Akorn (AKRX) Q3 2019 Earnings Call Transcript

Akorn (AKRX)
Q3 2019 Earnings Call
Oct 31, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Akorn third-quarter 2019 financial results call. [Operator Instructions] As a reminder, today's conference is being recorded. I would like to turn the conference over to Jennifer Bowles, Akorn's senior vice president of corporate strategy and investor relations. Please go ahead.

Jennifer Bowles -- Senior Vice President of Corporate Strategy and Investor Relations

Thank you. Good morning, and welcome to Akorn's third-quarter 2019 conference call. I'm joined today by Douglas Boothe, Akorn's president and chief executive officer; and Duane Portwood, Akorn's chief financial officer. The third-quarter press release is available on the investor relations portion of Akorn's website.

On today's call, Doug will provide a business update and then Duane will review the company's third-quarter 2019 financial results. We will then open up the call to your questions. As a reminder, the conference call and the webcast are being recorded and will be available on Akorn's Investor Relations website shortly following the conclusion of today's call. Before we begin, I would like to remind everyone that any statements made on this call today that express a belief, expectation, anticipation or intent as well as those that are not historical fact are considered forward-looking statements and are protected by the safe harbor provisions of the Private Securities Litigation Reform Act.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. A description of these risks can be found in the Risk Factors section of Akorn's most recent annual report on Form 10-K as updated by Akorn's subsequent filings with the SEC. The forward-looking statements on this call speak only as of today's date, and Akorn assumes no obligation to update forward-looking statements as a result of new information or future developments. With that, I'll turn the call over to Doug.

Doug Boothe -- President and Chief Executive Officer

Thank you, Jennifer. Good morning, and Happy Halloween, everyone. As we quickly approach the end of the fiscal year, I'm delighted by the continued progress made across our business and the performance momentum we've generated year to date. For the first time since the fourth quarter of 2016, company revenues for the quarter registered growth versus the prior-year quarter.

Our financial results and operating performance this quarter are a direct result of companywide commitment to strengthening our business through customer focus, process improvements and cost-containment activities. Performance improvements across the business contributed to positive operating cash flow generation and continued margin growth for the quarter. I'd like to take this time to thank all the Akorn associates for your hard work, commitment and focus in support of our sales, operations, quality and financial targets. One of the many examples, we continue to improve our customer service levels in quarter 3.

Throughout the year, our plant product availability has been increasing, service levels are higher, and as a result, failure to supply claims received in the third quarter were down significantly. You may have noticed in our press release that failure to supply penalties were actually a small credit for the quarter. This was driven not only by a large reduction in new claims received but also by a collaborative internal effort to improve our claims-processing activities to allow for faster resolution of disputed claims and increased recoveries of the corresponding customer deductions. Although we can't expect credits in future periods, this reengineered claims-handling process as well as the company's operational focus on supply and-demand planning to maximize revenues while minimizing potential backorders should serve us well moving forward.

On the CGMP activities front, I am pleased to report that we are on track for essentially full completion of our 483- and warning-letter-related action items in our Decatur facility by the end of 2019. A notable enhancement made during our scheduled quarter 3 shutdown at Decatur was the installation of restricted-access barrier systems, or RABS, on two additional injectable manufacturing lines. At our Somerset facility, we have already completed the majority of our 483 action items and are on track to complete the majority of the warning letter activities in early 2020. We are anticipating that the FDA will return to both of these facilities for reinspections.

However, we cannot predict when that will occur. And as a follow-up from recent interactions with FDA Office of Pharmaceutical Quality leadership at the recent PMA conference, we are working to schedule an in-person meeting to update the agency on our continued remediation progress and our companywide QSCAP initiatives, hopefully, prior to year-end. On the new products front, we are pleased with the progress made in the first few months after launching the Loteprednol 0.5% ophthalmic suspension and have recently completed the work necessary to expand our batch size to allow us to pursue additional market opportunities. Also, we launched our Diclofenac Sodium 1% topical gel during the third quarter.

