Q2 2021 Lannett Company Inc Earnings Call
Welcome from on that company fiscal 'twenty 'twenty, one second quarter financial results Conference call. My name is Adrian and I'll be your operator for today's call.
This time all participants are in a listen only mode. Later, we'll conduct a question and answer session.
During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note. This conference is being recorded.
I'll turn the call over to Robert Jaffe, Robert Jaffe, you may begin.
Good afternoon, everyone and thank you for joining us today to discuss net companies' fiscal 2021 second quarter financial results.
On the call today are Tim crew, Chief Executive Officer, John Kozlowski, The company's Chief Financial Officer, and Maureen Kevin <unk>, our chief commercial operations Officer.
This call is being broadcast live at Www Dot low net dot com a playback will be available for at least three months on <unk> 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 is 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 <unk> press release announcing its fiscal 2021 second quarter financial results for the company as reasons for including non-GAAP financial measures in its earnings announcement.
The reconciliation of non-GAAP financial measures for the most directly comparable GAAP financial measures is also contained in the company's press release issued earlier today.
This afternoon, 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 revised fiscal 2021 guidance. We will then open the call for questions, but that said I will now turn the call over.
Tim crew Tim.
Thanks, Robert and good afternoon, everyone. We trust you all remain safe and well.
I'll begin with a brief review of our financial results.
For fiscal 2021 second quarter net sales were $134 million and adjusted EBITDA was $24 million, which exceeded our net our expectations respectively.
We overcame several challenges in the quarter driven by a strong performance of certain key in line products, such as public on adult and <unk> as.
As well as the launch of Levothyroxine capsules, and a full quarter of sales of the new products, we launched in Q1.
This was partially offset by lower than expected sales.
Triptan and the total ER, which I'll review for her in a moment.
Our gross margin was lower than anticipated largely due to more than expected competitive pricing pressure and associated customer inventory price adjustments.
Along with a few out of the ordinary item.
We expect some of these pressures to continue.
Others to abate.
An example of new competitive pricing pressures in both Sumatriptan nasal spray.
Our <unk> was approved in 2016.
Late last year, the second hand, it was approved some for five years after our approval.
This approval of course was on the heels of a new financing competitive approval at the start of this fiscal year.
The first such new approval in over a decade.
The back half of 2020 was certainly not fortuitous for us.
An example of an out of the ordinary item last quarter is that we discontinued 23 products at the end of the year as part of our portfolio rationalization of unprofitable products.
You, obviously look to be thoughtful about the returns of the products in our portfolio.
1000, <unk> discontinued product.
E R.
This product experienced several new competitors in the recent past.
And is burdened with higher than average government rebate claims as an authorized generic.
This project alone had a negative gross margin of over $2 $5 million for the quarter.
Another out of the ordinary item related to our product.
Portfolio rationalization.
Small number of products that had some net upward market adjustments.
While we expect future benefits for these adjustments, we recorded $1 $5 billion of expenses in the second quarter associated with certain customer agreements related to such adjustments.
While there are always many moving parts in the generic company income statement.
Atypical items, obviously reduced our gross margin percentage for the quarter.
As noted some will continue while others will abate.
Turning to our balance sheet.
In late November we used a portion of our cash to pay off in full at long last.
Term loans.
With payoff will reduce interest expense from principal payments going forward by $3 million and $27 million annually.
Further our remaining debt instruments have no financial leverage covenants offered us increased financial flexibility.
Also in the second quarter, we established a new $30 million revolving credit facility.
Which further enhances our liquidity.
John will discuss our financials in more details later, including context around the liquidity and addressing our remaining debt.
Meanwhile, our near term competitive environment remains challenging.
In part due to reduced sales from particularly profitable products.
For example, the Bruno is affected by fewer elective surgeries during the pandemic.
Only experienced an API disruption on the product called the total loans.
We expect both products to contribute significantly more if each quarters. Then we will have the balance of this fiscal year.
More significantly.
Also expect a new competitor for both other comparable in 2000 to occur in this third quarter.
However, we remain quite optimistic about our future billion dollar sales potential by 2025 for the.
Following.
First the products experiencing accelerated declines were always expected to decline over the planning period.
And second we.
To drive for value in our core business by carefully managing all facets of costs.
New share on existing lines of business.
Our launch per rate.
