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Edited Transcript of LCI earnings conference call or presentation 6-Feb-19 9:30pm GMT

Q2 2019 Lannett Company Inc Earnings Call

PHILADELPHIA Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Lannett Company Inc earnings conference call or presentation Wednesday, February 6, 2019 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

* Timothy C. Crew

Lannett Company, Inc. - CEO & Director

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Conference Call Participants

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* Dana Carver Flanders

Goldman Sachs Group Inc., Research Division - Research Analyst

* Elliot Henry Wilbur

Raymond James & Associates, Inc., Research Division - Senior Research Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Matthew Gregory Hewitt

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

* Scott Robert Henry

Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research

* Robert Jaffe

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Presentation

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Operator [1]

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

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Robert Jaffe, [2]

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

I would 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 forecasts 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 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 second 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 recent and planned product launches, cost reduction plans and other financial and product information 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 updated fiscal 2019 guidance. We will then open the call for questions.

With that said, I will 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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Thanks, Robert. Good afternoon, everyone.

We are very pleased to report record net sales in the fiscal 2019 second quarter. Net sales and adjusted net income for the quarter were solidly higher than expectations. In addition, our cash balance continued to increase, and as of December 31, exceeded $160 million. And as of this morning, the cash balance was comfortably more than $200 million.

To paraphrase Mark Twain, the news of our company's travails has been greatly exaggerated. More to the point, we are feeling quite good about the current state of our business, the progress we've made over the last several quarters and our future prospects. On last quarter's call, we spoke on the themes of adding revenues from new product launches and cutting costs. We'll update everyone on those themes today. We'll also look to provide more context on our business, excluding Levothyroxine, as well as some color about how we're thinking about our capital structure.

A note before we delve into these themes. We began the acceleration of product launches about a year ago. As such, we have grouped our product launches by calendar year but obviously discussed the impact of those product launches on a fiscal year basis. For now, we feel this is the best way to convey the information as the last calendar year was an inflection point for Lannett.

Our goal moving forward will be transition -- to transition to a fiscal year-only context. So with regard to new product launches, we did launch 17 products in calendar year 2018 as forecasted. We are reaffirming that they will contribute approximately $75 million of net sales in fiscal 2019 at a gross margin of at least 35%. Because in the first half of fiscal 2019, those same products generated approximately $40 million of net sales with a gross margin of about 37%.

Also, we previously said our plan is to continue that pace of launches for the foreseeable future. Our launch "parade" continues and includes approximately 10 planned launches in the next -- in the first half of this calendar year and more launches thereafter. In total, we estimate those 10 planned launches will generate approximately $10 million in sales for the second half of fiscal 2019. And we expect all of the launches in calendar year 2019, which will be about 20 products, to generate net sales of approximately $75 million in fiscal year 2020. As a reminder, we currently have a total of approximately 60 product candidates in various stages of launch readiness and development.

And with regard to cost reductions, we have previously announced a plan for $66 million in total savings with $33 million of reinvestment. To date, virtually all key actions in the plan had been completed or are in process. The completed actions include the closure of both our long-standing manufacturing facility and distribution site in Philadelphia, the initial restructuring of Cody Labs and reduced staffing and other expenses throughout the organization.

The main in-process item is the transition of Cody Labs, which we expect to finalize before the end of the current fiscal year. We thus expect to realize the substantial cost savings of the plan over the next several quarters.

These changes are never easy but important to support our future growth plans. We again sincerely thank our former colleagues for their meaningful contributions to Lannett. There are slides in the website to help clarify all of these items.

One way to frame all these activities is to consider it in context to historical Levothyroxine sales for Lannett. In fiscal year 2017, gross profit for that product was approximately $100 million. At the time, this amount was the most ever reported by Lannett for Levothyroxine and could be considered the normalized value. This value was before sporadic supply disruptions that later occurred in the market and from which Lannett further benefited.

In comparison, we currently estimate the products we launched in calendar year 2018, combined with the ones we expect to launch in calendar year 2019, will contribute more than $150 million to FY 2020 sales and generate more than $50 million of gross profit. That figure, coupled with $33 million in net cost savings compared to FY '17, means we believe we've already gone a very long way towards replacing our Levothyroxine gross profit by 2020. Again, we have a slide on our website that graphically depicts what I just referenced.

