Lannett Company Inc (LCI) 2015 Q1 法說會逐字稿

Welcome to the Lannett Company's FY15 first-quarter financial results conference call. My name is Vivian and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Robert Jaffe. Mr. Jaffem you may begin.

Thanks, Vivian. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2015 first-quarter financial results. On the call today are Arthur Bedrosian, President and CEO, and Marty Galvan, Chief Financial Officer.

This call is being broadcast live at www.lannett.com. A playback will be available for three months 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 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. I hope you enjoyed our latest theme song, Here We Go Again, by Whitesnake, an appropriate beginning to our Q1 conference call. I'm happy to report that we had an exceptional quarter, driven by strong sales across multiple product categories, as well as significant increase in gross margin.

For the fiscal 2015 first quarter, we recorded the highest net sales, gross margin, and net income in our Company's history, with net sales of $93 million, gross margin of 77%, and net income of $35 million, equal to $0.94 per diluted share. We have now reported eight consecutive quarters of record net sales as well as the eleventh consecutive quarter in which net sales and adjusted earnings per share exceeded the comparable prior-year period.

Our outlook for fiscal 2015 remains strong. And with the excellent performance of the first quarter now under our belt, we have raised our full-year guidance, which Marty will discuss in more detail shortly.

With that brief overview, I'd like now to turn the call over to Marty to review the financials. Then I'll provide an update and we'll open the call to questions. Marty?

Thank you, Arthur, and good afternoon, everyone. As Arthur mentioned, we reported a outstanding fiscal 2015 first quarter. For our first quarter, net sales more than doubled to $93.4 million from $45.8 million in last year's first quarter.

Net sales for our largest product category, thyroid deficiency, grew to $33.3 million, or 36% of our total net sales. Our two other largest categories, cardiovascular and gallstone, had net sales of $18.9 million and $11.8 million, respectively, representing 20% and 13% of our total net sales, respectively. As to net sales of our remaining categories, pain management was $6.7 million, migraine was $5.8 million, glaucoma was $4.7 million, antibiotic was $3 million, gout was $2.3 million, obesity was $915,000, and other represented $6 million.

Continuing with the remainder of the income statement, and for completeness and comparative purposes, I will provide both GAAP and adjusted amounts for gross profit operating income and net income for last year's first quarter. As you recall, in last year's first quarter, we issued 1.5 million shares of our common stock in connection with the signing of a contract extension with Jerome Stevens Pharmaceuticals. Accordingly, cost of sales for the fiscal 2014 first quarter included a non-recurring pretax charge of $20.1 million related to this contract extension.

Gross profit was $71.6 million, or 77% of net sales. This compares with fiscal 2014 first-quarter adjusted gross profit of $21.4 million, or 47% of net sales. GAAP gross profit last year was $1.3 million, or 3% of net sales.

Research and development expenses increased to $6.4 million, compared with $4.7 million in the same quarter of the prior year. Selling, general, and administrative expenses increased to $10.6 million, compared with $7.2 million. Operating income was $54.7 million versus a GAAP operating loss of $10.6 million, and adjusted operating income of $9.5 million in the first quarter of last year.

Net income attributable to Lannett was $34.9 million, or $0.94 per diluted share. This compares to a net loss attributable to Lannett Company of $6 million, or $0.20 per share.

And adjusted net income of $6.7 million, or $0.22 per diluted share for the first quarter of fiscal 2014. Our balance sheet at September 30, 2014 remains strong with cash, cash equivalents, and investment securities totaling $152.3 million.

Turning now for our guidance. We have raised our guidance for the full year fiscal 2015 as follows. Net sales in the range of $370 million to $390 million, up 6% from previous guidance of $350 million to $370 million. Gross margin as a percentage of net sales of approximately 73% to 75%, up from 70% to 72%.

R&D expense in the range of $34 million to $36 million, down from previous guidance of $36 million to $38 million. SG&A expense ranging from $46 million to $48 million, down from $47 million to $49 million. The full-year effective tax rate to be in the range of 36% to 38%, unchanged from previous guidance.

Regarding the phasing of quarters in fiscal 2015, in the second quarter, we anticipate net sales to increase compared to Q1. Q2 gross margin percentage decreases slightly compared to Q1, while operating expenses increased primarily due to an increase in R&D expense. As a result, we expect Q2 EPS to be similar to Q1.

