Lannett Company Inc (LCI) 2018 Q2 法說會逐字稿

Welcome to the Lannett Company Fiscal 2018 Second Quarter Fiscal Results Conference Call. My name is Sheryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded.

I would now like to turn the call over to your host, Robert Jaffe, Investor Relations at Lannett. Sir, you may begin.

Operator, we got cut out a little bit. Can you hear us?

Yes, I can hear you, sir. Your line is open.

Okay. Good afternoon, everyone, and welcome to the home of the Super Bowl champion, Philadelphia Eagles. Thank you for joining us today to discuss Lannett Company's fiscal 2018 second quarter financial results. On the call today are Tim Crew, our recently appointed Chief Executive Officer; and Marty Galvan, the company's 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'd 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 second 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 earnings press release issued earlier today.

This afternoon, Tim will provide opening remarks on the business, some brief comments on the quarter and conclude with thoughts on Lannett's path forward. Then Marty will discuss the financial results in more detail, including the company's revised fiscal 2018 guidance. We will then open the call for questions.

With that said, I will now turn over the call to Tim Crew. Tim?

Thank you, Robert, and good afternoon, everyone. Welcome to the Lannett's Fiscal 2018 Second Quarter Financial Results Conference Call, my first conference call as the company's new CEO. I am delighted to be here.

We'll discuss the second quarter financial results in just a moment. But before I do, I'll share some of my initial thoughts since joining the company about 5 weeks ago. As some of you may know or have read, I've been part of the pharmaceutical industry for more than 25 years and have held senior-level positions at Cipla, Teva, Dr. Reddy's and Bristol-Myers Squibb. In those roles, I have experience across virtually all functional areas. Every company has its strengths. So my first priority was to meet and connect with as many employees and colleagues as possible. I've been with our teams at our facilities across the country with the objective of evaluating the company to learn what's working and, of course, what might be improved.

I've also met or spoken with other key constituents, including customers and partners, many of whom I've known from my role from previous companies. I'm pleased to say that I've learned we have a great team of dedicated professionals committed to the reliable supply of high-quality medicines. Not surprisingly then, I have found Lannett to be a well-run company with a fundamentally sound strategy focused on managing the base business, building out the pipeline or making it open to opportunistic drivers of value. I acknowledge the good work of my predecessor and the team had done in building this business.

Moving forward, however, we will pursue a series of adjustments. First, we plan to achieve more financial flexibility by paying down our debt even more quickly than we have so far and continue to pursue certain refinancing options. As evidenced of our commitment to paying down the debt, we made a voluntary $25 million payment yesterday, which is in addition to the $27 million in principal payments made, thus far, in fiscal 2018. The recently enacted tax reform will provide added cash flow to help with this effort.

Second, we are recalibrating and looking at the timing of our various investments to better support our strategies. We plan to slow the rate of plant growth in certain long-term CapEx and certain product development projects to make more resources available for in-licensing and product acquisition. Because of our resources, systems and operations, Lannett has long proved itself to be an attractive and a ready-for-business partner in ways smaller companies with less capabilities or large companies with more reluctant portfolios cannot. Obviously, increased focus on the growth of our current sales base with new partner products and new customer awards will help further diversify our revenue streams and improve our financial flexibility to do even more. We've already taken action with a new partner product and new customer awards of in-licensing of Metoprolol XL, generic Toprol, which we launched a few weeks ago.

Also, as we said in the second quarter release, we have just completed the acquisition of bio products UCB, including some mature brands and NDAs -- ANDAs, excuse me. We plan to launch 3 of these products which are currently being marketed in the current fiscal year. On an annualized basis, we expect the 3 products to generate approximately $10 million in combined revenues with a gross margin percentage that is slightly below our historical average. As I said earlier, we are looking to do more of this kind of transactions because they diversify our revenue streams and generate cash that we can use to further pay down debt and invest still more on our future. Sales of Metoprolol and the product I just mentioned are included in our guidance, which Marty will discuss in more detail shortly.

