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Hi-Tech Pharmacal Co., Inc. (NASDAQ:HITK)

F2Q09 (Qtr End 10/31/08) Earnings Call Transcript

December 9, 2008, 10:00 am ET

Executives

David Seltzer – Chairman, President and CEO

Bill Peters – VP and CFO

Analysts

Tim Chiang – FTN Midwest

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter Hi-Tech Pharmacal Earnings Conference Call. My name is Emanuel and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator instructions)

Forward-looking statements, statements which are not historical facts in this conference call, are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not promises or guarantees, and investors are cautioned that all forward-looking statements involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, the regulatory environment, including without limitation reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other results and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission.

These statements are based on management's current expectations and naturally subject to uncertainty and changes in circumstances. We caution you not to place undue reliance upon any such forward-looking statements which speak only as of the date made. Hi-Tech is under no obligation to and expressly disclaims any such obligation to update or alter forward-looking statements, whether as a result of new information, future events or otherwise. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. David Seltzer, CEO. Please proceed, sir.

David Seltzer

Thank you, good morning. I am David Seltzer, President and CEO of Hi-Tech Pharmacal Co. Inc. and I would like to welcome all listeners to our conference call this morning.

The purpose of today's call is to discuss this morning's earning release for the second quarter of fiscal 2009, which ended October 31, 2008. Joining me on the call today is our Chief Financial Officer, Mr. Bill Peters. In a moment, I'll turn the call over to Bill who will review the financial results for the quarter, and then I'll discuss some of the highlight for the same period and give an update on more current events. After that time, we will be happy to take questions.

With that, I'd like to turn the call over to Bill.

Bill Peters

Thank you, David.

I am pleased to report that sales for the quarter increased 58% to a record $25.1 million from $15.9 million for the same period last year. Sales of generic prescription products increased 44% to $19.5 million due to sales of new generic prescription items, including Dorzolamide with Timolol ophthalmic solution, Dorzolamide ophthalmic solution and Fluticasone propionate nasal spray. In addition to the generic sales, the company recorded sales of $2.3 million from the Midlothian division, which was acquired last December.

Sales for our Health Care Products division increased to $3.3 million from $2.3 million, as we saw strong sales of our newly launched Zostrix Neuropathy and Nasal Ease products. Gross profit increased to 48% of sales from 36% of sales due to the sales of these newly launched generic products. Research and development costs increased to $1.8 million from $1.5 million as the company increased its investments in external projects. Selling, general and administrative expenses increased to $7.5 million from $5.7 million due to SG&A expenses related to our Midlothian division and amortization of Midlothian intangibles and legal costs associated with the launch of Dorzolamide with Timolol.

As a result of these factors, the company earned approximately $1.1 million or $0.09 per share. The company ended the quarter with $12.9 million of cash. This quarter we used some of our cash to increase our inventory to $21.9 million to support the Dorzolamide and Dorzolamide with Timolol launches and due to increases in cough and flu products ahead of the winter season. Our receivables increased to $22.9 million due to large sales of our newly launched products released in the quarter.

During the quarter, the company used some of its cash to purchase approximately 94,000 shares of its own stock at an average price of approximately $7 per share. Subsequent to quarter end, the company spent just under $1 million repurchasing shares to complete all of the company’s outstanding repurchase programs. At this time, the primary future use of our remaining cash would be to increase the growth prospects for the company, including acquisitions, capital expenditures and research and development spending.

I'll now turn the call back over to David.

David Seltzer

Thank you, Bill.

We are quite pleased with our overall performance in our second fiscal quarter as sales increased by 58% to $25million. Generic sales increased by 44% to $19.5 million dollars, which did not include sales of our Midlothian division, which added an additional $2.3 million in sales in the quarter. Our net income for the quarter was $1.1 million versus a net loss of $1 million for the same period last year. In addition, our cost of sales decreased as a percentage of sales in the quarter to 52% of net sales from 64% in the comparable quarter last year.

Our sales growth was due to the new product launches in the quarter, including the Dorzolamide with Timolol ophthalmic solution, the Dorzolamide ophthalmic solution, as well as new product launches in recent quarters, which include our Fluticasone propionate nasal spray and our Hydrocodone Bitartrate and Homatropine Methylbromide syrup. Our research and development spending increased in the quarter to $1,844,000 from $1,471,000 in the same period last year. This increase was largely the result of the products which we are developing on the outside, some of which require clinical trials and potentially patent challenges as well. We currently have 13 product applications at FDA with total sales of greater than $600 million according to IMS, and we had 20 active products with total sales of greater than $2 billion according to IMS. We strongly believe that investing in our research and development program will fuel the company's growth in the future.

Our focus is on several unique product opportunities, which are being developed internally as well as products that involve collaborations with partners. We work together with partners when we believe there's a potential for limited competition and where there are growth opportunities that go beyond our current development or manufacturing capabilities.

