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Edited Transcript of LCI earnings conference call or presentation 27-Aug-19 8:30pm GMT

Q4 2019 Lannett Company Inc Earnings Call

PHILADELPHIA Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Lannett Company Inc earnings conference call or presentation Tuesday, August 27, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Kozlowski

Lannett Company, Inc. - VP of Finance & CFO

* Martin P. Galvan

Lannett Company, Inc. - Consultant

* Timothy C. Crew

Lannett Company, Inc. - CEO & Director

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Conference Call Participants

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* Elliot Henry Wilbur

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

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Gregory B. Gilbert

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Lucas Grant Baranowski

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

* Scott Robert Henry

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

* Robert Jaffe;Robert Jaffe Co., LLC

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Presentation

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Operator [1]

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

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Robert Jaffe;Robert Jaffe Co., LLC, [2]

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Thanks, Adrienne. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2019 fourth quarter financial results. On the call today are Tim Crew, Chief Executive Officer; Marty Galvan, the company's Chief Financial Officer; and John Kozlowski, who will become the company's CFO upon Marty's retirement at the end of this month.

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 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 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 fourth 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 also included on the company's website is additional information regarding the company's net sales, excluding Levothyroxine for fiscal 2019, historical net debt payments on its Term A and Term B loans as well as a reconciliation of fourth quarter adjusted EBITDA.

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 fiscal 2019 financial results in more detail, followed by John, who will provide the company's fiscal 2020 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, and good afternoon, everyone. You may wish to get comfortable as we have much to review on this call and thus have longer-than-average commentary.

I'd like to start today by extending our best wishes to Marty, who will soon begin a well-earned retirement after a long and illustrious career. The last 8 years, Marty has been a mainstay here at Lannett. He played a significant role in the company's strategic growth and direction, and he's been a good friend and trusted adviser to me. His impact on our company and those he's worked with will be lasting.

At the same time, life goes on. And after a thorough search of internal and external candidates, I'm very pleased to welcome John Kozlowski as Lannett's next CFO, effective August 31. John joined Lannett 10 years ago, and over that time, he has served as our Vice President, Financial Operations and Corporate Controller, Chief Operating Officer, and most recently, as Chief of Staff and Strategy Officer. Thus, his experience at our company is both wide and deep. Moreover, he's worked with Marty for 8 years, so we anticipate a smooth transition.

On one other leadership note, we've announced the appointment of Dr. Melissa Rewolinski to our Board of Directors, that was effective July 1. The addition of Melissa further strengthens our Board. She brings extensive pharmaceutical experience, particularly around research and development. She has held several senior level positions with smaller entrepreneurial companies as well as worked for leading pharmaceutical firms such as Pfizer and Pharmacia & Upjohn.

Turning to our financial results. For both the fiscal 2019 fourth quarter and full year, our net sales, gross margins and implied profitability all exceeded our guidance. For fiscal 2019, we recorded sequential quarterly increases in our product sales when we exclude Levothyroxine. Net sales of this core business grew from approximately $101 million to $105 million to $118 million to $134 million in the first, second, third and fourth quarters, respectively. This progression equates to a growth rate of 33% from the first to last quarter.

And as just noted, for the fourth quarter, our first full quarter without Levothyroxine, total net sales were about $134 million and adjusted net income was approximately $15 million, which equates to $0.37 per diluted share. Our adjusted gross margin for the quarter was about 45%, the highest of any quarter in fiscal 2019 despite the absence of Levothyroxine in our fourth quarter sales. And our fourth quarter adjusted EBITDA was a strong $46 million.

Our fourth quarter did benefit from higher-than-expected customer orders in June in advance of the July 4 holiday, which fell midweek. Even without the better-than-expected sales in the fourth quarter, our portfolio of products excluding Levothyroxine exhibited solid quarter-over-quarter growth.

In the quarter, we successfully launched 4 solid products that collectively contribute to -- continue to contribute to our growth aspirations. These products are: amphetamine IR tablets; methylphenidate ER tablets, that's generic Concerta; dantrolene IR capsules; and aspirin and dipyridamole ER capsules.

Turning briefly to the balance sheet. Since January 2018, we have reduced our total outstanding debt by approximately $187 million, of which approximately $87 million was comprised of voluntary payments. Our cash balance at June 30 was just above $140 million, which reflects our cash position after we purchased about $38 million of our Term A loans during the quarter, but before the $20 million payment we made in July, related to our recent in-licensing of a new Levothyroxine asset.

