Lannett Company Inc (LCI) 2013 Q3 法說會逐字稿

Welcome to the Investor Relations for Lannett conference call. My name is Leslie and I'll be your operator for today. 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'll now turn the call over to Mr. Roger Pondel. Mr. Pondel, you may begin.

Thanks, Leslie, and good afternoon everyone. Thank you for joining us today to discuss Lannett Company's fiscal 2013 third quarter financial results. On the call today are Arthur Bedrosian, President & CEO, and Marty Galvan, Chief Financial Officer. This call is being broadcast live on the Internet at www.lannett.com. A playback will be available for three months, accessible on Lannett's website.

I would like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the Safe Harbor Provisions of the Litigation Reform Act. The Company's discussion will include forward-looking information reflecting management's current forecast of certain aspects of the Company's future and actual results could differ materially from those stated or implied.

This afternoon Arthur will provide a brief overview and Marty will discuss the financial results for the quarter in more detail, followed by Arthur's concluding remarks. We'll then open the call to questions. So with that said I will now turn the call over to Arthur Bedrosian. Arthur?

Thanks, Roger, and good afternoon everyone. As you are probably aware, today we reported excellent results for our fiscal third quarter. In fact we generated record net sales and net income. The momentum we achieved in recent quarters continued and we significantly improved our operating performance in all major areas of measurement.

For the third quarter net sales rose significantly up 27% over the prior year period to $39 million. Operating income doubled to $4.7 million and net income climbed to $3.9 million. The quarter exceeded our expectations which is why we pronounced preliminary results last week.

I want to take this time to thank our entire team for their hard work, long hours and extraordinary achievements. With our press release today, we also announced that we are increasing our guidance for the fiscal year and Marty will provide the details. Marty will review our financial performance in detail momentarily.

The growth we achieved in the quarter reflects solid sales in our base products and growing market penetration from our more recently approved products. Our gross margin was positively impacted by favorable sales mix and price increases as well as enhanced manufacturing efficiencies related to incremental sales volume. With that brief overview, I'd like now to introduce our CFO, Marty Galvan, to review the third quarter financials in more detail. Then I will provide an operational update and we'll open the call to questions. Marty?

Thank you, Arthur, and good afternoon everyone. As Arthur mentioned we posted excellent fiscal third quarter financial results. Starting with the top line net sales increased 27% to $39.0 million from $30.7 million in last year's fiscal third quarter. I want to note that the sales growth for the most recent quarter was achieved despite essentially no sales of Oxycodone for which we soon expect FDA approval of our ANDA. We had approximately $700,000 of Oxycodone in last year's third quarter.

Net sales for our largest product category, thyroid deficiency, grew to $14.0 million or 36% of our total net sales. Our two other largest categories, cardiovascular and pain management, had net sales of $7.0 million and $5.0 million, respectively, representing 18% and 13% of our total net sales, respectively. As for net sales of our remaining categories, antibiotic was $3.5 million or 9% of total sales, gallstone was $1.4 million or 4%, obesity was $1.1 million equal to 3%, migraine was $1.3 million or 3%, glaucoma was $1.6 million or 4%, gout was $1.8 million or 5% and other represented $2.4 million or 6% of our total net sales.

Gross profit for the fiscal 2013 third quarter rose significantly to $15.2 million from $10.9 million for last year's third quarter. As a percent of net sales, gross margin rose to 39% from 35% for the fiscal third quarter of last year. The increase was primarily due to favorable sales mix and price increases along with enhanced manufacturing efficiencies related to our higher sales volume. Strict cost control was an important contributor.

Regarding operating expenses, R&D expense rose to $5.2 million from $2.9 million a year ago. As we discussed in previous earnings calls this fiscal year, the increase is due to our significant incremental investment in R&D in order to drive future growth, however, we now expect Q4 R&D expense to be in the range of $4.0 million less than we previously anticipated primarily because some of the planned expenses for fiscal 2013 we now expect to be incurred in the first half of fiscal 2014.

SG&A amounted to $5.2 million down slightly from $5.6 million for the same quarter of last year.

Operating income increased sharply to $4.7 million from $2.4 million for the comparable quarter last year.

