Lannett Company Inc (LCI) 2015 Q3 法說會逐字稿

Welcome to the Lannett Company's fiscal 2015 third quarter conference call. (Operator Instructions). I'll turn the call now over to Robert Jaffe, Event Relations for Lannett. Please go ahead.

Thanks, [Adrian]. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2015 third 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 managements 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 "Baby Hold on to Me" by Eddie Money.

Turning to our financial results we reported a solid quarter driven by strong sales across multiple product categories and a significant increase in gross margin compared with last year. For the fiscal 2015 third quarter net sales were $99 million with gross margin of 76%, and net income was $36 million equal to $0.97 per diluted share. We have now reported the 13th 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 in the third quarter and outlook for a solid fourth quarter we have raised our full year guidance. Marty will discuss this 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 will provide an update and open the call for questions. Marty.

Thank you, Arthur, and good afternoon everyone. As Arthur mentioned we reported a solid fiscal 2015 third quarter with net sales increasing 24% to $99.4 million from $80.0 million in last year's third quarter. Net sales for our largest product category thyroid deficiency grew to $36.7 million or 37% of our total net sales. Our two other largest categories, gallstone and cardiovascular, had net sales of $20.5 million and $8.5 million respectfully. Representing 21% and 9% of our total sales respectably.

As to net sales of our remaining categories migraine was $6.7 million, glaucoma was $5.7 million, pain was $4.3 million, antibiotic was $3.0 million, gout was $1.5 million, obesity was $1.1 million and other represented $11.4 million. Gross profit rose 35% to $75.6 million or 76% of net sales from $56.1 million or 70% of net sales. Research and development expenses decreased to $9.2 million compared with $10.6 million in the same quarter of the prior year.

Selling, general and administrative expenses increased to $12.2 million compared with $9.6 million. SG&A expenses for the fiscal 2015 third quarter included acquisition related expense of $1.1 million. Operating income grew 51% to $54.3 million from $36.0 million in the third quarter of last year.

The effective tax rate was 33% compared to 37% for last year's third 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 fiscal 2015 related to a shift in our product mix. In addition, Congress recently extended the R&D tax credit law which also contributed to the lower rate.

Net income attributable to the Lannett Company increased 58% to $36.2 million or $0.97 per diluted share from $23.0 million or $0.63 per diluted share for the third quarter of fiscal 2014.

Turning to our results for the first nine months of fiscal 2015 compared with the same period of the prior year. Net sales increased 59% to $307.6 million to $193.2 million. 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 nine month results.

As you may 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 included a nonrecurring pretax charge of $20.1 million related to this contract extension. Gross profit was $234.4 million or 76% of net sales. This compared with gross profit last year of $98.5 million or 51% of net sales. Gross profit excluding the JSP contract renewal charge was $118.6 million or 61% of net sales.

Research and development expense increase to $23.4 million compared with $21.1 million in the same period of the prior year. SG&A expenses increased to $35.6 million compared with $26.6 million. SG&A expenses for the first nine month of fiscal 2015 included acquisition related expenses of $3.2 million. Operating income was $175.5 million compared with $50.7 million dollars. Excluding the JSP contract renewal charge operating income was $70.8 million in the first nine months of last year.

Net income attributable to Lannett Company was $116.0 million or $3.13 per diluted share compared with $33.6 million or $0.97 per diluted share. Adjusted net income which excludes the contract renewal charge was $46.2 million or $1.34 per diluted share for the first nine months of fiscal 2014. Our balance sheet at March 31, 2015, remained strong with cash, cash equivalents and investment securities totaling $225.4 million. After quarter end we completed an amendment to our revolving credit facility which increases our borrowing capacity from $50 million to $120 million with an accordion feature for an additional $30 million.

Turning now to our guidance. Given our strong third quarter performance we have raised our guidance for the full year of fiscal 2015 as follows. Net sales in the range of $403 million to $408 million up from previous guidance of $395 million to $405 million. Gross margin as a percentage of net sales of approximately 75% to 76%, up from 74% to 75%. R&D expense in the range of $30 million to $31 million, up from previous guidance of $29 million to $31 million.

SG&A expense ranging from $51 million to $52 million up from $47 million to $49 million. The full year effective tax rate to be in the range of 34% to 35%, unchanged from previous guidance. And capital expenditures in fiscal 2015 in the range of $30 million to $35 million which includes $4 million to continue the partial fit out of two buildings recently acquired by the Company, revised from previous guidance of $40 million to $50 million.

