Lannett Company Inc (LCI) 2013 Q1 法說會逐字稿

Welcome to the Lannett 2013 first-quarter financial results conference call. My name is John 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. Please note that this conference is being recorded.

I will now turn the call over to Mr. Robert Jaffee. Mr. Jaffee, you may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2013 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 ww.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 Company's discussion today will include forward-looking information reflecting management's current forecasts of certain aspects of the Company's future and their 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 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. Looking at our fiscal 2013 first-quarter results you will see that we reported strong top- and bottom-line results. Our gross margin, operating income, and net income were higher than in any previous six quarters.

More specifically, net sales grew 22%, operating income increased 1 to 2.5 times, and net income rose to $2.9 million from $206,000 compared with last year's first quarter. These increases were largely due to strong sales of our base business products as well as recently approved drugs. The launch of our recently approved products improved our manufacturing efficiency and helped increase our gross margins to 39% of net sales from 30% for fiscal 2012 first quarter.

We continue to be active on the Investor Relations front. In September, we made presentation and met with a number of institutional investors at the 2012 UBS Global Life Sciences Conference in New York City. Over the next couple of months we will have the opportunity to meet and make presentations to the professional investment community at the Oppenheimer Healthcare Conference and Roth Capital Annual Growth stock conference. We have also been invited to attend the JPMorgan Healthcare Conference in San Francisco.

We believe Lannett's growth opportunities are compelling and we look forward to delivering that message to prospective investors.

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 2013 first quarter net sales were $35.3 million, up 22% from $28.9 million in the fiscal 2012 first quarter. By category, net sales in millions of dollars were thyroid deficiency, $13.6 million; cardiovascular, $7.1 million; pain management, $5.5 million; antibiotic, $1.7 million; gallstone $1.6 million; obesity, $1.3 million; migraine, $1.2 million; and other, $3.2 million.

Gross profit increased 58% to $13.6 million from $8.6 million for fiscal 2012 first quarter. As a percent of net sales, gross margin climbed 39% from 30% for the fiscal first quarter of last year. The higher gross profit percentage was largely due to sales of a recently approved drug for hypertension as well as a favorable sales mix, price increases, and enhanced manufacturing efficiencies.

Research and development expense rose to $3.8 million from $2.4 million in last year's first quarter. This increase reflects our major investment in drug development in 2013.

SG&A was $6.2 million compared with $4.7 million for the same quarter of last year. The increase was primarily due to the new GDUFA fees for products already in review at the FDA and additional employee compensation-related costs.

Operating income increased more than 2.5 times to $3.7 million from $1.4 million for the comparable quarter last year. Net income attributable to Lannett was $2.9 million, or $0.10 per diluted share, compared with $206,000, or $0.01 per diluted share, for last year's for last year's fiscal first quarter.

The current year first-quarter financial results included other income of approximately $1.5 million, or $0.03 per diluted share, and largely consisted of a favorable litigation settlement for $1.3 million. The prior-year first quarter included other expense of $1 million, or $0.02 per diluted share.

Now turning to the balance sheet, as of September 30, 2012, cash, cash equivalents, and investment securities were approximately $31.4 million.

Turning to our outlook for fiscal 2013, we are reiterating our full-year guidance with three caveats.

First, our fiscal 2013 full-year guidance does not include non-operating items such as the litigation settlement. Second, we expect our gross margin percentage for the balance of fiscal 2013 to be in line with our previous expectations. We anticipate our gross margin will decrease in the first quarter, primarily because we have not forecasted Oxycodone sales in the remainder of the year as we await approval of our ANDA, which we expect to be approved shortly.

Lastly, our R&D expense in the first quarter was less than we planned. However, this is a timing issue and we continue to look for our full-year guidance for R&D to be in line with our expectations though weighted towards the second half of our fiscal year. Accordingly, for fiscal 2013 we anticipate the following.

Full-year net sales of $132 million to $136 million. Gross margin as a percent of net sales for the remaining nine months of fiscal 2013 to be approximately 34% to 35%. With respect to operating expenses, we continue to expect full-year R&D expense to be in the range of $18 million to $20 million and full-year SG&A expense to be in the range of $21 million to $23 million. And, finally, planned capital expenditures are in the range of $10 million to $12 million.

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

Thank you, Marty. Overall, we are pleased with our financial performance in fiscal 2013 first quarter. Needless to say, we have a strong line of products in development being prepared for submission or already at the FDA, which includes approximately 40 in various stages of development and an additional 15 product applications pending at the FDA.

As Marty said, we intend to invest heavily in the Company's future by ramping up our product development efforts. For the current fiscal year we have increased our R&D budget by $6 million to $8 million, which we anticipate will pay off handsomely in terms of expanding our product portfolio with higher revenue and higher margin products than we typically enjoy.