While there's a fair amount of competition for this product, the market size is quite large, so we're expecting some modest incremental revenue from this molecule going forward. And for those of you keeping track at home, Diclofenac is our fifth new product launch so far in 2019. Also received two new ANDA approvals during the quarter, bringing our total number of new ANDA approvals to five year to date. Looking ahead, as a result of our third-quarter performance and current expectations for the fourth quarter, we are updating our net loss, and we are affirming our revenue and adjusted EBITDA guidance for full year 2019.

Year-to-date results have been tracking to our expectations, providing confidence in our long-term strategy and support the refinancing process, which Duane will provide more color on shortly. When you first heard from me in February, I articulated the belief that Akorn's road map to success would be paved by the continued prioritization and execution of our operations, quality systems and compliance enhancement initiatives. It is clear that these initiatives are bearing fruit. I will now hand the call over to Duane for a review of our financial results, the refinancing activities and provide some more color on our guidance for fiscal-year 2019.

Duane Portwood -- Chief Financial Officer

Thank you, Doug, and good morning, everyone. I hope you've had a chance to read the press release we issued earlier today outlining Akorn's preliminary third-quarter unaudited financial results. Please note that we intend to file our Form 10-Q later today. When discussing our financial results this morning, I'll be referring to a number of non-GAAP figures.

Please refer to today's press release for our GAAP to non-GAAP reconciliations and a listing of items included in our adjustments. With that, net revenue for the quarter ended September 30, 2019, was $176 million, an increase of $10.6 million or 6.4% over the prior-year quarter. The increase was primarily driven by favorable price variance that was partially offset by volume declines on a number of products, including Myorisan and the prescription version of our fluticasone nasal spray. Supply shortfalls from our Somerset site continued to negatively impact the year-over-year comparison.

Sequentially, net revenues were down slightly, but generally in line with the second quarter. Gross margin for the third quarter was 40.5% compared to 34.6% for the prior-year quarter. This increase in gross margin was primarily driven by favorable price and product mix and lower FDA compliance-related expenses, which were $4.6 million in the quarter compared to $9.5 million in the prior-year quarter. Please note that while these costs are included in our adjusted EBITDA results, we do call them out separately as we consider the amount of effort currently under way to be unusually high as we address the Decatur and Somerset warning letters and other CGMP enhancement opportunities.

On a sequential basis, gross margin improved to 40.5% in the third quarter from 38.2% in the second quarter, mainly due to product mix along with lower spending on FDA compliance-related expenses. This is really due to timing as we expect CGMP expenses to increase again in the fourth quarter as we work to complete the Somerset warning letter activities in early 2020. Selling, general and administrative expense was $56 million for the third quarter of '19 compared to $63 million for the prior-year quarter. The $7 million decrease was driven by lower legal expenses associated with the Delaware action and lower expenses related to our data integrity assessment effort.

These decreases were somewhat offset by increased expenses for refinancing advisory fees. Please note that these aforementioned expense are excluded from our adjusted EBITDA. Research and development expense for the third quarter of 2019 was $9 million compared to $12 million in the third quarter of 2018, reflecting lower spend on labor and projects and is in line with our spending target as a percent of revenue. Before we get to net income and adjusted EBITDA, there were two unusual items that had a significant impact on our reported third-quarter results.

First, as you may recall, last quarter, we recorded a $74 million charge and corresponding liability due to the securities class action litigation settlement agreement in principle. A portion of the agreement calls for the issuance of common shares, and as such, we are required to mark those contemplated shares to market each quarter until they are issued. Because the company's stock price at the end of the third quarter was lower than the stock price at the end of the second quarter, the liability related to the contemplated share issuance declined, and therefore, resulted in a $12 million benefit to third-quarter GAAP net income. Note, this item is excluded on an adjusted basis.

As a reminder, the settlement agreement is not final. It remains subject to final court approval, and we have the ability to terminate the agreement if the opt-out claims grow to be too large. There are significant constraints on our ability to dedicate cash toward litigation settlements or judgments. We believe the structure of this settlement offers class members real value in both the short and long term in spite of those cash limitations.

Therefore, we hope that no shareholders ultimately decide to opt out. The other unusual item that impacted the third quarter relates to our income tax provision. For the quarter, we reported a $66 million income tax benefit. This benefit was primarily the result of an IRS approval of an accounting method change related to the timing of deductions for chargebacks and rebates.

