Lannett Co Inc

Welcome to the Low Net Company Fiscal 2021 Second Quarter Financial Results Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. Please note this conference is being recorded. I'll now turn the call over to Robert Jaffe. Robert Jaffe, you may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Lynette Company's fiscal 2021 second quarter financial results. On the call today are Tim Crew, Chief Executive Officer, John Kozlowski, the company's Chief Financial Officer, and Maureen Cavanaugh, our Chief Commercial Operations 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 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 press release issued earlier today. This afternoon, 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 revised 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 trust you all remain safe and well. I'll begin with a brief review of our financial results. For fiscal 2021 second quarter, net sales were $134 million and adjusted EBITDA was $24 million, which exceeded and met our expectations, respectively. We overcame several challenges in the quarter, driven by a strong performance of certain key and line products, such as posiconazole and fluthenazine, as well as the launch of levothyroxine capsules and a full quarter of sales of the new products we launched in Q1. This was partially offset by lower than expected sales of sumatriptan and metroprolol ER, which I'll review further in a moment. Our gross margin was lower than anticipated, largely due to more than expected competitive pricing pressure and associated customer inventory price adjustments, along with a few out of the ordinary items. We expect some of these pressures to continue and others to abate. An example of new competitive pricing pressures involves Sumatriptan nasal spray. Our ANDA was approved in 2016, but late last year, a second ANDA was approved some four and a half years after our approval. This approval, of course, was on the heels of a new Flufenazine competitive approval at the start of the fiscal year, the first such new approval in over a decade. The back half of 2020 was certainly not fortuitous for us. An example of an out of the ordinary item last quarter is that we discontinued 23 products at the end of the year as part of a portfolio rationalization of unprofitable products. We obviously look to be thoughtful about the returns of the products in our portfolio. One now such discontinued product is Metoprolol ER. This product experienced several new competitors in the recent past, and is burdened with higher than average government rebate claims as an authorized generic. This product alone had a negative gross margin of over $2.5 million for the quarter. Another out-of-the-ordinary item related to our product portfolio rationalization was a small number of products that had some net upward market adjustments. We all expect future benefits for these adjustments. We recorded $1.5 million of expenses in the second quarter associated with certain customer agreements related to such adjustments. While there are always many moving parts in the generic company's income statement, these atypical items obviously reduced our gross margin percentage for the quarter. As noted, some will continue while others will abate. Turning to our balance sheet. In late November, we used a portion of our cash to pay off, in full, at long last, our term loan A note. This payoff will reduce interest expense and principal payments going forward by $3 million and $27 million annually. Further, our remaining debt instruments have no financial leverage covenants, offering us increased financial flexibility. Also in the second quarter, we established a new $30 million revolving credit facility, which further enhances our liquidity. John will discuss our financials and more details later, including context around the liquidity and addressing our remaining debt. Meanwhile, our near-term competitive environment remains challenging, in part due to reduced sales from particularly profitable products. For example, Nebrino is affected by fewer elective surgeries during the pandemic, and we experienced an API disruption on the product called Metosalom. We expect both products to contribute significantly more in future quarters than they will over the balance of this fiscal year. More significantly, We now also expect a new competitor for both Positronazole and Fluthemizine to occur in this third quarter. However, we remain quite optimistic about our future billion-dollar sales potential by 2025 for the following reasons. First, the products experiencing accelerated declines were always expected to decline over the planning period. And second, we continue to derive some value in our core business by carefully managing all facets of costs. seeking new share on existing lines of business, and continuing our launch parade, all while building out our pipeline where we have an expanding array of what we believe are durable, mid-, and longer-term pipeline assets. Regarding our launch parade, we launched seven new products fiscal year to date, with four products in the first quarter, including lorophenol and levothyroxine tablets, as well as three products in the second quarter, including levothyroxine capsules, and azithromycin IR tablets. We expect to launch another five new products over the balance of the current fiscal year, three of which are already approved, including clopromazine, which is in process as we speak. Collectively, these new products are expected to achieve our continuing yearly goal of around $70 million of annualized sales from new product launches. With respect to our pipeline, we have more than 20 products in development, another 11 ANDAs pending at the FDA, including partner products, plus four products that are approved and pending launch. I will now turn to larger and more durable opportunities in our pipeline, starting with our generic ADVER development program with Respirant. While we have lost a few weeks in our international development efforts across the US, Europe, and Asia related to the COVID pandemic, we are delighted to share that we are now finalizing the preparation of the PK-PD study data and assembling the ANDA for submission. Our expectation is that the ANDA will be filed around the end of March. We continue to believe a U.S. launch of the product is possible in calendar year 2022. And based on standard assumptions, we anticipate substantial net sales in fairly short order following the launch. While to some of you that may seem optimistic, please note the speed of this program's development has been exemplary. perhaps even extraordinary compared with historical programs. We entered this agreement less than 18 months ago, but now find ourselves only a few weeks from filing this highly specialized, durable, and