At June 30, 2019, the outstanding balances of our Term A and Term B notes were $154 million and $164 million, respectively. So debt, net of cash, was $628 million.

Turning to our strategies and investments. Over the last 18 months, we have focused on growing our core business, launching new products while building out the R&D pipeline and expanding our strategic alliances. We have successfully executed on our plan over that period as evidenced by over 40 products acquired or in-licensed and most importantly, the 25 products which we launched. Sales from these products have diversified our revenue base, and we still have about 60 products in our aggregate pipeline, which supports our ongoing so-called launch parade, which is significant relative to the roughly 110 products we have in the market today.

Our plan has been to improve the returns of our in-line portfolio through enhanced supply readiness and portfolio optimization while at the same time addressing numerous near-term opportunities. We will continue to press both components of that plan. However, we have also begun layering in both internal and external products that have a potential to derive significant growth to our business over the medium term and beyond.

In general, these products have a slightly longer road to commercialization, may require investment that's larger than we have typically made and have the potential to cause some lumpiness to our results, at least in the near term. We previously disclosed some of these opportunities, such as insulin glargine, Numbrino, thalidomide and the new future supply and distribution agreement for Levothyroxine. But we have also completed and are working on other transactions for other potentially meaningful products that for competitive and other reasons, we are not addressing publicly at this time. We hope to announce some of those transactions before the end of the calendar year.

Now turning to a couple of quick comments on our cost-reduction effort and our capital structure. First, on cost reductions, we have completed virtually all actions related to our previously announced cost-reduction plan. In July, we completed the last material element of that program, ceasing operations at our Cody API labs business and selling the associated equipment. The ceasing of operations at Cody comes before we achieved any real traction in the pain management business. The fact is we sold very little of such products, of silver lining, perhaps, given the current environment. And while we generally do not comment on pending litigation, I believe it's worth noting that, to date, the company is a defendant in only one opioid lawsuit. That case involves our Kremers Urban subsidiary and a single hospital. Moreover, we believe Kremers Urban was named in error in that suit. We are not named in any other opioid lawsuit.

Second, regarding the capital structure, we continue to evaluate how best to further improve our situation, and at the appropriate time, we plan to refinance our debt. We are now pleased to be working with Crédit Suisse, a firm with extensive experience in leveraged finance markets, to help us assess our opportunities.

Finally, I'd like to provide an update on some of the key products in our pipeline. Our Numbrino NDA continues to progress at the FDA and remains on track for an approval later this fiscal year, and we expect to launch shortly thereafter. We are also on track to qualify our Carmel plant as an alternative manufacturing site, given we have ceased operations at Cody.

Regarding thalidomide, the API matter noted in the Complete Response Letter is still being addressed. Accordingly, we now hope to launch the product in fiscal 2021. Regarding our insulin glargine biosimilar project with HEC, we completed dosing in normal healthy volunteers in a PK/PD study. The analysis is in process and we expect results by the end of next month. Following the analysis, we will request a pre-IND meeting with the FDA to discuss their guidance and next steps for the progression of the drug.

Regarding Levothyroxine. As we recently announced, we formed a strategic alliance with Cediprof to be the exclusive U.S. distributor of our Levothyroxine product. Cediprof's product is approved and currently being marketed by Sandoz. We will take over marketing of the product no later than August 1, 2022. Obviously, we know the Levothyroxine market well and it remains one of the most widely prescribed drugs in the U.S., so we believe this transaction is excellent potential for our company.

Meanwhile, our relationship with Cediprof and their parent company continues to grow. Today, we announced that we expanded the relationship to include an advisory agreement. And under the new agreement, we are providing our expertise to help Cediprof build commercialization capabilities in the USA. While that capability is being built, we also expect Lannett will have an opportunity to market in the U.S. several of the parent firm's oncolytic and hormonal products, including injectables, where they have development and manufacturing capabilities.

And last but certainly not least, I am very pleased to announce today that we have earlier entered into an agreement with Sinotherapeutics, Inc., a China-based specialty pharmaceutical company to be the exclusive U.S. distributor of posaconazole delayed-release tablets 100 milligrams. A few days ago, Sinotherapeutics received final approval from the FDA for the product. We believe this is the first and only known approved AB-rated generic posaconazole and thus we'll be pleased to provide, in conjunction with our partner, this first and lower cost alternative for both customers and patients.

