Lannett Company Inc (LCI) 2011 Q4 法說會逐字稿

Welcome to the Lannett Company fiscal 2011 fourth quarter and full year earnings 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 turn the call over to Robert Jaffe, Investor Relations for Lannett Company. You may begin.

Thanks, Monica. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2011 fourth quarter and full year financial results. On the call today are Arthur Bedrosian, President and CEO, and Marty Galvan, Chief Financial Officer.

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 3 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 Marty 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. Before we begin, I would like to take a moment to introduce Marty Galvan, our new Chief Financial Officer. Marty is a seasoned financial executive with extensive experience in the healthcare industry. He has worked for both large and small companies, as well as public and private entities, including VIASYS Healthcare, Rhone-Poulenc Rorer, Revlon, and Bristol-Myers Squibb. Marty is a welcome addition to our team.

Turning briefly to our financial results, as expected a number of factors and expectations, which were largely out of our control, impacted our financial results. More specifically, our top line and margins were affected by -- price and volume declines on certain key products; the temporary discontinuation of our morphine sulfate oral solution product; and a lack of product approvals impacts the expected price declines that are customary in our business.

As I said on our last conference call, without newly approved products, our sales people are largely left defending our existing products, excuse me, market share rather than growing market share. New generics are the life blood of our industry, and they allow us to leverage our sales calls and be more efficient. We have and continue to work closely with the FDA to get our product applications through their logjam.

I am very pleased to say that we have recently received a number of product approvals, which we expect to launch shortly. Of the 4 recent approvals, morphine sulfate oral solution has been launched, and is meeting expectations. Diethylpropion is ready for launch. Phentermine hydrochloride capsules 37.5 milligram will be launched shortly. And the Phentermine resin, which has no competition in the marketplace, will be marketed through our newly created specialty pharma division. We estimate the launch of this product by the third quarter.

Looking ahead, our antibiotic supplement application for MRSA was filed in February, and we are working with FDA to receive expedited review. Our C topical 505(b)(2) application will not be filed this fall as originally planned. The FDA is requiring additional clinical work before the application can be approved, and we are in the process of providing the FDA with the requested data.

Our intention to launch our first branded drug has already begun. We, along with the marketing firm we have engaged for this product, believe that the favorable opportunity exists for our drug. We estimate the market to be more than $30 million. Also, we have 14 product applications pending at the FDA, which is a large number of applications for a company of our size. Some of these product candidates represent meaningful market opportunities.

With that, I would like to turn the call over to Marty for an overview of our financial results.

Thank you, Arthur, and good afternoon, everyone. For fiscal 2011 full year, net sales were $106.8 million, compared with $125.2 million for the prior year. Gross profit was $23.3 million, compared with $41.3 million for fiscal 2010. Research and development expenses decreased to $8.6 million from $11.3 million in fiscal 2010. SG&A also declined to $15.9 million from $17.4 million last year. Net loss attributable to Lannett was $277,000, or $0.01 per share, compared to net income attributable to Lannett of $7.8 million, or $0.31 per diluted share for the prior year.

Turning to our results for fiscal 2011 fourth quarter, net sales were $25.5 million, compared with $33.8 million for the comparable period of fiscal 2010. Gross profit was $3.8 million, compared with $11.3 million for prior year fourth quarter. R&D expenses were $3.0 million, as compared with $2.1 million in last year's fourth quarter. SG&A expenses decreased to $4.2 million from $5.2 million in the same period of the prior year. And lastly, net loss attributable to Lannett was $1.9 million, or $0.07 per share, compared to net income attributable to Lannett of $2.8 million, or $0.11 per diluted share for the fourth quarter of fiscal 2010.

Now, turning to the balance sheet, as of June 30, 2011, cash, cash equivalents, and investment securities were approximately $24.7 million.

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

Thank you, Marty. With regard to our pain management division, the recent approval of our new drug application for morphine sulfate oral solution is an important development in getting this part of our business back on track. We launched the product in August, and we are working to capture market share. Currently, there are 2 other competitors in the market for this product, only 1 of which is currently selling the drug. We expect to recapture the market gradually.

We are investing in infrastructure at Cody Laboratories to increase capacity, and looking to add APIs to its product offering. I am pleased with the progress we have made. We expect to receive approval in the coming weeks for 2 ANDAs. We also anticipate additional approvals over the next several months for other product applications currently pending at FDA. Our pipeline includes an anti-hypertensive drug and 2 chemotherapeutic drugs from which we expect revenues of up to $100 million.

