Lannett Co Inc

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 Lair, who leads our insulin biosimilar initiatives. The call is being broadcast live at www.lanette.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 forward-looking 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 due to several factors, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K filed with the Securities and Exchange Commission. 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 third quarter financial results for the company's reasons for including non-GAAP financial measures in its earnings announcement. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to 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 Crew. Tim?

Thanks, Robert, and good afternoon, everyone. I'll begin today with an overview of our financial results, followed by brief comments on the progress of our restructuring plan, and then I'll provide an update on our product pipeline. including our expanding portfolio of near-term opportunities, as well as our durable assets. For the quarter, as has been the case for some time, competitive pressures compacted our top line. Despite this, our adjusted gross margin increased from the previous quarter, and our bottom line was modestly better than our internal estimates. But this is not the whole story. We also recorded unusually high product returns which mask higher than expected sales volume and what otherwise would have been a better than expected financial performance. Product returns are a regular part of our business and averaged in the mid-single-digit millions of dollars in recent quarters. However, in the third quarter of this year, product returns, which were largely related to sales from more than a year ago when our sales were higher, approximately doubled to about $12.5 million. Three products, Levothyroxine capsules, Flufenazine, and Vardenafil figured prominently in this result. While we expect these returns will continue at an accelerated level in the near term, we don't expect our current returns rate to be sustained through next fiscal year because of the different but discreet and attenuating reasons behind these returns. Turning to our November 2021 restructuring plan. In late March, we completed the sale of our liquid drug manufacturing plant in Carmel, New York, for $10.5 million. We received $9 million at closing and expect to receive the remaining balance in installments over the next 18 months. The transfer of certain products from the Carmel plant to our main plant in Seymour, Indiana is in process and is expected to continue into the next calendar year. Meanwhile, the Carmel plant continues to support the production of the products being transferred. We expect the major elements of the restructuring plan to be completed around the end of next month. The plan is anticipated to generate approximately $20 million of annual cost savings. While this restructuring effort is wrapping up, our efforts continue around portfolio optimization with the ever-important imperative to seek more yield from our inline portfolio. Now let's turn to our pipeline. I'll begin with our near-term product opportunities, a mix of our own and partnered products. These are products that may come to market over the next year ahead of the larger assets in our insulin and respiratory portfolios. As discussed on our last call, these products are increasingly different from our older immediate release oral generic products that have been subject to increasing competitive pressure. Thus, these new products have the potential to be meaningful contributors to our financial results. Moreover, we are encouraged that at least a few of these products could be launched in the first half of next fiscal year, if not the first quarter. These opportunities include seboflurane, which is a solution for inhalation, has four current competitors and an approximate market size of $190 million, according to IQVIA, although in-market generic sales are expected to be lower. We have a target action date in our first fiscal quarter of next year. Zolotriptan, which is a smaller nasal spray, has few competitors, and we have a target action date of early next fiscal year. Sulcrophate, which is an oral suspension, has fairly challenging bioequivalence in vitro studies and few competitors. We have a target action date late this calendar year. Moreover, we are in late-stage negotiations with partners on two drug shortage products, including the injectable fludarabine. If we secure and launch these products in the first half of next fiscal year and shortages persist, their value could be significant. Boudarabine would be our first commercial foray into the injectables market as a firm, although several members of our team have related earlier experience. We also note that we have agreed to terms with a European partner to develop another injectable product for later in 2023. In mid-calendar year 2023, we hope to launch Lisdex amphetamine, a controlled substance, so competing only against U.S. manufacturers. IQVIA estimates that the product's market size is about $4 billion. While generic market sales are expected to be lower, they could represent a sizable opportunity for us if we launch in the first generic wave as we plan. Additionally, we have reinvigorated our efforts to leverage a wide range of contract development and manufacturing capabilities at our Seymour, Indiana plant. We recently recruited a dedicated sales director for these efforts and have several opportunities already progressing. It will take some time for these efforts to bear fruit, but we are quite encouraged by the receptivity so far. Our team's ability to be highly responsive and provide a high-quality product on a highly reliable schedule has been well received by brand organizations that embrace such advantage of being, quote, unquote, made in America. Our earlier expansion efforts around our Niferix collaboration are completed with expanded packaging and manufacturing capacity for this brand, which our partner sells in China. Over 10% of our current plant output is dedicated to the sustainable opportunity, which in aggregate will generate about $10 million in sales with margins comfortably above our inline generic products. To sum up, we are responding to the heightened competitive environment with cost containment, new revenue streams, and have multiple shots on goal in our pipeline. We are moving closer to potentially launching a number of these pipeline products in the near term. Turning now to our durable product pipeline. I'll start with generic adverdiscus. We received a complete response letter from the FDA regarding the ANDA and more recently met with the FDA to seek clarification and additional information. While our partner's European clinical site was successfully inspected, based on the FDA's technical feedback, our partner is electing to conduct another clinical trial as well as additional PK trials. We anticipate concluding those new trials later next year. While we are disappointed, we have always maintained that, because of the complexity of the product, we expected at least one FDA review cycle. A revised timeline for a possible launch of the product is now in calendar year 2024. There is a silver lining. Based on the FDA's extensive feedback, we believe we have a clear roadmap towards a possible approval. Additionally, we are using the feedback we received from the FDA to help guide our ANDA for generic flovent discus. That product remains on track to file later this calendar year. Next to discuss is our biosimilar insulin Glargine product with HEC. There has been extensive recent press reporting around insulin affordability. As a result, trade interest and our progress is notable. In late March, we initiated the pivotal clinical trial, and thus far, we are pleased to report approximately 25% of the enrollment goal has been achieved. We anticipate clinical trial dosing will be completed by the fall, and following extensive analytics, we expect top-line data to possibly be available towards the end of this calendar year. If the trial is successful, we'd anticipate following the biologic license shortly thereafter, and if approved by the FDA, potentially launching the product in the first half of calendar year 2024. Our program on insulin aspart, a fast-acting insulin, has completed commercial scale-up and generally trails the timing of our insulin enlarging program by a little more than a year. It is important to point out that not only is insulin enlarging the most significant opportunity currently in our pipeline, but also the clinical development of the product differs significantly from the durable respiratory products in our pipeline. Specifically, a very high percentage of well-characterized biosimilar products, which we believe is the case with our product, has successful clinical trials, and typically receive approval from the FDA on the first review cycle. Obviously, this is not a guarantee, but it does give us optimism. I'll now turn over the call to John to review financials. John.

