Lannett Company Inc (LCI) 2010 Q4 法說會逐字稿

Welcome to Lannett Company's fiscal 2010 fourth quarter and full year financial results conference call. My name is Monica, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to Robert Jaffe, Investor Relations for Lannett Company. Mr. Jaffe, you may begin.

Good afternoon everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2010 fourth quarter and full year financial results. On the call today are Arthur Bedrosian, President and CEO, and Keith Ruck, Chief Financial Officer. 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 may be accessed on the Internet at Lannett's website. 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.

This afternoon, Arthur will review the Company's business highlights, then Keith will discuss the financial results for the quarter and year in more detail, followed by Arthur's concluding remarks. We will then open the call for questions. With that said, let me now turn the call over to Arthur Bedrosian. Arthur?

Thank you, Robert, and good afternoon, everyone. Our top line growth in the fiscal 2010 was primarily driven by strong sales of our pain management products, as well as certain base business pharmaceutical products, including Levothyroxine. We have spoken about our plans to vertically integrate our pain management products, and those plans are bearing fruit and will continue to bear fruit for the foreseeable future.

Last month, we announced that we received FDA approval of Ondansetron Injection USP 2-milligram per ML single dose vials. This approval is in addition to the one we received in May for Ondansetron Multi-Dose Vials. Both the single-dose and multi-dose vials of Ondansetron Injection come from our joint venture with Wintack, Limited. We have delayed the launch of these products while we negotiate with our supplier for better pricing, in light of the number of approved competitors already on the market. In July, we announced that we received FDA approval of Phentermine hydrochloride, blue and white seed capsules USP 30-milligram. We plan to launch this month or early October at the latest.

With regard to our shelf registration, as I mentioned on our last conference call, we continue to review our needs for additional funds to more rapidly exploit the potential for vertically integrating our operations. We believe vertically integrating the Company would significantly increase our prospects for growth. We are also exploring potential acquisitions of complementary products and/or companies, and evaluating the benefits of upgrading our facilities and expanding our pain management business. Utilizing the shelf for these purposes creates greater shareholder value. With that, I'd now like to turn the call over to Keith for an overview of our financial results.

Thank you, Arthur, and good afternoon, everyone. For the full year ended June 30th, 2010, net sales increased to $125.2 million, compared with $119.0 million in fiscal 2009. As Arthur mentioned, sales from our pain management business contributed to the increase to net sales. We added products to our pain management portfolio, and a competitor withdrew from the market. Partially offsetting our top line growth was a decrease in sales of our prenatal vitamin product, even though we command 95% of the market. As we have previously discussed, the manufacturer of the brand version ceased marketing and promoting its product in December of 2008, leading to a decrease in demand for our OB Natal One.

Gross profit was $41.3 million, compared with $45.2 million for the same period in the prior year. The decrease is primarily due to royalties accrued in connection with the sale of certain products and two months of idle capacity costs at our Cody lab subsidiary during the second quarter of fiscal 2010. Research and development expenses increased to $11.3 million, from $8.4 million in fiscal 2009.

Selling, general and administrative expenses decreased significantly to $17.4 million from $26.1 million in the prior year. A brief explanation regarding the significant decrease in SG&A. In fiscal 2009, we incurred professional fees related to the OB Natal One patent challenge of $6.5 million, and $818,000, for the full year and fourth quarter, respectively. Operating income rose to $13.0 million, compared with $10.8 million in fiscal 2009. Net income increased to $7.8 million or $0.31 per diluted share, compared with $6.5 million or $0.27 per diluted share for the prior year.

Turning now to the financial results for the fourth quarter of fiscal 2010. Net sales were $33.8 million, compared with $35.4 million for the comparable period of fiscal 2009. Gross profit was $11.3 million, compared with $13.6 million for the same period in the prior year. R&D expenses decreased to $2.1 million from $2.7 million in the fourth quarter of fiscal 2009. SG&A expenses decreased to $5.2 million from $6.9 million in the same quarter of the prior year. Operating income increased to $4.3 million from $3.9 million in the fourth quarter of fiscal 2009. Net income grew to $2.8 million or $0.11 per diluted share from $2.4 million or $0.10 per diluted share for the fourth quarter of the prior year.

Turning to the balance sheet, the Company has as of June 30th, 2010 approximately $22.5 million in cash, cash equivalents and short-term investment securities available for sale and approximately $7.7 million of long-term debt, including the current portion. With that brief financial overview, I'll now turn the call back over to Arthur. Arthur?

Thank you, Keith. According to data reported by IMS Health in August, 2010, Lannett is among the top 20 companies based on the number of prescription transactions for unbranded generic products in the United States. Additionally, our Levothyroxine tablets were recognized by IMS Health as the 18th most prescribed pharmaceutical product, including both branded and generic products in the United States. Over the last year, we experienced a 6% growth in prescriptions for our products.