It's important to point out that although licensed products typically have a lower gross margin percentage on a historical overall average, these are expectations products who obviously still add to our top and bottom lines.

The last adjustment of our strategic plan that I'll mention today is increasing our priorities and efforts to achieve operating efficiencies. The company's experienced tremendous growth in recent years. And as a result, there are several areas where we see opportunities to further improve efficiencies and increase the output of our plants to support recently and soon-to-be-approved products.

I will now turn to our financial results. For fiscal 2018 second quarter, we are very pleased to report record revenues and a 19% increase over the first quarter. The higher revenues were primarily driven by increased demand for a couple of key products. Please recall that in November, we raised our guidance largely based on our expectations of higher sales of Levothyroxine when a hurricane led to widespread power outages in Puerto Rico. The competitor supply was disrupted during that period, but the competitor resumed production earlier than we anticipated. As a result, the increase we did achieve in the second quarter was less than anticipated.

Turning to bottom line, our second quarter earnings also significantly benefited from tax reform. We are proud to be a U.S. company that makes its products, employs its staff and generates its sales in this country. As such, tax reforms has had, and we expect will continue to have, a very positive impact. Marty will discuss reform in more detail shortly.

Looking ahead, over the next few months, my focus will be to continue to align the team, the organization and our investments along the lines of our strategies. As I mentioned earlier, we'll be particularly looking for new products to launch and expand our offerings.

Before turning the call over to Marty, I'm pleased to say that Arthur Bedrosian, our former CEO, has agreed to a strategic adviser role at the company. He'll be focused on transitioning and strengthening our relationships with our key alliance partners like JSP and HEC, among others. I'm happy to have him aboard and look forward to continuing to work together.

So to summarize, we had a great quarter, and I'm delighted to be aboard. Our plans and goals are to pay down debt faster to increase financial flexibility and to in-license and acquire products more aggressively to diversify our revenues and, of course, enhance efficiencies to drive our bottom line.

Finally, on a personal note, I want to thank all of my new colleagues at Lannett for the warm and very patient welcome.

With that, I turn the call over to Marty. Marty?

Thank you, Tim, 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 to the financial results on a non-GAAP adjusted basis. For the fiscal 2018 second quarter, net sales of $184.3 million compared with $170.9 million for the second quarter of fiscal 2017. Gross profit was $96.7 million or 52% of net sales compared with $96.2 million or 56% of net sales for the prior year second quarter. R&D expenses were $10.7 million compared with $9.9 million. SG&A expenses were $20.9 million compared with $17.0 million. Operating income was $65.1 million compared with $69.3 million for the prior year second quarter.

Interest expense decreased to $16.2 million from $17.9 million. Income tax expense decreased to $10.5 million from $17.5 million, which represents an effective tax rate of 20.5% and 33.7%, respectively. The decrease reflects the favorable impact of the recently enacted tax reform

Net income attributable to Lannett was $40.6 million or $1.06 per diluted share compared with $34.5 million or $0.92 per diluted share for the second fiscal -- for the second quarter of fiscal 2017.

Turning to our balance sheet. At December 31, 2017, cash, cash equivalents and investment securities totaled $167.7 million, and our debt was $886.1 million. As a reminder, the debt balance I just mentioned was further reduced by a voluntary payment of $25 million we made yesterday. And we remain well within our required debt covenant ratio.

Turning now to our guidance. Reflecting our modified strategy, the expected launch of several recently acquired products and an updated estimate on sales of a key product, we have revised guidance for fiscal 2018 full year on an adjusted basis as follows: net sales in the range of $680 million to $700 million, down from $710 million $720 million; adjusted gross margin as a percentage of net sales in the range of 48% to 49%, down from approximately 51% to 52%; adjusted R&D expense in the range of $36 million to $38 million, down from $46 million to $48 million; adjusted SG&A expense ranging from $71 million to $73 million, down from $77 million to $79 million. Adjusted interest expense and other in the range of $62 million to $63 million, down from $66 million to $67 million; the full year adjusted effective tax rate to be approximately 27%, down from 35% as a result of recent tax reform.

