Lannett Company Inc (LCI) 2018 Q1 法說會逐字稿

Welcome to the Lannett Company Fiscal 2018 First Quarter Financial Results Conference Call. My name is Katarina, 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 Company. Please go ahead.

Thank you, Katarina. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's Fiscal 2018 First Quarter Financial Results. On the call today are: Arthur Bedrosian, Chief Executive Officer; and Marty Galvan, Chief Financial Officer. This call is being broadcast live at www.lannett.com. A playback will be available for 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 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 2018 first quarter 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 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 revised 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. We have a lot to discuss today. Let's begin with several recent, very positive developments, that position Lannett for continued near- and longer-term growth.

In the past 2 months, we received 5 product approvals, announced the dismissal with prejudice of a class action lawsuit involving average wholesale price reporting, entered into a licensing agreement that will allow us to market generic thalidomide and filed our 505(b)(2) New Drug Application for our proprietary C-Topical product. I'll discuss some of these in more detail shortly.

Regarding our fiscal 2018 first quarter, net sales were $155 million compared with $161.6 million in last year's first quarter. We are pleased that as we said in the last earnings call, we are off to a strong year, with sales in the current year first quarter rebounding from the challenges we faced in the preceding quarter. Key contributors to the first quarter improvement were strong sales across several product categories.

Looking ahead, we are on track to launch a number previously approved products in the second half of the current fiscal year. Importantly, we continue working closely with the FDA shortage side and coordinating with our supplier partners and customers to prevent potential drug shortages and avoid disruption in the supply to patients of important medications.

We have already received purchase orders from customers that previously purchased competitors' products. As a result of the anticipated product launches and expected increase in sales I just mentioned, we have [raised] our guidance for fiscal 2018. 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 2018 first quarter, net sales were $155.0 million compared with $161.6 million for the first quarter of fiscal 2017. Gross profit was $76.7 million or 50% of net sales compared with $94.0 million or 58% of net sales for the prior year first quarter. R&D expenses were $7.4 million compared with $12.4 million.

SG&A expenses declined to $18.7 million from $20.9 million. Operating income was $50.7 million compared with $60.7 million for the prior year first quarter. Interest expense decreased to $16.4 million from $18.1 million. Net income attributable to Lannett was $22.7 million or $0.60 per diluted share compared with $29.0 million or $0.77 per diluted share for the fiscal 2017 first quarter.

Turning to our balance sheet. At September 30, 2017, cash, cash equivalents and investment securities, totaled $116.4 million. We continue to make significant progress paying down debt to its current balance of $895 million, and we remain well within our required debt covenant ratio.

Turning now to our guidance. As Arthur mentioned, we have substantially increased our expectations for the current fiscal year. Our revised guidance for the fiscal 2018 full year on an adjusted basis is as follows: net sales in the range of $710 million to $720 million, up from $655 million to $665 million; adjusted gross margin as a percentage of net sales remains unchanged at approximately 51% to 52%; adjusted R&D expense remains unchanged in the range of $46 million to $48 million; adjusted SG&A expense ranging from $77 million to $79 million, up from $73 million to $75 million; adjusted interest expense in the range of $66 million to $67 million, down from $67 million to $68 million; the full year adjusted effective tax rate to be approximately 35%, unchanged. And lastly, capital expenditures in fiscal 2018 in the range of $65 million to $75 million, unchanged from previous guidance.

Regarding the phasing of the quarters in fiscal 2018, we expect net sales in the second quarter to increase approximately 25% compared with the first quarter. Net sales for the third and fourth quarters are anticipated to be consistent with each other. We expect gross margin percentage to increase in the second quarter compared with the first quarter, and remain consistent over the remainder of the year. In addition, operating expenses are expected to increase in the second quarter compared with the first quarter, and be consistent over the next 3 quarters.