In addition, Levothyroxine has experienced an 11% annual growth during that period. And over the past five years, we have experienced a 95% growth in our revenues from approximately $64 million in fiscal year 2006 to over $125 million in fiscal year 2010. This rapid growth has been achieved through strategic partnerships and opportunities resulting from certain difficulties our various competitors have experienced with regulatory compliance.

Looking ahead, we expect to see additional competitors marketing some of our key products. This, combined with the FDA's decision ordering Lannett and others to cease manufacturing Morphine Sulfate oral solution will negatively impact our business for the balance of calendar year 2010. However, we are optimistic about receiving FDA approval in the next several months for our New Drug Application for Morphine Sulfate oral solution and expect to relaunch the drug in early 2011.

Moreover, we continue to invest in product development. Currently we have 21 product applications pending at the FDA, two of which we believe are first time generics. We have an additional 60 product candidates in various stages of development. This is the largest number of products we have ever had in development, and compares favorably to companies much larger than Lannett.

Before we open the call to questions, let me close by saying, Lannett is a quality conscious Company with a robust pipeline, excellent prospects for long-term growth and a dedicated team. We expect to see new pain management abuse deterrent drugs coming to the market. We believe we will breathe new life into our pain management business, as prescribers and patients are less concerned about the potential for abuse. 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 Scott Henry of Roth Capital Partners.

Thank you. Good afternoon. Guys, just for starters, when we look at the quarter, could you give any color on the revenues for pain management, thyroid deficiency, and heart failure, just three of the more important categories, if you could just approximate those would be helpful.

The fourth quarter by itself?

Yes.

I don't have that data handy.

Pain management, do you get a sense, was it up from third quarter?

Well, the both Levo and pain management I believe were up over the third quarter, yes.

Okay.

I would concur with that.

Okay. And then --

Just real quick, to put a bit more color on that. If you remember in the fourth quarter of last year, we had a large backfill of Digoxin when Parado left the market. That added about $6.5 million additional to our fourth quarter of 2009. So we feel very comfortable talking about Levo and pain management being significantly up from the third quarter.

Okay.

Because of that difference.

Maybe just walking through the key products only, when you think about next year, Levothyroxine is kind of everything on track, no new competitors there, or do you see anything different there?

Levothyroxine, I don't see any new competitors there. There is someone entered the market with a capsule version of the product, a brand, and they don't seem to be making any headway. Remember, we continue to erode the Synthroid market for this product and also parts of the Levoxyl markets. So there will be continued growth for the generic Levothyroxine for the foreseeable future, as those markets erode in favor of the generics. We are seeing some increased competition on Levo from a pricing point of view and we do state in our press release that will put some pricing pressure, maybe not volume, but it does put some pricing pressure on Levo going into this first quarter.

Okay. And then Digoxin, I guess, how is that looking? We know that's coming under pressure, and that's expected next year. Could you give any color on how significant it may be?

I don't think it's going to be that significant. As we spoke about previously, especially last year, we anticipated some decline in both markets. We didn't really experience it in this past fiscal year. But it's certainly going to happen in this fiscal year, 2011, and we believe we have some products and things in the pipeline that should address that on a full fiscal year basis.

First for one or two quarters, we might see the impact because when your competition comes in and quotes a price you initially match a price, you have floor stock adjustments, so the impact is greater, the initial stage, than it is as you go on for the remainder of the year. So I do expect that there will be some decline in profits on some of those products, but we've been anticipating that and we're not completely reliable on the profits from those products. I think the remainder of the year, certainly the last six months ending June 30th of 2011, we'll see a pick up in more pain management products, which should offset that. But yes, we are seeing some late first quarter pricing pressure on Digoxin from one competitor.

Okay. All right. And then when we think about pain management, I mean, it sounds like the morphine will hurt you in the first half and may help you in the second half. When you think about that category as a whole, for 2011 fiscal year, I gather you would still expect growth?

Yes, I do. Because certainly for this fiscal year, there will only be two people in the item, one that currently exists and our approval, even the FDA indicated it would be approved by January of 2011, possible could be sooner but it certainly should be approved by then which gives me roughly six months to sell the product. So I would think there might be an increase in the overall usage of the product. Our product is a little more desirable than the other Company's product in terms of the packaging. We believe we'll benefit from that rather quickly.

Okay. And then leading into kind of these comments about first half having some headwinds, should we think about the first half of fiscal year 2011 and it sounds like you're telling me it's probably not going to be as good as the second half of fiscal year 2010 was but I assume it should do better than the first half of last year where you had $0.11 total. I mean, I'm not trying to have you give guidance but I'm just trying to get a sense of how to interpret those statements.

It might be a little too early because we still don't have a final picture on what the pricing pressure on Levo and/or Digoxin would be. So it's probably a little too early for us to comment on first and second quarter of 2011.

Okay. Well, maybe just keeping it in broader terms, I mean, do you feel comfortable, given that you're having some pricing pressures to your base business, that you can grow the bottom line in full year 2011 versus 2010?

