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Cambrex Corp  (NYSE:CBM)
Q3 2018 Earnings Conference Call
Nov. 08, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to the Cambrex Third Quarter 2018 Earnings Call.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Thank you, Miranda and good morning everyone. My name is Greg Sargen and I'm the Chief Financial Officer of Cambrex. 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. Further information regarding such risks and uncertainties, please refer to the risk factors and forward-looking statements portions of our 2017 Form 10-K as well as the forward-looking statements section in both our third quarter 2018 Form 10-Q and the earnings release issued this morning.

During this call, we will be referring to several times to changes in revenue, all of which are made on a constant currency basis. 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, November 15th, and will also be available on the Investors section of our website.

Today's call will begin with a business review by Steve Klosk, our President and CEO. I will follow Steve with comments on our financial results before opening the call for Q&A.

With that, it's my pleasure to introduce Steve Klosk. Steve?

Steven Klosk -- President and Chief Executive Officer

Thank you, Greg, and good morning ladies and gentlemen. During the third quarter, we continued to make significant progress toward our strategic objective of continuously adding capabilities that we believe will make us more valuable partner to our customers. On September 12th we closed the acquisition of Halo Pharma, a leading finished dosage form contract development, and manufacturing organization or CDMO that provides product development and commercial manufacturing services to the innovator and generic pharmaceutical markets. We are excited to welcome Halo's 450 employees at our Mirabel, Quebec and Whippany, New Jersey site to the Cambrex team.

I'd like to do a quick recap of why we acquired Halo. Halo offers broad manufacturing capabilities in the finished dosage form space including oral solids, liquids, sterile and non-sterile ointments, gels and creams as well as certain specialty offerings. We believe combining Halo's finished dose expertise with Cambrex's leading API business transforms Cambrex into a powerful end to end small molecule CDMO with a broad range of capabilities in both APIs and finished dosage forms for both innovator and generic companies worldwide. Not unlike the API market, the market for finished dosage services is large, fragmented and growing. The acquisition expands our customer base and broadens our small molecule funnel in all three of the product categories that we typically target: innovator, generic and controlled substances.

Halo has over 70 customers of which about 50 are new to Cambrex. Integration efforts are well under way and although it may take a little time, we think the medium to long-term growth synergies should meaningfully improve Cambrex's growth profile. These synergies should primarily come from cross-selling to the respective API and finished dose customer bases and having the ability to deliver an end-to-end solution to our customers.

Lastly, the acquisition of Halo creates a new segment for Cambrex called finished dosage form or FDF. Our existing business excluding Halo will be a segment called API. Greg will recap some of the numbers related to the acquisition and Halo's Q3 performance shortly.

Now I'd like to comment on our performance during the quarter. Our third quarter reflects a decline in revenues and profits versus the same quarter last year, but it was primarily in line with our expectations coming into the quarter. And while we are revising revenue guidance down slightly from our prior guidance, primarily due to the timing of some project shipments are adjusted EBITDA, adjusted income from continuing operations and free cash flow expectations in each case excluding Halo's results remain on track to meet our full year 2018 guidance provided at the beginning of the year. Accordingly, we expect a very strong fourth quarter to wrap up 2018.

During the third quarter, we added one new late stage innovator project to our pipeline with the potential to be more than $10 million in revenues to Cambrex at maturity. In addition, we are working on another project at our High Point facility that is expected to enter Phase III and transition to our larger facility in Iowa over the next few months. Customer demand for new projects continues to be strong and we have several late-stage projects in the pipeline that we are bidding on. To meet this demand for both early and late stage clinical development, and manufacturing services, we continue and invest for growth and are on track with those critical projects. All references to revenues and EBITDA that I will make will be under the prior US GAAP revenue recognition standard.

Net revenue in the third quarter was $103 million compared to $113 million during the third quarter last year, an 8% decrease on a constant currency basis. Excluding the acquisition of Halo now referred to as our finished dosage form segment, net revenues were $96 million or 14% lower than prior year comparable results on a constant currency basis. We saw lower revenues in all three of our product categories, innovator, generics and controlled substances. Lower revenues were largely due to the timing of deliveries. Adjusted EBITDA in the third quarter excluding the acquisition of Halo was $28 million, a $6 million decrease compared to the same quarter last year. We had revenue of $6 million and adjusted EBITDA of $1.7 million in our FDF segment during the portion of September that we owned Halo.