exciting opportunity. And as we have said, we are evaluating in the late stage negotiation for additional product opportunities in the drug device inhalation respiratory space for dry powder and metered dose inhalers. These markets are, of course, generally quite large, growing, and durable. Similarly, our progression with the insulin-glargine asset in partnership with HEC, we also see as exemplary. Over the last two years, we have significantly progressed through various manufacturing, clinical, and regulatory milestones. And I'm going to go through them all briefly with you now. First, we have successfully produced products, conducted a pilot healthy human volunteer clinical trial, developed related analytical data, and received supportive FDA feedback. That feedback suggests, essentially, that we can repeat the same, albeit slightly larger, healthy human volunteer study at the same clinical site used previously with new product produced at the new facility that HEC has constructed. Such feedback significantly accelerates the development timeline and lowers expected development costs. The new state-of-the-art dedicated insulin manufacturing facility has been built expressly to USA standards and is stocked with the finest European equipment. It has been commissioned at a cost well north of $100 million. That plant has a capacity adequate to supply double-digit market share in the multiple metric ton U.S. insulin market, which is what is needed to compete in the U.S. market. And if we are successful, HEC stands ready by contract to build even more capacity. Third, from a commercial opportunity perspective, insulin barging is a very large, multibillion-dollar market, and only a small number of pharmaceutical firms have the requisite technology and have committed the requisite resources, particularly related to the scale of manufacturing needed to compete in this market. And finally, working with well-qualified counsel we believe we will have freedom to operate with respect to related product and device IP. Moreover, we expect to have an attractive cost position to support an affordable alternative and still maintain attractive gross margins. Such efficiency is especially important in this very high-volume market, where formulary switches between various forms of glargine occurs more regularly than other far more expensive so-called biologics. And yet, even with such relative affordability, And assuming future price erosion, we see each 10% share of the gargine-only market worth around $200 million annually. Moving forward, we are now working with our partner to scale up the product processes in the new plant to produce clinical batches while the FDA reviews our Healthy Human Volunteer Study Protocol, which we submitted at the end of last year. We expect to produce clinical material in the first half of this calendar year and then file an IND later this calendar year. Thus, we expect to be running the clinical trial early next calendar year. Thereafter, our plan anticipates a filing of the BLA later in calendar year 2022 and a product launch in 2023. While there are operational logistical challenges aplenty, we are delighted to have already ameliorated so much of the program risk, and we are excited to see the culmination of our efforts propel us towards a relatively near-term filing. Now, stepping back to broader market dynamics, I have a few comments to share. First, starting with COVID-19. Although we see a slow recovery to the pandemic, we are encouraged, as we all are, by the progress on the vaccine front. We look forward to better days and expanding volume for our generic business soon ahead. Meanwhile, our team remains laser-focused on launching new products and managing our costs. Second, President Biden recently signed an executive order that says, in part, that the U.S. government should, whenever possible, procure goods and services from sources that will help American businesses compete in strategic industries and help America's workers thrive. As a company with its headquarters and all of its own R&D and finished-dose manufacturing based in the U.S., we are encouraged by the President's executive order. While we believe it will take some time, we hope to become an even more important supplier of the medications we produce to the federal government. One interesting optic around Made in America is that we see it as being aligned with emerging shareholder expectations and possible future SEC guidance around climate risk. Lynette is one of the few scaled American generic pharmaceutical companies that is producing the vast majority of its finished products in the U.S., as well as acquiring the significant majority of its API for those products from the U.S. or so-called TAA, Trade Agreement Act compliant countries. By contrast, much of American-consumed generic products are being made in or with API from non-TAA compliant countries. As a primarily made-in-American firm, Lynette is subject to and meets or exceeds America's high OSHA and EPA standards. While it all comes at a cost, our relatively tighter U.S.-oriented supply chain likely lessens our carbon footprint and perhaps reduces our contribution to and exposure from climate risk events, especially when compared with so many competitors who operate in and ship to America from the far side of the globe. So do buy American and ask your pharmacist to buy Lynette products. In doing so, you can help out some of your fellow citizens and perhaps help out our planet. To sum up my remarks today, for the quarter, we reported better than expected net sales and our adjusted EPS was in line with our estimates. Our gross margin was impacted by ongoing competitive pricing pressure and some out of the ordinary events. Our launch parade continues. We have launched seven new products thus far in fiscal 2021. and expect to launch approximately five more in the coming months. We have revised our fiscal 2021 foliar guidance down due to ongoing pricing pressure in our portfolio and, to a lesser extent, our decision to discontinue a range of lower margin products. Our outlook assumes additional market entrance for both sufentazine and posiconazole, essentially now, in our current fiscal third quarter. In November, we paid off in full our remaining Term A loan balance, and as a result, we have reduced our annual interest expense and principal payments moving forward. Finally, the development of our durable high-value pipeline continues to expand and progress, giving us optimism for our growth over the midterm and beyond. We believe we are on track for filing the ANDA for Generic Adver in the current quarter, and we believe we remain on track for filing the BLA for Infant Glargine just next year in calendar year 2022. With all of that, I turn the call over to John. John?

