Q4 2021 Lannett Company Inc Earnings Call

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Welcome to own that company fiscal 2021 fourth quarter and full year financial results Conference call. My name is Adrian and out of your operator.

Today's call.

At this time all participants are in a listen only mode later, well 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 call is being recorded I'll now turn the call over to Robert Jaffe Investor Relations Portland.

For the company.

Robert Jaffe you may begin.

Good afternoon, everyone and thank you for joining us today to discuss <unk> company's fiscal 2021 fourth quarter and full year financial results.

On the call today are Tim crew, Chief Executive Officer, John Kozlowski, the company's Chief Financial Officer.

And that could Kevin <unk>, our chief commercial operations officer, and Steve layer, who leads our insulin biosimilar initiatives.

This call is being broadcast live at Www Dot net dot com, a playback will be available for at least three months on <unk> website.

I would like to make the cautionary.

Or even and remind everyone that all of the information discussed on today's call is covered under the safe Harbor provisions of the litigation Reform Act.

The company's discussion will include forward looking information, reflecting management's current forecast of certain aspects of the company's future and actual results could differ.

Materially from those stated or implied.

In addition, during the course of this call we refer to non-GAAP financial measures that are not prepared in accordance with U S. Generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review.

In its press release announcing its fiscal 2021 fourth quarter and full year financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement.

The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings.

Press release issued earlier today.

In a moment, Tim will provide brief remarks on the company's financial results as well as recent developments and initiatives.

John will discuss the financial results in more detail. We will then open the call for questions.

That said I will now turn the call over to Tim crew Tim.

Thanks, Robert and good afternoon, everyone. Thank you for joining the call. We hope you remain safe and well as we all manage through the persistency of the pandemic.

I'll start today reviewing some of the highlights of the past year that are relevant to our future before turning to the key elements, we see in that future.

First and foremost in.

2021, we continue to launch products and build our future portfolio.

We launched about a dozen new products highlighted by a few significant contributors, including Levothyroxine tablets, levothyroxine capsules and quite promising.

The products, we launched last year added new revenue streams and further diversified.

<unk> offerings, reducing our exposure and reliance on key products.

We also grew our base product pipeline with continued investment in our robust internal product development program.

For example, our recent macro ventilate approval was achieved in just under 10 months.

The third such product we developed to achieve so called first.

Final approval in the past few years.

We have made great strides in our internal efforts, including significant changes to our portfolio selection.

Such changes take time to be fully reflected in our financials.

But we believe meaningful value is being built.

Further we are working on our existing strategic alliance part.

Cycle or expand our agreements to include new products.

For example, this past year insulin as part with editorial Hec agreements.

And more recently generic Spiriva handheld <unk> was added to our restaurant agreements.

Together these projects represent multibillion dollar markets with relatively few competitors.

<unk> two.

We also formed a new strategic alliance partnership to launch several flooring.

Our product with relatively few competitors in our market size of about $190 million based on acute care data.

We look to launch type of flooring in the back half of the fiscal year.

The second.

We expect Publishment last year was even while we launched new products and grow our pipeline. We also maintain firm control of our expenses and exhibited operating discipline.

We implemented and completed the cost reduction plan that included consolidating our R&D functions into a single location and lowered operating costs by approximately $15 million annually.

The third key accomplishment was that we significantly improved our capital structure.

This last year, we paid off our term a loans with cash on hand.

And later successfully completed a full refinancing transaction of the term b loans.

The refinancing transaction as we have often highlighted was significant for several reasons.

First we extended the maturity of our debt to 2026.

From 2022.

Which is now after several of our larger and more meaningful pipeline assets are expected to launch and contribute to a reduction in our debt.

Second we upsized, our credit facility and substantially freed up cash flow.

Primarily.

Due to the elimination of mandatory principal payments until maturity.

Third the new debt does not have any leverage covenants.

Fourth as a result of this refinancing in combination with working capital initiatives, we have improved our cash position.

Thus, we now have more ready resources to.

<unk> and growth opportunities.

Of course, another accomplishment to note was that our teams, particularly in our plants and labs showed up to work everyday throughout the pandemic and.

We maintained a reliable supply of our affordable medicines.

This of course, despite all the extra challenges in doing so this past year.

We are quite proud of all of these accomplishments.

Of course, there are also real challenges.

While competition is a fact of life in the generic industry. The competitive environment, we encountered last year was particularly impactful because it involves some of our most profitable products.

We offset some of these pressures with the aforementioned new product launches and cost reductions.

But the decline significantly exceeded the offsets.

On top of a particularly competitive environment COVID-19 continued to impact our financial performance with more downstream influences.