Net revenue year-to-date was $340 million compared to $352 million for the same period last year, a 6% decrease on a constant currency basis. Excluding the acquisition of Halo, year-to-date net revenues were $330 million or 7% lower than the same period last year on a constant currency basis. Adjusted EBITDA for the first nine months of 2018 excluding the acquisition of Halo, was $87 million compared to $111 million last year. Just as with the quarter, the year-to-date amounts for 2018 includes $6 million of revenue and $1.7 million of adjusted EBITDA resulting from our new FDF segment. Excluding the impact of the Halo acquisition, we are revising adjusted net revenue growth for the full year 2018 to be between negative 1% and negative 3% on a constant currency basis. Again, this revision is primarily due to the timing of shipments for certain projects. We have narrowed our full year 2018 adjusted EBITDA guidance excluding Halo to be between $153 million and $159 million, a $1 million increase at the midpoint compared to prior guidance. In addition to this, we expect full-year 2018 finished dosage forms segment net revenue to be between $29 million and $31 million.

Let me now move to a review of each of our product categories. Starting with innovator, our largest category. Innovator net revenues were $65 million in the third quarter, a 13% decrease compared to the third quarter last year on a constant currency basis. The revenue decline in the quarter was primarily driven by the timing of deliveries of certain products. Year-to-date innovator revenues declined 10% on a constant currency basis. As we've said in prior calls, we expect our largest product, which is an API in the innovator category, to decline significantly over the next few years. We have a firm commitment for significantly reduced volumes of this product for 2018, which is embedded in our current financial guidance. We also have a defined minimum volume for 2019, which represents a further significant decline versus 2018. There is no minimum volume stipulated in the agreement for 2020, the last year of our current supply agreement.

We continue to see positive trends in the innovator market, including a strong preference among innovators for large western suppliers with end to end API development and manufacturing capabilities. Additionally, there is a robust and growing small molecule clinical development pipeline and an increasing desire by large pharmaceutical companies to reduce their small molecule manufacturing footprint and outsource more. Small molecule approval trends continue to be strong with 34 new chemical entities approved by the FDA in 2017 and 34 approvals so far in 2018. Our goal is to aggressively grow our innovator product category annually by increasing the number of later stage clinical projects that we are working on and secure additional supply positions for already commercial products.

So far in 2018, we have won four late-stage projects. One has graduated to commercial status and one did not meet its primary endpoints in the clinic. We now have 18 late-stage API projects in our portfolio and our goal is to steadily increase this number. To support the demand for clinical stage development capacity, we have completed capital projects in 2017 and 2018. We have added both laboratory and scale-up assets of a variety of sizes and capabilities, focused on clinical phase volumes and we have been adding technical personnel to allow us to continue to win and complete more innovator projects.

As we've mentioned in recent quarters, we are also investing to address the growing demand for highly potent compounds for oncologic and other therapeutic classes, which now represent about 30% of the global clinical pipeline and one-third of all approvals for small molecules. For example, 9 of the 34 new small molecule FDA approvals so far this year are oncology products. Highly potent compounds require specialized containment and handling facilities. We are already well-positioned to meet clinical stage demand in this category with our existing development and smaller scale high potency capabilities at the Charles City site. We are now building a high potency active ingredient manufacturing facility at that site, which will expand our capabilities and position us to serve the full range of customer needs from a clinical material to commercial products. We expect this facility to be operational in the first half of 2019 and the total cost of the project to be approximately $25 million. We expect to begin to produce several products that require specialized handling in the new facility shortly after it is up and running.

Another element of our strategy in the innovator category is to meet our customers' needs for earlier clinical stage development capabilities, which also broadens the funnel of opportunities for our late-stage pipeline as some of these projects progress to later stages. We deliver these services from our High Point, North Carolina facility. Demand for this earlier clinical stage work is strong, and last quarter we completed the addition of analytical laboratory capacity and multiple continuous flow reactor platforms to address these segments of the market. We remain very pleased with the positive impact that our High Point team has had on our overall business development and we just transfered our fourth project from High Point to our largest scale facility in Charles City. We will continue to aggressively expand our portfolio of these earlier-stage clinical projects.

