.

The capital deployment, we believe the way FDA is moving now. And this is what is going to make biosimilars is more affordable, more accessible and more of a game for players like us and Teva and Mylan, and not a game for Pfizer and other, Merck and big pharma, because the approval requirements, where it used to require lengthy trials, we believe, would go away. And FDA would work with us on a more on analytical methods, more on PK studies. And we may not have to repeat unnecessary big trials of already proven effective products. So that will bring the capital deployment to a more manageable numbers. We don't have exact number, but let's say, I could -- our appetite is between $25 million to $50 million per biosimilar to spend, then we see this deployment over the next 5 years to build our pipeline.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [21]

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That's very helpful, Chirag. I have a follow-up on the injectables. Firstly, so you had 15 new launch since August. Was this just a question of timing of approvals? Or did the revamped management do anything differently? And on the injectables pipeline, what kind of a time line would most of these materialize? How should I factor growth around this part of the -- of your pipeline?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [22]

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So we already market almost 20 injectables products. We have started, but we do have 2 manufacturing plants of our own. We have a very strong pipeline to add on injectables and become a key player in coming years.

Today, we're approximately $120 million to $150 million in injectable revenue. We see that as a key growth driver in the next 5 years. As you know that we have the great R&D capabilities, and our focus has turned more into injectables as well as biosimilars and Specialty products. So we will expand that. The 15 complex products we expect to launch over 18 to 24 months, which we have launched 4 already, which includes both. So these are complex products only. We do have other product launches as well this year. So I just want to make sure we're not confusing The Street by 15 only. It's 15 plus, I call it, regular products.

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Operator [23]

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The next question today comes from Randall Stanicky of RBC Capital Markets.

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Randall S. Stanicky, RBC Capital Markets, Research Division - MD of Global Equity Research & Lead Analyst [24]

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How much new launch revenue have you built into the outlook for 2020? And how does that compare to how you're thinking about 2021? Is it more? Is it less on a relative basis? And then the follow-up question just on opioids. How are you guys currently thinking about the opioid exposure? And what are the next data points from an Amneal perspective that we should be focused on?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [25]

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On a -- we have significant new revenues, obviously, with Carafate and NuvaRing launch in December. We have not broken it down. So -- but let's call it, a significant, and 2021 will continue because of the pipeline that we've been investing over the years. That all comes to approval cycle over the next several years, and we keep filing new products as well, and we have revamped the R&D to file the products we used to file very high-value products. Very excited about the new product revenues in 2020 and coming years. On opioid exposure, since we have a GC here, which is Steve Manzano, I'm going to turn it over to him.

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Stephen J. Manzano, Amneal Pharmaceuticals, Inc. - Senior VP, General Counsel & Corporate Secretary [26]

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Thank you, Chirag. Randall, on the opioid exposure. In terms of that point, I really can't give you any data points that are coming soon. The reason is that we're on track to defend it at the end of the day. It seems that the multi-district litigation judge is focusing on promotion activities as well as distributor activities in terms of a case, which Amneal is neither one of those. So we have been purely a generic provider of opioids and have not engaged in promotional activities about the safety and efficacy of generic opioids that were that -- to prescribing physicians, patients and/or anybody else.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [27]

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Yes. So there's no activities at this point, Randall.

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Operator [28]

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The next question today comes from Ami Fadia of SVB Leerink.

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Unidentified Analyst, [29]

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This is Sharon on for Ami. Congratulations on the good quarter. And our main question is, you expect about 15 new filings this year. How many of those new launches do you expect this year? And how many of those are -- that kind of high-value comeback to Generics? And a follow-up question is on IPX203. The time line seems to have been delayed a few times in the past. What's the main challenge there?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [30]

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Yes, just for clarity, we expect to file 20 to 25 new products in year 2020, and we are expected to launch close to 30-plus new launches in year 2020.

As far as IPX203, as you know, there are always challenges, recruitment, and that's why certain time lines have shifted slightly. But we feel very comfortable to have top line data by first half 2021 and commercialize the product no later than 2023.

