Lannett Company Inc (LCI) 2022 Q3 法說會逐字稿

Welcome to The Lannett Company Fiscal 2022 Third Quarter Financial Results Conference Call. (Operator Instructions)

I will now like the call over to your host, Robert Jaffe, Investor Relations. Mr. Jaffe, you may begin.

Thanks, operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2022 third quarter financial results. On the call today are Tim Crew, Chief Executive Officer; John Kozlowski, the company's Chief Financial Officer; Maureen Cavanaugh, our Chief Commercial Operations Officer; and Steve Lehrer, who leads our insulin biosimilar initiatives. The 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 forward-looking 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 due to several factors, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent forms, 10-Q and 8-K, filed with the Securities and Exchange Commission.

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 2022 third quarter financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings 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 initiatives, then John will discuss the financial results in more detail. 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. I'll begin today with an overview of our financial results followed by brief comments on the progress of our restructuring plan, and then I'll provide an update on our product pipeline, including our expanding portfolio of near-term opportunities as well as our durable assets. For the quarter, as has been the case for some time, competitive pressures compacted our top line. Despite this, our adjusted gross margin increased from the previous quarter, and our bottom line was modestly better than our internal estimates, but this is not the whole story.

We also recorded unusually high product returns which masked higher-than-expected sales volume and what otherwise would have been a better-than-expected financial performance. Product returns are a regular part of our business and averaged in the mid-single digit millions of dollars in recent quarters. However, in the third quarter of this year, product returns, which were largely related to sales from more than a year ago when our sales were higher, approximately doubled to about $12.5 million. Three products, Levothyroxine capsules, fluphenazine and fluphenazine, figured prominently in this result. While we expect these returns will continue at an accelerated level in the near term, we don't expect our current returns rate to be sustained through next fiscal year because of the different but discrete and attenuating reasons behind these returns.

Turning to our November 2021 restructuring plan. In late March, we completed the sale of our liquid drug manufacturing plant in Carmel, New York, for $10.5 million. We received $9 million at closing and expect to receive the remaining balance in installments over the next 18 months. The transfer of certain products from the Carmel plant to our main plant in Seymour, Indiana, is in process and is expected to continue into the next calendar year. Meanwhile, the Carmel plant continues to support the production of the products being transferred. We expect the major elements of the restructuring plan to be completed around the end of next month. The plan is anticipated to generate approximately $20 million of annual cost savings. While this restructuring effort is wrapping up, our efforts continue around portfolio optimization with the ever-important imperative to seek more yield from our in-line portfolio.

Now let's turn to our pipeline. I'll begin with our near-term product opportunities, a mix of our own and partnered products. These are products that may come to market over the next year, ahead of the larger assets in our insulin and respiratory portfolios. As discussed on our last call, these products are increasingly different from our older immediate-release oral generic products that have been subject to increasing competitive pressure. Thus, these new products have the potential to be meaningful contributors to our financial results. Moreover, we are encouraged that at least a few of these products could be launched in the first half of next fiscal year, if not the first quarter.

These opportunities include sevoflurane, which is a solution for inhalation, has 4 current competitors and an approximate market size of $190 million according to IQVIA, although in-market generic sales are expected to be lower. We have a target action date in our first fiscal quarter of next year. Sumatriptan, which is a smaller nasal spray, has a few competitors, and we have a target action date of early next fiscal year. Sucralfate, which is an oral suspension, has fairly challenging bioequivalents in future studies and a few competitors. We have a target action date late this calendar year. Moreover, we are in late-stage negotiations with partners on 2 drug shortage products, including the injectable fludarabine. If we secure and launch these products in the first half of next fiscal year and shortages persist, their value could be significant.

Fludarabine would be our first commercial foray into the injectables market as a firm, although several members of our team have related earlier experience. We also note that we have agreed to terms with a European partner to develop another injectable product for later in 2023. In mid-calendar year 2023, we hope to launch lisdexamfetamine, a controlled substance, so competing only against U.S. manufacturers. IQVIA estimates that the product's market size is about $4 billion. While generic market sales are expected to be lower, that could represent a sizable opportunity for us if we launch in the first generic wave as we plan.

Additionally, we have reinvigorated our efforts to leverage a wide range of contract development and manufacturing capabilities at our Seymour, Indiana plant. We recently recruited a dedicated sales director for these efforts and have several opportunities already progressing. It will take some time for these efforts to bear fruit, but we are quite encouraged by the receptivity so far. Our team's ability to be highly responsive and provide a high-quality product on a highly reliable schedule has been well received by brand organizations that embrace such advantage of being "made in America".

Our earlier expansion efforts around our Niferex collaboration are completed with expanded packaging and manufacturing capacity for this brand, which are partner sales in China. Over 10% of our current plant output is dedicated to the sustainable opportunity, which, in aggregate, will generate about $10 million in sales with margins comfortably above our in-line generic products.

To sum up, we are responding to the heightened competitive environment with cost-containment new revenue streams and have multiple shots on goal in our pipeline. We are moving closer to potentially launching a number of these pipeline products in the near term.

