Lannett Company Inc (LCI) 2013 Q4 法說會逐字稿

Welcome to the Lannett Company fiscal 2013 fourth-quarter and full-year financial results 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. Robert Jaffe. Mr. Jaffe, you may begin.

Thanks, Leslie. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2013 fourth-quarter and full-year financial results. On the call today are Arthur Bedrosian, President and CEO and Marty Galvan, our Chief Financial Officer. This call is being broadcast live on the internet at www.Lannett.com. A playback will be available for three months and is 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 and full year in more detail, followed by Arthur's concluding remarks. We will then open the call for questions. With that said, I'll now turn the call over to Arthur Bedrosian. Arthur?

Thanks, Robert, and good afternoon, everyone. Today, I have the pleasure of reporting record results from fiscal 2013 fourth quarter and full year. Net income for the full year more than tripled compared with the prior year and was the highest in our Company's 71 year history. We also reported record net sales for both the fourth quarter and full year. I want to take a moment to recognize and thank all of my colleagues and co-workers for their hard work and dedication and achieving this extraordinary accomplishment. The key drivers for our outstanding performance were the combination of sales growth across nearly all of our key product categories and higher gross margin percentage due to a favorable sales mix, price increases and efficient manufacturing. I am pleased to report that we believe these positive trends will continue throughout fiscal 2014, which Marty will address in our guidance.

Before he reviews our financial results, I think it's important to point out that we achieved these results while continuing to invest in the Company's future. This past year, we significantly increased our R&D spending by nearly 40%. We believe we enhanced our long-term prospects by expanding our product development activities to include therapies that have the opportunity to meaningfully contribute to our top and bottom line. We also recently completed negotiations with Jerome Stevens Pharmaceuticals to extend our arrangement. Under the amended agreement, Lannett will continue to be the exclusive distributer of substantially all Jerome Stevens products for an additional five years through March 2019. Since signing the initial contract nearly 10 years ago, the products covered under this agreement have combined to contribute significantly to our financial results. We are obviously pleased to continue this highly rewarding and mutually beneficial relationship with the JSP staff.

Finally, last month, we entered into an agreement to purchase 196,000 square foot building located in Philadelphia. Our long term plans for the facility includes consolidating existing facilities and providing space for future expansion. With our API facility, we have been asked by the city and state to consider an expansion on to a larger site in Cody, Wyoming.

With that brief overview, I'd like to now turn the call over to Marty to review the 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, our positive momentum continued into the fourth quarter resulting in excellent financial results for both the fourth quarter and the full year. Starting with our fiscal 2013 fourth quarter results, net sales increased 13% to $40.2 million from $35.7 million in last year's fourth quarter. I want to note that a sales growth for the most recent quarter was achieved despite no sales of oxycodone, for which we soon expect FDA approval of our ANDA. We had approximately $1.5 million of oxycodone sales in last year's fourth quarter. Gross profit rose to $15.2 million from $12.0 million in last year's fourth quarter. As a percent of net sales, gross margin rose to 38% from 34% for the fourth quarter of fiscal 2012. R&D expense decreased modestly to $3.7 million from $4.0 million. SG&A increased to $5.8 million from $5.4 million for the prior-year fourth quarter. Operating income more than doubled to $5.7 million from $2.6 million. Lastly, net income attributable to Lannett increased to $3.6 million or $0.12 per diluted share compared with $1.4 million or $0.05 per diluted share for the fiscal 2012 fourth quarter.

Turning to our fiscal 2013 full-year results, net sales increased 23% to $151 million from $123 million last year. Net sales for our largest product category, thyroid deficiency, grew to $58.0 million or 38% of our total net sales. Our two other largest categories, cardiovascular and pain management, had net sales of $25.9 million and $21.2 million respectively, representing 17% and 14% of our total net sales respectively. As to net sales of our remaining categories, antibiotic was $9.2 million or 6% of total net sales; glaucoma was $6.4 million or 4%; gallstone was $6.1 million, equal to 4%; migraine was $5.4 million, also 4%; gout was $5.1 million or 3%; obesity was $4.7 million or 3%; and other represented $9.1 million or 7% of our total net sales.

Gross profit rose significantly to $57.4 million from $38.9 million for last year. As a percent of net sales, gross margin rose to 38% from 32% for fiscal 2012. The increase was primarily due to favorable sales mix and price increases along with enhanced manufacturing efficiencies related to the higher sales volume. R&D expense rose to $16.3 million from $11.8 million a year ago. SG&A amounted to $22.4 million up from $20.2 million for the prior year. Operating income nearly tripled to $18.8 million from $6.9 million last year. The effective tax rate was 35.3% compared with 39.3% for the fiscal 2012. Net income attributable to Lannett increased to $13.3 million or $0.46 per diluted share, which included the favorable litigation settlement of $1.3 million or $0.03 per diluted share. This compares with $3.9 million or $0.14 per diluted share for fiscal 2012. Our balance sheet at June 30 of 2013 remains strong with cash, cash equivalents and investment securities of $51.2 million.

