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Edited Transcript of CXR.TO earnings conference call or presentation 14-Nov-18 1:30pm GMT

Q3 2018 Concordia International Corp Earnings Call

Dec 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Advanz Pharma Corp earnings conference call or presentation Wednesday, November 14, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Peeler

ADVANZ PHARMA Corp. - VP of IR & Communications

* Adeel Ahmad

ADVANZ PHARMA Corp. - CFO

* Graeme Neville Duncan

ADVANZ PHARMA Corp. - CEO & Director

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Conference Call Participants

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* Ash Thomas-Watson

* Prasath Pandurangan

Bloom Burton & Co., Research Division - Associate of Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to Concordia's Third Quarter 2018 Results Conference Call. My name is Kelly, and I will be your conference operator today. (Operator Instructions)

At this time, I would like to turn the call over to Adam Peeler, Investor Relations and Corporate Communications on behalf of Concordia International Corporation. Please go ahead, sir.

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Adam Peeler, ADVANZ PHARMA Corp. - VP of IR & Communications [2]

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Thank you, operator, and good morning, everyone, and welcome to Concordia's Third Quarter 2018 Results Conference Call. Before we start, we'd like to remind you that all amounts discussed on this call are denominated in U.S. dollars, unless otherwise indicated.

Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding Concordia and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectations of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of this date hereof, and Concordia assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not guarantees of future performance or results. A number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements and information and future-oriented financial information section of our public filings, including, without limitation, our MD&A and our September 30, 2018 earnings press release for additional information.

Joining us on the call today are Graeme Duncan, Concordia's Chief Executive Officer; and Adeel Ahmad, Concordia's Chief Financial Officer.

I will now turn the call over to Graeme Duncan for opening remarks. Graeme?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [3]

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Thank you, Adam, and good morning, everyone. We're pleased to be with you today to review recent developments at Concordia as well as our financial and operating results for the 3 and 9 months ended September 30, 2018.

As many of you are aware, on September 6, we announced the completion of our recapitalization transaction that was implemented pursuant to a court-approved plan of arrangement under the Canada Business Corporations Act. We sincerely thank all our stakeholders, business partners and employees around the world for their support and hard work through this challenging process.

Concordia now has a far more sustainable capital structure that will help support the implementation of our strategic plan. The company can now focus its attention, resources and efforts on achieving its 2 strategic guiding policies, namely, acquiring products and companies predominantly in our core and proximate markets to deliver both short-term growth and longer-term value and aggressively expand our product portfolio through pipeline, partnerships and swaps to deliver midterm growth and longer-term value.

Concordia has an enviable global commercial capability, a highly efficient operating model and a platform that is ready to scale and grow. We have already increased investment in the corporate development function and will continue to do so as we look to achieve our guiding policies.

With our solidified capital structure, our new board and leadership team and our global specialty generics platform, we believe we are positioned favorably to participate in M&A opportunities and pipeline expansion, particularly in Europe. Indeed, in the short period since the recapitalization, we have already started assessing a number of opportunities linked to both acquisition and portfolio expansion.

Our 2 new additions to the Board of Directors, Maurice Chagnaud and Frances Cloud, further solidified the company's position. Both have extensive experience in the European pharmaceutical market and should help accelerate the company's efforts to achieve organic and inorganic growth in the region. I would like to personally welcome both to the board.

Alongside this focus, we continue to work hard to stabilize our base business in a highly competitive environment. This involves working diligently and competing hard in our core markets, ensuring our global capability is as lean and leveraged as possible and harnessing the renewed energy in the business.

An example of this is the recent notification to shareholders of our intention to rebrand the company as ADVANZ PHARMA. Assuming the support of shareholders, this rebranding will be an important signal both internally and externally of the new start we are embarking upon. ADVANZ PHARMA will be an organization that looks to help shape, innovate and grow within the specialty off-patent sector.

With regards to the results from our current operations, Concordia's third quarter revenue of $128 million and adjusted EBITDA of $59 million are in line with our expectations for our consolidated business. Adeel will provide more color in our financial results in a few moments.

Since joining the company this summer, Concordia's Chief Corporate Development Officer, Guy Clark, has been focused on building out our corporate development team, assessing and optimizing the value of our current pipeline as well as identifying and assessing inorganic and organic growth opportunities.