In the second half, we expect net sales for each quarter to be similar to the first quarter. However, increased operating expenses are expected to result in lower EPS compared to the first half.

Capital expenditures in fiscal 2015 in the range of $40 million to $50 million, which includes $7 million to continue the partial fit out of the two buildings recently acquired by the Company. This is unchanged from previous guidance. And with that, I will now turn the call back over to Arthur.

Thank you, Marty. For the quarter, we recorded strong sales across a number of product categories, including cardiovascular, gallstone, glaucoma, migraine, and thyroid deficiency. We also benefited from increased sales of our C-Topical and recently launched oxycodone hydrochloride oral solution products.

The Jackson sales remained steady compared with sales in our fiscal 2014 fourth quarter. As we discussed in our last call, we took a conservative approach in estimating fiscal 2015 sales of this product after a medical abstract was published. We advise that the study results may not have an impact and, as it turned out, they did not.

As we previously discussed, the Attorney General's office of the State of Connecticut requested information on the pricing of Digoxin. We have responded to all the Attorney General's questions to date, and firmly believe we have acted in full compliance with all applicable laws and regulations. We have also responded to an information request from a US congressional committee on generic drug prices.

We believe our Company is positioned for continued growth and success. The alliances we have formed are in various stage of the development or marketing. And on the business development and M&A fronts, we continue to seek out acquisition opportunities for both products and companies.

We have a pipeline of companies where in some stage of negotiations. And while I cannot predict when or if the transaction will close, I remain optimistic.

Our team continues to look at opportunities that are a strategic fit and accretive to our business. We are particularly interested in opportunities to globalize and further vertically integrate our operations. In addition, we are focused on potential acquisition and a tax favorable jurisdiction to enhance shareholder value.

Last week, we announced the approval of Letrozole. This is the third FDA approval we have received thus far in fiscal 2015. While total sales of Letrozole are significant, we are a late entry into the market having filed the ANDA in June of 2010.

This morning, we announced positive results from an FDA inspection of our Cody Lab subsidiary. After a thorough investigation and inspection, we received only one minor 483 observation. I'd like to acknowledge our Cody team for their dedication and the high standards of quality and excellence.

We continue to increase our pipeline. We currently have 21 ANDAs, including five with paragraph IV certifications, pending at the FDA.

Of our additional 483 products in various stages of development, we expect to submit several additional product applications in the near future. And our plans call for continued significant investments in R&D.

With regard to our C-Topical solution product, we had targeted December of this year to submit our new drug application. However, due to minor delays in the recruitment of patients, we are revising the filing date of our new drug application to mid-year calendar 2015.

We have been invited and expect to present at several upcoming investor conferences including the Credit Suisse Healthcare Conference in Phoenix next week, the Jefferies Conference in London in mid-November, the Oppenheimer Conference in New York in December, the Guggenheim Conference in Boston, also in December, and the JPMorgan Conference in San Francisco in January.

I want to thank our Board of Directors and my 400 colleagues for doing an outstanding job, and to our shareholders who have continued to support our efforts. We continue to be very positive about Lannett's future. Marty and I'd now like to address any questions you may have. Operator?

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

(Operator Instructions)

Matt Hewitt, please go ahead.

Good afternoon, gentlemen, and congratulations on a phenomenal quarter.

Thank you.

I was hoping to ask a few questions about some of the recent developments, specifically related to the Letrozole approval, the Oxy approval, and then the two products you acquired. Just going down that list, with the Letrozole, did you inventory at risk?

I mean, are you going to be able to launch that immediately? And if so, how quickly do you think you can get up to a normalized market share? I know that there's a number of other competitors, but your share of that, I mean, is that going to be a couple quarters or maybe take a little bit longer than that?

Well, first of all, no risk to any inventory. And we expect to launch, probably gain market in the last two quarters of this fiscal year.

Okay. And then regarding, I guess, the two products you acquired. Are those tech transfers done yet? And if so, are have you relaunched or when do you think that will occur?

Well actually, one of the two -- well, there's no tech transfers needed to be waited on because the Company agreed to manufacture the product for us while the tech transfers were occurring, so that's not being delayed. One of the products, I think we said, would be launched this year, the other one we didn't give a date for and, at this sitting, I don't have the date for the other product either.