Turning now to our guidance for the fiscal 2014 full year. As Arthur noted, we anticipate strong sales and improved gross profit resulting from favorable sales mix, price increases, and efficient manufacturing as well as new product launches. We expect net sales in the range of $181 million to $186 million, gross margin as a percentage of net sales of approximately 43% to 44%, R&D expense in the range of $24 million to $26 million, SG&A expense ranging from $28 million to $30 million, and the full-year effective tax rate to be in the range of 34% to 36%. Regarding our quarters in fiscal 2014, we expect our upcoming Q1 results to be similar to 2014. It is important to note that our guidance for fiscal 2014 does not include the impact of the shares issued in connection with the Jerome Stevens contract extension. The Company intends to expense the value of the shares issued, which approximates $20 million, in the first quarter of fiscal 2014. The impact of this transaction would also reduce the effective tax rate by approximately two percentage points. Capital expenditures in fiscal 2014 are expected to be in the range of $28 million to $32 million, which includes $20 million for the purchase in partial fit-out related to the new facility Arthur mentioned earlier.

With that, I will now turn the call back over to Arthur.

Thank you, Marty. I can not be happier with our achievements and our financial performance and the progress we have made building our pipeline. As we have discussed over several quarters now, we have stepped up our product development initiatives with products that we believe can generate more revenue and higher margins than we have typically experienced in the past. As previously reported, we have submitted our first Paragraph IV ANDA filing and additional Paragraph IV product candidates are in the later stages of development. Having received the FDA acceptance letter, we sent our first Paragraph IV notice and expect to follow with a few more in the coming fiscal Year. We continue to wait approval of our oxycodone hydrochloride solution, which we expect soon.

We are laying the ground work to expand our detailing effort for our C-Topical solution products. We expect to complete a contract that will add at least 10 additional sales representatives over the next two quarters. We are working closely with the FDA and expect our clinical trial to be approved the end of this month. Preparation will begin immediately after that with trial commencement expected in the third quarter of this fiscal year. The current target date for the NDA submission is December 2014. Our ANDA for thalidomide is on track for FDA filing in the fall. We were hoping to file sooner but experienced delays in receiving an API for commercial production of our exhibit batch. After completing our pilot studies, we immediately commenced our pivotal study.

We continued to evaluate several potential acquisition candidates. Our team is looking at products as well as companies that are a strategic fit and accretive to our business. Our current pipeline includes 15 product applications pending at the FDA and an additional 33 products in various stages of development. As you can imagine this is an exciting time for our Company. We look forward to continuing to report on our progress.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Steven Crowley, Craig-Hallum Capital.

Well, congratulations. Wow, is all I can say, fantastic finish to a fantastic year.

Thank you.

In terms of some of the things, you have a lot in the hopper, but maybe we could talk a little bit about -- your R&D budget is going to go up significantly, so you're going to continue investing in the business aggressively. Can you give us some sense for what kind of ramp we're going to see early in the year? Is it going to be over the year? Help us get the best picture you have of your intentions there.

Steve, this is Marty responding. The main driver of the R&D increase in 2014 is the Phase III clinical trial for the C-Topical product, and as you know we've been addressing that topic during fiscal 2013. The expenses in our 2014 numbers, and it's the main driver of the increase and it is back-end loaded, so it's more so ramping up in the second and then mostly in the third and fourth quarters.

Okay. If we think about Q1, is there some loft between where you were in Q4 and in Q3 just based on the other things going on? Or is that a baseline that we should look at Q4?

I'm not quite sure of the question there. As we said in my prepared remarks, we're looking at Q1 to be similar to Q4 and its results. Maybe you can help me with what you were looking for beyond --

Well there was quite a difference. You were at $3.7 million in Q4, you were at $5.2 million in Q3, and I was just wondering if Q4 was a natural run-rate level, and it appears, or sounds I should say, like that's the case.

I'm sorry, are you talking about --?

Specifically about R&D, yes. I'm still on the R&D topic.

I'm sorry. Yes, we're expecting R&D in the first quarter then -- okay, first of all we've said the results would be similar at the bottom line. Our expectation right now is that we expect to see that the first quarter R&D would ramp up a bit from the fourth quarter of 2013. We expect to see that ramp up occur consequentially as we go through the quarters now.

Now, in terms of C-Topical it seems like you have plans that are moving ahead on the clinical trial and on the expansion of sales and marketing activities, so I would infer that you're not really impeded from continuing to grow your sales and marketing commercial efforts while you're starting your Phase III clinical trial? Help us understand the best you can the dynamics there? I guess you wouldn't be adding those people if you didn't think it were appropriate in the context of everything else going on?

This is Arthur answering the question, that's correct. From our point of view we did a preliminary study with regards to three salespeople to see what the reaction would be if we detailed the product. Again, this product is used by surgeons in their practice. It's not prescribed. As a result of the results from that three-person initial study, we decided that adding more people into the market to detail this product and to contact surgeons would be appropriate. Our firm that we brought into do the market research initially recommended 20 people for the entire country. We felt we would be a little more conservative and start with 10 with the understanding that at about six months, if we find that the 10 were not too risky, we will probably seek to add an additional 10 people. This is a first move for Lannett into the branding of a product. Because we don't have a lot of experience in that area, we wanted to be a little bit conservative in the engagement of all of the sales reps. We would then have, with these 10 additional people, 12 out on the road calling on the surgeons, the hospitals and introducing the product.

