Lannett Company Inc (LCI) 2018 Q3 法說會逐字稿

Hello, and welcome to the Lannett Company Fiscal 2018 Third Quarter Financial Results Conference Call. My name is Michelle, and I will be your operator for today's conference. (Operator Instructions) Please note that today's conference is being recorded.

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

Thanks, Michelle. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2018 third quarter financial results. On the call today are Tim Crew, 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 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 third 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 brief remarks on the quarter as well as comments on recent developments and near-term goals. Then, Marty will discuss the financial results in more detail, including the company's fiscal 2018 guidance. We will then open the call for questions.

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

Thanks, Robert, and good afternoon, everyone. After 5 months as CEO, I'm pleased with our overall progress. We're executing on our growth strategy and adding depth and expertise to the management team. We're proceeding with several product launches, and our organization is operating efficiently and effectively.

For the fiscal 2018 third quarter we just reported, net sales were $174 million, an increase of approximately $9 million over the prior third year quarter. Profitability, on an adjusted basis for the quarter, was in line with our expectations.

A couple of key products performed better than anticipated, while others faced volume declines. Gross margin was lower largely on sales mix due to declines of the sales of a high-margin product, offset by sales of lower-margin generic Toprol, a product we first began selling this reported quarter. Positively impacting the quarter was a reduction in operating expenses.

With regard to our fiscal 2018, we are affirming our full year outlook for net sales and adjusted profitability, although certain items between the top and bottom lines have been tweaked. A more thorough discussion of our financial results and guidance will be provided by Marty shortly.

Stepping back from the financials, our last conference call, my first as CEO, I said our focus should be to align the team, the organization and our investments, along the lines of our fresh strategies. With that in mind, I'd like to begin today by welcoming Maureen Cavanaugh to the Lannett family. Today is Maureen's first day, and she told me it's looking good so far. Maureen will serve as our Senior Vice President and Commercial Operating Officer, and in this role, she'll oversee sales and marketing, research and development, and regulatory affairs.

Maureen and I previously worked together at Teva and Bristol-Myers Squibb, and she's an extremely skilled and well-known industry executive with a long record of driving commercial organizational success.

In addition to Maureen, 2 other executives recently joined our team. Grant Brock is Vice President of Operations; and Alicia Evolga as Vice President of Marketing. Both are talented experienced executives in their respective areas. Grant will be focusing on increasing our manufacturing output and improving efficiency, and Alicia will focus on driving our near-term product launches and future product selection. Moreover, new Head of Engineering, Project Management and Site Quality have also joined us this last quarter.

In conjunction with these new team members, we also realigned some of our organizational structure and management responsibilities of a few of our tenured officers. John Kozlowski has been named our Chief Strategy Officer, while John Abt has been promoted to Vice President and Chief Quality Operations Officer.

All of these changes are intended to provide increased managerial depth to drive operational discipline and execution, enhance efficiencies, increase the output of our development production sites, and ultimately, increase our sales to our customers through a myriad of new product launches and customer-shared rewards.

On a related note, we also announced some changes to our Board of Directors that become effective July 1 of this year. Patrick LePore, an exceptional and seasoned pharmaceutical executive many of you may know, has been appointed Chairman, succeeding Jeffrey Farber, who will remain on our board.

In addition, John Chapman, who has extraordinary experience as a very tenured audit partner, has been named to our board. John will succeed James Maher as our Audit Chair. Jim will step down from the board after completion of the audit of our fiscal 2018 financial statements.

I personally thank Jeff for his steady and insightful leadership as Board Chair, and of course, look forward to working with him in the future. Similarly, we wish Jim all the best in his next chapter. He also has my personal thanks for easing my transition to publicly-traded life.

Turning to our strategies and investments. As I said in the last conference call, because of our midmarket position capabilities, Lannett is an attractive and ready-for-business partner. I said we particularly focused looking for new products to expand our offering, and I'm happy to share we have progressed this goal with several partnerships over the last few months that supplement our internal development efforts.

To recap, these recent transitions -- transactions. We launched generic Toprol in January, following an agreement executed in late calendar 2017. In February, we acquired 5 products from UCB. These products include metaxalone, where we already had received major customer rewards and will begin shipments this quarter.

