Lannett Company Inc (LCI) 2012 Q1 法說會逐字稿

Welcome to the Lannett fiscal year first-quarter financial results conference call. My name is Adrian 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'll now turn the call over to Robert Jaffe, Investor Relations for Lannett. Robert Jaffe, you may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2012 first-quarter 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 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 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 in more detail followed by Arthur's concluding remarks. We will then open up 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 fiscal 2012 first-quarter results were largely in line with our expectations and a solid improvement over the last couple of quarters. Revenues, gross profit and operating income were all significantly better than last year's first quarter and primarily driven by higher sales of Levothyroxine and certain pain management products.

Net income would have been even higher but for realized and unrealized losses on investments recorded in the quarter. Marty will discuss this in more detail shortly.

Turning to product approvals and launches, for some time our financial results have been negatively impacted by a lack of product approvals which is due to a backlog at the FDA. I am very pleased to say that since June 23 we have received six product approvals, five ANDAs and one new drug application -- the most in any four-month period in Lannett's history.

Over that same period we have also launched five of these six approved products including the Morphine Sulfate Oral solution, Diethylpropion tablets 25 milligram, the phentermine capsules 37.5 milligram, the Loxapine 5, 10, 25 and 50 milligram capsules, and finally the Diethylpropion extended release tablets 75 milligram.

Morphine Sulfate was relaunched in our first quarter and we commenced marketing the other products in the current quarter. This gives us positive momentum going into our second quarter and the balance of fiscal 2012.

With that brief introduction I'd now like to turn the call over to Marty for an overview of our financial results.

Thank you, Arthur, and good afternoon, everyone. For fiscal 2012 first-quarter, net sales rose to $28.9 million from $25.4 million for the prior year fiscal first quarter. Gross profit climbed to $8.6 million from $5.9 million for fiscal 2011 first quarter.

As a percent of net sales gross margin grew to 30% from 23% for the first quarter of last year. The gross margin increase was due to improved manufacturing efficiencies at Cody and increased sales of certain higher margin pain management products.

Research and development expenses increased to $2.4 million from $2.0 million in last year's first quarter. SG&A was $4.7 million compared with $4.6 million for the same quarter of last year. Operating income was $1.4 million versus an operating loss of $739,000 for the comparable quarter last year.

Net income attributable to Lannett was $206,000 or $0.01 per diluted share versus net loss attributable to Lannett of $404,000 or $0.02 per share for last year's fiscal first quarter. The fiscal 2012 first quarter included realized losses on investments of $173,000 and unrealized losses on investments of $827,000 for a total of approximately $1 million.

However, since quarter end the stock market has rallied and we have seen a corresponding increase in the value of our investment securities. The year-to-date losses on investments has shrunk considerably and now approximates $350,000 versus the $1 million loss at the end of the fiscal first quarter.

Now turning to the balance sheet. As of September 30, 2011 cash, cash equivalents and investment securities were approximately $24.4 million.

Turning to our outlook for fiscal 2012, we are reiterating the guidance we provided on our last call with the following caveat. Cody Labs, our pain management division, has had recent challenges receiving quota from the DEA. It is important to point out that this is not an issue specific to Cody, but rather a development that we believe all US manufacturers of pain management products are dealing with.

We continue to work with the DEA to resolve the situation. However, at this time we do not have a timetable as to when to expect resolution.

I think it's appropriate to note that Cody is not currently a material contributor to our top- or bottom-line. However, achieving our full-year guidance depends in part on contributions from this division. With the expectation that the quota issue will be resolved in the near term, we anticipate achieving the following.

Full-year net sales to increase close to previous levels and reflect a growth rate in the low-double-digits as compared to fiscal year 2011. Full-year gross margin percentage to be in the mid-20s. Full-year R&D and expense to increase to between 9% and 10% of revenue. Full-year SG&A expense to increase but at a rate less than our anticipated increase in net sales. SG&A as a percentage of revenue we expect to decrease by 30 to 40 basis points as compared to 2011.

