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Edited Transcript of LCI earnings conference call or presentation 5-Feb-20 9:30pm GMT

Q2 2020 Lannett Company Inc Earnings Call

PHILADELPHIA Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Lannett Company Inc earnings conference call or presentation Wednesday, February 5, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Kozlowski

Lannett Company, Inc. - VP of Finance & CFO

* 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

* 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

PondelWilkinson Inc. - Principal and SVP

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Presentation

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Operator [1]

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Welcome to the Lannett Company Fiscal 2020 Second Quarter Financial Results Conference call. My name is Adrianne, 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. Robert Jaffe, you may begin.

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Robert Jaffe, PondelWilkinson Inc. - Principal and SVP [2]

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Thanks, operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's Fiscal 2020 Second Quarter Financial Results. On the call today are Tim Crew, our Chief Executive Officer; and John Kozlowski, 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 provision 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 2020 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.

This afternoon, Tim will provide brief remarks on the company's financial results as well as comments on recent developments and associated initiatives; then John will discuss the financial results in more detail, including 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. In some ways, our second quarter performance serves as a microcosm of how we manage our business in our competitive industry. Let me explain. 2 years ago, we implemented a strategy designed to improve our in-line product performance and supplement our internal product development efforts with product acquisitions and in-licensing agreements. This strategy has helped expand our portfolio, add new revenue streams and diversify our product offering. In short, we injected near-term sales and profits into our business. This strategy has helped mitigate the impact of regular competitive pressures, and we continue to demonstrate the success of our strategy with well above-market revenue growth.

With that as a backdrop, let's take a closer look at our fiscal 2020 second quarter financial results. Net sales of $136 million were higher than expected, yet adjusted gross margin percentage for the second quarter was lower than we expected. Nevertheless, with a higher sales, gross profit dollars were only slightly lower than anticipated.

Now comparing the second quarter results to our first quarter, both the top line and net income grew meaningfully. This is largely due to a full quarter of sales of posaconazole, a key product that we launched late in our fiscal 2020 first quarter as well as the launch of 7 new products during the second quarter. The adjusted gross profit was lower, in part due to a changing mix of sales, including lower fluphenazine sales related to the timing of customer orders and loss sales related to the ranitidine recall in our cocaine solution withdrawal. The puts and take in this quarter illustrate, on one hand, our success in launching new products and, on the other hand, the various challenges inherent to our industry.

Turning briefly to our full year guidance. We have revised several elements in our outlook. The changes include higher net sales guidance and lower gross margin. Our expected adjusted EBITDA, however, remains unchanged. This guidance is based on certain assumptions, including: first, the continuing durability of fluphenazine and posaconazole sales. You may recall that we previously expected to see new competitors for both products some time during the second half of our current fiscal year. We have reassessed the market for fluphenazine and now believe no new competitors are likely until the beginning of our next fiscal year. While for posaconazole, we are forecasting competition to occur late in the fiscal year.

Another item of note to our guidance is the planned launch of 10-or-so additional products through the remainder of this year. John will discuss our financials as well as our revised guidance in more detail shortly. Now regarding our "launch parade." As we have said, our calendar launch year was back-end loaded for this fiscal year. After single but important posaconazole launch in Q1, we have launched 7 products in Q2, including prednisone, cyproheptadine, clobazam, Venlafaxine ER, Lidocaine 4% and 2 dosage strengths of ABC capsules -- excuse me, BAC capsule. And as just noted, over the balance of the fiscal year, we are planning to launch an additional 10-or-so products.

Now for an update on some of the key products in our pipeline. About 3 weeks ago, we received FDA approval of our 505(b)(2) NDA for Numbrino, a branded local anesthetic product. Note, we have seen news stories that incorrectly describe the product as a nasal spray. In fact, the product is a nasal solution. Numbrino is the first NDA approval in the company's history to include both safety and efficacy clinical trials.

This is a major achievement for Lannett. I'd like to acknowledge our product development teams, regulatory teams and operation teams for their perseverance and hard work over many years. We are producing the product at our Carmel, New York facility and expect to ship the product shortly. Our near-term goal is to regain customers that used our previously sold cocaine hydrochloride product, position ourselves as a consistent and reliable supplier, and we are now, of course, analyzing marketing and managed care opportunities based on our approved label.