I think that's a distinct possibility because we do have some things in the works that, again, we're relying on the approval process. We do expect some things to be approved, but again, I'm predicting the future and I'm not a prophet. I'm a little concerned that with the FDA backlog we just don't know what's going on at the Agency and when they'll approve things. I tend to be more optimistic. I do expect some products that will give us a bit of a benefit in the second and third quarters for sure.

Okay. And then just a couple final ones. When I look at SG&A sequentially going from $4.4 million in Q3 to $5.2 million in Q4, how should I think of it next year versus this year? Is Q4 a seasonally high SG&A quarter? I mean, I guess it has been in the past but there's been a lot of noise. Or how should I think of the sequential discrepancy there?

We had some additional sales and some improved profitability in the fourth quarter that increased certain bonus amounts, and that's partially what you're seeing in the increased quarter-over-quarter SG&A expense. I would tell you, if you took the -- I'll take the bonus out. You're probably running on an SG&A, you'd probably be running totally without bonus, something less than around $4 million a quarter. I don't see really any other change going on in SG&A. We have some slightly increased legal fees because of what we're doing with the FDA on the Morphine Sulfate matter. But that was a one and-a-half month blip right now. We're not sure what the future is going to hold on that level but I don't see it right now being significant.

Okay. That's fair enough. And then just the final question, R&D did dip down in Q4. Any thoughts in 2011 on R&D? Should we see any significant deviations from 2010? Is there any reason that should be higher or lower?

It was down in the fourth quarter, primarily just from the timing of both bio-studies and third party development work. We didn't have too many either milestones on the development side or biostudy results really hit in the fourth quarter. That's why it was somewhat down. Going forward, it depends on when those will hit. We do have a lot of active agreements currently in place, but if I were to guess right now, somewhere between $2.1 million and $2.7 million would be an R&D level.

Okay.

For base.

All right. That's helpful. Then that's all the questions for now. Thank you both.

Thank you.

(Operator Instructions). Our next question comes from Gregg Hillman's line of First Wilshire Securities.

Yes, good afternoon, gentlemen.

Good afternoon, Gregg.

Could you talk about the Morphine Sulfate oral solution, what were the sales of that in the fourth quarter?

They were significantly above $2 million for just the quarter. We had some customers that bought a fair amount in the fourth quarter, because they had a feeling that once only one person was in the marketplace, the price would go up, which has occurred. So we had a decent amount of sales even through the end of June on that specific product.

Okay. And so -- and can you explain to me one more time what's happening now? You're saying so you're forced to withdraw selling further market on the product at what date?

As of July 24th.

Okay.

The FDA has asked all unapproved people that had -- were selling or manufacturing Morphine Sulfate that did not have an application to remove themselves from the market.

Okay.

And we know that everyone but Roxane is out of the market for manufacturing and none of the big players are distributing.

And Mallinckrodt doesn't make that stuff either?

Not any longer. They were.

Okay. Well, then, could you just talk about Cody a little bit, the various rooms. Do you have a dedicated room for hydromorphone?

Yes, we do. Sometimes those dedicated rooms, in the case of hydromorphone, can be used for other purposes. Currently, that room is used for hydromorphone. Then the solutions are made in a dedicated area, but the Morphine Sulfate and the other solutions are made in that same area. Of course, we're not manufacturing Morphine Sulfate currently until our New Drug Application is approved, and we are still litigating that issue with the Agency.

There's a hearing in October in Cheyenne, Wyoming again on that matter. We'll continue to wait for our application to be approved. The application process is moving along. We are responding to the Agency's requests.

And then so you mean you're having a hearing concerning Morphine Sulfate oral solution in Cheyenne, is that correct?

That's correct.

Getting back to hydromorphone. What kind of headwinds are you seeing in terms of gaining market share there?

We're running into severe competitions from Mallinckrodt. Who has been going after business with aggressive pricing on a number of occasions. So we are dealing with that issue. And as a result, we have lost some opportunities to Mallinckrodt on that product. We continue to capture market share for the product. I believe it's increasing in sales as we speak. But some bigger opportunities were missed.

Okay. So it's really hard to say. So that's kind of a question mark in terms of what kind of market share you normally get for that market?

Correct.

Okay. And then how about some of the other things, the codeine thing, like for either nasal spray or something like that, what's happening with that thing?

That's not used for nasal spray so you may have it confused with something else. Are you talking about the C-topical product.

Yes, C-topical, yes.

Sales on that product continue to grow and we continue to sell the product as both grandfathered and we've already begun the PIND, the Preliminary Investigation for the New Drug process, with the FDA. In other words, we're going down on two tracks even though we believe a product is grandfathered. We continue to file and work with the Agency on applications as well. It's not that we necessarily disagree on the idea of an application. So that product remains a product on the market, and we expect to continue to file the application. In this case, we may be the only application filed for that product. We don't know of anybody else working on it.

Okay. Well, are there any other products right now that you have approval from that currently have approval on that could gain sales rapidly to take the place of I guess the Morphine Sulfate solution?

