Lannett Company Inc (LCI) 2012 Q3 法說會逐字稿

Welcome to the Lannett Company Fiscal 2012 Third Quarter Financial Results Conference Call. My name is Jackie, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to Mr. Robert Jaffe. Mr. Jaffe, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's Fiscal 2012 Third 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 3 months, and may be accessed on the internet at Lannett's website.

I'd 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 solid fiscal 2012 third quarter performance was largely in line with our expectations, and substantially improved over the previous two quarters.

Several factors contributed to our financial results, including strong sales of our cardiovascular and pain management products, price increases on certain products, and improved manufacturing efficiencies.

Thus far in fiscal 2012, we continue to benefit from products approved and launched over the last 9 months. Over that time period, we have received 9 product approvals, which include 7 ANDAs, 1 supplemental ANDA, and 1 new drug application.

Two of these products, hydrochlorothiazide capsules 12.5 mg, and Phentermine hydrochloride capsules 15 mg, were launched in the quarter.

As we discussed our last conference call, we are working with appropriate government officials in an effort to rectify, or at least mitigate the impact on Lannett of costs related to the Patient Protection and Affordable Care Act, or PPACA. This legislation, which became effective a year ago, requires pharmaceutical companies to rebate a portion of the cost of branded prescription drugs for Medicaid Part D beneficiaries. We believe the Act has been inappropriately applied to our levofloxacin product, which was approved as a new drug application, but is marketed as a generic. Accordingly, we contend that our levofloxacin sodium product is outside the spirit and intention of PPACA. Until the situation is resolved, we will continue to record and accrue this charge, which was less than $150,000 for the fiscal 2012 third quarter.

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.

For the fiscal 2012 third quarter net sales rose 19% to $30.7 million from $25.9 million in the fiscal 2011 third quarter. Gross profit more than doubled to $10.9 million from $5.3 million for fiscal 2011 third quarter.

As a percent of net sales, gross margin was 35%, compared with 20% for the fiscal third quarter of last year. The higher gross profit percentage was due to favorable sales mix, price increase, and enhanced manufacturing efficiencies. Research and development expenses increased to $2.9 million from $1.9 million in last year's third quarter.

SG&A was $5.6 million, compared with $4.3 million for the same quarter of last year. Approximately, $560,000 of the increase related to the engagement of a marketing partner for our C-Topical branded drug opportunity. Arthur will discuss this in more detail momentarily.

Operating income was $2.4 million versus an operating loss of $830,000 for the comparable quarter last year. Net income attributable to Lannett was $1.7 million, or $0.06 per diluted share, compared to a net loss attributable to Lannett of $362,000, or $0.01 per share for last year's fiscal third quarter.

Now, turning to the balance sheet. As of March 31, 2012, cash, cash equivalents, and investment securities were approximately $24.6 million. Turning to our outlook for fiscal 2012, we anticipate achieving the following -- full year net sales to be approximately $120 million; full year gross margin percentage to be approximately 31% to 32% of net sales. With respect to operating expenses, we expect full year R&D expense to increase to approximately 10% of net sales.

We expect our SG&A expense in the second half of fiscal 2012 to increase compared with the first half, primarily due to the engagement of the new marketing partner for C-Topical. We had $560,000 in the third quarter, and expect an additional approximately $500,000 in the fourth quarter. And finally, we expect capital expenditures to be approximately $6 million.

And 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. We are delivering on our promise of significant improvement to our financial results, and the second half of our fiscal year.

Looking ahead, we have a strong pipeline that includes approximately 40 products in various stages of development. Of these opportunities, several are worth noting, such as 2 chemotherapeutic drugs from which we expect higher revenues than we typically enjoy. One of the chemotherapeutic products is thalidomide, a generic version of Thalomid, which currently has brand sales of approximately $300 million, and is still looking a first-to-file candidate. 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 products strategy. We have identified several opportunities, including our C-Topical product, for which we are utilizing a 505(b)(2) strategy to gain FDA approval. We expect the C-Topical clinical trial to be completed, and to file a related new drug application by the end of calendar year 2012.

As Marty mentioned, we have engaged a marketing partner to test market C-Topical in certain geographies around the country. The firm will detail the product using a dedicated sales force. We expect to see initial results and market feedback beginning in the second quarter of fiscal 2013.

Phentermine Resin, which currently has no competition on the market, we intend to market this product through our newly created specialty pharma division. While we had hoped to begin marketing this product in the fourth quarter of the current fiscal year, we now expect to commence marketing in the fourth quarter of fiscal 2013, due to delays in sourcing raw materials. And our antibiotic supplemental application for MRSA was filed in February 2011. We have been recently informed that the expedited review that we are seeking will be delayed due to the FDA backlog.

We are optimistic that our financial and operation momentum will continue. With the continued time available, we would like now to address any questions you may have. Operator. Jackie.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Scott Henry with Roth Capital. Please go ahead.

Thank you. Good afternoon. Arthur, I just wanted to make sure I heard you correct. Did you say full-year guidance on 2012 revenues of $128 million?