The major portion of that increase is earmarked for clinical trials related to our C-Topical branded drug strategy for which we are utilizing a 505(b)(2) to gain FDA approval. We expect the C-Topical clinical trial to be completed and to file a new drug application by the end of fiscal year 2013.

A pilot test market for our C-Topical in certain geographies around the country has been underway for four months now using a dedicated sales force. In the last fiscal year, we invested approximately $1 million toward the marketing effort. We are now in a position to assemble the sales data from IMS and conduct an announcement of that effort. We expect to see initial results beginning in the second quarter of fiscal 2013.

Contracts for the clinical testing with a prominent CRO is now in place and preliminary trial work has been initiated.

Let me highlight another one of our product opportunities. We have completed developing the chemo-therapeutic drug thalidomide, a generic version of Thalomid, which according to IMS has annual brand sales of approximately $277 million domestically and $339 million globally. Our (inaudible) was completed and we are preparing for our pivotal study.

We continue to believe this is a first-to-file candidate. As you know, product candidates that are first-to-file often generate significant sales and carry higher margin.

In addition, we've expanded the product development and manufacturing capabilities of our pain management business. This will allow us over time to add active pharmaceutical ingredients and final dosage forms to our portfolio.

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

(Operator Instructions) Scott Henry, ROTH Capital Partners.

Thank you and good afternoon. I guess just starting, just out of curiosity, the litigation benefit of $1.3 million, what was that for, what litigation?

Well, we launched the OB-Natal product a few years back. We had a delivery of softgel and in capsules from our vendor that had some issues with them and we tried to recover the cost of the batch. They refused to pay for that and we ended up litigating that matter.

Throughout the litigation, which took approximately a year now, we ended up receiving a settlement from them which covered the cost of those capsules.

Okay. I do recall that actually.

Shifting to the quarterly run rate, it looks like the thyroid number as well as the cardiovascular number were both very strong. I thought pain management perhaps might be a little higher. Can you talk a little bit about those trends and what we should expect going forward?

I would expect that the thyroid product, the trend will increase sales, so it will be stronger not only this year but we expect it to continue into next year. With regards to the hypertensive drug, we also expect that to remain strong. The pain management products, these are products that are generally impacted by quota issues, but generally we do see an increase year over year for the pain management business as well.

Okay. That's helpful. Now shifting to what I consider some of the key pipeline products. On thalidomide, I had thought we were looking for a year-end 2012 filing. If you are still -- if you are preparing for a pivotal, how long would this pivotal trial take and when should we think about a filing for that product?

Well, unfortunately, we do our best guessing when we anticipate when we are going to get things done and when we are going to receive raw materials and what have you. Right now, we are looking at a May 2013 filing. We have that study now scheduled for January of 2013.

So it takes about four months to complete, I would calculate?

[The study itself] will take really roughly a month and then the statistical analysis roughly another month. Then it has to be assembled in the application.

So all the work is ready, but we did fall a little behind from the December date we were looking for. Now we are definitely comfortable with the May 2013 deadline.

Is there anything new on the competitive front? Is there any reason to think someone may be in front of you or behind you on this filing?

We do know that only one other firm received the brand's product. At this point, we don't know if they are ahead of us or behind us. But we know that the REMS work -- we finished the REMS work for the insert, so that is completed and some of that took a little more time than we thought.

We anticipated doing it in-house and ended up giving it outside to have that done because we didn't have a lot of experience with a REMS of that magnitude. And that certainly added to some of the delay here. As you know, we have to file REMS program with the application.

At worst, we expect one person to be in front of us; at best, they're not in front of us.

Okay. Then the cocaine topical product; do you still expect by to file that by the end of fiscal year 2013? What is the target on that now?

That one we've had some delays with quota, so I would say that's been pushed off a little bit. But we really don't have a date beyond June of 2013, so I'm going to stay with that one a little bit longer until I know little bit more.

The signing of the contract sometimes takes longer. We have had some issues with the firm at the CRO uses for the packaging of the clinical supplies. We just completed some negotiations with that and just completed signing and indemnification that they requested just today.

So there has been some legal delays with the subcontractors that weren't anticipated, but we still are hoping to make that time up if we can. So I don't have a date beyond June, but if I were to guess would it take maybe another quarter after June if I were going to be late.

Okay. And I guess just the final question, in the pipeline, certainly with regards to Cody and the pain division, it appears that abuse-resistant opioids looks like a pretty promising area. The question is are you thinking about that area? Are you targeting it and have you begun any work in the abuse-resistant space?

Well, first, most of the products that we have in development, with a few exceptions, does not require abuse technology. As you know, that's for extended-release drugs. On those where we have developed work, some of those products don't have any abuse technologies incorporated in them.

So, for example, where I believe OxyContin has the abuse technology and Opana Extended Release announced theirs, there are still products on the market that don't have that technology. But, yes, we are looking at it. We have been talking to firms that have offered to license the technology to us.