This approval allowed for the reversal of this previously uncertain tax liability position. It's important to note that this is a book tax benefit and does not impact cash taxes. GAAP net income for the third quarter of 2019 was $48 million or $0.38 per diluted share compared to a GAAP net loss of $70 million or $0.56 per diluted share for the same quarter of 2018. Including a net negative adjustment of $45 million to net income for non-GAAP items, adjusted diluted earnings per share for the third quarter of 2019 were $0.02 compared to a $0.06 loss in the same quarter of 2018 after a net adjustment of $63 million to net income for non-GAAP items.

Included in the $45 million net adjustment for the third quarter of 2019 is the $66 million income tax benefit previously discussed. Our adjusted EBITDA for the third quarter of 2019 was $29 million compared to $10 million in the prior-year quarter. The increase in adjusted EBITDA from the prior-year quarter is primarily the result of higher revenues and product margins and lower FDA compliance-related costs. Sequentially, adjusted EBITDA improved to $29 million from $22 million for the second quarter -- from the second quarter, primarily as a result of product mix and lower FDA compliance-related costs.

Please refer to the reconciliations tape -- reconciliation tables in the press release for non-GAAP measures. Turning to the balance sheet. Our cash balance at September 30, 2019, was $206 million, up approximately $27 million from June 30, driven by $34 million in positive cash flow from operations, partially offset by $7 million in capital expenditures. The $34 million in operating cash flow generated during the quarter reflects our operating results as well as positive working capital performance, driven somewhat by timing.

Year to date, we have generated $5 million of cash from operations despite approximately $38 million expended on FDA compliance and data-integrity-related matters and $12 million on refinancing activities. With a debt balance of $845 million, on a trailing 12-month basis, our net debt to adjusted EBITDA ratio was approximately 16 times at September 30, 2019. Turning to our outlook for the full year. We are pleased with our progress and remain confident in the fundamentals of the business.

At this time, we expect that our net revenues will be biased toward the lower end of the $690 million to $710 million guidance range and our adjusted EBITDA will be biased toward the higher end of the $71 million to $86 million guidance range. We continue to expect spending on FDA compliance and data-integrity efforts to total approximately $50 million for the full year. There are a couple of moving parts on the other lines. Net loss is now expected in the range of $193 million to $178 million.

The improvement from prior guidance is primarily driven by the third-quarter income tax benefit I described earlier. And capital expenditures are now expected to be approximately $35 million for the year. Please refer to the reconciliation tables in the press release for non-GAAP measures. Finally, turning to our effort to refinance our existing term loan and address our capital structure with our lenders as required by the standstill agreement.

The last few months have been very active, and I'm pleased to report that there's been strong interest from prospective investors. In fact, we've received several indicative proposals that are moving forward in the diligence and structuring process. With several options being considered, we are working hard to identify and implement the appropriate solution. In addition, we're also in discussions with our current lenders to accommodate the timing of implementation of these proposals.

With that, I'll turn the call back over to Doug.

Doug Boothe -- President and Chief Executive Officer

Thanks, Duane. Akorn's story this year has been one of execution, and I cannot have been more pleased with the collective efforts of the entire Akorn team, working hard to help realize the improvements we are seeking across the business. I firmly believe that we are on the right path, that we will continue to see progress if we stay the course and maintain our focus on compliance, transparency and accountability. While there's still much work to be done, I'm extremely optimistic about the future of Akorn and confident that the company will return to long-term growth and sustained profitability.

And with that, we'll open the floor to questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from the line of David Amsellem with Piper Jaffray.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. So just a couple. So the first is, you had mentioned in the release, price increases on specific products. So I just wanted to get specifics on that.

And maybe talk -- can you can talk about the extent to which you can take price, how you can be opportunistic there? So that's number one. And then number two, maybe I missed this, so I just want to clarify. You'd said previously that you're looking at EBITDA or adjusted EBITDA potentially more than doubling next year. I wanted to get your latest thoughts on the EBITDA outlook for next year and if you're still thinking about that target as credible.

