Hi Tech Pharmacal Management Discusses Q3 2013 Results - Earnings Call Transcript

Mar. 7.13 | About: Hi-Tech Pharmacal (HITK)

Hi Tech Pharmacal (NASDAQ:HITK)

Q3 2013 Earnings Call

March 07, 2013 10:00 am ET

Executives

David S. Seltzer - Chairman, Chief Executive Officer, President, Secretary and Treasurer

William J. Peters - Chief Financial Officer and Vice President of Finance

Analysts

Timothy Chiang - CRT Capital Group LLC, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Elliot Wilbur - Needham & Company, LLC, Research Division

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

David W. Maris - BMO Capital Markets U.S.

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal Year 2013 Earnings Conference Call. My name is Lisa, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. The company has asked me to read the following statement.

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 1955. 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 are 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 its forward-looking statements, whether as a result of new information, future events or otherwise.

I would now like to turn the conference over to your host for today, Mr. David Seltzer, Chief Executive Officer. Please proceed.

David S. Seltzer

Thank you very much. Good morning, ladies and gentlemen. I'm David Seltzer, and I would like to welcome all of our listeners to our conference call this morning. The purpose of today's call is to discuss this morning's earnings release for the third quarter ended January 31, 2013. Joining me on the call this morning is Bill Peters, our Chief Financial Officer. In a moment, I will turn the call over to Bill to review the financial results. And then I will make some additional comments on the quarter and give an update on some more current events. Bill?

William J. Peters

Thank you, David. Sales for the quarter increased 16% to $64.3 million from $55.6 million the previous year. Sales of generic products increased 14% to $54.1 million. Strong unit sales of Fluticasone Propionate nasal spray at lower average prices resulted in sales of $23 million in the quarter, up from $21.8 million the previous year.

Products launched over the last year contributed to the increase. And we also saw strong sales of hydrocodone/homatropine, which benefited from a strong cough, cold and flu season.

Sales of our Health Care Products division increased 37% to $5.1 million. The cough, cold and flu season led the strong sales of Diabetic Tussin. We also saw sales increases across every product line and the addition of Sinus Buster has contributed to the product results.

Part of the increase for both the Hi Tech generic division and the Health Care product division was due to shipments which were delayed at the end of the previous quarter by super storm Sandy.

Sales at Hi Tech ECR Pharmaceutical's subsidiary rose 17% to $5.1 million from $4.3 million in the prior year. The increase was led by Tussicaps, which benefited from the strong cough, cold and flu season.

Cost of sales increased to $31.5 million from $24.9 million, an increase as a percentage of sales from 49% -- to 49% from 45%. Pricing declines as a result of competition on our Fluticasone were the primary reason for this change. Gross margins at the HCP and ECR divisions were up slightly due to price increases at ECR and sales of Sinus Buster at HCP. Sales, general and administrative spending increased to $16.5 million from $11.7 million, which excludes amortization expense, which we now break out on a separate line. The largest single increase was a $1.7 million increase in advertising spending at the Health Care Products division. Other increases were in marketing expense at ECR of $1.4 million, including the costs related to the start-up of a new contract sales organization, $250,000 in severance costs at ECR, legal expenses in the generic division and freight out across all divisions.

We now break out amortization on a separate line because it has become a significant portion of our expense after several acquisitions over the last 2 years. Amortization increased to $1.6 million from $1.5 million from the previous year. The increase was due to the Sinus Buster acquisition.

Research and development expenditures increased to $6 million from $3 million, as the company increased headcount and spending on development projects requiring clinical trials. The company now has 5 R&D projects requiring clinical trials, 4 of which are undertaken with partners. 2 of the clinical trials were ongoing in the quarter. One of those trials has finished, but the company anticipates beginning a third clinical trial prior to the end of the fiscal fourth quarter. We anticipate SG&A spending to remain high in the fourth quarter due to advertising in Health Care Products, but could drop from the third quarter spending levels.