In March, we entered into 3 separate agreements with 3 additional strategic alliance partners. The first was an exclusive U.S. distribution agreement for Diclofenac ER tablets, another product we plan to launch in the current quarter. In the second agreement, we acquired the exclusive U.S. distribution rights to Fluvastatin ER, the application of this product is pending at the FDA and we believe could be approved and launched late in the second half of the current calendar year. And the third agreement, where we provided 5 more currently marketed products to Pharmaceutical Associates Inc., for repacking to unit dose cups and distribution of the managed care and hospital markets. This transaction has already begun generating new revenue streams for our business. For all 3 of these agreements, no upfront payments required and profits will be shared by partners.

And last, but not least, earlier today, we announced the acquisition of a portfolio of 23 approved ANDAs, one pending application from Endo. The portfolio mainly consists of oral solutions, with a few semisolid products. The products will primarily be manufactured at liquids generics facility Carmel, New York, which has the requisite capacity, expertise and capabilities.

We will meet and begin transfer activities and the associated regulatory filings, and we currently estimate that we will begin launching the products in the second half of fiscal 2019. While we are well pleased with this new blizzard of activity, we remain actively engaged in a number of similar discussions and are optimistic that several of these discussions will result in transactions to drive more near-term revenue, our working goal is to augment internal development efforts with immediate opportunities to diversify revenue streams, generate cash we can use to grow our business and/or pay down debt.

Now let's turn to some other operational developments and opportunities. First, I'm pleased to report in the past few weeks we've had satisfactory FDA inspections at our main manufacturing sites in Seymour, Indiana and Carmel, New York. We've had a well-earned reputation for tight manufacturing standards. And congratulations to our current staff for continuing this impressive history.

Second, last year, we announced a $50 million expansion related to our Cody Laboratory subsidiary. As part of our focus on near-term opportunities, we have decided to suspend that significant expansion, while we reassess the timing risks and opportunities associated with the investment. We continue to make substantial investments in Cody, and continue to believe in a vertical integration opportunities of this business.

Third, later this month, I'll be spending time with the leadership teams of the China-based partner, HEC. In addition to reviewing multiple near-term and our product opportunities, we'll be discussing generic insulin pen opportunity. I'm increasingly optimistic that relationship will be able to deliver in affordable customer product option, with a prudent level investment well within the strategic planning time frame. I hope to provide an update on this matter on our next conference call.

Fourth, with regard to our C-Topical product, as many of you know, in December 2017, another company received FDA approval to market and sell of cocaine hydrochloride topical product. To our knowledge, that product has not yet been launched. Meanwhile, our 505(b)(2) NDA for Numbrino, which is related to our grandfather product, continues to be reviewed by the FDA. We have a PDUFA goal date of July 2018. However, due to ongoing FDA guidance expectations, we do not anticipate approval of that product until the 2019 calendar year.

Finally, with regard to long-steady partnership with Jerome Stevens, we continue to discuss with them the myriad of business matters of mutual interest to strengthen that partnership. We remain optimistic that Numbrino will be extended at the point in time it makes sense for the both parties to do so.

So to summarize, I'm feeling very good about the rapid progress we are making to improve our overall operations and grow the business. We have strengthened our already talented management team, added several near-term revenue streams and continued to pursue a number of additional opportunities to add even more products to your portfolio.

To date, our progression has been well received by our employees, our partners, and importantly, our customers. 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 for the financial results on a non-GAAP adjusted basis. For the fiscal 2018 third quarter, net sales increased $174.4 million from $165.7 million for the third quarter of fiscal 2017. Gross profit was $76.7 million or 44% of net sales compared with $85.5 million or 52% of net sales for the prior year third quarter.

R&D expenses were $2.7 million compared with $8.3 million. SG&A expenses decreased to $14.1 million from $17.3 million. Operating income was $59.8 million compared with $59.9 million. Interest expense decreased to $16.2 million from $16.7 million. Income tax expense decreased to $13.2 million from $15.0 million, reflecting the favorable impact of the recently enacted tax reform.