For perspective, the brand's annual U.S. sales were approximately $325 million for the 12 months ended June 2019 according to IQVIA. In the near future, we expect to begin shipping the product, sales of which are included in our fiscal 2020 guidance. We now expect the product to be a meaningful contributor to our business so we plan to issue a press release tomorrow before the market opens.

To sum up, we believe we have made solid progress rebuilding our business, and we feel quite positive about our prospects. We are excited about our portfolio, our pipeline, our growth strategy and our ability to execute against our plans. We have this view despite the challenges and knowns that we and many in our industry face. Our optimism is based on several factors. First, the generic industry provides an important and valuable service by significantly lowering the overall cost of pharmaceutical health care. Generics represent 90% of all pharmaceutical volume but only a fraction of all pharmaceutical sales. To again paraphrase Mark Twain as we did some quarters ago, we believe the news of the industry's travails has been exaggerated. Second, the generic industry today represents a very large opportunity relative to our size, where we have low single-digit aggregate share. And third, we believe Lannett is rather unique. What our company is and what it is not differentiates us from many others in our space.

We're a midsized company so we do not have to hit a so-called home run to have meaningful growth. We are focused on the U.S. market, have technical expertise across multiple disciplines and are very open to collaboration. So we are an attractive business partner to both smaller and larger companies here in the USA and abroad, and we're focused on reliable supply. Our U.S.-based manufacturing footprint and associated flexibility that is free of the global complexity and fragmentation that besets some of our competitors makes it easier and increasingly preferable for customers to do business with us. We believe we can respond quickly to opportunities as they arise.

We believe our coming fiscal year will be a solid one and one from which we'll continue to build. We look to continue the strong growth of our current portfolio that was demonstrated during fiscal year 2019. The growth of that portfolio this past year demonstrates the strength and durability of that portfolio as well as our ability to launch new products. Our goal is to achieve top line compounded annual growth rates of our reset business of over 15% across the next 3 years, starting in fiscal 2020. With our strong base business and multiple shots on goal to add new products, some with significant upside, we believe we are well on our way.

With all of that, I turn the call over to Marty. Marty?

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Martin P. Galvan, Lannett Company, Inc. - Consultant [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 2019 fourth quarter, our first full quarter without Levothyroxine, net sales were $133.8 million compared with $170.9 million for the fourth quarter of fiscal 2018. Gross profit was $59.8 million or 45% of adjusted net sales compared with $76.0 million or 44% of adjusted net sales for the prior year fourth quarter.

R&D expenses were $8.6 million compared with $8.3 million. SG&A expenses were $17.0 million compared with $17.4 million. Operating income was $34.1 million compared with $50.3 million for the prior year fourth quarter. Interest expense was $16.0 million compared to a $16.6 million. Income tax expense was $3.9 million compared with $9.6 million in the prior year period. Net income was $14.7 million or $0.37 per diluted share compared with 25 -- $24.5 million or $0.64 per diluted share for the fiscal 2018 fourth quarter. And adjusted EBITDA was $46 million in Q4.

Turning to our balance sheet. At June 30, 2019, cash and cash equivalents totaled $140 million. During the quarter, we purchased approximately $38 million of our Term A loans. This amount includes $7.3 million of purchases late in May after we announced the purchase of $30.5 million of Term A loans on May 21. At June 30, 2019, our debt was approximately $768 million and debt net of cash was $628 million. We continue to expect to be within our financial covenants up to the maturity date of the Term A loans.

I'll now turn the call over to John to discuss the company's guidance for the fiscal 2020 full year. John?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [5]

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Thanks, Marty, and good afternoon, everyone. For the fiscal 2020 full year, on an adjusted basis, we currently expect net sales in the range of $525 million to $545 million, which would represent a 15% to 19% increase in sales over 2019 full year sales, excluding Levothyroxine. Our net sales guidance reflects a continuation of the growth of our solid base business as well as sales of recently launched products, previously approved but not yet launched products and other products that we recently assumed will be approved and launched in the period.

Adjusted gross margin as a percentage of net sales of approximately 40% to 42%. This is lower than our gross margin in fiscal 2019 due to product sales mix, which includes the loss of Levothyroxine, anticipated competition on some products and the expected launch of a number of partner products which generally have a slightly lower gross margin than internally developed products.