Royalty income declined $400,000 from $900,000. As a key component of this income stream, royalties from products we divested from our former Midlothian division ended during the first quarter. The discontinued royalty stream accounted for $1.5 million of the royalties received in the last fiscal year.

Company reported net income from continuing operations of $5.9 million compared to last year's $10.8 million. The diluted EPS was $0.43 per share. On January 31, 2013, the company had approximately $87.6 million of cash, down from $104 million the previous quarter as the company paid dividends of $20.2 million.

As usual, we are not giving any formal guidance, but I will discuss the trends we are seeing as of now. We reported sales growth in all 3 businesses on a year-to-date basis, and we expect this trend to continue in the fourth quarter. As indicated on the last call, we anticipate sales declines in our top selling Fluticasone product as a result of the additional competitor, which came on the market in January 2012. We anticipate growth across our leading Health Care Product -- OTC product lines and sales from the relaunch of Nasal Ease, a homeopathic allergy reliever. Additionally, we will get a full quarter of sales from our newly acquired Sinus Buster, which was purchased in March of 2012. These factors will contribute to double-digit growth sales for this division. We expect increases in our ECR branded pharmaceuticals business with growth in Bupap and Dexpak lines. Tussicaps sales were also expected to be much stronger, as we have a sales and marketing campaign. Pricing increases in February 2012 for both Tussicaps and Bupap will contribute to the double-digit growth for this division as well. We anticipate that our cost to manufacture key suspension products, such as Fluticasone will come down in the fourth quarter, as we bring new manufacturing equipment online and as we benefit from lower input costs. We did not realize as much of this cost improvement as we expected in the third quarter, and these improvements will phase in over the next several quarters.

We anticipate that our R&D expense will grow as we are now developing 5 generic products, which require clinical trials. But the timing of those expenses will vary from quarter to quarter as certain milestones are reached in those projects.

As we get closer to fiscal 2014, we are now disclosing that we anticipate top line growth in every division and bottom line growth for the entire company. I'll now turn the call back over to David.

David S. Seltzer

Thank you, Bill. We're very pleased that we recorded sales of $64.3 million in this quarter. We had increases in all 3 of our business units. Generic sales increased by 14% to $54.1 million. Sales of our generic Flonase increased to $23 million from $21.8 million in the prior period. We sold more units at lower average prices, which led to lower gross profit in the quarter. As Hi-Tech expanded our generic product line over the last 12 months, we are continuing to see growing contribution from other products in the quarter as well. Several of our recently launched products continue to gain market share and have contributed nicely, including our Nystatin oral suspension, our Lidocaine ointment, Levetiracetam and Paregoric solution. Most of these products are in markets with little generic competition and favorable generic pricing. Several of our more mature brands, such as Clobetasol and Buprenorphine sublingual tablets also showed consistent growth.

In addition, we benefited from the strong demand for cough and cold products over the last few months, as products like our generic Hycodan performed well in the quarter.

Our unit dose products line continues to do well, in spite of the delay in getting our new packaging equipment prepared for large-scale commercial operations. We remain very positive on the future of our unit dose product line. We fully expect to see an increase in shipments for our existing products, when our large-scale unit dose filling line is fully operational.

We have several new items that we plan to launch over the next 6 months. The planned April launch of an unidentified product is now anticipated for early May. And we are anticipating 1 new ANDA approval before the end of the fiscal first quarter 2014.

Hi-Tech's commitment to research and development has never been stronger. R&D expenses increased to just under $6 million in the quarter, almost double the same period last year. This significant increase is partially due to timing of clinical trials. However, we continue to be aggressive in our product development efforts internally as well as with external partnerships. We currently have 15 products at FDA that target $2.5 billion in sales, according to IMS, and an additional 20 projects in development, targeting almost $4 billion in sales, according to IMS. We are optimistic that our ongoing investments in R&D and our accelerating in-licensing activities will generate future sales growth for our generic business. We recently in-licensed 2 controlled substances, which have been filed with the FDA. When the impact of our R&D and licensing effort takes effect, we will have a steady flow of new product launches.

