Lannett Co Inc

Hello, and welcome to the Lynette Company's Fiscal 2022 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Robert Jaffe, Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us today to discuss Lynette Company's fiscal 2022 fourth quarter and full year financial results. On the call today are Tim Crewe, chief executive officer, John Kowalski, the company's chief financial officer, Maureen Cavanaugh, our chief commercial operations officer, and Steve Lair, who leads our insulin biosimilar initiatives. This 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 Private Securities 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 fourth quarter and full year financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the 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. This afternoon, 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 and the company's guidance for fiscal 2023. With that said, I will now turn the call over to Tim Crewe. Tim?

Thanks, Robert, and good afternoon, everyone. I'll begin today with a few positive overarching comments. First, on the financial front, Q4 net sales, adjusted gross margin, and adjusted EBITDA were all at or above our expectations. Further, we had a robust cash position on June 30th of approximately $88 million. with income tax refunds of approximately $26 million expected within the next couple of months. My second comment is an update to our previously announced restructuring and cost reduction plan. The major elements of the plan were completed during the fourth quarter. We are particularly pleased with how quickly the product transfer process is progressing. We expect the manufacturing of Lynette labeled products at our formal Carmel site to be largely completed by the end of this calendar year. And the third and final overall comment relates to our pipeline. We have made substantial progress not only on advancing with our partners our so-called durable assets, but also adding potentially meaningful near-term product opportunities to our pipeline. I'll focus today on the discussion of that pipeline, particularly our durable partner products, which we believe represent large market opportunities. Our two current insulin projects, long-acting insulin Glargine and short-acting insulin Aspart, target commercial markets with an estimated aggregate annualized value of about $2.7 billion, according to manufacturer-reported sales in the first half of this year. Meanwhile, for all forms of these two types of insulins, the current IQVIA-estimated sales for the 12-month moving average annual total as of June 2022 is about $16 billion. The significant difference between the two figures is what is in part behind the growing clamor for more affordable insulin. There has been extensive reporting at the state and national levels of initiatives and programs to make insulin more accessible and more affordable for millions of patients. In fact, the recent Inflation Reduction Act included provisions to lower certain patient copays around insulin. We welcome these initiatives and believe with our significant scale and competitive cost structure, we will be well positioned to support and prosper from these important initiatives. On the respiratory front, our three key products target markets with sales over $4 billion annually, as reported by Acuvia, for a recent 12-month moving annual total. Although actual generic market sales will likely be much lower, we believe the size of the opportunity remains significant for a company of our size. For both our insulin and respiratory franchises, we anticipate fewer competitors than typically found in the generic market due to the operational scale and complexity involved in serving these markets. turning specifically to our long-acting insulin glargine program, where we have remained on our development program for a few years now. We are over 90% complete with subject dosing in our healthy volunteer glargine study. Importantly, no serious adverse events have been reported thus far. We expect to complete subject dosing in the next few weeks. We continue to expect top-line data and analytics to be available toward the end of this calendar year. We also believe the trial will very likely be successful in meeting its clinical endpoints, given the notably high historical success rates of such biosimilar medicines. Thus, we anticipate being able to file the biologics license application in the first quarter of the next calendar year. However, at that time, we expect to avail ourselves to a FDA pre-submission meeting to increase the likelihood of a first pass approval. Depending on our discussion with the FDA, We could then file the BLA in our fourth quarter of this fiscal year and then expect that the review time could be shorter. If approved by the FDA, we remain on track to potentially launch the product in the first half of calendar year 2024. Turning to our program for biosimilar insulin aspart, a fast-acting insulin. This program generally trails the timing of our insulin glargine program by approximately 12 to 15 months. We are already producing an insulin aspart at commercial scale and will be requesting a Type 2 meeting with the FDA later this calendar year. We then anticipate filing an IND later this fiscal year. We thus estimate initiating the clinical study next summer and completing the study in the spring of calendar year 2024. If approved, we are looking at a potential launch of the product mid-year calendar 2025. Turning to our respiratory franchise. I'll start with generic flovent discus. The pivotal clinical trial has been completed, and following an FDA product development meeting, we currently believe the ANDA for the product would be submitted early next calendar year. Moreover, key matters that arose in the review of our generic adverb discus program have been proactively addressed in the generic flovent discus program. Also of note, the FDA has designated the product with CGT, or competitive generic therapy status. which among other things may allow for