Lannett Company Inc (LCI) 2017 Q4 法說會逐字稿

Welcome to the Lannett Company Fiscal 2017 Fourth Quarter Full Year Financial Results Conference Call. My name is Ashley, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Robert Jaffe, Investor Relations for Lannett. Mr. Jaffe, you may begin.

Thanks, Ashley. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's Fiscal 2017 fourth quarter and full year 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 at least 3 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.

In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with U.S. 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 fiscal 2017 fourth quarter and full year financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's 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 fiscal 2018 guidance, 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. These are exciting times for us. Not only because our company has grown substantially in size and complexity, but also because we have continuous new opportunities to further expand and diversify our business.

Many even know my flaws with regard to debt. We have been working diligently to delever the company. In mid-May, we voluntarily paid down the remaining principal balance of $25 million against our existing revolving credit facility. Since January of this year, we have made payments totaling $125 million to pay down the entire outstanding balance of our revolving credit facility. As a result, we will save more than $7 million in annualized cash interest expense at current rates.

Our investments in product development has gained dividends. Over the last few months, we received 6 product approvals, including 1 in May, 4 in June and 1 in July. The approvals were Levocetirizine Dihydrochloride Oral Solution, Amantadine Hydrochloride Capsules, niacin Extended-Release Tablets, 2 separate approvals for multiple dosage strength of Hydrocodone Bitartrate with Acetaminophen Tablets and Cyproheptadine Hydrochloride Oral Solution. New product approvals are the growth engine for generic drug companies. We expect to launch all of these products as well as other already approved products in fiscal 2018, while at the same time continuing to streamline and move production to our facility in Seymour, Indiana.

Turning to our financial performance. As most of you know, 2 weeks ago, we reported preliminary financial results for our fiscal 2017 fourth quarter and full year. Our financial results, which we issued today were at the higher end of the range of the preliminary results we announced. The fiscal 2017 full year net sales increased approximately 13% to $637.3 million from $566.1 million for the prior year. Fourth quarter net sales were $139.1 million compared with $168.9 million for the fourth quarter of fiscal 2016.

As we reported in our preliminary release, our fourth quarter was impacted by anticipated items which totaled approximately $0.24 per diluted share, as well as pricing and volume pressures. However, we expect our top line in fiscal 2018 to solidly improve compared to fiscal 2017. We also expect our adjusted gross margin for fiscal 2018 to be above 50%, which exceeds the average of peer companies. These margins reflect management's ability to execute an effective strategy. Our confidence is due in part to the launch of the products I mentioned a moment ago.

Before I turn the call over to Marty to discuss our financial results and fiscal 2018 guidance in more detail, I'd like to mention that Sam Israel has joined our team as the company's first General Counsel. In addition to being an excellent attorney, Sam is the one individual who can hit the ground running. Prior to joining Lannett, Sam served as Lannett's outside General Counsel for the last 19 years. He was a partner with the national law firm, Fox Rothschild, where he served as Chair of the firm's pharmaceutical and biotechnology practice. Sam strengthens our team, and I am pleased to welcome him to Lannett.

With that, I'll turn it over to Marty. Marty?

Thank you, Arthur, and good afternoon, everyone. As was mentioned earlier, I will be referring to non-GAAP financial measures. The reconciliation of the GAAP to non-GAAP numbers can be found in today's press release. Our earnings release also includes a schedule of our net sales by medical indication.

Now for the financial results on a non-GAAP adjusted basis. For the fiscal 2017 fourth quarter, net sales were $139.1 million compared with $168.9 million for the fourth quarter of fiscal 2016. Gross profit was $68.0 million or 49% of net sales compared with $91.9 million or 54% of net sales for the prior year fourth quarter. As Arthur mentioned, our net sales and gross margin were impacted by several unanticipated items, as well as competitive pricing and volume pressure across a number of products, which began in the fiscal third quarter and continued into the first month of the fourth quarter.

R&D expenses were $11.4 million compared with $13.1 million. SG&A expenses declined to $16.2 million from $17.8 million. Interest expense decreased to $16.0 million from $21.8 million due to our efforts to reduce debt, which is a key priority for the company. Operating income was $40.4 million compared with $61.0 million for the prior year fourth quarter. Net income attributable to Lannett was $15.1 million or $0.40 per diluted share, compared with $27.5 million or $0.73 per diluted share for the fiscal 2016 fourth quarter.

Turning to our balance sheet. As Arthur mentioned, in mid-May we voluntarily paid down the remaining principal balance of $25 million against our existing revolving credit facility. Since January of this year, we have made payments totaling $125 million to pay down the entire outstanding balance with our revolving credit facility. Accordingly, at June 30, 2017, cash, cash equivalents and investment securities totaled $144.8 million and debt outstanding was $904 million. We continue to be well within our required debt covenant ratio.

