Lannett Company's (LCI) CEO Tim Crew on Q2 2022 Results - Earnings Call Transcript

Feb. 03, 2022 8:52 PM ETLannett Company, Inc. (LCI)3 Comments1 Like
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Lannett Company, Inc. (NYSE:LCI) Q2 2022 Earnings Conference Call February 3, 2022 4:30 PM ET

Company Participants

Robert Jaffe – Investor Relations

Tim Crew – Chief Executive Officer

John Kozlowski – Chief Financial Officer

Conference Call Participants

Scott Henry – ROTH Capital

Janet Smith – Raymond James

Operator

Welcome to Lannett Company Fiscal 2022 Second Quarter Financial Results Conference Call. My name is Adrianne, and I'll be your operator for today's call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]

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

Robert Jaffe

Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2022 second quarter financial results. On the call today are Tim Crew, Chief Executive Officer; John Kozlowski, the company's Chief Financial Officer; Maureen Cavanaugh, our Chief Commercial Operations Officer; and Steve Lehrer, who leads our insulin biosimilar initiatives. This call is being broadcast live at www.lannett.com. A playback will be available for at least three months on of the information discussed on today's call is covered under the safe harbor provisions Lannett's website.

I would 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 refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Lannett's press release announcing its fiscal 2022 second quarter financial results for the company's reasons for including 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 the company's earnings press release issued earlier today. Shortly, Tim will provide brief remarks on the company's financial results as well as recent developments and initiatives, then John will discuss the financial results in more detail. We will then open up the call for questions.

With that said, I will now turn the call over to Tim Crew. Tim?

Tim Crew

Thanks, Robert, and good afternoon, everyone. We hope you have been well and safe since our last call. I'd like to start today by extending our thanks and appreciation to Paul Taveira, who ably served as a member of our company's Board of Directors for the last 10 years. As a trusted adviser, Paul provided insights and guidance to the management team and helped shape the company's strategic direction. We thank Paul for his long service to Lannett. For now, our Board will consist of 6 versus 7 members, all 6 of whom were reelected at our Annual Shareholders Meeting held last week.

Turning to company business. I'll begin with some context on our second quarter financial results, then provide a progress update on the restructuring plan we announced in November. I'll then discuss our pipeline, including recent developments related to the more durable assets in our portfolio. As we have discussed over the last few quarters, the pricing environment in the generic industry has been exceptionally competitive. While there may be a number of reasons for the situation, we believe perhaps the primary cause is related to fewer approvals of newer generic products, particularly important to manufacturers and customers alike, and relatively higher number of approvals and related launches for older and already competitively priced oral generic products. Thus, the competitive pricing environment we currently find ourselves in has intensified beyond historical norms and our recent expectations. This is obviously an industry-wide phenomenon, which has been independently reported on by research analysts covering the prescription drug sector.

The effect of this deteriorating price environment contributed, as you would expect, to net sales and gross margin that were lower than our internal estimates. We experienced incremental competitive pressure across our base portfolio and a few of our key products. A knock-on effect of the expanding supply and lower pricing has been fewer opportunities for Lannett to step in to help customers with supply disruptions. A market that are reliable and predominantly U.S. based supply chain is well positioned to capitalize on. While we believe with time, such opportunities will reemerge, we have notably reduced our expectations for such business over the balance of this fiscal year.

Finally, while the finished dose markets appear to have been remarkably well supplied during the pandemic, we have suffered unexpected episodic API supply disruptions or issues, which have pushed back time lines for certain pipeline products that we had expected to launch this year, including zolmitriptan and sevoflurane. In a moment, John will discuss the numbers in more detail. I do stress, however, that we are not sitting back merely watching events unfold. In fact, we have and continue to take several actions to mitigate the impact of the current pricing environment.

First, by adding new products to our pipeline, both organically and through value-adding partnerships. I will discuss this in greater detail shortly. Second, looking to increase the productivity and profitability of our pipeline by being even more selective in our development processes, that I will also elaborate upon. Third, by vigilantly reducing costs when and where possible and continue to execute upon a restructuring and cost-reduction plan. And fourth, by remaining prepared to leverage our reliable and predominantly USA supply chain to opportunistically address supply chain disruptions while helping customers and generating valuable revenues. While the timing and scope of these opportunities cannot be predicted, we remain ready for them to emerge.

At the same time, we continue to execute on our strategy of advancing our pipeline of more durable products, which we believe positions the company for growth and improved performance. Concurrently, we also emphasized the importance of our cash position. Maintaining adequate cash levels to support our operational needs since the launch of our durable pipeline remains a key focus. As a point of reference, our cash position was approximately $98 million at December 31, 2021.