During the quarter, we added another new product to our late-stage clinical development pipeline, which we expect to generate greater than $10 million of revenue for Cambrex at maturity. As I mentioned earlier, we now have a total of 18 late-stage products in our pipeline and we continue to have a robust set of late-stage projects that we are actively competing to win. We characterize the project as late-stage from the time the product is in Phase III until it is approved and the production process is validated in our facility. We generally group our late-stage portfolio into three categories, those that we expect to generate over $10 million in annual revenue for Cambrex at maturity, those between $5 million and $10 million and those less than $5 million in sales. As these projects progressed through the development stage, we often adjust our initial estimates of the volume potential.

Our current late-stage portfolio breaks out as follows. We have six products that we expect to generate over $10 million in revenue each. Seven products that could each generate between $5 million and $10 million and five products that are each expected to generate less than $5 million annually. Future Cambrex revenue from the products in our pipeline will of course depend on each products regulatory approval, success in the market and the share of commercial supply that we secure among other variables. We now expect innovator revenues to be down mid-single digits for the full-year 2018 versus 2017, compared to prior guidance of approximately flat at the midpoint. This change is due to certain deliveries that we had previously forecast to occur in late 2018 that we now expect to be shipped in early 2019, the possibility of which we mentioned on last quarter's call. Due to these delivery delays, we now expect innovator sales, excluding our largest product, to increase in the mid single-digit percentage range on a constant currency basis, compared to the full-year 2017.

I will now move to our generic API category. Net revenue in the quarter was $18 million compared to $22 million for the same period a year ago. Year-to-date generic API revenues were $77 million, effectively flat on a constant currency basis compared to the same period last year. Developing and launching new products and geographic expansion are the key growth drivers for our generic API product category. We currently have 11 generic APIs and 1 controlled substance in later stages of development. We continue to expect net revenue growth from generic APIs for the full-year 2018 to be about flat. Growth in the low to mid single digit range outside of US market is being offset by the impact of certain customers discontinuing sales of several products in the US market.

Sales of controlled substances, our third product category, which we define as those classified as Schedule II products by the DEA, was $13 million in the third quarter compared to $15 million in the same quarter last year. Year-to-date revenue from controlled substances was $59 million, a decline of 7% versus the same period last year. As we discussed in previous quarters, there were delays earlier in the year in the release of 2018 quotas from the DEA, causing a shift in the timing of shipments to later in the year. Accordingly, we expect strong sales of controlled substances during the fourth quarter and we now expect full-year 2018 controlled substances revenues to grow in the high single-digit percentage range versus 2017. We have received sufficient quota and have orders on hand to support these expectation. We are in the process of developing one new controlled substance API and one new ADHD product is expected to be approved this year and is expected to generate commercial sales in early 2019.

Now, let me move to our generic drug product initiatives. We filed three Abbreviated New Drug Applications or ANDAs during 2017, and continue to develop a number of additional generic drug products. We filed an additional ANDAs in July of this year, and anticipate filing one more before the end of the year. We are working with formulation development and manufacturing partners and expect to work with generic marketing partners to sell these products when they are approved. We continue to expect to see modest revenues from this initiative, beginning in late 2019 to early 2020.

Lastly, we currently expect 2018 revenues within our finished dosage forms segment, reflecting revenues since the mid-September acquisition date to be between $29 million and $31 million. The M&A market for small molecule outsourcing continues to be very active and competitive. After acquiring Halo, Cambrex continues to have a strong balance sheet, and we will continue to proactively review opportunities for additional inorganic growth. We remain focused on those sectors of the market that are both large and exhibiting strong growth, and that would give us access to a greater number of customers, capabilities and molecules.

In summary, the third quarter was consistent with our expectations, and we have a high level of visibility on deliveries through the end of the year. To reiterate, excluding the impact of our Halo acquisition, we expect net revenue growth in the range of minus 1% to minus 3%, net of currency impact, and adjusted EBITDA to be between $153 million and $159 million.