Turning now to our guidance. For the fiscal 2018 full year, on an adjusted basis, we currently expect net sales in the range of $655 million to $665 million, representing a 3% to 4% increase over fiscal 2017. Adjusted gross margin as a percentage of net sales was approximately 51% to 52% ; adjusted R&D expense in the range of $46 million to $48 million; adjusted SG&A expense ranging from $73 million to $75 million; adjusted interest expense in the range of $67 million to $68 million; the full year adjusted effective tax rate to be approximately 35%; and lastly, capital expenditures in fiscal 2018 in the range of $65 million to $75 million.

Regarding the phasing of quarters in fiscal 2018, we expect first quarter net sales to increase in the low double-digit range as compared with our fiscal 2017 fourth quarter. For the remainder of the fiscal year, we expect net sales to increase compared with the first quarter and spread evenly across all the 3 quarters. With regard to earnings, we expect first quarter adjusted EPS to increase by approximately 30% as compared with our fiscal 2017 fourth quarter with adjusted EPS for the subsequent quarters to increase compared with the first quarter and be similar to each other. While we have a deep pipeline, including a large number of products, product applications currently pending at the FDA, our guidance does not include sales from these products, nor does our outlook include the benefit of any potential acquisitions or strategic alliances or from possible further paydowns of debt.

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

Thanks, Marty. We have a number of initiatives in place for short- and long-term growth. In the near-term, we are looking to enter the veterinary pharmaceutical and growing compounded pharmacy market. Other opportunities include drug delivery devices, innovative API candidates and adding vertically integrated products, as well as products to treat opioid addictions.

As you are aware, opioid addiction is a growing issue nationally and this population is in need of affordable generic drugs for the treatment of addiction. We are working on the development of existing and new treatments for this population. Regarding the integration of Kremers Urban, we remain on track to fully achieve our anticipated synergies.

Turning to our manufacturing function, we continue to make excellent progress transferring production to our Seymour plant. During the fourth quarter, we filed 3 product transfers with the FDA, and we completed one product transfer that does not require FDA filing. We expect to transfer 3 additional products from Pennsylvania to Seymour, Indiana plant in the current quarter. We are targeting the end of fiscal 2018 for production to cease in our Pennsylvania plant.

With regard to our pipeline, we currently have pending at the FDA 18 ANDAs, including 9 with Paragraph IV certification. We are optimistic that we will receive several FDA approvals in the coming months. In addition to our own filings, we have the U.S. distribution agreement for 11 product applications of the FDA through our collaboration with ATC. ATC is expecting an FDA reinspection of the manufacturing facility next month, which may open the gates to that pending ANDAs. It is worth noting that one of the pending ANDAs is currently on the FDA's shortage list, and ATC has indicated they could have the product available within 60 days.

On top of the products to the U.S. market, we are making excellent progress on a longer-term opportunity for the distribution of up to 20 of our products in China by ATC. Obviously, the Chinese market is substantial. We are awaiting ATC to complete their market research and a final word from Chinese FDA as a requirement for receiving marketing authorization.

In addition, our combined effort with ATC to develop a generic insulin is advancing. We received FDA comments to our preliminary investigational new drug application for the product, and we are working together to develop the best plan for filing the application.

We're on track to file our new drug application for C-Topical next month. We anticipate an approval to come within 15 months, following the PDUFA submission of our application. With the approved -- with the approval, soon they will be able to market the product more broadly with FDA-approved claims. As we have said in the past, we estimate the potential market of C-Topical to be approximately $200 million annually. We have engaged market researches to evaluate additional physician markets for C-Topical, including dentistry, facial plastics, OB-GYN, ophthalmology and [veterinary], on top of the current ear, nose and throat emergency room and sinoplasty markets. In a few weeks, we expect to better understand the sign and potential of these additional physician markets for C-Topical.

We continue to negotiate with UCB to acquire 2 of their products. If we conclude the deal, these brand new opportunities will be addictive to our forecasts -- additive, excuse me. Regarding our planned expansion of Cody Labs, construction has commenced. The expansion allow us to more efficiently grow our pain management business, both APIs and finished dosages. We are working diligently to identify additional innovative API, which will become the cornerstone of the ROI on this investment. We have already identified additional opportunity that we’ll be able to be brought to the markets rather quickly.

Finally, we believe the pharmaceutical veterinary market has excellent potential for us. It is a market that has limited number of competitors. As recently announced, we are looking at the pharmaceutical veterinary market and extend our product offerings through acquisitions and alliances.