Thanks, Tim, and good afternoon, everyone. I'll begin with some comments regarding our efforts to regain compliance with the New York Stock Exchange listing requirements and then discuss our financial results. focusing my discussion on our non-GAAP-adjusted measures. In early March, the New York Stock Exchange informed the company that it was not in compliance with the exchange's $1 stock price and $50 million market capitalization listing requirements. With assistance from an outside advisor, we have submitted our plan to the NYSE and are in contact with their staff on this topic. Now turning to our financial performance. For the 2022 third quarter, net sales were $78.4 million, compared with $112.4 million for the third quarter of last year. Gross profit was $9.3 million, or 12% of net sales, compared with $30.4 million, or 27% of net sales, for the prior year third quarter. Interest expense increased to $12.9 million from $9.8 million. Net loss was $16.7 million or $0.41 per share versus net income of $1 million or $0.02 per diluted share. Adjusted EBITDA was $98,000. Turning to our balance sheet, at March 31st, 2022, cash and cash equivalents totaled approximately $106 million, which included proceeds from the sale of our liquid manufacturing plant in Carmel, New York. We continue to expect to end the current fiscal year with close to $80 million of cash, which is after a $14 million interest payment in the current fourth quarter. And We continue to expect to receive approximately $20 million of income tax refunds in the first half of next fiscal year. At March 31st, total debt was approximately $650.7 million, comprised of first lien senior secured notes of $350 million, second lien notes of $214.4 million, and convertible notes of 86.3 million. Turning to our guidance, we tightened and or updated several items. For fiscal 2022, we now expect net sales in the range of 335 million to 350 million, from 335 million to 360 million. Adjusted gross margin as a percentage of net sales of approximately 13.5% to 14.5% from approximately 14% to 15%. Adjusted R&D expense in the range of 22 million to 24 million from 23 million to 26 million. Adjusted SG&A expense ranging from 55 million to 57 million from $55 million to $58 million. Adjusted interest expense of approximately $52 million, unchanged. The full-year adjusted effective tax rate in the range of 23.5% to 24.5%, from 23% to 24%. Adjusted EBITDA in the range of $0 to $8 million, unchanged. And lastly, capital expenditures to be approximately $12 million from $10 million to $14 million. We expect to provide guidance for fiscal 2023 on our next investor conference call, currently planned for late August. At that time, we believe we'll have additional clarity on the status of the nearer-term product opportunities that Tim discussed earlier. I'll now turn the call back over to Tim. Tim?