The effective tax rate was 25% compared to 38% for the third quarter of last year. The decrease is primarily due to the reinstatement of the R&D tax credit retroactive to January 1, 2012 which was recorded in the third quarter. An increase in incentive stock option exercises also provided additional tax benefits during the quarter.

All of these metrics resulted in net income attributable to Lannett of $3.9 million or $0.14 per diluted share compared with $1.7 million or $0.06 per diluted share for last year's fiscal third quarter.

Our balance sheet at March 31, 2013 remains strong with cash, cash equivalents, and investment securities of $39.0 million. As Arthur mentioned and as he stated in today's press release, we are revising our guidance upward for the fiscal 2013 full year. We now expect net sales of $147 million to $149 million up from the previous guidance of $140 million to $142 million.

Gross margin as a percentage of net sales of approximately 38%, up from 36% to 37%. R&D expense in the range of $16 million to $17 million, down from $17 million to $18 million. Expense ranging from $22 million to $23 million, versus $24 million to $25 million. Other income of approximately $2.0 million essentially equal to the favorable litigation settlement the Company reported in the first quarter and year-to-date gains on investments. The full-year effective tax rate in the range of 35% to 37%. And capital expenditures in the range of $7 million to $9 million versus $10 million to $12 million in the previous guidance. And with that I will now turn the call back over to Arthur.

Thank you, Marty. We are pleased with the third quarter performance, the improvement in our stock price, and the recognition by our shareholders of our achievements. As we have discussed for several quarters now, we are stepping up our product development initiatives with the products we believe can generate more revenue and higher margins than we have typically experienced in the past.

We have submitted our first paragraph IV filing, and additional paragraph IV product candidates are in the later stages of development. We await approval of our Oxycodone Hydrochloride solution which we expect soon.

Our specialty pharma division continues to lay the groundwork for the expansion of our detailing of our C-Topical. We expect to sign a contract which will add a number of sales persons over the next two quarters and we are on track for the FDA filing by December 2013.

Our ANDA for Thalidomide is on track for FDA filing in the fall. We were hopeful to file sooner but faced delays in receiving an API for our commercial production of our exhibit batch.

We have begun talks with a number of potential generic manufacturing candidates which would add complementary products that we believe would be accretive. We look forward to hopefully concluding a transaction with one or more of these firms. Our current pipeline includes 15 product applications pending at the FDA and an additional 30 products in various stages of development.

This is an exciting time for Lannett. In addition to our excellent financial results we are developing a strong pipeline, making changes to our Board, and investing in our company's future. We look forward to continuing to report on our progress.

Marty and I would now like to address any questions you may have. Operator?

We'll now begin the question-and-answer session. (Operator Instructions). Our first question comes from Randall Stanicky with Canaccord Genuity. Please go ahead.

Hi thanks. This is actually Dana Flanders filling in for Randall. Thanks for the question and congrats on the quarters. So first, Arthur, could you just give us an update on contract negotiations with JSP and potential timing on when we could see an agreement come through?

Yes, we have been having ongoing discussions with Jerome Stevens Pharmaceutical Company and I will be submitting to them a term sheet with regard to certain adjustments we plan to make to the agreement that we have in place currently that expires March of 2014. And I expect that we will conclude something shortly.

Okay, that's great. Thanks. And then second, I know last quarter you talked around some of the issues at Cody regarding product development. I was wondering if you could give us an update on some of the progress made there and integration of that asset.

Not much to say in one quarter in terms of the integration but we are actively working closely with Cody and I'll have more to report in the next couple of quarters when we can see the integration actually taking root. But there's definitely a lot of movement in that direction and I do expect that the cooperation between the two companies will become more seamless than it has been in the past.

Okay great. And then regarding quota with the DEA, have you been having discussions regarding this calendar year? Where does that stand?

Well, we have discussions with them every calendar year besides the annual submission that we make in April for the next calendar year that we have to do every year. We also have ongoing discussions about additional quota or not receiving enough and going back for additional quota. And so far at this point in time there hasn't been any particular unusual delays with our quotas.

Okay, perfect. And then just last question to wrap up. Can you give some more color on the M&A front? I know you gave some closing remarks regarding some companies that you're in discussions with. What sort of companies are those and what areas and how close are we to potentially seeing a transaction? Thanks.