Our OTC branded product division healthcare products reported sales of $3.3 million, which was an increase of 44% compared to the same period last year. The increase was primarily due to sales of the previously launched Zostrix Neuropathy cream and a unique allergy product marketed under the brand name Nasal Ease. The Health Care Products division has shown solid growth from new introductions that compete in non-cough and cold categories. With the launch of Zostrix Neuropathy cream and Nasal Ease, we have demonstrated the ability to successfully market products in therapeutic categories in which we have not traditionally competed. Regarding cough cold products, we have seen a relatively mild start to the season, but we fully expect demand for our Diabetic Tussin line of products to grow as we get deeper into the winter season. We're optimistic about the growth of our OTC business as we plan the launch of several new products in the current fiscal year.

Regarding our Dorzolamide with Timolol ophthalmic solution, the generic for Cosopt, while we're extremely disappointed with the FDA’s ruling denying our 180 exclusivity, we're very pleased with the execution throughout from development to product launch. We see generic ophthalmic as a good niche market with excellent prospects for growth, based on several significant products with patent expirations that will occur over the next few years, and some potential Paragraph IV opportunities as well. The successful launch of Dorzolamide with Timolol ophthalmic solution has confirmed Hi-Tech’s position in the market as a respected supplier of generic ophthalmic products, in addition to our core strength in liquid generic products.

Regarding our Dorzolamide and Timolol ophthalmic solution, on November 7, the company filed a motion with the court seeking a preliminary injunction, a permanent injunction and a declaratory judgment. Both FDA and Apotex have respectfully responded to the motion by closing it. The court has indicated that it will decide the motion without a hearing. Our recent launches of Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution this quarter let to record sales as we comped off a long list of new product launches over the past year. These product launches have given us good momentum as well as the ability to invest in our future growth.

Thank you for your time. And at this time, we are happy to take questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Tim Chiang with FTN Midwest. Please proceed.

Tim Chiang – FTN Midwest

Hi, David. Hi, Bill.

David Seltzer

Good morning, Tim.

Tim Chiang – FTN Midwest

So how much share do you think you have grabbed in the Cosopt market and how do you sort of see the landscape of this market evolving as we head into next year?

Bill Peters

Tim, we initially had probably the most significant share of any of those generic players, but we have lost some customers since the initial launch, but we are somewhere in the neighborhood of about 40% market share right now. But it's too early to say exactly, but with the other approvals that happened, that haven't launched, such as the Sandoz approval and potential other ones that could come down the road, we would have to say that our share would only come down from where it is now.

Tim Chiang – FTN Midwest

I mean I would think that you probably could maintain some of it this year, but that the price would fall, and I sort of wanted to ask you that question, which is where is pricing today? I mean is it a pretty good pricing you are getting?

Bill Peters

Pricing has come down, but it hasn't come down tremendously since the time of the launch.

Tim Chiang – FTN Midwest

Okay.

Bill Peters

So, it is still a profitable number.

Tim Chiang – FTN Midwest

But it is not a 90% discount?

Bill Peters

No.

Tim Chiang – FTN Midwest

More like a 60% discount?

David Seltzer

The product has held up well. I mean let’s just leave it at that. We are pleasantly surprised while there are in fact many players, we are still pleasantly surprised that the product is holding up pretty nicely in pricing.

Tim Chiang – FTN Midwest

And then what happened with the tax rate this quarter? It seems like your tax was like $1.7 million? That seems pretty high.

Bill Peters

When you are going back and forth between having operating losses and operating income as the company has over the past year, there’s different things that can swing the tax rate back and forth because of some non-taxable items and taxable items. So the tax rates that you will see in the quarter isn’t something that you would necessarily see on a going forward basis, but we would expect the tax rate to come down to be a more normalized number in the future.

Tim Chiang – FTN Midwest

So where there any one time type tax issues in the quarter?

Bill Peters

No.

Tim Chiang – FTN Midwest

No. But the tax rate was about 60% this quarter, is that right?

Bill Peters

Yes.

Tim Chiang – FTN Midwest

Right. And then, David, you sort of commented about how you expect to pick up with the cough cold season, I mean are you already starting to see that happen now? I mean that should help you –

David Seltzer

I think you have a little bit of a lag. I mean I guess this pertains to prescription items as well, so OTC brands. We had a very odd fiscal year particularly. We had a big fourth quarter because we had a very late season. So obviously I think some of the retailers and wholesalers may have had some inventories. So between the late start to the cough cold season and may be some excess inventories, we are starting to see a little bit of a turn there for sure. We'll never know when we are going to see the big demand, but it comes during the year at some point. So we are expecting still to see greater demand for these cough cold products for the balance of this fiscal year.

Tim Chiang – FTN Midwest

And I guess is there a possibility you will consider opening up another share buyback program I guess given where the stock is?

Bill Peters

There is a possibility but the Board has not authorized one at this point.

Tim Chiang – FTN Midwest

Okay. Aright thanks, David. Thanks, Bill.

David Seltzer

Thanks, Tim.

Operator

(Operator instructions) At this time, I show no more questions in queue.

David Seltzer

Okay. If there are no questions, then we appreciate your time everybody, and thank you for joining on the call, and we will speak to you soon. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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