Q1 2022 Lannett Company Inc Earnings Call
Welcome to the <unk> company fiscal 2022 first quarter financial results Conference call. My name I feel that and I will be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press star and then one on your Touchtone phone.
I will now turn the call over to Mr. Robert Jaffe Investor Relations Portland, Mr. Jaffe, you may begin.
Thank you operator, good afternoon, everyone and thank you for joining us today to discuss blend that company's fiscal 2022 first quarter financial results on.
On the call today are Tim crew, Chief Executive Officer, John Kozlowski, The company's Chief Financial Officer, Maureen Kavanaugh, our chief commercial operations Officer, and Steve layer, who leads our biosimilar insulin 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 statement and remind everyone that all of the information discussed on today's call is covered under the safe Harbor provisions of the litigation Reform Act.
The company's discussion will include forward looking information, reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied.
In addition, during the course of this call we refer to non-GAAP financial measures that are not prepared in accordance with U S. Generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.
Investors are encouraged to review in its press release announcing its fiscal 2022 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 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 and then John will discuss the financial results in more detail. We will then open the call for questions, but 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 have a couple of items of news to report today.
In addition to issuing our fiscal 2022 first quarter financial results.
We also announced the substantial restructuring and cost reduction plan.
I'll discuss both matters in term.
Overall first quarter results were on track, our topline and bottom line were respectively above in at our expectations.
Due to solid sales of several key products.
Our gross margin, however was lower than anticipated primarily due to growing competitive pressures on our base portfolio.
Turning to our balance sheet, our cash position increased to more than $105 million as of September 32021.
Up from approximately 93 million at June 32021.
We continue to emphasize the importance of our cash position as we believe it affords a strategic flexibility in how we run our business.
Maintaining adequate cash levels to support our operational needs the launch of our durable product pipeline remains a key focus.
Meanwhile, as often mentioned across the industry, we are operating in a particularly competitive environment.
Especially for oral generics.
The market generally and some of our products such as pro benefit Esomeprazole Levothyroxine tablets and clip Promazine, specifically has been deteriorating more quickly than the declines we had anticipated.
This environment, certainly reinforces our pivot towards expanding our portfolio to include more durable assets such as the three respiratory into insulin products in our pipeline.
However, we do not expect the current competitive environment to abate in the near term.
While we are disappointed in the accelerating declines we are taking actions to address the current competitive environment.
First we have revised down our fiscal 2022 guidance.
And second while preserving our core portfolio strategies, we are taking immediate and proactive steps to make limit a leaner and more focused organization.
So with that let's turn to the restructuring and cost reduction plan, we announced earlier today.
Again, our plan retains our core strategies, while further optimizing our operations improving efficiencies and reducing costs.
The plan will be implemented in phases, and we expect will be completed in about 18 months.
Key elements of the plan includes.
First consolidating our manufacturing footprint from two facilities to one.
This concludes transferring liquid drug production to our main plant in Seymour, Indiana from our facility incremental New York.
And closing the Carmel plant once relevant products are transferred and pursuing itself.
We are already in active discussions with several potential parties.
Our <unk> plant will be strengthened in this process by increasing the technology that supports an expanded portfolio with smaller volume, but decent margin liquid products.
Further optimizing our overall network.
The second element of the restructuring plan involves the R&D function.
This includes reducing head count and eliminating development, formerly dedicated to the Carmel site and discontinuing future development programs targeting liquid generic medications.
As we no longer see adequately scaled returns in that sector.
We will also raise product threshold requirements and start internally developed products and API selection earlier, the goal of which is to focus on fewer potentially larger market opportunity products and <unk>.
To Mark as part of the so-called first wave of generics.
We will continue to be a targeted generic manufacturer focused on attractive select internal development areas, where we believe we can successfully compete.
But we will scale those investments to what the business can support today and continued to augment our pipeline with durable partnered assets like generic advair and influence.
And the third element of the restructuring plan is further rationalizing over time as we have in the past certain lower margin products.
This particular exercise primarily involves scaling back our phasing out some low margin and low volume OTC products that were made at Carmel and.
And two very low margin prescription products.
Ultimately the plan is expected to result in a workforce reduction of approximately 11% from current levels.
Another 3% or so of the workforce, mainly at the plant, we expect not to replace as attrition occurs.
Are there existing vacancies will also not be filled.
Total, we anticipate cost savings approximately $20 million annually.
So now, let's turn to our pipeline.
