Lannett's (LCI) CEO Arthur Bedrosian on Q2 2016 Results - Earnings Call Transcript

| About: Lannett Company, (LCI)

Lannett Co., Inc. (NYSEMKT:LCI)

Q2 2016 Earnings Conference Call

February 3, 2016 16:30 PM ET

Executives

Robert Jaffe - IR, Robert Jaffe Co., LLC

Arthur Bedrosian - Chief Executive Officer

Martin Galvan - Chief Financial Officer

John Abt - Member of the Leadership Team

Analysts

Elliot Wilbur - Raymond James & Associates

Gregg Gilbert - Deutsche Bank

Scott Henry - Roth Capital Partners

Matt Hewitt - Craig Hallum

Andrew Finkelstein - Susquehanna Financial Group

Corey Davis - Canaccord Genuity

Rohit Vanjani - Oppenheimer & Co

Operator

Welcome to the Lannett Company Fiscal 2016 Second Quarter Financial Results Conference Call. My name is Eric; I will be your operator for today's call. At this time, all participants are in a listen-only mode. But later we will conduct a question-and-answer session.

I will now turn the call over to Robert Jaffe. Robert, you may begin.

Robert Jaffe

Thanks, Eric. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2016 second quarter financial results. On the call today are Arthur Bedrosian, Chief Executive Officer; Marty Galvan, Chief Financial Officer; and John Abt, Member of the leadership team overseeing the KU integration. This call is being broadcast live at www.lannett.com. A playback will be available for three months on Lannett's website.

I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company's discussion will include forward-looking information reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied.

In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles and that may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Lannett's press release announcing its fiscal 2016 first quarter financial results for the company's reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in our earnings press release issued earlier today.

This afternoon, Arthur will provide a brief overview of the quarter then Marty will discuss the financial results in more detail, including the company's guidance for the full fiscal year 2016, followed Arthur and John's concluding remarks. We will then open the call for questions.

With that said, I will now turn the call over to Arthur Bedrosian. Arthur?

Arthur Bedrosian

Thanks, Robert, and good afternoon, everyone. Today we are reporting full financial results for our fiscal 2016 second quarter, after providing preliminary results for the quarter last week.

As a reminder, we completed the acquisition of Kremers Urban Pharmaceuticals on November 25th. Accordingly, our fiscal 2016 second quarter results include the operations of KU since that date.

For the fiscal 2016 second quarter, net sales were 127 million, GAAP net income was 13.5 million equal to $0.36 per diluted share, and adjusted net income was 35.4 million equal to $0.95 per diluted share. Both GAAP and adjusted earnings per share came in at the upper end of the range we provided last week.

For a comparison, in the prior year second quarter, which was an exceptionally good quarter, we reported net sales of 115 million, GAAP net income of 44.8 million, or $1.21 per diluted share and adjusted net income of $46.1 million or $1.24 per diluted share.

With that overview, I'll turn the call over to Marty to discuss our financial results in more detail. Marty?

Martin Galvan

Thank you, Arthur, and good afternoon, everyone. For the fiscal 2016 second quarter net sales increased 11% to $127.1 million from $114.8 million in last year's second quarter. The recently completed quarter included KU net sales of $26.1 million.

Net sales for our largest product category, thyroid deficiency were $37.4 million or 29% of our total net sales. Our two other largest categories, gallstone and cardiovascular, had net sales of $18.7 million and $13.1 million, respectively, representing 15% and 10% of our total net sales. As for net sales of our remaining product categories, pain management was $8.1 million, glaucoma was $6.5 million; migraine was $5.7 million; antibiotic was $2.8 million; and muscle relaxant was $1.4 million.

As a result of the KU acquisition, we had a partial quarter of sales from several new product categories. These categories and their sales were, gastrointestinal $8.6 million, central nervous system $6.1 million, urinary $3.4 million, and respiratory $1.4 million.

Net sales for -- net sales of the remaining product categories of the combined Company represented $11.6 million. In addition, we recorded $2.3 million of contract manufacturing revenues.

Continuing with the remainder of the income statement and for completeness and comparative purposes I will first provide the non-GAAP adjusted amounts for gross profit, SG&A, operating income, tax expense, and net income. And then provide GAAP amounts. The differences between the non-GAAP and GAAP amounts primarily include expenses related to the KU acquisition.

Adjusted net income excludes the after-tax effect of these items. Adjusted gross profit was $81.0 million or 64% of net sales, compared with $87.2 million dollars or 76% of net sales. Adjusted SG&A was $11.6 million, compared with $10.8 million. Adjusted operating income was $60.4 million, compared with $68.6 million.

Adjusted tax expense was $16.8 million, compared with 23.1 million. The adjusted tax rate for the second quarter was approximately 32%, primarily due to the retroactive effect of research and development credits related to recently enacted tax law. We expect our adjusted tax rate for the second half of fiscal 2016 to be higher than of the first half rate of 33%, in order to arrive at the overall full year guided rate of 34% to 35%. Adjusted net income attributable to Lannett Company was $35.4 million or $0.95 per diluted share, compared with $46.1 million or $1.24 per diluted share.