Not that would help this first and second quarter. So not to offset the morphine initially. But we certainly do have some good prospects in front of us with regards to the third quarter, because of some approval process that's going ahead at the Agency. In other words, we're using the experiences of where their questions are coming from as to whether or not we'll have a product approved. It's a good chance that we'll have it approved for year end, calendar year end and launch in January. So there are some good prospects that will offset the loss of the morphine but it won't help these two quarters. Lack of sales hurts Cody and it hurts Lannett.

That's why you're litigating it. And these products that you're trying to get approval, these are -- I guess it depends whether other people come out but are these significant size products that you're going to try to get approval for?

Well, the one that's pending is a significant product. There is probably four or five approvals that have tentatively been approved, but I can't say anything more than that because I don't want to mislead people. Trying to predict what the Agency is going to do is fraught with difficulties. I'm an optimist and I do believe our product will be approved for the third quarter, launched the beginning of the third quarter.

Okay. I'll get back in queue. Thank you.

(Operator Instructions). Our next question comes from Marco Rodriguez of Stonegate Securities.

Good afternoon, guys. Thanks for taking my questions. Most of my questions have actually been answered, but I was wondering if you could provide an update in regard to Cody, and how you see those utilization levels there and how you see them maybe progressing through the year?

Well, Cody continues to move forward on its plan to manufacture more active pharmaceutical ingredients, which is its main goal, of course, and it continues to work on manufacturing our own source of the C-topical product so that will increase the profitability of the product dramatically instead of purchasing the raw materials. So all of that development work continues on and we should benefit from those things in some cases immediately, some cases over the long term, as vendors, or including Lannett, is able to change the source of their raw material to Cody, so that we're vertically integrated on those products. That process continues to move forward.

Cody spent a little sum of money to continue to increase the number of rooms that they can use, both as dedicated facilities for certain products as well as for interchangeable products so that they can use the same equipment and make more than one product. That's all moving forward very rapidly then so we expect Cody to continue to give us a future opportunity to be vertically integrated, and really what we're doing is exploiting that licensing opportunity we have there.

And would you classify the progress that you guys are making on schedule, ahead of schedule, behind schedule?

I would say it's on schedule.

And then, I know you kind of addressed this a couple different times here in various responses to questions, but perhaps could you maybe put a little bit more color in regard to your pipeline, and any sort of expectations that you may have here?

Well, the problem with the pipeline is we should have gotten quite a number of product approvals, starting in our third and fourth quarter of last year, and unfortunately with the FDA backlog, we just don't know how long that backlog is going to last. We rarely know what's going on because they won't tell you. They don't know themselves. But we do expect an approval shortly on some products, based on the communications that are coming about. So we feel we'll be launching a couple of new products fairly shortly.

Again, you're trying to predict what the FDA will do always is a difficulty. Certainly it won't be for the first quarter, that's for sure. But I certainly expect to see some products that we can launch in the second quarter that might offset the sales lost from Morphine Sulfate solution. And the rest of the products at the Agency, I hate to say that I have no clue but unfortunately there's just no way for us to tell whether they have three products they're going to suddenly approve, or they're not. The fact that you don't hear anything doesn't mean that they're not working on it. Could mean they have no reason to talk to us, and the application is moving along, and on other occasions when you hear something from them you have a better idea of what's going on.

We're optimistic in that because we've added one year to those applications that I would expect them over the next three to six months from now. So second and third quarter, I should start getting a lot of approvals, that should have been approved almost a year ago, but for the backlog at the Agency. That backlog was a surprise to everyone in the industry. They were running around 18 months and now they've added -- raised it, excuse me, to 26.7 months and that really hurts a Company because it really adds almost another year of waiting time. Meanwhile, we've made the investment, and filed the application and all we can do is sit back and wait.

There's nothing wrong with our application. It's not like we're getting major deficiencies or anything like that. It's just a waiting game.

Can you kind of quantify those approvals you should have gotten last year? Had the time line been a little bit shorter, if you will?

Well, out of 20 applications our guess is we should have had roughly seven or eight approved already. So those are falling behind the approval process. The one we're expecting, let's say in the next month or two, I should have received back in March or April. So I'm gaining in that case six, seven months of delay, and some of the others, we haven't heard anything. We just don't know what to tell you there. I don't want to guess because nobody wants to guess at what the Agency's going to do. I wish I could tell you more than that but there is no clue coming out of the Agency regard to these applications. It's frustrating for us as it is for all my shareholders to not be able to tell you I have this data or the other thing expected to be approved and yet tomorrow morning I could get three approvals and I wouldn't have known about it ahead of time.

Just wait by the fax machine, unfortunately. The only thing companies like us can do is continue business as usual, keep submitting applications, because eventually by filling the pipeline you will benefit from those products and if you don't do anything then you lose completely, because if it takes three years to get an application approved, the sooner you submit one, the sooner you'll get it approved.

Great. Thank you, guys.

You're welcome, Marco.

Our next question comes from [George Gaspar], who is a shareholder.