All while building out our pipeline, we have an expanding array of what we believe are durable mid and longer term pipeline assets.
Regarding my lunch break we launched seven new products fiscal year to date.
With for products in the first quarter, including a lower ethanol and lever for oxy tablets.
As well as three products in the second quarter, including Levothyroxine capsules, and Azithromycin IR tablets.
We expect to launch another five new products over the balance of the current fiscal year.
Three of which are already approved including chlorpromazine, which is in process as we speak.
Collectively these new products are expected to achieve our continuing yearly goal of around $70 million of annualized sales from new product launches.
With respect to our pipeline, we have more than 20 products in development.
Other 11, andas pending at the FDA, including partner products plus for products that are approved and pending launch.
I will now turn to larger and more durable opportunities in our pipeline starting with our generic Advair development program with Westlake.
While we have lost a few weeks for international development efforts across the U S Europe and Asia related to the Covid pandemic.
We are delighted to share that we are now finalizing the preparation of the PK PD study data and assembling the NDA for submission.
Our expectation is that the NDA will be filed around the end of March.
We continue to believe our U S launch of the product as possible in calendar year 2022 and.
And based on standard assumptions, we anticipate substantial net sales in fairly short order following the launch.
Well to some of you that may seem optimistic.
Note the speed of this program's development had been exemplary.
Perhaps even extraordinary compared with historical programs.
We entered this agreement less than 18 months ago, but now find yourselves only a few weeks from finding this highly specialized durable and exciting opportunities.
And as we have said.
Evaluating in late stage negotiations for additional product opportunities and the drug device installations respiratory space.
For dry powder and metered dose inhalers.
These markets are of course generally quite large growing from durable.
Similarly, our progression with the insulin <unk> assets in partnership with Hec.
Also see is exemplary.
Over the last two years, we have significantly progressed through various manufacturing clinical and regulatory milestones.
And I'm going to go through them all briefly with you now.
First we have successfully produced product conducted a pilot healthy human volunteer clinical trial developed related analytical data and receive supportive FDA feedback.
That feedback suggests essentially that we can repeat the same albeit slightly larger healthy human volunteer study at the same clinical site used previously with new product from you set the new facility for Hec is constructed.
Such feedback significantly accelerates the.
The development timeline and low expected development cost.
Second the new state of the art dedicated insulin manufacturing facility has been built expressly to USA standards and stocked with the finest European equipment.
It has been commissioned at a cost well north of $100 million.
That plant has a capacity adequate to supply double digit market share in the multiple metric ton U S insulin market.
Which is what is needed to compete for U S market.
And if we are successful.
C stands ready by contract to build even more capacity.
Third from a commercial opportunity perspective, <unk> is a very large multibillion dollar market and only a small number of pharmaceutical firms.
The requisite technology and have committed the requisite resources.
Particularly related to the scale of manufacturing needed to compete in this market.
And finally, working with well qualified counsel, we believe we will have freedom to operate with respect to related product and device IP.
Moreover, we expect to have an attractive cost position to support an affordable alternative and still maintain attractive gross margins.
Such efficiency is especially important this very high volume market for formulary switches between various forms the closing occurs more regularly than other far more expensive so called biologics.
And yet even with such relative affordability and assuming future price erosion, you see each 10% share of the garage and only market worth around $200 million annually.
Moving forward, we are now working with our partner to scale up the product processes and the new plant to produce clinical batches, while the FDA reviews are healthy human volunteer study protocol.
Which we submitted at the end of last year.
So we expect to produce clinical material in the first half for this calendar year and then file an IND later this calendar year.
Thus, we expect to be running the clinical trial early next calendar year.
So after our plan anticipates a filing of the BLA later in calendar year, 2022, and our product launch from 2023.
Well, there are operational and logistical challenges of plenty.
Delighted to have already accelerated so much of the program risk.
And we are excited to see the culmination of our efforts propel us towards a relatively near term file.
Now stepping back to broader market dynamics as a few comments to share.
First starting with COVID-19.
Although we see a slow recovery to the pandemic. We are encouraged as we all are but the progress on the vaccine from.
We look forward to better days and expanding volume for a generic business going ahead.
Meanwhile, our team remains laser focused on launching new products and managing our costs.
Second.
