Lannett Company Inc (LCI) 2009 Q1 法說會逐字稿

Good afternoon. My name is Tim and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal first-quarter Lannett earnings conference call. (Operator Instructions).

I would now like to turn the call over to Mr. Jaffe. You may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2009 first-quarter financial results. On the call today are Arthur Bedrosian, President and CEO, and Brian Kearns, Chief Financial Officer.

First, some housekeeping before we start. Please be advised that this conference call is being broadcast live on the Internet at www.lannett.com. A playback of this call will be available for three months and may be accessed on the Internet at Lannett's website.

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

With that said, let me turn the call over to Arthur Bedrosian. Arthur?

Thank you, Robert, and good afternoon, everyone. I'm pleased all of you could join us today to discuss our fiscal 2009 first-quarter financial results. I will begin with a brief review of the quarter, then turn the call over to Brian to provide a more detailed description of the financial results, and then I will make some concluding remarks.

For those new to our Company, Lannett is the oldest generic drug company in the United States. We manufacture, market and distribute a variety of prescription medications in tablet, liquid, topical and capsule forms.

In April of last year, we acquired Cody Laboratories, a small, privately owned manufacturer and supplier of bulk active pharmaceutical ingredients, called APIs in the industry. The acquisition of Cody will help facilitate growth and expand our product offering.

We recently announced that Cody received an import license for CPS, which is concentrated poppy straw, from the Drug Enforcement Agency. The import license provides us with the capability to enter the pain management market, which has relatively few competitors and favorable demographics.

Cody Labs has resolved its FDA warning letter, which occurred before the acquisition, and resolved its latest 483, which had four minor observations. We expect to begin marketing hydromorphone, our first API product, later this year, and plan to introduce four additional products beginning early in calendar year 2009.

Looking at our topline growth in the quarter, most of it was fueled by strong sales of our base business products. In fiscal 2008, we received six ANDA approvals which could help fuel our future performance.

With that, I would like to turn the call over to Brian Kearns. Brian?

Thank you, Arthur, and good afternoon, everyone. For the first quarter of fiscal 2009, net sales grew to $25.6 million from $17.5 million in the last year's first quarter. The growth in net sales was primarily due to strong sales of our base business products.

Net income was $1.2 million or $0.05 per diluted share versus net loss of $127,000 or $0.01 per share in last year's fiscal first quarter. Gross profit increased to $9 million or 35% of net sales compared with $5.1 million or 29% of net sales for the prior-year first quarter.

Research and development expenses were $1.9 million compared with $1.3 million in the same period of fiscal 2008. Selling, general and administrative expenses were $5 million compared with $4 million in last year's first quarter. The increase in SG&A was primarily due to litigation expenses related to our current patent challenge.

Overhead associated with the April 2007 acquisition of Cody Labs were included in both quarters.

With that brief financial overview, I would now like to turn the call back over to Arthur. Arthur?

Thank you, Brian. We have made tremendous progress in positioning the Company for future growth. We've successfully completed plant expansion, established strategic relationships and acquired a raw material supplier.

Most importantly, we have done an excellent job of building our pipeline, which now includes a number of ANDAs pending at the FDA and a larger number of additional product candidates in various stages of development. Given the high cost of healthcare and current tough economy, we believe lower-cost generic drugs are even more attractive to folks looking to lower expenses where they can.

Let me briefly address a few topics before we open the call to questions. Our top line increased in part because sales of some products grew due to regulatory issues that our competitors encountered. It is a testament to our employees and flexible manufacturing capability that we were able to address this market situation.

We are currently involved in a patent litigation lawsuit. Our case is strong and we believe we will prevail. With regard to our prenatal vitamin, we are marketing the product and are prepared to make any changes to our formulation as required.

We believe Lannett is well positioned for growth and its future looks bright. With the time available, we would like to address any questions you may have. Operator?

(Operator Instructions). Kevin McDevitt.

Congratulations, guys. It looks like you really turned a corner. When you look at this quarter, it looks like a record quarter, going back to 2002, and a run rate of around $100 million. I guess the first question would be, is this sustainable, and what do you see as far as sales growth for the remainder of this year and next?

That is a great question. As you know, we don't get into a lot of details about predicting the future, primarily because it is so hard to do in this business. We would like to have a very high level of recurring revenue, but this business is a little bit lumpy and it doesn't seem to play out that way.