Our Health Care Products division reported net sales of $5.1 million for the fiscal third quarter, an increase of $1.3 million or 37% compared to the same period last year. Sales of all major product lines grew nicely, including our flagship brand, Diabetic Tussin and the Sinus Buster brand, which was acquired last year.

In the quarter, we increased our advertising outreach for Sinus Buster brands and Zostrix. As we enter the spring allergy season, we expect to see the benefits of our investment in these brands as well as Nasal Ease, which is currently being advertised.

Through licensing and acquisitions, we have taken on several high-margin brands that have great sales potential, but require more significant advertising than we have been accustomed to. We are carefully monitoring these brands and how they respond to advertising. To date, we are overall pleased with the trends that we are seeing on these brands and we remain optimistic about our consumer brands business.

ECR Pharmaceuticals, our branded specialty prescription subsidiary, contributed net sales of $5 million, up from $4.3 million in the comparable period last year. Growth was primarily attributable to the significant increase in sales of Tussicaps, the only 12-hour prescription oral solid cough cold product on the market. Recently, the company was notified that an additional patent was issued related to Tussicaps, which provides additional protection out to 2025. With additional patent protection and positive momentum created by the strong cough and cold season, we are optimistic about the potential of Tussicaps.

Since we have recently restructured ECR's management team, we have seen growth of key product lines, including our headache treatments as well as Tussicaps. As mentioned on previous calls, we have spent a good amount of time and effort restructuring ECR Pharmaceuticals. In addition to acquiring the approved products over the last 2 years, we have made significant managerial changes. The team is now being led by Mr. Cameron Durant, a seasoned executive in pharmaceuticals. We have much confidence in Cameron's ability to drive growth and profitability in our ECR division.

At this time, we are prepared to answer your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tim Chiang with CRT Capital.

Timothy Chiang - CRT Capital Group LLC, Research Division

David, certainly the operating expenses ramped up a lot more than I think the market had expected this quarter. How much of these marketing expenses do you think are going to continue? Do you think you will get a payback on this increased marketing spend that you incurred near term as well?

David S. Seltzer

So the answer is yes, we do. Number one, I just want to say that as I mentioned on the call and we've mentioned, we've in-licensed or purchased on the over-the-counter side several high-margin, high-sales potential products, which are relatively different than our typical diabetic products, which are more doctor pharmacist/diabetic educator recommended products. But these -- the Sinus Buster, the Nasal Ease and the Zostrix products are products that are in categories that have much higher sales potential quickly, but require advertising. So we've been advertising these products. We fully expected to have to advertise these products when we took them on. And we monitor really on a quarterly, but annual basis how these products are responding to advertising. So, so far, we've been overall pleased with the results. The Sinus Buster brand did nicely in the quarter and continues to grow. We expect Nasal Ease, which had been off season this particular quarter, to increase next quarter while we are running some advertising there as well. So we do expect that the expenses are going to level off as far as a percentage of sales, but that the sales are going to be increasing and going in a positive direction. However, that being said at the end of the fiscal year, we're going to carefully sit down as we deal with management and go through product by product and see how they are and make necessary steps. But we do think that these products in these categories have great potential for sales increase and they're high-margin products. So we do expect positive things to continue on the sales side. However, there continues to be a need for advertising when you're involved in categories like allergy and pain.

William J. Peters

And just to expand on that, the entire increase in advertising in the Health Care products division was actually spent on the Sinus Buster brand. And that's a brand that we didn't have a year ago. We're running -- just beginning the advertising campaign. We started the advertising campaign a couple of quarters ago, but we spent pretty heavily this quarter for some more development and to get some more ads out on that product. So our expectation is, is that spending will pay off in the long term as we build that brand, but we probably will not see a positive return on that this fiscal year. The expectation -- we have some sales expectations for that and strong growth for that product. If those expectations aren't met, then we would consider radically changing the spend profile on that product. And then going on ECR, since I believe David didn't really discuss that division, we spent a lot of money on revamping the sales force there. We laid off, we reorganized the sales force, realigned some territories, changed some of the division managers there, had some severance costs in the quarter related to those activities. Also with the new contract sales force coming on and a lot of new people, we decided to have an annual meeting, which we did not have the previous year. And that was held in the month of January, getting all the entire sales force and the entire ECR division with some of the top management together to have kind of a kickoff and launch for the new products. So some of those expenses were onetime in the quarter. And some of those expenses are I'll say annual expenses that we anticipate having annually every year, but not necessarily every quarter. But we do expect to see strong growth out of the ECR division as well. And we think that those -- the changes there will contribute to -- we forecast actually that both ECR and Health Care products will return to profitability in fiscal 2014. So we expect that all 3 divisions will be earning money next year.