Adjusted R&D expense in the range of $34 million to $36 million, which is consistent with R&D expense in fiscal 2019; adjusted SG&A expense ranging from $63 million to $66 million, which is lower than SG&A in fiscal 2019, largely due to the full year impact of our cost-reduction plan, which has been completed. Adjusted interest expense in the range of $56 million to $58 million, which is substantially lower than in our fiscal 2019, primarily due to the voluntary and required payments we have made to lower our debt and the recent drop in interest rates. The full year adjusted effective tax rate in the range of 22% to 23%; adjusted EBITDA in the range of $145 million to $160 million; and as Marty mentioned earlier, the full range of this guidance is within our financial covenants. And lastly, capital expenditures in fiscal 2020 to be approximately $20 million to $25 million. These ranges incorporate our cost-reduction efforts. As a reminder, the savings will be realized in our cost of goods sold as well as operating expenses.

Regarding the phasing of quarters. We expect net sales, adjusted EBITDA and EPS in fiscal 2020 first quarter to be lower than Q4, largely due to the timing of customer orders related to the July 4 holiday. We anticipate Q1 net sales to be lower by approximately 10% compared to Q4. Over the course of the remainder of the year, we expect sales, adjusted EBITDA and EPS to ramp up quarter-over-quarter.

With regard to gross margin percentage, we expect slight declines over the course of the year with Q1 slightly lower than Q4, again, this is related to anticipated product mix and the impact of partner products. However, we expect gross profit dollars to increase modestly from Q2 through Q4 and operating expenses to remain relatively stable over the course of the upcoming year.

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 the first question comes from Gregg Gilbert from SunTrust.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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I have a few. Marty, good luck, and whatever's next. And John, welcome to you. Tim, can I get you to talk a little bit more about that new distribution deal, the financial terms, how long the deal lasts, perhaps relative margins? I'm sure folks want to understand to what degree it drives the guidance for fiscal '20.

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

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Thanks, Gregg. In general, the relationship has some level of parity to the proceeds and we've guide that the gross margin results of our forecast will be within the range of our historical gross margins of the net portfolio, so it should be an attractive asset. We've been talking about $75 million of annual new product launches over the course of each fiscal year. This product should be a good contributor to it. We have other products planned for the balance of the fiscal year, so somewhat backloaded, so we'll have to see if we could get ahead of that number, but it's a significant agreement. There's some technical things around the product, if you're into extrusion technologies that we hope to not see too many people over the coming months and quarters. And we're excited about it and glad to have it into our portfolio and expect to launch pretty shortly.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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And how long does that deal last, that agreement?

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

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It's 7 years or more. I'll have to double check.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [6]

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Okay. And then I want to clarify on the 15% CAGR. Can you just confirm what the starting point number is? And can you confirm that, that goal does not include any external sort of BD stuff other than the one you just announced?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [7]

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We're kind of basing that on the -- our sales of our base products excluding Levothyroxine, which totals 400...

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Martin P. Galvan, Lannett Company, Inc. - Consultant [8]

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I believe it's 440 -- 457.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [9]

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457 of last year's base business without Levothyroxine and is effective starting immediately for 2020, 2021 and '22. We also do not have any inorganic sort of BD in that. We do have other in-licensed products that are part and parcel of our business plan, whether internal or external, so it's based on those parameters.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [10]

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Okay. And lastly, just -- you've kind of addressed the opioid overhang or perhaps your belief that there's a lack of one or should be a lack of an overhang for your company, but the capital structure plans, obviously, loom large. Can you talk about what options, at least in broad strokes, you're considering in any time line or sense of urgency you have around answering that question?

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

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You're asking the -- which litigation are you referring to? I'm sorry, Gregg, I missed the first part.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [12]

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Yes. I was saying the capital structure improvements that you are talking about, looking for an advice or 2 to look at all options. What's the most important to you? What types of options are you considering? And perhaps any insight into the time line?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [13]

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So thanks, Gregg. Well, we have been thinking about our capital structure pretty much for the last several years. We believe that with our improving performance in the marketplace, our options continue to expand. So we felt it was right to get more engaged in what that would look like in the market relative to what is available to us. Clearly, we have the Term A loans coming due at the end of next year, so pragmatically, it's time now to start exploring those engagements. We did feel it was important to put up a good quarter without Levothyroxine to take over some of the overhang of our viability, which had been out there historically. We believe our bonds are trading closer to par than we've been in the past and it's reflective of cost of capital that's quite reasonable to kind of refinance and re-extend those term loan debts, but we'll work with experts in the space to figure out which mechanic makes the most sense of the very, very many options that exist out there.