We further expect to launch generic Adderall XR, propranolol LA and methadone oral concentrate in the coming months. We expect these and several other products to continue to contribute to our aggregate results.

Now regarding our internal pipeline, we have been working hard at improving our effectiveness and tuning our product selection process. We are now choosing products with notably more expected future value based on our expanding capabilities, and we currently have more than 20 products in development. We also have about 14 additional products that Lannett has earlier filed with the FDA, plus another 7-or-so products that are approved and pending launch.

An encouraging hidden statistic in our recent average FDA submission to approval time lines for approved ANDAs has been a reduction by more than 50% to 15 months. The statistic relates to just 3 files that are approved in FY '19 from those filed in just FY -- excuse me, this statistic relates to just 3 files that are approved in FY '19 from those files submitted in FY '18 and is compared to a larger set of approvals that occurred in earlier years. But we believe that it is an indicator of our improving [file] quality in R&D throughput.

Turning to some of the larger and more sustainable products in our partnered pipeline. In December, we announced positive results from our human PK/PD clinical trial or insulin biosimilar project with our partner HEC. As a reminder, HEC is making substantial operational investments in their global insulin platform. Insulin glargine is one of the largest addressable U.S. markets in which Lannett has ever potentially participated with reported sales of greater than $6 billion. The study, which compared HEC's insulin glargine to US Lantus met all primary endpoints. We expect to send to the FDA our briefing book over the next few weeks and meet with them later this fiscal year to review the development plan for what additional studies are needed based on an in-depth review of the biosimilarity data we have in hand. As you may be aware, the FDA has made several announcements this past year that seek to facilitate biosimilar filings. So we look forward to sitting down with them soon.

We also remain excited about the other significant and sustainable product opportunities that are progressing in our pipeline. Generic ADVAIR, another project with our partner, Respirent, is investing heavily in their global program, is another one of the largest U.S. markets in which Lannett has potentially participated. The product is currently in confirmatory PK/PD trials, which are proceeding nicely. We expect to file that product ANDA later this year.

And last but not least, we currently expect to launch an improved levothyroxine product, currently sold by another party, no later than August of 2022.

In a slightly different vein, we have been pleased with our progress on some litigation matters and have a brief update. The first is related to a class action lawsuit filed in October of 2018 against the company and 2 of its officers. The court granted preliminary approval of the settlement in July of 2019, and a hearing is scheduled in a few days to request the court's final approval to settle the litigation. Under the proposed settlement, the company has agreed to pay $300,000 without the admission of liability.

The second update is related to some shareholder derivative lawsuits filed last summer against certain former and current officer and Board members of the company. In this matter, we have reached an agreement in principle to resolve the consolidated and related cases. The settlement, which is subject to court approval, proposes Lannett adopt some new corporate policies and pay $600,000 in legal fees in exchange for release of all liability. Bringing these cases to a conclusion should help reduce some recent growth in our legal fees, and we continue to look for ways to resolve other pending litigation on terms acceptable to the company.

Now looking beyond our quarterly variances, daily operational discipline and recent growth, the company has begun to refresh its 5-year strategic plan on where and how to compete as a mid-sized company in the large and growing U.S. generic medicines market. We have set for ourselves an ambitious goal to become a $1 billion health care company. This means we need to grow at about a 15% CAGR.

As we estimate the future value of the products we have now and what we expect of our existing pipeline, particularly if we are successful with the more sustainable assets in development and what more we need to do, when we add all of that up, we believe we are well on our way to achieving our goal. We believe we are positioned for success with our dynamic teams, our creative partnerships, our operational discipline and especially our organizational nimbleness and reliability, which is greatly facilitated by a made in America foundation, far less encumbered by the global complexity that plagues many of our competitors.