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Unidentified Analyst, [31]

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Could you clarify, among the remaining maybe 11 high-value new launches you identified before, how many can potentially launch this year?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [32]

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Sharon, good question, but we don't -- because certain things are with agency, but we think we'll have a few in the coming year -- in 2020. But we are not, at this time, prepared to do exact number. But we do expect that we'll have a few in 2020.

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Operator [33]

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The next question today comes from Gary Nachman of BMO Capital Markets.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [34]

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Maybe you can provide a general comment on how challenging the environment has been for new complex launches like NuvaRing and Carafate versus the way it was over the last couple of years. It seems like you're grabbing some good share. Are you giving up a fair amount of price in order to be able to do that?

And then just a quick follow-up on the Generic gross margin. How long will it take to get to the greater than 40% goal? Just lay out the path for that. Maybe you could get there in 2021 if you do high 30s, like you said, in 2020.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [35]

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Yes, nice questions. So your first question is on the new key product launches on Carafate and NuvaRing. The market share dynamic stays the same except for the complex products. Nobody builds out a 100% capacity because it requires all the capital investments, and we expect the competitors to be there.

The pricing side, as you know, the 3 major buying groups have come down hard on generic manufacturers over the last 3 years. And the profitability, what used to be, has reduced for even the first-to-market products.

Your second question on gross margin. The 4 drivers we've been working on it since we came back: the plant utilization, the efficiency in supply chain, the product launches and operations excellence, all of them are showing results. As we continue on, as we said, high 30s, our run rate would be in 40s by fourth quarter. So we expect to get that as soon as possible. The complete focus is on that.

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Operator [36]

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And our last question today comes from Dana Flanders of Guggenheim Securities.

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Dana Carver Flanders, Guggenheim Securities, LLC, Research Division - Senior Analyst [37]

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Just 2 quick ones. First, has the supply situation for your generic epinephrine improved at all? And kind of what's the outlook for that product in 2020? And then my second one actually is on just IPX203. I know you have some data, Phase III data, expected soon. How do you think about the incremental benefit you need to see over Rytary to get both kind of physicians and payers on board to switch with Rytary generics expected 5, 6 years from now?

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [38]

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Thank you, Dana. On EpiPen supply, it's been stable to our expectations from Pfizer. So we are in an okay situation. We could use more, but this is what we have forecasted, and we are getting it. So good job by the hospital plant in -- or the Pfizer on the supply at this point.

IPX203 Phase III, we expect the top line results in first half and it's a meaningful improvement over IR and over Rytary as well. We are -- we have a pretty good coverage on Rytary, and we expect the coverage to improve as our KOL and initial feedback, our CMO, everybody's is excited on IPX203 because it's duration is good on time is 6 to 8 hours compared to 3 to 4 hours on Rytary, and the fluctuations are much, almost half, than the IR products. So very excited about 203. To expand the market, we will have more proactive commercial strategies than the Rytary when that was launched by Impax a few years ago. Since we have learned a lot, we are with the community all the time. So very excited about 203. Joe, would you like to add anything?

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Joseph Todisco, Amneal Pharmaceuticals, Inc. - SVP of Specialty Commercial [39]

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No, I'd say we're putting a framework in place now with the agreements we have on Rytary to lay the ground for the launch of IPX203. So we're confident at the point of launch, we'll have a meaningful managed care coverage on the book.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [40]

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Thank you, Joe.

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Operator [41]

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This concludes our question-and-answer session. I would like to turn the conference back over to Todd Branning for any closing remarks.

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Todd P. Branning, Amneal Pharmaceuticals, Inc. - CFO & Senior VP [42]

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Thank you, operator. I would just close by saying we appreciate you joining our call this morning, and we look forward to our ongoing dialogue with you. And with that, we wish you all a good day.

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Chirag K. Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO, President & Director [43]

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Thank you.

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Chintu Patel, Amneal Pharmaceuticals, Inc. - Co-Founder, Co-CEO & Director [44]

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Thank you.

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Stephen J. Manzano, Amneal Pharmaceuticals, Inc. - Senior VP, General Counsel & Corporate Secretary [45]

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Thank you.

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Operator [46]

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