Lannett Co Inc

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, 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 2022 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 earnings 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 initiatives. Then John will discuss the financial results in more detail. 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. Thank you for joining the call. We have a couple items of news to report today. In addition to issuing our fiscal 2022 first quarter financial results, we also announced a substantial restructuring and cost reduction plan. I'll discuss both matters in turn. Overall, first quarter results were on track. Our top line and bottom line were, respectively, above and at our expectations, largely due to solid sales of several key products. Our gross margin, however, was lower than anticipated, primarily due to growing competitive pressures on our base portfolio. Turning to our balance sheet, our cash position increased to more than $105 million as of September 30, 2021, up from approximately $93 million at June 30, 2021. We continue to emphasize the importance of our cash position as we believe it affords us strategic flexibility in how we run our business. Maintaining adequate cash levels to support our operational needs to the launch of our durable product pipeline remains a key focus. Meanwhile, as often mentioned across the industry, we are operating in a particularly competitive environment, especially for oral generics. The market generally, and some of our products such as probenicid, esomeprazole, levothyroxine tablets, and clopromazine specifically, have been deteriorating more quickly than the declines we had anticipated. This environment certainly reinforces our pivot towards expanding our portfolio to include more durable assets, such as the three respiratory and two insulin products in our pipeline. However, we do not expect the current competitive environment to abate in the near term. While we are disappointed in the accelerating declines, we are taking actions to address the current competitive environment. First, we have revised down our fiscal 2022 guidance. And second, while preserving our core portfolio strategies, we are taking immediate and proactive steps to make Lynette a leaner and more focused organization. So with that, let's turn to the restructuring and cost reduction plan we announced earlier today. Again, our plan retains our core strategies while further optimizing our operations, improving efficiencies, and reducing costs. The plan will be implemented in phases, and we expect we will be completed in about 18 months. Key elements of the plan include, first, consolidating our manufacturing footprint from two facilities to one. This includes transferring liquid drug production to our main plant in Seymour, Indiana, from our facility in Carmel, New York, and closing the Carmel plant once relevant products are transferred and pursuing its sale. We are already in active discussions with several potential parties. Our seamer plant will be strengthened in this process by increasing the technologies it supports and expanding its portfolio with smaller volume but decent margin liquid products, thus further optimizing our overall network. The second element of the restructuring plan involves the R&D function. This includes reducing headcount and eliminating development formerly dedicated to the Carmel site and discontinuing future development programs targeting liquid generic medications, as we no longer see adequately scaled returns in that sector. We will also raise product threshold requirements and start internally developed products and API selection earlier, the goal of which is to focus on fewer, potentially larger market opportunity products and come to mark as part of the so-called first wave of generics. We will continue to be a targeted generic manufacturer focused on attractive, select, internal development areas where we believe we can successfully compete. But we will scale those investments to what the business can support today and continue to augment our pipeline with durable partnered assets like generic adver and influence. And the third element of the restructuring plan is further rationalizing over time, as we have in the past, certain lower margin products. This particular exercise primarily involves scaling back or phasing out some low margin and low volume OTC products that were made at Carmel and two very low margin prescription products. Ultimately, the plan is expected to result in a workforce reduction of approximately 11% from current levels. Another 3% or so of the workforce, mainly at the plant, we expect not to replace as attrition occurs. while their existing vacancies will also not be filled. In total, we anticipate cost savings of approximately $20 million annually. So now let's turn to our pipeline. While we tend to focus on the potentially transformational value of our durable pipeline, there are a number of interesting pipeline assets that could be launched before the end of next fiscal year, including seboflurane, sulcafate oral solution, zometriptan, and fluidamide. And our business development team is hard at work to secure more. We currently have approximately 12 ANDAs pending at the FDA, including partner products, plus three additional products that are approved and pending launch. We also have more than 20 products in development and expect to add more from both external and internal efforts. With regard to our large, durable, partnered product pipeline, I'll provide an update on two of the five, starting with our generic Adverdiscus product. The FDA provided mid-cycle discipline review comments on the pending ANDA, and we are working to address the FDA's helpful comments and intend to respond to as many of the agency's requests as possible before the FDA due dates. We expect to receive additional comments from the FDA on the FDA-assigned goal date of January 31, 2022. 