Now I'll provide the GAAP amounts. Gross profit was $71.6 million or 56% of net sales, compared with $87.2 million dollars or 76% of net sales. R&D expenses increased to $9.1 million from $7.8 million in the same quarter of the prior year. SG&A expenses increased to $14.7 million from $10.8 million. The increase was primarily attributable to integration costs. Acquisition related expenses were $17.6 million, compared with $2 million in the second quarter of last year.

Operating income was $30.3 million, compared with $66.5 million. Interest expense was $11.8 million, compared with $73,000 in last year's second quarter. Net income attributable to Lannett Company was $13.5 million or $0.36 per diluted share compared with $44.8 million or $1.21 per diluted share.

Now our balance sheet. At the end of the most recent quarter has grown significantly compared with the previous periods due to the addition of KU's operations. At December 31, 2015, cash, cash equivalents and investment securities totaled $192.8 million and total long-term debt outstanding was $1.16 billion reflecting a debt used to finance the KU acquisition. As we have said previously, our primary objective is to use our free cash flow to de-lever as quickly as possible.

Now, turning to our guidance. Before I begin, I'd like to remind everyone that our guidance includes amounts that are adjusted to exclude among others the effects of amortization of purchased intangibles, acquisition-related expenses, and other purchase accounting entries, non-cash interest expense as well as certain other items considered unusual or non-recurring in nature. Also, our guidance is based on a partial year of contribution from KU.

With that said, for the 2016 fiscal full year, we are reiterating the guidance we provided last week. Net sales in the range of $585 million to $595 million, adjusted gross margin as a percentage of net sales of approximately 62% to 63%, adjusted R&D expense in the range of $49 million to $51 million, adjusted SG&A expense ranging from $59 million to $61 million, Adjusted interest expense in the range of $50 million to $53 million. The adjusted effective tax rate for the full year in the range of 34% to 35%. And capital expenditures in fiscal 2016 in the range of $35 million to $45 million.

Regarding the phasing of the quarters in second half of fiscal 2016 profitability is skewed to the fourth quarter, due to modestly higher net sales and lower operating and interest expenses in the fourth quarter compared with the third quarter.

Our guidance for interest expense includes a benefit from the potential changes we are contemplating by refinancing a portion of our debt, primarily our 12% bonds. We have assumed a reduction in the overall effective interest rate by 1.25% on our total debt beginning in the fourth quarter of fiscal 2016.

With regard to other assumptions in our guidance, our full year guidance includes approximately $27 million of cost savings. Arthur will discuss our cost savings and restructuring plans in more detail shortly. And we are not anticipating any significant price increases in fiscal 2016.

With that, I will now turn the call back over to Arthur.

Arthur Bedrosian

Thanks, Marty. We remain positive about KU acquisition and excited about the opportunities ahead of us. The combined Company markets more than 100 products as 37 ANDAs standing at the Agency and another 51 product candidates in various stages of development. Our plans call for continued significant investments in research and development. Earlier this week, we announced a cost savings and restructuring plan to streamline our operations, improve efficiencies and significantly reduce costs.

I'll now turn the call over to John to discuss the plan in more detail. John?

John Abt

Thank you, Arthur. Our integration restructuring efforts focus on the categories of corporate offices, research and development, distribution, and operations. We've already taken action with the closing of our KU corporate head offices in Princeton and have initiated activities to transfer our manufacturing and packaging operations from our Philadelphia sites to our Seymour, Indiana facility.

We expect to complete the transfer of our manufacturing operations within three years with two-thirds of the volume moved to Seymour by the end of calendar 2017. Our plan includes the ultimate sale or closure of our Philadelphia production sites. We expect to complete the move of our packaging between June and September of this year. We accelerated this move to be able to capitalize on synergies earlier than our original plan called for.

We are consolidating our solid dose research and development functions in the Philadelphia area in order to capitalize on our existing product development strengths and the tablet rich resource -- talent rich resources of the northeast. Additionally, this will ensure close coordination with our corporate resources.

We've adopted a distribution model utilizing our existing Kremers Urban and Lannett distribution facilities that will be optimize our efficiency and cost structure while minimizing our business risk. The outcome of this plan is a sustainable, scalable, strong foundation that supports continued growth, leverages the combined company's assets, lowers our cost structures and enhances our competitive position.

The impact of these efforts are an immediate reduction of approximately 10% of our workforce that affects all of the above areas. Additional reductions over the next three years, primarily in operations, will decrease our head count by another 10% for a total reduction of approximately 20% of our current workforce.

In the 12 months following the close of the KU acquisition, we expect to generate approximately 40 million of cost reductions, which includes 27 million of cost savings in fiscal 2016. The 40 million of cost savings is primarily comprised of right sizing our R&D function which we estimate will contribute approximately 28 million in savings.

We currently estimate that the plan will generate annualized synergies of approximately 50 million by the end of fiscal 2018 and achieve an ultimate run-rate of approximately 65 million in savings by fiscal 2020. Approximately half of the final 65 million in savings is expected to come from the consolidation of operations.

I will now turn the call back to Arthur.

Arthur Bedrosian

Thank you, John.

With the overview we are now are going to turn to questions shortly, but I would like to point out that we continue to meet with customers to replace the revenues lost as a result of the key customer transitioning, its purchases at certain KU product lines. I am pleased to report that a portion of those revenues have been brought back to us. We also see the purchase orders coming in and certainly the merchandise is being invoiced out as we speak. So we are concerned that we will be able to bring all the revenue back and are working diligently to get to that point.