We also believe that based on being able to make a generic equivalent, we are comfortable that we can develop our own internal abuse technologies. I know, for example, Cody has developed one for a hydromorphone product so we don't really think that it's going to be a stumbling block for us.

But, for example, when you are trying to make a generic equivalent you cannot use Company A's abuse technology, deterrent technology let's say, if it doesn't match precisely the brand you're trying to emulate. So a lot of what we're doing is determined by the brand we are trying to be equivalent to.

But, yes, we are looking at it and we don't see that it has any kind of the delay for us or a difficulty for example. The ones that are successfully on the market we are comfortable we can make generic equivalents to.

Okay, great. Thank you for taking the questions.

You're welcome, Scott. Thank you.

Marco Rodriguez, Stonegate Securities.

Hello, this is actually Dan Trang sitting in for Marco Rodriguez.

Just kind of wondering what's the progress of manufacturing at the Cody, Wyoming, facility. I remember from previous calls that you were at 50% capacity and the particular products that come out of Cody carry a higher margin because manufacturing costs have been streamlined. Also knew that you also have an option of working with the city and getting part of the facility in large through a subsidy from the city of Cody. Kind of wondering what's going on there.

Well, let me work backwards then. The city of Cody was very generous in an offer essentially with an interest-free loan to put in an additional warehouse to the building of roughly 24,000 square feet.

But, unfortunately, there's a provision within their law within their state that would not guarantee that the property after the period of time of 10 years would be sold back to us. There was a potential possibility that the citizens of the city may choose not to sell the building back to us, and we didn't want to take that risk because the property would be in the middle of our 15 acres. So we are planning on going ahead on our own.

The city of Cody is working with their attorney general to see if they can modify the language to the law or give us some assurances that that decision won't be made negatively. Nevertheless, we are planning to go ahead with the warehouse regardless of whether we use our own funds or not.

As you know, we are sitting with plenty of cash and whatever building we will put up it will be another mortgage, so we don't really feel that this would be a handicap. But we appreciate the city showing their appreciation for our business in the community.

As far as capacity is concerned, we are not operating at capacity at Cody within all the areas but we certainly are in some areas. I believe, for example, one of the APIs we have (inaudible), for example, the hydromorphone raw material. We are manufacturing close to capacity there.

We are operating 24/7, but we also have another alternative and we are working on another what we call a two-step process that will reduce the time to make the product. We need to supply material to our customers so that they can file supplements and get FDA approval to use that new process. And that's all in the works.

The rest of the facility, most of the leasehold improvements that we invested in are already up and they are moving rapidly to making more material that should be ready for us by end of December. Then we plan on giving them additional projects beginning in January. So that's really working and clicking along the way we expected, so there's no setbacks there.

Okay. In regards to quota, I know that you spend a certain amount of legal costs every quarter kind of going toward that. Has there been any headway dealing with quota or getting more and kind of lessening the lag time between application and the approval from the FDA?

Overall, I would say that quotas are not a major handicap for us.

Okay.

But, unfortunately, every once in awhile when you get a delay the delay can be roughly six weeks to two months and it's hard to plan for that. So to have occasions where, let me give you an example, we would get our quota -- when we got the quota we didn't rush out and buy the raw material. Then when we went to the vendor to get the raw material, the material arrived and was rejected.

Other times we run into problems where when we go to buy the material the other vendors run out of their quota. So it's really an effort in coordinating all of the pieces of the puzzle to make sure that your scheduled production plans and the needs of your customers, meaning Cody's customers, are aligned with some of Cody's API suppliers and the quota office.

It is improving and I do believe that the DEA is working diligently to resolve all those delays, so I don't see or anticipate that to be an ongoing problem. But near the end of each calendar year it generally does pose some issues for all of us in the industry, but I believe in working with the DEA a lot of that will be addressed so that there isn't a seasonality to the quota problem.

Okay. And just one last question, I know you've put $1 million to the marketing of the C-Topical. Just wondering how many reps you have out in the field and also kind of what is their step to educate physicians on to use the C-Topical since it is a branded drug on Lannett's end.

We have three seasoned sales reps out there and they have been very successful in assembling what we call key opinion leaders and having physicians have group meetings with other physicians where a physician customer actually leads the discussion and explains to the other physicians how he uses C-Topical and the value of it. And that has been improving.

We are getting more and more of these physicians willing to address their colleagues and more and more of them actually using the product and more uses. So we are seeing an expansion in the usage.

We also compared those areas that they operate in to three markets where we don't have any sales reps so that we can do a fair comparison and see if the representation enhanced the sales or not. So far, we are comfortable with it. However, we launched this on June 12 and giving it the six months may not have been enough time.