I can say that based on everything we know now, we think that the last three months' performance is very achievable going forward. But at the same time, some of the strength in our base business that exists today may not continue six months or a year out into the future. But based on what we know now, we're very optimistic and excited about where we're going.

Okay. I have a couple other questions. Second question was with regard to the prenatal vitamins. Can you say what was -- this quarter, did this include the sales of the vitamins?

This quarter, there were no sales of the prenatal vitamin included in those numbers.

Okay. And with regard to the Cody Laboratories, I'm just kind of curious. You bought that, what, April of last year. What was your business plan prior to you purchasing Cody and what does it look like now? And maybe you could comment on some of the surprises, both on the positive and negative side.

Well, the business plan prior to acquiring Cody was rather bleak. We were looking at a market where the amount of generic competition is enormously increasing. Almost monthly, there is another new competitor. The number of customers is decreasing, almost at the same rate. There's a lot of consolidation and acquisitions that are going on in the marketplace. So you'd find yourselves with overcapacity, too many suppliers supplying the same product to too few customers.

We anticipated that problem getting worse back in '05 and started looking for a strategy that would help us overcome that problem. Being a small company, it was more important for us to find a strategy that would help us circumvent that problem, because going forward in a true generic fashion, filing more ANDAs, what more competition would mean -- you know, that won't solve the problem. There are still going to be very few opportunities for profits.

And when we looked at the marketplace, the one area that seems to have some heavy governmental interference, you might say, is the area of narcotic products. So pain management took on an importance to us in terms of an area where you cannot import narcotics that easily, generally can't import them at all, which meant my competition would be limited to the domestic competition. The license to import narcotics, to actually extract morphine from concentrated poppy straw, is limited. So therefore, having a license in that field put us in a unique position to be able to survive, go forward, build our business and concentrate ourselves into pain management area.

Now, what were the difficulties? Well, when we got involved with Cody as a supplier to us for one of our APIs at the time, our active pharmaceutical ingredients, they received a 483 inspection. And that subsequently ended up with a warning letter to them, more from naivete. To their prior inspection, they had a 0483. But they moved into a larger facility.

So the challenge for us was helping them overcome their regulatory problems. And in helping them do that, we found the opportunity that they were exploring themselves, which is to import the raw material to make morphine sulfate and what have you, to being intriguing, a step above what we were thinking of doing. And as a result, we decided to go ahead.

But the difficulty in remediating a facility, getting it out from under the FDA warning letter, was rather difficult and costly, nothing that we weren't up to the challenge. I can say that the inspectors were absolutely astounded at the turnaround for Cody. They didn't expect the kind of results that we were able to produce there.

So that was probably the hardship. Getting involved in resolving problems and remediating a company delays you from actually taking advantage of the opportunity. But now that that is behind us, we can now capitalize on that acquisition.

I will go back in the queue, but what does that look like timing-wise as far as being fully functional, importing the poppy and going forward with supplying the product? What does the timing look like for having that all implemented?

Well, you see, the problem in our business is, because it is so highly regulated, there's a lot of obstacles, for example -- which makes this attractive, by the way. You have the quota issue that the DEA gives out. And if you don't get a quota, you can't even begin to start work on anything. So sometimes the quotas are not available because you don't have sales yet. Well, you don't have sales because you're just beginning to make the product.

So sometimes, the initial stages of this kind of a business are rather slow in getting up to speed, But as you develop those quotas, as you develop sales, the quotas grow. The other problem is you're trying to solicit customers who already have a supplier. For them to change suppliers requires them to receive FDA permission.

So even if I were up to speed tomorrow and went to all my customers, it would take each one of them one year to get the FDA to approve a change of suppliers on raw material. So I am forced to wait for me to find the customer; then I am forced to wait if the customer wants to buy from me to get permission to use my material.

So the actual implementation is not something that happens overnight. But when we acquired this company, we were looking to vertically integrate Lannett and to help our bottom line by reducing our costs. So our goal was to go ahead and develop products within Cody that supports each one of the products that Lannett plans to get approved from the FDA, so that we're vertically integrating them one at a time.

To give you a timeframe, again, because I have to deal with FDA delays and DEA quotas and such, you are probably looking at probably five years before you actually could sit down and say, we're not doing everything we wanted to do, and we are up to speed, running full speed ahead. It is going to take that long because of the timeframes that no one can control with FDA approvals and such.