And now we will turn it over to questions, if anyone has any questions to ask us. So, operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And Elliot Wilbur is on the line. Please go ahead.

Elliot Wilbur

Thanks. Good afternoon. Just real quickly. I want to go back to some of your commentary from the last call, the update call, regarding I believe Levothyroxine. Arthur, you had talked about being able to secure supply certainty on that product of one of your largest customers, but it seem to suggest that there may have been pricing concession there or pricing conditions in the marketplace may not have been what you originally expected. But then you also basically reiterated your guidance for the full year in terms of sales expectations. So I just want to try and reconcile that. I don't know if you were expecting to do better and now you're basically expecting to do what you had originally expected or if there was just maybe some misinterpretation around some of your commentary on the levo market and that customer in particular?

Arthur Bedrosian

Well, there was a concession made on price in order to secure a three year commitment. So we -- you know, that's accurate. But remember in the marketplace we are also gaining market share every year as well. So sometimes when we anticipate what's going to happen if we know we are giving a price reduction, we can then predict that the revenue will reflect that going forward. What we don't know is that there might be offsetting purchasing going on in the market or more transitioning of innovative brands products to the generic of which we pick up a good portion of that. So that I believe is where the difference is. You know, we are doing our best estimate what the future revenues will be and, again, we try to be very conservative. So maybe in this case, we were being too conservative and we are finding that the reduction in revenue, because of the slightly lower price that we gave in the way of the concession in exchange, for the securing the business for a period of time wasn't going to be offset and fortunately it was. So I hope that clears it up. Just a matter of forecasting you could say and being too conservative.

Elliot Wilbur

Okay. Then additional follow-up question on some of the updated synergy estimates that have been provided particularly with respect to the long-term, I guess, specifically with regard to R&D. I mean, obviously, 28 million is a fairly big chunk of R&D spend coming out of the combine companies spending base. Just wondering at this point if there's been any material impact to the pipeline as a result of these updated or further rationalization activities?

John Abt

So, this is John. And let me state that when we looked at the synergies and the right-sizing of our R&D program as we brought these two very large R&D development efforts together, one of the things we focused on was ensuring that we're pursuing value – valuable products and products that are going to provide us with both the high probability of return and strong revenue.

The types of projects that we discontinued were low value projects or projects that we did not see a significant value or opportunity for years to come beyond 2020. So, as a result, we don't anticipate that impacting [indiscernible] our forward forecasts.

Martin Galvan

Elliott, the other – this is Martin. The other piece I'll add is, as we said last week, the KU operation running at a certain level of R&D expense on an annual basis. Some of the synergies we speak of were planned expenses by KU beyond what run rate would lead one to. So you know everything John said is correct but in addition the numbers might be a little misleading to the extent to which some of that synergy again that we speak up is eliminating planned expenses that were never actually triggered, but certainly were in the budget for KU for these months.

Elliot Wilbur

Okay. Thanks for the additional clarification, Marty. And then one last question for – for Arthur. Obviously, in the last couple of weeks you have had extensive discussions with both internal, external stakeholders and members of the financial community, and I guess in light of the – the retreat in your equity market value to put it mildly. Do you think that based on these discussions that were already significant misperceptions or misconceptions around this acquisition, its integration for or base business that should be addressed at this point?

Arthur Bedrosian

Yeah. I would say I agree with what you're saying. There certainly is a misconception. You could also argue that maybe there's a bit of a gambling going on that we were unable to deal with this. You know it's sad some of the people that encourage you to do acquisitions seems to be one that don't feel comfortable after you do them that you're capable of doing the acquisition.

Clearly, we got caught up in a perfect storm with regard to the interest rate and even getting the deal concluded. You know, instead of getting credit for getting the deal done everybody is looking at well maybe you shouldn't have done the deal in the first place. You know, we have to grow the business. We have to do what we can for the long-term benefit of the shareholders. We can't look at the incremental quarterly results all the time, because we realize that in this business you either grow or you go out of business. Our goal is to grow the Company and this opportunity came along to grow it.

The integration we've been trying to respond and letting people know how aggressive we're attempting to do the integration, and if they don't believe it they just going to have to wait around and see that we're going to be right. You know, it's not brain surgery we're doing here, but integration is a skill and we brought people onboard the Company that have the skill both as consultants and as employees.

Two of my officers have a lot of experience in integration. I don't think the Street is giving us any credit for that because if they know the backgrounds of these individuals they realize they've done a lot of integrations in their previous jobs, but nevertheless, there is this feeling out there that you took out too much debt, you took on too big a company and you're not going to succeed.

Well, you know, I can't do anything about people have those feelings except to say stay tuned because we're not stopping, we're not, not growing. We're being very focused on how we're doing the integration. We're not wasting money.

We're trying to avoid opportunities in R&D that don't appear to be opportunities from the day they were started because both companies including Lannett always have a large R&D opportunity. And at times, you look at the future of those projects and you say you know something there's too many people projected to be in this market and you drop some of those products.

So what we're doing now with the merger of the two companies is just taking a harder look at everybody's product line including our own.

Also, we touched on a problem that in our guidance for Lannett some shareholders said well there was a bit of a shortfall in your own numbers without the acquisition. Well, you know that is typical what happens in our business. We were expecting to do 20 million on one particular drug. We brought it back to the market because there was a shortage of the product, so it was not only an opportunity to jump in when people were looking for the product, but also get some higher margins on it.