For example, as we have said.

The pandemic resulted in fewer elective medical procedures being performed.

This reduction limited sales and use of our cocaine based product.

As a branded product our <unk> NDA carries a higher than average gross margin for us so.

So changes up or down and sales have a disproportionate impact on our bottom line.

Fortunately, we believe many of the negative for the past year are beginning to attenuate.

While the positive factors.

Continue to propel meaningful opportunities.

With that as a background in lean John to note the specific financial results I'll turn to our outlook for the upcoming years.

We expect our overall net sales and gross margin to continue to face pressure by recent and anticipated competitive pricing of certain key products.

Partially offset again by the benefit of new product launches.

We also expect sales of our debris <unk> NDA to be impacted by continuation of further elective surgeries.

<unk> performed.

Once the pandemic subsides, we would expect to see an increase in these types of procedures and along with that and increase in sales.

While we are forecasting a down year in sales and profit we see fiscal 'twenty two as a trough year.

Our key products.

<unk> already been impacted by notable competitive pricing pressure.

Thus those products have less further downside.

At the same time, the relative future potential of our pipeline continues to increase.

I also want to note that while we believe our generic Advair <unk> product has the potential to launch in calendar year 2020.

Hum.

We did not include any sales of the product in our FY 'twenty two guidance.

Similarly on the Triptan is also not contemplated in our FY 2022 forecast.

As a result of ongoing delays from our API supplier.

Nevertheless, we do expect both products.

Two meaningful contributors in fiscal 2023.

So now, let's turn to our pipeline.

We continue to launch products can be approximately 13 and is pending at the FDA, including partner products plus four additional products that are approved and pending launch.

We also have more than 20 product can.

Products to mid <unk>.

We expect to add more from both external and internal efforts.

We continue to target more valuable products that has been our historical average.

With regard to our large durable product pipeline. We currently have five disclosed assets.

First with a.

In development you see we have two insulin assets.

Insulin as part of fast acting insulin product and insulin largely along acting insulin product.

Combined the two products participate in a double digit billion dollar U S market as reported by <unk>.

Our partner <unk>.

Our drug device respiratory portfolio with our partner restaurant now has three assets.

Generic Advair discussed, which is filed with the FDA.

Along with generic Flovent discus.

And most recently generic spiriva and dealer.

Combined sales of these products also.

A multibillion dollars U S market as reported by <unk>.

As we have said all of these products are differentiated from traditional generic products because of the significant technical expertise required for development and substantial plant investments made by our partners they're needed to manufacture them.

So for all of.

Represents we expect only a handful of competitors.

I will discuss next the significant progress we are making advancing these large durable product opportunities.

With regard to generic Advair discus, we had been regular contact with the FDA regarding this party applications since.

It was accepted in May of this year.

We are encouraged by the level of engagement.

We anticipate a mid cycle review update from the FDA sometime in the next few months.

Thus, we expect to provide a better sense of how the application is progressing on our next investor call in November.

Currently we continue to anticipate more than one FDA cycle, and believe and just noted and approval and U S launch of the product as possible in calendar year 2022.

For those new to <unk> story generic Advair <unk> is one of the larger assets in our filed pipeline.

It is also currently.

The closest to expected commercialization in our partnered respiratory portfolio.

The second most advanced product in our respiratory portfolio is generic flovent disputes.

The last patient for the pivotal clinical trial for this product had been dosed.

And we anticipate the analysis of the trial to be completed within a few months.

We are currently planning for an Anda submission before the end of the current fiscal year and a possible launch in calendar year 2023.

Next as noted we recently expanded our opportunities with respiratory include generic spree that handy healer.

The development arc for this product should be approximately 12 to 18.

Behind the generic Flovent discus product.

However, as there are various IP matters involved.

Not commenting today on specific launch timing expectations.

Finally, as we have previously said, we are evaluating and in negotiations for additional product opportunities installation.

Respiratory space.

Particularly dry powder inhalers and metered dose inhalers.

Where continues to be additional multibillion dollar market opportunities to pursue that both current and future partners.

Okay.

Now turning to our two biologic insulin products starting with Biosimilar.

18 months insulin <unk>.

Clinical material for the drug product has now been manufactured in the new dedicated manufacturing site.

It is a very significant milestone.

We still expect to submit an IND around the end of the calendar year and commenced the pivotal clinical trial early next calendar year.

Similar however, we have recently added a few months to the clinical timeline due to current COVID-19 restrictions at the study sites in South Africa.

We have also added a few more months toward timelines to address interchange ability with the FDA, which I'll discuss in a moment.

Thus, we currently think the biologic.