The acceptance of the product has been so overwhelming by the physician market that we believe the only alternative for us was to put more people out on the road to let the surgeons know this product is available and to get them to include it on formularies within the hospitals. Yes, we're pretty confident that we're making the right decisions here, but doing it conservatively.

Arthur, for you in terms of the manufacturing expansion with the new facility, can you tell us two things? How much of that capacity do you think will accommodate your near-term needs? How much head room or extra capacity will you have for future expansion? So, if we looked at that 196,000 feet, how much are you likely to utilize over the near term? And what's for future expansion? What kind of additional capabilities are you looking to bring on board or in house with this maneuver?

If you consider that we have three facilities in Philadelphia and that's roughly 160,000 square feet under three roofs. This building, this fourth building, is 196,000 by itself. The concern is that we were originally thinking of consolidating two of our facilities into that, but the more we reviewed some of our needs for product development and facilities and the space, the new requirements we anticipate FDA that will be introduced into the marketplace, we're now believing that we'll probably only consolidate one of our facilities into this building. So, we'll still have three at the end of the day and of course more square footage. The problem right now is our sales capacity has really been reached at our manufacturing facility. What we'll plan to do is fit out the new building as soon as we close on the transaction, and then do it over time so that we're building into this building, which is far in excess of where our needs are today. We're anticipating what our needs are going to be as we grow. We believe this building will address that, so it's not like we're going to fit out the building all at once.

We'll certainly put in the infrastructure initially and then we'll add suites and rooms as we grow and we've already designed and brought in some firms to help us with the design. We'll be meeting with the FDA with regards to the layout of the facility as we've done in the past. We try to work with the FDA to avoid problems later. It's easier to set the stage with the local district to make sure that we're addressing any particular questions they might have about the facility, easier to plan ahead of time. It's really going to be a manufacturing facility. It's going to be expansion of our product development facility, because our plan is actually to manufacture all of the products that we sell into the marketplace. We believe that's where our strengths lie and we look at all of the different dosage forms we might get involved in with this site. I hope that answers the question.

It certainly does. Last one for me. Marty, in terms of cash flow it was really strong in Q4 and it looks like receivables came down a lot. Was there something anomalous going on there and how should we think about cash flow as we move forward here?

Well, thank you for giving me the opportunity to address cash flow. We had an outstanding quarter in terms of free cash flow. It was the strongest in many, many quarters of the history of Lannett, so we're very proud of that increase that you see in our cash, cash equivalents and investments. So, very strong quarter on a free cash flow basis. The cash net income, as we refer to it, in the fourth quarter was about similar to other quarters. It's just that we then got an extra benefit from the balance sheet basically, and that's what drove it to be even higher than in previous periods. Nothing of an anomaly there. I would say balance sheet impact is always something of a timing nature and things all hit well in the quarter. Of course, we're always managing our receivables down. We showed improvement there as we continued to do and with the growing business, the cash management a key concern for us, but again it just lead all to a very outstanding fourth quarter.

Great. Thanks for taking my questions.

Elliot Wilbur, Needham & Company.

First question for, Art, I suppose. Last quarter, you had provided preliminary color on your fiscal-2014 outlook, specifically on the top line. I think you said you're looking for high-single to low-double digit sales growth? Obviously, today's number or outlook is certainly much stronger than that. Can you just talk about some of the key factors that have changed between the last time you provided guidance and now, to that sort of underlie your more optimistic outlook? Whether it be pricing or volume trends on base generics or maybe some better visibility in terms of timing of new approvals?

Actually, the best way to answer that is we're hitting on all cylinders. All of our products are selling in larger quantities than we've ever sold them before. We've introduced our product to more customers than we had previously, and those customers that we had have been purchasing more of the products. Our service levels, as you know, are quite high for the industry, so when we get an order we fill the order. I really think it's a combination of all those things. We've rarely seen -- usually there's always some part of your business that's good and another part doesn't do so well, in this case every part of the business has been doing very well. My compliments to my employees and my sales staff.

Okay, and then next question for you is on C-Topical. At least in terms of the regulatory strategy and the timeline for NDA filing, obviously that continues to get pushed out and this is obviously a unique product in the sense that you can step up your commercial efforts in advance of the actual filing. So, not as if it necessarily hurts you in the short term, but maybe you could just walk us through some of the things that are happening behind the scenes on the regulatory front that are causing the extended timeline on the actual NDA filing?

Well, the one that comes to mind when we submitted the final protocol, the FDA asked us to add something to it and then when we submitted that back to them with the addition, they asked us why we added what they ask us to add. That process, and I know that sounds silly, but that's what happened. That process took 90 days, because you have to wait for letters from them. So, even though we do some things by e-mail and by phone, we still have to wait for letters. They put a clinical hold on the project to ask a question about why we added something to the protocol when they were the ones that asked us to add it to the protocol. Of course, all we had to do was say your colleague asked us to add this to protocol and that's why it's there. Once that was answered that clinical hold, that they call it, is the one they're removing the end of this month. The clinical trial will then begin.