At the same time, we do believe Cody can achieve breakeven prior to that, not to the extent that we think they have the ability to, and what we're excited about in that area. But they are making, not necessarily on the API side, some finished products that bring in cash flow in the relatively near term to help stabilize that continued spend and hopefully turn that around to a cash flow-positive operation.

George Gaspar.

First question, just an ongoing on Kevin's question on Cody. Can you dissect out of the $25.5 million, what sales would have come out of there, what Cody would've represented, or is it strictly a producer of raw material going into Philadelphia for you?

Initially, it's -- no, actually, the sales -- any purchases we made from Cody would've included some finished dosages, because they do make our oral liquids, the morphine sulfate and the oxycodone solutions, and they're also making a topical product that they have shipped to us. But those are not reflected in the numbers. Prior quarters, we had sales of morphine sulfate and oxycodone that were made by Cody. And some APIs were shipped to us during those quarters as well. But I would say that the first raw material of any substance that we're going to receive in will probably be in the next quarter.

Okay. And out of this $25.5 million, can you identify what Cody would've represented in terms of sales?

No. That is all the net business, actually. The bulk of that -- matter of fact, all of that $25 million essentially is from Lannett ANDAs, Lannett distributed products and such. It doesn't really involve Cody. We're not really receiving the benefit from Cody at this point, except for two oral liquid products that they are shipping and the one topical that they just shipped, which we are going to be launching shortly. So we're really not getting any benefits from Cody in those numbers, and I don't foresee that for another quarter at least.

Okay. And secondly, you mentioned about doing -- or marketing now in prenatal. Are you actually generating sales this quarter of the prenatal vitamin?

This quarter meeting the one we are in now?

Yes.

Yes, we are.

Okay. So that will start to show up. So you're basically in the market, even though -- and you are proceeding to press your position from a legal point of view of your acceptance, or having approval to market this, exclusive of the patent arrangement that is out there?

That is correct. We are a small company, and this is our first patent challenge. But I can just tell you, we have done our homework and we are very comfortable with the position we are taking. We have launched a product where we will be very competitive in the marketplace against our competitor. And we do expect to prevail in court. That court case is up for the first calendar quarter of next year. So we believe the trial and the success of that trial is going to be in our favor.

And then an ongoing about your sales volume for the quarter, $25.5 million. Can you identify the amount that was for digoxin? How did that compare with year-ago sales or the previous-quarter sales for the June quarter? What kind of sales did you have in digoxin? What is the sales number for digoxin out of this $25.5 million?

George, that is a great question. Unfortunately, we have a policy that we don't comment on specific product sales. However, in the 10-Q to be released shortly, there are key therapeutic areas that are identified. And one of them happens to be heart, which might give you a little bit of indication and address your question.

Okay. And that will be revealed in what filing?

That is in the 10-Q that we will file tomorrow.

Okay, all right. Okay, I will go back into queue. Thank you.

Tom Harenburg.

First off, I'm pleased to see that you are holding a conference call. You're certainly going to give us a little better light on the Company. I don't imagine you're going to answer this question. It was a little bit of a follow-up to George's. But I was wondering what the margins were on digoxin.

I can tell you that the margins on that product are above Company average.

Okay, very good. Thank you again.

George Gaspar.

Okay. Just a couple, Brian, on the financials. I notice a couple of things in your release this afternoon on the asset side. The cash position has risen dramatically from a year ago, and I don't have what you had in cash for the June quarter. But you are showing $15.1 million, which is up from $6.2 million a year ago -- excuse me, I'm sorry. This is the June quarter. Okay. That is pretty significant. And then I noticed your trade accounts receivable declined from $34 million down to $25.8 million. Can you explain those situations?

Certainly. I would say that is the only big change from the June quarter balance sheet to this September quarter balance sheet, is exactly what you just identified -- much higher cash position and lower receivables position. That is really driven off of the activity we had with the multivitamin in the June quarter. In that period, we sold roughly $10 million of product. We then in subsequent months collected basically all of that sale.

At the same time, because of the challenges that we have previously disclosed regarding the national databases not recognizing that multivitamin as a low-cost alternative to the brand, we accepted returns on that product with all of our customers. And as of today, we have accepted returns on roughly -- it is in between half and roughly 75% of them. As of September 30, it was roughly half of that balance.

