Lannett Company Inc (LCI) 2018 Q4 法說會逐字稿

Welcome to the fiscal 2018 fourth quarter and full year financial results conference call. My name is Adrian, and I will be your operator for today's call. (Operator Instructions) Please note this conference is being recorded.

I'll now turn the call over to Robert Jaffe, Investor Relations for Lannett Corporation. Please go ahead.

Thanks, operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2018 fourth quarter and full year 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 broadcasted 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 will 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 fourth quarter and full year financial results, for the company's reasons for including non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings press release issued earlier today.

This afternoon Tim will provide brief remarks on the company's financial results 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 2019 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.

For the fiscal 2018 fourth quarter and full year, net sales and adjusted net income grew period-over-period. Our overall financial performance for the full year was within the guidance range we provided. Marty will discuss our financial results in much more detail shortly.

My comments today will focus on where we see the business going in light of recent events. As announced this week, the company was informed that its supply contract of Jerome Stevens Pharmaceuticals to distribute 3 products including Levothyroxine would not be renewed. That contract expires in March of next year. We have been assured by JSP that they will continue to supply us with the products through the contract expiration and will -- we will work closely with the new distribution partner to ensure an orderly transition for our customers and the patients they serve. We are of course disappointed by this event and are taking steps to address our new operating reality. Importantly, since the JSP products will continue to significantly contribute for most of fiscal 2019, we have some time to progress our growth plans while also reducing our operating cost.

Since January of this year, we have been further enhancing efficiencies and bringing new parts to market even as our pipeline expanded. Furthermore, we have added key management positions, thereby augmenting an already experienced management team that is committed to growing our business. With regard to efficiencies, our primary plant in Seymour, Indiana, has significantly increased its output by more than 50% comparing fiscal 2017 to fiscal 2018.

We also sold off 2 unused buildings in Philadelphia for about $14 million, and restructured and refocused our Cody Laboratories' API business, significantly reducing operating overhead. We also began the consolidation of our Philadelphia distribution site, transferring that function to our primary distribution center in Seymour. Finally, targeted cost reductions were also made in SG&A.

With regard to our pipeline and new product launches, since January of this year, we've acquired over 20 approved product families. This includes ANDA acquisitions from UCB and Endo. We also end-licensed from partners 3 additional pipeline products mainly Diclofenac, Fluvastatin and Methylphenidate ER.

All told, we now have about 25 products entering later stages of the launch process including Esomeprazole, Dronabinol and some other pain management products. In total, our portfolio of approved but not yet launched products that we are currently planning to launch have an IMS market value of more than $2 billion, although, obviously, actual generic market values will be notably lower than IMS estimates. Moreover, we have a pool of over 20 generic products from owned or partnered sources that are currently pending approval from the FDA. Several of which we believe could receive final approval and be launched in FY '19. These include generic Concerta, azithromycin and potentially Venlafaxine ER. This pool of products has a combined IMS value of over $4 billion.

Meanwhile, we continue to work on our internal development portfolio. In the current quarter, we have already filed 5 new ANDAs covering 2 product families and we are targeting more than 10 families this fiscal year. In addition, we continue to work on new end-licensing deals to bring new products to market in the short to midterm.

We point with some real pride to the first 8 products we have launched since January, which is substantially more than we have launched in the previous 2 years. And speaks to the significant improvements we have made in advancing our pipeline and engaging more deeply with our customers. We have forecasted 8 products to contribute over $50 million of revenue for the full fiscal year in 2019. And importantly, with the aforementioned pipeline of products currently in our hands today, we aim to maintain this cadence of launch for some time into the future. Nevertheless, the loss of future Levothyroxine revenues does of course require that we reevaluate the magnitude of sequencing of our investments for future growth.

On the revenue side, we are engaged in an ongoing process to analyze our investment strategy to develop what we believe to be strong risk-adjusted returns and resulting cash flows. On the expense side, we have targeted substantial cost savings across all expense lines compared to our earlier budgets. We have also targeted an additional reduction in discussion on capital expenditures of approximately $20 million versus 2018. Many other options are on the table that may affect previously announced plans.

