Q1 2021 Lannett Company Inc Earnings Call
Welcome to the <unk>.
Let me just go 2021 quarter financial results Conference call. My name is Karen I'll be your operator for today.
Hi, I just <unk> on the listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If your question. Please press Star then one and you touched on phone. Please note that this conference is recorded I'm not trying to call over to Robert Jaffe, Robert you may begin.
Good afternoon, everyone and thank you for joining us today to discuss Lannett company fiscal 2021 first quarter financial results on.
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 Dot <unk> Dot com, a playback will be available for at least three months I'm on its 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 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 US generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.
Investors are encouraged to review in its 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 at associated initiatives, then John will discuss the financial results in more detail, including the Companys fiscal 2021 Guy.
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 Atlantic 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.
For the quarter net sales were $126 million, which we view as a solid achievement given the reduced contribution from our largest product dependency after.
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 up fiscal 2021 headwind and I'm pleased to report that the plan had 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 b notes.
This pay off will be an important and long sought accomplishment.
In a moment that we will celebrate because.
Does paying off our term loan aid 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 B convertible notes have no financial covenant ratios.
Of course once a term loan A's are paid off we will increase our attention on addressing our remaining debt.
Our term loan b mature in just over two 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 four new products during the quarter.
Namely lighter came 2% topical solution.
Philippine but more funnel and we both rocketing 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 LIBOR boxing 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 this product from their previous suppliers.
And earlier this week, we announced we commenced the marketing of all 12 dosage strength of the authorized generic of trio sense or leave up rocketing sodium capsules.
The acute care market from the boxing capsules is approximately $111 million, although end market generic sales will be lower.
We have a proxy capsules complements and in addition to our leverage rocketing tablets product.
We expect another supplier will enter this market in due course with a subset of strikes.
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 one of only two 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 a zipper myself IR tablets, 250 milligram and 500 milligram 30 count bottle sizes only.
Now looking to the cadence of future launches.
In addition to the 12 products launched in the last seven months, which include the six product launch fiscal year to date, our plans to launch about another seven product over the balance of fiscal 2021, including.
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.
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 a biosimilar product as often noted we have partnered with HSBC to develop a biosimilar insulin glargine for the us market.
And as we said on our last conference call a team from one that and HTC met with the FDA in June to review, the so called CMC data chemistry manufacturing and controls.
And to discuss the clinical advancement of a biosimilar insulin glargine.
The update provided encouraging guidance that leads us to believe that we remain on track to file a BLA in calendar year 2022.
More recently HCC has now substantially completed construction of a large new plant that will include 812500 liter reactors, creating substantial part of capacity for insulin with us demand as measured in many metric tons.
In EG 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 Sta for their feedback.
They're positive feedback will allow us to commence the required study as soon as a 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 were able to track other potential competitive efforts overtime.
At this time, we continue to believe that there will be no more than four other competitors to win that and hccs insulin by the time, we expect to launch our product.
As a result of all this context, we continue to believe the US launch of the product is quite possible in calendar year 2023.
Based on standard assumptions and given reported in 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 AD there another potentially durable product for us.
The pivotal PK trials for the 250 50, and the 550 strengths have been completed by our partner respirator.
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 the us launch of the product as 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 new breanna product, which carries a higher than average gross margin.
Last quarter, we sold less than a million dollars.
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 unless 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 durable portfolio of future drug candidates.
To sum up.
We reported a solid quarter of net sales and EBITDA of $33 million.
Spite, a new competitor for flip anything.
From Phentermine was our largest and most profitable product last year.
We launched four new products in the first quarter of this fiscal year and earlier. This week, we initiated marketing of north right generic of LIBOR for Oxy castles we.
We believe this product will be 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 food benzene or pecan is all apartment product until late this fiscal year along.
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.
When 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.
Hccs, 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 on track on following 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 billion dollar company by 2025 with the gross margin percentage in the low thirtys.
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 some financing.
SGN 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 years 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 six cents 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 22 cents per diluted share.
Adjusted EBITDA was $33 million.
Per our credit agreement the calculation for adjusted EBITDA included the full cost savings benefit other 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 Thirtyth 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 mature 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 I've 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 EPS DNA 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, two increased 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 operator.
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.
Yes. Thank you we will now begin question and answer session. If you have a question. Please press Star then one on the Touchtone phone if you wish to be removed from Q. Please press site or the house key if you can speak a song you. Many typical handsets first there's no question the number one.
Once again, if you have a question. Please press star then.
Touchtone phone.