Thanks, Tim, and good afternoon, everyone. As was mentioned earlier, I will be referring to non-GAAP financial measures. The reconciliation of the GAAP to non-GAAP numbers can be found in today's press release. Now for the financial results on a non-GAAP adjusted basis. For the 2021 second quarter, Net sales were $133.9 million compared with $136.1 million for the second quarter of last year. Gross profit was $31.1 million or 23% of net sales compared with $50.2 million or 37% of net sales for the prior year second quarter. The decline in gross margin was largely related to competitive pricing pressure and associated customer inventory price adjustments and sales mix. Research and development expenses declined to $5.6 million from $6.8 million largely due to timing of project spend and cost reductions related to the restructuring we implemented in July 2020. SG&A expenses declined to $12.1 million from $16.1 million largely due to the restructuring and cost reduction initiatives announced and implemented in the first quarter and lower incentive compensation. Interest expense decreased to $10.5 million from $13.1 million in last year's second quarter due to repayments of Term A and Term B loans, as well as lower interest rates. Net income was $3.2 million, or $0.08 per diluted share, Net income for last year's second quarter was $11.7 million, or $0.27 per diluted share. As previously stated in Q1, our Q1 adjusted EBITDA, excluding the full cost-saving benefit of the recent restructuring, less expenses such as severance incurred in the quarter, was $26 million. Our comparable adjusted EBITDA for Q2 was $24 million. Turning to our balance sheet, at December 31st, 2020, cash and cash equivalents totaled approximately $34 million. We expect our cash balance to increase in the second half of the fiscal year and to be around $50 million at the end of both Q3 and Q4, primarily due to improvement in our working capital, as well as from already received and expected future income tax refunds. Additionally, We have $5 million of cash not included above and a restricted account based on our amended agreement with our term loan B holders. Our outstanding debt at the quarter end was as follows. Total debt was approximately $639.4 million. Debt net of cash was $600.2 million. And net secured debt was $514 million. As Tim mentioned, in November we used a portion of our existing cash to pay off in full our Term A loans. We are actively pursuing opportunities to enhance our capital structure and intend to refinance our remaining Term B loans well in advance of maturity. In December, we established a new $30 million revolving credit facility which provides enhanced liquidity. Our Q2 GAAP financial results included a non-cash asset impairment charge of $198 million, primarily related to the write-down of intangible assets, specifically product rights, associated with the acquisition of Kramer's Urban Pharmaceuticals. The impairment analysis was partially triggered by our decision to discontinue certain product lines, sales of which have declined over a fairly lengthy period of time. Product lines generated net sales of $29.9 million for the fiscal 2020 full year and $3.6 million and $0.8 million for Q1 and Q2 of the current fiscal year respectively. Turning to our outlook, we are revising our guidance for the fiscal 2021 full year as follows. Net sales in the range of $480 million to $500 million. down from $520 million to $545 million. Adjusted gross margin as a percentage of net sales of approximately 24% to 26%, down from 29% to 31%. Adjusted R&D expense in the range of $26 million to $28 million, down from $29 million to $32 million. I'd like to point out that our total R&D for the year has come down because of lower than anticipated project spend in the first half related to timing. We expect R&D to ramp up in Q3 and Q4, which is largely related to our investment in our durable product pipeline. Adjusted SG&A expense, ranging from $52 million to $54 million, down from $55 million to $58 million. Adjusted interest expense in the range of $41 million to $42 million unchanged. The full year adjusted effective tax rate in the range of 26% to 27%. Adjusted EBITDA in the range of $75 million to $85 million, down from $100 million to $110 million. And lastly, capital expenditures to be approximately $10 million to $15 million. down from $15 million to $20 million. Regarding the phasing of the quarters, we expect net sales and profitability in Q3 and Q4 to be similar, but lower than Q2. With that overview, we would now like to address any questions you may have. Operator?