Turning to the restructuring and cost-reduction plan, which we expect, upon completion, will generate approximately $20 million of savings. We are making excellent progress, and we anticipate the initiatives associated with the plan will be largely completed by the end of the current fiscal year. With regard to those initiatives, first, we have completed the streamlining of our internal R&D function, which included reducing headcount and eliminating development at the Carmel, New York site and discontinuing future development programs targeting liquid generic medications, where we have seen declining returns and inadequate scale to justify further investment. At the same time, we intend to reinvest some of the savings into lower cost overseas contract development to augment our internal efforts.

Second, we have completed targeted headcount reductions throughout the organization, including staff at our Seymour, Indiana plant and corporate headquarters in Trevose, Pennsylvania. Certain functions have been consolidated and workloads redistributed. All levels of the organization have been examined, even to the board level, as previously mentioned. Third, we've identified and begun phasing out the production of certain low-value products at both the Carmel and Seymour sites. We have also begun the process of transferring manufacturing of certain liquid products from our Carmel facility to our main plant in Seymour. We estimate this effort will take some time into fiscal 2023 to complete. The process requires, among other things, fairly routine technical transfers, regulatory clearances and a modest investment in equipment and facilities at the Seymour plant.

And finally, we have completed the sale of our former operating site in Cody, Wyoming and our advanced discussions for the sale of our Carmel plant. We are optimistic that we will sign a definitive agreement for the Carmel site in the near future. We'd expect the new owner would largely retain employment and facilitate aforementioned transfer work as well as certain product production for a period of time. As we have previously said, the restructuring plan will be implemented in phases, and most related actions will be completed by the end of this fiscal year. Having said that, we expect to see some cost savings by the fourth quarter of the current fiscal year.

Now let's turn to our pipeline. As noted last quarter, we spent a lot of time addressing our respiratory and biosimilar insulin opportunities due to the potential scale, value and durability of these assets. Nevertheless, we also invest significant time and energy in other diversified dosage forms beyond the regular immediate-release Stadol medications, those subject to the increasing competition.

Given the pressure we have articulated on our current portfolio, we will provide a bit more color on products that may come to market next year ahead of the larger assets we typically focus on. So looking to fiscal 2023, we are working to launch several meaningful products, including sevoflurane, which is the solution for inhalation. We had expected to launch sevoflurane this year, but subsequent to a successful facility inspection an API amendment was made, pushing our target action date to August 2022. Sevoflurane is roughly $190 million market according to IQVIA, although in-market generic sales are expected to be lower. There are four other providers currently. A gross margin contribution in the low double-digit millions is our current expectation for this product next fiscal year.

In addition to sevoflurane and the aforementioned generic zolmitriptan, which is a nasal spray, we are also advancing our sucralfate oral suspension, which has a fairly difficult bioequivalent in vitro studies. We expect to file the product this quarter. It has potential gross margin contribution in the high single or low double-digit millions of dollars. If we achieve a first cycle review, contributions may begin next fiscal year. Moreover, we are in advanced discussions to secure a generic Lialda with an existing partner. Generic Lialda also has a challenging development program. Our existing partner expects to file the product within the next few months. Full year gross margin contribution could again be in the high single to low double-digit millions of dollars, and some of that is possible next year.

Similarly, we are optimistic that we'll add a generic CHANTIX to our portfolio soon and launch the product next year. However, we're advancing the expansion of our [indiscernible] collaboration, which is the brand we produced for Nuance and which is sold into China. We have a fairly unique approval from the China FDA for our U.S. plant. That expanding contract manufacturing work might add mid-single-digit millions of dollars in profits to our organization next year.

Given we now have excess capacity at our Seymour plant, we believe we are just scratching the surface on such contract development and manufacturing opportunities to leverage our high-quality and reliable plant beyond its value as a generic manufacturing site. For those of you listening that know of firms looking for such easily accessible, high-quality and reliable pharmaceutical development and manufacturing, do send them our way. The point of all this is that we have many "irons in the fire," and we have been seeking ways to leverage our assets. We don't expect every opportunity will be culminated, but we also don't expect our current trends to continue unabated through next year and the team is working hard to make that happen.

We have also, for some time, been emphasizing portfolio development in areas less impacted by the increasingly commoditized regular solid oral generics. While we still pursue transformational value in our insulin aspirations, we have continued to invest to strengthen our core business with both internal and external opportunities. Overall, we have 11 ANDAs pending at the FDA, including partner products plus four additional products that are approved and pending launch. We also have about a dozen products in development and more under strategy review. As noted above, we expect to add more to our pipeline from external and internal efforts.