And while on the topic of Levothyroxine, we obviously had an exceptional quarter. The decision to transition the contract early demonstrates our prudence and risk management, especially given the new market entrants. And the significant sales of Levothyroxine in the quarter demonstrates our ability to execute well while ensuring continuity of supply for customers and their patients for this important medication.

Also, I'd like to note that some of the extra Levothyroxine profit in Q2 did not flow to our bottom line as there were some incremental costs associated with the transition. We also took the opportunity in the quarter to make incremental investments in R&D, SG&A and portfolio optimization, all of which are intended to support our future growth.

Now a few comments on what Lannett looks like without Levothyroxine. It's important for this context to reflect on the many moving parts in this company this past year, my first with Lannett. We augmented, particularly on the commercial side, an already strong management team and initiated strategic shifts, such as discontinuing a controlled substance API strategy, to focus on more immediate opportunities and finished dose generics. These shifts were supported by significant reevaluation of our portfolio and a thoughtful and dramatic expansion of partnerships and product launches right at a time when some other major generic suppliers are stepping back somewhat from the generic operations.

On top of all those actions, we have undertaken a significant cost reduction program while dramatically expanding our Seymour plant output, which has increased approximately 45% from year-ago volumes. The net effect of these actions is that, we believe, our business today without Levothyroxine is generating about $110 million a quarter in sales, and we're looking to achieve around $120 million in sales in 4Q FY '19. And of course, our sales are expected to continue to grow as more new and valuable products continue to be launched.

Related to these expectations, in December, we amended the covenant related to our Term A loans. More specifically, our required debt-to-EBITDA covenant ratio was revised from what would have been 3.25 to 4.25 at December 31, 2019.

Considering our current cash balance and our current loan amortization rates and thus assuming net balance -- debt balance of around $600 (sic) [$600,000] at the end of fiscal 2020, we expect to be well within our required leverage ratio. We again thank our Term A lenders for their full support in that significant step that provides us financial flexibility and further strengthens our capital structure.

Before I turn this call over to Marty, I'd like to briefly touch on a few items that add to our excitement about the company's future.

First, our partner's ANDA for Methylphenidate ER, Concerta, received a minor complete response letter to which they have already responded. Thus, we believe that we will launch that product before the end of the fiscal year.

Second, we received a complete response letter on thalidomide, primarily around the associated API supplier. While we are still assessing the situation, a launch later in the current calendar year is still planned.

Third, our Numbrino NDA continues to progress at the FDA, and we completed the gating QT prolongation study in December. We believe we remain on track for an expected approval before the end of the calendar year.

Fourth, our efforts to develop a biosimilar to Lantus insulin glargine with our partner HEC also continues to progress. We have completed an encouraging PK and PD animal comparability study, and the summary slide of the results is on our website. As a result, a clinical trial application for the first normal healthy volunteer study with HEC insulin glargine versus U.S. Lantus has been filed with South African health authorities.

And last but not least, our business development teams continue to evaluate a pipeline of transactions to expand our portfolio. The success we have had launching new products, combined with our talented teams and strong customer relationships, makes us an impactful partner. And while our internal pipeline continues to progress, we certainly expect we'll transact many more partnership deals.

To sum up. While the generic industry is dynamic, we have a management team well able to address opportunities and overcome inevitable challenges. Absent Levothyroxine, we see our business as healthy and growing based on a significant and ongoing inflow of new product launches and cost reductions.

We have launched 19 new products since January 2018 and have a significant pipeline of products that are pending launch to maintain this pace of new product launches. These products have and will continue to make substantial contributions to our financial results. Based on those items, we believe we have made excellent progress towards significantly replacing the $100 million of normalized Levothyroxine gross profit by fiscal 2020. And finally, our Term A amendment and growing cash position provides significant financial flexibility to capitalize on more growth opportunities, and we continue to assess other opportunities to even further improve our capital structure.

And with all of 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 second quarter, net sales were $193.7 million compared with $184.3 million for the second quarter of fiscal 2018. Gross profit was $86.0 million or 44% of adjusted net sales compared with $96.7 million or 52% of adjusted net sales for the prior year second quarter. R&D expenses were $8.7 million compared with $10.7 million. SG&A expenses were $17.4 million compared with $20.9 million. Operating income was $59.9 million compared with $65.1 million for the prior year second quarter. Interest expense was $17.1 million compared with $16.2 million for the second quarter of fiscal 2018. Net income was $33.6 million or $0.86 per diluted share compared with $40.6 million or $1.06 per diluted share for the fiscal 2018 second quarter.