So basically, the dynamic you're seeing is recorded the receivable in June of about $10.5 million. We had a corresponding offset as a returns reserve as a liability in the exact same amount, did not record any sales in the June quarter, and as we were paid, reduced the receivable balance, and obviously our cash balance increased. Now, what will happen going forward, the customers, as they purchase additional product from Lannett, they will just take the deduction on their payments to us for the amount they have essentially prepaid.

I see. So this isn't necessarily negative to changing the cash position that you have?

No. The way I look at it is the customer is essentially or effectively prepaid for sales of future product over the next couple of months as a result of the prompt payment. And the nature of our industry is basically our customers all pay on time and in full. And that is one of the nice things that usually takes place with our sales.

And evidence of that is with this multivitamin. Even though that they knew returns would be accepted, they still paid anyway. So that had the benefit of basically increasing our cash position for a period. I think it is going to go down over the next couple of months to be more what I would view as a normalized cash flow, which I also think you will see increasing as a result of the favorable dynamics and improvement in our base business.

Okay. All right. And then following on the -- of the $25.5 million, can you identify what, say, the approvals that you have received in the last six months or so in terms of generating any sales, what would that sales number amounted to of that $25.5 million?

Yes. You'd think that -- we are excited about the fact that we've received recent approvals, and we've got six new approvals in the last six months. They have not all been launched as of September 30. And the cumulative effect of all of those new approvals is not meaningful for this current quarter.

I see. For the past quarter.

The September quarter. Now, I will also tell you that, at this time, I would not view any of those individual six products as being what we would refer to as home runs or really meaningful to the Company. But in aggregate, we believe they will continue to help fuel the growth of the business.

Okay. And in terms of looking out over the next one to two years and your sales opportunity going forward, do you have enough capacity in Philadelphia as you stand now, and Cody, to reach your objectives? What do you sense about facilities requirement?

Cody sits on 16 acres, has a 75,000-square-foot plant. So there's plenty of space in the plant currently, and there is also plenty of space to grow. Here in Philadelphia, we are planning to move into that third facility that we've leased on Townsend Road. We are in State Road and Torresdale, which are opposite each other across the highway, and we are planning to move into Townsend.

We delayed that move because the FDA backlog was slowing down the approval process. But now that those products are getting approved, we're going to have to go ahead and make that move to the larger facility. So we believe that -- we had already set up the Torresdale facility to ultimately be manufacturing. So we will be moving the warehouse out of that facility. And then that plant will then be mostly manufacturing, as is the one on State Road. And Townsend will be administrative offices, essentially.

So we are well prepared, and have been. And that Townsend facility sits on a 7-acre site, and it is within 10 minutes of our other two plants. So we are within the same Philadelphia city, but we are prepared and have been prepared for that growth already.

Okay. So if you were looking at square footage, it's a square footage in terms of Philadelphia operations. Where are you coming from and where are you going in terms of (multiple speakers)?

About 160,000 square feet all together. We have roughly 96,000 now, and that other facility is around 65,000, roughly. So roughly all three of them would be around 160,000.

We are strictly talking Philadelphia now?

That is correct, yes, just three buildings in Philadelphia and the one in Cody, Wyoming.

Both of the buildings that we're currently in, State Road and Torresdale, are both FDA-approved for manufacturing.

I see. Okay. All right, well, that sounds like you're going to have a pretty decent amount of square footage.

In looking at margins, your gross margin ran in the 35% range on sales. As you look out, what is your objective? What do you think you can reach in terms of gross margin and operating income percentage? Any thoughts on that?

I think what we saw in the September quarter is higher than I expected to be what I'd view as a more normalized gross margin for Lannett. I think that is due to a somewhat opportunistic situation with one of the products. I would say just use very round numbers. A 30% gross margin is what we're targeting right now.

Okay. And is there anything in the carryforwards? What is your tax carryforward position at this point in time? Can you identify that?

We have a very nice on-the-balance-sheet deferred tax asset position here. We have, as a result of the Jerome Stevens write-down and a number of other items, we have over $20 million in deferred tax asset that we expect to benefit from going forward.

Okay. All right. And in terms of shares outstanding, which show here as $24.4 million, close to that, diluted, what type of option program is there on top of this that is approved for execution, or what you have got exercised and unexercised at this point?

We recently approved -- the Board and the compensation committee thought it was prudent to increase the equity ownership of the Company employees and management team to directly incent management in line with investors and approved a 2006 long-term incentive plan associated with that, which had basically 2.5 million shares that were eligible for issuance under either stock options or restricted stock.