Based on the midpoint of the guidance above, we expect tax expense will be reduced by $13 million. Our fiscal 2019 effective tax rate will be further reduced by -- be further reduced to approximately 21% as a result of the full year impact of tax reforms. And lastly, capital expenditures in fiscal 2018 in the range of $45 million to $55 million, down from $65 million to $75 million.

Regarding the phasing of the remaining quarters in fiscal 2018, we expect our third quarter net sales and profitability to be slightly higher in the fourth.

As a reminder, our guidance does not include sales from product applications currently pending at the FDA, nor does our outlook include sales of pending ANDAs of our strategic partners or benefit from any potential acquisitions, strategic alliances or possible further paydowns of debt.

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

(Operator Instructions) And our first question comes from Andrew Finkelstein from Susquehanna Financial.

I was hoping you could talk a bit more about the environment for some of these licensing deals in terms of the level of competition you're seeing for transactions, maybe how the structure may be different than deals have historically been in the space, if at all, and how you're approaching it maybe differently than Lannett has done over time. And then, if you could talk a bit more specifically about the timing on some of the upcoming launches, and how we should think about that in terms of our quarterly revenue progression.

Super. This is Tim. One of the things that really attracted me to joining Lannett, which is referenced in our opening statements, is I love the midmarket position of the company. The company has a lot of shots on goals built up over the past several years. And as we look forward out there, there's quite a bit of people calling me every day, some I know, some I don't, that are offering up new product opportunities. I -- we're not in a position to consider something subsident in terms of acquisitions. But from in-licensing perspective of products and portfolio sections or sectors, we're a great partner. We have the sort of capabilities that make us most relevant that some of the smaller companies can't have, don't have. And our portfolio is not of the scale here yet that it as a number of overlapping situations that a big company would have. And these products, as we bring them in, much as the 2 we mentioned, the 2 groups of products we mentioned on the call today, move the dime for us as an organization. So we're -- I see lots of opportunities. There's a lot of folks developing products across the globe, quite frankly. They have a lot of expertise, but they don't necessarily have the infrastructure necessary to bring it to market. And not everybody has the appetite to bring them into their firms. We are not the only people doing that, but they are a much smaller subset in the overall number of players in the generic space.

And from a structuring perspective, I mean, do you think of mainly competing on your ability to maximize the products? Or do you take -- look to take on and some amount of financial risk in the deals? And how do you balance that with the margin profile of what you're getting?

Yes. So obviously, we at the end of the day book margin dollars, not margin percentages. I'm always thoughtful of that, especially in a world where we're trying to work down our debt and diversify our sales base. But as it relates to the structure, there's lots to do with the product, right? And there's quite a few products that are ready to go, and it's often simply sharing the margin. And yes, the margin percentage will be down, but we're adding dollars to our pocket. And there's also development deals out there where we do pay some portion of that development expense to get a higher percentage of that participation. And that's fine, too, for the same reason I just discussed, it increases our margin dollars, but equally, this is important that it diversifies how we're investing our money, balancing what we do internally for our own capabilities with the capabilities and technologies and capacities of other firms out there that are looking for the front end and the operating capabilities that we bring.

And on launches?

Yes, Andrew. The launches, in terms of timing, in our guidance right now, they're essentially in the -- most dominant in the fourth quarter. At this stage, there's a piece of it in the third, but it's almost all on the fourth quarter for now.

Our next question comes from Gregg Gilbert from Deutsche Bank.