Okay, well first of all, they are all in the generic drug space as we are and they're all manufacturing businesses and we've made some discussions that, say, that date back a few months with some. With others where you might say at the earlier stages but clearly there are three transactions that we are looking at. And the size of the companies are modest compared to our size. Certainly the type of acquisitions that would fit in nicely. The companies bring product to the table that we don't currently have. A form of dosage form that while we make for ourselves, they offer quite a larger portfolio of products in that dosage form. And I believe that the relationships will get stronger as we continue to court these companies. At this point in time there's been no due diligence but there has been an interest on the part of one of the companies that was an overseas company to sell the US subsidiary. However, that doesn't mean that we'll be the ones that acquire it but that's a decision that has apparently been reached.

The other companies are private held companies and we've had some preliminary discussions with them. So at this point I really don't have too much more to say than that.

Great, thanks.

Our next question comes from Steven Crowley with Craig-Hallum Capital. Please go ahead.

Good afternoon, gentlemen, and another round of congratulations on a great quarter.

Thank you.

In terms of a couple of things, drilling down you gave us some nice granularity there, Marty, and a couple of things stood out to me and I'm hoping we might be able to get a little bit more. For example, the antibiotic category, you seem to have quite a bit of success maybe on a little different scale than historical. What was that all about? Obviously you're gaining market share or is that one of the areas where that was price increase?

Yes, Steve, well some of the favorable results you've seen in that particular category are the result of some market conditions where there have been some shortages actually in the market place. So one of the opportunities that Lannett generally benefits from are from these circumstances with a range of over 40 products. We're in an excellent position to take advantage of shortages that do develop and this is one instance where that has happened.

And in terms of the pain management category, there was also some nice sequential in year-over-year growth there. I know that's part of your longer term strategy to drive that category, but this little bit of a pop was pre-Oxycodone. Was that a function of several products or one product in particular and is that the start, hopefully, of a trend? How would you characterize it?

I would say it's some of the success, as you've heard us talk, we perceive our C-Topical product to be a significant opportunity for Lannett going forward. And one of the primary drivers of that category in this third quarter, sequentially, was just the uptick in that particular -- in the performance of that particular product. So that's what you're seeing.

Okay, now you gave us some good guidance on Research and Development backing off temporarily here in the fourth quarter before it goes north again in 2014. On the SG&A front, I'm trying to -- you gave us some overall year guidance. It seems to allow for a jump in SG&A in fourth quarter. Maybe with some of that commercialization that Arthur -- additional investment in commercialization of C-Topical that Arthur referenced, so we should think about a jump in the fourth quarter, I guess of as much as $1 million or so. What are the variables in that equation that you're weighing?

The big driver in SG&A that's a separate, apart from the run rate you might say is the expense that we're allocating or providing for the detailing effort behind the C-Topical product. So as you recall in the -- three months ago in the guidance, we said okay, we're going to go forward with an expansion of that sales force and we provided additional monies in our guidance for SG&A. At this point in time, though, we're seeing a bit of a delay in that expansion and the guidance now -- the reduction in the SG&A outlook for 2013 is because of just moving back a bit on that expansion -- the timing for it. But there is still money in the fourth quarter for it so the uptick you see would be less than we had before but there is still some in there for that.

Okay and I would think on the downtick in CapEx, is that really just a push-out also to next year and is there any preliminary look at what you might spend on the CapEx front next year?

No preliminary outlook that we can provide at this time, Steve, for that one but the reduced CapEx in the fiscal 2013 is primarily timing. You know, like any company as we put forward -- as we start a year, we're ambitious and we have many projects. And just as the months go by, we're just not able to get to everything we might like to think we're getting to. So all those projects, probably the bulk of the them, will move into 2014 but, conceptually, the 2014 projects may be moved into 2015. So I think it's primarily timing but, for now, for 2013 it will come in less than what we had previously guided to.