With respect to our outlook for next fiscal year, we intend to discuss our guidance for fiscal 2016 in more detail on our next conference call. For now we'll provide some preliminary thoughts. We anticipate the percentage increase in revenue to be in the low single digits compared with fiscal 2015 with modest volume growth in sales of our existing products. We are not anticipating any significant price increases in fiscal 2016. We expect fiscal 2016 full year gross margin as a percentage of net sales to be in the low 70s. While we have a deep pipeline including a large number of product applications currently pending at the FDA our expectations do not include sales from these products, nor does our outlook include the benefit of any potential acquisitions or strategic alliances.

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. As expect the (Inaudible) -- excuse me, including gallstone, glaucoma, migraine and thyroid deficiency. As expect Digoxin sales declined compared with sales in the second quarter due to competition. The guidance Marty just provided anticipates sales of Digoxin to be similar in the fourth quarter compared with the third quarter.

As we said, we completed an amendment to our revolving credit facility. The increased credit facility together with our strong balance sheet provides additional financial resources and flexibility to fund our acquisition and our organic growth strategy. Excuse me, I have a bit of a cold today.

On the business development and M&A front we continue to evaluate potential acquisitions and seek out other opportunities for both products and companies. 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 or enhance shareholder value through an acquisition in a tax favorable jurisdiction.

We continue to increase our pipeline. We currently have 20 ANDAs including 5 with Paragraph IV certification pending at the FDA. 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 continue significant investment in R&D.

I would like to address another matter that Lannett fortunately has very little experience in. During the third quarter our Cody Laboratory subsidiary voluntary initiated a limited recall of its C-Topical product due to a mislabeling issue. A small number of bottles were labeled with 10 milliliters when they actually contained 4 milliliter. We believe this a minor issue as use of the product does is not considered to present a health risk and product quality was not effected. We have placed an order for equipment design to prevent this from happening, and in the interim have instituted additional controls. We take product safety very seriously and believe there was no danger to patients.

I want to thank our entire staff for doing an outstanding job, and 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 have. Operator, [Adrian]?

Thank you. (Operator Instructions). And our first question comes from Matt Hewitt from Craig-Hallum Capital. Please go ahead.

Good afternoon gentlemen. Thank you for taking our questions and congratulation on the progress in the quarter.

Thank you, Matt.

It sounds like you kind of address some of the questions I had as far as the pain management. So the C-Topical recall can you quantify what that impact was in the quarter? It was pretty weak relative to the recent history, was that a couple million dollar hit or even greater than that?

Yes, Matt it was $2.4 million, $2.4 million.

Okay. That is helpful. Thank you. Another question you have laid had out some preliminary guidance I guess you should call it for FY2016. What can you do here over the short-term or near-term that would enable you to grow at a faster rate for the full year? Obviously if you get an approval that would help, but is there anything -- and it doesn't sound like there is pricing but is there anything else that could occur in the next couple of quarters that would enable much faster growth during the year barring some acquisition?

No, I'm afraid I don't know what we can do fast in our industry. We are always waiting on some Government bureaucrat to approve. So I don't think there is anything we have in our works that we would say would enhance the growth. Our belief is that there was some feeling that 2016 would we be a down year, and all we're trying to do is point out that we don't expect it to be a down year, but we also are not sitting here saying we're going to have outstanding growth either.

One more for me and then I'll hop back in to queue. A few of your peers have recently been dealing with some pricing issues. A large competitor came back and offered greater rebates in several products with one of the channel partners. I'm curious if you have seen anything on pricing. From my research you guys weren't impacted by this, but have you seen anything where the pricing story over the last couple of years price going up maybe is starting to revert back and we are starting to see pricing come down.

Well, I wouldn't say that is really a change in the business model. While there has been increases most generic if you look at the universe of generic drugs they are all on the decline. You had a handful of products and by handful I certainly don't mean that they are not 10,000 bottles -- excuse me 10,000 drugs out of maybe 100,000 drugs that have price increases. But the number of products that have increases are far smaller than the number of generics that are out there that are reduced in price year after year. So there is always a competition issue we deal with. When someone wants to get market share they use a lower price to gain that market share, sometimes it works, sometimes it just brings the price down in general. So I'm not going to say we're immune from it, but it is the nature of our business and something we have been dealing with for 73 years. And I am the one who has predicted that by December 2016 I tended to believe there wasn't going to be a decline in these opportunities to raise prices. So I'm not surprise that some of that behavior is starting to come back in to the markets.

Okay, great. Thank you very much.

You're welcome.

Your next question comes from John Newman from Canaccord. Please go ahead.