We occasionally provide high-level guidance regarding our revenue expectations for the upcoming year, during our third quarter call. With the recent acquisition of Halo, and the changes to our forecasting process, as a result of the requirement to complete our transition to the new revenue standard in 2019, we believe it is prudent to take the next few months to complete our detailed budget reviews before commenting on 2019 expectations. I look forward to updating you on our fourth quarter performance, and 2019 expectations early next year.

With that, I will turn the call over to Greg.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Thanks, Steve. I'd like to start by repeating a few remarks made in prior quarters this year relating to revenue recognition before commenting on other financial statement line items. We adopted US GAAP's new revenue recognition standard, ASC 606 beginning on January 1st, 2018. Adoption of the new standard has changed our revenue recognition methodology for roughly half our revenue or we are providing products to specific customers with no alternative use for the product. Previously, we have been recognizing this revenue upon delivery to the customer.

From January 1st, 2018, we have been recognizing this portion of our revenue over time, effectively as we produce the product. Our actual US GAAP results are reported under the new standard, but we have been providing or continue to provide revenue and profitability information for 2018 as it would have been reported under the prior standard. Our financial guidance for 2018 is based on the prior standard to allow comparability to 2017. For 2019, we will begin reporting only under the new standard and will compare results to 2018 under the new standard.

Steve's remarks on revenue were all based on the prior revenue standard. Net revenue in the third quarter under the new standard was $105 million and net revenue through the first nine months on this basis was $398 million. Reconciling adjustments between the old and new revenue standard, as well as the related impact on net income and EBITDA can be found in this morning's earnings release, as well as the Form 10-Q which was filed earlier today.

Let me move onto a few other financial statement items. Please note that where applicable and consistent with our approach to providing guidance, I'll discuss each item under the old revenue recognition standard first before providing the corresponding information under the new standard. Gross margin for the third quarter was 38% compared to 42% in the same quarter last year. The decline in margin was driven by lower production volumes and higher raw material costs. 2018 year-to-date gross margin was 36% compared to 43% last year, also driven by lower production volumes and higher raw material costs. Gross margins for the third quarter and year-to-date under the new revenue recognition standard were 31% and 37% respectively.

As we have mentioned previously, we expect API segment gross margins to steadily compress during 2018, which we have seen year-to-date, and likely continue over the next couple of years. This margin compression will primarily be driven by a drop in capacity utilization to more manageable levels, as we bring on additional capacity for specific types of projects, as well as a change in product mix, as volumes of our largest product continued to decline over the next few years. Also, the addition of several new products over the next few years will also contribute to margin compression because of the manufacturing inefficiencies often experienced in the early stages of production. The manufacturing efficiencies of new commercial scale products improve over time, as we improve the process, and as volumes increase.

We have indicated that we expect gross margins to be in the high 30%s to 40% range over the next few years. Achieving this level of margin performance will be dependent on us winning new innovator projects at an appropriate rate, and both these new and existing projects getting approved, gaining market share and adequately ramping up in volume over that same period.

Selling, general and administrative expenses for the third quarter before expenses related to M&A were $14.5 million, down $2.7 million versus the prior year, driven primarily by lower personnel costs. Year-to-date SG&A spending of $47 million is $4 million lower than the same period last year, driven by the same items affecting the quarter. Acquisition and integration expenses, which are not included in the above figures were $7 million during the quarter, primarily relate to the acquisition of Halo during the quarter. We expect additional near-term integration cost related to the acquisition of Halo to be approximately $1.5 million to $2 million. This excludes any cost to upgrade the Halo business to SAP, our ERP software, which will likely happen in due course over 2019 and 2020.

Research and development expense for the third quarter was $4 million and $12 million year-to-date, essentially flat versus both periods last year. During the quarter, the Company recorded an unrealized gain in other income of $6 million related to an equity investment and a European company. This investment is subject to a one-year lock-up period and our equity share substantially greater than the current daily trading volumes of the stock. As the value of this stock could be very volatile, it is unrelated to current operations and there is no viable near-term way for Cambrex to realize this increased value. We have excluded the gain from any profit metric for which we have provided guidance.

