LCI
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Thank you, <UNK>, and good afternoon, everyone.
As was mentioned earlier, I will be referring to non-GAAP financial measures.
The reconciliation of the GAAP to non-GAAP numbers can be found in today's press release.
Our earnings release also includes a schedule of our net sales by medical indication.
I also want to remind everyone that during the third quarter of last year, we recorded a pretax onetime settlement agreement with one of our customers for approximately $24 million.
In the current year third quarter, we recorded a $4 million adjustment to the settlement agreement.
As a result, our GAAP total net sales were $161.7 million compared with $140.1 million for the prior year third quarter.
Due to the nonrecurring nature of this item, we excluded it from our adjusted results as it does not affect our sales run rate.
Now for the financial results on a non-GAAP adjusted basis.
For the fiscal 2017 third quarter, net sales increased to $165.7 million from $163.7 million in last year's third quarter.
Gross profit was $85.5 million or 52% of net sales compared with $97.4 million or 59% of net sales.
As <UNK> mentioned, our gross margin was impacted by competitive pricing pressure across a number of products, product mix and changes within the distribution channels.
R&D expenses decreased to $8.3 million from $16.4 million in the prior year third quarter.
The decrease was due to synergies and the timing of project spend.
SG&A expenses were $17.3 million compared with $15.8 million.
Operating income was $59.9 million compared with $65.2 million for the prior year third quarter.
Interest expense decreased to $22.4 million from $27.0 million.
The decrease is the result of our efforts to reduce debt.
In the fourth quarter of fiscal 2016, we refinanced all of our 12% senior notes which totaled $250 million with incremental $150 million term loan B and retired the remaining balance of the notes with cash.
And as <UNK> mentioned, we made payments totaling $100 million to pay down our fully drawn revolving credit facility in January and March of this year.
Net income attributable to Lannett increased to $29.2 million or $0.77 per diluted share compared with $27.9 million or $0.75 per diluted share for the fiscal 2016 third quarter.
Turning now to our balance sheet.
As <UNK> mentioned, we paid down approximately $100 million of debt during the quarter.
Accordingly, in March 31, 2017, cash, cash equivalents and investment securities totaled $154.6 million.
Debt outstanding was $937 million.
And we continue to be well within required ---+ our required debt covenant ratio.
With regard to our guidance.
We expect the factors that unfavorably impacted our third quarter to continue in the fourth quarter, resulting in slightly lower Q4 sales.
We expect our fiscal 2017 fourth quarter profitability on an adjusted basis to be similar with our fiscal 2017 third quarter.
With that, I will now turn the call back over to <UNK>.
Thanks, Marty.
Regarding the integration with KU, we continue to make excellent progress consolidating our manufacturing, sales, research and development and distribution functions.
All packaging activities in Philadelphia have now been contracted to our Seymour, Indiana plant.
With respect to manufacturing, 6 of our high-value products have been transferred from Philadelphia and are now being produced at the Seymour plant.
Transfer activities are ongoing for an additional 6 products, 4 of which are in advanced stages of being moved in the current quarter.
We anticipate that by calendar year-end, approximately 50% of the production previously performed in Philadelphia will be moved to our Indiana plant.
With regard to our pipeline, we currently have pending at the FDA 26 ANDAs, including 11 with a Paragraph IV certification.
With one of our Paragraph IV products, Zomig, we are in the process of preparing our appeal, which we expect to file later this month.
We are optimistic that we will receive several additional FDA approvals before the end of our current fiscal year.
In addition to our own filings, we have another 11 applications at the FDA through our alliance partners.
We're on track to file a new drug application for C-Topical over the summer.
We anticipate an approval could come within 1 year, following the PDUFA submission of our application.
With an approval, we will be able to market the product more aggressively with FDA-approved claims.
A brief update on our strategic alliance with HEC.
I recently returned from a trip to China to meet with HEC's leadership team.