While we tend to focus on the potentially transformational value of our durable pipeline. There are a number of interesting pipeline assets. It can be launched before the end of next fiscal year.
Including several flooring silica oral solution, a triptan and <unk>.
And our business development team is hard at work to secure more.
We currently have approximately 12 andas pending at the FDA, including partner products plus three additional products that are approved and pending launch.
We also have more than 20 products in development.
And expect to add more from both external and internal efforts.
With.
Regard to our large durable partnered product pipeline.
Provide an update on two of the five starting with our generic <unk> product.
The FDA provided mid cycle disciplined review comments on the pending <unk>.
And we are working to address the FTC's helpful comments and intend to respond to as many of the agencies request as possible before the FDA due dates.
We expect to receive additional comments from the FDA on the FDA assigned goal date of January 31 2022.
As previously disclosed we expect the product to undergo more than one review cycle.
We believe and we're planning for a launch that is possible next fiscal year.
I would note. The application approval is also contingent on a successful FDA inspection of the overseas facilities involved.
The CRO site that conducted the bioequivalence and clinical studies has already been inspected by the FDA and the observations. They shared we believe are addressable.
Given inspection backlogs due to COVID-19, we appreciate the parent priority FDA is assigned to these inspections.
We are formally ask the FDA to schedule, an inspection of the manufacturing site and we look forward to their visit in the near future.
Regarding our Biosimilar insulin <unk> product.
We remain on track for submitting the investigational new drug application next month.
And commencing the pivotal trial around March 2022.
While there are always execution risks, we expect to launch this product in fiscal year 2024.
In terms of our expectations for next year's clinical trial.
We're not aware of a U S trial failure of a well characterized biosimilar.
And at this point, we believe our product is well characterized and highly similar based on the results of our structural and functional assays.
Those assets had been early reviewed by the FDA.
We are also seeing positive trends in formulary decisions for 2022, demonstrating payers continued effort to pursue affordable insulin.
Express scripts has added <unk> biosimilar, an interchangeable insulin <unk> <unk> as the preferred product for 2022 on one of their formularies.
In addition, Florida, Illinois, and Texas have included Walmart rely on insulin as a preferred product on their 2022 state Medicaid formularies.
We will continue to monitor how payers adopt biosimilar, an interchangeable insulin as we develop our go to market plans.
All five of the durable products in our pipeline are differentiated from the average oral generic products that are under the aforementioned industry pressures because of the significant technical expertise required for development.
And a substantial and largely dedicated plant investments needed to manufacture them.
So for all of these products, we expect only a handful of competitors.
US more durable value.
Also as noted on the last call, we are evaluating and in negotiations for additional market and product opportunities for insulin and drug device inhalation products.
There continues to be additional multi billion dollar markets to pursuing these areas with both current and future partners.
When combined with our targeted internal development efforts. We believe we have built and continue to expand and exciting pipeline of opportunities.
One brief comment on legal matters, we have earlier reached a settlement agreement with genius life Sciences related to our new <unk> products.
While the terms of the settlement are confidential the various challenges levied by genus related to the product and our right to market. It have all been dismissed.
To sum up today's remarks.
We have reported better than expected top line for the quarter.
We have revised down our fiscal 2022 guidance to reflect the increasingly competitive environment for our base oral generics portfolio.
However, our cash levels remains substantial.
Our core strategies remain in place and we have begun implementing restructuring plans to become a leaner more focused organization.
The plan is expected to be completed in approximately 18 months and generate annual cost savings of approximately $20 million.
Our pending generic Advair <unk> Anda continues to make its way through the FDA review process.
We expect to submit an IND application for Biosimilar insulin <unk> next month.
And commenced the pivotal trial around March of 2022.
We anticipate both fees and our other durable assets can contribute significantly to our future sales.
And one final comment.
We appreciate the frustration as our investors may have of the pressures we are now forecasting in our near term results.
We are keenly aware of our current stock and bond valuations.
However, our optimism on future expectations remains quite high.
Our durable pipeline of exciting opportunities are steadily progressing and we believe we have the capabilities disciplined and resources to get them to market over the next few years.
With that in mind, our management and our board will continue to carefully considered various options looking to enhance investor value across the near immediate and longer term.
With all of that I will turn the call over to John.
John.
Thanks, Tim and good afternoon, everyone.
I'll begin with our financial results on a non-GAAP adjusted basis.
For the 2022 first quarter net sales were $101 5 million.