As a reminder, while we have a deep pipeline, including a large number of filed applications currently pending at the FDA, our guidance does not include sales from these products, nor does the outlook include sales of the 11 pending ANDAs of our strategic partners or the benefit from any potential acquisitions, strategic alliances or possible further pay-downs of debt.

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

Thanks, Marty. I'd like to briefly discuss and provide an update regarding our Board of Directors' recent announcement to initiate a search for our new CEO. I'll do my best to provide answers to questions that I've received from some of you over the last several weeks. As previously disclosed, the board has retained an executive search firm to help identify potential candidates to assume the role of CEO.

Once the new CEO is appointed, I will step down. The board has formed a search committee of 2 independent directors to screen initial candidates. The full board will vote on the appointment -- the full board will vote on the, and appoint the CEO. The search has only recently begun, and no timetable has been set to name the CEO. I expect to remain a member of the board through the end of my current term. The possibility exists that I will remain with the company in a strategic advisory position, until such a role has not been formally defined or offered. I expect to discuss any further role as a strategic adviser with the board at the appropriate time.

With regard to Lannett's ongoing relationship with Jerome Stevens Pharmaceuticals, the current contract expires in about 1.5 years from today. In recent weeks, 2 separate Lannett board members met independently with, and have spoken with senior executives at Jerome Stevens. It is my understanding conversations will continue.

Turning back to our business. Regarding the integration of Kremers Urban, we continue to drive the manufacturing efficiencies through the shift in production volume from Pennsylvania to our Seymour, Indiana facility. During the first quarter, we filed with FDA new product transfer; and during the second quarter, we expect to file 2 additional product transfers. Additional manufacturing efficiencies were achieved by keeping costs steady, while increasing sales volumes.

With regard to our pipeline, we currently have pending at the FDA, 13 ANDAs, including 8 with a Paragraph IV Certification. As I mentioned earlier, also pending at the FDA, is our new drug application for C-Topical. This new drug application submission utilizes the 505(b)(2) pathway, and is supported by 2 Phase III studies. These multi-center studies of 800 patients as well as the Phase I pharmacokinetic study were completed successfully. Since filing the company's first New Drug Application to approve full clinical trial studies, I'm extremely proud of this accomplishment and of our entire team for their efforts.

The 5 approvals we received in September and October were Esomeprazole Magnesium Delayed-Release Capsules, Dexmethylphenidate Hydrochloride Tablets, oxycodone acetaminophen tablets; 2 separate approvals for Lansoprazole Delayed-Release Capsules USP; approval for the full prescription product and other -- the other one for the over-the-counter product.

We're very optimistic that we will receive several more FDA approvals in the coming months. In addition to our own filings, we have a U.S. distribution agreement for 11 product application pending at the FDA through our collaboration with HEC Group of China. It is worth noting that one of the pending ANDAs is currently on FDA's shortage list, and HEC has indicated they can have product available within 60 days.

I just returned from meeting with HEC Group's senior management. We explored more concrete steps to strengthen the alliance to include Cody's new API development strategy for new and innovative APIs. HEC has advanced its in-house API development and aligning the 2 companies' scientists can only strengthen the marketing opportunities related to HEC distributing LCI products in China, and Lannett introducing additional ATC products in the United States.

The distribution of up to 22 LCI products in China by HEC has been delayed, due to proposed changes by China's Food and Drug Administration related to bioequivalency testing and marketing authorization requirements. We are confident that our domicile/subsidiary has the capabilities and expertise to be a valuable resource once the changes are implemented.

Nevertheless, our alliance with HEC continues to identify mutual opportunities, and we believe the future of this relationship is even brighter, given the growth plans announced by China's President, Xi Jinping.

Turning briefly to news about the State's Attorney General amended complaint, we cannot comment on the details of allegations in an ongoing litigation, but we believe the allegations are meritless. Having said that, Lannett manufactures only one drug mentioned in the amended complaint. The product, doxycycline monohydrate, represents a small percentage of the company's sales. More importantly, the marketplace for this drug was intensely competitive as demonstrated by the fact that during the relevant time period, Lannett lost substantial market share to competitors.