Thank you. We'll now begin the question and answer session. If you have an audio question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. And our first question comes from Gary Nachman from BMO. Your line is open.

Hi, good evening. It's Rafay Sardar on for Gary. Could you help us better appreciate the magnitude of the various components that drove the reduction in guidance? How much is due to greater competition on the base portfolio versus pressure on newer products? And could you also comment on the cadence for gross margin for the balance of the year?

Hi, Rafi. This is John. I can take that one. We'll start by saying that, you know, there was a few components on the revised guidance The first part is really the acceleration of competition as we saw with, or as we're modeling with both posiconazole and with flufenazine, if you recall from Q1, we had in our guidance competition towards the end of the fiscal year. In our new guidance, we have that now in the current quarter. So where we had some strong sales, in both those categories, both infectious diseases and in antipsychosis. Our expectations now in Q3 and Q4 is that they will come down. On top of that, though, we also had the discontinued products that had a run rate in Q1 of about 3.6 million. That was a bit less in Q2, but some of that was due to the fact that we had a large government rebate to pay for metropolol. But But overall, it's mostly a reflection of our new sales forecast.

And, Rafael, I just add to Tim here. I think the decline in margin percentage coming from the new competitors on our higher-value products will largely offset by the very low margin to negative margin on the discontinued products. So we expect gross margin percentage on a lower sales base to be maintained.

Thanks. And could you also comment on what you're seeing with respect to potential business development opportunities? How confident are you in completing a few transactions in 2021?

Regarding business development, we still find ourselves very well positioned relative to our commitment to the space, the quality of the team, the degree of benefit and services we offer beyond commercialization to the full range of what those partners are looking for. We do expect to be announcing more transactions, particularly around some more durable elements over the course of this fiscal year, and look forward to getting those words out to you when they get transacted.

Thank you.

And our next question comes from Greg Gilbert from Truist Securities. Your line is open.

Thank you. First, for John, can you help us understand what the cats and dogs were in gross margin percentage in the quarter? I believe Tim characterized some of them as not sounded like one-timer-ish, but don't want to put words in your mouth. And Tim, has the slippery slope that has been gross margin percentage, you know, sort of soured your view on continuing down the path of the same kinds of products going forward? Clearly, you're looking to get into higher value, larger opportunities like you've discussed. But I have to imagine it's been frustrating to have to deal with the melting ice cube aspects of the business that in some cases melt faster than you expect them to.

