Lannett Company Inc (LCI) 2021 Q1 法說會逐字稿

Welcome to the Lannett Company's Fiscal 2021 First Quarter Financial Results Conference Call. My name is Karen. I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Robert Jaffe. Robert, you may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2021 first quarter financial results. On the call today are Tim Crew, Chief Executive Officer; and John Kozlowski, 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 2021 first quarter financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's press release issued earlier today.

In a moment, Tim will provide brief remarks on the company's financial results as well as recent developments and associated initiatives, then John will discuss the financial results in more detail, including the company's fiscal 2021 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. We hope you all remain well. At Lannett, we continue to manage through the pandemic and are grateful for the dedication of our teams standing behind our essential services.

I'll begin with a brief review of our financial results. For the quarter, net sales were $126 million, which we view as a solid achievement given the reduced contribution from our largest product, fluphenazine, after a new competitor entered the market early in the quarter. Our gross margin was slightly lower than anticipated, largely due to more than expected competitive pricing pressures on some key products and associated customer inventory price protection. On the other hand, operating expenses were substantially lower during the quarter, anchored by cost reductions. You may recall that in July, we announced a restructuring and cost reduction plan which will generate approximately $15 million in annual cost savings. That plan was initiated on the expectations of fiscal 2021 headwinds, and I'm pleased to report that the plan has been fully implemented. Adjusted EBITDA came in at $33 million and benefited from the aforementioned restructuring.

Turning to our balance sheet. We ended the quarter with approximately $109 million in cash. Now at the end of this month, we expect to use a portion of that cash to pay down in full our Term Loan A notes. This payoff will be an important and long-sought accomplishment and a moment that we will celebrate because paying off our Term Loan As has multiple benefits. First, it will reduce interest expense going forward, a cost savings equal to approximately $3 million annually; second, it will reduce principal payments by $27 million annually; and third, it will provide us with financial flexibility as our remaining debt, the Term Loan Bs and convertible notes, have no financial covenant ratios. Of course, once the Term Loan As are paid off, we will increase our attention on addressing our remaining debt. Our Term Loan Bs mature in just over 2 years, which gives us runway to continue to evaluate a number of forward financing options. John will discuss our financials in more details later, including efforts to further enhance liquidity.

Turning to our commercial highlights. We launched 4 new products during the quarter, namely: lidocaine 2% topical solution; mexiletine; levorphanol; and levothyroxine tablets. Of course, these products contributed only a partial quarter of sales, so we expect to see quarterly sales from these products to increase going forward. For example, sales of levothyroxine tablets during the quarter was just north of $3 million. We anticipate additional quarterly sales and market share as our customers have now largely worked through their previous inventory of this product from their previous suppliers. And earlier this week, we announced we commenced the marketing of all 12 dosage strengths of the authorized generic of Tirosint or levothyroxine sodium capsules. The IQVIA market for levothyroxine capsules is approximately $111 million, although in-market generic sales will be lower. Levothyroxine capsules complement and is in addition to our levothyroxine tablets product.

We expect another supplier will enter this market in due course with a subset of strengths. Currently, the other expected supplier has approvals on strengths that represent around 25% of the market with, based on litigation records, perhaps another 35% of other strengths filed but not yet approved. Thereafter, given the intellectual property landscape, we believe we will remain 1 of only 2 suppliers of the generic product for an extended period of time and the only generic supplier with all dosage strengths. Thus, we think this product could be a sustained contributor to our business for some period of time. During our current quarter, we have also launched azithromycin IR tablets, 250-milligram and 500-milligram, within 30-count bottle sizes only.

Now looking to the cadence of future launches. In addition to the 12 products launched in the last 7 months, which includes the 6 products launched fiscal year-to-date, our plan is to launch about another 7 products over the balance of fiscal 2021, including possibly a first-to-market generic zolmitriptan nasal spray toward the end of the fiscal year. We are pleased to note that the average value of our products continues to increase, thus suggesting more value on the investments we make.

