Lannett Company Inc (LCI) 2016 Q2 法說會逐字稿

Welcome to the Lannett Company fiscal 2016 second quarter financial results conference call. My name is Eric, I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Robert Jaffe. Robert, you may begin.

Thanks Eric. Good afternoon everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2016 second quarter financial results. On the call today are Arthur Bedrosian, Chief Executive Officer, Marty Galvan, Chief Financial Officer, and John Abt, a member of the leadership team overseeing the KU integration. 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, certain aspects of the Company's future, and actual results could differ materially from those stated or implied. In addition, during the course of this call we may refer to non-GAAP financial measures that are not prepared in accordance with US Generally Accepted Accounting Principles, and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Lannett's press release announcing its full fiscal 2016 second quarter financial results, and the Company's reasons for including those non-GAAP financial measures in the earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in our earnings press release issued earlier today.

This afternoon Arthur will provide a brief overview of the quarter, then Marty will discuss the financial results in more detail, including the Company's guidance for the full fiscal year 2016, followed by Arthur and John's concluding remarks. We will then open the call for questions. With that said, I will now turn the call every to Arthur Bedrosian. Arthur.

Thanks Robert. Good afternoon everyone. Today we are reporting full financial results for our fiscal 2016 second quarter. After providing preliminary results for the quarter last week. As a reminder, we completed the acquisition of Kremers Urban Pharmaceuticals on November 25th. Accordingly our fiscal 2016 second quarter results include the operations of KU since that date. For the fiscal 2016 second quarter net sales were $127 million, GAAP net income was $13.5 million, equal to $0.36 per diluted share, and adjusted net income was $35.4 million, equal to $0.95 per diluted share. Both GAAP and adjusted earnings per share came in at the upper end of the range we provided last week. For a comparison in the prior year second quarter, which was an exceptionally good quarter, we reported net sales of $115 million, GAAP net income of $44.8 million, or $1.21 per diluted share, and adjusted net income of $46.1 million, or $1.24 per diluted share. With that overview I'll turn the call over to Marty to discuss our financial results in more detail. Marty.

Thank you Arthur, and good afternoon everyone. For the fiscal 2016 second quarter, net sales increased 11% to $127.1 million from $114.8 million in last year's second quarter. The recently completed quarter included KU net sales of $26.1 million. Net sales for our largest product category thyroid deficiency were $37.4 million, or 29% of our total net sales. Our two other largest categories, gallstone and cardiovascular had net sales of $18.7 million and $13.1 million respectively, representing 15% and 10% of our total net sales. As for net sales of our remaining product categories, pain management was $8.1 million, glaucoma was $6.5 million, migraine was $5.7 million, antibiotic was $2.8 million, and muscle relaxant was $1.4 million.

As a result of the KU acquisition, we had a partial quarter of sales from several new product categories. These categories and their sales were gastrointestinal $8.6 million, central nervous system $6.1 million, urinary $3.4 million, and respiratory $1.4 million. Net sales of the remaining product categories of the combined Company represented $11.6 million. In addition, we recorded $2.3 million of contract manufacturing revenues. Continuing with the remainder of the income statement and for completeness and comparative purposes, I will first provide the non-GAAP adjusted amounts for gross profit, SG&A, operating income, tax expense, and net income. And then provide GAAP amounts. The differences between the non-GAAP and GAAP amounts primarily include expenses related to the KU acquisition. Adjusted net income excludes the after-tax effect of these items.

Adjusted gross profit was $81.0 million, or 64% of net sales, compared with $87.2 million, or 76% of net sales. Adjusted SG&A was $11.6 million, compared with $10.8 million. Adjusted operating income was $60.4 million, compared with $68.6 million. Adjusted tax expense was $16.8 million compared with $23.1 million. The adjusted tax rate for the second quarter was approximately 32%, primarily due to the retroactive effect of Research & Development credits related to recently enacted tax law. We expect our adjusted tax rate for the second half of fiscal 2016 to be higher than that for the first half rate of 33%, in order to arrive at the overall full year guided rate of 34% to 35%. Adjusted net income attributable to Lannett Company was $35.4 million, or $0.95 per diluted share, compared with $46.1 million, or $1.24 per diluted share.

Now I'll provide the GAAP amounts. Gross profit was $71.6 million, or 56% of net sales, compared with $87.2 million, or 76% of net sales. R&D expenses increased to $9.1 million from $7.8 million in the same quarter of the prior year. SG&A expenses increased to $14.7 million from $10.8 million. The increase was primarily attributable to integration costs. Acquisition related expenses were $17.6 million, compared with $2 million in the second quarter of last year. Operating income was $30.3 million, compared with $66.5 million. Interest expense was $11.8 million, compared with $73,000 in last year's second quarter. Net income attributable to Lannett Company was $13.5 million, or $0.36 per diluted share, compared with $44.8 million, or $1.21 per diluted share.