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Operator [14]

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And your next question comes from Gary Nachman from BMO Capital Markets.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [15]

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My best to you as well, Marty. And welcome, John, from me, too. So first, with that greater than 15% growth target, are you anticipating any major competitive dynamics for any of your significant products over the next few years that we should think about? And would Levo be included in that in 2022?

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

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Thanks, Gary. We have nothing specifically changing, I would say, as it relates to our aggregate forecast in that sort of growth plan. It's really just the totaling up from the bottom up to all the products that we've got stacked and ranked to launch, offset by the sort of typical erosions we'd participate in our base businesses. We have larger than double-digit erosion if the product has few competitors and particularly high margin for older products that are more eroded. We have lower single-digit percentage erosion. Each product has its own story. So there's no change in our forecasting. It's the blend of the business and the portfolio and the products that we have that we believe risk-adjusted gets us comfortable with a CAGR in excess of 15%. Levothyroxine should come in to that planning period towards the end of the -- of that 3-year period.

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

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Okay. And maybe just on Levo, just could you explain how the arrangement works? And under what scenarios could you start distribution, potentially, earlier than August 2022? And then what was the margin be for that product? What sort of range would they fall into?

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

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So thanks. The relationship, as we've indicated, starts in 2022 on expiration of that agreement. I want to be very clear that is what we're marching towards. As a practical matter, given our own personal experience in this space, when those contract expirations get closer, it can be pragmatic in the interest of customers and patients in the product to think about some sort of orderly transition much as we did previously with our Levothyroxine asset earlier this year. So we haven't any conversations with them about that, but we simply acknowledge it's typically in everybody's interest to do something that is thoughtful relative to patients and customers to avoid disruptions. From a margin perspective, given where we are with that asset and what we'd expect it to look like in future years, we'd expect it to have a lower percentage than it historically had for us and perhaps even little lower than our prevailing gross margins for the current business. It goes back to the comment of its lots of gross margin dollars. We're quite happy to add it.

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

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Okay. And then last quick one. I know you have this $75 million target for new product launches annually. Did you also still have a target of filing about 20 new products per year? And then how many of those would be internally generated versus partnerships that either you have currently or that you're thinking about in the future?

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

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So Gary, we've spoken to thinking about 10 products from internal development and 10 products from external sources. It's how we build our pipeline year-on-year. We do believe that volume is important because there's always some give and takes in any particular product in our portfolio. So we do like to have a number around in that range to have enough shots on goal. That number is obviously less important than the quality and the value of any individual product. So while that might ebb and flow for any given year, we can certainly get to 20 products if we're indiscriminate, but we don't plan to be indiscriminate. And so that keeps us closer to that sort of 20 range, half internal, half external, that gives us good shots on goals. So if any particular product comes up light, we increase the chances and other product comes up strongly. And I think, for example, posaconazole is a great example of that product. Some months ago when we signed it, we thought it would be a good product. But as the market evolved and fewer people showed up and the patents fell away, we think it's going to have more value than we'd have earlier forecasted. For fair balance, we would hope for more sales out of methylphenidate, Concerta, when we first signed up that deal, but more people showed up in the market and that product value, while still significant, has come down. So we always try to think about having shots on goal, some diversity for some ups and downs and net-net, feel comfortable with that $75 million annual new goal.

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Operator [21]

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The next question comes from Elliot Wilbur from Raymond James.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [22]

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Quick financial question, but first I want to congratulate Marty on his well-deserved retirement and to say thank you for all the wisdom and knowledge that you have shared with us over the many years that we were together. Very much appreciate it.

