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Edited Transcript of ACET earnings conference call or presentation 25-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Aceto Corp Earnings Call

Lake Success Aug 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Aceto Corp earnings conference call or presentation Friday, August 25, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Roth

Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary

* Jody Burfening

Lippert/Heilshorn & Associates, Inc. - MD and Principal

* Salvatore J. Guccione

Aceto Corporation - CEO, President and Director

* Walter J. Kaczmarek

Aceto Corporation - COO

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Conference Call Participants

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* Adam Peck

* Daren Heitman

* Dewey Steadman

Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst

* Greg Alan Eisen

Singular Research, LLC - Research Analyst

* Matthew Gregory Hewitt

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

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the ACETO Fourth Quarter Fiscal 2017 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jody Burfening of LHA. Please go ahead.

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Jody Burfening, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, Brandon. Good morning, everyone, and welcome to ACETO Corporation's Fourth Quarter Fiscal 2017 Earnings Conference Call. On today's call are Sal Guccione, President and CEO; and Doug Roth, Chief Financial Officer. They will lead the discussion about the quarterly financial results and business performance. Walt Kaczmarek, ACETO's Chief Operating Officer, is also with us today to participate in the Q&A session. The company issued its fourth quarter earnings press release yesterday after the market close. For those of you who have not yet seen the release, a copy is available in the Investor Relations section of the company's website at www.aceto.com.

Before starting the call, I'd like to remind you that today's call will contain forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, that can be identified by words such as believe, expect, anticipates, plans, projects, seeks and similar expressions that involve numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied by these forward-looking statements as a result of certain factors that are set forth in the company's filings with the Securities and Exchange Commission. Also, on today's call, management will be referring to certain non-GAAP financial measures. These measures, ACETO's net -- adjusted net income and ACETO's adjusted earnings per share, are defined as net income, excluding amortization of intangibles, debt extinguishment and amortization of debt discounts and debt issuance costs and costs related to acquisitions. These non-GAAP measures allow investors to compare our results of operations in the current period to prior period results based on the company's fundamental performance and analyze operating trends of the business.

With those housekeeping items out of the way, I would now like to turn the call over to Sal. Good morning, Sal.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [3]

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Good morning, Jody, and thank you. Good morning, everyone, and thank you for joining us on ACETO's fourth quarter and full year fiscal '17 earnings conference call.

The fourth quarter brought to a close a year in which we definitely advanced our strategic transition towards Human Health but also brought to a close a year of challenges in our generics business. Despite the increase in sales brought about primarily by the acquisition of products from Lucid and Citron, our financial profit results are clearly disappointing.

Net sales in our fourth quarter were $196 million, which was an increase of about 43.5% from the $135 million in last year's quarter. Net income was $2 million or $0.06 a share compared to net income of $6.8 million and $0.23 a share for the comparable quarter of fiscal '16. On a non-GAAP basis, adjusted net income was $9.6 million or $0.27 a share in the quarter, and that compares to $10.3 million or $0.35 a share in the prior year period.

Increased competition and customer consolidation in the generic pharmaceutical industry continued to create headwinds for us in the quarter, which we partially offset through the launch of 9 new generic products. One of the launches, a product called atomoxetine, which is an AB-rated generic version of Eli Lilly's Strattera, for us was a sizable P4 launch, which originated from the Citron transaction. Strattera was about a $1 billion drug before the launch. The overall impact of that launch was favorable for us but was at the lower end of our range of expectations. In terms of our ongoing transition towards Human Health, our Human Health plus Pharma Ingredients business segments in the quarter accounted for about 77% of our total sales.

Regarding our Pharma Ingredients and Performance Chemicals business segments, both of these segments continued as stable, cash-generating businesses during the quarter.

Looking at the full year numbers. After achieving 6 consecutive years of increases in sales, gross profits, reported GAAP to EPS and non-GAAP adjusted earnings per share, fiscal '17, unfortunately, saw a break in that trend, in particular in terms of profitability.

Net sales for fiscal '17 were $638 million, which is an increase of 14% over fiscal '16. That was fueled by the acquisition of the Citron and Lucid products.

Gross profit was just under $141 million, which is down 1.4% versus last year, and GAAP net income was $11.4 million, which is a decline of 67% versus last year.

GAAP EPS was $0.35 a share. That compares to $1.18 in fiscal 2016. While non-GAAP adjusted EPS decreased by around 20% from $1.50 last year to $1.19 this year.

On fiscal '17, our Rising business faced increased competitive pressure stemming from customer consolidations as well as new competitive product launches. Rising also experienced supply chain challenges mostly early in the year that affected several new product launches as well as commercial product supply.