Net income attributable to Lannett increased to $30.5 million or $0.80 per diluted share from $29.2 million or $0.77 per diluted share for the fiscal 2017 third quarter. As Tim mentioned, our overall profitability on an adjusted basis exceeded our internal expectations. Having said that, I'd like to add a bit of color to our third quarter performance compared with those expectations.

During the quarter, sales of a few products were negatively impacted by volume pressure, most notably in our anti-psychosis and migraine categories. This was partially offset by a higher-than-anticipated sales of 2 key products in our thyroid deficiency and CNS categories. Gross margin was lower, due to a change in our overall sales mix. R&D expenses were lower due to a canceled order for prelaunch inventory totaling $3.8 million and the timing of milestone payments.

In addition, as Tim mentioned earlier, we are supplementing internal product development efforts with product acquisitions and in-licensing deals to enhance our product portfolio.

Lastly, our effective tax rate in the quarter was approximately 30%, a couple of percentage points higher than expected. The increase in the third quarter reflects the catch-up impact related to a reduction to our R&D tax credit and other tax deductions that resulted in our expected full year effective tax rate of 28%.

Turning to our balance sheet. At March 31, 2018, cash, cash equivalents and investment securities totaled $123.1 million, and our debt was $851.5 million. As a reminder, in February, we made a voluntary payment of $25 million toward our debt balance, and we remain well within our required debt covenant ratio.

Turning now to our guidance. Our guidance for fiscal 2018 full year on an adjusted basis for net sales and profitability is unchanged, although individual elements have been revised as follows: Net sales in the range of $685 million to $695 million. We have tightened the range from $680 million to $700 million, though the midpoint is unchanged.

Adjusted gross margin as a percentage of net sales were approximately 48%, down from the range of 48% to 49%. Adjusted R&D expense in the range of $30 million to $32 million, down from $36 million to $38 million. Adjusted SG&A expense ranging from $71 million to $73 million, unchanged. Adjusted interest expense and other in a range of $62 million to $63 million, unchanged. The full year adjusted effective tax rate to be approximately 28%, up from approximately 27%. And lastly, capital expenditures in fiscal 2018 to be approximately $50 million, changed from the range of $45 million to $55 million.

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 the benefit from any potential acquisitions, future strategic alliances or possible further paydowns of debt.

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

(Operator Instructions) The first question in the queue comes from Gregg Gilbert from Deutsche Bank.

I have a couple. First, Tim, I'd like to better understand the screen that you're using to bring products in, other than revenue generation near-term and a price that can generate a good return. What are the operational and strategic linkages that are important to you? And my second question is about Cody. Did I hear correctly, that you're still committed to vertically integrating in controlled substances, but you're suspending that investment or changing your mind about the magnitude of it? Just want to square those things up.

Thanks, Gregg. I guess we'll see you in a couple of days. First off, I'll take the Cody question first. Yes, what you said is a reflection of our indication at this time. Still believe in vertical integration. I still believe in the impactful amount of customer need in the pain space. However, the scale and rate of our investment, the degree of the vertical integration is what we're reconsidering now at this time, and we'll get back to you in the coming weeks as we work that through the process. So we still have a fairly significant footprint in Cody lying -- I mean, before the expansion, we continued to support that portion of our business accordingly. As it relates to the threshold that we have on new product launches, I think it's fairly straightforward. We want to typically look for something that's accretive almost immediately. At this level of purchasing, we're looking to minimize risk expenditure. That is to say, near-term approvals or approved products that are in our thresholds. We're maybe a bit more flexible in the margin point than the company historically has had for its overall blended margins, but we're certainly looking for some room that can support if there's later price pressure that would still be profitable and continues to supply our customers. It's very important to those folks that when you come and bring a product to market to their patients, that you're able to sustain them through thick and thin. So we obviously need some room to do that. And then, obviously, there were certain limitations of what we do internally versus the partnership. So often, the partnerships, if it's non-oral, nonsolution, it needed to come with its own sort of manufacturing capacity, which is also a great thing to tap into near term as our internal capacity is still working through the acquisition of the KU products. So I think those are kind of the moving parts, right? And I think, more importantly, the exact threshold, we're seeing quite a few opportunities that are virtually immediately accretive when you bring them into the market, and I think that's a far turn from some of the more expensive acquisitions you've seen in recent years in the industry.

