Q3 2022 Lannett Company Inc Earnings Call
Yeah.
Okay.
Welcome to the <unk> company fiscal 2022 third quarter financial results Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
I'd now like to call over to your House, Robert Jaffe Investor Relations. Mr. Jaffe, you may begin. Thanks, operator, good afternoon, everyone and thank you for joining us today to discuss <unk> company's fiscal 2022 third quarter financial results on the call today are Tim crew, Chief Executive Officer, John Kozlowski, the company's Chief financial.
Officers, Maureen Kavanaugh, our chief commercial operations Officer, and Steve layer, who leads our insulin biosimilar initiatives.
Call is being broadcast live at Www Dot net dot com, a playback will be available for at least three months on <unk>.
Web site.
I would like to make the cautionary statement and remind everyone that forward looking information discussed on today's call is covered under the safe Harbor provisions of the litigation Reform Act.
The company's discussion will include forward looking information, reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied due to several factors, including those discussed in our earnings release.
Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K, and subsequent forms 10-Q, and 8-K filed with the Securities and Exchange Commission.
In addition, during the course of this call we refer to non-GAAP financial measures that are not prepared in accordance with U S. Generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.
Investors are encouraged to review <unk> press release announcing its fiscal 2022 third quarter financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement.
Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today.
In a moment, Tim will provide brief remarks on the company's financial results as well as recent developments and initiatives.
Then John will discuss the financial results in more detail.
We will then open the call for questions.
That said I will now turn the call over to Tim crew Tim.
Thanks, Robert and good afternoon, everyone.
I'll begin today with an overview of our financial results followed by brief comments on the progress of our restructuring plan and then I'll provide an update on our product pipeline, including our expanding portfolio of near term opportunities as well as our durable assets.
For the quarter has been the case for some time competitive pressures compacted our topline.
Despite this our adjusted gross margin increased from the previous quarter and our bottom line was modestly better than our internal estimates.
But this is not the whole story, we also recorded unusually high product returns, which mask higher than expected sales volume and what otherwise would have been a better than expected financial performance.
Product returns are a regular part of our business and averaged in the mid single digit millions of dollars in recent quarters.
However, in the third quarter of this year product returns, which were largely related to sales for more than a year ago. When our sales were higher approximately doubled to about $12 5 million.
Three products Levothyroxine capsules for <unk> and Vardenafil figured prominently in this result.
While we expect these returns will continue at an accelerated level in the near term. We don't expect our current returns right to be sustained through next fiscal year because of the different but discrete and attenuating reasons behind these returns.
Turning to our November 2021 restructuring plan.
In late March we completed the sale of our liquid drug manufacturing plant in Carmel, New York for $10 5 million.
We received $9 million at closing and expect to receive the remaining balance in installments over the next 18 months.
The transfer of certain products from our Carmel plant to our main plant in Seymour, Indiana is in process and is expected to continue into the next calendar year.
Meanwhile, the Carmel plant continues to support the production of the products being transferred.
We expect the major elements of the restructuring plan to completed around the end of next month.
The plan is anticipated to generate approximately $20 million of annual cost savings.
While this restructuring effort is ramping up our efforts continue around portfolio optimization with the ever important imperative to seek more yields from our in line portfolio.
Now, let's turn to our pipeline.
I'll begin with our near term product opportunities and mix of our owned and partnered products.
These are products that may come to market over the next year ahead of the larger assets and our insulin and respiratory portfolios.
As discussed on our last call. These products are increasingly different from our older immediate release oral generic products that have been subject to increasing competitive pressure.
Thus these new products have the potential to be meaningful contributors to our financial results.
Moreover, we are encouraged that at least a few of these products can be launched in the first half of next fiscal year, if not the first quarter.
These opportunities include.
Flooring, which is the solution for emulation.
As for current competitors in approximate market size of $190 million According to Acadia.
Although end market generic sales are expected to be lower.
We have a target action date in our first fiscal quarter of next year.
So I'm, a triptan, which is a smaller nasal spray has few competitors and we have a target action date of early next fiscal year.