Okay, but once you are able to get those transferred, I would assume there would be a gross margin benefit to getting those done, correct?

You're saying would it add to our gross profit margins?

Correct.

I think we're at such a high level, I don't know if it would really add to it. Just probably stay within the same range.

Okay. And then maybe one follow up for me and then I'll jump back in queue. Regarding your gross margin, you guys are extremely high.

Bravo on that front, but as you start to launch additional products, is it safe to assume that that's going to come in? And granted, you'll have higher sales so the gross profit should remain similar, if not go up. But the gross margin percentage should come down as you are launching additional products, correct?

That's about right. And, Matt, this is Marty. So, yes, we would expect newer products to come on at lower than these levels.

We have the full-year guidance out there And although we increased it, it is still lower than we are today, and that just reflects the evolution of the Company. Newer price coming on, it would be hard to think that we maintain the pace we are going at in terms of gross margin percentage.

Okay, all right. Well, congratulations again, guys. Thank you.

Thank you, Matt.

John from Canaccord.

Hey, guys. Thanks for taking the question and very nice quarter, congrats.

Thank you for that, John.

Sure. I just had a general question in terms of taking up the guidance for the year. What were the main components in that?

Was it the new product launches that you have because of the ANDA approvals? Are you seeing things on the pricing side that you hadn't expected? Or is a lot of it from just the rollout that you've had? Or sort of, sorry, the continued sales strength you've had with Digoxin? Thank you.

Yes, well, John, it's several things. First of all, we are seeing volume increases. We're having some or seen some good volume increases, for example, out of Levothyroxine, actually.

But in addition to that, we have been, as you know, we have been conservative, and we've said strictly with projecting out Digoxin and, second of all, Ursodiol. The two products, we've talked about price increases for these two products now for the last two conference calls.

So on Digoxin, we are feeling a bit more confident now than we were at the end of August when we did our last call. And Ursodiol, too, we were holding that back from a guidance perspective because we were unclear as to how long that multiple-fold increase in price would continue for. So with both products, we feel more positive now, more confident.

Okay. And also, Arthur, you made comments overtime about the longevity and the timeline ahead in terms of being able to continue to take a price on some of your larger products.

Can you give us any kind of a sense as to how much longer you think, for example, you can continue to raise prices on Digoxin and Levo? I know there's a lot of factors that go into that, but I'm just curious as to how much more time you think there is before it becomes a little bit more challenging?

Well, on the Digoxin, if we just look at the mechanics, we're at 25% of the brand. So Digoxin could be increased to 50% to 75% of the brand, where, of course, 75% being the limit.

In the case of Levo, we're already at 75% of the innovative brand. So unless they advance their product pricing further, were kind of stuck where we are in the Levo. And in the case of Digoxin, it is under consideration as far as whether we have further increases on it.

But what Marty is trying to say is those two products alone don't really account for everything. We're getting price increases on a lot of products in our line. And to part of your question as to how long do I think this will last, I have told some shareholders previously in the conferences that, in my opinion, the end of 2016, calendar 2016, I tend to think some of these price increases will start to decline.

I do see what I'm calling the patent cliff panic, where people are not seeing any growth in their revenues because they don't have any periods of exclusivity looking to capture market share by lowering prices. And also, the consolidation that goes on in our marketplace certainly doesn't help.

So from my perspective, what we are seeing here is an opportunity to raise prices because everybody has accepted the fact that our costs are going up dramatically and less concerned about grabbing market share. We're all interested in making a profit, not how many units we sell.

So it's really a combination of those things. So I don't think Levo and Digoxin are the only products I would sit here and tell you I could raise prices on because I believe any of the products in our product line, including products that we may have just gotten approved, have those same opportunities underlying them.

We look at the market and sometimes we're the first ones to raise the price, sometimes were not. But we look at everything in our line as a potential product to have a price increased on.

And again, it's during this period of time where there have been shortages, there have been a lot of reasons for these price increases that are coming about. And most of it is tied to our increased costs going forward to be in the generic drug space.

Okay. Great. Thank very much.

You're welcome.

Elliott from Needham & Company.

