Lannett Company Inc (LCI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lannett fiscal 2009 second quarter financial results conference call. At this time, all participants in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Robert Jaffe, Investor Relations for Lannett Company. Mr. Jaffe, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2009 second quarter financial results. On the call today are Arthur Bedrosian, President and Chief Executive Officer 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 can join us today to discuss our fiscal 2009 second 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 form. In April, 2007, we acquired Cody Laboratories, a small privately owned manufacturer and supplier of bulk active pharmaceutical ingredients known in the industry as APIs. The acquisition of Cody will help facilitate growth and expand our product offering. This past summer, Cody received an import license for concentrated poppy straw, otherwise known as CPS from the drug enforcement agency, otherwise known as DEA. The import license provided us with the capability to enter the pain management market which has relatively few competitors and favorable demographics.

We began manufacturing hydromorephone, our first API product and plan to introduce four additional products beginning early calendar year 2009. Looking at our top line growth in the quarter, most of it was fueled by strong sales of several key products, including our prescription prenatal vitamin as well as growth of our base business products. In fiscal 2008, we received six ANDA approvals which should 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. The second quarter of fiscal 2009 net sales grew to $29.2 million from $17.5 million in last year's second quarter, a 67% increase. Net income was $1.6 million or $0.06 per diluted share versus a net loss of $658,000 or $0.03 per share in last year's second quarter. Gross profit increased to $11 million or 38% of net sales compared with $4.4 million, or 25% of net sales for the prior year second quarter. Research and development expenses were $1.8 million compared with $946,000 in the same quarter of fiscal 2008. Selling, general and administrative expenses were $6.7 million compared with $4.3 million in last year's second quarter. The increase in SG&A was primarily due to litigation expenses related to our current patent challenge. With that brief financial overview, I would like to quickly mention that Arthur and I will be presenting at Roth Capital's investors conference in California next week, and we would be happy to meet with any of you who might be there. So with that, I would now like to turn the call back over to Arthur.

Thank you, Brian. Over the last several years, we've done an excellent job of building our pipeline which now includes a number of ANDAs pending at the FDA and a large additional number of product candidates in various stages of development. We have complimented our internal drug development efforts with the establishment of several strategic alliances which have added and rounded out our product offering. Let me briefly address a few topics before we open the call to questions.

Currently, we are involved in patent litigation lawsuit. Our case is very strong, and we believe we will prevail. That litigation will begin on March 23 in the Delaware court, and we believe that the trial will last about five days. We believe Lannett is well positioned for growth and it looks like its future will be very bright. With the time available, we would like to address any questions you may have. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Standing by for questions. Our first question comes from Gregg Hillman from First Wilshire Securities. Please go ahead.

Good afternoon, Arthur, Brian.

Good afternoon.

Yes, I wanted to ask you if you could get into the market size for pain killers. In particular, for bulk active ingredient, bulk active pharmaceutical ingredients that market. The size of your addressable market, your share, your anticipated gross margin. And then also, can you talk about how long it will take you to get into the wholesale market for pain killers and what kind of share do you think you could get, and how -- and then how many products do you have in development right now that will start to address that wholesale market for pain killers, which I imagine would carry a higher margin than the bulk market.

You want me to remember all of those questions all at once? (laughter)

Well, I will remind you if you forget them.

Let me try my stab at it. First of all, your first call had to with the size of the market, APIs. Well, that is a tough question to ask in terms of dollars, because none of the companies actually report those sales in a way that you can actually match them up to the tonnage. But we do know the size of the market based on the DEA issuing quotas to the industry. From the quotas, we know the tonnage that is available for all of the products. But it would be difficult at this stage for me to be able to give you any pricing information because that information will become available to us as we go into the marketplace and compete with the companies that are out there selling the products now. But we know the market itself is in the billions in terms of the API marketplace.

That's comprised with roughly six competitors plus Lannett, and the majority of our sales are probably concentrated in two companies' hands. So I would say that the marketplace is certainly billions of API dollars, but specifically what products sell for what price, we don't have that information handy at this moment. I wouldn't be able to answer that.

Okay.