Regarding the quarters, given the anticipated timing of quota release we expect profit to be skewed to the second half of our fiscal year. And finally, we expect capital expenditures to be in the $6 million to $10 million range this fiscal year. With that brief financial overview I'll now turn to call back over to Arthur. Arthur?

Thank you, Marty. Overall we are pleased with our financial performance for the quarter. Looking ahead we have a deep pipeline with 12 product applications pending at the Food and Drug Administration and approximately 40 product candidates in various stages of development.

Our pipeline includes products with significant market opportunities such as an antihypertensive drug and two chemotherapeutic drugs from which we expect revenues of up to $100 million annualized. We are excited about these opportunities and look forward to their successful commercialization.

Also, we continue to make progress on our branded product strategy. We have identified several opportunities including phentermine resin which currently has no competition on the market. We intend to market this product through our newly created specialty pharma division. We estimate the launch of this product in our fiscal 2012 fourth quarter.

Our antibiotic supplemental application for MRSA, methicillin-resistant Staphylococcus aureus, was filed in February 2011 and we are working with the FDA to receive expedited review. And our C topical product, we are utilizing a 505-B2 strategy. However, the filing has been delayed because the FDA has required additional clinical work before the application can be approved. We expect to provide the FDA with a special protocol assessment for the Phase III clinical trial shortly.

Turning to our pain management division, we continue to invest in infrastructure to increase capacity. We are also looking to add APIs to the product offering which should over time help expand our margins as we produce both APIs and finished dosage forms of pain management products.

As I said on the last conference call, we expect fiscal 2012 to be much improved over fiscal 2011. Recent product approvals have gotten the year off to a good start. And based on current market conditions we expect to see continued financial and operational improvement throughout the coming fiscal year. With the time available we would like to address any questions you may have. Operator, Adrian.

(Operator Instructions). Laura Engel, Stonegate Securities.

This is actually Marco Rodriguez calling on behalf of Laura. I was wondering if you guys could -- I know you addressed the DEA situation with the approval for the raw opiates -- or not approval, but given the additional quota. Can you maybe perhaps provide a little bit more color -- I mean what kind of seems to be the hang-up there from your guys' opinion?

Well, the FDA -- excuse me, the DEA implemented a new automated system for dealing with quota back on June 30. And from taking six weeks for the normal processing of a quota request, we've been encountering 15- to 17-week time frames.

We have been speaking to the DEA and the process, while it's been automated, is also putting in additional layers of what's called a bureaucracy to approve the applications and those approval processes are taking longer than they anticipated.

They are expecting to shorten that time frame. But for example, one of the quota requests we made on June 30 has still not been responded to. So we're still waiting for those, and every week we do call in hopes that we'll finally get an answer.

I'm afraid I can't say any more than that. We know that sometimes when you automate a process you run into a lot of unanticipated issues and I'm presuming that's what happened at the DEA here.

Okay, that's great. And then in terms of some of the new products that you've launched here, the Loxapine and then the three other anti-obesity drugs, can you provide some sort of color in regard to how much of those markets you think you can capture over the next 12 months?

No, not really. I would tell you though that generally when we go into a market our minimum goal is to capture at least 10% of any market we're in. In most cases we exceed that expectation. The market for the phentermine products, it's a little too early to tell where our market position will be because there's no actual data to compare yourself to the others in the industry.

For example, the phentermine and (inaudible) products are used in clinics so you're selling products directly to the clinic. There aren't any prescriptions written so there's no way to track how well I'm doing as compared to someone else and how big a market share. And if you did look at the (inaudible) data, that data is so insignificant because very little of these products are prescribed by physicians other than within the clinic itself.

But I could tell you that we generally have been very successful, we have strong alliances with the clinics, very good rapport with them. So we would expect to capture a good portion of that market. I would say in excess of 10% certainly.

Okay, perfect. And then can you provide the revenue figures for the Levo and Digoxin in the quarter?

Sure, this is Marty. The Levo, or the thyroid deficiency category, it's $13.034 million -- $13,034,000. And the other, Marco, was Digoxin?