No, I said $120 million.

Okay.$120 million. Okay. That makes sense then. Another question just, first, just to tie up some loose ends here, Marty do you mind giving us the numbers for the big categories, such as, thyroid deficiency, cardiovascular, some of those?

Okay. So, thyroid deficiency, it's $12 million, for the quarter this is, for the third quarter, it's $12,543,000; cardiovascular is $6,050,000; pain management is $4,043,000.

Any other significant drivers, such as, I guess, I'm just looking at it right now, but the obesity category, or gall stones, or glaucoma, any others?

I can give you the number, certainly. I mean, gall stone it's $1,419,000; obesity, you mentioned, it's $979,000; and I'll through in migraine, this is the Butalbitals, it's $1,442,000.

Okay, great. That's helpful. Now, just shifting gears. Arthur, gross margins, obviously, pretty strong in the quarter. Do you think we've bottomed out? Should we continue to see gross margins around these levels, or even getting better? It seems like you kind of upped your guidance for gross margins on this call.

Scott, this is Marty. So, in the third quarter, we certainly had a number of factors that all went our way, let's say, with the sales mix worked out very well for us, particularly with the pain management products, and the cardiovascular products. That was one significant factor, sales mix. Second factor being we had some price increase in the third quarter. And finally, we had manufacturing efficiencies were very favorable due to cost control, and also some very favorable throughput in the factories.

So, that gave us -- those three factors led to the 35% gross margin in the third quarter. Right now, our outlook for the fourth quarter isn't as high as that. That's why, okay, we've upped our full-year expectation a bit for gross margin, but we do see gross margin coming off a bit from that 35% mark that we achieved in the third quarter.

Okay. And then perhaps shifting gears to some of the key either near-term products or of the pipeline, could you comment on dyazide? How that ramp is going?

That's doing very well. It's had a first, good strong quarter, our first quarter with the product. This, as you recall, it was approved December 22, so the original launch was very small in that second quarter. In the third quarter, we actually getting the benefit from it, and we continue to expand in that marketplace.

Yes. Excellent. And then on thalidamide, I was just looking at my notes, I think from the last call, do you still expect to file that product this summer?

Yes, we do. We've already had some batches of product made. The biostudy is being prepared. So, we are still expecting to file this summer.

Okay. And then, I just want to make sure I took this down right. The Phentermine Resin, you think -- what is that calendar year, fourth quarter 2013, you expect to launch that product?

No, no. That would be -- well, at the best it could be a year.

Okay. All right, I think that does it. Thank you guys for taking the questions.

Thank you, Scott.

Our next question comes from Chris Holterhoff with Oppenheimer. Please go ahead.

Hi, guys, good afternoon. Thanks for taking the questions. First question is just on the pricing increases that you took in the quarter. I guess it would be helpful if you kind of can tell us what products they were taken on, and maybe, just give us a sense of the percentage increase you took. And then, just your outlook for if you think that you can take similar price increases in the future.

No, to the similar price increases in the future. And also, no to identifying which product it was. We were able to get an increase from one of our large customers on some products that we supply them, but we prefer not to identify them any further. It would -- it's kind of embarrassing to actually nail down a particular product and customer in this marketplace, where I have a lot of competition.

Sure. No, that's fair enough. Could you maybe tell us what franchise it was in? What product franchise it was in?

It was in pain.

Okay. Okay, great. And then, you talked a little bit about manufacturing efficiencies helping you out in the quarter, and just kind of wondering if you see any future improvement in efficiencies aiding the bottom line as well.

Well, we expect -- this is Marty, Chris -- certainly, like I mentioned, we had some favorable efficiencies in the third quarter, and we would expect to see some of that still come through in the fourth quarter. It's kind of like as I was answering in the previous question, we do expect our margin -- our gross margin that is, in the fourth quarter to be better than we saw in the first 9 -- well, the first half of this year, let's say.

But the fourth quarter gross margin, we do not expect it to be as high as we saw in the fourth, but what's still keeping it to the -- on the up above say 30% in the fourth quarter, some of that would be the continuing achievement of these efficiencies.

Okay. Okay. And sorry if I missed this, but on the pilot sales program for C-Topical, I know you talked about maybe ramping up that effort, and maybe going to increasing number of reps from I believe the 3 or 4 or so that are marketing that product right now. Could you just talk about how you think about making that decision, and maybe what the timing might be there to increase the number of reps?

Yes, just to clarify, the reps we're starting with this March is the 3 we have that you refer to. If the launch is successful in the fall, we would start to ramp up -- we would hire an additional 16 people, but, of course, you're not going to get the 16 people day one. So over the course of the third, fourth, or our first and second quarters on fiscal basis, third and fourth quarters of this year, we should start to ramp up. We are expecting to see positive results from the test market.