It's really probably more of a combination of the government and let's say maybe a little bit of our inexperience in this area of doing clinical trials. Generally, as a generic drug company we don't get involved in Phase III studies. I would say part of it was a learning curve for us, part of it was the delay that was caused by the comments from the FDA and the questions with regards to their comments. We're on track now, and I always tell people I hate to predict and use timelines when it comes to waiting on the government for something because they never really meet the timeline. They respond when they respond, so I don't think we'll be incurring anymore delays here. At this point, I believe we're at the end and the clinical trial will begin and there should be no further reasons for this application not to get submitted.

Okay and then last question for you before I jump back into the queue here. Obviously the M&A environment is very fluid and dynamic and I know that on prior calls you've talked about some potential opportunity for the Company on that front and specifically three targets that you were evaluating. It seems when companies like Boca can get $225 million for effectively one generic version of Vicodin and Hi-Tech, obviously, going out at a relatively high multiple, clearly a sellers' market. So, I'm just wondering how you're thinking about some of these targets that you had been evaluating and what you see as opportunity for the Company on the M&A front, or acquisition front, in the short-to-intermediate term?

I'll admit that we are seeing some valuations, I guess one of my fears is that maybe I might be a little gun shy in spending the money I may need to spend to make an acquisition. Quite frankly, Marty won't let me do that, because he reminds me how much money we have in the bank and he wants me to spend it, so we will do an acquisition. We are talking to companies. The valuation of those companies really depends on the seller and the buyer. We certainly realize there's a value and if we think we're getting value for the money we'll make a recommendation to our Board. We do have a very astute Board right now and I believe they will certainly guide us in the right direction and will certainly quiz us on the valuations. Marty and I have met with some colleagues in the industry and have asked their help in helping us make some of these decisions. So, we're planning on doing some acquisitions. We're planning on not making any mistakes with those acquisitions and we're seeking out advice from people that have done acquisitions that can help us with the valuations.

While some of the companies we've talked to have indicated that if they were to consider, let's call it a merger or be acquired by Lannett, they might want shares, at least that seems to be the discussion. Some have said they might want money. I believe in a scenario when someone takes stock from Lannett to be acquired, let's assume from their point of view they could have got a bigger price. Well they're on the other side of the transaction now. If they take Lannett shares, now they are part of Lannett. Whatever bargain Lannett receives in purchasing them at a more reasonable price, flows to them as well. So, it's not like they're taking their cash and walking away into the sunset.

I think all of the companies we've talked to really have young management teams that will probably be helpful to Lannett in its growth and when we make these acquisitions I believe those management teams will want to come with us and want to see the larger companies succeed. I'm not concerned about the valuations. We're not looking at any companies that have risks assigned to them similar to what you seem to be indicating where they have one product that represents the bulk of their business. These are all very substantial companies with wide product lines, no unusual products within them that are bringing in all of the revenue, so I don't see any risks in purchasing them. I believe they want to be involved with a smaller company like Lannett because they still would like to grow their businesses with Lannett. I believe they are going to work that way and those acquisitions are going to be with these companies.

They range in size from $30 million to roughly $150 million in size, so of course the bigger one being $150 million. They are very preliminary discussions that are going on at this point, but we continue to have discussions with them. Of the same people I've alluded to previously, we've had additional discussions with. A fourth one joined the group as well, so I hope we'll have some acquisitions made some time in this fiscal year, but it depends on the seller and the buyer coming to terms.

Alright, thanks for taking the questions.

Randall Stanicky, Canaccord Genuity.

Arthur, can you talk about the levo pricing dynamics and any benefit that you've been able to capture from that as you look at 2014?

Did you say the legal?

No, the levothyroxine. One of your competitors took pricing up quite significantly. I'm wondering what your reaction was, what you've done? And, as we look at the numbers, how much of a benefit could you have captured from that?

You mean after I sent them the thank you note? I'm just kidding.

Exactly.

I'm always grateful to see responsible generic drug companies realize that our cost of doing business is going up as well. As everyone knows, the FDA has new requirements for stability work on generic drug products that are going to cost a lot of money, add the GDUFA fees on top of that. So, whenever people start acting responsible and raise prices as opposed to the typical spiral down of generic drug prices, I'm grateful because Lannett tends to be active in raising prices. We believe we have to sell our products for a price that we can make a profit, that profit has to cover all of the costs that we incurred to make the product as well as what we expect to incur for product development or enhancements to those products, so I'm grateful to see price increases. This particular one that was done by a competitor is embraced -- just like I'd do any other price increases. We don't necessarily see the benefits right away because most of the contracts that are in place usually give the customer a buy in period, so if you're going to raise the price on them, which is generally not the case, they have an opportunity to place an extra order. So, we don't really see the benefit for usually at least one full quarter, let's say, because there's 60-day buy ins. I would probably be better able to answer this when we do our guidance for our first quarter some time in November.

Well, I mean just going back to Elliot's question, as you look at the change over the last couple of months in your view of fiscal '14, 2014 revenue, it's pretty significant, so obviously the business is doing well. You guys are certainly executing. But, is there something we can point to that's changed over the last couple of months outside of that pricing increase? Whether a new product launch opportunity, or is it confidence that you're seeing in the business in part or more than in part due to the pricing opportunity there?