As of now, the combination of that recently approved plan, the 2003 stock option plan, and the plan that existed before that adds up to a total of roughly 1.7 million options to acquire shares at various strike prices, some of which are well underwater at this point. But nevertheless, I think that represents somewhere in the 7% range of the total outstanding shares today.

So effectively, you are saying that 1.7 million of the 2.5 million is committed in outstanding?

Well, the 2.5 million is not nearly penetrated. The 2003 plan I believe was 1.1 million shares available for distribution in options only. And that is not all used up, but a decent part of that is used up. And we just started issuing shares out of the 2006 plan recently.

I see. So there is a lot of availability that still comes under the 2.5 million out?

That is correct. I would say for senior management, there is a certain level of stock options that are issued on an annual basis to make sure there is continued incentive and retention in place. However, the restricted stock is performance based.

And last year, last fiscal year, we did not achieve our objectives, and therefore there were no restricted shares awarded as a result. What we're all optimistic about is, if we can achieve our objectives this year, we will receive cash bonuses and additional restricted stock. So that is one of the components. So it is performance based. It is intended to be more long-term value creation rather than alternative plans that might be more short-term operating performance in nature, like the annual incentive bonus plan.

And looking forward quarter to quarter, can you be profitable all four of the quarters going forward here?

We can't predict the future, but it is certainly our plan to do so.

And the objective at Cody, I think maybe you were a little bit behind schedule as to what your thought process was some time ago about producing a -- or getting to breakeven and producing a profit there. What do you see as your objective now or your target dates for reaching breakeven and producing some kind of a milestone profit there?

Well, we hope that this fiscal year they will be profitable. We have run into some delays primarily in the area of equipment failures which during the process of manufacturing couldn't be predicted. Some of them were brand-new pieces of equipment that failed us. And of course, that's a setback when you're trying to manufacture something for the first time.

Unfortunately, those things happen. Unlike Lannett, where we are over 60 years old and our equipment essentially is a well-oiled machine, you might say, any new piece of equipment we add in Lannett is easily absorbed, at Cody it was essentially all-new equipment.

However, between that and the quotas, we certainly were delayed in getting Cody back on stream. But I would say that currently, I feel very comfortable that we're at the end of that road, and we're still struggling with some quota issues. But those are things that are getting resolved as well.

I'm not trying to pass the buck. The buck does stop with me with regard to these delays. But some of these matters just cannot be predicted. You never go into a situation and say, well, the machine is going to break and I'm going to add three months to my plan. But sometimes things like that happen. There was nothing unusual, no surprises that we could have gone back and said would we do anything differently. Unfortunately, what's happened to us really are the things that normally happen in production when you are shaking down new equipment.

I see. Okay. And then a target data on morphine sales, can you give us a thought on that?

Are you talking about the oral liquid? We're already selling that product. Again, we could sell more than we are producing, because we don't have enough quota. See, the quota system is a little strange. For example, we had some material that was damaged in transit. And as a result, until that was destroyed, the DEA held your quota low because they counted that material as part of your quota. Even though it is worthless material, until it has physically left the building and destroyed, it is considered material sitting in your building.

So these are some of the dilemmas, because the DEA is making sure they have a tight rein on the narcotics because of the abuse in this country, which we understand and sympathize with the DEA. Nevertheless, it did hurt us in trying to get quota. Of course, that material has now been destroyed, so we are free to request additional material and have it granted.

But there's a lot that the DEA looks at today that it didn't look at before. Not only did they look at what Cody might have on hand, they look at the quantity on hand that Cody's customer will have. And sometimes they will reduce our quota request by claiming that the customer has too much material on hand.

They do monitor this through the ARCOS reporting system. And it's something I've never experienced before, even though I have a lot of experience with DEA matters in the industry, where they would actually look at your customers and their inventory levels and make determinations about how much quota to give you. So those new surprises that we're learning to accommodate have probably been a little bit helpful in slowing us down, you might say.

Yes, I see. Okay. All right. Thank you.

Morton Goldman.

I would like to know, the international monetary problems, is that having an impact in terms of your ability to compete? Is it more -- can you compete more easily? Is it more difficult?