To sum up, we reported net sales and net income growth in our second quarter versus the preceding first quarter based on strong sales across multiple product categories. We successfully introduced 8 new products in the first half of fiscal 2020 and expect to launch approximately 10 more in the second half of the year. The planned launches including Numbrino, our first NDA-approved product to include full clinical trials. Our adjusted EBITDA outlook for the full fiscal year 2020 remains unchanged. We have raised net sales guidance based on the strength of our existing product offering and expected new product launches. We've also slightly lowered our expectation for gross margin based on our emerging sales mix and competitive pressure for certain products. We continue to advance our pipeline of sustainable large market opportunity products, and we continue to work on additional opportunities to build strategic alliances with partners that have complementary products and capabilities. Again, our goal is to become a $1 billion health care company and achieve top line compounded annual growth rates well in excess of the industry.

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

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [4]

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Thanks, 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.

A quick note before I begin. As most of you know, in March of last year, our supply agreement with Jerome Stevens for levothyroxine expired. So in addition to providing year-over-year comparisons, I'll include some color comparing our second quarter financial results to our fiscal 2020 first quarter.

Now for the financial results on a non-GAAP adjusted basis. For the 2020 second quarter, net sales were $136.1 million compared with net sales for the second quarter of last year of $193.7 million. Excluding levothyroxine, net sales in Q2 of last year were $105.2 million. Q2 net sales increased by $8.8 million over Q1 net sales of $127.3 million, largely due to a full quarter of sales of posaconazole as well as higher sales across several other product categories.

As Tim mentioned, we launched 7 new products during Q2, generating only a partial quarter of sales. Fluphenazine sales were lower in Q2 than Q1 due to the timing of orders. However, we expect Q3 and Q4 sales of our antipsychosis product category to be closer to Q1 sales of approximately $28 million.

Gross profit was $50.2 million or 37% of net sales compared with $86.0 million or 44% of net sales for the prior year's second quarter. Again, the second quarter of the prior fiscal year included significant sales of levothyroxine, a product that had a higher-than-average gross margin.

Compared with the first quarter gross margin of 41%, our gross margin in Q2 declined, largely due to sales mix, with lower sales of fluphenazine and no sales of our withdrawn cocaine topical and ranitidine products. All 3 of these products are high gross margin products. Gross profit dollars were down only slightly.

Interest expense decreased to $13.1 million from $17.1 million in last year's second quarter due to repayments of Term A and Term B loans as well as the lower fixed interest rate on our senior convertible notes. Net income was $11.7 million or $0.27 per diluted share. This compares with net income of $33.6 million or $0.86 per diluted share for the fiscal 2019 second quarter. Compared with the first quarter net income of $8.8 million, net income for the second quarter increased by approximately $2.9 million. And Q2 adjusted EBITDA was $35.8 million, an increase from $35.1 million in Q1.

Turning to our balance sheet. At December 31, 2019, cash and cash equivalents totaled approximately $119 million. Our outstanding debt at the end of the quarter was as follows. Total debt was approximately $741 million, and debt net of cash was $622 million. And net secured debt was $536 million. We continue to expect to be within our financial covenants up to the maturity date of the Term A loans.

Regarding our refinancing activities, we continue to evaluate opportunities and market conditions to refinance our secured debt. As a reminder, this past September, we completed a senior convertible notes transaction, which, among other things, enhanced our capital structure and provided greater financial flexibility. In addition, our current cash position exceeds the outstanding balance of our Term A loans, which mature later this year in November. As of December 31, 2019, the balance of the Term A loans was approximately $63 million. At June 30, it will drop down to approximately $49 million and by the maturity date, the outstanding balance of the Term A loans will be approximately $42 million.

Turning to our guidance. We have raised our net sales and lowered our gross margin estimates for the full fiscal year. We also revised slightly downward our interest expense and tax rate. The net result of these changes is not expected to have an impact on our estimated adjusted EBITDA for the full fiscal year. Our guidance is as follows. Net sales in the range of $530 million to $550 million, up from $525 million to $545 million. Adjusted gross margin as a percentage of net sales of approximately 39% to 41%, down from approximately 40% to 42%. Adjusted R&D expense in the range of $34 million to $36 million, unchanged. Adjusted SG&A expense ranging from $63 million to $66 million, unchanged. Adjusted interest expense in the range of $51 million to $53 million, down from $54 million to $56 million. The full year adjusted effective tax rate in the range of 21% to 22%, down from 22% to 23%. Adjusted EBITDA in the range of $145 million to $160 million, unchanged. And lastly, capital expenditures to be approximately $20 million to $25 million, unchanged.