This application will be filed in the first half of calendar year 2023.

And we would expect to launch in the first half of calendar year 2024.

Also note.

China's version of the FDA. The MPA is approved Hec's insulin <unk> for China.

That product.

Slide eight in the same new plant, where we have now just made our insulin <unk> for clinical trials.

The months, we have added to the development plan to address the interchange ability with the FDA as it related to an important recent FDA approval of the first biosimilar an interchangeable insulin blogging.

<unk> secondly.

We believe that interchange ability approval is good news for <unk> and Hec's insulin <unk>.

It demonstrates the FDA will approve interchangeable insulin products, which over time should improve affordable access to these important medications.

Regarding biosimilar insulin as Bart.

<unk> is the development of the product continues and we currently anticipate a potential launch of the product about 15 months falling insulin large inc.

Again insulin <unk> introduced in the same facilities working with the same teams and technologies as insulin <unk>.

So we're able to leverage many of the earlier large investments in development and manufacturing.

Factoring that have been made by both Lynette in Hec.

Like our respiratory portfolio, we see several opportunities to leverage our insulin assets.

There are other dosage forms of both <unk> and <unk> sport, such as vinyls and other distinct insulin products.

These opportunities again.

Present, multibillion dollar markets as reported by <unk>.

We also see opportunities to leverage our USA clinical data 10 development and related IP, along with the manufacturing capacity at Hec to form a strategic alliance with third parties looking to accelerate their access to insulin products.

Again rough international markets, such as Europe.

While discussions on such opportunities are very preliminary.

Such relationships could yield meaningful value for both ourselves and our partners.

Finally, a few brief comments on made in America and ESG.

While we see a future that includes.

It's high technology products from overseas sources.

Today, we are mainly a U S domiciled generic medicines company.

Lynette adheres to strict U S laws and use environmental guidelines with regard to development and manufacturing compliance for U S made products.

Most of our larger generic competitors are.

Several based overseas and don't face the same set of regulations and chip most of their products from the far side of the globe.

We are proud that today, we serve the U S market from the U S market and do so with an enviable track record and reputation for being a high quality and reliable manufacturer.

We point out these characteristics.

Already Lynette increasingly unique as a generic supplier.

So that our investors and customers think of limit when they consider made America and various ESG related initiatives.

To sum up today's remarks.

Our accomplishments in fiscal 2021 were significant.

We faced head on.

But in a highly competitive market environment.

We launched new products and made important advances in the development of key products in our pipeline.

We expanded existing agreements that added three large durable assets to our respiratory insulin franchises.

We refinanced our debt improving free cash flow and extended our maturities beyond the expected.

On launch dates of our large pipeline assets.

We continue to believe that the exciting products in our advancing and expanding pipeline still have the potential to transform our firm into a $1 billion company by 2025.

With all that I'll turn the call over to John John.

Thanks, Tim.

<unk> and good afternoon, everyone.

I'll begin with our financial results on a non-GAAP adjusted basis.

For the 2021 and fourth quarter.

Net sales were 106.0 million comp.

Compared with $137.9 million for the fourth quarter of last.

Jim.

Gross profit was $26.4 million or 25% of net sales compared with $48.9 million or 35% of net sales for the prior year fourth quarter.

R&D expenses declined to six points.

Last year $1 million.

From $6.6 million.

SG&A expenses declined to $15.5 million from $15.6 million.

Operating income was $4.9 million compared with $26.

Point 1 billion.

Interest expense increased to $12.1 million from $11.3 million in last year's fourth quarter.

Net loss was $7.4 million or 19 <unk> per share versus net income of $13.

Seven 4 million or 31 cents per diluted share.

Adjusted EBITDA was $12.1 million.

Turning to our balance sheet.

At June 30th 2021, cash and cash equivalents totaled approximately 90.

$3 million up from 81 million at March 31.

Cash increased during the fourth quarter due to a few factors.

First as a result of the refinancing we did not have a principal payment on our debt.

The second relates.

19th capital improvement that continued from the third quarter.

And the third was it was the receipt of income tax refunds.

Looking ahead, we expect to receive additional income tax refunds continue to benefit from initiatives to improve our working capital and we have.

Two were mandatory principal payments on our debt until maturity.

Accordingly, we expect to maintain a healthy cash position throughout the year and in fiscal 2022 with approximately 80 plus million dollars.

As for our liquidity.

We also.

No access to our $45 million credit facility, which to date, we have not drawn upon.

Turning to our guidance, which as Tim mentioned earlier does not include sales of generic advair discus or XOMA triptan.

For fiscal 2022, we expect.

<unk> sales in the range of 400 million to $440 million.