Compared with $126 5 million for the first quarter of last year.
Gross profit was $20 6 million or 20% of net sales compared with $34 4 million or 27% of net sales for the prior year first quarter.
Interest expense increased to $12 8 million from $11 2 million.
Net loss was $10 6 million or 27 per share.
Versus net income of $2 2 million or six cents per diluted share.
Adjusted EBITDA was 10.0 million.
Turning to our balance sheet.
At September 30th two.
'twenty one.
Cash and cash equivalents totaled approximately $105 million.
Up from 93 million at June 30th.
Cash increased during the first quarter due to a few factors.
First as a result of our refinancing earlier this year.
We did not have any required debt interest or principal payments in Q1.
The second relates to timing of certain inflows and outflows of cash.
And the third was the receipt of a prescription drug fee refund.
Looking ahead, we expect to receive additional income tax refunds.
Continue to benefit from initiatives to improve our working capital and.
And we have no mandatory principal payments on our debt until maturity.
Accordingly.
We expect to maintain a healthy cash position of $80 million plus through the end of fiscal 2022.
As for our liquidity.
We also have access to our $45 million credit facility, which to date, we have not drawn upon.
Turning to our revised guidance.
For fiscal 2022.
We now expect.
Net sales in the range of 370 million to $400 million.
Down from 400 million to $440 million.
Adjusted gross margin as a percentage of net sales of approximately 19% to 21%.
Down from approximately 23% to 25%.
Adjusted R&D expense in the range of 25 million to $28 million.
Down from 26 million to $29 million.
Adjusted SG&A expense, ranging from 55 million to $58 million.
Down from 58 million to $61 million.
Adjusted interest expense of approximately $52 million.
Unchanged.
Yeah.
The full year adjusted effective tax rate in the range of 22% to 23%.
Up from 21% to 22%.
Adjusted EBITDA in the range of 22 million to 32 million.
Down from 40 million to $55 million.
And lastly capital expenditures to be approximately 10 million to $14 million.
Down from 12 million to $18 million.
Regarding the phasing of the quarters, we expect.
Net sales and adjusted EBITDA in Q2 to be lower than Q1.
Ramping up slightly in the second half of fiscal 2022.
With Q4 net sales and adjusted EBITDA.
To approximate Q1.
This reflects the new product launches, we've previously discussed combined with the initial benefits from the cost restructuring.
Gross margin to decline slightly in Q2 and Q3 from Q1.
We expect Q4 gross margin to be higher than Q1 as the restructuring plan begins to take effect.
And R&D expected to increase from Q1 and SG&A to decrease from Q1.
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 then one on your Touchtone phone.
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Once again, if you have a question. Please press star and then one using your Touchtone phone.
We have a question from Scott Henry from Roth Capital. Please go ahead.
Thank you good afternoon, just a couple questions.
First I think you might have hit on this a little bit.
But obviously there was some revenue upside in Q1, and some downside the rest of the year can you can you talk about what what products drove the upside and where are the.
The weakness is coming from going forward.
Hi, Scott This is John so the upside for the quarter was the strength in infectious diseases, specifically parse it kind of goes we had talked about.
That that category coming down in Q1, and we saw it relatively even actually ticking up a little bit.
And that is still though being forecast to come down now in Q2 significantly and hold that for the remainder of the year. So that was that was the.
The majority of the difference.
Okay, and then the downside the rest of the year.
Again, the downside of rest of the year would be deposit kind of pause it kind of got competition in infectious diseases coming down again significantly.
But across the across the categories, we are still seeing a strong.
Competition, which we're bringing down each category down by a bit youre seeing that in.
Psychosis, which came down to a little below $4 million.
Which which is a continuous decline from Q4.
Other also came down a little bit some of that was around <unk>, which was discussed a little bit earlier.
And <unk> is still seeing sales that are less than what we were what we call a more normalized number which is and it's running about a little bit less than half of that.
Okay, and then contract manufacturing not that it's particularly relevant but we do have to model it.
Way down should we expect that to stay down or your prayer prioritizing away from that.
Again, it's not a matter of prioritization and Theres, some ebbs and flows and theirs.
It's the run rates that may come up a little bit.
With.
Some increases towards the back end of the year.
I would note as Scott had said Tim here that.
Towards the end of last year, one of our contract manufacturing opportunities.
<unk> and that was part of the step down we still are open for business and I appreciate those sort of opportunities, but they are smaller this year than last year.