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Martin P. Galvan, Lannett Company, Inc. - Consultant [23]

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Thank you, Elliot.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [24]

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So with respect to inventory trends, for some reason I have in my mind, numbers should continue to move down and quite a bit below what we see in the last couple of quarters given the absence of Levothyroxine. So maybe just a little bit of insight into sort of why the inventory numbers remained flat rather than trending downwards?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [25]

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Thanks, Elliot. This is John. So actually, our inventory did increase going from Q3 to Q4. And what you've seen is it's we have a -- we're strategically increasing net inventory for certain products as we look to capitalize on market opportunity. And for the Levothyroxine product, our returns were lower on that product. So you -- we didn't see a significant decrease as we exited that market.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [26]

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Okay. Then a follow-up financial question for the team as a whole, I guess. Tim, you mentioned the hiring of an adviser to assist with the debt restructuring, but I guess as I think about numbers kind of playing out the next couple of years here, Term As will be paid off as you head towards maturity of the -- or as you head into next year, as you head into the maturity of the Term Bs, I mean, you're going to be well under 4x leverage. Kind of curious based on discussions you had to-date sort of what receptivity you find out there in terms of potentially being able to refinance it at more favorable terms? So I guess I asked the question because obviously the business, you've seen a lot of positive directional movement in the numbers and a lot of favorable trends but certainly hearing lot of commentary from other competitors who have maybe very different issues about how difficult it is to secure debt financing or businesses they'd like to spend or just to refinance some of their maturing debt as well.

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

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Well, thanks, Elliot. Well, that's exactly why we've brought them on board to further understand our options. We thought the cost to refinancing would be prohibitive or simply expensive, notably more expensive than our current capital structure if we try to go to market sooner. As we noted, we believe our sustained performance here the last several quarters and our optimism for the future should allow us some degrees of freedom to discuss those options. We'll work closely with those advisers to figure out what those best options are. There's lots of them. With the maturities being a year and 3-or-so out, practically, we need to address some, so we will. And we always kind of take a look at our Term B loans in the sense of our cost of capital that might suggest could cause us a little bit more than today to get some relief or flexibility in our capital structure. We do pay fair amount of amortization and we'd like some flexibility around that relative to all the opportunities we see to build our business on a daily basis. But we'll work closely with those advisers in the coming months to see what they think and what they hear and keep everybody abreast of any changes. We do feel there is a chance now for us to have a meaningful conversation with folks in that space and we'll see what they have to say.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [28]

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Okay. Last question for you, Tim. In previously talking about revenue expectations from new product launches, you basically guided to sort of a rough range of $3 million to $5 million per product. Obviously, the deal you have today in the Levo deal is significantly above that. Just curious, your perspective, what may have changed or what may have led you to these deals? Is it just good scouting on your part, past relationships or maybe the company just getting a little bit more visibility and you're getting more inbound calls in terms of folks looking for a platform to be able to leverage their development efforts off of?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [29]

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Well, thanks for the question, Elliot. It's a favorite one for us. We will continue to execute on the sort of -- I hate to call them buns and singles, but they're meat and potatoes perhaps of the generic business, which often involves products of a modest size. We think that gives stability to our portfolio. It gives certainty to some of our returns. And what you just articulated is exactly what I mentioned in my opening comments that we're starting to layer in opportunities that take a bit more time, may take a bit more money, but may give a bit better return. If we look over the last year, we weren't really in a position to lay out $20 million of Levothyroxine as we did after we had lost the earlier asset. And of course, at some level of success begets success, we're doing well with our products in the market. We're very, very public about our commitment to the U.S. generic market space. We're not the only ones out there, but not everybody says that. And we have mentality of our cross-functional teams whether its quality, manufacturing, R&D, regulatory, commercial, finance, all of them, we bring those teams to the table, we make a pretty good pitch and a very significant commitment to those partnered products that they care a great deal about that mean a lot to us given our scale. So we're looking to take a couple of swings here and there. We want to remain true to the less volatility of the core oral generic business that we have built our business around the last several quarters. But we do have a little more breathing room, we think, to take some slightly different attacks into opportunities that have a slightly different risk profile, that still we believe executable in the relatively near term. And that's what we'll be doing and we'll hope to hear more from us on that in the coming quarters.

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Operator [30]

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And your 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 [31]

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Marty, best of luck to you. It's really been a pleasure on a personal and a professional level. So thank you for the years.

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Martin P. Galvan, Lannett Company, Inc. - Consultant [32]

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Same here. Thank you.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [33]

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I do have a couple of questions here. First, I may have missed it, but typically, you provide some color on kind of the quarterly trajectory and the next quarter. And I think, if I recall, last first quarter was a tough comp, just trying to get an idea of how we should think about Q1 relative to the full year guidance.