So hi, Greg. This is John. I'll take the first part. Some of the one-offs in the period that we were referring to was specifically with Metropole. I mentioned that we had a large government rebate. Metropole is one of the products that that were in our discontinued list. So it was a significant reduction to the quarter that we will not see in Q3 or Q4. We also had some inefficiencies with our operations, some of them COVID related with absenteeism that we're expecting to increase as we go into the back half of this year. As a matter of fact, just looking at some of our results from January versus December, we're seeing a significant increase in our overall output.

And regarding to the slippery slope on gross margin, I do think the fact that we've been seeing fewer new generics being approved and more approvals on existing generics has accelerated the erosion on what we might call some of the base products in our portfolio, a bit more than we may have thought a few years ago. However, we have been focused on building out this sort of durable portfolio for quite some time. And I think it's important to note that we're in process with some of those durable portfolio items. We tend to speak to the very large ones like insulin and Advair. but we're pretty darn proud of getting products like posaconazole and verdenafil and levo caps out in the market as examples of products which have you know some pretty decent sustainable value uh while posaconazole is going to be coming down now it's the first second and approval uh that will exist and that is in the market now and and it's still a pretty valuable product for us it's those sorts of products that we have been working on building out for a while and it gives us hope for our expectations of our longer-term growth, particularly as the much more sizable and much more technology-intensive ones that we talk about in the respiratory space, in the insulin space, draw nearer to our gross margin delivery in our strategic plan.

Great. I have two more. On Nombrino, clearly a lot of elective surgeries are rebounding, as noted by other companies that make you know, widgets that are tied to such activity. Are you noticing any rebound there?

We have not seen any significant movement in our Nobrino sales. We think it is still under a fair amount of pressure from a lack of those sorts of surgeries. Our sales last quarter were sub $1 million as they were the year before. It is certainly an area where we expect to see recovery and significantly more sales. And like the other, I should have mentioned it as a durable product, it is a high margin and not expected to have a whole lot of other people in it for some period of time.

And then lastly, early in the pandemic, it was remarkable how few supply chain disruptions we saw across pharma, branded and generic. And I don't know how much of that was due to safety stock on hand or other things, but Is there a reason to be concerned that there could be more sort of hangover effects from that in this calendar year versus the prior calendar year as many companies have worked through their api's and materials and other things that might have been stockpiled at the beginning or really good about all things supply chain related to the the pandemic and how it's affected movement around the globe thanks.

Well, as you just noted, I think the industry, to its credit and to the benefit of patients, has been remarkably resilient during the pandemic in ensuring adequate supply of our medicines. Lunette has always prided itself as being particularly strong on a reliable supply and a less complex supply chain. And should the disruptions of the last year continue in a way that starts creating fewer safety stocks, we feel we're well positioned to supply those customers products that we need. It is a strength of the organization, but not one of which we've got much benefit from in the recent quarters, given the resiliency of the overall supply chains. But if that changes, we stand ready.

Thanks.

And the next question comes to Matt Hewitt from Craig Helium Capital. Your line is open.

Good afternoon. Thank you for taking the questions. Just a couple for me. First off, and I don't know if it's possible, but is there any way to quantify what the COVID headwinds have been over the past year? And you've talked about Nombrino, but you think about the ADHD drugs have been in decline because of the pandemic, and I'm sure there's others. How much of a headwind is that? Is that 10%, 15% over the past, call it, 12 months? And as we, you know, see vaccinations increasing, you know, infection rates declining, is that a potential tailwind for you later in this calendar year?

Good evening, Matt. We have noted in other calls and a number of you and your compatriots have observed the sort of volume declines across industries. which have been in the sort of low single digits. I always try to make the counterpoint. It's not just the decline. It's also the fact that it wasn't a gain. Over most of the decades I have now spent in this industry, you've always seen single-digit growth in generic pharmaceuticals. Over the last year, you've seen single-digit negative growth in pharmaceuticals. So that net swing can be maybe 10%. We shall see. We certainly hope to see that as part of our lift as we get into our next fiscal year. And then, of course, beyond the Nebrino curtailment, which you just referenced, We have other areas like you don't see as much cough and cold utilization, which is a disproportionate part of folks that are not getting cough cold as people stay in, right? So those particular products in our portfolio are certainly down more than 10%. So we do see lift on the balance of the portfolio as life returns a degree of normalization and new patient starts on existing generics goes up again. And then we see specific sectors of opportunity in Cough Cold, in Nobrino, for those pieces of our portfolio that have been disproportionately reduced more than the single digits you see for the macro effects.