Regarding the phasing of the quarters, we expect net sales in Q3 to be flat to slightly lower than Q2 and increasing in Q4 due to new product launches. With regard to gross margin, we expect Q3 to be slightly higher than Q2 based on product mix. We expect EPS and adjusted EBITDA in Q3 to be in line with Q2 and increasing in Q4.

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 Matt Hewitt from Craig-Hallum Capital.

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

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Thank you for providing the update and especially the guidance cadence here for the back half of the year. I guess for my first couple of questions, regarding Numbrino, the launch is pending soon. How quickly do you think you can get back to where you were prior to pulling the product from the market?

And then follow-up to that is given your success with the trial process and some of the nuances of getting that product to market, does that give you confidence to seek other similar-type markets where you would have to go through a similar process?

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

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Matt, thanks for the follow-up. We expect to launch Numbrino in the next few weeks at the -- on the long end of the range, and our target, as we indicated in the prepared remarks, is the recovery of former customers that used to purchase the unapproved product, again, focusing on our long history of reliable supply and high product quality. We will look to explore other opportunities afforded by the approved label in due course. But our expectations in the fairly near-term is to get back into the range of perhaps $1 million a month for that product.

As it relates to other sorts of 505(b)(2) products, we are primarily focused in the oral generic space, as we have often discussed, and have been looking to work with partners for other technologies and other capabilities. For example, the biosimilar filings that we're working with on HEC. So I'd expect, on a go-forward basis, we're open to products that are outside of traditional oral generics, which is the mainstay of therapy here in the United States, but we'll do it very carefully and probably only with a partner in areas that have a retail orientation to that brand.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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That's very helpful. And then maybe one more for me, and I'll hop back in the queue. Obviously, there's been a ton of news here recently about coronavirus. I'm just wondering if you could detail for us maybe any exposure that you have, either on the revenue side where -- either from a hit perspective or more importantly, I guess, whether or not there's some opportunities for you to take advantage of -- to kind of help with the situation, and from an API supply standpoint, whether or not there's any potential for impact there.

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

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We're in touch with all of our key suppliers, both finished dose and API. We, of course, start with an expression of sympathy and support regarding the situation in their home market. But while there has been some travel restrictions, including our own teams, all of our suppliers have indicated no concerns with any delivery interruptions over the near-term under current expectations.

As a practical matter, these outbreaks, as awful as they may be, typically will last some number of weeks, but our inventories last some number of months. And those inventories exist, and in fact, at some level, to be able to cover such sporadic and unpleasant events like these.

We will notice in terms of helping the other direction, we have the only ANDA of a lopinavir/ritonavir solution in the market, but it's a fairly small market. We have a partner considering it for import. But on a global stage, there are obviously numerous forms of these actives available globally. And so I wouldn't expect to see any material change to our opportunities from this outbreak. We're more interested in supporting our partners and continuing to supply the products we have in the market.

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Operator [6]

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And the next question comes from Gary Nachman from BMO Capital.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [7]

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Tim, first, what's the status of ranitidine? When you might be able to bring that product back to market? Are you assuming it will be this year? And are you on track for the $75 million contribution from new products this year? And then how much did posaconazole contribute in the quarter? You gave us that number last quarter. That would be helpful.

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

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So Gary, for ranitidine, we are still evaluating API that would meet the FDA requirements. But quite frankly, we don't have expectations of relaunching that product anytime soon. We think that the market may move a bit to other therapies. We'll continue to monitor that based on the FDA's guidance and expectations and the underlying chemical structure of that product. So it's not something that we anticipate returning to the market under the current condition and situation.

Regarding our new product launch goal, we have often stated that we look to launch 20-or-so products a year with $70 million, $75 million of value. We're clearly well on target for that goal this year. We're launching numerous single digit million-dollar products, but I've also launched a much larger posaconazole. So we're pretty comfortable that we'll be well within that achievement this year. It's why we remain on track for our guidance despite other challenges that occur.

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

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And that -- yes, the posaconazole, yes?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [10]

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Posaconazole itself is around -- this is John, it's around $14 million. You could see the infectious disease has increased in Q2 from a full quarter of posaconazole.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [11]

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Okay. And are you expecting that it's going to stay sort of at that level over the course of the year? So I mean, if I do the quick math, it seems like a big chunk of that $75 million is coming from posaconazole this year. Is that the right way to think about it?