Lo and behold, you know, the company that wasn't able to supply was able to solve their problems faster than we anticipated, so instead of doing 20 million on that drug, if I'm not correct Marty we did 6 million – we’re projecting to do 6 million instead. So there was some lost revenue there. But that lost revenue wasn't something we lost, that we had. It was revenue we were projecting to get but we didn't get because of the circumstances of changing market.

So but I think everybody perceive that is you lost business. With the [indiscernible] clearly there was more of a decline there, but that was not a big surprise. You know, we thought we would hold a 30% market share. We seem to be around 28. So we lost a little bit there.

But the rest of the product line is growing. The rest of the revenue is growing. And in some cases where we thought we would only do less than some of our key items we are doing bigger revenue streams from them. We are seeing more growth in those products. So I really think it's just a combination of people think that we're not going to be able to do this.

We're hoping with today's discussion and explaining and having John on the call because he is involved in the integration process that this is well in control and under capable hands and supervised by capable outside consultants as well as Marty and myself. So I'm very comfortable everything we're saying we're going to do we will achieve.

I hope that answers the questions because I don't know what else to do but tell people stay tuned. You know, I don't see any reasons for us not to be optimistic about all the work that we're undertaking here.

Elliot Wilbur

All right. Thank you, Arthur.

Arthur Bedrosian

All right. Thank you.

Operator

And the next question comes from Gregg Gilbert. Please go ahead.

Gregg Gilbert

Yeah. Hi, Arthur. It's related to what you were just talking about putting aside your market cap and with the market is taking short-term, but you've describe pricing pressures that you foresee which is not a new theme, the consolidation of the customer base as it is now and should it continue obviously making things difficult and it's obviously hard to find fairly value deals that are easy to integrate. So all that being said, do you think for a company like Lannett, one needs to keep all option open or are you very focused on the fact that your equity value is – there's a disconnect between your equity value and what you believe the value to be? I guess, the short question is, is it time to explore all strategic objections or is it premature to do so? And then I have a follow-up.

Arthur Bedrosian

Okay. Now, well, I'll say it would be premature to do that because if you look at Lannett, there was a time we were overvalued now we're undervalued. The worst thing we could do is just though up our hands because one, there's nothing wrong here. We will prove to the Street that we know what we're doing. We'll do the synergies. We'll do the consolidation. And there are some painful decisions we have to make and some of them well-known before we made the close – before we closed down the transaction that when we acquired them we'd have to make some very strategic changes in our operation, but we also know that we've outgrown our facilities.

And the question was, do we expand into that isle buildings we talked about expanding into which was one of our options, but it was going to take two years and $180 million before you could even get FDA to approve the site. It wasn't really an option for a growing company and since we wanted to not – sell ourselves and we wanted to grow expansion to acquisition was one of the options and the lo and behold this opportunity came up. We still like the opportunity. We still think together we're a better company, stronger, better facility. I mean, they operate out of a facility that's ten times the size of the one we operate out of and we are almost two and a half times the number of products we're making, but the FDA doesn't allow you to continue with old antiquated facilities. They want you to meet new requirements which would have meant that we didn't step-up to the plate and do something then the Company would have lost value.

I have to look at this from a shareholder's point of view of which I'm one and make sure that what I'm doing to grow this Company is going to succeed. Later on when I prove to the naysayers that we're able to do the integration and then some, you know, I would be more than happy to consider strategic options then but I'm in no mood to do that now. Right now the goal is let's get this job done, prove to the street we can do it. So that at least my value will go up to the average but all of pharma is down.

One of the biggest ones I'm shocked about has $340 offer on the table from a very large pharma and that's fluctuates the $70 discount to that price. I can't explain the behavior in the marketplace, why pharma is under attack right now other than the politicians, you know, throwing stones at our industry and industry that prevents disease and cures diseases, but it's a cyclical thing, nor was up, not able to down. We were up now we are down as an industry it's not just Lannett stock that suffered. So to my point of view its – there is no time to sit there and circle the wagons. We're going to go out there and take out all the comers.

Gregg Gilbert

Sure. Once you nailed this opportunity down and the Street believes what they believe, let's say a few quarters from now, is it totally an organic story from there, or do you continue to look for ways to diversify and get bigger in a world that's not too kind to sort of small generic only companies regardless of Wall Street's sort of short-term temperament?

Arthur Bedrosian

Well, right now we're still going down that path of looking at acquisitions and some other ones have come away that we previously looked at, so nothing has been cast aside and we haven't turned anything down. You know, we're certainly going to be somewhat of a challenge because when you have the debt load we have you can't sit there and be oblivious to it, so one of our goals is to bring down the debt and to look at acquisitions that help bring down that debt as well, that add value to the Company itself.

So we're continuing down the path. We haven't stopped talking to any of the ones we've been in discussions with and including one of the ones that we looked at a few years ago that we didn't do a deal with. So I would say that we're looking at organic growth, but that's not the way to grow in this industry. You do have to do acquisitions and we just have to buy time when they're willing to go back into our industry stocks and look at us as a growth industry.

Healthcare is one of those industries that doesn't suffer from seasonality, it doesn't suffer from a lack of patients, the demographics are favorable to us, especially for generic companies. There's no reason for our industry to be down, but it is and Marty and I will do something about it on Friday.