And I have 3. I'll ask them upfront. First, Tim, can you talk about how your vision for the future of the company is different from the one you inherited in a little more detail? I know you talked about ramping up in-licensing activity, but perhaps you have some other comments about your commitments to the pain and other partnerships and other changes you'd want us to know about your vision. And secondly, where do you stand on locking down an arrangement with JSP to secure your most important, for now, product over the longer term? And lastly, Marty, could you help us with tax rate, just pushes and pulls beyond this year? I know you're not guiding beyond this year. But is 27% sort of a good rate to use longer term based on your structure and your product mix as it is now?

Thanks, Gregg. Let me start with the JSP licensure first. Obviously, it's a critically important relationship. We look forward to expanding that relationship over time. We obviously have a very long and mutually beneficial relationship with JSP. They're a significant shareholder. I'd be happy to add that to their share base. I'm optimistic because of the number of things we have going on between the 2 companies that there is a big reverse to continue to partner as we have in the past. Please note, as we've announced earlier and I've noted in my remarks, we have retained Arthur to facilitate and guide exactly such transactions and conversations and transitions, and look forward to doing that with him. The time line of these sorts of transactions have their own pacing. But it's clearly a priority, and we're optimistic that we'll come to a good position in a relatively not-too-distant future. Stepping back a bit more broadly to the sort of nuances of strategy, as I noted, the fundamentals of the -- pursuing the base business and adding products to our pipeline and pursuing opportunistic value remains, I think, relevant for the firm. I'm thinking a little bit more about rate and speed, both with respect to the timing of the investment, making sure some of our early investments are near-term partnering. I think you need to do both long term and short term. I think short term drives at the end of the day, long term. So I'm looking to recalibrate a bit how we spend that money. Some of the guidance, I guess, that Marty just spoke to, you hear about down. But we're not decreasing R&D spending at all. We have a very high level of R&D spend. We're going to continue to make that spend. But the rated ramp-up we're thinking about again giving more financial flexibility, paying down that debt and generating more near-term revenue with partnerships that not only generate near-term revenue but, again, from a risk perspective, provide access to different technologies, different resources, different points of view. We want to spend those resources wisely. So those are the 2 big portions. You asked about vertical integration. We're still quite committed in that space. It's an exciting space. It's a big space. It's a few years out before we have a material impact on the scale of that work. But we're continuing to drive forward in that relationship and looking for ways to, again, optimize it like everything else we're doing here.

Okay. And Gregg, it's Marty. So as far as the tax rate goes, as you said, we're reflecting a 27% effective tax for this year. Next year, in 2019, fiscal 2019, we expect that to be 21% next year. So we obviously work with that at this stage.

And sorry, one more, Marty. Can you provide the cash flow from operations you generated in the quarter, if you have that handy?

Yes. Just give me one second here. Yes, Gregg, in the quarter, it's $78 million -- or I'll give you a better number, $77.7 million.

Our next question comes from Dana Flanders.

My first one here, can you talk a little bit about just revenue guidance and why that's moving lower? I would have thought with Toprol coming and some of the other products you mentioned, revenue guidance would be moving higher. Is that all Levo? Or are there other parts of the business that you're adjusting for as well? And then my second one here on C-Topical, just in light of the competitor approval, can you just maybe share how you're thinking about that opportunity now long term?

Sure, Dan. So I'll start with the first part. As far as the revenue guidance goes, yes, you're right. The main driver of the reduction in the guidance is the Levothyroxine, which, as Tim indicated, we over-anticipated. The other part is at the majority of the decrease, also, there's some other parts that when we reflected had some smaller or less large decreases. One other operational point as we -- in our guidance, we've actually delayed a bit, further delayed some of the products which have been approved but not yet launched. We moved those in -- moved them beyond another quarter or so. So it's these factors: Levo, the delay in the products, the approved not launched and just some other operational -- smaller operational changes.

