On May 10, 2016 AMRI (NASDAQ: AMRI) reported financial and operating results for the first quarter ended March 31, 2016 and provided an update to its outlook for 2016 (Press release, Albany Molecular Research, MAY 10, 2016, View Source [SID:1234512169]).

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Highlights:

First quarter contract revenue of $102.8 million, up 37% from 2015
First quarter royalties of $2.7 million, down 59% from 2015 due to expiration of Allegra royalties in Q2-2015
First quarter adjusted contract margins 27%
First quarter adjusted diluted EPS of $0.07, reflecting a $0.07 decrease in EPS from royalties in the current quarter
First quarter adjusted EBITDA of $13.1 million
Confirms standalone full year 2016 financial guidance

"Adjusted contract margins", "Adjusted diluted EPS", and "Adjusted EBITDA" are Non-GAAP measurements. See discussion under the heading "Non-GAAP Adjustment Items" in this release.
"Our first quarter results fell short of expectations largely due to timing of API revenue, combined with increased R&D investment and higher SG&A," said William S. Marth, AMRI’s president and chief executive officer. "While our API results were lower than we would have liked, we believe the results are transitory and revenue will build through the year based on contractual obligations we have in hand. Additionally, strong performances in our Drug Product and DDS businesses give us confidence in our outlook for the full year 2016.

We have also continued our investment in generics, with multiple co-development programs underway, as exhibited by the increase in annual R&D investment, in line with our guidance. While we are sharing the costs of some of these development programs now, longer term, we will capture revenue through commercial supply and royalty revenue that is expected to more than offset the investment we are making today."

We are excited about the Euticals acquisition and the benefits of adding such a highly regarded company to our team. As we have said before, our strategy is to build off our existing platforms of API, Discovery/Development and Drug Product by expanding our capabilities, both organically and inorganically in areas with high barriers to entry, creating greater sustainable value. The addition of Euticals fits that strategy well and offers compelling strategic benefits that we believe will generate meaningful value for our customers and shareholders longer term."

First Quarter 2016 Results

Total revenue for the first quarter of 2016 was $105.6 million, an increase of 29%, compared to total revenue of $81.8 million reported in the first quarter of 2015.

Total contract revenue for the first quarter of 2016 was $102.8 million, an increase of 37%, compared to total contract revenue of $75.1 million reported in the first quarter of 2015. Adjusted contract margins were 27% for the first quarter of 2016, compared with 23% for the first quarter of 2015, driven largely by the addition of Gadea Pharmaceuticals. Adjusted contract margins exclude purchase accounting depreciation and amortization, purchase accounting inventory adjustments, and share-based compensation expense that are included under U.S. GAAP. For a reconciliation of U.S. GAAP contract margins as reported to adjusted contract margins for the 2016 and 2015 reporting periods, please see Table 1 at the end of press release.

Royalty revenue in the first quarter of 2016 was $2.7 million, a decrease of 59% from $6.7 million in the first quarter of 2015 due primarily to lower royalties on Allegra (fexofenadine) products which ended in the second quarter 2015, based on the expiration of the underlying patents. Royalty revenue for the first quarter of 2016 includes $2.2 million from the net sales of certain amphetamine salts sold by Actavis and royalties from an API sourced from our business in Spain.

Net loss under U.S. GAAP was $(10.1) million, or $(0.29) per basic and diluted share, in the first quarter of 2016, compared to U.S. GAAP net loss of $(2.2) million, or $(0.07) per basic and diluted share for the first quarter of 2015. Net income on an adjusted non-GAAP basis in the first quarter was $2.4 million or $0.07 per diluted share, compared to adjusted net income of $6.4 million or $0.19 per diluted share for 2015.

Adjusted EBITDA in the first quarter of 2015 was $13.1 million, a decrease of $2.5 million or 16% compared to the first quarter 2015. For a reconciliation of U.S. GAAP net income (loss), EBITDA and earnings (loss) per diluted share to adjusted net income, EBITDA and earnings per diluted share for the 2016 and 2015 reporting periods, please see Tables 2 and 3 at the end of this press release.

Segment Results

Active Pharmaceutical Ingredients (API)

Three Months Ended

March 31,
(Unaudited; $ in thousands)

2016

2015

API Royalty Revenue

$ 2,741

$ 2,868
API Contract Revenue

54,702

37,848
API Total Revenue

57,443

40,716

Cost of Contract Revenue

40,921

28,583

Contract Gross Profit, excluding royalties

13,781

9,265
Contract Gross Profit, including royalties

16,522

12,133

Contract Gross Margin, excluding royalties

25.2%

24.5%
Contract Gross Margin, including royalties

28.8%

29.8%

Adjusted Contract Gross Profit, excluding royalties (1)

17,244

9,442
Adjusted Contract Gross Margin, excluding royalties (1)