Got it. Okay, and then one other one from me. As far as the pipeline is concerned, thank you for providing the update as far as, you know, number and development, pending approval and pending launch. As we look at, call it the next 12 to 18 months, The 11 pending approval by the end of the fiscal year, is it safe to assume somewhere between a quarter and maybe half of the ones that are in development could also reach the goal line over the next 12 to 18 months? I'm just trying to think how areas where you could drive some incremental EBITDA to help with that current balance sheet situation. Thank you.

So we tend to think of it, again, to that annual goal we've spoken to of $70 million of annualized sales from each bucket of year's product launches. We certainly accomplished that last year with the posiconazole anchor. This year it will certainly be accomplished, we believe, with the LevoCaps and LevoTabs anchors, as well as potential nasal spray opportunities late in the year on Zometriptan. And as we look forward to next year, we expect to be able to continue that. We are focused a little bit more on the sort of product quality. We're willing to back off from the 20 product launches we started with to getting to that same sort of dollar range on fewer products. We are pleased to share that it looks like the API issue that held up our tournament approval for some period of time is resolving itself. We do not have an approval yet, but The API issue, which has pulled that off of our commentary, is looking better for the course of the calendar year. And then as we get into next year, of course, there's all sorts of things that may occur, but we feel good about that $70 million of annual new value.

Understood. Thank you.

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

Thanks. Good afternoon. First question for Tim. I guess with respect to additional competitive entries on posiconazole and flufenazine, are those additional entrance pricing at points that coincide with historical experience, historical models? It sounded like from your commentary that that may not be the case, but just wanted to verify. if in fact that's true.

Yeah, so we, you know, try to avoid any commentary on individual pricing expectations on any particular product for our portfolio. We will note that in aggregate we are increasing our expectation of declines across the portfolio. to go from the mid to higher single digits to the highest single digits across our portfolio, which is a reflection, I think, of more entry on more products in our portfolio over the course of this year and beyond.

Okay. Maybe a question for John coming back to some of the earlier conversation around gross margin levels. could you disclose what the government rebate was related to Metropole? I guess the reason I ask the question is looking at the margin performance this quarter, certainly can understand the factors that led to lower than expected numbers and the change in guidance going forward. But if I look at your revenue performance, I mean, generally across the board and certainly in kind of your key high margin categories, certainly seem to be better than external expectations. So It seems like there's a little bit of a disconnect there. I'm not sure if I understand what may be fully behind that.

Yeah, there's a few different government rebate programs, but the largest one I'm referring to is one that has the donut hole in the Medicare Part D. So towards the end of the calendar year, we tend to see some higher amounts, and this was a bit over what we originally anticipated. So it had a significant impact to the overall quarter. Again, though, for a product that is part of our discontinuation list. So moving forward, we will not have that type of exposure.

Okay. And just perhaps last question for Tim, just coming back to Nombrino and Just maybe a status update in terms of some of the non-commercial issues taken around the product. Litigation update there. All right.

Well, we happen to have our general counsel with us, Sam Israel. So I'll ask him to maybe respond.

Yeah. Just an update is that... Most recently, in a case that the competitor filed against the FDA, we are working with the FDA. The court has basically asked the FDA to go back and look at our application in light of the issues that the competitor raised. We are working with the FDA on addressing any issues the court has fairly confident that we'll be able to continue to, as we have been to date, market that product.

Okay. Then maybe one last question, sorry. Just maybe Tim and Maureen, if you guys could just comment on the deal environment in general. Obviously, a lot of products out there potentially for sale, not a lot of buyers, but more thinking about just the opportunities around license and deals and partnerships, just the degree of flow that you're seeing and how competitive some of these opportunities are versus what you were looking at maybe 12 to 18 months ago?