I would think it is going to be more easy. Our business is really heavily dependent on oil, whether you think about it or not. All the drugs, all the synthesis process, etc., really rely on oil. And when you look at the price of oil going to $145 a barrel, that is the strain that it puts on a generic company, because your raw material costs are starting to grow so rapidly that you're going to be unable to pass along the savings to your customers. With the price of oil dropping, we're actually going to benefit from that.

Also, the recession tends to lower costs to us. People are more anxious to make sales. So I would say that we have a better opportunity to negotiate purchases during this time, because unlike the rest of the world, our industry grows in these times. A recession causes people to cut back on their spending so they will be using generic drugs more than they would ordinarily.

So my business in this timeframe tends to grow. And people are looking for business because they don't have the business they had before. So we're able to command better deals and better pricing. We're actually pushing back on a lot of our purchases and asking for lower prices, because we know their costs have dropped, or we know they are anxious to make a sale.

May I ask another question?

Sure.

Does it make any sense for you to hedge that oil situation, knowing that it is much more likely that it will be bouncing back than it will be going too much lower, and by locking in some futures at these low prices, would that not work out well for you in the future?

You know, that is a good question. I don't know that we have the sophistication to start getting involved in that level of money management. We certainly have looked at things, when we're buying products overseas, to certainly maybe make investments in foreign currencies so that we don't have the fluctuation of those currencies impact us.

But getting involved in the futures market on where the oil prices go, I'm not sure we have the sophistication here. As a generic company, we operate a very lean staff, so it would be difficult to find someone on staff that has the expertise. So no, it's not something we've thought about, but you've put an idea in our heads. And we certainly will see whether there are people out there that could suggest ways we might be able to do that or maybe even put in some futures contracts for some of the raw material purchases, which would essentially do the same thing you're recommending.

I love your answer. I love your open-mindedness. And thank you very much.

Kevin McDevitt.

Of the $25 million, a certain percentage of that sales is Company produced and a certain percentage is sold for other manufacturers. What roughly is that percent? And also, what would be the difference compared to your average gross margin of 30% in the two different sales?

The percentage, there are a certain number of drugs that we manufacture on site where we're sitting today. There is also products that we manufacture off-site, primarily through our business partner, Jerome Stevens. Now, we call that distributed items. However, it is not distributed in the manner in which some other companies serve as a distributor. And the reason I say that is we have exclusive marketing rights to the products that we are selling. So nobody else can sell them. They are ours, and we paid a decent price to get that right. And that business right now represents roughly three-quarters of our current sales, which has not changed much over the last year or so.

What business represents three-quarters?

What we will call the distributed items (multiple speakers).

The distributed items. So 75% of the $25 million is distributed items?

Correct.

Okay. And what is the -- can you say -- make any comment about the difference in margins between the two?

Generally speaking, you would think that a distributed product would carry a lower margin. Due to the nature that I was just describing, that is not necessarily the case. It has more of the look and feel of something that is actually manufactured by Lannett. And I would say it's probably in line with Company average.

Okay. Second question -- is there any -- I mean, in looking at your sales in the past, there is no real seasonality of sales quarter to quarter. It doesn't appear to be that way. Do you see -- is that true, and do you see that in the future or anything of this --

There is no seasonality within the product line we have. And generally speaking, within the pharmaceutical industry generically, the only timeframe when I've seen any dip in sales usually comes around the Christmas holidays, where it appears, for some reason, prescription business drops off.

So the cost impacts the business on the way up the line to the manufacturer. No one really understand that unless people are just not concentrating on taking their medicine and too busy shopping, or maybe they have already purchased their medicines because they knew they would be too busy to head to the pharmacies. I can't really speak to that. But it has been my experience that there is always a little bit of falloff just around the last two weeks of December.

But the product line that we have, we don't have anything that is seasonality, nothing that is seasonal, I should say, excuse me, with regards to any kind of flu season products, things like that. Nothing at all, no cough and cold. We have a product line that essentially deals with long-term illnesses.

Okay. I was going to just bring up the generic -- Levoxyl generic. I've read in the past that there was some difference in the consistency and the potency of the product by some of the competitors and that you had an advantage there, it appeared, being the first one really to have a generic in that area, and also the consistency that you produced in the product. I'm just wondering, are you making any inroads because of that and gaining market share, or is what I stated true and is it a marketing advantage?

I would say it's probably -- it certainly didn't hurt. It is hard to quantify that because most customers, to be honest with you, really are price-conscious. So they're not going to pay more because my product is superior to everyone else's. But they do recognize that there has never been a recall or a batch failure of the levothyroxine that we sell. And as a result, those recalls and the annoyance they cause the customers are eliminated when they do business with us.