To summarize what you have just heard, we have a number of initiatives that we have been developing to grow our business. We continue to file product application and launch approved drugs. We are close to submitting an NDA for our first branded drug, and we are making progress further integrating Cody Labs and adding products to our pain management franchise, including APIs for others. The execution of all these opportunities is well within Lannett's abilities. We are confident that we will execute on our strategic plan and our investments and efforts will pay dividends for years to come.

With that overview, I would now like to address any questions you may have. Operator?

(Operator Instructions) And from Deutsche Bank, we have Gregg Gilbert.

This is Pravesh, on for Gregg Gilbert. I just wanted you to know if you are -- if you have any new entrants you're planning or factoring in for Levo in the future?

If I have any what, I'm sorry?

If you are building any new entrants or any one you're factoring in for Levo in the future?

No, maybe an additional competitors. No, we’re very comfortable where we are. Remember, this is a Narrow Therapeutic Index Drug. It has 12 strengths. We have already discussed this with our customers. Most of them do not want to switch this product because it required giving the patients the opportunity to have more blood work done, which most patients won't enjoy doing. And we don't believe that the new entrants to market will impact us. Remember, in our world, we always have additional generic competition, and usually, they'll clip. It's just matching prices here and there. But since it has 12 strength, a very difficult product to make, we really are not that concerned. Now look, I'm not trying to say it's never going to happen, but I've been hearing this question now for 13 years, and we haven't had that additional competition. A lot of people claim they have applications, have never got them approved. So until they are approved, it's hard for me to do anything but to make sure that my customers plan to stay with me and we have raised those issues with them, and I am not concerned if we're going to lose business to a competitor on that item.

Okay. And just a small follow-up. So what are you factoring in for base business erosion next year versus new products for the guidance you just gave?

If you're asking about the new products, we -- so we had a series of products, as Arthur mentioned, that were approved in the last several months that we have not launched yet. Those products are in our guidance. And any products which we have with FDA and we're hoping to have, let's say, approved in fiscal '18, those are not in our guidance.

I believe your question was, are we worried about -- are we planning about additional price pressures and things like that. We've had those baked into our guidance. We have taken that into consideration that there are some tough pricing out there in the marketplace. But quite frankly, the impact on the wholesaler strip down was pretty severe. If they continue to press manufacturers for low prices, they'll continue to have lower earnings. So I don't see that continuing as a trend forever. And as I said to some of you, I expect this to end by September 2018.

And from Raymond James, we have Elliot Wilbur.

This is Lucas Lee in for Elliot. On a non-GAAP basis, the fourth quarter interest was around $50 million. But I see the 2018 guidance is approximately $67 million to $68 million, which implies an increase. Do you think you could provide some color around that? And as a follow up, what is your expectation for debt paydown in fiscal 2018?

Yes. The -- sounds like you're comparing with quarters?

Yes.

I'm sorry. Which quarter were you comparing? I'm sorry.

Fourth quarter 2017 -- this current quarter.

To?

I mean, it came in at $50 million. If you multiply that by 4, it would imply around $60 million for 2018. But the guidance is at $67 million to $68 million.

Right. Yes. What happened is that there are several other items in our other income and expense categories. It's not just interest. So in essence, we had about $3 million or so of favorable items. Also, in the quarter itself, we had about $1 million of favorable items in the fourth quarter so that actually brought down the interest -- brought down the expense line of other income and expense, so it's a little bit not that clear in that sense. When we issued our K or 10-K, you'll be able to see the full detail, and this is what we have in our interest expense. On a full year basis in fiscal '17, total year's expense was about $69 million, just that $69 million for the year. A decrease is down to about $67.5 million on a full year basis for fiscal '18. The decrease has 2 different effects. It's -- the extent to which in fiscal '17. We had our revolving credit facility outstanding so that -- as the interest expense, so you can whip that in our fiscal '17 numbers. Meanwhile, in fiscal '18, we have included some degree of interest rate increase. So we took the little route right now, which is about 6.5% on blended rate, and we increased that by about 1 quarter in each of the following 3 quarters for fiscal '18. So hopefully, that helps with what you're doing there.

Yes. And the follow-up question is that what's your expectation for debt paydown in fiscal 2018?

Well, 2018, we really just have our -- for now, we have our expectation is that we would meet our mandatory payments on term loan A and term loan B. The mandatory payment is 5% annually on the 2 items, the -- and that's the extent to which we're including debt paydown in fiscal '18.

And next from Craig-Hallum, we have Matt Hewitt.

This is Charlie, on for Matt. First, a couple regarding the pipeline. First, appreciate you providing an update on the number of ANDAs that you have at '18. Can you provide a total market value for the pipeline?

Not at -- on this call because, generally, that changes almost daily depending on who comes into the market and any of those items. So we generally don't do that, but I could return a call and let you know by tomorrow what the current numbers would be for '18, if that's okay.