Well, I think we're seeing a continuing bifurcation of more interesting assets against a lot of less interesting assets. So the sort of onesies and twosies of multiple competitor oral products are certainly available out there, but we don't see them generating the value in terms of being able to step into supply disruptions or securing share against a cost structure to the same extent we saw in the past. On the flip side of that, the more durable assets, the ones that take a little bit more time, take a little more support across our functional activities in our organization, those continue to show excellent deal flow for us. And as I said, I think you'll be hearing more from us soon on those sorts of products. quite a large range of things that are in the hopper. Not all of them will obviously be transacted, but we feel pretty confident that you'll see some increasing contributions of those sorts of assets into our portfolio. I do think there is also, as an industry, lots of duplication out there, right? There's lots of duplicate R&D. There's a lot of duplicate SG&A. There's a lot of duplicate manufacturing. So whether or not those sorts of transactions derive some value at some point, we shall see. There is a gap between what buyers are willing to pay and sellers are looking to receive. But on the product side, we see good deal flow and the things that we talk most about in terms of driving our returns in the mid-term and beyond.

I would just add that I'm sorry, I would just add that we are seeing lots of deals coming across our desk, and Lynette is considered a very good partner, and we've showed that success, and so we're always getting new opportunities every day to look at it. As Tim said, sometimes they just don't add the value that we're looking for, but when we find them, we act quickly on them.

Okay, thank you.

And our next question comes from Scott Henry from Ross Capital. Your line is open.

Thank you, and good afternoon. I do have a couple questions. I guess, first, did you quantify the annual revenues of the discontinued products?

Hi, Scott. Yeah, this is John. So, you know, as we had said that for last fiscal year, the revenues were about $30 million. And for Q1, they were about 3.6. They did come down significantly in Q2 to about 800,000, but a good portion of that was due to the difference in metropole. So I think an average run rate would... Go ahead.

Okay, thank you. That's helpful. I apologize for missing that. And question, the generic industry is often about opportunity. And the question is, once you discontinue a product, if an opportunity, whether a supplier falls off or whatnot, how hard is it to restart up that product?

This is Maureen. I'd say it really depends on how long it has been since you discontinued a product. So obviously, if you discontinue a product just because of the value that it gives with having no operational issues, it's easy to bring back. It's quick to, you know, buy some API and produce a product. The longer it gets, the longer timeline from when you discontinue a product until you consider bringing it back in the market, that takes a lot longer to bring a product back to the market. Things change. And so...

And when do you think a product goes stale? At what point is it you're almost starting from scratch? Is it a year? Is it two years? Just curious.

Yeah, I mean, there's lots of theories about that. I think it's product by product specific. One will, some people say five years and greater, but it really is very, very product specific. It depends. So we're constantly looking at that. We look at our old products. our old andes that we've not sold for a while and consider it all the time. We're constantly looking for opportunities in the market so we can jump on them.

I'd note that the FDA's support of prior approval supplements and their speed of which they are acting on them certainly shortens the time horizon that historically we have seen to bring those products back into market. So I assure you, should those markets become more valuable, they remain in our portfolio by and large and we'll be able to act upon them. I also think pragmatically that's not what our expectation is or we would not have discontinued them from where we stand here today. Certain products have a structural concern, as we mentioned on the Tropilol and its government rebate requirements as an NDA as opposed to an ANDA, which made it uncompetitive vis-a-vis numerous competitors in the market today.

Okay, that's helpful. I appreciate the color on that topic. Second question on gross margin. If we look at the adjusted gross margin here, and used the midpoints, it basically dropped from 30% to 25%. When we think about next year, now there'll be some new products and there'll be some other products that are worse. I mean, is it reasonable to think that perhaps the margins are down to 25% in 2022? Is that a rational way to think about it?

So, I mean, we typically give some color for our fiscal 2022 towards the end of our year. You know, we'll expect to give something on our Q3 call in May. So in a few months, we'll be able to provide a bit more color in terms of our margins, our margin debt from a run rate.