<unk>, which is an oral suspension has fairly challenging bioequivalence in vitro studies and few competitors.
We have a target action date late this calendar year.
Moreover, we are in late stage negotiations with partners on two drug shortage products, including the injectable therapy.
If we secure and launch these products in the first half of next fiscal year and shortages persist through value could be significant.
<unk> would be our first commercial foray into the injectables market as a firm although several members of our team have related earlier experience.
We also note that we've agreed to terms with a European partner to develop another injectable product for later in 2023.
In mid calendar year 2023, we hope to launch <unk>, a controlled substance so competing only against U S manufacturers.
<unk> estimates that the product market size is about $4 billion.
While generic market sales are expected to be lower they could represent a sizable opportunity for us if we launched in the first generic wave as we plan.
Additionally, we have reinvigorated our efforts to leverage our wide range of contract development and manufacturing capabilities at our Seymour, Indiana plant.
We recently recruited a dedicated sales director for these efforts and have several opportunities already progressing.
It will take some time for these efforts to bear fruit, but we are quite encouraged by the receptivity so far.
Our team's ability to be highly responsive and provide a high quality product on a highly reliable schedule has been well received by brand organizations that embraced such advantage of being quote unquote made in America.
Our earlier expansion efforts around our <unk> collaborations are completed with expanded packaging and manufacturing capacity for this brand, which our partner sales in China.
Over 10% of our current plant output is dedicated to the sustainable opportunity, which in aggregate will generate about $10 million in sales with margins comfortably above or in line generic products.
To sum up we are responding to the heightened competitive environment with cost containment new revenue streams and have multiple shots on goldner pipeline, we are moving closer to potentially launching a number of these pipeline products in the near term.
Turning now to our durable product pipeline I will start with generic Advair discussed.
We received a complete response letter from the FDA regarding the <unk> and more recently met with the FDA to seek clarification and additional information.
While our partners European clinical site was successfully inspected.
Just on the SBA technical feedback our partners elected to conduct another clinical trial as well as additional PK trials.
We anticipate concluding those new trials later next year.
While we are disappointed we have always maintained that because of the complexity of the product we expected at least one FDA review cycle.
Our revised timelines for a possible launch of the product is now in calendar year 2024.
There is a silver lining.
Just on the Fda's extensive feedback we believe we have a clear roadmap towards a possible approval.
Additionally, we are using the feedback we received from the FDA to help guide our Anda for generic Flovent discus.
That project remains on track to file later this calendar year.
Next to discuss is our biosimilar <unk> largest product with Hec.
There has been extensive recent press reporting around insulin affordability.
As a result trade interest in our progress is notable.
In late March we initiated the pivotal clinical trial and thus far we are pleased to report approximately 25% of the enrollment goal has been achieved.
We anticipate clinical trial dosing will be completed by fall and following extensive analytics, we expect topline data to possibly be available towards the end of this calendar year.
If the trial is successful we would anticipate selling the biologic license shortly thereafter, and if approved by the FDA potentially launching the product in the first half of calendar year 2024.
Our program on insulin as part of fast acting insulin has completed commercial scaleup and generally trailed the timing of our insulin <unk> program by a little more than a year.
It is important to point out that not only is <unk>. The most significant opportunity currently in our pipeline, but also the clinical development of the product differ significantly from the durable respiratory products in our pipeline.
Specifically, a very high percentage of well characterized biosimilar products, which we believe is the case with our product and successful clinical trials and typically receive approval from the FDA on the first review cycle.
Obviously this is not a guarantee but it does give us optimism.
I'll now turn over the call to John to review financials John .
Thanks, Kim and good afternoon, everyone.
I'll begin with some comments regarding our efforts to regain compliance with the New York stock Exchange listing requirements and then discuss our financial results focusing my discussion on our non-GAAP adjusted measures.
In early March the New York Stock Exchange informed the company that it was not in compliance with the exchanges $1 stock price and $50 million market capitalization listing requirements.
With assistance from an outside advisor, we have submitted our plan to the NYSE and are in contact with their staff on this topic.
Now turning to our financial performance.
For the 2022 third quarter net sales were $78 4 million compared with $112 4 million for the third quarter of last year.