With regard to our planned expansion of Cody Labs, construction on our API expansion project is progressing according to plan, with steel structure of the building now finished. The target date to complete construction is mid-fiscal 2020.

To summarize, we completed a solid beginning to our current fiscal year. We have significantly increase our guidance for fiscal 2018, and we continue to advance multiple strategies designed to grow the company over the near and longer-term. Fiscal 2018 may well be one of the strongest years in our company's history. Stay tuned.

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

(Operator Instructions) And our first question comes from Gregg Gilbert from Deutsche Bank.

I have a few. I'm going to start with Levo. Can you comment, Marty, on the sales in the quarter? And talk about any business wins and what you factored in for your new guidance for Levo?

Well, Levo in the quarter was -- as usual, run rate between $45 million and -- around $45 million in the quarter. Going forward, we expect to see a bit of an increase.

Quite frankly, Gregg, we don't know what that increase will be until we actually receive orders and start shipping. So we don't want to get ahead of ourselves. But we do anticipate it will grow further than the run rate we're currently talking about for this quarter.

And do you see that higher run rate as pretty sticky or temporary?

Well, in this business, nothing is sticky, is it? The generic space, it's always hard to decide whether you're going to stay with a vendor or not when you're the customer. There are so many choices. But we're kind of gluey people here. So we expect, we get a customer who'll try to hold on business. Are we still connected? It just -- operator?

It looks like Gregg still is on the line.

Oh, okay. Gregg, did you have any follow-up question? Gregg, if you can hear us, we're unable to hear you here.

And we'll go to our next question. We have Gary Nachman from BMO.

Just more specifically on the increased revenue guidance. Is most of that from new approvals that you received in the last several months? What's the timing of those launches? And when will be the most meaningful ones? And with Levo, the way you were just describing to Gregg, would that be included in the increased guidance, the higher run rate for Levo?

Well, yes. Okay. A couple of things there, Gary. The -- as far as the new products -- yes, our previous guidance -- excuse me, we had some of the new products that had been already proven. I don't know if -- we had some of them. We had about 9 of them in the previous guidance. Now that number is up to 13. So 13 of these products that have been approved, but once they are in the guidance for different amounts of money. But in total, the contribution from these new products is about equal. We've made some adjustments or some timing changes and things of that nature. But net-net, the contribution in the previous guidance as well as this guidance, those are consistent numbers. As far as Levo in the outlook, yes, Levo is one of the stronger players amongst all the price that are increasing. We have increases elsewhere. We also had some decreases resulting in a $55 million increase in our guidance at midpoint.

Okay. And as far as the new launches. When are most of those going to occur? And which are going to be the most meaningful ones? And it sounds like there's going to be a meaningful step up in 2Q. But then you expect it to sort of flat line after that? Or stay at that level?

It's actually more the second half of our fiscal year, Gary. The -- and most significantly, in the fourth quarter. The -- as we've commented on before a large part of this, as we're shifting production from Philadelphia to Seymour and getting additional capacity into Seymour, Indiana, the legacy Kremers Urban site. That's -- and the main driver why we've been delayed in launching these recently approved products. But yes, everything, except one smaller product of all these products that were approved, but not yet launched, they are all now in the guidance, and predominantly in the fourth quarter.

Okay. And then, Arthur, maybe you could comment on what you said very briefly about Jerome Stevens, and just elaborate on those discussions at the board level for the extent that you can. And when will we have greater visibility if that contract is actually extended?

I can't speak for the discussions on I wasn't present for with regards to the 2 board members that met with the Steinlauf family. One of them is my Chairman, and he's met them previously. So as far as one of the contract, the contract doesn't expire until March of 2019, when it needs to be renewed. So in the prior, let's say, history of the renewal, so one renewal, it occurred in August prior to that March. So I would it not until next year, with the discussion about any renewal of that agreement come about. Quite frankly, they've been dealing with us here at Lannett, both contractually and without the contract, over 15 years. I'm very pleased with the success we've had working together with each other, because they're an extraordinary good company to work with as well. Partnerships have to work from both sides, like a good marriage. So I suspect that that'll continue.