Thanks, Marty. On the cocaine side, there's quite a few moving parts here, obviously, first and foremost, we want to note that the FDA continues to review our 505(b)(2) NDA, and we have a summer PDUFA date. And we're working hard to see that product come through the system. We also continue to market our existing products in that space. And we'd expect to be able to do so for about a year, regardless of what may occur in terms of exclusivities that have not yet been granted to the existing competitive products. So we are pursuing our pending NDA with the same vigor as we had prior to this news and we continue to market our own product. Perhaps there's some validation in the space that other people are looking at it. I would also note that as of today, we have not seen a launch of that competitive product. And again, the exclusivity is nothing that looks like in the Orange Book as of, I guess, February is the most recent update, so we haven't seen anything there. And so we're currently evaluating our options, given the changing landscape to figure out the best way to invest behind the opportunity to this asset.

Our next question comes from Elliot Wilbur from Raymond James.

Just wanted to start out with a few specific product questions. Going back to the alteration and expectations for levothyroxine. Safe to assume at this point that that's primarily based on market share and Sandoz reacquiring customers that were maybe lost during the disruption, and there really hasn't been much of a change in price, first. And second part of the question is, how reasonable is it to assume that some of the incremental business that you've acquired, at least what's showing up at this point in terms of RX market share, how sticky do you think that is at this point?

Well, yes. The market is really returning back to where it was prior to the rate we guided. So I want to stress on a good year with Levothyroxine, it's certainly ahead of where we started our year's projections at. It was just this -- I wouldn't call it anomaly, but the strength and opportunities that the partnership did a great job producing product getting to market where customers have needs, so we're pleased with that performance, but it was on a sustained market situation. And looking forward, we see things are turning largely to where they were prior to the most recent uptick in that second quarter. In terms of stickiness, there are, as people are aware, concerns around this narrow therapeutic index, and we may pick up some incremental volume around that sort of space. But by and large, our expectations now are to maintain the good year we're having at the rates we're having that, more around the first quarter versus the second.

Okay. I wanted to follow up with just a couple of other product-specific questions, maybe just -- or category-specific, I guess. Anti-psychosis looks like it outperformed expectations fairly substantially. Just wondering if you could comment there on some of the underlying trends or product dynamics that drove that? Similarly, CNS, also I think came in well short of where external expectations were. I'm just kind of wondering what's sort of the key underlying drivers there. And if you could also comment on the migraine market category, specifically sumatriptan nasal spray product, looks like Sandoz has begun to reacquire shares. So I just want to get your sense on what's taking place in that market as well.

Sure, Elliott. I'll kick off on that one. On the anti-psychosis, that category is -- it's predominantly (inaudible) basically. It's 90% of the category. We did have a strong quarter. We're not expecting to continue at that level that we saw in the second quarter. The just our intelligence of -- the supply in the market, we think there may have been some excess bought there, purchased. So we're not continuing with that high spike as we might have seen in the second quarter. So that's anti-psychosis. On central nervous system, predominantly, the methylphenidate products. The decrease you're seeing there is really the Metadate product, which we have stopped selling at this stage. That essentially is the decrease that you're seeing there, both in the quarter and in the year-to-date numbers. The next category was migraine. I believe you asked about sumatriptan. Sumatriptan is about 2/3 of that category. Product continues to do well. In the past, we've talked about the supply circumstance in the market where the competitive products are not able to -- the source of the product, there's a challenge in the manufacturing. I won't go too much into the detail about other companies' problems. But that's what you're seeing there in the migraine. For the first -- for the next -- for the short-term foreseeable future, we're expecting that to continue.

And if I can just give a little color. I think it's important to note and congratulate the company on there's a fairly significant engagement here to convert the broader elements of the company to SAP. And when you do that, certain customers will think a little bit ahead and add a week or so of inventory. And this particular product hit that sort of space. And your specific question on the migraine product, we do understand the competitor is also coming back on market there as well. They were expecting to be fairly stable, again, back to the original trends before they had some of the disruption.