The actual tax rate for the quarter reflects among other items, the release of the state valuation allowance and the revaluation of state deferred tax balances of $12 million. The impact of tax reform in the United States and the benefit from immediate recognition of the effects of share-based compensation, which can be volatile and are difficult to predict. These items are included in the table at the end of this morning's release. Excluding these benefits, the effective tax rate was approximately 20% for the quarter and year-to-date. We continue to expect the underlying effective tax rate for the full-year to be between 20% and 22%. We expect the cash tax rate to be between 17% and 19%. Adjusted income from continuing operations, which excludes Halo's results was $0.49 per diluted share for the third quarter compared to $0.55 for the same period in the prior-year. Year-to-date adjusted income from continuing operations was $1.61 per diluted share compared to $1.91 for the same period in 2017. We now expect adjusted income from continuing operations for the full-year to be between $2.95 and $3.09 per share, reflecting the increase in adjusted EBITDA for the year.

Adjusted income and related earnings per share is computed in a manner consistent with the table at the end of this morning's release. We continue to expect full-year 2018 capital spending to be between $70 million and $80 million. We ended the third quarter with net debt of $228 million versus net cash of $171 million at the end of last quarter, a $399 million increase in net debt. This was driven by the acquisition of Halo, which resulted in the outlay of approximately $427 million, including a portion of related transaction costs, offset by free cash flow from the business of approximately $31 million during the quarter.

Year-to-date free cash flow, excluding the impact of the Halo acquisition was $20 million. For 2018, excluding the impact of the acquisition of Halo, we continue to expect free cash flow defined as the change in debt net of cash to be between $35 million and $45 million. With the exception of our net revenue guidance, which is net of foreign currency impacts and tax guidance, our current financial guidance for 2018 assumes that currency rates, primarily the Swedish krona and the euro remained reasonably stable versus current rates and relative to each other.

With that, I would now like to open the call for questions. Miranda?

Questions and Answers:

Operator

Certainly. (Operator Instructions) And we'll take our first question from John Kreger with William Blair. Please go ahead.

John Kreger -- William Blair -- Analyst

Hi, thanks very much. Greg and Steve, can you give us a better sense about what you expect the impact of Halo to be on the fourth quarter on the bottom line. Should we assume that's a little bit dilutive or accretive?

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Yeah, we haven't decided to comment on that just yet given the fact that we've owned it for 18 days, and there's a lot of moving parts there with integration costs and so forth. So I think we've said previously, we expect it to be accretive in 2019, and that's as much as we're going to say right now. So we decided to give some net revenue guidance so that we set a sense for what we were expecting for the year, but we weren't so bold as to -- as to bring it down to net income at this point.

John Kreger -- William Blair -- Analyst

Okay, thanks. And a follow-up on that, what is your plan to sort of get in front of those 50 unique clients to see what sort of cross-selling opportunities there might be?

Steven Klosk -- President and Chief Executive Officer

Well, John, what we've done already is integrated the sales teams to the extent that everybody is presenting the capabilities of old Cambrex. So you're able to present both the API and our dosage form services and manufacturing capability. So we've seen where there is an overlap and we're talking to those customers to try to cross-sell and then we're getting in front of the new, the Halo customers and presenting the Cambrex API capabilities already. So that integration more or less happened from day one.

John Kreger -- William Blair -- Analyst

Great. And Steve, when do you think you'll have more visibility on the firm order quantities to your largest product?

Steven Klosk -- President and Chief Executive Officer

Well, we have the minimum for 2019, and we're really not assuming at this point anything more than that minimum. So it will be embedded in the guidance that Greg and I give in early 2019.

John Kreger -- William Blair -- Analyst

Okay, thank you.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Thanks, John.

Operator

And we'll take our next question from Matt Hewitt with Craig-Hallum. Please go ahead.

Matthew Hewitt -- Craig-Hallum -- Analyst

Good morning. Maybe just to follow on the question with the Halo integration. How are those -- and I realize it's early, but how are those discussions going, what's been the feedback that you've been getting not only from the customers that did overlap, but have you had discussions with some of the new ones, and how are those communications going so far?

Steven Klosk -- President and Chief Executive Officer

The feedback from customers where we've made presentations or at least had calls has been only positive and in fact we have one or two opportunities to do what we would call an end-to-end proposal already, which quite frankly is ahead of what I expect.