Okay. Okay, and then maybe just one last question for Marty. I know we expect the gross margin to improve as the mix, product mix, just to more pain products, and I think that's going to go to about 50% eventually, just over -- can you help us think about over the next -- I know next quarter is going to be down, but is the 50% something that you think is achievable next fiscal year, or possible the year after? Just kind of a good way to think about that would be helpful

Well, a lot depends -- this is Arthur, a lot depends on how quickly we get products approved at the agency, and switching raw material sources to our subsidiary to benefit from the vertical integration. The 50% is certainly a reasonable number to shoot for, but would I expect to get there next year, no, I think is what you will see is certainly the year after, we'd be climbing towards that number, and a lot depends on whether we get quotas promptly, whether we fail to get quotas, of course, sets us back, and that's the difficulty of trying to anticipate how quickly those margins will come about.

But there's no question that we're moving in that direction. So, whether it takes one year, two years, or three years, that will be the margin that we can expect as we vertically integrate. We're certainly seeing it as we start to vertically integrate the products that we've already worked with Cody, our subsidiary.

Okay. Okay, that's helpful, and that's all I had. Thanks for taking the questions.

Yes, thank you.

Thanks, Chris.

Our next question comes from Gregg Hillman with First Wilshire Securities. Please go ahead.

Hi, good afternoon. Arthur, could you talk about the plant in Cody, the utilization of some of the rooms, and what's happening there, whether there's adequate capacity, and what kind of investments are occurring at Cody?

Well, there's certainly adequate space at Cody, and we certainly are utilizing those rooms. They're completed. They're running some validation through those rooms of different products. Once you get the room in place, you have to validate the equipment, and so it's a process that FDA requires. Then after you validate all the equipment that's installed there, you then can make a product there, and you have to validate the process of that product being produced. That's being completed on time with -- in essentially most areas, if we're off, we're off a month or two only, which is not unexpected.

So, I do expect those rooms to be utilized and start to produce. Now, the additional space, we have received a proposal from the state or the city of Cody to put an additional warehouse on our facility, and we're certainly exploring that opportunity. We don't necessarily need that immediately, but the proposal is very rewarding for the company, so we may go ahead and enter into an agreement, where they'll put an additional 24,000 square foot of warehouse space that will allow us to more efficiently use the manufacturing facility that we have in place, and take the warehousing that we're doing in the facility, and put it into an adjacent building.

But, again, that would be at no cost to the company, if we go ahead with that project.

Okay. And do you have -- how long does the quota -- when you get quota how long does it last for, for some of the narcotic products?

Some of them are for a year, if we request a quota on an annual basis, which is required in April of the prior year. So, last April, I had to apply for my full-year quota for this year. They generally will either give you everything you request, or nothing, or something in between. Usually, if they don't give you all that you request, they're only asking for additional information, or you volunteer to give them more information, or try to ascertain why they didn't grant the quota. And a lot of times, it's just clarifying the additional information they have.

For example, the DA these days is definitely looking at the market to see how much of products are available in the marketplace. So, they might turn me down for quota because they think my customer has quite enough inventory. Now, they tell us this upfront, but that seems to be what we're getting in the way of feedback when we try to ascertain why they would say, we're not giving you the quota you requested.

At other times it's just some confusion, because they do have a new automated process that everybody's trying to use, and we're not really getting rejected every place, but I would just say that some bugs still need to be sorted out there. And we certainly are working with the agency to sort those bugs out.

Okay. And then the R&D budget for the quarter, I think it was $2.9 million versus like $1.9 million. How much of that was the C-Topical study?

None of it was for C-Topical.

Okay.

That study, the outlay, I mean, we're at the point where we will be making some outlays for that, but most of that work is really been done with our own resources, as far as getting the protocol, getting the quotes from the outside pharma that are going to be actually conducting the study, the number of sites where they study will be conducted. There's a lot of preparatory work to actually doing clinical work. But that is all been completed at this point, and I believe we've actually decided on the firm that's going to do the study, so we will start to see some expenditures for that coming up in the next quarter or two.

Okay. Well, then, in terms of the wild cards here for the company, in terms of the remainder of this calendar year, what would they -- I guess it's always getting drugs approved, but are there any other wild cards internally that you could point to? Would they just be at getting drugs approved and quota, or are there additional other wild cards that are important to you company that could influence earnings materially for the remainder of this calendar year.

Not materially. I mean, we are expecting another approval imminently from the agency that would add some revenue cost, but nothing that would make a material change. Nothing from the agency that we expect. But our sales are growing on the existing products, and we're certainly finally capturing more market share, on some of them is more rewarding than others. And, for example, the new product we got approved in December, if we continue to grow in this quarter, that'll be a benefit, but we also believe that our competition may come back into the marketplace in the summer. So, I don't want to be too optimistic about that growth potential, in case they introduce their product sooner than I'm anticipating.

Okay. And, I guess, that's all I have for right now. Thank you.

Thank you, Gregg.

Thanks.

We have no further questions at this time. Is there any closing remarks?

I would just like to say, if there are no more questions, I'd like to say thank you for joining us today. If anyone has any further questions, please do not hesitate to contact the Investor Relations team at Lannett. And that concludes our call, and thanks again for joining us today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.