Moreover, we continue to invest in product development. Currently, we have a large number of product applications pending at FDA, and an additional 50 to 60 product candidates in various stages of development. According to the IMS data presented recently at the National Association of Chain Drug Stores, Lannett ranked 17th of the top 20 generic companies. We were also ranked number 15 for sales of Levothyroxine sodium, an increase of 6.6%, and ahead of the innovator drug, Synthroid, which was ranked 16.

In broad terms, we expect fiscal 2012 to be much improved over fiscal 2011. Recent product approvals have gotten the year off to a good start. More specifically, we expect our financial results in the first quarter of fiscal 2012 to compare favorably to the last 2 quarters of fiscal 2011. Based on current market conditions, we expect to see continued financial and operational improvement throughout the coming year.

Turning to 2012, we expect full year net sales to increase close to previous levels, and reflect the growth rate in the low double digits as compared to fiscal 2011. We expect the full year gross margin percentage to be in the mid-20%s. We expect full year R&D expense to increase to between 9% and 10% of revenue, versus the 8% of revenue in 2011.

And finally, we believe SG&A will increase at less than the rate of increase in net sales, and as a percentage of revenue, decrease by 30 to 40 basis points as compared to 2011. Regarding capital spending, in 2012 we expect our spending to be in the $6 million to $10 million range.

With the time available, we would like to address any questions you may have. Operator?

(Operator Instructions). Our first question comes from Scott Henry of ROTH Capital Partners. Please go ahead.

Thank you, and good afternoon. I guess for starters, I always like to ask, when the Q comes out, you're going to give us the product breakdowns. Could you hit on a couple of those for Q4, such as pain management, Digoxin, thyroid deficiency, where those subsectors of revenue came in for the quarter?

Sure, Scott. This is Marty, and I can give you some of the highlights. You're right, the K in this case will come out on Friday, and you'll see details there. But just to give you some of the information at this stage, the fourth quarter revenue, I'll talk to. The thyroid pipeline was $12.2 million in the fourth quarter. Heart failure, about $2.7 million. Pain management is $3.6 million, and I know sometimes the Company looks at pain in two different ways, but also I'll give you migraine headache products. That's $1.7 million. The larger products, I can give you now, if that works for you.

Okay, and just looking at it, I mean it looks like heart failure was a little low. Thyroid, I guess a little on the low side. Any -- anything going on? The two biggest products are always Digoxin and Levothyroxine. Anything going on there in terms of trends, anything we should think about going into 2012?

Well, the Levothyroxine we're expecting another 6% increase, and that was over prior year and it was increased last year. The Digoxin, we are expecting a decline annually because there's a lack of use for the product. We're projecting a roughly 10% decline in Digoxin sales year after year after year based on a lack of use for the product, not because we've lost market share or customers or anything. It's just not being prescribed like it was. While we see growth in Levo, as I mentioned earlier, we have the example of our sales has now surpassed the Synthroid brand in terms of our ranking. So, more prescriptions are being filled with Lannett's Levothyroxine than with the innovator product, and that's an increase over the prior year. We expect that to continue this year at the level of roughly 6%.

Okay, and I guess, you hit on a lot of guidance. I guess the thing that jumps out to me is that it looks like 2012 is going to look a lot like 2010. In 2010, you did about $125 million in revenues and about $0.30 in EPS. Is that ball park, what you're thinking about for next year? It just seems like everything seems to gravitate to those years looking similar.

Well, I would say the years are looking similar, but I don't want to predict $0.30 earnings per share per se. But I certainly do think the revenue would be similar to the prior year's revenue.

Okay, and --

And the launch of the products, and we don't know when we're expecting competition on the morphine sulfate. Presently, there's just Roxane and Lannett in the marketplace.

Okay. When you think about Q1, do you think you can be profitable in the first quarter of next year? I know there's a lot of timing in terms of when shipments are made. But is it realistic that Q1 2012 could be profitable?

Yes, Scott, this is Marty. So yes, we're looking at the first quarter at being profitable. We had the loss that you saw in the fourth quarter this year, so it's -- it will be slightly profitable is what our expectation is. The way our quarters look for 2012, the far majority of the profit will be in the -- infused in the quarters second, third and fourth, not much in the first quarter.

