Lannett Company Inc (LCI) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lannett Company fiscal 2009 fourth quarter and full year conference call. At this time, all participants are 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. Evan Pondel with Investor Relations for Lannett. Mr. Pondel, you may begin.

Thank you, very much. Good afternoon, everyone, and thanks for joining us today to discuss Lannett Company's fiscal 2009 fourth quarter and full year financial results. On the call today are Arthur Bedrosian, President and CEO, and Keith Ruck, Interim Chief Financial Officer. First some housekeeping items before we start. Please be advised that this conference call is being broadcast live on the Internet at www.lannett.com. A play back of this call will be available for three months and maybe accessed on the Internet at Lannett's Web site.

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 their actual results could differ materially from those stated or implied. With that let me now turn the call over to Arthur Bedrosian. Arthur?

Thank you, Evan, and good afternoon, everyone. Please bear with me as I struggle through today's discussion with a touch of laryngitis. I'll begin with a brief review of our fiscal 2009 fourth quarter and full year results, and then turn the call over to Keith to provide a more detailed description of the financial results. I will make some concluding remarks at the end of the call.

We reported strong fourth quarter and full year results, a testament to the progress we've made expanding our pipeline and continuing our tradition of providing high quality prescription medications in tablet, liquid, topical and capsule forms. Our performance in fiscal 2009 demonstrates Lannett's ability to rapidly adapt to changing market conditions and provide our customers with an uninterrupted supply of important products. Specifically, we had strong fourth quarter sales of our key products as well as increased demands for our existing products. During the year Lannett's, ability to maintain an uninterrupted and safe supply of Digoxin tablets amid market shortages was critical. We worked with the FDA to alleviate shortages for this critical drug. Other drugs that we worked with FDA on to reduce shortages were oxycodone hydrochloride oral solution and morphine sulfate oral solution used in palliative care environments. Our ability to react to these situations further established Lannett as a go to supplier in an increase single competitive marketplace.

We also achieved certain important milestones in preparing our company for future growth. In the fourth quarter we received positive results from an FDA inspection of our wholly-owned subsidiary Cody Laboratories. Cody Labs received approval earlier in the year from the United States Patent and Trademark Office regarding a method for preparing hydromorphone and hydrocodone, greatly enhancing our ability to manufacture these widely prescribed products quickly and efficiently. We also launched two products in fiscal 2009, including a certain topical anesthetic product used in a variety of hospital and out-patient settings and amantadine hydrochloride, a generic equivalent to Symmetrel. At the same time we expanded our product offering after receiving FDA approval for Ursodial 300-milligram capsules and Pilocarpine Hydrochloride 7.5-milligram tablets. These accomplishments, coupled with the progress we continued to make at Cody labs all contributed to our strong performance in fiscal 2009.

I would like now to turn the call over to Keith Ruck for a review of the financial results. Keith?

Thank you, Arthur, and good afternoon, everyone. First I'll review the full year results and then highlight the fourth quarter. For the year ended June 30, 2009, net sales rose 64% to $119.0 million compared with $72.4 million for the fiscal 2008. Net income increased to $6.5 million or $0.27 per diluted share, compared with a net loss of $2.3 million or $0.10 per share for the prior year. Gross profit nearly tripled to $45.2 million, compared with $16.3 million for the same period in the prior year. R&D expenses were $8.4 million versus $5.2 million in fiscal 2008. And SG&A expenses were $26.1 million compared with $16.6 million for the prior year.

Turning to our fourth quarter results, net sales grew 71% to $35.4 million from $20.7 million in the last year's fourth quarter. Net income was $2.4 million or $0.10 per diluted share, versus a net loss of $278,000, or $0.01 per share in last year's fourth quarter. Gross profit increased to $13.6 million compared with $2.9 million for the prior year fourth quarter, R&D expenses were $2.7 million compared with $1.5 million in the same quarter of fiscal 2008. And SG&A expenses were $6.9 million compared with $4.1 million in last year's fourth quarter.

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

Thank you, Keith. Our solid performance is a result of our hard working management team and employees. And I'd like to thank each of them for doing a stellar job helping our company maintain a CGMP compliant company, providing a safe and steady supply of high quality medication.

We recently announced a couple of key appointments that we believe will further strengthen our organization. Terence Vollrath was named Executive Vice President of Cody Laboratories, Terry brings more than two decades of operations, process development and business development experience. And yesterday we named Stephen Kovary Vice President of Operations at Lannett. Stephen brings extensive operations, plant management and manufacturing experience. I'd like to welcome these two executives to the Lannett family and note that these appointments are important for the long-term growth of our company.

We accomplished a lot in fiscal 2009 and I believe that Lannett made great progress positioning itself as a leader in the generic pharmaceutical industry. I am pleased to report that shares of Lannett were recently added to the Russel 2000 index. 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). Our first question comes from Greg Hillman from First Wilshire Securities. Please go ahead.

Good afternoon, Arthur. I had a question about the narcotics you are selling. Can you just kind of review the sales for the quarter that were like of a wholesale nature, I shouldn't say that, the sales were by you were providing the material to other wholesalers and also whether had you had any wholesale sales yourself of narcotics in the fourth quarter. And just what your time line is going forward to introduce more narcotics of your own under your own Lannett label in the remaining quarters of this calendar year.

Just so I'm clear you're talking about raw material from Cody or you're talking about dosage form from Lannett because we are both in the narcotic business.