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [34]

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Well, thanks, Scott. This is John. And you're right, last year, Q1 was a decline versus Q4. And we're expecting the same thing in this quarter. We talked a little bit about the timing of orders and its positive impact on Q4 and the negative to that would be in Q1, we're seeing some pressure. We talked about a 10% decline in the sales. But just like 2019, we would expect for the remainder of 2020 to continue ramp up both in sales and EPS quarter-over-quarter.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [35]

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Okay. So you would see EPS up sequentially every each quarter in 2020?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [36]

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Yes. That's how we're looking at it.

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

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And if I can add, obviously, there's a bit of a wildcard here on posaconazole based on how that market develops in the coming months. A lot of other product launches are back ended, so we'll be looking closely how this particular product does relative to overall expectations. But again, as the first and only in the market today, if that sustains for any period of time, there's obviously upside in that space. But we need to see what occurs, who comes out, how quickly we resupply when other folks launch, et cetera. But it is something we're keeping an eye on that could have some positive lumpiness to our results.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [38]

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Okay. And when we model out interest expense because it's a material number, should we think about that as kind of flat throughout the year? Or should we model in K down throughout the year? How -- when you factor in your guidance, how are you thinking about that?

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

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It does come down slightly throughout the year, but it's relatively flat.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [40]

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Okay. That's helpful. And then I did have a couple of questions with some of the categories where there was a little more variability. And I guess, when you look at cardiovascular, $31 million versus $23 million in Q3; and then anti-psychosis, $28 million versus $21 million. Anything different there? Or is that just an example of some of the buying patterns?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [41]

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I think that's a direct example of some of the buying patterns. When we talk about the timing, specifically with the anti-psychosis, it directly affected some of those categories.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [42]

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Okay. And then contract manufacturing, really low in Q4, that again, or it's just variability? Or is that an area that perhaps isn't a priority right now?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [43]

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No, that's actually just another example of timing, just in the opposite direction. In the previous quarter, we had seen an increase and the offset to that was in Q4.

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Operator [44]

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

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [45]

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This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. It looks like you're guiding to gross margin of 40% to 42%, so roughly in line with what we had modeled. Could you maybe walk us through some of the puts and takes that are needed to hit that gross margin?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [46]

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Thanks, Lucas. This is John. When we look at 2020, it's a reflection of our own product mix. We're forecasting some competition for some of our key products, but we also have projections in there for launches of some partner products, which has also been showing some pressure in our margins as we get into the second half of the fiscal year. But as we mentioned, we're forecasting slightly lower margins, our profit dollars should increase throughout the year.

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [47]

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Okay. That's helpful. And I believe that in some conferences over the summer you had kind of talked about new products layering in at like a 35% gross margin. I mean is that still kind of what you're thinking? Or has something changed on that front?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [48]

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Thanks, Lucas. It's Tim here. I think 35-ish is probably right for the blended of all the partnered products. Some are higher, some are lower. I think that's in general close. Now again, a couple of good quarters on our posaconazole or our other products in the pipeline could swing that a bit. But in general, I would think about it as just a bit lower than the company's average, which has pulled up a bit by a couple of higher-margin products that we have currently in the portfolio.

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [49]

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Okay. That makes a lot of sense. And then one final question here. The contribution from the Sinotherapeutics agreement that you announced on this call, I mean, how much of that was factored into the guidance that you just provided?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [50]

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So again, Lucas, it's Tim here. We think about our new product launches adding $75-ish million on an annual basis, and posaconazole would have been one of those. It's come a bit earlier and at a bit higher rate than we would had in our original forecast. But the year is young and there is a bunch of backloaded products that could slip or not be as valuable or become more valuable. So we're not really changing at this point our $75 million. It's how we get to the guidance that we've provided. We're happy to be a bit ahead of it for this particular product. Although as I noted earlier, our products that we launched just a few weeks or months ago on methylphenidate and aspirin/dipyridamole, both good products but not as valuable as you once hoped they would be. So it really is about this basket of enough shots on goal and enough interesting products that, on balance, we feel comfortable for $75 million. We don't want to say because these products are going to be x million dollars higher we're going to add to the $75 million till we get closer to the end of the year's experience.

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Operator [51]

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

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [52]

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All right. It's Tim again. I'll close out with our shout out to all of our employees, customers and partners, so important to the success we have just described. We look forward to sharing our progress at our next regularly scheduled call. Have a good evening.

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Operator [53]

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