We do have our first question.
From Matt enrolled from Craig Hallum Capital Group.
Good afternoon, gentlemen, thank you for taking the questions.
Maybe the first one up I think you addressed this a little bit so we could get a lot more color is on that does the prescription volume trends.
Obviously back in the spring with the locked down the skills are severely impacted it seemed like things were recovering this summer, but now with the spike in.
Cases, it I think there is the potential for things to reverse a little bit and I'm, just curious what you're seeing and is it.
Geographically.
Spread out as far as where we're seeing these spikes and maybe some areas. It suits. Your scripts are faring a little bit better so any color there would be helpful.
Good evening, Matt.
Description decline that were referencing in our prepared remarks really relates to the little less visited the physician offices that you would see on the sort of ongoing basis given the pandemic.
We're not seen significant changes, we're talking low single digits, 1% to 3% on a given period.
We do contrast that of course, the fact that typically you'd be seeing increase.
On prescriptions overtime, so that the net swing is a little bit more noticeable but mid single digits swing is not as much. For example is trade inventories might move as people are worried about stocking up for for particular products. So we don't see this as a a a major headwind at this point.
The various products that we provide at the industry provides is a central medicine is holding up pretty well, but it does create some marginal pressure on our turns as we think we are losing mid single digit volume opportunity in the margin associated with it.
Understood and then maybe one separate question so.
And 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 partner.
Partnerships that Youve signed over the last couple of years, but the plan was for gross profit dollars to relative to be relatively flat and we're seeing that in the EBITDA, where that's been relatively flat at least over the last five quarters, but the gross profit dollars have been trending down with those gross margins is that a function of mix is that a function.
So.
The phenom seen headwinds maybe.
Maybe explain what's going on there a little bit of help us understand how that were kind of recoveries over the course of this year. Thank you.
Sure well I want to be sure I'm clear, we're not looking to sacrifice any growth 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, 1920 product launches year has done just that it's held.
Doug create increased gross margin dollars far business I'll bet that gross margin percentage is lower than historical trends. It is indeed, a mix issue that results in the lower total.
Our gross margin dollar perspective, but that mix issue really is under.
July by the fact that we've had competitive.
Pressure competitive loss to leave with Roxane, some years ago and more recently, some dependency and so it's it's really more about the competitive context that creates the mix issue the reference.
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 paid off our term loan easier. 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 and given time and we've had a couple of.
Specific notes. This last couple of years on couple of our largest products, which have therefore belies our underlying success on our on our on our product launch efforts.
Our next question from Gary Tenner from CNL Middle market.
Hi, guys. Good afternoon first Tim do you still think that across leave a product will contribute about 25 million. This year, how is the competitive dynamics in that market and how to you layer that IGI as Sharon sent into the mix will that cannibalize the.
We have very good evening Gary.
I think we discussed at our.
Therapy category that the leave those fall into to be something around $40 million that might be roughly evenly split today, we see upside on it but but fundamentally thats 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 heavier 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 holding.
Number for now to projections, we think we have a conservative 40 ish or so a million dollars in the thyroid category, you'll see in our in our tables that we published as it relates to Leabo boxing capsules.
The price point here is obviously quite a bit higher than a multi competitor market.
The volume here is substantially smaller I think Lee both Roxane capsules is approximately one half of 1% of the total volume, but we have a proxy market.
So while we may see some access gains for the lead with Roxane capsules product as that pricing becomes more accessible to managed care plans and patients.
It's really the value that products driven by the fact that will be just ask for a period of time and then another competitor entering into the market. So much much lower volume, but significantly higher price point, although I might present, 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 to contribute about 75 million a year for the next few years and you mentioned you still confident in the billion target for fiscal 25, how much of that is going to come from products like generic add back.
And then in the late quarter Jane.
It can be really more back end loaded when we think of the you know the progress to get there.
Sure. We're very pleased with our product launches of late that being front end loaded. So many years in our lives we have to wait that launch late in the fourth quarter to achieve our objective going back to last year with POSITANO dissolve creating a big component of our our product launches and this year launching.
Leave with Roxane tabs leave with Rocketing capsules little bar for an all in the first several weeks of the quarter, we feel very good about that sort of annualized contribution of $75 million. We we certainly see that coming into our PML 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.
Okay.
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 $2 billion.
That $1 billion goal is indeed.
Depended upon at some level the.
The success of the more durable assets our portfolio.
Respiratory assets like add their insulin assets from our partner.
C, but I'd also note.
Those those sales might represent.