Turning now to three durable respiratory products with our partner Respirent. I'll start with generic Advair Diskus. The product currently closes to commercialization. As we discussed on our last call in November, the FDA provided mid-cycle disciplined review comments on the pending ANDA. We have and continue to respond to the agency's comments and requests and remain delighted with their level of engagement. However, the FDA-assigned goal date has moved to the end of the month related to an API amendment. As previously disclosed, we expect the product to undergo more than one review cycle. We believe and are planning for a launch that is possible later this calendar year or early in 2023, but we await FDA feedback before we can further refine our expectations.

We also note that since our last call, Teva, who already promotes a dry powder inhaler of a combination of fluticasone and salmeterol, received an ANDA approval referencing Advair Diskus. We have not heard of a commercialization plans. Meanwhile, the only other filer we are aware of, Cipla has noted in their earlier earnings calls that their file was under FDA review and they were targeting an approval in their fiscal 2023. The second most advanced product in our respiratory pipeline is generic Flovent Diskus. We successfully completed a 450 subject PD trial last summer and a favorable initial results on the 100 microgram PK trial, a PK trial for the 250 microgram should begin this month. We are currently planning an ANDA submission early next fiscal year.

Regarding generic Spiriva Handihaler with our partner Respirent, the development art for this product should be approximately 18 months behind the generic Flovent Diskus product. We look to initiate a pilot PK later this calendar year. Next, regarding biosimilar insulin glargine, a long-acting insulin product we are co-developing with our partner, HEC. About six weeks ago, we announced the submission of an investigational new drug application with the FDA and about two weeks ago we announced the FDA completed the safety review of the IND and concluded that we may proceed with the proposed clinical investigation.

So while the product won't contribute to next year's sales, the time it could contribute sales is certainly drawing nearer. We anticipate the pivotal clinical trial to commence next month and will be completed by early next year. If the trial is successful, we would anticipate filing the biologic license application shortly thereafter and, if approved by the FDA, potentially launching the product by early 2024. The commercial opportunity for insulin glargine we believe remains significant and interchangeability we think will accelerate access and penetration. We believe a 15% market share, which we expect to have the capacity to supply, is worth approximately $300 million annually in net sales.

The second insulin product in our pipeline, biosimilar insulin aspart, is a fast-acting insulin that we are also co-developing with HEC. Development of this product is approximately a bit more than one year behind insulin glargine. Our partner is already producing product at a commercial scale and assuming analytics proceed as they have already, we'd expect to file an IND in the first half of next calendar year. We believe a 50% market share of the insulin aspart market is worth in excess of $100 million in net sales. Finally, activity for our business development team has been picking up as pandemic restrictions subside. In addition to traditional product in-licensing, often with established partners pleased with our performance, we are also seeing new opportunities in contract manufacturing, injectables, authorized generics and other types of asset monetization. We hope to be able to share some successes in these areas soon.

I'll now turn the call over to John to review the financials. John?

John Kozlowski

Thanks, Tim, and good afternoon, everyone. I'll begin with our financial results on a non-GAAP adjusted basis. As Tim mentioned, our financial performance was lower than we anticipated due to the impact of a particularly competitive environment on our base oral generic business. For the 2022 second quarter, net sales were $86.5 million compared with $133.9 million for the second quarter of last year. Gross profit was $9.7 million or 11% of net sales compared with $31.1 million or 23% of net sales for the prior year second quarter. Interest expense increased to $12.9 million from $10.5 million. Net loss was $15.9 million or $0.39 per share versus net income of $3.2 million or $0.08 per diluted share. Negative adjusted EBITDA was $1 million.

Turning to our balance sheet. Even with the challenges mentioned above, we continue to maintain a solid cash position. At December 31, 2021, cash and cash equivalents totaled approximately $98 million. We still expect to end the current fiscal year with close to $80 million of cash, despite an anticipated delay in receiving approximately $20 million of income tax refunds. We originally expected to receive the tax refund in the current fiscal year. We now anticipate receiving this amount in the first half of next fiscal year.

As for our liquidity, we also have access to our credit facility, which to date, we have not drawn upon. At December 31, total debt was approximately $645.7 million, comprised of first lien senior secured notes of $350 million, second lien notes of $209.4 million and convertible notes of $86.3 million. I'd like to note that our Q2 GAAP financial results included noncash asset impairment charges of $49 million, primarily related to the November 2021 restructuring plan and ongoing competitive pressures.