Turning to our pipeline. We now have more than 20 products in development, another 14 ANDAs pending at the FDA, including partner products, plus a couple of other products that are approved and pending launch. Next, regarding our biosimilar product, as often noted, we have partnered with HEC to develop a biosimilar insulin glargine for the U.S. market. And as we said on our last conference call, a team from Lannett and HEC met with the FDA in June to review the so-called CMC data, Chemistry, Manufacturing and Controls, and to discuss the clinical advancement of our biosimilar insulin glargine. The FDA provided encouraging guidance that leads us to believe that we remain on track to file a BLA in calendar year 2022. More recently, HEC has now substantially completed construction of a large new plant that will include 8 12,500-liter reactors, creating substantial product capacity for insulin, where the U.S. demand is measured in many metric tons. And HEC stands ready to build more plants as needed. For our part, as requested by the FDA, we are in the process of developing the healthy volunteer protocol along with the statistical analysis plan for the FDA for their feedback. Their positive feedback will allow us to commence the required study as soon as the clinical trial material from the new plant is available. And we will be looking to show, once again, our product to be highly similar to US Lantus. We expect to initiate the clinical trial next year.

Note, given the investment required to build a dedicated insulin facility and the need to conduct clinical trials, we are able to track other potential competitive efforts over time. At this time, we continue to believe that there will be no more than 4 other competitors to Lannett and HEC's insulin by the time we expect to launch our product. As a result of all this context, we continue to believe a U.S. launch of the product is quite possible in calendar year 2023. Based on standard assumptions and given the reported end market realized sales of around $3 billion, just a 10% market share at affordable prices well below prevailing rates could be worth more than $200 million annually.

Turning to generic ADVAIR, another potentially durable product for us. The pivotal PK trials for the 250/50 and the 550 strengths have been completed by our partner, Respirent. The data is currently being analyzed. Assuming the data is acceptable, we plan to submit the ANDA around the end of this calendar year or early next calendar year. Depending on the quality of our submission and the FDA review time, we believe a U.S. launch of the product is possible next fiscal year. Based on standard assumptions, we anticipate some sales at the end of fiscal year 2022 and substantial net sales for fiscal year 2023. As discussed in our last call, we believe drug and device respiratory markets are generally large, durable and growing. We expect to continue to in-license additional pipeline opportunities over the course of this fiscal year.

Stepping back to the broader market. As we have all seen, the duration of COVID-19 has been associated with a modest decrease in the total number of prescriptions written compared to previous periods, and that decline is in contrast to a longer-term trend of increasing prescriptions. The net of these effects does have a marginally negative effect on our overall business. Also due to the pandemic, fewer elective medical procedures are being performed. This has negatively impacted sales of our Numbrino product, which carries a higher-than-average gross margin. Last quarter, we sold less than $1 million. We'd hope to at least double our volume once the pandemic subsides. Moreover, the average number of existing competitors at FDA approval of a product has continued to trend upward, resulting in increased product pricing pressure on less durable marketed products. Of course, our plan to navigate this market remains focused on launching new products and managing our costs, all while building and advancing a valuable, diversified and durable portfolio of future drug candidates.

To sum up, we reported a solid quarter of net sales and EBITDA of $33 million despite a new competitor for fluphenazine. Fluphenazine was our largest and most profitable product last year. We launched 4 new products in the first quarter of this fiscal year, and earlier this week, we initiated marketing of an authorized generic of levothyroxine capsules. We believe this product will be a sustained contributor to our business. We fully implemented a cost reduction plan that we expect to generate approximately $15 million of annual cost savings. As a result, we are affirming our previous fiscal 2021 full year guidance. Our outlook assumes no additional competition for fluphenazine or posaconazole, a partner product, until late this fiscal year, along with the continuing launch of new products and lower operating expenses. Later this month, we plan to pay off in full our remaining Term A Loan balance. Once paid off, our annual interest expense and principal payments will be $30 million lower annually. Further, our remaining debt has no financial covenant ratios.

The development for biosimilar insulin glargine continues to progress. HEC's new dedicated insulin production facility is nearing operational readiness, and we will soon be seeking FDA feedback on the healthy volunteer protocol so that we can commence what we expect to be the sole remaining clinical trial. We believe we remain track on filing the ANDA for generic ADVAIR around the end of the current calendar year or early next calendar year. Most importantly, we will continue to manage our expenses and look to optimize our product offering while growing our portfolio. Thus, we still expect to be a $1 billion company by 2025 with a gross margin percentage in the low 30s.

With all of that, I turn the call over to John. John?

Thanks, 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.