Doug Boothe -- President and Chief Executive Officer

Thanks for the questions. From a price increase perspective, I think as we noted, there was positive price variance. That's the result of price increases that we took on selected products that are -- have good dynamics, if you will. I don't want to get into the specifics, but I think one of the publicly available items would be Lidocaine Jelly.

We took price increases on that at the end of the first quarter, and we're seeing the impact of that as we go through the year. As it relates to 2020, we still do see a path toward doubling EBITDA from 2019 levels to 2020, as we look to significantly decrease the spend that we have on our FDA-compliance efforts as well as other kind of cost-containment efforts and so on. So that outlook still remains the same.

Duane Portwood -- Chief Financial Officer

David, I just want to add on the pricing discussion. I mean, certainly, it's our responsibility to look at our portfolio in light of both the competition and the available alternatives. And certainly, with the activities the company experienced late last year and many products not being available or unable to supply to fully meet the market demand, we went back and looked at the portfolio as we were coming back with items and took several actions in the early -- late part of the first quarter, one of which was the lidocaine. Again, these pricing actions were certainly not significant increases in terms of absolute dollar amount, I know obviously, there's a lot of sensitivity and awareness of that.

And all these actions were actually all reported consistent with the legal requirements by state as we went along with the activities.

David Amsellem -- Piper Jaffray -- Analyst

OK. That's helpful. If I may ask a follow-up. In terms of the discontinuations that you cited, are there more of those product discontinuations in the works? I know that managing the commercial portfolio is fluid, but can you talk about are you're thinking about portfolio optimization and specifically discontinuations?

Doug Boothe -- President and Chief Executive Officer

I'd say less on the discontinuation front. Certainly, some of the work that's been done with the CGMP-enhancement activities was to go back and look at methods on many of the older products in the portfolio. So some of those products have not come back to market. We're still completing that work, for example, at our Somerset facility.

So part of the growth trajectory in next year is the full year impact of products that have come back to market this year as well as we look at managing our mix, both of existing products, where there are opportunities or volumes that we are trying to recover from, as well as potential opportunity to bring back select limited items. But certainly, the base business is quite strong.

Duane Portwood -- Chief Financial Officer

The major discontinued item is Methylene Blue, which was an unapproved product that we had been selling. We're no longer on the market with that for a variety of reasons. But -- so no, discontinuing products is not going to be part of the strategy as we go forward. This is a fairly unique circumstance.

Doug Boothe -- President and Chief Executive Officer

There's pending litigation on that product.

David Amsellem -- Piper Jaffray -- Analyst

OK. All right. Thanks.

Operator

Thank you. Our next question comes from the line of Randall Stanicky with RBC Capital Markets.

Randall Stanicky -- RBC Capital Markets -- Analyst

Great. Thanks, guys. Doug, Duane, maybe help us out with the guidance for this year. On the one hand, you're pointing to EBITDA guidance at the upper end of the range, which is pointing to around $25 million.

On the other hand, it implies a bit of a stepdown from 3Q, which I suspect is a timing issue given the last couple of quarters of beats. But as we think about run rating 4Q, obviously run rating a number that's $25 million versus one that's higher is getting us to a lower overall number. So help us understand the moving parts, some of the perhaps cost issues and what ramps specifically the business up to that doubling of EBITDA in 2020. And then I've got a follow-up.

Duane Portwood -- Chief Financial Officer

Well, I guess if you just do kind of the squeeze math, if you will, for the year to date and then the guidance that we're talking about now for 2019. First of all, we do expect -- in that EBITDA performance, there'll be significantly larger FDA remediation costs in the fourth quarter relative to the third quarter. We were -- and that's a timing issue just as we get the Somerset activity kind of ramped up as we really getting going on the warning letter items. The other is, as Doug mentioned, failure to supply was significantly improved in Q3, actually a slight positive for us.

Some of that was, what I'll call, kind of onetime benefits from being able to adjudicate some claims favorably in our favor. So I don't expect a credit there in Q4. I do expect kind of overall improvement relative to what we've been seeing over the last number of quarters before Q3. The other thing is we've -- we continue to -- quite frankly, we were quicker to get backorders down.