a priority review and which can shorten the initial review to eight months from submission. Turning to our generic ADVERT DISCUS product, which previously received a complete response letter from the FDA. Key matters that arose during the review of the pivotal trial included sampling protocols, non-functional outer case geometry matters, and post-clinical trial formulation optimization, all of which we believe to be addressable in the new trial. Our partner for the product expects to commence a new clinical trial within the next several months, and the plan is to provide a full response to the CRL by the end of next year. If approved post-resubmission, the product could be launched by the end of 2024. Finally, a brief update on generic Spreva HandyHealer. Development of the product continues with a pilot PK trial to commence this calendar year. While the product is still in early stages of the development cycle, we believe it remains on track for an ANDA filing around the early part of calendar year 2024. So again, for our insulin and respiratory pipeline, IQVIA reflects combined 12-month trailing annual sales of about $20 billion for these markets. Moreover, these products we anticipate limited competitors, and we believe these products are steadily progressing towards launch over the next two to three years. turning now to our nearer-term product opportunities. As we have discussed previously, we have pivoted our product development and licensing efforts to focus on products that have the potential to be more meaningful contributors to our financial results, often products with different dosage forms. On our last call, we mentioned some of these opportunities, including Zolmetriptan, a nasal spray co-development product for migraine and cluster headaches, and Fludarabine, an injectable partnered product currently in very short supply. Pending FDA approval, we expect to launch these products over the next several months, and currently there are only a few manufacturers providing these products. Moreover, our near-term pipeline includes sulforaphate, an oral suspension product, and two additional partnered products, seboflurane, an inhaled aesthetic product, and misalamine-delayed release tablets, 1.2 gram, all of which we hope to launch, subject to FDA approval, by this fiscal 2023 fourth quarter. Finally, we have made solid progress growing our contract development and manufacturing capabilities. Nearly 20% of our current plant output already comes from contract manufacturing. For fiscal 2023, we expect to generate almost double the contract manufacturing revenues we generated in fiscal 2022, largely based on contracts already in place. Thus, we believe contract manufacturing revenues will contribute approximately 8% of our fiscal 2023 net sales. Importantly, this part of our business has gross margins in excess of our company average, and because the products generally involved are patented products, the terms of the contracts tend to be relatively lengthy, so the business is relatively stable. Also, we believe there is ample opportunity to further grow this business over the next couple of years. Now to address a few opportunities that are not included in fiscal 2023 guidance. First, with regard to our insulin products, we have initiated preliminary discussions with a number of states and other organizations that have expressed significant interest in partnering in different ways to commercialize affordable insulin for the millions of patients with diabetes. We believe such activity has dual benefit. One, we could begin generating revenues in the near term through licensing and other arrangements. And two, customers who partner with us now provide us a potential opportunity to lock in future value and associated market share. Second, as reflected in our guidance, we have reduced our sales expectations for certain key products, assuming new competitors may enter the market for these products, even though we may not have yet seen or aware of such new competitors. To the extent that competitive products are delayed from entering the market, we obviously could see higher sales from these products. And third, for a number of products we intend to launch in the coming year, if ultimately approved, we could see higher sales than we have estimated because we assume we are not the next new entrant in these markets. If we are the next new entrant, then we could have upside to our forecast. Overall, we currently have approximately 10 ANDAs pending at the FDA, including partner products, plus four additional products that are approved in pending launch. We also have approximately 16 products in development or early development, and expect to add more from external and internal efforts. To sum up today's remarks, we reported solid fourth quarter financial results with net sales, adjusted gross margin, and adjusted EBITDA in line or above our expectations. The major elements of our cost reduction plan were completed last quarter, and we expected the manufacturing of Lynette-labeled products at our former Carmel site will be largely completed this calendar year. We have made significant progress advancing our durable product pipeline. Our biosimilar insulin glargine project, which we see as the largest and most significant opportunity currently in our pipeline, is nearing completion of the pivotal trial. We believe we are on track for filing the BLA for the product this fiscal year. Development of our other insulin and respiratory acids are also moving forward. We added a number of meaningful near-term product opportunities, including products that have non-solid oral dosage forms and therefore the potential for more limited competition. We anticipate launching a number of them in the coming fiscal year. And we expect our contract manufacturing business in the coming year to almost double from last year. Moreover, we believe there's ample room for further growth over the next few years. With that, I'll now turn the call over to John to review the financials. John?

