Lannett Company Inc (LCI) 2012 Q2 法說會逐字稿

Welcome to the Lannett fiscal 2012 second quarter financial results conference call. (Operator Instructions) I will now turn the call over to Robert Jaffe. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2012 second 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 also 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 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 second quarter results were largely in line with our expectations, with the notable exception of the negative impact of $945,000 on our net sales from the Patient Protection and Affordable Care Act, also known as PPACA.

Let me share a little background on PPACA. As part of this legislation, pharmaceutical companies are now required to help reduce the cost of branded prescription drugs for Medicare Part D beneficiaries. For example, our levothyroxine product was approved under a 505(b)(2) New Drug Application and as such, is considered a brand drug. Accordingly, Lannett is required to provide this rebate.

However, while our levothyroxine product is considered a branded drug for purposes of PPACA, it is marketed and priced as a generic and does not enjoy the margins typically associated with a branded drug. In essence, we are rebating funds we never received in the first place. Because we believe our situation is outside the spirit and intention of PPACA, we have been and will continue to discuss our specific situation with appropriate government officials in an effort to rectify, or at least mitigate, the impact of this legislation on Lannett.

Moving on, without the impact of the PPACA, net sales, gross profit, and operating income in the recently completed quarter were comparable to our fiscal 2012 first quarter results. Thus far, in fiscal 2012, our financial performance has positively benefited from recently approved products.

Over the last seven months, we have received 9 product approvals, which include 7 ANDAs, 1 supplemental ANDA, and 1 new drug application. This is the most approvals in any seven-month period in the Company's 70-year history.

We continue to believe the second half of our fiscal year will show further improvement, largely due to the products approved in the first half of fiscal 2012, as well as the 2 approvals we have received thus far in our fiscal third quarter.

Since our last conference call we have received FDA approval and launched Triamterene with hydrochlorothiazide capsules and we have also received approvals for hydrochlorothiazide 12.5 milligram capsules and phentermine hydrochloride 15 milligram. Both will be launched shortly. This gives us positive momentum going into the second half 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. Marty?

Thank you, Arthur, and good afternoon, everyone.

Before I begin, I'd like to point out that last year's second quarter results benefited from certain nonrecurring items. Accordingly, we do not believe the second quarter over second quarter is an apples-to-apples comparison.

In last year's second quarter results, we recorded sales of OB Natal One tablets - a high margin product we no longer market - of $952,000 and we reversed a royalty expense in the amount of $618,000 related to the same product.

In addition, two non-operating items impacted last year's quarter. First, we recorded a $264,000 tax credit related to an agreement reached with the IRS. And second, weighted average shares outstanding used for calculating diluted EPS were 10% lower in last year's second quarter, due to our stock offering completed in December of 2010.

In addition, the line-by-line comparison of the current quarter to last year's second quarter is impacted by two additional unusual items in last year's second quarter, which essentially offset each other, from an EPS perspective. First, last year we reported inventory reserves related to morphine sulfate oral solution for $1.5 million and second, we reversed accrued bonuses of $1.4 million, which impacted the COGS, R&D and SG&A lines.

With that in mind, let's turn to our current year second quarter results.

Net sales were $27.7 million, compared with $30.0 million in the 2011 second quarter.

Gross profit was $7.4 million, compared with $8.4 million for fiscal 2011's second quarter.

As a percent of net sales, gross margin was 27%, compared with 28% for the second quarter of last year.

Research and development expenses increased to $2.5 million from $1.7 million in last year's second quarter.

SG&A was $4.4 million, compared with $2.9 million for the same quarter of last year.

Operating income was $495,000, compared with $3.8 million for the comparable quarter last year.

Net income attributable to Lannett was $609,000, or $0.02 per diluted share, compared with $2.4 million, or $0.09 per diluted share, for last year's fiscal second quarter.

Now, turning to the balance sheet. As of December 31, 2011, cash, cash equivalents, and investment securities were approximately $25.2 million.

Turning to our outlook for fiscal 2012, we are updating our guidance. More specifically, we are increasing our full year gross margin percentage.

We now anticipate achieving the following --

To clarify our sales outlook, we expect full year net sales to be between $120 million and $126 million, reflecting a growth rate in the low-to-mid teens, as compared to fiscal year 2011.

We are revising upward our full year gross margin percentage to be approximately 30%.