Thank you. Arthur, first question is regarding the R&D expense outlook. I know you made some comment on it but looking at last year for the first quarter it was about $3 million, if I'm doing this correctly, and you were off closer to $2 million in the fourth quarter. And your guidance is that it would be still below the $3 million range going forward on a quarterly basis? Is that what I'm hearing? Maybe $2.7 million or less?

I think I was talking about the current quarter.

Okay. The current quarter is the first quarter. So you're talking --

Yes.

About a top of $2.7 million, maybe?

From what I can see now, sitting here mid-September, it should be probably something less than the $3 million you saw in that first quarter.

That first quarter last year. Okay. And as you're looking at your -- you had a lot of discussion here on possible approvals and hope for approvals. How do you see the R&D expense overall on a quarter to quarter basis if you're going to try to combine that into the fiscal outlook for June 2011? Would it be in the $12 million range?

We're going to see how the pricing pressures on other products affect our profitability and we will, therefore, I'll say flex the R&D spend for this year. In effect, either push off some of the bio-studies or slow down some of the external third party development to manage our earnings for the year. It's really a little too early to state right now how much we would have to flex until we see the results of that early fiscal year pricing pressure.

Okay. And further, you're pretty well along here in the first quarter. I mean, we're almost mid-September. So you're more than two months into your quarter. And you can't judge at this point -- do you have a shot at coming in near the first quarter last year or can you improve it or are you going to fall short of that?

We don't give guidance. At the current time I would be reluctant to do so here.

Okay. All right. Let's discuss a little bit more at Cody. Can you break down fourth quarter Cody operating profit? Was it still in the loss column? It was pretty much a break even or a little profit in the third quarter, if I recall. How did I do in the fourth quarter?

It again was profitable, and the profits for the third and fourth quarter made it so that Cody was profitable for the entire year of 2010.

Well, that's impressive then because you still were lagging a $1 million per quarter loss, I thought, in the first six months. Can you describe -- can you talk about the progress at Cody, and in Philadelphia in terms of facilities progress? In the last quarter conference call regarding Cody there was discussion about some additional bays that were going to be completed for manufacturing, can you clarify that for me if I'm wrong? Secondly, can you update us where you are in Philadelphia. Can you tell us how you strategically see using the additional space in Philadelphia. How close are you to getting complete there?

First of all, let's start with Cody. Cody's on schedule with some of the work we talked about previously. And one of the examples of that will be the manufacture of the C-topical, should start there very shortly. As a matter of fact, some work in terms of actual manufacturing has started on that one. The other API that we're looking at, I don't believe the work is started on the actual manufacturing, but the facility is almost completed. So they're on schedule to gear up to making additional products in their facility.

Moving to Philadelphia here, we've moved into our third building. We have plans, we've already had quotes received on how we're going to fit out the facility that we vacated where we had our warehouse. As you know, we kept all three buildings now.

Yes.

And we plan to spend money carefully. We budgeted 50% of what we would need to fit out that building, but depending on our earnings we'll be careful as to what we do but there are certain products that we want to manufacture in that building that we're going to begin setting up that area within Torresdale to do manufacturing. More importantly, the original State Road where we moved our offices from, has had an extensive renovation completed there. We had a little internal ribbon cutting you might call it, wherein the HVAC issues that we felt needed to be addressed, we needed to upgrade that facility because it is our oldest facility and even though it was state-of-the-art, there are improvements that always need to be done and we completed those. That gave us some space to manufacture additional product there that we would be planning to make.

So we'll be utilizing that facility and continue with our plans to fit out Torresdale. Torresdale will take a couple of years to complete that fit-out, and again depending on the money we have available, we earmark some for some work that has to be done, and that started but I would say the bulk of the work will probably be put off until next fiscal year at the Torresdale site. The work at State Road our first plant that's completed, the work at Townsend Road where we moved into that's been completed.

Okay. So at this point you're bearing down on how much manufacturing space versus before you started this change-out in Philadelphia.

That's correct. We're anticipating getting approvals from the Agency and those approvals were going to cause a strain on our operations, and the FDA doesn't like to see crowded facilities, so that's why we needed to address it ahead of time. It's difficult to deal with this crowded problem after the facts because the FDA concerns themselves with possible mix-ups and what have you so we had to address it ahead of getting the approval.

But we're optimistic that those approvals that will start coming this fiscal year will now be able to be addressed in a facility that's geared to manufacture and handle that added volume and the additional applications that are out at the Agency that are further out will be addressed with the additional work we do in Torresdale. So everything -- remember, we don't borrow money here. All the money is coming out of our earnings so because we're conservative in that respect, it's hard for us to go ahead and do everything at once. It's easier to just manage it and we manage it as we see our income coming in.

Okay. So the goal line on manufacturing square footage is what versus where you were before you started?

Well, it will -- in the Philly area, it will double. We had roughly 20,000 square feet of manufacturing space and we'll be increasing that by roughly 28,000 so almost doubling the manufacturing area between State Road and Torresdale.

I see. Okay. And Arthur, you mentioned money availability. Now, the cash position in the quarter was, if I recall, I think you mentioned $22 million was it, plus.