Timothy Chiang - CRT Capital Group LLC, Research Division

I mean, just one really quick follow-up for both of you. I mean, do you think your operating margins can get back to what they had been not that long ago? I mean, if I look at your operating margins, they used to be in the 20 -- mid-20s, even some -- at one point you were in the low 30s. And this quarter, you certainly sort of diversed from that. I mean, with over-the-counter products, will that drag down your operating margins going forward?

William J. Peters

Well, I think the over-the-counter products will grow over time and the spending will become a lower percentage of sales, is the expectation there. The return -- but with our higher R&D spending that we anticipate to continue, we do not expect the operating margins to return to where they were a year ago within the next 2 years, but potentially past that 2-year period as we start to launch some more products in the generic division. That's a longer term goal to return to that profitability. But because of the spend profile that we see over the short term and the size of the sales launches that we expect over the next year, I would not anticipate that.

Operator

Your next question comes from the line of Randall Stanicky with Canaccord.

Randall Stanicky - Canaccord Genuity, Research Division

I just have a couple. Bill, just so that there's no confusion, how should we think about the absolute SG&A and R&D dollar figure in terms of spend for the next couple of quarters? Should we think about it as, this is a new run rate or is that number likely to...?

David S. Seltzer

The R&D spend had some very large costs associated with 2 of the clinical trials that were ongoing. And then we also had spending on the mesalamine product in there as well that is unlikely to continue. So a lot of this was just timing of certain milestones within clinical trials that were running more than one at a time. They can -- we hit a couple of different milestones in 1 clinical trial in the quarter and a milestone in the other. So as I mentioned, 1 trial is over. We do anticipate that a second one will begin by the end of this quarter. We did have ongoing expenses ahead of that trial in this quarter. So we're spending really on all 5 of the projects, but the clinical trial costs are where the big spend is. And my anticipation is that R&D spending will go down next quarter and potentially very significantly, but it really depends on milestones and when they're hit. As a matter fact, we -- usually we've seen more delays in the R&D milestones, but this quarter was one where we actually had an increase in our -- an acceleration of one of the milestones over our plan. So the R&D spending was actually higher -- significantly higher than we had anticipated at the beginning of the quarter.

Randall Stanicky - Canaccord Genuity, Research Division

And on SG&A, should we think about that moderating?

William J. Peters

Moderating slightly as we still anticipate spending on the advertising for the Health Care Products division to support the allergy products in the allergy season. But because of that, that the timing -- that's a seasonal thing and you would expect that to come down very significantly in the first and second quarter of next year. On the ECR side, there will be a decline in the SG&A spend as well as what they anticipated at this time.

Randall Stanicky - Canaccord Genuity, Research Division

Okay. And then you brought up mesalamine and you're not meaning to do another trial. That could mean a couple of things. Have you identified a path to potential approval for that product yet?

William J. Peters

We're not ready to comment on our path on mesalamine at this time.

Randall Stanicky - Canaccord Genuity, Research Division

But just to be clear, there's no additional spending from a trial perspective that we should be thinking about going forward relative to that?

William J. Peters

I would say that there's no clinical trial spending on that one, but there could be further spending on that one.