That happened in Q2, it really didn't help -- it didn't assist Q3 that much, but that's -- as we looked at the year -- at the beginning in Q1, the velocity at which we were able to kind of ramp that back down and get that down to more reasonable levels was quicker than we had anticipated. So all those kind of add up to a Q4 that's -- where we're guiding to. And I think if you take into account the failure to -- I'm sorry, the FDA costs, if -- again, if you just do the math, you're looking at $11 million, $12 million for the fourth quarter, which then puts us at $30 million, $35 million, $37 million, somewhere in the mid- to possibly high 30s on a run rate basis. If that's the true -- if just that is the true run rate, then we're $35 million times four for 2020, which is $140 million.

We're working hard on cost initiatives, either through procurement or at the facilities and a little bit at the headquarters, which then can provide more juice beyond that.

Doug Boothe -- President and Chief Executive Officer

I'm just going to add, Randall, that again, I mean, certainly not providing 2020 guidance here. But certainly, if you talk about failure to supply, I mean last year, the company had over $22 million in failure to supply penalties. We are kind of running at that same run rate in the first half of the year with about $4 million and $5-ish million. And then again, we had a quarter here where it was essentially flat.

There were some failure to supply but certainly at a much lower run rate. That's a number that it would look in 2020. If we maintain that rate, that's a net contributor of at least $10 million or so in EBITDA. And we also had several operational costs in the quarter, which were one-timers, as we are continuing to complete the remediation activities and some investigations.

So we still have more work to do to improve our operational performance at the sites, which again will contribute to our overall EBITDA improvement by cost reductions. And then lastly, from a commercial standpoint, with better supply performance, better cycle times at our facilities, higher rates of completion and compliance, there's more business out there for us to get. So something that's partly driving the top line, which will contribute margin to the bottom line as well.

Randall Stanicky -- RBC Capital Markets -- Analyst

Yes. No. That helps. I'm just trying to understand the support mechanisms to next year.

And then the two follow-ups on that topic I'd have. No. 1, Duane, does the gross margin continue to improve from the 40-plus percent level that we're at now? Because that's a little bit quicker capture than we expected. And then, Doug, what can we see Durezol? Do we have line of sight into some more specific timing on that? Thanks.

Duane Portwood -- Chief Financial Officer

Yes. On the -- certainly, absent the FDA remediation costs that are reported as part of COGS, I do expect continued improvement kind of in the underlying operations of the facilities and whatnot. We're -- we've come a long -- we had a long way to go, we've come a long way, but a little bit more work to do. We're still working in Decatur.

And I'm sure that, that is a little bit of a distraction, but we'll get that done this quarter and then get Somerset done sometime in early 2020. And then we're kind of cooking with gas, if you will. And so yes, I do expect continued margin improvement, again absent the dynamics of the kind of unusual FDA compliance cost.

Doug Boothe -- President and Chief Executive Officer

Yes, Randall, on the Durezol, we are -- as we mentioned last call, we did receive a complete response letter. The team is working on the required responses to that. The goal is to have that out before the end of the year, hopefully even before the end of -- at least early December. And with that, given the fact that we've yet to see an approval, we believe we're first in line with CGT designation that -- cycle time review on that potentially could be faster than six months.

But it certainly is an item we anticipate or we believe it will be a 2020 item for us.

Randall Stanicky -- RBC Capital Markets -- Analyst

OK. That's great. Thanks.

Operator

Thank you. Our next question comes from the line of Elliot Wilbur with Raymond James.

Elliot Wilbur -- Raymond James -- Analyst

Thanks. Good morning. Doug, just want to follow up on your last commentary around Durezol competitive environment. Always difficult to know who's doing what in the space, I guess, but are you -- so how are you thinking about your positioning in terms of first-to-market versus other players? I mean I know that, I think, you guys are the only ones where there's actually a -- what's -- a P4 filed in an action, but I think we're coming -- generics could be on the market in the next couple of weeks.

So I'm just kind of wondering what you may be hearing in terms of competitive activity in that product.