Thanks and good afternoon. And, Art, I think somewhere David Coverdale is thanking you. I don't think he's played to this big an audience since 1986. ( laughter) (multiple speakers )

Just a couple of additional questions on the top line and revised guidance. What would you characterize as the biggest swing factors between the low end of current guidance and the upper end of the revised range?

I mean, it would seem given the pricing dynamics in Ursodiol and Digoxin and Levothyroxine that further upward movement in those products is probably unlikely. Over the balance of the years, I'm just trying to get a sense of the $390 million, like how conservative is that in terms of adding in some maybe some additional new product launches that you didn't factor in when you gave the guidance originally?

So, Elliott, this is Marty. So I would think the more significant pieces are in the upsizing the existing products. Probably the same two we mentioned earlier on this call, Digoxin and Ursodiol.

We've still held back a bit in our outlook for the two products, or are not completely clear yet. So those are the two big drivers of the range, I would say.

Levothyroxine, we feel pretty good about our projections for that, so we don't see that is a big swing item, not right now. But it still would be on those two products, Digoxin and Ursodiol.

The new products could come in, but we've been fairly conservative in our outlook for the new products. They're not going to get out there early enough, and they're not going to be out there in significant enough volume early on to have a great impact on the results for fiscal 2015. So it's those two products, the two existing products.

Okay. Maybe we could just get Art to comment on expectations for increased competition in both of those product categories? I know on Digoxin, I've been talking for some time about West-Ward reintroducing -- reentering the market in more significant fashion. And maybe Caraco at some point as well, although that situation is pretty unclear.

But maybe more recently, Mylan recently got an approval out of their Puerto Rican facility, although they've been pretty quiet in terms of launch. Just wondering what you are thinking there over the balance of the year in terms of the competitive environment?

And also on Ursodiol, I think you talked last quarter that you expected the current dynamics to play out over the next three quarters or so, I'm just wondering if that's still your expectation?

Last first, yes, the Ursodiol we still expect the product to produce strong earnings and sales for us this year. With regards to the Digoxin market, we haven't really experienced Mylan's entry, but Mylan is one of those rational competitors, so we're not really expecting anything crazy from them. I believe what Mylan will do will pick up this space that we had predicted West-Ward would probably grab, when I thought that they would launch around June/July of this year and haven't.

Caraco still remains unknown. It would appear that since they're closing down Detroit, that product may not be on the front burner for them.

Of course, in the meantime, Sun acquired Ranbaxy. So I think there's a lot more important issues and in front of Sun Pharmaceutical than launching Digoxin.

So that really leaves the Par Pharmaceutical authorized generic, the innovative product, Mylan, and ourselves, and Impax. And I believe that all the negative news that came out about Digoxin, which caused us to be very conservative in our outlook for the first quarter, didn't materialize.

And now, we're more comfortable that we'll see a strong sales for Digoxin throughout the rest of the year with the unknown, of course, of when West-Ward and Caraco should jump in. But at this point in time, we're not hearing anything about them.

So we're going to discount the fact that those two will come into play, and we are expecting Mylan to come in. And this is one of those cases where each one of us has our favorite customers and usually we get business to start with from our customers that prefer doing business to one company versus another. No major change on either one of the Levos, Digoxins for the year, though.

Okay, fair enough. And let me just ask you one last question here as well on the M&A environment. And I know you make some comments earlier about still evaluating some potential targets, and I think there's a couple of things that maybe you've been looking at for a while.

Obviously, it's a seller's market. And just wondering from your perspective if you think there's really still -- if it's still possible to find good values out there? Or you're just simply paying fair market value and it just happens with relatively high PEs and low cost of capital that the transactions still end of being highly accretive?

And just wondering along those lines as well, given that it's a sellers market, if you're starting to see a lot more assets come into the fold in terms of small private companies looking to exit? Or bigger books of business from larger pharma companies maybe being putting in the block just because the valuations are so attractive?

Well, that's true. I mean, first of all, looking at the companies we're looking at, I'm not going to sit here and tell you we're underpaying for any of them by any stretch. We're certainly being fair in the marketplace and valuing them the same way any of my competitors would value them if I intend to purchase them.

So, and that is a challenge in itself. Yes we've also been having a lot of companies thrown at us, usually companies that there's no buyer any place else and they try to throw it at you as an inversion target, so they take, I'll use the example of a $30 million company they want to sell to me for $300 million so I can do an inversion, and our attitude is no thank you.