Okay. And then, last question for you, Arthur. Just at a high level, what do you think of Impax and Amneal combining to compete more effectively in this very challenging generic environment? Do you think that you guys really need to get bigger at some point? You've had some new wins recently in the pipeline, but do you think you'll need that scale at some point to compete more effectively?

Everybody agrees size matters. So I have to go along with the scale story and definitely say that we need to expand and grow through acquisitions, mergers whatever, even it's product line distribution agreements. I think what Paul did is recognize the -- I know Paul, so I may be biased in his favor. But I did believe that what Paul realized is, independent companies really are struggling against the consolidation that goes off on the customer side. So the only way to fight that back with a deal with that, really, is to be more valuable to that customer group. One of the ways to be more valuable is to end up having to -- have more health, more product line, things like that. So from that point of view, that makes sense to me. Both companies probably weren't as strong as they would be combined. However, combining companies as we all know, is easier to do than execute. So the execution is critical to the success of the merger. But certainly the concept makes sense. And it's something -- and really, what drove us back in 2015 to do the acquisition we did. When you look at the future of the industry, it's hard not to know what the future is going to hold for us because you've seen the consolidation going on for some time. And maybe now narrows down when you have 3 major customers for example. But the trend has been going on for the past 15, 20 years. So I think anybody who's not looking into the future is now paying attention of what's already transpired. So I think we certainly would be open to discussions like that. We are a public company. We are not in a position to say we're not going to talk to anyone. And it does make sense, but it depends on who you partner up with, I guess. Are there more synergies in the 2 companies merging together? Do they have a lot of overlapping products or not. Do they open up new opportunities for both companies? Those, to me, would be the more successful ones. So that's probably the best way I can answer that one.

And our next question comes from Matt Hewitt from Craig-Hallum Capital.

This is Charlie on for Matt. First question, kind of related to shortages. You mentioned 2 shortages, specifically within the press release. Are they -- first, are they both related to Puerto Rico? And then, can you talk -- can you speak a little bit more about the HEC product shortage? Is that a third product? Or is that one of the 2?

No. First of all, there's no shortages. What we said in that release was we're trying to prevent shortages. We tend to work with the FDA -- we're preventing a shortage, not dealing with a shortage. So that's to correct that question. The other one, occasionally, some of the products get on and off the shortage list. One of the products that was on and recently, is one of the HEC products that is awaiting the FDA -- as you know, the FDA reinspected their facility. We're waiting for the approval of those products to come through, and then we've outlined which of the products have a priority. So out of 11 products, we signal that one of them has been in a constant shortage, no shortage, that kind of situation. So then, we would go after the product that has more opportunities in the marketplace than a product that has less opportunities. So there has been some real shortage on one of their products, but on the other one, it was just preventing one by working with FDA.

Okay. That's helpful. And then, related to the large contracts you guys have previously disclosed. It's now back on -- a large customer that's now back on contract. Is there any update there? Have you guys expanded the relationship further?

The -- I'm trying to figure out which -- oh, the company that left and came back. Yes. Actually, the numbers have been going up. I don't know -- the latest number I know is $20 million annually. So let me stay with what I know is actual. But there's been more movements, more requests for quotes, more quotations going out. I do expect that business to grow further as we sit here. So the relationship is very strong on a personal basis. But we do have differences of opinion, vis-à-vis, pricing and market share. We're not chasing after market share per se. We take that for profits of Lannett. So sometimes, when you're given opportunities, but we find that the opportunity doesn't fit in with our profit goals, let's say for Lannett, we try to be more profitable in the generic space than most of our competitors. So any time we don't grow in volume, it's because we've chosen not to chase after those opportunities. So it's a kind of balance on both sides. We both need each other, but we both have needs for our own businesses as well.