Turning now to our durable product pipeline. I'll start with generic ADVAIR DISKUS. We received a complete response letter from the FDA regarding the ANDA and more recently met with the FDA to seek clarification and additional information. While our partner's European clinical site was successfully inspected, based on the FDA's technical feedback, our partner is electing to conduct another clinical trial as well as additional PK trials. We anticipate concluding those new trials later next year. While we are disappointed, we have always maintained that, because of the complexity of the product, we expected at least one FDA review cycle. Our revised timeline for a possible launch of the product is now in calendar year 2024. There is a silver lining. Based on the FDA's extensive feedback, we believe we have a clear road map towards a possible approval. Additionally, we are using the feedback we received from the FDA to help guide our ANDA for generic Flovent Diskus. That product remains on track to file later this calendar year.

Next to discuss is our biosimilar insulin glargine product with HEC. There has been extensive recent press reporting around insulin affordability. As a result, trade interest in our progress is notable. In late March, we initiated the pivotal clinical trial. And thus far, we are pleased to report approximately 25% of the enrollment goal has been achieved. We anticipate clinical trial dosing will be completed by fall. And following extensive analytics, we expect top line data to possibly be available towards the end of this calendar year. If the trial is successful, we anticipate calling the biologic license shortly thereafter, and if approved by the FDA, potentially launching the product in the first half of calendar year 2024.

Our program on insulin aspart, a fast-acting insulin, has completed commercial scaleup and generally trails the timing of our insulin glargine program by a little more than a year. It is important to point out that not only is insulin glargine the most significant opportunity currently in our pipeline, but also the clinical development of the product differs significantly from the durable respiratory products in our pipeline. Specifically, a very high percentage of well-characterized biosimilar products, which we believe is the case with our product, has successful clinical trials and typically receive approval from the FDA on the first review cycle. Obviously, this is not a guarantee, but it does give us optimism.

I'll now turn over the call to John to review financials. John?

Thanks, Tim, and good afternoon, everyone. I'll begin with some comments regarding our efforts to regain compliance with the New York Stock Exchange listing requirements and then discuss our financial results, focusing my discussion on our non-GAAP adjusted measures. In early March, the New York Stock Exchange informed the company that it was not in compliance with the Exchange's $1 stock price and $50 million market capitalization listing requirements. With assistance from an outside adviser, we have submitted our plan to the NYSE and are in contact with their staff on this topic.

Now turning to our financial performance. For the 2022 third quarter, net sales were $78.4 million compared with $112.4 million for the third quarter of last year. Gross profit was $9.3 million or 12% of net sales compared with $30.4 million or 27% of net sales for the prior year third quarter. Interest expense increased to $12.9 million from $9.8 million. Net loss was $16.7 or $0.41 per share versus net income of $1 million or $0.02 per diluted share. Adjusted EBITDA was $98,000.

Turning to our balance sheet. At March 31, 2022, cash and cash equivalents totaled approximately $106 million, which included proceeds from the sale of our liquid manufacturing plant in Carmel, New York. We continue to expect to end the current fiscal year with close to $80 million of cash, which is after a $14 million interest payment in the current fourth quarter. And we continue to expect to receive approximately $20 million of income tax refunds in the first half of next fiscal year. At March 31, total debt was approximately $650.7 million comprised of first-lien senior secured notes of $350 million, second-lien notes of $214.4 million and convertible notes of $86.3 million.

Turning to our guidance. We tightened and/or updated several items. For fiscal 2022, we now expect net sales in the range of $335 million to $350 million from $335 million to $360 million; adjusted gross margin as a percentage of net sales of approximately 13.5% to 14.5% from approximately 14% to 15%; adjusted R&D expense in the range of $22 million to $24 million from $23 million to $26 million; adjusted SG&A expense ranging from $55 million to $57 million from $55 million to $58 million; adjusted interest expense of approximately $52 million, unchanged; the full year adjusted effective tax rate in the range of 23.5% to 24.5% from 23% to 24%; adjusted EBITDA in the range of $0 million to $8 million, unchanged; and lastly, capital expenditures to be approximately $12 million from $10 million to $14 million.

We expect to provide guidance for fiscal 2023 on our next investor conference call currently planned for late August. At that time, we believe we'll have additional clarity on the status of the nearer-term product opportunities that Tim discussed earlier.

I'll now turn the call back over to Tim. Tim?

Thanks, John. To sum up today's remarks. Our bottom line performance was generally on track, and sales volumes were better than expected despite ongoing industry pressures. We submitted our plan and are in regular contact with the NYSE to regain compliance with their listing standards. We expect to complete the major elements of our restructuring plan by the end of next month. We sold our Carmel, New York liquid manufacturing plant, the proceeds of which helped increase our cash position to more than $106 million as of March 31. We look to that cash balance to help provide a bridge to our pipeline realization. We have expanded our near-term pipeline with products that have a potential to be meaningful contributors. We believe several of these products will be launched in the first half of next fiscal year. We received, as expected, a CRL from the FDA regarding our generic ADVAIR DISKUS ANDA. Based on that feedback, we are now targeting 2024, if approved, for the launch of the product. The FDA feedback provides a clear road map towards approval of the product as well as for our ANDA submission for generic Flovent Diskus. And finally, the pivotal trial for insulin glargine is well underway. Insulin glargine is the largest and most significant opportunity currently in our pipeline, and we have already seen significant early commercial interest in the product. If our development path progresses like most other biosimilars, we anticipate filing the BLA next year and if approved, launching in the first half of 2024.