Sales of the product, what we expect to capture, because Lannett went about this to vertically integrate themselves, the plan was really to support our own sales and not necessarily look to the wider market, so we're not really going after the marketplace to compete with the competitors in the API business. We're really going into the marketplace to just support Lannett's sales. So our goal would be to go ahead and file new drug applications for those narcotic products that Cody will begin to manufacture for us and support ourselves so that Lannett will be more profitable as a Company going forward, because it is making its own raw material.

And because we sell to virtually everybody in the United States, our customer base literally is every potential customer that purchases narcotic products currently. But it will be a slow process because remember, we're making narcotics as we're going forward and selling the dosage forms, and we also have to wait for FDA approvals for those dosage forms. The Cody division has applied for and received a quota for the concentrated poppy straw, so they will be importing that material and starting the process. So we are really looking at something that is at a startup stage in terms of where we can be with it. So I would say we would have to leave that answer for a future question or future teleconference.

Did you get approval to actually import the straw from Turkey? Or are you trying to still get that approval?

No, no, we did get that approval from the DEA to import the concentrated poppy straw, and Turkey is not the only supplier. If you're familiar with the 80/20 rule. 80% of what we import has to come from Turkey and India, the other 20% can come from France, Tasmania, which is part of -- within Australia, and I believe it is Spain now. So there are some other companies that you can purchase from. I'm not sure which country we're actually purchasing the concentrated poppy straw at this sitting, but we do have the DEA's permission and the quota has been assigned to us.

Okay, but are there -- just so I understand your strategy correctly, I thought at one time, it was your strategy to supply other makers of wholesale pain killers with the active ingredients for -- to make --

Narcotics.

-- to make narcotics basically, and now you're saying you're just going to supply your own wholesale effort from Cody, and you're not going to supply any other smaller competitors who can compete with existing people that make hydrocodone or whatever?

No, no, that's -- I'm sorry I led you with that impression. No, we still intend to sell to small companies, but I didn't want to make people listening to this phone call think that tomorrow morning we're going to be out starting to sell product right away, because we're making one raw material at the moment and we're certainly selling and offering that to smaller competitors, friendly competitors you might say, and we certainly have that strategy in mind.

Okay, and when do you think your shipments will start to these so-called friendly competitors?

We have one customer ready to place his order. He is just ready for us to give us the delivery information and that batch is being produced as we speak, so we would say within the next month or so we might be ready to ship that product to a customer outside of Lannett for Cody.

And what would be the capacity right now of Cody to supply some of these small friendly customers with active ingredients for narcotics?

I really don't want to --

You would rather not say.

I would have to get back to you with that answer, but I know that we have not sold our capacity for our hydromorephone, for example. So we certainly have the ability to sell more hydromorephone than we have customers for at the moment, but I I don't know the exact quantity of the kilos we are going to be making annually and the reason I don't know that is we just transferring from a three step process to a two step process that we recently received received a patent approval at Cody for, so that is going to expand the capability of the manufacturing for that product beyond what was originally.

Well, that's good. Will that expand your ability to earn margin, too?

I'm not sure about the -- you mean Cody or from Lannett?

For Lannette to go -- for Cody, to go from the three step to two step process.

For Cody, it will be a more profitable manufacturing step. For Lannett, I'm sure it wouldn't have an impact because the marketplace is what it is, and it is not going to make a difference to Lannett. It will just mean that Cody is more profitable.

Okay, thanks very much. I appreciate your answers.

Greg, just to touch on a little bit more color on that, I would say that the Cody capability right now, capacity will increase over time but right now or in the very near future, they're just getting to be at a point in which I would consider their capacity to be material to Lannett's overall sales. As you know, our run rate is just over $100 million now. Longer term, we think that the Cody opportunity could match or exceed where we are overall as a Company today, but near term, it is just becoming what I would view as material. And that is not to say that they are currently selling that. In fact, as of the December quarter, they are still experiences roughly the same loss rate that they had in the prior two years.

Our next question comes from Scott Henry from Roth Capital. Please go ahead.

Thank you, and I look forward to seeing both of you next week. Just two questions. And the first, I think you have hit on a little bit before, but maybe just if you could simplify it a little bit. If we're trying to gauge progress on the opioid importation license and how that can transfer into revenues from a timeline, what are the steps we should be focusing on and a time line when evaluating whether things are going according to plan or if they're ahead or behind schedule? I mean, what are the things we should focus on to connect it from having the importation approval to actually selling product?

