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Edited Transcript of CBM earnings conference call or presentation 2-May-19 12:30pm GMT

Q1 2019 Cambrex Corp Earnings Call

East Rutherford May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Cambrex Corp earnings conference call or presentation Thursday, May 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory P. Sargen

Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO

* Steven M. Klosk

Cambrex Corporation - President, CEO & Director

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Conference Call Participants

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* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Evan Arthur Stover

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Cambrex First Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Greg Sargen, Chief Financial Officer. Please go ahead, sir.

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [2]

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Thank you, Britney, and good morning, everyone. Today's discussion will contain forward-looking statements regarding expected operational and financial performance, and these statements may occur during our prepared remarks or during the question-and-answer session. These statements are based on Cambrex's current 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 regarding such risks and uncertainties, please refer to the risk factors and forward-looking statements portions of our 2018 Form 10-K as well as the forward-looking statements section of both our first quarter 2019 Form 10-Q and earnings release issued this morning.

During this call, we will be referring several times to changes in revenue, all of which are made on a constant currency basis. All results, guidance and year-over-year comparisons will be on an ASC 606 basis, which is the new revenue recognition standard we adopted in January of last year. Also during this conference call, to provide greater transparency regarding Cambrex's operating performance, we refer to certain non-GAAP financial measures that are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings press release issued this morning and available on our website at cambrex.com.

A replay of the call will be available shortly after we end today, through next Thursday, May 9, and will also be available on the Investors section of our website.

Before I turn the call over to Steve for a business review, I would like to quickly revisit the changes we made to our segment reporting following the acquisitions of Halo Pharma and Avista Pharma Solutions as discussed during our last conference call.

We now have 3 reportable segments: Drug Substance, Drug Product and Early Stage Development and Testing. The Drug Substance segment is comprised of the legacy Cambrex Active Pharmaceutical Ingredient business, excluding the High Point facility, which has moved to the Early-stage segment. The Drug Product segment includes the former Halo business and the Early Stage Development and Testing segment includes the former Avista business in addition to our High Point facility.

Now I would like to introduce Steve Klosk, our President and CEO. I will follow Steve with some comments on certain financial items before opening the call for Q&A. With that, it's my pleasure to introduce Steve. Steve?

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Steven M. Klosk, Cambrex Corporation - President, CEO & Director [3]

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Thank you, Greg, and good morning, ladies and gentlemen. I'd like to begin with some thoughts on the progress we made during the quarter toward our position to becoming the leading fully integrated small molecule Contract Development and Manufacturing Organization.

With the addition of Halo Pharma in September 2018 and Avista Pharma Solutions in January 2019, Cambrex added hundreds of new customers and capabilities that allow us to offer our customers virtually all the services they need to develop and manufacture their small molecule therapeutics. We anticipated that this would result in extensive cross-selling opportunities and have organized our commercial team as such with each business development professional selling our full range of services. I am pleased to report that this strategy is starting to bear fruit even at this early stage.

We are already seeing many new business opportunities where we can maintain customer relationships over a broader range of the product life cycle than in the past. We are able to improve delivery timelines for our customers by efficiently transferring products to our larger scale assets and shifting resources across our network of facilities to accelerate development, manufacturing and testing services.

In one recent case, we were presented with an opportunity to transfer a drug substance from our early stage development facility in Durham, North Carolina to our large-scale facility in Charles City, Iowa. By quickly transferring the production process to equipment scaled appropriately to this product stage in its life cycle, we are able to accelerate delivery and meet the customer's schedule.

In the past, this manufacturing would have likely left the Avista business and the customer would have sent out multiple requests for proposals to complete the later-stage work. Now just as we have done multiple times with our High Point facility over the last few years, our early-stage sites will involve our later-stage sites in scale-up decisions whether it be Drug Substance or Drug Product to make it easy for the customer to decide that the project will get done faster and with less risk if they move it to a larger scale Cambrex site.

Another project that we were recently awarded will involve multiple facilities as the product moves to its next phase of development. This project involves an early-stage Drug Substance and Drug Product customer from our Longmont, Colorado facility that will now scale up their Drug Substance manufacturing at our High Point, North Carolina facility while simultaneously scaling up their Drug Product manufacturing at our Whippany, New Jersey facility.

In this case, we are again accelerating delivery for the customer by executing a technical transfer across our development and manufacturing network to the facilities with the appropriate scale required by our customer.

