Lannett Company Inc (LCI) 2015 Q2 法說會逐字稿

Welcome to the Lannett Company's FY15 second-quarter financial results conference call. My name is Adrian, and I'll 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 Robert Jaffe. Robert Jaffe, you may begin.

Thanks, operator. Good afternoon everyone, and thank you for joining us today to discuss Lannett Company's FY15 second-quarter financial results. On the call today are Arthur Bedrosian, Chief Executive Officer; 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 will now turn the call over to Arthur Bedrosian. Arthur?

Thanks, Robert, and good afternoon everyone. I hope you enjoyed our latest theme song, Don't Stop, by Fleetwood Mac. Before I begin, let me welcome Michael Bogda as Lannett's President. Michael brings a global perspective, extensive operations, merger and acquisitions, and business integration experience. He joined us in December after having held senior-level positions with some respected companies in our industry. The addition of Mike will strengthen our team, help us manage our recent rapid growth, and bolster our M&A program.

Turning to our financial results, we had a tremendous quarter, driven by strong sales across multiple product categories, and a significant increase in gross margin. For FY15 second quarter, we recorded the highest net sales and net income in our Company's history. Net sales were $115 million, with gross margin of 76%. And net income was $45 million, equal to $1.21 per diluted share. We have now reported nine consecutive quarters of record net sales, as well as the 12th consecutive quarter in which net sales and adjusted earnings per share exceeded the comparable prior-year period.

Our outlook for FY15 remains strong. And with the excellent performance in the second quarter, we have raised our full-year guidance. Marty will discuss in more detail shortly. With that brief overview, I'd like to turn the call over to Marty to review the financials. Then I will provide an update, and we will open the call for questions. Marty?

Thank you, Arthur, and good afternoon, everyone. As Arthur mentioned, we reported an outstanding FY15 second quarter, with net sales increasing 71% to $114.8 million, from $67.3 million in last year's second quarter.

Net sales for our largest product category, thyroid deficiency, grew to $44.5 million, or 39% of our total sales. Our two other largest categories, cardiovascular and gallstone, had net sales of $18.3 million and $16.7 million, respectively, representing 16% and 15% of our total net sales, respectively. As to net sales of our remaining categories, pain management was $7.6 million, migraine was $6.9 million, glaucoma was $5.5 million, antibiotic was $3.3 million, gout was $3 million, obesity was $953,000, and other represented $7.9 million.

Gross profit more than doubled to $87.2 million, or 76% of net sales, from $41 million, or 61% of net sales. Research and development expenses increased to $7.8 million, compared with $5.8 million in the same quarter of the prior year. Selling, general and administrative expenses increased to $12.8 million, compared with $9.9 million. This amount includes acquisition-related expenses of $2 million, or approximately $0.04 per diluted share. Operating income more than doubled to $66.5 million, from $25.4 million in the second quarter of last year.

The effective tax rate was 33%, compared to 37% for last year's second quarter. The lower effective tax rate was due primarily to changes in the Philadelphia local tax laws, as well as higher federal domestic manufacturing deductions recorded in FY15, and related to a shift in our product mix. In addition, Congress recently extended the R&D tax credit law, which also contributed to a lower rate. Net income attributable to Lannett Company grew by 170%, to $44.8 million, or $1.21 per diluted share, from $16.6 million, or $0.46 per diluted share, for the second quarter of FY14. Turning to our results for the first six months of FY15, net sales increased 84%, to $208.2 million, from $113.2 million for the first six months of last year.

Continuing with the remainder of the income statement, and for completeness and comparative purposes, I will provide both GAAP and adjusted amounts for last year's second-quarter results. As you may recall, in less 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 included a nonrecurring pretax charge of $20.1 million related to this contract extension. Gross profit was $158.8 million, or 76% of net sales. This compares with gross profit last year of $42.3 million, or 37% of net sales. Gross profit, excluding the JSP contract renewal charge, was $62.4 million, or 55% of net sales.

Research and development expenses increased to $14.2 million, compared with $10.5 million in the same period of the prior year. Selling, general and administrative expenses increased to $23.4 million, compared with $17.1 million. This increase includes the acquisition-related expenses of $2.1 million, or approximately $0.04 per diluted share. Operating income was $121.2 million, compared with $14.7 million. Excluding the JSP contract renewal charge, operating income was $34.8 million in the first six months of last year. Net income attributable to Lannett Company was $79.7 million, or $2.15 per diluted share, compared with $10.6 million, or $0.31 per diluted share. Adjusted net income, which excludes the contract renewal charge, was $23.2 million, or $0.69 per diluted share, for the first six months of FY14. Our balance sheet at December 31, 2014 remains strong, with cash, cash equivalents and investment securities totaling $184.9 million.