And one follow-up, if I could. Just on your JSP situation, sort of the elephant in the room or one of them. Is there anything you could tell us about under what circumstances you would not proceed with extending that collaboration in some way? Just want to understand whether you're sounding confident about getting something done, versus something that looks a particular way. So anything you're willing to say on that would be really helpful.

Yes. It's a big, beautiful elephant. We embrace that as an organization. Look, I've met with the team there. We speak with them regularly. They're terrific folks. They're savvy managers. We have a great dialogue on an ongoing basis, all the various moving parts. And I believe they're very supportive of the initiatives that we've been talking about. I don't want to put the cart in front of the horse, elephant aside, but I'm optimistic that we'll get a chance to renew this agreement when it's right for both parties. There's clearly nothing more important to our business than doing so, and we'll continue to be focused on doing just that.

The next question in the queue comes from Dana Flanders with Goldman Sachs.

My first one here, just on the Endo deal that you recently announced. Can you give us just a little bit more flavor in terms of key products concentration? And then, just from a profitability standpoint, how much profitability does that add? And then, going back to some of the other deals you announced, can you help us just understand how much incremental revenue is captured in your fiscal '18 guidance from these deals?

All right. Thank you for the question. I'll start with the last one first, in terms of impact this quarter, outside of the Metoprolol launch from earlier, and some pretty good value coming from Metaxalone later this quarter. Most of these products are just, obviously, ramping up into the market. And so their effects in this quarter will be muted and more substantial moving forward. As it relates to the Par transaction, you'll see it in our -- I guess, our Q shortly, but we paid about $10 million for an upfront payment and a few million dollars of milestones only to get a transfer and first launch the product. While there are 24 products in that portfolio, there's a handful of them that are obvious near-term opportunities. We'd be hopeful that our first-year sales will be less than acquisition price, and the margins here, because they are typically products with not a ton of competitors, are actually pretty healthy. And I note that while the seller had a very large plant and perhaps excess capacity -- may have hardly been profitable, we have a more appropriately-scaled plant in Carmel, New York, that has that capability, and has that ability and capacity to bring those products in fairly profitably. But we have a transfer process we've got to go through, so those products also don't really hit our books until 9 months or so from here if they start going through the approval and transfer process.

Okay. And then, maybe just a quick follow-up. You mentioned, I think it was fluphenazine and Sumatriptan, some weakness this quarter. Is that competition coming back in? I think, previously, you had been pretty optimistic about the potential of those over the next 12 to 18 months. Can you just give us a little bit more flavor on what's going on in those markets?

Yes. For Sumatriptan, the competitor did come back, and we're kind of reverting to a position we were prior to their supply disruptions. So that's been working its way through our numbers for a few quarters now. On fluphenazine, it's a bit more of a bouncing ball around a slow erosion in our position. Late last year, there was some share shifts that didn't get maybe fully picked up. And as we went through a transition in our computer systems, right, to SAP, a couple of customers brought in some additional product that they make sure there was no interruption to the supply of some important therapeutic area. And that washed its way through a bit in the first quarter of this calendar year. And now we'll be having some recovery into the final quarter of this -- of our fiscal year, starting to be bouncing calendar and fiscal [year]. But so I'm trying to say it as there's a little bit of incremental sales in the second fiscal quarter of our year, which bled through in the third fiscal quarter of this year and on the fourth quarter comes back up a little bit, although on a level that's declining steadily since late last year. I don't know if you call it all that, but...

The next question in the queue comes from Andrew Finkelstein with Susquehanna.

I was hoping you could talk a little bit more about the gross margin dynamics in the quarter. Certainly, Toprol was a lower-margin product, but levothyroxine is above average. As I understand it, it was strong in the quarter. So if you could provide any more color, and also, I think the midpoint of guidance implies a bit of a rebound in gross margin in the fourth quarter. So if you could comment on that. And then, anything else you can say on your comment about guidance relative to Numbrino, would be helpful to understand the timeline for that product.