Gregg Gilbert

Let me ask you one more question somewhat unrelated. It's well known that Noramco [ph] might change hand. Do you have a view on what that does, if anything, to the structure of the controlled substance API market and what you are hopeful about?

Arthur Bedrosian

No, but if you really look at that market, it's a very attractive market. Everybody now wants to go there. You know, we started looking at it in 2005, of course, Lannett's has been in a long time now we are over a hundred years, but I'm saying as an industry a lot of people showing interest in that area all of a sudden. So it's only just supports what we have been saying we want to do all along.

In the case of Johnson & Johnson, it doesn't have the value it had to them originally because you remember when they owned the McNeill Labs and they had the Codeines, they probably had a vertical integration opportunity for themselves and as these products diminished in terms of importance to J&J, I could see them wanting to divest that subsidiary at this point.

But there's no doubt in ply mind someone is going to come along and grab it because it is a valuable asset and the growth in the controlled drugs industry is growing dramatically. And more importantly than anything else, there is more patents that appears in that area because of the abuse the current technology so it's a growth area of big pharma or a patented products. All those things bode well for that ram co, whoever buys it as well as for us with our subsidiary.

Gregg Gilbert

Thanks a lot.

Arthur Bedrosian

You're welcome.

Operator

The next question comes from Scott Henry. Please go ahead.

Scott Henry

Thank you. Arthur, there's been a lot of macro talk. I'm going to try to turn that around and focus a little more on the Lannett specific company business model. But first, I want to make sure you have a couple categories correct. Could you repeat, Marty, thyroid and cardiovascular?

Martin Galvan

Sure. Yes. Sure. Sure, Scott. So thyroid is $37 million, 432, 37.4 million, cardiovascular is 13.1 million.

Scott Henry

Okay. And on cardiovascular 13.1 is a pretty big number. Any thoughts on that? Should I expect, I'm guessing some ordering patterns? Should I expect that to kind of go down going forward sequentially?

Martin Galvan

Yes. The – when the cardiovascular category is one that sees the impact of the KU product line.

Scott Henry

Okay. So that is inclusive of some of the KU products...?

Martin Galvan

Correct. Correct.

Scott Henry

So should I think about that 13.1 is a kind of flattish category going forward? Or maybe even grow as it gets more KU?

Martin Galvan

Well, it gets a little bit more complicated is that that 13 only includes a partial quarter of sales. So we have to give you some other material to work with here probably. The – it's – let's put it this way. The Digoxin, we don't think end to this discussion anyway, so Digoxin in the quarter was about $6.5 million, which essentially it's down definitely versus last year, which was expected, right? We have talked about that all along here.

So, the remaining of that category is – there's also – one of the Lannett cardiovascular products, a smallish one. The rest of the $13.1 million is the KU product line. But the math you can play with to get a run rate I would say is Digoxin well we've talked about that for the full year so you can come up with a good reasonable run-rate for Digoxin, for the KU products, you know, the math would pretty much just say that, okay we had about five weeks of business in cardiovascular in KU and you could just extrapolate with that number and come up with a quarterly number for now it's actually run-rate.

Scott Henry

Okay. That's very helpful. Just knowing the KU is in there explains a lot. Keeping it on the categories you've given us these new four KU categories and the natural tendency is just to take that number and multiply it by three and but that would give me a sense of what the run-rate is for Q3.

Martin Galvan

Scott -

Scott Henry

Is there any new situations there?

Martin Galvan

Well, first of all bear in mind that again that's just five weeks of business there. You know -

Scott Henry

So that's what I'm saying if I treat that as a month the next quarter has three months, I multiply it by three, but obviously there maybe some noise too?

Martin Galvan

Yes. A little bit of noise. And then as far as using these come up with a quarterly number for these new categories using that for the rest of the year you're saying.

Scott Henry

Well, just trying to get a quarterly run-rate first, you know at work -

Martin Galvan

Quarterly, yes, as we just said – as we just said.

Scott Henry

Okay. Yeah. I think you answered my question that there was not any major deviation that should be factoring it.

Martin Galvan

I would say, yes.

Scott Henry

Okay. Shifting gears maybe a question for you, Arthur. I know you've got that expensive of 12% debt out there, but you're also sitting on $192 million of cash. The question is, how much of that cash do you need for working capital reasons and can you deploy some of that access cash just to pay down that debt? I mean that would seem to be the simplest adjustment to your capital structure.

Arthur Bedrosian

I'm going to let Marty answer that, because it doesn't take down all the debt. You realize that. It's 250 million and we only have 192 million.

Scott Henry

But it helps.

Arthur Bedrosian

Yes. But you don't want to leave yourself without any money because who is lending money to the farm industry today, you tell me.

Martin Galvan

....figure out in partial form, right. So the -- but its only one of the -- Scott to answer your question in the last call and it was in our prepared remarks this time around, we have retained a couple of high-level consultant to work with us on this and yes, you might say just take some of the cash and pay down that 12% bonds. There's restriction on partial payments. And other challenges within the paperwork, but then on the other hands at the end of the day we kind of say to ourselves at least anything is negotiable.