Turning now to our guidance. Given our strong second-quarter performance, we have raised our guidance for the full year FY15 as follows. Net sales in the range of $395 million to $405 million, up from previous guidance of $370 million to $390 million. Gross margin as a percentage of net sales of approximately 74% to 75%, revised from 73% to 75%. R&D expense in the range of $29 million to $31 million, down from previous guidance of $34 million to $36 million. SG&A expense ranging from $47 million to $49 million, up from $46 million to $48 million. The full-year effective tax rate to be in the range of 34% to 35%, down from previous guidance of 36% to 38%.

Capital expenditures in FY15 in the range of $40 million to $50 million, which includes $7 million to continue the partial fit-out of two buildings recently acquired by the Company, and this is unchanged from previous guidance. Regarding the phasing of the third and fourth quarters in FY15, we expect the results of Q3 and Q4 to be similar to each other. 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. As expected, the Jackson sales declined modestly compared with sales in the first quarter, due to competition. The guidance Marty just provided anticipates further reductions in the second half of FY15. We also saw increased sales of our C-Topical product.

We believe our Company is well-positioned for continued growth and success. The alliances we have formed during various stages of development are marketing. And on the business development and M&A fronts, we have undertaken two due diligence evaluations of potential acquisitions, and continue to seek out acquisition opportunities for both products and companies. We have an M&A pipeline of companies that are 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 that globalize our business, further vertically integrating our operations, our enhanced shareholder value through an acquisition in a tax-favorable jurisdiction. In late December, we announced the approval of Dorzolamide Hydrochloride with Timolol. This is the fourth FDA approval we have received thus far in FY15. While total sales of the product are significant, we are a late entry into the market, and therefore have modest expectations for the product.

We continue to increase our pipeline. We currently have 20 ANDAs, including five with Paragraph IV certification pending at FDA. As expected, Celgene filed suit against us regarding our Thalomid generic, one of our Paragraph IV products. And we are pleased the FDA has initiated their review of the application. Of our additional 42 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 2014 to submit our new drug application. However, due to minor delays in the recruitment of patients, as well as minor issues with the clinical trial, a meeting was requested with FDA. That meeting was held recently, and we were in agreement with FDA on the recommended changes to the protocol. We are revising the filing date of our NDA to late calendar 2015.

We have been invited, and expect to present, at a number of investor conferences over the next several months. I want to thank our entire staff for doing an outstanding job, and to our shareholders and Board members, who have continued to support our efforts. We remain very positive about Lannett's future. Marty and I would now like to address any questions you may have.

(Operator Instructions)

Matt Hewitt with Craig-Hallum Capital.

Congratulations on a fantastic quarter.

Thank you, Matt.

Thank you.

First question. The source of the upside in Q2, looks like both Levo and gallstone were up. Gallstone, you took price up last quarter, is that correct? And Levo, was that just volume gains?

In both cases, as far as it was a very strong quarter that was a bit beyond our own expectations. It was volume, in both cases.

Okay. And (multiple speakers) -- no, I get it.

There's some price on the gout product, but the driver that gave us a great quarter was volume.

Okay. A question I get a lot, and I'm sure you guys are getting a lot as well, is with Levo, the potential or expectation for generic entrance? And I'm wondering -- and I think this will be helpful for everybody. But as far as that drug is concerned, it's not a simple generic, or another competitor enters the market, and the doctors can switch over. Could you maybe remind everybody how that drug is differentiated, as far as patient -- the patients are concerned?

Yes, it's a narrow therapeutic index drug, and there's13 different strengths. And while the generic companies are generally comparable to each other, or bio-equivalent to each other, you still have the concern that, between the label claim of 95% to 105%, you could have one generic drug making, let's say, a 25 microgram strength at 95, 96 level. And then another GR company making it closer to 104. So there's a significant difference between those two strengths, and this is a very sensitive product.

So not every patient could be easily switched from one product to another. And if you look in the orange book, you'll find the FDA has four different AB rating categories for this drug. So a lot of physicians don't want to change patients once they are acclimated to the particular generic they are using, or even to the brand. And that explains why the brand -- and I'm talking about the Synthroid products in particular -- has continued to maintain a major market share for themselves, on a product that's been available generically for well over 15 years.