<unk> recently signed an executive order that says in part that the U S government should whenever possible procure goods and services from sources that will help American businesses compete in strategic industries and help America's workers thrive.
As a company with its headquarters and all of its own R&D and finished dose manufacturing based in the U S.
We're encouraged by the President's executive order.
While we believe it will take some time, we hope to become an even more important supplier.
Other medications we produce.
For the federal government.
One interesting optic around made the Americas that we see it as being aligned with emerging shareholder expectations and possible future SEC guidance around climate risk.
Lynette has one of the few scaled American generic pharmaceutical companies that is producing the vast majority of finished products in the U S as well as acquiring the significant majority of its API for those products from the U S. Our so called TAA Trade agreement Act complaint countries.
By contrast, much of American consume generic products are being made in for API from non TAA compliant countries.
As a primarily made in American firm when that is subject to and meets or exceeds America's high Osha and EPA standards.
Well it all comes at a cost a relatively tighter U S oriented supply chain likely lessens our carbon footprint.
And perhaps reduce the contribution to an exposure from climate risk events.
Especially when compared with so many competitors who operate in and shipped to America from the far side of the globe.
So do buy American and ask your pharmacist to buy when net products.
In doing so you can help out some of your fellow citizens and perhaps help out per plant.
To sum up my remarks today for the.
The quarter, we reported better than expected net sales and our adjusted EPS was in line with our estimates.
Our gross margin was impacted by ongoing competitive pricing pressure and some out of the ordinary events.
Our launch per a continues.
We have launched seven new products, thus far in fiscal 2021 and expect to launch approximately five more in the coming months.
We have revised our fiscal 2021 full year guidance down.
Two ongoing pricing pressure in our portfolio and to a lesser extent our decision to discontinue a range of lower margin products.
Our outlook assumes additional market entrants for both from <unk> and positive Carnival essentially now current fiscal third quarter.
In November we paid off in full our remaining term loan balance.
And as a result, we have reduced our annual interest expense and principal payments moving forward.
Finally, the development of our durable high value pipeline continues to expand and progress.
This optimism for growth over the midterm and beyond.
We believe we are on track for filing the NDA for generic Advair in the current quarter.
We believe we remain on track for filing the BLA for insulin <unk>, just next year and calendar year 2022.
With all of that I turn the call over to John John.
Thanks, Tim and good afternoon, everyone.
It 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 second quarter net sales were $133 9 million.
Compared with $136 1 million for the second quarter of last year.
Gross profit was $31 1 million or 23% of net sales compared with $50 2 million or 37% of net sales for the prior year second quarter.
The decline in gross margin was largely related to competitive pricing pressure and associated customer inventory price adjustments and sales mix.
Research and development expenses declined to $5 6 million from $6 8 million.
Largely due to timing of project spend and cost reductions related to the restructuring we implemented in July 2020.
SG&A expenses declined to $12 1 million from $16 1 million largely due to the restructuring and cost reduction initiatives announced and implemented in the first quarter.
Lower incentive compensation.
Interest expense decreased to $10 5 million from $13 1 million in last year's second quarter due to repayments of term a and term b loans as well as lower interest rates.
Net income was $3 2 million or <unk> <unk> per diluted share.
Net income for last year's second quarter was $11 7 million or 27 cents per diluted share.
As previously stated in Q1, our Q1 adjusted EBITDA, excluding the full cost saving benefit other recent restructuring less expenses such as severance incurred in the quarter was $26 million.
Our comparable adjusted EBITDA for Q2 was $24 million.
Turning to our balance sheet.
At December 31, 2020, cash and cash equivalents totaled approximately $34 million.
We expect our cash balance to increase in the second half for the fiscal year and to be around $50 million at the end of both Q3 and in Q4, primarily due to improvement in our working capital.
As well as from already received and expected future income tax refunds.
Additionally, we have $5 million of cash not included above in a restricted account based on our amended agreement with our term loan b holders.
Our outstanding debt at quarter end was as follows.
Total debt was approximately $639 $4 million.
Debt net of cash was $602 million.
And net secured debt was $514 million.
As Tim mentioned in November we used a portion of our existing cash to pay off in full our term a loans.
We are actively pursuing opportunities to enhance our capital structure and intend to refinance our remaining term b loans well in advance of maturity.
