Lannett Co Inc

Welcome to the Lynette Company's fiscal 2021 quarter financial results conference call. My name is Karen. I will be your operator for today's At this time, participants are in the listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Robert Gaffey. Robert, you may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Lynette Company's fiscal 2021 first quarter financial results. On the call today are Tim Crew, Chief Executive Officer, and John Kozlowski, the company's chief financial officer. This call is being broadcast live at www.lynette.com. A playback will be available for at least three months on Lynette'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 Lynette's press release announcing its fiscal 2021 first 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 press release issued earlier today. In a moment, Tim will provide brief remarks on the company's financial results as well as recent developments and associated initiatives. Then John will discuss the financial results in more detail, including the company's fiscal 2021 guidance. We will then open the call for questions. With that said, I will now turn the call over to Tim Crewe. Tim?

Thanks, Robert, and good afternoon, everyone. We hope you all remain well. At Lynette, we continue to manage through the pandemic and are grateful for the dedication of our teams standing behind our essential services. I'll begin with a brief review of our financial results. For the quarter, net sales were $126 million, which we view as a solid achievement given the reduced contribution from our largest product, Flufenazine, after a new competitor entered the market early in the quarter. Our gross margin was slightly lower than anticipated, largely due to more than expected competitive pricing pressures on some key products and associated customer inventory price protection. On the other hand, operating expenses were substantially lower during the quarter, anchored by cost reductions. You may recall that in July, we announced a restructuring and cost reduction plan, which will generate approximately $15 million in annual cost savings. That plan was initiated on the expectations of fiscal 2021 headwinds, and I'm pleased to report that the plan has been fully implemented. Adjusted EBITDA came in at $33 million and benefited from the aforementioned restructuring. Turning to our balance sheet, we ended the quarter with approximately $109 million in cash. Now, at the end of this month, we expect to use a portion of that cash to pay down in full our term loan A notes. This payoff will be an important and long-sought accomplishment and a moment that we will celebrate because paying off our term loan A's has multiple benefits. First, it will reduce interest expense going forward, a cost savings equal to approximately $3 million annually. Second, it will reduce principal payments by $27 million annually. And third, it will provide us with financial flexibility as our remaining debt, the term loan Bs and convertible notes, have no financial covenant ratios. Of course, once the term loan As are paid off, we will increase our attention on addressing our remaining debt. Our term loan Bs mature in just over two years, which gives us runway to continue to evaluate a number of forward financing options. John will discuss our financials in more details later, including efforts to further enhance liquidity. Turning to our commercial highlights, we launched four new products during the quarter, namely Lidocaine 2% Topical Solution, Mixilatine, levorphanol, and levothyroxine tablets. Of course, these products contributed only a partial quarter of sales, so we expect to see quarterly sales from these products to increase going forward. For example, sales of levothyroxine tablets during the quarter was just north of $3 million. We anticipate additional quarterly sales and market share, as our customers have now largely worked through their previous inventory of this product from their previous suppliers. And earlier this week, we announced we commenced the marketing of all 12 dosage strengths of the authorized generic of Triocin, or levothyroxine sodium capsules. The Acuvia market for levothyroxine capsules is approximately $111 million, although in-market generic sales will be lower. Levothyroxine capsules complements and is an addition to our levothyroxine tablets product. We expect another supplier will enter this market in due course with a subset of strengths. Currently, the other expected supplier has approvals on strengths that represent around 25% of the market with, based on litigation records, perhaps another 35% of other strengths filed but not yet approved. Thereafter, given the intellectual property landscape, we believe we will remain one of only two suppliers of the generic product for an extended period of time. and the only generic supplier with all dosage strengths. Thus, we think this product could be a sustained contributor to our business for some period of time. During our current quarter, we have also launched azithromycin IR tablets, 250 milligram and 500 milligram, but in 30-count bottle sizes only. Now, looking to the cadence of future launches. In addition to the 12 products launched in the last seven months, which includes the six products launched fiscal year to date, our plan is to launch about another seven products over the balance of fiscal 2021, including possibly a first-to-market generic Zolmatriptan nasal spray toward the end of the fiscal year. We are pleased to note that the average value of our products continues to increase, thus suggesting more value on the investments we make. Turning to our pipeline. We now have more than 20 products in development, another 14 ANDAs pending at the FDA, including