Well, I think we answered this at a previous teleconference. The issue here is I can make a product and then I can sell it to a competitor of Lannett's, a small company, and they could go ahead and want to use that raw material, but they still need FDA approval to switch raw material sources, and that generally can take upwards of a year. They have to buy the material from me. They have to make a few batches of the product, using my raw material now, put those materials on stability. Take that data, collect it and submit it to the FDA and wait for the FDA to approve it. That process is one nobody has any control over.

So it clearly is a stumbling block, you might say, or an obstacle that has to be overcome and time is something we all face as a consequence of the government regulations. So you are really probably looking at a couple of years before you will actually see this transgression between making the material, customers buying, it getting FDA approval, and actually being full steam customers, and then having a full year of purchases from those customers. It might end up being the third year, because it might take up to two years to get all of this going. So my guess would be between two and three years before Lannett is actually going to start to realize the benefits from this.

Okay.

With more money we could do it faster, but we don't borrow, as you know, from our history, so we would do it with our own finances.

Okay. Thank you. That's helpful. And just one other sort of industry question. We have seen a lot of companies have significant manufacturing problems, whether it be KV or a number of other companies as well. And are you starting to feel this in your base business, or do you notice -- is it still too small relative to have any impact on your base business?

No, actually, we've received the benefit from the difficulties our competitors have faced. For example, if you start with the old amide which was purchased by Actavis and now called Actavis Totowa, they imploded essentially and all of their products were taken off the market. We gained market share under digoxin because we had essentially been the only supplier that could supply that marketplace during the shortage that was created by Actavis' recall. So we went from 14% to 75% of the digoxin market, so clearly, that was a benefit.

We also picked up sales opportunities on four or five other products that amide/Actavis used to sell that are now were the same as products we had. So we picked up customers that Actavis had previously. And that has also happened now recently with KV because they had some products that happened to be the same as ones we had marketed previously. We're getting a lot of that business, and that occurs usually every time one of our competitors does have a problem, because everybody, especially our customers, amongst which know we have good GNP issues here -- we don't have any GNP issues, we have good GNP, feel comfortable switching that business to us.

So every one of my competitors that has had an FDA issue, a warning letter for example, has indirectly benefited us in a number of ways. Either directly where I get the product or indirectly because the customer is switching to me because I'm a more reliable supplier and they don't have to worry about any problems when they purchase from Lannett. We've actually put out a press release concerning our CGMP compliance record, and it is better than anyone else's apparently, so we were happy about that and pleased.

Okay. And specifically on the prenatal vitamin franchise, I mean given that KV is recalling product, and they're obviously not shipping any product and not selling any prenatal vitamins, do you expect your, I believe it is OB Natal One to suddenly have a huge ramp? Should you be the beneficiary of all of that lack of supply? Or how should we think about that?

Well, that is a good question and it is one we've been thinking about ourselves. We haven't really seen a major switch to the product. We've been getting the generic market share, as we expected, and that's on track. But I have not seen anything major in the way of a switch from KV's purchases going to us now for OB Natal Care from their PrimaCare ONE. I'm suspecting that at the moment they're probably going to create a vacuum, and that vacuum will be filled by all of the other prenatals that are out there, not just our generic.

Okay. Well, thank you for taking the questions. I will look at the scripts as they come out.

All right. Thank you.

Our next question comes from George Gaspar from Robert Baird. Please go ahead.

Yes, good afternoon, Arthur, Brian. A couple of questions on financials. Could you identify the loss at Cody for the quarter, what the net income figure might have been if Cody would have, say for example, broken even?

George, I would look at pretty much the same run rate that we've experienced in the last couple of years of about $300,000 per month or roughly a million dollars on the quarter.

Oh, okay. All right. And in terms of the gross revenue number, $29 million, can that be broken down at all as to, let's say the top two or three generics that you're putting out? What percent of that total would it have been? And what would the top generic that you're putting out represent in terms of that $29 million?

Well, if I can give you a little bit of detail, just high light it now on the call as broken out and if anyone is interested, you can see the detail in our 10-Q just filed with the SEC, out of the $29 million thyroid deficiency it is about 12 million, and then heart failure, $5.7 million, and then after that, you have a prenatal at about $4.5 million. And then there are a couple of other categories below that, but those are the larger players.