Okay, and then I guess, Arthur, with regards to pain management, $15 million in 2011 fiscal year, how should we think about that in 2012? That's kind of the biggest black box. Is $25 million unreasonable? I'm just trying to get kind of big picture outlook on that product, that category.

Up from $15 million, it's possible. A lot depends on whether or not we get quota from one of the other products that we've sold in June and July. But the quota application's pending. That's where I get hung up in making a commitment. We haven't been turned down for the quota, but if we don't get the quota, then I don't get the sale, and we're at a point where we need that quota now to start manufacturing. So, I'm expecting those sales, even though I don't have them in my annual operating plan at the moment.

Okay. Well, that's great. I'll jump back into the queue and certainly welcome aboard, Marty. Good to talk to you as well.

Thanks, Scott I look forward to working with you.

Our next question comes from Chris Holterhoff of Oppenheimer & Company.

Hi, good afternoon.

Good afternoon, Chris.

How are you doing? Just a quick question for Marty, looks like there was a deterioration in gross margin this quarter, looks like 28% this quarter compared to about 20% last quarter. Just wondering if that was solely due to price declines, or if there was something else at work there.

Yes, the other thing that we experienced in the fourth quarter was some -- in our factories, we had a degree of under utilization of labor and plant overhead. But we see that as a one-time item, and already in the weeks of 2012, we can see that that situation -- we've addressed the situation, but we did have weak throughput in the quarter, and it's now reversed. It's reversing itself.

Okay. Thank you. And just a question or two for Arthur. I guess just broadly, can you comment on any recent communication you've had lately with the agency regarding these 14 product candidates that are pending, and just kind of give us some color as to what gives you confidence that some or all might be approved by the end of this year?

Yes, well, certainly we have no regulatory issues, and we have been in touch with them, with at least two applications that are imminent, so within a week or two we have those. And then we have another application for which there's a shortage in the marketplace that could produce roughly $26 million in revenue on an annualized basis. If we receive that in the beginning of our second quarter, then we'll have three quarters of those sales, and that's also pending. And there's no reason it won't be approved. They are at that stage where I would say two are imminent. The anti-hypertensive one that I expect to do $26 million on an annualized basis is probably within a month, and then we still have two inspections going on in India in September. They are prior approval inspections. Once those inspections are over, there's two applications further that -- these are ophthalmic products that will be approved for us.

So, over the next first and second quarters, we're expecting somewhere in the neighborhood of five approvals. We'll be getting a lot of approvals over a short period of time, and we're gearing up to sell those products as well so that we're not wasting those approvals. That's why I'm very optimistic about this year. I had hoped that some of those approvals would come in last year, but unfortunately, they didn't come in in that fiscal year, and I did know that eventually they would be approved. The communication with the FDA is ongoing and very encouraging, and it should show up in the way of approvals shortly.

Great, okay. Yes, thanks for the added color there. And on the two additional ANDAs that you expect to be -- or the products, rather, that you expect to be approved in the next two weeks or so, could you just give us a sense of what markets the address, or any additional color you can about those products?

Two ophthalmic products we anticipate -- their expected revenue to us is about $6 million. On the anti-hypertensive, I said that would be $26 million, and the other two applications, in the neighborhood of $2 million. So, that would be 2, 6, 8 -- about $34 million in additional revenue if those get approved quickly this fiscal year.

Got it, okay. Great. Thanks a lot for the added color.

Okay, thank you.

(Operator Instructions). Our next question comes from Laura Engel of Stonegate Securities.

Good afternoon, gentlemen, and congratulations on a good quarter.

Thank you.

And welcome to Marty. I wanted to see if we could talk about the results for just a minute. You made a comment on the, I guess going forward, expected operational improvements in the SG&A line item. I was going to see if you could tell us a little bit about where you expect those improvements to come from and how that will kind of compare to current levels.

Well, one of the areas would be the decline in royalty that we were paying. That will be a reduction in the SG&A. But overall, I think we're predicting a slight increase in SG&A, but not an increase in line with the sales increase and revenue and profit increase. But we will see a small increase in SG&A.

Okay, and then also related to that somewhat, if you look at the research and development line item, a little higher than previous quarters than we had expected. I wondered if you could tell us kind of what went into that number and if you expect that to continue at the -- that $3 million a quarter level.