I'm talking about both. How much sales of raw material you had, and how much sales did you have of actual product under the Lannett label for narcotics.

For this last fiscal year, no API from Cody was sold to any customer. We do have orders from a customer outside from Lannett of course with regards to one of the APIs and both of us have pending ANDAs at the agency. We know those will be released now because Cody was reinspected for their API section and we know that ours is pending because a call was made to our local FDA district. We don't know whether they are going to insister on a preapproval inspection or not. If they don't, the approval will probably be within a week. If they do they will come in and give us an inspection for that preapproval.

The other customer is also in that same position who will be purchasing the material from Cody. He's waiting for his approval, which should be following ours, in other words, happening simultaneously, and as soon as they are approved by the FDA either preapproved inspection wise, or eliminate the inspection then they will be purchasing the raw material directly from Cody. So that would be in this fiscal year. But no material, no API from Cody was sold to any outside customers last year. And I believe the only API sold would have been sold to us as the parent company.

Going forward, the first product that Cody will make an API for, that will allow to us vertically integrate should be the morphine sulfate solutions. But so that I don't mislead you and the public, there's an issue right now with regards to the quota, the FDA, when they sent out that warning letter to everybody, and then rescinded it, the warning letter found its way to the DEA, the rescission letter did not. Other than us submitting it to them recently. And they have taken the position that they were going to withhold quota because the FDA said the product wasn't approved. As we all know, the FDA reversed themselves, and admits that the morphine sulfate 20-milligram per ml, there is no other product for it in the United States. There is a need for that product. And as a result they reversed themselves. We are trying to convince the DEA now to reverse their position as well. So at the moment, we are waiting for additional quota to be granted to us.

Quota to import the raw material?

Well, no, quota to purchase morphine sulfate from anyone else, including from Cody. Because even though Cody makes their own morphine sulfate, they can't just divert it to us, let's say. Everything still has to go through the system. So in our particular situation, while Cody is working on making morphine sulfate for us to use, that still has to be approved by the DEA's quota system. My own raw material made by Cody as well as any raw material I want to purchase from the other suppliers is at the moment not going to be allowed until they release the quota. We've been working with them for the past couple of weeks, submitting additional data, and we probably will have that resolved within a week. But once it's resolved favorably, then Cody will purchase raw material from another source for us initially, and then apply for permission to use their own produced product for us pending the DEA's okay to that to divert that material that they are making API for to us, we will be able to start using that material.

As I told you previously, there's a lot of regulatory hurdles in working out these issues with the DEA and we have to follow the DEA mandates which are rather archaic in the way they are done, a lot of things are done manually, and we are working with them to resolve all these issues. I do expect that within this fiscal year, we will be vertically integrating Lannett on some of the products Lannett sells by purchasing material from Cody. I hope that answers your question, Greg.

Okay. That's fine. Thanks. I'll get back in queue.

(Operator Instructions). We do have a follow-up question from Greg Hillman from First Wilshire Securities. Please go ahead.

Just another question about the Levothyroxine about the allowable range for, that issue we talked about last conference call, have you heard anything more about that.

No, we did have word that Abbott Laboratories submitted a supplemental application to their New Drug Application in April with a change in their formulation in the hopes that they will be able to meet that new spec. We don't know if that's been approved yet. So we are still not sure what we are going to have to face in October. We are prepared to meet an onslaught of additional business. Jerome Stevens, our vendor, has worked very diligently in increasing their capacity, and being able to meet any sudden demand, and we are expecting a sudden demand in increase on that product. If for example everyone is able to meet the specs or beliefs they can meet the specs in launch of their products and then has recalls, we will pick up that business in the future.

But we do think there's going to be an increase in the fall. We are talking about next month, now in the Levothyroxine business because everyone is confident that we've never had a recall or a batch failure on our product and that we are able to meet these new specs, so we believe some people will be switching their business to us, to Lannett. Things are still the same as what we said in the last quarter telephone call. Nothing has really changed. We do know some people who will be dropping out but I don't want to spread rumors. We will wait to see what they do in October if they announce discontinued products or not. At this time, everyone that's in the Levothyroxine in the brand version is still in the market.

Keith, can you talk about the profitability at the Cody level for the quarter, the fourth quarter?

Sure. We had given an indication at our third quarter call that we were hoping that Cody would be break even or start to turn profitable. For the fourth quarter, if you back out some of the intercompany charges that we had between the two companies, Cody lost approximately $150,000 for the quarter. Not quite break even but a lot better than previous quarters.

Okay. Is it correct to expect it to be break even the remaining quarters of this calendar year?

Well, they continue to try to get at least break even. They are ramping up their production to meet some of the increased demand that Lannett is seeing. With that ramp up there are some increased expenses such as additional hiring and training of those people, increased supply and what have you. So we are optimistic that they will perform better than last year. Will they be break even for this first quarter? We are not sure. We do have two quarters under our belt. They have a slight loss after two months, but we have to see what their shipments will be by the end of September.

Okay. Thank you.

Sure.

We have no further questions at this time. I will turn the call back to Mr. Bedrosian for closing remarks.

Well, thank you all for joining us today. If anyone has any further questions, it doesn't seem like we had too many today any way, please don't hesitate to contact the Investor Relations team at Lannett or PondelWilkinson is our firm, and they will be happy to get you in touch with us. That concludes our call and thanks again for joining us today.

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