And one more from me which is in terms of your revenue guidance, the approach you took coming out of last quarter, so Q2, the December quarter, whereas you had a period where most things went well within the product mix, it looks like you have another one of those quarters. But your approach was to not assume that was a steady state condition. In other words, not everything would go well in the next quarter and it looks like, in the June quarter, the implication of your guidance is that revenue is likely to be a bit below the March quarter. Is that a function of that same exercise and process and conservatism or are there some things that are fairly certain to drop off here in the fourth quarter?

I would say that it's a bit of both, Steve. The guidance is such that you're right, the fourth quarter kind of looks like our first and second quarter, closer to that second quarter. So three months ago we were saying the second would be the new norm and the guidance right now kind of says, okay, the fourth quarter will kind of look like the second quarter. But the third quarter had some even better than the second performance to it so sequentially it was up significantly as you see. But there is that conservative aspect to our outlook for the fourth quarter but there is also a couple of business dynamics that we are aware of right now that we're not prepared to share on this call but there are some business arrangements or things that help tell us or help our ability to forecast and, for these business situations, we can expect -- we should expect to see the sales drop off a little bit.

Okay so that's useful.

So both those factors in the fourth quarter outlook.

Thanks for the extra color and taking the questions.

Thank you.

(Operator Instructions). The next question comes from Scott Henry with Ross Capital.

Thank you and good afternoon. I guess, to start on the big picture, we've got three quarters down in fiscal 2013. I guess, can you give us, kind of, some big picture outlook for 2014? I mean, business is hitting on all cylinders right now. Do you expect 2014 to be kind of a growth year? Just want to get any color you can provide, kind of, from the top.

First of all it's a bit early to be commenting on 2014. We expect to provide full-year fiscal 2014 guidance on our next conference call. Having said that I'll touch on a couple of key items that we'll be thinking about as we put together our outlook for fiscal 2014.

First, we expect fiscal 2013 was much improved over fiscal 2012. The progress is largely due to strong sales of many of our traditional products, several new products gaining traction and opportunistic price increases and, of course, enhanced manufacturing efficiencies as well as a gain on the settlement of litigation. Naturally the $0.03 gain is a non-recurring item.

So regarding our very early outlook for 2014, the early indications are that we expect continued strong sales growth and anticipate the percentage increase in net sales to be in the high single digits to low double digits.

Regarding expenses in 2014, as you know we have moved a significant amount of spending to 2014 that was originally planned for 2013. This has contributed to the higher than expected Earnings per share for 2013. But the additional expense in 2014 has the effect of holding down Earnings per share next year. You may recall that we originally guided 2013 to be flat year-on-year with 2012. Now we are thinking 2014 Earnings per share may be similar to 2013 Earnings per share but at a much higher Earnings per share level than we were discussing a year ago. Hope that helps.

That's actually very helpful, Arthur. Thank you for that color. Now I'll just drift into some of the specifics. Certainly a new accomplishment getting a P4 filed. Can you give us any color on that? You know, do you think you're the first filer or any thoughts on the market potential for that product? I mean, obviously, you don't want to give a lot of color but I thought that was interesting.

Well, we haven't received our acceptance letter so until we receive that we won't be able to put the other (inaudible), the patent holder on notice but the market opportunity on that, I believe, is in the $50 million range.

Okay, thank you. Okay, you said you believe you are the first to file.

Yes.

And a lot of R&D spent in the quarter. Any color on kind of what the bolus of that is for? I mean, any project, specifically, or just multiple things going on?

The expense -- it's high in the quarter because we do have some -- we've talked a lot, Scott, about the phase 3 trial for C-Topical so the quarter does have a -- that's causing the blip, essentially, and it's compared to the other two quarters of this fiscal year.

Okay, and then on the pain management franchise and I know I've asked you about this in the past, but there were some recent events on the abuse-resistant front, that make abuse-resistant, at least to me, an appealing category going forward. Have you thought about how you may incorporate abuse-resistance into some of the things you're doing at Cody and what are the opportunities there?

Yes, it's something we've been looking at for some time so we were not surprised by this announcement from the FDA. Just the opposite, we were expecting it.