Yes, hi, Laura, this is Marty. In the fourth quarter, the pickup versus the third quarter, that's primarily some milestone payments that the timing -- milestone payments related to the bio studies. So, those payments occur as the work gets done. That's really what's driving the increase you see, the sequential increase. And with respect to next year, the -- that $3 million number, it's -- we are increasing the full year spend, as Arthur said in his outlook. That does put you at a point where mathematically you'll see that the quarters tend to be at about that $3 million mark.

Okay, and then one last question just for someone newer to the Company. On August 11, the release about the morphine sulfate oral solution was released, but then the press release mentions the temporary discontinuation of the morphine sulfate oral solution when it's discussing the impact from the quarter sales. How did those relate or different? Can you kind of give me some insight on that?

Sure. What happened is, as you recall, last July 24 we were asked to stop selling the morphine sulfate, so not only did we have inventory to write off during that period of time, but we had a loss of sales. At that time last year, we had 65% of the market. So, we lost all those sales. That product was approved under the new drug application June 24, even though the original PDUFA date was January. Nevertheless, when we did get the approval from the FDA, we launched the product in August. For the full year ending June 30, the loss of morphine sulfate not only for its profits and sales volume was significant to us. In this first quarter, beginning in August, we shipped the morphine sulphate -- re-shipped it, I should say, and now as a result, you'll see full year sales of morphine sulfate going forward under the new drug application that was approved in June.

Okay, okay. Well, great. Well, I appreciate it, and thanks for taking my questions.

Sure. Thank you, Laura.

(Operator Instructions). The next question comes from Gregg Hillman of First Wilshire Securities.

Yes, good afternoon, gentlemen. Arthur, could you talk about Oxycodone a little bit, what's happening there in terms of quota, marketing, et cetera?

Well, the product is a very profitable product for us, and we did receive quota. We've actually sold through that quota, have another quota pending at the agency. As far as we know, that quota will be honored and will be delivering material to us, so we can purchase raw material and relaunch the product. But if I don't get the quota, I don't want to mislead the public by talking about sales when if I don't have material, I don't have material. With the quota system, until you get the permission to buy raw material, you don't have any sales to make. The demand for the product is out there.

We know the only other competitor has had some issues with a warning letter recently that was put on the FDA website, and since they are the only other supplier in the marketplace, we expect that the material will be given to us under the quota. Otherwise, another shortage could be created by a lack of product in the marketplace. We don't have the Oxycodone in our numbers, because until we get a quota, there's really no predictions that we can make as far as our sales are concerned. But I could assure you that if the quota is given to us, and that is pending any day now to have that quota, we expect to do a very large volume of business with the Oxycodone, not only in revenue, but also in profits. That product would be a significant profit maker and revenue maker for us, and we are expecting to get it. But again, I didn't predict it, because I don't have the quota. And at the current time, we are out of stock and waiting for the quota to come in.

Would you do a press announcement if you got the quota on that?

Normally I wouldn't, but I would take a look at its materiality, because we try to keep our press releases based on the material value of things to the Company. And quite frankly, that is material to us, so we probably would put out a press release that we launched the product. Again, the last shipments we made were in July. We do have a quota that's pending, I believe since some time in June, and we are expecting to be granted the quota.

And when you say quota, you mean quota from the DEA?

That's correct.

Okay, and then, Arthur, on your API business in the narcotic area, can you tell me what you did in the API business for the year just ended, and what's the outlook for this year?

Well, I don't have Cody numbers broken out separately, but I can tell you that during this past fiscal year, they have been equipping the facility and fitting out the rooms that we spoke about previously. I was just out there a couple of months ago, and I'll be going out again in another month. And I could assure you, I'm very pleased with the progress. The rooms are just about completed. The R&D, where we are manufacturing additional APIs, is on schedule. And between December and March of this coming calendar and fiscal year for us, we expect to have additional APIs approved that Cody could make available to the marketplace and to Lannett. As we've always mentioned, though, once I get those raw materials, I still need FDA approval to use them within our formulas, but the important thing is Cody becomes self-sufficient with those launches of those products.

Okay. I didn't quite catch the last point you made, Arthur, that you need FDA approval for the raw material that's coming in?