With respect to operating expenses, we continue to believe full year R&D expense to increase to between 9.0% and 10% of revenue.

We expect our SG&A expense in the second half of fiscal 2012 to be similar to the first half.

And finally, we expect capital expenditures to be in the $6.0 million to $10 million range.

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

Thank you, Marty. Overall, we are pleased with our financial performance thus far in fiscal 2012.

Looking ahead, we have a deep pipeline with several near-term opportunities. Our products in development include two chemotherapeutic drugs from which we expect revenues of probably in the neighborhood of $70 million, annualized.

Our pipeline also includes Thalidomide, a brand version of thalomid currently with a $300 million brand sales revenue.

We are continuing to expand our pain management franchise and have a team focused on developing APIs, which ultimately will help expand our margins.

In addition, 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 of 2011 and we are working with FDA to receive expedited review.

And our C-Topical product. We are utilizing a 505(b)(2) strategy. Early last month we reached agreement with the FDA on a Special Protocol Assessment regarding the design of a Phase III study for this product. The SPA agreement provides a clear registration pathway for our C-Topical product. We expect C-Topical clinical trial to be completed and to file a related New Drug Application by the end of calendar year of 2012.

We have spoken with a number of potential marketing partners for our C-Topical product, as well as our Phentermine Resin and Chloramphenicol products. We have narrowed the field to a few companies and are hopeful to name the finalists shortly.

As I said on the last conference call, we expect fiscal 2012 to be much improved over fiscal 2011. Recent product approvals have added to our optimism to continue financial and operational improvement throughout the current fiscal year.

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

Thank you. (Operator Instructions) Scott Henry, Roth Capital Partners, LLC

Thank you and good afternoon. I guess, just to get us started, Marty, could you just give you the product categories, including thyroid deficiency, heart failure, and basically all the stuff that makes it into the queue as well?

Okay. So I'll give you the main ones there, Scott, and tell you what more you need. So, on cardiovascular, the number is $2,952,000. The thyroid category is $11,211,000. Pain management, $5,257,000. And I think those are the key -- no, those are the key categories. Do you want me to keep going?

Okay. Yes, I mean, as long as I got those, I can work with the other ones.

Okay.

Shifting gears a little bit, this issue with the PPACA. I guess my question is has this ever come up before and do you expect it to impact future quarters?

Well, first of all, the law was passed in March 22, 2010 and it went into effect in 2011 calendar year, so this would be the first year that we would then see any impact from it and the first, second, and third quarters of the calendar year we did have some revenue and we did have some reserves for it.

Actually, in the third quarter, my colleagues contacted CMS to find out what we could expect for the fourth quarter reserves and what we expect for the rebate to be and they indicated it would be less than the third quarter. Our third quarter reserve -- excuse me, our third quarter rebate was $270,000. So we reserved $200,000 for the fourth quarter. The one that they said would be lighter turned out to be four times the size of the third quarter, or $945,000.

So, while we did all we could by working with CMS to make sure that our reserves were adequate for this new rebate, because no one else had any expectations of what that amount would be, we thought we had everything planned. Lo and behold, a week ago they give me the invoice and tell me the rebate is much higher than it was.

In the meantime, we have been working with the government and try to make sure that the numbers are correct. And the way the system works, you have to pay the bill first and then you can dispute it and that's something we already have planned.

We do know that the unusual situation here is because of the type of filing that's made. So, if you file a new drug application, or what they call a 505(b)(2), which is, you might say, a smaller version as opposed to abbreviated version of a new drug application, that these products, because they're sold generically, wouldn't be impacted.

But, unfortunately, the way the law reads, if it's a 505(b)(2) new drug application, or a new drug application, it's considered a brand and a rebate is applicable. So, in a sense, we're giving a rebate for something that we sold as a generic, as if we sold it as a brand. We do expect to get this resolved.

We do know that there's a process where you can raise objections to the pricing of these products and we will work that out, but all of this is new and this is the first calendar year that this law went into effect. So there was no way to anticipate anything, other than the revenues and the correspondence we have with CMS. I hope that answers the question.

Oh, I'm sorry, that is helpful and I guess, just looking at -- so it sounds like almost the whole difference was all in that thyroid deficiency line, correct?