Thanks, Tim, and good afternoon, everyone. Turning to our financial performance, I'll focus my discussion on our non-GAAP adjusted measures. For the 2022 fourth quarter, net sales were $74.2 million, compared with $106 million for the fourth quarter of last year. On a sequential quarterly basis, net sales were down slightly from $78.4 million in the 2022 third quarter. The decline includes the impact of the previously announced product rationalization effort. Gross profit was $10.4 million, or 14% of net sales, compared with $26.4 million, or 25% of net sales, for the prior year fourth quarter. On a sequential quarterly basis, both gross profit and gross margin increased from $9.3 million or 12% of net sales in the 2022 third quarter. Interest expense increased to $13.1 million from $12.1 million. Net loss was $17.8 million or $0.44 per share compared with $7.4 million or 19 cents per share. Negative adjusted EBITDA was $1.3 million. Turning to our balance sheet, at June 30, 2022, cash and cash equivalents totaled approximately $88 million. Within the next few months, we continue to expect to receive sizable income tax refunds of approximately $26 million. At June 30th, total debt was approximately $654 million, comprised of first lien senior secured notes of $350 million, second lien notes of $217.7 million, and convertible notes of $86.3 million. Turning to our guidance, for fiscal 2023, we expect net sales in the range of $275 million to $300 million adjusted gross margin as a percentage of net sales of approximately 15% to 17% adjusted R&D expense in the range of $23 million to $25 million adjusted SG&A expense ranging from $56 million to $59 million Adjusted interest expense of approximately $53 million. The full year adjusted effective tax rate in the range of 23.5% to 24.5%. Adjusted EBITDA in the range of negative $12 million to break even. And lastly, capital expenditures to be approximately $8 million to $12 million. Regarding the phasing of the quarters, we expect net sales and gross margin in Q1 to be lower than Q4, ramping up slightly in Q2, and continuing to ramp up in the second half of fiscal 2023. The increase is related to expected new product launches, especially in the second half of the year. Operating expenses to be higher in the first half of the year. primarily due to higher project spend related to R&D and certain compensation-related expenses. With that overview, I would now like to turn the call over to Robert. Robert?

Thanks, John. Operator, that completes our prepared portion of today's presentation. We'd now like to open the call to questions.

Certainly. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Scott Henry from Roth Capital. Your line is now live.

Thank you and good afternoon. I do have a couple questions here. First, when I looked at the adjustments to get to non-GAAP, what was the reimbursement of legal costs? It looks like about $12 million, as well as there was a write-down of about $53 million. I was hoping to get some clarity on what those events were.

Hi, Scott. This is John. I'll start with the $53 million. It was an impairment. Most of that was associated with the KU acquisition. There was a few other products on that list as well. And then for the legal, we had been recording some legal expenses over the last couple of quarters. This is just a recording of a liability associated with that settlement. So it's, again, similar to what we've seen in the previous quarters.

So was it with regards to state fines or investigations, just trying to get a sense of what legal expenses you were reimbursing for specifically?

It's actually for a distribution agreement of ours. It's part of the identifications associated with the agreement itself. So it was recorded. you know, as a liability, but then removed from our non-GAAP results.