Turning to our balance sheet. At December 31, 2018, cash and cash equivalents increased by more than $65 million to approximately $164 million from our cash balance at June 30, 2018. At December 31, 2018, our debt was approximately $864 million, which equates to a net debt of $700 million. We anticipate that the expiring JSP contract will have a positive impact on our cash position, resulting from reduced working capital requirements. In addition, with the amended credit agreement, we expect to be well within its financial covenants up to maturity date of the Term A loans.

Turning now to our guidance. For the fiscal 2019 full year, on an adjusted basis, we have raised our guidance. We currently expect net sales in the range of $615 million to $635 million, up from $585 million to $615 million; gross margin as a percentage of net sales of approximately 44% to 45%, unchanged from previous guidance; R&D expense in the range of $33 million to $35 million, up from $30 million to $34 million; SG&A expense ranging from $66 million to $69 million, up from $63 million to $66 million; interest and other in the range of $66 million to $68 million, up from $63 million to $65 million; the full year adjusted effective tax rate in the range of 22% to 23%, unchanged; and lastly, capital expenditures in fiscal 2019 to be approximately $30 million to $35 million, unchanged.

Regarding the phasing of quarters, as Tim mentioned, we expect fourth quarter net sales to be approximately $120 million. Based on the midpoint of our guidance, Q3 net sales are expected to be approximately $155 million, which includes the last quarter of Levo sales. I'd like to point out that a portion of the exceptional sales of Levo in Q2 included sales that shifted from the third quarter.

With regard to earnings, we expect Q3 adjusted EPS to be approximately 25% less than the second quarter, with remaining earnings in Q4. This guidance includes sales of recently launched products, previously approved but not yet launched products as well as other products that we reasonably assume will be approved and launched in that 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) And our first question comes from Elliot Wilbur from Raymond James.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [2]

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Just a couple of quick product questions for yourself, Tim. First, with respect to generic Concerta. You mentioned the CRL tied to the API supplier. Was that something to do with the active itself or something to do with that company's status on the GMP front? And then follow-up -- that up with a question around Numbrino and C-Top. Are you still recognizing any C-Top revenue currently? Or has that product been completely removed? And as you think about Numbrino going forward, is that still an asset that you're committed to commercializing yourself? Or given the likelihood of some additional investment there, is that something that you might consider sort of monetizing kind of based on current priorities?

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

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Thanks, Elliot. That sounds like several questions. I'll try to hit them as best as I recall. First if I -- I hope I didn't speak in my comments, but the CRL, as it relates to Methylphenidate hasn't been responded to, and we're feeling optimistic about an approval and launch later this fiscal year. We started with validation procedures associated with that product. For thalidomide, that's the product where there is complete response letter related to the API supplier, and we're still evaluating the mechanics of that complete response letter, although we still expect to launch that product later this calendar year. So that's the 2 product questions. As it relates to Numbrino, we still remain in market with that product, and we continue to progress our NDA at the FDA. Our unapproved product remains in the market today, and we continue to progress our NDA on Numbrino with the FDA. We completed the gating QT prolongation study in December and remain hopeful of the launch later this calendar year.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [4]

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And if I could ask a follow-up question for you, Tim, as well. Could you just comment a little bit on the deal environment in general? Obviously, the BD team there has done a very good job in terms of bringing in additional assets largely through distribution or marketing agreements. But you're seeing a lot of assets come to market for sale, large portfolios that look to be transacting at very, very low multiples. So I would assume there are smaller portfolios and smaller baskets of assets out there that probably are not that different in terms of valuations. I'm just wondering sort of how you're thinking about your position currently to potentially transact for some of these assets and whether or not those depressed valuations are kind of spilling over into the licensing market, whereby the developers are maybe getting a -- you'll be able to get maybe a little bit more favorable terms just sort of based on the compression in multiples.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [5]

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Thanks, Elliot. Appreciate the question that's at the center of our kind of strategic plan in the near term. We agree that with the number of the major generic players stepping back somewhat from their core generics business, the environment for opportunity to bring in assets at a reasonable valuation either purchased or in-licensed is something we don't see changing in the immediate or near term. And we'll continue to make a market, we believe, in those opportunities. We do have a pretty good pipeline in front of the BD teams as we speak. And while we can't assure the conclusion or the timing of such transactions, we're pretty optimistic you'll see a continued deal flow in the next year or 2, similar to what we've experienced this last year.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [6]