Okay. All right. And then when Arthur was explaining about Actavis,what is the percentages that the digoxin market that have you at this point, do you think?

It is 75%. We had 14, they had 61, and it appears that we picked up the 70 -- well we totaled 75. We picked up their 61 because the shortage of digoxin raw material impacted our other two competitors that have the approval to sell digoxin tablets and as a result, all of the customers ended up coming to us that were previously purchasing from Actavis. I'm sure that now with the shortage alleviated, some of that market share might go to some of my competitors as it was before. But that was where it jumped to.

Okay. And if I could pursue another question. In terms of looking forward, quarter-to-quarter, was this sort of a blow-out quarter on revenue stream? Or is there some ballpark number that you're going to be shooting at on a quarterly basis going forward relative to the 29? Can you stay in that range, or is that pretty heady to do?

I can say that we are very pleased with the performance of the quarter. There's -- we don't want to get into the issue of putting out quarterly guidance and having to manage to that. But I can say in very general terms over the last six months, we're starting to see some benefits of some of the good things we're doing, and a few of the products that are particularly strong now, we see no evidence that they will go away in the near term.

Okay, fine. Thank you.

You're welcome.

Our next question comes from Kevin McDevitt from UBS. Please go ahead.

Hi, guys. Congratulations again, that was fantastic.

Thank you.

You had mentioned that you had six ANDAs last year. What are currently in the queue right now for ANDAs for FDA approval?

I believe there is 13 down at the agency as we sit here today.

Okay. And then kind of relating to George's comment about digoxin and KV Pharmaceutical in your comments about gaining market share, even with unrelated products, what -- I guess you kind of answered that, but as you anticipate hanging on to that, what has been the -- what has been your experience in the past about when this has happened, when competitors get shut down and you capture the market share, do you keep that or --

Generally speaking, yes, we do. The customers are happy with your service, so for another competitor to take an account away from me, they either try to do it on price, your customer always gives you a chance to match that price, or they do it because you're back ordering and not servicing the customer Since we give good service, that doesn't become an issue and since we match price, that doesn't become an issue, so we generally tend to keep the customer base. But we also recognize that sometimes you create the price war you don't want by recognizing or not wanting to recognize that other people need to get into the marketplace and capture some of the market. So we tend to look at this and sometimes we don't match a price. Sometimes we say maybe if we don't match a price and we lose a customer, there won't be this price war. Because the price wars, the drop in prices hurt everybody.

It is hard to remain compliant companies if you don't have profits. It is hard to file new applications if you don't have profits. So if you get too aggressive and say I am going to match every price and I'm not going to lose a customer, all you're going to do is see a spiral down of your prices and your profit margins. Sometimes it is smarter to just lose a customer. We tend to think we're smart in the way we handle this, and sometimes we do walk away from competition and let the customer go to a competitor at a lower price rather than match the price if we think that will create the spiral we don't want.

Okay. What about capacity with all of this increased volume? Are you having any constraints there?

Actually, that has turned out to be good, because a couple of years ago, we already had leased a facility with an option to purchase it in the anticipation of running out of capacity. But then the FDA backlog kicked in and as a result, we didn't get approvals like we expected, so we never physically moved into that building. We put the plans together.

The building is an empty building ready for us to move in, so now we are resurrecting those same plans, we've reviewed them, we're not making any changes to them and we're going to go ahead and implement them so by the end of the year, we will start to move our headquarters from State road into our new Townsend facility campus which is on seven acres, and then we will start to move the shipping and warehouse from the Torresdale building over to Townsend and we will expand manufacturing into the Torresdale facility where the warehousing was because that facility has the higher ceilings and the conducive atmosphere for the large scale production. So we do expect to move into those facilities and they are there already. They are already FDA licensed, so it is going to be a quick move.

So is there efficiencies in doing that?

Well, there are some cases. For example, we have increased batch sizes, and we will be making those larger batches in Torresdale . We're unable to do them in this facility because this facility, while it is a GNP facility and state of the art equipment, has low ceilings. It was developed in the 1960s and adequate for the manufacturer of drugs back then, but today you have you pieces of equipment that are two stories in height. You clearly, can't use this facility for things like that and we're unable to use totes in this facility because we don't have the ceiling height. So yes, it will increase batch sizes, which means I will reduce my costs in a lab by producing larger quantities of the product and assaying larger batches at a time instead of multiple assays of smaller batches. So yes, there will be some savings and economies of scale once we move in there.

