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Hi-Tech Pharmacal (NASDAQ:HITK)

Q1 2014 Earnings Call

September 09, 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

Elliot Wilbur - Needham & Company, LLC, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Hi-Tech Pharmacal Earnings Conference Call. My name is Jackie, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

Forward-looking statements 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 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 presentation over to Mr. David Seltzer, CEO. Please proceed.

David S. Seltzer

Hi, good morning, everyone. I'm David Seltzer, and I would like to welcome all of our listeners to the conference call this morning. The purpose of today's call is to discuss this morning's earnings release for the company's fiscal first quarter, which ended July 31, 2013. In a moment, Bill Peters will review the financial results for the quarter, and after that, I will give a quick update on more current events. And then, we will be happy to take some questions. Bill?

William J. Peters

Good morning. Thank you, David. Sales for the quarter declined 3% to $50.5 million from $52 million in the previous year. Sales of generic products dropped 5% to $43.5 million. Sales of Fluticasone Propionate nasal spray declined to $11.9 million in the quarter from $22 million in the previous year, as the company sold fewer units at lower average prices due to the loss of a major customer. Newly launched products, such as Flunisolide nasal spray; and increased sales of Buprenorphine, Lidocaine/Prilocaine, Clobetasol and Dorzolamide products partially offset these declines.

Sales for our Health Care Products division increased to $3.5 million for the quarter from $3 million the previous year. Strong sales of MagOx; and a decrease in the use of in-store pricing promotions, such as free-after-register rebates and coupons, were part of our -- which were part of our campaign to relaunch Nasal Ease last year, led to the increase.

Hi-Tech's ECR Pharmaceuticals subsidiary increased to $3.5 million in sales from $3.1 million in the previous year. Sales of TussiCaps were the primary driver of this increase.

Cost of sales decreased to $25.1 million from $26.7 million, the -- and decreased as a percentage of sales to 50% from 51%. Lowering pricing on Fluticasone was partially offset by lower unit costs of goods. Additionally, as previously mentioned, the decrease in rebates and couponing at the HCP division also increased margins this quarter.

Sales, general and administrative spending increased to $12.9 million from $10.6 million. We had increased spending on sales and promotions in our ECR subsidiary of $1.3 million. Additionally, we had increases in noncash stock-option-based compensation and increased legal fees in both the generic division and at the corporate level.

Amortization decreased to $1.7 million from $1.8 million in the previous year. Research and development expenditures increased to $3.9 million from $4.5 million due to reduced spending on internal projects. Royalty income dropped to $300,000 from $600,000, as the royalty agreements on certain products divested from our previously owned Midlothian division had expired. The company established a loss contingency reserve of $700,000 for potential litigation settlement related to the advertising of Sinus Buster.

The company reported adjusted non-GAAP net income of $6.1 million or $0.44 per diluted share compared to last year's $7.1 million or $0.53 per diluted share, a GAAP income of $4.6 million or $0.33 per share compared to income of $6 million or $0.44 in the prior year.

On July 31, 2013, the company had approximately $108.3 million of cash, up from $100.6 million in the previous quarter. Due to our pending transaction with Akorn, we are now discontinuing our forward-looking guidance.

I'll turn the call back over to David.

David S. Seltzer

Thank you, Bill. On August 27, 2013, the company entered into a definitive agreement under which Akorn, Inc. will acquire the company for cash. Under the terms of the agreement, Akorn will acquire the company for $640 million or $43.50 per share in cash. The acquisition will be subject to customary conditions, including shareholder approvals and termination of the waiting period under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended. Pending the satisfaction of such customary conditions, the company anticipates closing the transaction in the first quarter of calendar 2014.

At this time, we will be prepared to take questions regarding the quarter and answer whatever questions we can with regard to the announced acquisition by Akorn. However, it will be a limited. Thank you, and we're happy to take some questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Elliot Wilbur with Needham.

Elliot Wilbur - Needham & Company, LLC, Research Division

David, just want to first offer my congratulations to you on the acquisition. I'm sure there's a lot of mixed emotions for you there, but it certainly seems like a good price at the right time. More specifically on the business itself, and particularly with respect to Fluticasone, certainly, sales were quite a bit lower, I think, than anyone had anticipated. And we knew they were on the way down, but I guess the sequential step down is quite a bit more than what we had expected. And I thought we have seen some stability in pricing, so maybe, guys, could you just provide a little bit of color on pricing in the quarter versus the prior quarter sequentially, I'm speaking of? And also somewhat difficult to track was sort of the seasonality of the product, but if you look at recent Rx data, it still looks like you're seeing some pressure on units versus the overall market. So maybe just give us a sense of kind of units shipped post quarter and how that's comparing to what we saw in the July quarter.