partner products, plus a couple of other products that are approved and pending launch. Next, regarding our biosimilar product, as often noted, we have partnered with HEC to develop a biosimilar insulin glargine for the US market. And as we said on our last conference call, a team from Lynette and HEC met with the FDA in June to review the so-called CMC data. chemistry, manufacturing, and controls, and to discuss the clinical advancement of a biosimilar insulin glargine. The FDA provided encouraging guidance that leads us to believe that we remain on track to file a BLA in calendar year 2022. More recently, HEC has now substantially completed construction of a large new plant that will include eight 12,500-liter reactors creating substantial product capacity for insulin where the U.S. demand is measured in many metric tons. And HE stands ready to build more plants as needed. For our part, as requested by the FDA, we are in the process of developing the Healthy Volunteer Protocol along with a statistical analysis plan for the FDA for their feedback. Their positive feedback will allow us to commence the required study as soon as a clinical trial material from the new plant is available. and we will be looking to show, once again, our product to be highly similar to US Lantus. We expect to initiate the clinical trial next year. Note, given the investment required to build a dedicated insulin facility and the need to conduct clinical trials, we are able to track other potential competitive efforts over time. At this time, we continue to believe that there will be no more than four other competitors to Lantus and HEC's insulin by the time we expect to launch our product. As a result of all this context, we continue to believe a U.S. launch of the product is quite possible in calendar year 2023. Based on standard assumptions and given reported in-market realized sales of around $3 billion, just a 10% market share at affordable prices well below prevailing rates could be worth more than $200 million annually. Turning to generic Advair, another potentially durable product for us. The pivotal PK trials for the 25050 and the 550 strengths have been completed by our partner, Respirant. The data is currently being analyzed. Assuming the data is acceptable, we plan to submit the ANDA around the end of this calendar year or early next calendar year. Depending on the quality of our submission and the FDA review time, we believe a US launch of the product is possible next fiscal year. Based on standard assumptions, we anticipate some sales at the end of fiscal year 2022 and substantial net sales for fiscal year 2023. As discussed in our last call, we believe drug and device respiratory markets are generally large, durable, and growing. We expect to continue to in-license additional pipeline opportunities over the course of this fiscal year. Stepping back to the broader market, As we have all seen, the duration of COVID-19 has been associated with a modest decrease in the total number of prescriptions written compared to previous periods. And that decline is in contrast to a longer-term trend of increasing prescriptions. The net of these effects does have a marginally negative effect on our overall business. Also due to the pandemic, fewer elective medical procedures are being performed. This has negatively impacted sales of our Nombrino product. which carries a higher than average gross margin. Last quarter, we sold less than a million dollars. We'd hoped to at least double our volume once the pandemic subsides. Moreover, the average number of existing competitors at FDA approval of a product has continued to trend upward, resulting in increased product pricing pressure on less durable marketed products. Of course, our plan to navigate this market remains focused on launching new products, and managing our costs, all while building and advancing a valuable, diversified, and durable portfolio of future drug candidates. To sum up, we reported a solid quarter of net sales and EBITDA of $33 million, despite a new competitor for Flufenazine. Flufenazine was our largest and most profitable product last year. We launched four new products in the first quarter of this fiscal year. And earlier this week, we initiated marketing of an authorized generic of levothyroxine capsules. We believe this product will be a sustained contributor to our business. We fully implemented a cost reduction plan that we expect to generate approximately $15 million of annual cost savings. As a result, we are affirming our previous fiscal 2021 failure guidance. Our outlook assumes no additional competition for flufenazine or posiconazole, a partnered product, until late this fiscal year, along with a continuing launch of new products and lower operating expenses. Later this month, we plan to pay off, in full, our remaining Term A loan balance. Once paid off, our annual interest expense and principal payments will be $30 million lower annually. Further, our remaining debt has no financial covenant ratios. The development for biosimilar insulin glargine continues to progress. HEC's new dedicated insulin production facility is nearing operational readiness, and we will soon be seeking FDA feedback on the Healthy Volunteer Protocol so that we can commence what we expect to be the sole remaining clinical trial. We believe we remain track on filing the ANDA for generic ADVER around the end of the current calendar year or early next calendar year. Most importantly, we will continue to manage our expenses and look to optimize our product offering while growing our portfolio. Thus, we still expect to be a billion-dollar company by 2025 with a gross margin percentage in the low 30s. With all of that, I turn the call over to John. John?