In December we established a new $30 million revolving credit facility, which provides enhanced liquidity.
Our Q2 GAAP financial results included a noncash asset impairment charge of $198 million.
Primarily related to the write down of intangible assets, specifically product rights associated with the acquisition of Kremers Urban pharmaceuticals.
The impairment analysis was partially triggered by our decision to discontinue certain product line sales of which have declined over a fairly lengthy period of time product lines generated net sales of $29 9 million for the fiscal 2020 full year and $3 6 million and <unk> 8 million for.
Q1, and Q2 of the current fiscal year, respectively.
Turning to our outlook, we are revising our guidance for the fiscal 2021 full year as follows.
Net sales in the range of $480 million to $500 million down from 520 million to $545 million.
Adjusted gross margin as a percentage of net sales of approximately 24% to 26% down from 29% to 31%.
Adjusted R&D expense in the range of 26 million to $28 million down from 29 million to $32 million.
I'd like to point out debt, our total R&D for the year has come down because of lower than anticipated project spend in the first half related to timing.
We expect R&D to ramp up in Q3, and Q4, which is largely related to our investment in our durable product pipeline.
Adjusted SG&A expense, ranging from $52 million to $54 million down from 55 million to $58 million.
Adjusted interest expense in the range of 41 million to $42 million unchanged.
The full year adjusted effective tax rate in the range of 26% to 27%.
Adjusted EBITDA in the range of $75 million to $85 million down from $100 million to $110 million.
And lastly capital expenditures to be approximately 10 million to $15 million down from 15 million to $20 million.
Regarding the phasing of the quarters.
We expect net sales and profitability in Q3, and Q4 to be similar but lower than Q2.
With that overview, we would now like to address any questions you may have operator.
Thank you we will now begin question and answer session.
Thank you.
Ken.
Press Star one on your Touchtone phone.
If you wish to remove from the queue. Please press the pound sign.
Excuse me Speaker phone you may need to pick up the handset first before press from the numbers. Once again, if you have a question. Please press Star then one on you touched on from in the first question comes from Gary Nachman from BMO. Your line is open.
Hi, Good evening, it's rockface R&R on for Gary.
Could you help us better appreciate the magnitude of the various components that drove the reduction in guidance how much is due to greater competition on the base portfolio vs pressure on newer products.
And could you also comment on the cadence for gross margin for the balance of the year.
Yeah.
Hi, Ravi this is John I can take that one we will start by saying that there was a few components on the revised guidance.
The first part is really the acceleration of competition as we saw with <unk>.
So as we're modeling with both <unk> and with Fluphenazine. If you recall from Q1, we had.
In our guidance competition towards the end of the fiscal year.
And our new guidance, we have that now in the current quarter. So where we were we had some strong sales in both those categories, both infectious diseases and an anti psychosis our expectations now.
Q3, and for Q4 is that they will come down.
On top of that though we also.
Had the discontinued products that had a run rate in Q1 of about $3 6 million that was a bit less in Q2, but some of that was due to the fact that we had a large government rebates to pay for metro belong but.
But overall I'd say, it's mostly a reflection of our.
Our new sales are forecast.
And I would just add it's Tim here I think the decline in margin percentage coming from the new competitors on our higher value products.
Largely offset by the very low margin negative margin on the discontinued products. So we expect gross margin percentage on a lower sales base to be maintained.
Thanks.
And could you also comment.
On what Youre seeing with respect to potential business development opportunities. How confident are you in completing a few transactions in 2021.
Yeah.
Regarding the business development, we still find ourselves very well positioned relative to our commitment to this space the quality of the team the degree of benefit and services, we offer beyond commercialization to the full range of what those partners are looking for we do expect to be announcing more transactions.
Particularly around some more durable elements over the course of this fiscal year.
And look forward to getting those words out to you when they get transacted.
Thank you.
And your next question comes from Gregg Gilbert from choose Securities. Your line is open.
Yes.
Thank you first for John can you help us understand what the cats and dogs were in gross margin percentage in the quarter I believe Tim characterize some of them is.
Sounded like one timers, but don't want to put words in your mouth and Tim has the slippery slope that has been gross margin percentage sort of soured your view on continuing down the path.
Of the same kinds of products going forward clearly you are looking to get into higher value larger opportunities like you've discussed in.
In the out years, but I have to imagine it's been frustrating to.