The good side to this, of course, is we're going to now have brand products introduced into this marketplace that was traditionally dominated by generic drugs. Now all the companies that are coming out with their patented abuse technology platforms and introducing either new opiates like the Opana, the Oxymorphone as opposed to the Oxycodone and the Oxycontin formulas, I believe you're going to see a greater opportunity in front of Lannett for these brands. And at the same time, the generic marketplace where most of the narcotics are currently in is also going to be open to us for our vertical integration. So we kind of benefit in two ways. We capture a share of the market for which we provide our own raw material and then we see the market growing in the brand area. Now what's exciting about that, of course, is the brands introduce these products at substantially higher prices than what typically generics sell for which means my profit margins going forward will be higher than I was anticipating. So this, just to me, is additional good news.

On the issue with the abuse technology, really, the biggest stumbling block I would say facing us at the moment isn't creating an abuse technology, it's really making sure that the ones we create and use in our products are not involved in patents that are pending at the office but have not been approved yet. I think to find out that a technology I developed and launched, my product will get approved to be used on my product, some that belongs to somebody who happened to file a patent on it. So we are considering as a result of that risk on some of the more vulnerable products, to possibly license existing patented technologies so I don't have to worry about running across anybody who has a patent pending but I've not announced that formulation yet.

So we look forward to -- this market is really expanding what we were anticipating doing in that market with more opportunities for Lannett.

Okay great. Thanks for the color. Final question. The pricing environment has been pretty favorable for your product portfolio and I would speculate that it's been pretty favorable for the Lever Thyroxine franchise. Could you talk about -- is the environment for pricing there? It's obviously good right now. Are you concerned that it may change in the near term or does it seem relatively stable, I guess, in an increasing price environment? You would think it would be stable but I'm just curious if there is anything that I would expect to change that in the short term.

Well, we're in a generic drug space so for me to sit there and not tell you that we're not vulnerable to rice declines would be foolish. However, with this particular drug there is some unusual aspects. The physicians and the patients have a lot of extra work in front of them every time they want to switch a patient to another product. So even if another generic comes along and offers the product at a lower price, most of the customers have rights of first refusal. So the likelihood is I will not lose one customer. I conceivably could lose profit margins but, in the past when we've encountered competition from some generic brands and, let's just say, are one-third the quality of the product that we sell, we've refused to match those prices and we've retained those customers. Sometimes we'll make a bit of a compromise but we've never actually had to match a competitor's price on this product and, as a result, because our product is never involved in recalls and we're a good supplier, actually, a great supplier on the product, we're able to command a better share of the market and higher price for our product. And I believe while I expect there might be competition coming up, I really don't think it's going to have a major impact on us.

Okay, thank you for taking the questions.

You're welcome. Thank you, Scott.

Your next question is from Marco Rodriguez with Stonegate Securities. Please go ahead.

Hello, this is actually Dan Trang sitting in for Marco Rodriguez. Art, did you mention that there were no sales of Oxycodone-based drugs in this past quarter?

Yes, Marty did. Yes, that's true.

Could you give me some color as to why?

Well, the FDA had asked us to, in exchange for withdrawing our grandfather product and filing an application, they would expedite the application -- the approval process so we agreed to stop marketing the product in the third week of October of 2012 while the (inaudible) prior to that and we're expecting and were promised an expedited review. At this stage, of course, I always hate to predict anything when it comes to FDA approval process -- I am expecting it by the end of June. In which case we'll re-launch the product.

Okay, and I know that you mentioned that you expect to sign a contract in the next two quarters for C-Topical. Just wondering launch -- how soon after that contract is signed would you expect to go to market?

Well, probably within 60 to 90 days after they're put some through some training. As you know there's a lot of legal requirements for detailing brand products these days and we're not brand experts but we're certainly working with them to make sure that we don't run afoul of any of those regulations that are out there with regard to the physician contact and things like that.

So I would say that we'll start hiring and start training and, after the end of the two quarters, most likely we should have the sales force on the field the month following. So within those two quarters we should start to see some of those people in the field, literally. We do have two people in the field currently. The original two of the test market that we started last June. So they're still on the payroll and they're continuing to do the work. We have been successful with that pilot study and that's why we decided to expand and increase the number of sales people out on the road.

Okay. Thank you.

Thank you.

(Operator Instructions). I show no further questions at this time.

Thank you again for joining us today. We are always available to answer further questions and look forward to reporting on our continue progress on our next call.

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