Adjusted gross margin as a percentage of net sales of approximately 23% to 25%.

Adjusted R&D expense in the range of 26 million to $29 million.

Adjusted SG&A expense, ranging from 58 million to $61 million.

Adjusted interest expense of approximately $52 million.

The full year adjusted effective tax rate in the range of 21% to 22%.

Net adjusted EBITDA in the range of 40 million to $55 million.

And lastly capital expenditures to be approximately 12 million to $18 million.

Regarding the phasing of the quarters, we expect net sales and adjusted.

In Q1 to be lower than Q4 ramping up slightly in Q2 and continue to ramp up more in the second half of fiscal 2022.

The increase is related to expected new product launches.

Gross margin in the first half of the fiscal year to be.

EBIT at the lower range of our outlook ramping up to the upper end of the range in the second half of fiscal 2022.

And operating expenses to remain relatively consistent throughout the year, though we expect Q1 to be slightly higher than the other quarters as it includes certain.

Inflation related expenses that are only recorded at the beginning of our fiscal year.

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

Thank you we will now begin the question and answer session.

If you have a question please press star and one.

Comp attached on phone.

If you wish keeping in those kind of queue. Please press the pound sign or they ask me.

If you're using a speakerphone you may need to pick up the handset first before pressing the numbers.

Once again, if you have a question. Please press Star then one on your Touchtone phone and our first question comes from Elliot Wilbur.

<unk> annual Raymond James Your line is open.

Hi, guys. This is actually Michael <unk> on for Elliot Thanks for taking my questions.

So first wanted to get started just wondering if you could talk little bit about price and volume pressures on the base business in light of the FDA slowdown.

Of approvals.

Limited dollars go into new launches.

And then my second question is just I saw that you guys were guidance when adjusted gross margin of 23% to 25%.

Wondering if the.

<unk> gross margin target I'm, giving the expected contribution of the respiratory drugs and insulin.

And then that was expected to be.

Meaningful meaningfully higher moving forward I know that prior target was low mid or low to mid thirties on a three to five year basis. So I'm just wondering if that's how we should still be thinking about it. Thank you.

Good evening, Michael had said, Tim I'll start and then I'll.

I'll have John filling for for the some of the questions in the back end. There are first of all as it relates to price and volume volume is pretty consistent in the market over over many years.

Generic prescriptions, though theres been a bit of a dip relative to some of the COVID-19 elements overall, the vast volume is largely in place.

However, there has been price pressures as noted in some of the organizations and analytics, there's been an increasing number of approvals, particularly in older product that has put some pressure on our on our on our prices of the older portions of our portfolio on top of course of the pressures we felt on our major products, which really impacted us most notably this past year.

Going forward, we do expect to have significantly improved margins are more in the out years as those are more bespoke a larger volume larger value products, we've talked about expecting net of our.

Of our our partnership royalties to be north of 30% gross margin that is unchanged.

Changed and unaffected by.

The <unk> as it relates to the older products in the portfolio.

Oh.

Michael you have anything else you ended up.

Hello.

No that's it for me thanks for taking the questions.

Thank you.

And our next question comes from Matthew with Craig Hallum. Your line is open.

Good afternoon, thanks for taking the questions and for providing the update on the pipeline.

Kind of following up on the price.

Pressures in particular.

It appears that your guidance implies that things have kind of stabilized here as we look out over the next 12 months.

What are you anticipating from a competitive standpoint.

Given that you're seeing some competition to enter some of these older markets are you still anticipating more.

In which case, we should be looking at the lower end of your range for this upcoming year or you know is the midpoint considering that you didn't include advair in the guidance range is that kind of the right starting point. Thank you.

Good afternoon, Matt It's Tim.

The stabilization that you refer.

Of that is more structural related to the fact that the very largest products in our portfolio have already experienced significant price pressure some volume decline in share relinquishment.

So that the relative declines of those products as it relates to the ongoing launch parade.

As well as.

Other cost measures that we take are in our ongoing production activities resulted in a little bit more stability I think that's the first part of your question.

On the second part of the question Advair is not in this year's guidance and again as I just noted when those products do come in our portfolio, we expect them to net.

Reflect partnership royalties in the in the 30% or more gross margin range.

Understood Alright, thank you.

And we have no further questions I will turn the call back over to management for final remarks.

All right, it's Tim again, I'll close out with our customary shut out.

To our employees customers and partners working extra hard in these continuing challenging times to provide high quality low cost medicines for patients. We look forward to sharing our progress on our next call good evening.

Thank you ladies and gentlemen, this concludes today's conference call.

You for participating and you may now disconnect.

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