In the third quarter of 2018, Concordia launched 1 new product. Concordia also has 27 products that have already been approved or are awaiting approval by the regulators. In addition, the company currently has 12 products under development that are anticipated to launch in the next 3 to 5 years.

The company believes that these products include several second-to-market or early-to-market opportunities for difficult-to-make products. Additionally, Concordia has 10 products identified for potential development. Therefore, in total, Concordia's current pipeline is now comprised of approximately 49 products.

Consistent with Concordia's prior disclosure, the company continues to evaluate the composition of its pipeline of medicines. Over the short term, the company is not expecting material incremental revenue from its pipeline but is optimistic about some of the key assets that, if successful, will come to market during 2020 through to 2023. Furthermore, as outlined earlier, we will continue to invest in this pipeline expansion as a key strategic guiding policy.

With that, I'll hand the call over to Adeel, who will discuss our third quarter results. Adeel?

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Adeel Ahmad, ADVANZ PHARMA Corp. - CFO [4]

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Thanks, Graeme, and good morning, everyone. My remarks will address Concordia's 3- and 9-month financial results for the period ended September 30, 2018. My prepared comments will focus on revenue, gross margin and adjusted EBITDA because we believe they are important metrics in assessing the performance of the ongoing business. Additionally, I will provide some comments on the impact to the reported numbers, resulting from the realignment of the company's capital structure.

Adjusted EBITDA is a non-IFRS financial measure, and we have included a full reconciliation of adjusted EBITDA to IFRS measures in our third quarter MD&A and earnings press release. Consolidated top line revenue and adjusted EBITDA of $128 million and $59 million, respectively, were consistent with our expectations for the third quarter, as were 9-month revenues of $419 million and adjusted EBITDA of $198 million.

Third quarter revenue was approximately 8% lower compared to the second quarter of 2018, and third quarter adjusted EBITDA was approximately 12% lower versus the second quarter of 2018. Revenue for the third quarter of 2018 and year-to-date decreased by $27 million or 17% and $57 million or 12%, respectively, compared to the corresponding periods in 2017. These decreases were primarily due to lower sales from both segments, partially offset on a year-to-date basis by higher foreign exchange rates impacting translated revenues from the Concordia International segment.

Adjusted EBITDA for the third quarter of 2018 and year-to-date decreased by $20 million or 25% and $47 million or 19%, respectively, compared to the corresponding periods in 2017. These declines are primarily due to lower sales and gross margins from both segments, partially offset by higher foreign exchange rates impacting translated results of the Concordia International segment on a year-to-date basis.

Consolidated third quarter gross profit of 68% was flat compared to the second quarter of 2018. The company recorded a slight decrease in gross profit of 2 percentage points for the 3-month period ended September 30, 2018, compared to the same period in 2017, primarily attributable to a change in product mix. Year-to-date gross profit percentage was 67% compared with 70% during the same period in 2017. The decrease in gross profit percentage for the 9-month year-over-year period is attributed primarily to a change in the mix of product sales within Concordia's North America and International segments.

Our consolidated cash and cash equivalents position at September 30, 2018, was $209 million. The company's cash and cash equivalents position at the end of 2017 was $327 million. On a segmental basis, International segment revenue for the third quarter of 2018 was $92 million compared to $107 million in the second quarter of the year, a decline of $15 million or 14%. Approximately $5 million of the $15 million sequential decline in revenue is the result of foreign exchange arising from the weakening of the GBP against the U.S. dollar. The remaining $10 million sequential quarterly decline is attributable to lower sales in the U.K. market of approximately $6 million, mostly resulting from competition on certain key products and lower sales in other global markets of approximately $4 million, primarily due to the timing of shipments.

Revenue for the third quarter of 2018 decreased by $26 million or 22% compared to the corresponding period in 2017. The decrease was primarily attributable to ongoing competitive market pressures in the company's U.K. business, with a relatively small $0.5 million unfavorable impact from foreign exchange translation. Year-to-date revenues decreased by $40 million or 11% compared to the comparable period in 2017.