At the end of June correct.

That sounds like it might be up from the third quarter. I thought it was like 19 or something. Can you clarify that? And secondly, how do you see the cash position for the quarter here and going forward? Can you cash flow carry forward so that you can maintain your cash position? Is there any enhancements to cash coming that -- transactions that would enhance the cash position?

We were at $19.9 million at the end of May -- sorry, March. We ended up at $22.7 million at the end of June.

Okay.

We are -- the first quarter puts a lot of pressure on us from a cash point of view in that we have generally bonus payments occurring in that quarter. We have our payments with our tax return extensions. And in this specific quarter, we had a fairly sizable June level of sales for which we'll l have to pay for here in this quarter.

Okay.

We will have pressure on our cash for this quarter.

Are you doing anything about refinancing in Philadelphia or that could generate cash back?

We are bringing -- we have one -- we're working on two financing situations, one is just a refinance, will not bring any additional cash to the Company but the other one where we will close on the financing of our new facility here at Townsend Road, will bring about $5 million worth of cash. That is expected to occur in October. So you'll see a lower cash number end of September but then we'll pop back up in October. Please remember, even though we increased cash over the second and third quarters of last year, we did that, even though we paid for this current new facility and its fit out, totally out of our own cash until this financing is put in place and will come in probably October.

One last and I'll get in queue. On the OB Natal, what sales volume are you generating there? I noticed that K-V Pharmaceutical has received permission to go back into operation. How do you see that? I know that it was declining. Is there opportunity here or is that passe?

KV has only been given permission to re-establish their micro K generic product so that's the only product they can bring back to the market. It's my understanding they continue to actively try to sell the intellectual property, you might call, Primacare One. Until the brand is restored to the marketplace, there's no place for a generic and there is nobody doing anything or purchasing that license from them that we know of at the moment, so that continues to be a declining market. The Primacare One market is almost completely gone at this point.

Okay. Thank you.

(Operator Instructions). Our next question is a follow-up question from the Scott Henry of Roth Capital Partners.

Thank you. You know, I just wanted to dig a little deeper on Levothyroxine, given some cautious comments there. This is a product that historically has grown pretty well, even in this market and it's still growing on a prescription basis. I wanted to get a sense to try to put some quantification behind kind of the cautious comments. Do you expect the thyroid deficiency category, should we think about that being flat in fiscal year 2011 or lower growth or even turn negative? Just any color would be good.

From a prescription point of view, it should -- we expect it to continue to increase. From a pricing point of view, again, we're still not sure of the end result but we are seeing pricing pressure being caused by one of our competitors related to an acquisition that was made earlier this calendar year. Again, we don't have the final results but we are seeing pricing pressure, which should or will probably result in us selling Levo at a lower price as well as some form of a shelf stock, in order to keep a significant piece of our business.

Sorry, you said selling at a lower price and some sort of a shelf stock. Maybe you could just talk about what you mean by that.

Well, shelf stock is, we might be selling a certain product for $10 a bottle and what happens when you get pricing competition, another player may come in at $8 a bottle. Well, if you decide to match that quote of $8, the customer not only gets -- the standard practice is not only gets to buy it at $8 in the future, but they also get a shelf stock adjustment on everything that they currently have in their inventory that they bought at $10, down to the $8.

So might there be some one-time revenue adjustments because of that next year?

Yes, I expect there to be some in the first quarter, yes.

Okay. Thank you. That's helpful.

Okay.

Our next question is a follow-up question from Gregg Hillman of First Wilshire Securities.

Yes, Arthur, can you talk about selling API to other people in the narcotic space, how that's going?

Well, actually that's going rather well. That was not our actual plan. Lannett wanted Cody just for to be supplying ourselves, but we did have a customer on the hydromorphone. And what we've had there is when we manufacture hydromorphone, there's a particular step which another material is manufactured and we've been dealing with the DEA to get a quota for that material, and the quota in the United States had been moved up for that interim step, and we tried to find some solution in working with the DEA on this, and we haven't really found one. So as a result, it has stymied us in selling more. We have had more orders than we can fill on the hydromorphone right now from an outside customer. We tried to resolve that.

The DEA's been working with us. It's a dilemma that they're embarrassed about. It's not like they're doing it on purpose or anything. They understand that the regs are a little peculiar, in the way they treat this particular step. Nevertheless, we're trying to resolve that with them and hopefully we'll get it resolved. In the meantime, as soon as they get their quota for the United States, they'll certainly get quota to us so we can continue manufacturing of it. For now, in a way, we have more orders than we can handle on the hydromorphone. The other products, we're not ready to sell to outside customers at this point.

Okay.

That's what I told you we're making the C-topical raw material.

Yes.

For our own purposes and the Morphine Sulfate will be for our own Morphine Sulfate oral solution when we relaunch that in the fall. Excuse me, in the third quarter.

Okay. Your fiscal third quarter?

Yes.