While these specific examples are relatively modest in terms of project size, they are early indications of the potential value created by the combination of these businesses. Our hundreds of Early Stage customers provide a broad pipeline of clinical candidates, and our large-scale drug substance and drug product facilities are well suited to receive those products as they progress to late-stage or commercial manufacturing. We are seeing numerous opportunities like these, and I look forward to sharing more examples in the future as our commercial team gains experience selling our full line of services.

It is a process that will take some time, but we are confident that our existing and prospective customers are beginning to understand the value we add as a fully integrated service provider.

Operationally, delivering seamlessly across multiple facilities requires daily coordination, detailed technology transfer processes and harmonized systems. Our operation management team is focused on fully aligning these aspects of our business as quickly as possible, starting with the areas most impactful to our customers. This is an effort that will continue throughout the year.

In parallel, we continue to invest in our facilities to position ourselves to take advantage of continued growth in the CDMO market. In April, we completed construction of a new production area to manufacture highly potent drug substances at our Charles City, Iowa facility and expect to begin production during the second quarter of 2019. We also expanded the quality control laboratory at our generic drug substance facility in Milan, Italy. And recently announced an investment to add cGMP liquid filling capacity at our Mirabel, Québec facility.

We will continue to seek investment opportunities focused on the areas of the market we find most attractive.

Financially, first quarter performance was in line with our expectations, and we are maintaining our full year 2019 guidance. Net revenue in the first quarter was a $159 million, an increase of 17% compared to the first quarter last year on a constant currency basis. Adjusted EBITDA in the first quarter was $41 million compared to $38 million in the first quarter of 2018. We continue to expect revenue growth for the full year 2019 to be between 21% and 25% on a constant currency basis and adjusted EBITDA to be between $150 million and $160 million.

I will now comment on each of our business segments. Drug Substance net revenue was a $112 million, a decrease of 14% from last year on a constant currency basis. This decline was largely due to lower volumes of our largest product, which was expected and discussed during our fourth quarter 2018 conference call. Excluding our largest product, Drug Substance net revenue increased 19% compared to the first quarter of 2018 driven by higher volumes in both commercial and clinical phase products within our innovator portfolio.

First quarter revenues from our controlled substance and generic drug substance businesses were in line with our expectations, and we continue to expect those product categories to be approximately flat for the full year compared to 2018.

Our strategy in the innovator product category within our Drug Substance segment is to increase the number of later-stage clinical projects in our pipeline and secure additional supply positions for products which are already commercial. The small molecule clinical development pipeline remains robust, and growth in the innovator CDMO market appears to be continuing its trend from recent years with pharmaceutical companies generally showing a preference for outsourcing small molecule manufacturing over internal capacity investments.

Overall, we see the innovator Drug Substance market growing in the mid- to high single-digit percentages annually. During the first quarter, we won 2 new late-stage innovator projects, and 1 of our customer's products was put on hold due to clinical results, bringing our late-stage Drug Substance pipeline to a total of 19 products. We define a project as late stage from the time the product is in Phase III until it is approved and the manufacturing process is validated in our facility.

Among those 19 late-stage projects, 5 products are expected to generate over $10 million each in annual revenue at maturity, 6 products could generate between $5 million to $10 million and 8 products are each expected to generate less than $5 million annually. Future revenue from products in our pipeline will depend on each product's regulatory approval, success in the market and the share of commercial supply that we secure among other variables.

Now I'd like to briefly comment on our generic product category within our Drug Substance segment. This market continues to be characterized by a high level of competition, putting pressure on both prices and volumes for any single customer of ours, especially in the United States.

Our strategy is to offset those pressures by focusing on lower volume, higher value niche products, pursuing opportunities in other growing markets and focusing on opportunities where we believe we are favorably positioned relative to low-cost competitors, who have experienced ongoing quality and regulatory issues.

Over the medium term, we expect the generic drug substance market to grow in the low single digits, and we continue to maintain 10 to 15 new products in our generic pipeline to support future growth.

Despite the recent market pressure in the United States, orders for our generic drug substances throughout the rest of the world have been and continue to be strong enough to offset revenue declines in the United States. The market for the final product category within our Drug Substance segment, controlled substances, which we define as DEA Schedule II products, is characterized by increasing pricing pressure and a limited number of new products entering the market in recent years. However, our broad customer relationships have enabled us to consistently maintain our market share.