Gross profit was $9 3 million or 12% of net sales compared with $30 4 million.
Or 27% of net sales for the prior year third quarter.
Interest expense increased to $12 9 million from $9 $8 million.
Net loss was $16 7 million or 41 per share versus net income of $1 million or <unk> <unk> per diluted share.
Adjusted EBITDA was $98000.
Turning to our balance sheet.
At March 31 2022.
Cash and cash equivalents totaled approximately $106 million.
Which included proceeds from the sale of our liquid manufacturing plant in Carmel New York.
We continue to expect to end the current fiscal year with close to $80 million of cash which is after a $14 million interest payment in the current fourth quarter.
And we continue to expect to receive approximately $20 million of income tax refunds in the first half of next fiscal year.
At March 31, total debt was approximately $657 million.
Rise of first lien senior secured notes of $350 million.
Second lien notes of $214 4 million.
And convertible notes of $86 3 million.
Turning to our guidance.
We tightened and or updated several items.
For fiscal 2022, we now expect.
Net sales in the range of 335 million to $350 million from 335 million to $360 million.
Adjusted gross margin as a percentage of net sales of approximately 13, 5% to 14, 5% from approximately 14% to 15%.
Adjusted R&D expense in the range of 22 million to $24 million.
<unk> $23 million to $26 million.
Adjusted SG&A expense, ranging from 55 million to $57 million.
From $55 million to $58 million.
Adjusted interest expense of approximately $52 million.
<unk>.
The full year adjusted effective tax rate in the range of 23, 5% to 24, 5% from 23% to 24%.
Adjusted EBITDA in the range of zero to $8 million.
Unchanged.
And lastly capital expenditures to be approximately $12 million.
From 10 million to $14 million.
We expect to provide guidance for fiscal 2023 on our next Investor Conference call currently planned for late August .
At that time, we believe we will have additional clarity on the status of the nearer term product opportunities that Tim discussed earlier.
I'll now turn the call back over to Tim Tim.
Thanks, John to sum up today's remarks.
Our bottom line performance was generally on track and sales volumes were better than expected despite ongoing industry pressures.
We submitted our plan and are in regular contact with the NYSE to regain compliance with their listing standards.
We expect to complete the major elements of our restructuring plan by the end of next month.
We sold our Carmel, New York liquid manufacturing plant the proceeds of which helped increase our cash position to more than $106 million as of March 31.
We looked at that cash balance to help provide a bridge to our pipeline realization.
We have expanded our near term pipeline with products that have the potential to be meaningful contributors.
We believe several of these products will be launched in the first half of next fiscal year.
We received as expected a CRM from the FDA regarding our generic Advair discuss anda.
Based on that feedback we are now targeting 2024, if approved for the launch of the product.
The FDA feedback provides a clear roadmap towards approval the product as well as for our NDA submission for generic Flovent discussed.
And finally, the pivotal trial for <unk> is well underway.
In sum <unk> is the largest and most significant opportunity currently in our pipeline and we are already seeing significant early commercial interest in the product.
If our development path progresses like most other biosimilars we.
We anticipate filing the BLA next year and if approved launching in the first half of 2024.
One final comment our entire team continues to work on building and growing our company despite the challenging generic environment.
Many of US are also shareholders and in the case of the senior team and board members significant shareholders.
We along with other holders of our equity and debt are committed to our pipeline, particularly the durable assets and now some of the near term opportunities I mentioned earlier.
We are hard at work looking to bring these product candidates successfully to the market.
With that overview, we'd now like to address any questions. Operator, if you would like to ask a question. Please press star one on your telephone keypad now you'll be placed into the queue. In order received please prepare to ask your question when prompted.
If you have a question. Please press star one on your phone now.
Our first question comes from Scott Henry from Roth Capital. Please state your question.
Yes.
Thank you and good afternoon, I did have a couple of questions.
First.
You talked about the abnormally high product returns is there a reason for that.
Just curious if there's something that's motivating that.
Good afternoon, Scott it's Tim.
Generic industry returns as somewhat archaic world lots of different customer policies, but generally allows the return of products and exploration at the approximate value.