Yes.

Correct? $2,510,000.

And Levo seemed to have bid up pretty nicely here in the quarter and you made a point of stressing that in your press release. Was there any drivers behind that or just kind of a one-off type situation?

Yes, Marco, as we said on the last earnings call, we anticipate growth of 6% a year on the Levothyroxine products. And the main reason for that is a decline in the brand sales of Synthroid's product. And a recent presentation that IMS did, we became number 15 and Synthroid follows Lannett as being number 16 in the market. So we've moved ahead of Synthroid in terms of the prescription use of our product and we continue to see a decline in the Synthroid sales as we grow our market share.

Okay, perfect. And on the Digoxin, any changes in terms of the competitive pressures that that's experienced here over the last few months, year?

No, there's really been a quite period. There's been no additional pressure on the pricing of the product. But remember, with Digoxin we are anticipating a decline in the use of Digoxin in general across the United States of roughly -- I don't want to guess a percentage, but I think it was as high as 5% a year.

It's declining in terms of use because doctors are prescribing other products and in some cases there's no longer a need for Digoxin by those patients. So they're not switching to something else, they're just no longer needing our product. So we continue to see Digoxin declining in the marketplace in favor of other drugs.

And then last quick question here on the SG&A side, a little bit higher than what we had modeled in the quarter. Were there any one-time items there?

Yes, Marco, we had -- in the quarter we had some equity payments -- stock compensation payments, there was a small distribution to the employees and also to the Board. Those would be one-time in nature.

And can you quantify the amount?

It's in the range of $300,000 to $400000.

Got it. Great, thanks a lot, guys.

Sean McMahon, Kennedy Capital.

My question has been answered. Thank you.

[George Gasper].

Yes, thank you. I've got a couple questions here. Could Arthur give us an update on the physical facility update renovation that's been ongoing at Cody and where you are on that and when's that going to start contributing to the bottom line here?

Well, it's starting to contribute to the bottom line already. The physical facility is really completed essentially, everything is in place and of course now they're just completing a lot of the validation work. For example, when you fit out a room and you install equipment in there you have to validate all the installation. That's ongoing but it's just about at its end.

I would say certainly by December of this year that should be completed. The validation work, some of it might linger into the third quarter, but they should start using those facilities beginning in January. So I would say it's online and starting to be used.

And how many additional production days have you developed?

Well, they picked up roughly four rooms, but what's more important is some of the rooms have multiple API capability, so they've don't need to be dedicated to one product and that flexibility is what we were looking for. So it allows me to make multiple products in the same equipment without having to dedicate the particular equipment.

The original set up, we had some dedicated rooms which still exist. These additional rooms were made as multipurpose rooms. So this should help us expand the product offering. They do have four APIs they'll introduce by the end of our fiscal year -- four new additional ones. So that's all on track and they're meeting their expectation.

Second question, regarding the recent article in the Wall Street Journal and the White House stepping in to the FDA release schedule for -- particularly for drugs that are in short supply, and it brings to the point of this question -- what is the -- what are the next couple of releases that you're looking for out of FDA? If I recall the last conference call you were pretty optimistic about getting one out that was sizable, but apparently that didn't happen yet. Are you any closer to seeing a release come through?

Well, we've been working very closely with the shortage division to inspire them to motivate the reviewer on the application, that is sitting there waiting for a signature. So we know the application is very close to being approved. We've actually started to manufacture the product so we have multiple batches being produced.

I would expect -- it's still any day now for me, but any day could be two weeks or a month, you just don't know. But it is sitting on a director's desk to be signed. We have contacted the shortage division and we continue to work with them to let them know where that stands and they have been extremely helpful.

We've also worked with them on other issues too with regards to shortages, so we've had a good close working relationship with them. They've been trying to help us with regards to one of our quota issues and as of yesterday they told me that they're continuing to follow up with the DEA on our behalf with regards to that as well.

So the -- hopefully the President's message gets through to all the people and they realize that they can do things a little bit faster. But it's a bureaucracy and I don't know that our President has any more power than the rest of us.