31.5%

24.9%

Adjusted Contract Gross Profit, including royalties (1)

19,985

12,310
Adjusted Contract Gross Margin, including royalties (1)

34.8%

30.2%

(1) Refer to Table 1 included in this release for the reconciliation of U.S. GAAP contract gross profit and contract gross margin to adjusted contract gross profit and adjusted contract gross margin as a percentage of contract revenue.
API contract revenue for the first quarter of 2016 increased 45% compared to the same period of 2015, primarily due to $20 million of incremental revenue from the acquisition of Gadea Pharmaceuticals in July 2015, offset by lower revenue associated with the Holywell, UK site closure. API adjusted contract margin for the first quarter of 2016 increased 7 percentage points from the first quarter of 2015, driven by the margins realized on Gadea’s revenues. API adjusted profit margin including royalties was 35% for the first quarter of 2016, compared to 30% for the same period in 2015.

Drug Discovery Services (DDS)

Three Months Ended

March 31,
(Unaudited; $ in thousands)

2016

2015

DDS Contract Revenue (1)

$ 23,203

$ 17,873
Cost of Contract Revenue (1)

17,170

13,705
Contract Gross Profit

6,033

4,168
Contract Gross Margin

26.0%

23.3%

Adjusted Contract Gross Profit (2)

6,548

4,324
Adjusted Contract Gross Margin (2)

28.2%

24.2%

(1) A portion of the 2015 amounts were reclassified from DDS to DPM to better align business activities within our reporting segments.
(2) Refer to Table 1 included in this release for the reconciliation of U.S. GAAP contract gross profit and contract gross margin to adjusted contract gross profit and adjusted contract gross margin as a percentage of contract revenue.
Discovery and Development Services (DDS) contract revenue for the first quarter of 2016 increased 30% compared to the first quarter of 2015, primarily due to the additions of Whitehouse Laboratories and SSCI, along with organic growth. DDS adjusted gross margins increased to 28% in the first quarter of 2016, from 24% in the first quarter of 2015, driven by margins realized on Whitehouse Labs and SSCI revenue, and higher capacity utilization resulting from previous cost reduction initiatives.

Drug Product Manufacturing (DPM)

Three Months Ended

March 31,
(Unaudited; $ in thousands)

2016

2015

DPM Contract Revenue (1)

$ 24,933

$ 19,410
Cost of Contract Revenue (1)

21,272

15,851
Contract Gross Profit

3,661

3,559
Contract Gross Margin

14.7%

18.3%

Adjusted Contract Gross Profit (2)

3,972

3,730
Adjusted Contract Gross Margin (2)

15.9%

19.2%

(1) A portion of the 2015 amounts were reclassified from DDS to DPM to better align business activities within our reporting segments.
(2) Refer to Table 1 included in this release for the reconciliation of U.S. GAAP contract gross loss and contract gross margin to adjusted contract gross profit and adjusted contract gross margin as a percentage of contract revenue.
Drug Product Manufacturing contract revenue for the first quarter of 2016 increased 28% compared to the first quarter 2015, reflecting higher commercial manufacturing revenue. Drug Product adjusted contract margins for the first quarter of 2016 decreased 3 percentage points, reflecting higher costs associated with commercial launch preparations at our Burlington facility and planned site maintenance activities at our Albuquerque facility.

Liquidity and Capital Resources

At March 31, 2016, AMRI had cash, cash equivalents and restricted cash of $47.2 million, compared to $52.3 million at December 31, 2015. The decrease in cash and cash equivalents for the quarter ended March 31, 2016 was primarily due to the use of $11.6 million in capital expenditures and $5.8 million of debt paydown, offset by cash generated by operating activities of $11.7 million. At March 31, 2016, total common shares outstanding, net of treasury shares, were 35,708,100.

Financial Outlook

AMRI’s guidance takes into account a number of factors, including expected financial results for 2016, anticipated tax rates and shares outstanding. AMRI’s guidance also excludes any potential impact from the acquisition of Prime European Therapeuticals S.p.A., ("Euticals"), which is expected to close in the third quarter 2016.

AMRI’s estimates for full year 2016 are consistent with estimates previously provided on February 17, 2016:

Full Year 2016 revenue of $465 to $490 million, an increase of 19% at the midpoint, including
DDS revenue growth of over 20% to approximately $104 million
API revenue growth of 27% to approximately $260 million
Drug Product revenue growth of 8% to approximately $105 million
Adjusted contract margin of approximately 30%
Adjusted selling, general and administrative expenses of approximately 15% of revenue
R&D of between $9 and $10 million
Adjusted EBITDA between $91 and $97 million, an increase of 25% at the midpoint
Adjusted diluted EPS is expected to be between $1.00 and $1.10, based on an average fully diluted share count of approximately 37 million shares
Effective tax rate of between 29% and 30%
Capital expenditures of approximately $45 million