We are concerned that we are running into the summer holidays when we launched, then we're running into the seasonal holidays of November and December. So we've been discussing with the marketing firm that maybe we might extend the test market an additional three months so that we have a good series of data to use in order to make a decision.

But I would say overall we are still happy with the selection; we are still happy with the detail for us. We have done some ride-alongs where some of our staff has actually gone along with the sales force out on the road, meeting with the doctors, and just sitting in observing how that takes place. And we are overall pleased with the effort here.

Okay. That's all I have.

[George Gaspar], private investor.

Good afternoon, everyone, Arthur. Just wanted to cover a little bit here -- well, first of all, very impressive results for the quarter. On the basis of what you are indicating as your guidance for the year, it would look like on a quarterly basis you could average about $33 million. Is that about right?

I mean if you are giving us the range of $132 million, $135 million or $136 million and you back out first quarter, it looks like it would be $32.5 million to $33 million a quarter. Is that the way you'd be thinking about it?

Yes, George, this Marty. Yes, that is right.

Okay, all right. Now your R&D is moving up and you've got a pretty good cash position. I noticed that your cash position actually looks like it may have popped a little bit from the last quarter and it is basically, what, over $31 million?

Right.

Now how does that correlate -- I mean you are pretty good relative to your overall debt position, your long-term debt position and you reinstituted or extended your shelf registration. It looks like you have a sufficient amount of cash to carry you forward here, at least through the remainder of this year until you get into larger revenue generation from new product development.

Is there something else that you are seeing that you might need additional capital against coming out of the shelf registration, or is that just preparing well into the future?

Well, no. We have been looking at some acquisitions and we've been pretty active on the business development front in terms of product acquisitions, entire acquisitions of other competing generic drug companies. We wanted to make sure that we had the ability, should we need to raise any additional funding, that we could do that rather quickly.

To let that shelf registration expire would have been foolish in light of the activity we have going towards acquisitions. So that was just to make sure that if we needed to go out and raise funding, sell bonds, or what have you, we could quickly do that. But we are looking very seriously and are in negotiations with other companies about acquiring other firms, other licenses, and marketing opportunities, and some of that cash may be used to acquire those opportunities.

But, yes, that's really -- we just want to be prepared because we are moving forward on that front. I'm hoping to have a nice announcement shortly.

Okay, all right. Then on your -- based on margins and your selling prices obviously seemingly have improved. Your cost containment, is it -- what do you see on the near term? Do you see an opportunity to try to hold your pricing structure? Do you see it potentially improving from where you are now as you are going forward over the next couple, three quarters?

I do think you will see some more improvement in pricing, some more price increases on a limited basis. Clearly, most of it is taking advantage of our shortages in the marketplace for which one of the few suppliers. Just general price increases in the marketplace because some costs go up around the globe and we can't ignore some of those increases ourselves.

So I do think that there will be some; I don't think it's going to be material in terms of any major improvement in our improvement, but we are certainly expecting to have the margins at the level that Marty explained for the balance of the year.

Then some of these increases probably won't show up till the latter part of the second -- excuse me, the third and fourth quarters as well, if they show up. Because we do have to put out price increase notices and there is generally allowed buy-ins against those. So I don't see an immediate impact, but I would say maybe the latter part of the third quarter and certainly the fourth quarter.

Okay, all right. Then, Arthur, one question on where the stock price -- where it is. Is there any -- do you envision, from a corporate point of view, of looking at buying any stock back? Or is that not part of your posture considering your more aggressive drug development activities going on?

No, we have a standard policy that when the stock falls below $4 we automatically take advantage of that, because we believe the stock is clearly undervalued and it would be foolish not to make an investment in our stock. But that's not generally the plan to reduce the outstanding shares, because since we are looking at so many business development opportunities now, more than a dozen, we are concerned about what if we have three opportunities present themselves simultaneously, what do we do then?

These are really very good opportunities. Accretive -- we are being very selective in what we are looking at and what we are entertaining. So the stock hasn't fallen below $4 this past quarter so we generally wouldn't do anything with regard to a buyback, but that is in place and the broker knows to do the purchases anytime the stock falls below $4.

Now we may take a look at that in light of the fact that our net worth is probably gone beyond $4 and maybe raise that number up accordingly. But at the moment, -- I also believe in the first quarter we actually did buy back 68,000 shares.

Okay, all right. Well, thank you. It's so encouraging to hear the confidence that you are indicating in this report and the optimism you had moving forward. This is the best I've heard from all of you for at least a good last year-and-a-half. Hopefully it continues to go well for you.

Thank you, George. Marty and I are cognizant of the share price issues and we are familiar with the issues with liquidity that somewhat confronts us. We are addressing that and we will do our best to make sure that we can see our stock reflect the value of this company.

Thank you.

Thank you, George.

Thanks George.

We have no further questions at this time.

Well, let me 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. 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.