Matthew Hewitt -- Craig-Hallum -- Analyst

Okay, great. And then the timing of the shipments, could you prove that they are causing a little bit of a wrinkle here in Q3 and in the full-year guidance. Could you provide a little bit of color to help us understand what's going on there?

Steven Klosk -- President and Chief Executive Officer

Yes. So we had several projects where the development and the manufacturing timeline was expected to occur very late in the year. And I had made mention of that in my Q2 prepared remarks. As we look at those projects and get our production updates, we now expect a few of those projects to ship in 2019 instead of late 2018. And the shipment delays are really primarily due to a couple of things. One, we have customers that are adding to the scope of the project, so what we would call scope of work increases, and when that happens, that pretty much extends the timeline accordingly. And then with some of the new products and new processes, we've had longer processing or scale up times than we expected. And so, originally having them scheduled to be completed and shipped and out the door in '18, we'll now push those shipments into '19.

Matthew Hewitt -- Craig-Hallum -- Analyst

Got it. And then maybe one last one and I'll hop back in the queue. The large customer that's going to be ratcheting down here over the next couple of years, there is generic competition coming from that customer or products coming. Is it safer or how should we be thinking about your opportunity in those generics? Is that something that you may be able to participate in? Thank you.

Steven Klosk -- President and Chief Executive Officer

I mean they don't talk to us specifically about those products and markets, but I think it was safe to assume if those products are being sold into markets that currently use our API, then we'll participate in those generic products. As you know, they have licensed the number of manufacturers and marketers and what I'll call tertiary markets and those markets we won't participate in.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

But just to be clear, we don't -- we're not authorized to sell directly to any generic manufacturer of the product anywhere. We would only be selling volume to our largest customer whether as an authorized generic or whatever. But just to be clear, we're not selling to a flat out generic company our API.

Matthew Hewitt -- Craig-Hallum -- Analyst

Okay, that's helpful. Thank you very much.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Thank you.

Operator

And we'll go next to David Windley with Jefferies. Please go ahead.

David Windley -- Jefferies LLC -- Analyst

Hi, thanks. Good morning, thanks for taking my questions. So you talked about, Steve, the product, and I think you talked about before, but the product that graduated to commercial this year and I think you had previously characterized that as maybe as $20 million plus opportunity, how has that gone and is it contributing yet?

Steven Klosk -- President and Chief Executive Officer

It's validated. It moved out of as you know what we characterized as the late stage product -- project pipeline into commercial. It was always a late in the year ramp-up and that continues to be the case. So most of the revenues associated with that $20 million plus will occur in Q4 and it's still on track to be $20 million plus.

David Windley -- Jefferies LLC -- Analyst

And $20 million plus, I shouldn't expect that you get, I guess, knowing that maybe there is a buildup or a launch in quantity, I don't think launch is really applicable in this case, but you're not going to get $20 million in the fourth quarter, is that right? Means more, $20 million is an annual number, correct?

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Correct. But it is back-end tilted this year.

Steven Klosk -- President and Chief Executive Officer

Right.

David Windley -- Jefferies LLC -- Analyst

Okay. So maybe a 606 question, couple of them. Revenue recognition in the third quarter did kind of converge after a couple of quarters of pretty significant differences, and I know that the Management's commentary in the past was that, you expected that, that would eventually happen. Have we gotten there now or is it still possible that those numbers could swing around in the fourth quarter before we get to kind of a steady state where 605, 606 look the same?

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

A couple of things on that. First of all 605 will go away after one more quarter. So we won't be talking about convergence or divergence on a quarter-to-quarter basis. And I think that the convergence is, the longer the period of time, the more the convergence, right, because it's whatever we're producing, we're eventually shipping. So they all have to equal out in the long run. In any given quarter where we to look at 605 versus 606, we're probably expecting a full bit of volatility to the extent they converge in any given quarter, it's probably more happenstance than anything that deliveries in production kind of synced up in that quarter.

So it's really over a long period of time, they'll start to sync up, but during the transition phase there's revenues that get lost in black holes, for instance, some of the revenue this year that we won't deliver will get recognized, some reasonable portion of it will get recognized as 606 revenue in '18. But that revenue when we start reporting solely under 606 in 2019 will not get recorded, (inaudible) left to produce in early 2019 it is not shipped. So that's just the nature of this piece. Yeah, there is no real alternative short of getting into very long convoluted normalizing discussions at the end of each quarter or a year, it's unfortunate.