Well, actually, correct. It does cover our morphine sulfate, which is also a 505(b)(2) application, but since morphine sulfate is not dispensed, necessarily, to patients, but it's used in a hospice or hospital setting or by caregivers, it wasn't a prescription item, let's say. Whereas the levothyroxine product was all dispensed under prescription and it is a convoluted process as to how they determine what the rebates will be, which they're trying to help us understand, but, unfortunately, they don't understand it themselves at CMS and having difficulty explaining it to us.

So we will get more information from them and probably be able to explain it to our shareholders a little better once we get some clarification from outside counsel and from CMS and my staff. We have made provisions for this rebate over the future quarters of this fiscal year and we are not concerned about the impact. Our guidance's are taking into consideration that rebate.

Okay and just a couple more questions. On the pain management side, should we expect a continued uptick in the second half of your fiscal year 2012?

Yes, you would.

And I guess a significant uptick from where we are, from the $5.0 million level, is that fair, I mean?

Well, it depends on what I would call significant, but I would say significant. Remember, some of the quotas didn't come in till late December, so certainly most of the pain management products for which we received quota now, at Lannett, will start to be impacting the third and fourth quarters. I hate to use a word like "significant", because what you mean by it and what I mean by it might be different, but there'll certainly be a growth in the pain management business in the third and fourth quarters.

Okay, fair enough. As well, Arthur, you gave a little more color on the pipeline than is typical. I was particularly interested in the Thalidomide program and the two chemotherapeutics. What kind of data points should we be looking for on those programs? What should we focus our attention on over the next 6-to-12 months, in evaluating progress in those programs?

Well, let me start by saying that I am restricted under the settlement agreement in terms of what I can't say, but I can talk about where we are with the progress. We do have the brand product in our possession and we are working diligently on getting a submission batch prepared and submitted.

We do know that someone else is being given these capsules as well, so there are at least two people that we're familiar with will have this product, at least have the brand to do their testing against. We, hopefully, are ahead of sale of the other party, but depending on who the other party is they could be ahead of us.

Nevertheless, the market for the product, as we speak today, is $300 million. If we get our submission batch made in March, the biostudies will be done and we expect to file by the fall. If it's first-time generic, it will be approved probably within a year's time. So, roughly a year from now, let's say, or if I'm going to file next fall, say by the fall of 2013 we'll probably be on the market with this product.

Okay. Thank you. That is helpful. And in the two chemotherapeutics, anything there we should look for?

Well, one is already at the Agency awaiting approval. We expect that probably in another six months, but, again, predicting when the FDA will approve something is something no one's gifted at. But, based on the reviewing process that's going on, my guess is in another six months that should be approved. The other one was the one we just spoke about, the Thalidomide.

Oh, okay, I didn't realize that included. Okay. Arthur, thank you very much for taking the questions. Appreciate it.

You're welcome, Scott. Thank you.

Chris Holterhoff, Oppenheimer & Co.

Hi guys, congratulations on some good progress this quarter.

Thank you.

Just a first question. Just aside from the impact from the Patient Protection and Affordable Care Act, I was wondering if there were any other pricing pressures in any of the major categories that you could kind of quantify for us.

No. Quite frankly, currently we're not facing any pricing pressures on the remainder of our product line, with the exception of Digoxin, so one product has had some pricing pressure on it. The rest of the products have not, so we're expecting that to continue.

Okay and then I may have missed this, but can you give us an update, to the extent that you can, on the quota issues, the DEA quota issues with Cody Labs?

Yes. Well, with Cody, they're still waiting for some additional quota. Lannett's received all of their quota, with regards to our needs. Cody, of course, applies for their own quota and they did receive a good part of their quota by the calendar year-end and they've started to work on those. They're getting -- they are applying for additional quota and we are expecting those quotas to come to us a lot quicker than the previous ones.

There have been some changes as the DEA that, hopefully, are now behind both us and the DEA and I don't expect any more difficulties with the quota, but that's my optimism, but that does seem to be the case in the marketplace, currently.

Okay and I think on past calls you've talked about expectations for approval of the antihypertensive drug and then two ophthalmic drugs during this past quarter and I think, if I'm right, the approval of the ophthalmic drug hasn't come yet. So I'm just wondering if you could tell us a little bit about what your conversations or communication has been like with the Agency regarding these two products.