As mentioned earlier, we continue to expect full year controlled substance revenue to be approximately flat compared to last year, with volume offsetting price declines.

We continue to expect total Drug Substance revenues for the full year 2019 to decrease between 7% and 11%. Excluding our largest product, we still expect the Drug Substance segment to grow between 5% and 10% and revenues from innovator products to grow 10% or 14%.

In our Drug Product segment, first quarter net revenue was $24 million. While this is about 12% lower than pro forma first quarter 2018 revenues when this segment was operating as Halo, we continue to expect Drug Product net revenues to be between $105 million and $113 million for 2019, representing a growth rate of approximately 10% to 18% on a pro forma basis compared to 2018.

Over the next several years, we expect revenues in our Drug Product segment to grow faster than the market, which is large, fragmented and growing in the mid- to high single-digit percentages. Our current product portfolio consist of both innovator and generic products. And like our Drug Substance segment, our strategy over time is to win as many late-stage development projects as possible with the goal of manufacturing those products under long-term supply agreements when they advance to commercial status. We believe our assets, capabilities across multiple dosage forms and broad portfolio of customers in all stages of development present an opportunity for us to capture market share as we fill capacity within our drug product facilities.

Additionally, as we mentioned earlier, we are positioned to transfer our formulation development and manufacturing projects from our earlier stage site to one of our large scale drug product facilities.

Now I would like to comment on our Early Stage Development and Testing segment. Net revenues for the first quarter of 2019 in this segment were $23 million, an increase of 20% compared to pro forma first quarter of 2018 revenues. This included strong growth at both our High Point, North Carolina facility as well as the former Avista sites. The market for early-stage services is quite attractive. While it is smaller than the Drug Substance and Drug Product CDMO markets, it is a several-billion-dollar market, estimated to be growing at high single-digit percentages annually. Outsourcing in this segment of the market is driven primarily by funding of preclinical projects, which continues to run at very high levels.

Importantly, the Early Stage business provides access to a large number of customers and a broad pipeline of projects that have the potential to advance to our larger-scale manufacturing facilities. The year-over-year growth we saw in the first quarter reflects a robust book of repeat customers, new business and very strong demand for outsourced analytical services.

Relative to our Drug Substance and Drug Product segments, Early Stage projects tend to be much shorter in duration, typically a few months or less with a focus on advancing the product to the next phase of clinical development as quickly as possible. Revenues in this segment depend upon a continuing strong flow of new and repeat business, which creates less predictability of future revenues compared to our 2 other segments, which focus on later stage and commercial projects. At this time, we continue to expect Early Stage 2019 revenue in the $105 million to $113 million range, representing a 24% to 33% growth rate over the full year pro forma results for 2018.

In summary, on a consolidated basis, we remain on track to achieve our 2019 full year net revenue and adjusted EBITDA guidance. We made significant progress in the first quarter and are well on our way to becoming the leading integrated small molecule CDMO. We added hundreds of new customer relationships with the completion of the Avista acquisition, demonstrated the potential long-term value created by broadening our capabilities across all stages of Drug Substance and Drug Product development and manufacturing and began the critical work of harmonizing our commercial and operating processes to create 1 Cambrex. There is much ongoing work to do, but we believe we are well positioned for strong future growth.

With that, I'll now turn the call over to Greg.

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [4]

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Thanks, Steve. I'd like to comment on a few financial items that Steve did not already address.

Consolidated gross margin for the first quarter of 2019 was 34% compared to 36% during the same period last year with the decline relating to the addition of the Drug Product and Early Stage segments. Drug Substance gross margin was 39% for the quarter, an increase of 2% over the same quarter last year, reflecting favorable impact from foreign currency, favorable product mix within our generic API product category and lower inventory charges due to batch failures in 2018, partially offset by lower production volumes.

Gross margins for our Drug Product and Early Stage segments were each in the mid-20% range. Margins were in line with expectations in our Drug Product segment and lower than expected in our Early Stage segment due to lower utilization of our manufacturing suites. Selling, general and administrative expenses for the first quarter, excluding integration costs and amortization of purchased intangibles were $21 million or 13% of net revenues, an increase of approximately $4 million from the first quarter of 2018 when these costs represented 12% of net revenues. The increase reflects the addition of the Halo and Avista businesses, partially offset by lower administrative expenses in Drug Substance segment, reflecting lower consulting costs associated with the 2018 operational excellence initiative and a favorable impact from foreign exchange.