This is very roughly half of that total figure we are equally dependent upon the success of our internal development program in the in line products remain 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 five 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 the larger aspirations of our growth expectation, but there was also of course this much larger what I call the.
The more probable less low.
Large everyday work horse generics that we are we are developing from our internal developer folio that create the other half the value of our of our future moving forward.
Okay, and then just a couple of more the 27% gross margin in the first quarter is lower than we expected Harry still confident in the 29% to 31% guidance, especially of Twoq. Similar then the EBITDA guidance is that factoring the higher EBITDA long queue that include.
Did the restructuring or is that excluding that thank you.
Hi, Gary This is John so all the I'll just the margin piece first so yes, we do expect Q2 to be similar slightly higher but similar.
Coming up in the back half of the year in Q3, and Q4 on margin percent some of that's going to be due to overall.
Overall, our launches in our product mix some of that though is through efficiencies in the plant and higher volume.
So we believe that's where 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 essentially smooth that out so it's.
Moving forward, we would expect to remove the the lumpiness of our acceleration which was per our credit agreement.
So, we're still holding that $100 million to $110 million EBITDA.
But then again.
Oh, yes, well I just wanted to clarify that that budget to 110 includes $33 million from Lumpier and not 26, when we think about the remainder of the year.
That's correct as we calculated per our credit agreement correct correct that would include it would include that 33, but that would but in that regard that would mean that the Q2 through Q4 would not had the benefit of the restructuring by including the 20.
<unk> 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 had the benefit the savings in every is smoothed out through every quarter I think the reason why we provided the 26, it's a better number to be using as.
Our as our first quarter EBITDA and run rate.
Okay all right.
And Gary I'm, just going to add to John's comments, there that he referenced increased expectations on manufacturing efficiencies you. Unlike our sales are not back loaded there is some backloading of our margin expectations.
He mentioned mix, but to put some color on that right. We'd expect some normalization of Reno to the back half of this year is hoping the pandemic subsides and we referenced some important products from our internal development efforts.
Well prepare mix, so promising excuse me and as on the Triptans are which are in the back half the year, which also has good margin contributions and the last but not least we're never ending in our in our in our in our drive on portfolio optimization.
As you look at the margin percentages up the margin dollars, but simply bleeding some very low margin products aren't absorbing much capacity will immediately increase your margin percentages and then theres ongoing issues around sales mix and reducing the discounts and allowances that we provide on certain products that we think we don't have to provide that level of discounting anymore. As we move forward. So there is a lot of.
Moving parts in the back half the year that we think will improve our our margin percentages and and keep us on track to our growth for the outer years.
Okay.
Okay. Thank you.
We do have a next question from Scott Henry.
Thank you and good afternoon, and I apologize I had to jump in and out of the call I. So if some of my questions may have already been answered, but first in the in the release I notice you reiterated guidance, but you didn't provide the specific.
PICC 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 detailed going forward.
Hi, Scott This is John that's because none of the items none of the line items had changed.
So we did not provide provide the table because they all are that we are from them.
Okay.
Great and then.
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Did you I thought I heard you gave the LIFO number for the quarter.
Yes.
I believe we did it was $3 million for the quarter.
Okay and.
In the past you've talked about that level franchise and the potential for growth there.
Should we think of the tier ascent.
And our 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 one half of 1% of the total the boxing volume. That's obviously at a higher price point were discounted substantially versus the existing brand asset but.
Quite a bit higher than the.
Other leabo a tab assets that are out there. So we've talked about our lead with rocking category, our and our success iron deficiency category being in the $40 million range over the course of the year as we as we move forward, we think theres upside, but thats, where we put the number in for now.
Okay great.
Final question.
First it did you give that data.
You typically kind of give us.
The revenue trend for the following sequential quarter did you talk about how we should think about Twoq you 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.
Yes.
When we look at the non-GAAP shares the kind of $40.7 million.
I think there was a little lower than I expected I, how should I think about that shares outstanding number going forward.
I would use that further for the full for the full year I know there is that piece associated with our convertible notes, but based on our calculations you should you should continue to use that number.
Okay, great. Thank you for taking the question.
Thank you good night.
And we have no further questions at this time.
I'll now turn the call over to Tim for final remarks.
Alright, its 10 again I'll close with our customary shout out to our employees customers and partners working extra hard in extra challenging times to provide high quality low cost medicine for patients. We look forward to sharing our progress on our next call have a good night.
Thank you ladies and gentlemen concludes today's conference. Thank you for participating you may now disconnect.
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