We are looking at a target for an inversion, but it makes sense even if there was no inversion. And that's what really drives us, what makes sense.

With regards to some of the other valuations, there's a company out there asking north of $2 billion. We personally think it's worth $500 million. And we certainly would look at it $500 million, but at $2 billion, we're not interested.

So there is a lot of stuff being tossed at us. But quite frankly, I don't think it's wise to jump into the fray, make those rash or irrational decisions to overpay for something, and then wake up eight months from now and realize, how we ever going to pay back the shareholders for this payment we just made for this acquisition.

So I think we're being conservative is the way we are with our earnings releases and looking at each one of the acquisitions, but we're still talking deeply with some of them. So we're going beyond just the talking stage. And I would characterize it as we've gone beyond kissing as well.

So that hopefully we conclude a transaction. But as you all know, in the mergers and acquisition world, a lot of stuff comes up when you're doing your due diligences, when you're negotiating, and you have to get past all those hurdles.

We believe we will close on a transaction soon and we will believe it will be accretive as we promised. And the shareholders should be happy with our approach.

Thanks for taking the questions.

Okay, thank you.

Scott from ROTH Capital.

Thank you and congratulations, gentlemen.

Thank you, Scott.

A few questions. Marty, I didn't catch the thyroid number for the quarter, if you could just give that to me again?

Sure, it's $33.3 million.

Okay, great. And if I heard correct, cardiovascular was $18.9 million?

$18.9 million, correct.

Okay. Now, we should, I believe that would be the high watermark for the year. Should we expect that number to trend downward significantly or how should we think about that sequentially through the year?

Well, that is predominately Digoxin. I think everyone understands that. We have, in our own guidance, we've trended it down through the remaining quarters of fiscal 2015.

And, yes, we did increase the number, the full-year number, as compared to the last earnings call. We did increase it because, as we alluded to earlier, we're feeling more confident in the outlook for fiscal 2015 for Digoxin. But, yes, it trends down $2 million to $3 million each quarter, sequentially.

Okay. I believe originally you had trended it down 10% for potential risk from the Jack article. Have you completely removed that haircut from your forecast at this point, or -- ?

Yes, yes we have, we have it at stage. The last earnings call, we talked about a number of about $35 million, we were characterizing it is about 10%, or less than 10% of our fiscal 2013 revenue. That number now we have taken up. We've taken it up by about $10 million to about $45 million for the year.

Okay. Great. That's very helpful.

And I just had a couple other questions on the segment. The gallstone, $11.8 million, should we think about that as a representative number?

I mean, obviously, it jumped a lot and we were expecting that. Is that the new normal?

Well, this is the Ursodiol product. And right now, we expect that we'll more of the price, but it's already been implemented as a price increase, we will see more of that materialize in the second quarter. And we're also seeing some good volume in that particular category, so --

It still could go up from here?

Yes, we expect it to go up, correct.

Okay, that's helpful. And just the final segment that jumped out to me, pain, $6.7 million, hasn't really been as robust as some of the others. Should we start to see more of a notable growth in that segment?

Well, the pain category is primarily driven by the C-Topical product. We also have now, you'll see in that category, Oxycodone, coming in and our second quarter, based on the approval. So you should see that product category tick up a bit.

In both products, C-Topical is doing well, so we expect an uptick there into second quarter. And you'll see numbers now for Oxycodone, which you haven't had, as you know, in the past. Or, and hasn't been in our outlook, it was a minimal amount in our first quarter, our fiscal first quarter.

Okay, and I guess a general question, I mean we've seen these layers of price increases coming in Levo, Digoxin, Ursodiol. Is there a fourth one in that list we should be thinking about? Or I know you're seeing price everywhere, but are there any that are reaching the material level that we should be factoring into our numbers?

No, I would say no. We have others, a second-tier which are becoming -- could become significant, but right now, no. These are -- we've been talking about the main products.

Okay. And then maybe a question for Arthur, and this is a challenging question, but obviously generics is a competitive industry. And as we've seen these markets evolve, growing in magnitudes of higher level, one would think it would attract more competition.

The question I would have, Arthur, is are you seeing that start -- the seeds of that starting to play out? Or what kind of duration should we think of these relatively stable markets at higher prices?