Now for the financial results on a non-GAAP adjusted basis. For the 2021 first quarter, net sales were $126.5 million compared with $127.3 million for the first quarter of last year. Gross profit was $34.4 million or 27% of net sales compared with $52.6 million or 41% of net sales for the prior year first quarter. The decline in gross margin was largely related to the recent new competitor and associated competitive pricing pressure on fluphenazine. SG&A expense declined sharply to $12.7 million from $17.9 million, largely due to the restructuring and cost reduction initiatives announced and implemented in the first quarter. Interest expense decreased to $11.2 million from $15.3 million in last year's first quarter due to repayments of Term A and Term B Loans as well as lower interest rates and lower fixed interest rate on our senior convertible notes. For the quarter, the effective income tax rate was 43%. The calculation of the tax rate included a discrete item related to stock compensation, which we expect to be less impactful in subsequent quarters. Net income was $2.2 million or $0.06 per diluted share. EPS was below expectations, largely due to the competitive pricing environment Tim mentioned earlier.

Net income for last year's first quarter was $8.8 million or $0.22 per diluted share. Adjusted EBITDA was $33 million. Per our credit agreement, the calculation for adjusted EBITDA included the full cost savings benefit of the recent restructuring, less expenses, such as severance incurred in the quarter. Adjusted EBITDA, excluding the impact of the restructuring, was approximately $26 million.

Turning to our balance sheet. At September 30, 2020, cash and cash equivalents totaled approximately $109 million. Our outstanding debt at quarter end was as follows: total debt was approximately $691 million; debt net of cash was $582 million; and net secured debt was $496 million. As Tim mentioned, our Term A Loans matured later this month. At maturity, the outstanding balance will be approximately $42 million, which we plan to pay off in full with our existing cash on hand. We continued to monitor the capital markets for opportunities to enhance our capital structure. We intend to refinance our remaining Term B Loans well in advance of maturity. In addition, we are evaluating alternatives and have had preliminary discussions with lenders about a new smaller revolving credit facility. The new revolver will enhance liquidity and provide financial flexibility for business development during the period between the expiration of our current revolver and the comprehensive refinancing of our Term B Loans.

Turning to our outlook. As Tim mentioned, we are affirming our previous guidance for the fiscal 2021 full year as follows: net sales in the range of $520 million to $545 million; adjusted gross margin as a percentage of net sales of approximately 29% to 31%; adjusted R&D expense in the range of $29 million to $32 million; adjusted SG&A expense ranging from $55 million to $58 million; adjusted interest expense in the range of $41 million to $42 million; the full year adjusted effective tax rate in the range of 21% to 22%; adjusted EBITDA in the range of $100 million to $110 million; and lastly, capital expenditures to be approximately $15 million to $20 million. Regarding the phasing of the quarters, we expect net sales in Q2 to increase slightly compared with Q1 and continue to grow over the balance of the year; gross margin and EPS in Q2 to be comparable to Q1, an increase in Q3 and Q4; and operating expenses to increase slightly, remaining in line with our annual guidance.

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

(Operator Instructions) We do have our first question from Matt Hewitt from Craig-Hallum Capital Group.

Maybe the first one, I think you addressed this a little bit, but I'm just hoping we can get a little more color on that. The prescription volume trends, obviously, back in the spring with the lockdowns, those were severely impacted. It seemed like things were recovering this summer, but now with the spike in COVID cases, I think there's a potential for things to reverse a little bit. I'm just curious what you're seeing, and is it geographically spread out as far as why we're seeing these spikes in maybe some areas that's -- it's -- your scripts are faring a little bit better? So any color there would be helpful.

Good evening, Matt. The prescription decline that we're referencing in our prepared remarks really relates to the a little less visiting the physician offices that you would see on the sort of ongoing basis given the pandemic. We're not seeing significant changes. We're talking low-single digits, 1%, 2%, 3% on a given period. We do contrast that, of course, the fact that typically, you'd see an increase on prescriptions over time, so the net swing is a little bit more noticeable, but mid-single-digit swing is not as much, for example, as trade inventories might move as people are worried about stocking up for particular products. So we don't see this as a major headwind at this point. The various products that we provide, that the industry provides, is essential medicine is holding up pretty well, but it does create some marginal pressure on our returns as we think we're losing mid-single-digit volume opportunity and the margin associated with it.

Understood. And then maybe one separate question. So Tim, when you came on board, one of the things that you talked about was you were going -- are willing to sacrifice some of the gross margin, in return that was going to -- and in doing so, you're going to grow volumes and particularly do so with some of these new partnerships that you've signed over the last couple of years. The plan was for gross profit dollars to be relatively flat, and we're seeing that in the EBITDA where that's been relatively flat, at least over the last 5 quarters, but the gross profit dollars have been trending down with those gross margins. Is that a function of mix? Is that a function of the fluphenazine headwinds? Maybe explain what's going on there a little bit and help us understand how that kind of recovers over the course of this year.

