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?