At the same time, we did move the ball forward strategically with a midyear acquisition. The acquisition combined 2 complementary business lines, with similar asset-light business models and partnership-based product development strategies. The transaction substantially enhanced our scale in the generic space and broadened our growth opportunities. We've consolidated the commercial and pipeline products into Rising, and we're making progress on a new warehouse that will house the combined product lines. And we're also making products towards implementing a new ERP system through which we'll manage the business. Both these projects are expected to be completed around the end of this calendar year, while the cost synergies from these projects, together with headcount savings from the transaction, continue to be estimated at about $4 million on an annualized basis. We remain encouraged by how the transaction has expanded and diversified our product portfolio and strengthened our position in the generic marketplace, making ACETO definitely a more logical supplier to the industry.

From an operating perspective, we successfully resolved the API supply issues that had impacted 2 of our Rising products during the year. We also made good progress in minimizing approval to launch time gaps for new product launches. And in terms of the FDA serialization labeling protocol, we continue to work with our partners to be ready for the November 2017 date.

Regarding business development, during fiscal '17, we continued to invest in our new product pipeline, both through M&A as well as through R&D. Our R&D spending for 2017 was even with that of fiscal '16, which was $7.9 million. We expect to increase R&D spend in fiscal '18 to between $10 million and $13 million.

For the year, we launched a total of 20 new finished dose generic products, which was just slightly short of the range of 21 to 24 we've previously indicated. And of those 20 product launches, 13 were legacy Rising products and 7 were among the products we had acquired from Citron.

We currently have 133 projects in our pipeline, which compares to 154 projects we reported on our third quarter call. The difference is a combination of 2 things. It's a combination of the launch of 9 products that we did as well as a net reduction of 12 products that we -- that's related to pipeline pruning. Due to adverse market conditions on some of the products, we made the commercial decision to prune about 10 that we had previously slated for launch. Should market conditions become more favorable in the future, we certainly have the option to bring these products back into the launch queue.

During the quarter, we also filed new -- 4 new additional ANDAs, bringing the total number of ANDAs on file with the FDA to 39. In terms of our current pipeline, we're planning to launch between 15 and 20 generic products during fiscal 2018.

Just a quick word on our balance sheet. With respect to our debt, we generated roughly $45 million of cash from operations during the year, which allows to begin the process of reducing debt post acquisition. Total long-term debt was reduced by about $33 million during the third and fourth quarters of fiscal '17, so -- since the acquisition, and that brings our total long-term debt figure down to $339 million from the $368 million it was at in December -- at the end of December '16.

As we move through fiscal '18, we will continue to assess our new product development pipeline and our existing portfolio in order to maximize value and identify opportunities to secure our future growth. As we continue to scale our business, we're going to strategically look at becoming involved in larger, more complex projects and diversifying our product development projects to have not only the typical Rising singles and doubles but also product candidates with larger potential returns. We also intend to leverage -- to increase our leverage in our global API footprint in order to identify unique situations in the API market upon which we could capitalize. Additionally, a significant portion of our portfolio is now vertically integrated, which enhances our ability to compete on a cost basis.

We know we have our work cut out for us in fiscal '18, but we do expect it will be a year of growth, both top line and bottom line, for us. We recently added significant senior talent at the Rising business in key functional areas. We'll have a full year contribution of the former Citron and Lucid products. We have synergies to be realized from that acquisition yet. And we have the aforementioned 15 to 20 product launches planned at Rising as well as expect to see continued solid cash flow to be generated from our Performance Chemicals and Pharma Ingredients businesses. So all told, we expect a challenging 2018 ahead, but we expect a year of growth to come.

So with that, I'll turn the call over to Doug and then open up to questions.

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [4]

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Thank you, Sal, and good morning, everyone. Now I will walk you through our financial results for the fourth quarter and fiscal year and then provide you with our fiscal year 2018 guidance.

Net sales for the fourth quarter were $195 million, an increase of approximately 44% from the $135 million reported in the fourth quarter of 2016, reflecting in large part the contribution from Citron and Lucid products. Gross profit was $36.8 million, an increase of $8.2 million compared to $34 million in the fourth quarter of fiscal 2016.

Our gross margin in the fourth quarter was just under 19% compared to 25% in the prior year period. Our gross margin drop of 620 basis points versus the prior year level was primarily due to intensified pricing competition in our generic business, lower gross profit from acquired Citron and Lucid products, combined with a few charges in the generic business that I will cover shortly.

On a reporting segment basis, Human Health segment sales were $113.7 million, an increase of over 115% from the fourth quarter of fiscal 2016. The revenue gain was due to the addition of Citron and Lucid products we acquired in December, offset by increased competition and pricing pressure on more mature Rising products. On the nutritionals side, our sales were down modestly versus the prior year fourth quarter.

The Human Health gross margin was 19% compared to 31.7% last year. The decline in gross margin was primarily due to the lower gross profitability of the Citron and Lucid products and lower gross profitability on legacy products, reflecting an unfavorable product mix and price erosion on certain products. We also recorded charges totaling $4.7 million in the quarter, including an impact from the Medicaid Inflation-Adjusted Rebate program, short-dated inventory and amortization of the inventory step-up related to the Citron product acquisition.

Gross profit, on the other hand, increased almost 30% to $21.7 million, reflecting, once again, the addition of the Citron and Lucid [product] sales.

Pharmaceutical Ingredients segment sales were $36.2 million, a decrease of approximately 15% versus the fourth quarter of 2016.

Gross profit in the fourth quarter decreased 28.9% to $5.6 million from $7.9 million in the fourth quarter of 2016 primarily due to lower sales of a high-margin API.

Our Performance Chemicals segment sales increased $11.3 million to just under $45 million from $40 million in the fourth quarter of 2016, largely due to higher sales of specialty chemical products that -- including pigments, coating and dye intermediates.

Our gross profit was flat at $9.5 million, reflecting a less favorable agricultural protection product mix.

Our SG&A expense for the fourth quarter 2017 increased from $20.4 million to $26.7 million or 13.7% of sales, which was approximately 140 basis points lower than the fourth quarter of fiscal 2016. The absolute SG&A increase in the quarter was primarily attributable to the amortization of intangible assets and transition and administrative services costs associated with the Citron and Lucid product acquisition.

Our investment in research and development in the fourth quarter totaled $2.9 million compared to $1.7 million in the comparable period last year as milestone achievements and project initiations remained lumpy on a quarter-to-quarter basis.

With our SG&A and R&D growth outpacing our sales profit -- or, pardon me, our gross profit growth, operating income dropped to $7.2 million versus $11.9 million last year, and our net income was $2 million or $0.06 per share on a GAAP basis compared to net income of $6.8 million or $0.23 for the fourth quarter of last year. Our non-GAAP income was $9.6 million or $0.27 per share for the fourth quarter compared to $10.3 million or $0.35 last year.

Our adjusted EBITDA for the fourth quarter was $19.3 million, an increase of $2.3 million or 13% over the same quarter last year.

Now looking at the full year results. For the 12 months ended June 2017, our net sales were $638 million, a 14% increase from $558 million of fiscal 2016. For the full year, segment sales in Human Health were $315 million, an increase of 38% over last year. Our Pharmaceutical Ingredients segment sales were $157 million, a decrease of approximately 2.2%, and our Performance Chemicals sales were $165.5 million, a decrease of 2.4%.

Gross profit was $140.8 million, a decrease of 1.4% compared to the gross profit of $142.8 million in the prior year. Our full year gross margin contracted to 22.1%, a decrease of 350 basis points.

Gross profit from Human Health was $78.1 million, an increase of less than 1%. Our Pharmaceutical Ingredients gross profit decreased 11.4% to $25.5 million, while our Performance Chemicals gross profit increased 2.9% to $37 million.

Our SG&A expenses were $102 million or a 33% increase in fiscal 2017. Included in these -- in the fiscal 2017 SG&A were $8.8 million of transaction costs, $11.5 million of amortization costs and $2 million of consultant services provided by former Citron and Lucid employees, all in connection with the Citron and Lucid product purchase agreement.

Research and development expenses totaled $7.9 million, unchanged versus last year. Operating income was $30.6 million compared to $58 million, a 43% decrease.

For the full year, reported net income was $11.4 million or $0.35 per diluted share compared to $34.8 million last year or $1.18 per diluted share for 2016, decreases of 67% and 70%, respectively.

Non-GAAP net income was $38.7 million compared to $44 million last year, a 12.9% decrease, and non-GAAP earnings per share were $1.19 compared to $1.50 last year, a 20.7% decrease. Our total -- pardon me, our adjusted EBITDA for the full year was just under $72 million, a decrease of $2 million from fiscal 2016.

Turning to the balance sheet. As of June 30, 2017, our cash and cash equivalents and short-term investments totaled $57.7 million, our working capital was $251 million and shareholder equity was $408 million or $13.55 a share.

Our total bank debt and convertible debt was $357.7 million -- pardon me, $353.7 million, including $232 million under our senior credit facility. Our net -- our total net leverage ratio was 3.69%. Our trade receivables increased by $97.3 million from the year ended June 30, 2016, reflecting the addition of the Citron and Lucid product purchase acquisition.

Our DSOs increased from 83 days from June 30, 2016, to 99 days for the fourth quarter of fiscal 2017, bringing the number -- the DSO numbers down by 5 days from -- for the fourth quarter of 2017 versus our fiscal third quarter 2017. The year-over-year increase in DSO was expected and primarily reflects the inclusion of the purchased Citron and Lucid products, which have longer payment terms than our Performance Chemicals and Pharmaceutical Ingredients segments as well as we have an uptick in our legacy Rising DSOs. Financially, ACETO remains strong with ample capital resources to support our future growth plans and meet our financial obligations.

Now turning to our guidance for fiscal 2018. We expect sales and net income growth for the year based on our product launch schedule and the contributions from recently launched products, both of which, we expect, will sufficiently offset the generic industry headwinds.

We are currently projecting sales growth of 20% to 25%, reported diluted GAAP earnings per share to be in the range of $0.55 to $0.70 and diluted non-GAAP earnings per share to be between $1.25 and $1.40. This guidance assumes in part that we'll launch between 15 to 20 products -- 15 to 20 generic products.

We see generic product price erosion continuing in the upper single digits. And we have exchange rates in line with our fiscal fourth quarter 2017 averages.

Regarding our R&D spend, we anticipate spending between $10 million and $13 million in fiscal 2018 for our finished dosage form generic pipeline versus our R&D spend of just under $8 million for fiscal 2017. Again, as a reminder, our R&D expenditures are milestone based.

Now I'd like to turn over to the operator for questions.

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Questions and Answers

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Operator [1]

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

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

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First of all, looking at the pipeline, you've got, so what is it, 39 ANDAs that are currently awaiting FDA approval. A large portion of the total addressable market there is ungenericized markets. And again, in your slide presentation, you got $9.6 million -- or billion, sorry. How many of those are you first to file? And maybe a little bit of color on those opportunities as I see that having the best opportunities from a margin perspective to maybe rightsize that segment.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [3]

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So we're here. Doug is here, Walt's here, and I'm here, Matt. I'll take a quick shot and then I'll turn over to Walt. I don't know that we know if we're first to file in these, but we do know the way we laid this out is, again, because we don't know what the competition is working on. So we know that at this moment, there's no generics available on the blue within our chart. So there's a significant piece, and those are in a handful of products adding up to about $9 billion or $10 billion worth, where there are currently no generics on the marketplace.

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Walter J. Kaczmarek, Aceto Corporation - COO [4]

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Yes, to add to that, Matt, this is Walt, so we do have a handful of P4s, but I will refer back to the recently launched atomoxetine, which was also a P4 launch. That had 4 competitors, including Rising, come into it. So in essence, a P4 doesn't necessarily guarantee that you're not going to have competition. So we look forward to a robust pipeline, but that's really what it's looking like for now.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [5]

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Okay. And then, I guess, moving to the next segment. In the API, that came up a little bit light of our expectations. There have been disruptions. With GDUFA, the FDA has gone on and hired more inspectors. There's been disruptions internationally. We've seen other companies speak to this on their last conference call. I would expect that's creating opportunities for you. Is there a lag? Or is there something else going on that's maybe not -- you haven't yet capitalized on, on some of those opportunities?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [6]

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No, I think, again, our API business is a mix. It's a little bit different than some of the other companies that you might follow in that. For the most part, our API business is made up of a lot of, let's say, second-source opportunities. So we're -- as they -- we do have a number -- and we've had in the past a number of first-source opportunities on APIs, and that's where you'll see the large ups and downs, so to speak, okay, largely a bolus of business that come in, in one shot. We don't have too much of that. Our sense is it'd be a little bit more steady. So I think in our case, Matt, we saw nice growth in the API business in '16 -- I'm talking full year now, '16, over '15. I think sales and profits were up about 8% each, sales and gross profit. This year, we took a little bit step backwards. So that business for us is more or less consistent, little bit up, a little bit down, and it's not as affected by some of the aspects that you've mentioned.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Okay. And then maybe one for Doug. Doug, last quarter, DSOs, I mean, you just spent a little bit of time in your prepared remarks talking about this. DSOs increased. Obviously, there's some impact from Citron and Lucid. But one of the things you discussed last quarter was potentially lowering WAC prices, which would obviously have a positive impact on DSO. It doesn't appear that, that happened in your Q4. Is that still something that you're looking at? Or have market dynamics changed where it doesn't make sense to mess with WAC pricing?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [8]

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Okay, Matt. That's a great question. I'm glad you asked it. As you mentioned, I -- during my commentary, that we actually did realize a 5-day decrease in our DSOs from the March quarter. We have affirmatively reduced a few products, the WAC prices. And as I mentioned last time, when you reduce the WAC prices, it closes what's known as a shelf stock at which will slow down your payments. But then once you go up -- once you get through that, it should have a favorable increase moving forward. So we did -- we selectively have identified molecules that were -- that we took a WAC decrease, and there's more to come. We realized a 5-day decrease in DSOs this quarter, and we expect that trend to continue in the current quarter because we're having some good collection months or weeks so far in this quarter. So that's an ongoing process, and we still expect to see results from that.

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Operator [9]

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Our next question comes from Steve Schwartz of First Analysis.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [10]

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I guess the first question, just about the pipeline. So if I understand Slide 11 in your current deck, you've got 62 ANDAs that are filed and/or pending, approved, launched, and you're calling out 39 ANDAs. So to me, it -- I read that as there are 23 products that have been approved and are awaiting launch. Am I reading those numbers correctly?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [11]

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That's correct.

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Walter J. Kaczmarek, Aceto Corporation - COO [12]

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Correct.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [13]

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Yes.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [14]

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Okay. And then of the 23, you expect to launch 15 to 20 in this fiscal year?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [15]

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Correct.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [16]

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Yes? Okay. And then so, Sal, if I could ask, let's assume you do 20. You're -- you've burned through, right, a good portion of what's in the backlog, so to speak. Looking out a year from now, how do you expect to go into '19? Do you think your current pipeline will continue to feed through so that we have a similar number of opportunities going into next year? Do you think you'll need to continue to acquire products like you did with Citron?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [17]

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So -- no, we think as we go out into fiscal '19, again, so if there's 20-some-odd, 22 that are approved already, that means there's another 39 that are with the FDA waiting for a decision. So we think those will work their way through the system. We've got another 71 that are under development that will continue to get filed. And then, as we noted, we're upping our R&D spend this year versus last and -- so to keep that funnel full. So we think basically, as we look out over '18 and '19, the sheer investment and movement on products through our funnel should allow us to continue to launch a fair number of products.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [18]

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Okay. And Sal, in your prepared remarks, you talked about pruning the pipeline. And you had mentioned 12 products were pruned. Those are essentially ANDAs that had been filed, if I understand correctly?

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Walter J. Kaczmarek, Aceto Corporation - COO [19]

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Yes, this is Walt. I'll take that one. So those products were actually approved. And 10 of the products, as Sal mentioned in his earlier comments, were what we're terming as parked. So the current market dynamics are very unfavorable to launch. So 10 of the products we're parking, if the market dynamics change and it becomes a more profitable scenario, we'll certainly launch those at that particular time. Two of the products had very, very difficult technical challenges to bring into market, and we just canceled those.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [20]

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Yes. Yes, so we -- what we see from time and time, and again, more so now as things have changed a little bit in the industry, obviously, you have something in development that works its way all the way through, it gets through the FDA. So if you've done all that right and then you look up, and boy, 3 other people did that right also and they beat you to the market. And that's one of the dynamics in our industry, is we just don't know what the other guys are working on. So you make assumptions as that -- based off of history, and some of them just turn out to be not right timing by the time it's -- you're getting ready to launch.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [21]

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Okay. I pulled up a presentation from June of '16, so roughly a year ago. And at that time, you were showing 49 ANDAs. So did the differential in 10, where we stand today, are -- did those get approved? Did you decide to pull those? What's happened with the classification there?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [22]

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I'm not sure. When you say 49 ANDAs, where -- what bucket were they in?

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [23]

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Had been filed. This was a June 8 presentation for a conference, and I think you had shown 39 ANDAs filed with the FDA.

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Walter J. Kaczmarek, Aceto Corporation - COO [24]

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Yes, Steve, these particular 10 that we're referring to are 10 that came to us through the acquisitions of the Citron products. So those are the 10 we're referring to.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [25]

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Yes. No, and I understand, and thank you for the clarification on those. But...

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [26]

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Yes. Yes. Steve, I'll have to go back and check. But I imagine they were products that we launched over the course of the past -- you said it was June of '16, right? So...

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [27]

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Right, right.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [28]

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Yes. That's when we launched them. So we may have canceled a couple, too. I just -- I have to go back and check.

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

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Okay, okay. And so there's been news that the FDA issued draft guidelines for serialization, and there was a 1-year extension. It sounds like from the prepared remarks that you guys are not particularly benefiting from that extension. Or am I missing that?

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Walter J. Kaczmarek, Aceto Corporation - COO [30]

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Yes, this is Walt. I'll tackle this one first. And if Sal wants to add on, he certainly can. So there really wasn't an extension of the law. It was more of a ruling that suggested that there was not going to be any enforcement if you were not there. So we are continuing to move forward with our partners to be ready for the serialization, which is, if I have my date correct, November 27 of this year. So we want to be ready for it. And if there's a grace period of 12 months, and that's what is being referred to as a grace period, so be it, but we really do want to be ready for that event on the 27th of November.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [31]

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Yes, that's exactly it.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [32]

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Okay, I get you on that. And then lastly, if I could ask, with respect to the timing of earnings through the year and how your product launches will go, do you think of -- it's a progressive ramp from first quarter through fourth? Or do you think it see-saws? Or can you offer some perspective?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [33]

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Yes, yes. Hard to be precise on this, but I think we're seeing, at this point, that most of those occur right -- I think it's Q2 and Q3. Now again, there could be slippage, which happens sometimes. But I think, for the most part, it'd be Q2 and Q3.

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Operator [34]

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Our next question comes from Dewey Steadman with Canaccord.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [35]

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I guess on the overall corporate gross margins, I know you guys don't give guidance on the gross margins. But with the step-down from 3Q to 4Q, should we look at that as the new base going forward and sort of the adjusted gross margin around 24%? Or is it something where we could see normalization as the portfolio sort of stabilizes?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [36]

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Yes, I think that's a fair way to look at it. I think we're going to be -- what you're going to see going forward is somewhat consistent with or in the range of what we are showing for the full year. And then [there's] 22% and you just mentioned 24%, so I think we're in the low 20% region for that on a consolidated basis.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [37]

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Okay. A consolidated adjusted basis?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [38]

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Adjusted. I'm not aware of any adjustments within gross margin next year.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [39]

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Okay. I mean, normally, on a quarterly basis, you take out amortization and then there's one other item that you pick up, yes.

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [40]

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Right, that's below that line. We don't include our amortization, depreciation and gross profit as below the line.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [41]

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Oh, okay. And then I guess on the Performance Chemicals business or on the chemicals segment, with the looming breakup of Platform -- and I know your business is a little bit different than Platform, but the breakup of Platform into an ag company and then a performance chem company, does that create any opportunities for you? Or does it change the dynamics of your operating environment in the wake of that?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [42]

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To be honest, on that one, Dewey, I'm not sure. I know Platform Specialties (sic) [Platform Specialty], but I don't know how that might or might not affect us. I imagine it wouldn't have really an effect on the way we operate the business or the business at all. But your question's getting on something different and I don't understand it.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [43]

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No, no. Just kind of thinking about how that business would react to the new competitor in the market essentially operating independently. But I'd say...

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [44]

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No, I -- again, it's got -- again, a, we're distribution for the most part in that business; and b, we have plenty of competitors to begin with. So I don't see a change in much at all.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [45]

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Okay. And then in this consolidating environment of payers, with 100-some-odd [labelers] out there in the U.S. market and 3 or 4 major buyers, do you see continued opportunity to consolidate? And obviously, you've made some acquisitions recently. Are there other opportunities that you see out there that could bulk up the business or change the dynamics of your business on the Human Health side?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [46]

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So there are other opportunities out there, both in terms of companies and product lines. I think for us right now, we're going to continue to focus on getting the Citron and Lucid -- the former Citron/Lucid products totally integrated, the systems up and running, the warehouse, all the things we've kind of talked about up and going, pay down some debt. And then we'll come out and look for the next company acquisition and be my -- might go up there. Maybe there's a product line or 2 that we pick up over time. But in the near term, near term to my mind, say, the next 6 to 12 months, I'd expect us to be quiet on the company acquisition front.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [47]

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Okay. And how should we look at SG&A expense moving forward? Similarly -- I mean, you guys don't give guidance, obviously, but there was a -- there's been a steady step-up, obviously, because of the Citron and Lucid acquisitions. But it continued to rise from 3Q to 4Q. Do you see this leveling off as we head into '18? Or are there additional increases that we should see sequentially?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [48]

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I think, as -- our SG&A as a percentage of sales should not increase going forward. We need to -- as Sal and Walt spoke about before, we see some cost synergies once we fully integrate the Citron and Rising products in the form of headcount and warehouse savings. So I think what you'll see is improvement there as a percentage of sales.

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Operator [49]

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Our next question comes from Adam Peck with Riverwater Partners.

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Adam Peck, [50]

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Sal, you referenced you're looking at larger, more diverse products with larger potential returns. So are there any of those in the pipeline now?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [51]

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Yes, there definitely are. In fact, some of the -- if you go back a quarter or 2 and compare the pipeline then to the pipeline now, some of the changes that you'll see in there are -- include some products that are more complicated and larger. I'll have Walt comment.

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Walter J. Kaczmarek, Aceto Corporation - COO [52]

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Yes, I mean, Sal, you're absolutely right. And we're continually going to be looking for strategic differentiators in the pipeline products. I can't remember who it was. Either Steve or Matt already asked the question relative to the API situation and the FDA being more stringent in their review for the particular plans and does that create any opportunities. And we do think that, that does from a strategic perspective not only for our API business but also as we leverage our API footprint globally, which we've discussed strategically doing, and, in turn, using that for our finished goods portfolio as well. So we think there's some good opportunities out there.

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Adam Peck, [53]

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Okay. And Walt, on the 71 on file, does that number include multiple dosage forms of the same drug anywhere?

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Walter J. Kaczmarek, Aceto Corporation - COO [54]

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No. No, it's -- no.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [55]

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(inaudible).

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Adam Peck, [56]

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And then, Doug, what was CapEx this past year?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [57]

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Once you -- once we release the K, which should be later today, it was just short of $2 million.

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Adam Peck, [58]

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$2 million? Okay. And then, Doug, my last question is I'm -- yes, I'm looking at the reconciliation table, and there was roughly a $27 million difference last year between GAAP and non-GAAP. And I know that included $8 million of transaction costs and then the step-up in inventory of about $4.5 million. So I would expect the delta between GAAP and non-GAAP to be lower than what your guidance is giving. Can you give any color on what the onetime cost differences would be in '18 between GAAP and non-GAAP?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [59]

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Well, I think you'll see a full year of amortization of Citron and Lucid, right. So right now, in our 6 months -- pardon me, in our 2017 numbers, you only have 6 months. You won't have transaction costs next year, and you won't have inventory step-up next year.

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Adam Peck, [60]

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Got it. So the amortization will overtake -- will come in and then the transaction and the step-up will be gone. And then that results in roughly a negative -- about a $2.5 million drop between the difference between the 2?

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [61]

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Okay, yes.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [62]

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Right. You know what? I think Jody defines what our non-GAAP...

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [63]

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Non-GAAP is on a table.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [64]

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Yes. Okay, fine.

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Douglas Roth, Aceto Corporation - CFO, Chief Administrative Officer, Senior VP, Treasurer and Assistant Secretary [65]

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Exact (inaudible) we...

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Operator [66]

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Our next question comes from Greg Eisen with Singular Research.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [67]

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You mentioned for this quarter gross margin in Human Health was affected by price erosion. And you've had it, well, obviously, every quarter this year. Can you tell us what percentage price erosion you experienced this quarter? And my follow-up is -- surrounds next year's price erosion.

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Walter J. Kaczmarek, Aceto Corporation - COO [68]

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Yes, Greg, this is Walt. I'll take that. So we track price erosion not only, obviously, for our own portfolio but the market overall. And what we've seen sequentially from first fiscal quarter to current fiscal quarter not only for the market but for our portfolio is a little bit of a mitigating price deflation factor. So it is mitigating as the quarters go on throughout the year. But one thing I want to make sure that it's clear, that we're certainly not calling a bottom to the price inflation. There still are some events that are occurring out in the marketplace with the customer consolidation that have yet to be fully vetted. So it is -- once again, it's mitigating, but it's not over yet.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [69]

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Understood, understood. And my follow-up to that is, you referenced a high single-digit price erosion in your expectations for fiscal '18. And this year, you've called out -- there are some specific products that had unique circumstances that caused them to have price erosion, and they were highly profitable previously. So their margin contribution was severely cut. And that was the one factor that you described as hurting you the most earlier this year. As you look at next year, is the price erosion centered around any particular product? Or is it really in an across-the-board environmental backdrop to your business?

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Walter J. Kaczmarek, Aceto Corporation - COO [70]

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Right. At this point, it's going to be more of an environmental backdrop because our portfolio as it exists now is very diverse and very broad. We do not have 1 single product that accounts for greater than 10% of net sales or 10% gross profit of the entire book. So it's well diversified. So we're not going to be subject to the big hits that have occurred in the past.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [71]

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Understood, and that's helpful. But that also describes an industry environment where there is price pressure really for your competitors also as well as you -- kind of an -- across the industry environment. Is -- do you see -- how long do you see this lasting? Is this really just a fiscal '18 event? Or should we expect -- because you -- I guess I was expecting ongoing low -- lower end of the single-digit range price erosion, not high single-digit ongoing. Is this range of the high single digit something we should expect kind of ad infinitum until further notice in the industry?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [72]

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So we hope not. I would say this, though. Typically, what we used to see before kind of this intensified competition and price erosion, we would see on the existing product line somewhere 3%, 4%, 5% per year price erosion, okay. That was kind of normal. So part of our industry is price erosion. You launch a product, you grab share. Depending if you're first or third or fifth will determine, a, the price; and b, the share. But then, it's just one that -- it's an industry where there's generally erosion. So that, I'd say, we should expect as part of the business model. The elevated levels here of high single digits, hard to tell exactly. But as Walt said, we think it's beginning to mitigate. We don't -- we can't pinpoint exactly where the bottom is. We're talking about this as almost like a recession. You know when you look back where the bottom was. But we do think it's beginning to mitigate. I can't tell you if we're at the bottom, but it feels like it's starting to get a little bit better.

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Walter J. Kaczmarek, Aceto Corporation - COO [73]

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Yes, Greg. Then just to add a little bit more to that. We do feel like this business is cyclical. And if you look back at our industry, if you look back 10 years, there's a lot of correlations between what happened in the injectable market 10 years ago and what's going on now. So when you look at those parallels and the historic events that have occurred, you can see that it potentially is going to mitigate out, which we're seeing some signs of that. But once again, as I alluded to, there's a couple of events, predominantly the [ECON disk] joining [Webad] and the further clarification of the ClarusONE situation that needs to flush out of the system. And once those are done, then I think we're in a better position to really start mitigating some of these price declines.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [74]

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Understood, understood. And if I could just ask one quick question about the pipeline. 15 to 20 new drugs is your goal to launch new generics this fiscal year. Maybe I didn't -- wasn't hearing correctly, so tell me if I've misread it. Were these all coming from the acquired Citron product line? Or what -- and how much of those might be from the legacy Rising R&D pipeline? I wasn't sure if that was pointed out.

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [75]

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No, we didn't point that out. And so it comes from both. I think it's roughly 50-50. Again, depending on exactly whether it's 15 or 20, but it's roughly, we expect, 50-50.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [76]

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Good, okay. Because you just called it Rising. And at some point, everything will just be referred to as Rising once you fully integrate it, I realize that, but...

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [77]

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Yes, yes. Internally, we've heard everything is Rising now. But just because the acquisition is still only 6 months or 8 months old, we're providing that separation right now.

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Operator [78]

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(Operator Instructions)

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [79]

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Okay, I guess there are no more questions that have popped.

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Operator [80]

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We had someone jump in last minute. Our next question is from Daren Heitman with Azarias.

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Daren Heitman, [81]

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I want to follow up on the longer-term outlook for margins. Do you think that there's eventually some recovery in your gross margins on a corporate basis or beyond fiscal '18? And what would drive that?

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [82]

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Yes, so I think there is, and I think there's a few things. One, starting with maybe the Performance Chemicals and Pharma Ingredients businesses, those we've -- in particular, Performance Chemicals, we've optimized over the last number of years. And there may be a little bit of room to move those up over time but not much. But I think on the generics space, businesses do go through kind of cyclical situations. This one, I'd say, is a combination of some structural changes, meaning the consolidation that we saw amongst the customers and wholesalers, et cetera, that's changed, and I think that's the structural change that we're going to have to live with going forward. But then there's also just part of the cyclical nature of businesses. And I think what happens over time is some weaker players flush out. As I mentioned, I think we've become a more logical supplier to the industry with the expanded commercial and pipeline portfolio now. And the stronger ones carry on. So I think as we get through this kind of downturn that we've been -- we as an industry been mired in, I do think, through new product development as well as taking advantage of opportunities as they arise, we can begin to raise the margin, not to mention I think we're pretty much fully staffed. And as we grow, we can lever some of the SG&A, too. So I think there are opportunities, but it's going to take a little bit of time, at least through fiscal '18, to flush through that.

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Operator [83]

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(inaudible)

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Salvatore J. Guccione, Aceto Corporation - CEO, President and Director [84]

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Okay. Well, listen, thank you so much. We really appreciate the time, the attention and the questions. Appreciate all the support. And we look forward to speaking with everyone again in November after the end of the first quarter. So thank you so much.

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Operator [85]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.