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Just one last question for Marty. Marty, could you just help us or help me think about cash conversion over the next couple of quarters? I had expected cash balances this period to end certainly higher than where they came in. And I'm not sure that's maybe some timing issues on the Levo transition agreement or some of the cash collection timing issues with the pretty strong cadence of new launches. Just trying to think about the cash conversion over the next couple of quarters.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [7]

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Yes. So yes, Elliot, thanks for the question. So right now, just sort of very high level, as Tim indicated, the -- it is essentially timing, though. We do expect -- right now, that we're peaking at a certain level. Much of it has to do with the wind-down of the Levothyroxine business and working capital associated with it. But we're generating cash, and the company continues to be strong. So -- but yes, it's a bit of timing in that peak that we're seeing right now.

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Operator [8]

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And our next question comes Gary -- from Gary Nachman from BMO Capital Markets.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [9]

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First, for Tim or Marty. Could you just explain exactly how you're recognizing revenue and income from Levo during this transition with Amneal? It's still not clear how it's such a big number at $89 million in the quarter. And then just explain also how that's going to look next quarter before it goes away completely.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [10]

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Okay. Gary, so I'll start up by saying it's a little bit complicated. But the simple way to look at it from our perspective is that prior to the arrangement with the Amneal company, we had several large customers out there and small ones, of course, for the product. The -- as a result of the transaction, we now have one customer essentially. And as that -- and the one customer being Amneal. As Amneal shifts product or needs product from the source, which is Jerome Stevens, the product goes directly to Amneal. It actually is essentially bought by Lannett and sold to Amneal. The $50 million prepayment that came in, that was just an advanced payment of essentially what is margin on the product that we would have made otherwise. So as far as external reporting goes, you'll see no difference in our reporting, so to speak. We have just one customer now. The sales in the second quarter, the -- I'm going to let Tim comment on that. I mean, that was, as you saw, a very strong Levo number in the second quarter really as a result of managing the business prior to the transition to Amneal.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [11]

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Yes, just a bit of a clarification. The gross margin that was paid in advance is recognized over the period of December through January in accordance with the volume that Amneal sells during that particular period. The actual sales for the quarter was a combination of recognizing a prorated portion of their sales from those advance payments, along with the cost of goods of the associated product, in conjunction with the wind-down of our label in the market. Please note that Amneal has their own label in the market, and our label was closed out in November. And while there are a number of mechanisms around the contract of how that was handled, several customers were desirous of making sure they had adequate supply for transition, and that helped increase our sales beyond our normal run rate.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [12]

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Okay. That's helpful. And then, Tim, you said that the 10 new launches in the first half of '19 will generate $10 million, I think, in the second half of '19. So what would that be on an annualized basis? I'm trying to get a sense of how big those products are.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [13]

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Annualized -- oh, sorry. Shall I take it?

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [14]

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Yes. Because I mean annualized is generating only $10 million, I would think. They're going to stagger in over the course of the year, right? So -- or have a different impact over the course of the year.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [15]

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We're thinking they'll annualize somewhere in that $20 million to $30 million range.

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

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Yes, there's a slide on our website, Gary, that talks about the calendar year. I know it gets a little confusing trying to track one to the other, and we'll back away from this as soon as we can get it all into our base business. But that calendar year of 2019, our current calendar year, we are expecting $75 million in fiscal year 2020. The launches for the back half of this fiscal year are a little backloaded associated with Methylphenidate in terms of the total value, and will annualize up quite nicely as we get into 2020.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [17]

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Okay. That's helpful. And then the last question just in terms of the cadence of new launches beyond 2019. So I know you said in your prepared remarks, Tim, that you have talked about 60 product candidates. Maybe just go back and clarify or be specific on the number of products filed, number in development and what sort of cadence you expect going out the next couple of years in terms of new launches.