Randall Stanicky - Canaccord Genuity, Research Division

Okay. That's helpful. Then last one for David, and this is just a bigger picture question. We've been watching the stock over the last year. And Fluticasone has been and has -- continues to be a very great cash flow generator, but it's also brought a lot of volatility and some could argue it's holding back your valuation, given your dependence on it. As you look at the current platform, you've got a lot of cash on the balance sheet. How -- could we expect a transformational deal? And what's your appetite to do larger transactions that could reduce your dependence on Fluticasone rather than one-off product type deals?

David S. Seltzer

So we've been working diligently over the last couple of years to reduce the company's dependence on Fluticasone. And I think that if you look at our IMS data, you'll see -- and from our -- the numbers that we're reporting, that a lot of other products that we've developed in-house or in-licensed like the Nystatin that we acquired and the Buprenorphine that we have, and we mentioned in today's call that we recently licensed 2 narcotic ANDAs that are already filed at the FDA. So we are definitely spending money outside of our R&D efforts internally to beef up our generic product line. And I think that we're definitely seeing success there. There's no question that Flonase is still a very, very important part of our business, and -- but we're trying everyday and I think we're having success in making it less and less of a 1-product generic company. So I think that -- and we will continue to do that. We are looking at a lot of deals. We're looking at a lot of things. I think that it's not really a function of the size of a deal, but more of the fit of a deal and how well a deal would fit in into the company, that we don't want to just go out there and do deals for the sake of doing deals. And we also want to pay fair prices. So we've been out there in the generic space and in the branded space and have bid on quite a few things and come up short in a lot of things. And really, the things that we've succeeded on have been a little bit more on the small side, it just happens to turn out that way. There's a lot of cash out there today chasing a lot of things, a lot of private equity money. So we continue to work hard. I'm sure that sooner or later, we'll find the right deal and it'll come along. So we have an appetite for doing deals. We have a very, very strong balance sheet, as you know. We have plenty of borrowing power should we want to do that. And we definitely are looking to grow all 3 of our businesses. We think that there are very good opportunities for growth here. So we have a strong appetite, but we don't want to overpay for things too dramatically.

Randall Stanicky - Canaccord Genuity, Research Division

So it sounds like your interest level is still high on the deal front?

David S. Seltzer

Absolutely. It's still very high. We're really putting a lot of effort behind business development. Again, we've been successful in-licensing in some -- what we think are very significant generic products and potential products to kind of alongside of our internal R&D spend. So we think we have a great pipeline not just internally, but of products to be launched over the next several years, as far as generics go. And we're looking at a lot of things. And if we could do a transformational deal, that would be great, as long as it's a good fit strategically and economically, that there are a lot of synergies. So it's not easy, but you work hard and you have a little bit of luck, and I think we'll get right thing eventually here.

Randall Stanicky - Canaccord Genuity, Research Division

David, let me ask you 1 follow-up, just cause I'm getting a lot of questions on this right now. If it's appropriate, it'd be great if you could give us some color. But if you end up going to market with your partner on non AB-rated mesalamine, is there a market opportunity for you on that product? I don't know if you can comment, but if you can, that would be great.

David S. Seltzer

I think that we're not commenting. I think that if you look at mesalamine, I think that whoever comes to market with either a generic -- a generic is obviously the easiest in AB-rated product would do very, very well. But I also feel that if -- I think it was a piece that you put out on 505(b) and strategies of some of the larger generic companies on some of the larger products. We fully agree with your analysis of that. We think that if you get into a very big category and you have a 505(b), you don't necessarily need a big detailed sales force to make that product succeed. So we agree with your analysis on that. We think that mesalamine is play there. We can't -- we have a partner there. We haven't identified what our strategy is. You can make all the guesses that you want, but I think 1 way or another, there's a lot of money to be made there.

