Lannett Company, Inc.
Q1 2022 Earnings Call Transcript

Published: 3 Nov 2021

[Operator:]

Welcome to the Lannett Company Fiscal 2022 First Quarter Financial Results Conference Call. My name is Tilda, and I will be your operator for today. I’ll now turn the call over to Mr. Robert Jaffe, Investor Relations for Lannett. Mr. Jaffe, you may begin.

[Robert Jaffe:]

Thank you, operator. Good afternoon, everyone and thank you for joining us today to discuss Lannett Company’s fiscal 2022 first quarter financial results. 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 Lehrer, who leads our biosimilar insulin initiatives. This call is being broadcast live at www.lannett.com. A playback will be available for at least 3 months on Lannett’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 Lannett’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 Crew. Tim?

[Tim Crew:]

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 the 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 a 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 Probenecid, Esomeprazole, Levothyroxine Tablets, and Chlorpromazine specifically, has 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 Lannett 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

[John Kozlowski:]

Thanks, Tim, and good afternoon, everyone. I'll begin with our financial results on a non-GAAP 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 $0.27 per share versus net income of $2.2 million or $0.06 per diluted share. Adjusted EBITDA was $10.0 million. Turning to our balance sheet. At September 30, 2021, cash and cash equivalents totaled approximately $105 million, up from $93 million at June 30. Cash increased during the first quarter due to a few factors

[Operator:]

We have a question from Scott Henry from ROTH Capital. Please go ahead.

[Scott Henry:]

Thank you. Good afternoon. Just a couple of questions. First, I think you might have hit on this a little bit. But obviously, there was some revenue upside in Q1 and some downside the rest of the year. Can you talk about what products drove the upside and where the weakness is coming from going forward?

[John Kozlowski:]

Hi, Scott. This is John. So the upside for the quarter was the strength in infectious diseases, specifically posaconazole. We had talked about that category coming down in Q1, and we saw it relatively even actually ticking up a little bit. And that is still though being forecast to come down now in Q2 significantly and hold that for the remainder of the year. So that was the majority of the difference.

[Scott Henry:]

Okay. And then the downside, the rest of the year?

[John Kozlowski:]

Again the downside of the rest of the year would be the posaconazole competition and infectious disease is coming down again significantly. But across the categories, we're still seeing strong competition, which are bringing down each category down by a bit. You're seeing that in antipsychosis, which came down to a little below $4 million, which is a continuous decline from Q4. Other also came down a little bit. Some of that was around probenecid, which was discussed a little bit earlier. And Numbrino is still seeing sales that are less than what we were -- what we would call a more normalized number, which is -- and it's running about a little bit less than half of that.

[Scott Henry:]

Okay. And then contract manufacturing, not that its particularly relevant, but we do have to model it. Way down, should we expect that to stay down? Are you prioritizing away from that?

[John Kozlowski:]

Again, it's not a matter of prioritization and there's some ebbs and flows in there. It's -- the run rate may come up a little bit with some increases toward the back end of the year.

[Tim Crew:]

I would note, Scott, it's Tim here, that -- towards the end of last year, one of our contract manufacturing opportunities concluded, and that was part of the step down. We still are open for business and appreciate those sort of opportunities, but they're smaller this year than last year.

[Scott Henry:]

Okay. And then if I could shift to the pipeline. You talked about the ADVAIR DISKUS FDA meeting. We know that it was going to take multiple cycles, but that specific meeting, if you can, can you characterize whether it went about as planned? Did it go better-than-expected or worse-than-expected? Just so we can get a sense of how it's moving along relative to expectations.

[John Kozlowski:]

All right. Just to be clear, it wasn't an FDA meeting, we noted in the script that there was disciplined review letters that come back from the various parts of the FDA that reviewed those applications. There is quite a few comments that come from a file of this complexity. And we have been working on those responses. I don't think there was too much in those disciplined reviews that were surprising to us. We believe we can respond to most of them shortly. Some of them take a bit longer and thus will reappear in a -- what we call the CRL, complete response letter, that we'd expect in January. All in all, I think we are where we want to be and need to continue to work with the FDA, including the overseas inspection of the facility to get this product into next fiscal year.