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

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Yes. In general, that bucket of 60 products looks pretty similar to it did -- as it did last quarter as new products come in and new products go out. So I think around 20 products that are approved and the pending are launched, 20 products that are submitted to the FDA and waiting approval, another 20 or so that are in later stages of development. So that pool of 60 looks similar as it's refreshed as time goes on and new products are actually launched. We look to try to maintain that sort of pool as it were over the subsequent periods. And then similarly, the rate of launches would similarly look at that same sort of pace, 1 or 2 a month, which we would foresee for some time here, annualizing out at 20 or so products a calendar year or a fiscal year. Again, some variations from period to period. But order of magnitude, that's what we would think.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [19]

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Okay. So when you were talking about the $100 million of gross profit that you're going to be able to recapture with new launches and cost savings, that was just from launches in '18 and '19, but that didn't include any potential launches in '20, correct?

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

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That's correct. We've spoken to those launches where we have a bit more visibility and clarity to our expectations and launch readiness. We do, of course, expect continued launches as the time proceeds.

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Operator [21]

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And the next question comes from Dana Flanders from Goldman Sachs.

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Dana Carver Flanders, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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My first -- can you just maybe speak to the Levo market dynamics that you're seeing right now? I know Lupin got approval recently. How is pricing shaking out? Maybe that's my first one. And then secondly, just on gross margins for the overall business going into fiscal '20. I guess, with Levo rolling off, how should we think about just the sustainability of the gross margin profile? I know you have guidance of 44% to 45% for the year. Where do you think that can shake out with maybe some lower-margin launches as you just licensed in new products? And then I have one more follow-up.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [23]

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Thanks, Dana, for the questions. For the first one, I guess all we can say is that we made our deal. And relative to the end market performance, I'd refer you to the folks that are marketing that product today. We are pleased with our results this last quarter and expect something a little less than our average run rate as we get into the next quarter based on the comments that Marty earlier provided. Regarding the gross margins, Marty?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [24]

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Yes. Well, gross margin -- so Dana, we provided guidance, as you know, for the full year and phasing for the quarters. The math should point to a gross margin in the fourth quarter somewhere in that 40% to 42% range. And going forward, we think -- we believe we can hold that margin at about that -- gross margin at about that level going forward into 2020.

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Dana Carver Flanders, Goldman Sachs Group Inc., Research Division - Research Analyst [25]

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Okay. Great. And one more follow-up. Just on CapEx, I know you're making some changes to your manufacturing footprint and focus. How should we think about an annual CapEx number for you on a go-forward basis?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [26]

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Yes. Dana, I think for going-forward basis, I think the level that we have in our current guidance for fiscal '19, the $30 million to $35 million. I think that makes sense. We're not planning right now, at least as we can look into the future, any major capital outlays. Right now, our #1 goal is take down our debt. So I think that you'll see that perspective in the way we invest or spend our capital.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [27]

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And if I could shed one, like, obvious clarification to that piece. We have shut our -- discontinued our operations in Philadelphia, so that site no longer requires capital investment. And earlier, we announced the discontinuation of the expansion of Cody Laboratories, which historically was absorbing a lot of our cash. So on a go-forward basis, as Marty says, the $30 million to $35 million range is more than adequate to improve the efficiency, and productivity at Seymour, and then expand our capacity. I think we're pretty comfortable with that number as we look forward.

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Operator [28]

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And your next question comes from Matt Hewitt from Craig-Hallum.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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Just a couple of questions for me. First off, was there any changes to the product mix in the revenue buckets? I had some pretty big deltas versus my expectations, and particularly the other bucket came in dramatically lower. And I'm just wondering if some of those products shifted to other revenue buckets.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [30]

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Matt, so this is Marty. No, we did not change anything in the bucketing of the products. So what you're seeing is just moving within the individuals as we've seen in the past basically.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [31]

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Okay. And then I guess, looking at that other -- it was down, call it, $10 million versus my estimate and kind of a similar amount versus the last few quarters. Was there a product or 2 that was discontinued or new competition that entered? Anything there?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [32]

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Yes. Well, there was a couple of products actually that were lower in the quarter, and they basically -- that -- I mean, there's maybe 20 to 25 products in the other category, but 2 in particular did drop somewhat. Fluoxetine was one and terbutaline was the other.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [33]

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Okay. And then are you anticipating those coming back here in Q4? Or is this maybe a new run rate barring some of the launches that you discussed?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [34]

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No, I think it's a onetime hit, if you will, based on some commercial activity in the market. But at least our own projections that we're using for that category have it now going back to the historical levels on a quarterly basis.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [35]

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If I can maybe add, as I noted in our comments, we took the opportunity with the profits that occurred this past quarter to make investments across a number of areas with SG&A and R&D, what-have-you. We also mentioned portfolio optimization, which is a chance to, again, find ways to expand capacity, deal with the pricing environment of the market that can strengthen the business moving forward.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

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Okay. Got it. And then -- and maybe a couple more. Next up, the 60 products that you have, that you plan to launch over the next couple of years, including the 10 here before the end of the year, do you have a TAM for those 60?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [37]

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You mean like target action date?