Operator

Your next question comes from the line of Elliot Wilbur with Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

First question is for Bill. I just want to drill down a little bit on the R&D spend in the quarter and then think about the impact of some of the trials going forward. I guess my thinking had been that each one of these trials while partnered probably could cost somewhere in the order of $3 million, $3.5 million for Hi-Tech. I'm just trying to get a sense of what we could be thinking about in terms of sort of the cumulative or aggregate impact over the next couple of fiscal years. And it's really a question of how many do you think could actually be running simultaneously? Is there -- at some point in time when we could actually see all 4 remaining trials running at the same time and that full impact point to the P&L or do you think it's going to be a little bit more staggered? I mean, I guess, I'm thinking that you're probably looking at roughly $15 million in incremental spend tied to all these projects that's go-to-run on top of baseline R&D. I'm trying to figure out, is this going to be next 18 months, 24 months, 36 months? If you could maybe add a little color on that.

William J. Peters

Sure. So roughly, that $15 million number, that's in the right ballpark and a good way to think about it for the clinical trial costs. It could run a little higher than that because 1 of these trials is not partnered. But each of these trials are going to cost between $4 million and $8 million to run. So our cost individually is between really $2 million to $4 million on the partnered ones, and the one that we're running by ourselves is probably going to fall somewhere in the middle of that range. As I mentioned, the 1 clinical trial ended, so that one's over -- so that one is done with. One of the other trials will take about a year to run, the one that's going to begin at the end of this quarter. So that will be ongoing, we imagine, for -- the trial itself will be ongoing for about 12 months. The one that's currently ongoing right now should be similar timeframe. The other ones we don't anticipate -- I would not expect us to have all of them -- all of the remaining ones running at one time. So this cost is really going to be spread over 2 to 3 years. It's possible that we do have a quarter like this quarter in the future, but I don't see that in the next quarter or 2.

Elliot Wilbur - Needham & Company, LLC, Research Division

Okay. And then just with respect to SG&A, follow-up to some of the earlier questions. If I just think about the increase sequentially. I mean how much of that was specifically AMP and what products were in there?

William J. Peters

The advertising spend year-over-year is how I've always looked at. So that's the information I have ready to discuss today. But the Sinus Buster brand was increased in advertising by about $1.7 million. That was the full increase in the Health Care products advertising in the quarter from the previous year. We anticipate spending on that product as well on the fourth quarter. So that will be ongoing because it's an allergy product and the allergy season is upon us and coming up, so there will be spending on that as well. Some of the promotional activities in ECR were a little bit -- as I mentioned, some of those were one-time costs associated with the start-up of some of the sales force and then letting go of some the people there. Also, there was, as I mentioned, an annual costs associated with an annual meeting, which we had previously held -- ECR previously held every year, but we actually didn't have it last year because of a cost cutting measure last year. But we're confident enough in the growth of that division that we wanted to have that meeting again. But sequentially, going forward, the ECR spending should come down a little bit.

Elliot Wilbur - Needham & Company, LLC, Research Division

Okay. And then I wanted to ask you a question on Fluticasone as well and maybe just thinking about the sequential trends. Gave us a lot of color kind of year-over-year, but obviously the number is kind of up nicely sequentially in what is not generally a seasonally strong period. So just sort of curious how units and pricing has behaved sequentially. And then also just looking at the latest weekly Rx data, there was a fairly large increase in volume for one of the bigger players in this market. And I'm just curious if anything has changed recently in the marketplace that may -- we may see reflected in your numbers over the next couple of quarters?

David S. Seltzer

Sequentially, we think the business remains pretty steady. Pricing continues to decline, volumes are good. We had a big boost from the cough, cold season even though the product is really indicated for allergy, for allergic rhinitis. I think that -- it's getting a lot of we'll call it off label use. I know personally a lot of people that are being prescribed Flonase for congestion and things like that, which is good for us and everybody. We have heard ramblings about one of our competitors being a little bit aggressive in the marketplace, but not -- nothing that I think is going to be tremendously earth-shattering. And the product is a great product. I mean, the demand continues to increase overall demand, but there is competition and pricing continues to decline.

Elliot Wilbur - Needham & Company, LLC, Research Division

Since you brought up that subject matter, Dave, I want to ask you an additional question here. I have to admit, I look at this market and I find the behavior at times somewhat baffling. I mean, at least based on a WAC basis, it looks like the generic sell at about 75% discount, it's probably more than that on a realized basis. Yet here you have a market with limited supply, growth in terms of unit volume. I mean, it has all the characteristics frankly of a market, where players should be raising price, not battling it out over price. I guess I'm just puzzled as to sort of why we don't see this market behaving like we see other limited competition markets in the generic space.