And our next question comes from Andrew Finkelstein from Susquehanna.

I was hoping you could talk a bit more about Levothyroxine in relation to FDA, you trying to accelerate approvals for even some of the more difficult to manufacture products, and how you view the possibility of more competition there. And then, secondly, if you could talk more about the Sumatriptan opportunity, where your market position has improved? And how durable you think that may be?

Good. Let me speak with the FDA. I don't know of any FDA policy that going after difficult to approve products. What FDA is trying to accomplish is to eliminate potential shortages or a lack of competition within the marketplace. In the case of levothyroxine sodium, there really is no problem there. You have 3 brands on the market and the 3 generic companies on the market. Putting aside the issues on one of my competitors on the generic side, certainly, Mylan and Lannett are capable of supplying the market. So are 3 brand companies, for that product. So with 5 of us constantly in the marketplace. And as far as I know, my other competitor on the generic side has still got inventory in the stream of commerce. We don't think -- there's not going to be any reason for FDA to accelerate an approval for that product. So it's not like there's a need for that particular drug. With regards to their goal in general, yes, the FDA is trying to look at opportunities where there's one generic, no generic, and get those products to the market because they've been criticized that the approvals that are coming through are sixth and seventh and eighth approval on an existing generic product that's already on the market. Really not making any major changes in the marketplace. And I think it's respecting that complaint or that criticism, and doing what they can to fix that. The other part of the question I'm trying to remember was -- oh, the Sumatriptan. It's hard to say. When one of our authorized generic competitors, in this case, drops out, we're the first generic to the market for this product. When we became the first generic a few years ago, we decided to go after this particular drug, without realizing we'd be the first generic, and possibly the only generic on the market. That has turned out to be the case recently. And we've alerted the FDA that with the shortage -- I mean, with the withdrawal, let's say, temporarily, of the authorized generic, that we're still available to supply the market, and there's been no shortages in the marketplace. One of the reasons we work closely with FDA shortage-side isn't just to flood the market with our product, it's to control and minimize hoarding, which is one of the major factors involved in shortages. So we don't allow people to place huge orders and warehouse the materials, thereby exacerbating our shortage situation when there shouldn't be one. So we've seen there's an increase in sales of the product, and we continue to enjoy the fact that we're the only generic for that product.

And do you have any visibility on the time line where you're the only product?

No. Because I don't know what my competitors are thinking. We heard from their release to their customers, memorandum to their customers, that they expected to be out of the market for about a year.

And our next question comes from Scott Henry from Roth Capital.

Marty, did I hear you correct that you expect 25% sequential revenue growth in Q2?

Correct. That's correct, Scott.

Okay. So that's a good chunk of revenues. I think, I mean, that's $35 million to $40 million. And my question is, where do you expect those to show up? I mean, that's not just a little bit. That's a big chunk.

Yes. Well, it is weighted to several products. It's across-the-board, really. There's a bit of a weighting towards Levothyroxine, but that being said, we have several of our major products are improving, things like Sumatriptan. We've been talking about that. fluphenazine is showing some strength going into the second quarter. So I mean, those were a couple of the larger improvements. C-Topical, we're expecting to see an increase there. So it's several products. But yes, there is a weighting towards Levo.

Okay. And it sounds like you expect to step up in Q2, and then, somewhat consistent in the second half of the year. But I think when I run the numbers, it actually -- a slight decline. I imagine some of these benefits are onetime, and they kind of erode in the fourth quarter? Is that correct way to...

Well, part of it is -- as Arthur said earlier, we don't know. We just don't know. So we predicted what we can see somewhat clearly into our second quarter. But beyond that, as we have always been here, Lannett, we try to be conservative in our outlooks. And right now, we just cannot tell yet.

Okay. Sounds like things are going well. I guess...