Sure. No -- and that's really helpful. And then just kind of, again, with regards to the pipeline. Can you talk a little bit or provide a little bit of color on how backfilling efforts are going? You're seeing a lot of approvals coming out, I just want to -- wondering how you guys are backfilling it?

Backfilling, you mean filing additional applications?

Yes, exactly.

Well, as you know, we hired a VP of R&D recently and she started in June. So we've already started the process of bringing in additional staff, additional equipment. So she is still ratcheting up and we're also focusing a little better on the application and what products we could apply to try to get the best return on the investment at the time. So when we took on the Kremers, first example was to look at both R&D pipeline and products that are in development that will become an FDA pipeline and see which products we should remove, which ones we should continue with. And of course, we did lose our R&D individual during that time frame. So there was a period of time when we didn't have any leadership in that area. But with Kristin Arnold joining us, she's now ratcheting up the opportunities. So we'll be submitting applications in the agency this fiscal year to -- and be on track to be able to get those products approved. The good news about the delay, quite frankly, is that the timing of these application now, instead of having submitted them won't truly hurt us in terms of the approval. Because the FDA is ratcheting up the approval products, so as we file and we won't be delayed because of the delay we encountered in analyzing the 2 product pipeline from the different companies that we acquired, Silarx, ourselves and the Kremers pipeline. So I don't think there'll be any harm from that delay, but that would be one of the concerns that would impact us going forward. But we're okay with where we are with our filings for this fiscal year.

Okay. That's great to hear. And then just one more. Some of your peers have noted some API supply issues that have led to some delays in approvals. You guys have seen a number approvals come through, have any of those impacted your ANDAs at the FDA?

No. There's no -- nothing -- of all these approvals though, the only one that did impact was the one we received last February, Temozolomide. That was the one where they approved our application. The raw material supply was already approved by FDA. And then subsequent to approving the application, that firm in China failed in inspection. And that issue is being litigated with the agency because instead of allowing us to substitute another supplier, which we have readily available, because if you recall both Kremers and Lannett both received the Temozolomide approvals within a couple of months of each other. So we can substitute the API supplier from the Kremers application for ours, and that is something that's in litigation so I don't want to say anything more about that. But that happened previously, a while ago.

And next, from Susquehanna Financial Group, we have Andrew Finkelstein.

I was hoping you could talk a bit more about, yes, how you frame the guidance in terms of if we think about revenue guidance to date, how much is approved but only on one product. And then in terms of pricing pressures in the business, I expect the factors to come in. But off of what the right date is, exactly, so if fourth quarter items, a number of maybe unusual items, but what's the right first revenue date to think of in terms of pricing pressure off of that. And if you could say otherwise that the fourth quarter, that you think you have $100,000 in new products, more if there's erosion, so to help bring that up, that would be very helpful. And then specifically, you talked about not being concerned about the Levothyroxine business, but are you factoring similar for volume pricing on that part, inherent specifically for '17.

Yes, I'm sorry. It's still hard for us to fully understand what you're saying. I think you're looking for some sort of color around how we get our top line guidance numbers. I don't know if correct?

Yes. And specifically on Levothyroxine, net pricing assumptions for '18 or '17.

Okay. Well, I'll maybe just give you the global answer. I don't believe we're going to get into the specifics on how we came up with the Levothyroxine outlook for fiscal '18, full year and quarterizing. So let me explain how we get to the guidance. I mean, the guidance is done as we do our, I mean, pretty much our regularly occurring -- actually monthly forecasting on a rolling 12-month basis. What we do is for the top line, it's an effort between our sales team and support from finance, where the team goes through product by products, with the best of its ability it might have in each product and literally project out the remaining -- the rolling 12-month outlook for that particular product both on units, those are all projections or estimates based on -- or working with units, and then again with pricing or prices. So it's very in-depth projects that notably results in the numbers we have internally. And then, as Arthur always says, we tend to take a conservative look when we provide guidance to the public markets. So we layered other level of judgment on the numbers that are developed, and that is also the guidance -- the sales guidance which we're providing today.

And could you talk maybe a little bit more about the 4Q run rate and how you think about what the current -- what a good number for the current price and volume of the portfolio is?