Is this a three-year thing? A five-year thing? How do you think about that?

Well, as I said earlier, I'm thinking it's going to be -- it will have turned out to be four years, if I'm correct, because I'm predicting by end of calendar year 2016 that this will change. And the opposite will occur.

The larger generic companies will be looking to see growth, they won't be getting it from periods of exclusivity, so their next reaction, most likely, will be to be grab market share. And that usually means lowering price.

So when you look back, if I'm right, and it's the end of 2016, it will have been roughly four years of price increase that have held steady. So you'll have primed, I should say. So let's just say that the rocket ship is leveling off now, that it's broken through the atmosphere.

And then, what do you do -- ? (multiple speakers)

Marty wants to add to this.

For that, I would just add that the other very important factor to consider with Lannett is that, as you know, with the strategy for the Company, it's never been to build Lannett based on price increases. This has been more of a phenomenon that's occurred over the last couple of years, let's say.

The strategy has always been focus on pain, focus on controlled substances, and vertical integration. So in our mind, when we look out over the years, as much as we see prices coming down in time, as Arthur says, is if we look at our strategic plan, it's just about as those price increases are coming down, or decreasing, you then start seeing the product portfolio of Lannett shift more to controlled substances and at that higher-margin that we do enjoy today from the controlled substance products.

So as the price decreases occur, in say 2016, and that timeframe, at the same time, you're able to see the shift, the distinct shift in our product portfolio as we grow to more than 50% of our manufactured products being in controlled substances. So we see that -- it's so the products, we don't get hurt as much as you might think from the product price decreases because that is offset, as I just explained.

So when we think about that, if it plays out the way you think it will play out, and it may or may not, do you think you could, when it comes to around to 2017, do you think you could offset any declines with gains in the controlled substances and other categories?

Yes, that's correct. So the way we look at is that, say from a gross margin perspective, as margins start coming down from the levels we're at now, that up above 70%, let's say, as they start dropping we see our gross margins actually plateauing somewhere in that, say, 55% to 60% range.

Because as the, we say, today's portfolio starts dropping, say should it go below 50% or something of that nature, there's an offset. And the offset is the product mix of Lannett at higher margins in the controlled substance base offsets that decrease. And, in fact, from our own modeling, we think we level off into the

Okay. And then, we're nearing the final questions here, but obviously one area for net income growth could be lower taxes. Inversions, as they were six months ago, don't appear as simple.

I guess, what are some of the things, I mean can you take assets offshore? I guess the question is, how low can you get that tax rate away from, say, the 37%, 38%? And how long will it take given the new dynamics?

Well, first of all, some of those changes that were made to the potential for inversions is really didn't impact the kind of plans we had, and some of the typical inversions weren't impacted, as well. So I think you're reading more into what they've said in the papers as opposed to when you look at the changes they made, it really doesn't impact it.

So we still continue to believe that an inversion makes sense, but the target we've chosen also makes sense even if there was no inversion at all. And we are looking at globalizing the Company, which, as Marty has pointed out to me, offers a lot of other opportunities to start to reduce your tax concerns here in the United States, which puts us in an uncompetitive situation when you're trying to be a global player.

So we think we can address those things simultaneously with trying to increase our controlled substances to offset the profits we've been realizing on price increases, so that the Company has a stable basis for growth that no one is going to sit there and go, well what if this, and what if that. In other words, it would be so it avenues that we would've explored that we would be in a safe mode in terms of our growth and our profits.

Okay, great. I appreciate the color on that. Congratulations again, guys, and thanks for taking all the questions.

Thank you, Scott.

Rohit from Oppenheimer.

Hello, Arthur, hello, Marty. Thanks for taking the questions. Congrats on the quarter.

Thanks, Rohit.

Just on the piece of guidance that confirm, Marty, you're not valuing, besides Oxycodone, you're not valuing much of anything, is that still true?

It's at a low number, yes.

It's at a low number. So, you said you took up Digoxin by $10 million from the $35 million to $45 million.

I think, Ursodiol, you were at $25 million and then the bulk of it, you took that up by close to $10 million, and then, that's the majority of it, the guidance? Or something close to $35 million?

Well, Ursodiol, we had up at $35 million, actually, back in the last guidance.

Okay.