Sure. Those products did have preapproval inspections conducted at the Indian site where the products are made for us and there were some minor observations there. And the inspectors told us, depending on how promptly and the quality of the response is so those observations that were made, would determine whether those products would be approved.

From our perspective - and this is I'm talking about Lannett here - we're pretty comfortable that the responses were adequate and that those products will be approved and to me, that means imminently. There's no other delay that we would expect. We haven't heard any rejection of the 43 responses as this point, so we're just sitting and waiting any day for those to be approved.

We are certainly talking to our colleagues in India to make sure that they can quickly make both products once the approvals come and might go so far as to ask them to make some batches in anticipation of getting those approvals.

Okay. Yes, thanks for the color there and just a general question. It does seem like the pace of FDA approvals is picking up. I guess you've gotten 9 over the last seven months and just kind of want to get your opinion as to why you think this might be happening. And obviously it's a positive, but just kind of wondering if you expect this trend to continue into this calendar year.

Well, we're certainly with the Agency and with our local district and I do want to give credit to our local FDA, as well as the reviewers down in Washington that have been working with us and in some cases the shortage side of the FDA has been extremely helpful as well in recognizing that some of the products in the marketplace that we were approved on were in short supply.

So, overall, really, there's a combination of factors that helped us get these approvals and of course the quality of our applications and my staff, I must complement them for putting in good applications.

I do expect those to continue to come our way. They have been delayed for significant periods of time, as you know, from my prior earnings call discussion. So it was a matter of time before they would finally come through and without having any regulatory issues or any inspectional issues, there's no reason any of the applications should be held up.

We are expecting two ophthalmics, as I just mentioned, and also another oral dosage form any day now. So we are expecting more approvals over the near-term.

Okay, great and maybe just one last question for Marty. Could you just remind us what is left under the current share buyback program that Lannett has in place?

Well, in the current quarter, referring to that answer, we bought 33,000 shares and it's based on dollars, so the authorization from the Board was $5.0 million and to date, we've used 27% of that, or $1.4 million.

Okay and I'm sorry, the total was $5.0 million and change?

We were authorized for $5.0 million.

Okay.

And today we bought $1.4 million worth.

Got it. Okay, great. Well, that's all I had on my end. Thanks a lot for taking the questions.

Thank you.

Thank you.

Laura Engel, Stonegate Securities, Inc.

Good afternoon, gentlemen, how are you?

Fine, thank you, Laura. How are you today?

Good. Good. I guess I'll start with the easy one. When exactly are we celebrating the 70th anniversary?

Every day here.

Has it already? Has the official date already passed?

As you know, no it hasn't, actually, but we're a party town. We want to start partying early. Actually, I think it's in the middle of the year, so probably around April or May I believe it was, the actual date.

But 1942 is the date of incorporation and we're kind of proud of that, because in the 70 years we've been in business, we've never had a warning letter from the FDA. We want to keep it that way, so we're very diligent. Everybody's appreciative of our reputation and keeping it intact, but we are enjoying the 70th year of Lannett's existence.

Good, good. Well, congratulations on that. On the branded, potential branded product launch, can you kind of review? Is that alone or do you have anybody you're working with on that and what will it take to make that launch happen, as far as additional overhead?

Well, there will be some -- it won't be so much additional overhead. We've already engaged a marketing firm to do some market research on the products and then we've entertained some offers from some actual sales groups that would actually do the detailing to the doctors.

And, for example, the first product, the C-Topical, will probably be the first one we plan to launch, we've already received proposals. We're going to select one of those parties, but we are waiting to have a meeting with the DEA to make sure that we don't launch a product and then run into any difficulties with quota.

So we want to make sure we're coordinating our efforts with the DEA so they know what our plans are, what our expectations are for the sales results from those detailed efforts and then not have a situation where we have a successful launch, successful sales, and then run into a quota issue. So these DEA products, where there're quotas involved, it's not really up to us to make the determination when to launch. It really is an effort where we have to cooperate with the DEA and not surprise them with a sudden demand for material.

The other product, although it's a scheduled drug, is not involved in quotas and that one we need roughly 9 months to have Cody get the material ready for us, because we don't want to sell or make the raw material in anticipation of the launch until we have a partner. And now that we're talking to some people about the marketing of that product, we were hoping that we might launch that the latter part of the fiscal year.