All right. So I think, fundamentally, the comment on the gross margin is related to the mix. We do have more products coming in as we both partner, and then, launch some products with the lower average margin than our overall margin rate. Marty, do you want to add anything to that?

One other piece I'd add, Andrew, is the fluphenazine as we said, had a weaker quarter. So that -- it's a high-margin product for us, as you said, that was somewhat off our expectation. That's why also you see rolling into the company's gross margin percentage in the quarter.

As it relates to C-Topical, again, as I think I noted in the prepared remarks, the FDA continues to review our file. They had asked for some additional data, which pushes our belief of an approval to move into next calendar year. But meanwhile, the sales of our existing product continues well. The other company with an entry into this space has not showed up in the market yet, so we've had no ill effects of that arrival, and we continue to provide that product to our customers.

The next question in the queue comes from Elliot Wilbur with Raymond James.

Just a couple of follow-up questions with respect to Goprelto and possible impact on Numbrino review and timing of launch, given that Goprelto has received NCE exclusivity. To your vantage point, any potential impact to the ongoing review of Numbrino or ultimately launch of the product? And then, similar line of question, would you think this would possibly have an impact on your currently marketed C-Topical?

Thanks for the question, Elliot. Two things. First of all, as it relates to the grandfathered product in the market, typically, the FDA guidance on the arrival of an approved application of the same way, I would suggest about a 12-month period as it relates to the remaining useful life of the grandfathered product. The FDA, of course, is very sensitive to supply disruption issues. This is a controlled substance. Obviously, involving cocaine, so I'm sure the FDA will be thoughtful. But in general we'd expect to be able to sell this product, at least through December, assuming their product shows up into the market beforehand. As it relates to exclusivity in the vagaries of technical written language, if you go through the CFRs and review the nature of what that exclusivity means, it reads under the plain statute, to block submissions. And since our product has earlier been submitted, we do not believe we are blocked. Additional applications could be blocked, but we believe that we're able to proceed to an FDA review as we meet the requirements they have on that product.

Okay. Then 2 additional follow-ups here. I had expected perhaps a softer quarter than we actually saw in Levothyroxine, given return of one of the major players in that space. Can you maybe just talk about sort of current market dynamics there, is it better than expected results this quarter? Simply a function of delay of that particular player not recapturing share? Or is there perhaps been something that has gone your direction in terms of potentially being able to retain more of that business? And the last question is, I may not get the numbers correctly, but I think you have 12 owned ANDAs and 6 partner products that are in launch phase or early -- or will be launched or could be launched relatively soon. I'm just wondering if all those assets at this point, in fact, will be launched over the balance of this year and headed into fiscal ‘19.

All right. Thank you, Elliot. First of all, I'm again happy to announce in today's transaction, our owned ANDAs are north of 30 now, they are approved pending launch. That new block will take a bit longer to get through the sequencing, the ones that we've been talking about previously. We have -- we've launched a couple of products this last fiscal quarter. I think we'll launch half a dozen or so in this fiscal quarter. That compares to a number not much more than that of the previous 2 calendar years. So the company has been working for some time to get our capacity up and running. We've added some management bandwidth to focus on those issues. So all of those products will be under a very high level of scrutiny and pressure to bring to market if it -- the dynamics justify doing so. I wouldn't want to suggest all of them will come to market because dynamics change over a period of time, but a fairly substantial block of them will in the coming fiscal quarter. So we're excited about that, and it's a linchpin, quite frankly, of how we drive value to this company as we move into the coming quarters and years. As it relates to Levothyroxine, yes, there was some spillover effect that continues to benefit us in this last fiscal quarter. Some of the share information, depending upon how you look at probably peaked in the mid or higher 30s during the disruption, and that competitor came back on market, our shares drifting down was still somewhat higher than it was before disruption. So there is some persistency to our position subsequent to that disruption. I'd also note some of our key customers continue to aggregate their competitors. And some of that share has also come into our side of the house. Given one of our major customers in that space has added a player that didn't necessarily source from us. That also provides a little bit of a bump to our share position. But it's going to look a lot like the first fiscal quarter, in the fourth fiscal quarter, with a little bit of upside from the matters I just forwarded you to.