Well it's really a combination. There's been a lot of products that have surprised us with their volume. One of the products was an old product of ours that we resurrected. We didn't expect to do much business with it. We didn't talk about it much a year ago because we didn't expect much. That product turned out to do, if I'm not mistaken, Marty, it was $7 million in this fiscal year. So, we didn't anticipate that. We didn't think this customer would use that volume of product, so sometimes you're a little bit surprised. Of course, we went ahead and also had to make some modifications to deal with this volume. The volume of all of our other products picked up as well. We have a small facility that's really running at, I hate to say capacity, but I think we've expanded the capacity in that building so to speak. We've pushed the envelope and that's why we're moving quickly to get into this other building.

When I say we're hitting on all cylinders, virtually all of our products are being sold in larger quantities. Our antibiotics are selling in bigger quantities. As you know, there was a bit of a hiccup and a shortage in the market when a competitor of ours closed their facility for both doxycycline and digoxin, for example. So, there's opportunity to just really mix together with increases in sales that really contribute overall to the success we've had this past fiscal year. Of course, the strength came in the fourth quarter and now we see that continuing into this fiscal year. There were price increases last year with regards to all those products as well, so we had price increases. We had sales increases. We had additional products that we didn't have previously. We'll be launching, hopefully in about 30 days, another one of our older products. Now, that product we had taken off the market because the price of the product was very, very low and it wasn't profitable. Now, the price has experienced a dramatic increase in the marketplace, so we're going to reintroduce the product. That's going to add to our guidance for this year and our overwhelming feeling that all the products are going to continue the way they have and more products are coming back into the market.

We're also anticipating some approvals this year. I believe last time we talked internally we expected about four products to be approved by, let's say within the next six months, so that's leaning into some of our confidence in the year. It's really been almost everything working together, applications getting approved, new products being launched in this fiscal year, and price increases are just part of, you might say, the gravy, let's say, at that point.

Okay, and just one more question, somewhat related to that for Marty. The gross margin pick up in terms of guidance next year is really solid. Should we also expect that the to start to ramp as we get to the second fiscal quarter and into the back half or could we see more of that? I understand your EPS distribution, I'm just trying to understand the gross margin distribution. Should that ramp starting in fiscal 2Q or could we see it right away?

No, that piece will also ramp up. The gross margin as a percentage in the first quarter is a bit higher than the fourth, but you would expect that the more significant increase to occur in the second half of fiscal 2014.

Okay, that's great. Thanks very much guys.

Scott Henry, ROTH Capital.

Thank you and congratulations on a great year and strong guidance as well.

Thanks, Scott.

I guess to get started, levothyroxine, things are very good right now. On the competitive front, do you have any expectations for any new competitors or are you hearing anything about that? I'm just trying to get an idea of at least in the immediate to mid term, how long can we expect things to be as good as they are for levo?

Well, that's -- I'm not a prophet, so it's always hard to say. I always, while I'm an optimist generally speaking, when it comes to competition I always expect the worst. We certainly know that there are at least two possible competitors in the wings. None of them have talked about anything at this point and nothing's been approved at the agency. One is an overseas company that we know was looking for a distributor here in the United States to distribute their product, and the other one, I believe, has got an application, they're ar direct manufacturer of the product, but hopefully both companies turn out to be responsible companies and don't go into the marketplace. We're seeing more responsibility on the part of all of our competitors. I believe because all of us are facing the same costs. GDUFA's not a cheap expense every year. Every manufacturing plant has to pay that fee. The additional stability work for product development that was put off from January of 2014 to June of 2014 is going to add tremendously in terms of testing and time for each application. I would expect that all the companies are not going to behave like they have in the past. I suspect you're going to see more price increases in the generic marketplace or certainly less price erosion in the marketplace because of that.

Okay, great. Thank you that's helpful. Shifting over to the pipeline, and I apologize because I know you've addressed some of these questions, I just want to make sure I had it correct. On C-Topical, when is it you expect the clinical trial to begin and then how long do you expect the clinical trial to take and when do you expect to file that product?

Okay, let's work backwards. We know we'll file by December 2014. The clinical trials we expect to start probably in January, I'm giving most conservative because most of the recruiting that was done had to be stopped when the FDA put the clinical hold on the process. Of course, now that will be removed the end of this month, so now the physicians can go out and start recruiting again. Then, the actual clinical studies, the timing of it all, we're expecting to take about six months. Then the assembly of the data, submitting of the application, we hope to get done before December 2014. Right now, it is near the end. I don't think there's going to be anymore delays that we would have not been able to anticipate.

We certainly have been working very closely with the FDA for this drug and we still look forward to getting the application at the agency. I would say we're giving ourselves a year. It is a 600-person clinical trial, so it's atypical for a 505(b)(2) application process. I guess as a result, the recruiting effort that was aborted and now has to be restarted is part of that delay. Each physician has to recruit a large number of patients and do the study and then submit all that data. That's a lot of data to assemble. We have some big clinical labs that we're working with, as we mentioned before. We're pretty sure that our application will go down to the agency successfully. We're comfortable with the process.

Okay, thank you. That is helpful. Just the rest of the pipeline, did I hear you confirm thalidomide, you expect to file it in the fall? Is that still the target?