Expenses related to M&A and the integration of the Halo and Avista businesses were $6 million during the first quarter, including approximately $4 million of transaction fees relating to the Avista acquisition and $2 million of integration costs. These amounts are excluded from our adjusted EBITDA and adjusted earnings per share guidance, and we continue to expect total M&A and integration expenses for 2019 to be between $9 million and $11 million. This total does not include ERP system upgrades for our recently acquired businesses, which are included in our capital expenditure and profit guidance.

The effective tax rate for the quarter was 25%, an increase of 19% during the first quarter of 2018. This increase is primarily due to reduced tax benefits resulting from a decline in export sales to our largest customer and New Jersey state tax reform. Our expectations for the full year 2019 effective tax rate remain unchanged at 25% to 27%.

Adjusted income from continuing operations was $0.60 per share for the first quarter of 2019 compared to $0.77 per share during the same period last year. We now expect full year 2019 adjusted income from continuing operations to be between $1.95 and $2.17 per share. This represents an increase of $0.08 from our previous guidance, which was driven by a decrease of approximately $4 million in expected depreciation expense related to ongoing purchase accounting for our recent acquisitions. These estimates are still being assessed, and we expect to finalize them during the second quarter.

Capital expenditures for the first quarter of 2019 were $19 million, and we continue to expect full year capital expenditures to be between $60 million and $70 million. Net debt was $430 million at the end of the first quarter, an increase of $226 million from the end of 2018. This increase includes the purchase of Avista during January 2019 for $252 million plus related acquisition and integration costs, partially offset by $31 million of free cash flow during the first quarter.

Our expectations for full year 2019 free -- free cash flow, which we define as the change in net debt, excluding any M&A or related expenses remain unchanged at $60 million to $70 million.

Finally, there is one item to note in our balance sheet, which is the addition of $37 million of right-of-use assets and corresponding lease liabilities. This change reflects a new U.S. GAAP requirement, requiring companies to record most operating leases on their balance sheet. This change does not impact our income statement or guidance for 2019.

In summary, our performance during the first quarter of 2019 was in line with our expectations, and our outlook for the full year remains consistent with prior guidance. We are excited about the progress made so far as we integrate our 2 recently acquired businesses, and we look forward to updating you on our progress next quarter.

Britney, I would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matt Hewitt with Craig-Hallum Capital Group.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Congratulations on some of the progress you saw in the first quarter. I'm wondering if we could dig in a little bit more on the sales cross training. Where that sits, and more importantly, I guess, how those teams -- even if anecdotally, how those teams are starting to increase the pipeline, some of the feedback that they're getting from customers? Anything along those lines?

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Steven M. Klosk, Cambrex Corporation - President, CEO & Director [3]

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Sure, Matt. So you know we closed on the Avista business January 2. And then soon after that, we began the integration of our sales team, our commercial team. So that's an ongoing process. You have to begin, what I would call the basic or early-stage capabilities training which will be ongoing. We have our business development people traveling with a subject matter expert from one of the other businesses so that they can call on customers and prospective customers and listen to and actually see how those -- their partners are selling those services and capabilities that they're learning. And then, of course, you have to begin the process of having the commercial teams visit the various sites so that they can see the assets, the capabilities, meet our technical people and meet the project managers that they'll be working with as they do the cross-selling. So that's ongoing, I think that's going well. It will continue throughout the year.

As I mentioned in my prepared remarks, we are seeing early successes, which are a good summit. So we're seeing value from Cambrex becoming a fully integrated CDMO and from combining the businesses. So I would characterize it as early success, early growth synergies from the cross-selling, early synergies from being able to scale up from the early-stage sites to the larger scale sites, both in Drug Substance and Drug Product. But I think we feel confident that as the business development team gets more comfortable with all of our capabilities and our customers understand better the value of the platform of all the services that we can provide them, we're going to see even greater growth synergies.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Great. Yes. And that would -- it sounds like that right now, you're having multiple people calling together. As time goes by, everyone's comfortable with the entire platform, maybe you don't have those experts and the salesperson together, so maybe you would see some leverage there as well?