Doug Boothe -- President and Chief Executive Officer

Well, I think we're not hearing anything. So I think that's indicative of where we believe we are in line related to market entry. And again, this is not an easy formulation. It's one that again subject to the guidance and focus.

It's one that we spend a lot of time with the agency on. As I mentioned, we've received two CRLs, and we're working on the response to it, and it's a very important, very complicated, very challenging formulation as well as to produce in a sterile facility. So we haven't heard anything, but you're right. I mean since there is a -- the last of the pediatric IP will expire later this month, there could be out there.

But again, I'm pretty confident our ears from the customers, who always like to talk about new products, have not indicated that someone is waiting in the wings, but that's the generic drug business.

Elliot Wilbur -- Raymond James -- Analyst

Yes. No, got it. That's very helpful. I want to go back to some of the commentary around continued improvement in failure to supply activities and just basic sort of overall positive trends in terms of operational execution, trying to think a little bit more other than just sort of a reduction in spend tied to some of these items, how that could translate into better overall revenue performance for the existing base business.

That's a tough question to answer, lots of moving parts. But maybe the question is better framed as if you could just kind of give us a sense of where Somerset and Decatur are in terms of either capacity utilization or throughput relative to historic levels. Just trying to get a sense of kind of where we are in terms of operational performance versus historical levels.

Doug Boothe -- President and Chief Executive Officer

Yes, again, I would say, Elliot, that -- I mean, a lot of that, you just -- to me, talks about performance momentum, which I mentioned at the beginning of my remarks. Good cycle time, improved cycle time at the facilities, batches produced right the first time more swiftly and complete -- completion of investigations and CAPA implementation, those are all the sorts of things that accelerate product availability, our plant product availability metric, which, of course, results in the ability for our commercial team, John and the team out there, to go out and not just maintain the business we have but go out and seek additional opportunities. We've said no to a lot of business last year plus in light of the compliance challenges, the slowdown at the facilities, the taking things on and off-line is doing remediation implementation. So I know there's a lot of work out there, but certainly, we are looking at opportunities on our, again, our unique, and I think, very, very strong portfolio, valued portfolio from our customers.

So we are clearly looking at capacity utilization across our lines. Some areas where there is significant utilization, we've actually got alternative production being qualified, both within our facilities to potentially third parties. So that's an ability for us to go out and take more opportunities in the market space allows. And certainly, as we make things right the first time and eliminate the need to do it a second time, which again effectively won't necessarily increase the "utilization" of the facility but will increase the output.

So those are some of the basics. And with the leadership we have, as I mentioned in the last call, we've got new site leadership at Decatur, new quality leadership at all the facilities, new site leadership at our facility in Switzerland. They have now been on board for several months. And we're definitely seeing the momentum.

Duane mentioned service levels came -- or sorry, backwards came down significantly in the second quarter. We maintained and actually slightly improved upon that in the third quarter. So we're trying to get away from allocating products to actually having products available, then to go out and opportunistically take opportunities because they're offered to us, and we've been unable to pounce on them in the past. Those are some of the areas that we look forward to as part of the revenue growth activities in 2020.

Elliot Wilbur -- Raymond James -- Analyst

OK. Last question, financial question for Duane. Duane, you talked about the better operating cash flow performance in the quarter, certainly stands out, I guess, recent -- relative -- trend of the last couple of years. I mean it does look like decline in receivables was a fairly significant driver of that and receivable levels seem to be well toward the low end of the historical range, at least on an absolute basis.

It seems like something more than just simple timing, and I'm wondering if you could just address that particular aspect of cash flow dynamics in the quarter. And then just a follow-up on the price increase question. Much bigger contribution this quarter obviously. Is it basically the same products that contributed to positive benefit from price increase in 1Q and 2Q and you're just seeing full applicability of increases across all volume? Or maybe have there been some additional products where price has been taken and just -- we haven't seen those necessarily yet in some of the third-party sources?

Duane Portwood -- Chief Financial Officer

Yes. So on the pricing first. Yes, it's not a function of new price increases or additional price increases. It's a function of the ones we took and then getting -- sometimes it takes a little while for the effect of those to punch in, if you will.