We believe that continued progression on our base business from new product launches combined with cost containment will ensure that we have sufficient cash flow from operations to provide liquidity to fund our current obligations, projected working capital requirements and capital expenditures through this fiscal year.

With that, I'll 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 fourth quarter, net sales were $170.9 million compared with $139.1 million for the fourth quarter of fiscal 2017.

Gross profit was $76.0 million or 44% of adjusted net sales compared with $68.0 million or 49% of net sales for the prior year fourth quarter.

R&D expenses were $8.3 million compared with $11.4 million. SG&A expenses were $17.4 million compared with $16.2 million.

Operating income was $50.3 million compared with $40.4 million with the prior year fourth quarter.

Interest expense was $16.6 million compared with $16.0 million.

Income tax expense was $9.6 million compared with $10.0 million in the prior year period.

Net income attributable to Lannett increased to $24.5 million or $0.64 per diluted share from $15.1 million or $0.40 per diluted share for the fiscal 2017 fourth quarter.

Turning to our full year financial results. Net sales were $684.6 million compared with $637.3 million for fiscal 2017.

Gross profit was $326.2 million or 48% of adjusted net sales compared with $343.7 million or 54% of adjusted net sales.

R&D expenses were $29.2 million compared with $42.1 million. SG&A expenses were $71.0 million compared with $71.3 million.

Operating income was $226.0 million compared with $230.3 million for the prior year.

Interest expense declined to $65.4 million from $68.7 million for fiscal 2017.

Income tax expense was $45.8 million compared with $57.2 million.

Net income attributable to Lannett increased to $118.2 million or $3.10 per diluted share compared with $107.9 million or $2.86 per diluted share for fiscal 2017.

Turning to our balance sheet. At June 30, 2018, cash and cash equivalents totaled $98.6 million, and our debt was $839.3 million.

In July, as Tim mentioned, we closed on a sale of 2 buildings in Philadelphia for $14.0 million. Our cash balance at June 30 does not include proceeds from the sale. As Tim also mentioned earlier, we expect to have sufficient cash flow from operations to provide liquidity to fund our current obligations, projected working capital requirements and capital expenditures throughout this fiscal year.

Turning now to our guidance. As a reminder, our fiscal 2018 financial results benefited from our ability to fill a supply disruption for 2 key products. For the fiscal 2019 full year on an adjusted basis, we currently expect net sales in the range of $580 million to $610 million.

Adjusted gross margin as a percentage of net sales of approximately 44% to 45%. Adjusted R&D expense in the range of $28 million to $32 million. Adjusted SG&A expense ranging from $63 million to $66 million. Adjusted interest expense in the range of $63 million to $65 million. The full year adjusted effective tax rate in the range of 22% to 23%. And lastly, capital expenditures in fiscal 2019 to be approximately $30 million to $35 million.

Regarding the phasing of our quarters, we expect the first quarter net sales to be approximately 15% lower than Q4. This decrease was partially driven by increased customer orders in June 2018 with estimated impact of approximately $15 million in advance of a midweek holiday as well as a related maintenance shutdown of our Seymour manufacturing facility in the 1st week of July.

With regard to earnings, we expect Q1 adjusted EPS to decrease by approximately 45% compared with Q4 due to the midweek July 4 holiday, the maintenance shutdown of our Seymour plant, higher operating expenses and changes in product mix.

This guidance includes sales of recently launched products, previously approved and not yet launched products as well as other products that we reasonably assume will be approved and launched in the period. Guidance does not include sales of C-Topical after our fiscal second quarter. With regard to fiscal 2020, we are implementing a growth plan, which includes accelerating product launches and increasing our product offering through strategic relationships and product development. In addition, we are focused on cost savings initiatives to maximize profitability, liquidity and cash flow. Accordingly, we are not providing any thoughts or comments with regard to fiscal 2020 at this time.

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

(Operator Instructions) And our first question comes from Dana Flanders from Goldman Sachs.