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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No. I just mean like what's the market size for that bucket of 60 products that you plan to launch over the next couple of years?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [39]

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So we're not projecting out the 60, but to help with these sorts of questions, we did include a slide in our website that kind of buckets out the next 20, right, in terms of the period that we see in front of us. And we refer to our calendar launches in 2019 which of course [nips] into fiscal year 2020, and we'll continue to do that as we move forward. So while we're not commenting on the 60, we have provided guidance on the first 20.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Okay, okay. I've got that here. And then -- and the last one, I guess, if you could talk a little bit about some of the competitive dynamics that you're seeing. You mentioned that you are seeing market participants coming, going. How is that helping -- or are you seeing changes in pricing? Is that -- have we gotten to a point now where you're seeing maybe 1 or 2 players exit the market that had been more competitive in the past? Is that allowing for opportunities to, not necessarily increase the WACC, but maybe you're getting a higher net price? Any disclosures along that line would be helpful.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [41]

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Well, I think I've said before we believe pricing is always product-specific and the function of economics of supply and demand, and we don't make commentary on such trends as we don't see that informative and can't comment on individual price actions. From the supply and demand perspective, there have been a number of product withdrawals in the market from some of the major players, and we had benefited from that.

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Operator [42]

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And our next question comes from Scott Henry from Roth Capital.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [43]

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Gentlemen, I was just hoping to dig into a couple more of the product categories, just really looking for short answers on what's making up for the delta versus the prior quarters. On the downside, the GI category fell by $5 million. How should we think about that? Is it onetime or continuous?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [44]

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It's -- well, there's couple of products that drove that lower in the quarter, Scott. Glycolax was one of them. And that product, I think, will be at those lower levels going forward. And the other is Omeprazole, which had a weak quarter, but I don't expect that to continue for Omeprazole.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [45]

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Okay. That's helpful. And some of the -- the rest were largely [product availability], and some of that maybe where you're putting some of the new products. But I guess, first, cardiovascular, strong quarter relative to Q1. Anything going on there? Or...

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [46]

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Yes. I mean that is -- there are some good news there. I mean, a lot of our new products that we've been launching have been in cardio, things like Metolazone, metoprolol, Vardenafil, Verapamil has been up also strongly. But I mean, so at least 3 of those are new products that have been doing well.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [47]

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Okay. Great. And pain management was also doing very well.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [48]

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Again, a couple of new products, launches of Dronabinol in the last few weeks in that case; and Diclofenac, we launched also contributing to what you're seeing as improvement versus last year's quarter.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [49]

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Okay. And on some of these upticks, does it continue? I mean, is there some quarterly buy-in? Or should we think of kind of that $9 million as a new run rate going forward?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [50]

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I'm sorry. The $9 million being the -- that was the increase. Oh, the pain management. I'm sorry.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [51]

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The pain management was $9 million.

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [52]

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It drops back a little bit, we're expecting, but it's still holding at levels a bit above the historical.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [53]

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One product we didn't mention that's maybe affecting some of these numbers in the categories is obviously Glycolax came off the market, which used to be a higher dollar number, not a lot of gross margin associated with a higher dollar number.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [54]

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Okay. And I guess the only other thing that jumped out, I mean, not particularly material, but contract manufacturing took a significant jump up. Anything going on there? How should we think about that?

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Martin P. Galvan, Lannett Company, Inc. - VP of Finance & CFO [55]

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I think it's a bit of timing, Scott. So we had a strong second quarter. Right now, our own projections have it pulling back a little bit in the third and fourth quarters as compared to the second quarter.

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Operator [56]

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And this concludes the question-and-answer session. I'll now turn the call back over to management for final remarks.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [57]

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All right. It's Tim again. This concludes our call. Thanks, everyone, for joining us today. I'll close out again with a shout out to all of our employees and customers and partners that are so important to the success we have just described. We look forward to sharing our progress on our next regularly scheduled conference call. Good evening.

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Operator [58]

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Thank you, ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.