Thanks for taking the question. The question I had is actually in regard to Digoxin. On the last call you talked about the potential concerns regarding one of the API suppliers, but you also pointed out you believed had adequate API supply. So I just wondered if there has been any changes on that?

No, we caution people about things that we learn. We have not had any issues with it ourselves and we don't believe it is going to be in a factor in the market now that we have more time to determine how many of our competitors might be impacted by that. It certainly doesn't appear to be (Inaudible) favorable in terms of any shortages or difficulty getting the product things like that that might give opportunities to those that are in the product. I would say that the Digoxin guidance we have given for this year conservative as it is, is probably spot on.

Okay. And in terms of the looking forward in to your fiscal year 2016 in terms of potential approvals from the FDA, I know that historically you have said that it has been very difficult to try to get a sense as to when approvals might come. But would you say at least that the pattern that you have been seeing from the agency has been more consistent if it is just things are going to take a little bit longer has that been more consistent in terms of the timing or is it still a little bit more variable.

I'm afraid it is still more variable. I try to be the optimist here, that is my nature. But it is very hard to be optimist with the agency because there is really nothing to guide us. We have had occasions in the past where we knew once they were looking at the labeling you might presume that was the final stage of a review. We have instances today where they could be looking at the labeling and not even look at the CMC section of ANDA. So there is really nothing to guide us. We are trying to read the tea leaves at the agency to try to get a handle on how they are going to be evaluating both the pre GDUFA filed ANDAs, the ones that are in the backlog as well as the one that are being filed GDUFA. And there is still no consistent consensus among the industry as to what the times frame will be for any approvals. So I'm afraid I have given up trying to predict anything I'm going to get approved because I've been wrong more than I have been right.

Great, thank you. I'll jump back in to queue.

Okay, thank you.

And our next question comes from Scott Henry from Roth Capital. Please go ahead.

Thank you, and good afternoon guys. Just a couple of questions, I'll start with the 2015 numbers. Looking at your guidance and fiscal Q4 it looks like SG&A should take a notable uptick. Could you give me a sense of what is driving that uptick for Q4 .

Yes, Scott. The increase is primarily driven by what we provided for M&A, merger and acquisition related expenses which is basically consulting and legal expense that is the single largest driver of what is ticking up in the fourth quarter.

Okay. Thank you is that helpful. When I look at the numbers for cardiovascular and gallstone which have almost reversed from a year ago, are those good -- I guess we should expect cardiovascular to continue decline, but how do you feel about that number in the quarter for gallstone? Is that a reasonable proxy at least in the immediate near term?

For gallstone our perspective is that we had a very strong third quarter in gallstone and had one particular customer who bought more than we were expecting. And also as you know with this particular product and this is Ursodiol we have discussed it before there is an active ingredient issue in the industry. But all that being said, we had strong sales of a particular customer in the third quarter we think it might have been related to API supply issue, but we see it right now as a more one off additional sale in our third quarter so we have our fourth quarter outlook more similar now to what we saw historically as our second quarter.

Okay.

So right now we haven't made our fourth quarter look like the third quarter from our a projection perspective.

Okay, thank you. That is helpful. And then on the pain management even if I add in $2.4 million it is still kind of flattish to down. When would you expect to see that segment start to produce more meaningful growth?

We're hoping the fourth quarter and into next year. The recall did set us back a little bit and at the moment we have been back ordering the item as well. So hopefully we'll recover from that in the fourth quarter. But we still haven't made the decision on putting the other ten sales people out there. But we did hire a product manager from the brand world, and we are starting to make some (Inaudible) in to the success of that sales effort that before was let's say lack luster. And again as you know we use the contract sales organization to launch the detail people. So we're still enthusiastic about this but this is new ground for Lannett. We are not a brand company as you go know and it is a learning experience. We do see an increase in revenue coming from this product and we do see a success in this products potential outlook for us. While there has been a little set back with regards to the recall and it was a minor one nevertheless it was a costly one. We do think that the products upward trend is still there.

Okay, great. And the final question, when we think about the pipeline can you talk about maybe any catalyst or events we should be looking at over the next 12-months? Obviously the key products being the Clindamycin and the Cocaine Topical filing or maybe even the Zomig nasal spray P4. I guess what I am really wondering is what should we be focusing on in your pipeline over the next six to 12 months.

