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Edited Transcript of LCI earnings conference call or presentation 7-Nov-18 9:30pm GMT

Q1 2019 Lannett Company Inc Earnings Call

PHILADELPHIA Nov 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Lannett Company Inc earnings conference call or presentation Wednesday, November 7, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Martin P. Galvan

Lannett Company, Inc. - VP of Finance & CFO

* Robert Jaffe

* Timothy C. Crew

Lannett Company, Inc. - CEO & Director

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Conference Call Participants

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* Matthew Gregory Hewitt

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

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Presentation

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Operator [1]

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Welcome to the Lannett Company's Fiscal 2019 First Quarter Financial Results Conference Call. My name is Hilda, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. Robert Jaffe, Investor Relations for Lannett. Sir, you may begin.

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Robert Jaffe, [2]

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Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's Fiscal 2019 First Quarter Financial Results. On the call today are Tim Crew, Chief Executive Officer; and Marty Galvan, the company's Chief Financial Officer. The call is being broadcast live at www.lannett.com. A playback will be available for at least 3 months on Lannett's website.

I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the safe harbor provisions of the Litigation Reform Act. The company's discussion will include forward-looking information reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied.

In addition, during the course of this call, we refer to non-GAAP financial measures that are not prepared in accordance with the U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Lannett's press release announcing its fiscal 2019 first quarter financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings press release issued earlier today.

Please note that we have included additional information regarding the company's product launches and cost savings on Lannett's website. The information can be found under News Releases in the Investor Relations section of the website. This afternoon, Tim will provide brief remarks on the company's financial results as well as comments on recent developments and associated initiatives. Then Marty will discuss the financial results in more detail, including the company's fiscal 2019 guidance. We will then open the call for questions. With that said, I'll now turn the call over to Tim Crew. Tim?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [3]

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Thank you, Robert. Good afternoon, everyone, and happy Diwali for our friends and colleagues out there still inclined to still celebrate. In fiscal 2019 first quarter, net sales and adjusted net income exceeded our expectations. Given these results, combined with a number of recent positive developments, we are increasingly excited about our business and the company's future. There are 3 broad themes I'd like to share this afternoon. They provide details to what we directionally shared on the last conference call. Then I'll turn the call over to Marty, who will discuss our financial results in much more detail. The first theme is considering our size, our significantly accelerated success with new product launches to drive top and bottom line revenue. The second theme, again, considering our size, is our significantly expanded future pipeline to continue our rate of product launches as well as diversify our business. The third theme is our significant efforts to reduce costs to improve our returns. Importantly, and collectively, these efforts represent a renewed and revitalized Lannett and they're expected to materially ameliorate the impact from when we no longer sell Levothyroxine.

On the first theme of new product launches to drive sales, we are very pleased to have successfully launched 16 new products so far this calendar year, including recently launched Vardenafil, a first-to-market generic; and just this week, Dronabinol and Clarithromycin. For both Vardenafil and Clarithromycin, we are currently 1 of only 2 suppliers. Collectively, these 16 products have projected net sales of more than $75 million in fiscal 2019 with a projected gross margin of approximately 35% to 40% after partner royalties were applicable. These returns speak to the quality and deliberate nature of our product launches. We expect to maintain this pace of new product launches with approximately 10 more in the second half of fiscal 2019. And most of these will be internally developed products, which generally speaking, tend to have higher margins than in-licensed products.

Now onto the second theme of our expanding pipeline to continue our rate of new product launches. We have earlier noted that we have acquired or in-licensed more than 30 products since the beginning of calendar 2018. Today, in total, counting internal and partnered products, we have approximately, and there are 3 categories here, 20 ANDAs that have FDA approvals are not yet launched. This includes products like Dexmethylphenidate and SMZ-TMP suspension. We have another 20 ANDAs that are filed with the FDA and pending approvals. Importantly, this includes Methylphenidate ER, azithromycin, Venlafaxine ER, BAC, solifenacin and of course, thalidomide. BAC, by the way, is a combination product of Butalbital, acetaminophen and caffeine. Finally, we have more than 20 ANDAs in our active development portfolio. These 60 products, which is a substantial number relative to the size of our company, leads us to believe we can maintain our rate of new launches and a relative impact well into the future.

Meanwhile, our R&D teams have already submitted 5 product applications in this fiscal year. A substantial increase over the recent past. And we expect to file a similar amount over the balance of this fiscal year. And of course, our business development teams is in ever ongoing negotiations to in-license ever more products.

You should note that our internal efforts target areas where we have development strengths such as interesting liquid suspensions and certain oral dosage forms. Our business development efforts were repositioned as a partner of choice committed to the U.S. generic market, we are focused on products that complement our strengths and to accelerate revenue growth and/or bring in specialized technologies and capabilities. Of course, beyond our ANDA portfolio on Numbrino NDA, continues to progress with the FDA, and we expect to conclude a gating QT study by January.