They have to deal with.
The melting ice cube aspects of the business in some cases melt faster than you than you expect them to.
So hi, Greg This is John I'll take the first part.
Some of the one offs in the period debt.
We were referring to was specifically with the Triple I mentioned that we had a large government rebate from a triple wall is one of the products that were in our discontinued list.
So.
It was a significant reduction too for the quarter that we will not see in Q3 Q4. We also had some of the inefficiencies with our operations.
When I am COVID-19 related with absenteeism.
Debt, we're expecting to increase as we go into the back half of this year.
A matter of fact, if we're just looking at.
Some of our results from January versus December we're seeing a significant increase in our overall output.
Uh huh.
And regarding to the slippery slope on gross margin.
I do think.
That we've been seeing.
Fewer new generics being approved and more approvals on existing generics has accelerated the erosion on what we might call. Some of the base products in our portfolio a bit more than we may have thought a few years ago.
We have been focused on building out the sort of durable portfolio for quite some time and I think it's important to note that were in process for some of those a durable portfolio items. We we tend to speak to the very large ones like insulin and add there, but we're pretty darn proud of getting products like <unk> and <unk>.
And legal caps out in the market as examples of products, which have some pretty decent sustainable value.
Other Kona is always going to be coming down now, it's the first second and approval.
We will exist and that is in the market now and and it's still a pretty valuable product for us. It's those sorts of products that we have been working on building out for a while.
And.
It gives us hope for our expectations of our longer term growth, particularly is a much more sizeable and much more technology intensive ones that we've talked about in the respiratory space in the <unk> space, drawing nearer to our gross margin delivery in our strategic plan.
Great I have two more on <unk>.
Clearly a lot of elective surgeries are rebounding as noted by other companies that make widgets that are tied to such activity are you noticing any.
Rebound there.
Relative to we have not seen any significant movement in.
Our <unk> sales, we think that is still under a fair amount of <unk>.
Pressure from a lack of those sorts of surgeries are sales last quarter were sub $1 million as they were the year before it is certainly an area, where we expect to see recovery in significantly more sales and like the other I should've mentioned it as a durable product. It is a high margin and not expect.
To have a whole lot of other people in it for some period of time.
Yeah.
And then lastly.
Early in the pandemic. It was remarkable how few supply chain disruptions that we saw across pharma branded and generic.
How much of that was due to safety stock on hand or for other things but.
Is there a reason to be concerned that there could be more sort of hangover effects from that in this calendar year versus the prior calendar year as many companies have worked through their Apis and materials and other things that might have been stockpiled at the beginning or.
Hey, good about all things supply chain related to that.
Pandemic and how it's affected movement around the globe.
Whereas as you just noted I think the industry to its credit and to benefit of patients is has been remarkably resilient during the pandemic and ensuring adequate supply of our medicines.
And that has always prided itself as being particularly strong on a reliable supply and less complex supply chain and should.
The disruptions of the last year continue in a way that starts creating fewer safety stocks, we feel we're well positioned to to supply those customers products that we needed as a strength of the organization, but not one of which we've got much benefit from in the recent quarters given the resiliency of.
The overall supply chain, but if that changes we stand ready.
Thanks.
Yeah.
And your next question comes from Matt Hewitt from Craig Hallum Capital. Your line is open.
Good afternoon, and thank you for taking the questions.
Just a couple from me first off and I don't know if its possible, but is there any way to quantify what the COVID-19 headwinds have been over the past year and you've talked about <unk>, but you can think about the the.
ADH Street ADHD drugs have been in decline because of the pandemic and there's I'm sure there's others.
How much of a headwind does that does that 10%, 15% over the past call. It 12 months and as we see the vaccinations increasing.
Infection rates declining.
Is that a potential tailwind for you later in this calendar year.
Good evening, Matt.
We have noted in other calls in a number of you and your compatriots have observed the sort of volume declines across industry.
It had been in the sort of low single digits I always try to.
The counterpoint, it's not just the decline. It's also the fact there wasn't a gain over most of the decades I have now spent in this industry I've always seen single digit growth in generic pharmaceuticals over the last year, you've seen single digit negative gross in pharmaceuticals, So that net swing can be maybe 10% we shall see.
We certainly hope to see that as part of our lift as we get into our next fiscal year.