Okay. Well, I have one more question about Cody. You've mentioned that the losses have been similar to the losses in the past quarters, and your goal was to be break even and I know last conference call, you had mentioned that it will take probably another three months or so. What -- when are you going to move to break even at Cody, and what do you need to do to get there?

Brian will take this one.

Okay. We're looking for -- right now, I would say in the next few months, we think that we have a much better chance. We've had a number of what we would view as temporary setbacks, but they've piled on top of other setbacks. We think that there is some opportunity here with one of our market competitors recently experiencing FDA problems and really withdrawing from the market to accelerate sales and penetration into the market place. The question there is how quickly can we ramp up capacity and meet that market demand? We think that -- I will let Arthur comment on what we think we might be able to penetrate regarding a specific competitor, but we think the opportunity exists now where as before it was a little bit more slow going.

So we think we might be in a situation where we have the wind to our back at this time. But we're also fully aware that with we've tried and worked very hard to get the business to a break even point for the last year and a half and aware of the fact that we keep on pushing back that deadline. What we're trying to do is get a firm foundation and move forward from there. We feel like that is in sight now and I would say as of now, I think everybody in management believes that by June, we will be break even at Cody. Perhaps before then, but that is what we're thinking now. I would like to add one other bit of color regarding the perspective on where we think we are overall in our current run rate.

One of the items, that prenatal vitamin that we are experiencing some success in the marketplace today, there is no guarantee that that business is going to continue in the future. Well, specifically, there is no guarantee that any of this business will continue. But that one item in particular is subject to litigation, as Arthur indicated, in March, we're very excited about the potential of that product, but there is no guarantee that that sales run rate will continue beyond that point or into the future and future periods. So just wanted to make that clarification.

And let me add something. In the KV recall, they represented, I believe it was 60% of the oxycodone oral solutions and 80% of the morphine sulfate -- sorry, I think I have that switched around. The 80% is of the oxycodone solutions and 60% was the morphine sulfate market. They have recalled all of the product that's out in the marketplace, so they have created a huge vacuum and we have been fortunate enough that we are capable of filling some of that vacuum and possibly all of it.

So the result will be that we're not only going to supply the material, we're also adding capacity as we speak out in Cody to manufacture more of these solutions, so we will be able to take advantage of KV's recall. That is going to expedite the break even for Cody, because the added sales volume of those products is going to fall right into their hands and everything is operating, the equipment is there, the quota is there. Of course the quota is always subject to DEA, and that is one of those things that is difficult to predict, but it is likely the DEA will give us additional quota in light of what's happened, so that means we will have no obstacles to capturing more of that market, which as Brian said, will assure Cody's profitability.

Okay, Thanks, guys. Congratulations.

Our next question comes from Greg Hillman from First Wilshire Securities. Please go ahead.

Yes, Arthur, just a follow-up on your last point. On Cody, you mentioned earlier in the call that the people -- your friendly competitors that wanted to sell wholesale narcotics, they need to get FDA approval for your formulation. But now you're saying that the FDA is allowing you to fill the void left by KV? Wouldn't the Company selling that need to get some sort of FDA approval that you have the same absorption and whatnot first?

No, those two products, just so we're clear, are both grandfathered products. As a result, there is no comparability like you would have in a typical new drug application or abbreviated new drug application. We have already been selling oxycodone and morphine sulfate for a few years now. All we're going to be doing is selling more of it than we were before. We also have every intention of filing applications for these products. But that is not a requirement like you would normally face in another generic opportunity.

So no, there is no FDA involvement, and anybody who is making a product who doesn't have an FDA approval for their product on these solutions could enter the market or could continue to sell the products. So there is marketers out there, I believe at least two other competitors besides us, that competed with KV, will be able to get into the marketplace, but some of them didn't have enough quota or didn't have manufacturing capacity. We had just planned to increase our capacity in this area. So it kind of fell perfectly into our situation.

When you say quota, what do you mean?