Okay. And then last question for you Tim, more of a strategic question and specifically thinking about the controlled substances market. Obviously, it's an area the company has talked a lot about over the years and has suggested that, longer term, that would be a significant component of long-term growth. And there's been a lot of investment made there. But I'm just wondering sort of how you're thinking about that opportunity in light of what we're seeing within certain controlled substance categories, whether or not you're still as committed to it and whether there's things you believe you can do based on your assessment at this point to sort of accelerate revenue realization in that area of investment.

Again, I think I stated earlier, we're maintaining our R&D and CapEx investments. The rate and speed does matter to me, and so we're thinking about how we pace these things to optimize and manage our returns. Look, the -- that fee-to space is extraordinarily large. There's lots of important patient utilization. Now currently, there's a number of concerns about appropriate use. And we respect and support initiatives in that space to be a part of the solution and not part of the problem. But at the end of the day, it's a very, very big category which we expect to grow. There's unfortunately a lot of patients in America in pain. And even if that category has some attenuation as people think about more about appropriate use, it's a very big category for us. And so I still like it relative to both our finished dose capabilities and their integration back to a vertical side. The vertical side, again, takes time. We've invested money there and we continue to invest money there. Vertical integration is in one part, typically considered around issues of cost of goods or lower cost or better margins. But the optic guide have primarily in that space, it's about guaranteeing your supply, which is incredibly important to our -- to our customers that for many, many years, and we've seen it in this portfolio and lots of others, success in this marketplace has often been who can continue to rely and to supply product. And so vertical integration to me a category, and this one was good for us because we have so much in the finished dose side I think helps us with that core commitment that is so important to driving engagement and share with our customers. So I like it very much in that space. Getting to scale on that may take some time. And thinking that through as we're doing that on a weekly basis. But I like it, and we're committed to it. And we'll figure out any nuances to it as we go forward.

Our next question comes from Gary Nachman from BMO Capital Markets.

Tim, when you think of the C-Topical opportunity, are you just as bullish as Arthur, I guess, has been getting on this recently? And will you try and leverage that branded business to bring in more brands at some point? How do you think, from a big picture perspective, in terms of maybe having a branded business together with the generic business down the road?

So I don't want to -- I don't know exactly what has been set up and said on the records of what degree of bullishness was out there. I do think this is a very logical extension of the space that we're in. This is not developing a new chemical entity. This is leveraging both API and finished dose capabilities in the space that has enormous volumes as people deal with that space. So I think as we get started here, as we think through what the opportunity looks like, it obviously has to be somewhat smaller. The fact that there is a competitor in that space has actually caused an obvious moderation of expectations. But in terms of what we do now versus over time, I mean all companies -- most all generic companies are nibbling in this sort of area, I think, it's important to find the balance where we have competencies to do that and develop a product and distinguish it a bit from the commercialization side. So I'm open to thinking through how we best commercialize this product, which could be in our hands or with somebody else if they share our views of its opportunity. And I think that's an ongoing process today. There's another question in that.

Well, just like longer term, do you think it's important for a generic company to also have a branded business alongside it, like some of your peers do?

I think it's important for some people on our shareholder call to have continuous and solid and steady growth. Clearly, there are elements of the brand space which is a little bit more expensive to go into, takes longer to build. But once it's in place, it's more sustainable. And there's some natural affiliations between a lot of what a company does in the generic space and the branded space. But I do think it's important to think there are quite a bit of differences between them. So one of the things, I guess, is as we talk about the strategy, it's been a little bit more focused on perhaps a narrow set of initiatives. Opportunistically, we'll chase a bunch of things that makes sense to us. But I do think, as it relates for Lannett today, the bulk of our revenues will be on that generic side for a period of time. And I'd love to find branded opportunities that makes sense that don't cost too much money and don't present too much risk but have a probable ability of growing. So it's a bit of a generalized answer, but the question is of an issue that it's kind of a product-by-product opportunity, and we're -- we pursue that I think opportunistically as opposed to a core strategy at this point of our evolution.