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Steven M. Klosk, Cambrex Corporation - President, CEO & Director [5]

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Absolutely. So you have to understand, you get off to sort of a slower start for all the reasons that I said because of the training and the site visits and partnering. So the goal, of course, will be for each of those business development people to be able to present all of our capabilities. And that's why early stage in Q1 and then you gain momentum.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Got it. Maybe one more and then I'll hop back in the queue. Regarding the Gilead relationship, and obviously we know you've provided the guidance there but from -- are the years -- are those revenues weighted in any particular way? Meaning is there a first half weighting versus a second half weighting? Or is it pretty spread out over the course of the year?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [7]

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Yes. This is Greg. This year, they're pretty spread out over the year. Last year, they were a little bit back end tilted. So again we're going to try to avoid getting into quarter-by-quarter product descriptions, but larger -- in a 10,000-foot view, a little bit more evenly spread this year, a little more back-end loaded last year.

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Operator [8]

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Our next question comes from John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [9]

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Greg, based -- if you could just take the gross margin comments you gave us by segments, and maybe just update us on your longer-term thinking about where gross margins can settle in, in the 3 businesses, that would be very helpful.

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [10]

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Yes. I think we generally expect the Drug Substance gross margins to be in the mid-30% range. The -- we expect the Drug Product margins to be in the mid-20% range, and we expect the Early Stage margins to be in the low 30s. Maybe they'll get to mid-30s, but right now they're kind of in that zone.

The first quarter showed Early Stage segment in the mid-20s, which is not where we want it to be, and that's a manifestation of just simply not enough projects in the early-stage Drug Substance and Drug Product manufacturing suites there. So that is something that we've asked the commercial teams to be focused on. We have capacity there, and it's an important pipeline for our later-stage projects down the road. So we will be kind of emphasizing that as we move forward here to both -- not only get the revenue line up but to utilize those suites and provide the pipeline for the downstream synergies.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [11]

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Great. And then a follow-up question relating to M&A. Now that you've got Avista and Halo under your belt, are you thinking that you're sort of done with strategic additions for the time being? Or do you have an active M&A, kind of pipe at this point, too?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [12]

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Yes. I think it's safe to say that if we did anything at 2019, it would be small, noncomplicated bolt-on. As I think we get in later into 2019, and we assess how everything's going, how the cash flows look, what -- where we're seeing successes and where we're really running behind, and we'll critically evaluate kind of that next key piece in the machinery and there's a handful of capabilities and geographies and specific need in each of the segments that we have definitive lists on, and we're monitoring what's out there. But we think it would be not so prudent to bring on another integration challenge right now as we work on the 2 that we have. So we think that will take the better part of 2019 to kind of get it where we want it to be.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [13]

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Great. And Steve, one more quick one. It sounds like you've seen some deterioration in terms of pricing and competitive pressures within generics and controlled substances. Are you seeing any of that in the innovator side? And what's your longer-term view about that being a risk on the innovator Drug Substance business?

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Steven M. Klosk, Cambrex Corporation - President, CEO & Director [14]

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No. John, we're not really seeing that on the innovator side. I mean it is a competitive RFP process always, on the innovator side, but we don't see a similar pricing pressure like the whole generic pharmaceutical industry you see.

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [15]

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And just to be clear, John, we have not seen any meaningful price erosion on our generic API product category for quite some time. Certainly, our customers are seeing it in the end market, but we feel like the price erosion we took in the early 2000s, probably in the first decade of the 2000s, was pretty significant in that space as the Indian manufacturers, to a lesser extent Chinese manufacturers, entered pretty aggressively. Over the past 6, 7, 8 years, we've seen maximum 2%, usually less than 1%, of price erosion there on an annual basis, and the first quarter was virtually 0.

But just to make sure we're differentiating our customers' pricing pressures and what we're seeing right now.