My first, can you just -- and Marty, I know you just touched on this but on revenue guidance, can you just flush out exactly what you're expecting there? I think you mentioned you were including products that were reasonably going to get approved and launched. So is that a change versus how you've given guidance in the past on new product launches? And then secondly on C-Topical, if I heard right you're not including that after fiscal second quarter, is that just based on dialogue with the FDA in having to take your product off the market? And then I have one follow-up.

Yes. Look, Dana, as far as the products in our guidance. Yes, so we are including an assumption of product -- well, first of all products that have been approved but not yet launched, they are in our -- some of them are in our guidance and in addition to that, there are some in our guidance that have not yet been approved but we have a high degree of confidence that they will be approved in time and have such included those in our guidance. And as far as C-Topical...

And Dana, for C-Topical, we've had no communication from the FDA regarding the removal of that product from the market. We -- as a precaution are going to keep an eye on sort of 12 months from approval of the competitive product, however, we note that the competitor, to my knowledge, has not yet launched in the market for the product. And so from a supply perspective and ongoing continuity perspective, there is certain opportunity to potentially continue to sell that product, under FDA enforcement discretion but for our forecasting perspective, we have not included it in the guidance.

Okay. That's helpful. And maybe just my quick follow-up. Can you just touch on your manufacturing base? And I know you mentioned additional cost opportunities over time. Is there an opportunity to further consolidate that? And maybe just specifically, can you touch on your plans for Cody? I know you delayed investment in that, you had that announcement a couple of months ago. And how much revenue do you have generating out of Cody at this time?

Thank you for the question. The primary consolidation we have remaining for our business is previously announced shuttering of the Philadelphia manufacturing site. That process is I think fairly far along, we're looking to complete that closing by the end of this calendar year. And consolidate those products plus our expanding pipeline into the Seymour location, as I noted in my commentary, our volume at that Seymour plant is increasing sequentially quarter-over-quarter, not materially from previous fiscal year and we're hoping to see that continue as we get products into the marketplace that drives that demand. We have built a manufacturing site that maybe we're up in New York City, the New York, Carmel, that makes our liquid ointments, that plant was a result of an acquisition some years ago, and continues unabated. We are expanding on our portfolio of liquid ointments arena, we'll continue to look at whether that goes exactly into that facility or with contract manufacturers and try to balance our spending and our speed-to-market. And then as it relates to Cody, as we previously announced, we have restructured that business, big part of it was going to shared services so we didn't have as much freestanding support on the administrative SG&A side out in that location and targeting a little bit more portfolio selection given the environment for pain management products. It has some API transfer prices, which I -- inter-company processes, which are not significant. But it is importantly the source of our cocaine C-Topical that is in market today and the size of manufacturing for our future Numbrino NDA that we hope to see come to market in a year or so.

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

I have a few. First for Marty, can you tell us how much revenue you're including in fiscal '19 for the JSP products?

Well, for JSP, in '19, we're -- I mean, it's primarily Levothyroxine and we're assuming basically the -- what we've seen as a historical run rate for the product of roughly $50 million a quarter.

And the same that you highlighted on the last call for the other 2 smaller products?

Yes. In total, Gregg, they are -- in total, they're about $10 million in the guidance.

Okay. So basically, you're looking for $50 million a quarter on Levo and 75% of the $10 million flows through in the fiscal year from the other 2?

Yes. 75%, yes.

Can you help us either quantitatively or qualitatively on how much you're assuming in fiscal '19 in terms of revenue for products not yet launched whether they're approved or not approved? And maybe those 2 different buckets, at least give folks some comfort you're not dialing in much particularly for those not yet unapproved?

So you're right. We're not dialing in much, for the 2 pieces, for the products not yet approved, it's about $20 million in total. But let me back up one step, so $20 million is for the products that we have not yet launched yet, all right? Half of the $20 million is products that have been approved but not yet launched, and the other half of the $20 million is products not yet approved but that we have -- for which we have that high degree of confidence I spoke of earlier that we can see approved this year.