Right. In other words, when Cody makes another raw material, for example, I'll be using that raw material in my application and in some cases, asking the FDA to approve the use of a secondary supplier, this being my subsidiary, for an already-approved application. And generally, you have to file a prior approval supplement to the agency to allow you to use another raw material supplier. So, the impact of Cody's raw materials sometimes is delayed by the delays at the agency in approving -- changing the source of my raw materials. But over the course of our future and the reason we're so excited about our Cody subsidiary, is that vertical integration and the use of Cody's raw material from my finished dosage forms gives me additional profit margins. But nothing happens quickly in our business. Everything is waiting for FDA approval, unfortunately. But we do see some headwinds at the agency where approvals are coming through, not only for us, but I do believe the shortage at the agency is starting to apace.

Okay. Thanks very much, Arthur.

Okay, thank you.

(Operator Instructions). Our next question comes from George Gaspar, private investor.

Yes, thank you. Arthur, I would like to see if you could break down a little bit with Marty there. The revenue stream in the quarter was down $8.2 million year to year. But the costs of sales were about the same, dipped a little bit to $21.3 -- or $21.2 million versus $21.8 million. It's surprising not to see the cost of sales down on that kind of a decline in revenue stream. My question is, is that due more to Philadelphia, or is it due more to Cody?

George, this is Marty. It's due primarily to the two locations in Philadelphia.

I see. I see, okay. And then in terms of just following up on Cody, the construction number that's under construction is $5 million, $6 million. How has that improved since the last time we had a call? What's the structure of that construction number at this point in time? Where's all that taking place? Can you break it out?

Well, from my recollection, they didn't spend all $6 million that was allocated to them, but I believe they spent certainly around $4 million. And the facility, if you were to visit the facility, of course you can't visit it, but you would see the progress that's been made there. As we spoke, the rooms, the multipurpose rooms are up and running. They have already manufactured the -- I believe the third batch of the synthetic cocaine raw material, and some of the other APIs that we talked about are being manufactured as we speak. But the cocaine is already into its third validation batch. So, you'll see some improvement from the C topical product because we'll be using raw material that we acquire from Cody on those products going forward this fiscal year.

With regard to the other products that they are making and the versatility of the rooms, that's all on schedule. As far as the capital expenditures that went on there, I'm very pleased with Cody's facility. If you were to inspect the facility, it's clearly a very modern, state of the art API facility for narcotic production in the United States. As far as the APIs they are producing, they are on schedule to meet their goals for December and March for roughly 6 APIs and the filing or the preparation of the 6 DMFs with the FDA for those raw materials. Those are drug master file that when a company wants to use their raw material, they reference that drug master file, and the FDA looks at the raw material manufacturing processes. That's all ongoing. There's no regulatory issues at Cody either, so we have a very vibrant Company, and I believe that we'll start to see the benefits of Cody constantly year after year at Lannett as they continue to make more and more API. But you'll start to see those improvements this year.

Okay, and another question. On the total revenue stream projected for the first quarter here, can you top September of last year, which was $25.4 million? Do you anticipate that you can beat that? That's pretty close to what you did in the current -- the most recent quarter while you did --

Yes, we do anticipate beating that.

So, you would have an up quarter year to year in terms of revenue stream?

That's correct.

Okay, all right. I'll go back into queue. Thanks.

Thank you.

Our next question comes from Gregg Hillman's line of First Wilshire Securities.

Yes, Arthur, just kind of a follow-up on -- Mr. Henry from ROTH earlier alluded about doing $125 million in this fiscal year you've just entered, and I just wanted to make sure what was not included in that. I take it the Oxycodone was not included in that.

That is correct.

And additional things that were not included would be the anti-hypertensive, the two chemo drugs and the ophthalmic drugs, is that correct?

Yes and no. The anti-hypertensive drug was not included, and neither were the 2 ophthalmic products, nor the chemo therapeutic product, that's correct.

Okay, and then the whole -- I was just checking on this -- I guess the Phentermine resin, is that included in the $125 million?

No, the Phentermine resin is not available on the market as a brand. When we filed that application, the brand removed the brand from the marketplace. So, we have a unique situation where we have a generic for which no brand exists. However, we've developed a specialty pharma subsidiary, and that product is being offered to the firms that we're negotiating with to do the marketing, to sell that as one of our branded products. Since there's no generic on the market, we don't see the value of introducing this as a generically priced product into the market. We believe the obesity problem in the United States is so severe that one of the marketing firms will probably take the product up and do the marketing of it. What we mean by marketing, detail the product to physicians as a brand, and we would be the manufacturing supplier and joint venture or partners with that firm.