Sure. Well, I can tell you, what I can tell you here at this stage, the -- so we provided the outlook, the -- it's a low double-digit increase in sales from the $139 million in the fourth quarter to, we think, is a reasonable estimate for the first quarter of fiscal '18. The -- but back on that fourth quarter number, as we said when we did our prerelease, we felt that there were, at least in our lines, there were one-off items in there which give one an incorrect impression of what our run rate is. And to that number, to the $139 million, we believe you would add about 6 -- I'm sorry, we'd add about $7 million to $8 million of sales that was a negative act of what we believe are the -- what we would have characterized as onetime or nonrecurring items. So really, the $139 million will give you a run rate of about $146 million, $147 million. which then, going into the first quarter of fiscal '18, that the double-digit increase that we spoke of aside, it really gets -- it really comes out to about a 5% increase from the -- from a normalized fourth quarter to our first quarter of fiscal '18. That's the logic we see. And then the remaining 3 quarters of fiscal '18, as we say, is the remaining balance we have on taking the full year outlook, subtracting that what you'd come up with for the first quarter, and the remaining 3 quarters are fairly similar in our estimates in our guidance.

And our next question from Raymond James is Elliot Wilbur.

This is Lucas again. A question regarding a price erosion. You have alluded during last quarter that it was around 7.5%. Is that the level you factored in for fiscal 2018 guidance?

Well, for the guidance, pretty much as I explained on our last call or the last question, the -- we do have price decrease -- first of all, there's no price increases in our guidance for fiscal '18. We do have a price decrease. We're not prepared to say as to be explicit with that number. But -- and the exercise I just described about going product by product, part of that exercise was our -- was to make our best estimate of what pricing will do for each product over the next 12 months, and that's our guidance. The ultimate assumption is, for example, for some of the additional later or more recent consolidation that's happening in the industry, we also made necessarily what we thought that impact could be in our numbers.

And in addition, some of our products will increase in revenue and more units being sold as well.

Got it. And lastly, I have a higher-level question. Given current trends in the opioid space, continued volume and price pressure and the possibility that the Mallinckrodt business is sold to a player that could accelerate those pressures, how are you thinking about the long-term growth potential of this market and Lannett's potential advantages within the space? And do any of the current market dynamics alter your thoughts in terms of the type of assets you may pursue?

Well, look, I think I'll take that question. That's a good question. My attitude is on the pain that's being visited on my competitors right now. As you know, a lot of them closed down a facility that manufactured hydrocodone/APAP, and I believe they have exited the market to some degree. So I believe the market's this way. When we started coming to this area, it was in 2005, the market was $3 billion. It's now $30 billion. Even if you were to come to market by 1/3 or 50%, it's still a huge market. So I don't see the trends being negative. We're now enjoying the fact that there's an opioid addiction in this country, but a lot of that stems from not necessarily the products we're talking about manufacturing. It really is the illegal use of heroin carfentanil, where some of the deaths are coming from. And certainly, the prescription abuses, and most of us will visit an online competitor who has not been careful in the way they sold their products. So you certainly have a lot of, let's say, sloppy behavior out there that expanded that opioid market. And now some of that is coming back as a risk to them, to those companies. We see this as still a great opportunity for us because going forward, we're starting with a new facility, we’re finding better ways to make the products, which means less steps in the API production, so that the profits will be greater for the production of the API versus, I'd say, the Mallinckrodt, used as an example, that has facilities that are well in excess of 100 years old. So you're comparing a state-of-the-art facility that we'll be operating from with some that are not state-of-the-art. As far as whether who buys the company, we really don't know what the future will be, but most people that buy a company don't revisit the gross profit margins when they launch their products because they're too busy figuring out how to pay down the debt that they took on to buy it in the first place. So for example, private equity doesn't go around in creating price wars as an example. They tend to be responsible people. Yes, you could get strategic in there, whether you look to grab market share. But they are concerned right now, and using Mallinckrodt as an example, is losing market share. We don't have anything to lose. We have everything to gain going into that market. So from our perspective, we see the pain that's being suffered by our competitors to be something we avoided by not being in that market already. And obviously, on another factor, the opioid require quotas. You have quota announcements for the DA, where they said they're going to reduce the quotas this fiscal year, the one that's coming up, by 25%. Remember, they give the quotas. You apply the quotas in April of the calendar year for the following calendar year. So the quotas that they're cutting by 25% on schedule too will impact our competitors again because I don't have any quotas really to lose here. So you could say that the timing of our entry here has been rewarding or will be rewarding for us or a pleasant timing when my competition is considering exiting the market and we're going into that with lower cost production capabilities. And that is the goal for Cody, to produce products at lower cost than our competitors had been able to do. We're also very -- we integrated that since Mallinckrodt, but we will have the advantage of being a state-of-the-art facility on the Cody side for the API. So granted, you people all know I'm a very optimistic guy, but it's hard to look at this realistically and know the only way there to be optimistic about it, vis-à-vis, our company anyway. So I hope that answers the question.

And next, from BMO Capital Markets, we have Gary Nachman.