And then of course beyond.
<unk>.
Curtailment, which you just referenced we have other areas like you don't see as much cough and cold utilization, which has a disproportionate part.
Of folks that are not getting cough cold as people stay in right. So those particular products in our portfolio are certainly down more than 10%. So when you do see lift on the balance of the portfolio as as.
Life returns a degree of normalization in new patient starts on existing generics.
Those up again, and then we see specific sectors of opportunity in cough cold into Brito.
For those pieces of our portfolio that have been disproportionately reduced more than the single digits you see for the macro effects.
Got it Okay and then one other one from me as far as the pipeline is concerned. Thank you for providing the update as far as you know number in development pending approval and pending launch as we look at call. It. The next 12 to 18 months.
The 11th pending approval by the end of the fiscal year is it safe to assume somewhere between a quarter and maybe half of the ones that are in development.
Could it also.
Reached the goal line over the next 12 to 18 months I'm, just trying to think how areas, where you could drive some incremental EBITDA to.
To help with that current balance sheet situation. Thank you.
So we tend to think of it again to that annual goal, we spoken to a $70 million of annualized sales from each bucket of year's product launches.
We certainly accomplished that last year with deposit console anchor.
This year it will certainly be accomplished we believe with the levo caps in levo tabs anchors as well as potential.
Nasal spray opportunities late in the year on XOMA Triptan.
And as we look forward to next year, we expect to be able to continue that we are focused a little bit more on the sort of product quality. We are willing to back off from the 20 product launches, we started with to getting to that same sort of dollar range on fewer products.
We are pleased to share that it looks like the API issue that held up Arthur.
Approval for some period of time is resolving itself, we do not have an approval yet but.
The API issue, which is pulled that off of our commentary is looking better.
For the course of the calendar year.
And and then as going into next year of course, there's all sorts of things that may occur, but we feel good about that $70 million of annual new value.
Understood. Thank you.
And your next question comes from Elliot Wilbur from Raymond James Your line is open.
Thanks, Good afternoon.
First question for Tim I guess with respect to.
Additional competitive entries on contract.
Is it kind of it all.
And for financing.
Are those.
Additional entrench pricing net points debt.
Coincide with.
Historical experience historical models it sounded like from your commentary that that may not be the case, but just wanted to verify if in fact that that's true.
Yes, so we.
<unk> tried to avoid any commentary on individual pricing expectations on any particular product for our portfolio.
We will note that in aggregate, we are increasing our expectation of declines across the portfolio.
To go from the mid to higher single digits for the highest single digits across our portfolio, which is a reflection I think of more entry on more products in our portfolio over the course of this year and beyond.
Okay, maybe a question for John coming back from the earlier conversation around gross margin levels.
Could you disclose what the government rebate was related to <unk> and I guess the reason I ask the question is looking at the margin performance.
This quarter I, certainly can understand the factors that led to lower than expected numbers in the change of guidance going forward, but if I look at your Rev.
Revenue performance.
I mean generally across the board and certainly in kind of your key high margin categories, certainly seem to be better than external expectations. So.
It seems like there's a little bit of a disconnect. There I'm not sure if I understand what maybe fully behind that.
So I mean, there's a few different covenant rebate programs, but the large line I'm referring to is one.
One that has the donut hole in Medicare part D. So towards the end of the calendar year.
We tend to see some.
Higher amounts.
This was a bit over what we had originally anticipated.
So it had a.
<unk> impact to the overall quarter again, no for a product that.
As part of our discontinuation list. So moving forward, we will not have.
That type of exposure.
Okay.
Just.
Perhaps last question for Tim just coming back to.
<unk>.
Brito, just maybe a status update in terms of some other non commercial as you've taken around the product.
Litigation update.
Sure.
Alright, well, we havent have our general counsel with us.
Sam.
So I'll ask him to maybe respond.
Yes.
Just.
<unk> debt.
Most recently in a case that the competitor filed against the FDA.
We are working with.
The FDA. The court is basically you ask the FDA to.
Go back and look at our application in light of the.
Issues that the competitor raised we are working with the FDA.
On.
Addressing any issues the court has and are fairly confident that.
We will be able to continue to as we have been two day March that product.
Okay, and maybe one last question sorry.