David S. Seltzer

We're puzzled as well. It is what it is. I mean, we have to compete. You're right. And things change normally when you get into really high demand. With products like this, the only thing that I can say over the last couple of years that we've been in the product is that when you have such high-volume products and everybody producing product and the demand -- when you're a little bit off season is when the competitors start taking a couple of cheap shots at each other. But when you get into very, very high demand, things tend to change when people can't deliver as well or they get a little bit behind. So we're just out there. We're very, very focused on being a great partner to our customers. And we have been and we've been great at delivering the product and we continue to do that. And we're not aggressive in our approach to the pricing, but we can't speak for everybody else that's in the market. But I agree with you 100%. I mean, it's very, very tough product to supply. It's limited competition. There's limited amount of components out there. It's really one of those products that you would think would act more like a brand product but -- I can't explain why, but it doesn't.

Elliot Wilbur - Needham & Company, LLC, Research Division

I'll just say somebody has to be first in raising price and leave it at that.

Operator

Your next question comes from the line of Sumant Kulkarni with Bank of America Merrill Lynch.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

The first one is actually a follow-up on generic Isocol. So without commenting on your path forward, can you comment on whether you think generics will or will not be approved in July 30, because that seems like that would significantly affect your thinking on the price of opportunity by the time you get approval of whatever products you might have.

William J. Peters

We really can't comment on whether generics will be approved by that date because we don't know -- we don't have insight in anybody else's filing. But I'll say that we are unlikely to get an approval on that date.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Okay. That's helpful. And on generic Flonase, could you imagine gain based on the tweaks you have made to the manufacturing process more than offset the price declines at some point?

William J. Peters

Right now, we are expecting that the decline in manufacturing costs will offset the pricing declines. So we expect margins to remain flat for the product and potentially increase. But I would not expect a large increase at this point.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Okay. On Tussicaps, at what point could that product overcome the low drain sales, which were about $16 million I guess in the fiscal year [indiscernible] company?

William J. Peters

No, it's certainly not this fiscal year, but there's a potential next fiscal year or the year after that to get there. We have some strong marketing plans and some strong goals to pull that -- get that product growing pretty significantly. And with the new price increase, that makes it easier from a unit basis as well.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Okay. And a question for David on the controlled substances. How big could those product opportunities be? And at what point could we see them being launched?

David S. Seltzer

So they could be significant products for us, the 2 products that we recently acquired or in-licensed. And we haven't put out any guidance as to when they can be launched. But those are included in the 15 products that are currently at the FDA, targeting, total 15, of $2.5 billion. So, they're both, let's call it fairly significant products that upon approval, depending on the timing, could be very impactful to our business.

William J. Peters

And just to clarify, we have the new table on the press release that we put out this week. We gave that similar information in our presentation. That's on our website as well. The partnered products that are at the FDA, mesalamine, which we have disclosed is just under $600,000 in IMS value. So the remaining 3 partnered products are over $1 billion in branded opportunity right now. Those products, I believe, there's 2 narcotics that David mentioned and there's also a Paragraph IV opportunity in which our partners first file and we will receive a royalty once they've recouped some of their legal expenses. But we'll manufacture the product for them at a contract manufacturing royalty rate until that time.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Has the partner been already on the product on the supply?

William J. Peters

Yes.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

And just coming back to the R&D. If we look at the R&D expenses for the quarter, how much of that was clinical trial related and how much was it just a baseline of R&D?

William J. Peters

Most of the increase was clinical trial and external spending related, most of the increase. All of the increase is really that. We didn't increase internal projects from I'll say the second quarter, but we have increased headcount from a year ago. But most of the increase was clinical trial and external development related.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

And the last question is, how big is your sales force now in terms of absolute number of salespeople including the CSO?

William J. Peters

The number of salespeople at the ECR division including the CSO I think is -- it's over 90 now.

Operator

Your next question comes from the line of David Maris with BMO.

David W. Maris - BMO Capital Markets U.S.

How many opportunities are you seeing out there for in-licensed generic, hard to make generics? Can you maybe describe what you're seeing and what your capacity is? I mean conceivably, could you have another few of those in development a year from now? And if so, is that -- should we be impacting R&D for that?

David S. Seltzer

So there's a lot of opportunity out there. These -- capacity wise, we have plenty of capacity because these 2 products, we're not manufacturing the products because they happen to be solid dosage products. They are narcotics, which make them a little bit more difficult to handle and deal with. So we have a strong generic business. Our capacities internally are liquids and creams and ointments and sterile and nasal sprays, but our sales team and our warehousing can pretty much ship and sell anything that we can supply. So like the Buprenorphine that we have an alliance with EthyPharm. We bring the product in. We're doing the marketing and the warehousing and so on and so forth. So, it's pretty much a financial upfront payments and then additional payments upon reaching milestones. So we think that for the right products, there's plenty of potential. And we're being pretty aggressive in that area as we've established some pretty good relationships over the last couple of years with companies that either don't have a presence in the U.S., don't have sales force, don't have marketing ability, don't have the breadth that we have. It's not easy to get into this business today if you're not in it already. So there's a lot of opportunity there.

Operator

We have a follow-up question from the line of Elliot Wilbur with Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

Two quick ones. David, I just want to get your thoughts around current dynamics in the topical or semisolid market. Just taking a look at some of the trends there and frankly pretty surprised to see that you've seen something like 45% dollar sales growth in that market in the last 3 years and only 5% unit growth. Obviously to say there's been a lot of price increases. And basically you have 3 players now that control about 65% to 70% of the market. So certainly, it seems like a place where you could double down your investment and do quite well based on the current trends. Obviously, you guys have been there in various ways in the past. I'm just kind of wondering what you're thinking about, maybe -- whether or not that may present an area to take a look at again in terms of becoming larger from a capacity standpoint?

David S. Seltzer

So we happen to have -- number one, we happen to be doing a significant amount of topicals than -- compared to several years back. So we have the Clobetasol items that we pretty much brought all in-house on the manufacturing side. We have our generic EMLA. We have licensed in a couple of Lidocaine products that are doing very well for us. So we have capacity. And it just happens to be that we were also able to purchase very recently a very high-speed filling and packaging line for creams and ointments that we needed. But that's also going to give us a tremendous amount of capacity going forward. So we are looking very hard to find additional products. We definitely see opportunity. I mean, I think everybody knows and understands that there's been some significant price changes in that market over the last couple of years. But we are definitely stepping up our efforts in R&D as well as in trying to purchase or licensing some products in those areas. We see creams and ointments as a good area of expansion for us.

William J. Peters

And just a follow-up on that, we've seen that trend impact our Lidocaine/Prilocaine cream, which 3 years ago was not a top 10 product and today is our -- as of the end of October, it was our third best-selling generic product.

Elliot Wilbur - Needham & Company, LLC, Research Division

Okay. And then last question. You mentioned management change at ECR and I believe you said Cameron Durantt. I'm just wondering is it the same Cameron Durantt who was at Pediamed and PediatRx.

David S. Seltzer

That's him.

Elliot Wilbur - Needham & Company, LLC, Research Division

That's a very good hire for you, guys.

David S. Seltzer

We think so.

Elliot Wilbur - Needham & Company, LLC, Research Division

Sure he has much grander visions other than running a $20 million business. So, curious to see how that unfolds.

William J. Peters

Yes, he is a very big, bold plan for ECR.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to management for closing remarks.

David S. Seltzer

We want to thank you, all, for participating in our extended call today. And we will speak to you next time. Thank you very much. Have a great day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Hi-Tech Pharmacal (HITK): Q4 EPS of $0.43. Revenue of $64.3M beats by $3.85M. (PR)