But, certainly, the C-Topical will be the first brand that we'll launch. The Chloramphenicol, as soon as that approved, will probably be the second or third. The Phentermine Resin, somewhere in between, might be the second or third one to launch. Those are the three initial products and we're working with one of our colleagues on the nasal delivery of hydromorphone, but that has Phase III studies to undergo yet.

So we're putting together a list of branded opportunities and partners that'll help us with the launch and the amount of money that we're talking about is about $1.0 million for the C-Topical and that, really, is going to be a launch, a pilot launch to see how well the product is received in the marketplace. Because this is something new with us, in terms of brand marketing, and because the brand marketing business has changed dramatically, we wanted to make sure we understood all the requirements, legally and otherwise, for creating demand for products like this.

The C-Topical is not something that's prescribed for patients. It's used by surgeons and physicians in emergency rooms, or in ear, nose and throat surgery. So it's a different marketplace than a typical prescription product would be in and we're pretty sure of who we're going to work with. We are looking at the contract. We are preparing a master agreement to work with them, under which the statement of work will be handled.

So, I would say, within the next few weeks we'll probably have an announcement about the launch of that product.

Okay, great and I guess a last question on the gross margins. You gave the guidance for the year and we know what the first and the second quarter were. Which of these, I guess newer launches, are you expecting to pull up those margins? Which are the highest here, I guess, if you'd just talk about the larger categories of treatment areas, as far as gross margins and looking at those going forward?

Yes. So, Laura, this is Marty. The gross margin, in the second half of the year, we see it being moved upwards, really, along the lines of two areas. One is the new products that we've launched and are launching, probably particularly the antihypertensive is one of the higher margins.

And also, the pain management products; we had some restrictions with quota earlier in the fiscal year, as Arthur mentioned, quota, we're in good shape now from a quota perspective for the rest of this fiscal year. So we see the pain management products contributing more so in the second half and of course they bring a higher gross margin to the extent that these are vertically-integrated products within Lannett.

Okay, great. Well, thank you. I appreciate your time.

Thank you.

Thank you, Laura.

(Operator Instructions) Gregg Hillman, First Wilshire Securities

Yes, good afternoon. Arthur, can you talk about the antihypertensive drug? Are you the first generic to market for that one, the one you announced just a couple weeks ago?

No, that would be generic for Microzide. That one is on the market. I believe there were two competitors in that market, so we're not the first on that, nor the other one, the Triamterene with hydrochlorothiazide, that preceded it in the latter part of December. But if you recall, the Triamterene with hydrochlorothiazide was in short supply in the United States, both by the branded company and the generic company.

So, when we entered the market, in late December, we were able to go into a marketplace where there was a big demand and not enough suppliers, but that continues to be the case in January. So we've certainly enjoyed the opportunity of having a shortage in the marketplace as we entered the marketplace with our product, but we were, I think, the third generic on that one and of course, the brand.

So, both diuretic products will probably be helping us, but the one that's on the market is the Triamterene with hydrochlorothiazide now. We have not launched the hydrochlorothiazide capsules, 12.5 milligram, that we just received approval on a week or two ago.

Okay and for the MRSA product, if you would get, like, an unexpected approval for that, are you prepared? Do you have API lined up to go ahead and produce that?

Yes. We have API lined up, the capsules are in-house and we have a marketing proposal for that product as well. Again, this is not the initial drug for MRSA. It's one of the drugs that would be used for MRSA when the other drugs aren't working.

As you know, the bacteria has developed resistance to all the typical antibiotics that are used, so there's a limited market for this one, which we're estimating to be between $5.0 million and $25 million, on an annual basis. And we do expect that sometime before let's say May or June, that product will be approved, so if we don't launch it in this fiscal year, it'll certainly be launched in the beginning of our next fiscal year, but everything is ready to go on that product.

Okay and speaking of market sizes, what was the market size for the C-Topical, the liquid?

We're anticipating a roughly $19 million market for that product, but according to the market research firm, if we were to detail this product, they believe the range of the market would be between $58 million and $111 million in sales annually.

Okay.

Yes. We're going to do about $19 million annually, so the sales potential is tremendous for that product. There's a big need for it. A lot of the physicians' responses were rather very positive with regards to this product and that's what drove us toward expanding the marketplace by alerting the physicians that this product is available.