Just maybe Tim and Marine if you guys could just comment on the deal environment in general obviously, a lot of products out there potentially for sale not a lot of buyers, but more thinking about just the opportunities around.
Licensing deals.
Partnerships just the degree of flow.
Flow that youre seeing and how competitive some of these opportunities are versus what you were looking at maybe 12 to 18 months ago.
Well I think we're seeing a continuing bifurcation of more interesting assets against a lot of less interesting assets. So the sort of onesies and twosies of multiple competitive for all products.
Are certainly available out there, but we don't see them generating the value in terms of being able to step into supply disruptions or or securing share against the cost structure to the same extent, we saw in the past on the flip side of that the more durable assets. The one that take a little bit more time takes a little more support across our functional act.
<unk> in our organization those continued to show excellent deal flow for us and as I said I think you'll be hearing more from us soon on.
On those sorts of products, we have quite a large range of things that are in the hopper not all of them will obviously be transacted, but we feel pretty confident that youll see some increasing contributions of those sorts of assets into our into our into our portfolio. I do think there is also as an industry in lots of duplication out there right there's lots of duplicate.
R&D there is a lot of duplicate SG&A theres lot of duplicate manufacturing, so whether or not those sorts of transactions drive some value at some point, we shall see there is a GAAP between what buyers are willing to pay and sellers are looking to receive.
But on the product side, we see good deal flow for things that we talk most about in terms of driving our our returns in the mid term and beyond.
I would just add debt Im sorry, I would just add that we are seeing lots of deals coming across our desk and in other than that is considered a very good partner and we've showed that success and so we're always getting new opportunities every day to look guidance, Tim said, sometimes they just don't add the value that we're looking for.
When we find them react quickly.
Okay.
Okay. Thank you.
And our next question comes from Scott Henry from Roth Capital. Your line is open.
Thank you and good afternoon, I do have a couple of questions.
I guess first did you quantify the annual revenues of the discontinued products.
Yeah.
Hi, Scott Yeah. This is John so as we have said that for last fiscal year. The revenues were about $30 million and for Q1. They were about three six they did come down significantly in Q2 to about 800000, but.
A good portion of that was due to the difference in metro belong.
Moving on average run rate.
Go ahead, okay. Yeah. Okay. Thank you that's helpful and I apologize for missing that.
And.
Question.
The generic industry is.
Often about opportunity.
And the <unk>.
<unk> you want to discontinue a product.
If an opportunity whether a supplier.
Falls off or whatnot.
How hard is it to <unk>.
Startup that product.
This is Maureen I'd say it really depends on how long it's been since we discontinued the product. So obviously, if you discontinue a product just because of the value that again.
Having no operational issues, it's easy to bring back it's quick too.
From API and produce the product the longer debt the longer timeline from when you discontinue a product to consider bringing it back in the market that takes a lot longer to bring a product back to market.
Things change and so net.
When do you think a product goes stale.
At what point is it youre almost starting from scratch.
A year or is it two years just.
Curious.
Yeah, I mean, there's lots of theories about that I think it's product by product specific oneworld family per say five years and greater but it really is very very product specific it depends so.
We're constantly looking at that we look at our all our other <unk> that we've not felt for a while and consider it all the time are constantly looking for opportunities in the market. So we can jump on them.
I would note that the fda's support of prior approval supplements and their speed of which they are acting on them certainly shortens the time horizon that historically, we have seen to bring those products back in the market. So I assure you should those markets become more valuable they remain in our portfolio by and large and we will be able to act upon them I also think pragmatically.
Not what our expectation is or we wouldn't have discontinued them from where we stand here today.
Certain products, while the structural concern as we mentioned on the total all in its government rebate.
Our requirements as an NDA as opposed to an anda, which made it uncompetitive vis vis numerous competitors in the market today.
Okay. That's helpful. I appreciate the color on that topic.
Second question on gross margin.
If we look at the adjusted gross margin and use the mid point.
It basically dropped from 30% to 25%.
When we think about next year now there'll be some new products and there'll be some other products that are worse I mean does it is it reasonable to think that perhaps the margins are down to 25% in 2022 is that a rational way to think about it.
So I mean, we typically give some color for for our fiscal 2022.
Towards the end of our year.
We will expect to give something on our Q3 call in may so in a few months, we'll be able to provide a bit more color in terms of our margins our margin debt from a run rate.