And just so I understand what grounds your assumption there. I assume it's based on conversations you've already had with the trade in terms of availability to get some share at prices of X as opposed to just being a preliminary assumption?

Gregg, it's Tim. Again, having been in the market for a while, having spent some time with the team here to really do a better job with launch preparedness, there is a very large pool of products we spoke to in the call, 25 or so that are nearing the later stages of launch preparation, many of those are approved so it's really our operation readiness. Customer conversations are always ongoing, and we are thoughtful to the number of players in the market, we're getting prices to come up for estimates and again, it's not -- we think, this will not conclude some level back here in the number of products in front of us and we've taken some consumer concern in our guidance for that value.

Okay. And just to talk about a couple that you brought up, Tim, generic Concerta, should we assume that, that cannibalizes the BX product on the market? Or could you see net growth between the 2 products, your new one plus the existing one?

It's our current belief that while we need to be sure that it's clear for customers that there is a different label between the BX-rated product and the AB-rated product we hope to see approved later this year. We actually see those in slightly different markets, the BX product has current patients they're serving that have been stabilized on that product. We believe that they will want to stay on that product at a different price point as it relates to the rest of the Methylphenidate markets. So we don't expect -- a material cannibalization is certainly possible but to the extent we can distinguish the products and labels from the source, for the customer side, we have some optimism that will be incremental sales as opposed to cannibalized sales.

And then on Venlafaxine, I believe you said ER, can you just frame that opportunity and what the key variables are for whether you can get there and what the gating factors are?

Again, it's scheduled a little later in the quarter. Again, it's an FDA review process of an approval. That target date is toward the end of -- our estimate is toward the end of the fiscal year. If it comes in earlier, we'll launch sooner. If it comes later, it won't make the year. But it's not material in our guidance for the new product launches because of the sequencing and timing of that particular launch.

But potentially, a meaningful product longer term?

Correct.

Okay. And then lastly, I don't know to what degree you guys can comment on this, but what can you tell us about the options you're exploring to address your capital structure, at least the timeframe around that process that you could share with us at this point?

Yes. Gregg, so it's Marty. I'll take that one. So first of all, we're evaluating all of our options. Just to add some comment to that, our liquidity at this time remains very strong. And we believe we do have sufficient runway here to explore any option that could be available to us. As you know, we have good products, where -- through March, as Tim said, we expect them to continue to provide significant financial benefits on it through the -- through March. So we have runway here. And then, as I said -- and we have runway. So we also, for the foreseeable future, for fiscal 2019, as we said in our prepared remarks, we expect to make our debt principal and interest payments, and we'll certainly be in compliance with the covenants through the end of the fiscal year. But again, we have time, and we're evaluating all options.

And our next question comes from Gary Nachman from BMO Capital Markets.

First, just a follow-up on the last question. You said $50 million per quarter for Levo. Is that a flat line? What are you assuming for the step-down of the Levo revenue in the back half of fiscal '19? How will that look in fiscal 3Q and 4Q?

Yes. So right now, in our assumption, we have it at the $50 million mark or so through the end of March. But to that, I would say this is new news to us in the last week or so. There is -- I'm going to pass off to Tim here, let him comment on things that...

Yes, so kind of a normalized value for our view of Levo for current share positions and market conditions is in the realm of $50 million. However, there are a lot of moving parts out here, right? There is always competitors on the horizon. We don't have that in our forecast through March, but it's certainly possible, which would drive the number to a lower value. I would also note that customers remain always interested in maintaining good inventory on Levothyroxine, given its a high-volume, its patients sensitivity and the fact there's been a history of disruptions, never mind the fact that one of our competitors plants that makes Levothyroxine had a very significant 483. So there is, of course, upside as well to that business based on how those market conditions evolve. But our go forward run rate, as it were, to -- within our projection in that order of magnitude of $50 million, but there will be variations based on how the market actually unfolds.

Okay. And then Marty, on the gross margins, you said 44% to 45% for fiscal '19, but what would that be without Levothyroxine? I mean, that's a 50% gross margin product, so could you just do the math for us, would it be in the high 30s, low 40s without Levo?