Well, the DEA allocates the material. Every time you sell the raw material you have, for oxycodone for example, you have got to apply for additional oxycodone. In order to apply for that quota from the agency, you have to show them that you have purchase orders from a customer, no inventory on hand essentially and your customer has virtually no inventory in order for them to give you the API, the raw material with which to make additional material from.

Okay.

That's done hand-to-mouth. They don't allow you to stockpile large quantities. You have to sell off your material before you can get more material. But the larger the usage is of your material, for example, if I'm the biggest supplier, then I will also be the biggest receiver of the quota. But it is a gradual thing, so I can't just turn it on like a faucet. I have to contact the DEA, tell them why I'm going to be selling more, show them the purchase orders and then they will give me the quota, the additional quota that I normally shouldn't be getting because I didn't sell that much prior year.

Okay.

It is a little restrictive.

Okay, and then Arthur, also on the prenatal vitamins, I believe your competitor protested your going into the formulary because one of your ingredients wasn't bioequivalent to one of their ingredients. What was the status of that? Is your generic for a prenatal vitamins exactly equivalent to the branded one now, or is it somewhat different in terms of the materials that are used?

Well, just so we're -- it is exactly the same as the original PrimaCare ONE that we started with back in June, let's be clear on that. Then they just came out with a PrimaCare ONE enhanced, and we already have a product that is similar -- the same as their PrimaCare ONE enhanced. So depending on which one the customers are buying, we have an equivalent for either one. Currently, the PrimaCare ONE is outselling the enhanced version. They only launched the enhanced version in July. The sales on that have not been that big. So the majority of the market is still in the PrimaCare ONE arena and our product, the OB Natal One is an equivalent to PrimaCare ONE. When we switch over in the marketplace, to Prima Care enhanced, we will be switching them -- stop selling the Prima Care the -- excuse me, the OB Natal One and we will be switching to the OB Natal One enhanced, so to speak.

But Arthur, are you in all of the formularies for that, or is KV or their competitor protesting your being in the formulary?

Well, I know they protested it but it didn't seem to go anywhere. What KV did is they removed the PrimaCare ONE and replaced it with the Prima Care enhanced. We submitted our labeling for the Prima Care enhanced equivalent generically, as OB Natal One enhanced, and that has been linked. So those -- so that is not an issue for us. It is linked in the Prima Care enhanced arena. There is no more PrimaCare ONE in the databases because they discontinued that product and switched it to the enhanced. However, the market is loaded with the PrimaCare ONE, the doctors were still prescribing it, so the transition to the enhanced has not taken effect as they had hoped. So they tried to kind of outmaneuver us, and I can say it didn't work.

Okay. And then finally Brian, just a couple of questions about the couple of financial statements you just filed. One on the cash flow and one on the income statement. In terms of the selling and general and administrative expenses, they went up a fair amount. I guess sales did too, but can you just tell me what sort of SG&A is fixed or leveragable? What would that number be, or percentage at this point?

Sure. Well, at a very high level, I can tell that you that the prior year is basically what we're looking at as a stable ongoing level of SG&A., and the vast majority of the increase is due to the patent litigation with KV.

So that is like a one time legal expense of $2 million?

Yes.

And is that going to occur in future quarters?

Uncertain.

Well, the lawyers would like to, but (laughter).

Uncertain at this point.

But it wouldn't continue for like five quarters in a row? It might, --

I think there is an argument that says it wouldn't continue beyond the corresponding sales of the product.

Clearly, once we're in trial March 23, the bulk of the bills that we receive will be over. Then it is a five day trial, with just a couple of attorneys. All of the money we've spent to date really had to do with e-discovery and the witnesses -- the expert witnesses and the depositions that were taken, so a lot of this information had to be digested, and that's where the bulk of the money was spent. So going forward, we see a lessening of that expense certainly and once the trial is over, essentially there very little bills at that point.

And does this all have to do with the prenatal vitamin or was it something else?

No, prenatal vitamins. All of this litigation we're incurring had to do with the prenatal vitamin challenge.

Okay, okay, okay. And then Brian, on the cash flow statement, just turning there real quick, there was a big -- there were a couple of swings. One was in deferred tax expense, another was kind of accrued expenses. Can you just talk about cash provided by operating opportunities -- operating activities for the six months, whether that was represented or was something weird about that? In your view?