And that would really be the major stumbling block for any new generic that comes into the marketplace. Grabbing market share away from another company would mean possibly having patients not respond as well to the medication. And some physicians don't like dealing with that.

Everybody's doing fine with their medication. Why change it and create problems? So I believe, as a result, this is one of those drugs where you're not going to see a dramatic market changes in the marketplace itself. I hope that answers your question.

That was -- absolutely. That was perfect. Thank you very much for that. Maybe one quick one from me. R&D spend looks like it's going to decline. Is that a function of the NDA being pushed out a little bit for C-Topical?

That's part of it. Matt, the -- our expectations are that the expense in the third quarter, the fiscal third quarter, will be on the low side. Relative to -- and as Arthur explained in his prepared comments. And then also the expense, at this stage, for the fourth quarter, would ramp up as compared to the third. But yes, in total, then, it is down versus what we were projecting.

All right. Thank you very much, and congratulations again.

Thank you.

John Newman from Canaccord.

Hello. Thanks for taking my question.

The question I have is, should we expect to see the same pattern of price increases over the course of the year in the various therapeutic areas that we seen over the past 12 months? And the second question I have is, Marty, have there been any changes to the level of reserves that you have been taking on the products, when you take price increases? Or has that been relatively constant? Thanks.

Let me take the first part of your question, just so we're clear. If you're saying that the price increases that we've had in place, are they sustainable, and are they maintaining? My answer would be yes, they continue to hold up. As far as whether we talked about any increases for this year, we don't usually give a guidance for that. We predict what our revenues will be for the year. We're not seeing any declines, generally speaking, on the price increase products. So they continue to, let's say, level off at their new pricing.

So from that point of view, there's no planned increases, per se, on each one of the products. But we have previously increased, while on occasion some products have gone through a second round of increases. And I think Marty can address the issue about the reserves.

On the reserves, John, I would just say that, commensurate with our sales increase, you'll generally see our reserves expanding or growing, consistent with the top line growth.

Okay. But in terms of the percentage of revenues, would you say that the reserve level is remaining relatively constant?

It is consistent, yes.

Okay. Thank you.

Elliot Wilbur from Needham & Company.

A couple of product-specific questions. First, on -- going back to Levothyroxine and strength in the quarter, is there anything that you could perhaps share with us, in terms of maybe provide a little more clarity on what exactly what drove that? Certainly, looking at various services that provide prescription data, that product has been very, very constant, in terms of end market demand. So a little bit surprising to see such a significant step-up in one particular quarter.

And even assuming it was a new customer when it would seem like, at this point, it would be reflected in Rx data. So I'm just trying to get a little better sense as to what exactly drove that in the quarter? And based on your guidance, it doesn't seem like your expecting it to continue through the back half of the year.

And then Art, I want to ask you a question specifically around Digoxin. You talked about this product, in terms of potentially having additional pricing leverage, short of giving the still significant discount versus the brand, and given the possibility of additional competitive entrance sometime in the not so distant future.

It would seem like this would be very advantageous time in which to move forward with more aggressive pricing strategy, rather than waiting for potentially other players to come back into the marketplace. So I just want to get your thoughts on the outlook for the competitive environment around Digoxin? And then some commentary, maybe, on potential relative pricing to the AMEX in the market?

Let me -- let's take the Levo first. I would say that probably, the growth you're seeing in the Levo, where you're not noticing it in the IMS data. Because the IMS data is essentially tracking the percentage of the marketplace that we have. So I believe maybe our percentages might have stayed the same, even though we are capturing more shares of the brand market and probably getting some sales in areas that are not reported through IMS. Because we certainly have seen unit increases in this product's sales, and we continue to see that.

We've also normally taken a lot of market share from the Levoxyl product. When they left the marketplace, it was one of those scenarios where one of their biggest customers switched the product to us on two stages. First, when Levoxyl raised their price on the product, we picked up the generic market that they were occupying with their generic pricing. Then Levoxyl left the market completely, and the brand portion of that market was also brought under our control by that customer. So we were picking up some unusual business from Levoxyl, as opposed to our competitors, let's say, in the marketplace. And that might account for some of it.