There is a mere concern today that next year, in October, the new guidelines the FDA came out with for the Levos, where they tightened the specifications that will go into place, and those are not going to be able to be met by people. Generally, I believe, some of the ones that are out there -- I don't want to mention specific names -- will not be able to meet the new standard.

So I believe people are starting to switch their business to our product in anticipation of losing their current vendors. And as a result, we will probably see some growth in that area.

So that has probably helped us, that we have a better product than everyone else. But we also sell to everybody in the United States. So even though we are a small company, there isn't any class of trade or any customer in America that we don't do business with. And as a result, when issues like this come up, we are already a vendor to that company. It's very easy for them to make the switch from, let's say, Levoxyl to our levothyroxine. And we've found those advantages coming our way for a number of reasons. And quality of the levothyroxine, which I have to tell you is essential to anyone on that medication, I believe is one of the drivers.

Okay, thanks. And I hope I'm -- I have one more question about investment -- marketing of the stock to the investment community. Is there any research companies that are looking at research [report], covering you, or have you been proactive in that area? And if not, are you planning to be?

We have not been very active in marketing the Lannett story. I think in the future, that might make sense. Our basic philosophy was, get the strategy in place, begin execution of that. When that becomes visible in the numbers, so that investors can say, we see the results, we're not just listening to a story, then it would make more sense to step up and begin that activity with a little bit of effort. At the same time, we're working pretty hard here trying to execute on a daily basis. But that is part of the plan going forward.

Okay. Thank you very much. And this has been very helpful, to have a conference call. I appreciate your time and your candidness. Thanks.

George Gaspar.

Double Kevin's comment on, at last, it's nice to have this conference call and be able to have some dialogue with both of you.

Just a follow-on here on the sales area in terms of the vitamin. Brian, your explanation to me previous -- so if I understand, you are going to be having sales going out that will be sort of replacement with what came back in. So in terms of there could potentially be little impact on sales in the current quarter from the prenatal, because it is more of a replacement process, and therefore it really wouldn't impact on trying to look forward to any kind of a number as being part of the $25 million?

Well, I would say, as I indicated before, the June quarter there was $10.5 million of sales into our customer base. We brought all that back in returns. In the September quarter that we're reporting right now, there is no multivitamin sales. We have launched that product into the market. We're not going to comment right now on exactly how much we've put in, other than to say, in general terms, it is not going to be the same nature of sale as that made in June. It is not going to be that large. It is going to be spread out more over a few months' timeframe.

I see. Okay. All right. So --

That had to do with the litigation. Back in June, there was the likelihood that the other company could prevail in a restraining order. Once that was not the case and we were allowed to sell the product, there is no need to ship more or sell more. So now the customers can put this in their normal routine of ordering, and that is exactly what is happening.

I see. Okay. And then one question, Brian, on this tax situation. I asked you about the carryforward and so on. I noticed that you had an income tax expense of $919,00 -- well, almost, well, $920,000 for the quarter. It looks like a deduct. Did you actually pay taxes or did you have an opportunity to utilize your carryforward and actually on a net tax basis paid out have a lesser number?

Well, I think what you will find is, from an expense perspective, accounting requires certain expenses to be reflected on the income statement, which isn't always, in general is not going to be the same amount that you're going to pay out in cash in terms of income tax payments.

That is going to change from quarter to quarter. I think I can get probably into a little bit more detail on that offline. But in general terms, because of that rather sizable deferred tax asset that we currently have, the cash out is not going to be as significant as you might otherwise expect.

I see. Okay. All right. Well, thank you very much. Hopefully -- at one time many years ago, Lannett was looked at as one of the top, I think, 100 emerging small companies. Hopefully that you can work this situation forward now, with your opportunities of additional product line and others that you have potentially going into the pipeline that can really put this back on the map and get these earnings moving up so that the shareholders that have been with you a long time can regain their investments and finally make something on Lannett. Thank you.

That is what we're working for.

At this time, there are no more questions in queue.

Thank you very much, all of you, for joining us today. This is an exciting time for our Company. And we appreciate your continued support and interest. If anyone has any further questions, please do not hesitate to contact the Investor Relations team at Lannett. That concludes our call today, and we thank you for your attention.

This concludes today's conference call. You may now disconnect.