Okay. Getting back to the hydro, the API, so is -- I think you had some proprietary process for manufacturing different forms of hydromorphone. Is that correct?

Well, one is a patented form and the other one that we're using currently I don't believe is patented. It's a three-step process. The patented process is a two-step process. The problem with switching to a two-step process is both myself, Lannett here and our customer at Cody for that raw material have to submit supplements to the FDA to get that approved to switch to that new DMF process, that we're now using at Cody.

Until that's approved, we have to continue to make it the old fashioned three-step process. The two-step process would eliminate this problem with the quota for the interim step. So we're anxiously trying to move ourselves as customers of Cody as well as Cody's other customer into a position so they could use that material.

Have you submitted -- you said -- have you submitted samples from the two-step process to the FDA?

Well, no, you don't submit samples to the FDA. You have to change your drug master file and then you submit samples to the two customers. They have to formulate their product using the new two-step process, put it on stability and submit that data as a supplement to their individual applications and we're pushing Cody to push Lannett and the other customer to do that.

And that would circumvent the quota problem.

Right. Right now it's kind of caught in the middle. We didn't have that opportunity. Even if we did, the FDA wouldn't have approved it this quickly. So we still have to resolve the quota issue, and that's a case where the United States gets a quota from the UN, and when it's used up, they have to relinquish more quota to themselves, believe it or not. It's a silly process. And they're working on that as we speak.

And does the quota issue apply both to the two step process and the three-step process?

It's my understanding only applies to the three-step process.

So that would be kind of another wild card over the next six months?

Correct.

Okay. And that could be a sizable market. Because that customer has its own special relationship with its distributors that Mallinckrodt wouldn't have.

That's correct.

Okay. Great. Thanks.

I don't think it's going to take six months to resolve. We're expecting it to resolve I would guess within this quarter. I mean, within our -- by the end of our second quarter, let me say that, within the next couple of months.

Okay. So that would help to replace the lost Morphine Sulfate too?

Every little thing helps, but the Morphine Sulfate we had a 44% market share, so it's not going to replace that quickly. The only thing that will replace it is us getting back into the Morphine Sulfate business.

Okay. Which you're working on all fronts to happen.

Correct.

Okay. Thank you.

Our next question comes from Kevin McDevitt of UBS.

Hi, Arthur.

Hi, Kevin.

I have just a question, you have the cash position, $22 million, and I heard your comment that it looks like you'll have some expenditures in this first or second quarter that would deplete that, and then -- but my question is about the stock buyback. Is that in place or is that -- has that gone by the wayside? Do we still have that in place and what are our plans for that?

First of all, we didn't say we would be using up all our $22 million in cash. Keith said we would be using some of it.

Some.

So we'll still have plenty of cash. We're husbanding our cash very carefully here. With regard to the buyback, the buyback was authorized and was executed during the course of the past year. But we have limitations on what we're allowed to buy.

The rules that we have to follow are similar to insider trading rules. The Company can only buy during certain periods. It can't buy beyond 3.30 in the afternoon. It has to buy a percentage of the trading volume. So it's difficult for the Company to go out and buy a large block of shares. So when we feel the stock price gets unreasonably low, we step into the market and we look to purchase shares.

That should not be confused with a typical shelf registration, because a shelf registration is going beyond the typical buyback, because some people indicated, well, its seems like a conflict of interest. The shelf registration was designed for opportunities. I want to make an acquisition, I have the opportunity to use that shelf. The buyback is used to reflect the interest we have our own shares and a belief that if they're undervalued, we're going to do something about buying them at those prices but because of the restraints on us, the buyback doesn't make the impact everybody thinks it will have in a Company our size where our float is that small.

Is there -- last quarter, was there any shares that were purchased?

I don't believe we were able to get any. We did try to buy some shares, but we were unable to get it. A lot of times when we see the market price drop, we put in an order to get shares and the price jumps up. We're unable to buy the shares at the market price.

Okay.

We don't believe that those sales are actually real offers at this point. I looked into this with the American stock exchange specialist and he's had some indication, he's shown me the offer that someone puts out there, puts some shares out on the market. When he goes to buy it, the offer disappears and I understand the SEC's been looking at some things like this which are done purposefully, I can't say it happens to our stock but certainly looks like the same situation that was recently discussed in The Wall Street Journal for another Company. We did buy through the third quarter of last year about 124,000 shares, and you can see that in our March 10-Q filing. I don't think we bought any in the fourth quarter because of a number of issues.

What is approved right now? What's remaining on the approved?

It's not a timetable that it's approved. $5 million worth of stock was authorized to be purchased but no timetable was put behind that.

Okay.

It was put in place so that I don't have to turn to the Board each time when I need to do a buyback but the Board is advised whenever we make that decision and they concur with us whether we should go ahead and purchase some additional shares under that buyback.

Okay.

Let me correct something I stated. We bought back about $123,000 worth of stock.

Okay.

Not shares.

Okay. Gentlemen, thank you.

Thank you.

(Operator Instructions). Our last question comes from George Gaspar, a shareholder.