Okay and how many years do you get protection from generic competition with a 505(b)(2)?

Well, with the plain 505 you don't get any protection. In this case, though, we will be filing an NCE, a New Chemical Entity, because this raw material that we use for this product has never been approved in an approved product. So there's a five-year exclusivity from the data my new drug application gets approved, so, assuming I submit it in the fall, one year later it gets approved, the five-year exclusivity goes from that product forward.

From when you submit the application or when it gets approved?

From the day it gets approved.

Okay, so that'd be really positive for that one.

Oh, absolutely. It gives us plenty of time to reach those levels of volume that they talked about, even if we look at the $58 million, that's a significant volume for us, but we don't see any reason why we wouldn't hit $111 million or somewhere in that range. The demand was very enlightening from the physicians that we surveyed.

So it would take two years to get up there? It would take a while to get up to that level?

Well, sure, certainly. Well, I don't know if it would take two years, but, again, we don't have experience here, so I don't want to mislead you, but since we're already doing $19 million, I don't think it'll take that long to get to the $58 million. To the $111 million, which of course is the high side, certainly would take two years.

Okay and what was the market size for Phentermine Resin?

When the brand left the market, it was roughly $11 million in size.

Okay. Okay, so that should address more. And then, in going back to the antihypertensive drugs, the two ones you just alluded to, what's the size of the generic market for those, for those two drugs, respectively?

Well, the Microzide, which is the hydrochlorothiazide 12.5 million one, I know was $203 million at AWP. I don't recall what the Triamterene was according to our press release. Do you have that handy, by any chance, Marty? Marty's going to look that one up. I'm not sure what that market is. I just don't -- I don't want to guess.

Okay.

But why don't you move on to your next question. We'll look it up.

Okay. Okay, well that's good for me for right now. I'll get back in queue. Thank you.

Okay. The market for that Triamterene with hydrochlorothiazide was $111 million at AWP.

Okay. Thanks. And then, so, in those markets you'll be splitting with the other generic firms?

That's correct. Hopefully we get the bigger piece.

Okay. Okay, good and then just one other question in terms of competition. Have you seen any more competition from any of the other pain management companies, the generic, in terms of trying to undercut you on price for a big account? Or do you think you all would be able to hit one big account, like a Wal-Mart or something like that?

Not really. There's only been one competitor and I don't like to mention names about competitors, but there was one other vertically-integrated company that I've talked about in the past that we compete with, currently; all the rest just sell raw materials. And on one item, they have been very aggressive on pricing. But that has not stopped us from gaining market share, getting customers and even though we've walked away from those opportunities where they lowballed the quote, we're still on a backorder situation with our product, so we're selling all that we can produce.

And how about the supplying API For narcotics to other vendors, is that effort going well?

Well, again, that was never our plan at Cody over that. The goal was to vertically integrate Lannett. However, there are some small companies that we have nice relations with and sometimes we do get into those deals. One company in particular we're currently supplying raw material to and that's it.

We are not really generally soliciting or looking to sell raw materials to other companies. It would probably be on a case-by-case basis, because of a relationship with them, or maybe an opportunity to do some kind of joint marketing with a dosage form that they make. But, generally speaking, we're using this raw material for Lannett.

Okay. Okay, great. Thanks very much.

You're welcome.

Tom Harenburg, Carl M. Henning Investments

Yes, fellows, can you give me a little bit of an update on Cody? Is the expansion there completed? Or where do you stand on that, how many employees you have and is Cody profitable or not, at this point and if not, when do you expect it to be profitable?

Hey, let me see if I remember all four questions. Yes, the money that they were given part of when we raised money in 2010 has been used to complete an expansion. That expansion is virtually complete. Right now they're actually validating equipment, manufacturing in some of the rooms and validating those batches. So, from a perspective that you're talking about, the equipment's in place. The rooms are ready to go. We're now actually manufacturing in the rooms.

Cody is profitable. Occasionally, when we have quota issues where we're held up and not getting the quota on time, Cody can fall into a negative category; but then generally speaking on an annual basis, Cody is profitable.

Okay and what's roughly you're employment level there?

They have roughly 94 employees out of Cody.

Okay. Thank you.

You're welcome.

We have no further questions at this time. I will now turn the call back over to management for any closing remarks.

Well, I'd like to 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.