Because there's so many moving parts, we historically rely on historical experience, which you can think of in the range of 1% 2% annually.
However in the case of three products mentioned there is some changes to that historical experience than that are pretty.
Specifically talking about those particular products and the first is levothyroxine capsules.
Product that we launched.
A year or so ago and essentially.
The substitution rates for a variety of reasons were lower than initially anticipated and appears some stranded inventory at the customers has been coming back at a higher than anticipated rate.
Customer order patterns appear to be have been corrected and therefore, we expect while that bolus of inventories working through.
Our current return expectations that will not be sustained.
As it relates to wrap a mill in <unk>, it's a different pack effect pattern.
But again, a diversification or a change from our historical experience.
I think it's well documented a year or so ago, we experienced some significant price declines.
And some share losses on those products as new competitors came into the market.
Historically customers were more likely to work such products are through their inventory, replacing.
Hyster older product with new product as it arrived but that pattern seems to have changed a bit for these couple of products given the size of the.
The price drops and held on to that inventory and a return to the later date I don't think this will be unique to our particular situation given some of the industry challenges, but it's partly what's affected our near term histories.
Okay. Thank you for that color on a couple of other questions. You did mention advair discus a clear road map.
Going forward now.
How should we think about that from the risk profile because clarity doesn't have to mean less risky. It just means a clearer path, but I guess my question is do you view it as a less risky path going forward or has that changed in either direction.
Yes.
Thanks, Scott a quick clarification, I said I believe rapidly a moment ago.
I meant.
Vardenafil right, so just to be clear on that to identify on that revenue.
Regarding the clearer pathway.
These complex products, there's tens of thousands of pages and lots of nuance around.
The application the file.
Always indicated we expected a CRM.
Many folks for us.
This product has spent a lot of time, arguing they're valid concerns from our perspective.
The FDA, sometimes you'll agree with <unk> position, sometimes will disagree, but the debate itself takes time.
Given where we are at the development and whats the asks are from the FDA.
Thank <unk>.
Harley achievable given what we have in our hands right now and so the discretion being the better part of Valor, we're going to just move forward as they'd ask which we then think increases our chances of a successful approval on the timeline we discussed.
Okay, and you had mentioned that Advair discus was likely multi cycle approval.
With regards to insulin <unk>.
Do you view that as a multi cycle process as well or how should we think about the review.
Our expectations there.
Well Scott as we said in the call itself, we really believe that those sorts of biologic products. Once a well characterized there's a variety of tests. The FDA requires before you cannot claim they are well characterized we believe we have met those expectations and as a result, the sort of clinical success.
In such Biosimilars has been very very high to industries experience and similarly, the approval subsequent to the completion of a successful clinical trial is equally been high much higher than the complexities of around of a drug device combination product again, there are some issues and occasionally occur in the space of I would call cgmp.
For our plant in this case, we have.
Partner brand new plant built for purpose solve the sort of western technologies that we'd like to have in place. So we're managing to that at a fairly high level of priority and again the average experience here in such products is much higher for a first cycle review 60, 70% to our knowledge in the biological space very very.
Different than what you see in complex generics that don't have as clear of a set of expectations from the FDA.
So therefore, we have confidence can't guarantee of the confidence that.
That product will will will have a successful clinical trial and likely to have a first pass review cycle.
Okay. Thanks for that color final question.
The other new or the other product line was.
A notable upward bounce sequentially from <unk> to <unk> anything going on there and should we expect it to continue at that higher level or revert back to prior trends.
Thank you.
This is John I'll take that one so.
What we've done historically in the past, sometimes we get to take advantage of opportunities we had an opportunistic sale within the period that.
That increase that overall category that is not currently in our in our Q4.
Forecast for that to continue.
So we look at it as.
Just an opportunity for for a good sale.
Okay, great. Thank you for taking the questions.
At this time, we have no further questions.
All right, it's Tim again, thanks, again for joining the call and as always thanks to our employees customers and partners are working hard to provide high quality low cost medicines for patients. We look forward to sharing our progress on our next call have a good night.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.