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Operator [16]

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Our next question comes from David Windley with Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [17]

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Congrats on the progress in the quarter. In regard to some of the margin comments, I wanted to start there. Starting with Drug Product, Greg, you said expectation's in the mid-20s. Could you kind of flesh that out a little bit in terms of Halo's performance prior to acquisition, which I think saw EBITDA margins at that level and how that has changed? And then maybe while we're on that subject, could you talk about what EBITDA contribution, kind of translating GAAP to non-GAAP for me, what EBITDA contribution from the Drug Product business would have been in the quarter?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [18]

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Yes. I won't get into EBITDA per quarter, because there's a fair bit of segment reporting as it is, and you could probably back into it, frankly. But the EBITDA margin in the Drug Product segment is not all that different in the gross margin. There is a fair bit of depreciation expense loaded in there and not a whole lot of SG&A, frankly. So the EBITDA margin tends to not be that different than the gross margin. So yes, gross margins aren't exactly where we want them to be for that business in 2019, based on kind of our assumptions from say, last summer, when we were embarking on it and about buy it. And we know exactly why that is the case. We have some capacity there that we need to fill, and we'll fill it over time, but it's not immediate. And so where we are right now, and -- we're okay with that. It's a positively contributing business since -- decent EBITDA margins, but we'll endeavor to get those margins up as we fill that capacity over time.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [19]

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Okay. And then thinking about seasonality, I think there's been a couple of comments about Halo running a little lower and growth for the -- than the expected growth for the year. I think probably the comps get a little easier in the second half and maybe the same thing in the ESDT segment. But I know you don't want to give quarterly, but maybe you could help us to understand just kind of directionally how the 3 segments are going to move as we progress through the year.

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [20]

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Yes. It's a little lumpier than I would have expected. And right now, again, when I talked a couple of months ago, I would have told you that the forecast -- and I -- not would've -- I did say that the forecast was relatively evenly spaced throughout the quarters. And the forecast now has it a bit more front half loaded than back half loaded, but I'm -- I'll take that with a grain of salt because we've seen a fair bit of movement in production and timing of deliveries and everything. So I wouldn't be surprised that a bit of that first half forecasted business over the next couple of months shifts into the Q3, and some of that Q3 goes into Q4. It's just a natural evolution we've seen over time here.

So I don't see a whole -- to refer to your earlier comments with respect to Drug Product, I think we're fine on a full year forecast basis right there, right now, if you annualize the first quarter, which is never necessarily the thing we want to do. But maybe just did that as a sanity check and we come up a bit short. So we do see some easier comping and some growth in the quarters as it progresses there.

On the ESDT side, I think we're 20% growth on a pro forma basis there, forecasting 24% to 32% growth. So I wouldn't say the comps get easier there. I think we have to continue to ramp that business up, and as I mentioned to an earlier caller, we need to fill some of those manufacturing suites with the early-stage formulation development and Drug Substance manufacturing projects.

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Operator [21]

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Our next question comes from Evan Stover with Robert W. Baird.

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Evan Arthur Stover, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [22]

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Dave stole a little bit of my thunder on his last question, but maybe I can dig into it a little further. On Early Stage, I know the business there is fast burning, we're literally talking about hundreds of projects and the comments leading into a deal was the -- an exceptionally robust funding environment, lots of project work and you actually gave the growth guidance there pretty early before closing it. So I guess the lighter capacity utilization in 1Q '19 for Avista and maybe High Point, I'm not sure what the mix there or that comment related to. I just wanted to dig into a little bit on why some of that demand is not pulling through into that business in maybe the way that you thought the market indicated?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [23]

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Yes. So if you break that business down, the biggest single revenue component is analytical services and related testing, and there's a handful of other components, there's just microbiological testing. Those units are doing just fine. It's really the 2 categories that related to process chemistry manufacturing and formulation development, which are not big units, but nonetheless, they're -- the pipeline coming into 2019 probably wasn't where it needed to be, and we need to build that pipeline. And I'm -- if there's one thing that we're pretty good at, it's selling process chemistry capabilities in, admittedly, later stage. But this is right in our sweet spot. So I don't have any doubt that we'll fill that capacity over time, it's just matter of how and when and until we do, there is a little bit of margin pressure there, and we just need to keep growing that business and attracting that business.

So it's not that the market conditions are weaker. I think some of the friction in the first quarter was probably that commercial friction where we're training folks, sending them around to plants, having them listen to internal webinars, subject matter experts, the folks that are good at selling the early stage stuff, a bit of their time diverted and likewise with the later stage stuff.

So I think time will tell. It's a little early yet to jump to any conclusions. I think we have a lot of year left, and we're going to endeavor to fill those gaps.

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Evan Arthur Stover, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [24]

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Okay. A couple of quick ones I think we can tick off pretty quick. The generic ANDA initiative, what's the timeline for a response from the FDA on those few molecules that you have in front of them?