[Scott Henry:]

Okay. And question on thalidomide. I haven't heard about that in a little while. Where exactly does that R&D program stand currently?

[John Kozlowski:]

So, Scott, we have earlier disclosed that but for an API, we believe we are in an approvable state. There has been some progression at that suppliers situation in their facility, suggesting that they will have resolution of the FDA concern with the API. And therefore, we noted in our script that this product could come back into our forecasting for next fiscal year.

[Scott Henry:]

Okay. And then just a final question. The EBITDA guidance certainly down for the rest of the year, particularly if I pull out the stronger first quarter, that EBITDA number is pretty significantly below the interest expense number, even if not cash interest expense. What are your thoughts on that in terms of kind of bridging that gap? And is there any risk to any covenants? I know you're sitting on a lot of cash, but sometimes the debt covenants can be cumbersome. Anything, anywhere that you would comment on?

[John Kozlowski:]

Well, Scott, we will start with the debt covenants as part of our refinancing from last year. The financial covenants was removed. It's not included in our new agreements. So that's not a concern, provide us the flexibility that we needed. And to bridge for this year, there's one large item that's included in our overall cash flow expectations. That's the significant tax refund that we're expecting to receive sometime in the third quarter. That's currently on our balance sheet for a little bit more than $30 million. That helps bridge some of the cash flows with the declining EBITDA.

[Tim Crew:]

Scott, just to add, as John noted in the script, we are forecasting a cash balance in excess of $80 million at the end of this fiscal year. And of course, the restructuring itself will start improving our cash flows as they -- as it comes into full effect later this year.

[Scott Henry:]

Okay, great. Thank you for that clarity, and thank you for taking the questions.

[Operator:]

Thank you. Our next question comes from Elliot Wilbur from Raymond James. Please go ahead.

[Unidentified Analyst:]

Hi. This is Smith calling on behalf of Elliott Wilbur. And I'd like to ask a few questions. First, are you facing any potential delays to reaching target gross margin above 30% within your previous target within the next 3 to 5 years?

[John Kozlowski:]

So the gross margin that we have talked about toward the end of our strategic plan in 2025 are clearly driven by the emergence into our in line from our current pipeline, the bespoke and larger durable assets. To the extent those products are successfully launched, their in-market margins are quite a bit higher than 30s, but we, of course, have -- we are expected to be higher -- well higher than the 30s. But we, of course, have margin sharing agreements with those partners, which brings it back down into that sort of range. So while the pressures on our near-term portfolio are being reflected in our near-term results, most of those products would have had lower margin -- significantly lower margins by the time we launch. So our overall expectations for 2025 have not changed a great deal from last quarter. It's the near-term results that we're facing those pressures, and we remain optimistic about our pipeline in the out years.

[Unidentified Analyst:]

Okay, great. Thank you. Also, can you please talk about the trends in base generics erosion both volume and price? And how does that trend in this most recent quarter?

[Tim Crew:]

So the market, as we've said, has been competitive. We clearly don't talk to pricing specifically on any sort of public forum or private when outside of our own company. But the competitive environment is fundamentally reflecting more supply out there and not a lot of new generics and both of those trends has been putting the pressures into the -- to our results. And I think you're seeing those same comments across most of the industry for the generic portfolios that are being discussed in the quarterly results.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

Thank you. And now I would like to hand the call back to management for final remarks.

[Tim Crew:]

All right. It's Tim again. Thanks again for joining the call, and thanks to our employees, customers and partners still working hard in challenging times to provide high-quality, low-cost medicines for our patients. We look forward to sharing our progress on our next call and some of you perhaps at the upcoming investor conferences, which we'll be at this quarter and into next. Have a good night.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.