So our plan and what we are working on currently is with these couple of advisors what is possibly to essentially get to the -- which is the goal as you described it to be able to take down some of that 12% bond. And cash as far as what we need for working capital, yes, we -- we are going through that exercise right now, let's say okay what's a normalized run rate that we would need to have cash-on-hand and then seeing where we can go from there. So yes, these are all the opportunities that we're currently exploring.

Scott Henry

Okay. Thank you. And the final question on the ANDA pipeline, we are starting to see companies talk about action dates for responses on ANDAs pending at the agency. Can you talk about if you have any recent action dates where you have heard back or do you have any action dates coming up? Just trying to get a sense of that end of pipeline? And is there any visibility on it?

Arthur Bedrosian

We do have some. We do have some action dates, and we are getting some correspondence from the agency unlike in the past certainly. So there is some improvement in that area. And some of the action dates and the notices or the requests are somewhat challenging because they give you 10 days to respond.

So you know, we are in the middle of doing integration and consolidating and moving businesses around, let alone trying to get all that done, but we are doing it. So yes, it is -- there is some improvement I would see with the agency and we are expecting to gets a number of approvals on the KU side teen now and June 30th, somewhere in the neighbor 7 to 8 ANDAs should be approved.

But I say that tongue and cheek in a way because we're also expecting one for ourselves in January and it's already February 3rd, but we are expecting that one any day new. So I hate predicting these things because you know I never get it right. But yes, there is some opportunities in front of us going through to the end of our fiscal year with regards FDA and the action letters. But what I will do is, I will get that information and get it to you separately from my regulatory department.

Scott Henry

Okay. Thank you for the color on that, Arthur.

Arthur Bedrosian

Okay. Thanks.

Operator

Our next question comes from Matt Hewitt. Please go ahead.

Matt Hewitt

Good afternoon, gentlemen. A couple questions regarding the pipeline I guess for me. You did some rationale or you are going to be doing some rationalization of the R&D programs. How does the pain management or your targets in pain management, your targets in pain management, you previously talked about some pretty big goals to beef up that product category over the next five, six years. Has that changed or has that timeline pushed out given the KU acquisition?

Arthur Bedrosian

No, no. That is not been pushed out because the KU – excuse me, KU acquisition gave us more opportunities for the supply of our own raw material. I would say that some of the improvements that we're making at Cody are very exciting. For example, when he first worked on one of the raw materials, we were in a situation where I could buy the raw material in the market for roughly the same price as I could make it.

After some improvements in the technology, we now have a raw material that we could bring to our – to Lannett at a much cheaper rate than if we have to buy on the outside. And one of the advantages Cody has is it it's not stuck with antiquated processes, so Cody being the new kid on the block is actually making some innovative changes to the process, finding more economical ways to make the extractions on some of these opiates, so that it will benefit us going forward. That's really on a full steam.

We have Master Files -- Drug Master Files with the agency, the hope is we will be converting some of the products that we have at the Agency in dosage forms to use the raw material that Cody makes. So that plan is still moving ahead.

And we are doing some more research on the expansion of that site as well because we realize that as this company becomes more successful in supplying raw material, we need to be more focused and accurate on what our needs will be going forward, so we right size the expansion opportunity here.

I don't want to build something that's too big for my need. And I don't want to build something that's too small. So we're doing a lot of research there. But it's not been interfered with regards to the work we did for KU. Remember the two additional officers that joined the Company that have the integration background are not integrating Cody Labs. They're integrating the KU acquisition. They've integrated the Silarx one, fact the Silarx was a smaller one and somewhat easy to deal with. So, we are able to do all those things at the same time and nothing has been dropped in a way of any of our goals that previously spoken about.

Matt Hewitt

Okay. Well that's great. It actually leads into my second question. It sounds like you've got the one Lannett drug that could be approved any day. Sounds like you could have 7 to 8 approved by June from the KU and the portfolio. Have you set a target or is there something still in the works but have you set a target of number of ANDAs that you anticipate filing on any given year to kind of backfill that – that pipeline? I know Silarx provided you some incremental capacity that you have been lacking I would think that KU does the same. What type of goals are you anticipating setting on the ANDAs submission side?

John Abt

Okay. Guy, this is John, and I would make two – I have two responses to that. The first response is when we looked at combining our two R&D programs and right sizing it. Our first focus was getting the most out of what we already had filed. We wanted to make sure that where we have our money invested that we get a return on that by focusing on as Arthur pointed out responding quickly to the action dates that are now being provided to us and launchings these products. So we can get a return on that.

In addition to that, you know, we do have an active R&D program that is constantly looking for new opportunities whether it be in the area of P4 challenges or whatever the case may be. So I would say to you we don't have a specific magic number. I think it would be foolish just to say 20 for the sake of 20, because we don't want to make sure we're picking the right products that fit our strategy, that give us the appropriate returns. So yes, we will be looking at adding to that in addition to what we have in the -- in our pipeline right now.

Matt Hewitt

All right. Thank you.

John Abt

You're welcome.

Operator

Our next question comes from Andrew Finkelstein. Please go ahead.

Andrew Finkelstein

Hi. Thanks for taking the question. Could you just address anything else about the pipeline in terms of what can give some visibility as we think out to the pipeline for KU the detail in the seven to eight, this year is helpful, but you talked in more detail about for fiscal 2017 having 50 million to 60 million of revenue? What's in there and for these KU products you expect to get approved are you going to be ready to manufacture and launch immediately on approval, and how does that relate to the guidance you gave in terms of the revenue from launches in your fiscal 2016 guidance? Thanks.