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Steven M. Klosk, Cambrex Corporation - President, CEO & Director [25]

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I mean the assumption there, as in on any of them, is 18 months or so from filing. So we're really sort of in a hold pattern there waiting to see -- to get approvals and then see commercial success. So we're really not investing more at the moment, it's really a wait and see.

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Evan Arthur Stover, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [26]

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Okay. And then currency. We haven't talked about it on this call or I think the last one. The headwind on revenue was a little bit heavier than I expected. Can you just tell us, based on current rates, what kind of impact do you think currency will have on revenue this year?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [27]

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Yes. I think it will have -- if it stays where it is, the Swedish krona is a bit weaker than we expected. It scripted weaker as the year progressed. We're relatively well hedged at an operating profit and EBITDA basis, so I'm not too concerned about the impact on profitability, but I wouldn't be surprised to see a continued 2% headwind on revenues if the rates stay where they are as the year progresses.

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Operator [28]

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Our next question comes from Steve Schwartz with First Analysis.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [29]

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I guess the first question with respect to reducing depreciation, you held adjusted EBITDA. So in the process of reducing the depreciation add back, that kind of suggests that your operating model through operating profit is $1 million stronger than you initially expected. I know it's a relatively small number, it's maybe 3%, but is there something specific there that's interesting to talk about?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [30]

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No. I think that's just a purchase accounting assumption we made on the front end of the year that when you go through evaluating these businesses, you pretty much mark everything to its fair market value, both intangible assets and you step up the value of the property client equipment. And we made certain high-level estimates upon the acquisition of Avista in -- when we came out with our fourth quarter and full year guidance. And we're refining that. I think there might be further revisions to it. I don't expect significant adjustments from here but that's simply a purchase accounting exercise. It doesn't have any underlying impact. It doesn't reflect any underlying strength or weakness in the operation of the business. It's simply a purchase accounting exercise.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [31]

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Well, you understand in holding $150 million to $160 million and reducing depreciation by $4 million suggest that either your gross profit or operating profit is $4 million higher than you had originally thought?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [32]

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Sure. Yes. The add-back is then -- so I could justify $2 million or $12 million, the EBITDA range is going to stay right where it is versus, by definition, it excludes depreciation. So I'm not sure exactly what you're getting at. It had no impact on EBITDA, and it won't when we refine it further. It will impact our EPS and our operating profit absolutely, but it will not necessarily reflect anything ongoing in the operations.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [33]

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Got it. All right. With respect to CapEx, certainly, we've seen a lot of news flow on your activities with expansions and what have you. What's your new level of maintenance CapEx now within the business? And you did mention the ERP upgrades, I think that are pending, right, for Halo and Avista?

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [34]

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Yes. So I think we would add probably mid-single millions for each of the 2 segments we added, you know, kind of call it 4 to 6. I think we may invest a little bit more heavily to in-systems and certain capabilities early on with these businesses, and we're still evaluating those and we'll continue to evaluate those probably in '19 and '20, and that's embedded in our '19 guidance. But we would -- the Drug Substance maintenance CapEx as we used to talk about it is probably in the $8 million to $10 million zone per major site. So call it $25 million to $30 million of maintenance CapEx and then you would add another $5 million in for the Drug Product and Early Stage segments to get to something in the $35 million to $40 million zone, and then anything we're doing above and beyond that would be considered growth capital.

Take all those with a grain of salt because everything we do has a growth element into it, even if we're replacing older equipment or doing anything of a capital nature, we're trying to factor in growth if you will.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [35]

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Okay. And then last one I'd -- this is pretty simple, but the HP API capability in Charles City, did that go into Pharma 4? Or do you still have Pharma 4 on standby as a shell?

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Steven M. Klosk, Cambrex Corporation - President, CEO & Director [36]

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No. It's a separate production area, Steve, where we're able to do high potency manufacturing down to like a 0.1 microgram per cubic meter level. So it's separate area. Pharma 4 is still available for when we need to expand whether it be mid-scale or large scale or a combination thereof.

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Gregory P. Sargen, Cambrex Corporation - Executive VP of Corporate Development & Strategy and CFO [37]

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And with that, Britney, we'll wrap up the call. Thank everybody for their time, and look forward to talking to you next quarter.

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Operator [38]

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Yes. Right. Thank you, everyone. This concludes today's teleconference. You may now disconnect.