William J. Peters

Well, first of all, Elliot, the pricing was down a little bit from the previous quarter and a lot from last year, so that was one major driver. But we did lose a pretty significant customer during the course of the quarter, so we were only shipping to that customer for 1 month, and that led to a very significant decline in unit volume as well. Subsequent to the quarter -- well, it was a fairly relatively weak quarter for us, allergy season year-over-year. So for the customers that we did hold for the whole year, we did not -- we'd been seeing double-digit unit growth, and we did not see double-digit unit growth, although we did see some minor growth in the customers that we retained.

Elliot Wilbur - Needham & Company, LLC, Research Division

Okay. And then just a follow-up question for David as well. I mean, there's been a lot of movement within ECR as of late in terms of restructuring and strategic initiatives, but I guess the bigger-picture question still is, can this division operate profitably given the current portfolio of products that it has? And I guess the question is maybe, can you update us on some -- of newer initiatives, whether or not you believe these are having a positive impact? And number two, given the pending acquisition by Akorn, how is this impacting your ability to still think about this business strategically? And I guess the simple question is, if the right asset acquisition presented itself and it was something significant, is that something you would still consider given the pending acquisition by Akorn?

David S. Seltzer

So I'll answer the first question. Yes, we -- as we've stated in the last couple of calls, so we think that, substantially, ECR is going to be a breakeven cash flow-wise this year. We've said that. We don't have any reason to change that forecast for now even though we're not really -- that's just what we've said and there's nothing really that's changed. We do think that the product mix is a good one and the right one for now and that ECR, through its restructuring and under its leadership, can and will do well into the future. As far as the questions that you're asking now about Akorn and the upcoming potential merger, that we really can't answer those questions at this point.

Elliot Wilbur - Needham & Company, LLC, Research Division

Well, I guess, David, I mean, really I'm just trying to get a sense of is to whether you've just kind of put the brakes on everything with respect to strategic alternatives around ECR or whether or not there still remains some desire to grow that business either, obviously, organically but inorganically...

William J. Peters

We -- really, those decisions are really not for Hi-Tech really anymore because that's -- those are going to be Akorn decisions.

Operator

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

Randall Stanicky - Canaccord Genuity, Research Division

I just have 3, and hopefully we'll be able to get some color from 1 or some of these questions. But David, have you entered into a partnership on Fluticasone for an over-the-counter opportunity yet? And is that something that you would do ahead of the closing of the deal? That's number one. Number two, could you give us an early maybe color in terms of what you're seeing in the cough and cold and flu seasons? And then the third, just maybe for Bill, what's -- when should we expect the proxy to be filed?

David S. Seltzer

So we are definitely monitoring the situation with Fluticasone, and obviously, we'll do whatever it takes to make sure that we get the best value. And I'm sure that Akorn would do the same out of the Fluticasone products. So that being said, we're not saying whether we have or haven't, but we're certainly looking very carefully at the potential for an OTC Fluticasone at sometime in 2014. That's what all the scuttlebutt is and that's what all the talk is around. So we think there are going to be opportunities in both the Rx as well as the OTC area, but we really can't answer whether we've inked any deals as of now or not. The next question is, I mean, I can tell you that I've gotten a pretty nasty cough and cold, but we haven't really seen anything dramatic as of yet. I mean, it's early, really early to -- we're expecting to have a normalized season. Two years ago, we had a terrible one where there was almost no demand for cough, cold products; and then last year was a spectacular one. So hopefully, this year, it'll be more normalized, and we do expect to have a good season. But again, we really can't predict the weather...

William J. Peters

And then the third question, on the proxy, we're targeting to have it filed by September 25, but that -- on or about that date.

Operator

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

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

First, a couple ones on Fluticasone. Is there any chance of this customer coming back, all else equal? And secondly, on margins on the Fluticasone product within the quarter, were they higher or lower relative to the corporate margins reported?

David S. Seltzer

So there's always a chance for the customer to come back. However, we just stopped shipping to the customer very, very recently. You can see from the IMS data really where the swings are, as well as anybody's. So there's always a chance that the customer can come back. If there's no change in the supply, then that would take lower pricing, which is not something that we've been in favor of doing over the past number of years. So you never say never as far as that is concerned.

William J. Peters

And the gross profit was fairly close to corporate averages, which -- and the generic average. And we'll be filing the 10-Q -- plan to file the 10-Q later today, which will have some information about the different segments of the business.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

And could you comment on when your last FDA inspection was and when the next FDA inspection is going to be?

David S. Seltzer

The last one was a year ago, November.

William J. Peters

Right.

David S. Seltzer

No idea of when the next one. I mean, every 1 year to 18 months has been pretty average. However, we don't really know exactly when the next inspection will be.

Operator

At this moment, we have no further questions. Mr. Peter, you may proceed.

David S. Seltzer

Thank you very much for participating in today's call. Have a good day. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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