Arthur, are there specific bidding cycles with the consortiums you're still waiting for? Or have the renegotiations been sort of random? So does anything significant change with any of your customers? And I'm specifically interested in Methylphenidate ER, it looks like you lost some share there, and what are your assumptions for that product in fiscal '18?

I hate to brag, but check our results on the methylphenidate going forward. I think you'll find the increase. And you're right, we did lose some market share, but the salespeople have taken steps to and have resolved that. We started to see some business already coming in. So I could be optimistic about it because we know we're getting the orders. The concern I have there is really not as big an impact as you would think. The big concern, of course, is you have additional AB-rated products. We're still working with the agency to try to get our AB restored. But the AB-rated products that are approved have indicated they're not going to launch until the end of the year. At least in one case, I believe one of the first that we got approved, has now talked about launching until the end of the year, which probably means they will wait until they get their quotas in January. The other companies that got it sooner has not been able to grab any market share, so that isn't much traction on the AB-rated product. So I believe we now have 3 AB-rated competitors, the authorized generic and another competitor under BX. We believe we're in a good position to increase the revenue on that product. We don't see any downside because we've already secured some additional business this fiscal year.

Okay. And the bigger picture question, just on the bidding cycles with the consortiums.

Yes, well, it's actually about the bidding cycle, it's not about product. It's really, I mean, as far as I know, and I'm not in sales so I don't want to say I know this intimately, but there's really no bidding cycle per se. Generally, they put their bids out in -- as they need to in the line of suppliers, and then that bid cycle is in place until the summer comes along and also will have a better price that they want us to match or something or we want to do more business with them, or there are have been raw materials sourced from most of their other vendors and come back to us as it happens, hey, we want to buy more from you, that we’re buying now, could you supply this initial quantity. One of the advantages we've always had is we have helped the inventory, and generally, with someone else like my competitors is unable to supply, that's an opportunity for us to jump in. And those are looking in our face really for this fiscal year. Some of those opportunities already have come to fruition. So from my point of view, there's really no cycle that comes up with a time to do this once a year. I know, in January of each year, to -- I don't want to mention any names, but one of the competitors will put out their business standards, and then -- but that's really not focusing on a new cycle of bidding. If you're already a supplier, you remain a supplier in that time frame. The newest entrants, of course, came approximately in, I'm going to say March and April, and they've already put all their -- did not receive all the bids they're going to get. So I don't see any more pressure coming from those consortiums. So quite frankly, let's be clear about it, all 3 of those consortiums we'll talk about here have declared the difficulties they're facing with earnings and their earnings dropping and dropping, without pressures coming from the consortiums to the manufacturers. So the more pressure they put on us to lower that prices means the lower their earnings will be. There comes a point where they have to worry about not making any money reselling these products. In the past, brands were their bread and butter. Today, generic drugs is their bread and butter. If they continue to destroy the business that gives them all their revenue and profit, well, where do they end up? So I believe, as an optimist, that this will stop, hence, this year by the end of the fourth quarter, that I think by September of 2018, that this kind of behavior will come to an end. And I believe that's where we're focusing within our optimism for we see some of that already coming.

Okay. And then on Levo, you mentioned before you don't really see a competitive threat. But just regarding the agreement with Jerome Stevens, just remind us when that expires and how comfortable you are that you're going to be able to renew it. And when are we going to have visibility on that, just given the concentration that you have in the portfolio with that product?

Well, the contract comes up during the middle of the March 20 -- excuse me, March 2019. And for an additional 5 years, we negotiated. All those terms have already been established as you know, so we really have to come to an agreement on whether we'll renew it with each other. The purchase price has already been established, and that's in our 10-K. It's 1.5 billion shares to renew the agreement. So from the timing point of view, we're talking about something that's about a couple of years off or 18 months away from now. And we've had very extraordinary service from them as far as they are being embedded to us, so we have no reason to leave them. That's for sure. And they still are my personal friends, so I guess when they don't like me, they might change their mind. Hopefully, they still like me. Last time I checked, they did. So I don't see any concerns about renewing the agreement or going forward. We're both doing a good job for each other here and we had extraordinary success with their product. But they also had been an extraordinary supplier. So it works hand in hand. It's been a great relationship. I hope that answers the question.

Yes. It does. And then just one last one. I guess looking a little farther out for you. How much could the API and vet businesses and the China partnership, how much could those contribute for you going forward? I'm assuming, and just to confirm, that none of those are in the guidance in any way for this year. But when could those really hit and how big of a contribution could they be for you?