Yes, that's correct.

And then cocaine topical, the non-FDA approved, when are we expecting that to ramp? In the past you've given us a monthly expectation.

The sales efforts -- September we should have the CSO start to do the hiring. They need about two months to do the training, so we're probably looking at a November launch, let's say, and the actual representatives out on the road, the additional 10. Two are already out on the road, for example. Initial 10 will go out there, so by November those legs will be out on the road and they are only working for us with one product so we're going to get a lot of attention to this product. Quite honestly, in meeting with some of the physicians myself, I have to tell you I've been astounded at their response to the value of this product. I just didn't realize how important it was to them, to the physicians, because it's so much better than the competing product that they use and there's nobody promoting the competing product.

There are two old drugs that they combine to accomplish the same thing. This is superior and the quick onset, so we're comfortable that just letting the physicians know it's available, getting it on to the formularies, its it's just a matter of extra work to get that market established. Then, I think we're going to see some dramatic results from it. I know we're being conservative with the 10, but I'm pretty sure by six months we might go out and put an additional 10 people on the road, if all goes according to plan.

Then the P-IV filing, have you given us any color on the market size? How many entrants you expect out there or if you are in fact a first filer? How should we think about that and as well timeline?

Well, let me say this. We submitted the letters to them, so of course they will have 45 days to do something with the letters and the application at the agency, as you know. Until we get the product, it's hard to say how many people will be in the market at the time, but I do believe we have two people out there already on the market and in authorized generic. This product in the market is very large, so we're comfortable we'll get a nice piece of the market based on our sales capability.

And, Arthur, very large is somewhat of a subjective term, could you put it in a basket? Is it a $500 million product, or how should we think about it? Any color that you can give?

Don't hold me to this, but I'm fairly sure this is around a $300 million market.

Okay, perfect thank you. Final one for you, Arthur. Cody, Wyoming, for 2014 we're looking for oxycodone. Anything else we should expect to come out of there in 2014, any signs of expansion progress there?

Well yes, on the front of the APIs, we certainly expect to get additional APIs. They are working on the oxycodone raw material there. The hydrocodone material, we received some material already, so we expect the emphasis to be on the active pharmaceutical ingredient front at Cody to make sure that we can vertically integrate and go ahead and achieve the goal we set for ourselves of 50% of our manufactured products being controlled substances by 2018. The goal is really working to continue to integrate Cody, which we have. We've addressed some of the distractions with regards to the litigation there with the former CEO. As you may or may not know, he's not been successful in his attempts to gain any ground, so we expect that to remain the same and the distraction now is over. The city of Cody is encouraging and has sent us letters that they're very supportive of the Company, so is the community, so we continue to enjoy the support of the community out there.

The Company is continuing to do well. At this point, we've had a lot of inspections that we've passed, the EPA included. I'm very comfortable that our compliance record out there is matching Lannett's compliance record here in Philadelphia. I just see them bringing more API to the market. He has a goal is by June 30. I'm hoping that that will -- that's all around API, that he'll achieve those goals. Then, we'll just add to them for the following fiscal year.

Okay. What was that goal by 2018? 50% of manufacturing capacity?

We're hoping that 50% of our manufactured products will be controlled substances. The reason we don't use sales is because sales could be masked by price increases and what have you. Our goal is to be a controlled substance, one-stop-shop. The only way to achieve that is to make sure that we're filing more applications for controlled substances using Cody as the raw material supplier, so that our vertical integration and our profit margins are higher than what typically expect in the generic industry today.

Okay. That's an impressive goal. Thank you, Arthur, I know that I asked you a lot of questions. Marty, if I could hit you with a quick speed round. First of all, you said EPS would be similar in first quarter to fourth quarter, which would be about $0.12 escalating thereafter. I thought when I ran through the numbers I got to around $0.50, but if you're starting out at $0.12 and going higher I'd think it would be higher than $0.50. Any thoughts? Maybe I didn't do the math right?

Well, so we're not giving specific guidance on EPS numbers, Scott. The EPS, you've got it right in terms of we think the first quarter will be similar to what we had, the results that is, will be similar in the first quarter, similar to the fourth quarter. That is correct and we expect to see it ramp up. Yes, you do good math, but we are not going to give specifics on EPS outlooks by quarter.

Okay, fair enough. Then, the tax rate goes down a little bit. Is that a sustainable lower tax rate of 35% or --? Just trying to get an idea of how I should think about that beyond 2014.

That would be the rate to use for the year 2014, that's right.

And it's a sustainable tax rate and beyond 2014?

We would have to see how that works out. We haven't, I mean from Arthur's perspective that is clearly -- the goal is to get lower than that. I'll say that.

We are addressing the fact that we pay a high tax rate as compared to some of our generic competitors, so we are addressing the reasons for it and what we can do to resolve that. I'm hoping that certainly beyond fiscal 2014 that we'll have addressed that problem successfully.

Okay. Then the very final question, Marty, I noticed I didn't see an amortization line in there or a product royalty line. Are those lines being shifted into cost of goods sold, how should I think about that?