Okay, and -- but do you have to do additional testing for that to go onto market?

No, no. It would just be finding a marketing partner and then start manufacturing the product. There's no sense manufacturing the product when you're not going to have a brand to substitute for, but it does give us a unique situation where we have a product in what I consider to be a market vacuum for anti-obesity products. As you know, all the newer ones are getting rejected by the FDA or advisory committee. This is a drug that was previously on the market, and we believe we can bring it back to the market. And the firms we've been talking to, although I don't have a definitive agreement signed, we do feel comfortable one of them will take this product on.

Okay, and you do have FDA -- but you still need final approval to market it from the FDA, is that correct?

No, no, we have the FDA approval.

Okay.

We can launch the product as soon as we want. Let's put it this way. As soon as we create a trademark for it and we have a marketing firm, we'll launch the product. If we don't make a deal with a marketing firm, we're clearly capable of contract sales organizations doing the marketing for us. We're looking at that aspect as well. But we find sometimes working with dedicated firms that have a field sales force already under contractor or under their employee -- excuse me, as employees, I should say, that we would get more bang for the buck if we worked with those firms. And my sales department has been in touch with a few people, and we are discussing this product with them.

And do you know what that was doing when it was on the market? It was like $5 million or $10 million product?

No, about $11 million, and the brand was Ionamin. It was an $11 million brand at the time.

Ionamin, okay, that's pretty interesting. And did you give any amounts earlier for the 2 chemo drugs and the ophthalmic drugs? You said 2 chemos?

I lumped them together. The 2 chemos I lumped together. One would be -- that's not available for this year, just so we're clear. That's the pipeline I was talking about, that's worth at least $60 million to us, one of the chemo. The other chemo drug, about $24 million.

Yes. Okay. That's just the size of the -- of what would be the generic market for it?

The expected generic market, right. Since we know we'll be number two on one of them, it's the THALOMID product, generically it's thalidomide, Celgene has offered to settle our litigation and provide the brand to us. Since those documents have been unsealed by the court, I can talk about that particular product. That's the one we expect to do about $60 million. The brand revenue is around $500 million on that, and Celgene has indicated that providing the capsules to two firms, my Company's one of them and I'm not aware of who the other firm is. We're anticipating being the, let's say the second in the marketplace first, or share the marketplace with the second firm, and that's where the $60 million conservative number comes from.

Okay, that's pretty interesting. And then finally, what was the number on the ophthalmic?

The 2 of them are $6 million expected revenue at our end. And these products are currently on the market. We expect that would be our revenue from them.

Okay, okay. Thanks for the clarification.

And if I could just jump in here, just to say one thing before -- as we go along here, the outlook for revenue for 2012, we kind of broadly talk about comparing 2012 to 2010, I would just encourage everyone, when you're thinking about revenue and modeling, I would just encourage you to look the a the words in Arthur's prepared comments for guidance on the revenue line.

Okay.

Thank you.

Thanks.

Operator?

Next question comes from Scott Henry of ROTH Capital Partners.

Hello, and thank you for taking the follow-up. Just a quick question. Gross margins, I thought the guidance was mid-20s for fiscal year 2012. When you get beyond 2012, how do you expect that line item to move? It used to be the mid-30s, on its way to 40 for gross margin. Do you think you can improve considerably from that mid-25, or that mid-20 range in outer years, or how should we think about that?

Yes, we do expect them to improve, because remember, the vertical integration starts to improve my profit margins year after year. It's incremental, depends on how many products I get approved from the FDA, how quickly I get my applications in. We're certainly ready to get the applications in for the use of Cody's raw material. Matter of fact, there's some formulas already been produced, and all we're waiting for is Cody's raw material to come in. And once those go down to the agency, some of them, quite a few of them have no bio equivalency studies, so we expect those applications to get inspected by the FDA rather quickly, or review it, I should say. And as a result, when those products are approved, they are going to be at higher profit margin levels than the existing products. So, there's constant growth in profit margin.

Okay, and I did hear that correct, it was mid-20s guidance for the gross margins?

Yes, that's correct.

Okay. Thank you for taking the follow-up.

You're welcome, Scott.

We have no further questions in queue at this time. I will now turn the call over to Arthur Bedrosian for any closing remarks.

Well, thank you for joining us today. If anyone has any further questions, please do not hesitate to contact the Investor Relations team at Lannett. 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 now disconnect.