Two iterations ago, we were talking about a run rate, annual run rate of $50 million for the product based on a 10 point price increase. Two earnings calls prior, we put that at $25 million, saying hedged at the year, you'd expect --

Right, then you took it up to $35 million. Right, my fault, right. And so, you took it up to something like $40 million or $45 million for this quarter?

We took it up to $50 million-ish. 5-0.

And then, Arthur, I think you were saying for Mylan you thought about the entry in October. I haven't seen a script for that yet, are you still characterizing that entry as imminent for Digoxin.

Yes because that's what they told their customers, and that's usually the feedback we first get is when they talk to their customers about a product.

They did indicate and confirmed they were going to launch in October. I know October has come and gone, but unless they've launched and I didn't hear about it, it could be late by a week. But I still expect it to be imminent.

Okay. And then, so if Hikma West-Ward came out in the next quarter, let's say, or fiscal 3Q, would that force you to take down Digoxin guidance? I know you are saying that Mylan is awash with Hikma and Sun, but if Hikma comes out, or I'm sorry, West-Ward comes out in the next quarter or so, how does that impact your Digoxin forecast?

I don't really think it would. Remember, we've been trying to tell everyone, even though we take the conservative approach and assume we'll lose market share, the reality is West-Ward could take market share away strictly from Impax, strictly from Par, and not from Lannett at all. So none of our customers may leave us and we'll continue to do the volume we're talking about.

But when we make our guidances or we give out guidances or talk internally, we assume worst-case scenario. But since the companies we're looking at here are not irrational players, I don't see them just going out and trying to grab market share.

They'll solicit customers when they're ready to ship and they'll start to make some inroads in a small way. So it still won't impact us.

If they haven't launched yet, we're already into our second quarter, so what are we talking about? Maybe the third and fourth quarter they might start to pick up some business.

And remember, the customers carry inventories. They're not sitting there with an empty shelf waiting for vendors, so they may not be ready to buy for a quarter at least. So that gives me at least three quarters of some comfort.

And our second-half outlook is, our numbers that are in the guidance are pretty conservative yet on Digoxin.

Okay. And then, with on the approval on Letrozole, I think you've mentioned that you have 21 ANDAs pending at the FDA. This one took four years.

What is the average, I guess, for the other one 21 products, what is the average length of stay for those products?

Well, it's hard to say because we've got one approved in 14 months recently which we weren't expecting, we thought was a mistake because it came so quick.

Right.

But generally, they're running about, certainly close to the four and five years for all of the --

No, I don't mean what's the average FDA timeline. I meant your specific products, the 21 products, what is the average timeline that you have there sitting there? If that makes sense?

Oh, I'm going to say for probably half of that, say at least 10 of those products, they've been down there close to four years.

Okay. And then the China partnership, where do we stand on that, ATC?

Well, they're expecting some approvals, they're expecting two approvals by December that will be distributing of theirs, they're pretty large volume products. But we don't have any indication other than their feelings, and we all know none of us can predict FDA.

They are continuing to work on the contract manufacturing proposal that they had made, so we're waiting for some quotes on some products that we've asked them to consider making for us. And they really haven't done much on the API side. So this thing is starting off a little bit slow.

But remember, it was a multi-part agreement and I do think that it was the, I would say, almost the first foray for them into the United States. So I'm expecting a little more responses, let's say, in the next month or two from them with regards to the other two product lines, which would be the API support, the dosage forms that they want to quote on, which we've given them already, and now, of course, the two products that are at the agency, we hope that they're right about when they'll be approved.

But I'll know a little bit more as we've had more context, because we're also been authorized by them to contact the agency on their behalf. So with my staff following up, I'll have a little more information in the next few weeks.

Okay. And then the last question for me is on the AG investigation. You submitted everything to him and then did he give a timeline? Or what are the next steps, you just have to wait for him to go through all the data?

Exactly. I got to wait for him to go through all the data.

And there's no timeline on how long that could take him?

No. (laughter)

We're inexperienced in this area, so you're not going even get a guess out of me.

Okay.

Governments are so slow, I don't know what to tell you.

Okay. I appreciate it, guys. Thanks.

Okay, thanks, bye.

I see nobody else in the queue. I will now turn the call back over to management for closing remarks

Thank you, Vivian, and 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.

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