Sure. Well, I want to be sure I'm clear. We're not looking to sacrifice any gross margin percentage, but we are focused on gross margin dollars. And we think the work we have done this past several quarters, past few years with a plethora of product launches, 18-, 19-, 20-product launches a year, has done just that. It's helped create increased gross margin dollars for our business, albeit at gross margin percentages lower than our historical trends. It is indeed a mix issue that results in the lower total gross margin dollar perspective, but that mix issue really is under-belied by the fact that we've had competitive pressure, competitive loss to levothyroxine some years ago and more recently, fluphenazine.

So it's really more about the competitive context that creates the mix issue that you referenced, and -- but for the ongoing launch parade that has generated significant incremental margin dollars for us, we would not be in a position to be paying off our Term Loan As here later this month. So we're proud of how we've executed. We think we're executing very well, but there is pressure on any given portfolio at any given time, and we've had a couple of specific notes this last couple of years in a couple of our largest products, which show, therefore, belies our underlying success on our product launch efforts.

Your next question from Gary Nachman from BMO Capital Markets.

First, Tim, do you still think levothyroxine -- levo product will contribute about $25 million this year? How are the competitive dynamics in that market? And how do you layer the [EG]of Tirosint into the mix? Will that cannibalize the [product]?

Good evening, Gary. I think we discussed that our therapy category that the levos fall into to be something around $40 million that might be roughly evenly split today. We see upside on it, but fundamentally, that's the range that we're thinking about as we sit here today. There are, obviously, numerous new competitors over the past several quarters into this market, so it's smaller than it used to be from the headier days when I first had joined. But it's still a significant volume product, a significant therapy for our patients, and we're still looking to expand upon the share of positions we have in the market today and have more contributions. But as a whole, the number for now and projections, we think we have a conservative $40-ish-or-so-million in the thyroid category you'll see in our tables that we published.

As it relates to levothyroxine capsules, the price point here is obviously quite a bit higher than a multi-competitor market. The volume here is substantially smaller. I think levothyroxine capsule is approximately 1/2 of 1% of the total volume of the levothyroxine market. So while we may see some access gains for the levothyroxine capsules product, as that pricing becomes more accessible to managed care plans and patients, it's really the value of that product is driven by the fact it will be just us for a period of time and then another competitor entering into the market. So a much, much lower volume, but a significantly higher price point, although I might press, a significant discount to the current brand option on the market today.

Okay. That's helpful. And are you still thinking that new product launches should contribute about $75 million a year for the next few years? And you mentioned you're still confident in the $1 billion target for fiscal '25. How much of that is going to come from products like generic ADVAIR and the insulin glargine? So is it going to be really more back-end loaded when we think of the progress to get there?

Sure. We're very pleased with our product launches of late being front-end-loaded. So many years in our lives, we have to wait to that launch late in the fourth quarter to achieve our objectives. Going back to last year with posaconazole, creating a big component of our product launches. And this year, launching levothyroxine tabs, levothyroxine capsules, Levorphanol, all in the first several weeks of the quarter, and we feel very good about that sort of annualized contribution of $75 million. We certainly see that coming into our P&L from last year's launches, and we certainly see ourselves annualizing that again from this year's launches. So we feel good about that goal, it's just in context to, again, the competitive environment and new competitors and a couple of our key products that otherwise is slowing down our march to $1 billion.

That $1 billion goal is indeed dependent upon, at some level, the success of the more durable assets in our portfolio, respiratory assets like ADVAIR, insulin assets from our partner HEC. But I'd also note, those sales might represent -- this is very roughly, half of the total figure. We are equally dependent upon the success of our internal development program and the in-line products we made today to get to the larger number, right? So the upside of our growth probably comes disproportionately from those durable assets, which are in the mid- to later parts of our strategic plan. I mean we're not talking 5 years away. We're talking calendar year '22, '23, '24 for some of these products to come into our portfolio, and they do create the octane to the larger aspirations of our growth expectation. But there's also, of course, this much larger, what I call, the more probable, less large everyday workhorse generics that we are developing from our internal development portfolio that create the other half of the value of our future moving forward.

Okay. And then just a couple more. The 27% gross margin in the first quarter is lower than we expected, how are you still confident in the 29% to 31% guidance, especially if 2Q is similar? And then the EBITDA guidance, is that factoring the higher EBITDA in 1Q that included the restructuring? Or is it excluding that?