Okay. All right. I'll just work with that then. You're looking at some of the products. The Levo, I guess, endocrinology category was pretty low. What's going on there, and how should we think about that going forward?

Well, it did come down in the fourth quarter. Some of the drops, let's just say, was associated just with some activities in the quarter itself. But going into next year, as part of our expected guidance, we have that category actually going up. So we think that that should be trending in a positive direction as we go into 23. Okay. Okay.

And then you mentioned, I think, five new products expected in fiscal year 2023. What kind of revenue contribution, if you can put just a range around that, should we expect for fiscal 23 and then maybe fiscal 24? I was trying to get a sense of some of the moving parts.

Well, yeah. So let's start with the fact that for our guidance, as always, I think we provide a very balanced guidance. So in our expectations, we do have some of those launches. They're in the back end of the year. But a lot of the upsides or potentials of the products themselves that Tim was talking about aren't necessarily in our forecasted numbers. So ultimately, we're accounting for the launches themselves, but I guess I'll stress that I feel that our guidance is very balanced.

Okay. And just a couple more. You've got the insulin data coming by the end of the year. Let's say that data is positive. How should we think about the risk profile post-data? I mean, how much is manufacturing a factor? How many cycles should we expect after that? Just trying to get a sense of, you know, how much for an insulin program is de-risked based on clinical data, or is, you know, the manufacturing also, you know, something we really got to focus on?

Hello, Scott. It's Tim. As noted in our remarks, the success rates of these sorts of products for the clinical trial is extremely high. And as it relates to first pass approvals, again, outside of specific CGMP concerns, again, quite high expectations. In our circumstance, we have a brand new plant built for purpose. It only makes insulin. It only makes two insulins. So we feel pretty good about that CGMP environment being controllable, but we've got to get there. But it's one of the reasons we are so optimistic about the prospects for this product. We think it's going to pass its clinical trial, but we'll confirm that when the data is officially in, and we're optimistic about a first pass. But that's up to the FDA and us holding our CGMP compliances.

Okay. Thank you. That's helpful. And then also on the pipeline, ADVERDISCUS complete response letter by the end of next year. That seems like a long time. Would you like to give – I mean, one, maybe I'm wrong. Maybe that's not a long time, but it seems like a long time. Could you give any color on why it is taking that long to respond?

Essentially, the timeline involved is around making some changes to the final formulation as well as implementing the clinical trial, a redo of the clinical trial. That's the biggest time component of responding. As we noted in the remarks, it's fairly clear what the issues were in the clinical trial from the FDA's feedback, and we feel pretty good about our ability to address them, but it does take some time.

Okay. All right. I didn't realize the magnitude of that CRL. Thank you. Final question, and I apologize for asking so many, but could you just give a sense of how we should think about you know, the cash runway at the company. Just in your terms, you know, when are the next key data points that we have to worry about debt being taken care of? Just trying to understand that from a big picture. Thank you for taking all the questions.

So, well, first of all, I'll say, you know, as you mentioned, the debt, you know, as part of our refinancing a little over a year ago, you know, obviously we were able to extend that runway. And I also like to say that we ended the year with a cash balance of $88 million, and I'll say that's a healthy cash balance. We were providing some estimates that were a little bit lower than that. And we're also expecting $26 million of tax refunds in this calendar year. So with that, we are expecting cash to come down, but we're happy to start the year with a healthy balance.

Okay. And when's the next debt due?

Well, right now, I mean, we have interest payments that are paid semi-annually for the next couple of years. So we're a little under four years away from maturity on the first lien.

Okay, four years for maturity. And then are there any covenants that come into play?

You know, when we did the refinancing, there were no financial covenants included in the refinancing, so no, in terms of that.

Good to hear that. Okay, great. Thank you for taking all the questions. Great. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

All right, it's Tim again. Thank you for joining the call. And as always, thanks to our employees, customers, and partners all working hard to provide high-quality, low-cost medicines for our patients. We look forward to sharing our progress on our next call. Good night.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.