In Q3, it was kind of the first quarter where everything is in full effect, if you will. As it relates to working capital, yes, a couple of things on working capital. First of all, there's steep reduction in receivables. That is less about timing.

That's more about product mix than it is timing. I don't expect -- absent big changes in sales performance, I don't expect big changes in AR going forward. So I don't think that timing will reverse or reverse significantly anyway. The timing that I'm alluding to is, if you take a look at the balance sheet, based on the timing of payments, our payables and whatnot we're also a help during the quarter.

And that's really a function of timing, nothing more than that. So I guess, yes, that's how I'd approach looking at what could reverse going forward.

Operator

Thank you. Our next question comes from the line of Matt Hewitt with Craig-Hallum.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Good morning. Congratulations on the return to growth on the top line. First question, regarding the pipeline. Obviously, you've got a lot of moving parts with the FDA remediations and the debt refi -- all these other things that you have going on.

But as you look at the pipeline, how are you allocating resources? And what are your -- where do you see some opportunities to kind of bolster that pipeline as we kind of move into 2020?

Doug Boothe -- President and Chief Executive Officer

Yes, great question, Matt. I think, certainly, as you mentioned and we've mentioned on several calls, we've shifted our internal portfolio, focus on to more complicated and more complex ophthalmic suspensions and specialty injectables. So I think overall, you're going to see less "filings," if you will, but certainly the ones that we intend to file will have more value. We certainly have got resources back and working on development projects.

We did pull some away to support the remediation activities, and they're still working that in some of the last efforts in 2019 and early 2020 with the remediation of methods with some of our R&D resources. But overall, we continue to look at, I'd say, less filings but ones which we believe will be more impactful over the longer term.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Great. And then one more question, I guess, regarding the gross margin. The 40.5% in Q3 was strong. In light of the fact that, that's normally your quarter of seasonal shutdown for the facilities, when you went through that shutdown this year, were you able to get the work done that you needed to? Anything new pop up? Or did you get in and realize, OK, things aren't -- maybe we've done more than we anticipated? Maybe just some color regarding that normal shutdown process and what you're able to learn during that.

Doug Boothe -- President and Chief Executive Officer

Well, again, I think the teams executed extremely well during the scheduled shutdowns we had across all of our facilities. And yes, certainly, as we continue to look at the work we're doing for remediation and ongoing investigations, we did have some additional product writedowns in the quarter, which is something again from the earlier questions about operational metrics and performance. That's a number that definitely needs to come down in Q4 and into 2020 to support maintaining and sustaining improved operating margins. So -- but again, we got a lot accomplished.

I mentioned the RABs implementations. We've done RABs previously at the last scheduled shutdown at Decatur. Those have been submitted to the agency. So again, those -- that was the last significant commitment from a manufacturing capabilities.

Certainly, the training and ongoing activities to complete the warning letter and 483 commitments are also well under way. Part of the reason why there's a step-up in the spend in Q4 on the remediation is the warning letter for Somerset required third-party retrospective evaluations and that's getting the team on board, which is Quantic, and getting them up to speed. That's why there's a little bit of a timing change on the -- on that work, but that's certainly an activity that's not affecting the daily production activities but certainly is a means to address the questions and items identified from the agency and the warning letter.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Got it. All right. Thanks very much.

Operator

Thank you. Our next question comes from the line of Greg Gilbert with SunTrust.

Greg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Thank you, guys. I have a couple. First, on Fresenius litigation, can you offer any update there and fill us in on to what degree that plays into either the cost or the timing of the refinancing options that you have?

Doug Boothe -- President and Chief Executive Officer

Well, again, the Fresenius thing, we submitted our response at the end of September. So again, it's in the -- it's going through the process, and we're still ongoing discovery. We're not expecting any sort of decision before the end of the year-end, potentially it's going to run into early 2020. Some of that's disclosed, it's available, it's been part of our discussions, of course, with both our existing lenders as well as the multiple companies where -- firms we're speaking with about our refinancing and capital structure initiatives as well as the class action lawsuit, the proposed settlement there.

So people are aware, there's no new news, other than, again, I think we submitted a very, very strong response.

Greg Gilbert -- SunTrust Robinson Humphrey -- Analyst

So no expectations on timing other than just not by year-end?

Duane Portwood -- Chief Financial Officer

Yes, we don't expect a decision from a core perspective during 2019.

Greg Gilbert -- SunTrust Robinson Humphrey -- Analyst

OK. Great. And then back to the pricing question. You talked about that $37 million in growth tied to the price increases on the certain exclusive products, you named one of them.

I assume you're not going to name the others. But can you give us a sense for how sticky you think that will be? When I consider what you said about 2020 EBITDA, it sort of implies that you don't expect a lot of revenue to go away. And correct me if I'm wrong on that. But do you expect the exclusivity or relative exclusivity period on these products to continue for several quarters, I guess, is the question.

Doug Boothe -- President and Chief Executive Officer

So I would say [operationally] again, sticky is right. I mean the -- first of all, the actions we took were after a significant review of looking at the market dynamics. And by the way, some of them were to catch up with others who have taken action when we were off the market. So we're not -- you talk about exclusive or relatively exclusive.

Some -- most of these products are not exclusive items. So we're seeing dynamics in the marketplace and those are maintaining appropriately as well as, again, we've got volume increase as we've gone after the market space. So we are seeing or maintaining our role and our share and our position on those items so far.

Duane Portwood -- Chief Financial Officer

Yes. And I guess, sometimes -- with Lidocaine Jelly, we called that one out because it's the biggest one of the bunch, we won't call the others out. Some of them, you may be able to see if the pricing is public. But our feel is that for most of these products, there is some stickiness.

None of these markets are massive and none of the price increases were hugely massive and are -- where applicable, are priced at parity with kind of alternative forms that may be out there even though that molecule might be exclusive. So none of them were out of whack, if you will. And for 2020 anyway, we do anticipate some stickiness.

Greg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Great. And my final one, I promise, is not a sneaky way to ask about long-term guidance because I know you're not into it, Doug. But curious if you think the assets and the capabilities that you have in-house today are sufficient to provide you with growth after sort of the turnaround phase and getting back to a more normalized level of EBITDA, which we could call that 2020. Do you think you have the capabilities and assets in-house to grow the company and sort of overwhelm that leaky bucket that's inherent in the industry? Or do you think there'll have to be some external growth drivers inevitably to make growth happen off of a more normalized base over time?

Doug Boothe -- President and Chief Executive Officer

Greg, great question. I think it's both. But certainly, on the internal capabilities and again, we haven't talked about our brand franchise, we haven't talked about TheraTears and certainly, those are products that are growing and categories are growing as well as again getting our R&D group back into delivering and executing on the portfolio items, which we think are difficult, sustainable and valuable. And that's certainly an area that as we -- certainly, a lot of the near-term focus.

When I started in January, the first half of the year was around the operations and our compliance and our QSCAP program, which is now deeply seated within the company. Certainly expect and appropriately look at what are the growth prospects. So I think our internal development portfolio focused on specialty ophthalmics and injectable products push into our branded assets as well as our over-the-counter franchise and TheraTears. And well, I'll say, opportunistic, either in-licensing or asset purchase, when our capital structure has improved, our cash balances are -- we have some dry powder back, which is certainly one of the outcomes of our renewed run rate on EBITDA as well as our refinancing activities completed.

Greg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Thanks a lot.

Operator

Thank you. And I'm showing no further questions at this time. I will now turn the call back over to Jennifer Bowles for closing remarks.

Jennifer Bowles -- Senior Vice President of Corporate Strategy and Investor Relations

Well, thank you all for joining our call today, and we look forward to speaking with you again next time. Take care.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Jennifer Bowles -- Senior Vice President of Corporate Strategy and Investor Relations

Doug Boothe -- President and Chief Executive Officer

Duane Portwood -- Chief Financial Officer

David Amsellem -- Piper Jaffray -- Analyst

Randall Stanicky -- RBC Capital Markets -- Analyst

Elliot Wilbur -- Raymond James -- Analyst

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Greg Gilbert -- SunTrust Robinson Humphrey -- Analyst

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