The other part, I would have to say, is just eroding away at the Synthroid market. But we have seen an increase in unit sales ourselves. It's a product that -- a lot of people like our product for a lot of reasons. One of which is never having a recall on it, and this product has been on the market over 30 years. It is one of the best -- it is the best formula, I'll say, in the marketplace, in terms of that history. So it just may just be that the loyalty that the physicians and the patients show to this product is coming through in increased unit sales.

That would be my best guess, because the IMS data is not that reliable, and not that accurate, in terms of what's going on today, because it reflects what's happening on a historical basis. So I may know a little more, as you will, as we see the IMS data change going forward. And it may reflect what I'm thinking, that we're taking more market share away from the Synthroid product.

Getting back to the Digoxin, yes, there was some interest on my part in raising the price of Digoxin, before we had the entrance of Mylan and Westwood into the marketplace. The probably with that, though, is sometimes, the timing isn't right. But I'm still concerned about the pricing potential, meaning the prices could go higher, because there's an issue now with the raw material.

Most people in the marketplace are using raw material by one supplier. That supplier has decided to discontinue the product. They're planning on selling their drug master file to another firm. So there's a potential for disruption in the marketplace, if everybody doesn't have enough raw material available.

And that disruption certainly could equate to a price increase for us. So I would just say stay tuned. But we're also looking to capture more market share on the Digoxin. This is an important product for us. We don't want to sit by and just let our competition take away our market share.

And Art, if I could follow up your earlier comments on Levothyroxine with an additional question? Given the fact that it seems like you're suggesting that the bump up seems to be sustainable, and ultimately, at some point, we will be able to figure out why, or see it more accurately, just like the IMS data. I guess, again, thinking about the back half of the year, in terms of top line guidance.

Why -- doesn't seem like we would, or should be, thinking about any meaningful step-down from the current run rate? I'm just trying to get a sense of conservatism embedded in second half, versus knowing something specifically about Levo, or any one of the other major products?

So Elliot, this is Marty.

So in our guidance that we provided, we have taken the Levo full-year number up. Previously, we were talking about a number at $150 million. Now, our numbers $155 million, essentially reflecting the upside that you saw in the second quarter. So in our numbers, we are still expecting Levo sales to drop down, and be fairly similar in the third and fourth quarters.

And some of it is some of what we do know, in terms of agreements with our customers. And some of it is, there's a bit of conservatism in there, perhaps. But we're keeping the second half -- the way the numbers fall out, actually, is that the second half is only slightly lower than the first half.

Our first quarter might have -- if you look at the first quarter, it might have been a bit lower than we were expecting, and then we spiked in the second quarter. So our thinking is -- somewhat predominately thinking that it's maybe a one half versus the second half exercise. So -- and with the current guidance at $155 million, we essentially have the first half -- the second half, that is, equal to the first half. And again, we do know some pieces of the business that would cause the second -- or cause the third and fourth quarters to be down a bit versus the second.

Okay. And if I could ask one last question of Art, in terms of current thinking around M&A possibilities. Obviously, we've talked in the past about this being a seller's market, and no secret that you've had a short list, for some time, of some potential transactions. Just wondering, how would you -- or what would you characterize as the biggest impediment, or the biggest stumbling block, in terms of moving forward to transaction. Is it simply price? Or you just haven't yet found the right deal?

I would say it's probably the narrow focus that we placed upon ourselves. We promised the Street that we would stay within the area that we operate in, and that we'd make sure they were accretive. So there are a lot of opportunities that were out there that would not be accretive for us. And we didn't want to go back on our word. Everybody's expecting us to keep within that framework, so it means I can't go into -- for example, I wouldn't be buying a brand product, because I said I'm going to stay in the generic field.

I think that limits my opportunities. And we're certainly looking at whether or not we should change that. But I'm going to change it, I'm going to change it after I tell the shareholders what my intentions are, not before. But right now, that's really the impediment.

You narrow the focus, so you don't have all of those opportunities that are out there available to you. All the companies, for example, that have been thrown at us from Ireland, because of potential aversions, or even a Canadian company, were not companies that fit in that criteria of being accretive, and being in the same space that we're in.

So because it's going to be our first acquisition, we wanted to make sure that we handled something that everybody on the street would understand we were capable of integrating and merging with, and handling successfully, as opposed to taking some risks. I will take risks once we have a little more experience under our belt.

All right. Thank you.

Thank you.

Gregg Gilbert from Deutsche Bank.