Arthur Bedrosian

Well, before Marty jumps in because he might have an answer or some addition, we never generally talk about a launch and putting that in our guidance, because with FDA you never know when you're going to get the products. So it's hard to sit there and say, well, I'm going to have it in May, so I'll go ahead and start manufacturing in March so I have the product ready to launch, because sometimes you won't get until the fall and then you got materials sitting around with an expiration date or they might make us to change the labeling. So we generally don't do that. But I do believe that there was one product in our guidance if I'm not mistaken. Do you want to comment on that, the relative numbers about that?

Martin Galvan

Sure. We kind of touched on this last week, too. So yes, in our fiscal 2016 there are two products it's in our fourth quarter and in total there were about $9 million, Andrew.

Andrew Finkelstein

Terrific. And then on C-Topical only since last week but any updates in terms of meeting with FDA and the promotional launch?

Arthur Bedrosian

Yes. Well, we're waiting to hear back from the FDA so -- but that's not unusual setting up meetings doesn't happen overnight. There is a lot of people they have to get together on their side. We are comfortable with the position we are and we certainly want to show the enforcement side, excuse me, the compliance side of FDA where we are with the study. You know, we are co-operating with the FDA with regards to the pediatric study because remember, we're dealing with two different parts of the agency.

For the preliminary investigation into the drug application, we're working on that now will include pediatric studies. We are dealing with one part of the agency. The compliance side doesn't always know what's going on. So they're the ones that responded to the -- excuse me -- to the citizen's petition. And wouldn't need our -- an answer we intended to expect, but our lawyers said, look, you have to explore all your options with FDA otherwise you get [indiscernible] for not doing that.

So we aren't expecting a positive response, but they said you need to go through the action of requesting it any. And now we have the requesting to meet with the agency. That meeting will really involve our consultants to bring them up to speed on where we are with the Phase III study. We will certainly point out to the agency that our study is further along and moving faster than the typical Phase III even though you know and we have certainly admitted that we've been a little bit late with the study ourselves, partly our fault, partly the fault of our outside firms doing recruiting. The clinical lab that's certainly recruiting the patients, down with the 600 patients study, which is quite unusual for a 505(b)(2) application.

But nevertheless, on the scheme of things in looking at compare to Phase III studies, our studies are moving along faster than the typical study would do. Those would be the details we would provide to the FDA, so that they know, the compliance people will know that we're moving diligently and the application date for filing will be given to them, and then we'll be able to continue the pediatric studies as well because I know that's being developed in terms of the protocol that we're going to use for the pediatrics.

And of course, that will mean recruiting young people for that portion of the test. As you know that's a new requirement FDA want done with all the drugs. They want pediatric studies done so that there's a dose available for children under 18, I believe is the pediatric age, over 12 and under 18. So, all that's being done and moving forward.

Andrew Finkelstein

And on the commercial launch or the promotional launch?

Arthur Bedrosian

That was – we had that meeting on Tuesday, yesterday morning. I should remember. I was there, but I was out of town as well after that meeting. That started we have about 14 people at the last minute. Two of the candidates decided to not join us, which is a big surprising at the moment you invited the sales meeting, they decide they don't want to accept the position, but we do have now 14 people who will be out on the road, enthusiastic senior executives, when I say senior, I'm not talking about their age, but we're not talking about newbie. These are people that have been detailing products that they experienced people they know the space. So we're pretty comfortable that we will have a better result than we did when we used the CSO and my complements to Craig, who is running that – that department foresee was previously a product manager in this industry as well as I believe a detail person himself.

So there's a little more organization behind it. We're fully supporting it and we're not relying on a third-party who just didn't perform for us. So we're comfortable that this product will meet its projections. Yes, they are little aggressive, its projections, but I expect them to be a salesperson. I don't expect them to be pessimist. But I do feel that after meeting all the people there their enthusiasm for the product, their – their desire for more information from the clinical studies that they could share with the physicians was very, very interesting because they realize that there's a lot of physician that don't understands the value of this product. So we're very comfortable that this will do well under our supervision as opposed to outsourcing it.

Andrew Finkelstein

All right. Thanks very much.

Arthur Bedrosian

You're welcome.

Operator

One moment while I gather questions. And the next question comes from Corey Davis. Please go ahead.

Corey Davis

Thanks very much. I just have one question. And trying to get a sense for how concentrated your business is if you're willing to disclose this on a pro forma basis. Can you breakdown the types and numbers of measures that you sell to and something like 90% of your business goes to 5 or whatever the number is.

Arthur Bedrosian

Well, you know, if you look at everybody's 10-K to be frank as this question comes up I kind of challenge all of you to look at all of the generic companies for example and then look at their top customers in their 10-K and it's all the same customers. In the marketplace, you have a number of giants and if you have the joints you essentially have the great part of the market.

Those giants are Walgreens and CVS on the retail side and I'm presuming that Rite-Aid is part of Walgreens for the moment, so I'm not excluding them, but otherwise you would have three, but you really have the two big ones and then you certainly have -- you may have lot of firms and you have the three different sellers, AmerisourceBergen, Cardinal, and McKesso really make up the bulk of the business with the chains and a couple of mail orders. So let's say 70 customers, your top five probably are 80% of the volume for everybody and then you have all the rest. It's no different for us than anybody else.