I'm always one who doesn't want to predict FDA approval, but I will bring you up to speed, which I (Inaudible) they have already done a pre approval inspection at the contract research lab that did the (Inaudible) testing. They've also recently gone to the firm that will do the packaging for us because this product is sold in a blister pack. So we do know the application is being viewed rather seriously at the agency, so there is a good likelihood that product might be approved. You know my predictions are never good so I don't want to predict. But that is one I would certainly think will be useful for next year. More importantly is the arrangement we have with the Chinese company the HEC Group that we announced and their Sunshine Lake division here in the U.S. They also have had pre approval inspection on one of their key items actual two products that they expect to get approved shortly. So we might get the benefit from that alliance remember we have the exclusive distribution rights for all their filings. And we learned when I recently made the trip to China that they have about 15 ANDAs at the agency some dating back to 2010. So the approval process will start to come through and we may be the beneficiaries of their application pipeline as well. These are products we have never put in our guidance or anything else but now that they have communicated that they did receive a pre approval inspection themselves we are expecting to launch some of there products this year as well. Again these are not in the guidance though because until something is approved we generally don't put in to the guidance.

Okay, great. Thank you for that color and thank you for taking the questions.

You're welcome Scott. Thank you.

Our next questions come from Rohit Vanjani from Oppenheimer. Please go ahead.

Hi, Arthur and Marty. Thanks for taking the questions.

Hi, Rohit.

Did I hear that right on cardiovascular it was $8.5 million versus last quarter of $18.33 million and if that is right can you maybe speak to the dynamics of the market. Is that decrease strictly a function of new competitors because the script data maybe doesn't indicate that. I don't know if there is a lag on the scripts though.

The third quarter was $8.5 million. I'm sorry. You're asking about --

Cardiovascular.

-- cardiovascular, yes.

It was down -- I'm sorry, go ahead.

Down from $21 million last year's third quarter.

I meant quarter-over-quarter it seemed down significantly, is that strictly a function of new competitors because it doesn't really seem to be showing up in the script data that it is down that much.

This change would be -- I mean this is Digoxin, right. And last year, 12 months ago we had our peak in the winter time (Inaudible) market share we peaked out right then and there. (Inaudible).

I'm just speaking to the quarter-over-quarter change, Marty.

Sequentially, sorry. Okay. I thought year-on-year. Okay. Well, that still is pretty much Digoxin.

So what was in the second quarter?

I think it was 16.7.

And now it's 8.5.

Well, if I talk about just Digoxin it is $7 million in the third quarter, so that drop is what we were expecting. We had projections. It was a little bit lower in the quarter than we were expecting. We were $8 million in the each of the third and fourth quarter so we came in at $7 million slightly lower than we were expecting. But (Inaudible) is consistent with what we have been seeing saying.

So you're saying it is strictly a function of a new competitor and that's what driving this.

Competitors and I think you referring to the script data, but as we have said there is always a lag with that information.

Sure.

Because it doesn't capture the whole market that we sell Digoxin into. So we might see the decline in some markets that are not captured in that data, but it is in line with our guidance and what we expected for the year. So we predicted accurately and it is unfortunate that we have extra competition but that's the business we're in.

And the same thing with the thyroid? I mean I thought you had picked up some business maybe it was a onetime deal in the last quarter. Did you lose that business or was it some ad hoc business or was there volume changes there?

No. The customer picked up some additional -- well, they made a small so they picked up some additional customers and then they just placed additional orders in anticipation of what that new customer base might use. So it was just a blip let's say for that quarter, but we haven't lost anything. The business is back to normal, let's say the quarterly numbers, the market, the trend in the script data is all the same. We haven't lost any market share at all.

So this is kind of a good run rate number?

Yes.

And for the guidance for the separate products where you gave I think the $155 million, $60 million and $50 million for Levo, Ursodiol and Digoxin are you still good with those numbers?

Let me go back to thyroid piece. Because -- thyroid we were projecting for the third and fourth quarter we were projecting about $38 million in each quarter, so at $36 million or so it came in $36.5 million, it came in a bit lower than we were expecting. And our own thinking we actually rolled that so call decrease let's say against our expectations we rolled that in to the fourth quarter. So half year on half year sequentially we're just where we expected to be. We thought there was some timing differences in the third quarter and like I said we rolled that in to our fourth quarter. So we are still (Inaudible) $155 million is what you're asking, we are still about that same number on a full year basis as we were projecting three months ago.

And the $60 million and $50 million for Urso and Digoxin still good?

On Digoxin that's still good at $50 million and on Ursodiol because we had such a strong quarter we rolled that into our full year outlook. We have not increased the fourth quarter, but when we were at $60 million previously now we have taken that full year outlook up to $65 million. But again consistent with my comments earlier on this call our fourth quarter if you look sequentially third quarter going into the fourth it drops down fourth quarter again being similar to our second quarter because we're not expecting a repeat of the incremental business, we are not expecting a repeat of what we saw in the third quarter.

Okay. And then the other category I think that was up quarter-over-quarter something like $4 million. What was the strength there?

The strength there -- in the fourth quarter you're saying? I'm sorry.

In this quarter it was 11.4 and last quarter I think it was something 7.9. Just wondering what the quarter-over-quarter strength was in there.

Actually it was --

Baclofen?

Yes, it was Baclofen, yes.

And then the last one for me, I just want to confirm that C-Topical that won't impact the fiscal fourth quarter. That was just a $2.4 million impact for this quarter and it should be right sized going forward?

Yes. I mean the fourth quarter -- we had the fourth quarter. When you do the math you'll see it is about $7.5 million in the fourth quarter which is about our run rate. As you know C-Topical the particular product has fluctuations in the quarters. It can swing a bit, but right now we're projecting $7.4 million in the fourth quarter.

Okay, great. Thanks a bunch for taking the questions.

You're very welcome.

And your next question comes from Elliot Wilbur from Raymond James. Please go ahead.

Thanks, good afternoon. First question for Arthur around some of your earlier commentary on the M&A front. Arthur, you continued to talk about international opportunities, and I'm just wondering if you are leaning that direction or maybe just seeing more idea flow coming internationally and you just think that there's better relative valuations there or it's really just more reflection of your desire to diversify revenue stream, and potentially look for tax arbitrage opportunities? And then, I want to ask a follow-up question for Marty as well and going back to some of the earlier questioning around the sequential increase in SG&A. And obviously, expecting around a $5 million uptick in the fourth quarter. And we certainly know that lawyers and bankers can be quite expensive.

You can say that again.

They don't offer the value that research guys do but.

You're right. You're right, Elliot.

But even if you think about a $500 million M&A transaction with a 1% fee, we're talking about $5 million. I mean, it seems like a lot of money to be spending in particular period on activities, that I would've thought have been going on for some period of time. So I'm sort of -- Marty, if you wouldn't mind, maybe just elaborate on that little bit more. Thanks.

Sure. I don't want to get everybody's hopes up because my colleague, Marty, had told me because he has come from that background, that you could look at 50 deals and do one of them. So clearly, you might say that's exactly the experience we're faced with. But a lot of the time was spent early on for an overseas opportunity. And let's just say even though we didn't close on that as expected, that discussion is ongoing, and some discussions will lead to some product alliances and it possibly might lead to a merger and acquisition of them as well. So that discussion and that effort has not been wasted. And of course, when you're dealing overseas, there's a lot more involved than the typical transactions done here in the U.S. While we were doing that one, we were talking about doing that tuck-in, that small domestic company, that's gone through its due-diligence stages. So we also have been tied up with that one. And we looked at another opportunity that we've talked to you, to the public about. We didn't specify them. So I would say that we've looked between 2 to 4 transactions, some heavily involved with due diligence and some just initial contacts and discussions. So yes, some of the money was spent and no fees were paid per se to any bankers, but there's a considerable amount of fees that are paid to our consultants that help us through the due diligence. Remember, we're not experienced in M&A, so it's not something we could turn to our staff for. And my staff has really stepped up to the plate, and I would now say a quite capable of doing an M&A deal. But we're still leaning and leaning towards outside consultants, which I have to admit they are just as expensive as those bankers.

I'm sorry, the first part of your question was, are we looking overseas? No, we really were not looking overseas for an acquisition. We certainly were looking overseas to do an inversion. And we continue to have confidence that we might be able to find an opportunity there. So we're not giving up on that. Again, as Marty will call it a plain vanilla inversion is the type we are looking at, which is not precluded by any of the activity in Washington back in the fall. So yes, we're looking at inversion. As far as globalizing internationally, no, that was not the emphasis of our Company. It really was domestic. But sometimes you find opportunities that you don't look that are brought to you by a banker and they are a perfect fit. So I would say that the time we spent there may not turn out to be wasted, that maybe actually a closing transaction occurring there 6 months in. But the relationship and the effort probably will turn into at least two alliances of some kind on a product basis. And then, whether it leads to M&A, we'll see. That covered all of your questions, Elliot?

Elliot, are you still there?

Elliot?

We have no further questions. I will now turn the call back to the speakers for final comments.

All right. Well, on the note that we lost Elliot Wilbur, you know how to reach us. We'll be more than happy to continue our discussions. We seem to have lost your connection. So I thank, everybody, for joining us today. We're always available to entertain the questions and look forward to reporting on our continued progress on our next call. Thank you very much, everyone.

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