That's a good question I don't have the answer to yet because the problem with the vet scale, for example, is there is no IMS maybe you could turn to, to review product. So it's really a very difficult way to try to find out from the veterinary distributors that are in the business and some veterinarians to try to gauge how much and what products they purchase. But for example, we've been looking at opportunities for products that are oral solutions, for example, a topical solution for animals in, Rifampin, based on the cost of raw materials. And looking at the prices in the human market, we've realized we can make a lot more money, some to get into the veterinary field. Some of our products already are sold into that field, and we've reached out to someone who has a veterinary license. That's the only other license for this product. So there's one product in the vet field already with the said license. There's another license that may -- had been offered to us, but I don't have the information as to what the other company is doing in the vet field. So we are positioning and like trying to figure out how much raw material to look forward to, to try to gauge what the market is. So this is a tough question you've asked me because we're struggling to get all that information as well. On the Chinese front, there's some new opportunity there. What we certainly know was 1.4 billion people and roughly 1/3 of them are middle class or higher, wealthy people. There's opportunities like equivalent to one in the United States. But the problem is we have to file that to the FDA, the Chinese FDA, what their requirements are, and our [clinic] is trying to do that in China. They're also doing market research because these are new products that are not available in China, and it's hard for them to get back to it without doing a lot of research. So I've been a little impatient myself in trying to get some idea. But I don't want them to just give me an idea of enough of that, not really based on facts. So they've assured me they're continuing to work with their FDA in China to see what the requirements were to get approval, how long the approval process would take so that I can match it up to the revenue projection they might give me and then I'll answer the question. So yes, the second part of your question is it's not in our guidance and in our revenues. It doesn't mean if we're able to make a deal on the antibiotic product, that we wouldn't be able to launch that this year. But we'd stopped the file of the supplement, it's a psych change, a Cpe30, so there is some delay waiting for FDA approval. So I can assure you it's not in our guidance and in our projections at this time. These are just new avenues we're looking at because we're not able -- by ourselves, we can't change the environment that's going on within the human generic drugs. While we certainly know that in the veterinary field, you don't have the kind of difficulties that the human drugs are being faced with, both branded and generic in terms of pricing and such, and we all know there's an enormous amount of competitive animals in this country. So we just look into this and say, well, we know how to make drugs, we already started in this field, why not expand that area. And that's exactly what we're doing, to expand into the areas uphill. So maybe in another quarter or so, I have better information for you.

And next, from Canaccord, we have a question from Dewey Steadman.

Arthur, now that you're fully warmed up and ready to chat, I was wondering if you could expound a little bit on your thoughts on consolidation within the sector. Given that there's probably 100 or so labelers out there in the generic universe and only 3 or 4 major buying consortia, how do you see Lannett playing into the potential for consolidation?

Well, it's funny. I read something from another CEO about the market. I don't disagree that there’ll be some consolidation within the space. But as everyone has realized, when you're consolidating in this marketplace, it doesn't help you with the consortium at all. It doesn't matter whether you're helping with probably the broadest product line of anybody when you're trying to bid against all the other players that can knock off most of your product line. So while they have the clout of the largest product line, they're unable to deal with that, they have enough to deal with anyway. In our case, we have been doing this now since 2002 and Lannett has since been involved, with Kevin Smith, by the Senior Vice President of Sales. And even though we get the same problem over and over again, it hasn't changed in 49 years. I can still, and cheaper, use the modus operandi in the generic drug space because most are selling a commodity. And just like the gasoline station, you have to be competitive with each other. So I saw us grow this company dramatically by just doing it the old-fashioned way, filing an ANDA, getting approval and launching the product. Customer service, supplying product, having a tremendous track record with compliance, having virtually no recall, God-willing, having no other issues from our customers, means we get more business from people for our side of the company than some of our competitors do. Think about some of the companies that have to be stopped in the on-boarding into the United States. If you're a chain, and all of a sudden, a product cannot be brought in, there's the scramble to find someone who could supply the volume of product that they require. And I'm mining all the pharma of 6 different companies. And if they don't have anything on the shelf, what do they do for merchandise. We don't cause that kind of grief for our customers. They know they can depend on us. They know we're going to supply them. We may not be the cheapest in the marketplace, but they know who's the most dependable. And I think those are the reasons we've been successful. So do I see someone -- volume at some competition, sure, I see that happening. But in this industry, in this space, it looks like the only people going out and looking to buy things are mainly the target equity shops. Most of the banks don't want to lend in this space, allow the people concerned about where price to collect will stop. I already believe it's going to happen in the year from now. So from my point of view, I think I know where it's going to end, but I'm not looking to buy anybody today because my goal is to delever Lannett. There are some good opportunities out there, but first, you got to pay off your lenders.

And then just touching on the compounding a bit. You touched on a -- about a potential area about expansion. Would it be through 503B pharmacy or through some other potential avenues?