And this question came up and someone actually did that and said you know, you're right, all of you report the same top five customers. So nothing is different for us. It's important that we do a good job in servicing them, because they have choices, obviously, and we are one of the better suppliers. So from our point of view and our customers, you know, they want to do business with Lannett because we don't have recalls every week, we don't have import alerts every week, we supply the products promptly, we don't back order.

That's important because the bigger you are as a customer, the more demand for products you have up and you can't tell a consumer I'm sorry I can't fill your prescription today. He will go next door. So they really need vendors like Lannett and that's one of our goals to continue to be a good supplier, carrying good inventories as we have done and pick up market share because we are a good supplier. We're still on a growth trend and KU just adds to that and certainly gives my sales people more things to sell. We now have 100 products to offer the marketplace.

I hopefully see going into our new fiscal year starting July that all of the consolidation is in place, that everybody has familiarity with all the products. We cross-pollinate amongst our customers or they're buying the KU and Lannett products and vice-versa, so that we could see that growth go forward. And any other integration -- excuse me acquisition or products with launches that we get will all add to that growth. I mean we have a bright future ahead of us. So I don't know what else to say.

Corey Davis

Sorry. I lied. I have one more. Is your biggest product.

Arthur Bedrosian

You don't want to say you lie. But I can't lie.

Corey Davis

Is your biggest product this year going to be your most profitable product?

Arthur Bedrosian

I will let Marty answer that. My biggest product.

Corey Davis

In revenue terms going to be your most profitable product.

Martin Galvan

Most profitable in terms of dollars I assume you mean, Corey?

Corey Davis

Yes.

Martin Galvan

Well, the -- the Levothyroxine is our largest product. The gross margin on the product it's above 50%. The -- you know, we have other products that have a higher percentage of gross margin but they're lower in dollars.

Corey Davis

I see. Okay. Yes. I should have said percentage-wise.

Martin Galvan

Okay. Well, percentage-wise at this -- I mean we kind of speak about this it would probably be ursodiol our most profitable product right from a gross margin perspective. It had been – as you know the story, big three on the Lannett side of the house, it's been Levothyroxine, Digoxin and Ursodiol. Levo is held at the higher levels now that we're seeing over the last – over two years now.

Meanwhile, Digoxin has kind of peaked and now coming back down as other – as there's other manufacturers in that segment. And meanwhile since what happened is that as Digoxin has been coming down that that decrease has been pretty much offset by an increase in Ursodiol, which is – and spells out look right now continues to be strong.

Corey Davis

Right. Okay. That's great. Thank you.

Martin Galvan

Thank you.

Arthur Bedrosian

Thank you.

Operator

And our next question comes from Rohit Vanjani. Please go ahead.

Rohit Vanjani

Hey, Arthur and Marty. Thanks for taking the questions. I missed what you said before. You had mentioned the product last week that with some luck could get approval this week. Was that your answer to Scott that where you had an action date at the end of January and now February 3 you hadn't heard from the FDA?

Arthur Bedrosian

That's correct.

Rohit Vanjani

Okay. And then were there any other LCI reporting segments besides cardiovascular that now include KU, Marty? So, from migraine for glaucoma, for gallstone prevention, for thyroid for antibiotic, more pain management. Was there something elsewhere KU was dumped in just like with cardiovascular?

Martin Galvan

I'm just checking. I believe that was the only one. And other than we have any other categories, we have some KU in there, so it's a smallish number. The KU had a smaller – has the smaller number of product categories molecules as compared to Lannett. So it's very much the categories the new categories we spoke to pretty much cover it. Yeah. Those – gastrointestinal, respiratory, central nervous system that covers the bulk of the KU products, you add in the cardiovascular KU products and you pretty much have covered it.

Rohit Vanjani

So it's cardiovascular and other that have KU in it?

Martin Galvan

Yes. The other – the KU in the other category is very limited.

Rohit Vanjani

Okay. And then can you say what the cardiovascular is ex KU, I think you gave it Digoxin number of -

Martin Galvan

Yeah, I gave the Digoxin number also in that category on the Lannett side – exactly, exactly, exactly which is about a $1 million in a quarter or so.

Rohit Vanjani

Okay. So it's 7.5 for cardiovascular without KU?

Martin Galvan

That's about right.

Rohit Vanjani

Okay. And then were there any inventories with Levo, Digoxin and Ursodiol that were out of bounds or are they all kind of at four weeks?

Martin Galvan

I think you will have to say that one again. What was that question?

Rohit Vanjani

Inventories – inventory levels with the wholesalers with Levo, with Digoxin, and with Ursodiol, are they all within kind of?

Martin Galvan

Yeah. I mean nothing for us – nothing unusual that we report.

Arthur Bedrosian

I would say nothing unusual.

Rohit Vanjani

Okay. Okay. That was it for me then. I appreciate you taking the questions.

Martin Galvan

All right. Thank you.

Arthur Bedrosian

All right. Thank you. Thank you.

Operator

We have no further questions at this time.

Arthur Bedrosian

Okay. Well, I want to thank everybody for joining us today and I hope you like the theme song we have picked. I certainly picked it because where we certainly seem to be under attack a little bit but I will leave by saying we'll keep standing. Thank you very much for your attention today.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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