Maybe just a follow-up on that last question, Arthur. I was intrigued by your comments about globalizing the business. Aside from tax inversion kinds of things, what are the things that you're considering or thinking about, as they relate to global-ness? Where would you go, where would you not go, et cetera?

I wouldn't go to Afghanistan that's for sure. (laughter) Other than a place like that, we're really open to anything. I would say, within Western Europe is where we are focused. But actually, the globalization we're talking about happens to be a company that's very attractive to us, that's also a good candidate for an inversion. So it just happened to be also a candidate for inversion. It wasn't that we started just looking for an inversion candidate. Again, we would look into something that fits that narrow criteria we put in front of ourselves.

We did look at companies in Europe, and we did spend some money on our due diligence. And at this point, we did view the potential for the globalization of our Company, if we made any one of those two potential acquisitions. But at this point, I can't say any more, other than that. But we are looking in the marketplace, and we have looked at Europe, but that was not the main focus. We came across companies who are very attractive in that market, but not because we were looking for European companies.

Hope that answered the question.

Yes. And my other question is a bit -- more of an industry question. You've been in the industry a long time, not to date you, Arthur. But I'm curious about your thoughts on the sustainability of pricing? Not on each of your products, as already asked and answered. But rather, what are some of the themes and trends you're looking at, to assess whether this pretty good environment is going to continue?

Okay, I will start by saying, you are as young as you feel, and I still feel young. So I'm going to forget about my age, at least I try to every day. Seriously, though, with regards to the market, we've sustained these price increases now probably close to three years. So it's hard -- not all of them, but over time, depending on when you look at the first one. It is my understanding that the entire generic marketplace has probably looked at the cost structure of our ANDAs going forward and have realized that, to be in a competitive marketplace may mean, if we sell on price, we won't be in business in the future.

The cost to file an ANDA, in my estimation, has probably quadrupled. And I'm putting together some statistics to prove that, because there's been a lot of changes in the marketplace. If you just look at the latest budget from Obama, he's increasing user fees. So what we're having is, every time you turn around, the cost to file an ANDA, the cost to do business with the FDA, is going up and up and up. The PDUFA fees, for your convertible -- the products that are grandfathered converting to licensed products, the PDUFA fees are close to $3 million now. When we did our marketing (inaudible), it was only $1 million.

So all of the fees, all the expenses, go up and up and up. And we look at these price increases as being sustainable, because everybody's faced with those same costs, the GDUFA fees, as we now know, are not going to go down. So we're not getting the benefit we expected from it. But we certainly are getting increases in the fees.

So I'm expecting these pricings to really sustain themselves, to continue. I see people raising prices further, because the generic prices were so low. When you're 10% of the brand, that's not because the brand overpriced the product by 90%. It's because the generic marketplace has so much competition sometimes, people get desperate just to unload their inventory that they cut the prices.

We don't see that kind of behavior sustainable, and we don't see it going further into the future. I think you're going to find more capital pricing -- more -- I'll say less competition, in a sense. You won't have price wars. You are still going to have competition, because there's a lot of generic companies in the market. I just don't see the prices eroding like they did in the past. It's really unfortunate, but what they see some significant pricing -- cost increases, I should say, that are driving this.

Thanks a lot.

Scott Henry from ROTH Capital.

Thank you, and good afternoon, gentlemen. I guess, just getting started, 2015 -- your FY15 has been a tremendous year, a lot of pricing influences. My question is, at this point in time, how are you starting to think about 2016, if just directionally? I know you're going to hit some headwinds, possibly, on Digoxin, and maybe, at some point, Levo. Should we think about 2016 as being a flat year? Should we think about it up or down? Just obviously, big picture.

The best way I can answer that is, it's probably too early to provide a guidance for 2016 at this time. But I can offer my thoughts regarding our outlook for sales next year. I think our sales will increase next year. And I expect increase to be the second half of the fiscal year, and primarily due to new product approvals.

Will existing products also increase, or will they decrease due to increased competition? I expect a modest volume increase in sales of our existing products, as compared to the second half of FY15. And my thoughts with regards to price increases and decreases, I think I just really touched on that.

There are no forecasted price increases in our estimates for next year. In addition, any anticipated price decreases are already in our guidance for this fiscal year. So I really struggle to say that the year would be flat.