The 503A and the 503B, both compounding pharmacies, one earned and investigative, inspected by the state and one is inspected by the FDA. Well, we looked into this part and we've seen some pharmacies growing at a rate of like $10 million in 2 years from date of launch. So there's a lot of opportunities in these places. Both the Cody, we sold API to, which is one aspect, and quite frankly, a lot of the competition we have on our C-Topical is coming from compounded pharmacies. So you could say, if you can't beat them, you got to join them. Well, we're looking at that as an opportunity that can happen and be viable to me immediately. I don't need to file anything away from approval. It's just go out and find out what they want and supply it. And Cody has that relationship in the compounding pharmacy space prior to us acquiring the company. So it is an area we know could be growing. And we're pursuing that. So we've had meetings with some firms in that field. And we see that as an opportunity. When you're facing the headwind that everybody talks about in a generic drug space, you either sit there and feel sorry for yourself or you go out and find new opportunities. And I have to tell you, we're finding plenty of new opportunities that we may not have decided to go on to previously because the market was growing and robust within the human generic drug space. Now that it's facing these headwinds, we have to go out and find other opportunities to grow the company. We have to grow the company. That's the bottom line.

Okay. And my final question, just on C-Topical, I just wanted to clarify a point. Did you say you're expecting a 15-month review time line for the approval post-submission or is that -- did I hear that wrong?

Yes. What my colleague was telling me in -- like Christie Stevens was pointing out to me that on the PDUFA, there's an action date of 12 months. So when you file the application, you have to have an action. She reminded me they could approve it in 12 months, or you can have an action and there would be a delay. So she said, to be on the safe side, if you would have mentioned anything on the call, she was more comfortable with 15 months. That way, we'd cover ourselves and not be too optimistic. It's our first new drug application on the PDUFA race, and in some very serious application. There's been, I believe, somewhere in the neighborhood of a million documents that had to be put together for the clinical trial work that we did. So she just was trying to cover her bases. I guess she didn't want me to point out that we missed the 12 month thing. But I'm still optimistic that we'll see something approved quickly. There's no real difficulty with this product, it's well known. So -- but this is our guidance. Give or take, she said, give us an extra 3 months. But the filing is still next month.

And our next question, from Roth Capital, is from Scott Henry.

Just a couple of specific questions as we think about 2018. And Marty, I don't know if you want to give guidance, but I'm just trying to think directionally, for instance, for the thyroid deficiency line, I think it was about $174 million in 2017. What are you looking for there in 2018, slight growth or -- I'm just looking for some directional comment.

Well, the -- you're right that we're not going to give you specifics or specificities, but we do see it increasing, Scott, year-on-year. We talked a bit about the competitive landscape and what our anticipation is for, at least, for fiscal '18. So yes, at this stage, we do have a product increasing. I mean, I can't tell you -- say how much, but it's -- let's just leave it to say that the product is increasing and we're comfortable with what we have.

Okay. Great. And another question. In Q4, the revenues pulled back significantly. It wasn't completely even across the board. When we're thinking about next year, would it be better to kind of look at what we saw in Q3 than Q4? Or was there any sort of kind of method, the madness of why some products were hitting harder than others in Q4?

The delay we're looking at -- well, Q4, we did our previous -- back earlier, earlier this month, we talked about $0.24 of non -- of unusual nonrecurring items. On the sales line, as I mentioned then, it was a previous caller here, the -- we would characterize about $7 million to $8 million as the onetime items that have impacted the sales volumes. So I would think that would normalize fourth quarter about $146 million, $147 million, a number like that. But that is low -- would have been our lowest, even on a normalized level, it would be our lowest quarter in fiscal '17, but again, impacted by some of the market dynamics that we've been speaking about in terms of the pricing and volume and the consolidation on the buyer's side. The third quarter, on the other hand, for fiscal '17, third quarter was a bit strong -- stronger than the other -- well, we started off with our first quarter last year and improved it seemingly through the year. I would just encourage you to look at it as we described it before that -- against that normalized number for the fourth quarter of about $146 million to $147 million, take up about 5%, then you get to what we think is a reasonable number for the first quarter. That's what we're trying to get people to -- and then they're meeting 3 quarters of fiscal '18, they're all higher than the first quarter, and they're only about a similar level to then get to that midpoint of $660 million with fiscal '18.

Okay. And then a couple of your key growth drivers, Ursodiol, fluphenazine, I think Baclofen also had an impact on your revenue line. Can you talk about any changes to the competitive dynamics for those 3 products? Or is it relatively stable from last quarter to this quarter?

It's relatively stable.

Thank you. And we have no further questions at this time. I would like to turn the call back over to management.

Well, I want to thank everybody for joining us on the call today, and I look forward to speaking with you in the next earnings call. Thank you very much for your support in the Lannett Company.

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