I think, when you do the math, you'll see it works out down to the low 40s.

Okay. And I -- so I know you're, at this point, not going out to fiscal '20, but just trending on the gross margin, now that you're doing more the distributor-type agreement, should that stay in the low 40s or potentially go a little bit lower than that over time?

It's a little hard to comment on that question right now. There is a lot that we're working right now, with the new products coming onboard, the launches, the in-licensing. There is also, as Tim indicated and my remarks also indicated, we're looking at substantial expense reduction initiatives that take some time in different expense categories to implement, but when you look at the cost of goods sold, it's our single largest number on our income statement after the sales number. So there is a huge amount of money that we spend there, but it's also at the same time an area of opportunity in terms of expense reductions and improving efficiency and productivity of the company. So we look into the future, as much as we [S&P], Levothyroxine will not be on our listing. But on the other hand, all these cost initiatives that we're embarking on now will pick up momentum and then have a future and have an impact in fiscal 2020 beyond what we've assumed in fiscal 2019.

And if I could make -- it's Tim here -- a clarifying comment on the pipeline itself. There are 2 kind of components, right? You alluded to this increased in-licensing efforts, and that's true. But of our pending products, it's probably -- at the FDA, it's probably half and half. We also do have that large bucket I mentioned of 24 owned and approved and working its way to launch. So there is a fairly good blend of both owned assets, internally developed assets and partnered assets, so it won't be purely the partner-aided as part of our go-forward portfolio. I would point to Metozalone (sic) [Metolazone], which we launch a little later this year, as a great example of a high-margin product, which we are alone in having significant market shares in that marketplace.

Okay. And then just the last question. You briefly mentioned the cost-cutting initiatives, but sounds like most of that would be focused on the manufacturing side. Are you thinking of anything more dramatic whether it's just in terms of the R&D infrastructure or G&A? Can you just give us a little bit of a better sense, order of magnitude of the types of cost-cutting initiatives you're thinking of?

Yes. It is beyond simply capital, right? We are looking at virtually all of our expense lines for ways to reduce operating expenses and cut cost. Our fundamental story we're articulating, we're trying today is that, in the sort of a new Lannett, Levo-free 2020, we are going to be spending as much as energy and time as we can to accelerate our product launches, expand on that portfolio, cut costs, (inaudible) trying to optimize our profits and our cash balances, trading off both near-term and long-term value as -- while we also keep an eye to our future maturations of our debt. And as a result of that, there's a lot of moving parts at this juncture. Some of the guidance that Marty provided reflects some of these targeted expense reductions that take some time to implement during the course of the year and have a more of a full effect as you get into 2020.

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

Just maybe a quick point of clarification on expected Levothyroxine trends in fiscal '19, Tim, I guess what everyone was anticipating was there would there be some sort of bleed down of channel inventory headed into the transition of the agreement such that you wouldn't have a full quarter of benefit in the March quarter. But it sounds like based on your comments that, that's not what you're anticipating. I just want to get some clarification around that and then why you wouldn't necessarily expect that to occur?

Well, again, our focus and emphasis on that transition in conjunction with JSP and the new distribution partners, to ensure an orderly transition from our supply into theirs. You should speak perhaps to some customers because it's not quite so straightforward. You could actually maybe go the other direction. It depends on how we make it, again, in the customer's best interest, and we are currently in our forecast expecting to maintain that product volume through the contract expiration.

Okay. And then just shifting gears back to your comments earlier around C-Top. Any visibility or market discussion about when in fact you may actually see a competitive entry. And then if it in fact it even occurs this calendar year, it seems like, assuming that the product wouldn't continue beyond December, it seems pretty conservative based on usual FDA movement on these issues. I just want to get your thoughts on those comments.

Well, I appreciate your comments and certainly think that's a scenario that is possible in this world. I think the FDA can be very thoughtful about ensuring the continued supply, obviously, if the existing approval does not show up in the market by that time, we'll almost for sure we'll be selling the product. But again, based on FDA guidance, we are conservatively making that assumption that product is does not continue to be in the marketplace. But I do you think there is a number of options that exist that could create that continuing FDA discretion in terms of ensuring patient access to that product.