Yes, they are being shifted into the cost of goods sold and if it's important for your modeling, we can provide that. I mean going forward, in the Jerome Stevens -- most of the amortization, it is almost all Jerome Stevens. So, that will run out, then come March of 2014, beyond that it's just a limited amount that rounds to zero the amortization expense. You could just continue with the same amortization you've been seeing quarterly for the first and second quarter and third quarter for that matter of 2014, but then it stops.

Okay, great. Thank you that's helpful, and thank you for taking all the questions.

Rohit Vanjani, Oppenheimer.

Hi guys, congratulations on the quarter. Thanks for taking the questions. On the gross margin, is that just more of the same, it's manufacturing efficiencies, product launches, sales mix and then pricing? I mean I thought of you guys as a price follower, or maybe you go out and you take price sometimes and see if it works, I wouldn't think that would be embedded in guidance.

Well, I may take exception, we're not a price follower. We tend to be a price leader on price increasing and the credit goes to my sales vice president. He takes an aggressive stance towards raising prices. He understands one of his goals as objectives as a sales vice president is to increase profit margins for the Company and he's the first step in that process. I can reduce costs and manufacturing efficiencies, but it has to be combined with sales increase -- profit increases I should say by the salespeople, and he's done a good job there. With one or two exceptions, we've tended to lead in the way of price increases.

We believe that these prices are important, we need to try raising them. Sometimes it doesn't stick and we have to go back and reduce our price and other times it does. I am finding a climate out there's changed dramatically and I see more price increases coming from our competitors than I've seen in the past. We're going to continue to lead. We have more price increases planned for this year within our budgets and hopefully our competitors follow suit. If they don't, that's their issue, but our plan is to raise prices on any product we think we can, or we haven't raised the price. We -- you know our costs aren't going down. Someone has to pay for these things, unfortunately.

Okay. Then on the R&D, I think it was $6 million or so expenses for the 600 patient trial? I think the NDA filing would cost around $2.5 million to $3 million? That $6 million, would that bolus come throughout the year or is it in fiscal 2Q '14? Can you give any outlines on when those big expenditures would come?

Yes, the larger piece of it, Rohit, would be in the second half of this upcoming fiscal year.

Okay. And then I missed the oxycodone. You're still expecting that by December 2013, the approval?

Well, for October 2013.

Okay. Then, the FDA's announcement that doesn't affect you guys at all, the extended-release, long-acting opioids, you're going to be working mostly in short-acting opioids?

No, we're doing both, but we are already addressing that. We've been looking at the steady-release products for some time and we have products in the works already. We weren't surprised by their decision. That was something we anticipated, but we tend to not go after the blockbuster drugs and ones that are the most popular so that our margins are higher because we go after the products that are not on everyone's radar screen. All of those products, because we're in the controlled substance business, will be filed by us and we expect to file for all of the extended-release products as well. So, you might say there is some stage of development and product review, what have you.

So what did you make of what they were saying about additional studies to get to what the duration and what the dosage is? Are you embedding that as part of your R&D or is it too early to say that kind of stuff?

No, that's something that didn't surprise us because the FDA's attitude about being bio-equivalent or being an equivalent generic, in my mind, means you're equal in a lot of respects. We weren't surprised by that ruling or that guidance, you might say, so we tended to expense that early on and have been thinking about how we make a product and instead of trying to be -- because a lot of people have offered patents to us. There's about 50 patents for abuse technology for extended-release products and our concern was we can't just use any of them. We have to make sure that the ones we select will make my product equal to the innovative product, so I don't see that as a handicap. I see it as part of what the FDA normally would have required, so I'm not surprised by that. We anticipated it and all of our actions are heading in that direction.

So, previously you talked about either licensing that technology or you said you were also comfortable developing your own internal abuse technology and that Cody developed one for hydromorphone product. Do you have any update there on where you were leaning?

We are actually doing -- we're leaning towards licensing it because the dilemma with developing our own or using the ones we've developed ourselves is that there's no guarantee it's not pending at the patent office. For example, let's say I used my own technology and then I get approved on my finished product by the FDA and when I go to launch it I find out that the abuse technology I developed, someone already has a patent on it. Because it was pending, I wasn't aware of it and now I have a licensing issue and I can't just change to another method without re-filing the product. Our thinking is let's go with a patented process, so I eliminate that risk and I don't have to be concerned. Yes, it means licensing the technology, but we are in talks with some people and we've had modest proposals made to us for, well, we've had immodest proposals, too, where someone offered us the technology for $25 million and I told them I don't think we would make that kind of profit for the drug.

Generally speaking, most of the other companies are offering fees between $400 to $1 million in terms of the cost for the technology and one-time costs. We're really looking at something modest here that could be used across our products. So yes, we've been working diligently in finding -- our patent attorneys are looking at some of these patents now to make sure that the ones we've purchased are strong and we'll survive any challenges that we would expect from the innovator companies.

Okay, great. Thanks for taking the questions, congrats again.

Okay, thank you.

Dan Trang, Stonegate Securities.

Congratulations on a good quarter.

Thank you.

Question about the acquisitions you're going to do, wondering if you can provide color behind what's your reasoning and rationale behind what's a good candidate and what's not?