David Windley -- Jefferies LLC -- Analyst

Got you. Okay, that brings up an interesting thought process. But I'll move on, one more question here on, on your largest product, have you said or can you say whether your 2018 amounts kind of committed in volume or committed purchase volume is higher than the minimum that pre-existed in 2018?

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Yeah, I don't think we've commented on what the minimum was. I think the number is not that different than the minimum. They have given us some flexibility to produce and ship in different periods.

Steven Klosk -- President and Chief Executive Officer

Yeah, David, what we -- we got a purchase order for 2018. So that number really wasn't related to minimum or not minimum. It was a purchase order and then the minimum came into effect for 2019.

David Windley -- Jefferies LLC -- Analyst

Okay, all right. Thank you.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Thank you, David.

Operator

And we'll take our next question from Steve Schwartz with First Analysis. Please go ahead.

Steven Schwartz -- First Analysis Securities -- Analyst

Hey, good morning, everyone.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Hi, Steve.

Steven Schwartz -- First Analysis Securities -- Analyst

With respect to Halo, it looks like you're allocating all of that revenue into that finished dosage form segment. I thought Halo did have some API production capacity. Is that correct?

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

No.

Steven Klosk -- President and Chief Executive Officer

No, it's virtually a 100% dosage form. Oral solid and semi-solid.

Steven Schwartz -- First Analysis Securities -- Analyst

Okay. And then with respect to your guidance, for the most part, you've taken revenue guidance down, but you know when I look at adjusted EBITDA, essentially it slightly moved up the midpoint of adjusted EBITDA. Can you talk to exactly what's going on, are we to presume that's just mix in there?

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Yeah, there's a little bit of positive mix from controlled substances being up a bit and that's a very profitable product category for us, generics are up a little bit and they are reasonably profitable also. We've held cost down this year through operational excellence programs, we've had a fair bit of success with that. And I think at the end of Q2, we were a bit above the midpoint at least in our internal projections and which created a small cushion for better or worse that which when coupled with the other cost and mix dynamics is allowing us to kind of hold the midpoint roughly.

Steven Schwartz -- First Analysis Securities -- Analyst

Okay. Got you. And then if I could just bring up the question again about the ASC 605 versus 606, my understanding was, yeah, that on a quarter basis this year, you would get some high variability at certain points. But that across the course of the year, essentially it would play itself out. Once you especially took the bookends right, the first quarter and the fourth quarter into play together. So 606 basically benefited your revenue versus 605 by what $56 million in the first half. Can we expect now that you basically -- it worked against you by about $2 million here in the third quarter. So you've got about $54 million of benefit so far -- comparing the two accounting standards year-to-date. Can we expect that, that $54 million benefit will kind of offset itself in the fourth quarter now, that we (multiple speakers)

Steven Klosk -- President and Chief Executive Officer

Yeah, I don't -- I haven't specifically kind of tabulated how that will mitigate, but given if you just back into what the size of the fourth quarter will be. Given our year-to-date performance and anticipated guidance even if you just take it at the midpoint, the fourth quarter is a large shipment quarter. So I would think that some of that difference will mitigate, but I haven't spent a lot of time kind of calibrating it, given that we're not really guiding on the 606. We'll shift our attention to a full 606 over 606 comparability for '19. But I think your general intuition is correct.

Steven Schwartz -- First Analysis Securities -- Analyst

Okay. Got you. That's helpful. Thank you.

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

All right. Thank you. So, I believe that's the last person in queue, Miranda. So with that, we will thank everyone for their time this morning and look forward to speaking to you next quarter.

Operator

This will conclude today's program. Thank you for your participation. You may now disconnect and have a wonderful day.

Duration: 41 minutes

Call participants:

Gregory Sargen -- Chief Financial Officer and Executive Vice President, Corporate Development and Strategy

Steven Klosk -- President and Chief Executive Officer

John Kreger -- William Blair -- Analyst

Matthew Hewitt -- Craig-Hallum -- Analyst

David Windley -- Jefferies LLC -- Analyst

Steven Schwartz -- First Analysis Securities -- Analyst

More CBM analysis

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