It's going to be good surprises, if there's going to be surprises. Let's put it that way.

Yes. And just from a modeling standpoint, factored in that a lot of things are going well. When I look at that gallstone line, that dropped down. Should I expect that to rebound? Or do you think this is kind of a new base going forward?

Well, that is the (inaudible) product. And we're seeing some competition there. So it's probably dropping off to a run rate that makes more sense.

Okay. And then, on the migraine I realize Sumatriptan is a nice tailwind. How far can that migraine category go? How should we think about that from Q1 to Q2. Obviously, jumped significantly in Q1. Sounds like there's another step up.

Well, if politicians keep giving everybody headaches in this country, it's going to work well for us.

Okay All right, guys. And I guess, just a final question. I did notice, you took the interest expense down the guidance. What drove a lower interest expense guidance?

So that's the -- yes. In the quarter, the revolver was in place earlier like for this quarter -- quarter-on-quarter, that benefits now $1.6 million in the quarter. That's the revolver that we had in the first quarter of the prior year. Didn't have it -- don't have it in this last quarter, obviously. And then, in terms of the guidance, there's also a piece where, as you recall back in the last call, we had an increase of 25 basis points in each quarter and right now, we're thinking that that's not going to be the case. So we pulled back a little bit on that.

And our next question comes from Elliot Wilbur from Raymond James.

This is Lucas Lee in for Elliott. The first question I have is what was the price erosion you experienced during the quarter? And secondly, maybe I missed it. But you've alluded during last quarter that you're negotiating with UCB to acquire 2 of their products. Did you provide any update on this matter?

Okay. While Marty's looking up first question -- do you know which one it is?

Yes. Well, the price in the -- so in the quarter versus last year's quarter, we were up about $7 million -- I'm sorry, down about $7 million. And that was predominantly price. (inaudible) was about $25 million or so compared to last year's first quarter.

With regards to the second part of your question, the UCB, the -- I'm trying to be careful here because we have friendly relations with UCB. But the real problem that really stopped us from going further with that intervention. Both drugs was Scheduled II drugs, and the climate for Scheduled II drug brands in this country not only is there a negative, but there's a lot of litigation against those companies. It didn't seem like a prudent idea to go ahead and buy 2-brand products, and then involve ourselves in the litigation, having owned those brands since their writing is already on the wall. So we chose to back away. One of them, as you know, was the Tussidex product, which uses Hydrocodone as an ingredient, and that went from a Scheduled III to a Scheduled II. So that was already declining in revenue as a brand, as well as all the generics that are out there. So those are really the factors that caused us to say, maybe it's not the best time in the world to jump in and buy this product until we kind of see what's going on within that space. We're still advocating to a very integrated and controlled drugs. It's not changing our focus. But with regards to the brand and that field, some of them has some history that we're not completely familiar with. So that caused us some hesitation. So at the moment, we've turned down the opportunity to buy those 2 products.

And our next question comes from Gregg Gilbert from Deutsche Bank.

Sorry, guys. I'm not sure what happened there with my phone. I think you covered out the Levo stuff and what's in guidance. Arthur, can you talk about whether you expect pricing pressure on your [estate] business to get better or worse or stay roughly the same in the coming quarters? That's my first question. For my second question, it's for you, Arthur, as well. Do you have a better understanding from your board colleagues now why they announced the discussion plan they did, and how they did, and when they did now that some time has passed?