Similarly, our efforts to develop a vial similar to Lantus, that's insulin glargine injection, with our partner HEC, also continues to progress. And we expect all clinical -- preclinical work to be completed in FY '19. We'll obviously believed this significantly expanded pipeline will drive significant future sales while we also further diversify our business and revenue streams. As Robert mentioned earlier, some of the pipeline and new product launch detail can be found in the company's website.

Our third and final theme today is our significant progress on reducing our cost structure. All told, based on specific and announced restructuring, our expenses will be reduced by approximately $66 million on an annualized basis by fiscal 2020. About half of these expense savings will be redirected into growth opportunities for the portfolio and business. This $66 million reduction equates to more than 25% of our expense base. I'll say that again, 25% of our expense base. And primarily relates to our proposed sale of Cody API operations, ceasing RPA manufacturing and distribution operations and reducing SG&A expenses.

In total, more than 250 employees or approximately 20% of our total staffing, will be impacted by these changes. Virtually, all of these employees are aware of the changes that are affecting them. While restructuring can be challenging, we believe we are now well-poised for future growth. Importantly, with the reinvestment of some of the expense reductions, our overall level of R&D will not be substantially reduced. And ANDA-specific project spend is expected to increase. Again, we've included additional information regarding the cost savings on our website. As I started out in my comments today, we have 3 themes we are emphasizing. First, we have significantly accelerated our new product launches, and they're expected to add $75 million to our projected FY '19 revenue. This is transformative to our recent past. Second, we have significantly expanded our future pipeline to be able to continue new product launches and diversify our revenue base. And finally, we have significantly increased deficiencies in our cost structure to accelerate other investments and improve our bottom line. Together, these continuing investments make us increasingly excited about the renewed and revitalized Lannett. With that, I turn the call over to Marty. Marty?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [4]

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Thank you, Tim, 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. Now for the financial results on a non-GAAP adjusted basis. For the fiscal 2019 first quarter, net sales were $155.1 million compared with $155.0 million for the first quarter of fiscal 2018. Gross profit was $68.7 million or 44% of adjusted net sales compared with $76.7 million or 50% of adjusted net sales for the prior year first quarter.

R&D expenses were $9.8 million compared with $7.4 million. SG&A expenses were $19.2 million compared with $18.7 million. Operating income was $39.6 million compared with $50.7 million for the prior year first quarter. Interest expense was $16.9 million compared with $16.4 million. Income tax expense was $5.9 million compared with $12.5 million in the prior year period. Net income was $16.9 million or $0.44 per diluted share compared with $22.7 million or $0.60 per diluted share for the fiscal 2018 first quarter.

I'd like to briefly mention a GAAP charge that we recorded in the first quarter. As previously disclosed, we recorded noncash charges totaling approximately $639 million -- I'm sorry. $369 million, related to the full impairment of goodwill and the impairment of certain long-lived assets as a result of our plan to sell the Cody Laboratories API business. This charge has no effect on our ability to make debt payments nor does it have any impact on our debt covenants.

Turning to our balance sheet. At September 30, 2018, cash and cash equivalents increased by more than $50 million to approximately $150 million from our cash balance at June 30, 2018. The increase in cash was primarily the result of timing of cash receipts, a $15 million tax refund and $14 million from the previously reported sale of 2 buildings in Philadelphia. At September 30, 2018, our debt was approximately $827 million.

We also anticipate that the expiring JSP contract will have a positive impact on our cash position, resulting from reduced working capital requirements. We expect to generate strong cash flows from operations, which will fund our capital expenditures and business development activities through fiscal 2019.

In addition, we expect to have sufficient liquidity and cash flows to meet our debt service requirements, at least through September 30, 2019. We also expect to be in compliance with our financial covenants during the same period.

I want to provide an update on our efforts to address our debt and capital structure. Along with our advisers, we are evaluating a number of options. We believe the actions we are taking with product launches, pipeline expansion, plant efficiencies and cost reductions, et cetera, not only are revitalizing our business but also expanding our capital structure options. It is a priority of this team and our Board to address questions around our capital structure expeditiously while we still have plenty of time to do so.

Now turning to our guidance. For the fiscal 2019 full year, on an adjusted basis, we are reaffirming our previous guidance with minor increases to net sales and R&D expense.

We currently expect net sales in the range of $585 million to $615 million. Adjusted gross margin as a percentage of net sales of approximately 44% to 45%. Adjusted R&D expense in the range of $30 million to $34 million. Adjusted SG&A expense ranging from $63 million to $66 million. Adjusted interest expense in the range of $63 million to $65 million. The full year adjusted effective tax rate in the range of 22% to 23%; and lastly, capital expenditures in fiscal 2019 to be approximately $30 million to $35 million. Regarding the phasing of quarters, we expect net sales to increase sequentially for the second and third quarters in the mid-single digits compared with the first quarter. With regard to earnings, we expect adjusted EPS for the second quarter to increase approximately 50% from the first quarter, and adjusted EPS for the third quarter to increase approximately 15% from the second quarter.

This guidance include sales of recently launched products, previously approved but not yet launched products as well as other products that we reasonably assumed will be approved and launched in the period. With that overview, we would now like to address any questions you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Gary Nachman from BMO Capital Markets.