Turning to our revised guidance. For fiscal 2022, we now expect net sales in the range of $335 million to $360 million, down from $370 million to $400 million; adjusted gross margin as a percentage of net sales of approximately 14% to 15%, down from approximately 19% to 21%; adjusted R&D expense in the range of $23 million to $26 million, down from $25 million to $28 million; adjusted SG&A expense ranging from $55 million to $58 million, unchanged; adjusted interest expense of approximately $52 million, unchanged; the full year adjusted effective tax rate in the range of 23% to 24%, up from 22% to 23%; adjusted EBITDA in the range of $0 to $8 million, down from $22 million to $32 million; and lastly, capital expenditures to be approximately $10 million to $14 million, unchanged.

Regarding the phasing of the quarters, we expect to begin to see the impact of the restructuring plan in the fourth quarter, with net sales coming down as a part of product rationalization efforts and gross margin increasing. More specifically, we expect Q3 net sales to be comparable to Q2 followed by a decline in Q4; gross margin to ramp up in Q3 and Q4 from Q2; total R&D expenses in Q3 and Q4 to increase from Q2, largely related to costs from our insulin development program; and SG&A expenses in Q3 and Q4 to be comparable to Q2.

With that, I would now like to turn the call back over to Tim. Tim?

Tim Crew

Thanks, John. To sum up today's remarks, our core strategies remain in place, and our cash levels remain substantial. We see accelerating new portfolio opportunities emerging by fiscal 2023 to help strengthen our business. We currently estimate the combined opportunity for biosimilar insulin glargine and insulin aspart products at a 15% market share to be worth approximately $400 million annually in net sales. However, we have revised down our fiscal 2022 guidance to reflect the increasingly competitive environment for our base oral generics portfolio, fewer opportunistic supply requests on that portfolio and the delay of the sevoflurane launch.

We have made solid progress on our restructuring plan to become a leaner, more focused organization. The plan is expected to be substantially completed this fiscal year and generate annual cost savings of approximately $20 million. Our pending generic Advair Diskus ANDA continues to make its way through the FDA review process, while our IND for biosimilar insulin glargine has been cleared by the FDA for a pivotal clinical trial. We thus expect to commence that trial next month. We anticipate both these and our other potential pipeline medicines can contribute significantly to our future sales.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Henry from ROTH Capital. Your line is open.

Scott Henry

Thank you and good afternoon. I guess just starting with a big-picture question. The generic industry, as it its name would suggest, tends to be a cyclical industry. The macro environment seems like it's even worse now than it was a quarter ago, and it was worse than before. Do you get a sense that we're approaching kind of a bottom to that cycle? I mean, at a certain point, people stop filing ANDAs and becomes less crowded because the reward just isn't there. Do you get a sense if we're starting to reach that bottom of the cycle?

Tim Crew

Good evening, Scott. It's Tim Crew. I certainly think there are many sectors of the generic environment still quite attractive, right. We're still working hard towards developing those products, which are a little less subject to the level of competition and price erosion that you're speaking to. And I think at some level, that's our focus of our portfolio. As it relates to the core older generics, which are receiving that level of pressure, as noted out there by several of the analysts, the erosion even last quarter was accelerated significantly over any historical norm.

The last period of this level of inflation that I have seen was really following on a period of price inflation, which is not the case in this situation. So it would feel to us and my sense of structure is that it's hard for it to accelerate anymore. But I don't know that there is a significant supply chain coming, a change in supply that's going to necessarily strengthen our expectations near term. So we are planning to deal with the environment we find ourselves in, keeping our costs down and working towards products in this much larger sea of generics, which are not subject to the sort of core level of erosion, which typically is a little outside the oral immediate release less complex products.

Scott Henry

Okay. Would you expect this fiscal fourth quarter to be the low water mark? I mean, obviously, there's two things, there's the base business erosion, but you also have the new products coming on. Do you think it starts to get better after fiscal fourth quarter? I mean, obviously, there's some subjectivity to that answer.

Tim Crew

It's hard for me to predict what the industry would do. I have been surprised it's gone down past its historical norms and accelerated past that. We are not counting on a rebound as it relates to that market to drive our results, and we'll focus in on those products in our portfolio and our development and with our partners that aren't subject to those levels of pressure. So we're anticipating the world is the way we see it and then looking to improve our position by bringing out the right products with the right cost structure and keeping our cost down.

Scott Henry

Okay. And then looking at the specific revenue segment, it looked like thyroid deficiency or endocrinology, as it's now labeled, was a little stronger. How do you expect that category to be going forward? And also cardiovascular, do you think that's starting to bottom out? Or what's leading kind of the lower numbers from Q2 through the end of the year?