Okay. Let me take the question first. My prediction stays the same back in March and now actually has started to say then that I expect prices to start to rebound by September of 2018. I continue to believe that. I'm starting to see some changes in the marketplace. That doesn't mean, with hundreds of thousands of generic drugs on the market that you're not going to see examples when prices come down. A lot depends on the competitive nature of the business we're in and the people that want me to grab market share. But generally speaking, this anti-price phenomenon, where people are against anybody raising a price are ridiculous in light of what FDA wants us to do, which is upgrade facilities, meet new requirements that they're putting out there, which requires us to spend more money in our operations and our facilities. We cannot continue to do that if you don't raise prices on some of your products. So I think you're going to find more modest price increases, but you will see those price increases coming back. On the other hand, you also have the customer base, the 3 major customers. They work on profit margins on marking up the goods they buy. The lower they buy the merchandise, the lower the profit margins for them. And you're also noticing that the PBMs seem to be concerned about this margin erosion as well because they don't have the luxury of making that opportunity between the negotiated prices of the manufacturers, and what they negotiate with the insurance companies, for example. So you have a lot of people who are being punished when there's no price increases versus this aberration of a few thousand products that have big increases that affords out all these scrutiny in the first place. Most increases within the generic drug space are modest. And they're really covering salaries, overhead, new operations, upgrade the facility, and things like that. It's state-of-the-art. So I don't think you're going to see any particular change there. The second part of your question. It's a little bit tougher because I really don't have any information that I could give you as to what motivated the board. I can certainly tell you there's no any dispute between myself and any of the board members. There's no directional dispute. Everything we've done at Lannett, the board's approved. The acquisition [that got us] 1 vote to acquire Kremers Urban, at the time there were 6 board members. The other 5 approved the acquisition. So there's nothing related to acquisition. I'm trying to cover everybody's questions that we've gotten in. So excuse me if I'm long-winded on this one. So I just think that the -- certainly my age is probably a concern for some of the board members. As some of you know, I may look 20 years younger, but I'm going to turn 72 next month. And fortunately, for me, I don't look my age -- and I don't act my age either as all of you know. But nevertheless, I think those are some of the factors. But more importantly, I didn't disagree, in 2014, that if you're a board member as I am, that you have to do succession planning. And whether that means sitting there or talking about replacing myself, which is probably a very difficult situation for any person, unless they want to leave the company, it still has to be addressed. So whether I like it or not, the right thing the board did back in 2014 was to address it. The only difference of opinion you might say I have is, the acceleration of searching for someone now versus waiting until the -- bringing in a president and planning to go ahead with that original plan. Aside from that, I don't really see a difference here. The board felt that they'd get more candidates if there was a real knowledge out there that I was going to be replaced at some point. So that capable candidates could come forward as opposed to people that are being solicited. People would know that there's an opportunity here, and maybe we'll get the best of the best. I hope that kind of answers the questions because I'm trying to fill in for board members who -- they haven't given me an answer that I can give you more directly. So I'm reading a little bit of the tea leaves here.

And our next question comes from Andrew Finkelstein from Susquehanna.

I was just hoping you could talk a little bit about gross margin, given the gross margin guidance is unchanged. But you have the extra volume on some products, I would think are above average. Is that not the case? Or is the gross margin balancing some additional pricing pressure on other products? What went into the dynamics of the guidance there?

I would say, Andrew, it's both those things. Actually, I think, you're answering your own question to a degree. So the sales increases that we're showing in our guidance, they're, for the most part, the higher-margin products. The -- as I mentioned, [Erstalvo] is coming down and that's also [we're heading] in the opposite direction. But yes, we do expect to, generally speaking, an ongoing price decrease, just a trend in the marketplace. So we have some of that also working into our numbers.

As you know, we continue to look at our product line. And occasionally, we do raise prices on our products on individual products. They certainly don't make the New York Times business section. But we do look at our products and look at our costing. We are moving into another facility, making changes, upgrading some of the processes that we have here at State Road have to be more modern, because you're moving to another facilities. You upgrade the processes. All those things bring -- add cost sometimes. So we might raise prices on some of the oddball items here and there just to make sure all of our product line is as profitable as it could be. At the same time, we're also reacting where we have additional competition or more aggressive customer -- competitors out there looking for market share.

And with that, we have no further questions. I will now turn the call back to management for closing remarks.

Okay. Well, I want to thank everybody for joining today's call, and look forward to speaking to you in another quarter. So thank you, everyone.

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