We are looking at some growth in that year. We certainly can't predict whether they'll be any price increases that will answer the growth. But we're certainly looking at unit growth in sales of the products that we manufacture, bringing products to the market, returning them to the market. Opportunities for us that we're looking at presently. So I'm -- and I'm always an optimist, of course, but I see 2016 as a growth year.

Okay. Thank you for that color. That is helpful.

Shifting to Digoxin. You made comments about a raw material supplier possibly having some disruption. Could you just confirm, one, if you also use that same raw material supplier? And then perhaps if you could talk about what kind of inventory you have on hand?

We are in a good position on inventory. But yes, I believe everybody in the marketplace in Digoxin is using that same vendor at this time. I believe there was essentially just one vendor.

There have been a couple of new entrants into the market that have talked about getting involved in Digoxin. But I believe, from the drug master files that are available to us, I believe we're all using the same supplier. So that's what concerns me, if they're switching to another source, and that person makes any changes to the formulation, the process, the manufacturing, what have you, there could be some disruptions.

I can't speak for everyone in the industry, but they're all aware of this problem. So I'm assuming everyone is, of course, taking steps to make sure they don't run of out of inventory. But if they do or they don't, I certainly think people are going to be a little cautious about trying to grab market share in that scenario. Because if you go out and you grab the market share, and then you are unable to supply, because you're unable to get raw material, then you're going to be hit with those failures of supplies.

So I see a real steadiness to the market, and probably some growth, if some of our competitors are unable to supply all the needs of their customers. So I just don't see this as a very competitive market, because of that problem.

Okay. And you mentioned you had a, quote, good inventory position. Should we think about that being six months? Or -- and I don't how much color you want to provide. And as well, with a new supplier, do you have any -- I guess, do you have any -- is the pricing fixed? Or at some point, is the supplier going to raise price? How should we think about that?

I would always assume the supplier is going to raise price, especially if he's purchased a drug master file, and he is going to start launching it. I would presume that. I can't really speak to the inventory on raw material, because I don't know the answer to that, off the top of my head, at the moment. But we certainly always try to make sure that we have good service levels. So I'm always presuming that our partner at Jerome Stevens will always make sure that they're in a good position on raw material.

But nevertheless, I would presume there's some raw material increases in our future, just from the norm. That's the way companies behave. But I can't speak to any particular contracts that are being transferred, for example. So there may be some opportunities where we have to be given notice before they can change the price. I'm not in the raw material purchasing side, so I really can't add much color to that. I may have to get back to you with an answer, once I look into that question.

Okay, fair enough. Shifting gears, with regards to Levothyroxine, there was that approval for Lloyd, which I guess is ultimately Actavis for Levothroid. Anything new on that front? Do you expect that to be another brand? Or might it come out as a generic? Or I guess relaunch as a generic? It would seem likely it would be a brand.

Originally, it was a brand. Lloyd's made that product for Forest, so we're presuming -- and they are stating that they're going to relaunch Levothroid. So it sounds to me that they're coming into the market as a branded generic, at the very least. Because there's already two brands out there, and multiple generics. So I'm presuming that they're launching. That is our opinion.

I have heard from one company who claims that Actavis was planning on making sure their product was equivalent to all the other generics out there, but that doesn't necessarily mean that their plan is to sell it as a generic. They may be doing that so that they can make sure all the patients could be switched to their brand, away from Synthroid, or our Levo, or our competitors' generic Levo's that are out there.

But right now, we're not expecting anything dramatic to happen with that product. As you know, the company had some severe FDA issues with their formula. They believe they've gotten them resolved. We'll see how well that goes in the marketplace. If they launch, and they have recalls, than they'll lose market share rather quickly.

So I'm really get a take a wait and see. But again, this is a product that the patients don't like to be switched, the doctors don't want to switch. The customers that we have don't want to go through that process either. So I don't really see any unit loss to us, and we hope to continue to keep our market share on that product. I just -- look, no one likes additional competition, especially me. But I'm not concerned about this particular product hurting us that much.

Okay, great. Thank you for taking all the questions.

You're quite welcome. Thank you, Scott.

Rohit Vanjani from Oppenheimer.

On the R&D and tax rate guidance. So the tax rate guidance, you were able to take down, Marty, because of some of those issues you talked about, the Philadelphia issues and the R&D tax credit. Is that why the whole year came down, because of the quarter?

Correct. That's right.

And then, I was a little confused on the R&D guidance. You said that the filing got pushed for C-Topical to the end of calendar 2015. But was there something else that caused you to lower the R&D guidance?