I don't want to take over troubled companies because I'm always concerned that the cost of rehabilitating them is far greater than the value for the Company. We're not looking for accretive issues, so we look at the accretive issues, so one of my goals is to make sure the companies we're looking at are attractive, no FDA problems, and are accretive and are giving me dosage forms that I believe will be more valuable going forward. We've identified companies also that have products that fit with our goals and our goal is to be vertically integrated on controlled substances. So, that really starts the process, but we'll look at anything. I mean, we're not limited. We're talking about acquisitions, we're suddenly looking at companies that generally fit the goal. I'm not going to look at medical device companies or brand companies or something like that, that doesn't fit the mold, because I find when you don't focus on something, you end up not succeeding. We have a strategic plan. We're trying to make sure we achieve the goals in that plan and not get distracted and that means staying within the plan.

That doesn't mean I'm not an opportunistic guy. It doesn't mean we won't buy a product here and there and we are looking at opportunities to continue to sell pure generic drugs that are not controlled substances, but the emphasis on what we're going to manufacture, what we're going to submit to the agency and what we're going to get from our subsidiary in Cody, Wyoming all tie together. The acquisitions that we're looking at, the four people where I've known these companies, familiar with the ownership, familiar with the regulatory history and that's what really attracted me.

My only concern is will someone get them out from under me and hopefully they would prefer to be with Lannett than with other companies. Some cases that seems to be the feeling on the part of the management of the other companies. They don't feel like they're going to be acquired, closed down and relocated to Philadelphia. We need the facilities and in some cases they have facilities that are far more appropriate for what they are going to manufacture than we have and instead of me investing in those facilities, in our new facility there, the new building we talked about earlier, I would just make an acquisition that would give me those facilities. Then the applications at the agency would just be transferred there. So, we are planning to use our common sense. Look, I'm at the end of my career, so to speak, and I need to make sure that any acquisition we make is reasonable and a good one. I'm not in a position to make mistakes.

We are being careful that the criteria we use to identify the targets. We've started talks with four people and I say talks I want them to understand they are very preliminary, just to make sure that the chemistry is right, that both sides think that this is a benefit to them, because integration is the biggest problem with all these acquisitions and mergers and you always want to make sure that you don't have those distractions to deal with. Marty's had a lot of experience in this area throughout his career, so one of the reasons we asked him to join Lannett was because he brought that with him.

Number of acquisitions, are you only looking at one for the next couple years or do you have any set number?

Yes, that's when I get a little piggish. I'm actually looking at four. Now, I don't expect them to do simultaneously, but I am -- because you never know which way they are going to go. Some people take a year to make up their mind about something and some make up their minds in three or four months, so I feel that with four of them there's a good likelihood, and have plenty of time to make them one at a time. I am prepared if need be to do two at a time. Marty and I, as I said earlier, have been reaching out to colleagues that we can rely upon that can help us to get the due diligence done quickly and effectively. Because we don't have a lot of experience here on hand, with the exception of Marty, in doing that. We want to make sure that we don't make mistakes and that we have a team we could bring in right away.

Okay, so it's four possible? Oh, it's four opportunities not possibilities, right, that you'd ideally like to be able to acquire? Am I correct?

That is correct. We have talked to all four and told them what our interests are and they are talking to us because they seem to have similar interests. Hopefully, one of them or all four of them will decide that Lannett is the best place to work.

Okay, thank you.

Steven Crowley, Craig-Hallum Capital.

Just two quick ones. I've had a chance to digest some of the revenue mix granularity that Marty gave us. It seemed like virtually everything is going well, but one area that sticks out, I'm just hoping you can address what might be behind the weakness and whether you think it's sustainable, seemed to be the cardiovascular area in digoxin in the fourth quarter. Can you talk to us a little bit about the market dynamic there and what the outlook is?

Yes, Steve, so it's a bucket of products that is cardiovascular for us. In particular what you're seeing in the numbers is you'll recall we launched back in December 2011 this product that's a generic Dyazide, it's triamterene. That product, when we first launched it, we had some particular advantages in the marketplace, which were unique at that point in time, and the product, at least in the quarter, tended to drop off a bit. That's what your seeing. That's the color behind the numbers I can give you.

On the flip side, glaucoma, while relatively small, you've had a really good run, two year run at least of growth. How are you thinking about the overall category of ophthalmology and your play in glaucoma? Have we seen it run its course or is that a foundation for some bigger things in that category?

As I told you we're an opportunistic Company, so we have two applications, two ophthalmic products at the agency that we need to do a site change for, because they are ready to be approved. That's in the works, so again this was just something we saw opportunities to make money from. Again, our goal, of course, is vertical integration in controlled substances. These are the products for us that developed a few years ago and we expect to launch them. I expect the sales on the other glaucoma product to continue as well. Our hopes are that we'll continue to keep the business we have and grow it further. As you know, you have an aging population, so that adds to that. You have more people needing the products.

Absolutely. Have an appreciation for that. Congrats again, and thanks for taking my follow-up questions.

Thank you.

Thanks, Steve.

At this time I show no further questions, so I'll turn it back to Arthur for final remarks.

Thank you again for joining us today. We are always available to answer further questions and look forward to reporting on our continued progress on our next call. Thank you and have a good evening, everyone.

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

Thank you.