I see. And assuming you get a release in the near term, what's the visibility on annual volume from that particular release?

The antihypertensive drug that we're talking about here in particular, that one I believe -- let's see, we have the remaining six months roughly. So it's probably in the $3 million or $4 million range I believe. Is that correct, Marty? Yes, it's $3 million to $4 million in additional revenue.

Okay, thank you.

[Angad Ruhma], Oppenheimer.

This is (inaudible) in for Chris Holterhoff. Congrats on the good quarter and thanks for taking the question. I was just hoping you could provide some color regarding your generic pipeline. I miss -- I'm pretty sure I misheard, but I was wondering if you could clarify how many pending applications do you have at the FDA currently?

We have 12 pending as we speak. We received six approvals since June 23, one of which was an NDA. And of the 12 that's remaining, one of them is the one I just spoke to about a moment ago, an antihypertensive that's in short supply, we're expecting that momentarily. Then we did have a pre-approval inspection at our partner in India on the ophthalmic products and an injectable product.

The two ophthalmic products we expect to be approved if they accept the response to the 43 that was left behind when they inspected the Company a few weeks ago. We are pretty comfortable that they're going to approve those two products. So we're expecting three shortly of the 12 that's pending.

So within the second fiscal quarter?

Yes, I would say before -- well, the antihypertensive certainly before the end of my second quarter. The two ophthalmic products, they probably will be approved by the end of the second quarter, but I don't believe we'll be able to launch them until our third quarter.

And the revenue ranges for those, the expected revenue ranges for those three products if you could provide --?

Well the one -- the antihypertensive I said about -- between $3 million and $4 million. And the other two drugs my guess would be at around the $2 million range. There are already people in the market with those two products. But we generally capture our market share when we go out, so we are expecting something in the $2 million range there.

$2 million each or $2 million --?

$2 million altogether.

Okay. That's it, thank you and congrats again.

(Operator Instructions). [Dan Wickman], [Broadson].

A couple quick ones. Just, Marty, I think I caught what you said for the most part on gross margins and the nice sequential improvement. But was there anything in there that would mean this improvement wasn't sustainable and new products potentially would contribute further to the margin improvement, just relative to what you said about the year? I just want to understand that exactly.

Well, we do expect some additional efficiencies in the plant in the second half of the year. And also we have some of that being driven by the additional volume. And so we'll -- okay, so the new products, the new products we generate would come in at higher margins also. But we're seeing the second half of the year gross margin to be in the high 20s in our modeling.

So similar to this quarter?

Similar, but -- yes, similar.

At least as a baseline I guess. We're just trying to figure out if there was any reason why what happened this quarter wouldn't be something that would be sustainable building on going forward. But, okay. And then just could you address cash balance and maybe, Art and Marty, what you're thinking as far as use of cash, whether business development, buyback, that sort of thing?

We're still looking at -- and have been talking to some people about acquisitions. Quite frankly we've turned down a couple that just didn't fit in. But we continue to talk to people about product acquisitions, that's still ongoing. And we're husbanding the money on one respect, but I understand that the Street doesn't want me to hold onto money. But it's hard to come by, so we want to be careful what we spend it on.

But we are looking aggressively at acquiring some licenses, but unfortunately we haven't an able to conclude anything yet. But we are actively talking to a number of people on that.

And as far as the acquisitions go, a few companies have been offered to us that while they were attractive were not something that fit into our operations. One was an offshore company for example that while it had some attractive parts to it we didn't believe we had the ability to handle an offshore acquisition at this time.

And does stock buyback factor into your thinking going forward?

Yes. Generally we have that buyback in place and generally whenever we see the stock below fall below 4 we've gone into the market and we've purchased shares. I believe the last time we purchased we mentioned we purchased almost 92,000 shares.

Correct.

Okay, thanks.

We'll continue to do that based on what happens in Greece apparently.

Okay.

The 90 was in the quarter.

You have no further questions at this time. I'd like to turn the call back over to management.

Thank you all 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 and you may now disconnect.