In my view, I would say it is representative. The one thing that I view as a little bit of a one-off, if you will, is the litigation expense and the corresponding, perhaps income of the multivitamin, which it is hard to understand really how to view that, so I kind of set it off to the side and view it separately. The rest of the business, primarily the heart drug and LIVO and thyroid continues to be very strong. There is some signs of easing pricing pressure in the market. It appears, although it is hard to quantify, the overall economy and the global outlook is diminished, the capital inflow into India and elsewhere that have historically challenged the pricing in the marketplace. So there is some evidence that the pricing is easing rather than being so severe and competitive as in the past several years. In terms of the deferred tax asset, I think you will notice that on the balance sheet, we have a pretty significant deferred tax asset, and the amount of expense on the income statement in terms of tax expense, that's not really a cash out for the Company because of that deferred tax asset. I can go through this in more detail offline, but if you combine the different line items in the balance sheet,of the short term, long term deferred tax asset along with prepaid taxes and the deferred tax liability, sorry for that, but that's how you get to the tax effective or cash flow, which is not a lot.

Okay. And then finally, for Arthur, some of the products you had approved recently, like one for the gallbladder stone thing, have any other -- are you the only -- are you the second drug in the market? Are you the first generic or are there other people that happened to get their ANDAs approved at the same time for the same applications so you're in there with six other guys?

Well, there are a couple ahead of us, but it is not six. I think there are only two other approvals for the Ursodiol product. So we've been fortunate in some of the approvals we're getting, the market for them doesn't have 15 competitors or even six, it is a lesser number. And then in this case, same thing. A lesser number of competitors, but we're not first to market on that product.

Okay. But so far, you have been selective and maybe even lucky in the fact that you haven't entered -- you're just trying to go after the niche markets basically without a lot of competitors.

Correct. Of course, everybody wants to do that today. But yes, that is the goal. We try to look at markets where we don't find it is flooded. That's why we stay away from blockbuster drugs for example, because those seem to attract at least 15 applications, and no one seems to be able to make a profit from them. So we tend to look at the market differently. We also have limited resources, so we don't challenge patents, generally. So that kind of limits the market to products where there is less competition, which is why we tended to go into the narcotic area with the acquisition of Cody. And it allowed us to compete domestically with companies, but not have to worry about imports, and that helps considerably.

That is really a good point. Well, I will just, I guess I will ask you more questions at Roth and we can talk then.

We will be happy to see you again.

Thanks very much.

Thank you.

Our next question comes from George Gaspar from Robert Baird. Please go ahead.

Thank you. Well I should have said originally, as I asked my first question, to congratulate you on the progress that you're making. It is very inspiring. My follow-up question here would be on the financing requirement, if any, based on your growth and revenue stream. Do you see any reason to be looking at doing some financing along the way to, let's say if you can four times the revenue range on a quarterly basis that you're doing now, are you pretty well set to handle that? Or what's your thought on that?

George, there's a few options that we're pursuing. Obviously, we have the strategic plan for growth that includes pain management and trying to pick submissions wisely, in advance, but one thing nea term we're looking at, Arthur mentioned the capacity and the leased property that we had, there's 65,000 square feet in Philadelphia that we currently have as planned warehouse and administrative facilities. We do lease that today. We are evaluating whether we should purchase that. If we did, we could decrease our annual expense due to the favorable interest rates we think we could get. Even though the current market environment is very tight on lending and debt, we have a very solid balance sheet we believe, and we're exploring alternatives in that area, at least for the purchase of that building.

We have not made a decision yet. We're evaluating our options. And in addition to that, we are evaluating options of potentially accelerating our strategy in pain management and elsewhere, while currently, we are planning on funding all of that planned growth through operating funds and internally generated cash flow. There's some argument in some cases, a compelling argument I think, that says it makes sense to accelerate that and invest a little bit more aggressively to bring that cash flow closer to home today and take advantage of the opportunities that present themselves today. So we are exploring those alternatives, even though I would view the overall capital markets as not entirely welcoming. But we are evaluating our options.

Okay. Fine. Thanks for that explanation.

We have no further questions at this time.

Thank you all for joining us today. This is an exciting time for Lannett, 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.

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