Okay. And then on the generic pipeline. And I know you're trying to maybe diversify the portfolio a little bit more and have some partnerships that are going to complement what you do internally. But you have a goal for how many ANDAs you want to file every year that you'll be generating internally. I mean, it does seem like you're scaling back a little bit in terms of the expenses. But you made the point that you're not really changing the investment behind a lot of the programs. So I just wanted to reconcile how you think about the pipeline and what you think you're going to be able to churn out of it?

This is a really important question. We spend a lot of time on this, and we'll continue to do because it's a product-by-product engagement. While I clearly want to see more products sooner and later in our portfolio, it's really a question of quality not necessarily quantity. There's lots of ways to bring in a whole bunch of products very shortly. But they wouldn't be adequately contributing to my margin dollar equations as opposed to just top line piece. We do want both. So that we need more, that we want to be efficient, that we want better yield out of our investments, that's absolutely true. It's important to be thoughtful about what is our capability in terms of ability to execute. And we've ramped up R&D so much in the past couple of years. And how long it takes things to the equation. So I want more, I want a blend of risks. I don't want to be all invested in the great team that we are building here at Lannett today. I want to think about a lot of expertise that exists across the industry. My background has extensive amount of [BD] experience. And I think most all the portfolios, most all the major generic companies have significant business development whether it's an acquisition or licensing issue. There's very few companies that I can think of that have this portion amount of their internal sales as being internally developed, right? So I think this recalibration is the natural evolution of our scale and size. And I'm committed to doing so. And we'll come back to you over time as we think about levels of investment, managed investment, time investment. Right now, we're not backing down at all. We're just recalibrating what is internal and what is external and building to take a lower margin profile for sure certain revenue than less sure and less certain future revenue.

Okay. And last question for Marty. Just explain a little bit more why the gross margin is coming down as much as it is in terms of the guidance given what you did in the first half of the year? And I get the pieces there, but maybe you could just help us quantify it a little bit. How much is the lower Levo versus, I guess, these new partnerships that are contributing to lower margin revenue?

Sure, Gary. So yes, I mean, our second half of the year gross margin is lower as reflected in the guidance. There is -- 2 key factors there are the decrease in the levothyroxine business, which is a gross margin higher than our company average. That coming down, that's an unfavorable impact on our gross margin percentage. The other piece is the addition of the metoprolol product. It brings us good top line sales and good profit, albeit at a lower margin as it's [sugar] product, so it's logical that the margin there will not be as good as our company average, let's just stay. So those are the 2 key drivers there that are bringing down the gross margin in the second half of the year.

Our next question comes from Matt Hewitt from Craig-Hallum capital.

Welcome, Tim.

Thank you.

Just I guess 3 questions for me. First off, would it be possible to get an update on methylphenidate? I believe there was still an outside chance that that product could get the AB rating back, if we could get an update on that? Secondly, if we could get an update on the large customer that started to come back last year, where that sits today? And then lastly, if we could get an update on your current and the pipeline and maybe the TAM that goes with that?

All right. On the first question, the methylphenidate, remains a good product with a good margin. But I think the last remaining patents, there's a lot in that space as there's one new entrant. So as we look forward, we see our position is drifting down. Our share has been and look to remain in the mid-single digits. So I don't think we have a huge risk profile around that. But it is what it is. We are certainly continuing to pursue the FDA. We did file a petition for hearing regarding the status of our product. It probably will take up to a year before that petition is heard regarding the BX rating of the product. But we continue to market, and it's a good product. And -- but it's less than it used to be. The second question was on -- what was the customer question?

The large customer that started to come back last year. I believe it was CVS. Where is that relationship today? Have you continued to add new product through that channel? And how do you see that developing going forward?