John Kozlowski

Hi, Scott. This is John. So let's first start with the endocrinology. We did come up a little bit going into Q2 from Q1, and we think that will continue into Q3 and Q4. Some of that increase just – was just in the levo tab caps. But overall, we think that's still going to be a good category for us. Cardiovascular is the same. We did come down in Q2. Specifically, we were – we saw a decline in Verapamil. But overall, we think that will come up a little bit in Q3 and Q4.

Scott Henry

Okay. Then I guess could you just give us a sense of where we would expect? Obviously, if you're expecting, I think, Q3 to be similar to Q2 and then a decline in Q4, where would you expect the decline to be coming from?

John Kozlowski

Well, we have a few different categories, I'll say first on CNS. We're modeling right now a pretty significant decline across a few different products, the [indiscernible] and a few others. On top of that, we saw infectious diseases come down pretty significantly. We had modeled that and talked about that in the last quarter, but we're also showing some declines going into the back half of the year. And then finally, in Q4, through some of our product rationalization, we'll see an additional decrease in sales. At the same time, though, our margin percent should come up a bit in Q4.

Scott Henry

Okay. Final question, if you could. The asset impairment of, I think, it was $49 million. Could you speak to what specific asset was impaired? Are there a couple of products that you took a write-down on just any specificity on that?

John Kozlowski

The biggest portion of that would be the intangible assets, specifically around our portfolio rationalization. We took down our – around 40-some million of our intangibles associated with – originally with the KU acquisition, so it was a non-cash event.

Scott Henry

Okay, great. Thank you for taking the questions.

Tim Crew

Thanks, Scott.

Operator

And our next question comes from Elliot Wilbur from Raymond James. Your line is open.

Janet Smith

Good afternoon. This is Janet Smith on behalf of Elliot. We have a few questions. First, why has the tax refund been delayed? And is there any dispute with respect to the amount?

John Kozlowski

Hi. This is John again. So no, there is no dispute. I think some of that delay – again, we were estimating a certain time frame, but we think some of the delay might just be COVID-related, just staffing issues. But ultimately, we're still expecting that this calendar year, just we're not forecasting it in Q4. We're now putting that into Q1 or Q2 of next year.

Janet Smith

Okay. Also, you mentioned in the press release, you expect fewer new products, supply requests in the second half. Our clients are asking us if this is because the supply chain is concerned about your financial condition or is there another reasons?

Tim Crew

No. That's not the case at all. From my perspective, to be clear, the same economics that are driving prices down in the market is expanding supply. And so the supply of the industry has been remarkably resilient in this most recent period. And therefore, we're getting less request because there's less shortages elsewhere. That's all that I'm trying to communicate.

Janet Smith

Okay. And where are you in your product rationalization efforts? Is it having a favorable impact on margins? And given your margins have fallen to, might you consider retaining these products and harvesting them for cash?

John Kozlowski

We'll start with the first part on the product rationalization and the margin impact. As we said, Q4 is where we expect to see the biggest impact of that, so where sales will come down a bit. We expect, as part of our cost savings, we'll see our margin both the dollars and the percentages tick up a bit. Others are also just on as we're consolidating the plants, as we're moving products over from Carmel into Seymour. There will be an additional decrease in our overall product decline. And ultimately, though, it is to increase our profits. And we should see the biggest impact of that as we go into next year.

Tim Crew

I would also note that given the environment that these products are competing in, that the selling price was pretty much at our COGS for some of those products. And so coming out of them after we deal with customer needs for an orderly transition to another supplier, we'll generate cash coming out of the working capital environment. So this is actually positive to our cash, not negative.

Janet Smith

Okay. And last question, the revised sales guidance range at the high end suggests top line to be flat over the next two quarters. What are the biggest swing factors between the high end and low end of your revised guidance? And is it primarily external, meaning pricing and competition or internal meaning new launches?

John Kozlowski

So, again, this is John. So our guidance reflects, I think, just some of the pressures that we were seeing as we were seeing at the end of this calendar year and going into next year. But ultimately, the ranges are – some of it would be just timing of overall launches, but ultimately, the impact of some of our expectations around the increased competition.

Tim Crew

There is also some swing as we work with our customers on the timing of the ultimate exit that could affect the total sales value of it for those outer quarters. So it's a mix of launches. It's a mix of pricing environment. It's a mix of some of the rationalization.

Janet Smith

Okay, great. Thank you Tim and John for your time.

Tim Crew

Thank you.

John Kozlowski

Thank you.

Operator

And I see no one else on the queue. I'll now turn the call back over to management.

Tim Crew

All right. It's Tim again. Thanks for joining the call. And as always, thanks to our employees, customers and partners, all working hard to provide high-quality, low-cost medicine for patients. We look forward to sharing our progress on our next call. Good night.

Operator

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

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