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

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It is a big chunk of the total. There are 20 products that have single to mid-digit, single to upper single digit millions of contribution over the course of a 12-month horizon. Certainly for this year, posaconazole will be the largest contributor to that $75 million product goal. We've all -- we've talked about a portfolio of launches that have those puts and takes regarding its forward-looking expectation. We are currently, in our guidance, expecting a competitor late in the fiscal year. I should be clear, we don't have any knowledge of an imminent competitive threat, but from the risk adjusting we do in our forecast, that's where we placed it. If that forecast assumption is optimistic, we'll have more pressure. If that forecast assumption is conservative, we'll have upside.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [13]

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Okay. And then just last question, Tim, with your target of a 15% revenue CAGR over the next 5 years or so, how should we think about gross margin trending over that period of time to the extent that a portion -- probably a decent portion of that growth is going to come from partnerships? So we saw a little bit more weakness in gross margin than we thought in the second quarter. So how are you thinking about balancing that revenue growth with the gross margin and just making sure that you maintain it at a certain level?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [14]

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Yes. So as we've stated on numerous calls, we've always tried to focus fundamentally on gross margin dollars. That being said, we obviously prefer to have more wiggle room with our gross margin percentages. But in general, over the planning period, we would think that our gross margins with a percentage of partnered products of some scale would be in the 30s at some point over a protective period of time. I think that sort of margin, to my mind, is reflective of industry, of a balanced portfolio. And again, the margin dollars could be substantial in some of these partnered products, even if the margin percentage is not as high as some of the historical gross margins we've delivered.

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

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Okay. And I mean, can I push you a little bit, when you say the 30s, is mid-30s the place where it could settle over the course of time? Is that a reasonable place to think about it?

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

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I think if we're a $1 billion health care company with a 35% gross margin, we'd be pretty pleased. Yes.

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Operator [17]

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And our next question comes from Gregg Gilbert from SunTrust.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [18]

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I want to start with gross margin percentage, recognizing there's a mix effect that affected the quarter. John, can you talk about anything else going on in gross margin that might be more permanent in nature? Not related to mix, permanent or temporary, let's say, write-downs on inventory, temporary or more permanent sort of pricing that you won't get back. Maybe talk a little more about the non-mix effect within gross margin?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [19]

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Sure, Gregg. Well, when we look at Q2, it really was sales mix. Our decline from 41% in Q1 was related to the fluphenazine, which we talked about, but also the removal of the cocaine solution and the ranitidine. As we talked a little bit earlier, we expect gross margins actually to come up a little bit in Q3, and then again in Q4. So when we look at Q2, it really was just a, overall, a result of our mix of products.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [20]

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Okay. And then, Tim, on your $1 billion comment. I want to ask you about gross margin, but I will ask you about the $1 billion. Maybe you could further characterize how you get there? I'm sure folks are wanting to understand how much of that is bird in hand stuff you have or agreements you have. Maybe you could put a little more meat on the bones as it relates to your ability to get to $1 billion in 5 years, which is surely much higher than most folks are modeling?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [21]

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I hoped I was maybe clear enough in the prepared remarks. But listen, we are running ahead of the 15% CAGR, as we've noted for this year. And the pressure on that CAGR is really on the outer years as you start compounding, which is at the same time, some very large market to move new products that we have in our portfolio, I believe, will come online. I mean, we're not going to assume it's the only way to get there, but the contribution of an insulin glargine is successful, makes that CAGR conversation pretty much not a consideration or concern. It's really more about building out a diversified portfolio in terms of that CAGR or that product taking longer than you might think. We are looking to add additional products in that space with our partners in that arena. As we said in the prepared remarks, when we look at what we have in hand, what we look at in our development pipeline, the quality of that developed pipeline, the progression of that pipeline, this isn't taking a swag at some percent of the total market. It's built on a product-by-product basis with some gaps to go to achieve those goals along the way. Some of those gaps involve products we have not yet filed, but we will file over the 3 or 4 years that need to come into our portfolio and launch and get some share. So we feel it's a rallying cry for the organization that is reflective of the capabilities we're building, the size of the market we operate in, and the number of projects we have in hand and the number of products we see line of sight to. So that's why we put that out there as our goal.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [22]

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Okay. Maybe, Tim, I could get you lastly to just comment on industry conditions at the moment after a couple of years of extreme consolidation of the buyer set? What's the latest tone that you're sensing in terms of the intensity of pricing pressure and frequency of bids, et cetera?

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

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Well, I've made the comment on several occasions that we don't feel what we observe in our portfolio is indicative or useful to an industry statistic. We've always believed, I continue to believe, that the pricing pressures we experienced are relevant to the products in our mix in the portfolio. And I believe that pricing pressure has always been related to the number of competitors that are on the products in which you compete with. So we haven't seen any change in that dynamic. We have better quarters and worse quarters based on competitive activity or lack thereof as it relates to that portfolio.

On the other side of it, in terms of more strategic conversations, we still don't see a lot of strategic buyers in that market, or at least, not sellers willing to provide their assets at the price point a buyer might be interested in. And we see perhaps even fewer strategic partners. So from our perspective, our offering continues to resonate well with both existing and new partners. And I note that most of our partners are looking to do more with us, which means less with somebody else, which further helps our relative outperformance in the market. So at the end of the day, I think the market looks similar, and it's always been tied to competitors. You point to a supply disruption, I will point to improved pricing. You point to a supply glut, I will point to supply declines. And that is a portfolio by product conversation, to my view.

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Operator [24]

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And our 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 [25]

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Tim, I just want to go back to your earlier commentary around the outlook for fluphenazine. Just curious, what gives you increased confidence that you're not going to see additional competitive entries before the end of your fiscal year? Is that based on feedback from customers? Or is there something more related to API or the regulatory pathway that maybe gives you that visibility? And then just to extend that a little bit and sort of talk about, are there any potential more significant longer term barriers to entry that might limit the number of eventual competitors in that particular product?

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [26]

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All right. Elliot, I want to restress that we have smooth sailing today with fluphenazine. We remain the only ANDA on the market. Our competitive intelligence is tied to competitive intelligence. It's not based on some underlying gotcha, relative to structural inability for competitors to compete. It is based on -- we're sitting here in January, we are constantly searching, trying to understand the status of other files. And our vision to that is not being pushed out very many months. We're talking June, July as opposed to where we sit here today in January. So again, we're not aware of an imminent threat, but we don't see enough structural reasons to preclude people from coming in due course. And there is always some drumbeat out there of potential players. We just don't see them in the immediate near term.

The product, by the way, does have some high handling requirements that is a little bit different. In our plant, we were gowned up and have oxygen masks right for that product. So it's not just simply made in a regular oral room, but it doesn't have any sort of inordinate technological barriers. So we are pragmatically expecting, as we've always done, that our goal to grow is to launch new product launches, because inevitably we'll have a decline of our in-line portfolio. We see that coming in the relatively near term, but not tomorrow.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [27]

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Okay. And I want to ask you an additional competitive intelligence question around the ADVAIR opportunity, and specifically with respect to Sandoz' recent decision to withdraw their filing and terminate that program. I guess quite surprising to many of us who've followed that for several years now, considering their investment, and we seem to be sort of well past a go/no-go decision on that, not knowing, of course, what the FDA asked for. But just wondering, based on the eliminated amount of time and information that's probably emerged since that announcement, if there's been anything from your perspective that might lead to some learning lessons around what you may do with your filing going forward.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [28]

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So with regard to ADVAIR, we are working with an incredibly experienced team on the Respirent side. And they're working with the team that's looked at a lot of applications from a lot of different companies over the years. So we feel we have a pretty good sense of the pinch points in what's required to develop this asset. We may be a small company, but Respirent's investing very heavily in the infrastructure issues that are necessary. And we're impressed with the progress that they understand. I think we've talked earlier that the clinical programs are always a little less of the trick here, and I think the European filing that Sandoz had out there was based more on the clinical efforts they have done in terms of efficacy clinicals. It's always been the PK/PD that has been the challenge and the guidance that's come from the FDA in these sorts of products.