Is there anything you can tell us at this point or you can share with us with respect to your own filing that might help shed a little bit of light or maybe help establish a little bit more confidence in terms of a time line of approval or realization of approval?

I think we've earlier indicated that we did receive a complete response letter on around our target action date. That letter reflected some additional work that we anticipated based on a conversation with them. That work is still under development and process, and we'll continue to work on it. The nature of that deficiency would suggest an approval toward the later part of 2019 if successfully completed and later approved.

Okay. Then maybe just a couple of quick questions on the pipeline as well. Thanks for providing some additional clarity in terms of the numeric value and also a couple of the additional products. Beyond those already mentioned, I'm just wondering if there's any other assets in there that you look at that you -- that are a potential first to market or something special or unique about them where they may have much higher upside optionality than seems to be kind of generally reflected in expectations and evaluation at this point. Maybe just a quick follow-up to that. Just with the restructuring of Cody, where does that leave you in terms of your approvals on hydrocodone and oxycodone and -- I'm not sure if dexmethylphenidate came out of that facility or not. But just where are we on those products, or kind of what's the plan for those?

Okay. I'll take that couple of questions there in perhaps reverse order. To start with, the larger pain products, which are in our portfolio, are approved and are in the launch sequences, have API not sourced from our Cody site. And so while there is some opportunities for some potential efficiencies, sourcing from larger-scale third parties is still a competitive approach to how we bring that product to market. And therefore, those products that are in our launch planning aren't really affected by what changes we've made on the scale of the Cody asset. As it relates to the pipeline, again, this market has got a lot of moving parts to it these days. I take solace in the sort of ongoing changes, those smaller products becoming more valuable. As so many of the large suppliers are coming onto the market, I would again point to the value of Diclofenac in the market for us today that we've launched, Metozalone (sic) [Metolazone] we've launched today. This is how we're getting up to the sort of $50 million of value. As it relates to first-to-file or first-to-launch markets, we want to be fairly discrete for competitive reasons about those sorts of opportunities. A little further into next fiscal year, there's obviously the awareness of our settlement on thalidomide. But it's really this sort of basket of products aside from Methylphenidate ER that is -- that gives us our confidence in maintaining the sort of run rate we've established over the previous 7 months as we've expanded our pipeline and got products into market.

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

A couple of questions, I guess, for me regarding the pipeline. You've talked about that the cadence, similar to what we've seen here in the first half of the calendar year, continuing. How -- I guess, the questions are, when you think about the next few quarters, is that for a quarter or could it be a little more front-end loaded here in Q1? And then I guess a follow-up to that is how are you going to manage the cash position with what seems like a pretty large number of launches?

Alrighty. The cadence of launch is we've done 7 or so in the last 6 or 7 months and expect to be 7 or so in the coming 6 or so months. We'll talk around the realm of 15 perhaps. Again, we have a pool of 24 products -- 25 or products or so that are nearing late-stage launches. We are launching as we speak, Esomeprazole, for example. We do have a number of those pain products that are up and ready to go. So our existing plans as we look forward on operational readiness, and most of these products, of course, having previously approved, so they are prioritized. That sort of cadence of, call it, 7 or so every half year was not exact precision, could be more, could be less. But there's a very large pool of products here that we are progressing and have progressed and expect to be launching. And I think you'll hear before this quarter is out of several launches that we'll speak to as they've gone into market. We don't want to get too explicit in the middle of product launches because it gives a competitive opportunity for people to push back and constrain our performance. But it's coming, and it's not back-end loaded.

And from a cash standpoint, I mean, how do you balance which products are -- the timing of those products given that there's a significant amount of cash that's required upfront to get the products launched? Obviously, you capture that on the back end, but how will you balance that piece?

Well, the cash upfront, I mean, if you're thinking that about the purchase price, anything like that, most of these transactions have been on the profit share base, the ones were...

Or owned.