One final comment. Our entire team continues to work on building and growing our company despite the challenging generic environment. Many of us are also shareholders, and in the case of the senior team and Board members, significant shareholders. We, along with other holders of our equity and debt, are committed to our pipeline, particularly the durable assets and now some of the near-term opportunities I mentioned earlier. We are hard at work, looking to bring these product candidates successfully to the market.

With that overview, we'd now like to address any questions. Operator?

(Operator Instructions) Our first question comes from Scott Henry from ROTH Capital.

I did have a couple of questions. First, you talked about the abnormally high product returns. Is there a reason for that? Just curious if there's something that's motivating that.

Scott, it's Tim. Generic industry returns is a somewhat archaic world. Lots of different customer policies but generally allows the return of products at expiration at their approximate value. Because there are so many moving parts, we historically rely on historical experience, which you can think in the range of 1% to 2% annually. However, in the case of 3 products mentioned, there were some changes to that historical experience that are pretty specifically targeted at those particular products. The first is Levothyroxine capsules, a product that we launched a year-or-so ago. And essentially, the substitution rates for a variety of reasons were lower than initially anticipated, and it appears some stranded inventory at the customers who have been coming back at a higher-than-anticipated rate. Customer order patterns appear to be have been corrected. And therefore, we expect, while that bolus of inventory is working through our current return expectations, it will not be sustained.

As it relates to verapamil and fluphenazine, it's a different fact pattern but again a diversification or a change from our historical experience. I think it's well documented, a year or so ago, we experienced some significant price declines and some share losses on those products as new competitors came into the market. Historically, customers were more likely to work such products through their inventory, replacing historical product with new product as it arrived, but that pattern seems to have changed a bit for these couple of products given the size of the price drops and held on to that inventory and have returned at a later date. I don't think this will be unique to our particular situation given some of the industry challenges, but it's partly what's affected our near-term histories.

Okay. A couple of other questions. You did mention ADVAIR DISKUS, a clearer road map going forward. Now how should we think about that from the risk profile? Because clarity doesn't have to mean less risky. It just means a clearer path. But I guess my question is do you view it as a less risky path going forward? Or has that changed in any -- in either direction?

Yes. Thanks, Scott. Quick clarification. I said, I believe, verapamil a moment ago. I meant Vardenafil, right? So just to be clear on that. So Vardenafil, not verapamil.

Regarding the clear pathway, these complex products, there's tens of thousands of pages and lots of nuance around the application of file. We've always indicated, we expected a CRL. Many folks before us on this product, I spent a lot of time arguing their valid concerns. From our perspective, the FDA sometimes will agree with these positions. Sometimes, will disagree, but the debate, itself, takes time. Given where we are with the development and what the asks are from the FDA, we think they're fairly achievable given what we have in our hands right now. And so the discretion being the better part of valor, we're going to just move forward as they'd ask, which we then think increases our chances of a successful approval on the timeline we discussed.

Okay. And you had mentioned that ADVAIR DISKUS was likely a multicycle approval process. With regards to insulin glargine, do you view that as a multicycle process as well? Or how should we think about the review expectations there?

Scott, as we said in the call itself, we really believe that those sorts of biologic products, once they're well characterized, there's a variety of tests the FDA requires before you can claim they're well characterized, we believe we have met those expectations. And as a result, the sort of clinical success in such biosimilars has been very, very high to industry's experience. And similarly, the approval, subsequent to the completion of a successful clinical trial, has equally been high, much higher than the complexities of around of a drug device combination sort of product.

Again, there are some issues that occasionally occur in the space of, I would call, cGMP for a plant. In this case, we have a partner, a brand-new plant built for purpose, all the sort of Western technologies that we'd like to have in place. So we're managing to that at a fairly high level of priority. And again, the average experience here in such products is much higher for a first-cycle review, 60%, 70% to our knowledge in the biological space, very, very different than what you see in complex generics that don't have as clear of a set of expectations from the FDA. So therefore, we have confidence but can't guarantee it, but the confidence that, that product will have a successful clinical trial and likely to have a first pass review cycle.

Okay. Final question, the other new -- or the other product line was a notable upward balance sequentially from 2Q to 3Q. Anything going on there? And should we expect it to continue at that higher level or revert back to prior trends?

Scott, this is John. I'll take that one. So we -- like we've done historically in the past, sometimes we get to take advantage of opportunities. We had an opportunistic sale within the period that increased that overall category. That is not currently in our Q4 forecast for that to continue. So we look at it as just an opportunity for a good sale.

At this time, we have no further questions.

All right. It's Tim again. Thanks again for joining the call. And as always, thanks to our employees, customers and partners all working hard to provide high-quality, low-cost medicines for patients. We look forward to sharing our progress on our next call. Have a good night.

This concludes today's conference call. Thank you for attending.