We have always felt since we've signed up with these folks that they're one of the players, and we're pleased to see that market tightening. We believe we may continue to gain ground in some of the folks that are in front of us. We don't think we're next up in the market, but we think we could be much closer to the competitive sets that are more pronounced and more visible. So we're excited about the position we hold. We'll hopefully have some good news to report in the coming quarter regarding our PK/PD, and then we'll be able to better assess where -- what our position is in the competitive lineup. But we're feeling pretty good that we've got the right partner and the right product and the right plan. But time will tell.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [29]

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Okay. And just one final question, going back to some of your early commentary around the Numbrino relaunch and the opportunity there. I guess the last couple of quarters, you guys have consistently sort of gauge expectations around the asset in terms of your ability to essentially recapture the sales that the company was generating from the unapproved product. At various points along the way, during the development of this asset, the company had indicated that there were potentially much larger opportunity around the product via some form of promotional strategy. And you guys -- doesn't seem to be something you guys have kind of fully embraced as of yet. So I'm wondering if you've really had the kind of the chance to sort of fully vet a potential direct sales force, enhanced promotional strategy tied to this asset versus just what you have talked about more recently in terms of just kind of getting back to where you were.

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Timothy C. Crew, Lannett Company, Inc. - CEO & Director [30]

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So Elliot, I think some of the higher potential numbers that someone might speak to in the past has looked at the number of uses of this sort of product in that sort of space. But as an approved product, you need the label to support it. And I think to get to the more significant percentages that have in one point in the company's history have been considered, you need to invest very heavily in clinical trials that would be successful to achieve an indication to allow promotion that would achieve this higher penetration of a share of market. So we're a bit more pragmatic, again, on existing use at a fairly low share basis, focused initially on our training partners that we believe will appreciate our history of reliable supply and a high-quality product, to recover something that for us is still a high-margin product that has durability to it. So we're pleased about that sort of component of the opportunity.

We do think there can be some opportunities to think about how this product is used within its label, how it gets reimbursed at the operating level of the hospitals or the surgeons that are using the product that might facilitate an easier utilization of the product. But we are early in those stages and our forecasts are currently tied to a number that is more reflective of our historical past. And once we have that wrapped up and locked and loaded, we will look to -- for incremental investments. But we do want to modify those expectations over time.

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Operator [31]

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And the 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 [32]

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A couple of questions. Starting with some of the line items. Antipsychosis was a little weaker than it has been in the past couple of quarters. How should we think about that going forward? Do you expect it to -- and I'm just talking about this year. I recognize the fluphenazine is in there longer term. But how should we think about that sequentially in the next couple of quarters?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [33]

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So for the antipsychosis that came down in Q2, we talked about that being really about the timing of orders. We expect Q3 and Q4 to be more in line with Q1 at around $28 million.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [34]

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Okay. And then other lines that jumped out at me, gastrointestinal, stronger than any of the past 5 quarters, and it was strong in Q1, and it's even stronger in Q2. How should we think about that for the rest of the year? Should it maintain those levels? Or drop back down?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [35]

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That actually will be dropping back down slightly. We saw some strong sales, specifically from like Pantoprazole in Q2. But we're modeling that to come down in Q3 and Q4.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [36]

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Okay. And then just a logistical question. As far as how you calculate the EPS with the convert in there or the interest add back, what kind of adjustment are you making to adjusted net income to get to your EPS? Just -- and should that be relatively constant going forward?

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [37]

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Yes. On the EPS calculation, it's -- the adjustments are really on the overall share count, adding back the effect of the convert and then backing out the interest associated with the convertible note. We could actually go through that if you like in through greater detail, but that's essentially how you get to the adjusted EPS.

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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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Yes. And I expect to see that in the 10-Q, obviously. But could you just tell me what the back out of interest is? Just for calculations, just to get a sense of...

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John Kozlowski, Lannett Company, Inc. - VP of Finance & CFO [39]

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For the quarter?

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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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Generally, yes.

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

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It's about $1 million.

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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. Great.

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Operator [43]

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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 [44]

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All right. It's Tim again. I'll close out with our customary shout out to our employees, customers and partners working hard, so hard, to provide high-quality, low-cost medicines for patients. We look forward to sharing our progress on our next call. Good night.

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Operator [45]

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