The next question in the queue comes from Matt Hewitt with Craig-Hallum Capital Market.

This is Charlie Eidson on for Matt Hewitt. A couple for me, first. You've shown an ability to in-license a number of products since taking the helm. How much runway is there for LCI with this strategy? And what is the pipeline of additional in-licensing opportunities look like today?

Thanks for the question. It's one of my favorite, reflective to the position you see for the company. As a mid-market firm with an adequate portfolio, but nothing like the size of the majors, we see a fairly sizable set of opportunities in front of us, right? Some of the larger, well-known players in the space are casting aside their products, doing a lot of rationalization, leaving us great opportunities to partner with their former partners as we've done with diclofenac or metoprolol or add new partners as we've done with several bigger transactions that we've known about. So I see a fairly substantial runway. We have relatively modest share in the market and have got great commitment to it. And I believe we're building the team and we've got a company here with the right capabilities to avail themselves to that situation. I mean, any given moment, obviously, we have dozens of conversations ongoing. Not all of them will come to fruition or bear. And we'll be spending time to make sure we balance the full value of internal development against the sort of opportunistic situations on external parties. But we are absolutely open for business in this space. We get called literally every week on opportunities. Most all of them with reasonable financials, and we'll continue to execute that as we drive forward in the coming quarters.

Okay. That sounds great. And then, one more. You've added a number of people to your operations and commercial teams over the last couple of quarters. Can you talk about how long you think it will take them to get fully acclimated to where things are moving like you want them to move?

Well, some of them are around the table right now. We'll let them -- give them your -- we're hoping to bring them up to speeds in matters of weeks, obviously. Some stuff makes immediate impact. Some of this is a bandwidth issue. The company is considerably larger today than it was just a few years ago, and we've been working with that same management team for a period of time. So some areas get underserved, right? Or some of it is simply the bandwidth of experience management joining with the team we have here to make things move more quickly. These are not young, I'm sorry, children, but seasoned executives that can make immediate impact. Obviously, the nuances of the company and the situation and history and the context will take some time, but they are ready now and recruited as such to help drive our progression forward. And again, I add that in context to a great team that is already here. This is an intention to provide additional bandwidth, particularly around these areas where we've been a bit less than ideal in getting new products into the portfolio or into the market from our organization. All the rest of the moving parts are going quite well, but we're a little underserved on the teams in that space. And therefore, the adds in production, operations, quality, marketing, commercial, et cetera. And so far, so good, and looking forward to the coming quarters from the extended team.

And the next question in the queue comes from Gary Nachman from BMO Capital Markets.

Tim, on these other deals that you're looking at, are most of them similar to Endo with mostly marketed products? Any real pipeline that you're looking at? Just clarify that. And as your internal R&D spend is coming down, how will you be able to appropriately fund the pipeline? How do you think about managing that going forward? Just -- I think it's an important point to elaborate on.

Yes. Thank you for the questions. As it relates to the spend, I think there's a lot of moving parts, right? We haven't done any reductions in our staff, introduced any of the products that we're developing a portfolio. There are some moving parts about the timing of specific projects. There is issues around the specific timing of bio studies, what have you. And of course, we just spent $10 million, $12 million acquiring 23 products, right? That doesn't hit the R&D lines, but there's both income statement, investments, and there's also balance sheet sort of investments. So I would not align with the -- an impression we're doing anything other than spending more on R&D. We are spending some time balancing what we can do now versus later. Because of this interest and availability of products that are available right now, the disproportionate number of products have been approved products. And we've done a couple of in-licensing in the pipeline, but as you get into the pipeline, we have our own internal capabilities. And so you're not necessarily accelerating your time-to-market as quickly. So we'll judiciously add some pipeline efforts, particularly around technology that we're looking to access or specialize manufacturing capability. But again, right now, there's this large pool of things that are very clearly in our wheelhouse that is coming to us and we're executing on and will continue to do so until that faucet runs dry. But I don't see that happening anytime soon.

Okay. And then, just a couple of follow-ups on Levo. How has pricing held up with their products? Has Sandoz reentered? Are they -- is everyone still, I guess, behaving nicely? And when are you guys expecting an additional competitor to enter the market? And any visibility on your side when you think that might happen?