An underlying decrease of $61 million was partially offset by a $21 million increase in revenue due to the GBP's strengthening against the U.S. dollar during the first half of 2018 compared to the corresponding period in 2017. Approximately $23 million of the underlying decrease of $61 million was driven by a decline in sales of liothyronine sodium tablets as a result of 2 competitors entering the market in the latter half of 2017. The remainder of the underlying decline is driven by competition and the resulting erosion in volume and price on other key products, including trazodone, prednisolone and levothyroxine. These declines to revenue were partially offset by increased revenue from other exclusive generic products in our portfolio.

Gross profit as a percentage of revenue decreased slightly to 63% in the third quarter of 2018 compared to 64% in the second quarter of the year. The slight decline in gross profit margin was primarily due to a change in product mix in the company's U.K. business in the third quarter. Gross profit for the third quarter of 2018 decreased by 4 percentage points compared to the corresponding period in 2017.

2018 year-to-date gross profit as a percentage of revenue was 64% compared to 67% in the corresponding period in 2017. Year-over-year and quarter-over-quarter gross profit declines are due to declines in revenue, a shift in product mix to a higher proportion of sales from products with lower profit margins and price erosion on certain key products.

Moving to the North America segment. Revenue for the third quarter was $36 million compared to $33 million in the second quarter of the year, an increase of approximately $3 million or 9%. In general, the sequential increase is primarily attributable to timing of shipments to wholesale partners and lower co-pay utilization on Donnatal, rather than an underlying increase in prescriptions. Please refer to disclosures in our Management's Discussion and Analysis for more details.

Revenue for the 3 months ended September 30, 2018, decreased by $1 million or 3% compared to the corresponding period in 2017. The decrease was primarily driven by continued competitive pressure on certain key products in the U.S. portfolio, including Donnatal and Plaquenil AG.

Revenue for the 9 months ended September 30, 2018, decreased by $16 million or 13% compared to the corresponding period in 2017. Approximately $9 million of the overall decline was driven by a decrease in Donnatal sales, which continued to face pressure from competition. The remaining decrease was primarily attributable to general competitive market pressures across the segment's product portfolio. The decrease was partially offset by increases in revenue from Orapred, Dibenzyline and Zonegran.

North America gross profit for the third quarter of 2018 was 80% compared with 81% in the second quarter of this year and 81% in the corresponding period in 2017. The slight sequential and quarter-over-quarter decline in margin is attributable to a change in product mix.

Year-to-date gross profit as a percentage of revenue was 79% in North America compared with gross profit of 80% in the corresponding period in 2017, driven by a shift in product mix.

Regarding Donnatal tablets, late in the third quarter of 2017, we became aware that a second competitive product to Donnatal had entered the market. To date, this new entrant has had a moderate impact on our market share. We continue to assess the legal rights of this tablet product to be on the market and are considering our legal options. However, this product, combined with the first non-FDA-approved copy of Donnatal that entered the market in 2016, has reduced our related market share for Donnatal tablets by approximately 50% as measured by total prescriptions as of the end of Q3 '18.

In addition, during the second quarter of 2018, we became aware of 2 additional competitive entrants against our elixir version of Donnatal. As disclosed in our Q3 financial statements and MD&A, we have taken legal action against both of these elixir competitors as we believe they have no legal basis to be on the market with these products given Donnatal's unique regulatory history. These elixir products have also reduced our market share for Donnatal elixir by approximately 50%.

As Graeme discussed in his remarks, on September 6, we announced the completion of our recapitalization transaction. The recapitalization transaction has had an impact on the reported results of the company. The details of which are disclosed in our Q3 2018 financial statements and MD&A. The significant impacts are primarily as follows, however, please refer to our Q3 2018 financial statements and MD&A for further details.

The company's outstanding debt obligations have decreased by approximately $2.4 billion. The company now has outstanding long-term debt of approximately $1.36 billion, which is comprised of USD-denominated term loans of $799.4 million, euro-denominated term loans of EUR 226.8 million and USD-denominated 8% senior secured notes of $300 million. The term loans are subject to quarterly amortization payments.

Given the reduction in debt, our annual cash interest expense is expected to be lower by approximately $170 million. As a result of the recapitalization transaction, the company has recorded a gain on debt settlement of $1.9 billion. This has significantly increased the reported GAAP net income for the quarter and year-to-date.