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Unidentified Analyst, [2]

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This is [Raffe] on for Gary. Can you provide any more color on the range of option that you're considering for the capital structure and one we could hear something coming out of that? And then on gross margin, can you talk about the sustainability of 44% to 45% range as you continue to enter partnerships?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [3]

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Yes. Sure. So this is Marty speaking. So on the first question, at this point in time, we provided the amount of insight we're going to provide regarding our -- what we're looking at. It's a range of options. As I said, we believe we have plenty of runway. However, we are being very expeditious here in searching or reviewing our options and more to come in the future. And on the second question, can you pleased repeat the second question? I'm sorry.

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Unidentified Analyst, [4]

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Sure. Can you talk about the sustainability of the 44% to 45% gross margin range as you enter various partnerships?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [5]

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Sure. Well, first of all, I'll point out that as we -- as the Jerome Stephens contract expires in March of next year, next calendar year, that, that will have an impact on the margins. They will come down as we've said publicly, I mean, our levothyroxine product, we've had gross margins in the range of 60% or so. So that -- as that contract ends, our gross margins will come down. And going forward, we'll -- I'll talk to the $75 million or so of new products that we expect that we'll see in our -- that's in our 2019 guidance. We expect -- we're expecting right now gross margin on that range of products, which is about 16 products, to be in the high 30s. And that will help to mitigate impact coming from the Jerome Stephens contract as that falls off and that should provide some insight as to what we expect going forward.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [6]

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And if I just add 2 comments to that, please. As I noted in my prepared remarks, the proportion of our internally launched products versus partner products increases in the back half of this year, that'll help our margin profile somewhat. And of course, I'm not sure the cost reductions that we discussed on this call and provided information around our targeted the operating cost and will reflect in a point or 2 in our margin aligned with the quarter.

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Unidentified Analyst, [7]

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Great. And if I can just ask one more. With respect to the products that you acquired from Endo last May, you originally expected to launch this in the second half of this fiscal year. Is that still the plan? Or do you see that slipping?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [8]

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That still should be in the plan towards the very end of the fiscal year. One of the trade-offs we had to make as we looked at our expense basis was to think about going to third parties for some of those products versus internally manufacturing in the Carmel location up in New York. So those are not showing up in a material way this fiscal year, but they do start showing up in a material way in the subsequent one.

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Operator [9]

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(Operator Instructions)

The next question comes from Matt Hewitt from Craig-Hallum capital.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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The first one for me, as you look out later this year, how should we be thinking about your cash collections given some of the timing? Obviously, a very strong first quarter here from a cash collections perspective, but is that contingent upon, I guess, the mix and the timing of launches?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [11]

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Yes. Well -- Matt, it's Marty. So one of the drivers as we said on the call that drove up the cash was the timing of the collections. Specifically, that was a little bit of an unusual item for us in the quarter and that if you recall, we had strong sales back at the end of our fiscal 2018 that essentially in the June month of last fiscal year. So what you saw hitting or increasing our sale, our cash that is in September month where those receipts basically being collected. Going forward, there will be no reason to think that the cash collections would run usually high -- unusually high. It'll track with sales with the normal course of business. But then, of course, as I mentioned, when -- as the JSP business ceases in March month, at that point in time, then the amount of working capital that we have associated with that product line will come down and benefit as we're expecting in the range of -- overall, something in the range of $50 million improvement by the end of our fiscal year. But that will be a onetime benefit.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [12]

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And I would also add, it's Tim here, that obviously the expense reduction themselves, resulted in savings to our cash improving our earnings. And we're trying to be very thoughtful about how we spend our cash. We did earlier announce the reduction to our discretionary capital. So we're trying to get the most out of the cash that comes in to leave ourselves as many options as possible as we move forward.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Understood. Okay. Regarding some of those cost reductions that you're going to be targeting. How should we be thinking about the split between gross margin and OpEx? Is it 20%-80% split? 20% of those reductions coming out of cost of goods or conversely given that it's Cody? Just help us understand where that's going to be benefiting the most.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [14]

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Yes. So these savings, it's more in the manufacturing area. Net versus operating expense. So the $66 million it's weighted about 2/3, 1/3 towards the manufacturing.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay, understood.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [16]

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Although at the same time, some of the reinvestments, rather than expansion of the capacity at Seymour as is our R&D and our ANDA. So it's probably, probably -- I get that ratio is probably right. But just remember, it's not pure expense cuts. It's also reinvestment of savings into core parts of our business.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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And when you talk about the reinvestment, I'm assuming that you're talking about end of the R&D programs, so that you can get back to submitting more ANDAs?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [18]

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R&D programs and capacity expansions at Seymour. Yes.

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Operator [19]

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We show no further questions at this time. I will like to turn the call back to management for final remarks.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [20]

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All right. It's Tim again. This concludes our call. Thanks, everyone, for joining us today. I'll close out with this quick shoutout of appreciation to all our employees and customers, that are so important to the success we have just described. We look forward to sharing our progress at our next regularly scheduled conference call. Have a good night.

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Operator [21]

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Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.