Gary, this is John, so I'll address the margin piece first. So yes, we do expect Q2 to be similar, slightly higher, but similar with us coming up in the back half of the year in Q3 and Q4 on a margin percent. Some of that's going to be due to overall our launches and our product mix. Some of that goes through efficiencies in the plant and higher volume, so we believe that's why we're holding our guidance there to the 29% to 31%. In terms of the EBITDA, we held EBITDA in the range of $100 million to $110 million. The $33 million was a -- basically a reflection of accelerating some of the restructuring benefits into the first quarter. And by providing the $26 million, it essentially smooths that out. So it's -- and moving forward, we would expect to remove the lumpiness of our acceleration, which was per our credit agreement. So we're still holding that $100 million to $110 million of EBITDA.

Yes. Well, I just wanted to clarify that, that $100 million to $110 million includes $33 million from 1Q and now $26 million when we think about the remainder of the year?

Correct. As we calculated per our credit agreement, correct. Correct. It would include that $33 million, but that would -- but in that regard, that would mean that the Q2 through Q4 would not have the benefits of the restructuring. By including the $26 million which we provided and by removing that acceleration, you'd still have $100 million to $110 million of EBITDA for the year, but you would have the benefit, the savings in -- it smooths out through every quarter. I think the reason why we provided the $26 million, it's a better number to be using as our first quarter EBITDA and run rate.

Okay. Right. That's helpful.

And Gary, I was just going to add to John's comments there that he referenced increased expectations on manufacturing efficiencies. Unlike our sales, which are not backloaded, there is some back loading of our margin expectations. He mentions mix, but to put some color on that, right, we'd expect some normalization of Numbrino to the back half of this year is hopefully the pandemic subsides, and we referenced some important products from our internal development efforts for (inaudible), excuse me, and Sumatriptan, which are in the back half of the year, which also had good margin contributions. And the last but not least, we're never-ending in our drive on portfolio optimization. As you look at the margin percentages, not the margin dollars, but simply believing some very low-margin products that aren't absorbing much capacity will immediately increase your margin percentages and then there's ongoing issues around sales mix and reducing the discounts and allowances that we provide in certain products that we think we don't have to provide that level of discounting anymore as we move forward. So there's a lot of moving parts in the back half of the year that we think will improve our margin percentages and keep us on track to our growth for the outer years.

We do have the next question from Scott Henry from ROTH Capital.

I apologize, I had to jump in and out of the call, so some of my questions may have already been answered. But first, in the release, I noticed you reiterated guidance, but you didn't provide the specific line items like I'm used to seeing in prior quarters. Is that simply because none of that changed? Or are you perhaps not going to be giving that detail going forward?

Scott, this is John. That's because none of the items -- none of the line items have changed, so we did not provide the table because they all -- we affirm them.

Okay. Great. And then did you -- I thought I heard you gave the levo number for the quarter?

I believe we did. It was $3 million for the quarter.

Okay. And in the past, you've talked about that levo franchise and the potential for growth there. Should we think of the Tirosint ANDA or generic as additive to that franchise? Or how should we think about that in totality?

Good evening, Scott. Yes, it's completely additive. We've mentioned a little earlier that while the volume of this product is substantially lower, less than 1/2 of 1% of the total levothyroxine volume, it's obviously at a higher price point. We've discounted it substantially versus the existing brand asset, but quite a bit higher than the other levo tab assets that are out there. So we've talked about our levothyroxine category or, I should say, our thyroid deficiency category, being in the $40 million range over the course of year as we forward. We think there's upside, but that's where we put the number in for now.

Okay, great. Final questions. First, did you give -- you typically kind of give the revenue trend for the following sequential quarter. Did you talk about how we think about 2Q total revenues relative to Q1?

Yes. We did say that they should be up slightly and then grow through the remainder of the year.

Okay. Sorry to have missed that. And final question, just on the shares outstanding, when we look at the non-GAAP shares, the kind of $40.7 million, I think that was a little lower than I expected. How should I think about that shares outstanding number going forward?

I wouldn't use that for the full year. I know there is the piece associated with our convertible notes, but based on our calculations, you should continue to use that number.

And we have no further questions at this time. And I will now turn the call over to Tim for final remarks.

All right. It's Tim again. I call with our customary shoutout to our employees, customers and partners working extra hard in extra challenging times to provide high-quality, low-cost medicine for our patients. We look forward to sharing our progress on our next call. Have a good night.

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