I'm not going to comment on market pricing for a whole host of competitive and compliance reasons. We are pleased with where we are with the product, and they are meeting our expectations. As it relates to moving forward, there's a whole lot of moving parts of bringing this product into market. I don't want to bore our audience to extensive lengths. There's obviously ongoing rumors and expectations of people coming into this market, but that's going on for a long time. I just always have to reiterate the couple of reasons why that hasn't happened recently. As a result of a number of logistical and technical challenges, including the products Narrow Therapeutic Index, making customers and patients who like to switch from a current supplier. Their very broad range of extremely low dose and very high-volume product presentations, making it very hard to rely on the manufacturer as our partner, JSP, has done so well for so many years. As a result of multiple brands and entities in this space, requiring multiple so-called AB ratings to create flexibility for the customers as substitute from whatever physician-brand preference may exist out there. And again, we're a company that has a product with our partner with 3 of those AB ratings and a long history of reliable supply of this high-volume, low-dosage Narrow Therapeutic Index. So eventually, someday, someone will show up, but it's not the sort of product environment where you would expect significant and rapid deterioration of your position.

And the next question in the queue comes from Scott Henry with Roth Capital.

Scott Henry at Roth Capital. A lot of questions have been asked. Just really wanted to focus, if you can, I mean, we're into the fourth quarter of the fiscal year. Any thoughts on fiscal 2019? Not looking for guidance, but just directionally on the top line. Do you view it as an up year, a down year, a flat year? And within that context, how do you think about Levo in that year?

Super. Well, that sort of sounds like -- I'll be a bit circumspect relative to what we say at this time. Later in the summer, we will get into a little bit more clarity once we had a chance to review all the moving parts with our board. I would note that this year we're getting to be large enough that even modest erosion on the base part of our business is notable. I would note that we've discussed at length this year the sort of supply disruptions that we benefited from that we don't expect to repeat next year. And so as you deal with that sort of normalization, particularly in Levothyroxine, that starts with a number of things you got to make up before we start layering in all of these approved and unlaunched products. Some of which will be launched by the time you exit this quarter and into next. So there's a bit of a moving series of adjustments which we are not comfortable providing any comment on at this time. Marty, do you want to add a little...

Yes. The only other piece, Scott, that I would add is that -- as Tim said, the anomalies of our current fiscal year and will be not necessarily going to repeat next year, right? And then, the point I'd mention, and again, these are only to talk specific numbers, but the other piece of the way you can look at fiscal '19 from a gross margin perspective is the point I wanted to mention is that the -- we have a longer first half of the year for the gross margin perspective and a slower second half of the year as everyone all knows. I would say, to start thinking about fiscal 2019, most of the gross margin we've had like in this quarter, the 44%, or even what you're working out to see for the fourth quarter. There are margins in fiscal -- gross margin in fiscal '19 will be on that lower end, much like what we're seeing in the second half of fiscal '18. I just wanted to get that point from a direction perspective.

That's helpful. And I appreciate the color on that. Just separately, just as a pure modeling question, I'm looking at the line items you're putting in, and urinary kind of fell off the map. I don't typically see that sequentially, a change of that magnitude. Did something happen there? Is urinary going away? Or how should I model that going forward?

No -- yes, so as far as modeling it, Scott, the -- in the quarter, we had a couple of other things that impacted that -- that drove us that very low number that you're seeing, $33,000. It's a -- yes, so 2 things actually happened there. We had some pricing adjustments that we had to make with a particular customer that affected our -- the number. So -- and the volume number, if we look at the volume, it's down about -- it is down about 25% or so to 30% as compared to the second quarter and also compared to last year's third quarter. And what that is, is a temporary production backlog that we've had at the end of our third quarter, and that number will -- we expect that number to go back up to a normal run rate that we've been experiencing when you get to the fourth quarter.

Okay. So it sounds like Q2 is more representative than Q3?

Correct.

We have no further questions in the queue at this time. So I'll turn the call over to management.

Well, thank you, everybody for joining us today. We look forward to sharing our progress on our next scheduled conference call. Thanks again for joining.

Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.