Well, I learned long ago not to drop names with large customers. We care about all of them. They care less about each other. So it's a little bit delicate to get too much into detail in that space. Look, one of the things I found when I joined the company that was both the sort of yin and yang, surprise and an upside is that we are underdeveloped. We got good customer relationships across the industry. But there is currently areas to expand our depth and breadth of those relationships and some areas more than others. I have been selling to all of these key customers in various capacities and scale and size, both from their organization's growth and their personal growth, those people in the organization. And I'm optimistic that we will see growth and development in that space that will help diversify our sales base and grow the sales. We need to earn the trust of all those customers to do so. And that's important context. And I think at some level, I'm quite comfortable you can ask the customer how they feel about us. I think our reputation is strong and even stronger and quite confident that there are opportunities to add sales and value as we deepen that trust and add more new product launches to the portfolio that we offer.

That's great. And regarding the pipeline -- the pipeline and the possible TAM if you've got it?

The possible -- excuse me?

The TAM, the market size of that and the pipeline?

Yes, we have, I don't know, a dozen or so products that are pending at the FDA. There are -- I think the generic market size, my math was around $500 million or something like that. So again, I think much as the customer question that I see a lot of opportunity for expansion again to diversify, add revenues and grow our business, I would say in the same side on the pipeline perspective, right? We basically launched -- we'll be launching 4 or so products in the next -- we've in-licensed 4 products in the last 6 weeks, right, that we think has good value for us and growth. So I think the size of the upside there is really -- my focus as opposed to where we are, which is great and is going to progress, but there's a lot of opportunity. We are a mid-cap player, and there are billions out there for us to get to work on.

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

I will try to be quick. First, Marty, could you talk at all about the trajectory for revenues in the rest of the year? I know there's only a couple of quarters, but any color you can give us on how that should trend out.

Sure, Scott. The 2 quarters are fairly similar in revenue, in total revenue. Although, we think it's slightly weighted more to the third quarter than the fourth quarter at this stage. The key driver there is as levothyroxine settles back down to the normalized levels, that is what is causing that movement or that trend from the third to the fourth quarter.

Okay. So we should think about Levo as perhaps still having a little tail benefit in the third quarter and then really be normalized in Q4?

That's about right, yes.

Okay, great. That's helpful. Just another question on Levo. I think when you did the deal, I recall it was a 5-year deal with JSP with an option for another 5 years. Could you talk about how that option factored into the negotiations, if at all? I mean, are you pretty much starting from scratch? Or how does that factor in?

This is Tim. I'll take that question. Again, there's 2 parties in the negotiation. We're going to have that conversation with them in terms of things that matter to them and things that matter to us. I want to stress that we -- it's a long-term relationship. There's a lot of moving parts, shareholder relationships, share repurchase opportunities which I think is disclosed in all of our documents and again working with Arthur to find a way that makes sense in us in the way to move forward as quickly as possible. So it's -- there is a renewal component as it relates to the current contract, but we would sit down with them and find out what are the things that they most care about in order to make it a productive conversation. So I won't speculate here on those moving parts, but just please trust that it is an incredibly high priority for us and that we're working with all the folks in the company, before I came and while I'm here, to make sure that comes to a great outcome for both parties.

Okay, great. Final question, a very quick one. Contract manufacturing, I know not a huge lever, but it's been bouncing around a lot. It's been strong in the first half of both years. Is there just noise there? Or how do I think about that line?

Well, yes. So Scott, first of all, as you know, it's never been a core focus of the company from a strategic perspective. We had some weaker sales in the last several quarters. But I do not expect that line to deteriorate beyond where we are right now. So I think it's safe to, for now, at least to say the slippage has -- we stopped it, and we've taken -- the second quarter is fairly representative of what we think the next 2 quarters will be.

And we have no further questions.

Well then, thank you, everyone, for joining the call. I will look forward to sharing our progress on our next scheduled conference call. Again, thank you for joining us today.

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