As part of the recapitalization transaction, the company completed the share consolidation on a 1-for-300 basis. IFRS requires that we retrospectively update previously reported EPS numbers for the share consolidation.

Looking forward, following our third quarter results and taking into account the ongoing competitive pressure in both our International and North American businesses, we continue to expect that full year 2018 revenues and adjusted EBITDA will both be between 10% to 15% lower than our fourth quarter 2017 annualized run rates for each metric.

As a reminder, fourth quarter 2017 revenue was $150 million, and fourth quarter 2017 adjusted EBITDA was $71 million. Please refer to the forward-looking statements and information and future-oriented financial information section of our public filings, including, without limitation, our Q3 MD&A and Q3 earnings press release for additional information.

As we look ahead to 2019, our new Board of Directors and executive leadership team will take the opportunity to evaluate the extent to which we will provide financial forecast for the coming fiscal year. We intend to share more information on this matter when we disclose our 2018 year-end results during the first quarter of 2019.

In prior quarterly calls, we have provided information with regards to the ongoing competition and market authority matters involving Concordia. As we have stated previously, we are working cooperatively with the CMA as it assesses all the facts, and we do not believe that Concordia has infringed on any competition law with respect to any of these matters. Please see our Q3 2018 MD&A and financial statements for a summary of the current status of the CMA investigations.

I will now hand the call back to Graeme for closing remarks.

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [5]

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Thanks, Adeel, and thank you to the Concordia team across the world for all your hard work and dedication so far in 2018. We're looking forward to our shareholder meeting on November 29, 2018, where shareholders can vote on our new proposed name change to ADVANZ PHARMA. We believe the new name and rebranding efforts really reflect the excitement and focus present throughout our global workforce. We hope that you will share in this excitement, and we look forward to updating you on our progress as the remainder of 2018 unfolds.

Thank you all, and we will now open the call up for any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Prasath Pandurangan from Bloom Burton.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [2]

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I had a couple. Firstly, could you provide more color on the pipeline products in terms of what percent of the combined total market that you expect to capture at peak? Just so we get an idea on how to model these opportunities. And then secondly, you've launched quite a few products after taking over AMCo. So when do you expect revenues from these new launches to kind of reflect on the top line? And the weakness in the other mature products, when do you expect them to stabilize? Or do you expect them to continue to work against the company?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [3]

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Thanks, Prasath, for the question. Our Q3 press release, obviously, provides an update on the pipeline, and it is 1 of our 2 key strategic guiding policies that we're investing in to further build out that portfolio. We have some assets that we are optimistic about, that if successful, we'll come to market between 2020 and 2023. And we're obviously actively seeking other partnerships and swaps and development deals to bolster this. In the past, we've looked at IMS values. And IMS values can be a typical -- typically a measure of the volume in a given market that IMS capture multiplied by the innovator prices. And whilst this can be good surrogates, I've asked Guy Clark in his role as Chief Commercial Development Officer to do a more granular and data-rich assessment of the market landscapes that we will be launching in using IMS, but also other qualitative measures and data. In terms of giving any granularity about specific products in the pipeline, we haven't done that, and we will continue to not divulge that level of detail around our pipeline moving forward.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [4]

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Sure. But broadly, how do you think we should approach these products from a modeling or forecasting perspective?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [5]

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We're not going to give any further details on the granularity. Obviously, these products vary. We have some first-to-market or second-to-market generics in there. We have in the pipeline, as I say, some interesting assets that we're optimistic about coming out between 2020 and '23, but we are not at liberty to give any further detail around specific assets and outlooks.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [6]

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Got it. Got it. Sorry, I had another one as well on the launches. Since we've taken over AMCo, when do you expect these new launches to kind of reflect on the top line? And the weakness in the mature products that you've talked about in your comments, when do you expect them to stabilize?