Our relationship continues to get stronger, and we are now making excellent progress on a number of fronts, including the distribution of up to 20 of our products in China by HEC.
We have already submitted 2 quotations.
In addition, our joint effort to develop generic insulin is advancing.
We received FDA comments to our pre-investigational new drug application for the product, and we are working together to develop the best plan for filing the application.
As I mentioned earlier, we anticipated the current competitive pricing pressure in our industry and took steps to prepare for and grow our business under these conditions.
These steps included, among others, the addition of C-Topical, our first branded drug product using our patented technology, which allows us to expand our offering with a proprietary product; and the forming and developing of a multidimensional strategic business alliance with HEC.
Our efforts also included the acquisitions of Kremers Urban and Silarx, which not only added a wide array of new capability, but also diversified our offerings with added products; and the planned expansion of Cody Labs, which will allow us to more efficiently grow our pain management business, both APIs and finished dosages.
As you have just heard, we have been working to grow our generic drug business and expand into branded drug business.
We are confident that we will execute on our strategic plan, and our investments and efforts will pay dividends.
Before we open the call to questions, I'd like to mention that Lannett has been recognized as a CIO 100 Award winner for 2017.
I would like to congratulate our information technology team for winning this prestigious award and thank them for their efforts.
With that overview, we would now like to address any questions you may have.
Ashley.
Well, as Marty said, we're looking at the fourth quarter being similar to our third quarter, maybe slightly weaker.
As you know, there's a lot of pressure on pricing right now.
So as far as we can tell, we think it will probably be somewhat similar to the third quarter, but there's no way to predict that right now.
So I'd rather be conservative and not make a prediction, but our feeling is it will be very similar to the third quarter.
<UNK>, I'll take that one.
Our expectation is that the fourth quarter gross margin could tick up a bit from the third in addition to the pricing pressures and other environmental topics we discussed.
We did have some manufacturing variances of a one-off nature.
And we do not expect those to repeat.
So we expect that you'll see some limited uptick in gross margin.
But the factor is the holistic or macro factors that we spoke about.
Those, we do expect to continue as we said in our press release and earnings ---+ and our prepared remarks for the earnings call here.
Well, we're not ---+ first of all, let me start with an answer here and I think <UNK> will add to that.
As far as the numbers go, the R&D expense is low for the quarter.
It's a bit more unusually low, let's say, for the quarter.
We do expect that to tick up on a run-rate basis going forward.
In our own projections, we see R&D expense somewhere in the range of $10 million to $11 million a quarter, something like that.
And then as Kristin Arnold gets her feet on the ground here and gets better intent or has more time in position, I think we'll see our spending increase because obviously the pipeline is critical to us.
<UNK>, do you want to add anything.
We're not trying to reduce R&D for any reason other than the economy, looking at consolidating the 3 sites that was ongoing, but we didn't have a leader in that department as you know.
So our efforts to consolidate R&D and set it up so that it's operating out of Philadelphia really wasn't, let's say, robust.
With Kristin on board, the first thing she's doing is consolidating the sites and setting her sights on what products we're going to be going after.
Some of the other delays in product spend for the R&D also equate to the lower spend.
Sometimes you plan for a bio study and if you don't get it done in the quarter, you don't have that obligation, but you get it in the next quarter.
So it's not like we reduced R&D for any purpose other than just timing.
Yes, Gregg, it was not a surprise to us.
I think what we're saying is that our sales nonetheless were impacted by it.
The law was something we're very, very aware of and again, it was not a surprise.
Well, as you know, there's been these alliances or consortiums or consortium that comes on, how everybody pronounces that expression.
And the latest one, of course, is with one of the wholesalers and one of the chain stores, referring to McKesson and Walmart.
That company that group purchasing, ClarusONE, wasn't available previously.
And it just evolved recently in terms of ---+ actually, it's still an ongoing process, but they're just formulating and putting out requests for quotes now.
So that was the newest entry.
The others were already doing things like that.
So those we were familiar with.
And that's the one we're really referring to.
Yes, it does.
Yes, it does because it's selling directly to the customers.
They're now selling through the industry as a wholesaler into the customer.
Previously, we would sell directly to the customer.
No.
As my Chairman said, we're a public company, which means that the company is always available if anybody wants to make an offer to buy it.
So there's nothing untoward there, except they're running out of things to buy, you might say.
So either we're going to the last holdout or we got the best offer or not.
That depends on the people in the marketplace.
We're not doing anything to dissuade anybody from making any offers and we know that there's a lot of consolidation.
And quite frankly, we expect it.
It's not something we don't think is going to happen, but it's just a matter of waiting our turn.
Well, I would say that we're certainly feeling pricing pressure.
I mean, every customer is looking for a low price.
What surprises me is that they buy it for less money and they're going to resell it at a lesser profit.
So it just punishes the customer when they purchase at those prices.
We certainly aren't new to pricing pressure because everybody wants to reprice, get the product at a lower price because that's how they think they'll make more money.
Trouble is, then they sell it based on their new cost, so it's just a spiral going down.
We have been less subjected to it, you might say, than most of the competitors we've been listening to out there.
So ---+ but it's not like we're immune from it.
We are in the generic drug space.
And clearly, there's a focus on price.
It's always been a price business.
And we have to stay competitive.
But we really haven't seen a severe impact to any one particular product.
Well, the way it's working is, first of all, we've owned this company now a little over 15 months with this ---+ today's May, so 5, 6, about exactly 18 months now.
And quite frankly, we haven't received any complaints with regard to that particular issue.
Now that we own the company, are we getting the complaints directly, we haven't seen one complaint.
We know the FDA's claim that 29% of the complaints they received was on Kremers' product.
So our first question has to do with, well, where are the complaints you claim you received because we want to see them.
And that was part of what we asked for under the Freedom of Information Act.
We're trying to get hold of the negative event they used to decide that the product was not AB rated.
And that's the meeting we're awaiting.
And they've asked us to accept that the language we agreed to, to allow them time to get that information collected together and submit it to us.
Once we get that information, we'll then be able to request the meeting date.
So right now, we're questioning the fundamental reason for removing the AB rating from our product.
And quite honestly, I think we have a very strong argument with regards to our position there.
So that's what we're ---+ for the meantime, we sell the product, we continue to sell the product.
I believe we picked up some new customers on it.
So it continues to be a BX-rated product.
It is less expensive than the authorized generic that's out there on the AB rated from another competitor.
And as a result, people continue to use this product as well as the other BX-rated product on the market.
Unfortunately, we're in the same boat as you, waiting and waiting and waiting.
And when we say any day now, we literally mean any day we expect to get some approvals.
That's what we talked about again in the earnings call.
We expect a number of approvals before our June 30 fiscal year-end.
And I know today is May 2, gives us all about 7 weeks roughly, but we do expect some product to come through.
The problem will be, of course, at this point, they'll come through, be too late for this fiscal year, but they'll certainly be available to us the fiscal year beginning July 1.
So we just have to be patient, as we always are, with the FDA and await the approvals.
But there's no reason for us to change what we're expecting.
We are expecting those products to be approved any day now.
Well, on the levothyroxine, it's essentially the macro factors that we've been talking about.
There's nothing in specifics that we want to go into at this point in time.
And I'm sorry, the second category you asked about.
Yes, I wasn't sure which category you mentioned, Derek or Marcus.
Urology.
That one we talked about previously.
The oxybutynin, that one has dropped off previous quarters.
Nothing this past quarter ---+ I mean, there's no difference this quarter over previous quarters.
Let's put it that way.
We had a competitor go into the space actually 6 months or so, right.
So yes, so this category is more of a competitive situation that has been in place and it wasn't unusual this quarter.
I'll take the first question.
Marty will handle the second one.
Yes, we do expect ---+ we said it, our revenue and our units have grown.
So our sales volume is picking up.
What you're seeing is the price reduction when you give a customer a low price impacting sales.
So sales are down on a price basis, but they're not down on a unit basis.
So we have picked up additional business.
The unit sales on most of the products have been up, at least overall.
And we expect that trend to continue, especially as we get new products, we now have more customers to sell those new products to.
But with the pricing pressure, which is somewhat mild as compared to our competitors, as far as we're concerned, we don't see it impacting us that dramatically unless we actually lose an item as opposed to having to meet a low price.
We're more concerned about, let's say, losing a product to a competitor outright than matching a lower price, which is generally what we have to do.
So I don't see anything except potential more sales, increased sales with a larger customer base.
As far as the move to Seymour, well, Marty will answer the margin.
Yes.
As far as the move, <UNK>, it's the synergy program that we announced over a year ago, we talked about savings, significant savings.
We talked about $50 million of synergy savings in fiscal 2018, and that number grows by 2020.
Just to put it in perspective, the $50 million in 2018, roughly half of that number we projected that we would see that in the cost of goods sold line basically with the efficiencies achieved from consolidating manufacturing in Seymour.
In addition, that synergy savings grows actually when we get to fiscal 2020 because the moving of manufacturing to Seymour, we always had that program in place now since the acquisition.
It's a 3-year program, so it's going to take time.
And to answer your question, yes, we would see ---+ expect to see, like I said, half of the synergy that we've been projecting manifest themselves on the cost of goods sold line.
So that will help us.
No.
We're not expecting anything.
I can't talk what the competitors are going to do when they do it.
But as we speak today, there's been no changes there.
Clearly, most of the products, as I said, that we've really not had any major impact on them in a negative way.
It's really more generally pricing.
People asking for a requote, the competitive environment.
This is my 49th year in generic drugs, <UNK>, so this is like the same old thing.
I'm talking about d\u0102\u0160j\u0102\xa0 vu.
I can sell cheaper than you, that seems to be the theme.
And it's not something we didn't anticipate a few years ago, quite frankly.
So I think my goal was, I'm not going to be able to stop that spiraling environment because there's too many competitors out there.
But I certainly could make sure I can survive it with the plans for C-Topical, the work we're doing with China, the exporting of 20 of my products there.
I mean, that's a huge opportunity for us.
So those were the kinds of things we needed to do.
We don't do any exporting, as you know, currently.
So those opportunities should offset the decline that we might see of the competitive marketplace we have in the U.S.
No M&A.
We're paying down debt first.
My shareholders would like me to concentrate on that.
So all I will say is stay tuned.
We do intend to continue to pay down debt.
That's true.
But optimistically, we have a lot of opportunities where we certainly have some opportunities in the small M&A world where we purchased some products that we'll be launching next year.
So we know for sure we're going to have some additional revenue.
We know at least we'll have some of the product we already have approved by FDA.
Now remember, we're approved in our Philadelphia plant that we were closing had to be moved to Seymour.
So those launches got delayed.
So between the launches, the new products, the products we expect to get approved, 2018, while, I don't want to be an optimist because there's certainly the pricing pressure.
In terms of units and volume, we do see some growth there.
I can't speak for what the prices will be on each one of these items because, of course, that determines where you end up.
But I do feel optimistic about 2018 because a lot of the launches we didn't file this year, this fiscal year, will be launched next year.
We know we're getting more approvals from the agency.
That's a sure thing.
We know we have this export opportunity with the Chinese.
These are things we didn't have in this fiscal year.
Now there's no way all those things wouldn't end up realizing an offset to the pricing environment.
As far the pricing environment is concerned, there's been a lot of pricing pressure that, quite frankly, we haven't experienced as much of it as some of our competitors.
But we're a small company, when you drop your prices on an item, the impact is far greater.
When you don't get to launch products because you're in the middle of synergy, it just exacerbates that problem.
But we believe July 2018, actually, July 1, 2017, our fiscal 2018 will probably be a better year.
And it won't be as impacted by pricing as we are this quarter.
I think, we think, <UNK>, to be fairly consistent, it will ebb and flow with sales.
But right now, I know our projection right now has the fourth quarter ---+ our fiscal fourth quarter to be slightly lower than the third quarter.
But no, it's not going to change dramatically and would ebb and flow with our sales numbers.
We had some pricing pressure on levo in the quarter.
And remember, when we gave that pricing to that large customer, as they transferred more business over to us from our competitors, we sold more units but at a lower price.
Well, the DOJ, well, it's been 15 months now.
We haven't heard anything from them.
Our outside counsel has not heard anything.
So we're thinking this has moved on to other companies.
And there's no longer anything going on with Lannett.
We've been saying that for some time now.
Nothing's changed there.
As far as the other opportunities, yes, we have opportunities to export some APIs from our Cody facility.
We've been in discussions with regards to that.
And certainly some controlled drugs as well.
So we see next year having probably our first export order with any luck.
And then the expansion of that export because the countries we're talking to and the people we're talking about, these will be significant volumes in terms of the products themselves based on the market.
So ---+ but I don't have a number in front of me.
We're still working on how long it takes to get these products launched.
We did know there's an expedited review process, one that's in already our FDA approved product in the U.S. so it doesn't go through their normal channels.
So I'm still trying to understand what that means.
Is that 6 months, 9 months or 3 months.
So I don't have new information, but they're getting back to me within the next few days, so I can answer that.
But there's no question, we'll be doing a lot more exporting next year than we've ever done before.
The longer-term ones with regards to our C-Topical, that requires filings in Europe.
We are moving forward with those filings.
So those take at least, I'm going to say a year to be approved.
And probably at least another 6 months or more to file.
So what we're doing is really planting seeds in the European market for our products, especially the C-Topical for now.
The other 2 products we're waiting for the approval on here in the U.S. before we can offer them there.
So there's 2 products we're waiting for FDA approval on that we're planning to export.
So we've been doing a lot of partnering.
We now have people that want the products, are willing to launch them in the European market and then, of course, in the Chinese market.
As far as raw materials are concerned, we have opportunity to do something with the raw materials we produce at Cody as well.
And those are in the talking stages right now.
But I have a pretty good optimistic point of view that we will have done some exporting next year for sure.
Because we don't know what those 20 products are.
I only know 2 of them.
They do want to buy 20 products.
That's what they've committed to.
Two of them we quoted on already.
We're getting the details as to what they need in the way of ---+ we're shipping it to them in bulk.
We know that.
We know we have to give some pricing that includes shipment and freight to their destination.
They'll do the packaging locally.
The rest of the products, we're just reviewing with them to see which one of our products they want.
And probably means that I'll have a trip there to finalize the products themselves.
But I really don't have any numbers to give you because we don't have any for ourselves either.
Once we identify the 20 products, they'll give me some estimate as to what size orders they'll place initially and then we'll have a fairly good idea.
But we are talking about a very, very big market.
China, as you can imagine, is 3x the size in terms of the population.
So ---+ and I'm not saying we're going to sell to everybody in China, obviously.
But if you sold to 20% in China, you have a huge amount of business coming your way.
And these are products that are not currently available in China.
So there'll be a new introduction, and they really feel very comfortable about the products that they're talking to us about.
I'm not allowed to say all of them, but they have identified categories that they're interested in.
And out of respect for their competitive marketplace, I don't want to give out too many details.
But it's an overwhelming opportunity for a company our size.
That much I will say.
Okay.
Well, we look forward to sharing our progress on our next scheduled conference call in August, and we thank everyone for joining us today.
Thank you very much and have a good day.