Okay and then.
If I could shift to the pipeline.
You talked about the Advair discuss FDA meeting.
We know that it was going to take multiple cycles, but that specific meeting.
If you can can you characterize where it went or whether it went about as planned did it go better than expected or worse than expected. Just so we can get a sense of.
How it is moving along relative to expectations.
Alright, just to be clear it wasn't an FDA meeting we noted in the script that there was disciplined review letters that come back from the various parts of the FDA to review those applications.
There is quite a few comments that come from file of this complexity.
And we have been working on those responses I don't think there was.
Too much in those disciplined reviews that were surprising to us.
We believe we can respond to most of them.
Shortly some of them will take a bit longer and thus will reappear in a.
But what we call the <unk> complete response letter that we'd expect in.
In January all in all I think we are where we want to be and need to continue to work with the FDA, including the overseas inspection of the facility to get this product into our next fiscal year.
Okay.
Yes.
A question on isolate them I haven't heard about that in a little while where exactly does that R&D programs and currently.
So Scott we have early earlier disclosed that but for an API. We believe we are in an approvable state there has been some progression.
At that suppliers.
Asian in their facility, suggesting that they will have resolution of the FDA concern with the API.
<unk>.
Therefore, we noted in our script that this product could come back into our forecasting for next fiscal year.
Okay.
And then just the final question.
The EBITDA guidance.
It's certainly down for the rest of the year.
If I pull out the <unk>.
<unk> first quarter.
That EBITDA number is pretty.
Pretty significantly below the interest expense number even if not cash interest expense.
What are your thoughts on that in terms of kind of bridging that gap.
And is there any risk to any covenants I know youre sitting on a lot of cash, but you know sometimes the debt covenants can be cumbersome.
Anything anywhere that you would comment on.
Scott will start with the debt covenants as part of our refinancing from last year the financial covenants was.
Removed, which is not included in our in our new agreements.
So that's not a concern provide us the flexibility that we needed and to bridge for this year.
There is one large item thats included in our overall cash flow expectations.
Thats the significant tax refunds that were expecting to receive sometime in the third quarter. That's currently on our balance sheet for a little bit more than $30 million that helps bridge.
Some of the.
The cash flows with the declining EBIT is.
And Scott just to add as John noted in the script, we are forecasting a cash balance in excess of $80 million at the end of this fiscal year and of course, the restructuring itself will start.
Improving our cash flows as they as it comes into full effect later this year.
Okay, great. Thank you for that clarity and thank you for taking my questions.
Good night.
Thank you. Our next question comes from Elliot Wilbur from Raymond James. Please go ahead.
Hi.
Tim Smith, calling on behalf of Elliot Wilbur.
Like to ask a few questions first are you facing any potential delay.
<unk> target gross margin above 30% within your previous target within the next three to five years.
Yeah.
So the gross margins that we have talked about towards the end of our strategic plan in 2025 are clearly driven.
Bye.
The emergence and two are in line from our current pipeline.
The spoke in larger durable assets to.
To the extent those product successfully launched there in market margins are quite a bit higher.
<unk>, but we of course have.
Expected to be higher.
Higher than the <unk>, but we of course have.
Margin sharing agreements with those partners, which brings it back down into that sort of range. So.
The pressures on our near term portfolio are being reflected in our near term results. Most of those products would have had lower margin and significantly lower margins by the time, we launch so our overall expectations for 2025 have not changed a great deal from last quarter to near term results that were facing those pressures and we remain optimistic about our pipeline.
On the out years.
Okay, great. Thank you often.
Talk about the trends in base generics evaluation as volume and price.
Is that trend in this most recent quarter.
So.
The market as we've said it's been competitive we clearly don't talk to pricing.
Specifically on any sort of public forum or private went outside of our own company.
But the competitive environment is fundamentally reflecting more supply out there.
And not a lot of new generics in both of those.
<unk> has been putting the pressures into the two.
Our results and I think youre seeing those same comments across most of the industry.
The generic portfolios.
<unk> been discussed in.
In the quarterly results.
Okay, great. Thank you.
Thank you and now I would like to hand, the call back to management for final remarks.
All right, it's Tim again, thanks, again for joining the call and thanks to our employees customers and partners talking hard in challenging times to provide high quality low cost medicines for our patients. We look forward to sharing our progress on our next call and some of you perhaps at the upcoming investor conferences, which will be at this.
This quarter and into next have a good night.
Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.
Alright.
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