Or owned. And the -- I mean, there's an inventory, working capital aspect to it which we work into our plans. I would say these elements of these launches are in control. I don't see any strong effect on the business we're putting into our supply chain or people that do this part of the business. And we're getting those assumptions on the cash side for working capital purposes, but beyond that, it's in our expectations for fiscal 2019.

And if I could just add, I guess, from you -- for asking about cash flows, right, because we'd already launched a bunch of products since January that those are now generating cash. We don't launch all 14, 15 of our new products that have been out in the market in 1 month. There is kind of a steady sequencing of these products that you do have, I guess, some ramp-up on inventory you're suggesting. There is nothing on here, unfortunately, that has $150 million of inventory or something like that. These are all single to low double-digit millions sort of products. And since they are scheduled out over of the course of the calendar year -- and the ones that are more expensive are -- it's a cost structure. The cost is a smaller portion of -- if you wanted a higher market price, I'm saying, it would have lower COGS. COGS are never a huge part of a high-priced product, obviously. It's just kind of in our existing working capital expenditures, and we haven't seen any glitch yet in our expectations from that flow of product.

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

I guess, just to confirm, you spoke of a material impairment to goodwill in first quarter of fiscal '19. I just wanted to confirm, that would have no impact on your current debt covenants?

Correct there, Scott -- as far as -- all I'm saying is that's correct.

Okay. And then just from a big picture standpoint, Lannett's always had kind of 3 or 4 key drugs that drive the income statement. Could you speak to what you're top 4 revenue generators are expected to be in a post-Jerome-Stevens world?

Okay. I can take that. I mean, the -- yes, so the key products, Scott, I'll start with going down the list. Fluphenazine is -- will continue to be a significant product with the company. We've had some changes, I mean, in products. I'm just going down my list here. The Sumatriptan continues to be strong. It's going to be less in fiscal -- we're expecting it to be less in fiscal '19 than '18, and that's one of the 2 products that in fiscal '18, there was a supply shortage in the market so we were able to take advantage of that. There's also Ursodiol, still continues to be one of our larger products, although that is seeing significant price erosion on that particular product. And I think I said the largest ones. The metoprolol came onboard. That's going to be one of the larger ones now, Metolazone, Diclofenac. I think I hit on the largest half dozen or so larger products.

If I could make the obvious comment though, that's not how we wanted to get here. By definition, we are a more diversified business, and all these product launches, we hope, can continue that diversification, so we'll not clearly have such dependence. Before that will be the case for sure in FY 2020. And we're working our hardest to make it as precise as possible when we get there.

Okay. That's helpful. And then one question on the cardiovascular line, which has been strong the past 2 quarters, that appeared to match up with market share gains for Digoxin in the script trends I mentioned. But your verbal commentary seems to say that it's not Digoxin, it's some of the other products. Could you just clarify perhaps what's driving the strength in the cardiovascular section?

Yes. Scott, sure. It's metoprolol that came on back in the beginning of the calendar year. So we don't have -- you'll see that the increase from Q2 to Q3 and then again from Q3 to Q4, what you're seeing pretty much is metoprolol. I mean, just -- in addition, in our fiscal fourth quarter, we saw additional volume sequentially from the third to the fourth. And for example, atorvastatin had some growth there. But as we've said before, the largest single product in that category now is metoprolol. It's about half of the fourth quarter sales. So the other increase we saw going from the third to the fourth quarter is less significant increases in this year in the maybe 10 or so cardiovascular products that are in that category right now.

And okay. Great. And just the final question. I believe the thalidomide product comes to the market in March of 2019, if I recall correctly. Could you talk to the magnitude of that product and how we should be thinking about it from a revenue potential?

It's -- I think the settlement date, that was earlier mentioned is August 2019. And we don't want to talk to our commercial plans on that particular space at this particular time.

And that concludes our question-and-answer session. I'll now turn the call back over to management for closing remarks.

Other than -- thank you everybody for joining us this afternoon and evening -- early evening. We look forward to sharing our progress on the next regularly scheduled call.

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