Some of the -- as Arthur mentioned, in discussions with the FDA about the protocol, we actually had some of the testing -- the Phase III testing was on hold, while we were talking to the FDA. So that's causing the expense that we're incurring, like right now, to be lower than what we were expecting, say, three months ago. So that's why we brought down the full-year outlook for FY15

Okay. And then, Arthur, some of those products that we talked about a couple quarters ago slipping from FY14, the CINV product, the cytoxic drug product. Have you heard anything from the FDA on those products?

No. No, the only one that we've heard about, really, is the Thalomid, because we know that they've started the review of that application already. That's good, in a way. Of course, you know there's litigation with Celgene. So clearly, there's a 30-month hold that comes with that litigation. So don't not expecting anything tomorrow. But no, still don't have any idea or any clues when the FDA is going to approve anything over the next few months.

Okay. And then on the components of guidance, I think you said Levo is $155 million in FY15, right? And so you're expecting -- and then you've talked about, now, up to -- out to FY19. So you have flattish sales for Levo out to FY18, before dropping in FY19? Is that right?

That's about right. Yes.

Okay. And then for FY15, you have Digoxin still at $45 million?

Digoxin, we're taking it up to $50 million. Again, like with Levo, we rolled into the full-year outlook the upside that we saw in the second quarter.

Okay. And then Ursodiol was at $35 million, and you took that up, as well?

No, Ursodiol, last time, we were talking about it being at $50 million, actually. And we've taken it up again now, just based on what we can see for the rest of the fiscal year. So we've taken that up to $60 million for the fiscal year.

So Ursodiol, I thought, was at $50 million. And then you dropped it to $25 million, and then you brought it back up. No? It was always at $50 million, and now you brought it up to $60 million?

On Ursodiol, no. We started, like three quarters or four quarters ago, at $25 million. First, it was a $5 million product. We increased it up to $50 million, in terms of our outlook. So back in the May call, we took it -- we started with $25 million for FY15. Then we took it up to $35 million, next time around. And we just increased it to $50 million last time, and now it's at $60 million. Staying confident.

As you recall, last summer, we felt that, with the significant price increase, we just weren't -- it wasn't quite clear with APIC was the other competitor at that time. And the outlook wasn't clear. So we only put six months of that price increase into our FY15 outlook. Now, essentially, we have 12 months of that price increase, plus some volume increase.

Okay. And then C-Topical, I think last quarter, you had it at 25 to 30. Where is that now?

Same. We've held that as it is. It's at the same place in the current guidance.

And then is the Dorzolamide product in your guidance?

No.

That is not?

No.

Okay. And there's no other product approvals, or anticipated approvals, in there?

I'm always anticipating approvals, but they're not in our guidance until we get them.

Okay. And then the last question for me is, I think last quarter, we saw a new entrant in the Digoxin market. I think you mentioned it, Mylan. I don't think that competitor was able to take share for you in the reported quarter. But are you seeing them take share from you in this current quarter, fiscal 3Q?

The -- well, you've got to be careful. There is two entrants now, in Mylan and Westwood. So -- but -- so we have seen some market share lost to some of them, but not necessarily the first one that introduced. So it's not necessarily Mylan. It might be Westwood, or a combination of them.

Okay.

So I didn't lose any to Mylan; I lost some to Westwood, is the way I will answer that.

Sure. No, I got it. Okay, great. Thanks. I appreciate you taking the questions.

Sumant Kulkami, Bank of America.

Arthur, could you give us an update on the latest on your dronabinol filing?

Not really. It's still with the agency, and not much I can tell you. I'm giving up on predicting anything with the agency. I've been wrong on this one too many times, so I'm just going to wait until it gets approved.

And then, how has the progress been on vertical integration on the controlled substance part of the business? Because that's something we've not been focused on, given the positive dynamics in the other parts of the business.

The vertical integration is not as pronounced as you might expect, because the -- our subsidiary, that's the riskiest side of our business. So we always want to make sure that operates as a separate entity, and not have its control by Lannett. It has its own Board, has its own offices, and what have you.

The integration, I would call it more sharing of resources. I'm trying to think of the word we use. Shared services. Thank you. One of my colleagues just reminded me. We're working on shared services with them, and that's moving forward nicely.

Thank you.

Now, I'd like to turn the call back to the speakers for closing comments.

Thank you very much, everyone, for joining the call. I look forward to speaking to you on our next earnings call.

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