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Adeel Ahmad, ADVANZ PHARMA Corp. - CFO [7]

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Yes, Prasath. I'll take those 2 questions. I think both are actually good questions. And as you rightly point out, we have launched a number of products since the acquisition of AMCo in October of 2015. What I would say is those product launches span a variety of therapeutic areas. They're good launches from our pipeline, and they're already reflected kind of in the numbers that you see. So we do have revenue coming from those pipeline products in our current numbers. What I would say and it's related to your third question is that -- and Graeme has pointed this out previously in discussions around strategy, it's that the revenue from those products do not compensate for the fact that there is an erosion in the base business. So the asset that we hold in our portfolio sort of globally are such that they are very old assets, they do decline over time and that the decline is not offset by the new launches. In terms of the weakness or -- sorry, the erosion of the portfolio that you talk about, again, it's a good observation. We do have an erosion of the base, and that's a trend that we've seen in our industry. We do have a significant amount of competition, particularly in the U.K. -- particularly in the U.S., I mean. And I do expect -- I expect that trend to stabilize somewhat, but the trend is not going away. There is going to be continued pressure on the base. And as a management team, we are very focused on looking for pipeline opportunities and accretive acquisition opportunities to offset that decline.

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Operator [8]

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Our next question comes from the line of Ash Thomas from Bybrook Capital.

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Ash Thomas-Watson, [9]

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I was wondering if you could talk to us a little bit about why you think Concordia, in particular, as a platform is well positioned to win acquisitions of legacy brands? Because I do understand that's a market where there are a few other competitors looking to do something similar.

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [10]

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I'll take that one. Thank you, Ash. Yes, you're right to point out that it's a fiercely competitive market, and others will certainly be looking to secure interesting legacy brands and indeed, niche off-patent medicines. We're under no illusions about that. However, we do believe that we're in a very strong competitive position to win on some of these divestments, really, for 3 reasons. Firstly, the proven ability to implement these transactions fast and most importantly, effectively. And this includes being able to carry out the MA transfers around the world in multiple countries, being able to carry out the tech transfers where the divestor desires, being able to professionally manage the integration. We've done this multiple times including, for example, when we acquired Fucithalmic from LEO, which was sold in more than 80 countries around the world. The second reason is I think the fact we have a proven global commercial capability. This can mean that we're one of very few organizations that can take these legacy brands en masse, enabling the divestor to not have to run multiple processes in multiple regions, and it also means that we have an organization that is serious about being the guardian for these brands on a global level. And finally, our recapitalized balance sheet, our stated strategic guiding policy and our bolstered corporate development team mean that we are now fully ready and focused to go and get these deals done. So I think focus and funding makes us a serious player in this space.

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Operator [11]

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(Operator Instructions) Your next question comes from the line of [Elliott Remninski] from Cantor Fitzgerald.

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Unidentified Analyst, [12]

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Congratulations on the recapitalization, et cetera. My only question really is on Brexit. How do we look at Brexit relative to your performance? And what implications do you think it's going to have?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [13]

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Thanks very much, [Elliott]. So we believe we've taken all the sensible measures to mitigate the direct risks that could be associated with Brexit. And this includes ensuring we've got appropriate inventory levels, we have dual QP release capabilities, the transference of MA holders where appropriate, working on serialization and also working as a key member of the British Generics Manufacturers Association working group. However, to be clear and candid, Brexit remains a complex situation with many possible outcomes, and we've seen news overnight of some positive steps. But it's not possible to predict with 100% accuracy how the broader pharmaceutical supply chain may or may not be impacted and therefore, how changes in market dynamics may or may not impact our business during 2019. But we do think we've taken all the sensible measures to be ready to mitigate any of those direct risks.

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Operator [14]

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(Operator Instructions) And your next question comes from the line of Prasath Pandurangan from Bloom Burton.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [15]

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I had one more question, if you don't mind. Just to confirm about Photofrin, the other indications, are they still in play? And what's the status?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [16]

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So yes is the short answer. Our PDT franchise, of which mostly Photofrin is a key part, is a very interesting asset that we're continuing to assess how we can generate the future growth that, that franchise deserves. That means looking at a whole variety of different indications and uses for that asset. We're obviously not at liberty to divulge what R&D and clinical development pipeline is right now, but we remain optimistic about the value within that part of our business.

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Operator [17]

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There are no further questions at this time. I will now turn the call back to Adam Peeler for closing remarks.

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Adam Peeler, ADVANZ PHARMA Corp. - VP of IR & Communications [18]

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Thank you, operator, and thank you to Graeme and Adeel and everyone else, who participated in today's call. This concludes our third quarter conference call.