And I'll add that we have previously said, we still believe that as we look out over time with more durable items from our portfolio recognizing that most of those durable items will have a partnership we've always talked to a $1 billion goal and happy to be in a 30% gross margin arrangement.
GAAP net margin to ourselves I think that remains in place. So the portfolio itself of any given year will affect obviously, what our gross margin target for that year, but over time.
Think something in the sort of low <unk> is what we would see is.
Expected or targeted.
As these more valuable products come into our portfolio.
Okay, and perhaps you Havent covered this company for.
About 10 years.
The cycle on the high side the low side.
Do you 10 minute, obviously, it's an opinion, but do you get the sense that we are kind of approaching the bottom of the generic cycle. Here is is there a level.
In your opinion, where margins typically bottom out before you have less competition and then they start the upward trend again.
Well I'll simply say that we're not satisfied with where we are but.
But the market does indeed have lots of ups and downs and we're fighting hard to do the best we can with the hand that we've been dealt and we tried to keep our eye on the price. So from our company perspective, we're quite proud of what we've done I want to stress. This right. We created a launch right out of kind of the ethos in the last few years with the $70 million of annualized.
<unk> value, we brought to market first launch products like public comment on legal caps and for identifying on and on but we're paying down our debt reducing our costs.
And now building is really rather durable portfolio. So our main off because what we can do with our team to deliver more value to that marketplace and I do think the fact that we're talking more and more about these durable products that takes significant infrastructure investment likely need a partner for a company of our size remarkable at some level of the company.
For our size and being able to latch onto these sorts of opportunities. It is a reflection that there are components of this industry, which I think are under duress and will likely to stay there for a while as well.
Always said about supply and demand that you can point to lots of supply I will show you lower pricing. If you can point to less supply I will show you a higher pricing and were working like heck to find those durable valuable fewer supplier markets that move the needle for us and we're pretty excited about what we've done we think it would be transformational value when we get there.
And we're going as hard as we can to get there be darn, but the rest of the market is doing.
Great I appreciate that feedback.
Final question is just a.
Multiple part one on the insulin gene I just wanted to make sure I have this correct youre going to start the trial in early calendar year 2022.
How long does that trial take from from starting to read out.
Yes.
Well, Gary we have on the line with US Steve layer, who also leads our biologic efforts, particularly around insulin online or Steve. If you are there could you. Please respond.
Yes, good afternoon.
The clinical phase of that trial takes about Florida five months or so.
We start into early 'twenty two by mid 'twenty two we have.
While our basically wrapped up.
Okay. So then would we expect that it's going to take a little time to prepare the and maybe you file that by the end of 'twenty two and then and then that leads to the launch.
Kind of mid 23, perhaps second half 'twenty three.
Yeah.
Calendar year.
Steve you want to continue.
Yes, yes, we will be filing a.
Biosimilar application.
BLA.
And that will be in the back half of calendar year 'twenty, two as Tim mentioned earlier.
And given the approval timelines, we expect approval on.
The back half of calendar year 'twenty three.
And I guess on that.
How are we how should we think about a biosimilar.
Application in the turnaround.
Are they trying to.
Stick to a certain time horizon, there or just any color you can give.
Yes, so there's a there's a specific biosimilar.
Programs, the <unk> and the agency has.
Managed to keep within their timelines and that's where we come up with about the year estimate right now between filing the BLA and approval.
And of course, yes.
Thats, having ongoing discussions with the agency and.
Making sure that we'll be able to file the <unk>.
BLA with all the appropriate information.
Okay, and Scott if I can add just to reinforce the comments we made in the prepared remarks.
It often gets lost in the.
Information, we try to share and because it's a little bit different than things. We normally talk about when we talk about conducting a pilot healthy human volunteer clinical trial that is significantly faster and abbreviated and at lower cost than what people have seen in the past right. So we are very <unk>.
Courage by that guidance and it is significant that the FDA has been supportive of that approach and it really has accelerated our timelines to to the point that were talking about this filing as we get into next year.
Okay. Thank you for that as well.
And thank you for taking the multiple questions.
Thank you Scott.
And this concludes the question answer session I'll now turn the call back over for management for final remarks.
All right, it's Tim again.
Close out with our customary shout out to all of 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 evening.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yeah.