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 next fiscal year. I note the application approval is also contingent on a successful FDA inspection of the overseas facilities involved. The CRO site that conducted the bioequivalence and clinical studies has already been inspected by the FDA, and the observations they shared we believe are addressable. Given inspection backlogs due to COVID-19, we appreciate the parent priority FDA has assigned to these inspections. We have formally asked the FDA to schedule an inspection of the manufacturing site and look forward to their visit in the near future. Regarding our biosimilar insulin glargine product, we remain on track for submitting the investigational new drug IMB application next month and commencing the pivotal trial around March 2022. While there are always execution risks, we expect to launch this product in fiscal year 2024. In terms of our expectations for next year's clinical trial, we are not aware of a US trial failure of a well-characterized biosimilar. And at this point, we believe our product is well-characterized and highly similar based on the results of our structural and functional assays. Those assays have been early reviewed by the FDA. We are also seeing positive trends in formulary decisions for 2022 demonstrating PEARS' continued effort to pursue affordable insulin. Express Scripts has added Viatris' biosimilar and interchangeable insulin Glargine, Semigli, as a preferred product for 2022 on one of their formularies. In addition, Florida, Illinois, and Texas have included Walmart's Rely on Insulin as a preferred product on their 2022 state Medicaid formularies. We will continue to monitor how PEARS adopt biosimilar and interchangeable insulins as we develop our go-to market plans. All five of the durable products in our pipeline are differentiated from the average oral generic product that are under the aforementioned industry pressures because of the significant technical expertise required for development and the substantial and largely dedicated plant investments needed to manufacture them. So, for all of these products, we expect only a handful of competitors and thus more durable value. As noted on the last call, we are evaluating and in negotiations for additional market and product opportunities for insulin and drug device inhalation products. There continues to be additional multi-billion dollar markets to pursue in these areas with both current and future partners. When combined with our targeted internal development efforts, we believe we have built and continue to expand an exciting pipeline of opportunities. One brief comment on legal matters. We have earlier reached a settlement agreement with Genus Life Sciences related to our Nobrino product. While the terms of the settlement are confidential, the various court challenges levied by Genus related to the product and our right to market it have all been dismissed. To sum up today's remarks, we have reported better than expected top line for the quarter. We have revised down our fiscal 2022 guidance to reflect the increasingly competitive environment for a base oral generics portfolio. However, our cash levels remain substantial. Our core strategies remain in place, and we have begun implementing restructuring plans to become a leader, more focused organization. The plan is expected to be completed in approximately 18 months and generate annual cost savings of approximately $20 million. Our pending generic adverdiscus ANDA continues to make its way through the FDA review process. We expect to submit an IND application for biosimilar insulin glargine next month and commence the pivotal trial around March of 2022. We anticipate both these and our other durable assets can contribute significantly to our future sales. And one final comment. We appreciate the frustrations our investors may have over the pressures we are now forecasting in our near-term results. We are keenly aware of our current stock and bond valuations. However, our optimism on future expectations remains quite high. Our durable pipeline of exciting opportunities are steadily progressing, and we believe we have the capabilities, discipline, and resources to get them to market over the next few years. With that in mind, our management and our board will continue to carefully consider various options looking to enhance investor value across the near, immediate, and longer term. With all of that, I'll turn the call over to John.

John? Thanks, Tim, and good afternoon, everyone. I'll begin with our financial results on a non-gap adjusted basis. For the 2022 first quarter, Net sales were $101.5 million compared with $126.5 million for the first quarter of last year. Gross profit was $20.6 million or 20% of net sales compared with $34.4 million or 27% of net sales for the prior year first quarter. Interest expense increased to $12.8 million from $11.2 million. Net loss was 10.6 million, or 27 cents per share, versus net income of 2.2 million, or 6 cents per diluted share. Adjusted EBITDA was $10.0 million. Turning to our balance sheet, at September 30th, 2021, Cash and cash equivalents totaled approximately $105 million, up from $93 million at June 30th. Cash increased during the first quarter due to a few factors. First, as a result of our refinancing earlier this year, we did not have any required debt interest or principal payments in Q1. The second relates to timing of certain inflows and outflows of cash, and the third was the receipt of a prescription drug fee refund. Looking ahead, we expect to receive additional income tax refunds, continue to benefit from initiatives to improve our working capital, and we have no mandatory principal payments on our debt until maturity. Accordingly, we expect to maintain a healthy cash position of 80 million plus through the end of fiscal 2022. As for our liquidity, we also have access to our $45 million credit facility, which to date we have not drawn upon. Turning to our revised guidance for fiscal 2022, we now expect Net sales in the range of $370 million to $400 million, down from $400 million to $440 million. Adjusted gross margin as a percentage of net sales of approximately 19% to 21%, down from approximately 23% to 25%. Adjusted R&D expense, in the range of $25 million to $28 million, down from $26 million to $29 million. Adjusted SG&A expense ranging from $55 million to $58 million, down from $58 million to $61 million. Adjusted interest expense of approximately $52 million unchanged. The full-year adjusted effective tax rate in the range of 22% to 23%, up from 21% to 22%. Adjusted EBITDA in the range of $22 million to $32 million, down from $40 million to $55 million. And lastly, capital expenditures to be approximately $10 million to $14 million, down from $12 million to $18 million. Regarding the phasing of the quarters, we expect net sales and adjusted EBITDA in Q2 to be lower than Q1, ramping up slightly in the second half of fiscal 2022, with Q4 net sales and adjusted EBITDA to approximate Q1. This reflects the new product launches we've previously discussed combined with the initial benefits from the cost restructuring. Gross margin to decline slightly in Q2 and Q3 from Q1. We expect Q4 gross margin to be higher than Q1 as the restructuring plan begins to take effect. And R&D expected to increase from Q1 and SG&A to decrease from Q1. With that overview, we would now like to address any questions you may have. Operator?