Now our balance sheet. At the end of the most recent quarter it has grown significantly compared with the previous periods, due to the addition of KU's operations. At December 31, 2015, cash, cash equivalents and investment securities totaled $192.8 million, and total long term debt outstanding was $1.16 billion, reflecting the debt used to finance the KU acquisition. As we have said previously, our primary objective is to use our free cash flow to de-lever as quickly as possible.

Now turning to our guidance, before I begin I would like to remind everyone that our guidance includes amounts that are adjusted to exclude among others, the effects of amortization of purchased intangibles, acquisition-related expenses, and other purchase accounting entries, noncash interest expense, as well as certain other items considered unusual or non-recurring in nature. Also, our guidance is based on a partial year of contribution from KU.

With that said for the 2016 full year, we are reiterating the guidance we provided last week. Net sales in the range of $585 million to $595 million, adjusted gross margin as a percentage of net sales of approximately 62% to 63%, adjusted R&D expense in the range of $49 million to $51 million, adjusted SG&A expense ranging from $59 million to $61 million. Adjusted interest expense in the range of $50 million to $53 million. The adjusted effective tax rate for the full year in the range of 34% to 35%. And capital expenditures in fiscal 2016 in the range of $35 million to $45 million. Regarding the phasing of the quarters in the second half of fiscal 2016 profitability is skewed to the fourth quarter, due to modestly higher net sales and lower operating and interest expenses in the fourth quarter compared with the third quarter.

Our guidance for interest expense includes a benefit from the potential changes we are contemplating by refinancing a portion of our debt, primarily our 12% bonds. We have assumed a reduction in the overall effective interest rate by 1.25% on our total debt beginning in the fourth quarter of fiscal 2016. With regard to other assumptions in our guidance, our full year guidance includes approximately $27 million of cost savings. Arthur will discuss our cost savings and restructuring plans in more detail shortly. And we are not anticipating any significant price increases in fiscal 2016. With that, I will now turn the call back over to Arthur.

Thanks Marty. We remain positive about the KU acquisition and are excited about the opportunities ahead of us. The combined Company markets more than 100 products, has 37 ANDAs pending at the Agency, and another 51 product candidates in various stages of development. Our plans call for continued significant investments in Research & Development. Earlier this week we announced a cost savings and restructuring plan to streamline our operations, improve efficiencies, and significantly reduce costs. I will now turn the call over to John to discuss the plan in more detail. John.

Thank you Arthur. Our integration restructuring efforts focus on the categories of corporate offices, research and development, distribution, and operations. We have already taken action with the closing of our KU corporate offices in Princeton, and have initiated activities to transfer our manufacturing and packaging operations from our Philadelphia sites to our Seymour, Indiana facility. We expect to complete the transfer of our manufacturing operations within three years, with two-thirds of the volume moved to Seymour by the end of calendar 2017. Our plan includes the ultimate sale or closure of our Philadelphia production sites. We expect to complete the move of our packaging between June and September of this year. We accelerated this move to be able to capitalize on synergies earlier than our original plan called for.

We are consolidating our solid dose Research & Development function in the Philadelphia area, in order to capitalize on our existing product development strengths and the talent rich resources of the Northeast. Additionally this will ensure close coordination with our corporate resources. We have adopted a dual site distribution model using our existing Kremers Urban and Lannett distribution facilities, that will optimize our efficiency and cost structure while minimizing our business risk. The outcome of this plan is a sustainable, scalable, strong foundation that supports continued growth, leverages the combined Company's assets, lowers our cost structures, and enhances our competitive position. The impact of these efforts are an immediate reduction of approximately 10% of our workforce that affects all of the above areas. Additional reductions over the next three years, primarily in operations, will decrease our headcount by another 10%, for a total reduction of approximately 20% of our current workforce. In the 12 months following the close of the KU acquisition, we expect to generate approximately $40 million of cost reductions, which includes $27 million of cost savings in fiscal 2016. The $40 million of cost savings is primarily comprised of right-sizing our R&D function, which we estimate will contribute approximately $28 million in savings.

We currently estimate that the plan will generate annualized synergies of approximately $50 million by the end of fiscal 2018, and achieve an ultimate run-rate of approximately $65 million in savings by fiscal 2020. Approximately half of the final $65 million in savings is expected to come from the consolidation of operations. I will now turn the call back to Arthur.

Thank you John. With the overview we are now are going to turn to questions shortly, but I would like to point out that we continue to meet with customers to replace the revenues lost as a result of a key customer transitioning its purchased in certain KU product lines. I am pleased to report that a portion of those revenues have been brought back to us. We have purchase orders coming in, and certainly the merchandise is being invoiced out as we speak. So we aren't concerned that we will be able to bring back all of the revenue back and are working diligently to get to that point. I will now turn it over to questions, if anyone has any questions to ask us. Operator.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Elliott Wilbur is on the line. Please go ahead.

Thanks. Good afternoon. Just real quickly. I want to go back to some of your commentary from the last call, the update call, regarding I believe the Roxy. Arthur, you had talked about being able to secure supply certainty on that product, with one of your largest customers, but it seems to suggest that there may have been pricing concessions there, or pricing conditions in the marketplace may not have been what you originally expected. But then you also basically reiterated your guidance for the full year in terms of sales expectations. So I just want to try and reconcile that? I don't know if you were expecting to do better, and now you're basically expecting to do what you had originally expected, or these was maybe some misinterpretation around some of your commentary in the legal market on that customer in particular?

Well, there was a concession made on price in order to secure a three year commitment, so that's accurate. But remember in the marketplace we're also gaining market share every year as well. So sometimes when we anticipate what's going to happen if we know we are giving a price reduction, we can then predict that the revenue will reflect that going forward. What we don't know is that there might be offsetting purchasing going on in the market, or more transitioning of later brands products to the generic, of which we pick up a good portion of that. So I believe that is where the difference is. We're doing our best estimate what the future revenues will be, and again, we try to be very conservative, so maybe in this case we were being too conservative, and we're finding that the reduction in revenue because of the slightly lower price than we gave in the way of a concession in exchange for the securing of the business for a period of time wasn't going to be offset, and fortunately it was. So I hope that clears it up. Just a matter of forecasting you could say, and being too conservative.

Okay. Then an additional follow-up question on some of the updated synergy estimates that have been provided, particularly with respect to the long-term I guess specifically with regard to R&D. I mean obviously $28 million is a fairly big chunk of R&D spend coming out of the combined companies spending base. Just wondering at this point, if there's been any material impact to the pipeline as a result of these updated or further rationalization activities?

So this is John, and let me state that when we looked at the synergies and the right-sizing of our R&D program ,as we brought these two very large R&D development efforts together, one of the things we focused on was ensuring that we were pursuing valuable products, and products that were going to provide us with both the high probability of return and strong revenue. The types of projects that we discontinued were low value projects, or projects that we did not see a significant value or opportunity for years to come beyond 2020. So as a result we don't anticipate that impacting any of our forward forecasts.

Elliot, this is Marty, the other piece I'll add is as we said last week, the KU operation is running at a certain level of R&D expense on an annual basis. Some of the synergies we speak of were planned expenses by KU, beyond what run-rate would lead one to. So everything John said is correct, but in addition the numbers might be a little bit misleading to the extent to which some of that synergy again that we speak of, is eliminating planned expenses that were never actually triggered, but certainly were in the budget for KU for these months.

Okay. Thanks for the additional clarification, Marty. Then one last question for Arthur. Obviously in the last couple of weeks you have had extensive discussions with both internal and external stakeholders, and members of the financial community, I guess in light of the retreat in your equity market value to put it mildly, do you think that based on these discussions, there were already significant misperceptions or misconceptions around this acquisition, its integration for your base business that should be addressed at this point?

I would say I agree with what you are saying. There certainly is a misconception. You can also argue that maybe there's a bit of a gambling going on, that we are unable to deal with this. It's sad, some of the people that encourage us to do acquisitions seem to be the ones that don't feel comfortable after you do them, that you're capable of doing the acquisition. Clearly we got caught up in a perfect storm with regards to the interest rates, and even getting the deal concluded. Instead of getting credit for getting the deal done, everybody is talking now, well maybe you shouldn't have done the deal in the first place. We have our grow the business. We have to do what we can for the long-term benefit of the shareholders. We can't look at the incremental quarterly results all of the time, because we realize that in this business, you either grow or you go out of business.

Our goal is to grow the Company. And this opportunity came along to grow it. The integration we have been trying to respond to many people know how aggressive we're attempting to do the integration, and if they don't believe it, they are just going to have to wait around and see that we're going to be right. It's not brain surgery we're doing here, but integration is a skill, and we brought people onboard the Company that have the skill. Both as consultants and as employees. Two of my officers have a lot of experience in integration. I don't think the Street is giving us any credit for that, because if they knew the background of these individuals, they would realize they have done a lot of integration in their previous jobs. But nevertheless there is this feeling out there that we took on too much debt, you took on too big a company, and you're not going to succeed. Well, I can't do anything about people having those feelings, except to say, stay tuned because we're not stopping, we're not not growing.

We're being very focused on how we're doing the integration. We're not wasting money. We're trying to avoid opportunities in R&D that don't appear to be opportunities from the day they were started, because both companies including Lannett always have a large R&D opportunity, and at times you look at the future of those projects, and you say you know something there's too many people projected to be in this market, and you drop some of those products. So what we're doing now with the merger of the two companies is just taking a harder look at everybody's product line, including our own. Also, we touched on a problem that in our guidance for Lannett, some shareholders said well there was a bit of a shortfall in your own numbers without the acquisition.

Well, that is typical what happens in our business. We were expecting to do $20 million on one particular drug. We brought it back to the market because there was a shortage of the product, so it was not only an opportunity to jump in when people were looking for the product, but also get some higher margins on it. Lo and behold, the company that wasn't able to supply was able to solve their problems faster than we anticipated, so instead of doing $20 million on that drug, if I'm not correct Marty we did $6 million, we projected to do $6 million instead, so there was some lost revenue there. But that lost revenue wasn't something that we lost that we had. It was revenue we were projecting to get, but we didn't get because of the circumstances of the changing market. But I think that everybody perceived that is you lost business. But clearly there was more of a decline there, but that was not a big surprise. We thought we would hold at 30% market share. We seem to be around 28. So we lost a little bit there, but the rest of the product line is growing, the rest of the revenue is growing, and in some cases where we thought we may do less on some of our key items, we're doing bigger revenue streams from them, seeing more growth in those products. So I really think it's just a combination of people think that we're not going to be able to do this. We're hoping with today's discussion and explaining, and having John on the call, because he is involved in the integration process, that this is well in control, and on the capable hand and supervised by capable outside consultants, as well as Marty and myself. So I'm very comfortable everything we're saying we're going to do, we will achieve. I hope that answers the questions, because I don't know what else to do, but tell people to stay tuned. I don't see any reasons for us not to be optimistic about all of the work that we're undertaking here.

All right. Thank you, Arthur.

Alright. Thank you. And the next question comes from Gregg Gilbert. Please go ahead.

Yes. Hi Arthur. It's related to what you were just talking about, putting aside your market cap and what the market is thinking short-term, but you have described pricing pressures that you foresee, which is not a new theme, the consolidation of the customer base as it is now, and should it continue obviously making things difficult, and it's obviously hard to find fairly valued deals that are easy to integrate. So all of that being said, do you think for a company like Lannett, one needs to keep all options open, or are you very focused on fact that your equity value is, there's a disconnect between your equity value and what you believe the value to be? I guess the short question is, is it time to explore all strategic objections, or is it premature to do so? And then I have a follow-up.

Well, I'll say it would be premature to do that, because if you look at Lannett, there was a time we were overvalued, now we're undervalued. The worst thing we could do is just though up our hands, because there's nothing wrong here. We will prove to the Street that we know what we are doing, we will do the synergies, we will do the consolidation. There are some painful decisions we have to make, and some of them were well known before we closed on the transaction, that when we acquired them we would have to make some very strategic changes in our operation, but we also know that we have outgrown our facilities, and the question was, do we expand into that [Ireles] buildings we talked about expanding into, which was one of our options, but it was going to take two years and $180 million before you could even get FDA to approve the site.

It wasn't really an option for a growing company, and since we wanted to not sell ourselves and we wanted to grow, expansion through acquisition was one of the options, and lo and behold this opportunity came up. We still like the opportunity. We still think together we're a better company, a stronger, better facility. I mean they operate out of a facility that's ten times the size of the one we operate out of, and we are almost 2.5 half times the number of products we were making, but the FDA doesn't allow you to continue with old antiquated facilities. They want you up to meet new requirements, which would have meant that if we didn't step up to the plate and do something, then the Company would have lost value. I have to look at this from a shareholder's point of view of which I'm one, and make sure that what I'm doing to grow this Company is going to succeed seed.

Later on when I prove to the naysayers that we're able to do the integration, and then some, I would be more than happy to consider strategic options then but I'm in no mood to do that now. Right now the goal is let's get this job done, prove to the Street we can do it, so that at least the value will go up to the average, but all of pharma is down, one of the biggest ones I am shocked about has a $340 offer on the table from a very large pharma, and that stock trades at $70 discount to that price. I can't explain the behavior in the marketplace, why pharma is under attack right now, other than the politicians throwing stones at our industry, an industry that prevents disease and cures diseases, but it's a cyclical thing. Oil is up, oil is down. We were up, now we're down, as an industry it's not just Lannett stock that suffered.

Sure.

So to my credit, there's no time to sit there and circle the wagons. We're going to go out there, and take on all of the comers.

Sure. Once you nailed this opportunity down, and the Street believes what they believe, let's say a few quarters from now, is it totally an organic story from there, or do you continue to look for ways to diversify and get bigger, in a world that's not too kind to small generic-only companies, regardless of Wall Street's sort of short-term temperament?

Well, right now we're still going down that path of looking at our positions, and some other ones that have come our way that we have previously looked at, so nothing has been cast aside, and we haven't turned anything down. We're certainly going to be somewhat of a challenge, because when you have the debt load that we have, you can't sit there and be oblivious to it, so one of our goals is to bring down the debt, and to look at acquisitions that help bring down that debt as well. That add value to the Company itself. So we're continuing down that path. We haven't stopped talking to any of the ones we've been in discussions with, and including one of the ones that we looked at a few years ago, that we didn't do a deal with. So I would say that we're looking at organic growth, but that's not the way to grow in this industry. You do have to do acquisitions, and we just have to bide our time, when they're willing to go back into our industry stocks, and look at us as a growth industry. Healthcare is one of those industries that doesn't suffer from seasonality, it doesn't suffer from a lack of patients, the demographics are favorable to us, especially for generic companies. There's no reason for our earnings to be down but it is, and Marty and I will do something about it on Friday.

Let me ask you one more question somewhat unrelated. It's well known that Noramco might change hands. Do you have a view on what that does, if anything, to the structure of the controlled substance API market, and what you're hopeful about?

No, but if you really look at that market, it is a very attractive market. Everybody now wants to go there. We started looking at it in 2005, of course Noramco has been at it a long time, now about over 100 years, but I'm saying as an industry, a lot of people are showing interest in that area all of a sudden. So it only just supports what we have been saying we wanted to do all along. In the case of Johnson & Johnson, it doesn't have the value it had to them originally, because you remember when they owned the McNeil labs and they had the Tylenol and Codeines, they probably had a vertical integration opportunity for themselves, and as these products diminished in terms of importance to J&J, I can see them wanting to divest that subsidiary at this point, but there's no doubt in my mind that someone is going to come along and grab it, because it is a valuable asset, and the growth in the controlled drugs industry is growing dramatically, and more importantly than anything else, there are more patents that appear in that area, because of the abuse to turn technology, so it is a growth area helping pharma, or are patent products. All of those things bode well for Noramco, whoever buys it, as well as for us with our subsidiary.

Thanks a lot.

You are welcome. Next, Scott Henry. Please go ahead.

Thank you. Arthur, there's been a lot of macro talk. I'm going to try to turn that around, and focus a little more on the Lannett specific company business model, but first, I want to make sure I have a couple of categories correct. Could you repeat, Marty, thyroid and cardiovascular?

Sure. Yes. Sure, Scott. So thyroid is $37 million, 432 or $37.4 million, cardiovascular is $13.1 million.

Okay. And cardiovascular $13.1 million is a pretty big number. Any thoughts on that? I'm guessing some ordering patterns. Should I expect that to go down going forward sequentially?

Yes. When the cardiovascular category is one that sees the impact of the KU product line.

Okay so that is inclusive of some of the KU products?

Correct. Correct.

So should I think about that $13.1 million as a kind of flattish category going forward? Or maybe even grow as it gets more?

Where it gets a little bit more complicated is that $13 million only includes a partial quarter of sales, so we have to give you some other material to work with here probably. Let's put it this way. Digoxin, we often get into this discussion anyway, so Digoxin in the quarter was about $6.5 million, which essentially it's down significantly versus last year, which was expected, right? We have talked about that all along here. So the remaining of that category is there's also one other Lannett cardiovascular product, a smallish one. The rest of the $13.1 million is the KU product line. But the math that you can play with to get a run-rate, I would say is you know Digoxin, well we have talked about that for the full year, so you can come up with a good reasonable run-rate for Digoxin, for the KU acquisition products, you know the math would pretty much just say that okay, we had about five weeks of business in cardiovascular in KU, and you could just extrapolate with that number, and come up with a quarterly number for now as your run-rate.

Okay. That's very helpful. Just knowing that KU is in there explains a lot. Keeping it on the categories, you have given us these new 4 KU categories, and the natural tendency is just to take that number and multiply it by three, and that would give me a sense of what the run-rate is for Q3.

Scott.

Are there any unique situations there?

Well, first off, again that's just five weeks of business there.

So that's what I'm saying, if I treat that as a month, the next quarter has three months so I multiply it by three. But obviously there may be some noise, too?

Yes. A little bit of noise. And then as far as using these, come up with a quarterly number for these new categories using that for the rest of the year you're saying?

Well, just trying to gets a quarterly run-rate first? It will work itself into it.

Quarterly, yes, as we just said.

Okay. Yes. I think you answered my question that there were not any major deviations that I should be factoring in. There will be some noise.

I would say correct.

Okay. Shifting gears maybe a question for you, Arthur. I know you ever got the expensive 12% debt out there, but you're also sitting on $192 million of cash. The question is, how much of that cash do you need for working capital reasons, and can you deploy some of that excess cash just to pay down that debt? I mean that would seem to be the simplest adjustment to your capital structure?

I'm going to let Marty answer that, because it doesn't take down all the of debt. You realize that? It's $250 million, and we only have $192 million.

But it helps.

Yes. But you don't want to leave yourself without any money, because who is lending money to the pharma industry today? You tell me.

You don't have it down in partial form yet right?

So the certainly one of the, Scott to answer your question, in the last call and it was in our prepared remarks this time around, we have retained a couple of high level consultants to work with us on this, and yes, you might say just take some of the cash and pay down that 12% bond. There are restrictions on partial payments. Another challenge is within the paperwork, but then on the other hand at the end of the day we kind of say to ourselves, at least anything is negotiable so our plan and what we are working on currently, is with these couple of advisors what is possible to essentially get to the goal as you described it, to be able to take down some of that 12% bond. And cash as far as what we need for working capital, yes, we are going through that exercise right now to say okay. What is a normalized run rate that we would need to have cash-on-hand, then seeing where we go from there. So yes, these are all of the opportunities that we're currently exploring.

Okay. Thank you. And the final question on the ANDA pipeline, we are starting to see companies talk about action dates for responses on ANDAs pending at the Agency. Can you talk about if you have any recent action dates, where you have heard back, or do you have any action dates coming up? Just trying to get a sense of that ANDA pipeline, and is there any visibility on it?

We do have some. We do have some action dates and we are getting some correspondence from the Agency, unlike in the past certainly, so there is some improvement in that area, and some of the action dates are with the deficiency notices or the requests are somewhat challenging because they give you ten days to respond. So we're in the middle of doing it, the integration and consolidating and moving businesses around, let alone trying to get all of that done, but we are doing it. So yes, there is some improvement I would see with the Agency, and we are expecting to get a number of approvals on the KU side between now and June 30th. Somewhere in the neighborhood of 7 to 8 ANDAs should be approved, but I say that tongue in cheek in a way, because we're also expecting one for ourselves in January, and it's already February 3rd, but we are expecting that one any day now, so I hate predicting these things because I never get it right, but yes, there are some opportunities in front of us going through to the end of our fiscal year, with regards to the FDA and the action letters. But what I will do is I will get that information and get it to you separately from my regulatory department.

Okay. Thank you for the color on that, Arthur.

Okay. Thanks.

Our next question comes from Matt Hewitt. Please go ahead.

Good afternoon, gentlemen. A couple of questions regarding the pipeline I guess for me. You did some ration, or your are going to be doing some rationalization of the R&D programs. How does the pain management area your targets in pain management, you have previously talked about some pretty big goals to beef up that product category over the next five or six years. Has that changed, or has at that timeline pushed out given the KU acquisition?

No, no. That is not pushed out because the KU acquisition gave us more opportunities for the supply of our own raw material. I would say that some of the improvements that we're making at Cody are very exciting. For example when we first worked on one of the raw materials, we were in a situation where I could buy the raw material in the market for roughly the same price as I could make it. After some improvements in the technology we now have a raw material that we can bring to Lannett at a much cheaper rate than if we have to buy it on the outside. And one of the advantages Cody has is it's not stuck with antiquated processes. So Cody being the new kid on the block is actually making some very innovative changes to the process, finding more economical ways to make the extraction of some of these opiates, so that it will benefit us going forward.

That is really on full steam. We have [NASDA] filed, drug meds files at the Agency, the hope is we will be converting some of the products that we have at the Agency in dosage forms, to use the raw material that Cody makes, so that plan is still moving ahead. And we are doing some more research on the expansion of that site as well, because we realize that as this Company becomes more successful in supplying raw material, we need to be more focused and accurate on what our needs will be going forward, so we right-sized the expansion opportunity there. I don't want to build something that's too big for my needs, and I don't want to build something that's too small, so we're doing a lot of research there, but it's not been interfered with, with regards to the work we did for KU. Remember the two additional offices that joined the Company, that have the integration background are not integrating Cody (lapse). They're integrating the KU acquisition, they have integrated the Silarx one, granted Silarx was a smaller one, and somewhat easier to deal with. So we were able to do all of those things at the same time, and nothing has been dropped in the way of any of our goals that we have spoken about.

Okay. Well that's great, and it actually leads into my second question. It sounds like you have got the one Lannett drug that could be approved any day. Sounds like you could have 7 to 8 approved by June from the KU and the portfolio. Have you set a target, or is there something still in the works, but have you set a target of number of ANDAs that you anticipate filing on any given year to kind of backfill that pipeline? I know Silarx provided you some incremental capacity that you had been lacking, I would think that KU does the same. What type of goals are you anticipating setting on the ANDA submission side?

Okay. This is John, and I have two responses to that. The first response is, when we looked at combining our two R&D programs and right-sizing it, our first focus was on getting the most out of what we already had filed. We wanted to make sure that where we have our money invested, that get a return on that by focusing as Arthur pointed out, responding quickly to the action dates that are now being provided to us, and launching these products so that we can get a return on that. In addition to that, we do have an active R&D program that is constantly looking for new opportunities, whether it be in the area of P4 challenges, or whatever the case may be. So I would say yes, we don't have a specific magic number. I think it would be foolish to say 20 for the sake of 20, because we want to make sure that we're picking the right products that fit our strategy, that give us the appropriate returns. So yes, we will be looking at adding to that, in addition to what we have in our pipeline right now.

Alright. Thank you.

You are welcome.

Next question comes from Andrew Finkelstein. Please go ahead.

Hi. Thanks for taking the question. Could you just address anything else about the pipeline in terms of what can give some visibility, as we think out to the pipeline for KU acquisition? The detail in the 7 to 8 this year is helpful, but you talked in more detail about for fiscal 2017, having $50 million to $60 million of revenue. What's in there and for these KU products you expect to get approved, are you going to be ready to manufacture and launch immediately on approval, and how does that relate to the guidance you gave in terms of the revenue from launches in your fiscal 2016 guidance? Thanks.

Well, before Marty jumps in because he might have an answer or some addition, we never generally talk about a launch, and putting that in our guidance, because with FDA you never know what you're going to get the product. So it's hard to say sit there and say, well I will have it in May, so I go ahead and start manufacturing in March so that I have the product ready at launch. Because sometimes you won't get it until the fall, and then you have materials sitting around with an expiration date, or they might make a last minute change to the labeling. So we generally don't do that, but I do believe that there was one product in our guidance if I'm not mistaken. Do you want to comment on that.

Sure. We kind of touched on this last week, too. So yes, in our fiscal 2016 there are two products that are in our fourth quarter and in total there were about $9 million, Andrew.

Terrific. And then on C-Topical only since last week but any updates in terms of meeting with FDA ,and the promotional launch?

Yes. Well, we're waiting to go hear back from the FDA, so that is not unusual, setting up meetings doesn't happen overnight. There are a lot of people they have to get together there, on their side. We're comfortable with the position where we are, and we certainly want to show the enforcement, the compliance side of FDA, where we are with the study. We are cooperating with the FDA with regards to the pediatric study, because remember we're dealing with two different parts of the Agency.

The preliminary investigation into the drug application we're working on, that now will through pediatric studies, we are dealing with one part of the Agency. The compliance side doesn't always know what's going on. So they're the ones that responded to the citizen's petition. An answer we tended to expect, but look, you have to explore all of your options with FDA, otherwise you get chastised for not doing that. So we weren't expecting a positive response, but they said you need to go through the action of requesting it anyway. Now we have the request in to meet with the Agency. That meeting will really involve our consultants to bring them up so speed with where we are on the Phase III study. We will certainly point out to the Agency that our study is further along, and moving faster than a typical Phase III, even though we have certainly admitted that we have been a little bit late with the study ourselves, partly our fault, partly the fault of our outside firms doing the recruiting, the clinical lab that's recruiting the patients. It's a 600 patient study which is quite unusual for a 505(b)(2) application.

But nevertheless, on the scheme of things in looking at comparative Phase III studies, our study is moving along faster than the typical study would do. Those would be the details we would provide to the FDA so that they know, the compliance people will know, that we're moving diligently and the application date for filing will be given to them, and then we'll be able to continue the pediatric studies as well, because I know that's being developed in terms of the protocol that we're going to use for the pediatrics. And of course that will mean recruiting young people for that portion of the test. That is a new requirement FPA wants done with all of the drugs. They want pediatric studies done, so that there's a dose available for children under 18, I believe is the pediatric age. Over 12, and under 18. So all that's being done and moving forward.

And on the commercial launch or the promotional launch?

We had that meeting on Tuesday, yesterday morning. I should remember. I was there, but I was out of town as well after that meeting. That started we have about 14 people. At the last minute two of the candidates decided to not join us, which is a big surprising at the moment you invited the sales meeting they decide they don't want to accept the position, but we do now have 14 people who will be on the road, enthusiastic senior executives, when I say senior I'm not talking about their age, but we're not talking about newbies. These are people have been detailing products, and they are experienced people, they know the space. So we're pretty comfortable that we will have say better result than we did when we used the CSO. And my compliments to Craig who is running that department for us. He was previously a product manager in this industry, as well as I believe a detail person himself. So there's a little more organization behind it. We're fully supporting it, and we're not relying on a third-party, who just didn't perform for us. So we're comfortable that this product will meet his projections. Yes, they are a little aggressive, his projections. But I expect them to be, he is a salesperson. I don't expect hi, to be President. I do feel that after meeting all of the people there, their enthusiasm for the product, their desire for more information from the clinical studies that they could share with the physicians was very interesting, because they realize that there's a lot of physicians that don't understand the value of this product. So we're very comfortable that this will do well under our supervision, as opposed to outsourcing it.

Alright. Thanks very much.

You are welcome.

One moment while I gather questions. The next question comes from Corey Davis. Please go ahead.

Thanks very much. I just have one question, and trying to get a sense for how concentrated your business is, if you're willing to disclose this on a pro forma basis. Can you breakdown the types and numbers of measures that you sell to, and something like 90% of your business goes to 5 or whatever the number is?

Well, if you look at everybody's 10-K to be frank because this question comes up, I kind of challenge all of you to look at all of the generic companies for example, and then look at their top customers in their 10-K, and it's all the same customers. In the marketplace you have a number of giants, and if you help the giants you essentially have a great part of the market. Those giants are Walgreens and CVS on the retail side, and I am presuming that Rite-Aid as part of Walgreens for the moment, I am not excluding them, but otherwise you would have three, but you really have the two big ones, and then you certainly have the mail order firms, and you have the three big O center. Commercial, Bergen, Cardinal, and McKesson really make up the bulk of the business with the chains, and a couple of mail orders. So out of let's say 70 customers, your top 5 probably are 80% of the volume for everybody, and then you have all of the rest. It's no different for us than anybody else. This question came up, and someone actually did that and said you know, you are right. All of you report to the same top five customers.

So nothing is different for us. It's important that we do a good job in servicing them, because they have choices obviously. We are one of the better suppliers, so from our point of view and our customers, they want to do business with Lannett, because we don't have recalls every week, we don't have [importer leads] every week, we supply the products promptly, we don't back order. That's important because the bigger you are as a customer, the more demand for products you have, and you can't tell a consumer I am sorry I can't fill your prescription today. Go next door. So they really need vendors like Lannett, and that's one of our goals to continue to be a good supplier, carry good inventories as we have done, and pick up market share because we're a good supplier. We're still on a growth trend, and KU just adds to that, and certainly gives my sales people more things to sell. We now have 100 products to offer the marketplace. I hopefully see going into our new fiscal year starting July, that all of those things are in place, that everybody has familiarity with all of the products, we cross-pollinate amongst our customers, or they're buying the KU and Lannett products, and vice versa, so that we can see that growth going forward, and any other acquisition or products that launches that we get, will all add to that growth. I mean we have a really bright future ahead of us, so I don't know what else to tell you.

Sorry. I lied. I have one more. Is your biggest product.

You almost never lie. But I can't lie.

Is your biggest product this year going to be your most profitable product?

I will let Marty answer that. Our biggest product.

In revenue terms, going to be your most profitable product?

Most profitable in terms of dollars I assume you mean, Corey?

Yes.

Well, the lead, Levothyroxine is our largest product. The gross margin on the product is above 50%. We have other products that have a higher percentage of gross margin, but they're lower in dollars.

I see. Okay. Yes. I should have said percentage-wise?

Okay. Well, percentage-wise, I mean we kind of speak about this, it would probably be Ursodiol is our most profitable product right now from a gross margin perspective. It had been the story, our big three on the Lannett side of the house, it's been Levothyroxine, Digoxin, and Ursodiol. Levo has held at the higher levels now that we have seen for over the last two years now, meanwhile Digoxin has kind of peaked and now coming back down, as there's other manufacturers in that segment, and meanwhile since what has happened is that as Digoxin has been coming down, that decrease has been pretty much offset by an increase in Ursodiol, which Ursodiol's outlook right now continues to be strong.

Right. Okay. That's great. Thank you.

Thank you.

Thank you.

And our next question comes from Rohit Vanjani. Please go ahead.

Hey Arthur and Marty. Thanks for taking the questions. I missed what you said before. You had mentioned a product last week that was with some luck could get approval this week. Was that your answer to Scott that where you had an action date at the end of January, and now February 3 and you haven't heard from the FDA?

That is correct.

Okay. And then were there any other LCI reporting segments besides cardiovascular that now include KU, Marty? So for migraine, for glaucoma, for gallstone prevention, for thyroid, for antibiotic, for pain management. Was there something else where KU was dumped in, just like with cardiovascular?

I'm just checking. I believe that was the only one. And other than we have in the other category. We have some KU in there, but a smallish number. KU has a smaller number of product categories, molecules as compared to Lannett. So it's very much the categories, the new categories we spoke to pretty much cover it. Yes. Those gastrointestinal, respiratory, central nervous system, that covers the bulk of the KU products. You add in the cardiovascular KU products, and you pretty much have covered it.

So it's cardiovascular and other that have KU acquisition in it?

Yes. The other, the KU in the other category is very limited.

Okay. Can you say what the cardiovascular is ex-KU? I think that you gave the Digoxin number.

I think yes I gave the Digoxin number. Also in that category on the Lannett side. Exactly, which is about $1 million in the quarter or so.

Okay. So it's 7.5 million for cardiovascular without KU?

That's about right.

Okay. And then were there any inventories with Levo, Digoxin, Ursodiol that were out of bounds, or are they all kind of at four weeks?

I think you will have to say that one again. What was that question.

Inventory levels with wholesalers, with Levo, with Digoxin and with Urso, are they all within kind of--?

Yes. I mean nothing unusual that we report.

Nothing unusual.

Okay. Okay. That was it for me then. I appreciate you taking the questions.

Okay. Thank you.

Thank you.

We have no further questions at this time.

Okay. Well, I want to thank everybody for joining us today, and I hope you like the theme son we have picked we picked it because we certainly seem to be under attack a little bit, so I will leave by saying, We'll keep Standing. Thank you very much for your attention today.

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