And I'll add that we have previously said and still believe that as we look out over time with the more durable items in our portfolios, recognizing that most of those durable items will have a partnership. We've always talked to a billion-dollar goal and happy to be in a 30% gross margin arrangement, that net margin to ourselves. I think that remains in place. So the portfolio itself of any given year will affect, obviously, what our gross margin will target for that year. But over time, I think something in the sort of low 30s is what we would see as expected or targeted as these more valuable products come into our portfolio.

Okay. And perhaps, you know, having covered this company for about 10 years, I've seen the cycle on the high side, the low side. Do you, Tim, and obviously it's an opinion, but do you get the sense that we are kind of approaching the bottom of the generic cycle here? Is there a level, in your opinion, where margins typically bottom out before you have less competition and then they start the upward trend again?

Well, I'll simply say that we're not satisfied with where we are, but the market does indeed have lots of ups and downs, and we're fighting hard to do the best we can with the hand that we've been dealt, and we try to keep our eye on the prize. So from our company perspective, we're quite proud of what we've done. I want to stress this, right? We created a launch parade out of kind of ethos in the last few years with $70 million of annualized value. We brought to market first launch products like Pazocanozone, Levocaps, and Verdenifol, and on and on while we're paying down our debt, reducing our costs, and now building this really rather durable portfolio. So our main optic is what we can do with our team to deliver more value to that marketplace. And I do think the fact that we're talking more and more about these durable products that take significant infrastructure investment, likely need a partner for a company of our size, remarkable at some level that a company of our size has been able to latch on to these sorts of opportunities. It is a reflection that there are components of this industry, which I think are under duress and likely to stay there for a while. It's, as we've always said about supply and demand, if you can point to lots of supply, I will show you lower pricing. If you can point to less supply, I will show you higher pricing. And we're working like heck to find those durable, valuable, fewer supplier markets that move the needle for us. And we're pretty excited about what we've done. We think it'll be transformational value when we get there. And we're going as hard as we can to get there. Be darned what the rest of the market is doing.

Okay, great. I appreciate that feedback. Final question. It's just a multiple part one. On the insulin, Glargine, I wanted to make sure I had this correct. You're going to start the trial in early calendar year 2022. How long does that trial take from starting to readout?

Well, Gary, we have on the line with us Steve Lair, who also leads our biologic efforts, particularly around insulin online. Steve, if you're there, could you please respond? Sure.

Yes, good afternoon. The clinical phase of that trial takes about four to five months, so we start in early 22. By mid-22, we have the trial basically wrapped up.

Okay, so then would we expect that it's going to take a little time to prepare the ANDA. Maybe you file that by the end of 22, and then... And then that leads to the launch kind of mid-23, perhaps second half 23, calendar year, that is.

Steve, do you want to continue?

Yes. We'll be filing by a similar application, BLA, and that will be in the back half of calendar year 22, as Tim mentioned earlier. And given the approval timeline, so we expect approval on That's the back half of calendar year 23.

And I guess on that, how do we think about a biosimilar application in the turnaround? Are they trying to stick to a certain time horizon there or just any color you could give?

Yes, so there's a specific biosimilar application program fee and the agency has managed to keep within their timelines. And that's where we come up with about the year estimate right now between filing the BLA and approval. And of course, you know, Lynette's having ongoing discussions with the agency and making sure that we'll be able to file the BLA with all the appropriate information.

And Scott, if I can add, just to reinforce the comments we made in the prepared remarks, it often gets lost in the information we try to share because it's a little bit different than things we normally talk about. But we talk about conducting a pilot, healthy, human, volunteer clinical trial that is significantly faster and abbreviated and at lower cost than what people have seen in the past, right? We are very encouraged by that guidance, and it is significant that the FDA has been supportive of that approach, and it really has accelerated our timelines to the point that we're talking about this filing as we get into next year.

Okay. Thank you for that as well, and thank you for taking the multiple questions.

Thank you, Scott.

And this concludes the question and answer session. I'll now turn the call back over for management for final remarks.

All right, it's Tim again. I'll close out with our customary shout-out to all of our employees, customers, and partners working extra hard in extra challenging times to provide high-quality, low-cost medicine for patients. We look forward to sharing our progress on our next call. Have a good evening.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating.