Q1 2023 Lannett Company Inc Earnings Call

Thank you for standing by this is the conference operator, welcome to the Linac companies' fiscal 2023 first quarter financial results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing star Zero I would now like to turn the conference over to Robert Jaffe Investor Relations for Lynette.

Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining us today to discuss <unk> company's fiscal 2023 first quarter financial results.

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

And Steve layer, who leads our insulin biosimilar initiatives.

This call is being broadcast live at Www Dot net dot com.

Playback will be available for at least three months on <unk> website.

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 private Securities Litigation Reform Act.

Today'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 in its press release announcing its fiscal 2023 first quarter financial results for the company's reasons for presenting non-GAAP financial measures.

Reconciliation of the 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 there.

Then John will discuss the financial results. 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 I'll begin today with a few comments on our financial results.

Q1 net sales.

Adjusted gross margin and adjusted EBITDA were all above our expectations.

Moreover, I am pleased to note that all three measures increased over the preceding fiscal Q4.

A few factors drove this performance including.

Increased sales during the quarter of generic Adderall as a result of the current market shortage, we were able to maintain our supply.

The sale of certain products under our private label agreement at a better than company average gross margin.

And our continuing normalization of our product return rates and a more favorable pricing environment than we had anticipated.

We were also pleased with our bottom line performance in context, Q1 research and development expenses that were higher than recent quarters due to incremental investment that was made related to the progression of our durable assets.

We are now approximately six to seven months from filing the BLA for our partnered Biosimilar insulin <unk> product in approximately 18 months from the potential approval.

We are of course also advancing other durable assets.

Meanwhile, we continue to focus on our liquidity and we recently announced the sale of several discontinued Anders for approximately $3 million to a privately held pharmaceutical company.

In a separate transaction with the same company, we sold certain products under our private label agreement, which as I mentioned above helped support the better than expected first quarter financial results.

The private company has the option to purchase additional batches of products. This fiscal year and we expect they will.

John will address our cash balance and liquidity later in this call, but we certainly believe our liquidity position to be sufficient throughout this fiscal year.

Finally on the operating Brian and as previously announced related to our 2021 restructuring and cost reduction plan.

We received FDA approval to manufacture our branded topical anesthetic product Brito at our main plant in Seymour, Indiana.

This FDA approval was received well ahead of schedule and is important for a couple of reasons.

First it facilitates the continuing transfer of other liquid products to our Seymour plant.

Second it opens the door for expansion of our contract development and manufacturing efforts for liquid products.

Third we expect our overall manufacturing efficiencies can be enhanced as we ramp up production of debris and other liquid drugs at the Zimmer plant, which we are consolidating from our former Carmel production site.

Now I'll turn to our pipeline and begin with updates of the Biosimilar insulin <unk> and Biosimilar ASP art products.

Overall, the timelines for these products remain largely on track.

As a quick reminder, these products target commercial markets with an estimated aggregate annualized value in the billions of dollars.

And represent for a company of our size very large and in fact transformational opportunities.

For our long acting insulin <unk> program as earlier discussed we have completed the subject dosing in our healthy volunteer pivotal study and no serious adverse events reported.

We continue to expect top line data and analytics to be available next month.

And as we have said we believe the trial will be successful in meeting its clinical endpoints, given the notably high historical success rates of such Biosimilar medicine trials.

We further expect to avail ourselves to an FDA pre submission meeting in the early part of next calendar year to increase the likelihood of a first pass approval and potentially shorten the review time.

We currently anticipate filing the biologic license application in the spring of next year.

Which is just months from now.

Ultimately as noted previously we are working towards an approval and launch of the product by mid calendar year 2024.

Next biosimilar insulin as part of fast acting insulin.

This product generally trailed the timing of our insulin <unk> program by approximately 12 to 15 months.

We are already producing insulin as Bart at commercial scale, and we will be requesting a type two meeting with the FDA in about three months.

If that meeting proceed as expected we would anticipate filing an IND shortly thereafter looking.

Looking to initiate the clinical study next summer and completing this study in the spring of calendar year 2024.

If approved we are looking at a potential launch of the product mid calendar year 2025.

Interestingly, we have and continue to assume we will be the second biosimilar insulin <unk> approval.

Whereas for Biosimilar insulin <unk>, we expect to be the next and thus the third approval.

However, today, there is no biosimilar as Bart product on the market.

And there are a few emerging its still unlikely scenarios, where we could have the next and therefore, the first biosimilar as Bart approval.

Turning to our eventual commercialization expectations and as I mentioned on our last call. There has been extensive reporting on state and national initiatives to make insulin more accessible and more affordable for millions of patients.

We are delighted to be in active discussions with a few states and other entities to collaborate and provide solutions regarding their important initiatives.

We believe such approaches play well to our strengths as Lynette and our partner Hec group had the philosophy flexibility capacity and competitive cost structure to support these initiatives.

Turning to our respiratory franchise.

I'll start with generic Flovent discus.

The FDA earlier granted the company's request for a CGT status and the filing of the NDA is still expected earlier next calendar year.

Our partner has completed the human clinical and PK trials.

We expect to avail ourselves to a pre submission meeting in the first quarter of 2023 to get FDA feedback prior to a submission of this complex development project.

If that feedback is encouraging and we have learned a lot and related feedback related to generic <unk>. A launch would then be possible in the first half of 2024.

For our generic Advair business product, we respond to the CRA will just last month.

We anticipate additional responses to another <unk> in the second half of calendar year 2023.

That will include results from our new clinical trial, and new pharma kinetic studies scheduled to begin in the next few months.

If all work remains on track our launch will then be possible around mid year 2024.

Finally.

For generics breathe, a handy healer, we expect our partner will commence a pilot PK study.

By early next calendar year.

Turning now to our nearer term product opportunities, particularly those that have the potential to be more meaningful contributors to our financial results that we have mentioned on our last call.

First over the course of the current fiscal year, we anticipate launching four notable products with respect to potential value sell.

<unk>, an oral suspension product and three additional partnered products.

<unk>, an injectable product currently in short supply.

Silver flooring inhaled anesthetic product.

And <unk> delayed release tablets, one two grams.

Okay.

Next we continue to make good progress in growing our contract development and manufacturing business.

We appear on track to achieve the higher end of our forecasted sales range of $22 million to $26 million.

Which is a substantial increase over the previous year.

We also are currently engaged with nearly two dozen parties that have expressed potential interest in working with us.

Of these based on prior experience, we would anticipate three to four of these leads to eventually evolve into development and our commercial agreements.

So we continue to believe there is ample opportunity to further grow this business over the next couple of years.

Now as we noted last quarter I'd like to address a few opportunities that are not included in fiscal 2023 guidance.

First we are currently working with outside experts to achieve new incremental companywide annualized cost savings of at least $10 million.

Moreover, we continue to assess additional optimization and rationalization of selected products and our offering to both generate and free up more cash.

Second for our sales guidance, we have assumed new competitors for certain inline key products, even where that competition has not yet materialized.

So to the extent the competitive products are delayed from entering the market, we obviously could see higher sales for those products.

And third in the similar vein for new products, we hope to launch this year, we could see higher sales than we had estimated because we generally assume we are not the next new entrant to these markets.

If we are the next new entrant then we could again have upside to our forecast.

Yeah.

Overall, we currently have approximately 10 and is pending at the FDA, including partner products.

Plus four additional products that are approved and pending launch.

We further have about a dozen products in development or early development and expect to add more from external and internal efforts.

To sum up today's remarks.

We reported better than expected financial results with net sales adjusted gross margin adjusted EBITDA all above our estimates.

We sold several discontinued and as for about $3 million.

We completed dosing of subjects in the pivotal Biosimilar insulin <unk> clinical trial, and we anticipate topline results next month.

Thus, we believe the BLA filing is on track for spring of next year.

We engaged outside experts to help drive continued cost reductions throughout the company.

Based on the preliminary review, we have estimated the annualized savings to be at least $10 million.

We continue to expect our contract manufacturing business to approximately double this year over last year.

The recent FDA approval to move the manufacturing of <unk> to our Seymour plant facilitates additional liquid transfers improves our efficiencies and adds to our contract development and manufacturing offerings.

We believe there is ample room for further growth in this area over the next few years.

And finally, our liquidity position is expected to be more than sufficient throughout this fiscal year.

With that I'll now turn the call over to John to review the financials more closely John .

Thanks, Tim and good afternoon, everyone.

Turning to our financial performance.

I'll focus my discussion on our non-GAAP adjusted measures.

For the 2023 first quarter net sales were $75 1 million <unk>.

Compared with $101 5 million.

For the first quarter of last year.

On a sequential quarterly basis.

Net sales rose from $74 2 million in 2020 to fourth quarter.

Gross profit was $13 8 million or 18% of net sales.

Compared with $20 6 million or 20% of net sales for the prior year first quarter.

On a sequential quarterly basis, both gross profit and gross margin increased from $10 4 million or 14% of net sales in the 2020 to fourth quarter.

Interest expense increased to $13 3 million from $12 8 million.

Net loss was $17 1 million or <unk> 42 per share.

Compared with $10 6 million or <unk> 27 per share.

We reported positive adjusted EBITDA of $3 million.

Turning to our balance sheet.

At September 32022, cash and cash equivalents totaled approximately $78 million.

Within the next few months, we continue to expect to receive a sizable income tax refund of approximately $20 million we.

We also expect to receive additional income tax refunds.

So now we anticipate receipt outside of the current fiscal year.

At September 30, total debt was approximately $656 $7 million comprised of first lien senior secured notes of $350 million.

Second lien notes of $224 million.

And convertible notes of $86 3 million.

As Tim mentioned, we are working closely with outside experts to help us identify operational improvements and cost efficiencies.

Our preliminary analysis suggests that there are at least $10 million of incremental annualized cost savings that we believe can be implemented over the near term.

These initial efficiencies will be achieved largely through improving our procurement process.

Ongoing recalibration of our production schedules and some other operational adjustments.

We expect to share our findings on this front soon.

Turning to our outlook for fiscal 2023.

While we have reiterated our full year guidance given the better than expected Q1 results. We now believe our adjusted gross margin will be closer to the top end of our range.

Specifically, we expect net sales in the range of 275 million to $300 million.

Adjusted gross margin as a percentage of net sales of approximately 15% to 17%.

Adjusted R&D expense in the range of 23 million to $25 million.

Yeah.

Adjusted SG&A expense, ranging from 56 million to $59 million.

Adjusted interest expense of approximately $53 million.

The full year adjusted effective tax rate in the range of 23, 5% to 24, 5%.

Adjusted EBITDA in the range of negative $12 million to breakeven.

And lastly capital expenditures to be approximately 8 million to $12 million.

Regarding the phasing of the quarters, we expect.

Net sales in Q2 to be comparable to Q1 coming down in Q3 based on forecasted competition on a couple of key products and ramping up in Q4 based on expected new product launches.

Gross margin to be lower in Q2, compared with Q1 ramping up in Q3, and then ramping up again in Q4.

Operating expenses to decline lately in Q2, compared with Q1 and declined further in the back of the year.

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

Thank you.

We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad Youll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to.

To withdraw your question. Please press Star then two.

Our first question comes from Scott Henry of Roth Capital. Please go ahead.

And good afternoon, a couple questions.

First the generic adderall market shortage has that normalized or could we see any benefit.

In further quarters.

Good afternoon, Scott said, Tim the shortage and that market continues to persist, it's not clear how long it will persist.

Recall these markets have some stickiness relative to DEA quotas that are underlying we believe there is some potential upside but that upset of course is captured in the guidance we provided.

Okay now.

Had strong numbers for Q1, but you maintained the full year guidance do you feel more comfortable in our full year guidance or do you anticipate offset.

Later in the year to make up for the upside in the first quarter.

Okay.

Hi, Scott. This is John so the answer is yes, we feel more comfortable with the guidance having a.

Good first quarter de risks.

Q2 through Q4.

That's the easy answer.

Okay.

And in the press release, it talks about a more a more favorable pricing environment.

I guess the question from a big picture is.

Good things actually be improving the worst be over in the generic environment or do you think it's just a natural variability.

Again, Scott. This is Tim I think what I said was a more favorable pricing environment than we anticipated I don't know if I characterize that pricing environment is on some absolute standard we expect erosion in this space.

On a portfolio by portfolio basis. So we're pleased that have less erosion than we are anticipating we clearly have fewer products in our portfolio now that can come down as far as it did in the previous periods. So we think theres, some asymptotic element to declines to our existing pace based portfolio, but.

Not really making a comment on the broader industry.

Okay.

And then just.

Our balance sheet item I mentioned, the approximately $20 million in income tax refunds has that number changed at all.

I thought it was a little more than that but.

I don't know if you've brought in some of those already or if the numbers changed.

So the the.

The number that we had discussed back in the August call year end call was around $26 million that actually was to refund the $20 million that we were referencing today and then there was an additional <unk>.

$6 million refund that we're now expecting.

Sometime next fiscal year, so through through our contacts with the IRS and communications, we've pushed that one out.

And our forecast.

Okay, Great and then the final question.

I think on page two you reference.

Launching four notable products.

Sucralfate CMO foreign Musalo mean, and Fludarabine could you talk about either individually or in total the magnitude of revenues that they could generate and kind of the first year in and some of that peak sales. Thank you.

<unk>.

I'll take the <unk>.

First part about fiscal 'twenty three.

We had talked about before our launches being in the back half of the year. So its impact to the year itself.

It is really determined whether we see some favorability and a quicker launch with that market conditions would be.

So we've held our expectations in terms of R.

Our launch revenue for the year.

Tim I don't know if you want to address the.

So it's a full year.

Terms of the shape of those expectations two of the products <unk> delayed release delete.

Leading release excuse me lead delayed release tablets, one two grams.

Civil flooring in a fairly large markets and so the annualized numbers would be quite a bit higher than the quarterly expectations.

However on the other side of that Fludarabine, which we hope to launch relatively soon.

Is more of a shortage product and we would expect.

The near term.

<unk> expectations to be higher than the annualized ones over time, So I think it will be some stability to these numbers as you look into 2024.

Okay, great. Thank you for taking the questions.

Thank you.

This concludes the question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Alright, it's Tim again, thanks 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 you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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