Yes, a couple follow-ups. One, Arthur, based on today's volume you shouldn't have any problem buying stock if you so choose going forward and I know that you probably have to be out of the market for a short time here since you just reported. Secondly, on the follow-up on the Morphine Sulfate situation, you mentioned that you had -- it's very important that you have 44% of the market in the area that was withdrawn. Correct me on my observation, if it's wrong.

My question is, what was it specifically that pulled the various other producers including yourself out of the market, and it sounds like you were producing this without a formal approval of FDA along with the other producers that were withdrawn. What is it that caused FDA to do this in a manner that wouldn't allow sales to continue, your production to continue, and if there's only one player in the market right now, which I believe was commented on earlier, what's happening? The price has got to be going up pretty good if everybody else is out of the market. Can you explain this in some further dynamic?

Sure. First of all, let's go back to the FDA's guidance, which they claim is not a legal document. Nevertheless, they acted against us. They contacted the DEA and asked the DEA to withhold quota from us, which is unprecedented. They then notified our customers to cease distributing the product, which is unprecedented. Our allegations in our court filings are that they favorably were disposed to helping Roxane, to our detriment. We don't understand why.

Their own guidance says that when someone else is approved, that you have roughly one year, I'm quoting from their own guidance, to continue to sell your product. We were asked to stop selling within six months, Roxane was approved in January 2010. I submitted my application in February, 2010. I should have had roughly one year to continue to sell my product, which would coincide with the approval of my application. Instead, the FDA asked us to take the product off the market, threatened our customers and told the DEA to start giving me quota to manufacture any more, and have inspected both Cody and our facility to confirm that we stopped shipping the product as of that deadline, which we did.

Why they're doing it? We're questioning that judgment ourselves. When the FDA puts out a guidance and doesn't follow it and says well we're using our discretion, we just find that a little bit strange. When they used their discretion they created a shortage. They used their discretion here. They now have one person in the market place.

If anything goes wrong with that supply chain, there's going to be no morphine sulfate oral solution concentrated on the market. The hospices, and the people dying in those hospices will suffer. And we think all of this doesn't make any sense. In light of the fact that there's a recession, that they have a backlog at the Agency that they can't deal with, to burden them with additional applications during this time frame seems rather strange to me. Why not take those assets, provide them to the generic drug divisions so that you can get this backlog resolved, and leave a drug that's been on the market since 1860 on the market another year or another two years.

We didn't disagree to file an application. We weren't trying to be difficult. We still firmly believe this is a grandfathered product. We believe we have all the evidence, proving it's the same formula going back to 1867. We have followed all the previous issues with regards to grandfather status of drugs.

And we found that the FDA took on a new tack. They suddenly decided that in order for it to be grandfathered, you actually had to be the Company selling the product prior to 1906, 1938 or 1962. Which is a definition that's never been prescribed by them before. I just don't understand what to tell you. They have created a monopoly for Roxane and Roxane actually did raise their prices dramatically, and I don't know what they're going to do, if they're going to further raise them, but that's the situation as we sit here today.

Are you saying, Arthur, that there is a potentially some denial of the product in the market where it's really needed and the government has fostered this?

I don't know what you mean by denial in the marketplace.

I mean, you mentioned that --

The first time around there was. When they sent the warning letters out, they stipulated that they had done their research and there would be no shortage if these products were removed from the market. Two weeks after they sent that warning letter out, in I believe it was March 2009, they rescinded that and said yes there was a shortage and allowed everybody to stay on the market for the next six months or until someone got approval. So someone got an approval, and then they asked us to get off the market six months hence.

The problem with that is their own guidance said that you had roughly one year to remain on the market. We never adequately been responded to with regards to why the urgency to remove the only other product on the market, create this monopoly, the higher prices that are going with it. Nothing makes sense. But there's nobody to answer that question. This is their discretion, they call it, and of course we disagree with it, and we're litigating it. We don't always agree with the FDA. We don't always disagree with the FDA. When we disagree we have to litigate, unfortunately.

Thanks for that explanation and sounds like it's kind of a downer, it's a downer situation, but you've been through a lot in terms of getting your expansion up and just seems to me like you've got a real opportunity going forward here. Hopefully you can launch out here in six months with some product additions that really you can capture market share faster with the increased capacity that you're building in both at Cody and Philadelphia.

We're monitoring the situation and certainly our customers claim that they're unhappy with the Roxane product, they're not happy with the cup that they use to dose the patient because of the inaccuracy of it, and they're unhappy that the bottle is not a Bustrip bottle, ours is a unit strip bottle, so it allows you to see the remaining inventory in the container which helps diversion issues, so that people cannot steal product from the bottle. So we have an advantage and it looks like if Roxane doesn't file a supplement in the meantime, that advantage will accrue to us.

Thank you for that.

You're welcome.

We have no further questions at this time. Would you like to make any closing remarks?

Yes. We would like to thank everyone who participated today. We appreciate your interest in Lannett Company. And we look forward to continuing our progress for you, our shareholders.

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